-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJSjlgbdZG22Fre0JuAbDbFQDBgRWhAS2VzjkXGsVQR9cgeZj050n6tGecAGj0Kb d2bjEsMYooHmjqEvqL/yfQ== 0000950134-03-016404.txt : 20031209 0000950134-03-016404.hdr.sgml : 20031209 20031209063607 ACCESSION NUMBER: 0000950134-03-016404 CONFORMED SUBMISSION TYPE: SC TO-T/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20031209 GROUP MEMBERS: AIMCO GP INC GROUP MEMBERS: APARTMENT INVESTMENT AND MANAGEMENT CO GROUP MEMBERS: SHELTER REALTY VI CORP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES VI LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000730013 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570755618 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48078 FILM NUMBER: 031043585 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES VI LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000730013 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570755618 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48078 FILM NUMBER: 031043586 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: AIMCO PROPERTIES LP CENTRAL INDEX KEY: 0000926660 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 841275621 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A BUSINESS ADDRESS: STREET 1: 4582 S ULSTER ST PARKWAY STREET 2: SUITE 1100 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 4582 S ULSTER ST PARKWAY STREET 2: SUITE 1100 CITY: DENVER STATE: CO ZIP: 80237 SC TO-T/A 1 d07278a2sctovtza.txt AMENDMENT NO. 2 TO SC TO SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SCHEDULE TO/A (AMENDMENT NO. 2) TENDER OFFER STATEMENT UNDER SECTION 14(D)(1) OR 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 Shelter Properties VI Limited Partnership - -------------------------------------------------------------------------------- (Name of Subject Company (Issuer)) Apartment Investment and Management Company AIMCO-GP, Inc. Shelter Realty VI Corporation AIMCO Properties, L.P. - -------------------------------------------------------------------------------- (Names of Filing Persons - Offerors) Limited Partnership Units - -------------------------------------------------------------------------------- (Title of Class Securities) None - -------------------------------------------------------------------------------- (CUSIP Number of Class Securities) Patrick J. Foye Apartment Investment and Management Company Colorado Center, Tower Two 2000 South Colorado Boulevard, Suite 2-1000 Denver, Colorado 80222 (303) 757-8101 - -------------------------------------------------------------------------------- (Name, address, and telephone numbers of person authorized to receive notices and communications on behalf of filing persons) Copy to: Joseph A. Coco Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 and Jonathan L. Friedman Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue Los Angeles, California 90071 (213) 687-5000 1 Calculation of Filing Fee
Transaction valuation* Amount of filing fee - ---------------------- -------------------- $1,254,587.22 $ 101.50
* For purposes of calculating the fee only. This amount assumes the purchase of 14,551 units of limited partnership interest of the subject partnership for $86.22 per unit. The amount of the filing fee, calculated in accordance with Section 14(g)(1)(B)(3) and Rule 0-11(d) under the Securities Exchange Act of 1934, as amended, equals $80.90 per million of the aggregate amount of cash offered by the bidder. [X] Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $101.50 Filing Party: AIMCO Properties, L.P. Form or Registration No.: Schedule TO Date Filed: November 14, 2003 [ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [X] third-party tender offer subject to Rule 14d-1 [ ] issuer tender offer subject to Rule 13e-4 [X] going-private transaction subject to Rule 13e-3 [ ] amendment to Schedule 13D under Rule 13d-2 Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ] 2 AMENDMENT NO. 2 TO SCHEDULE TO This Amendment No. 2 amends and supplements the Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO, as amended by Amendment No. 1 thereto (the "Schedule TO"), relating to the offer by AIMCO Properties, L.P., a Delaware limited partnership, to purchase units of limited partnership interest ("Units") of Shelter Properties VI Limited Partnership, a South Carolina limited partnership (the "Partnership"), at a price of $86.22 per unit in cash, subject to the conditions set forth in the Offer to Purchase dated November 14, 2003, and in the related Letter of Transmittal (which, together with any supplements or amendments, collectively constitute the "Offer"). Copies of the Offer to Purchase and the Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2), respectively, to the Schedule TO. The item numbers and responses thereto below are in accordance with the requirements of Schedule TO. Unless defined herein, capitalized terms used and not otherwise defined herein have the respective meanings ascribed to such terms in the Offer to Purchase. ITEM 1. SUMMARY TERM SHEET. Item 1 is amended and supplemented as follows: (1) The following paragraph under "THE SUMMARY TERM SHEET" is amended and restated as follows: "Covenant Not to Sue. If you requested exclusion from the settlement but tender your units in this offer, by signing the letter of transmittal, you agree not to bring any action, claim, suit or proceeding against us and those affiliates who were defendants in the class and derivative litigation concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including this Litigation Settlement Offer, other than for violations of federal or state securities laws. If you do not request exclusion from the settlement class, you will already have agreed not to bring any such action, you will already have agreed not to bring any such action, claim, suit or proceeding once the settlement." (2) The following paragraph under "THE SUMMARY TERM SHEET" is amended and restated as follows: "Conflicts of Interest. NHP Management Company (which is our affiliate) receives fees for managing your partnership's property and the general partner of your partnership (which is our affiliate) is entitled to receive asset management fees and reimbursement of certain expenses involving your partnership and its property. As a result, a conflict of interest exists between continuing the partnership and receiving these fees, and the liquidation of the partnership and the termination of these fees. See "The Litigation Settlement Offer -- Section 13. Conflicts of Interest and Transactions with Affiliates" and "-- Section 15. Certain Information Concerning Your Partnership." (3) The following paragraph is added as the eighteenth paragraph under "THE SUMMARY TERM SHEET": "Fairness of the Offer. Although we, Apartment Investment and Management Company ("AIMCO") and AIMCO-GP, Inc. (collectively, the "AIMCO Entities") and your general partner have interests that may conflict with those the partnership's unaffiliated limited partners, each of the AIMCO Entities believes that the offer price and the offer are fair to the unaffiliated limited partners of your partnership. This determination is based on the information and the factors set 3 forth under "The Litigation Settlement Offer -- Section 12. Position of Your General Partner of Your Partnership With Respect to the Offer." ITEM 2. SUBJECT COMPANY INFORMATION. Item 2(a) of the Schedule TO is amended and supplemented as follows: (1) The following paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership" is amended and restated as follows: "Ownership and Voting. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 27,773 units, or 65.62%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we have the ability to control most votes of the limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer" and "-- Section 16. Voting Power."" (2) The chart under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership - Financial Data" is amended by adding the following line items:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------- 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) Income (loss) per unit from continuing operations $ 4.04 $ 12.90 $ 309.78 $ 20.82 $192.07 Ratio of earnings to fixed charges (deficit)....... 119.4% 151.8% 1,063.3% 170.2% 465.9% Book value per limited partnership unit............ (151.92) (116.01) (90.87) (25.82) (29.35)
ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. Item 3(a) - (c) of the Schedule TO is amended and supplemented as follows: (1) The Rule 13e-3 Transaction Statement on Schedule TO is being filed by Apartment Investment and Management Company, a Maryland corporation ("AIMCO"), AIMCO Properties, L.P., a Delaware limited partnership ("AIMCO OP"), AIMCO-GP, Inc. a Delaware corporation ("AIMCO-GP"), and Shelter Realty VI Corporation, a Delaware corporation ("Shelter Realty"). AIMCO-GP is the general partner of AIMCO OP and a wholly owned subsidiary of AIMCO. Shelter Realty is the managing general partner of the Partnership and a wholly owned subsidiary of AIMCO. The principal business of AIMCO, AIMCO-GP, and AIMCO OP is the ownership, acquisition, development, expansion and management of multi-family apartment properties. The business address of AIMCO, AIMCO-GP and AIMCO OP is 4582 Ulster Street Parkway, Suite 1100, Denver, Colorado 80237, and their telephone number is (303) 757-8101. The principal address of Shelter Realty is 55 Beattie Place, P.O. Box 1089, Greenville, South Carolina 29602, and its phone number is (864) 239-1000. During the last five years, none of AIMCO, AIMCO-GP, AIMCO OP or Shelter Realty nor, to the best of their knowledge, any of the persons listed in Annex I to the Offer to Purchase (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of or 4 prohibiting activities subject to federal or state securities laws or finding any violation with respect to such laws. (2) The fourth paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 10. Information Concerning Us and Certain of Our Affiliates" is amended and restated as follows: "We and AIMCO are both subject to the information and reporting requirements of the Exchange Act and, in accordance therewith, file reports and other information with the Securities and Exchange Commission relating to our business, financial condition and other matters, including the complete financial statements summarized below. Such reports and other information may be inspected at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Room of the SEC in Washington, D.C. at prescribed rates. The SEC also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. In addition, information filed by AIMCO with the New York Stock Exchange may be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005." (3) The following chart under Annex I is amended and restated as follows:
NAME POSITION -------------------------- ------------------------------------- Terry Considine............ Chairman of the Board of Directors and Chief Executive Officer Peter K. Kompaniez......... Vice Chairman, President and Director Harry G. Alcock............ Executive Vice President and Chief Investment Officer Miles Cortez............... Executive Vice President, General Counsel and Secretary Joseph DeTuno.............. Executive Vice President -- Redevelopment Patti K. Fielding.......... Executive Vice President -- Securities and Debt Patrick J. Foye............ Executive Vice President Lance J. Graber............ Executive Vice President -- AIMCO Capital Paul J. McAuliffe.......... Executive Vice President and Chief Financial Officer Ronald D. Monson........... Executive Vice President and Head of Property Operations David Robertson............ Executive Vice President -- President and Chief Executive Officer of AIMCO Capital Jim Purvis................. Executive Vice President -- Human Resources Randall J. Fein............ Executive Vice President -- Student Housing James N. Bailey............ Director Richard S. Ellwood......... Director J. Landis Martin........... Director Thomas L. Rhodes........... Director
ITEM 4. TERMS OF THE TRANSACTION. Item 4(a) of the Schedule TO is amended and supplemented as follows: (1) The following paragraph under "RISK FACTORS" is amended and restated as follows: "THERE MAY BE A POSSIBLE REDUCTION OF AVAILABLE INFORMATION ABOUT YOUR PARTNERSHIP AS A RESULT OF THIS OFFER. 5 If there are less than 300 unitholders in your partnership upon consummation of the offer, your partnership would no longer be required to file periodic reports with the SEC, such as annual reports on Form 10-KSB containing annual audited financial statements, and quarterly reports on Form 10-QSB containing unaudited quarterly financial statements. Such reports are publicly available and can be obtained on the SEC's web site. The lack of such filings could adversely affect the already limited secondary market which currently exists for units in your partnership and may discourage offers to purchase your units. In such a case, you would regularly have access only to the information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which consists primarily of tax information. See "The Litigation Settlement Offer - Section 7. Effects of the Offer - Effect on Trading Market; Registration Under Section 12(g) of the Exchange Act." (2) Section 1 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "1. TERMS OF THE OFFER; EXPIRATION DATE Upon the terms and subject to the conditions of the offer, we will accept (and thereby purchase) any and all units that are validly tendered on or prior to the expiration date and not withdrawn in accordance with the procedures set forth in "The Litigation Settlement Offer -- Section 4. Withdrawal Rights." For purposes of the offer, the term "expiration date" shall mean midnight, New York City time, on December 19, 2003, unless we in our sole discretion shall have extended the period of time for which the offer is open (which may not exceed 90 business days from the date of commencement, as provided in the settlement). See "The Litigation Settlement Offer -- Section 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period," for a description of our right to extend the period of time during which the offer is open and to amend or terminate the offer. The purchase price per unit will automatically be reduced by the aggregate amount of distributions per unit, if any, made or declared by your partnership on or after the commencement of our offer and prior to the date on which we acquire your units pursuant to our offer. If the offer price is reduced in this manner, we will notify you and, if necessary, we will extend the offer period so that you will have at least ten business days from the date of our notice to withdraw your units. If, prior to the expiration date, we increase the consideration offered pursuant to the offer, the increased consideration will be paid for all units accepted for payment pursuant to the offer, whether or not the units were tendered prior to the increase in consideration. The offer is conditioned on satisfaction of certain conditions. The offer is not conditioned upon any minimum number of units being tendered. See "The Litigation Settlement Offer -- Section 19. Conditions to the Offer," which sets forth in full the conditions of the offer. We reserve the right (but in no event shall we be obligated), in our reasonable discretion, to waive any or all of those conditions. If, on or prior to the expiration date, any or all of the conditions have not been satisfied or waived, we reserve the right to (i) decline to purchase any of the units tendered, terminate the offer and return all tendered units to tendering limited partners, (ii) waive all the unsatisfied conditions and purchase, subject to the terms of the offer, any and all units validly tendered, (iii) extend the offer and, subject to your withdrawal rights, retain the units that have been tendered during the period or periods for which the offer is extended, or (iv) amend the offer. If we are unable to accept the units tendered in this Litigation Settlement Offer due to a failure of any or all of the conditions of our offer to be satisfied, we will conduct another offer in 6 accordance with the terms of the settlement (which will occur no later than six months after the date of the commencement of this offer). We will continue this process until we have accepted for payment all units properly tendered in an offer conducted in accordance with the terms of the settlement. By executing the letter of transmittal, you will agree that the transfer of units will be deemed to take effect as of the first day of the calendar quarter in which the offer expires. Upon expiration of the offer, the books and records of the partnership will reflect the change in ownership as having occurred as of this date. For tax, accounting and financial reporting purposes, the transfer of tendered units will be deemed to take effect on the first day of the calendar quarter. Accordingly, all profits and losses relating to any tendered units will be allocated to us from and after this date. If we waive any material conditions to our offer (other than those relating to necessary governmental approvals), we will notify you and, if necessary, we will extend the offer period so that you will have at least five business days from the date of our notice to withdraw your units. This offer is being mailed on or about November 14, 2003 to the persons shown by your partnership's records to be limited partners or, in the case of units owned of record by Individual Retirement Accounts and qualified plans, beneficial owners of units." Section 2 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR UNITS Upon the terms and subject to the conditions of the offer, we will purchase, by accepting for payment, and will pay for, any and all units validly tendered promptly following the expiration date. A tendering beneficial owner of units whose units are owned of record by an Individual Retirement Account or other qualified plan will not receive direct payment of the offer price; rather, payment will be made to the custodian of such account or plan. In all cases, payment for units purchased pursuant to the offer will be made only after timely receipt by the Information Agent of a properly completed and duly executed letter of transmittal and other documents required by the letter of transmittal. See "The Litigation Settlement Offer -- Section 3. Procedure for Tendering Units." UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE OFFER PRICE BY REASON OF ANY DELAY IN MAKING SUCH PAYMENT. For purposes of the offer, we will be deemed to have accepted for payment pursuant to the offer, and thereby purchased, validly tendered units, if, as and when we give verbal or written notice to the Information Agent of our acceptance of those units for payment pursuant to the offer. Payment for units accepted for payment pursuant to the offer will be made through the Information Agent, which will act as agent for tendering limited partners for the purpose of receiving cash payments from us and transmitting cash payments to tendering limited partners. If any tendered units are not accepted for payment by us for any reason, the letter of transmittal with respect to such units not purchased may be destroyed by the Information Agent or us or returned to you. You may withdraw tendered units until the expiration date (including any extensions). In addition, if we have not accepted units for payment by January 13, 2004 you may then withdraw any tendered units. After the expiration date, the Information Agent may, on our behalf, retain tendered units, and those units may not be otherwise withdrawn, if, for any reason, acceptance for payment of, or payment for, any units tendered pursuant to the offer is delayed or we are unable to accept for payment, purchase or pay for units tendered pursuant to the offer. Any such action is subject, however, to our obligation under Rule 14e-1(c) under the Exchange Act, to pay you the offer price in respect of units tendered or return those units promptly after termination or withdrawal of the offer. 7 We reserve the right to transfer or assign, in whole or in part, to one or more of our affiliates, the right to purchase units tendered pursuant to the offer, but no such transfer or assignment will relieve us of our obligations under the offer or prejudice your rights to receive payment for units validly tendered and accepted for payment pursuant to the offer." (3) The first paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 3. Procedure for Tendering Units - Release of Claims" is amended and restated as follows: "Release of Claims. By executing the letter of transmittal, effective upon acceptance for payment of the units tendered by you, you will, on behalf of yourself, your heirs, estate, executor, administrator, successors and assigns, and your partnership, fully, finally and forever release, relinquish and discharge us and our predecessors, successors and assigns and our present and former parents, subsidiaries, affiliates, investors, insurers, reinsurers, officers, directors, employees, agents, administrators, auditors, attorneys, accountants, information and solicitation agents, investment bankers, and other representatives, including but not limited to AIMCO Properties, L.P. (collectively, the "Releasees"), from any and all claims and causes of action, whether brought individually, on behalf of a class, or derivatively, demands, rights, or liabilities, including, but not limited to, claims for negligence, gross negligence, professional negligence, breach of duty of care or loyalty, or breach of duty of candor, fraud, breach of fiduciary duty, mismanagement, corporate waste, malpractice, misrepresentation, whether intentional or negligent, misstatements and omissions to disclose, breach of contract, violations of any state or federal statutes, rules or regulations, whether known claims or unknown claims that have been asserted or that could have been asserted against the Releasees, that arise out of or relate to (a) those matters and claims set forth in the class and derivative litigation described in this Litigation Settlement Offer, (b) the ownership of one or more units in your partnership, including but not limited to, any and all claims related to the management of your partnership or the properties owned by your partnership (whether currently or previously), the payment of management fees or other monies to the general partner of your partnership and its affiliates, prior acquisitions or tender offers and the prior settlement, (c) the purchase, acquisition, holding, sale, tender or voting of one or more units in your partnership, or (d) any of the facts, circumstances, allegations, claims, causes of action, representations, statements, reports, disclosures, transactions, events, occurrences, acts, omissions or failures to act, of whatever kind or character whatsoever, irrespective of the state of mind of the actor performing or omitting to perform the same, that have been or could have been alleged in any pleadings, amended pleading, argument, complaint, amended complaint, brief, motion, report or filing in the class and derivative litigation described in this Litigation Settlement Offer (collectively, the "Released Claims"); provided, however, that the Released Claims are not intended to include (i) any unrelated claims that are unique to a limited partner or settlement class member (e.g., a settlement class member slips and falls on property owned by one of the defendants in the class and derivative litigation, loses or did not receive a distribution check distributed to other limited partners in such partnership, or is an employee of one of the defendants and has an employee related claim) or (ii) any claim based upon violations of federal or state securities laws in connection with this offer." (4) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 3. Procedure for Tendering Units - Covenant Not to Sue" is amended and restated as follows: "Covenant Not to Sue. By executing the letter of transmittal, you agree not to bring any action, claim, suit or proceeding against us and those affiliates who were defendants in the class and derivative litigation concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including this Litigation Settlement Offer, other than for violations of federal or state securities laws." 8 (5) The paragraph under "THE LITIGATION SETTLEMENT OFFER -- Procedure for Tendering Units - Section 3. Procedure for Tendering Units -- Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects" is amended and restated as follows: "Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of units pursuant to our offer will be determined by us, in our reasonable discretion, which determination shall be final and binding on all parties. We reserve the absolute right to reject any or all tenders of any particular unit determined by us not to be in proper form or if the acceptance of or payment for that unit may, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive or amend any of the conditions of the offer that we are legally permitted to waive as to the tender of any particular unit and to waive any defect or irregularity in any tender with respect to any particular unit of any particular limited partner. If we waive any of the conditions to the offer with respect to the tender of a particular unit, we will waive such condition with respect to all other tenders of units in this offer as well. Our interpretation of the terms and conditions of the offer (including the letter of transmittal) will be final and binding on all parties. No tender of units will be deemed to have been validly made unless and until all defects and irregularities have been cured or waived. Neither we, the Information Agent, nor any other person will be under any duty to give notification of any defects or irregularities in the tender of any unit or will incur any liability for failure to give any such notification." (6) The first paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period" is amended and restated as follows: "We expressly reserve the right, in our reasonable discretion, at any time and from time to time, (i) to extend the period of time during which our offer is open (but not beyond 90 business days from the date of commencement of the offer) and thereby delay acceptance for payment of, and the payment for, any unit, (ii) to terminate the offer and not accept any units not theretofore accepted for payment or paid for if any of the conditions to the offer are not satisfied or if any event occurs that might reasonably be expected to result in a failure to satisfy such conditions, (iii) upon the occurrence of any of the conditions specified in "The Litigation Settlement Offer -- Section 19. Conditions of the Offer" relating to necessary governmental approvals, to delay the acceptance for payment of, or payment for, any units not already accepted for payment or paid for, and (iv) to amend our offer in any respect (including, without limitation, by increasing or decreasing the consideration offered, increasing or decreasing the units being sought, or both). We will not assert any of the conditions to the offer (other than those relating to necessary governmental approvals) subsequent to the expiration of the offer. Notice of any such extension, termination or amendment will promptly be disseminated to you in a manner reasonably designed to inform you of such change. In the case of an extension of the offer, the extension may be followed by a press release or public announcement which will be issued no later than 9:00 a.m., New York City time, on the next business day after the scheduled expiration date of our offer, in accordance with Rule 14e-1(d) under the Exchange Act." (7) The third paragraph under "THE LITIGATION SETTLEMENT OFFER--Section 8. Valuation of Units -- Determination of Offer Price" is amended and restated as follows: "We relied on the direct capitalization method because we believe this is the valuation methodology most often used by the real estate industry to value income producing property. The 9 court appointed independent appraiser also utilized the direct capitalization method as one its valuation methodologies. However, in comparison to our methodology, the independent appraiser relied on pro forma net operating income as opposed to the current property income of your partnership." (8) The first paragraph and the first bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" are amended and restated as follows: "Notwithstanding any other provisions of our offer, we will not be required to accept for payment and pay for any units tendered pursuant to our offer, may postpone the purchase of, and payment for, units tendered, and may terminate or amend our offer if at any time on or after the date of this Litigation Settlement Offer and at or before the expiration of our offer (including any extension thereof), any of the following shall occur: o any change (or any condition, event or development involving a prospective change) shall have occurred or been threatened in the business, properties, assets, liabilities, indebtedness, capitalization, condition (financial or otherwise), operations, licenses or franchises, management contract, or results of operations or prospects of your partnership or local markets in which your partnership owns or operates its property, including any fire, flood, natural disaster, casualty loss, or act of God that is or could reasonably be expected to be materially adverse to your partnership or the value of your units to us, which change would, individually or in the aggregate, result in, or reasonably be expected to result in, an adverse effect on net operating income of your partnership of more than $10,000 per year, or a decrease in value of an asset of your partnership, or the incurrence of a liability with respect to your partnership, in an amount in excess of $100,000 (a "Material Adverse Effect"), or we shall have become aware of any facts relating to your partnership, its indebtedness or its operations which has had or could reasonably be expected to have a Material Adverse Effect; or" (9) The third bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o there shall have been threatened in writing, instituted or pending any action, proceeding, application or counterclaim by any Federal, state, local or foreign government, governmental authority or governmental agency, or by any other person, before any governmental authority, court or regulatory or administrative agency, authority or tribunal, which (i) challenges or seeks to challenge the acquisition by us of the units, restrains, prohibits or delays the making or consummation of the offer, prohibits the performance of any of the contracts or other arrangements entered into by us (or any of our affiliates) seeks to obtain any material amount of damages as a result of the transactions contemplated by the offer, (ii) seeks to make the purchase of, or payment for, some or all of the units pursuant to the offer illegal or results in a delay in our ability to accept for payment or pay for some or all of the units, (iii) seeks to prohibit or limit the ownership or operation by us or any of our affiliates of the entity serving as your general partner (which is our affiliate) or to remove such entity as the general partner of your partnership, or seeks to impose any material limitation on our ability or any of our affiliates to conduct your partnership's business or own such assets, (iv) seeks to impose material limitations on our ability or any of our affiliates to acquire or hold or to exercise full rights of ownership of the units including, but not limited to, the right to vote the units purchased by us on all matters properly presented to unitholders or (v) could reasonably be expected to result in a Material Adverse Effect; or 10 (10) The fifth bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o your partnership shall have (i) changed, or authorized a change of, its units or your partnership's capitalization, (ii) issued, distributed, sold or pledged, or authorized, proposed or announced the issuance, distribution, sale or pledge of (A) any equity interests (including, without limitation, units), or securities convertible into any such equity interests or any rights, warrants or options to acquire any such equity interests or convertible securities, or (B) any other securities in respect of, in lieu of, or in substitution for units outstanding on the date hereof, (iii) purchased or otherwise acquired, or proposed or offered to purchase or otherwise acquire, any outstanding units or other securities, (iv) declared or paid any dividend or distribution on any units or issued, authorized, recommended or proposed the issuance of any other distribution in respect of the units, whether payable in cash, securities or other property, (v) authorized, recommended, proposed or announced an agreement, or intention to enter into an agreement, with respect to any merger, consolidation, liquidation or business combination, any acquisition or disposition of a material amount of assets or securities, or any release or relinquishment of any material contract rights, or any comparable event, not in the ordinary course of business, (vi) taken any action to implement such a transaction previously authorized, recommended, proposed or publicly announced, (vii) issued, or announced its intention to issue, any debt securities, or securities convertible into, or rights, warrants or options to acquire, any debt securities, or incurred, or announced its intention to incur, any debt other than in the ordinary course of business and consistent with past practice, (viii) authorized, recommended or proposed, or entered into, any transaction which, has or could reasonably be expected to have a Material Adverse Effect, (ix) proposed, adopted or authorized any amendment of its organizational documents, (x) agreed in writing or otherwise to take any of the foregoing actions, or (xi) been notified that any debt of your partnership or any of its subsidiaries secured by any of its or their assets is in default or has been accelerated (any changes to the offer resulting from the conditions set forth in this paragraph will most likely involve a change in the amount or terms of the consideration offered or the termination of the offer); or" (11) The seventh bullet point of "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o there shall have occurred any event, circumstance, change, effect or development that, individually or in the aggregate with any other events, circumstances, changes, effects or developments, has had or would reasonably be expected to have an adverse effect on our financial condition in an amount in excess of $10,000,000; or" (12) The following bullet point under "THE LITIGATION SETTLEMENT OFFER - - Section 19. Conditions to the Offer" is deleted in its entirety: "o we shall not have adequate cash or financing commitments available to pay for the units validly tendered, which is the result of events or circumstances beyond our reasonable control." (13) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "The foregoing conditions are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to such conditions or may be waived by us at any time in our reasonable discretion prior to the expiration of this offer. The failure by us at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to any particular facts or circumstances shall not be deemed a waiver with respect to any other facts or circumstances. All conditions to our offer will be satisfied or waived on or before the expiration of our offer." 11 (14) The first paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto hereby acknowledges that he or she has received (i) the Purchaser's Litigation Settlement Offer, dated the date set forth above (the "Offer Date"), relating to the offer by AIMCO Properties, L.P. (the "Purchaser") to purchase Limited Partnership Interests (the "Units") in the Partnership and (ii) this Letter of Transmittal and the Instructions hereto, as each may be supplemented or amended from time to time (collectively, the "Offer")." (15) The fourth paragraph of the Letter of Transmittal is amended and restated as follows: "By executing this Letter of Transmittal, the undersigned hereby acknowledges that neither the court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether the undersigned should accept the Offer, and the undersigned hereto represents and warrants to the Purchaser that the undersigned (i) has received the Offer, including the executive summary of the independent appraiser's report attached to the Litigation Settlement Offer, and (ii) has had an opportunity to seek the advice of such undersigned's attorney, tax advisor and/or financial advisor before deciding whether or not to accept the Offer." (16) The sixth paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto, on behalf of himself or herself, his or her heirs, estate, executor, administrator, successors and assigns, and the Partnership, fully, finally and forever releases, relinquishes and discharges the Purchaser and its predecessors, successors and assigns and its present and former parents, subsidiaries, affiliates, investors, insurers, reinsurers, officers, directors, employees, agents, administrators, auditors, attorneys, accountants, information and solicitation agents, investment bankers, and other representatives, including but not limited to Apartment Investment and Management Company and the general partner of the Partnership (collectively, the "Releasees"), from any and all claims and causes of action, whether brought individually, on behalf of a class, or derivatively, demands, rights, or liabilities, including, but not limited to, claims for negligence, gross negligence, professional negligence, breach of duty of care or loyalty, or breach of duty of candor, fraud, breach of fiduciary duty, mismanagement, corporate waste, malpractice, misrepresentation, whether intentional or negligent, misstatements and omissions to disclose, breach of contract, violations of any state or federal statutes, rules or regulations, whether known claims or unknown claims that have been asserted or that could have been asserted against the Releasees, that arise out of or relate to (a) those matters and claims set forth in the class and derivative litigation described in the Litigation Settlement Offer, (b) the ownership of one or more Units in the Partnership, including but not limited to, any and all claims related to the management of the Partnership or the properties owned by the Partnership (whether currently or previously), the payment of management fees or other monies to the general partner of the Partnership and its affiliates, prior acquisitions or tender offers and the prior settlement, (c) the purchase, acquisition, holding, sale, tender or voting of one or more Units in the Partnership, or (d) any of the facts, circumstances, allegations, claims, causes of action, representations, statements, reports, disclosures, transactions, events, occurrences, acts, omissions or failures to act, of whatever kind or character whatsoever, irrespective of the state of mind of the actor performing or omitting to perform the same, that have been or could have been alleged in any pleadings, amended pleading, argument, complaint, amended complaint, brief, motion, report or filing in the class and derivative litigation described in the Litigation Settlement Offer (collectively, the "Released Claims"); provided, however, that the Released Claims are not intended to include (i) any unrelated claims that are unique to a unitholder or settlement class member (e.g., a settlement class member slips and falls on property owned by one of the defendants in the class and derivative litigation, loses or did not receive a distribution check 12 distributed to other limited partners in such partnership, or is an employee of one of the defendants and has an employee related claim), or (ii) any claim based on violations of federal or state securities laws in connection with the Offer." (17) The tenth paragraph of the Letter of Transmittal is amended and restated as follows: "Subject to and effective upon acceptance for payment of any Unit tendered hereby in accordance with the terms of the Offer, the signatory agrees not to bring any action, claim, suit or proceeding against the Purchaser and its affiliates who were defendants in the class and derivative litigation described in the Litigation Settlement Offer concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including the Offer, other than for violations of federal or state securities laws." (18) The eleventh paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto irrevocably appoints the Purchaser and its designees as his or her proxy, each with full power of substitution, to the fullest extent of the undersigned's rights with respect to the Units tendered by him or her and accepted for payment by the Purchaser. Such proxy shall be considered coupled with an interest in the tendered Units. Such appointment will be effective upon receipt of this Letter of Transmittal. Upon receipt of this Letter of Transmittal, all prior proxies and consents given by undersigned hereto with respect to the Units will, without further action, be revoked, and no subsequent proxies or consents may be given (and if given will not be effective). The Purchaser and its designees are, as to those Units, empowered to exercise all voting as a limited partner as the Purchaser, in its discretion, may deem proper at any meeting of limited partners, by written consent or otherwise. The Purchaser reserves the right to require that, in order for Units to be deemed validly tendered, immediately upon our acceptance for payment of the Units, the Purchaser must be able to exercise full voting rights with respect to the Units, including voting at any meeting of limited partners then scheduled or acting by written consent without a meeting. By executing this Letter of Transmittal, the undersigned agrees to execute all such documents and take such other actions as shall be reasonably required to enable the Units tendered to be voted in accordance with the Purchaser's directions. The proxy granted by the undersigned hereto to the Purchaser will remain effective and be irrevocable for a period of ten years following the Expiration Date of the Offer." (19) The following paragraph in the Letter of Transmittal is deleted in its entirety: "The undersigned hereto irrevocably constitutes and appoints the Purchaser and any designees of the Purchaser as the true and lawful agent and attorney-in-fact of the undersigned with respect to such Units, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to withdraw any or all of such Units that have been previously tendered in response to any tender or exchange offer provided that the price per unit being offered by the Purchaser is equal to or higher than the price per unit being offered in the other tender or exchange offer. This appointment is effective upon execution and receipt of this Letter of Transmittal and shall continue to be effective unless and until such Units are withdrawn from the Offer by the undersigned prior to the Expiration Date." ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. Item 5(a) and (b) of the Schedule TO is amended and supplemented as follows: 13 (1) The first, second and third paragraphs of "THE LITIGATION SETTLEMENT OFFER - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints" is amended and restated as follows: "On December 20, 2002, the parties to the above-entitled litigation executed a Stipulation of Settlement of the two actions. That settlement was the result of over one year of negotiations and the involvement of two separate settlement judges. Class counsel and defendants' counsel first met with the Honorable William J. Cahill, Retired California Superior Court Judge, on two separate occasions. Counsel also met on four separate occasions with the Honorable Margaret J. Kemp, California Superior Court Judge, before reaching a settlement in principle. The parties initially met with Judge Cahill on two occasions in the fall of 2000, but were ultimately unsuccessful in reaching a definitive settlement agreement. At the Court's direction, they renewed formal settlement discussions before Judge Kemp. The parties first attended a settlement conference before Judge Kemp in September or October 2002 and then subsequently met with her on October 28, 2002, November 26, 2002 and December 2, 2002. The parties reached final agreement on the material terms of the settlement at the last settlement conference with Judge Kemp on December 2, 2002 and put the terms of that agreement on the record in open court. In each of the conferences described above, counsel from Lieff Cabraser Heimann & Bernstein LLP, Farella Braun & Martel LLP & Berman Devalerio Pease & Tobacco attended on behalf of the named plaintiffs and the putative settlement class; counsel from Skadden, Arps, Slate, Meagher & Flom LLP attended on behalf of AIMCO and its affiliated entities, including your general partner, and Orrick Herrington & Sutcliffe attended on behalf of the remaining defendants. AIMCO Executive Vice President Patrick Foye also attended each of these meetings. Mr. Vincent Gresham of the Law Offices of Vincent Gresham also participated on behalf of plaintiffs and the putative settlement class in those settlement discussions before the Hon. Cahill, Retired. At these meetings, discussions included possible transactions that could provide liquidity to investors and form the basis of a settlement, the use of a settlement fund and the amount of such fund, the timing and distribution of any settlement fund, selection and use of an appraiser and disclosures that would accompany any contemplated transaction(s). The participants considered but ultimately rejected a merger or roll-up of the various partnerships as possible alternatives to cash tender offers. The parties ultimately concluded, however, that a merger or roll-up could be potentially complicated and time consuming and that a cash tender offer would be a less coercive form of providing liquidity to those investors who desired it. The Settlement Agreement requires each tender offer to attach executive summaries of partnership property appraisals commissioned specifically for the settlement tender offers and to provide an explanation of how the appraised values of the properties compare to the per Unit price(s) being offered. It also requires the payment of an allocable portion of the settlement fund for each unit tendered pursuant to the settlement fund, details the scope of the release and covenants not to sue which will bind class members, requires that tender offers be made no more than one year after final approval of the settlement and imposes certain restrictions on the length of time in which the tender offers can remain open, as well as with regard to other disclosures made therein. On April 4, 2003, the Court preliminarily approved the settlement and, on June 13, 2003, entered an order finally approving the settlement and dismissing both the Heller and Nuanes litigation with prejudice. On August 12, 2003, an objector filed an appeal of the court's order approving the settlement and is seeking to reverse or vacate the Court's order and the judgment entered thereto. Although we reserve our right to terminate or amend our offer if final court approval of the settlement is reversed or vacated, we have nevertheless elected to proceed with this offer under the terms of the settlement. On November 24, 2003, the objector appealing the settlement and judgment entered thereto filed an application requesting the Court order AIMCO to withdraw the settlement tender offers, refrain from making further offers pending the appeal and auction any units tendered to third parties. The objector contends that this offer does not conform with the terms of the Settlement. Alternatively, counsel for the objector has requested the Court on behalf of a settlement class member order AIMCO to pay all non-tendering settlement class members their pro rata share of the Settlement Fund whether or not the settlement and judgment entered thereto is vacated on appeal and to notify settlement class members that the releases and covenant not to sue are not binding unless the settlement and judgment entered thereto is affirmed on appeal. AIMCO asserts that such applications are without merit and is opposing such applications." 14 (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $178.02 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (3) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." (4) The first paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "NHP Management Company (which is our affiliate) received fees of approximately $84,000 and $296,000 for the years ended December 31, 2002 and 2001, respectively, for 15 construction management services. The construction management service fees are calculated based on a percentage of current additions to investment properties." (5) The third paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "During the year ended December 31, 2002, the partnership paid us approximately $252,000 for brokerage fees associated with the refinancing of River Reach, Rocky Creek, Carriage House, and Nottingham Square Apartments. The approximately $103,000 paid for Nottingham Square was written off when the property was sold. The approximately $149,000 paid for River Reach, Rocky Creek and Carriage House Apartments is included in other assets as loan costs on the balance sheet of the partnership." ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. Item 6(a), (c)(1) - (7) of the Schedule TO is amended and supplemented as follows: (1) The first two paragraphs under "THE LITIGATION SETTLEMENT OFFER -- Section 7. Effects of the Offer" are amended and restated as follows: "Because the general partner of your partnership is our affiliate, we have control over the management of your partnership. In addition, we, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 27,773, or 65.62%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units and control your partnership's general partner, we control the outcome of most voting decisions with respect to your partnership. In general, we will vote the units owned by us in whatever manner we deem to be in our best interests, which may not be in the interest of other limited partners. This could (1) prevent non-tendering limited partners from taking action that they desire but that we oppose and (2) enable us to take action desired by us but opposed by non-tendering limited partners. We are also affiliated with the company that currently manages, and has managed for some time, the property owned by your partnership. In the event that we acquire a substantial number of units pursuant to this offer, removal of the property manager may become more difficult or impossible. If we acquire all of the units that we are seeking in the offer, our interest in your partnership's net earnings ($171,000 for the nine months ended September 30, 2003) and net book value ($(6,430,000) as of September 30, 2003) will increase to 100%. AIMCO-GP owns a 1% interest in AIMCO Properties, L.P. and AIMCO, through its subsidiaries, owns an 89% in AIMCO Properties." (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 7. Effects of the Offer - Effect on the Trading Market; Registration Under Section 12(g) of the Exchange Act" is amended and restated as follows: "The units are registered under Section 12(g) of the Exchange Act, which means, among other things, that your partnership is required to file periodic reports with the SEC and to comply with the SEC's proxy rules. We do not expect or intend that consummation of the offer will cause the units to cease to be registered under Section 12(g) of the Exchange Act. If the units were to be held by fewer than 300 persons, your partnership could apply to de-register the units under the Exchange Act. Your partnership currently has 1,517 unitholders. The lack of filing periodic 16 reports could affect the already limited secondary market which currently exists for units in your partnership and may result in others not tendering for such units. In such a case, you would regularly have access only to the limited information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which information consists primarily of tax information. In particular, you will continue to receive a Schedule K-1 each year as well as audited financial statements with respect to your partnership. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date."" (3) The first, second and third paragraphs of "THE LITIGATION SETTLEMENT OFFER - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints" is amended and restated as follows: "On December 20, 2002, the parties to the above-entitled litigation executed a Stipulation of Settlement of the two actions. That settlement was the result of over one year of negotiations and the involvement of two separate settlement judges. Class counsel and defendants' counsel first met with the Honorable William J. Cahill, Retired California Superior Court Judge, on two separate occasions. Counsel also met on four separate occasions with the Honorable Margaret J. Kemp, California Superior Court Judge, before reaching a settlement in principle. The parties initially met with Judge Cahill on two occasions in the fall of 2000, but were ultimately unsuccessful in reaching a definitive settlement agreement. At the Court's direction, they renewed formal settlement discussions before Judge Kemp. The parties first attended a settlement conference before Judge Kemp in September or October 2002 and then subsequently met with her on October 28, 2002, November 26, 2002 and December 2, 2002. The parties reached final agreement on the material terms of the settlement at the last settlement conference with Judge Kemp on December 2, 2002 and put the terms of that agreement on the record in open court. In each of the conferences described above, counsel from Lieff Cabraser Heimann & Bernstein LLP, Farella Braun & Martel LLP & Berman Devalerio Pease & Tobacco attended on behalf of the named plaintiffs and the putative settlement class; counsel from Skadden, Arps, Slate, Meagher & Flom LLP attended on behalf of AIMCO and its affiliated entities, including your general partner, and Orrick Herrington & Sutcliffe attended on behalf of the remaining defendants. AIMCO Executive Vice President Patrick Foye also attended each of these meetings. Mr. Vincent Gresham of the Law Offices of Vincent Gresham also participated on behalf of plaintiffs and the putative settlement class in those settlement discussions before the Hon. Cahill, Retired. At these meetings, discussions included possible transactions that could provide liquidity to investors and form the basis of a settlement, the use of a settlement fund and the amount of such fund, the timing and distribution of any settlement fund, selection and use of an appraiser and disclosures that would accompany any contemplated transaction(s). The participants considered but ultimately rejected a merger or roll-up of the various partnerships as possible alternatives to cash tender offers. The parties ultimately concluded, however, that a merger or roll-up could be potentially complicated and time consuming and that a cash tender offer would be a less coercive form of providing liquidity to those investors who desired it. The Settlement Agreement requires each tender offer to attach executive summaries of partnership property appraisals commissioned specifically for the settlement tender offers and to provide an explanation of how the appraised values of the properties compare to the per Unit price(s) being offered. It also requires the payment of an allocable portion of the settlement fund for each unit tendered pursuant to the settlement fund, details the scope of the release and covenants not to sue which will bind class members, requires that tender offers be made no more than one year after final approval of the settlement and imposes certain restrictions on the length of time in which the tender offers can remain open, as well as with regard to other disclosures 17 made therein. On April 4, 2003, the Court preliminarily approved the settlement and, on June 13, 2003, entered an order finally approving the settlement and dismissing both the Heller and Nuanes litigation with prejudice. On August 12, 2003, an objector filed an appeal of the court's order approving the settlement and is seeking to reverse or vacate the Court's order and the judgment entered thereto. Although we reserve our right to terminate or amend our offer if final court approval of the settlement is reversed or vacated, we have nevertheless elected to proceed with this offer under the terms of the settlement. On November 24, 2003, the objector appealing the settlement and judgment entered thereto filed an application requesting the Court order AIMCO to withdraw the settlement tender offers, refrain from making further offers pending the appeal and auction any units tendered to third parties. The objector contends that this offer does not conform with the terms of the Settlement. Alternatively, counsel for the objector has requested the Court on behalf of a settlement class member order AIMCO to pay all non-tendering settlement class members their pro rata share of the Settlement Fund whether or not the settlement and judgment entered thereto is vacated on appeal and to notify settlement class members that the releases and covenant not to sue are not binding unless the settlement and judgment entered thereto is affirmed on appeal. AIMCO asserts that such applications are without merit and is opposing such applications." (4) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $178.02 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (5) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." 18 (6) The fourth and fifth paragraphs under "THE LITIGATION SETTLEMENT OFFER - Section 14. Future Plans of the Purchaser" are amended and restated as follows: "We have been advised that the general partner does not currently expect to consider, on behalf of your partnership any of the following transactions: (i) payment of extraordinary distributions; (ii) refinancing, reducing or increasing existing indebtedness of the partnership; (iii) sales of assets, individually or as part of a complete liquidation; and (iv) mergers or other consolidation transactions involving the partnership. Any such merger or consolidation transaction could involve other limited partnerships in which your general partner or its affiliates serve as general partners, or a combination of the partnership with one or more existing, publicly traded entities (including, possibly, affiliates of AIMCO), in any of which limited partners might receive cash, common stock or other securities or consideration. As discussed under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Investment Objectives and Policies; Sale or Financing of Investments," the general partner regularly evaluates the real estate and capital markets. The general partner may consider refinancing the partnership's existing indebtedness to the extent that the general partner is able to obtain a lower interest rate or if such indebtedness is approaching maturity. Furthermore, in the event that the general partner receives an attractive offer for any of your partnership's properties, the general partner would give due consideration to such an offer. If any of the transactions referred to above occur, and financial benefits accrue to the limited partners, we will participate in those benefits to the extent of our ownership of units. The agreement of limited partnership prohibits limited partners from voting on actions taken by the partnership, unless otherwise specifically permitted therein. Limited partners may vote on a liquidation, and we will be able to significantly influence or control the outcome of any such vote. Our primary objective in seeking to acquire the units pursuant to the offer is not, however, to influence the vote on any particular transaction, but rather to generate a profit on the investment represented by those units." ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. Item 7(a), (b) and (d) of the Schedule TO is amended and supplemented as follows: (1) The following sentence is added to the end of the first paragraph under "THE LITIGATION SETTLEMENT OFFER -Section 21. Fees and Expenses": "The partnership will not be responsible for paying any of the fees or expenses incurred by us in connection with this offer." (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER -- Section 21. Fees and Expenses" is amended and restated as follows: "The following is an itemized statement of the aggregate estimated expenses incurred and to be incurred in this offer by us: Information Agent Fees............... $ 7,500 Legal Fees........................... 11,000 Printing Fees........................ 7,600 Tax and Accounting Fees.............. 1,500 Postage.............................. 500 Appraiser............................ 8,900 Depositary........................... 500 ------------ Total.............................. $ 37,500" =============
19 ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. Item 8 of the Schedule TO is amended and supplemented as follows: The following paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership" is amended and restated as follows: "Ownership and Voting. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 27,773 units, or 65.62%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we have the ability to control most votes of the limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer" and "-- Section 16. Voting Power."" ITEM 11. ADDITIONAL INFORMATION. Item 11(b) of the Schedule TO is amended and supplemented as follows: Section 16 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "16. VOTING POWER Decisions with respect to the day-to-day management of your partnership are the responsibility of the general partner. Because the general partner of your partnership is our affiliate, we control the management of your partnership. Under your partnership's agreement of limited partnership, limited partners holding a majority of the outstanding units must approve certain extraordinary transactions, including the removal of the general partner, most amendments to the partnership agreement and the sale of all or substantially all of your partnership's assets. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates) own 27,773 units, or 65.62%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we control most voting decisions made by limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer."" ITEM 12. EXHIBITS. Item 12 of the Schedule TO is amended and supplemented as follows: (c)(1) Appraisal of Carriage House Apartments (c)(2) Appraisal of River Reach Apartments (c)(3) Appraisal of Rocky Creek Apartments (c)(4) Appraisal of Village Gardens 20 ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3. Item 13 of the Schedule TO is amended and supplemented as follows: (1) The thirteenth paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 6. Certain Federal Income Tax Matters" is amended and restated as follows: "Tax Consequences to Your Partnership of Our Offer. Section 708 of the Code provides that if there is a sale or exchange of 50% or more of the total interest in capital and profits of a partnership within any 12-month period, such partnership terminates for United States federal income tax purposes. It is possible that our acquisition of units pursuant to the offer alone or in combination with other transfers of interests in your partnership could result in such a termination of your partnership. If your partnership is not deemed to terminate for tax purposes, there will be no tax effect to your partnership. If your partnership is deemed to terminate for tax purposes, however, the following federal income tax events will be deemed to occur: the terminated partnership will be deemed to have contributed all of its assets (subject to its liabilities) to a new partnership in exchange for an interest in the new partnership and, immediately thereafter, the old partnership will be deemed to have distributed interests in the new partnership to the remaining limited partners in proportion to their respective interests in the old partnership in liquidation of the old partnership. A termination of your partnership for federal income tax purposes may also subject the assets of your partnership to longer depreciable lives than those currently applicable to the assets of your partnership. This would generally decrease the annual average depreciation deductions following our offer, but would have no effect on the total depreciation deductions available over the useful lives of the assets of your partnership. Additionally, upon a termination of your partnership, the taxable year of your partnership will close for federal income tax purposes. Elections as to tax matters previously made by the old partnership will not be applicable to the new partnership unless the new partnership chooses to make the same elections. Tax Consequences to Non-Tending and Partially-Tendering Limited Partners. As described above, if 50% or more of such interests are sold or exchanged within a 12 month period, including as a result of our acquisition of units, a deemed tax termination of your partnership will occur for tax purposes. If less than 50% of the total interest in capital and profits of your partnership are sold or exchanged within any 12 month period, there will be no tax effect to you from the offer. You will not recognize any gain or loss upon a deemed tax termination of your partnership, and your capital account in your partnership will carry over to the new partnership. A termination of your partnership for federal income tax purposes may change (and possibly shorten) your holding period with respect to interests in your partnership that you choose to retain. Gain recognized by you on the disposition of retained units with a holding period of 12 months or less may be classified as short-term capital gain and subject to taxation at ordinary income tax rates. A deemed tax termination will also decrease the annual depreciation deductions (as a result of the longer partnership depreciation lives described above) allocable to you (thereby possibly increasing the taxable income allocable to your interests in the partnership each year)." 21 (2) The first two paragraphs under "THE LITIGATION SETTLEMENT OFFER -- Section 7. Effects of the Offer" are amended and restated as follows: "Because the general partner of your partnership is our affiliate, we have control over the management of your partnership. In addition, we, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 27,773, or 65.62%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units and control your partnership's general partner, we control the outcome of most voting decisions with respect to your partnership. In general, we will vote the units owned by us in whatever manner we deem to be in our best interests, which may not be in the interest of other limited partners. This could (1) prevent non-tendering limited partners from taking action that they desire but that we oppose and (2) enable us to take action desired by us but opposed by non-tendering limited partners. We are also affiliated with the company that currently manages, and has managed for some time, the property owned by your partnership. In the event that we acquire a substantial number of units pursuant to this offer, removal of the property manager may become more difficult or impossible. If we acquire all of the units that we are seeking in the offer, our interest in your partnership's net earnings ($171,000 for the nine months ended September 30, 2003) and net book value ($(6,430,000) as of September 30, 2003) will increase to 100%. AIMCO-GP owns a 1% interest in AIMCO Properties, L.P. and AIMCO, through its subsidiaries, owns an 89% in AIMCO Properties." (3) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 7. Effects of the Offer - Effect on the Trading Market; Registration Under Section 12(g) of the Exchange Act" is amended and restated as follows: "The units are registered under Section 12(g) of the Exchange Act, which means, among other things, that your partnership is required to file periodic reports with the SEC and to comply with the SEC's proxy rules. We do not expect or intend that consummation of the offer will cause the units to cease to be registered under Section 12(g) of the Exchange Act. If the units were to be held by fewer than 300 persons, your partnership could apply to de-register the units under the Exchange Act. Your partnership currently has 1,517 unitholders. The lack of filing periodic reports could affect the already limited secondary market which currently exists for units in your partnership and may result in others not tendering for such units. In such a case, you would regularly have access only to the limited information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which information consists primarily of tax information. In particular, you will continue to receive a Schedule K-1 each year as well as audited financial statements with respect to your partnership. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date."" (4) The following subsection under "THE LITIGATION SETTLEMENT OFFER - Section 8. Valuation of Units" is amended and restated as follows: 22 ESTIMATED LIQUIDATION PROCEEDS BASED ON INDEPENDENT APPRAISAL SELECTION AND QUALIFICATIONS OF INDEPENDENT APPRAISER. Under the terms of the settlement, your partnership's property was appraised by American Appraisal Associates, Inc. ("AAA"), an independent appraiser appointed by the court. The information set forth below was provided to us by AAA with respect to its appraisals. AAA is an experienced independent valuation consulting firm with more than 50 offices on four continents. AAA provides valuation and consulting services for the real estate industry through its specialized industry focus and operates through a team of professionals with different economical, financial, statistical, legal, architectural, urban and engineering knowledge and expertise. FACTORS CONSIDERED. AAA performed complete appraisals of all of your partnership's properties. AAA has represented that its report was prepared in conformity with the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. We furnished the appraiser with all of the necessary information requested by AAA in connection with the appraisal. The information furnished to the appraiser was true, correct and complete in all material respects. No limitations were imposed on AAA by us or any of our affiliates. In preparing its valuation of your partnership property, AAA: o inspected and analyzed the exterior of all buildings and site improvements and a representative sample of units; o conducted neighborhood and area research, including major employers, demographics (population trends, number of households, and income trends), housing trends, surrounding uses, and general economic outlook of the area; o conducted market research of rental inventory, historical vacancy rates, historical average rental rates, occupancy trends, concessions, and marketing strategies in the submarket, and occupancy rates at competing properties; o reviewed leasing policy, concessions and history of recent occupancy; o reviewed the historical operating statements for your partnership's property and an operating budget forecast for 2003; o prepared an estimate of stabilized income and expense (for capitalization purposes); o conducted market inquiries into recent sales of similar properties to ascertain sales price per unit, effective gross income multipliers and capitalization rates; and o prepared sales comparison and income capitalization approaches to value. AAA was provided by us with the following management budgets for your partnership's property:
CARRIAGE HOUSE RIVER REACH ROCKY CREEK VILLAGE GARDENS FISCAL YEAR 2003 FISCAL YEAR 2003 FISCAL YEAR 2003 FISCAL YEAR 2003 MANAGEMENT BUDGET MANAGEMENT BUDGET MANAGEMENT BUDGET MANAGEMENT BUDGET DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ---------- -------- ---------- -------- ---------- -------- ---------- -------- Revenues Rental Income $ 791,572 $ 7,761 $2,846,140 $ 9,551 $ 842,400 $ 7,020 $1,241,067 $ 8,865 Vacancy 60,360 592 123,338 414 38,500 321 52,000 371 Credit Loss/Concessions 6,720 66 56,231 189 23,400 195 0 0 Subtotal $ 67,080 $ 658 $ 179,569 $ 603 $ 61,900 $ 516 $ 52,000 $ 371 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 26,950 $ 193 Garage Revenue 0 0 0 0 0 0 0 0 Other Misc. Revenue 27,132 266 195,600 656 50,400 420 77,620 554 Subtotal Other Income $ 27,132 $ 266 $ 195,600 $ 656 $ 50,400 $ 420 $ 104,570 $ 747 Effective Gross Income $ 751,624 $ 7,369 $2,862,171 $ 9,605 $ 830,900 $ 6,924 $1,293,637 $ 9,240 Operating Expenses Taxes $ 42,548 $ 417 $ 224,319 $ 753 $ 48,945 $ 408 $ 63,335 $ 452 Insurance 23,256 228 112,259 377 21,894 182 23,394 167 Utilities 51,596 506 144,000 483 54,000 450 147,518 1,054 Repair & Maintenance 97,256 953 240,810 808 40,000 333 36,672 262 Cleaning 0 0 0 0 48,000 400 0 0 Landscaping 0 0 0 0 36,000 300 0 0 Security 0 0 0 0 0 0 0 0 Marketing & Leasing 24,720 242 36,120 121 18,000 150 11,455 82 General Administrative 104,373 1,023 240,790 808 101,898 849 128,062 915 Management 37,680 369 144,197 484 41,190 343 63,761 455 Miscellaneous 0 0 0 0 0 0 33,887 242 Total Operating Expenses $ 381,429 $ 3,740 $1,142,495 $ 3,834 $ 409,927 $ 3,416 $ 508,084 $ 3,629 Reserves 0 0 0 0 0 0 0 0 Net Income $ 370,195 $ 3,629 $1,719,676 $ 5,771 $ 420,973 $ 3,508 $ 785,553 $ 5,611
THE ABOVE MANAGEMENT BUDGETS ARE INTERNALLY PREPARED OPERATING PROJECTIONS FOR THE PARTNERSHIP'S PROPERTIES. A MANAGEMENT BUDGET DOES NOT REFLECT A PROPERTY'S ACTUAL PERFORMANCE, OR CHANGES IN THE CONDITION OF A PROPERTY, IN THE LOCAL AREA SURROUNDING A PROPERTY OR IN THE ECONOMY IN GENERAL. 23 SUMMARY OF APPROACHES AND METHODOLOGIES EMPLOYED. The following summary describes the material approaches and analyses employed by AAA in preparing the appraisals. The partnership imposed no conditions or limitations on the scope of AAA's investigation or the methods and procedures to be followed in preparing the appraisal. AAA principally relied on two approaches to valuation: (1) the sales comparison approach and (2) the income capitalization approach. The sales comparison approach uses analysis techniques and sales of comparable improved properties in surrounding or competing areas to derive units of comparison that are then used to indicate a value for the subject property. Under this approach, the primary methods of analysis used by the appraiser were: (1) sales price per unit analysis; (2) net operating income analysis; and (3) effective gross income analysis. The purpose of the income capitalization approach is to value an income-producing property by analyzing likely future income and expenses of the property over a reasonable holding period. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive property value. The direct capitalization analysis determines the value of a property by applying a capitalization rate that takes into account all of the factors influencing the value of such property to the net operating income of such property for a single year. The direct capitalization method is normally more appropriate for properties with relatively stable operating histories and expectations. The discounted cash flow analysis determines the value of a property by discounting to present value the estimated operating cash flow of such property and the estimated proceeds of a hypothetical sale of such property at the end of an assumed holding period. The discounted cash flow method is 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. AAA relied principally on the income capitalization approach to valuation and secondarily on the sales comparison approach. Although the sales comparison approach is considered a reliable method for valuing property, the income capitalization approach is the primary approach used for valuing income producing property, such as your partnership's property. Summary of independent appraisals of your partnership's property. AAA performed complete appraisals of all of your partnership's properties. The summary set forth below describes the material conclusions reached by AAA based on the values determined under the valuation approaches and subject to the assumptions and limitations described below. The estimated total "as is" market value of the fee simple estate of your partnership's property is $30,500,000, which was determined by adding the estimated values determined by AAA for each of your partnership's properties and which is higher than our estimated total gross valuation of $22,230,033. 24 CARRIAGE HOUSE APARTMENTS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Carriage House Apartments that were sold between March 1999 and August 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of all five comparable properties as superior to the location of Carriage House Apartments. AAA rated the quality/appeal of all five comparable properties as superior to the quality/appeal of Carriage House Apartments. AAA rated the amenities of all five comparable properties as comparable to the amenities of Carriage House Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Carriage House Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $26,873 to $35,614 per unit with a mean or average adjusted price of $30,835 per unit and a median adjusted price of $30,468 per unit. Thus, the estimated value based on a $31,000 sales price per unit for the 102 units was approximately $3,100,000 after adjustment for lease-up costs and present value of concessions. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Carriage House Apartments' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $32,404 and $45,208 per unit, with an average of $37,005 per unit. The appraiser concluded a value of $35,000 per unit for the 102 units of the property, resulting in an estimated "as is" market value of $3,500,000 using the NOI analysis after adjustment for lease-up costs and present value of concessions. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Carriage House Apartments to be 50.90% before reserves, with the expense ratios of the five comparable properties ranging from 40.25% to 44.64%, resulting in EGIMs ranging from 5.21 to 7.06. Thus, AAA concluded an EGIM of 5.25 for Carriage House Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $4,100,000 after adjustment for lease-up costs and present value of concessions. AAA estimated the value using the price per unit analysis at $3,100,000, the value using the NOI analysis at $3,500,000 and the value using the EGIM analysis at $4,100,000. Based on these three valuation methods, AAA concluded that the reconciled value for Carriage House Apartments under the sales comparison approach was $3,600,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Carriage House Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Carriage House Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $801,717. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Carriage House Apartments of approximately $368,107. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. 25 The assumptions employed by AAA to determine the value of Carriage House Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 12%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 10.50%; (4) terminal capitalization rate of 11.00%; (5) discount rate of 12.00%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. An adjustment was made for lease-up costs because Carriage House Apartments' occupancy level was below a stabilized occupancy projection Thus, AAA assumed a 12-month lease up period. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $45,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $3,700,000 through the discounted cash flow method. The reversion value contributed approximately 37% of the value. Under the direct capitalization method, utilizing a capitalization rate of 10.50%, the projected NOI resulted in a value (after rounding) of $3,400,000 after adjustments for lease-up costs and present value of concessions. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Carriage House Apartments was $3,600,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $3,600,000 and the estimated market value under the income capitalization approach was $3,600,000. After reconciling the various factors, AAA determined a final "as is" market value for Carriage House Apartments of $3,600,000 as of May 14, 2003. RIVER REACH APARTMENTS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with River Reach Apartments that were sold between March 2000 and January 2003 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of two comparable properties as comparable and three comparable properties as inferior to the location of Carriage House Apartments. AAA rated the quality/appeal of all five comparable properties as superior to the quality/appeal of Carriage House Apartments. AAA rated the amenities of all five comparable properties as comparable to the amenities of Carriage House Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Carriage House Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $50,870 to $56,745 per unit with a mean or average adjusted price of $54,442 per unit and a median adjusted price of $55,125 per unit. Thus, the estimated value based on a $55,000 sales price per unit for the 298 units was approximately $16,400,000. 26 As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Carriage House Apartments' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $46,604 and $55,563 per unit, with an average of $50,274 per unit. The appraiser concluded a value of $55,000 per unit for the 298 units of the property, resulting in an estimated "as is" market value of $16,400,000. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Carriage House Apartments to be 43.68% before reserves, with the expense ratios of the five comparable properties ranging from 28.38% to 37.26%, resulting in EGIMs ranging from 6.21 to 7.03. Thus, AAA concluded an EGIM of 6.00 for Carriage House Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $16,700,000. AAA estimated the value using the price per unit analysis at $16,400,000, the value using the NOI analysis at $16,400,000 and the value using the EGIM analysis at $16,700,000. Based on these three valuation methods, AAA concluded that the reconciled value for Carriage House Apartments under the sales comparison approach was $16,400,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Carriage House Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Carriage House Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $2,777,620. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Carriage House Apartments of approximately $1,489,949. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Carriage House Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 8%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.50%; (5) discount rate of 11.50%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. 27 No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $16,500,000 through the discounted cash flow method. The reversion value contributed approximately 38% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.50%, the projected NOI resulted in a value (after rounding) of $15,700,000. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Carriage House Apartments was $16,500,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $16,400,000 and the estimated market value under the income capitalization approach was $16,500.000. After reconciling the various factors, AAA determined a final "as is" market value for Carriage House Apartments of $16,500,000 as of May 28, 2003. ROCKY CREEK APARTMENTS Valuation Under Sales Comparison Approach. AAA compared four apartment complexes with Rocky Creek Apartments that were sold between June 1999 and November 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of all four comparable properties as comparable to the location of Rocky Creek Apartments. AAA rated the quality/appeal of three comparable properties as comparable and one comparable property as inferior to the quality/appeal of Rocky Creek Apartments. AAA rated the amenities of one comparable property as superior, two comparable properties as comparable and one comparable property as inferior to the amenities of Rocky Creek Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Rocky Creek Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $26,156 to $39,950 per unit with a mean or average adjusted price of $32,686 per unit and a median adjusted price of $32,319 per unit. Thus, the estimated value based on a $32,500 sales price per unit for the 120 units was approximately $3,900,000. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Rocky Creek Apartments' NOI to the NOI of the four comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $29,446 and $34,987 per unit, with an average of $31,974 per unit. The appraiser concluded a value of $32,000 per unit for the 120 units of the property, resulting in an estimated "as is" market value of $3,800,000 using the NOI analysis. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Rocky Creek Apartments to be 51.05% before reserves, with the expense ratios of the four comparable properties ranging from 42.43% to 61.10%, resulting in EGIMs ranging from 3.64 to 6.29. Thus, AAA concluded an EGIM of 4.75 for Rocky Creek Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $3,900,000. 28 AAA estimated the value using the price per unit analysis at $3,900,000, the value using the NOI analysis at $3,800,000 and the value using the EGIM analysis at $3,900,000. Based on these three valuation methods, AAA concluded that the reconciled value for Rocky Creek Apartments under the sales comparison approach was $3,900,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Rocky Creek Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Rocky Creek Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $828,600. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Rocky Creek Apartments of approximately $384,570. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Rocky Creek Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 10%; (2) replacement reserve of $175 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.00%; (5) discount rate of 12.00%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $3,900,000 through the discounted cash flow method. The reversion value contributed approximately 38% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.50%, the projected NOI resulted in a value (after rounding) of $4,000,000. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Rocky Creek Apartments was $3,900,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their 29 substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $3,900,000 and the estimated market value under the income capitalization approach was $3,900,000. After reconciling the various factors, AAA determined a final "as is" market value for Rocky Creek Apartments of $3,900,000 as of June 1, 2003. VILLAGE GARDENS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Village Gardens that were sold between November 2001 and January 2003 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of four comparable properties as superior and one comparable property as comparable to the location of Village Gardens. AAA rated the quality/appeal of three comparable properties as superior and two comparable properties as comparable to the quality/appeal of Village Gardens. AAA rated the amenities of four comparable properties as comparable and one comparable property as inferior to the amenities of Village Gardens. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Village Gardens in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $50,405 to $53,550 per unit with a mean or average adjusted price of $52,105 per unit and a median adjusted price of $52,297 per unit. Thus, the estimated value based on a $52,000 sales price per unit for the 140 units was approximately $7,000,000 after adjustment for lease-up costs and present value of concessions. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Village Gardens' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $51,119 and $71,214 per unit, with an average of $57,223 per unit. The appraiser concluded a value of $53,000 per unit for the 140 units of the property, resulting in an estimated "as is" market value of $7,200,000 using the NOI analysis after adjustment for lease-up costs and present value of concessions. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Village Gardens to be 40.91% before reserves, with the expense ratios of the five comparable properties ranging from 27.19% to 45.79%, resulting in EGIMs ranging from 6.12 to 8.78. Thus, AAA concluded an EGIM of 6.20 for Village Gardens, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $7,000,000 after adjustment for lease-up costs and present value of concessions. AAA estimated the value using the price per unit analysis at $7,000,000, the value using the NOI analysis at $7,200,000 and the value using the EGIM analysis at $7,000,000. Based on these three valuation methods, AAA concluded that the reconciled value for Village Gardens under the sales comparison approach was $7,000,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Village Gardens. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Village 30 Gardens' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $1,159,708. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Village Gardens of approximately $657,222. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Village Gardens under the income approach included: (1) stabilized vacancy and collection loss rate of 13%; (2) replacement reserve of $200 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.00%; (5) discount rate of 12.00%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. An adjustment was made for lease-up costs because Village Gardens' occupancy level was below a stabilized occupancy projection. Thus, AAA assumed a 18-month lease up period. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $123,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $6,400,000 through the discounted cash flow method. The reversion value contributed approximately 40% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.50%, the projected NOI resulted in a value (after rounding) of $6,700,000 after adjustments for lease-up costs and present value of concessions, if any. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Village Gardens was $6,500,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $7,000,000 and the estimated market value under the income capitalization approach was $6,500,000. After reconciling the various factors, AAA determined a final "as is" market value for Village Gardens of $6,500,000 as of May 17, 2003. ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF AAA'S VALUATION. In preparing the appraisal, AAA relied, without independent verification, on the accuracy and completeness of all information supplied or otherwise made available to it by or on behalf of the partnership. In arriving at the appraisal, AAA assumed: o good and marketable title to the property; o validity of owner's claim to the property; o no encumbrances which could not be cleared through normal processes, unless otherwise stated; o accuracy of land areas and descriptions obtained from public records; o no subsurface mineral and use rights or conditions; 31 o no substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials in existence or present on or in the property; o full compliance with applicable federal, state and local environmental regulations and laws, unless otherwise stated, defined and considered; o possession of all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization and that the renewal of these items is possible; o compliance with all applicable zoning and use regulations and restrictions, unless a nonconformity has been stated, defined, and considered; o utilization of the land and improvements within property boundaries and no encroachment or trespass of the improvements, unless otherwise stated; o 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 not readily apparent during inspection; and o compliance with the Americans with Disabilities Act of 1992. COMPENSATION OF APPRAISER. AAA was appointed by the court to perform all the real estate appraisals in connection with the settlement and this Litigation Settlement Offer. AAA was paid a fee of $619,100 for the appraisals. We have agreed to pay 50% of the costs of the appraisals, with the other 50% to be paid from the settlement fund. AAA has conducted other appraisals of property in connection with the other offers being made pursuant to the settlement agreement. Other than the appraisals performed in connection with the settlement agreement, during the prior two years, no material relationship has existed between AAA and your partnership or any of its affiliates, including the AIMCO Entities. AVAILABILITY OF APPRAISAL REPORTS. You may obtain a full copy of AAA's appraisals upon request, without charge, by contacting the Information Agent at one of the addresses or the telephone number on the back cover of this Litigation Settlement Offer. Copies of the appraisal for the property are also available for inspection and copying at the principal executive offices of the partnership during regular business hours by any interested unitholder or his or her designated representative at his or her cost. In addition, a copy of the appraisals has been filed with the SEC as an exhibit to the Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO. In estimating the net liquidation proceeds that would be payable per unit based on the total appraised value of your partnership's properties, we applied the same basic methodology as described under "Valuation of Units", except that we did not deduct any amounts that were reflected in the total appraised value nor did we include any payment from the settlement fund. As indicated below, based on the total appraised value of the partnership properties, the estimated net liquidation proceeds per unit is $178.02, which is higher than our offer price of $86.22. 32 Appraised value of partnership properties................... $ 30,500,000 Plus: Cash and cash equivalents (net of tenant security deposits)................................................. 352,949 Plus: Other partnership assets, including any amounts payable by the general partner and its affiliates upon liquidation............................................... 488,971 Less: Mortgage debt, including accrued interest and any prepayment penalty........................................ (22,617,401) Less: Accounts payable and accrued expenses................. (111,308) Less: Other liabilities..................................... (547,803) ------------ Partnership valuation before taxes and certain costs........ $ 8,065,408 Less: Estimated closing costs............................... (530,750) ------------ Estimated net liquidation proceeds of your partnership...... $ 7,534,658 Percentage of estimated net liquidation proceeds allocable to holders of units based on the partnership agreement.... 100% ------------ Estimated net liquidation proceeds of units................. $ 7,534,658 Total number of units..................................... 42,324.00 ------------ Estimated net liquidation proceeds per unit................. $ 178.02 ============
(5) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $178.02 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of 33 interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (6) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." (7) Section 12 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "12. POSITION OF THE GENERAL PARTNER OF YOUR PARTNERSHIP WITH RESPECT TO THE OFFER The partnership and the general partner of your partnership (which is our affiliate) have provided the following information for inclusion in this Litigation Settlement Offer: Factors in Favor of Fairness Determination. The general partner of your partnership believes the offer price and the structure of the transaction are fair to the unaffiliated limited partners. In support of such determination, the general partner considered the factors and information set forth below, but did not quantify or otherwise attach particular weight to any such factors or information: o the Court's approval of the settlement pursuant to which the offer is being made; o the fact that the interests of the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement; o the method we used to determine our offer price is a method commonly relied upon by investors to value income producing property; o the offer gives limited partners an opportunity to make an individual decision on whether to tender their units or to continue to hold them; 34 o there is no established trading market for the limited partnership units, and the offer would provide immediate liquidity for tendering limited partners; o the uncertainty of the resulting proceeds from the possible alternative transactions, particularly a property sale or a liquidation of the partnership, o the fact that no unaffiliated limited partners would be able to participate in the future performance of the partnership following such alternative transactions; o the offer price exceeds the book value per unit of $(151.92) at September 30, 2003; o the fact that our offer price does not reflect any discount for minority interests; and o the absence of any other firm offers by third parties for all or substantially all of the partnership's assets, a merger or other extraordinary transaction during the past two years with which to compare the Litigation Settlement Offer. Factors Not in Favor of Fairness Determination. In addition to the foregoing factors, the general partner considered the following countervailing factors: o the recent valuation of your partnership's property by American Appraisal Associates, Inc., an independent appraiser appointed by the Court, which results in an estimate of net liquidation proceeds per unit of $178.02, which is higher than our offer price of $86.22; o the fact that offer prices in our prior tender offers were higher than our current offer price; and o prices at which the units have recently sold were higher than our current offer price. The general partner believes that consideration of the offer was procedurally fair because, among other things, (1) the Court approved the settlement agreement pursuant to which the offer is being made, (2) limited partners are provided the opportunity to retain their units, (3) the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement, and (4) limited partners can evaluate our offer price by comparing it to the net liquidation proceeds per unit derived from the independent appraiser's property valuation. While the general partner believes our offer is fair, the general partner also believes that you must make your own decision whether or not to participate in any offer, based upon a number of factors, including several factors that may be personal to you, such as your financial position, your need or desire for liquidity, your preferences regarding the timing of when you might wish to sell your units, other financial opportunities available to you, and your tax position and the tax consequences to you of selling your units. Consequently, the general partner makes no recommendation as to whether or not you should tender or refrain from tendering your units in this offer. YOU ARE ENCOURAGED TO CAREFULLY REVIEW THIS LITIGATION SETTLEMENT OFFER, THE EXECUTIVE SUMMARY OF THE INDEPENDENT APPRAISER'S REPORT (ATTACHED AS ANNEX II) AND ANY OTHER INFORMATION AVAILABLE TO YOU AND TO SEEK ADVICE FROM YOUR INDEPENDENT LAWYER, TAX ADVISOR AND/OR FINANCIAL ADVISOR BEFORE DECIDING WHETHER OR NOT TO ACCEPT THIS LITIGATION SETTLEMENT OFFER. Neither the general partner of your partnership or its affiliates have any plans or arrangements to tender any units. Except as otherwise provided in "The Litigation Settlement Offer -- Section 14. 35 Future Plans of the Purchaser," the general partner does not have any present plans or proposals which relate to or would result in an extraordinary transaction, such as a merger, reorganization or liquidation, involving your partnership; a purchase or sale or transfer of a material amount of your partnership's assets; or any changes in your partnership's present capitalization, indebtedness or distribution policies. For information relating to certain relationships between your partnership and its general partner, on one hand, and AIMCO and its affiliates, on the other, and conflicts of interests with respect to the tender offer, see "The Litigation Settlement Offer -- Section 11. Background and Reasons for the Offer" and "-- Section 13. Conflicts of Interest and Transactions with Affiliates." See also "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Comparison to Alternative Consideration" for certain information regarding transactions with respect to units of your partnership. Your partnership did not receive any report, opinion or appraisal with respect to the fairness of this Litigation Settlement Offer or the offer price being offered to limited partners. However, the partnership did receive the appraisals prepared by AAA, as described above. Although the AIMCO Entities have interests that may be in conflict with those of the partnership's unaffiliated limited partners, each of the AIMCO Entities believes that the offer price and the structure of the transaction are fair to the unaffiliated limited partners based on the information and factors considered by the general partner of your partnership. Each of AIMCO Entities expressly adopts the analysis, and the factors underlying such analysis, of the general partner of your partnership." (8) The first paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "NHP Management Company (which is our affiliate) received fees of approximately $84,000 and $296,000 for the years ended December 31, 2002 and 2001, respectively, for construction management services. The construction management service fees are calculated based on a percentage of current additions to investment properties." (9) The third paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "During the year ended December 31, 2002, the partnership paid us approximately $252,000 for brokerage fees associated with the refinancing of River Reach, Rocky Creek, Carriage House, and Nottingham Square Apartments. The approximately $103,000 paid for Nottingham Square was written off when the property was sold. The approximately $149,000 paid for River Reach, Rocky Creek and Carriage House Apartments is included in other assets as loan costs on the balance sheet of the partnership." (10) The fourth and fifth paragraphs under "THE LITIGATION SETTLEMENT OFFER - Section 14. Future Plans of the Purchaser" are amended and restated as follows: "We have been advised that the general partner does not currently expect to consider, on behalf of your partnership any of the following transactions: (i) payment of extraordinary distributions; (ii) refinancing, reducing or increasing existing indebtedness of the partnership; (iii) sales of assets, individually or as part of a complete liquidation; and (iv) mergers or other consolidation transactions involving the partnership. Any such merger or consolidation 36 transaction could involve other limited partnerships in which your general partner or its affiliates serve as general partners, or a combination of the partnership with one or more existing, publicly traded entities (including, possibly, affiliates of AIMCO), in any of which limited partners might receive cash, common stock or other securities or consideration. As discussed under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Investment Objectives and Policies; Sale or Financing of Investments," the general partner regularly evaluates the real estate and capital markets. The general partner may consider refinancing the partnership's existing indebtedness to the extent that the general partner is able to obtain a lower interest rate or if such indebtedness is approaching maturity. Furthermore, in the event that the general partner receives an attractive offer for any of your partnership's properties, the general partner would give due consideration to such an offer. If any of the transactions referred to above occur, and financial benefits accrue to the limited partners, we will participate in those benefits to the extent of our ownership of units. The agreement of limited partnership prohibits limited partners from voting on actions taken by the partnership, unless otherwise specifically permitted therein. Limited partners may vote on a liquidation, and we will be able to significantly influence or control the outcome of any such vote. Our primary objective in seeking to acquire the units pursuant to the offer is not, however, to influence the vote on any particular transaction, but rather to generate a profit on the investment represented by those units." (11) The chart under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership - Financial Data" is amended by adding the following line items:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------- 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) Income (loss) per unit from continuing operations $ 4.04 $ 12.90 $ 309.78 $ 20.82 $192.07 Ratio of earnings to fixed charges (deficit)....... 119.4% 151.8% 1,063.3% 170.2% 465.9% Book value per limited partnership unit............ (151.92) (116.01) (90.87) (25.82) (29.35)
(12) The following chart under Annex I is amended and restated as follows:
NAME POSITION - -------------------------- ------------------------------------------------------------------ Terry Considine............ Chairman of the Board of Directors and Chief Executive Officer Peter K. Kompaniez......... Vice Chairman, President and Director Harry G. Alcock............ Executive Vice President and Chief Investment Officer Miles Cortez............... Executive Vice President, General Counsel and Secretary Joseph DeTuno.............. Executive Vice President -- Redevelopment Patti K. Fielding.......... Executive Vice President -- Securities and Debt Patrick J. Foye............ Executive Vice President Lance J. Graber............ Executive Vice President -- AIMCO Capital Paul J. McAuliffe.......... Executive Vice President and Chief Financial Officer Ronald D. Monson........... Executive Vice President and Head of Property Operations David Robertson............ Executive Vice President -- President and Chief Executive Officer of AIMCO Capital Jim Purvis................. Executive Vice President -- Human Resources Randall J. Fein............ Executive Vice President -- Student Housing James N. Bailey............ Director Richard S. Ellwood......... Director J. Landis Martin........... Director Thomas L. Rhodes........... Director
37 SIGNATURE After due inquiry and to the best of its knowledge and belief, the undersigned hereby certify that the information set forth in this statement is true, complete and correct. Date: December 9, 2003 AIMCO PROPERTIES, L.P. By: AIMCO-GP, INC. Its General Partner By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President 38 SCHEDULE 13E-3 After due inquiry and to the best of its knowledge and belief, the undersigned hereby certify that the information set forth in this statement is true, complete and correct. Date: December 9, 2003 AIMCO-GP, INC. By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President SHELTER REALTY VI CORPORATION By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President 39 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- (c)(1) Appraisal of Carriage House Apartments (c)(2) Appraisal of River Reach Apartments (c)(3) Appraisal of Rocky Creek Apartments (c)(4) Appraisal of Village Gardens
40 EX-99.(C)(1) 3 d07278a2exv99wxcyx1y.txt APPRAISAL OF CARRIAGE HOUSE APARTMENTS CARRIAGE HOUSE APARTMENTS 1220 CARRIAGE HOUSE LANE GASTONIA, NORTH CAROLINA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 14, 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: CARRIAGE HOUSE APARTMENTS 1220 CARRIAGE HOUSE LANE GASTONIA, GASTON 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 102 units with a total of 123,450 square feet of rentable area. The improvements were built in 1971. The improvements are situated on 10.23 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 84% 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 14, 2003 is: ($3,600,000) 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 ........................................... 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Carriage House Apartments LOCATION: 1220 Carriage House Lane Gastonia, 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 14, 2003 DATE OF REPORT: July 3, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 10.23 acres, or 445,619 square feet Assessor Parcel No.: 115987 Floodplain: Community Panel No. 37071C0282E (March 3, 2003) Flood Zone X, an area outside the floodplain. Zoning: R-17 MF (Multifamily Zoning) BUILDING: No. of Units: 102 Units Total NRA: 123,450 Square Feet Average Unit Size: 1,210 Square Feet Apartment Density: 10.0 units per acre Year Built: 1971 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ---------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - ------------------------------------------------------------ 1Br/1.5Ba Tnhs 900 $599 $0.67 $ 2,995 $ 35,940 2Br/1.5Ba Tnhs 1,100 $659 $0.60 $25,042 $300,504 2Br/1.5Ba Grdn 1,100 $659 $0.60 $10,544 $126,528 3Br/1.5Ba Tnhs 1,200 $719 $0.60 $ 3,595 $ 43,140 3Br/1.5Ba Grdn 1,400 $789 $0.56 $18,936 $227,232 3Br/2Ba Tnhs 1,425 $799 $0.56 $11,186 $134,232 - ------------------------------------------------------------ Total $72,298 $867,576 ============================================================
OCCUPANCY: 84% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 32 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA REMAINING ECONOMIC LIFE: 13 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [EXTERIOR - SUBJECT ENTRANCE PICTURE] [EXTERIOR - TYPICAL BUILDING ELEVATION PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $ 867,576 $ 8,506 Effective Gross Income $ 801,717 $ 7,860 Operating Expenses $ 408,110 $ 4,001 50.9% of EGI Net Operating Income: $ 368,107 $ 3,609 Capitalization Rate 10.50% DIRECT CAPITALIZATION VALUE $ 3,400,000 * $33,333 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 13% Stabilized Vacancy & Collection Loss: 12% Lease-up / Stabilization Period 12 months Terminal Capitalization Rate 11.00% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 3,700,000 * $36,275 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 3,600,000 $35,294 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $40,139 to $52,261 Range of Sales $/Unit (Adjusted) $26,873 to $35,614 VALUE INDICATION - PRICE PER UNIT $ 3,100,000 * $30,392 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.21 to 7.06 Selected EGIM for Subject 5.25 Subject's Projected EGI $ 801,717 EGIM ANALYSIS CONCLUSION $ 4,100,000 * $40,196 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 3,500,000 * $34,314 / UNIT RECONCILED SALES COMPARISON VALUE $ 3,600,000 $35,294 / 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 3,100,000 NOI Per Unit $ 3,500,000 EGIM Multiplier $ 4,100,000 INDICATED VALUE BY SALES COMPARISON $ 3,600,000 $35,294 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 3,400,000 Discounted Cash Flow Method: $ 3,700,000 INDICATED VALUE BY THE INCOME APPROACH $ 3,600,000 $35,294 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 3,600,000 $35,294 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 1220 Carriage House Lane, Gastonia, Gaston County, North Carolina. Gastonia identifies it as 115987. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by John Hayden on May 14, 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 14, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 SP VI LP. 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. There are currently three offers for the purchase of the subject at $3,200,000, $3,000,000, and $2,700,000. However, very little other information regarding the parameters of theses offers is known. Hence, a direct comparison with the value estimate from this report provides little information regarding their applicability. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 11 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 Gastonia, 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 - Huntsmoor Drive West - Hoffman Boulevard South - Highway 279 North - Audrey Lane 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, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA - -------------------------------------------------------------------------------- POPULATION TRENDS Current Population 6,828 44,520 91,139 1,561,413 5-Year Population 7,328 47,275 93,958 1,721,386 % Change CY-5Y 7.3% 6.2% 3.1% 10.2% Annual Change CY-5Y 1.5% 1.2% 0.6% 2.0% HOUSEHOLDS Current Households 3,042 18,152 36,135 601,124 5-Year Projected Households 3,321 19,588 37,844 667,464 % Change CY-5Y 9.2% 7.9% 4.7% 11.0% Annual Change CY-5Y 1.8% 1.6% 0.9% 2.2% INCOME TRENDS Median Household Income $40,229 $39,808 $35,825 $ 48,633 Per Capita Income $23,243 $23,390 $20,181 $ 24,575 Average Household Income $53,193 $57,204 $50,933 $ 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 50.48% 40.06% 36.38% 29.67% 5-Year Projected % Renting 53.93% 41.89% 37.32% 29.33% % of Households Owning 45.52% 55.17% 58.12% 64.90% 5-Year Projected % Owning 42.33% 53.68% 57.47% 65.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Single Family Residential South - Retail Center East - Single Family Residential West - Single Family Residential CONCLUSIONS The subject is well located within the city of Gastonia. 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Gastonia in Gaston County. The overall pace of development in the subject's market is more or less stable. Currently, there are no units under construction within this submarket. Additionally, no new units were completed over the past year. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------------------------- Feb-01 8.8% 4.5% Aug-01 9.8% 6.9% Feb-02 12.9% 7.9% Aug-02 11.2% 10.4% Feb-03 12.7% 11.6%
Source: Charlotte Apartment Index March '03 Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. Occupancies have been declining for the Charlotte area as a whole while the subject's submarket appears to be mirroring the overall area's performance, although not as intensely. Occupancies are expected to remain at these levels at least for the near future, as recently developed and planned units are absorbed. 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 - --------------------------------------------- Feb-01 $700 - $581 - Aug-01 $713 1.9% $623 7.2% Feb-02 $712 -0.1% $608 -2.4% Aug-02 $708 -0.6% $599 -1.5% Feb-03 $710 0.3% $619 3.3%
The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - ------------------------------------------------------------------------------------- R-1 Walker's Ridge 144 96% 1990 1 mile west of subject R-2 Patriots 186 73% 1998 2 miles west of subject R-3 Quail Woods 188 72% 1973 1 mile west of subject R-4 River Wind 180 91% 1998 2 miles west of subject Subject Carriage House Apartments 102 84% 1971
Within the subject's submarket, while rental rates have fluctuated, in general they have remained relatively stable at around the same (average) level. This tends to mirror the Charlotte market's performance, although rental rates within the subject's submarket tend to average approximately $100 per unit lower than the overall Charlotte area. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 10.23 acres, or 445,619 square feet Shape Irregular Topography Rolling Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 37071C0282E, dated March 3, 2003 Flood Zone Zone X Zoning R-17 MF, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2003 ---------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ------------------------------------------------------------------------- 115987 $408,000 $2,895,250 $3,303,250 0.01461 $48,254
IMPROVEMENT ANALYSIS Year Built 1971 Number of Units 102 Net Rentable Area 123,450 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Wood or vinyl siding Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, tennis court, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - ------------------------------------------ 1Br/1.5Ba Tnhs 5 900 2Br/1.5Ba Tnhs 38 1,100 2Br/1.5Ba Grdn 16 1,100 3Br/1.5Ba Tnhs 5 1,200 3Br/1.5Ba Grdn 24 1,400 3Br/2Ba Tnhs 14 1,425
Overall Condition Average Effective Age 32 years Economic Life 45 years Remaining Economic Life 13 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 1971 and consist of a 102-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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Carriage House Apartments Cedars I Walker's Ridge LOCATION: Address 1220 Carriage House Lane 7139 Winding Cedar Trail 1100 Robinwood Road City, State Gastonia, North Carolina Charlotte, NC Gastonia, NC County Gaston Mecklenburg Gaston PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 123,450 340,000 134,640 Year Built 1971 1983 1990 Number of Units 102 360 144 Unit Mix: Type Total Type Total Type Total 1Br/1.5Ba Tnhs 5 1Br/1Ba 152 1Br/1Ba 32 2Br/1.5Ba Tnhs 38 2Br/2Ba 152 2Br/2Ba 72 2Br/1.5Ba Grdn 16 3Br/2Ba 56 3Br/2Ba 40 3Br/1.5Ba Tnhs 5 3Br/1.5Ba Grdn 24 3Br/2Ba Tnhs 14 Average Unit Size (SF) 1,210 944 935 Land Area (Acre) 10.2300 31.3500 N/A Density (Units/Acre) 10.0 11.5 Parking Ratio (Spaces/Unit) 2.44 N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Good APPEAL: Average Average Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/Yes Gym Room No Yes Yes Laundry Room Yes Yes Yes Secured Parking No Yes Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 84% 93% 94% TRANSACTION DATA: Sale Date August, 2002 February, 2002 Sale Price ($) $14,800,000 $6,800,000 Grantor CAPREIT Cedars LP N/A Grantee Cedars Apt Assoc LLC Guardian Management Sale Documentation Book 13946 Page 148 N/A Verification Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,964,816 $8,236 $8.72 $1,315,104 $9,133 $9.77 Vacancy/Credit Loss $ 355,778 $ 988 $1.05 $ 157,812 $1,096 $1.17 Effective Gross Income $2,609,038 $7,247 $7.67 $1,157,292 $8,037 $8.60 Operating Expenses $1,164,600 $3,235 $3.43 $ 465,840 $3,235 $3.46 Net Operating Income $1,444,438 $4,012 $4.25 $ 691,452 $4,802 $5.14 NOTES: None None PRICE PER UNIT $41,111 $47,222 PRICE PER SQUARE FOOT $ 43.53 $ 50.51 EXPENSE RATIO 44.6% 40.3% EGIM 5.67 5.88 OVERALL CAP RATE 9.76% 10.17% 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 River Wind LOCATION: Address 1701 Gander Cover 9200 Willow Ridge 1231 East Hudson Boulevard Ln City, State Charlotte, NC Charlotte, NC Gastonia, NC County Mecklenburg Mecklenburg Gaston PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 223,200 370,728 185,900 Year Built 1988 1986 1998 Number of Units 288 456 180 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 144 1Br/1Ba 190 1Br/1Ba 56 2Br/2Ba 144 2Br/2Ba 266 2Br/2Ba 92 3Br/2Ba 32 Average Unit Size (SF) 775 813 1,033 Land Area (Acre) N/A 11.9780 N/A Density (Units/Acre) 38.1 Parking Ratio (Spaces/Unit) N/A N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Good APPEAL: Average Average Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/Yes Gym Room Yes Yes Yes Laundry Room Yes Yes Yes Secured Parking No Yes Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 89% 93% 92% TRANSACTION DATA: Sale Date August, 2001 December, 2002 March, 1999 Sale Price ($) $11,560,000 $20,300,000 $9,407,000 Grantor WTC No One Hundred Willow Ridge Apts LLC N/A Grantee Group One New Willow Ridge Assoc. River Wind Holdings Investments Sale Documentation Book 12518, Page 898 Book 14555, Page 549 N/A 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 $1,515,048 $8,417 $8.15 Vacancy/Credit Loss $ 302,607 $1,051 $ 1.36 $ 487,062 $1,068 $ 1.31 $ 181,806 $1,010 $0.98 Effective Gross Income $2,219,121 $7,705 $ 9.94 $3,571,784 $7,833 $ 9.63 $1,333,242 $7,407 $7.17 Operating Expenses $ 931,680 $3,235 $ 4.17 $1,475,160 $3,235 $ 3.98 $ 582,300 $3,235 $3.13 Net Operating Income $1,287,441 $4,470 $ 5.77 $2,096,624 $4,598 $ 5.66 $ 750,942 $4,172 $4.04 NOTES: None None None PRICE PER UNIT $40,139 $44,518 $52,261 PRICE PER SQUARE FOOT $ 51.79 $ 54.76 $ 50.60 EXPENSE RATIO 42.0% 41.3% 43.7% EGIM 5.21 5.68 7.06 OVERALL CAP RATE 11.14% 10.33% 7.98% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $40,139 to $52,261 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 $26,873 to $35,614 per unit with a mean or average adjusted price of $30,835 per unit. The median adjusted price is $30,468 per unit. Based on the following analysis, we have concluded to a value of $31,000 per unit, which results in an "as is" value of $3,100,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Carriage House Apartments Cedars I Walker's Ridge Address 1220 Carriage House Lane 7139 Winding Cedar Trail 1100 Robinwood Road City Gastonia, North Carolina Charlotte, NC Gastonia, NC Sale Date August, 2002 February, 2002 Sale Price ($) $14,800,000 $6,800,000 Net Rentable Area (SF) 123,450 340,000 134,640 Number of Units 102 360 144 Price Per Unit $41,111 $47,222 Year Built 1971 1983 1990 Land Area (Acre) 10.2300 31.3500 N/A VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2002 0% 02-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $41,111 $47,222 Location Superior -20% Superior -20% Number of Units 102 360 10% 144 0% Quality / Appeal Average Superior -10% Superior -10% Age / Condition 1971 1983 / Average 0% 1990 / Good -10% Occupancy at Sale 84% 93% -10% 94% -10% Amenities Average Comparable 0% Comparable 0% Average Unit Size (SF) 1,210 944 10% 935 10% PHYSICAL ADJUSTMENT -20% -40% FINAL ADJUSTED VALUE ($/UNIT) $32,889 $28,333 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------- ---------- ---------- ---------- Property Name Drake Willow Ridge River Wind Address 1701 Gander Cover Ln 9200 Willow Ridge 1231 East Hudson Boulevard City Charlotte, NC Charlotte, NC Gastonia, NC Sale Date August, 2001 December, 2002 March, 1999 Sale Price ($) $11,560,000 $20,300,000 $9,407,000 Net Rentable Area (SF) 223,200 370,728 185,900 Number of Units 288 456 180 Price Per Unit $40,139 $44,518 $52,261 Year Built 1988 1986 1998 Land Area (Acre) N/A 11.9780 N/A VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2001 3% 12-2002 0% 03-1999 6% VALUE AFTER TRANS. ADJUST. ($/UNIT) $41,343 $44,518 $55,397 Location Superior -20% Superior -20% Superior -20% Number of Units 288 5% 456 10% 180 0% Quality / Appeal Superior -10% Superior -10% Superior -10% Age / Condition 1988 / Average 0% 1986 / Average 0% 1998 / Good -10% Occupancy at Sale 89% -5% 93% -10% 92% -10% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 775 -5% 813 10% 1,033 5% PHYSICAL ADJUSTMENT -35% -20% -45% FINAL ADJUSTED VALUE ($/UNIT) $26,873 $35,614 $30,468
SUMMARY VALUE RANGE (PER UNIT) $26,873 TO $35,614 MEAN (PER UNIT) $30,835 MEDIAN (PER UNIT) $30,468 VALUE CONCLUSION (PER UNIT) $31,000
VALUE OF IMPROVEMENT & MAIN SITE $3,162,000 LESS: LEASE-UP COST -$ 23,000 PV OF CONCESSIONS -$ 45,000 VALUE INDICATED BY SALES COMPARISON APPROACH $3,094,000 ROUNDED $3,100,000
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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 9.76% $1,444,438 $368,107 0.899 $36,977 $ 41,111 $ 4,012 $ 3,609 I-2 144 $ 6,800,000 10.17% $ 691,452 $368,107 0.752 $35,491 $ 47,222 $ 4,802 $ 3,609 I-3 288 $11,560,000 11.14% $1,287,441 $368,107 0.807 $32,404 $ 40,139 $ 4,470 $ 3,609 I-4 456 $20,300,000 10.33% $2,096,624 $368,107 0.785 $34,942 $ 44,518 $ 4,598 $ 3,609 I-5 180 $ 9,407,000 7.98% $ 750,942 $368,107 0.865 $45,208 $ 52,261 $ 4,172 $ 3,609
PRICE/UNIT
Low High Average Median $32,404 $45,208 $37,005 $35,491
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 35,000 Number of Units 102 Value $3,570,000 Less: Lease-Up Cost -$ 23,000 PV of Concessions -$ 45,000 ---------- Value Based on NOI Analysis $3,502,000 Rounded $3,500,000
The adjusted sales indicate a range of value between $32,404 and $45,208 per unit, with an average of $37,005 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 $3,500,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 $ 2,609,038 $1,164,600 44.64% 5.67 $ 41,111 I-2 144 $ 6,800,000 $ 1,157,292 $ 465,840 40.25% 5.88 $ 47,222 I-3 288 $11,560,000 $ 2,219,121 $ 931,680 41.98% 5.21 $ 40,139 50.90% I-4 456 $20,300,000 $ 3,571,784 $1,475,160 41.30% 5.68 $ 44,518 I-5 180 $ 9,407,000 $ 1,333,242 $ 582,300 43.68% 7.06 $ 52,261
EGIM
Low High Average Median - --- ---- ------- ------ 5.21 7.06 5.90 5.68
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.25 Subject EGI $ 801,717 Value $4,209,014 Less: Lease-Up Cost -$ 23,000 PV of Concessions -$ 45,000 ---------- Value Based on EGIM Analysis $4,141,014 Rounded $4,100,000 Value Per Unit $ 40,196
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 50.90% before reserves. The comparable sales indicate a range of expense ratios from 40.25% to 44.64%, while their EGIMs range from 5.21 to 7.06. Overall, we conclude to an EGIM of 5.25, which results in an "as is" value estimate in the EGIM Analysis of $4,100,000. 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 $3,600,000. Price Per Unit $3,100,000 NOI Per Unit $3,500,000 EGIM Analysis $4,100,000 Sales Comparison Conclusion $3,600,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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/1.5Ba Tnhs 900 $517 $0.57 80.0% 2Br/1.5Ba Tnhs 1100 $549 $0.50 84.2% 2Br/1.5Ba Grdn 1100 $528 $0.48 87.5% 3Br/1.5Ba Tnhs 1200 $631 $0.53 80.0% 3Br/1.5Ba Grdn 1400 $719 $0.51 83.3% 3Br/2Ba Tnhs 1425 $713 $0.50 85.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS --------------------------------------- R-1 R-2 R-3 R-4 Walker's Quail Ridge Patriots Woods River Wind --------------------------------------- SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING --------------------------------------- DESCRIPTION TYPE RENT RENT Superior Superior Similar Similar MIN MAX MEDIAN AVERAGE - ----------- ------------ ------- ------- -------- -------- ------- ------- --- --- ------ ------- Monthly Rent 1BR/1.5BA TNHS $ 517 $ 599 $ 600 $ 635 $ 579 $ 610 $ 579 $ 635 $ 605 $ 606 Unit Area (SF) 900 900 708 864 940 816 708 940 840 832 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.67 $ 0.85 $ 0.73 $ 0.62 $ 0.75 $ 0.62 $ 0.85 $ 0.74 $ 0.74 Monthly Rent 2BR/1.5BA TNHS $ 549 $ 659 $ 700 $ 650 $ 629 $ 705 $ 629 $ 705 $ 675 $ 671 Unit Area (SF) 1,100 1,100 924 864 1,200 1,075 864 1,200 1,000 1,016 Monthly Rent Per Sq. Ft. $ 0.50 $ 0.60 $ 0.76 $ 0.75 $ 0.52 $ 0.66 $ 0.52 $ 0.76 $ 0.70 $ 0.67 Monthly Rent 2BR/1.5BA GRDN $ 528 $ 659 $ 700 $ 650 $ 629 $ 705 $ 629 $ 705 $ 675 $ 671 Unit Area (SF) 1,100 1,100 924 864 1,200 1,075 864 1,200 1,000 1,016 Monthly Rent Per Sq. Ft. $ 0.48 $ 0.60 $ 0.76 $ 0.75 $ 0.52 $ 0.66 $ 0.52 $ 0.76 $ 0.70 $ 0.67 Monthly Rent 3BR/1.5BA TNHS $ 631 $ 719 $ 850 $ 750 $ 779 $ 805 $ 750 $ 850 $ 792 $ 796 Unit Area (SF) 1,200 1,200 1,136 1,080 1,400 1,292 1,080 1,400 1,214 1,227 Monthly Rent Per Sq. Ft. $ 0.53 $ 0.60 $ 0.75 $ 0.69 $ 0.56 $ 0.62 $ 0.56 $ 0.75 $ 0.66 $ 0.66 Monthly Rent 3BR/1.5BA GRDN $ 719 $ 789 $ 850 $ 750 $ 779 $ 805 $ 750 $ 850 $ 792 $ 796 Unit Area (SF) 1,400 1,400 1,136 1,080 1,400 1,292 1,080 1,400 1,214 1,227 Monthly Rent Per Sq. Ft. $ 0.51 $ 0.56 $ 0.75 $ 0.69 $ 0.56 $ 0.62 $ 0.56 $ 0.75 $ 0.66 $ 0.66 Monthly Rent 3BR/2BA TNHS $ 713 $ 799 $ 850 $ 750 $ 779 $ 805 $ 750 $ 850 $ 792 $ 796 Unit Area (SF) 1,425 1,425 1,136 1,080 1,400 1,292 1,080 1,400 1,214 1,227 Monthly Rent Per Sq. Ft. $ 0.50 $ 0.56 $ 0.75 $ 0.69 $ 0.56 $ 0.62 $ 0.56 $ 0.75 $ 0.66 $ 0.66
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/1.5Ba Tnhs 5 900 $599 $0.67 $ 2,995 $ 35,940 2Br/1.5Ba Tnhs 38 1,100 $659 $0.60 $25,042 $300,504 2Br/1.5Ba Grdn 16 1,100 $659 $0.60 $10,544 $126,528 3Br/1.5Ba Tnhs 5 1,200 $719 $0.60 $ 3,595 $ 43,140 3Br/1.5Ba Grdn 24 1,400 $789 $0.56 $18,936 $227,232 3Br/2Ba Tnhs 14 1,425 $799 $0.56 $11,186 $134,232 Total $72,298 $867,576
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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 $666,546 $ 6,535 $798,858 $ 7,832 $770,519 $ 7,554 $791,572 $ 7,761 Vacancy $ 89,215 $ 875 $108,030 $ 1,059 $ 91,363 $ 896 $ 60,360 $ 592 Credit Loss/Concessions $ 15,636 $ 153 $ 20,488 $ 201 $ 11,452 $ 112 $ 6,720 $ 66 Subtotal $104,851 $ 1,028 $128,518 $ 1,260 $102,815 $ 1,008 $ 67,080 $ 658 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 30,296 $ 297 $ 39,926 $ 391 $ 38,354 $ 376 $ 27,132 $ 266 Subtotal Other Income $ 30,296 $ 297 $ 39,926 $ 391 $ 38,354 $ 376 $ 27,132 $ 266 Effective Gross Income $591,991 $ 5,804 $710,266 $ 6,963 $706,058 $ 6,922 $751,624 $ 7,369 Operating Expenses Taxes $ 36,037 $ 353 $ 41,884 $ 411 $ 48,700 $ 477 $ 42,548 $ 417 Insurance $ 16,240 $ 159 $ 19,572 $ 192 $ 21,038 $ 206 $ 23,256 $ 228 Utilities $ 51,370 $ 504 $ 60,760 $ 596 $ 62,806 $ 616 $ 51,596 $ 506 Repair & Maintenance $ 87,187 $ 855 $ 94,270 $ 924 $ 86,396 $ 847 $ 97,256 $ 953 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 $ 28,307 $ 278 $ 31,553 $ 309 $ 27,273 $ 267 $ 24,720 $ 242 General Administrative $125,194 $ 1,227 $147,613 $ 1,447 $114,066 $ 1,118 $104,373 $ 1,023 Management $ 31,318 $ 307 $ 39,062 $ 383 $ 36,717 $ 360 $ 37,680 $ 369 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Total Operating Expenses $375,653 $ 3,683 $434,714 $ 4,262 $396,996 $ 3,892 $381,429 $ 3,740 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Net Income $216,338 $ 2,121 $275,552 $ 2,701 $309,062 $ 3,030 $370,195 $ 3,629 ANNUALIZED 2003 ------------------- PROJECTION AAA PROJECTION -------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - ----------- -------- -------- -------- -------- ------ Revenues Rental Income $754,612 $ 7,398 $867,576 $ 8,506 100.0% Vacancy $145,200 $ 1,424 $ 86,758 $ 851 10.0% Credit Loss/Concessions $ 9,768 $ 96 $ 17,352 $ 170 2.0% Subtotal $154,968 $ 1,519 $104,109 $ 1,021 12.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 40,276 $ 395 $ 38,250 $ 375 4.4% Subtotal Other Income $ 40,276 $ 395 $ 38,250 $ 375 4.4% Effective Gross Income $639,920 $ 6,274 $801,717 $ 7,860 100.0% Operating Expenses Taxes $ 41,724 $ 409 $ 48,254 $ 473 6.0% Insurance $ 21,560 $ 211 $ 21,420 $ 210 2.7% Utilities $ 69,456 $ 681 $ 61,200 $ 600 7.6% Repair & Maintenance $ 80,428 $ 789 $ 96,900 $ 950 12.1% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 25,556 $ 251 $ 28,050 $ 275 3.5% General Administrative $107,936 $ 1,058 $112,200 $ 1,100 14.0% Management $ 32,048 $ 314 $ 40,086 $ 393 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% Total Operating Expenses $378,708 $ 3,713 $408,110 $ 4,001 50.9% Reserves $ 0 $ 0 $ 25,500 $ 250 6.2% Net Income $261,212 $ 2,561 $368,107 $ 3,609 45.9%
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 12% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------- --------- ------ ---------- ---- I-1 Aug-02 93% $41,111 9.76% I-2 Feb-02 94% $47,222 10.17% I-3 Aug-01 89% $40,139 11.14% I-4 Dec-02 93% $44,518 10.33% I-5 Mar-99 92% $52,261 7.98% High 11.14% Low 7.98% Average 9.88%
Based on this information, we have concluded the subject's overall capitalization rate should be 10.50%. 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 11.00%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.00%. 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 12.00% indicates a value of $3,700,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA approximately 37% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS CARRIAGE HOUSE 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 $ 867,576 $ 880,590 $ 907,007 $ 934,218 $ 962,244 $ 991,111 Vacancy $ 113,544 $ 88,059 $ 90,701 $ 93,422 $ 96,224 $ 99,111 Credit Loss $ 17,352 $ 17,612 $ 18,140 $ 18,684 $ 19,245 $ 19,822 Concessions $ 34,703 $ 17,612 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 165,599 $ 123,283 $ 108,841 $ 112,106 $ 115,469 $ 118,933 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 38,250 $ 38,824 $ 39,988 $ 41,188 $ 42,424 $ 43,696 -------------------------------------------------------------------------------- Subtotal Other Income $ 38,250 $ 38,824 $ 39,988 $ 41,188 $ 42,424 $ 43,696 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 740,227 $ 796,131 $ 838,155 $ 863,300 $ 889,199 $ 915,875 OPERATING EXPENSES: Taxes $ 48,254 $ 49,702 $ 51,193 $ 52,729 $ 54,310 $ 55,940 Insurance $ 21,420 $ 22,063 $ 22,724 $ 23,406 $ 24,108 $ 24,832 Utilities $ 61,200 $ 63,036 $ 64,927 $ 66,875 $ 68,881 $ 70,948 Repair & Maintenance $ 96,900 $ 99,807 $ 102,801 $ 105,885 $ 109,062 $ 112,334 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 28,050 $ 28,892 $ 29,758 $ 30,651 $ 31,571 $ 32,518 General Administrative $ 112,200 $ 115,566 $ 119,033 $ 122,604 $ 126,282 $ 130,071 Management $ 37,011 $ 39,807 $ 41,908 $ 43,165 $ 44,460 $ 45,794 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 405,036 $ 418,871 $ 432,345 $ 445,315 $ 458,674 $ 472,435 Reserves $ 25,500 $ 26,265 $ 27,053 $ 27,865 $ 28,700 $ 29,561 -------------------------------------------------------------------------------- NET OPERATING INCOME $ 309,692 $ 350,994 $ 378,757 $ 390,120 $ 401,824 $ 413,878 ================================================================================ Operating Expense Ratio (% of EGI) 54.7% 52.6% 51.6% 51.6% 51.6% 51.6% Operating Expense Per Unit $ 3,971 $ 4,107 $ 4,239 $ 4,366 $ 4,497 $ 4,632 ================================================================================ YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 REVENUE Base Rent $1,020,845 $1,051,470 $1,083,014 $1,115,505 $1,148,970 Vacancy $ 102,084 $ 105,147 $ 108,301 $ 111,550 $ 114,897 Credit Loss $ 20,417 $ 21,029 $ 21,660 $ 22,310 $ 22,979 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 122,501 $ 126,176 $ 129,962 $ 133,861 $ 137,876 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 45,007 $ 46,358 $ 47,748 $ 49,181 $ 50,656 ------------------------------------------------------------------ Subtotal Other Income $ 45,007 $ 46,358 $ 47,748 $ 49,181 $ 50,656 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $ 943,351 $ 971,651 $1,000,801 $1,030,825 $1,061,750 OPERATING EXPENSES: Taxes $ 57,618 $ 59,347 $ 61,127 $ 62,961 $ 64,850 Insurance $ 25,577 $ 26,344 $ 27,134 $ 27,948 $ 28,787 Utilities $ 73,076 $ 75,268 $ 77,526 $ 79,852 $ 82,248 Repair & Maintenance $ 115,704 $ 119,175 $ 122,750 $ 126,433 $ 130,225 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 33,493 $ 34,498 $ 35,533 $ 36,599 $ 37,697 General Administrative $ 133,973 $ 137,992 $ 142,132 $ 146,396 $ 150,787 Management $ 47,168 $ 48,583 $ 50,040 $ 51,541 $ 53,087 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 486,608 $ 501,206 $ 516,242 $ 531,729 $ 547,681 Reserves $ 30,448 $ 31,362 $ 32,303 $ 33,272 $ 34,270 ------------------------------------------------------------------ NET OPERATING INCOME $ 426,295 $ 439,084 $ 452,256 $ 465,824 $ 479,799 ================================================================== Operating Expense Ratio (% of EGI) 51.6% 51.6% 51.6% 51.6% 51.6% Operating Expense Per Unit $ 4,771 $ 4,914 $ 5,061 $ 5,213 $ 5,369 ==================================================================
Estimated Stabilized NOI $368,107 Sales Expense Rate 2.00% Months to Stabilized 12 Discount Rate 12.00% Stabilized Occupancy 90.0% Terminal Cap Rate 11.00%
Gross Residual Sale Price $4,361,805 Deferred Maintenance $ 0 Less: Sales Expense $ 87,236 Add: Excess Land $ 0 ---------- Net Residual Sale Price $4,274,569 Other Adjustments $ 0 ---------- PV of Reversion $1,376,297 Value Indicated By "DCF" $3,709,002 Add: NPV of NOI $2,332,705 Rounded $3,700,000 ---------- PV Total $3,709,002
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------ TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - ------------------------------------------------------------------------------------- TERMINAL CAP RATE 10.50% $3,896,376 $3,834,800 $3,774,540 $3,715,563 $3,657,839 10.75% $3,861,310 $3,800,511 $3,741,009 $3,682,772 $3,625,769 11.00% $3,827,839 $3,767,781 $3,709,002 $3,651,471 $3,595,156 11.25% $3,795,855 $3,736,505 $3,678,417 $3,621,561 $3,565,904 11.50% $3,765,262 $3,706,589 $3,649,163 $3,592,951 $3,537,924
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently 84% occupied, below our stabilized occupancy projection. We have estimated a 12-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 $23,000 as shown in the following table. DESCRIPTION YEAR 1 - ---------------------------------------------- "As Is" Net Operating Income $309,692 Stabilized Net Operating Income $335,139 -------- Difference $ 25,447 PV of Income Loss During Lease-Up $ 22,721 -------- Rounded $ 23,000
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 $45,000 (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 CAPITALIZATION APPROACH PAGE 35 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 10.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA CARRIAGE HOUSE APARTMENTS
TOTAL PER Sq. Ft. PER UNIT % OF EGI ----- ----------- -------- -------- REVENUE Base Rent $ 867,576 $ 7.03 $ 8,506 Less: Vacancy & Collection Loss 12.00% $ 104,109 $ 0.84 $ 1,021 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 38,250 $ 0.31 $ 375 4.77% ---------------------------------------- Subtotal Other Income $ 38,250 $ 0.31 $ 375 4.77% EFFECTIVE GROSS INCOME $ 801,717 $ 6.49 $ 7,860 OPERATING EXPENSES: Taxes $ 48,254 $ 0.39 $ 473 6.02% Insurance $ 21,420 $ 0.17 $ 210 2.67% Utilities $ 61,200 $ 0.50 $ 600 7.63% Repair & Maintenance $ 96,900 $ 0.78 $ 950 12.09% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 28,050 $ 0.23 $ 275 3.50% General Administrative $ 112,200 $ 0.91 $ 1,100 13.99% Management 5.00% $ 40,086 $ 0.32 $ 393 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 408,110 $ 3.31 $ 4,001 50.90% Reserves $ 25,500 $ 0.21 $ 250 3.18% ---------------------------------------- NET OPERATING INCOME $ 368,107 $ 2.98 $ 3,609 45.91% ---------------------------------------- "GOING IN" CAPITALIZATION RATE 10.50% VALUE INDICATION $3,505,780 $28.40 $34,370 LESS: LEASE-UP COST ($ 23,000) PV OF CONCESSIONS ($ 45,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $3,437,780 ROUNDED $3,400,000 $27.54 $33,333
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------------------------------------------------- 9.75% $3,707,455 $3,700,000 $36,275 $29.97 10.00% $3,613,069 $3,600,000 $35,294 $29.16 10.25% $3,523,287 $3,500,000 $34,314 $28.35 10.50% $3,437,780 $3,400,000 $33,333 $27.54 10.75% $3,356,250 $3,400,000 $33,333 $27.54 11.00% $3,278,426 $3,300,000 $32,353 $26.73 11.25% $3,204,061 $3,200,000 $31,373 $25.92
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $3,400,000. 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 $3,700,000 Direct Capitalization Method $3,400,000 Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $3,600,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 $3,600,000 Income Approach $3,600,000 Reconciled Value $3,600,000 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 14, 2003 the market value of the fee simple estate in the property is: $3,600,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - SUBJECT ENTRANCE EXTERIOR - TYPICAL BUILDING ELEVATION [PICTURE] [PICTURE] EXTERIOR - TYPICAL BUILDING ELEVATION EXTERIOR - TYPICAL BUILDING ELEVATION [PICTURE] [PICTURE] EXTERIOR - TYPICAL BUILDING EXTERIOR - TYPICAL BUILDING ELEVATION (REAR) ELEVATION (REAR) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] INTERIOR - TYPICAL UNIT INTERIOR - TYPICAL UNIT [PICTURE] [PICTURE] INTERIOR - TYPICAL UNIT INTERIOR - TYPICAL UNIT [PICTURE] [PICTURE] EXTERIOR - OFFICE EXTERIOR - SWIMMING POOL AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CEDARS I WALKER'S RIDGE DRAKE 7139 Winding Cedar Trail 1100 Robinwood Road 1701 Gander Cover Ln Charlotte, NC Gastonia, NC Charlotte, NC [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 WILLOW RIDGE RIVER WIND 9200 Willow Ridge 1231 East Hudson Boulevard Charlotte, NC Gastonia, NC [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------------------------------------------------------------------------------------------ Property Name Carriage House Apartments Walker's Ride Management Company AIMCO Guardian Management LOCATION: Address 1220 Carriage House Lane 1100 Robinwood Road City, State Gastonia, North Carolina Gastonia, NC County Gaston Gaston Proximity to Subject 1 mile west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 123,450 134,640 Year Built 1971 1990 Effective Age 32 13 Building Structure Type Brick & wood siding walls; Brick & Wood siding walls; asphalt shingle roof asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 102 144 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1.5Ba Tnhs 900 5 $517 1 1BD/1BH 708 32 $ 600 2 2Br/1.5Ba Tnhs 1,100 38 $549 2 2BD/2BH 924 36 $ 700 3 2Br/1.5Ba Grdn 1,100 16 $528 3 2BD/2BH 924 36 $ 700 4 3Br/1.5Ba Tnhs 1,200 5 $631 4 3BD/2BH 1,136 13 $ 850 5 3Br/1.5Ba Grdn 1,400 24 $719 5 3BD/2BH 1,136 13 $ 850 6 3Br/2Ba Tnhs 1,425 14 $713 6 3BD/2BH 1,136 14 $ 850 Average Unit Size (SF) 1,210 935 Unit Breakdown: Efficiency 0% 2-Bedroom 22% Efficiency 0% 2-Bedroom 40% 1-Bedroom 78% 3-Bedroom 0% 1-Bedroom 22% 3-Bedroom 28% CONDITION: Average Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony W/D Connect. X Balcony X W/D Connect. Fireplace X Fireplace X X Cable TV Ready X Cable TV Ready Carports Project Amenities X Swimming Pool Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball 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 Gym Room X Gym Room OCCUPANCY: 84% 96% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions N/A None Pet Deposit 150 $300 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ---------------------------------------------------------------------------------------------------------------------- Property Name Patriots Ouail Woods Management Company David Drye Company AIMCO LOCATION: Address 1272 Union Road 1657 Ouail Woods Road City, State Gastonia, NC Gastonia, NC County Gaston Gaston Proximity to Subject 2 miles west of subject 1 mile west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 149,916 60,632 Year Built 1998 1973 Effective Age 5 30 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 186 188 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1BD/1BH EFF 336 21 $ 555 1BD/1BH 750 20 $ 589 1BD/1BH 512 21 $ 550 1 1BD/1.5BH TNHS 940 30 $ 579 1 2BD/1BH 864 54 $ 635 2 2BD/1.5BH TNHS 1,200 54 $ 629 2 2BD/2BH 864 27 $ 650 3 2BD/1.5BH TNHS 1,200 54 $ 629 3 2BD/2BH 864 27 $ 650 4 3BD/2BH TNHS 1,400 10 $ 729 4 3BD/2BH 1,080 12 $ 750 5 3BD/2BH TNHS 1,400 10 $ 729 5 3BD/2BH 1,080 12 $ 750 6 3BD/2BH TNHS 1,400 10 $ 729 6 3BD/2BH 1,080 12 $ 750 Average Unit Size (SF) 806 1,143 Unit Breakdown: Efficieny 11% 2-Bedroom 58% Efficiency 0% 2-Bedroom 61% 1-Bedroom 11% 3-Bedroom 20% 1-Bedroom 39% 3-Bedroom 0% CONDITION: Good Average APPEAL: Good Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash X Basketball Court 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 Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 73% 72% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions 850 off market rent Reduced rents Pet Deposit $300 $150 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Superior Similar COMPARABLE DESCRIPTION R - 4 - ------------------------------------------------------------------------- Property Name River Wind Management Company River Wind Holdings LOCATION: Address 1321 Fast Hudson Boulevard City, State Gaston NC County Gaston Proximity to Subject 2 miles west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 185,940 Year Built 1998 Effective Age 5 Building Structure Type Brick & Wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Number of Units 180 Unit Mix: Type Unit Qty. Mo. 1 1BD/1BH 816 56 $ 610 2 2BD/2BH 1,075 46 $ 705 3 2BD/2BH 1,075 46 $ 705 4 3BD/2BH 1,292 11 $ 805 5 3BD/2BH 1,292 11 $ 805 6 3BD/2BH 1,292 10 $ 805 Average Unit Size (SF) 1,033 Unit Breakdown: Efficiency 0% 2-Bedroom 51% 1-Bedroom 31% 3-Bedroom 18% CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Fireplace X Cable TV Ready Project Amenities X Swimming Pool Spa/Jacuzzi Car Wash X Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room OCCUPANCY: 91% LEASING DATA: Available Leasing Terms 6 to 12 Months Concessions None Pet Deposit $200 Utilities Paid by Tenant: X Electric Natural Gas Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 WALKER'S RIDGE PATRIOTS QUAIL WOODS 1100 Robinwood Road 1272 Union Road 1657 Quail Woods Road Gastonia, NC Gastonia, NC Gastonia, NC [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 RIVER WIND 1231 East Hudson Boulevard Gastonia, NC N/A [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 CARRIAGE HOUSE APARTMENTS, GASTONIA, 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 Valuation," Co-authored with Dr. Ronald C. Rutherford and Dr. Mark Eakin, The Journal of Real Estate Research, Vol. 8, No. 3, Summer 1993, p. 365. AMERICAN APPRAISAL ASSOCIATES, INC. CARRIAGE HOUSE APARTMENTS, GASTONIA, NORTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. CARRIAGE HOUSE APARTMENTS, GASTONIA, 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. EX-99.(C)(2) 4 d07278a2exv99wxcyx2y.txt APPRAISAL OF RIVER REACH APARTMENTS RIVER REACH APARTMENTS 5000 SAN JOSE BOULEVARD JACKSONVILLE, FLORIDA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 28, 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 9, 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: RIVER REACH APARTMENTS 5000 SAN JOSE BOULEVARD JACKSONVILLE, DUVAL COUNTY, FLORIDA 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 298 units with a total of 369,450 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 13.83 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 95% 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 28, 2003 is: ($16,500,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Alice MacQueen -------------------------- July 9, 2003 Alice MacQueen #053272 Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 Assisted By: Stephen B. Spraberry, MAI AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ...................................................... 4 Introduction ........................................................... 9 Area Analysis .......................................................... 11 Market Analysis ........................................................ 14 Site Analysis .......................................................... 16 Improvement Analysis ................................................... 16 Highest and Best Use ................................................... 17 VALUATION Valuation Procedure .................................................... 18 Sales Comparison Approach .............................................. 20 Income Capitalization Approach ......................................... 26 Reconciliation and Conclusion .......................................... 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: River Reach Apartments LOCATION: 5000 San Jose Boulevard Jacksonville, Florida 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 28, 2003 DATE OF REPORT: July 9, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 13.83 acres, or 602,435 square feet Assessor Parcel No.: 099157 0000 Floodplain: Community Panel No. 1200770207E (August 15, 1989) Flood Zone X, an area outside the floodplain. Zoning: RMD-D (Medium Density Apartment District) BUILDING: No. of Units: 298 Units Total NRA: 369,450 Square Feet Average Unit Size: 1,240 Square Feet Apartment Density: 21.5 units per acre Year Built: 1972 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square -------------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - -------------------------------------------------------------------------------------------- 1Br/1Ba - 1A10 900 $650 $0.72 $ 42,900 $ 514,800 1Br/1Ba - 1B10 1,100 $725 $0.66 $ 17,400 $ 208,800 2Br/2Ba - 2A15 1,200 $785 $0.65 $ 50,240 $ 602,880 2Br/2Ba - 2A20 1,250 $800 $0.64 $ 33,600 $ 403,200 2Br/2Ba - 2B20 1,450 $820 $0.57 $ 39,360 $ 472,320 3Br/3Ba - 3A20 1,550 $990 $0.64 $ 11,880 $ 142,560 3Br/3Ba - 3B20 1,575 $985 $0.63 $ 41,370 $ 496,440 ------------------------------------- Total $236,750 $2,841,000
OCCUPANCY: 95% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EFFECTIVE AGE: 20 Years REMAINING ECONOMIC LIFE: 25 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR LEASING OFFICE EXTERIOR VIEW AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - --------------------- ------ ------ Potential Rental Income $2,841,000 $9,534 Effective Gross Income $2,777,620 $9,321 Operating Expenses $1,213,171 $4,071 43.7% of EGI Net Operating Income: $1,489,949 $5,000 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $15,700,000 * $52,685 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 7% Stabilized Vacancy & Collection Loss: 8% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.50% Discount Rate 11.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $16,500,000 * $55,369 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $16,500,000 $55,369 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $52,500 to $78,261 Range of Sales $/Unit (Adjusted) $50,870 to $56,745 VALUE INDICATION - PRICE PER UNIT $16,400,000 * $55,034 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.21 to 7.03 Selected EGIM for Subject 6.00 Subject's Projected EGI $2,777,620 EGIM ANALYSIS CONCLUSION $16,700,000 * $56,040 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $16,400,000 * $55,034 / UNIT RECONCILED SALES COMPARISON VALUE $16,400,000 $55,034 / 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $16,400,000 NOI Per Unit $16,400,000 EGIM Multiplier $16,700,000 INDICATED VALUE BY SALES COMPARISON $16,400,000 $55,034 / UNIT INCOME APPROACH: Direct Capitalization Method: $15,700,000 Discounted Cash Flow Method: $16,500,000 INDICATED VALUE BY THE INCOME APPROACH $16,500,000 $55,369 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $16,500,000 $55,369 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 5000 San Jose Boulevard, Jacksonville, Duval County, Florida. Jacksonville identifies it as 099157 0000. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Stephen B. Spraberry, MAI on May 28, 2003. Alice MacQueen has not made a personal inspection of the subject property. Stephen B. Spraberry, MAI assisted Alice MacQueen with the research, valuation analysis and writing the report. Alice MacQueen reviewed the report and concurs with the value. Alice MacQueen and Stephen B. Spraberry, MAI 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 28, 2003. The date of the report is July 9, 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 Shelter Properties, VI, LP. 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 Jacksonville, Florida. Overall, the neighborhood is characterized as an urban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Interstate Highway 95 West - St. Johns River South - University Boulevard North - Emerson Street MAJOR EMPLOYERS Major employers in the subject's area include Mayport Naval Station, Duval County Schools, Ponte Vedra Inn & Club, PGA Tour, Sawgrass Marriott, City of Jacksonville Beach, St. Johns County Schools, Fleet Landing and Vicars Landing. 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA - ------------------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 6,472 42,647 127,354 1,134,647 5-Year Population 6,457 42,604 129,195 1,224,933 % Change CY-5Y -0.2% -0.1% 1.4% 8.0% Annual Change CY-5Y 0.0% 0.0% 0.3% 1.6% HOUSEHOLDS Current Households 2,952 18,290 54,325 441,107 5-Year Projected Households 2,981 18,522 55,795 481,465 % Change CY - 5Y 1.0% 1.3% 2.7% 9.1% Annual Change CY-5Y 0.2% 0.3% 0.5% 1.8% INCOME TRENDS Median Household Income $ 40,934 $ 36,250 $ 38,405 $ 41,613 Per Capita Income $ 31,736 $ 24,617 $ 24,569 $ 22,610 Average Household Income $ 71,909 $ 57,873 $ 57,408 $ 58,159
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 33.13% 37.24% 39.43% 29.34% 5-Year Projected % Renting 33.71% 37.36% 39.25% 28.72% % of Households Owning 61.35% 55.37% 51.54% 61.49% 5-Year Projected % Owning 60.84% 55.40% 51.90% 62.72%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Residential South - Residential and commercial East - Retail West - St. Johns River CONCLUSIONS The subject is well located within the city of Jacksonville. The neighborhood is characterized as being mostly urban in nature and is currently in the stable stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA MARKET ANALYSIS The subject property is located in the city of Jacksonville in Duval County. The overall pace of development in the subject's market is more or less stable. There have not been any apartment projects constructed near the subject property for several years. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ---------------------------------------- 4Q01 N/A 6.2% 1Q02 N/A 5.7% 2Q02 N/A 5.3% 3Q02 N/A 4.9% 4Q02 6.0% 5.2% 1Q03 6.6% 5.0%
Source: Reis Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has outperformed the overall market. This market has been exhibiting a slight decrease in the overall vacancy rate and is currently 5.0%. This submarket is still below the overall Jacksonville vacancy rate of 6.6%. 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 - $ 545 - 1Q02 N/A N/A $ 557 2.2% 2Q02 N/A N/A $ 559 0.4% 3Q02 N/A N/A $ 566 1.3% 4Q02 N/A N/A $ 564 -0.4% 1Q03 N/A N/A $ 567 0.5%
Source: Reis The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - --------------------------------------------------------------------------------------------------- R-1 Summer Oaks Apartments N/A 90% 1972 Five miles northeast R-2 Victoria Park at Mandarin N/A 95% 1983 Four miles southeast R-3 River Plantation N/A 92% 1971 1.5 miles northeast R-4 Mandarin Lanai N/A 96% 1986 Four miles southeast R-5 Brierwood Place Apartments N/A 95% 1974 Four miles southeast Subject River Reach Apartments 298 95% 1972
Rates reflect the market's stability. Overall, this market commands slightly lower rates than the overall Jacksonville market. This is partially due to the lack of new projects in this submarket, which is a function of the lack of developable land parcels. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 13.83 acres, or 602,435 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 1200770207E, dated August 15, 1989 Flood Zone Zone X Zoning RMD-D, 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 - -------------------------------------------------------------------------------------------- 099157 0000 $1,506,125 $9,359,016 $10,865,141 0.01960 $213,008
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 298 Net Rentable Area 369,450 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, spa/jacuzzi, tennis court, gym room, fishing pier, playground, laundry room, business office, playground, fishing pier, and parking area. Unit Amenities Individual unit amenities include a 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - ----------------------------------------------------------- 1Br/1Ba - 1A10 66 900 1Br/1Ba - 1B10 24 1,100 2Br/2Ba - 2A15 64 1,200 2Br/2Ba - 2A20 42 1,250 2Br/2Ba - 2B20 48 1,450 3Br/3Ba - 3A20 12 1,550 3Br/3Ba - 3B20 42 1,575
Overall Condition Average Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1972 and consist of a 298-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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - --------------------------------------------------------------------------------------------------------------------------------- Property Name River Reach Apartments 54 Magnolia at Deerwood Park The Wimberly at Deerwood Park LOCATION: Address 5000 San Jose Boulevard 9600 Touchton Road 9727 Touchton Road City, State Jacksonville, Florida Jacksonville, Florida Jacksonville, Florida County Duval Duval Duval PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 369,450 299,832 400,000 Year Built 1972 1998 2000 Number of Units 298 276 322 Unit Mix: Type Total Type Total Type Total 1Br/1Ba - 1A10 66 1BR/1BA 24 1BR/1BA 88 1Br/1Ba - 1B10 24 1BR/1BA 48 2BR/2BA 28 2Br/2Ba - 2A15 64 1BR/1BA 36 3BR/2BA 206 2Br/2Ba - 2A20 42 2BR/2BA 84 2Br/2Ba - 2B20 48 2BR/2BA 36 3Br/3Ba - 3A20 12 2BR/2BA 24 3Br/3Ba - 3B20 42 2BR/2BA 24 Average Unit Size (SF) 1,240 1,086 1,242 Land Area (Acre) 13.8300 17.9000 33.4000 Density (Units/Acre) 21.5 15.4 9.6 Parking Ratio (Spaces/Unit) 2.10 2.01 N/A Parking Type (Gr., Cov., etc.) Open Open, Covered Open, Covered CONDITION: Average Good Very Good APPEAL: Average Good Very Good AMENITIES: Pool/Spa Yes/Yes Yes/Yes Yes/Yes Gym Room Yes Yes Yes Laundry Room Yes Yes Yes Secured Parking No Yes Yes Sport Courts No Yes Yes Washer/Dryer Connection Yes (Select Units) Yes Yes OCCUPANCY: 95% 95% 95% TRANSACTION DATA: Sale Date March, 2000 December, 2001 Sale Price ($) $20,000,000 $25,200,000 Grantor Estates at Deerwood Park, Cat Wimberly Partnership I, Ltd. Ltd. Grantee Property Reserve, Inc. Palomar Commerce Center, LLC Sale Documentation Book 9583, Page 1754 Book 10269, Page 306 Verification Public Record Public Record Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $3,121,010 $11,308 $10.41 $4,201,620 $13,049 $10.50 Vacancy/Credit Loss $ 156,050 $ 565 $ 0.52 $ 210,081 $ 652 $ 0.53 Effective Gross Income $2,964,960 $10,743 $ 9.89 $3,991,539 $12,396 $ 9.98 Operating Expenses $ 841,328 $ 3,048 $ 2.81 $1,288,000 $ 4,000 $ 3.22 Net Operating Income $2,123,632 $ 7,694 $ 7.08 $2,703,539 $ 8,396 $ 6.76 NOTES: None None PRICE PER UNIT $72,464 $78,261 PRICE PER SQUARE FOOT $ 66.70 $ 63.00 EXPENSE RATIO 28.4% 32.3% EGIM 6.75 6.31 OVERALL CAP RATE 10.62% 10.73% Cap Rate based on Pro Forma or Actual Income? Actual Pro Forma COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - --------------------------------------------------------------------------------------------------------------------------------- Property Name St. Johns Plantation Gloucester Apartments St. Johns Plantation LOCATION: Address 7595 Baymeadows Circle West 4915 Baymeadows Road 7595 Baymeadows Circle West City, State Jacksonville, Florida Jacksonville, Florida Jacksonville, Florida County Duval Duval Duval PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 384,956 151,459 384,956 Year Built 1989 1974 1989 Number of Units 400 100 400 Unit Mix: Type Total Type Total Type Total 1BR/1BA 224 2BR/2BA 56 1BR/1BA 224 2BR/2BA 152 3BR/2BA 40 2BR/2BA 152 3BR/2BA 24 4BR/2.5BA 4 3BR/2BA 24 Average Unit Size (SF) 962 1,515 962 Land Area (Acre) 24.1000 6.6200 24.1000 Density (Units/Acre) 16.6 15.1 16.6 Parking Ratio (Spaces/Unit) 3.50 N/A 3.50 Parking Type (Gr., Cov., etc.) Open, Covered Open Open, Covered CONDITION: Good Fair Good APPEAL: Average Fair Average AMENITIES: Pool/Spa Yes/Yes Yes/No Yes/Yes Gym Room Yes No Yes Laundry Room Yes Yes Yes Secured Parking Yes No Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 95% 95% 90% TRANSACTION DATA: Sale Date January, 2003 July, 2002 May, 2001 Sale Price ($) $24,500,000 $5,250,000 $21,617,000 Grantor St. Johns Plantation, LLC Gloucester Realty Associates Bear Capital, J.V. Grantee The Lincoln Property Group Boxwood at Bay Meadows, LLC St. Johns Planation, LLC Sale Documentation N/A Book 10574, Page 1878 Book 9985, Page 671 Verification Public Record Public Record Public Record Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $3,668,016 $9,170 $9.53 $889,920 $8,899 $5.88 $ 0 $ 0 $0.00 Vacancy/Credit Loss $ 183,401 $ 459 $0.48 $ 44,496 $ 445 $0.29 $ 0 $ 0 $0.00 Effective Gross Income $3,484,615 $8,712 $9.05 $845,424 $8,454 $5.58 $ 0 $ 0 $0.00 Operating Expenses $1,280,000 $3,200 $3.33 $315,000 $3,150 $2.08 $ 0 $ 0 $0.00 Net Operating Income $2,204,615 $5,512 $5.73 $530,424 $5,304 $3.50 $2,053,653 $5,134 $5.33 NOTES: None This project is now known This is the previous sale of as Boxwood at Bay Meadows Comparable Sale I-3. PRICE PER UNIT $61,250 $52,500 $54,043 PRICE PER SQUARE FOOT $ 63.64 $ 34.66 $ 56.15 EXPENSE RATIO 36.7% 37.3% N/A EGIM 7.03 6.21 N/A OVERALL CAP RATE 9.00% 10.10% 9.50% Cap Rate based on Pro Forma or Actual Income? Pro Forma Pro Forma Actual
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $52,500 to $78,261 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 $50,870 to $56,745 per unit with a mean or average adjusted price of $54,442 per unit. The median adjusted price is $55,125 per unit. Based on the following analysis, we have concluded to a value of $55,000 per unit, which results in an "as is" value of $16,400,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ----------------------------------------------------------------------------------------------------------------------------------- Property Name River Reach Apartments 54 Magnolia at Deerwood Park The Wimberly at Deerwood Park Address 5000 San Jose Boulevard 9600 Touchton Road 9727 Touchton Road City Jacksonville, Florida Jacksonville, Florida Jacksonville, Florida Sale Date March, 2000 December, 2001 Sale Price ($) $20,000,000 $25,200,000 Net Rentable Area (SF) 369,450 299,832 400,000 Number of Units 298 276 322 Price Per Unit $72,464 $78,261 Year Built 1972 1998 2000 Land Area (Acre) 13.8300 17.9000 33.4000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 03-2000 0% 12-2001 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $72,464 $78,261 Location Comparable 0% Comparable 0% Number of Units 298 276 0% 322 0% Quality / Appeal Good Superior -15% Superior -15% Age / Condition 1972 1998 / Good -15% 2000 / Very Good -20% Occupancy at Sale 95% 95% 0% 95% 0% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 1,240 1,086 5% 1,242 0% PHYSICAL ADJUSTMENT -25% -35% FINAL ADJUSTED VALUE ($/UNIT) $54,348 $50,870 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - --------------------------------------------------------------------------------------------------------------------------------- Property Name St. Johns Plantation Gloucester Apartments St. Johns Plantation Address 7595 Baymeadows Circle West 4915 Baymeadows Road 7595 Baymeadows Circle West City Jacksonville, Florida Jacksonville, Florida Jacksonville, Florida Sale Date January, 2003 July, 2002 May, 2001 Sale Price ($) $24,500,000 $5,250,000 $21,617,000 Net Rentable Area (SF) 384,956 151,459 384,956 Number of Units 400 100 400 Price Per Unit $61,250 $52,500 $54,043 Year Built 1989 1974 1989 Land Area (Acre) 24.1000 6.6200 24.1000 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 0% 07-2002 0% 05-2001 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $61,250 $52,500 $54,043 Location Inferior 10% Inferior 10% Inferior 10% Number of Units 400 0% 100 0% 400 0% Quality / Appeal Superior -10% Superior -5% Superior -5% Age / Condition 1989 / Good -15% 1974 / Fair 5% 1989 / Good -15% Occupancy at Sale 95% 0% 95% 0% 90% 10% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 962 5% 1,515 -5% 962 5% PHYSICAL ADJUSTMENT -10% 5% 5% FINAL ADJUSTED VALUE ($/UNIT) $55,125 $55,125 $56,745
SUMMARY VALUE RANGE (PER UNIT) $50,870 TO $56,745 MEAN (PER UNIT) $54,442 MEDIAN (PER UNIT) $55,125 VALUE CONCLUSION (PER UNIT) $55,000
VALUE INDICATED BY SALES COMPARISON APPROACH $16,390,000 ROUNDED $16,400,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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-1 276 $ 20,000,000 10.62% $2,123,632 $ 1,489,949 0.650 $47,088 $ 72,464 $ 7,694 $ 5,000 I-2 322 $ 25,200,000 10.73% $2,703,539 $ 1,489,949 0.595 $46,604 $ 78,261 $ 8,396 $ 5,000 I-3 400 $ 24,500,000 9.00% $2,204,615 $ 1,489,949 0.907 $55,563 $ 61,250 $ 5,512 $ 5,000 I-4 100 $ 5,250,000 10.10% $ 530,424 $ 1,489,949 0.943 $49,487 $ 52,500 $ 5,304 $ 5,000 I-5 400 $ 21,617,000 9.50% $2,053,653 $ 1,489,949 0.974 $52,629 $ 54,043 $ 5,134 $ 5,000
PRICE/UNIT
Low High Average Median $46,604 $ 55,563 $50,274 $49,487
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 55,000 ----------- Number of Units 298 ----------- Value Based on NOI Analysis $16,390,000 Rounded $16,400,000
The adjusted sales indicate a range of value between $46,604 and $55,563 per unit, with an average of $50,274 per unit. Based on the subject's competitive position within the improved sales, a value of $55,000 per unit is estimated. This indicates an "as is" market value of $16,400,000 (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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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-1 276 $20,000,000 $ 2,964,960 $ 841,328 28.38% 6.75 $ 72,464 I-2 322 $25,200,000 $ 3,991,539 $1,288,000 32.27% 6.31 $ 78,261 I-3 400 $24,500,000 $ 3,484,615 $1,280,000 36.73% 7.03 $ 61,250 43.68% I-4 100 $ 5,250,000 $ 845,424 $ 315,000 37.26% 6.21 $ 52,500 I-5 400 $21,617,000 $ 54,043
EGIM
Low High Average Median 6.21 7.03 6.57 6.53
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.00 ----------- Subject EGI $ 2,777,620 ----------- Value Based on EGIM Analysis $16,665,720 Rounded $16,700,000 Value Per Unit $ 56,040
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 43.68% before reserves. The comparable sales indicate a range of expense ratios from 28.38% to 37.26%, while their EGIMs range from 6.21 to 7.03. Overall, we conclude to an EGIM of 6.00, which results in an "as is" value estimate in the EGIM Analysis of $16,700,000. 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 $16,400,000. Price Per Unit $16,400,000 NOI Per Unit $16,400,000 EGIM Analysis $16,700,000 Sales Comparison Conclusion $16,400,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area ------------------ Unit Type (Sq. Ft.) Per Unit Per SF %Occupied - --------------------------------------------------------------------------- 1Br/1Ba - 1A10 900 $ 617 $ 0.69 90.9% 1Br/1Ba - 1B10 1100 $ 739 $ 0.67 95.8% 2Br/2Ba - 2A15 1200 $ 731 $ 0.61 100.0% 2Br/2Ba - 2A20 1250 $ 783 $ 0.63 90.5% 2Br/2Ba - 2B20 1450 $ 827 $ 0.57 93.8% 3Br/3Ba - 3A20 1550 $1,020 $ 0.66 100.0% 3Br/3Ba - 3B20 1575 $ 959 $ 0.61 97.6%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------------- Summer Victoria Brierwood Oaks Park at River Mandarin Place Apartments Mandarin Plantation Lanai Apartments ------------------------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Similar Superior Similar Similar Similar - --------------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba - 1A10 $ 617 $ 659 $ 585 $ 669 $ 575 $ 595 $ 599 Unit Area (SF) 900 900 750 766 600 680 795 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.73 $ 0.78 $ 0.87 $ 0.96 $ 0.88 $ 0.75 Monthly Rent 1Br/1Ba - 1B10 $ 739 $ 739 $ 669 $ 600 $ 685 $ 615 Unit Area (SF) 1,100 1,100 766 800 860 942 Monthly Rent Per Sq. Ft. $ 0.67 $ 0.67 $ 0.87 $ 0.75 $ 0.80 $ 0.65 Monthly Rent 2Br/2Ba - 2A15 $ 731 $ 789 $ 765 $ 799 $ 700 $ 800 $ 800 Unit Area (SF) 1,200 1,200 1,150 1,129 1,290 1,165 1,280 Monthly Rent Per Sq. Ft. $ 0.61 $ 0.66 $ 0.67 $ 0.71 $ 0.54 $ 0.69 $ 0.63 Monthly Rent 2Br/2Ba - 2A20 $ 783 $ 819 $ 765 $ 799 $ 645 $ 735 $ 675 Unit Area (SF) 1,250 1,250 1,150 1,129 1,280 1,165 1,290 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.66 $ 0.67 $ 0.71 $ 0.50 $ 0.63 $ 0.52 Monthly Rent 2Br/2Ba - 2B20 $ 827 $ 829 $ 765 $ 799 $ 785 $ 735 $ 675 Unit Area (SF) 1,450 1,450 1,150 1,129 1,280 1,165 1,290 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.57 $ 0.67 $ 0.71 $ 0.61 $ 0.63 $ 0.52 Monthly Rent 3Br/3Ba - 3A20 $ 1,020 $ 999 $ 890 $ 1,029 $ 860 $ 825 Unit Area (SF) 1,550 1,550 1,650 1,375 1,600 1,685 Monthly Rent Per Sq. Ft. $ 0.66 $ 0.64 $ 0.54 $ 0.75 $ 0.54 $ 0.49 Monthly Rent 3Br/3Ba - 3B20 $ 959 $ 989 $ 890 $ 1,029 $ 850 $ 923 Unit Area (SF) 1,575 1,575 1,650 1,379 1,520 1,685 Monthly Rent Per Sq. Ft. $ 0.61 $ 0.63 $ 0.54 $ 0.75 $ 0.56 $ 0.55 DESCRIPTION MIN MAX MEDIAN AVERAGE - -------------------------------------------------------------------------- Monthly Rent $ 575 $ 669 $ 595 $ 605 Unit Area (SF) 600 795 750 718 Monthly Rent Per Sq. Ft. $ 0.75 $ 0.96 $ 0.87 $ 0.85 Monthly Rent $ 600 $ 685 $ 642 $ 642 Unit Area (SF) 766 942 830 842 Monthly Rent Per Sq. Ft. $ 0.65 $ 0.87 $ 0.77 $ 0.77 Monthly Rent $ 700 $ 800 $ 799 $ 773 Unit Area (SF) 1,129 1,290 1,165 1,203 Monthly Rent Per Sq. Ft. $ 0.54 $ 0.71 $ 0.67 $ 0.65 Monthly Rent $ 645 $ 799 $ 735 $ 724 Unit Area (SF) 1,129 1,290 1,165 1,203 Monthly Rent Per Sq. Ft. $ 0.50 $ 0.71 $ 0.63 $ 0.61 Monthly Rent $ 675 $ 799 $ 765 $ 752 Unit Area (SF) 1,129 1,290 1,165 1,203 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.71 $ 0.63 $ 0.63 Monthly Rent $ 825 $ 1,029 $ 875 $ 901 Unit Area (SF) 1,375 1,685 1,625 1,578 Monthly Rent Per Sq. Ft. $ 0.49 $ 0.75 $ 0.54 $ 0.58 Monthly Rent $ 850 $ 1,029 $ 907 $ 923 Unit Area (SF) 1,379 1,685 1,585 1,559 Monthly Rent Per Sq. Ft. $ 0.54 $ 0.75 $ 0.55 $ 0.60
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows: GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ------------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income - ----------------------------------------------------------------------------------------------------------------- 1Br/1Ba - 1A10 66 900 $650 $ 0.72 $ 42,900 $ 514,800 1Br/1Ba - 1B10 24 1,100 $725 $ 0.66 $ 17,400 $ 208,800 2Br/2Ba - 2A15 64 1,200 $785 $ 0.65 $ 50,240 $ 602,880 2Br/2Ba - 2A20 42 1,250 $800 $ 0.64 $ 33,600 $ 403,200 2Br/2Ba - 2B20 48 1,450 $820 $ 0.57 $ 39,360 $ 472,320 3Br/3Ba - 3A20 12 1,550 $990 $ 0.64 $ 11,880 $ 142,560 3Br/3Ba - 3B20 42 1,575 $985 $ 0.63 $ 41,370 $ 496,440 ------------------------- Total $236,750 $2,841,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 $2,683,117 $ 9,004 $2,770,669 $ 9,298 $2,807,637 $ 9,422 $2,846,140 $ 9,551 Vacancy $ 110,326 $ 370 $ 105,294 $ 353 $ 111,172 $ 373 $ 123,338 $ 414 Credit Loss/Concessions $ 86,032 $ 289 $ 106,400 $ 357 $ 73,523 $ 247 $ 56,231 $ 189 ------------------------------------------------------------------------------------------------------ Subtotal $ 196,358 $ 659 $ 211,694 $ 710 $ 184,695 $ 620 $ 179,569 $ 603 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 70,972 $ 238 $ 158,260 $ 531 $ 199,621 $ 670 $ 195,600 $ 656 ------------------------------------------------------------------------------------------------------ Subtotal Other Income $ 70,972 $ 238 $ 158,260 $ 531 $ 199,621 $ 670 $ 195,600 $ 656 ------------------------------------------------------------------------------------------------------ Effective Gross Income $2,557,731 $ 8,583 $2,717,235 $ 9,118 $2,822,563 $ 9,472 $2,862,171 $ 9,605 Operating Expenses Taxes $ 197,157 $ 662 $ 207,699 $ 697 $ 207,122 $ 695 $ 224,319 $ 753 Insurance $ 34,434 $ 116 $ 78,933 $ 265 $ 140,082 $ 470 $ 112,259 $ 377 Utilities $ 161,825 $ 543 $ 140,350 $ 471 $ 140,935 $ 473 $ 144,000 $ 483 Repair & Maintenance $ 273,244 $ 917 $ 195,482 $ 656 $ 252,368 $ 847 $ 240,810 $ 808 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 $ 44,317 $ 149 $ 39,589 $ 133 $ 34,991 $ 117 $ 36,120 $ 121 General Administrative $ 255,579 $ 858 $ 268,163 $ 900 $ 233,454 $ 783 $ 240,790 $ 808 Management $ 132,328 $ 444 $ 145,162 $ 487 $ 140,753 $ 472 $ 144,197 $ 484 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------------------------ Total Operating Expenses $1,098,884 $ 3,688 $1,075,378 $ 3,609 $1,149,705 $ 3,858 $1,142,495 $ 3,834 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------------------------ Net Income $1,458,847 $ 4,895 $1,641,857 $ 5,510 $1,672,858 $ 5,614 $1,719,676 $ 5,771 ANNUALIZED 2003 ------------------------ PROJECTION AAA PROJECTION -------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - ------------------------------------------------------------------------------------------ Revenues Rental Income $2,837,468 $ 9,522 $2,841,000 $ 9,534 100.0% Vacancy $ 95,588 $ 321 $ 170,460 $ 572 6.0% Credit Loss/Concessions $ 90,376 $ 303 $ 56,820 $ 191 2.0% -------------------------------------------------------------- Subtotal $ 185,964 $ 624 $ 227,280 $ 763 8.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 160,540 $ 539 $ 163,900 $ 550 5.8% -------------------------------------------------------------- Subtotal Other Income $ 160,540 $ 539 $ 163,900 $ 550 5.8% -------------------------------------------------------------- Effective Gross Income $2,812,044 $ 9,436 $2,777,620 $ 9,321 100.0% Operating Expenses Taxes $ 222,536 $ 747 $ 253,300 $ 850 9.1% Insurance $ 109,808 $ 368 $ 110,260 $ 370 4.0% Utilities $ 146,432 $ 491 $ 146,020 $ 490 5.3% Repair & Maintenance $ 272,592 $ 915 $ 268,200 $ 900 9.7% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 32,676 $ 110 $ 34,270 $ 115 1.2% General Administrative $ 262,656 $ 881 $ 262,240 $ 880 9.4% Management $ 142,108 $ 477 $ 138,881 $ 466 5.0% Miscellaneous $ 0 $ 0 $ 0 0.0% -------------------------------------------------------------- Total Operating Expenses $1,188,808 $ 3,989 $1,213,171 $ 4,071 43.7% Reserves $ 0 $ 0 $ 74,500 $ 250 6.1% Net Income $1,623,236 $ 5,447 $1,489,949 $ 5,000 53.6%
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 8% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA RESERVES FOR REPLACEMENT "Reserves for replacements" is a contingency account allocated to the expenses of the property to provide for replacement of short-lived items and for unforeseen necessary capital expenditures. We have utilized the Korpacz Real Estate Investor Survey of the national apartment market, which reports a range of replacement reserves between $150 and $400 per unit. For purposes of this analysis, we have included an allowance of $250 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $250 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES --------------------------------------------------- GOING-IN TERMINAL --------------------------------------------------- LOW HIGH LOW HIGH --------------------------------------------------- RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - ------------------------------------------------------------------- I-1 Mar-00 95% $72,464 10.62% I-2 Dec-01 95% $78,261 10.73% I-3 Jan-03 95% $61,250 9.00% I-4 Jul-02 95% $52,500 10.10% I-5 May-01 90% $54,043 9.50% ------- ----- High 10.73% Low 9.00% Average 9.99%
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 10.50%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 11.50%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.50% indicates a value of $16,500,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA approximately 38% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA DISCOUNTED CASH FLOW ANALYSIS RIVER REACH 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 $2,841,000 $2,926,230 $3,014,017 $3,104,437 $3,197,571 $3,293,498 Vacancy $ 170,460 $ 175,574 $ 180,841 $ 186,266 $ 191,854 $ 197,610 Credit Loss $ 56,820 $ 58,525 $ 60,280 $ 62,089 $ 63,951 $ 65,870 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------- Subtotal $ 227,280 $ 234,098 $ 241,121 $ 248,355 $ 255,806 $ 263,480 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 163,900 $ 168,817 $ 173,882 $ 179,098 $ 184,471 $ 190,005 --------------------------------------------------------------------------------- Subtotal Other Income $ 163,900 $ 168,817 $ 173,882 $ 179,098 $ 184,471 $ 190,005 --------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,777,620 $2,860,949 $2,946,777 $3,035,180 $3,126,236 $3,220,023 OPERATING EXPENSES: Taxes $ 253,300 $ 260,899 $ 268,726 $ 276,788 $ 285,091 $ 293,644 Insurance $ 110,260 $ 113,568 $ 116,975 $ 120,484 $ 124,099 $ 127,822 Utilities $ 146,020 $ 150,401 $ 154,913 $ 159,560 $ 164,347 $ 169,277 Repair & Maintenance $ 268,200 $ 276,246 $ 284,533 $ 293,069 $ 301,861 $ 310,917 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 34,270 $ 35,298 $ 36,357 $ 37,448 $ 38,571 $ 39,728 General Administrative $ 262,240 $ 270,107 $ 278,210 $ 286,557 $ 295,153 $ 304,008 Management $ 138,881 $ 143,047 $ 147,339 $ 151,759 $ 156,312 $ 161,001 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,213,171 $1,249,566 $1,287,053 $1,325,665 $1,365,435 $1,406,398 Reserves $ 74,500 $ 76,735 $ 79,037 $ 81,408 $ 83,850 $ 86,366 --------------------------------------------------------------------------------- NET OPERATING INCOME $1,489,949 $1,534,647 $1,580,687 $1,628,108 $1,676,951 $1,727,259 Operating Expense Ratio (% of EGI) 43.7% 43.7% 43.7% 43.7% 43.7% 43.7% Operating Expense Per Unit $ 4,071 $ 4,193 $ 4,319 $ 4,449 $ 4,582 $ 4,719 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ----------------------------------------------------------------------------------------------------------- REVENUE Base Rent $3,392,303 $3,494,072 $3,598,894 $3,706,861 $3,818,066 Vacancy $ 203,538 $ 209,644 $ 215,934 $ 222,412 $ 229,084 Credit Loss $ 67,846 $ 69,881 $ 71,978 $ 74,137 $ 76,361 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 271,384 $ 279,526 $ 287,912 $ 296,549 $ 305,445 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 195,705 $ 201,576 $ 207,624 $ 213,852 $ 220,268 ------------------------------------------------------------------ Subtotal Other Income $ 195,705 $ 201,576 $ 207,624 $ 213,852 $ 220,268 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $3,316,624 $3,416,122 $3,518,606 $3,624,164 $3,732,889 OPERATING EXPENSES: Taxes $ 302,453 $ 311,527 $ 320,873 $ 330,499 $ 340,414 Insurance $ 131,656 $ 135,606 $ 139,674 $ 143,864 $ 148,180 Utilities $ 174,356 $ 179,586 $ 184,974 $ 190,523 $ 196,239 Repair & Maintenance $ 320,245 $ 329,852 $ 339,748 $ 349,940 $ 360,438 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 40,920 $ 42,148 $ 43,412 $ 44,715 $ 46,056 General Administrative $ 313,128 $ 322,522 $ 332,198 $ 342,164 $ 352,429 Management $ 165,831 $ 170,806 $ 175,930 $ 181,208 $ 186,644 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,448,590 $1,492,047 $1,536,809 $1,582,913 $1,630,400 Reserves $ 88,957 $ 91,626 $ 94,374 $ 97,206 $ 100,122 ------------------------------------------------------------------ NET OPERATING INCOME $1,779,077 $1,832,449 $1,887,423 $1,944,046 $2,002,367 Operating Expense Ratio (% of EGI) 43.7% 43.7% 43.7% 43.7% 43.7% Operating Expense Per Unit $ 4,861 $ 5,007 $ 5,157 $ 5,312 $ 5,471
Estimated Stabilized NOI $1,489,949 Sales Expense Rate 2.00% Months to Stabilized 1 Discount Rate 11.50% Stabilized Occupancy 94.0% Terminal Cap Rate 10.50%
Gross Residual Sale Price $19,070,161 Deferred Maintenance $ 0 Less: Sales Expense $ 381,403 Add: Excess Land $ 0 ----------- Other Adjustments $ 0 Net Residual Sale Price $18,688,757 ----------- PV of Reversion $ 6,292,624 Value Indicated By "DCF" $16,494,229 Add: NPV of NOI $10,201,606 Rounded $16,500,000 ----------- PV Total $16,494,229
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------------ TOTAL VALUE 11.00% 11.25% 11.50% 11.75% 12.00% - --------------------------------------------------------------------------------------------------------------- 10.00% $17,355,633 $17,079,267 $16,808,860 $16,544,265 $16,285,337 10.25% $17,187,073 $16,914,456 $16,647,708 $16,386,682 $16,131,236 TERMINAL CAP RATE 10.50% $17,026,539 $16,757,493 $16,494,229 $16,236,603 $15,984,473 10.75% $16,873,472 $16,607,831 $16,347,889 $16,093,504 $15,844,536 11.00% $16,727,362 $16,464,972 $16,208,201 $15,956,909 $15,710,960
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 9.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA RIVER REACH APARTMENTS
TOTAL PER Sq. Ft. PER UNIT %OF EGI - --------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,841,000 $ 7.69 $ 9,534 Less: Vacancy & Collection Loss 8.00% $ 227,280 $ 0.62 $ 763 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 163,900 $ 0.44 $ 550 5.90% ------------------------------------------------ Subtotal Other Income $ 163,900 $ 0.44 $ 550 5.90% EFFECTIVE GROSS INCOME $ 2,777,620 $ 7.52 $ 9,321 OPERATING EXPENSES: Taxes $ 253,300 $ 0.69 $ 850 9.12% Insurance $ 110,260 $ 0.30 $ 370 3.97% Utilities $ 146,020 $ 0.40 $ 490 5.26% Repair & Maintenance $ 268,200 $ 0.73 $ 900 9.66% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 34,270 $ 0.09 $ 115 1.23% General Administrative $ 262,240 $ 0.71 $ 880 9.44% Management 5.00% $ 138,881 $ 0.38 $ 466 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,213,171 $ 3.28 $ 4,071 43.68% Reserves $ 74,500 $ 0.20 $ 250 2.68% ------------------------------------------------ NET OPERATING INCOME $ 1,489,949 $ 4.03 $ 5,000 53.64% "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $15,683,674 $ 42.45 $ 52,630 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $15,683,674 ROUNDED $15,700,000 $ 42.50 $ 52,685
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - --------------------------------------------------------------------------- 8.75% $17,027,989 $17,000,000 $57,047 $46.01 9.00% $16,554,989 $16,600,000 $55,705 $44.93 9.25% $16,107,557 $16,100,000 $54,027 $43.58 9.50% $15,683,674 $15,700,000 $52,685 $42.50 9.75% $15,281,528 $15,300,000 $51,342 $41.41 10.00% $14,899,490 $14,900,000 $50,000 $40.33 10.25% $14,536,088 $14,500,000 $48,658 $39.25
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $15,700,000. 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 $16,500,000 Direct Capitalization Method $15,700,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $16,500,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 $16,400,000 Income Approach $16,500,000 Reconciled Value $16,500,000
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 28, 2003 the market value of the fee simple estate in the property is: $16,500,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR LEASING OFFICE EXTERIOR VIEW [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING TYPICAL LIVING AREA [PICTURE] [PICTURE] TENNIS COURTS EXTERIOR BUILDING VIEW AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] TYPICAL KITCHEN TYPICAL BATHROOM [PICTURE] [PICTURE] EXTERIOR - PARKING AND DRIVES TYPICAL BEDROOM [PICTURE] [PICTURE] STREET SCENE STREET SCENE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 54 MAGNOLIA AT DEERWOOD PARK THE WIMBERLY AT DEERWOOD PARK 9600 Touchton Road 9727 Touchton Road Jacksonville, Florida Jacksonville, Florida [PICTURE] [PICTURE] COMPARABLE I-3 COMPARABLE I-4 ST. JOHNS PLANTATION GLOUCESTER APARTMENTS 7595 Baymeadows Circle West 4915 Baymeadows Road Jacksonville, Florida Jacksonville, Florida [PICTURE] [PICTURE] COMPARABLE I-5 ST. JOHNS PLANTATION 7595 Baymeadows Circle West Jacksonville, Florida [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA SUMMARY OF COMPARABLE RENTAL PROPERTIES
Comparable Description Subject R - 1 ----------- ------- ---------- Property Name River Reach Apartments Summer Oaks Apartments Management Company AIMCO LOCATION: Address 5000 San Jose Boulevard 5350 Arlington Expressway City, State Jacksonville, Florida Jacksonville, Florida County Duval Duval Proximity to Subject Five miles northeast PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 369,450 N/A Year Built 1972 1972 Effective Age 20 25 Building Structure Type Brick & wood siding walls; asphalt Stucco and wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Number of Units 298 N/A Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1Br/1Ba - 1A10 900 66 $ 617 1 1BR/1BA 750 $585 2 1Br/1Ba - 1B10 1,100 24 $ 739 3 2BR/2BA 1,150 $765 3 2Br/2Ba - 2A15 1,200 64 $ 731 4 2BR/2BA 1,150 $765 4 2Br/2Ba - 2A20 1,250 42 $ 783 5 2BR/2BA 1,150 $765 5 2Br/2Ba - 2B20 1,450 48 $ 827 6 3BR/2BA 1,650 $890 6 3Br/3Ba - 3A20 1,550 12 $1,020 7 3BR/2BA 1,650 $890 7 3Br/3Ba - 3B20 1,575 42 $ 959 Average Unit Size (SF) 1,240 Unit Breakdown: Efficiency 0% 2-Bedroom 52% Efficiency 2-Bedroom 1-Bedroom 30% 3-Bedroom 18% 1-Bedroom 3-Bedroom CONDITION: Good Good 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. Fireplace X Fireplace X Cable TV Ready Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall X Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room X Playground X Gym Room Playground X Fishing Pier X Fishing Pier Fishing Pier Fishing Pier X Playground Playground OCCUPANCY: 95% 90% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions 1 - 1 1/2 Months Free 1 - 1 1/2 Months Free Pet Deposit $250 - $500 $200 - $500 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash X Water Trash Confirmation May 28, 2003; Stephanie Cronin (Property 5/28/03 Manager) Telephone Number (904) 737-0573 (904) 722-3660 NOTES: None COMPARISON TO SUBJECT: Similar Comparable Comparable Description R - 2 R - 3 ----------- ---------- ---------- Property Name Victoria Park at Mandarin River Plantation Management Company LOCATION: Address 4083 Sunbeam Road 3952 Atlantic Boulevard City, State Jacksonville, Florida Jacksonville, Florida County Duval Duval Proximity to Subject Four miles southeast 1.5 miles northeast PHYSICAL CHARATERISTICS: Net Rentable Area (SF) N/A N/A Year Built 1983 1971 Effective Age 20 25 Building Structure Type Stucco and wood siding walls; asphalt Stucco and wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units N/A N/A Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BR/1BA 766 $ 669 1 1BR/1BA 600 $575 2 1BR/1BA 766 $ 669 2 1BR/1BA 800 $600 3 2BR/2BA 1,129 $ 799 3 2BR/2BA 1,290 $700 4 2BR/2BA 1,129 $ 799 4 2BR/2BA 1,280 $645 5 2BR/2BA 1,129 $ 799 5 2BR/2BA 1,280 $785 6 3BR/2BA 1,375 $1,029 6 3BR/2BA 1,600 $860 7 3BR/2BA 1,379 $1,029 7 3BR/2BA 1,520 $850 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Good 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 Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball X Meeting Hall X Sand Volley Ball X Meeting Hall X 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 Playground X Gym Room Playground Fishing Pier Fishing Pier Fishing Pier Fishing Pier Playground Playground OCCUPANCY: 95% 92% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions 1 - 1 1/2 Months Free 1 - 1 1/2 Months Free Pet Deposit $300 - $500 $300 - $500 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash X Water Trash Confirmation 5/28/03 5/28/03 Telephone Number (904) 731-3470 (904) 398-3396 NOTES: None None COMPARISON TO SUBJECT: Slightly Superior Similar Comparable Comparable Description R - 4 R - 5 ----------- ---------- ---------- Property Name Mandarin Lanai Brierwood Place Apartments Management Company LOCATION: Address 3909 Sunbeam 8880 South Old Kings Road City, State Jacksonville, Florida Jacksonville, Florida County Duval Duval Proximity to Subject Four miles southeast Four miles southeast PHYSICAL CHARATERISTICS: Net Rentable Area (SF) N/A N/A Year Built 1986 1974 Effective Age 15 25 Building Structure Type Stucco and wood siding walls; asphalt Stucco and wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units N/A N/A Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BR/1BA 680 $595 1 1BR/1BA 795 $599 2 1BR/1BA 860 $685 2 1BR/1BA 942 $615 3 2BR/2BA 1,165 $800 3 2BR/2BA 1,280 $800 4 2BR/2BA 1,165 $735 4 2BR/2BA 1,290 $675 5 2BR/2BA 1,165 $735 5 2BR/2BA 1,290 $675 6 3BR/2BA 1,685 $825 7 3BR/2BA 1,685 $923 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Good 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 Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball X Meeting Hall X Sand Volley Ball X Meeting Hall X 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 Playground X Gym Room Playground Fishing Pier Fishing Pier Fishing Pier Fishing Pier Playground Playground OCCUPANCY: 96% 95% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions 1 - 1 1/2 Months Free 1 - 1 1/2 Months Free Pet Deposit $300 - $500 $300 - $500 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash X Water Trash Confirmation 5/28/03 5/28/03 Telephone Number (904) 733-0200 (904) 731-1200 NOTES: None None COMPARISON TO SUBJECT: Similar Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 SUMMER OAKS APARTMENTS VICTORIA PARK AT MANDARIN RIVER PLANTATION 5350 Arlington Expressway 4083 Sunbeam Road 3952 Atlantic Boulevard Jacksonville, Florida Jacksonville, Florida Jacksonville, Florida [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 MANDARIN LANAI BRIERWOOD PLACE APARTMENTS 3909 Sunbeam 8880 South Old Kings Road Jacksonville, Florida Jacksonville, Florida [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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 report analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the impartial and 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 or bias with respect to the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. The engagement of American Appraisal Associates, Inc., and myself personally in this assignment and compensation for American Appraisal Associates, Inc., are not contingent on the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice and the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers. I personally did not inspect the subject property. Stephen B. Spraberry, MAI provided significant real property appraisal assistance in the preparation of this report. -s- Alice MacQueen ------------------- Alice MacQueen Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA ALICE Macqueen VICE PRESIDENT AND PRINCIPAL, REAL ESTATE GROUP POSITION Alice MacQueen serves as a Vice President and Principal for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Ms. MacQueen specializes in the appraisal of investment real estate and is annually involved in the valuation of several billion dollars of real property. The purposes of these valuations include allocation of purchase price, charitable donation, financing, purchase, sale, and syndication. She has also been involved in land planning analyses for major mixed-use developments. She has appraised various types of real estate including congregate care facilities, industrial properties, manufacturing facilities, office buildings, recreational subdivisions and planned unit developments, single- and multifamily residential properties, and shopping centers. Special-purpose properties she has appraised include campgrounds, churches, country clubs, golf courses, historic landmarks, proprietary cemeteries, and schools. In addition to market value opinions, Ms. MacQueen has provided feasibility and highest and best use studies. She has also been involved in several research projects, providing background studies involving major property tax appeal cases. These studies included the impact of inflation, rate of return considerations, sales-assessment ratio analyses, and the applicability of income capitalization to commercial and industrial properties. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA Ms. MacQueen has appraised real estate in 46 U.S. states, Mexico, and Puerto Rico. Business Ms. MacQueen joined AAA in 1983. She served as Regional Real Estate Director for the southeastern United States from 1987 to 1992 and as National Director of the Real Estate Valuation Group from 1992 through 1995, when she assumed her current position. Before joining the firm, she was involved in property management for five years and spent an additional five years as an appraiser, consultant, and research analyst. EDUCATION Realtors Institute of Virginia Greenbrier College for Women - Liberal Arts STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30987 State of Florida, Certified General Appraiser, #RZ0002202 State of Georgia, Certified General Real Property Appraiser, #239776 State of Minnesota, Certified General Real Property Appraiser, #AP-20144872 State of New Mexico, General Certified Appraiser, #001626-G State of Utah, State Certified General Appraiser, #CG00057001 PROFESSIONAL American Society of Appraisers, Candidate AFFILIATIONS AMERICAN APPRAISAL ASSOCIATES, INC. RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. RIVER REACH APARTMENTS, JACKSONVILLE, FLORIDA 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. EX-99.(C)(3) 5 d07278a2exv99wxcyx3y.txt APPRAISAL OF ROCKY CREEK APARTMENTS ROCKY CREEK APARTMENTS 950 STEVENS CREEK ROAD AUGUSTA, GEORGIA MARKET VALUE - FEE SIMPLE ESTATE AS OF JUNE 1, 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] JULY 10, 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: ROCKY CREEK APARTMENTS 950 STEVENS CREEK ROAD AUGUSTA, RICHMOND COUNTY, GEORGIA 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 120 units with a total of 131,400 square feet of rentable area. The improvements were built in 1979. The improvements are situated on 9.44 acres. Overall, the improvements are in fair condition. As of the date of this appraisal, the subject property is 93% 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 June 1, 2003 is: ($3,900,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Michael Bates ------------------------ July 10, 2003 Michael Bates, MAI #053272 Assistant Manager, Real Estate Group State of Georgia, Certified General Real Property Appraiser #CG00685 Report By: Phillip McGinnis AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Rocky Creek Apartments LOCATION: 950 Stevens Creek Road Augusta, Georgia 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: June 1, 2003 DATE OF REPORT: July 10, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 9.44 acres, or 411,206 square feet Assessor Parcel No.: 007-0-020-01-0 Floodplain: Community Panel No. 1301580020B (February 4, 1987) Flood Zone C, an area outside the floodplain. Zoning: R-3B (Multiple-Family Residential Zone) BUILDING: No. of Units: 120 Units Total NRA: 131,400 Square Feet Average Unit Size: 1,095 Square Feet Apartment Density: 12.7 units per acre Year Built: 1979 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ---------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - --------------------------------------------------------- 2Br/2Ba-2A20 1,095 $600 $0.55 $72,000 $864,000 ------------------------ Total $72,000 $864,000 ========================
OCCUPANCY: 93% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 20 Years REMAINING ECONOMIC LIFE: 25 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - ENTRANCE DRIVEWAY EXTERIOR - LEASING/CLUBHOUSE AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - --------------------- ------ ------ Potential Rental Income $ 864,000 $ 7,200 Effective Gross Income $ 828,600 $ 6,905 Operating Expenses $ 423,030 $ 3,525 51.1% of EGI Net Operating Income: $ 384,570 $ 3,205 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $4,000,000 * $33,333 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 10% Stabilized Vacancy & Collection Loss: 10% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.00% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $3,900,000 * $32,500 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $3,900,000 $32,500 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $19,375 to $39,950 Range of Sales $/Unit (Adjusted) $26,156 to $39,950 VALUE INDICATION - PRICE PER UNIT $3,900,000 * $32,500 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 3.64 to 6.29 Selected EGIM for Subject 4.75 Subject's Projected EGI $ 828,600 EGIM ANALYSIS CONCLUSION $3,900,000 * $32,500 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $3,800,000 * $31,667 / UNIT RECONCILED SALES COMPARISON VALUE $3,900,000 $32,500 / 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $3,900,000 NOI Per Unit $3,800,000 EGIM Multiplier $3,900,000 INDICATED VALUE BY SALES COMPARISON $3,900,000 $32,500 / UNIT INCOME APPROACH: Direct Capitalization Method: $4,000,000 Discounted Cash Flow Method: $3,900,000 INDICATED VALUE BY THE INCOME APPROACH $3,900,000 $32,500 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $3,900,000 $32,500 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 950 Stevens Creek Road, Augusta, Richmond County, Georgia. Augusta identifies it as 007-0-020-01-0. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Phillip McGinnis on June 1, 2003. Michael Bates, MAI has not made a personal inspection of the subject property. Phillip McGinnis performed the research, valuation analysis and wrote the report. Michael Bates, MAI reviewed the report and concurs with the value. Michael Bates, MAI and Phillip McGinnis 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 June 1, 2003. The date of the report is July 10, 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 Shelter VI Limited Partnership. 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 Augusta, Georgia. 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 - Alexander Drive West - Furys Ferry Road South - Washington Road North - Riverwatch Parkway MAJOR EMPLOYERS Major employers in the subject's area include US Military, local government, and local educational facilities. 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA NEIGHBORHOOD DEMOGRAPHICS
AREA --------------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - -------------------------------------------------------------------------------- POPULATION TRENDS Current Population 4,989 44,728 114,658 488,021 5-Year Population 5,238 45,883 117,780 516,255 % Change CY-5Y 5.0% 2.6% 2.7% 5.8% Annual Change CY-5Y 1.0% 0.5% 0.5% 1.2% HOUSEHOLDS Current Households 2,414 18,950 47,708 182,165 5-Year Projected Households 2,588 19,862 49,849 196,305 % Change CY - 5Y 7.2% 4.8% 4.5% 7.8% Annual Change CY-5Y 1.4% 1.0% 0.9% 1.6% INCOME TRENDS Median Household Income $ 38,799 $ 51,529 $ 40,549 $ 36,270 Per Capita Income $ 26,655 $ 30,871 $ 25,387 $ 19,200 Average Household Income $ 55,534 $ 72,441 $ 61,462 $ 51,437
Source: Demographics Now The subject neighborhood's population is expected to show increases below that of the region. The immediate market offers superior income levels as compared to the broader market. The following table illustrates the housing statistics in the subject's immediate area, as well as the MSA region. HOUSING TRENDS
AREA ---------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - ---------------------------------------------------------------------------- HOUSING TRENDS % of Households Renting 50.14% 31.33% 34.69% 27.39% 5-Year Projected % Renting 50.17% 30.72% 34.08% 26.64% % of Households Owning 41.03% 61.33% 56.72% 63.46% 5-Year Projected % Owning 41.26% 62.18% 57.64% 64.78%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Multi-Family Residential South - Multi-Family Residential East - Multi-Family Residential West - Multi-Family Residential CONCLUSIONS The subject is well located within the city of Augusta. 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA MARKET ANALYSIS The subject property is located in the city of Augusta in Richmond County. The overall pace of development in the subject's market is more or less stable. There are no new apartment complexes under construction in the local market area. The following table illustrates historical occupancy rates for the subject's market. HISTORICAL OCCUPANCY
Period Region Submarket - ------------------------- 1Q03 92.9% 93.3% 4Q02 93.9% 93.6% 3Q02 95.8% 95.7% 2Q02 94.9% 94.3% 1Q02 93.5% 92.7%
{Source: Axiometrics.com Apartment Market Summary, Augusta, GA-SC 1Q03} Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. Occupancy for the region has been declining for the past year and is below its 1Q02 level of 93.5%. The West Augusta submarket has followed a similar trend, however in the 4th quarter of 2002, the submarket has out-performed the regional market. Market rents in the subject's market have been following an increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - --------------------------------------------- 1Q02 $551 - $520 - 2Q02 $558 1.3% $523 0.6% 3Q02 $571 2.3% $548 4.8% 4Q02 $566 -0.9% $530 -3.3% 1Q03 $568 0.4% $534 0.8%
The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - ------------------------------------------------------------------------------------------ R-1 Stevens Creek Commons 256 95% 1976 Adjacent to subject. R-2 Ridgecrest Apartments 280 94% 1980 Adjacent to subject. R-3 Iron Horse Apartments 206 92% 1980 .2 miles NW of subject, on same R-4 Westbury Creek 120 94% 1984 Approximately 3 miles R-5 Champion Pines 220 97% 1990 Approximately 3 miles Subject Rocky Creek Apartments 120 93% 1979
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 9.44 acres, or 411,206 square feet Shape Irregular Topography Slightly slope Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 1301580020B, dated February 4, 1987 Flood Zone Zone C Zoning R-3B, 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 - ---------------------------------------------------------------------- 007-0-020-01-0 $315,000 $2,140,000 $2,455,000 0.01516 $37,228
IMPROVEMENT ANALYSIS Year Built 1979 Number of Units 120 Net Rentable Area 131,400 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Brick or masonry Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, sand volleyball, tennis court, gym room, car wash, barbeque equipment, meeting hall, business office, and parking area. Unit Amenities Individual unit amenities include a 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - ---------------------------------------- 2Br/2Ba-2A20 120 1,095
Overall Condition Fair Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1979 and consist of a 120-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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Rocky Creek Apartments Rocky Creek Apartments West Eagle Green LOCATION: Address 950 Stevens Creek Road 950 Stevens Creek Road 249 Boy Scout Road City, State Augusta, Georgia Augusta, Georgia Augusta, Georgia County Richmond Richmond Richmond PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 131,400 131,400 150,455 Year Built 1979 1979 1973 Number of Units 120 120 165 Unit Mix: Type Total Type Total Type Total 2Br/2Ba-2A20 120 2Br/2Ba 120 1Br/1Ba 15 2Br/1Ba 100 3Br/1Ba 50 Average Unit Size (SF) 1,095 1,095 912 Land Area (Acre) 9.4400 10.0000 11.5200 Density (Units/Acre) 12.7 12.0 14.3 Parking Ratio (Spaces/Unit) 2.00 N/A 2.00 Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: 0 Average Average APPEAL: 0 Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room No Yes Yes Secured Parking No No No Sport Courts Yes Yes Yes OCCUPANCY: 93% 93% 95% TRANSACTION DATA: Sale Date Current LOIs March, 2000 Sale Price ($) $4,000,000 $6,591,780 Grantor Cornerstone Realty Grantee Alliance MD Portfolio Sale Documentation Current LOIs 680/1720 Verification AIMCO Public Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF - ------------------------------------------------------------------------------------------------------------ Potential Gross Income $885,559 $7,380 $6.74 $1,140,000 $6,909 $7.58 Vacancy/Credit Loss $ 83,761 $ 698 $0.64 $ 91,200 $ 553 $0.61 -------------------------------------------------- Effective Gross Income $801,798 $6,682 $6.10 $1,048,800 $6,356 $6.97 Operating Expenses $418,579 $3,488 $3.19 $ 445,000 $2,697 $2.96 -------------------------------------------------- Net Operating Income $383,219 $3,193 $2.92 $ 603,800 $3,659 $4.01 -------------------------------------------------- NOTES: PRICE PER UNIT $33,333 $39,950 PRICE PER SQUARE FOOT $ 30.44 $ 43.81 EXPENSE RATIO 52.2% 42.4% EGIM 4.99 6.29 OVERALL CAP RATE 9.58% 9.16% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 ----------- ---------- ---------- Property Name Westchester Apartments Merrick Place LOCATION: Address 2905 Arrowhead Drive 3190 Skinner Mill Road City, State Augusta, Georgia Augusta, Georgia County Richmond Richmond PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 82,595 274,920 Year Built 1970 1973 Number of Units 69 240 Unit Mix: Type Total Type Total 2Br/1Ba 25 1Br/1Ba 57 2Br/2Ba 20 2Br/1.5Ba 75 3Br/2Ba 24 2Br/2Ba 84 3Br/2Ba 24 Average Unit Size (SF) 1,197 1,146 Land Area (Acre) 4.1100 23.4300 Density (Units/Acre) 16.8 10.2 Parking Ratio (Spaces/Unit) N/A N/A Parking Type (Gr., Cov., etc.) Open Open CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa No/No Yes/No Gym Room No Yes Laundry Room Yes Yes Secured Parking No No Sport Courts No Yes OCCUPANCY: 92% 94% TRANSACTION DATA: Sale Date November, 2002 June, 1999 Sale Price ($) $1,800,000 $4,650,000 Grantor Westchester Apartments Merrick Place Partners Grantee Mulberry-Westchester Merrick Place Apartments, Apartments LLC Sale Documentation 823/209 651/2093 Verification Public Records Public Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $457,500 $6,630 $5.54 $1,418,400 $5,910 $5.16 Vacancy/Credit Loss $ 36,600 $ 530 $0.44 $ 141,840 $ 591 $0.52 -------------------------------------------------- Effective Gross Income $420,900 $6,100 $5.10 $1,276,560 $5,319 $4.64 Operating Expenses $225,000 $3,261 $2.72 $ 780,000 $3,250 $2.84 -------------------------------------------------- Net Operating Income $195,900 $2,839 $2.37 $ 496,560 $2,069 $1.81 -------------------------------------------------- NOTES: PRICE PER UNIT $26,087 $19,375 PRICE PER SQUARE FOOT $ 21.79 $ 16.91 EXPENSE RATIO 53.5% 61.1% EGIM 4.28 3.64 OVERALL CAP RATE 10.88% 10.68% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $19,375 to $39,950 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 $26,156 to $39,950 per unit with a mean or average adjusted price of $32,686 per unit. The median adjusted price is $32,319 per unit. Based on the following analysis, we have concluded to a value of $32,500 per unit, which results in an "as is" value of $3,900,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ---------------------------------------------------------------------------------------------------------- Property Name Rocky Creek Apartments Rocky Creek Apartments West Eagle Green Address 950 Stevens Creek Road 950 Stevens Creek Road 249 Boy Scout Road City Augusta, Georgia Augusta, Georgia Augusta, Georgia Sale Date Current LOIs March, 2000 Sale Price ($) $4,000,000 $6,591,780 Net Rentable Area (SF) 131,400 131,400 150,455 Number of Units 120 120 165 Price Per Unit $33,333 $39,950 Year Built 1979 1979 1973 Land Area (Acre) 9.4400 10.0000 11.5200 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) Current LOIs 0% 03-2000 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $33,333 $39,950 Location Comparable 0% Comparable 0% Number of Units 120 120 0% 165 0% Quality / Appeal Good Comparable 0% Comparable 0% Age / Condition 1979 1979 / Average 0% 1973 / Average 5% Occupancy at Sale 93% 93% 0% 95% 0% Amenities Good Comparable 0% Superior -10% Average Unit Size (SF) 1,095 1,095 0% 912 5% PHYSICAL ADJUSTMENT 0% 0% FINAL ADJUSTED VALUE ($/UNIT) $33,333 $39,950 COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 - ----------------------------------------------------------------------------------- Property Name Westchester Apartments Merrick Place Address 2905 Arrowhead Drive 3190 Skinner Mill Road City Augusta, Georgia Augusta, Georgia Sale Date November, 2002 June, 1999 Sale Price ($) $1,800,000 $4,650,000 Net Rentable Area (SF) 82,595 274,920 Number of Units 69 240 Price Per Unit $26,087 $19,375 Year Built 1970 1973 Land Area (Acre) 4.1100 23.4300 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) November, 2002 0% June, 1999 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $26,087 $19,375 Location Comparable 0% Comparable 0% Number of Units 69 0% 240 20% Quality / Appeal Comparable 0% Inferior 10% Age / Condition 1970 / Average 5% 1973 / Average 5% Occupancy at Sale 92% 0% 94% 0% Amenities Inferior 15% Comparable 0% Average Unit Size (SF) 1,197 0% 1,146 0% PHYSICAL ADJUSTMENT 20% 35% FINAL ADJUSTED VALUE ($/UNIT) $31,304 $26,156
SUMMARY VALUE RANGE (PER UNIT) $26,156 TO $39,950 MEAN (PER UNIT) $32,686 MEDIAN (PER UNIT) $32,319 VALUE CONCLUSION (PER UNIT) $32,500
VALUE INDICATED BY SALES COMPARISON APPROACH $3,900,000 ROUNDED $3,900,000
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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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-1 120 $4,000,000 9.58% $383,219 $384,570 1.004 $33,451 $ 33,333 $ 3,193 $ 3,205 I-2 165 $6,591,780 9.16% $603,800 $384,570 0.876 $34,987 $ 39,950 $ 3,659 $ 3,205 I-3 69 $1,800,000 10.88% $195,900 $384,570 1.129 $29,446 $ 26,087 $ 2,839 $ 3,205 I-4 240 $4,650,000 10.68% $496,560 $384,570 1.549 $30,011 $ 19,375 $ 2,069 $ 3,205
PRICE/UNIT
Low High Average Median - ----------------------------------- $29,446 $34,987 $31,974 $31,731
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 32,000 Number of Units 120 ---------- Value Based on NOI Analysis $3,840,000 Rounded $3,800,000
The adjusted sales indicate a range of value between $29,446 and $34,987 per unit, with an average of $31,974 per unit. Based on the subject's competitive position within the improved sales, a value of $32,000 per unit is estimated. This indicates an "as is" market value of $3,800,000 (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. EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
SALE PRICE EFFECTIVE SUBJECT COMPARABLE NO. OF ---------- ------------ OPERATING ------------- NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM - ------------------------------------------------------------------------------------ I-1 120 $4,000,000 $ 801,798 $418,579 52.21% 4.99 $ 33,333 I-2 165 $6,591,780 $1,048,800 $445,000 42.43% 6.29 $ 39,950 51.05% I-3 69 $1,800,000 $ 420,900 $225,000 53.46% 4.28 $ 26,087 I-4 240 $4,650,000 $1,276,560 $780,000 61.10% 3.64 $ 19,375
EGIM
Low High Average Median - --------------------------- 3.64 6.29 4.80 4.63
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES
Estimate EGIM 4.75 Subject EGI $ 828,600 ---------- Value Based on EGIM Analysis $3,935,850 Rounded $3,900,000 Value Per Unit $ 32,500
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 51.05% before reserves. The comparable sales indicate a range of expense ratios from 42.43% to 61.10%, while their EGIMs range from 3.64 to 6.29. Overall, we conclude to an EGIM of 4.75, which results in an "as is" value estimate in the EGIM Analysis of $3,900,000. 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 $3,900,000. Price Per Unit $3,900,000 NOI Per Unit $3,800,000 EGIM Analysis $3,900,000 Sales Comparison Conclusion $3,900,000 AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 i s especially useful for multi-tenant properties in volatile markets. The direct capitalization AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 - ---------------------------------------------------- 2Br/2Ba-2A20 1095 $618 $0.56 92.5%
RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------ R-1 R-2 R-3 R-4 R-5 ------------------------------------------------ Stevens Creek Ridgecrest Iron Horse Westbury Champion Commons Apartments Apartments Creek Pines ------------------------------------------------ COMPARISON TO SUBJECT SUBJECT SUBJECT ----------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Superior Superior Inferior Superior Superior MIN MAX MEDIAN AVERAGE - ------------------------------------------------------------------------------------------------------------------------------------ Monthly Rent 2Br/2Ba-2A20 $ 618 $ 629 $ 645 $ 650 $ 530 $ 635 $ 630 $ 530 $ 650 $ 635 $ 618 Unit Area (SF) 1,095 1,095 1,004 1,000 1,028 1,020 1,100 1,000 1,100 1,020 1,030 Monthly Rent Per Sq. Ft. $ 0.56 $ 0.57 $ 0.64 $ 0.65 $ 0.52 $ 0.62 $ 0.57 $ 0.52 $ 0.65 $ 0.62 $ 0.60
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 - ------------------------------------------------------------------------------- 2Br/2Ba-2A20 120 1,095 $600 $0.55 $72,000 $864,000 ------------------ Total $72,000 $864,000 ==================
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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 $869,250 $ 7,244 $871,183 $ 7,260 $840,842 $ 7,007 $842,400 $ 7,020 Vacancy $ 70,364 $ 586 $ 45,540 $ 380 $ 61,267 $ 511 $ 38,500 $ 321 Credit Loss/Concessions $ 57,223 $ 477 $ 40,868 $ 341 $ 22,494 $ 187 $ 23,400 $ 195 ------------------------------------------------------------------------------------- Subtotal $127,587 $ 1,063 $ 86,408 $ 720 $ 83,761 $ 698 $ 61,900 $ 516 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 49,261 $ 411 $ 56,117 $ 468 $ 44,717 $ 373 $ 50,400 $ 420 ------------------------------------------------------------------------------------- Subtotal Other Income $ 49,261 $ 411 $ 56,117 $ 468 $ 44,717 $ 373 $ 50,400 $ 420 ------------------------------------------------------------------------------------- Effective Gross Income $790,924 $ 6,591 $840,892 $ 7,007 $801,798 $ 6,682 $830,900 $ 6,924 Operating Expenses Taxes $ 32,952 $ 275 $ 32,450 $ 270 $ 39,684 $ 331 $ 48,945 $ 408 Insurance $ 20,007 $ 167 $ 25,257 $ 210 $ 22,740 $ 190 $ 21,894 $ 182 Utilities $ 60,439 $ 504 $ 52,790 $ 440 $ 58,743 $ 490 $ 54,000 $ 450 Repair & Maintenance $ 44,441 $ 370 $ 68,333 $ 569 $ 60,053 $ 500 $ 40,000 $ 333 Cleaning $ 67,623 $ 564 $ 54,228 $ 452 $ 54,942 $ 458 $ 48,000 $ 400 Landscaping $ 14,510 $ 121 $ 16,378 $ 136 $ 14,875 $ 124 $ 36,000 $ 300 Security $ 7,278 $ 61 $ 7,375 $ 61 $ 7,988 $ 67 $ 0 $ 0 Marketing & Leasing $ 41,922 $ 349 $ 13,418 $ 112 $ 15,546 $ 130 $ 18,000 $ 150 General Administrative $129,907 $ 1,083 $115,234 $ 960 $103,130 $ 859 $101,898 $ 849 Management $ 41,139 $ 343 $ 49,021 $ 409 $ 40,878 $ 341 $ 41,190 $ 343 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------- Total Operating Expenses $460,218 $ 3,835 $434,484 $ 3,621 $418,579 $ 3,488 $409,927 $ 3,416 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------- Net Income $330,706 $ 2,756 $406,408 $ 3,387 $383,219 $ 3,193 $420,973 $ 3,508 ANNUALIZED 2003 ------------------- PROJECTION AAA PROJECTION ------------------- ---------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - ----------------------------------------------------------------------------- Revenues Rental Income $851,412 $ 7,095 $864,000 $ 7,200 100.0% Vacancy $ 98,320 $ 819 $ 60,480 $ 504 7.0% Credit Loss/Concessions $100,912 $ 841 $ 25,920 $ 216 3.0% ------------------------------------------------- Subtotal $199,232 $ 1,660 $ 86,400 $ 720 10.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 50,652 $ 422 $ 51,000 $ 425 5.9% ------------------------------------------------- Subtotal Other Income $ 50,652 $ 422 $ 51,000 $ 425 5.9% ------------------------------------------------- Effective Gross Income $702,832 $ 5,857 $828,600 $ 6,905 100.0% Operating Expenses Taxes $ 51,108 $ 426 $ 45,000 $ 375 5.4% Insurance $ 22,240 $ 185 $ 22,800 $ 190 2.8% Utilities $ 60,388 $ 503 $ 57,000 $ 475 6.9% Repair & Maintenance $ 34,996 $ 292 $ 51,000 $ 425 6.2% Cleaning $ 58,720 $ 489 $ 55,200 $ 460 6.7% Landscaping $ 16,700 $ 139 $ 16,800 $ 140 2.0% Security $ 6,192 $ 52 $ 7,800 $ 65 0.9% Marketing & Leasing $ 17,920 $ 149 $ 18,000 $ 150 2.2% General Administrative $ 90,456 $ 754 $108,000 $ 900 13.0% Management $ 36,524 $ 304 $ 41,430 $ 345 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% ------------------------------------------------- Total Operating Expenses $395,244 $ 3,294 $423,030 $ 3,525 51.1% Reserves $ 0 $ 0 $ 21,000 $ 175 5.0% ------------------------------------------------- Net Income $307,588 $ 2,563 $384,570 $ 3,205 46.4%
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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 $175 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 $175 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - ----------------------------------------------------- I-1 Current LOIs 93% $33,333 9.58% I-2 Mar-00 95% $39,950 9.16% I-3 November, 2002 92% $26,087 10.88% I-4 June, 1999 94% $19,375 10.68% I-5 Jan-00 0% N/A High 10.88% Low 9.16% 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 10.00%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.00%. 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 12.00% indicates a value of $3,900,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA approximately 38% 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA DISCOUNTED CASH FLOW ANALYSIS ROCKY CREEK 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 $ 864,000 $ 872,640 $ 885,730 $ 903,444 $ 926,030 $ 953,811 Vacancy $ 60,480 $ 61,085 $ 62,001 $ 63,241 $ 64,822 $ 66,767 Credit Loss $ 25,920 $ 26,179 $ 26,572 $ 27,103 $ 27,781 $ 28,614 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 86,400 $ 87,264 $ 88,573 $ 90,344 $ 92,603 $ 95,381 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 51,000 $ 51,510 $ 52,283 $ 53,328 $ 54,662 $ 56,301 -------------------------------------------------------------------------------- Subtotal Other Income $ 51,000 $ 51,510 $ 52,283 $ 53,328 $ 54,662 $ 56,301 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 828,600 $ 836,886 $ 849,439 $ 866,428 $ 888,089 $ 914,731 OPERATING EXPENSES: Taxes $ 45,000 $ 46,350 $ 47,741 $ 49,173 $ 50,648 $ 52,167 Insurance $ 22,800 $ 23,484 $ 24,189 $ 24,914 $ 25,662 $ 26,431 Utilities $ 57,000 $ 58,710 $ 60,471 $ 62,285 $ 64,154 $ 66,079 Repair & Maintenance $ 51,000 $ 52,530 $ 54,106 $ 55,729 $ 57,401 $ 59,123 Cleaning $ 55,200 $ 56,856 $ 58,562 $ 60,319 $ 62,128 $ 63,992 Landscaping $ 16,800 $ 17,304 $ 17,823 $ 18,358 $ 18,909 $ 19,476 Security $ 7,800 $ 8,034 $ 8,275 $ 8,523 $ 8,779 $ 9,042 Marketing & Leasing $ 18,000 $ 18,540 $ 19,096 $ 19,669 $ 20,259 $ 20,867 General Administrative $ 108,000 $ 111,240 $ 114,577 $ 118,015 $ 121,555 $ 125,202 Management $ 41,430 $ 41,844 $ 42,472 $ 43,321 $ 44,404 $ 45,737 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 423,030 $ 434,892 $ 447,311 $ 460,306 $ 473,899 $ 488,116 Reserves $ 21,000 $ 21,630 $ 22,279 $ 22,947 $ 23,636 $ 24,345 -------------------------------------------------------------------------------- NET OPERATING INCOME $ 384,570 $ 380,364 $ 379,849 $ 383,175 $ 390,554 $ 402,271 Operating Expense Ratio (% of EGI) 51.1% 52.0% 52.7% 53.1% 53.4% 53.4 Operating Expense Per Unit $ 3,525 $ 3,624 $ 3,728 $ 3,836 $ 3,949 $ 4,068 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - --------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 982,426 $1,011,898 $1,042,255 $1,073,523 $1,105,729 Vacancy $ 68,770 $ 70,833 $ 72,958 $ 75,147 $ 77,401 Credit Loss $ 29,473 $ 30,357 $ 31,268 $ 32,206 $ 33,172 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 98,243 $ 101,190 $ 104,226 $ 107,352 $ 110,573 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 57,990 $ 59,730 $ 61,522 $ 63,368 $ 65,269 ------------------------------------------------------------------ Subtotal Other Income $ 57,990 $ 59,730 $ 61,522 $ 63,368 $ 65,269 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $ 942,173 $ 970,439 $ 999,552 $1,029,538 $1,060,424 OPERATING EXPENSES: Taxes $ 53,732 $ 55,344 $ 57,005 $ 58,715 $ 60,476 Insurance $ 27,224 $ 28,041 $ 28,882 $ 29,749 $ 30,641 Utilities $ 68,061 $ 70,103 $ 72,206 $ 74,372 $ 76,603 Repair & Maintenance $ 60,897 $ 62,724 $ 64,605 $ 66,543 $ 68,540 Cleaning $ 65,912 $ 67,889 $ 69,926 $ 72,023 $ 74,184 Landscaping $ 20,060 $ 20,662 $ 21,282 $ 21,920 $ 22,578 Security $ 9,314 $ 9,593 $ 9,881 $ 10,177 $ 10,483 Marketing & Leasing $ 21,493 $ 22,138 $ 22,802 $ 23,486 $ 24,190 General Administrative $ 128,958 $ 132,826 $ 136,811 $ 140,916 $ 145,143 Management $ 47,109 $ 48,522 $ 49,978 $ 51,477 $ 53,021 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 502,759 $ 517,842 $ 533,377 $ 549,378 $ 565,860 Reserves $ 25,075 $ 25,827 $ 26,602 $ 27,400 $ 28,222 ------------------------------------------------------------------ NET OPERATING INCOME $ 414,339 $ 426,769 $ 439,573 $ 452,760 $ 466,342 Operating Expense Ratio (% of EGI) 53.4% 53.4% 53.4% 53.4% 53.4% Operating Expense Per Unit $ 4,190 $ 4,315 $ 4,445 $ 4,578 $ 4,715
Estimated Stabilized NOI $384,570 Months to Stabilized 1 Stabilized Occupancy 93.0% Sales Expense Rate 2.00% Discount Rate 12.00% Terminal Cap Rate 10.00%
Gross Residual Sale Price $4,663,425 Less: Sales Expense $ 93,268 ---------- Net Residual Sale Price $4,570,156 PV of Reversion $1,471,468 Add: NPV of NOI $2,384,032 ---------- PV Total $3,855,500 Deferred Maintenance $ 0 Add: Excess Land $ 0 Other Adjustments $ 0 ---------- Value Indicated By "DCF" $3,855,500 Rounded $3,900,000
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ----------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - -------------------------------------------------------------------------------------- 9.50% $4,058,889 $3,995,235 $3,932,945 $3,871,987 $3,812,326 TERMINAL CAP RATE 9.75% $4,017,356 $3,954,621 $3,893,230 $3,833,147 $3,774,341 10.00% $3,977,899 $3,916,039 $3,855,500 $3,796,249 $3,738,255 10.25% $3,940,368 $3,879,338 $3,819,610 $3,761,151 $3,703,929 10.50% $3,904,623 $3,844,385 $3,785,430 $3,727,724 $3,671,238
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 9.50% 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA ROCKY CREEK APARTMENTS
TOTAL PER SQ. FT. PER UNIT %OF EGI REVENUE Base Rent $ 864,000 $ 6.58 $ 7,200 Less: Vacancy & Collection Loss 10.00% $ 86,400 $ 0.66 $ 720 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 51,000 $ 0.39 $ 425 6.15% ---------------------------------------- Subtotal Other Income $ 51,000 $ 0.39 $ 425 6.15% EFFECTIVE GROSS INCOME $ 828,600 $ 6.31 $ 6,905 OPERATING EXPENSES: Taxes $ 45,000 $ 0.34 $ 375 5.43% Insurance $ 22,800 $ 0.17 $ 190 2.75% Utilities $ 57,000 $ 0.43 $ 475 6.88% Repair & Maintenance $ 51,000 $ 0.39 $ 425 6.15% Cleaning $ 55,200 $ 0.42 $ 460 6.66% Landscaping $ 16,800 $ 0.13 $ 140 2.03% Security $ 7,800 $ 0.06 $ 65 0.94% Marketing & Leasing $ 18,000 $ 0.14 $ 150 2.17% General Administrative $ 108,000 $ 0.82 $ 900 13.03% Management 5.00% $ 41,430 $ 0.32 $ 345 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 423,030 $ 3.22 $ 3,525 51.05% Reserves $ 21,000 $ 0.16 $ 175 2.53% ---------------------------------------- NET OPERATING INCOME $ 384,570 $ 2.93 $ 3,205 46.41%
"GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $4,048,105 $30.81 $33,734 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $4,048,105 ROUNDED $4,000,000 $30.44 $33,333
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ------------------------------------------------- 8.75% $4,395,086 $4,400,000 $36,667 $33.49 9.00% $4,273,000 $4,300,000 $35,833 $32.72 9.25% $4,157,514 $4,200,000 $35,000 $31.96 9.50% $4,048,105 $4,000,000 $33,333 $30.44 9.75% $3,944,308 $3,900,000 $32,500 $29.68 10.00% $3,845,700 $3,800,000 $31,667 $28.92 10.25% $3,751,902 $3,800,000 $31,667 $28.92
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $4,000,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $3,900,000 Direct Capitalization Method $4,000,000 Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $3,900,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 $3,900,000 Income Approach $3,900,000 Reconciled Value $3,900,000 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 June 1, 2003 the market value of the fee simple estate in the property is: $3,900,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - ENTRANCE DRIVEWAY EXTERIOR - LEASING/CLUBHOUSE [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] INTERIOR - APARTMENT UNIT INTERIOR - APARTMENT UNIT AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - POOL AREA EXTERIOR - TENNIS COURT [PICTURE] [PICTURE] EXTERIOR - STORAGE/MAINTENANCE SHED VIEW OF BBQ/DECK AND PLAYGROUND AREA [PICTURE] [PICTURE] VIEW OF CAR WASH AREA VIEW NORTH ALONG STEVENS CREEK ROAD AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 ROCKY CREEK APARTMENTS WEST EAGLE GREEN WESTCHESTER APARTMENTS 950 Stevens Creek Road 249 Boy Scout Road 2905 Arrowhead Drive Augusta, Georgia Augusta, Georgia Augusta, Georgia [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 MERRICK PLACE 3190 Skinner Mill Road Augusta, Georgia [PICTURE] N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------------------------------------------------------------------------------------------------ Property Name Rocky Creek Apartments Stevens Creek Commons Management Company AIMCO Concoran LOCATION: Address 950 Stevens Creek Road 100 Bon Air Drive City, State Augusta, Georgia Augusta, Georgia 30907 County Richmond Richmond Proximity to Subject Adjacent to subject. PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 131,400 240,914 Year Built 1979 1976 Effective Age 20 27 Building Structure Type Brick & Wood Frame Brick & Wood Frame Parking Type (Gr., Cov., etc.) Open Open Number of Units 120 256 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 2Br/2Ba-2A20 1,095 120 $618 1 2Br/2Ba 1,004 166 $645 2 1Br/1Ba 825 90 $550 Average Unit Size (SF) 1,095 941 Unit Breakdown: Efficiency 2-Bedroom 100% Efficiency 2-Bedroom 65% 1-Bedroom 3-Bedroom 1-Bedroom 35% 3-Bedroom CONDITION: Good APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash Basketball Court X BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball X Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room Gym Room OCCUPANCY: 93% 95% LEASING DATA: Available Leasing Terms 12 Months 12 Months Concessions Pet Deposit $200 Does Not Accept Pets Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation Telephone Number Subject 706-868-5020 NOTES: COMPARISON TO SUBJECT: Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ---------------------------------------------------------------------------------------------------------------------- Property Name Ridgecrest Apartments Iron Horse Apartments Management Company McKinley ATC Development LOCATION: Address 926 Stevens Creek Road Stevens Creek Road City, State Augusta, Georgia 30907 Augusta, Georgia 30907 County Richmond Richmond Proximity to Subject Adjacent to subject. .2 miles NW of subject, on same road. PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 271,600 194,020 Year Built 1980 1980 Effective Age 23 23 Building Structure Type Brick & Wood Frame Wood frame with siding. Parking Type (Gr., Cov., etc.) Open Open Number of Units 280 206 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 2Br/2Ba 1,000 224 $650 1 2Br/2Ba 1,028 155 $530 2 1Br/1Ba 850 56 $550 2 1Br/1Ba 680 51 $425 Average Unit Size (SF) 970 942 Unit Breakdown: Efficiency 2-Bedroom 80% Efficiency 2-Bedroom 75% 1-Bedroom 20% 3-Bedroom 0% 1-Bedroom 25% 3-Bedroom CONDITION: Good APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool Swimming Pool X Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room Gym Room OCCUPANCY: 94% 92% LEASING DATA: Available Leasing Terms 12 Months 12 Months Concessions Pet Deposit $300 $200 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation Telephone Number 706-868-0196 706-736-4748 NOTES: COMPARISON TO SUBJECT: Superior Inferior COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - -------------------------------------------------------------------------------------------------------------------------- Property Name Westbury Creek Champion Pines Management Company Mid-America Bradford Group LOCATION: Address 222 Boy Scout Road 1500 Champion Pines City, State Augusta, Georgia Augusta, Georgia County Richmond Richmond Proximity to Subject Approximately 3 miles Approximately 3 miles PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 110,784 224,840 Year Built 1984 1990 Effective Age 19 13 Building Structure Type Frame/Siding Parking Type (Gr., Cov., etc.) Open Open Number of Units 120 220 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 2Br/2Ba 1,020 96 $635 1 2Br/2Ba 1,100 154 $630 2 1Br/1Ba 688 24 $529 2 1Br/1Ba 840 66 $500 Average Unit Size (SF) 954 1,022 Unit Breakdown: Efficiency 2-Bedroom 80% Efficiency 2-Bedroom 70% 1-Bedroom 20% 3-Bedroom 1-Bedroom 30% 3-Bedroom CONDITION: APPEAL: AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi X Car Wash X Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking X 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 X Gym Room OCCUPANCY: 94% 97% LEASING DATA: Available Leasing Terms 12 Months 12 months Concessions Pet Deposit $200 $150 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation Telephone Number 706-738-1069 706-733-1600 NOTES: COMPARISON TO SUBJECT: Superior Slightly Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 STEVENS CREEK COMMONS RIDGECREST APARTMENTS IRON HORSE APARTMENTS 100 Bon Air Drive 926 Stevens Creek Road Stevens Creek Road Augusta, Georgia 30907 Augusta, Georgia 30907 Augusta, Georgia 30907 [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 WESTBURY CREEK CHAMPION PINES 222 Boy Scout Road 1500 Champion Pines Augusta, Georgia Augusta, Georgia [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA such testimony, and then such testimony shall be at American Appraisal Associates, Inc.'s, prevailing per diem for the individuals involved. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use, the identity of the appraiser or the firm with which the appraiser is connected, or any reference to the Appraisal Institute 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 ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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. Phillip McGinnis 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- Michael Bates ----------------------- Michael Bates, MAI Assistant Manager, Real Estate Group State of Georgia, Certified General Real Property Appraiser #CG00685 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EXHIBIT E QUALIFICATIONS OF APPRAISER (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA MICHAEL P. BATES, MAI DIRECTOR - HEALTHCARE REAL ESTATE AND ASSISTANT MANAGER, REAL ESTATE GROUP POSITION Michael P. Bates is the Assistant Manager of the Atlanta Real Estate Group of American Appraisal Associates, Inc. ("AAA"). He shares responsibility for the management, quality control, and review of commercial real estate assignments principally in the southeast United States. Mr. Bates is also the national Director - Healthcare Real Estate for AAA and is responsible for the management and valuation process for specialty health care facility assignments. EXPERIENCE Valuation Mr. Bates has 17 years of commercial appraisal experience. He has performed appraisals in 43 states and Canada, and he is currently a certified general appraiser in 21 states. Court Mr. Bates has been accepted as an expert witness and given testimony in federal bankruptcy court in Delaware. He has prepared many other appraisals that were submitted as expert evidence to federal bankruptcy court, but those cases were settled prior to testimony being required. Mr. Bates has testified in property tax appeal cases in California, Missouri, and Texas, and his hospital appraisals have been submitted in tax appeal cases in Pennsylvania, South Carolina, and South Dakota. Business Mr. Bates joined AAA in 1997. Prior to joining AAA, he was president of his own valuation company and was previously a vice president for both Gulf/Atlantic Valuation Services, Inc., and Valuation Counselors. Prior to gaining his appraisal experience, Mr. Bates worked seven years in commercial mortgage financing. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA EDUCATION University of Tennessee - Knoxville Master of Business Administration - Finance and Management Bachelor of Science - Marketing STATE State of Alabama, Certified General Real Property Appraiser, #G00503 CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #31067 State of Arkansas, State Certified General Appraiser, #CG1414N State of California, Certified General Real Estate Appraiser, #AG026120 State of Colorado, Certified General Appraiser, #CG40023849 State of Delaware, Certified General Appraiser, #X1-0000352 State of Florida, Certified General Appraiser, #0002494 State of Georgia, Certified General Real Property Appraiser, #CG00685 State of Illinois, State Certified General Real Estate Appraiser, #153001243 State of Maryland, Certified General Real Estate Appraiser, #10814 State of Michigan, Certified General Appraiser, #1201069262 State of Mississippi, State Certified General Real Estate Appraiser, #GA-629 State of New Jersey, General Appraiser, #42KG00195600 State of New York, Real Estate General Appraiser, #46000041317 State of North Carolina, Certified General Real Estate Appraiser, #A4095 Commonwealth of Pennsylvania, Certified General Appraiser, #GA001817R State of South Carolina, Certified Real Estate Appraiser, #CG3059 State of Tennessee, Certified General Real Estate Appraiser, AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA #00051881 State of Texas, State Certified General Real Estate Appraiser, #TX-1328483-G Commonwealth of Virginia, Certified General Real Estate Appraiser, #4001005254 State of Washington, Certified General Real Estate Appraiser, #1100998 PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS VALUATION AND Appraisal Institute SPECIAL All required courses COURSES Standards of Professional Practice, Parts A and B The Appraiser as an Expert Witness: Preparation and Testimony Litigation Appraising: Specialized Topics and Applications Separating Real and Personal Property from Intangible Business Assets Specialty Courses Hotel/Motel Valuation and Investment Seminar Valuation of Special-Purpose Properties PUBLICATIONS "Estimating Hospital Real Property Values for Ad Valorem Tax Purposes," Journal of Property Tax Management, Fall 1997, republished by Appraisal Institute in A Business Enterprise Value Anthology, 2001 Co-authored "Abnormal Investor Returns Resulting from the Burroughs and Memorex Merger," Mergers & Acquisitions, June 1984 AMERICAN APPRAISAL ASSOCIATES, INC. ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. ROCKY CREEK APARTMENTS, AUGUSTA, GEORGIA 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. EX-99.(C)(4) 6 d07278a2exv99wxcyx4y.txt APPRAISAL OF VILLAGE GARDENS VILLAGE GARDENS 1025 OXFORD LANE FORT COLLINS, COLORADO MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 17, 2003 PREPARED FOR: APARTMENT INVESTMENT AND MANAGEMENT COMPANY (AIMCO) C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP & LIEFF CABRASER HEIMANN & BERNSTEIN ON BEHALF OF NUANES, ET. AL. [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JUNE 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: VILLAGE GARDENS 1025 OXFORD LANE FORT COLLINS, LARIMER COUNTY, COLORADO 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 140 units with a total of 106,977 square feet of rentable area. The improvements were built in 1973. The improvements are situated on 14.35 acres. Overall, the improvements are in good condition. As of the date of this appraisal, the subject property is 74% 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 17, 2003 is: ($6,500,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Douglas Needham June 28, 2003 Douglas Needham, MAI #053272 Managing Principal, Real Estate Group Colorado State Certified General Real Estate Appraiser #CG40017035 Report By: James Newell AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 VILLAGE GARDENS, FORT COLLINS, COLORADO TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ................................................... 4 Introduction ........................................................ 9 Area Analysis ....................................................... 11 Market Analysis ..................................................... 14 Site Analysis ....................................................... 16 Improvement Analysis ................................................ 16 Highest and Best Use ................................................ 17 VALUATION Valuation Procedure ................................................. 18 Sales Comparison Approach ........................................... 20 Income Capitalization Approach ...................................... 26 Reconciliation and Conclusion ....................................... 38
ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 VILLAGE GARDENS, FORT COLLINS, COLORADO EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Village Gardens LOCATION: 1025 Oxford Lane Fort Collins, Colorado 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 17, 2003 DATE OF REPORT: June 28, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 14.35 acres, or 625,086 square feet Assessor Parcel No.: R1139754 Floodplain: Community Panel No. 0801020012C (March 18, 1996) Flood Zone X, an area outside the floodplain. Zoning: M-M-N (Medium Density Mixed-Use Neighborhood District) BUILDING: No. of Units: 140 Units Total NRA: 106,977 Square Feet Average Unit Size: 764 Square Feet Apartment Density: 9.8 units per acre Year Built: 1973 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Square Market Rent Monthly Annual Unit Type Feet Per Unit Per SF Income Income - -------------------------------------------------------------------------------- 1Bd/1Ba 600 $ 650 $ 1.08 $ 7,150 $ 85,800 1Bd/1Ba 612 $ 675 $ 1.10 $ 7,425 $ 89,100 1Bd/1Ba w/ fireplace 700 $ 685 $ 0.98 $ 11,645 $ 139,740 2Bd/1Ba 765 $ 705 $ 0.92 $ 38,070 $ 456,840 2Bd/1Ba w/ fireplace 845 $ 715 $ 0.85 $ 7,865 $ 94,380 3Bd/1Ba 865 $ 815 $ 0.94 $ 29,340 $ 352,080 - -------------------------------------------------------------------------------- Total $ 101,495 $ 1,217,940 ================================================================================
OCCUPANCY: 74% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 VILLAGE GARDENS, FORT COLLINS, COLORADO EFFECTIVE AGE: 22 Years REMAINING ECONOMIC LIFE: 23 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - APARTMENT BUILDING AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ----------- -------- DIRECT CAPITALIZATION Potential Rental Income $ 1,217,940 $ 8,700 Effective Gross Income $ 1,159,708 $ 8,284 Operating Expenses $ 474,485 $ 3,389 40.9% of EGI Net Operating Income: $ 657,222 $ 4,694 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $ 6,700,000* $ 47,857 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 11% Stabilized Vacancy & Collection Loss: 13% Lease-up / Stabilization Period 18 months Terminal Capitalization Rate 10.00% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 6,400,000* $ 45,714 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 6,500,000 $ 46,429 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $48,090 to $87,162 Range of Sales $/Unit (Adjusted) $50,405 to $53,550 VALUE INDICATION - PRICE PER UNIT $ 7,000,000* $ 50,000 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.12 to 8.78 Selected EGIM for Subject 6.20 Subject's Projected EGI $ 1,159,708 EGIM ANALYSIS CONCLUSION $ 7,000,000* $ 50,000 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 7,200,000* $ 51,429 / UNIT RECONCILED SALES COMPARISON VALUE $ 7,000,000 $ 50,000 / UNIT
- ---------- * Value indications are after adjustments for concessions, deferred maintenance, excess land and lease-up costs, if any. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8 VILLAGE GARDENS, FORT COLLINS, COLORADO PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 7,000,000 NOI Per Unit $ 7,200,000 EGIM Multiplier $ 7,000,000 INDICATED VALUE BY SALES COMPARISON $ 7,000,000 $ 50,000 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 6,700,000 Discounted Cash Flow Method: $ 6,400,000 INDICATED VALUE BY THE INCOME APPROACH $ 6,500,000 $ 46,429 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 6,500,000 $ 46,429 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 VILLAGE GARDENS, FORT COLLINS, COLORADO INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 1025 Oxford Lane, Fort Collins, Larimer County, Colorado. Fort Collins identifies it as R1139754. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by James Newell on May 17, 2003. Douglas Needham, MAI has not made a personal inspection of the subject property. James Newell performed the research, valuation analysis and wrote the report. Douglas Needham, MAI reviewed the report and concurs with the value. Both, Douglas Needham, MAI and James Newell 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 17, 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 SP VI LP. 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 Fort Collins, Colorado. 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 - Timberline Road West - South College Avenue South - East Horsetooth Way North - East Prospect Road MAJOR EMPLOYERS Major employers in the subject's area include Colorado State University. 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 VILLAGE GARDENS, FORT COLLINS, COLORADO NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA - --------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 14,514 87,604 143,539 263,552 5-Year Population 14,364 96,088 159,266 294,734 % Change CY-5Y -1.0% 9.7% 11.0% 11.8% Annual Change CY-5Y -0.2% 1.9% 2.2% 2.4% HOUSEHOLDS Current Households 6,293 34,287 55,588 102,355 5-Year Projected Households 6,334 38,311 62,366 115,866 % Change CY - 5Y 0.7% 11.7% 12.2% 13.2% Annual Change CY-5Y 0.1% 2.3% 2.4% 2.6% INCOME TRENDS Median Household Income $ 44,539 $ 47,982 $ 45,867 $ 53,910 Per Capita Income $ 25,555 $ 23,869 $ 23,674 $ 25,034 Average Household Income $ 58,384 $ 61,324 $ 61,171 $ 64,459
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 41.36% 40.54% 37.39% 29.39% 5-Year Projected % Renting 41.39% 40.13% 36.44% 28.26% % of Households Owning 53.78% 55.69% 58.75% 63.45% 5-Year Projected % Owning 53.58% 56.36% 60.00% 65.23%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 VILLAGE GARDENS, FORT COLLINS, COLORADO SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Multi-family housing South - Residential Condominiums East - Single-family housing West - Single-family housing CONCLUSIONS The subject is well located within the city of Fort Collins. 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 VILLAGE GARDENS, FORT COLLINS, COLORADO MARKET ANALYSIS The subject property is located in the city of Fort Collins in Larimer County. The overall pace of development in the subject's market is more or less stable. There has been no known new construction in the subject's neighborhood. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ----------------------------- 2001 5.9% 2.6% 2002 8.1% 7.0%
Source: Fort Collins Coloradoan Online Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. The housing market has drawn in many former renters, causing this usually high-occupancy market to fall to lower levels lately. The apartment market will rebound to its normally high levels as the housing market slows down. Market rents in the subject's market have been following an increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ----------------------------------------------------- 2001 $ 639 - $ 727 - 2002 $ 629 -1.6% $ 757 4.1%
The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 VILLAGE GARDENS, FORT COLLINS, COLORADO COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - ---------------------------------------------------------------------------------------------- R-1 Collins West 300 82% 1989 Approx. 1 mile west of subject R-2 Brookview 200 89% 1976 1 mile northeast of subject R-3 Parkwood East 259 92% 1987 1 mile northeast of subject R-4 Governor's Park 188 90% 1983 2 miles southeast of subject R-5 Scotch Pines East 102 96% 1977 Across the street from subject Subject Village Gardens 140 74% 1973
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 VILLAGE GARDENS, FORT COLLINS, COLORADO PROPERTY DESCRIPTION SITE ANALYSIS Site Area 14.35 acres, or 625,086 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 0801020012C, dated March 18, 1996 Flood Zone Zone X Zoning M-M-N, 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 - ------------- --------- --------- --------- --------- -------- R1139754 $ 171,570 $ 505,530 $ 677,100 $ 0.08725 $ 59,077
IMPROVEMENT ANALYSIS Year Built 1973 Number of Units 140 Net Rentable Area 106,977 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Wood or vinyl siding Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, basketball court, tennis court, gym room, theater room, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, microwave dishwasher, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 VILLAGE GARDENS, FORT COLLINS, COLORADO Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - -------------------- --------------- --------- 1Bd/1Ba 11 600 1Bd/1Ba 11 612 1Bd/1Ba w/ fireplace 17 700 2Bd/1Ba 54 765 2Bd/1Ba w/ fireplace 11 845 3Bd/1Ba 36 865
Overall Condition Good Effective Age 22 years Economic Life 45 years Remaining Economic Life 23 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 1973 and consist of a 140-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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE DESCRIPTION SUBJECT I - 1 - ----------------------------------------------- ---------------------------- ------------------------------- Property Name Village Gardens Parkwood East LOCATION: Address 1025 Oxford Lane 1720 Kirkwood Drive City, State Fort Collins, Colorado Fort Collins, Colorado County Larimer County Larimer County PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 106,977 196,050 Year Built 1973 1987 Number of Units 140 259 Unit Mix: Type Total Type Total 1Bd/1Ba 11 1Bd/1Ba 11 1Bd/1Ba w/ fireplace 17 2Bd/1Ba 54 2Bd/1Ba w/ fireplace 11 3Bd/1Ba 36 Average Unit Size (SF) 764 757 Land Area (Acre) 14.3500 0.0000 Density (Units/Acre) 9.8 Parking Ratio (Spaces/Unit) 1.85 0.00 Parking Type (Gr., Cov., etc.) Open 0 CONDITION: 0 Good APPEAL: 0 Good AMENITIES: Pool/Spa Yes/No Yes/Yes Gym Room Yes Yes Laundry Room Yes Yes Secured Parking No Sport Courts No Yes OCCUPANCY: 74% 92% TRANSACTION DATA: Sale Date January, 2003 Sale Price ($) $18,650,000 Grantor Equity Residential Properties Grantee Parkwood East LLC Sale Documentation Verification Jeff Hawks (Selling Broker) Telephone Number N/A ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income N/A Vacancy/Credit Loss N/A Effective Gross Income $ 2,438,846 $ 9,416 $ 12.44 Operating Expenses $ 853,500 $ 3,295 $ 4.35 Net Operating Income $ 1,585,250 $ 6,121 $ 8.09 NOTES: Cap Rate of 8.5% used per Jeff Hawks (Selling Broker). PRICE PER UNIT $ 72,008 PRICE PER SQUARE FOOT $ 95.13 EXPENSE RATIO 35.0% EGIM 7.65 OVERALL CAP RATE 8.50% Cap Rate based on Pro Forma or Actual Income? PRO FORMA
COMPARABLE COMPARABLE DESCRIPTION I - 2 I - 3 - ----------------------------------------------- -------------------------------- ------------------------------- Property Name Parkside Village (Village by the The Maples at Crestwood Park) LOCATION: Address 10701 Pecos Street 1327 West 84th Avenue City, State Denver, Colorado Denver, Colorado County Adams County Adams County PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 203,040 231,624 Year Built 1971 1973 Number of Units 288 300 Unit Mix: Type Total Type Total 1Bd/1Ba 144 Studio 38 2Bd/1Ba 144 1Bd/1Ba 160 2Bd/1Ba 74 3Bd/2Ba 28 Average Unit Size (SF) 705 772 Land Area (Acre) 12.5000 11.0900 Density (Units/Acre) 23.0 27.1 Parking Ratio (Spaces/Unit) 1.56 1.58 Parking Type (Gr., Cov., etc.) Open Open CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa Gym Room Laundry Room Secured Parking No No Sport Courts OCCUPANCY: 87% 95% TRANSACTION DATA: Sale Date November, 2002 August, 2002 Sale Price ($) $13,850,000 $19,400,000 Grantor Jay B. Rich Corp. Partridge Properties Trust Grantee Village by the Park LLC Maples LLP Sale Documentation 1052436 1015850 Verification Buyers broker Broker Telephone Number 303-292-3700 N/A ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $ 2,602,080 $ 9,035 $ 12.82 $ 2,483,000 $ 8,277 $ 10.72 Vacancy/Credit Loss $ 338,270 $ 1,175 $ 1.67 $ 124,150 $ 414 $ 0.54 Effective Gross Income $ 2,263,807 $ 7,860 $ 11.15 $ 2,358,850 $ 7,863 $ 10.18 Operating Expenses $ 991,918 $ 3,444 $ 4.89 $ 1,080,000 $ 3,600 $ 4.66 Net Operating Income $ 1,271,889 $ 4,416 $ 6.26 $ 1,278,850 $ 4,263 $ 5.52 NOTES: PRICE PER UNIT $ 48,090 $ 64,667 PRICE PER SQUARE FOOT $ 68.21 $ 83.76 EXPENSE RATIO 43.8% 45.8% EGIM 6.12 8.22 OVERALL CAP RATE 9.18% 6.59% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
COMPARABLE COMPARABLE DESCRIPTION I - 4 I - 5 - ----------------------------------------------- -------------------------------- ------------------------------- Property Name Summerhill (Pine View) Cascade Village LOCATION: Address 300 Russell Blvd 6880 West 91st Street City, State Thornton, Colorado Westminster, Colorado County Adams County Jefferson County PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 86,100 340,548 Year Built 1973 1987 Number of Units 100 444 Unit Mix: Type Total Type Total 1Bd/1Ba 10 1Bd/1Ba 222 2Bd/1Ba 80 2Bd/1Ba 222 3Bd/2Ba 10 Average Unit Size (SF) 861 767 Land Area (Acre) 5.0000 16.9220 Density (Units/Acre) 20.0 26.2 Parking Ratio (Spaces/Unit) 1.75 2.04 Parking Type (Gr., Cov., etc.) Open Open, open covered CONDITION: Average Good APPEAL: Average Good AMENITIES: Pool/Spa No/No Yes/Yes Gym Room No Yes Laundry Room No No Secured Parking No No Sport Courts Yes No OCCUPANCY: 94% 90% TRANSACTION DATA: Sale Date November, 2001 December, 2002 Sale Price ($) $5,950,000 $38,700,000 Grantor 300 East Russell LBK 3 Grantee Summer Hill Apartments Henderson Global Investors Sale Documentation 890881 JFA-12206 Verification Buyer Public Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $ 907,800 $ 9,078 $ 10.54 $ 4,898,856 $11,033 $ 14.39 Vacancy/Credit Loss $ 54,468 $ 545 $ 0.63 $ 489,886 $ 1,103 $ 1.44 Effective Gross Income $ 853,332 $ 8,533 $ 9.91 $ 4,408,970 $ 9,930 $ 12.95 Operating Expenses $ 315,733 $ 3,157 $ 3.67 $ 1,198,800 $ 2,700 $ 3.52 Net Operating Income $ 537,599 $ 5,376 $ 6.24 $ 3,210,170 $ 7,230 $ 9.43 NOTES: PRICE PER UNIT $ 59,500 $ 87,162 PRICE PER SQUARE FOOT $ 69.11 $ 113.64 EXPENSE RATIO 37.0% 27.2% EGIM 6.97 8.78 OVERALL CAP RATE 9.04% 8.30% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 VILLAGE GARDENS, FORT COLLINS, COLORADO IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $48,090 to $87,162 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 $50,405 to $53,550 per unit with a mean or average adjusted price of $52,105 per unit. The median adjusted price is $52,297 per unit. Based on the following analysis, we have concluded to a value of $52,000 per unit, which results in an "as is" value of $7,000,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 VILLAGE GARDENS, FORT COLLINS, COLORADO SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ----------------------------------- ---------------------- --------------------------- ------------------------- Property Name Village Gardens Parkwood East Parkside Village (Village by the Park) Address 1025 Oxford Lane 1720 Kirkwood Drive 10701 Pecos Street City Fort Collins, Colorado Fort Collins, Colorado Denver, Colorado Sale Date January, 2003 November, 2002 Sale Price ($) $18,650,000 $13,850,000 Net Rentable Area (SF) 106,977 196,050 203,040 Number of Units 140 259 288 Price Per Unit $72,008 $48,090 Year Built 1973 1987 1971 Land Area (Acre) 14.3500 12.5000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Special Financing 15% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 0% 11-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $72,008 $55,304 Location Comparable 0% Superior -10% Number of Units 140 259 0% 288 0% Quality / Appeal Good Superior -15% Comparable 0% Age / Condition 1973 1987 / Good -15% 1971 / Average 0% Occupancy at Sale 74% 92% 0% 87% 0% Amenities Good Comparable 0% Inferior 5% Average Unit Size (SF) 764 757 0% 705 0% PHYSICAL ADJUSTMENT -30% -5% FINAL ADJUSTED VALUE ($/UNIT) $50,405 $52,539
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - ----------------------------------- ------------------------- ------------------------- ------------------------- Property Name The Maples at Crestwood Summerhill (Pine View) Cascade Village Address 1327 West 84th Avenue 300 Russell Blvd 6880 West 91st Street City Denver, Colorado Thornton, Colorado Westminster, Colorado Sale Date August, 2002 November, 2001 December, 2002 Sale Price ($) $19,400,000 $5,950,000 $38,700,000 Net Rentable Area (SF) 231,624 86,100 340,548 Number of Units 300 100 444 Price Per Unit $64,667 $59,500 $87,162 Year Built 1973 1973 1987 Land Area (Acre) 11.0900 5.0000 16.9220 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2002 0% 11-2001 0% 12-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $64,667 $59,500 $87,162 Location Superior -10% Superior -10% Superior -20% Number of Units 300 0% 100 0% 444 10% Quality / Appeal Superior -10% Comparable 0% Superior -15% Age / Condition 1973 / Average 0% 1973 / Average 0% 1987 / Good -15% Occupancy at Sale 95% 0% 94% 0% 90% 0% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 772 0% 861 0% 767 0% PHYSICAL ADJUSTMENT -20% -10% -40% FINAL ADJUSTED VALUE ($/UNIT) $51,733 $53,550 $52,297
SUMMARY VALUE RANGE (PER UNIT) $ 50,405 TO $ 53,550 MEAN (PER UNIT) $ 52,105 MEDIAN (PER UNIT) $ 52,297 VALUE CONCLUSION (PER UNIT) $ 52,000
VALUE OF IMPROVEMENT & MAIN SITE $ 7,280,000 LESS: LEASE-UP COST -$ 115,000 PV OF CONCESSIONS -$ 123,000 VALUE INDICATED BY SALES COMPARISON APPROACH $ 7,042,000 ROUNDED $ 7,000,000
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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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-1 259 $ 18,650,000 8.50% $ 1,585,250 $ 657,222 0.767 $ 55,229 $ 72,008 $ 6,121 $ 4,694 I-2 288 $ 13,850,000 9.18% $ 1,271,889 $ 657,222 1.063 $ 51,119 $ 48,090 $ 4,416 $ 4,694 I-3 300 $ 19,400,000 6.59% $ 1,278,850 $ 657,222 1.101 $ 71,214 $ 64,667 $ 4,263 $ 4,694 I-4 100 $ 5,950,000 9.04% $ 537,599 $ 657,222 0.873 $ 51,957 $ 59,500 $ 5,376 $ 4,694 I-5 444 $ 38,700,000 8.30% $ 3,210,170 $ 657,222 0.649 $ 56,594 $ 87,162 $ 7,230 $ 4,694
PRICE/UNIT
Low High Average Median $ 51,119 $ 71,214 $ 57,223 $ 55,229
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 53,000 Number of Units 140 Value $ 7,420,000 Less: Lease-Up Cost -$ 115,000 PV of Concessions -$ 123,000 ------------ Value Based on NOI Analysis $ 7,182,000 Rounded $ 7,200,000
The adjusted sales indicate a range of value between $51,119 and $71,214 per unit, with an average of $57,223 per unit. Based on the subject's competitive position within the improved sales, a value of $53,000 per unit is estimated. This indicates an "as is" market value of $7,200,000 (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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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-1 259 $ 18,650,000 $ 2,438,846 $ 853,500 35.00% 7.65 $ 72,008 I-2 288 $ 13,850,000 $ 2,263,807 $ 991,918 43.82% 6.12 $ 48,090 I-3 300 $ 19,400,000 $ 2,358,850 $ 1,080,000 45.79% 8.22 $ 64,667 40.91% I-4 100 $ 5,950,000 $ 853,332 $ 315,733 37.00% 6.97 $ 59,500 I-5 444 $ 38,700,000 $ 4,408,970 $ 1,198,800 27.19% 8.78 $ 87,162
EGIM
Low High Average Median - ---- ---- ------- ------ 6.12 8.78 7.55 7.65
VALUE ANALYSIS BASED ON EGIM's OF COMPARABLE SALES Estimate EGIM 6.20 Subject EGI $ 1,159,708 Value $ 7,190,188 Less: Lease-Up Cost -$ 115,000 PV of Concessions -$ 123,000 Value Based on EGIM Analysis $ 6,952,188 Rounded $ 7,000,000 Value Per Unit $ 50,000
There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 40.91% before reserves. The comparable sales indicate a range of expense ratios from 27.19% to 45.79%, while their EGIMs range from 6.12 to 8.78. Overall, we conclude to an EGIM of 6.20, which results in an "as is" value estimate in the EGIM Analysis of $7,000,000. 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 $7,000,000.
Price Per Unit $7,000,000 NOI Per Unit $7,200,000 EGIM Analysis $7,000,000 Sales Comparison Conclusion $7,000,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 - -------------------------------------------------------------------------- 1Bd/1Ba 600 $654 $1.09 63.6% 1Bd/1Ba 612 $643 $1.05 63.6% 1Bd/1Ba w/ fireplace 700 $646 $0.92 94.1% 2Bd/1Ba 765 $687 $0.90 72.7% 2Bd/1Ba w/ fireplace 845 $718 $0.85 100.0% 3Bd/1Ba 865 $786 $0.91 63.9%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 VILLAGE GARDENS, FORT COLLINS, COLORADO RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------ R-1 R-2 R-3 R-4 R-5 ------- --------- -------- ---------- ---------- Collins Parkwood Governor's Scotch West Brookview East Park Pines East ------- --------- -------- ---------- ---------- COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------------------ SUBJECT UNIT ACTUAL ASKING Slightly Slightly Slightly DESCRIPTION TYPE RENT RENT Superior Similar Superior Superior Similar - ---------------------------------------------------------------------------------------------------------------- Monthly Rent 1BD/1BA $ 654 $ 639 $ 690 $ 655 Unit Area (SF) 600 600 600 600 Monthly Rent Per Sq. Ft. $1.09 $1.07 $1.15 $1.09 Monthly Rent 1BD/1BA $ 643 $ 629 $ 705 Unit Area (SF) 612 612 632 Monthly Rent Per Sq. Ft. $1.05 $1.03 $ 1.12 Monthly Rent 1BD/1BA W/ $ 646 $ 639 $ 745 Unit Area (SF) FIREPLACE 700 700 724 Monthly Rent Per Sq. Ft. $0.92 $0.91 $1.03 Monthly Rent 2BD/1BA $ 687 $ 669 $ 780 $ 785 $ 813 $ 699 Unit Area (SF) 765 765 880 836 851 870 Monthly Rent Per Sq. Ft. $0.90 $0.87 $0.89 $ 0.94 $0.95 $0.80 Monthly Rent 2BD/1BA W/ $ 718 $ 689 $ 790 $ 848 $ 715 $ 745 Unit Area (SF) FIREPLACE 845 845 923 904 890 800 Monthly Rent Per Sq. Ft. $0.85 $0.82 $0.86 $0.94 $0.80 $0.93 Monthly Rent 3BD/1BA $ 786 $ 799 $ 895 Unit Area (SF) 865 865 1,116 Monthly Rent Per Sq. Ft. $0.91 $0.92 $ 0.80 DESCRIPTION MIN MAX MEDIAN AVERAGE - --------------------------------------------------------- Monthly Rent $ 655 $ 690 $ 673 $ 673 Unit Area (SF) 600 600 600 600 Monthly Rent Per Sq. Ft. $1.09 $ 1.15 $ 1.12 $ 1.12 Monthly Rent $ 705 $ 705 $ 705 $ 705 Unit Area (SF) 632 632 632 632 Monthly Rent Per Sq. Ft. $1.12 $ 1.12 $ 1.12 $ 1.12 Monthly Rent $ 745 $ 745 $ 745 $ 745 Unit Area (SF) 724 724 724 724 Monthly Rent Per Sq. Ft. $1.03 $ 1.03 $ 1.03 $ 1.03 Monthly Rent $ 699 $ 813 $ 783 $ 769 Unit Area (SF) 836 880 861 859 Monthly Rent Per Sq. Ft. $0.80 $ 0.95 $ 0.91 $ 0.90 Monthly Rent $ 715 $ 848 $ 768 $ 774 Unit Area (SF) 800 923 897 879 Monthly Rent Per Sq. Ft. $0.80 $ 0.94 $ 0.89 $ 0.88 Monthly Rent $ 895 $ 895 $ 895 $ 895 Unit Area (SF) 1,116 1,116 1,116 1,116 Monthly Rent Per Sq. Ft. $0.80 $ 0.80 $ 0.80 $ 0.80
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 --------- --------------- ---------- -------- ------ ------- ---------- 1Bd/1Ba 11 600 $650 $1.08 $ 7,150 $ 85,800 1Bd/1Ba 11 612 $675 $1.10 $ 7,425 $ 89,100 1Bd/1Ba w/ fireplace 17 700 $685 $0.98 $ 11,645 $ 139,740 2Bd/1Ba 54 765 $705 $0.92 $ 38,070 $ 456,840 2Bd/1Ba w/ fireplace 11 845 $715 $0.85 $ 7,865 $ 94,380 3Bd/1Ba 36 865 $815 $0.94 $ 29,340 $ 352,080 -------- ---------- Total $101,495 $1,217,940
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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 $1,160,946 $8,292 $1,210,305 $8,645 $1,212,812 $8,663 $1,241,067 $8,865 Vacancy $ 41,588 $ 297 $ 48,306 $ 345 $ 129,302 $ 924 $ 52,000 $ 371 Credit Loss/ Concessions $ 4,703 $ 34 $ 1,786 $ 13 $ 3,893 $ 28 $ 0 $ 0 ---------------------------------------------------------------------------------------- Subtotal $ 46,291 $ 331 $ 50,092 $ 358 $ 133,195 $ 951 $ 52,000 $ 371 Laundry Income $ 16,986 $ 121 $ 26,613 $ 190 $ 23,114 $ 165 $ 26,950 $ 193 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 67,309 $ 481 $ 83,223 $ 594 $ 87,868 $ 628 $ 77,620 $ 554 ---------------------------------------------------------------------------------------- Subtotal Other Income $ 84,295 $ 602 $ 109,836 $ 785 $ 110,982 $ 793 $ 104,570 $ 747 ---------------------------------------------------------------------------------------- Effective Gross Income $1,198,950 $8,564 $1,270,049 $9,072 $1,190,599 $8,504 $1,293,637 $9,240 Operating Expenses Taxes $ 62,333 $ 445 $ 67,662 $ 483 $ 60,812 $ 434 $ 63,335 $ 452 Insurance $ 13,888 $ 99 $ 18,382 $ 131 $ 20,621 $ 147 $ 23,394 $ 167 Utilities $ 116,230 $ 830 $ 148,107 $1,058 $ 110,702 $ 791 $ 147,518 $1,054 Repair & Maintenance $ 57,018 $ 407 $ 37,430 $ 267 $ 42,155 $ 301 $ 36,672 $ 262 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 $ 10,838 $ 77 $ 10,962 $ 78 $ 11,437 $ 82 $ 11,455 $ 82 General Administrative $ 152,109 $1,086 $ 131,999 $ 943 $ 109,718 $ 784 $ 128,062 $ 915 Management $ 60,838 $ 435 $ 68,584 $ 490 $ 59,762 $ 427 $ 63,761 $ 455 Miscellaneous $ 43,822 $ 313 $ 35,390 $ 253 $ 34,156 $ 244 $ 33,887 $ 242 ---------------------------------------------------------------------------------------- Total Operating Expenses $ 517,076 $3,693 $ 518,516 $3,704 $ 449,363 $3,210 $ 508,084 $3,629 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------- Net Income $ 681,874 $4,871 $ 751,533 $5,368 $ 741,236 $5,295 $ 785,553 $5,611 ANNUALIZED 2003 ------------------- PROJECTION AAA PROJECTION - --------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - --------------------------------------------------------------------------- Revenues Rental Income $1,140,800 $8,149 $1,217,940 $8,700 100.0% Vacancy $ 254,948 $1,821 $ 146,153 $1,044 12.0% Credit Loss/ Concessions $ 10,140 $ 72 $ 12,179 $ 87 1.0% ------------------------------------------------ Subtotal $ 265,088 $1,893 $ 158,332 $1,131 13.0% Laundry Income $ 20,140 $ 144 $ 21,700 $ 155 1.8% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 75,640 $ 540 $ 78,400 $ 560 6.4% ------------------------------------------------ Subtotal Other Income $ 95,780 $ 684 $ 100,100 $ 715 8.2% ------------------------------------------------ Effective Gross Income $ 971,492 $6,939 $1,159,708 $8,284 100.0% Operating Expenses Taxes $ 58,924 $ 421 $ 63,000 $ 450 5.4% Insurance $ 22,496 $ 161 $ 23,100 $ 165 2.0% Utilities $ 94,900 $ 678 $ 112,000 $ 800 9.7% Repair & Maintenance $ 39,928 $ 285 $ 39,900 $ 285 3.4% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 18,424 $ 132 $ 17,500 $ 125 1.5% General Administrative $ 134,460 $ 960 $ 129,500 $ 925 11.2% Management $ 53,732 $ 384 $ 57,985 $ 414 5.0% Miscellaneous $ 14,460 $ 103 $ 31,500 $ 225 2.7% ------------------------------------------------ Total Operating Expenses $ 437,324 $3,124 $ 474,485 $3,389 40.9% Reserves $ 0 $ 0 $ 28,000 $ 200 5.9% ------------------------------------------------ Net Income $ 534,168 $3,815 $ 657,222 $4,694 56.7%
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 13% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 31 VILLAGE GARDENS, FORT COLLINS, COLORADO SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - ----------------------------------------------------------- I-1 Jan-03 92% $72,008 8.50% I-2 Nov-02 87% $48,090 9.18% I-3 Aug-02 95% $64,667 6.59% I-4 Nov-01 94% $59,500 9.04% I-5 Dec-02 90% $87,162 8.30% High 9.18% Low 6.59% Average 8.32%
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 10.00%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.00%. 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 12.00% indicates a value of $6,400,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 APPROACH PAGE 33 VILLAGE GARDENS, FORT COLLINS, COLORADO DISCOUNTED CASH FLOW ANALYSIS VILLAGE GARDENS
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 - ----------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,217,940 $1,217,940 $1,230,119 $1,267,023 $1,305,034 $1,344,185 Vacancy $ 266,672 $ 163,025 $ 147,614 $ 152,043 $ 156,604 $ 161,302 Credit Loss $ 12,179 $ 12,179 $ 12,301 $ 12,670 $ 13,050 $ 13,442 Concessions $ 100,800 $ 42,000 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------- Subtotal $ 379,651 $ 217,205 $ 159,916 $ 164,713 $ 169,654 $ 174,744 Laundry Income $ 21,700 $ 21,700 $ 21,917 $ 22,575 $ 23,252 $ 23,949 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 78,400 $ 78,400 $ 79,184 $ 81,560 $ 84,006 $ 86,526 ------------------------------------------------------------------------------------- Subtotal Other Income $ 100,100 $ 100,100 $ 101,101 $ 104,134 $ 107,258 $ 110,476 ------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 938,389 $1,100,835 $1,171,305 $1,206,444 $1,242,637 $1,279,916 OPERATING EXPENSES: Taxes $ 63,000 $ 64,890 $ 66,837 $ 68,842 $ 70,907 $ 73,034 Insurance $ 23,100 $ 23,793 $ 24,507 $ 25,242 $ 25,999 $ 26,779 Utilities $ 112,000 $ 115,360 $ 118,821 $ 122,385 $ 126,057 $ 129,839 Repair & Maintenance $ 39,900 $ 41,097 $ 42,330 $ 43,600 $ 44,908 $ 46,255 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 17,500 $ 18,025 $ 18,566 $ 19,123 $ 19,696 $ 20,287 General Administrative $ 129,500 $ 133,385 $ 137,387 $ 141,508 $ 145,753 $ 150,126 Management $ 46,919 $ 55,042 $ 58,565 $ 60,322 $ 62,132 $ 63,996 Miscellaneous $ 31,500 $ 32,445 $ 33,418 $ 34,421 $ 35,454 $ 36,517 ------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 463,419 $ 484,037 $ 500,430 $ 515,443 $ 530,906 $ 546,833 Reserves $ 28,000 $ 28,840 $ 29,705 $ 30,596 $ 31,514 $ 32,460 ------------------------------------------------------------------------------------- NET OPERATING INCOME $ 446,969 $ 587,958 $ 641,170 $ 660,405 $ 680,217 $ 700,623 ------------------------------------------------------------------------------------- Operating Expense Ratio (% of EGI) 49.4% 44.0% 42.7% 42.7% 42.7% 42.7% Operating Expense Per Unit $ 3,310 $ 3,457 $ 3,575 $ 3,682 $ 3,792 $ 3,906 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,384,510 $1,426,046 $1,468,827 $1,512,892 $1,558,278 Vacancy $ 166,141 $ 171,125 $ 176,259 $ 181,547 $ 186,993 Credit Loss $ 13,845 $ 14,260 $ 14,688 $ 15,129 $ 15,583 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------- Subtotal $ 179,986 $ 185,386 $ 190,947 $ 196,676 $ 202,576 Laundry Income $ 24,668 $ 25,408 $ 26,170 $ 26,955 $ 27,764 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 89,122 $ 91,796 $ 94,550 $ 97,386 $ 100,308 ---------------------------------------------------------------------- Subtotal Other Income $ 113,790 $ 117,204 $ 120,720 $ 124,341 $ 128,072 ---------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,318,314 $1,357,863 $1,398,599 $1,440,557 $1,483,774 OPERATING EXPENSES: Taxes $ 75,225 $ 77,482 $ 79,807 $ 82,201 $ 84,667 Insurance $ 27,583 $ 28,410 $ 29,262 $ 30,140 $ 31,044 Utilities $ 133,734 $ 137,746 $ 141,878 $ 146,135 $ 150,519 Repair & Maintenance $ 47,643 $ 49,072 $ 50,544 $ 52,060 $ 53,622 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 20,896 $ 21,523 $ 22,168 $ 22,834 $ 23,519 General Administrative $ 154,630 $ 159,269 $ 164,047 $ 168,968 $ 174,037 Management $ 65,916 $ 67,893 $ 69,930 $ 72,028 $ 74,189 Miscellaneous $ 37,613 $ 38,741 $ 39,903 $ 41,100 $ 42,333 ---------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 563,238 $ 580,136 $ 597,540 $ 615,466 $ 633,930 Reserves $ 33,433 $ 34,436 $ 35,470 $ 36,534 $ 37,630 ---------------------------------------------------------------------- NET OPERATING INCOME $ 721,642 $ 743,291 $ 765,590 $ 788,558 $ 812,214 ---------------------------------------------------------------------- Operating Expense Ratio (% of EGI) 42.7% 42.7% 42.7% 42.7% 42.7% Operating Expense Per Unit $ 4,023 $ 4,144 $ 4,268 $ 4,396 $ 4,528
Gross Residual Sale Price $8,122,144 Deferred Maintenance $ 0 Estimated Stabilized NOI $657,222 Sales Expense Rate 2.00% Less: Sales Expense $ 162,443 Add: Excess Land $ 0 ---------- Months to Stabilized 18 Discount Rate 12.00% Net Residual Sale Price $7,959,702 Other Adjustments $ 0 ---------- Stabilized Occupancy 88.0% Terminal Cap Rate 10.00% PV of Reversion $2,562,811 Value Indicated By "DCF" Rounded $6,437,712 Add: NPV of NOI $3,874,901 $6,400,000 ---------- PV Total $6,437,712
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ---------------------------------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - -------------------------------------------------------------------------------------------------------------- 9.50% $6,790,247 $6,680,236 $6,572,597 $6,467,271 $6,364,201 9.75% $6,717,910 $6,609,501 $6,503,425 $6,399,625 $6,298,043 TERMINAL CAP RATE 10.00% $6,649,190 $6,542,303 $6,437,712 $6,335,361 $6,235,193 10.25% $6,583,822 $6,478,383 $6,375,205 $6,274,231 $6,175,408 10.50% $6,521,567 $6,417,507 $6,315,674 $6,216,013 $6,118,471
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 VILLAGE GARDENS, FORT COLLINS, COLORADO INCOME LOSS DURING LEASE-UP The subject is currently 74% 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 $115,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 - ----------------------------------------------------------------- "As Is" Net Operating Income $446,969 $587,958 Stabilized Net Operating Income $561,462 $603,987 --------------------- Difference $114,493 $ 16,029 PV of Income Loss During Lease-Up $115,004 -------- Rounded $115,000 --------
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 $123,000 (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 35 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 APPROACH PAGE 36 VILLAGE GARDENS, FORT COLLINS, COLORADO VILLAGE GARDENS
TOTAL PER SQ. FT. PER UNIT % OF EGI - ---------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,217,940 $11.39 $ 8,700 Less: Vacancy & Collection Loss 13.00% $ 158,332 $ 1.48 $ 1,131 Plus: Other Income Laundry Income $ 21,700 $ 0.20 $ 155 1.87% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 78,400 $ 0.73 $ 560 6.76% --------------------------------------------------- Subtotal Other Income $ 100,100 $ 0.94 $ 715 8.63% EFFECTIVE GROSS INCOME $1,159,708 $10.84 $ 8,284 OPERATING EXPENSES: Taxes $ 63,000 $ 0.59 $ 450 5.43% Insurance $ 23,100 $ 0.22 $ 165 1.99% Utilities $ 112,000 $ 1.05 $ 800 9.66% Repair & Maintenance $ 39,900 $ 0.37 $ 285 3.44% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 17,500 $ 0.16 $ 125 1.51% General Administrative $ 129,500 $ 1.21 $ 925 11.17% Management 5.00% $ 57,985 $ 0.54 $ 414 5.00% Miscellaneous $ 31,500 $ 0.29 $ 225 2.72% TOTAL OPERATING EXPENSES $ 474,485 $ 4.44 $ 3,389 40.91% Reserves $ 28,000 $ 0.26 $ 200 2.41% --------------------------------------------------- NET OPERATING INCOME $ 657,222 $ 6.14 $ 4,694 56.67% "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $6,918,131 $64.67 $49,415 LESS: LEASE-UP COST ($ 115,000) PV OF CONCESSIONS ($ 123,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $6,680,131 ROUNDED $6,700,000 $62.63 $47,857
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 37 VILLAGE GARDENS, FORT COLLINS, COLORADO DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------------------------------------------------------------------------- 8.75% $7,273,113 $7,300,000 $52,143 $68.24 9.00% $7,064,471 $7,100,000 $50,714 $66.37 9.25% $6,867,107 $6,900,000 $49,286 $64.50 9.50% $6,680,131 $6,700,000 $47,857 $62.63 9.75% $6,502,743 $6,500,000 $46,429 $60.76 10.00% $6,334,224 $6,300,000 $45,000 $58.89 10.25% $6,173,926 $6,200,000 $44,286 $57.96
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $6,700,000. 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 $6,400,000 Direct Capitalization Method $6,700,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $6,500,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 $7,000,000 Income Approach $6,500,000 Reconciled Value $6,500,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 17, 2003 the market value of the fee simple estate in the property is: $6,500,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA VILLAGE GARDENS, FORT COLLINS, COLORADO ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A VILLAGE GARDENS, FORT COLLINS, COLORADO EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A VILLAGE GARDENS, FORT COLLINS, COLORADO SUBJECT PHOTOGRAPHS [EXTERIOR - APARTMENT BUILDING PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [INTERIOR - CLUBHOUSE PICTURE] [INTERIOR - APARTMENT UNIT PICTURE] [INTERIOR - APARTMENT UNIT PICTURE] [INTERIOR - APARTMENT UNIT PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A VILLAGE GARDENS, FORT COLLINS, COLORADO SUBJECT PHOTOGRAPHS [INTERIOR - APARTMENT UNIT PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [CLUBHOUSE - POOL AREA PICTURE] [EXTERIOR - PLAYGROUND PICTURE] [EXTERIOR - GYM ROOM PICTURE] [EXTERIOR - DOG PARK AREA PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B VILLAGE GARDENS, FORT COLLINS, COLORADO EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B VILLAGE GARDENS, FORT COLLINS, COLORADO PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 PARKWOOD EAST PARKSIDE VILLAGE (VILLAGE THE MAPLES AT CRESTWOOD 1720 Kirkwood Drive BY THE PARK) 1327 West 84th Avenue Fort Collins, Colorado 10701 Pecos Street Denver, Colorado Denver, Colorado [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 SUMMERHILL (PINE VIEW) CASCADE VILLAGE 300 Russell Blvd 6880 west 91st Street Thornton, Colorado Westminster, Colorado [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B VILLAGE GARDENS, FORT COLLINS, COLORADO SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Village Gardens Collins West Management Company AIMCO LOCATION: Address 1025 Oxford Lane 2736 Raintree City, State Fort Collins, Colorado Fort Collins, Colorado County Larimer County Larimer County Proximity to Subject Approx. 1 mile west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 106,977 Year Built 1973 1989 Effective Age 22 10 Building Structure Type Parking Type (Gr., Cov., etc.) Open Open Number of Units 140 300 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 600 11 $654 1 1Bd/1Ba 600 $690 2 1Bd/1Ba 612 11 $643 4 2Bd/1Ba 880 $780 3 1Bd/1Ba w/ fireplace 700 17 $646 5 2Bd/1Ba 895 $780 4 2Bd/1Ba 765 54 $687 5 2Bd/1.25Ba 950 $800 5 2Bd/1Ba w/ fireplace 845 11 $718 6 3Bd/1Ba 865 36 $786 Average Unit Size (SF) 764 Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony 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 X Basketball Court BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court X 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 Gym Room OCCUPANCY: 74% 82% LEASING DATA: Available Leasing Terms 6-12 month leases 10 OR 12 month leases Concessions 1 month free rent $50 off Garden Level and 2Bd/1.25Ba Pet Deposit $250 $250 Utilities Paid by Tenant: X Electric X Natural Gas X Electric Natural Gas X Water X Trash Water Trash Confirmation Property manager Leasing Agent Telephone Number 970-226-4980 NOTES: COMPARISON TO SUBJECT: Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Brookview Parkwood East Management Company OMNI LOCATION: Address 1717 Welch 1720 Kirkwood Drive City, State Fort Collins, Colorado Fort Collins, Colorado County Larimer County Larimer County Proximity to Subject 1 mile northeast of subject 1 mile northeast of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) Year Built 1976 1987 Effective Age 25 10 Building Structure Type Parking Type (Gr., Cov., etc.) Open Open Number of Units 200 259 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 2 1Bd/1Ba 632 $705 3 1Bd/1Ba 724 $745 4 2Bd/1Ba 836 $785 4 2Bd/2Ba 824 $800 6 3Bd/2Ba 1,116 $895 4 2Bd/2Ba 878 $825 5 2Bd/2Ba 886 $840 5 2Bd/2Ba 922 $855 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Average Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony 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 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 X Tennis Court Secured Parking Racquet Ball X Laundry Room X Racquet Ball Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room X Gym Room OCCUPANCY: 89% 92% LEASING DATA: Available Leasing Terms 6-12 month leases 6-12 month leases Concessions $100 off each month $100 off each month Pet Deposit $250 $250 Utilities Paid by Tenant: X Electric X Natural Gas X Electric Natural Gas Water Trash X Water X Trash Confirmation Leasing agent Leasing Agent Telephone Number 970-493-4250 970-221-0945 NOTES: COMPARISON TO SUBJECT: Similar Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Governor's Park Scotch Pines East Management Company AIMCO AIMCO LOCATION: Address 2212 Vermont Drive 915 E. Drake Road City, State Fort Collins, Colorado Fort Collins, Colorado County Larimer County Larimer County Proximity to Subject 2 miles southeast of subject Across the street from subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) Year Built 1983 1977 Effective Age 15 20 Building Structure Type Parking Type (Gr., Cov., etc.) Open Open Number of Units 188 102 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 4 2Bd/1Ba 870 52 $699 Studio 400 $565 5 2Bd/1Ba 890 136 $715 1 1Bd/1Ba 600 $655 5 2Bd/1Ba Loft 800 $745 Average Unit Size (SF) 884 Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Good APPEAL: Good Good 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 X 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 Laundry Room Racquet Ball Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room Gym Room OCCUPANCY: 90% 96% LEASING DATA: Available Leasing Terms 6-12 month leases 6-12 month leases Concessions 1 month free none Pet Deposit none allowed Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash X Water X Trash Confirmation Leasing Agent Leasing Agent Telephone Number 970-493-3030 970-223-4038 NOTES: W/D in each unit W/D in each unit COMPARISON TO SUBJECT: Slightly Superior Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B VILLAGE GARDENS, FORT COLLINS, COLORADO PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 COLLINS WEST BROOKVIEW PARKWOOD EAST 2736 Raintree 1717 Welch 1720 Kirkwood Drive Fort Collins, Colorado Fort Collins, Colorado Fort Collins, Colorado [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 GOVERNER'S PARK SCOTCH PINES EAST 2212 Vermount Drive 915 E. Darke Road Fort Collins, Colorado Fort Collins, Colorado [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C VILLAGE GARDENS, FORT COLLINS, COLORADO EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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 VILLAGE GARDENS, FORT COLLINS, COLORADO 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. James Newell 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- Douglas Needham ---------------------------------- Douglas Needham, MAI Managing Principal, Real Estate Group Colorado State Certified General Real Estate Appraiser #CG40017035 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E VILLAGE GARDENS, FORT COLLINS, COLORADO EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E VILLAGE GARDENS, FORT COLLINS, COLORADO DOUGLAS A. NEEDHAM, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION Douglas A. Needham is a Managing Principal for the Irvine Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Needham has appraised all types of major commercial real estate including apartments, hotels/motels, light and heavy industrial facilities, self-storage facilities, mobile home parks, offices, retail shopping centers, service stations, special-use properties, and vacant land. Business Mr. Needham joined AAA in 1998. Prior to joining AAA, he was a senior associate at Koeppel Tener, a senior analyst at Great Western Appraisal Group, and an associate appraiser at R. L. McLaughlin & Associates. EDUCATION Texas A&M University Bachelor of Business Administration - Finance STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30943 State of California, Certified General Real Estate Appraiser, #AG025443 State of Colorado, Certified General Appraiser, #CG40017035 State of Oregon, Certified General Appraiser, #C000686 State of Washington, Certified General Real Estate Appraiser, #1101111 PROFESSIONAL Appraisal Institute, MAI Designated AFFILIATIONS Member AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E VILLAGE GARDENS, FORT COLLINS, COLORADO VALUATION AND Appraisal Institute SPECIAL COURSES Advanced Income Capitalization Appraisal Principles Appraisal Procedures Basic Income Capitalization Standards of Professional Practice AMERICAN APPRAISAL ASSOCIATES, INC. VILLAGE GARDENS, FORT COLLINS, COLORADO GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. VILLAGE GARDENS, FORT COLLINS, COLORADO 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. -----END PRIVACY-ENHANCED MESSAGE-----