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.