-----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, D9tpH3Ltz2tSY8ElF0os5XzzNTHD2B3wUGLZLSa/lZO9pUSjFk2iw0Z34r3erZyT IENAJqoyNe2AdUpyPYKsNw== 0001072761-05-000007.txt : 20050415 0001072761-05-000007.hdr.sgml : 20050415 20050415172905 ACCESSION NUMBER: 0001072761-05-000007 CONFORMED SUBMISSION TYPE: SC TO-I PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20050415 DATE AS OF CHANGE: 20050415 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SECURED INVESTMENT RESOURCES FUND LP CENTRAL INDEX KEY: 0000745481 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 480979566 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I SEC ACT: 1934 Act SEC FILE NUMBER: 005-80666 FILM NUMBER: 05754884 BUSINESS ADDRESS: STREET 1: 199 S. LOS ROBLES AVENUE STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 626-585-5920 MAIL ADDRESS: STREET 1: 199 S. LOS ROBLES AVENUE STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: MILLENIUM MANAGEMENT LLC CENTRAL INDEX KEY: 0001072761 IRS NUMBER: 954710593 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-I BUSINESS ADDRESS: STREET 1: 199 S. LOS ROBLES AVE STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 6265855920 MAIL ADDRESS: STREET 1: 199 S. LOS ROBLES AVE STREET 2: SUITE 200 CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: MILLENIUM INVESTORS 2 LLC DATE OF NAME CHANGE: 19981028 SC TO-I 1 sir1_sctoi041505.txt OFFER TO PURCHASE SIR I SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- SCHEDULE TO-I TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 Secured Investment Resources Fund, L.P. - -------------------------------------------------------------------------------- (Name of Subject Company [Issuer]) Millenium Management, LLC (offeror) - -------------------------------------------------------------------------------- (Filing Persons) Units of Limited Partnership Interest - -------------------------------------------------------------------------------- (Title of Class of Securities) None - -------------------------------------------------------------------------------- (CUSIP Number of Class of Securities) Christopher K. Davis Millenium Management, LLC 199 S. Los Robles Ave., Suite 200 Pasadena, CA 91101 Telephone (626) 585-5920 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Filing Persons) CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- Transaction Valuation: $32,000(1) Amount of Filing Fee: $6.40 - -------------------------------------------------------------------------------- (1) Calculated as the product of the Units on which the Offer is made and the gross cash price per Unit. [ ] Check 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: Not Applicable Filing party: Not Applicable Form or registration no.: Not Applicable Date filed: Not Applicable [ ] Check 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: [ ] third-party tender offer subject to Rule 14d-1. [X] issuer tender offer subject to Rule 13e-4. [ ] 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: [ ] This Tender Offer Statement on Schedule TO (this "Statement") relates to an offer by Millenium Management, LLC ("Millenium" or the "Purchaser"), a California limited liability company, to purchase up to 8,000 units ("Units") of limited partnership interests in Secured Investment Resources Fund, L.P. (the "Partnership") at a cash purchase price of $4 per Unit, without interest, less the amount of Distributions (as defined in the Offer to Purchase (as defined herein)) per unit, if any, made to unit holders by the Partnership after the date of the Offer, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 15, 2005, as it may be supplemented or amended from time to time (the "Offer to Purchase"), and the related Agreement of Transfer and Letter of Transmittal, as it may be supplemented or amended from time to time (the "Letter of Transmittal," which, together with the Offer to Purchase, constitutes the "Offer"), copies of which are filed as Exhibits 12.1 and 12.2 hereto, respectively. Capitalized terms used but not defined herein have the meaning ascribed to them in the Offer to Purchase. ITEM 1. SUMMARY TERM SHEET. Reference is hereby made to the information set forth in the cover page, "Introduction" and "Summary of the Offer" of the Offer to Purchase, which is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION. (a) The name of the subject company is Secured Investment Resources Fund, L.P., a Kansas limited partnership (the "Partnership"). The address of the Partnership's principal executive offices is 199 S. Los Robles Ave., Suite 200. The telephone number of the Partnership is (626) 585-5920. (b) The class of equity securities to which this Statement relates is Units of Limited Partnership Interests in the Partnership. Reference is hereby made to the information set forth in "Certain Information Concerning the Partnership - Outstanding Units" of the Offer to Purchase, which is incorporated herein by reference. (c) Reference is hereby made to the information set forth in "Summary of the Offer" and "Certain Information Concerning the Partnership - Trading History of the Units" of the Offer to Purchase, which is incorporated herein by reference. ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. Reference is hereby made to the information set forth in the "Certain Information Concerning the Purchaser" and Schedule I of the Offer to Purchase concerning the executive officers ("Executive Officers") of Millenium and its manager, Everest Properties II, LLC ("EPII"), which is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. Reference is hereby made to the information set forth in the "Summary of the Offer," "Details of the Offer," "Effects of the Offer" and "Federal Income Tax Matters" of the Offer to Purchase, which is incorporated herein by reference. The Purchaser does not currently plan to provide a subsequent offering period, as described by Rule 14d-11 of Regulation 14D under the Securities Exchange Act of 1934, as amended. No Units will be purchased from any Executive Officer, any officer director or affiliate of the Partnership, or any officer director or affiliate of Millenium. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. Reference is hereby made to the information set forth in "Background of the Offer" and "Certain Information Concerning the Purchaser - Prior Acquisitions of Units and Prior Contacts" of the Offer to Purchase, which is incorporated herein by reference. ITEM 6. PURPOSE OF THE TRANSACTION AND PLANS OR PROPOSALS. Reference is hereby made to the information set forth in "Summary of the Offer," "Future Plans of the Purchaser" and "Effects of the Offer" of the Offer to Purchase, which is incorporated herein by reference. Except as set forth in the Offer to Purchase, the Purchaser does not have any present plans or proposals which would relate to, or would result in, any transaction, change or other occurrence with respect to the Partnership or the Units as is listed in paragraphs (c)(1) through (c)(7) of Item 1006 of Regulation M-A. ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) Reference is hereby made to the information set forth in "Certain Information Concerning the Purchaser - Source of Funds" of the Offer to Purchase, which is incorporated herein by reference. (b), (d) Not applicable. ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. Reference is hereby made to the information set forth in "Certain Information Concerning the Purchaser - Prior Acquisitions of Units and Prior Contacts" and " - General" of the Offer to Purchase, which is incorporated herein by reference. ITEM 9. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED. Reference is hereby made to the information set forth in "Certain Legal Matters - Fees and Expenses" of the Offer to Purchase, which is incorporated herein by reference. ITEM 10. FINANCIAL STATEMENTS. Reference is hereby made to the information set forth in Appendix A of the Offer to Purchase and is incorporated herein by reference. The incorporation by reference in this Item of the above-referenced information does not constitute an admission that such information is considered material under the instructions for Item 10 of Schedule TO. Certain information regarding Purchaser's method of financing the Offer is set forth in "Certain Information Concerning the Purchaser - Source of Funds" and is incorporated herein by reference. Purchaser does not believe its financial statements are material to persons considering the Offer because: (i) the offer is for cash; (ii) for persons selling their securities, Purchaser's ability to finance the transaction is disclosed; and (iii) the Purchaser's ownership percentage after the Offer is irrelevant to Purchaser's potential to effectuate a change of control because Purchaser already controls the Partnership as its general partner. ITEM 11. ADDITIONAL INFORMATION. (a) None. (b) Reference is hereby made to the entire text of the Offer to Purchase and the related Agreement of Transfer and Letter of Transmittal, which are incorporated herein by reference. ITEM 12. EXHIBITS. 12.1 Offer to Purchase, dated April 15, 2005. 12.2 Agreement of Transfer and Letter of Transmittal, with Instructions. 12.3 Letter to Unit Holders dated April 15, 2005. 12.4 Appraisal of the Cascade Apartments dated April 29, 2004. 12.5 Appraisal of the Hidden Valley Exchange Retail Center dated April 30, 2004. SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: April 15, 2005 MILLENIUM MANAGEMENT, LLC By: /S/ W. ROBERT KOHORST -------------------------- W. Robert Kohorst President EX-99 2 sir1_sctoi041505offer.txt EXH 1 OFFER TO PURCHASE OFFER TO PURCHASE FOR CASH 8,000 UNITS of Limited Partnership Interest in SECURED INVESTMENT RESOURCES FUND, L.P. by MILLENIUM MANAGEMENT, LLC at a Cash Purchase Price of $4 per Unit THE OFFER, WITHDRAWAL RIGHTS AND PRORATION PERIOD WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON THURSDAY, MAY 19, 2005, UNLESS THE OFFER IS EXTENDED. Millenium Management, LLC ("Millenium" or the "Purchaser"), a California limited liability company, is offering to purchase 8,000 Units of SECURED INVESTMENT RESOURCES FUND, L.P. (the "Partnership"), at a cash purchase price of $4 per Unit, without interest. No transfer fees will be deducted. The Offer (as defined below) is subject to certain terms and conditions set forth in this Offer to Purchase, as it may be supplemented from time to time (the "Offer to Purchase") and in the related Agreement of Transfer and Letter of Transmittal, as it may be supplemented or amended from time to time (the "Letter of Transmittal," which together with the Offer to Purchase, constitutes the "Offer"). This Offer is not subject to brokerage commissions or and is not conditioned upon financing. To the knowledge of the Purchaser, a Unit Holder will not incur any fees, such as selling broker commissions or depositary fees, to sell Units in response to this Offer; unless such Unit Holder holds Units in a manner that involves fees particular to such Unit Holder. The enclosed Letter of Transmittal may be used to tender Units for the Offer. Please read all Offer materials completely before completing and returning the Letter of Transmittal (blue form). ------------------ For More Information or for Further Assistance, Please Call or Contact the Purchaser at: Millenium Management, LLC 199 South Los Robles Avenue Suite 200 Pasadena, California 91101 (626) 585-5920 (800) 611-4613 (toll free) April 15, 2005 TABLE OF CONTENTS Page INTRODUCTION..................................................................1 SUMMARY OF THE OFFER..........................................................1 DETAILS OF THE OFFER..........................................................4 1. Terms of the Offer; Expiration Date; Proration....................4 2. Acceptance for Payment and Payment of Purchase Price..............4 3. Procedure to Accept the Offer.....................................5 4. Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects........5 5. Withdrawal Rights.................................................6 6. Extension of Tender Period; Amendment.............................7 7. Conditions of the Offer...........................................7 8. Backup Federal Income Tax Withholding.............................8 9. FIRPTA Withholding................................................8 CERTAIN INFORMATION CONCERNING THE PARTNERSHIP................................8 General................................................................9 Outstanding Units......................................................9 Trading History of the Units...........................................9 Selected Financial and Property Related Data...........................9 DETERMINATION OF OFFER PRICE..................................................9 CERTAIN INFORMATION CONCERNING THE PURCHASER.................................11 The Purchaser.........................................................11 General...............................................................11 Prior Acquisitions of Units and Prior Contacts........................11 Source of Funds.......................................................12 FUTURE PLANS OF THE PURCHASER................................................12 EFFECTS OF THE OFFER.........................................................12 Future Benefits of Unit Ownership.....................................13 Limitations on Resales................................................13 Influence Over Future Voting Decisions................................13 FEDERAL INCOME TAX MATTERS...................................................13 CERTAIN LEGAL MATTERS........................................................15 General...............................................................15 State Takeover Statutes...............................................15 Fees and Expenses.....................................................15 Miscellaneous.........................................................15 SCHEDULE I - EXECUTIVE OFFICERS APPENDIX A - PARTNERSHIP INFORMATION INTRODUCTION The Purchaser hereby offers to purchase 8,000 Units of limited partnership interest in the Partnership at a cash purchase price of $4 per Unit, without interest. No transfer fees will be deducted. To the knowledge of the Purchaser, a Unit Holder will not incur any other fees, such as selling broker commissions or depositary fees, to sell Units in response to this Offer; unless such Unit Holder holds Units in a manner that involves fees particular to such Unit Holder. SUMMARY OF THE OFFER. The purpose of the Offer is for the Purchaser to acquire an equity interest in the Partnership for investment purposes. In considering the Offer, Unit Holders are urged to consider the following: o The price offered for the Units is $4 in CASH. See "Details of the Offer - Acceptance for Payment and Payment of Purchase Price." o Millenium is the general partner of the Partnership and therefore has a conflict of interest in making this Offer. Millenium became the sole general partner of the Partnership, assuming control from the prior general partners: James R. Hoyt and Secured Investment Resources, Inc. (the "Former General Partners"), pursuant to the vote of limited partners holding a majority of the units of limited partnership interest. o Millenium has taken control of the Partnership's properties and accounts, but has not yet had enough time to determine the true financial condition of the Partnership and its properties. Millenium is making this offer notwithstanding the lack of complete or reliable information available concerning the status of the Partnership and its properties and the other risks associated with the Partnership at this time. Therefore, the price offered is not based on any estimate of the liquidation or net asset value of the Partnership. The offer price is speculative due to the substantial uncertainties and risks that exist at this time. Millenium has received numerous communications from Unit Holders wishing to dispose of their Units, and Millenium is willing to make the Offer to provide such an opportunity, notwithstanding the speculative nature of the offer price. See "Determination of the Offer Price." o One of the Partnership's two remaining properties, the Hidden Valley Exchange Shopping Center, is threatened with foreclosure again. At this time the Purchaser, as the new general partner, cannot predict whether or not we will succeed in preventing a loss of the property in foreclosure. See "Background of the Offer" and "Appendix A." o The Former General Partners have not obtained audited financials for over five (5) years. All financial information described herein is based on unaudited information received from the Former General Partners, which is the only information available to Millenium. See "Certain Information Concerning the Partnership - Selected Financial and Property Related Data," and "Appendix A." o There is no current plan to sell the Partnership's properties or liquidate the Partnership. It will take Millenium several months to determine the true financial condition of the Partnership, to evaluate and understand the issues concerning each property, to determine a plan for managing each property and to implement a strategy for each property that Millenium believes to be in the best interests of the Partnership. o The Partnership will not be required to terminate before the year 2044, unless a majority of the limited partners approve an earlier dissolution or an event occurs that would require a dissolution, according to the Partnership's limited partnership agreement. o The Units are illiquid - trades of only 15 Units have been reported over the last 12 months, according to Direct Investment Spectrum, an independent industry publication. Such trades occurred between January 31, 2004 and January 31, 2005 at the average price of $55 per Unit. The Offer allows Unit Holders to dispose of their Units without incurring the sales commissions (typically up to 8% with a minimum of $150-$200) associated with sales arranged through brokers or other intermediaries. See "Certain Information Concerning the Partnership - Trading History of the Units." o Due to its conflict of interest, Millenium is unable to make a recommendation regarding the Offer. o The Purchaser is making the Offer with a view to making a profit for itself. Accordingly, the desire of the Purchaser to purchase Units at a low price conflicts with the desire of the Unit Holders to sell their Units at a high price. o The Offer is an immediate opportunity for Unit Holders to liquidate their investment in the Partnership, but Unit Holders who tender their Units will be giving up the opportunity to participate in any potential future benefits from ownership of Units, including distributions resulting from any future sale of the Partnership's properties. Unit Holders may have a more immediate need to use the cash now tied up in the Units, and may consider the Offer more certain to achieve a prompt liquidation of their investment in the Units. Unit Holders who sell all of their Units will also eliminate the need to file Form K-1 information for the Partnership with their federal tax returns for years after 2005. See "Details of the Offer - Acceptance for Payment and Payment of Purchase Price." o The Offer allows Unit Holders the option to sell "All or None" of their Units, thereby allowing Unit Holders the option to avoid proration if more than 8,000 Units are tendered. See "Details of the Offer - Terms of the Offer; Expiration Date; Proration" and "- Withdrawal Rights - Automatic Withdrawal Option." Each Unit Holder must make his own decision, based on the Unit Holder's particular circumstances, whether to tender Units. Unit Holders should consult with their respective advisors about the financial, tax, legal and other implications of accepting the Offer. The above statements are intended only as a brief overview of the principal terms and considerations regarding the Offer. The entire Offer to Purchase, which follows, provides substantially greater detail about the Offer, and all of the statements above are qualified by the entire Offer to Purchase. You should read it completely and carefully before deciding whether or not to tender your Units. The Offer is subject to certain terms and conditions set forth in this Offer to Purchase, and in the related Agreement of Transfer and Letter of Transmittal, that are not summarized above. BACKGROUND OF THE OFFER The Partnership, though subject to the public reporting requirements of the Securities Exchange Act of 1934, has not filed any periodic reports with the Securities and Exchange Commission since the annual report for its fiscal year ended December 31, 1998, and has not otherwise published or provided Unit Holders with audited financial statements reporting on the Partnership's operations and financial condition. In October 2003, Everest Management, LLC and KM Investments, LLC, affiliates of the Purchaser, filed suit against the Former General Partners, the Partnership and another partnership for which James Hoyt and his affiliate served as general partners, Secured Investment Resources Fund, L.P. II ("SIRF II") seeking access to the books and records of the Partnership and SIRF II. In April 2004, the Purchaser commenced solicitations of Unit Holders in the Partnership and SIRF II to obtain their written consents to the removal of the Former General Partners as general partner of the Partnership. In June 2004, the Purchaser's affiliates sought, and subsequently obtained, the appointment of a receiver for the assets of the Partnership and SIRF II. In August 2004, the Former General Partners filed suit against the Purchaser and its affiliates alleging that the proxy statements and solicitation sent by them to Unit Holders of the Partnership and SIRF II contained materially false and misleading information; and requesting a declaration that the voting procedures set forth in the proxy solicitation violated the respective partnership agreements and that any resulting votes were void and of no effect. In December 2004, one of the Partnership's two remaining properties, the Hidden Valley Exchange Shopping Center, was threatened with foreclosure. The Partnership made a payment in order to reinstate the mortgage loan and prevent the foreclosure. The lender subsequently claimed that the amount paid to reinstate the loan was not adequate, and returned that payment to the Partnership. In January 2005, the Purchaser and the Former General Partners entered into a Settlement Agreement which resolved the foregoing litigation and allowed Millenium to take over as the new general partner of the Partnerships on March 3, 2005. See "Certain Information Concerning the Purchaser - Prior Acquisitions of Units and Prior Contacts." In March 2005, Millenium engaged new, unaffiliated property management companies which, as of the date of this Offer, have just recently taken over the actual operation of the properties. Millenium has taken possession of most of the books and records of the Partnership, but the material is voluminous and Millenium has just begun to review such information. In March 2005, the lender for the Hidden Valley property notified the Partnership of its intention to proceed with foreclosure. We believe the Partnership has valid arguments to dispute the propriety of the foreclosure and we are attempting to negotiate a delay of the foreclosure and a resolution with the lender, but at this time we cannot predict whether or not we will succeed in preventing a loss of the property in foreclosure. DETAILS OF THE OFFER 1. Terms of the Offer; Expiration Date; Proration. On the terms and subject to the conditions of the Offer, the Purchaser will accept and purchase up to 8,000 validly tendered, and not withdrawn, Units in accordance with the procedures set forth in this Offer to Purchase ("Properly Tendered"). For purposes of the Offer, the term "Expiration Date" means 5:00 p.m., Los Angeles time, on Thursday, May 19, 2005, unless the Purchaser extends the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date to which the Offer is extended by the Purchaser. If, prior to the Expiration Date, the Purchaser increases the price offered to the Unit Holders pursuant to the Offer, the increased price 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. If more than 8,000 Units are Properly Tendered the Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for an aggregate of 8,000 Units, pro rata, according to the number of Units that are Properly Tendered by each Unit Holder, with appropriate adjustments to avoid purchases of fractional Units. Subject to its obligation to pay for Units promptly after the Expiration Date, the Purchaser intends to pay for any Units accepted for payment pursuant to the Offer after determining the final proration or other adjustments. The Purchaser does not believe it would take any longer than five business days to determine the effects of any proration required. If the number of Units that are Properly Tendered is less than or equal to 8,000 Units, the Purchaser will purchase all Units that are Properly Tendered, upon the terms and subject to the other conditions of the Offer. See "Effects of the Offer - Limitations on Resales." Unit Holders may indicate, by checking a box on the Letter of Transmittal (the "All or None Box"), that they only wish to sell their Units if they will be able to sell all of their Units, without any proration. See "Details of the Offer - Withdrawal Rights." If more than 8,000 Units have been Properly Tendered without checking the All or None Box, then the above description of proration will apply only to tenders of such Units that do not have the All or None Box checked. If prior to the Expiration Date any or all of the conditions of the Offer have not been satisfied, or waived by the Purchaser, the Purchaser reserves the right to: (i) decline to purchase any of the Units tendered, terminate the Offer and return all tendered Units, (ii) waive the unsatisfied conditions and, subject to complying with applicable rules and regulations of the Securities and Exchange Commission (the "Commission"), purchase all Units that are Properly Tendered, (iii) extend the Offer and, subject to the right of Unit Holders to withdraw Units until the Expiration Date, retain previously tendered Units for the period or periods for which the Offer is extended, and (iv) amend the Offer. 2. Acceptance for Payment and Payment of Purchase Price. On the terms and subject to the conditions of the Offer, the Purchaser will purchase and will pay for up to 8,000 Properly Tendered Units, promptly following the Expiration Date. In all cases, payment for Units purchased pursuant to the Offer will be made only after timely receipt by the Purchaser of: (i) a properly completed and duly executed and acknowledged Letter of Transmittal, and (ii) any other documents required in accordance with the Letter of Transmittal. No transfer fees will be deducted. UNDER NO CIRCUMSTANCE WILL INTEREST ON THE PURCHASE PRICE BE PAID, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. If any tendered Units are not purchased for any reason (other than proration adjustments), the Purchaser may destroy the original Letter of Transmittal with respect to the Units. If for any reason acceptance for payment of, or payment for, any Units tendered pursuant to the Offer is delayed or the Purchaser is unable to accept for payment, purchase or pay for Units tendered, then, without prejudice to the Purchaser's rights under Section 4 herein, the Purchaser may, nevertheless, retain documents concerning tendered Units, and those Units may not be withdrawn except to the extent that the tendering Unit Holders are otherwise entitled to withdrawal rights as described in Section 5 herein, subject, however, to the Purchaser's obligation under Rule 14e-1(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to pay Unit Holders the purchase price in respect of Units tendered or return documents, if any, representing those Units promptly after termination or withdrawal of the Offer. 3. Procedure to Accept the Offer. For the tender of any Units to be valid, the Purchaser must receive, at the address listed on the back page of this Offer to Purchase on or prior to the Expiration Date, a properly completed and duly executed Letter of Transmittal and all documents required by the Instructions. The method of delivery of the Letter of Transmittal and all other required documents is at the option and risk of the tendering Unit Holder, and delivery will be deemed made only when actually received by the Purchaser. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery. By executing and delivering a Letter of Transmittal, a tendering Unit Holder irrevocably appoints the Purchaser and its officers and any other designee of the Purchaser, and each of them, the attorneys-in-fact and proxies of the Unit Holder, in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of the Unit Holder's rights with respect to the Units tendered by the Unit Holder and accepted for payment by the Purchaser (and with respect to any and all distributions, other Units, rights or other securities issued or issuable in respect thereof (collectively, "Distributions")), including without limitation the right to direct any IRA custodian, trustee or other record owner to execute and deliver the Letter of Transmittal, the right to accomplish a withdrawal of any previous tender of the Unit Holder's Units and the right to complete the transfer contemplated thereby. All such proxies will be considered coupled with an interest in the tendered Units, are irrevocable and are granted in consideration of, and are effective upon, the acceptance for payment of the Units by the Purchaser in accordance with the terms of the Offer. Upon acceptance for payment, all prior powers of attorney and proxies given by the Unit Holder with respect to the Units and Distributions will, without further action, be revoked, and no subsequent powers of attorney or proxies may be given (and, if given, will be without force or effect). The officers and designees of the Purchaser will, with respect to the Units for which the appointment is effective, be empowered to exercise all voting and other rights of the Unit Holder as they in their discretion may deem proper at any meeting of the Partnership or any adjournment or postponement thereof. 4. Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects. All questions about the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Units pursuant to the Offer will be determined by the Purchaser, which determination will be final and binding. The Purchaser reserves the right to reject any or all tenders of any particular Units determined by it not to be in proper form or if the acceptance of or payment for those Units may, in the opinion of Purchaser's counsel, be unlawful. The Purchaser also reserves the right to waive or amend any of the conditions of the Offer that it is legally permitted to waive and to waive any defect in any tender with respect to any particular Units. The Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal) will be final and binding. No tender of Units will be deemed to have been validly made until all defects have been cured or waived. Neither the Purchaser nor any other person will be under any duty to give notification of any defects in the tender of any Units or will incur any liability for failure to give any such notification. A tender of Units pursuant to the procedure described above and the acceptance for payment of such Units will constitute a binding agreement between the tendering Unit Holder and the Purchaser on the terms set forth in the Offer. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment pursuant to this Offer, and thereby purchased, Properly Tendered Units if, as and when the Purchaser gives written notice to the Partnership or its Transfer Agent of the Purchaser's acceptance of those Units for payment pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Units accepted for payment pursuant to the Offer will be made and transmitted directly to Unit Holders whose Units have been accepted for payment. 5. Withdrawal Rights. Tenders of Units made pursuant to the Offer are irrevocable, except that Units tendered pursuant to the Offer may be withdrawn at any time on or prior to the Expiration Date and, unless already accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after June 11, 2005. If purchase of, or payment for, Units is delayed for any reason, including extension by the Purchaser of the Expiration Date, or if the Purchaser is unable to purchase or pay for Units for any reason (for example, because of proration adjustments) then, without prejudice to the Purchaser's rights under the Offer, tendered Units may be retained by the Purchaser and may not be withdrawn, except to the extent that tendering Unit Holders are otherwise entitled to withdrawal rights as set forth in this Section 5; subject, however, to the Purchaser's obligation, pursuant to Rule 14e-1(c) under the Exchange Act, to pay Unit Holders the purchase price in respect of Units tendered promptly after termination or withdrawal of the Offer. For withdrawal to be effective, a written notice of withdrawal must be timely received by the Purchaser at its address listed on the back cover of this Offer to Purchase. Any notice of withdrawal must specify the name of the person(s) who tendered the Units to be withdrawn and must be signed by the person(s) who signed the Letter of Transmittal in the same manner as the Letter of Transmittal was signed. Any Units properly withdrawn will be deemed not validly tendered for purposes of the Offer. Withdrawn Units may be re-tendered, however, by following the procedures described in Section 3 herein at any time prior to the Expiration Date. All questions about the validity and form (including time of receipt) of notices of withdrawal will be determined by the Purchaser, which determination shall be final and binding. Neither the Purchaser nor any other person will be under any duty to give notice of any defects in any notice of withdrawal or incur any liability for failure to give any such notice. Automatic Withdrawal Option. Unit Holders may indicate, by checking a box on the Letter of Transmittal (the "All or None Box"), that they only wish to sell their Units if they will be able to sell all of their Units, without any proration. If at any time during the day of the Expiration Date more than 8,000 Units have been Properly Tendered, unless the Purchaser amends the Offer to increase the number of Units to be purchased, the Purchaser will deem all Units from Unit Holders that checked the All or None Box to be withdrawn and not validly tendered for purposes of the Offer. Neither the Purchaser nor any other person will be under any duty to give any notice that such automatic withdrawal will occur. Unit Holders may change their election whether or not to check the All or None Box at any time on or prior to the Expiration Date by submitting a new Letter of Transmittal with their preferred election, in the manner described in Section 3 herein. 6. Extension of Tender Period; Amendment. The Purchaser expressly reserves the right at any time: o to extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and the payment for, any Units; o to delay for a reasonable period the acceptance for payment of, or payment for, any Units not already accepted for payment or paid for, if the Purchaser reasonably anticipates the prompt receipt of any authorization, consent, order of, or filing with, or the expiration of waiting periods imposed by, any court, government, administrative agency or other governmental authority, necessary for the consummation of the transactions contemplated by the Offer; o to amend the Offer in any respect (including, without limitation, by increasing or decreasing the price, increasing or decreasing the number of Units being sought, or both). Notice of any such extension or amendment will promptly be disseminated to Unit Holders in a manner reasonably designed to inform Unit Holders of such change in compliance with Rule 14d-4(c) under the Exchange Act. In the case of an extension of the Offer, the extension will 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, in accordance with Rule 14e-1(d) under the Exchange Act. If the Purchaser makes a material change in the terms of the Offer or waives a condition that constitutes a material change in the terms of the Offer, the Purchaser will extend the Offer and disseminate additional tender offer materials to the extent required by Rules 14d-4(c) and 14d-6(d) under the Exchange Act. If a Distribution occurs before the Expiration Date and the Purchaser reduces its Offer price as a result, the Purchaser will provide notice thereof to Unit Holders and extend the Expiration Date in accordance with Rule 14e-1(b) under the Exchange Act. 7. Conditions of the Offer. Notwithstanding any other term of the Offer, the Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to a bidder's obligation to pay for or return tendered securities promptly after the termination or withdrawal of such bidder's offer), to pay for any Units tendered, may delay the acceptance for payment of the Units tendered, or may withdraw the Offer if, at any time on or after the date of the Offer and before the Expiration Date, any of the following conditions exists: (a) a preliminary or permanent injunction or other order of any federal or state court, government, administrative agency or other governmental authority shall have been issued and shall remain in effect which: (i) makes illegal, delays or otherwise directly or indirectly restrains or prohibits the making of the Offer or the acceptance for payment, purchase of or payment for any Units by the Purchaser; (ii) imposes or confirms limitations on the ability of the Purchaser effectively to exercise full rights of both legal and beneficial ownership of the Units; (iii) requires divestiture by the Purchaser of any Units; (iv) materially adversely affects the business, properties, assets, liabilities, financial condition, operations, results of operations or prospects of the Purchaser, or the Partnership; or (v) seeks to impose any material condition to the Offer unacceptable to the Purchaser; (b) there shall be any action taken, or any statute, rule, regulation or order proposed, enacted, enforced, promulgated, issued or deemed applicable to the Offer by any federal or state court, government, administrative agency or other governmental authority which, directly or indirectly, results in any of the consequences referred to in paragraph (a) above; (c) there shall be any authorization, consent, order of, or filing with, or expiration of waiting periods imposed by, any court, government, administrative agency or other governmental authority, necessary for the consummation of the transactions contemplated by the Offer and requested by Purchaser, that shall not have occurred or been filed or obtained, including a resolution to the satisfaction of any such authority of any comments or inquiries made concerning the Offer; (d) any event shall have occurred or been disclosed, or shall have been threatened, regarding the business, properties, assets, liabilities, financial condition, operations, results of operations or prospects of the Partnership, which event is materially adverse, or which threatened event, if fulfilled, would be materially adverse, to the Partnership or its business or properties, or there shall be any material lien not disclosed in the Partnership's financial statements, or the Purchaser shall have become aware of any previously undisclosed fact that has or with the passage of time would have a material adverse effect on the value of the Units or the Partnership's properties; (e) there shall have been threatened, instituted or pending any action or proceeding before any court or governmental agency or other regulatory or administrative agency or commission or by any other person, challenging the acquisition of any Units pursuant to the Offer or otherwise directly or indirectly relating to the Offer, or otherwise, in the reasonable judgment of the Purchaser, adversely affecting the Purchaser, the Partnership or its properties or the value of the Units; The foregoing conditions are for the sole benefit of the Purchaser and may be (but need not be) asserted by the Purchaser regardless of the circumstances giving rise to such conditions or may be waived by the Purchaser in whole or in part at any time prior to the Expiration Date, subject to the requirement to disseminate to Unit Holders, in a manner reasonably designed to inform them of, any material change in the information previously provided. Any determination by the Purchaser, in its reasonable judgment, concerning the events described above will be final and binding upon all parties. 8. Backup Federal Income Tax Withholding. To prevent the possible application of backup federal income tax withholding with respect to payment of the purchase price, a tendering Unit Holder must provide the Purchaser with the Unit Holder's correct taxpayer identification number in the space provided in the Letter of Transmittal. 9. FIRPTA Withholding. To prevent the withholding of federal income tax in an amount equal to ten percent of the amount of the purchase price plus Partnership liabilities allocable to each Unit purchased, the Letter of Transmittal includes FIRPTA representations certifying the Unit Holder's taxpayer identification number and address and that the Unit Holder is not a foreign person. CERTAIN INFORMATION CONCERNING THE PARTNERSHIP As noted above, the Partnership is subject to the information reporting requirements of the Exchange Act and is required to file reports and other information with the Commission relating to its business, financial results and other matters. However, the Partnership has not complied with its periodic reporting requirements since filing its annual report on Form 10-K for the year ended December 31, 1998 in November of 2000. Since that date, the only public filings have been preliminary and definitive proxy soliciting materials. All such filed documents may be examined and copies may be obtained from the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or electronically at http://www.sec.gov. Copies should be available by mail upon payment of the Commission's customary charges by writing to the Commission's principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549. General. Attached as Part I of Appendix A to this Offer to Purchase are excerpts from the last Annual Report on Form 10-K filed by the Partnership with the Commission, which was filed for the year ended December 31, 1998 (the "Last Form 10-K"), and additional information obtained by Millenium regarding the Partnership, which describe the business and operations of the Partnership. Outstanding Units. According to the Former General Partners, there are currently 24,869.5 Units issued and outstanding, held by approximately 1,216 Unit Holders. Trading History of the Units. There is no established trading market for the Units other than limited and sporadic trading through matching services or privately negotiated sales. At present, privately negotiated sales and sales through intermediaries (such as through the American Partnership Board) are the only means available to a Unit Holder to liquidate an investment in Units (other than this Offer or other occasional offers by other partnership investors, if any) because the Units are not listed or traded on any exchange or quoted on any NASDAQ list or system. According to Direct Investment Spectrum, an independent third party publication, between January 31, 2004 and January 31, 2005 (the most recent published information): 15 Units traded at the average price of $55 per Unit. Sales may be conducted which are not reported in the Direct Investment Spectrum and the prices of sales through other channels may differ from those reported by the Direct Investment Spectrum. The reported gross sales prices may not reflect the net sales proceeds received by sellers of Units, which typically are reduced by commissions (typically up to 8% with a minimum of $150-$200) and other secondary market transaction costs. The Purchaser does not know whether the information provided by the Direct Investment Spectrum is accurate or complete. Selected Financial and Property Related Data. Attached as Part II of Appendix A is certain financial information with respect to the Partnership and its properties. This information has been obtained by the Purchaser as a result of taking over as the new general partner of the Partnership. Such information includes unaudited financial information and other data as to which the Purchaser has no independent means to verify its accuracy, completeness or basis of presentation. More comprehensive financial and other information generally available for public companies in periodic reports and other documents filed with the Commission is not available for the Partnership. The Purchaser, as the new general partner, intends to obtain an audit of the Partnership's financial statements, but such audit has not yet been commenced. The Purchaser does not currently know when such an audit will be commenced or completed, and does not know if such audit will result in material changes to the financial information set forth in Appendix A. Unit Holders should refer to any documents filed with the Commission after the date of this Offer for more recent information relating to the business and operations of the Partnership. DETERMINATION OF OFFER PRICE Before establishing the Offer price, the Purchaser reviewed certain information including among other things: (i) the Partnership's limited partnership agreement (the "Partnership Agreement"), (ii) financial information provided by the Former General Partners, and (iii) independent appraisals of the Partnership's properties performed for the Former General Partners. While Purchaser reviewed the foregoing information, Purchaser is making a highly speculative offer based on the unique circumstances of the Partnership. The Purchaser determined its Offer price by selecting a price at which Purchaser is willing to risk a total loss of Purchaser's investment, and that Purchaser believes is sufficiently high to motivate Unit Holders to sell their Units in order to dispose of their investment under the circumstances of the Partnership. The Purchaser did not otherwise obtain current independent valuations or appraisals of the assets. Appraisal of Cascade Apartments. The Former General Partner obtained an appraisal of the Cascade Apartments property on or about April 29, 2004, from Cushman & Wakefield of Colorado, Inc. ("Cushman"). The appraisal is a "Restricted Use Appraisal Report" and is made subject to numerous limiting conditions and assumptions, including without limitation: it assumes the Partnership has good and marketable fee simple title to the property free and clear of all liens; the opinion of value is only as of the date of the appraisal; it assumes responsible ownership and competent management of the property; it assumes there are no hidden or unapparent conditions of the property, subsoil or structures that render the property more or less valuable; and Cushman may have relied on some information provided to it by the Former General Partners. Subject to the limiting conditions and assumptions therein, the appraisal estimates that the fair market value of the property was $2,800,000, as of the valuation date. The Purchaser has not received any representations or assurances from the Former General Partner, Cushman or any other party regarding such appraisal or the continuing accuracy thereof; and has not independently investigated the accuracy of such appraisal. The Purchaser disclaims responsibility for the contents of the appraisal except to the extent prohibited by law. The Purchaser gave no consideration to this appraisal in determining the price offered for the Units. A copy of the appraisal is filed as an Exhibit to the Schedule TO filed with the Commission relating to the Offer, and may be obtained in the manner described in "Certain Information Concerning the Partnership." Appraisal of Hidden Valley Exchange Retail Center. The Former General Partner obtained an appraisal of the Hidden Valley Exchange Retail Center property on or about April 30, 2004, from Cushman & Wakefield of Illinois, Inc. ("Cushman"). The appraisal is a "Restricted Use Appraisal Report" and is made subject to numerous limiting conditions and assumptions, including without limitation: it assumes the Partnership has good and marketable fee simple title to the property free and clear of all liens; the opinion of value is only as of the date of the appraisal; it assumes responsible ownership and competent management of the property; it assumes there are no hidden or unapparent conditions of the property, subsoil or structures that render the property more or less valuable; and Cushman may have relied on some information provided to it by the Former General Partners. Subject to the limiting conditions and assumptions therein, the appraisal estimates that the fair market value of the property was $1,400,000, as of the valuation date. The Purchaser has not received any representations or assurances from the Former General Partner, Cushman or any other party regarding such appraisal or the continuing accuracy thereof; and has not independently investigated the accuracy of such appraisal. The Purchaser disclaims responsibility for the contents of the appraisal except to the extent prohibited by law. The Purchaser gave no consideration to this appraisal in determining the price offered for the Units. A copy of the appraisal is filed as an Exhibit to the Schedule TO filed with the Commission relating to the Offer, and may be obtained in the manner described in "Certain Information Concerning the Partnership." The appraisals described above expressly disclaim responsibility to any party other than the original recipient and expressly disallow use for any purpose other than the original purpose, which purpose was not for Unit Holders to estimate the value of their Units. Therefore, Purchaser believes that the Unit Holders are not entitled to rely on Cushman's appraisals in any manner whatsoever. Other Financial Information. According to the financial statements received from the Former General Partners, the mortgage debt balance on the Partnership's properties is approximately $2,986,424 as of December 31, 2004, the net other assets and liabilities as of December 31, 2004 were ($1,049,223). Using the April 2004 appraised values and the foregoing data, a calculation of net asset value of the Partnership would be approximately $164,000, or $6.61 per Unit, before considering the commissions and other costs of selling the Partnership's properties. Due to such commissions and other costs, the threatened foreclosure of one of the properties, the illiquidity of the Units, the inability of third party purchasers to control the Partnership, the lack of reliable financial information and the substantial uncertainty of the true financial condition of the Partnership and its properties at the current time, the Purchaser believes that any third party would offer only a small fraction of such net asset value to purchase the Units, if any third party were willing to make any offer at all. The foregoing calculation is provided solely for the benefit of Unit Holders who may find it informative. The Purchaser did not consider such calculation to be meaningful, reliable or useful in determining the price of the Offer. CERTAIN INFORMATION CONCERNING THE PURCHASER The Purchaser. The Purchaser is a California limited liability company that was formed in 1998. The principal office of the Purchaser is 199 South Los Robles Avenue, Suite 200, Pasadena, CA 91101. The Purchaser's manager is Everest Properties II, LLC, a California limited liability company ("EPII"). Both the Purchaser and its manager have the same executive officers. For certain information concerning the executive officers of the Purchaser and its manager, see Schedule I to this Offer to Purchase. The Purchaser and EPII and their affiliates invest in limited partnerships such as the Partnership, and in other forms of real estate oriented investments, and conduct activities incident thereto. General. Except as set forth elsewhere in this Offer to Purchase: (i) the Purchaser does not beneficially own or have a right to acquire, and, to the best knowledge of the Purchaser, no associate or majority-owned subsidiary of Purchaser or the persons listed in Schedule I hereto, beneficially owns or has a right to acquire any Units or any other equity securities of the Partnership; (ii) the Purchaser has not, and to the best knowledge of the Purchaser, none of the persons and entities referred to in clause (i) above or any of their executive officers, directors or subsidiaries has, effected any transaction in the Units or any other equity securities of the Partnership during the past 60 days other than as stated in this Offer to Purchase; (iii) the Purchaser does not have and, to the best knowledge of the Purchaser, none of the persons listed in Schedule I hereto has, any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Partnership, including, but not limited to, the transfer or voting thereof, joint ventures, loan arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations; (iv) since December 31, 2002, there have been no transactions which would require reporting under the rules and regulations of the Commission between the Partnership or any of its affiliates and the Purchaser or any of its subsidiaries or, to the best knowledge of the Purchaser, any of its executive officers, directors or affiliates; and (v) since December 31, 2002, except as otherwise stated in this Offer to Purchase, there have been no contacts, negotiations or transactions between the Purchaser, or any of its subsidiaries or, to the best knowledge of the Purchaser, any of the persons listed in Schedule I hereto, on the one hand, and the Partnership or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets of the Partnership. Prior Acquisitions of Units and Prior Contacts. On March 3, 2005, Millenium became the sole general partner of the Partnership , assuming control from the prior general partners: James R. Hoyt and Secured Investment Resources, Inc.; pursuant to the vote of limited partners holding a majority of the units of limited partnership interest and the approval of the Court and court-appointed receiver in the case captioned Everest Management, LLC, et al. v. James R. Hoyt, et al., (District Court, Johnson County, Kansas, Case No. 03CV07056) (the "Litigation"). The Litigation involved the Partnership and another limited partnership controlled by Mr. Hoyt, and certain terms of the settlement are related to the foregoing change of control. The principal terms of the Settlement Agreement were as follows. All Unit Holders have been admitted as substitute limited partners with respect to the units they currently hold, and the Former General Partners were removed and Millenium became the successor general partner of the Partnership, in accordance with the Partnership Agreement and the majority vote received by Millenium. The Partnership will repay to Mr. Hoyt all amounts loaned by him to the Partnership, which amount is initially set at $100,000 but shall be audited and adjusted accordingly. Millenium does not own any limited partnership units, but its affiliate, Everest Management, LLC, owned 946 Units prior to the Settlement Agreement, and an affiliate, Everest Properties II, LLC, acquired an additional 200 Units as a result of the Settlement Agreement, which together represent 4.6% of the 24,869.50 limited partnership units outstanding. In accordance with the Settlement Agreement, Everest Properties II, LLC, paid $100 per Unit for the 200 units it acquired, which price was determined solely by negotiation without reference to any valuation or analysis and was not paid in cash, but was paid by providing an offset from other amounts due from the Former General Partners and their affiliates. The foregoing affiliate Unit Holders do not intend to tender their Units to the Purchaser. Except as set forth above and below in this Offer document, neither the Purchaser nor its affiliates are party to any past, present or proposed material contracts, arrangements, understandings, relationships, or negotiations with the Partnership or with the Former General Partner concerning the Partnership. See also, "Background of the Offer." Source of Funds. Based on the Offer price of $4 per Unit, the Purchaser estimates that the total amount of funds necessary to purchase all Units sought by this Offer and to pay related fees and expenses, will be approximately $40,000. The Purchaser expects to obtain these funds by means of equity capital contributions from its members at the time the Units tendered pursuant to the Offer are accepted for payment. Such members will fund their capital contributions through existing cash and other financial assets which in the aggregate are sufficient to provide the funds required in connection with the Offer without any borrowings. Such members have irrevocably agreed and are obligated to make such capital contributions available to the Purchaser on demand. FUTURE PLANS OF THE PURCHASER The Purchaser is seeking to acquire Units pursuant to the Offer to obtain a substantial equity interest in the Partnership, for investment purposes. Following the completion of the Offer, the Purchaser and persons related to or affiliated with the Purchaser may acquire additional Units, although there is no current intention to do so. Any such acquisition may be made through private purchases, through one or more future tender or exchange offers or by any other means deemed advisable by the Purchaser. Any such acquisition may be at a price higher or lower than the price to be paid for the Units purchased pursuant to the Offer, and may be for cash or other consideration. The Purchaser also may consider selling some or all of the Units it acquires pursuant to the Offer, either directly or by a sale of one or more interests in the Purchaser itself, depending upon liquidity, strategic, tax and other considerations. Millenium's goals as the new general partner of the Partnership are: resume sending financial reports to the Unit Holders; resume making required filings with the Commission; investigate and pursue any further claims to be brought against the Former General Partners, if warranted; reduce property management fees and other expenses; and consider selling the properties and liquidating the Partnership if Millenium deems it to be in the best interest of the Partnership and the Unit Holders. Other than as set forth this Offer, the Purchaser does not currently intend to change current management, indebtedness, capitalization, corporate structure or business operations of the Partnership and does not have current plans for any extraordinary transaction such as a merger, reorganization, liquidation or sale or transfer of assets involving the Partnership. However, these plans could change at any time in the future. If any transaction is effected by the Partnership and financial benefits accrue to the Unit Holders, the Purchaser and its affiliates will participate in those benefits to the extent of their ownership of the Units. EFFECTS OF THE OFFER Future Benefits of Unit Ownership. Tendering Unit Holders shall receive cash in exchange for their Units purchased by the Purchaser and will forego all future distributions and income and loss allocations from the Partnership with respect to such Units. Limitations on Resales. The Partnership Agreement prohibits a transfer of Units if the transfer would result in 50% or more of the Units being transferred in a 12 month period (a "Tax Termination"). This provision may limit sales of Units on the secondary market and in private transactions following completion of the Offer. Accordingly, the Partnership may not recognize any requests for recognition of a transferee Unit Holder upon a transfer of Units if the transfer would result in a Tax Termination. Because the Units of the Partnership are not traded in any readily available market, the Purchaser believes it is highly improbable that the Partnership would receive requests to transfer 50% or more of the Units in any 12 month period, even after including transfers resulting from the Offer. See "Details of the Offer - Terms of the Offer; Expiration Date; Proration." Influence Over Future Voting Decisions. Under the Partnership Agreement, Unit Holders holding a majority of the Units are entitled to take action with respect to a variety of matters, including removal of the General Partner, dissolution and termination of the Partnership, and approval of most types of amendments to the Partnership Agreement. The influence of Purchaser and its affiliates on taking or preventing such actions may be significantly increased after the Offer is completed. FEDERAL INCOME TAX MATTERS The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, and judicial authority, all as of the date of the Offer. All of the foregoing is subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder in light of such Unit Holder's specific circumstances, nor does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer may be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER OF SELLING UNITS PURSUANT TO THE OFFER. In general, a Unit Holder will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit Holder's "amount realized" on the sale and (ii) the Unit Holder's adjusted tax basis in the Units sold. The amount of a Unit Holder's adjusted tax basis in a Unit will vary depending upon the Unit Holder's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder for the Unit pursuant to the Offer (that is, the purchase price), plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if the Unit was held by the Unit Holder as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary gain or loss. It is possible that the basis allocation rules of Code Section 751 may result in a Unit Holder's recognizing ordinary income with respect to the portion of the Unit Holder's amount realized on the sale of a Unit that is attributable to such items while recognizing a capital loss with respect to the remainder of the Unit. Capital losses are deductible only to the extent of capital gains, except that taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward period is five years and an individual taxpayer can carry forward such losses indefinitely). Under Code Section 469, individuals, S corporations and certain closely-held corporations generally are able to deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Substantially all post-1986 losses of Unit Holders from the Partnership are passive activity losses. Unit Holders may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder sells less than all of its interest in the Partnership pursuant to the Offer, a passive loss recognized by that Unit Holder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit Holder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any gain recognized by a Unit Holder upon the sale of Units can be offset by the Unit Holder's current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder sells 100 percent of its interest in the Partnership pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any net passive activity income from the Unit Holder's other passive activity investments, and the balance of any net passive activity losses attributable to the Partnership will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder from its other "ordinary" income (subject to any other applicable limitations). If more than the number of Units sought in the Offer are Properly Tendered, some tendering Unit Holders may not be able to sell 100 percent of their Units pursuant to the Offer because of proration of the number of Units to be purchased by the Purchaser, unless the Purchaser amends the Offer to increase the number of Units to be purchased. A tendering Unit Holder will be allocated the Unit Holder's pro rata share of the annual taxable income and losses from the Partnership with respect to the Units sold for the period through the date of sale, even though such Unit Holder will assign to the Purchaser its rights to receive certain cash distributions with respect to such Units. Such allocations and any Partnership distributions for such period would affect a Unit Holder's adjusted tax basis in the tendered Units and, therefore, the amount of gain or loss recognized by the Unit Holder on the sale of the Units. Unit Holders (other than tax-exempt persons, corporations and certain foreign individuals) who tender Units may be subject to 28 percent backup withholding unless those Unit Holders provide a taxpayer identification number ("TIN") and are certain that the TIN is correct or properly certify that they are awaiting a TIN. A Unit Holder may avoid backup withholding by properly completing and signing the Letter of Transmittal. If a Unit Holder who is subject to backup withholding does not include its TIN, the Purchaser will withhold 28 percent from payments to such Unit Holder. CERTAIN LEGAL MATTERS General. Except as set forth herein, the Purchaser is not aware of any filings, approvals or other actions by any domestic or foreign governmental or administrative agency that would be required prior to the acquisition of Units by the Purchaser pursuant to the Offer. The Purchaser's obligation to purchase and pay for Units is subject to certain conditions, including conditions related to the legal matters discussed herein. State Takeover Statutes. The Partnership was formed under the laws of the State of Kansas, which currently does not have any takeover statute applicable to limited partnerships. However, it is a condition to the Offer that no state or federal statute impose a material limitation on the Purchaser's right to vote the Units purchased pursuant to the Offer. If this condition is not met, Purchaser may terminate or amend the Offer. If any person seeks to apply any state takeover statute, the Purchaser will take such action as then appears desirable, which action may include challenging the validity or applicability of any such statute in appropriate court proceedings. If there is a claim that one or more takeover statutes apply to the Offer, and it is not determined by an appropriate court that such statutes do not apply or are invalid as applied to the Offer, the Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. This could prevent the Purchaser from purchasing or paying for Units tendered pursuant to the Offer, or cause delay in continuing or consummating the Offer. In such case, the Purchaser may not be obligated to accept for payment or pay for Units tendered. Fees and Expenses. Purchaser will not pay any fees or commissions to any broker, dealer or other person for soliciting tenders of Units pursuant to the Offer. Employees of the Purchaser's managing member may solicit tenders of Units without any additional compensation. The Purchaser will pay all costs and expenses of printing and mailing the Offer and its legal fees and expenses. Miscellaneous. The Offer is not made to (nor will tenders be accepted on behalf of) Unit Holders residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities or other laws of such jurisdiction. However, the Purchaser may take such action as it deems necessary to make the Offer in any jurisdiction and extend the Offer to Unit Holders in such jurisdiction. In any jurisdiction where the securities or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of the Purchaser by one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. The Purchaser has filed with the Securities and Exchange Commission a Tender Offer Statement on Schedule TO pursuant to Rule 14d-3 under the Exchange Act, furnishing certain additional information with respect to the Offer, and may file amendments thereto. The Schedule TO and any amendments thereto, including exhibits, may be inspected and copies may be obtained at the same places and in the same manner as set forth under the caption "Certain Information Concerning The Partnership -- General." No person has been authorized to give any information or to make any representation on behalf of the Purchaser not contained herein or in the Letter of Transmittal and, if given or made, such information or representation must not be relied upon as having been authorized. MILLENIUM MANAGEMENT, LLC April 15, 2005 SCHEDULE I EXECUTIVE OFFICERS The Purchaser's manager is Everest Properties II, LLC, a California limited liability company. The Purchaser has no employees of its own. Both the Purchaser and its manager have the same executive officers and no directors. The business address of each executive officer of Everest Properties II, LLC is 199 South Los Robles Avenue, Suite 200, Pasadena, California 91101. Each executive officer is a United States citizen. The name and principal occupation or employment of each executive officer of the Purchaser and Everest Properties II, LLC ("EPII"), are set forth below. Present Principal Occupation or Employment Name Position and Five-Year Employment History W. Robert Kohorst President of EPII from 1996 - present. President and Director of Everest Properties, Inc. from 1994 - present. President and Director of KH Financial, Inc. from 1994 - present. David I. Lesser Executive Vice President and Secretary of EPII from 1996 - present. Executive Vice President of Everest Properties, Inc. from 1995 - present. Christopher K. Davis Vice President and the General Counsel of EPII since 1998. Senior Staff Counsel and then Director of Corporate Legal of Pinkerton's, Inc. from 1995 - 1998. Peter J. Wilkinson Vice President and the Chief Financial Officer of EPII since 1996. Chief Financial Officer and Director of Everest Properties, Inc. since 1996. APPENDIX A The Partnership is subject to the reporting requirements of the Securities Exchange Act of 1934, but has not complied with its public reporting requirements since the filing of its Annual Report on Form 10-K for the year ended December 31, 1998 (the "Last Form 10-K"). The following information has been copied from the Last Form 10-K and supplemented by information that the Purchaser has obtained in the course of becoming the successor general partner of the Partnership. Although the Purchaser has no information that any statements contained in this Appendix A are untrue, the Purchaser has not independently investigated the accuracy of statements, cannot verify, and therefore takes no responsibility for, the accuracy, inaccuracy, completeness or incompleteness of any of the information taken from the Last Form 10-K. PART I Item 1. Business Secured Investment Resources Fund, L.P. ("Partnership") is a Kansas limited partnership formed pursuant to the Kansas Revised Uniform Limited Partnership Act on March 30, 1984. According to the Last Form 10-K, the Partnership was formed with the intent to engage in the business of acquiring, improving, developing, operating and holding for investment, income producing properties with the objectives of (i) preserving and protecting the Partnership's capital; (ii) providing capital gains through potential appreciation; (iii) providing quarterly "tax sheltered" cash distributions from operations; (iv) generating tax losses in excess of tax shelter distributions, which may be used to offset taxable income from other sources; and (v) increasing equity through the reduction of mortgage loans on Partnership properties. The term of the partnership is sixty (60) years from the date of the Partnership Agreement of October 1, 1984, or the date of which all the assets acquired by the Partnership are sold or converted to cash. According to the Last Form 10-K, on August 31, 1986, the Partnership closed its offering, having received gross proceeds of $12,434,750 from the sale of 24,869.5 units of limited partnership interests. According to the Last Form 10-K, the Partnership acquired two garden-style apartment communities in 1985 and three commercial strip shopping centers in 1986. According to the Last Form 10-K, as of December 31, 1998, the Partnership had made cash distributions to Limited Partners of approximately $5,343,000 for the period June 1, 1985 through December 31, 1998. According to the Last Form 10-K, no distributions have been made since January 1990. PART II Item 2. Properties The Partnership owns two properties as of March 3, 2005: Cascade Apartments in Topeka, Kansas, which has 86 units and, according to the Last Form 10-K was acquired on December 7, 1989 for $2,584,253; and, Hidden Valley Exchange Shopping Center in Independence, Missouri, which has 27,200 Sq.Ft. and, according to the Last Form 10-K was acquired on September 30, 1986 for $2,013,709. The Hidden Valley property is back in foreclosure proceedings and is currently scheduled to be sold in foreclosure on April 25, 2005. This property was threatened with foreclosure in December 2004. The Partnership made a payment in order to reinstate the mortgage loan and prevent the foreclosure. The lender subsequently claimed that the amount paid to reinstate the loan was not adequate, and returned that payment to the Partnership. We believe the Partnership has valid arguments to dispute the propriety of the foreclosure and we are attempting to negotiate a delay of the foreclosure and a resolution with the lender, but at this time we cannot predict whether or not we will succeed in preventing a loss of the property in foreclosure. The Partnership's properties have suffered from years of neglect and have substantial deferred maintenance. Both of the remaining properties in the Partnership are in dire need of significant repairs and replacements that will require a substantial investment of new capital, if it is determined that such an investment would be justified in lieu of or as a predicate to selling the properties. FINANCIAL DATA The Former General Partners had not filed any current reports or sent updated financial information to the Limited Partners for periods after 1998. The following financial data has been copied or derived from information obtained by the Purchaser as a result of taking over as the new general partner of the Partnership. The information is not audited and at this time the Purchasers have no means to verify its accuracy or completeness or its compliance with generally accepted accounting principles. Nevertheless, it represents the most current available information. SECURED INVESTMENT RESOURCES FUND, LP
CONSOLIDATED BALANCE SHEETS December 31, 2004 2003 2002 (unaudited) (unaudited) (unaudited) ASSETS INVESTMENT PROPERTIES Land and Buildings $4,598,550 $4,597,060 $4,563,429 Furniture, Fixtures and equipment 493,793 493,793 493,793 ------------------------------------------- 5,092,343 5,090,853 5,057,222 Less accumulated depreciation 2,835,669 2,688,799 2,541,928 ------------------------------------------ 2,256,674 2,402,054 2,515,294 ------------------------------------------- CURRENT ASSETS Cash 34,701 (1,729) (33,144) Rent and other receivables less allowance of $7,714 in 2004, $0 in 2003,$730 in 2002 797 1,475 4,284 Debt issuance costs, net of accumulated amortization of $60,691in 2004, $50,323 in 2003,and $39,090 in 2002 41,540 51,909 63,142 Commercial commissions, deposits and other 47,266 40,402 75,298 Due to related parties 46,279 43,561 40,843 Restricted deposits 81,868 17,395 25,020 ------------------------------------------- 252,451 153,013 175,443 ------------------------------------------- ------------------------------------------- TOTAL ASSETS $2,509,125 $2,555,067 $2,690,737 ------------------------------------------- LIABILITIES AND PARTNERSHIP CAPITAL Mortgage debt $2,986,424 $3,037,963 $3,105,607 Accrued interest 62,245 90,698 38,369 Accounts payable and accrued expenses 181,645 141,488 223,474 Due to related parties 1,022,163 680,835 464,335 Unearned revenue 1,597 11,234 3,960 Tenant security deposits 34,024 34,924 38,940 ------------------------------------------- TOTAL LIABILITIES 4,288,098 3,997,142 3,874,685 ------------------------------------------- PARTNERS CAPITAL (DEFICIT) Capital Contribution 5,529,334 5,529,334 5,529,334 Partnership deficit (7,308,307) (6,971,409) (6,713,282) ------------------------------------------- TOTAL PARTNER CAPITAL (DEFICIT) (1,778,973) (1,442,075) (1,183,948) ------------------------------------------- ------------------------------------------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $2,509,125 $2,555,067 $2,690,737 ------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2004 2003 (unaudited) (unaudited) REVENUES Rents $779,496 $835,820 Interest 3,010 2,718 Maintenance escalations 14,677 17,189 ------------------------ TOTAL REVENUE $797,183 $855,727 ------------------------ OPERATING AND ADMINISTRATIVE EXPENSES Repairs and maintenance $81,475 $81,643 Payroll 126,077 117,597 Utilities 46,647 46,884 Other operating expenses 24,943 13,651 General and administrative expenses 248,095 138,022 Management fees 40,326 41,852 Insurance 44,568 43,503 Property Tax 91,396 89,087 ------------------------ TOTAL OPERATING EXPENSES $703,527 $572,239 ------------------------ NET OPERATING INCOME (LOSS) 93,656 283,488 NON OPERATING EXPENSES Interest expense 273,306 383,519 Depreciation and amortization 157,249 158,094 ------------------------ PARTNERSHIP INCOME (LOSS) ($336,899) ($258,125) ------------------------ Allocation of loss: General partners ($3,369) ($2,581) Limited partners (333,530) (255,544) ------------------------- ($336,899) ($258,125) ------------------------- Partnership loss per limited partner unit ($13.54) ($10.37) CONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31, 2004 2003 (unaudited) (unaudited) OPERATING ACTIVITIES Partnership loss ($336,899) ($258,125) Adjustments to reconcile loss to net net cash provided by operating activities: Depreciation and amortization 157,249 158,094 Change in assets and liabilities: Rents and other receivables 678 2,809 Commercial commissions, deposits and other (6,864) 34,896 Accrued interest (28,453) 52,329 Accounts payable and accrued expenses 40,157 (81,986) Unearned revenue (9,637) 7,274 Tenant security deposits (900) (4,016) ------------------------- ------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ($184,669) ($88,725) -------------------------- INVESTING ACTIVITIES Improvement to investment properties ($1,490) ($33,631) Restricted deposits (64,473) 7,625 -------------------------- NET CASH USED IN INVESTING ACTIVITIES ($65,963) ($26,006) -------------------------- FINANCING ACTIVITIES Advances to related parties ($2,718) ($2,718) Advances from related parties 341,328 216,500 Principal payments on debt (51,548) (67,635) -------------------------- NET CASH PROVIDEDBY (USED IN) INVESTING ACTIVITIES $287,062 $146,147 -------------------------- INCREASE IN CASH $36,430 $31,416 CASH AT BEGINNING OF YEAR (1,729) (33,145) -------------------------- CASH AT END OF YEAR $34,701 ($1,729) --------------------------
The Letter of Transmittal, and any other required documents should be sent or delivered by each Unit Holder or his broker, dealer, commercial bank, trust company or other nominee to the Purchaser at its address set forth below. Questions and requests for assistance may be directed to the Purchaser at its address and telephone number listed below. Additional copies of this Offer to Purchase, the Letter of Transmittal, and other tender offer materials may be obtained from the Purchaser as set forth below, and will be furnished promptly at the Purchaser's expense. April 15, 2005 MILLENIUM MANAGEMENT, LLC Everest Properties II, LLC 199 South Los Robles Avenue Suite 200 Pasadena, California 91101 (800) 611-4613 or (626) 585-5920 Facsimile: (626) 585-5929 EX-99 3 sir1_sctoi041505exh2.txt EXH 2 AGMT TRANSFER & INSTRUCTIONS AGREEMENT OF TRANSFER AND LETTER OF TRANSMITTAL for Units of SECURED INVESTMENT RESOURCES FUND, L.P. for $4 per Unit Subject to and effective upon acceptance for payment, the undersigned (the "Seller") hereby sells, assigns, transfers and delivers, and irrevocably directs any custodian or trustee to sell, assign, transfer and deliver ("Transfer") to Millenium Management, LLC, a California limited liability company (the "Purchaser"), all of the Seller's right, title and interest in such Seller's units of limited partnership interest ("Units") of SECURED INVESTMENT RESOURCES FUND, L.P., a Kansas limited partnership (the "Partnership"), at the cash purchase price of $4 per Unit, without interest, less the amount of Distributions (as defined in the Offer to Purchase) per Unit, if any, made to Seller by the Partnership after the date of the Offer to Purchase, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 15, 2005, as it may be supplemented or amended (the "Offer to Purchase") and this Agreement of Transfer and Letter of Transmittal, as it may be supplemented or amended (the "Letter of Transmittal," which together with the Offer to Purchase, constitutes the "Offer"). Such Transfer shall include, without limitation, all rights in, and claims to, any Partnership profits and losses, cash distributions, legal claims, settlements and awards, voting rights and other benefits of any nature whatsoever distributable or allocable to Seller's tendered Units, and all certificates evidencing the same, and Seller agrees immediately to endorse and deliver to Purchaser all distribution checks received from the Partnership after the date upon which the Purchaser purchases Units tendered pursuant to the Offer. Seller hereby irrevocably constitutes and appoints the Purchaser as the true and lawful agent and attorney-in-fact of the Seller with respect to all tendered Units, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to vote, inspect Partnership books and records, change the address of record of tendered Units prior to or after completion of the Transfer, or act in such manner as any such attorney-in-fact shall, in its discretion, deem proper with respect to such Units, to deliver such Units and transfer ownership of such Units on the Partnership's books maintained by the General Partner of the Partnership, together with all accompanying evidences of transfer and authenticity to, or upon the order of, the Purchaser, to execute and deliver in the name and on behalf of Seller any and all instruments or documents the Partnership or its General Partner may request in order to complete the Transfer (including without limitation any additional agreement of transfer, representation and warranty, indemnity, confirmation of intention to sell Units, or other forms required by the Partnership or its General Partner), to immediately revoke and withdraw all prior tenders of Units, to direct any custodian or trustee holding record title to the Units to do any of the foregoing, including the execution and delivery of a copy of this Letter of Transmittal, and upon payment by the Purchaser of the purchase price, to receive all benefits and cash distributions, endorse Partnership checks payable to Seller and otherwise exercise all rights of beneficial ownership of such Units. The Purchaser shall not be required to post bond of any nature in connection with this power of attorney. Seller hereby represents and warrants to the Purchaser that Seller owns all Units tendered pursuant to the Offer. Seller further hereby represents and warrants to Purchaser that Seller has full power and authority to validly sell, assign, transfer and deliver such Units to the Purchaser, and that when any such Units are accepted for payment by the Purchaser, the Purchaser will acquire good and marketable title thereto, free and clear of all claims, options, restrictions, charges, encumbrances or other interests. If the undersigned is signing on behalf of an entity, the undersigned declares that he has authority to sign this document on behalf of such entity. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase (including proration), the Purchaser may not be required to accept for payment any or all of the Units tendered hereby. In such event, the undersigned understands that this Letter of Transmittal will be effective to Transfer only those Units accepted for payment by the Purchaser and any Letter of Transmittal for Units not accepted for payment may be destroyed by the Purchaser. All authority herein conferred or agreed to be conferred shall survive the death or incapacity or liquidation of Seller and any obligations of the Seller shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Upon request, Seller will execute and deliver, and irrevocably directs any custodian to execute and deliver, any additional documents deemed by the Purchaser to be necessary or desirable to complete the assignment, transfer and purchase of such Units. Seller hereby certifies, under penalties of perjury, that (1) the number shown below on this form as Seller's Taxpayer Identification Number is correct and (2) Seller is not subject to backup withholding either because Seller is exempt from backup withholding, has not been notified by the Internal Revenue Service (the "IRS") that Seller is subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified Seller that Seller is no longer subject to backup withholding. Seller hereby also certifies, under penalties of perjury, that Seller, if an individual, is not a nonresident alien for purposes of U.S. income taxation, and if not an individual, is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations). Seller understands that this certification may be disclosed to the IRS by the Purchaser and that any false statements contained herein could be punished by fine or imprisonment. Upon completion and recording of the Transfer, the Purchaser accepts all of the terms and conditions of the Partnership Agreement, as amended. The Seller requests that the Purchaser become a substitute limited partner of the Partnership. The Seller also hereby separately instructs the Partnership and its General Partner to immediately change the address of Seller's account to the Purchaser's address. Seller agrees that the Partnership and its General Partner shall have no liability to Seller for immediately making the address change or for transferring the Units under this Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of a Letter of Transmittal will be determined by the Purchaser, and such determinations will be final and binding. The Purchaser's interpretation of the terms and conditions of the Offer (including this Letter of Transmittal) will also be final and binding. The Purchaser will have the right to waive any defects or conditions as to the manner of tendering. Any defects in connection with tenders, unless waived, must be cured within such time as the Purchaser will determine. This Letter of Transmittal will not be valid until all defects have been cured or waived. _________________________________________ _________________________________ [Social Security or Taxpayer ID Number(s)] [Signature of Owner] ____________________/____________________ _____________________/___________ [Phone Number] / [Fax or E-mail] [Print Name] [Date] [ ] Sell ALL OR NONE _______________ _________________________________ Check Box If You Do [If Selling Less [Signature of Co-Owner] Not Want to Sell All than ALL UNITS, UnlessYour Units Specify Number] _____________________/___________ Will Be Bought Print Name] [Date] _______________/_____________/____________________ [IRA Custodian / Account No. / Phone (if applicable)] -------------------------------------------------------- Forward the completed Letter of Transmittal and original Partnership Certificate(s) (if available) to: Millenium Management, LLC 199 S. Los Robles Ave., Suite 200 Pasadena, CA 91101 Attn: Securities Processing Department (626) 585-5920 Re: Secured Investment Resources Fund, L.P. -------------------------------------------------------- Instructions To Complete Agreement Of Transfer ================================================================================ TO SELL YOUR UNITS, PLEASE DO THE FOLLOWING: 1. Sign the Agreement, print your name and the date. 2. Provide your social security number. 3. If you are selling less than all your Units, indicate the number you wish to sell. 4. Be sure to enter your telephone number. 5. If the units are held in an IRA, enter the name of the custodian, your account number, and the phone number of the custodian. 6. Send the Agreement in the envelope provided. ADDITIONALLY... IF YOU OWN THE UNITS JOINTLY WITH ANOTHER INDIVIDUAL: Please have both owners sign the Agreement. IF THE OWNER OR A CO-OWNER IS DECEASED: Please enclose (a) certified copy of the Death Certificate and (b) a Letter Testamentary or Will showing your beneficial ownership or executor capacity. IF YOU OWN THE UNITS IN YOUR IRA: Please provide your IRA account number. This information will be used solely by your custodian to make certain that the purchase proceeds are properly deposited in your account. IF THE UNITS ARE OWNED IN A TRUST, PROFIT SHARING, OR PENSION PLAN: Attach the first page, signature pages, and the section of the Trust Agreement showing that the signer has the authority to sign the Agreement on behalf of the Trust or Plan. IF THE UNITS ARE OWNED IN A CORPORATION, PARTNERSHIP OR LIMITED LIABILITY COMPANY: Attach an original resolution showing that the signer has the authority to sign the Agreement on behalf of the corporation, partnership or LLC. ================================================================================ Millenium Management, LLC, 199 S. Los Robles Avenue, Suite 200, Pasadena, CA 91101 (800) 611-4613 EX-99 4 sir1_sctoi051505exh3.txt EXH 3 LTR TO UNIT HOLDERS Millenium Management 199 S. Los Robles Avenue Suite 200 Pasadena, CA 91101 Tel: 626-585-5920 Fax: 626-585-5929 April 15, 2005 TO UNIT HOLDERS OF SECURED INVESTMENT RESOURCES FUND, L.P. Re: Offer to Purchase Units for $4 Per Unit Dear Unit Holder: Enclosed is an OFFER TO PURCHASE up to 8,000 Units of limited partnership interests in Secured Investment Resources Fund, L.P. (the "Partnership") at a cash purchase price of $4 per Unit, without interest, less the amount of distributions made to you after the date of the Offer. No transfer fees will be deducted - the Purchaser will pay any such fee. Please consider the following points, which are discussed in greater detail in the accompanying Offer to Purchase: o The Offer is $4 per Unit in cash. Under the current circumstances of the Partnership, we believe it is unlikely that anyone else would offer to buy a large number of Units, at any price, such as we are offering. o The Units are illiquid -trades of only 15 Units were reported over the last 12 months, according to an independent industry publication. Such trades reportedly occurred at the average price of $55 per Unit, before commissions were deducted. o There is no current plan to sell the Partnership's properties or liquidate the Partnership. It will take Millenium several months to determine the true financial condition of the Partnership, to evaluate and understand the issues concerning each property, to determine a plan for managing each property and to implement a strategy for each property that Millenium believes to be in the best interests of the Partnership. o One of the Partnership's two remaining properties, the Hidden Valley Exchange Shopping Center, is threatened with foreclosure again. Millenium does not know whether or not the Partnership will lose this property through foreclosure. Millenium is the general partner of the Partnership and therefore has a conflict of interest in making this Offer. Millenium has taken control of the Partnership's properties and accounts, but has not yet had enough time to determine the true financial condition of the Partnership and its properties. The Former General Partners have not obtained audited financials for over five (5) years, therefore the only financial information available is unaudited. We urge you to read the Offer to Purchase completely and to return your completed Agreement of Transfer and Letter of Transmittal promptly (blue form) in the envelope provided. The Offer is scheduled to expire on May 19, 2005. For answers to any questions you might have regarding these materials or our Offer, or assistance in the procedures for accepting our Offer and tendering your Units, please contact us at (800) 611-4613 (toll free). Very truly yours, MILLENIUM MANAGEMENT, LLC EX-99 5 sir1_sctoi041505exh4.txt EXH 4 APPRAISAL CASCADE APARTMENTS COMPLETE APPRAISAL OF REAL PROPERTY The Cascade Apartments 3441 SW Burlingame Road Topeka, Shawnee County, Kansas 66611 IN A RESTRICTED APPRAISAL REPORT As of 4/16/04 Prepared For: SPECS, Inc. 4200 Blue Ridge Boulevard, Suite LH-06 Kansas City, Missouri 64133 Prepared By: Cushman & Wakefield of Colorado, Inc. Valuation Services, Advisory Group 1670 Broadway, Suite 3400 Denver, CO 80202-4801 C&W File 10: 2004-51001-9059 Cushman & Wakefield Cushman & Wakefield of Illinois, Inc. 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 312.470.1817 Tel 312.470.2317 Fax randal_dawson@cushwake.com April 29, 2004 Mr. Jim Hoyt President SPECS, Inc. 4200 Blue Ridge Boulevard, Suite LH-06 Kansas City, Missouri 64133 Re: Complete Appraisal of Real Property In a Restricted Report The Cascade Apartments 3441 SW Burlingame Road Topeka, Shawnee County, Kansas 66611 C&W File ID: 2004-51001-9059 Dear Mr. Hoyt: In fulfillment of our agreement as outlined in the Letter of Engagement, we are pleased to transmit our complete appraisal report on the property referenced above. The value opinion reported below is qualified by certain assumptions, limiting conditions, certifications, and definitions, which are set forth in the report. We particularly call your attention to the following extraordinary assumptions and hypothetical conditions: Extraordinary Assumptions: Our conversations with the maintenance supervisor indicated that the subject property experienced soil settlement in some of the concrete stairs and carports. We did not receive a copy of structural tests and we assume throughout this analysis that there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them). Hypothetical Conditions: This appraisal employs no hypothetical conditions. Mr. Jim Hoyt Specs, Inc. April 29, 2004 Page 2 This report was prepared for SPECS, Inc., and is intended only for their specified use. It may be distributed to the client's attorneys, accountants, advisors. investors, lenders, potential mortgage participants and rating agencies. It may not be distributed to or relied upon by other persons or entities without written permission of Cushman & Wakefield of Colorado, Inc. This appraisal report has been prepared in accordance with our interpretation of FIRREA, your institution's guidelines and requirements, the regulations of OCC, Fannie Mae Multifamily Delegated Underwriting guidelines and the Uniform Standards of Professional Appraisal Practice (USPAP) including the competency provision. This is a Restricted Use Appraisal Report which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(c) of the Uniform Standards of Professional Appraisal Practice for a Restricted Use Appraisal Report. As such, it represents no discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated below. The appraiser is not responsible for unauthorized use of this report. The property was inspected by and the report was prepared by Arod B. Javier under the supervision of Guy DiRienzo, MAL This appraisal employs the Sales Comparison Approach and the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that these approaches would be considered applicable and/or necessary for market participants. The subject's age makes it difficult to accurately form an opinion of depreciation and tends to make the Cost Approach unreliable. Investors do not typically rely on the Cost Approach when purchasing a property such as the subject of this report. Therefore, we have not utilized the Cost Approach to develop an opinion of market value. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the market value of the Fee Simple estate, subject to short term leases, of the referenced property, subject to the assumptions and limiting conditions, certifications, extraordinary and hypothetical conditions, if any, and definitions, "as-is" on April 16, 2004 is: TWO MILLION EIGHT HUNDRED THOUSAND DOLLARS $2,800,000 Mr. Jim Hoyt Specs, Inc. April 29,2004 Page 3 Based on recent market transactions, as well as discussions with market participants, a sale of the subject property at the above-stated opinion of market value would have required an exposure time of approximately under twelve (under 12 months) months. Furthermore, a marketing period of approximately under twelve (under 12 months) months is currently warranted for the subject property. This letter is invalid as an opinion of value if detached from the report, which contains the text, exhibits, and Addenda. Respectfully submitted, CUSHMAN & WAKEFIELD OF COLROADO, INC. /S/ AROD B. JAVIER - ------------------- Arod B. Javier Associate Appraiser arodjavier@cushwake.com 303-813-6493 Office Direct 303-813-6499 Fax /S/ GUY DIRIENZO - ----------------- Guy DiRienzo, MAI Managing Director Kansas Certified General Appraiser License No. G-1420 guy _dirienzo@cushwake.com 303-813-6443 Office Direct 303-813-6499 Fax SUMMARY OF SALIENT FACTS Common Property Name: The Cascade Apartments Location: 3441 SW Burlingame Road Topeka, Shawnee County, Kansas 66611 The site is located at the southwest corner of Burlingame Road and 34th Street, just north of Interstate 470. Property Description: The property consists of a 10-building, 2 story garden apartment community containing 86 units on a 5.58-acre parcel of land. Assessor's Parcel Number: 1461303002105 Interest Appraised: Fee Simple Estate, subject to short term leases, Date of Value: April 16, 2004 Forecast Date of Stabilization: May 1, 2004 Date of Inspection: April 16, 2004 Ownership: Cascade Joint Venture LP Occupancy: Current physical occupancy is 87.21 percent, with 75 occupied units and 11 vacant units. Current Property Taxes Total Assessment: $3,208,000 2003 Property Taxes: $52,060 Highest and Best Use If Vacant: Investment property development to the highest density possible As Improved: As it is currently employed Site & Improvements Zoning: PUD - Multi-Family Land Area: 5.58 gross acres (5.58 net) 243,065 gross square feet (243,065 net) Number of Units: 86 Number of Stories: 2 Number of Buildings: 10 Year Built: 1973 Type of Construction: Wood stud wall construction Net Building Area: 109,088 Parking: 172 spaces (2.00:Unit). This is a typical parking ratio. SUMMARY OF SALIENT FACTS INDICATED AS IS VALUE Rent Loss: Capital Improvements $66,250 Sales Comparison Approach: Indicated Value: $2,800,000 Per Unit: $32.558 Per Square Foot: $25.67 Income Capitalization Approach Discounted Cash Flow Projection Period: 11 years Holding Period: 10 years Terminal Capitalization Rate: 10.25% Internal Rate of Return: 11.00% Indicated Value: $2,700,000 Per Unit: $31,395 Per Square Foot: $24.75 Direct Capitalization Net Operating Income: $285,909 Capitalization Rate: 10.00% Indicated Value: $2,800,000 Per Unit: $32,475 Per Square Foot: $25.60 Reconciled Income Capitalization Approach Value: $2,800,000 Per Unit: $32,558 Per Square Foot: $25.67 FINAL VALUE CONCLUSION $2,800,000 Per Unit: $32,558 Per Square Foot: $25.67 Implied Capitalization Rate: 10.21% Exposure Time: under 12 months Marketing Time: under 12 months Extraordinary Assumptions and Hypothetical Conditions Extraordinary Assumptions An extraordinary assumption is defined by the Uniform Standards of Professional Appraisal Practice (2002 Edition, The Appraisal Foundation, page 3) as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis". Our conversations with the maintenance supervisor indicated that the subject property experienced soil settlement in some of the concrete stairs and carports. We did not receive a copy of structural tests and we assume throughout this analysis that there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them). Hypothetical Conditions A hypothetical condition is defined by the Uniform Standards of Professional Appraisal Practice (2002 Edition, The Appraisal Foundation, page 3) as "that which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis". This appraisal employs no hypothetical conditions. SUBJECT PHOTOGRAPHS Graphic Omitted Exterior view of a typical rental building Graphic Omitted Exterior view of a typical rental building with an attached carport Graphic Omitted View of a typical carport Graphic Omitted View of a typical interior roadway Graphic Omitted Exterior view of the office/clubhouse Graphic Omitted Exterior view of the pool Graphic Omitted Interior view of a typical vacant unit Graphic Omitted Interior view of a typical occupied unit Graphic Omitted View of the storage units Graphic Omitted View of a typical laundry room Graphic Omitted South view along SW Burlingame Road, subject to the right Graphic Omitted North view along SW Burlingame Road, subject to the left TABLE OF CONTENTS INTR0DUCTION..................................................................1 AREA ANALYSIS.................................................................5 PROPERTY DESCRIPTION..........................................................7 VALUATION PROCESS............................................................13 SALES COMPARISON APPROACH....................................................15 INCOME CAPITALIZATION APPROACH ..............................................21 RECONCILIATION AND FINAL VALUE OPINION.......................................29 ASSUMPTIONS AND LIMITING CONDITIONS..........................................30 CERTIFICATlON OF APPRAISAL...................................................33 ADDENDA......................................................................34 INTRODUCTION Identification of Property Common Property Name: The Cascade Apartments Location: 3441 SW Burlingame Road Topeka, Shawnee County, Kansas 66611 The site is located at the southwest corner of Burlingame Road and 34th Street, just north of Interstate 470. Property Description: The property consists of a 31 year old, 10-building, 2-story garden apartment complex containing 86 units on a 5.58 acre site. Assessor's Parcel Number: 1461303002105 Property Ownership and Recent History Current Ownership: Cascade Joint Venture LP Sale History: The property has not transferred within the past three years to the best of our knowledge. Current Disposition: To the best of our knowledge, the property is not under contract of sale nor is it being marketed for sale. Intended Use and Users of the Appraisal This appraisal is intended to provide an opinion of the market value of the Fee Simple interest in the property for the exclusive use of SPECS, Inc. in internal decision-making. It may be distributed to the client's attorneys, accountants, advisors, investors, lenders, potential mortgage participants and rating agencies. All other uses and users are unintended. Dates of Inspection and Valuation The value conclusion reported herein is as of April 16, 2004. The property was inspected on April 16, 2004 by Arod B. Javier. Guy DiRienzo, MAl has reviewed the report but did not inspect the property. Property Rights Appraised Fee Simple Interest Scope of the Appraisal This is a complete appraisal presented in a restricted report, intended to comply with the reporting requirements set forth under the Uniform Standards of Professional Appraisal Practice (US PAP) for a Restricted Appraisal Report. In addition, the report was also prepared to conform to the requirements of the Code of Professional Ethics of the Appraisal Institute and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Title XI Regulations. In preparation of this appraisal, we investigated a wide array of improved sales in the subject's submarket, analyzed rental data, and considered the input of buyers, sellers, brokers, property developers and public officials. Additionally, we investigated the general regional economy as well as the specifics of the local area of the subject. The scope of this appraisal required collecting primary and secondary data relative to the subject property. The depth of the analysis is intended to be appropriate in relation to the significance of the appraisal issues as presented herein. The data have been analyzed and confirmed with sources believed to be reliable, whenever possible, leading to the value conclusions set forth in this report. In the context of completing this report, we have made a physical inspection of the subject property and the comparables. The valuation process involved utilizing market-derived and supported techniques and procedures considered appropriate to the assignment. This appraisal employs the Sales Comparison Approach and the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that these approaches would be considered applicable and/or necessary for market participants. The subject's age makes it difficult to accurately form an opinion of depreciation and tends to make the Cost Approach unreliable. Investors do not typically rely on the Cost Approach when purchasing a property such as the subject of this report. Therefore, we have not utilized the Cost Approach to develop an opinion of market value. This is a Restricted Use Appraisal Report which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(c) of the Uniform Standards of Professional Appraisal Practice for a Restricted Use Appraisal Report. As such, it represents no discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated below. The appraiser is not responsible for unauthorized use of this report. Definitions of Value, Interest Appraised and Other Terms The following definitions of pertinent terms are taken from the Dictionary of Real Estate Appraisal, Third Edition (1993), published by the Appraisal Institute, as well as other sources. Market Value Market value is one of the central concepts of the appraisal practice. Market value is differentiated from other types of value in that it is created by the collective patterns of the market. A current economic definition agreed upon by agencies that regulate federal financial institutions in the United States of America follows, taken from the glossary of the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and acting in what they consider their own best interests; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Fee Simple Estate Absolute ownership unencumbered by any other interest or estate, subject to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Market Rent The rental income that a property would most probably command on the open market, indicated by the current rents paid and asked for comparable space as of the date of appraisal. Cash Equivalent A price expressed in terms of cash, as distinguished from a price expressed totally or partly in terms of the face amounts of notes or other securities that cannot be sold at their face amounts. Market Value As Is on Appraisal Date The value of specific ownership rights to an identified parcel of real estate as of the effective date of the appraisal; related to what physically exists and is legally permissible and excludes all assumptions concerning hypothetical market conditions or possible rezoning. Exposure Time and Marketing Time Exposure Time Under Paragraph 3 of the Definition of Market Value, the value opinion presumes that "A reasonable time is allowed for exposure in the open market". Exposure time is defined as the length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at the market value on the effective date of the appraisal. Exposure time is presumed to precede the effective date of the appraisal. The reasonable exposure period is a function of price, time and use. It is not an isolated opinion of time alone. Exposure time is different for various types of real estate and under various market conditions. As noted above, exposure time is always presumed to precede the effective date of appraisal. It is the length of time the property would have been offered prior to a hypothetical market value sale on the effective date of appraisal. It is a retrospective opinion based on an analysis of recent past events, assuming a competitive and open market. It assumes not only adequate, sufficient and reasonable time but adequate, sufficient and a reasonable marketing effort. Exposure time and conclusion of value are therefore interrelated. Based on discussions with market participants and information gathered during the sales verification process, a reasonable exposure time for the subject property at the value concluded within this report would have been under 12 months. This assumes an active and professional marketing plan would have been employed by the current owner. Marketing Time Marketing time is an opinion of the time that might be required to sell a real property interest at the appraised value. Marketing time is presumed to start on the effective date of the appraisal. (Marketing time is subsequent to the effective date of the appraisal and exposure time is presumed to precede the effective date of the appraisal). The opinion of marketing time uses some of the same data analyzed in the process of estimating reasonable exposure time and it is not intended to be a prediction of a date of sale. We believe, based on the assumptions employed in our analysis, as well as our selection of investment parameters for the subject, that our value conclusion represents a price achievable within a period of under 12 months. Legal Description The subject site is identified by Shawnee County as Parcel Number 1461303002105. AREA ANALYSIS Regional Analysis The short- and long-term value of real estate is influenced by a variety of factors and forces that interact within a given region. Regional analysis serves to identify those forces that affect property value, and the role they play within the region. The four primary forces that influence real property value include environmental characteristics, governmental forces, social factors, and economic trends. These forces determine the supply and demand for real property, which, in turn, affect market value. The subject property is located in the City of Topeka in the central portion of the Topeka MSA. A profile of the Topeka MSA provided by Economy.com, a leading provider of economic, financial, and industry information indicated that "Topeka continues to be a mediocre-performing state capital economy. While the state government offices are definite assets to the metro area, they are not catalysts for growth. The metropolitan economy's dismal demographic trends will constrain growth on the service and retail fronts, while low industrial diversity will foster high employment volatility, unsettling the potential for stable growth. Longer term, the metro area's loss of migrants to faster growing, more diverse metro areas will weigh on Topeka's economy, especially on population-driven industries. The metro area is expected to lag the nation throughout the extended forecast horizon: This has been exacerbated by the closure of the TeleTech call center when it was not able to renew a contract with Verizon. The site closure resulted in the layoff of 800 employees and the loss of $17 million in payrolls annually. However, Target has recently opened a warehouse distribution center, which will slightly offset the resultant layoffs in TeleTech. Local Market Area Analysis The subject local market area is described in this section of the report. The subject property is located within the City of Topeka, the government county seat of Shawnee County, Kansas. Within the context of the Topeka MSA, the subject is located within the southerly sector of the Topeka Metropolitan Area. The Central Business and State Capital Districts of Topeka are located approximately four miles northeast of the subject property. The overall location of the subject is at the northwest quadrant of the Kansas Turnpike and Burlingame Road. The area has good access within the framework of the metropolitan area. Access characteristics to and through the neighborhood are considered good, with various major highways and arteries servicing the area. US 75 is a secondary north-south highway serving the southerly periphery of Topeka. This limited access highway terminates at Interstate 470 to the north. Interstate 470 is a peripheral looping around the southerly portion of the Greater Topeka MSA. According to the Greater Topeka Chamber of Commerce, this highway has experienced several improvements in the past years as part of the Kansas Comprehensive Highway Program. A new $48 million stretch connects U.S. Highway 75 with Interstate 470 near Burlingame Road. Both roadways establish the neighborhood's south perimeter. The subject is currently accessed by S.W. Burlingame Road, a secondary arterial that connects directly with Interstate 470 and indirectly with Interstate 75, and the Kansas Turnpike. The area comprising the immediate subject neighborhood has been and remains single- and multi-family residential development. However, to the east of the subject is Topeka Boulevard, the major north-south commercial thoroughfare providing accessibility throughout the city of Topeka. In this general area, Topeka Boulevard is comprised of various service commercial uses, business and industrial parks, and the Forbes Field Airport. Commercial air service is provided from Forbes Field by US Airways Express with several daily commuter flights to Kansas City International Airport. Other uses in the area along Topeka Avenue include modest single to multi-family development, and several manufactured housing communities. SW 37th Street to the south of the subject also contains several retail development. Overall, regional and local access characteristics to and through the neighborhood is considered good. Various major arteries service the area and Interstate 70 is the major east-west highway serving the Topeka Metropolitan Area. The subject's proximity to highway access causes it to be linked to other employment and residential centers throughout the Metro Area. Market Analysis Information for the Market Analysis was obtained from statistics published by NAI Cohen-Esrey Real Estate Services Inc. through year-end 2003 and previous periods. The Topeka market is broken down into four submarkets, South, Southwest, Midtown, and West submarkets with a total inventory of 7,455 units. The subject property is located in the South submarket, the smallest of all the submarkets. Occupancy for the entire market as of year-end 2003 was reported at 90.63 percent, a slight increase from the year-end 2002 rate of 88.71 percent, but still below Topeka's historical 10-year occupancy rate, except for 1996, which reported an occupancy rate of 90.36 percent. For the South submarket, occupancy was reported at 92.07 percent, an increase from year-end 2002, but still below the 95.96 percent occupancy rate experienced in 2001. We also surveyed apartment complexes that directly compete with the subject property. Our rental survey indicated a slightly lower occupancy rate of 88 percent, with a range between 80 and 95 percent. As of year-end 2003, average rental rates for the Topeka market were reported at $0.61 per square foot, a slight decrease from year-end 2002. The South submarket reported an average rental rate of $0.6075 per square foot, a substantial decrease from year-end 2002 rate of $0.70 per square foot. Rental rates since 1994 have increased at an average rate of 1.63 percent after a decrease in 2003. Our rental survey indicated a lower average rental rate at $0.57 per square foot, with a range between $0.34 and $0.96 per square foot. The Topeka apartment market maintained stabilized occupancy rates in the range of 90 and 93 percent. Since 1994, rental rates continued to increase by an average of less than two percent through 2003. Due to a downturn in economic conditions, many companies have downsized and vacated space. There have also been a large number of layoffs, particularly TeleTech. The entire Topeka apartment market as well as the subject's sub market has felt the effects. Concessions are being offered but rates remain stable in general and are projected to continue to be that way for two to three years more. PROPERTY DESCRIPTION Site Description Location: 3441 SW Burlingame Road Topeka, Shawnee County, Kansas 66611 The site is located at the southwest corner of Burlingame Road and 34th Street, just north of Interstate 470. Shape: Rectangular Topography: Relatively flat, level at street grade Land Area: 5.58 gross acres (5.58 net acres) 243,065 gross square feet (243,065 net square feet) Frontage, Access, Visibility: The site has good visibility and access with a normal depth to frontage ratio. Soil Conditions: We did not receive nor review a soil report. However, we assume that the soil's load-bearing capacity is sufficient to support existing and/or proposed structure(s). We did not observe any evidence to the contrary during our physical inspection of the property. Drainage appears to be adequate. Utilities Site Improvements: The site improvements include asphalt paved parking areas, curbing, signage, landscaping, and drainage. Land Use Restrictions: We were not given a title report to review. We do not know of any easements, encroachments, or restrictions that would adversely affect the site's use. However, we recommend a title search to determine whether any adverse conditions exist. Flood Zone: National Flood Insurance Rate Map Community Panel Number 2051870014c dated December 1, 1981 designated at Flood Zone C, areas outside the 1 OO-year flood plain. Hazardous Substances: We observed no evidence of toxic or hazardous substances during our inspection of the site. However, we are not trained to perform technical environmental inspections and recommend the services of a professional engineer for this purpose. Overall Functionality: The subject site is functional for the current intended use. Improvements Description The unit mix is as follows.
UNIT MIX No. Unit NRA Units Actual No. Plan BR BA Units (SF) (SF) Leased Occupancy - ------------------------------------------------------------------------------- 1 1BR1BA 1 1 23 727 16,721 18 78.3% - ------------------------------------------------------------------------------- 2 2BR2BA 2 2 13 1,092 14,196 11 84.6% - ------------------------------------------------------------------------------- 3 2BR2BALoft 2 2 9 1,280 11,520 7 77.8% - ------------------------------------------------------------------------------- 4 2BR2BA 2 2 19 1,119 21,261 19 100.0% - ------------------------------------------------------------------------------- 5 2BR1.5BA TH 2 1 1/2 10 1,845 18,450 8 80.0% - ------------------------------------------------------------------------------- 6 3BR2BA TH 3 2 12 2,245 26,940 12 100.0% - ------------------------------------------------------------------------------- TOTAL AVERAGE 86 1,268 109,088 75 87.2% - -------------------------------------------------------------------------------
General Description Number of Units: 86 Year Built: 1973 Number of Buildings: 10 Number of Stories: 2 Net Rentable Area: 109,088 square feet Design and Functionality: The subject consists of a garden apartment property of wood stud wall construction with brick and wood veneer exterior and pitched roof with composition shingles. The subject has Average overall appeal to prospective apartment tenants. Amenities: Office/clubhouse, pool, laundry rooms, storage units Construction Detail Foundation: Poured concrete slab Framing: Wood stud wall construction Floors: Upper floors are of wood decking Exterior Walls: The exterior facade of the building consists of brick and wood veneer exterior. Roof Cover: Pitched roof with composition shingles. Windows: Units have windows in aluminum frames. The windows are single paned with screens. Mechanical Detail Heating: Heat to the subject is supplied either by electric single unit forced air heaters. Heating is supplied via baseboard converters with local zone temperature control. Cooling: The subject is cooled by ground mounted package HVAC units.Cooling is distributed to the apartments through an integrated duct network with individual controls. Plumbing: The plumbing system is assumed to be adequate for existing use and in compliance with local law and building codes. The plumbing system is typical of other apartment properties in the area with a combination of PVC, steel, copper and cast iron piping throughout the building. Electrical Service: The electrical system is assumed to be adequate for existing use and in compliance with local law and building codes. The electrical system is typical of other apartment properties in the area. Fire Protection: The building is not fully sprinklered. Each apartment has electric smoke detector and fire extinguishers in compliance with local code. Interior Detail Layout: The subject property is a 10-building community arranged in a campus setting. Floor Covering: Carpet in living, dining and bedroom areas and sheet vinyl tile in kitchen and bathrooms. Walls: Painted and textured gypsum board. Ceilings: Painted and textured gypsum board. Bathrooms: Depending on the unit type, each apartment is equipped with one or two full bathrooms. Full bathrooms consist of a showerltub kit with wall mounted showerhead, toilet and sink and sheet vinyl floor covering, and a combination wall papered gypsum board walls. Site Improvements Parking: 172 spaces (2.00:Unit). This is a typical parking ratio. On site Landscaping: A variety of trees, shrubbery and grass. Other: Concrete curbs and walkways. Summary Condition: The subject improvements are in average/fair condition given its competitive position. There are currently no "downed" or unleasable units. The current capital improvement expenditure is estimated herein to be $66,250. We did not inspect the roofs or make a detailed inspection of the mechanical systems. The appraisers, however, are not qualified to render an opinion as to the adequacy or condition of these components. The client is urged to retain an expert in this field if detailed information is needed about the adequacy and condition of mechanical systems. Quality: The overall quality is average and is consistent with the comparables in the micro-market. Layout & Functional Plan: Average Year Built: 1973 Effective Age: 25 years Expected Economic Life: 40 years Remaining Economic Life: 15 years Real Property Taxes And Assessments The property is subject to the taxing jurisdiction of Shawnee County. The assessors' parcel identification number is 1461303002105. Current property taxes are presented below: PROPERTY TAX DATA (2003) Total 2003 Assessment Assessor's Parcel Number 1461303002105000 Assessor's Market Value Land $364,420 Improvements 2,843,580 Assessor's Market Value: $3,208,000 Equalization/Assessment Ratio 11.50% Assessed Value $368,920 Assessed Value per Unit $36,892 Assessed Value per SqFt $47.30 Taxes for 1st $20,000 in value $279 Total Tax Rate 14.12% Total Property Taxes $52,060 Property Taxes per Unit $5,206 Property Taxes per SqFt $6.67 ZONING The property is zoned PUD - Multi-Family by the City of Topeka. Permitted uses within this district include residential development and small-scale attendant retail. Office and industrial development is prohibited in this zoning district. Zoning regulations imposed within this district are as follows: We are not experts in the interpretation of complex zoning ordinances but the property appears to be a conforming use based on our review of public information. The determination of compliance is beyond the scope of a real estate appraisal. We know of no deed restrictions, private or public, that further limit the subject property's use. The research required to determine whether or not such restrictions exist, however, is beyond the scope of this appraisal assignment. Deed restrictions are a legal matter and only a title examination by an attorney or title company can usually uncover such restrictive covenants. Thus, we recommend a title search to determine if any such restrictions do exist. HIGHEST AND BEST USE Definition Of Highest And Best Use According to The Dictionary of Real Estate Appraisal, Third Edition (1993), a publication of the Appraisal Institute, the highest and best use is defined as: The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. Highest And Best Use Criteria We evaluated the site's highest and best use both as currently improved and as if vacant. Highest and Best Use of Site As Though Vacant Considering the subject site's size, configuration and topography, location among other apartment properties and state of the local apartment market, it is our opinion that the Highest and Best Use of the subject site as though vacant is investment property development to the highest density possible. Highest and Best Use of Property As Improved According to the Dictionary of Real Estate Appraisal, highest and best use of the property as improved is defined as: The use that should be made of a property is as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. . It is our opinion that the existing complex adds value to the site as if vacant, and rent levels of existing leases encumbering the subject property would dictate a continuation of the current use. Therefore, it is our opinion that the Highest and Best Use of the subject property as improved is as it is currently employed. VALUATION PROCESS Methodology There are three generally accepted approaches available in developing an opinion of value: the Cost, Sales Comparison and Income Capitalization approaches. We have considered and analyzed each in this appraisal to develop an opinion of the market value of the subject property, because this is a complete appraisal. In appraisal practice, an approach to value is included or eliminated based on its applicability to the property type being valued and the quality of information available. Each approach is discussed below, and applicability to the subject property is briefly addressed in the following summary. Land Value Developing an opinion of land value is typically accomplished via the Sales Comparison Approach by analyzing sites of comparable utility adjusted for differences, to indicate a value for the subject parcel. Valuation is typically accomplished using a unit of comparison such as price per square foot or acre. Adjustments are applied to the units of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a total value. The reliability of this approach is dependent upon (a) the availability of comparable sales data; (b) the verification of the sales data; (c) the degree of comparability; (d) the absence of non-typical conditions affecting the sales price. Cost Approach The Cost Approach is based upon the proposition that an informed purchaser would pay no more for the subject than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable when the property being appraised involves relatively new improvements, which represent the highest and best use of the land; or when relatively unique or specialized improvements are located on the site, for which there exist few sales or leases of comparable properties. In the Cost Approach, the appraiser forms an opinion of the cost of all improvements, depreciating them to reflect value loss from physical, functional and external causes. Land value, entrepreneurial profit and depreciated improvement costs are then added for a total value. Sales Comparison Approach The Sales Comparison Approach utilizes sales of comparable properties. adjusted for differences, to indicate a value for the subject property. Valuation is typically accomplished using a unit of comparison such as price per square foot, effective gross income multiplier or net income multiplier. Adjustments are applied to the units of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a total value. The reliability of this approach is dependent upon (a) the availability of comparable sales data; (b) the verification of the sales data; (c) the degree of comparability; (d) the absence of non-typical conditions affecting the sales price. Income Capitalization Approach This approach first determines the income-producing capacity of a property by utilizing contract rents on leases in place and by estimating market rent from rental activity at competing properties. Deductions then are made for vacancy and collection loss and operating expenses. The resulting net operating income is capitalized at an overall capitalization rate to derive an opinion of value. The capitalization rate represents the relationship between net operating income and value. Related to the Direct Capitalization Method is the Discounted Cash Flow Method. In this method, periodic cash flows (which consist of net operating income less capital costs) and a reversionary value are developed and discounted to a present value using an internal rate of return that is determined by analyzing current investor yield requirements for similar investments. The reliability of the Income Capitalization Approach depends upon whether investors actively purchase the subject property type for income potential, as well as the quality and quantity of available income and expense data from comparable investments. Summary This appraisal employs the Sales Comparison Approach and the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that these approaches would be considered applicable and/or necessary for market participants. The subject's age makes it difficult to accurately fonn an opinion of depreciation and tends to make the Cost Approach unreliable. Investors do not typically rely on the Cost Approach when purchasing a property such as the subject of this report. Therefore, we have not utilized the Cost Approach to develop an opinion of market value. The valuation process is concluded by analyzing each approach to value used in the appraisal. When more than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or is a correlation of all the approaches used in the appraisal. SALES COMPARISON APPROACH Methodology In the Sales Comparison Approach, we developed an opinion of value by comparing this property with similar, recently sold properties in the surrounding or competing area. Inherent in this approach is the principle of substitution, which states that when a property is replaceable in the market, its value tends to be set at the cost of acquiring an equally desirable substitute property, assuming that no costly delay is encountered in making the substitution. By analyzing sales that qualify as arm's-length transactions between willing and knowledgeable buyers and sellers, we can identify value and price trends. The basic steps of this approach are: 1. Research recent, relevant property sales and current offerings throughout the competitive area; 2. Select and analyze properties that are similar to the property appraised, analyzing changes in economic conditions that may have occurred between the sale date and the date of value, and other physical, functional, or locational factors; 3. Identify sales that include favorable financing and calculate the cash equivalent price; 4. Reduce the sale prices to a common unit of comparison such as price per square foot, price per unit or effective gross income multiplier; 5. Make appropriate comparative adjustments to the prices of the comparable properties to relate them to the property being appraised; and 6. Interpret the adjusted sales data and draw a logical value conclusion. On the following pages we present a summary of the improved properties that we compared to the subject property, a map showing their locations, and an adjustment grid. Detail sheets describing these sales can be found in the Addenda. Due to the nature of the subject property and the level of detail available for the comparable data, we have elected to analyze the comparables through application of a traditional adjustment grid utilizing percentage adjustments and an effective gross income multiplier analysis.
APARTMENT SALES Name Grantor Sale Price Average % Occ. Quality SP/SF ------- ------- ----------- -------- -------- ------- ------- No. Address Grantee Date Bldg SqFt # Units Year SP/Unit Built 1. Mt. Vernon Mt. Vernon $2,575,000 953 N/Av Average $23.69 Apartments Housing LP Topeka, KS DCAL LLC 11/03 108,696 114 units 1946 $22,588 2. Brookfield MRV Inc. $7,250,000 861 99.0% Good $52.64 Village Apartments IRET Inc. 10/03 137,717 160 units 1989 $45,313 3. Sunrise Sunrise $2,300,000 986 82.0% Average $34.32 Place Place LC Apartments Lawrence, Edward Carter 10/03 67,020 68 units 1983 $33,824 KS et al 4. Quail TCI Quail $4,700,000 1,377 95.0% Average $35.93 Creek Quail Creek Apartments Lawrence,KS Quail 11/03 130,796 95 units 1969 $49,474 Creek Inc. 5. Capital Highland $660,000 494 95.0% Average $27.25 Square Realty of Apartments Topeka, LLC Topeka, KS Douglas 8/02 24,220 49 units 1970 $13,469 Phelps Expense Name Grantor Ratio NOI/Unit ------- ------- -------- -------- No. Address Grantee EGIM OAR Comments 1. Mt. Vernon Mt. Vernon N/Av N/Av Brick building with one Apartments Housing LP and two bedroom units. Topeka, KS DCAL LLC N/Av N/Av Inferior location age, and appeal. 2. Brookfield MRV Inc. 38% $4,110 This is a good quality Village complex considered Apartments IRET Inc. 6.88 9.07% overall superior when compared to the subject property. 3. Sunrise Sunrise 46% $2,462 Part of a two property Place Place LC portfolio. Experienced Apartments setbacks in management Lawrence, Edward Carter 7.43 7.28% and operated below KS et al market. Superior location near the University of Kansas. 4. Quail TCI Quail 41% $4,700 This property includes 7 Creek Quail Creek apartment buildings, 4 Apartments townhouse buildings, 2 Lawrence,KS Quail 6.23 9.50% duplexes and an office Creek Inc. /clubhouse. Superior location near the University of Kansas. 5. Capital Highland 67% $1,210 This is a Class C Square Realty of apartment complex with Apartments Topeka, LLC minimal land. Topeka, KS Douglas 3.69 8.98% Phelps
Survey Minimum $660,000 494 SF 82.0% N/A $23.69 38% $1,210 Survey Maximum $7,250,000 1,377 SF 99.0% N/A $52.64 67% $4,700 Survey Average $3,497,000 934 SF 92.8% N/A $34.77 48% $3,120 Survey Minimum 8/02 24,220 SF 49 units 1946 13469 3.69 7.28% Survey Maximum 11/03 137,717 SF 160 units 1989 49474 7.43 9.50% Survey Average 7/03 93,690 SF 97 units 1971 32933 6.06 8.71% Subject Property N/A 1,268 SF 87.2% average N/A 52% $3,325 N/A 109,088 SF 86 1973 N/A N/A N/A
- ------------------------------------------------------------------------------- IMPROVED COMPRABLE SALE ADJUSTMENT GRID - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ECONOMIC ADJUSTMENTS(CUMULATIVE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No. $/Unit Property Financing & Exp. After Market* Subtotal Date Rights Conditions of Purchase Conditions Conveyed Sale - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 $22,588 Fee Simple/Mkt. Arms-Length None Inferior $22,768 11/03 0.0% 0.0% 0.0% 0.8% 0.8% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2 $45,313 Fee Simple/Mkt. Arms-Length None Inferior $45,811 10/03 0.0% 0.0% 0.0% 1.1% 1.1% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3 $33,824 Fee Simple/Mkt. Arms-Length None Inferior $34,196 10/03 0.0% 0.0% 0.0% 1.1% 1.1% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4 $49,474 Fee Simple/Mkt. Arms-Length None Inferior $50,625 7/03 0.0% 0.0% 0.0% 1.6% 1.6% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 5 $13,469 Fee Simple/Mkt. Arms-Length None Inferior $13,914 8/02 0.0% 0.0% 0.0% 3.3% 3.3% - -------------------------------------------------------------------------------
PROPERTY CHARACTERISTIC ADJUSTMENTS (ADDITIVE) No. Location Size Ave, Amenities Unit Utility Economics Quality Size Conditions 1 Inferior Similar Inferior Similar Inferior Similar Similar 5.0% 0.0% 5.0% 0.0% 10.0% 0.0% 0.0% 2 Superior Similar Superior Similar Inferior Similar Similar -5.0% 0.0% -30.0% 0.0% 10.0% 0.0% 0.0% 3 Superior Similar Superior Similar Inferior Similar Inferior -15.0% 0.0% -10.0% 0.0% 10.0% 0.0% 10.0% 4 Superior Similar Superior Similar Superior Similar Superior -15.0% 0.0% -5.0% 0.0% -5.0% 0.0% -10.0% 5 Inferior Similar Inferior Inferior Inferior InferiorSimilar 20.0% 0.0% 15.0% 20.0% 35.0% 20.0% 0.0% No. Other Adj. Overall 1 Similar $29,599 Inferior 0.0% 30.0% 2 Similar $34,358 Superior 0.0% -25.0% 3 Similar $32,486 Superior 0.0% -5.0% 4 Similar $32,672 Superior 0.0% -35.0% 5 Similar $29,219 Inferior 0.0% 110.0%
SUMMARY Price Range Unadj. Adj. *Market Conditions Adjustment $/Unit $/Unit Low $13,469 $29,219 Compound annual change in mark conditions: 2.00% High $49,474 $34,358 Date of Value (for adjustment calculations): Apr-04 Average $32,933 $31,667 Net Adjustment Low -35.0% High 110.0% Average 15.0%
Percentage Adjustment Method Adiustment Process The sales that we have utilized represent the best available information that could be compared to the subject property. The major elements of comparison for an analysis of this type include the property rights conveyed, the financial terms incorporated into a particular transaction, the conditions or motivations surrounding the sale, changes in market conditions since the sale, the location of the real estate, its physical traits and the economic characteristics of the property. The first adjustment made to the market data takes into account differences between the subject property and the comparable property sales with regard to the legal interest transferred. Advantageous financing terms or peculiar conditions of sale are then adjusted to reflect a normal market transaction. Next, changes in market condition must be accounted for, thereby creating a time adjusted normal unit of comparison. Lastly, adjustments for location, the physical traits and the economic characteristics of the market data are made in order to generate the final adjusted unit rate, which is appropriate for the subject property. Summary of PercentaGe Adiustment Method After adjusting each comparable sale for differences with the subject property, the adjusted sale price range is $29,219 to $34,358 per unit. Therefore, we conclude that the indicated value by the Sales Comparison Approach is: ADJUSTMENT METHOD CONCLUSION Rounded to Per Per Nearest Unit SqFt $100,000 Indicated Stabilized Value per $31,700 Unit Number of Units x 86 ------------ Indicated Stabilized Value $2, 726,200 $2,700,000 $31,395 $24.75 Less: Rent Loss 0 Less: Capital Improvements 66,250 ------------ Value Prior to Stabilization: $2,659,950 $2,700,000 $31,395 $24.75
Effective Gross Income Multiplier Analysis The effective gross income multiplier (EGIM) is calculated in the sales transactions by dividing the sales price by the effective gross income at time of sale. The EGIM expresses the relationship between a sales price and the property's effective gross income. All other things being equal, the lower the income, the lower the sales price. However, there are other variables that affect the income/price relationship such as the condition of the property, the vacancy at time of sale, the stability of the income stream and the likelihood of near term change (up or down). and the ratio of operating expenses to effective gross income. As all of these sales are very similar to the property appraised in terms of physical condition, access and visibility and the prospect for continuation of the income stream at or near current levels, the expense ratio is the most significant variable of difference. The expense ratio affects net operating income and, by implication, the overall capitalization rate. As the EGIM is a function of the overall capitalization rate and the ratio of net operating income to effective gross income, it is important to examine this relationship. Summary of the EGIM Analvsis All of the sales had achieved a stabilized occupancy level in Year 1 of the buyer's projections. The expense ratios of the com parables fall within a range of 37.60 percent to 66.90 percent, with the EGIM range from of 3.69x to 7.43x. Based on our projected effective rental rates for the subject, the projected stabilized expense ratio equates to 52.20 percent of the effective gross income, falling within the upper half of the range indicated by comparable sales. An inverse relationship generally exists between the expense ratio and the EGIM, i.e., the higher the expense ratio, the lower the EGIM. Conversely, the lower the expense ratio, the higher the EGIM. As evidenced by the chart, the sales included generally follow this trend. As stated, the comparable sales indicate an EGIM range of 3.69x to 7.43x. Applying this range to the Year 1 effective gross income of $598,097 ($10,941 per unit) produces a probable value range of $25,635 to $51,682 per unit. The subject's pro forma occupancy is similar to the com parables with the expense ratio in the middle to upper portion of the range. As a result, an EGIM towards 4.75x is expected. This multiplier is applied to the stabilized effective gross income estimated for the subject of $598,097 (see Income Capitalization Approach section of this report) resulting in a value conclusion as follows: - ------------------------------------------------------------------------- EGIM SUMMARY - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- No. Property Name Effective Sale Gross Price EGIM Income - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 1 Mt. Vernon Apartments $2,575,000 / N/A = N/A - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 2 Brookfield Village $7,250,000 / $1,053,806 = 6.88 Apartments - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 3 Sunrise Place Apartments $2,300,000 / $309,501 = 7.43 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 4 Quail Creek Apartments $4,700,000 / $754,223.00 = 6.23 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 5 Capital Square Apartments $660,000 / $179,057 = 3.69 - -------------------------------------------------------------------------
- ---------------------------------------------------------------- Subject Indicated - ---------------------------------------------------------------- Range EGIM EGI Value $/Unit - ---------------------------------------------------------------- - ---------------------------------------------------------------- Low 3.69 $598,097 $2,204,567 $25,635 - ---------------------------------------------------------------- - ---------------------------------------------------------------- High 7.43 $598,097 $4,444,650 $51,682 - ---------------------------------------------------------------- - ---------------------------------------------------------------- Average 6.06 $598,097 $3,622,777 $42,125 - ----------------------------------------------------------------
CONCLUSIONS Indicated EGIM 4.75 Effective Gross Income x $598,097 -------------------- Indicated Stabilized Value $2,840,961 Rounded to nearest $25,000 $2,850,000 Per Unit $33,140 Per Square Foot $26.13 Value Prior to Stabilization Indicated Stabilized Value $2,850,000 Less: Rent Loss 0 Less: Capital Improvements (66,250) -------------------- Value Prior 10 Stabilization $2,783,750 Rounded to nearest $25,000 $2,800,000 Per Unit $32,558 Per Square Foot $25.67
Sales Comparison Approach Sales Comparison Approach Conclusion The following is a summary of our concluded values within the Sales Comparison Approach: Method Conclusion Value indicated on basis of percentage adjustments $2,800,000 Value indicated by EGIM comparison $2,800,000
Based on our analysis of competitive transactions, we conclude that the indicated value by the Sales Comparison Approach is as follows: Indicated Value $/SqFt $/Unit $2,800,000 $25.67 $32,558
INCOME CAPITALIZATION APPROACH Methodology The Income Capitalization Approach is a method of converting the anticipated economic benefits of owning property into a value through the capitalization process. The principle of "anticipation" underlies this approach in that investors recognize the relationship between an asset's income and its value. In order to value the anticipated economic benefits of a particular property, potential income and expenses must be projected. and the most appropriate capitalization method must be selected. The two most common methods of converting net income into value are Direct Capitalization and Discounted Cash Flow. In direct capitalization, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the discounted cash flow method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). In our opinion, both the discounted cash flow and direct cap methods are appropriate to value the subject property. Historical Performance of the Subject Property The following is a summary of historical revenue and expenses as well as our Year 1 forecast for the subject property. INCOME CAPITALIZATION APPROACH - ------------------------------------------------------------------------------ REVENUE AND EXPENSE ANALYSIS - ------------------------------------------------------------------------------ 2001 2002 Total $/Unit $/SF Total $/Unit $/SF ------------------------ ------------------------- Average Physical Occupancy (%) -94% -92% Economic Occupancy (%) 94% 90% POTENTIAL GROSS INCOME Gross Potential $633.98 $7,372 $5.81 $644,244 $7,491 $5.91 Rental Income loss/Gain to Lease (1,600) N/A N/A (1.206) N/A N/A ------------------------ ------------------------- Adjusted Rental $632,376 $7,353 $5.80 $643,038 $7,477 $5.89 Revenue ------------------------ ------------------------- Other Income $19,352 $225 $0.18 $25,089 $292 $0.23 ------------------------ ------------------------- Total Other Income $19,352 $225 $0.18 $25,089 $292 $0.23 Less: Employee (10,884) (127) (0.10) (9,664) (112) (0.09) Unit Discounts Rent Concessions (1,773) (21) (0.02) (3,753) (44) (0.03) ------------------------ ------------------------- ($12,657) ($147) ($0.12) ($13,427) ($156) ($0.12) ------------------------ ------------------------- Total Potential Gross $639,079 $7,431 $5.88 $654,700 $7,613 $6.00 Revenue Vacancy & Credit Loss Vacancy ($37,759) ($439) ($0.35)($51,426) ($598) ($0.47) Credits Loss 17,050 198 0.16 (909) (11) (0.01) ------------------------ ------------------------- (20,709) ($241)($0.19) (52,335) ($609) ($0.48) ------------------------ ------------------------- EFFECTIVE GROSS INCOME $618,362 $7,190 $5.67 $602,365 $7,004 $5.52 OPERATING EXPENSES Management Fee $30,367 $353 $0.28 $30,192 $351 $0.28 Total Payroll & Burden 105,563 1,227 0.97 100,351 1,167 0.92 General & Administrative 10,727 125 0.10 11,966 139 0.11 Marketing & Promotion 4,532 53 0.04 4,598 53 0.04 Maint. & Repairs 35,884 417 0.33 49,234 572 0.45 & Contract Svc. Total Utilities 44,015 512 0.40 44,347 516 0.41 Insurance 12,695 148 0.12 25,812 300 0.24 Real Estate Taxes 50,097 583 0.46 49,997 581 0.46 ------------------------ ------------------------- Total Operating Expense $293,880 $3,417 $2.69 $316,497 $3,680 $2.90 ------------------------ ------------------------- NET OPERATING INCOME $324,482 $3,773 $2.97 $285,868 $3,324 $2.62 ------------------------ ------------------------- OTHER CAPITAL $0 $0 $0.00 $0 $0 $0.00 Replacement Reserves 0 0 0.00 0 0 0 Expense Ratio 47.53% 52.54% Management Fee % of EGI 4.91% 5.01%
2003 2004 Budget Total $/Unit $/SF Total $/Unit $/SF ------------------------ ------------------------- Average Physical Economic Occupancy (%)-89% -95% 84% 91% POTENTIAL GROSS INCOME Gross Potential $646,044 $7.512 $5.92 $656.181 $7.630 $6.02 Rental Income loss/Gain to Lease 2,318 N/A N/A (6.018) (70) (0.06) ------------------------ ------------------------- Adjusted Rental $648,362 $7,539 $5.94 $650,163 $7,560 $5.96 Revenue ------------------------ ------------------------- Other Income $20,106 $234 $0.18 $23.930 $278 $0.22 ------------------------ ------------------------- Total Other Income $20,106 $234 $0.18 $23,930 $278 $0.22 Less: Employee (9,855) (115) (0.09) (9,900) (115) (0.09) Unit Discounts Rent Concessions (17,642) (205) (0.16) (7,250) (84) (0.07) ------------------------ ------------------------- ($27,497) ($320)($0.25) ($17,150) ($199) ($0.16) ------------------------ ------------------------- Total Potential Gross $640,971 $7,453 $5.88 $656,943 $7,639 $6.02 Revenue Vacancy & Credit Loss Vacancy ($71,034) ($826)($0.65) ($32,809) ($382) ($0.30) Credits Loss (4,171) (49) (0.04) (1,200) (14) (0.01) ------------------------ ------------------------- (75,205) ($874)($0.69) (34,009) ($395) ($0.31) ------------------------ ------------------------- EFFECTIVE GROSS INCOME $565,766 $6,579 $5.19 $622,934 $7,243 $5.71 OPERATING EXPENSES Management Fee $29,142 $339 $0.27 $31,672 $368 $0.29 Total Payroll & Burden 108,143 1,257 0.99 111,012 1,291 1.02 General & Administrative 24,555 287 0.23 9,982 116 0.09 Marketing & Promotion 656 8 0.01 3,460 40 0.03 Maint. & Repairs 33,871 394 0.31 41,198 479 0.38 & Contract Svc. Total Utilities 43,405 505 0.40 44,148 513 0.40 Insurance 23,915 278 0.22 25,584 297 0.23 Real Estate Taxe s 41,460 482 0.38 50,010 582 0.46 ------------------------ ------------------------- Total Operating Expense $305,257 $3,550 $2.80 $317,066 $3,687 $2.91 ------------------------ ------------------------- NET OPERATING INCOME $260,509 $3,029 $2.39 $305,868 $3,557 $2.80 ------------------------ ------------------------- OTHER CAPITAL $0 $0 $0.00 $86,250 $1,003 $0.79 Replacement Reserves 0 0 0.00 0 0 0.00 Expense Ratio 53.95% 50.90% Management Fee % of EGI 5.15% 5.08% Budget Year 1 C&W Comparison Forecast Total $/Unit $/SF Adj.* Total $/Unit $/SF ------------------------ ---------------------------- Average Physical 93% Occupancy (%) Economic Occupancy (%) 89% POTENTIAL GROSS INCOME Gross Potential Rental ($10,137) ($118) ($0.09) $646,404 $7,516 $5.93 Income loss/Gain to Lease N/A N/A N/A (7,267) (85) (0.07) ------------------------ ---------------------------- Adjusted Rental ($1,801) ($21) ($0.02) $639,137 $7,432 $5.86 Revenue Other Income (3,824) (44) (0.04) $23,650 $275 $0.22 ------------------------ ---------------------------- Total Other Income ($3,824) ($44) ($0.04) $23,650 $275 $0.22 Less: Employee Unit Discounts 45 1 0 (9,720) (113) (0.09) Rent Concessions (10,392) (121) (0.10) (7,000) (81) (0.06) ------------------------ ---------------------------- ($10,347) ($120) ($0.09) ($16,720) ($194) ($0.15) Total Potential Gross ($15,972) ($186) ($0.15) $646,067 $7,512 $5.92 Revenue Vacancy & Credit Loss Vacancy ($38,225) ($444) ($0.35) 7.00% ($44,740) ($520) ($0.41) Credits Loss (2,971) (35) (0.03) 0.50% (3,230) (38) (0.03) (41,196) ($479) ($0.38) (47,970) ($558) ($0.44) EFFECTIVE GROSS INCOME ($57,168) ($665) ($0.52) $598,097 $6,955 $5.48 OPERATING EXPENSES Management Fee ($2,530) ($29) ($0.02) 5.00% $29,905 $348 $0.27 Total Payroll & (2,869) (33) (0.03) 111,800 1,300 1.02 Burden General & 14,683 171 0.13 10,750 125 0.10 Administrative Marketing & (2,804) (33) (0.03) 3,440 40 0.03 Promotion Maint. & Repairs (7,327) (85) (0.07) 34,400 400 0.32 & Contract Svc. Total Utilities (743) (9) (0.01) 44,033 512 0.40 Insurance (1,669) (19) (0.02) 25,800 300 0.24 Real Estate Taxes (8,550) (99) (0.08) 52,060 605 0.48 Total Operating Expense ($11,809) ($137) ($0.11) $312,188 $3,630 $2.86 NET OPERATING INCOME ($45,359) ($527) ($0.42) $285,909 $3,325 $2.62 OTHER CAPITAL ($86,250) ($1,003) ($0.79) $66,250 $770 $0.61 Replacement 0 0 0.00 21,500 250 0.20 Reserves Expense Ratio 52.20% Management Fee % of EGI 5.00% *Rents may be adjusted for lagging market conditions.
Market Rental Rates. In an effort to estimate the current market rent achievable for the subject's unit mix, we surveyed several competitive apartment complexes summarized as follows:
COMPETITIVE APARTEMENT COMPLEXES Cascade Apartments Rent Rent Item Year Blt Bed/ Unit Per Per No. Name & Location No. Units Bath Size Month Sq.Ft. 1 La Casa Grande 1969 (0/1) 45O - 450 $434-$434 $0.96 - $0.96 2908 SW 31st Ct 191 (1/1) 716 - 792 $485-$505 $O.68 - $0.64 Topeka, KS (2/1.5) 946 - 946 $560-$560 $0.59 - $0.59 785-272-7900 (3/2) 1,488-1,488 $760-$760 $O.51 - $0.51 2 Misty Glen 1969 (1/1) 135 - 735 $435-$445 $O.59 - $O.61 3201 SW Randolph 216 (2/2) 935 - 935 $5OO-$510 $O.53 - $O.55 Topeka.KS (2/2TH) 1,600-1,800 $655-$715 $O.41 - $0.40 785-266-8010 (3/2TH) 2,200-2,200 $755-$770 $O.34 - $0.35 3 Whitehall 1979 (1/1) 730 - $750 $435-$455 $O.60 - $0.61 3930 SW Twilight Dr 74 (2/2) 1,111-1,111 $575-$595 $0.52 - $O.54 Topeka. KS (3/2) 1,250-1,265 $625-$650 $O.5O - $O.51 785-273-0932 4 Park South 1970's (1/1) 575 - 750 $420-$475 $O.73 - $O.63 3711 SW Park 234 (2/1) 75O - 950 $475-$550 $O.63 - $0-58 South Ct (2/1.5) 95O - 950 $545-$555 $0.57 - $O-58 Topeka, KS 785-266-8957 5 Carriage House 1968 (1/1) 686 - 686 $380-$415 $O.55 - $0.60 1601 SW 37th 282 (2/1) 869 - 860 $410-$445 $0.47 - $0.51 Terrace (2/1.5) 875 - 875 $430-$465 $0.49 - $0.53 Topeka, KS (2/1) 941 - 941 $480-$480 $0.51 - $0.51 785-266-8761 6 White Lakes Plaza 1970's (1/1) 75O - 75O $470-$485 $0.63 - $O.65 3733 SW Plaza Dr 144 (2/2) 950 - 950 $550-$575 $0.58 - $0.61 Topeka, KS 785-267-2060 Project Item Unit & No. Name & Location Occ Amenities Premiums Concessions 1 La Casa Grande 91% Laundry room, Fireplace $15 1st and last 2908 SW 31st Ct W/D hookups Security month free on Topeka, KS in some units, Deposit $200 14 month 785-272-7900 firplace, Pet Deposit $200, $10/mo lease patio/balcony, Garage $45 ceiling fan, All utililies storage, paid for clubhouse, studio Tenant pool pays elec in 1&2BR Tenant pays all utils in 3BR 2 Misty Glen 89% Storage, All utilities One month free 3201 SW Randolph W/D hookups, paid Deposit on a 6-12 Topeka.KS patio/ balcony, $150 on apts month lease 785-266-8010 fireplace, Deposit $250 on TH clubhouse, pool 3 Whitehall 86% Ceiling fan, Fireplace $30 One monlh free 3930 SW Twilight Dr W/D hookups, Carpool $15 on a 12 month Topeka. KS fireplace lease 785-273-0932 in townhouses, patio/balcony, pool 4 Park South 87% Laundry rooms, Application fee One month free 3711 SW Park pool, hot tub, $35 Deposit $150 on a 12 month South Ct clubhouse, Pet Deposit $150 lease 1.5 Topeka, KS All utilities paid months free on 785-266-8957 18 month lease 5 Carriage House 8O% Laundry room, Balcony $35 Two monlhs 1601 SW 37th balcony, pool Security Deposit free on a 13 Terrace $150 Application month lease Topeka, KS Fee $20 Pet 785-266-8761 Deposit $100,$15/mo All utilities paid 6 White Lakes Plaza 95% Laundry room, Fireplace $15 None 3733 SW Plaza Dr patio/balcony, Carpoo1 Topeka, KS clubhouse, pool 785-267-2060
Rental Rate Conclusion for the Subject Property The previous chart shows the range of rental rates indicated by rent comparables for each unit type. In consideration of this information as well as the subject's performance as summarized below, our opinion of market rent and total potential apartment rental income assuming full occupancy is set forth as follows. - ------------------------------------------------------------------------------- UNIT MlX - ------------------------------------------------------------------------------- No. Unit NRA Units Actual No. Plan BR BA Units (SF) (SF) Leased Occupancy - ------------------------------------------------------------------------------- 1 1BR1BA 1 1 23 727 16,721 18 78.3% 2 2BR2BA 2 2 13 1,092 14,196 11 84.6% 3 2BR2BALoft 2 2 9 1,280 11,520 7 77.8% 4 2BR2BA 2 2 19 1,119 21,261 19 100.0% 5 2BR1.5BA TH 2 1 1/2 10 1,845 18,450 8 8O.O% 6 38R2BA. TH 3 2 12 2,245 26,940 12 100.0% - ------------------------------------------------------------------------------- TOTAL/AVERAGE 86 1,268 109,088 75 87.2% - ------------------------------------------------------------------------------- POTENTIAL RENTAL RATES - ------------------------------------------------------------------------------- Potential Potential Average Quoted C&W YR1 Monthly Annual Contract $/SqFt Month $/SqFt Forecast $/SqFt Rent Rent $494 $O.68 $499 $0.69 $499 $O.69 $11,477 $137,724 597 0.55 610 0.56 610 0.56 7,930 95,160 650 0.51 650 0.51 650 0.51 5,850 70,200 609 0.54 610 0.55 610 0.55 11,590 139,080 734 0.40 730 0.40 730 0.40 7,300 87,600 826 0.37 810 0.36 810 0.36 9,720 116,640 - ------------------------------------------------------------------------------- $626 $0.49 $626 $0.49 $626 $O.49 $53,867 $646,404 - -------------------------------------------------------------------------------
Based on the amenities of the subject, its location and condition relative to the rent comparables, it is our opinion that the current quoted rental rates (as provided by the property manager) are within the quoted market rates for the comparables. Estimate of Potential Unit Rental Income The potential rental income for the subject property at our projected market rent for all unit types is $646,404 on an annualized basis. These figures reflect the subject as if fully occupied and collecting market rent for every unit. For comparison purposes, the current quoted rental income is $ .49 per square foot, or approximately $646,404 in total on an annualized basis. Employee Units The practice of non-revenue units or reduced rental rates for employees is common within the market area. The subject development provides full abatement on one unit for the manager. The combined monthly rent abatement totals $9,720, which we have deducted from base rental revenue. Vacancy and Collection Loss We have forecasted a vacancy loss of 7.00 percent and a collection loss of 0.05 percent for the first two years of the analysis. We have decreased the vacancy loss to 7.00 percent on the third year and stabilized it at 6.00 percent. Rent Concessions We have deducted $7,000 as rent concessions for the first two years of the analysis stabilized the rent concession deductions in year 3 at $2,000. Other Income Our estimate is $23,650 or $ 275 per unit in Year 1. Effective Gross Income Considering all of the foregoing income and vacancy items, we have estimated a Year 1 effective gross income of $598,097, which is within -3.99 percent of that set forth in the owners 2004 budget. This adds credibility and support to our independent forecasts. Income and Expense Summary We have discussed our projections of income and expenses for the subject property. On the following chart we present our opinion of income and expenses for year 1. YEAR 1 PRO FORMA - ------------------------------------------------------------------------------- POTENTIAL GROSS INCOME $/Year $/Unit $/SF ----------------------------------------- Gross Potential Rental Income $646,404 $7,516 $5.93 Loss/Gain to Lease (7,267) (65) (0.07) Less: Employee Unit Discounts -.810/Mo. (9,720) (113) (0.09) ----------------------------------- Adjusted Renlal Revenue $629,417 $7,319 $5.77 Vacancy & Credit Loss Vacancy 7.00% ($44,740) ($520) ($0.41) Credit loss 0.50% (3,230) (38) (0.03) Rent Concessions (7.000) (81) (0.06) ----------------------------------- Total Potential Gross Revenue ($16,720) ($194) ($O.15) Other Income $23,650 $275 $0.22 ----------------------------------- Total Other Income $23,650 $275 $0.22 ----------------------------------- EFFECTIVE GROSS INCOME $598,097 $6,955 $5.48 OPERATING EXPENSES Management Fee 5.00% $29,905 $348 $0.27 Total Payroll & Burden 111,800 1,300 1.02 General & Administrative 10,750 125 0.10 Marketing & Promotion 3,440 40 0.03 Maint. & Repairs & Contract Svc. 34,400 400 0.32 Total Utilities 44,033 512 0.40 Insurance 25,800 300 0.24 Real Estate Taxes 52,060 605 0.48 Replacement Reserves 21,500 250 0.20 ----------------------------------- Total Operating Expenses $312,188 $3,630 $2.86 ----------------------------------- NET OPERATING INCOME $285,909 $3,325 $2.62
Direct Capitalization Method Conclusion In the Direct Capitalization Method. we developed an opinion of market value by dividing year 1 net operating income by a 10.00 percent overall capitalization rate. Our conclusion via the Direct Capitalization Method is as follows: DIRECT CAPITAUZATION METHOD Net Operating Income $285,909 - ------------------------------------------------------------------------------- Rounded to Sensitivity Analysis Nearest (0.25% OAR Spread) Value $25,000 $/Unit $/SqFt - ------------------------------------------------------------------------------- Based on Low-Range of 9.75% $2,932,400 $2,925,000 $34,098 $26.66 Based on Most Probable Range of 10.00% $2,859,090 $2,850,000 $33,245 $26.21 Based on High-Range of 10.25% $2,789,356 $2,800,000 $32,434 $25.57 Reconciled Stabilized Value $2,859,090 $2,850,000 $33,245 $26.21 Less: Rent Loss $0 $0 $0.00 Less: Capital Improvements 66,250 $770 $0.61 ---------------------------------------------- Indicated A5 Is Value $2,792,840 $2,800,000 $32,475 $25.60
Discounted Cash Flow Method In the Discounted Cash Flow Method, we employed the ARGUS software to model the income characteristics of the property and to make a variety of cash flow assumptions. We attempted to reflect the most likely investment assumptions of typical buyers and sellers in this particular market segment. Summary of Discounted Cash Flow Assumptions The following table illustrates the assumptions used in the discounted cash flow analysis. DCF Analysis Assumptions Holding Period 10 Years Start Date: April 16, 2004 Vacancy Rate 7.00% Collection Loss Rate 0.50% Management Fee Rate 5.00% Replacement Reserves $250/unit Growth Rates Revenue 0.00%, 2.00% thereafter Expenses 3.00% Property Taxes 3.00% Rates of Return Internal Rate of Return 11.00% Terminal Cap Rate 10.25% Reversionary Sales Costs 2.00%
Discounted Cash Flow Method Conclusion Based on the discount rate selected above, market value would be $2,700,000, rounded. Our cash flow projection is presented at the end of this section. Reconciliation Within Income Capitalization Approach Since the subject is a typical apartment property with normal tenant characteristics, we have placed reliance on the Direct Capitalization method. Therefore, our opinion of market value via the Income Capitalization Approach is as follows. Value Indicated by the Discounted Cash Flow Method: $2,700,000 Value Indicated by the Direct Capitalization Method: $2,800,000 Income Capitalization Approach Reconciliation: $2,800,000
Software : ARGUS Ver. 11.0.04 File : Cascade 2004 ARGUS File Revised Property Type: Apartment Portfolio Cascade Apartments SCHEDULE OF PROSPECTIVE CASH FLOW In Inflated Dollars for the Fiscal Year Beginning 5/1/2004 Year 1 Year 2 Year 3 Year 4 For the Years Ending Apr-2005 Apr-2006 Apr-2007 Apr-2008 ----------- ---------- ---------- ---------- OPERATING RATIOS Total Number of Units 86 86 86 86 Average Occupancy 98.84% 100.00% 100.00% 100.00% Avg Monthly Rent per Occ Area 0.49 0.49 0.50 0.51 Avg Monthly Rent per Occ Unit 626.60 626.36 638.75 651.52 Expense Ratio to Operating Inc 52.20% 53.10% 52.66% 53.12% Expenses per Unit Area 2.86 2.95 3.04 3.12 Expenses per Unit 3,630.09 3,735.67 3,851.08 3,963.03 POTENTIAL GROSS REVENUE Potential Market Rent $646,404 $646,404 $659,328 $672,516 Loss to Lease (7,267) (152) (159) ----------- ---------- ---------- ---------- Potential Rental Revenue 639,137 646,404 659,188 672,369 ----------- ---------- ---------- ---------- Scheduled Base Rental Revenue 639,137 646,404 659,188 672,369 Other Income 23,650 24,359 25,090 25,843 Employee Unit Discounts (9,720) (10,012) (10,312) (10,621) Rent Concessions (7,000) (7,210) (2,122) (2,185) ----------- ---------- ---------- ---------- TOTAL POTENTIAL 646,067 653,541 671,844 685,406 GROSS REVENUE General Vacancy (44,740) (45,248) (39,551) (40,342) Collection Loss (3,230) (3,268) (3,359) (3,427) ----------- ---------- ---------- ---------- EFFECTIVE GROSS REVENUE 598,097 605,025 628,934 641,637 ----------- ---------- ---------- ---------- OPERATING EXPENSES Management Fee 29,905 30,251 31,447 32,082 Total Payroll and Burden 111,800 115,154 118,609 122,167 General and Administrative 10,750 11,073 11,405 11,747 Marketing and Promotion 3,440 3,543 3,649 3,759 Maint & Repair & Contract Serv 34,400 35,432 36,495 37,590 Utilities 44,033 45,619 46,987 48,397 Insurance 25,800 26,574 27,371 28,192 Real Estate Taxes 52,060 53,622 55,230 56,887 ----------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES 312,188 321,268 331,193 340,821 ----------- ---------- ---------- ---------- NET OPERATING INCOME 285,909 283,757 297,741 300,816 ----------- ---------- ---------- ---------- LEASING & CAPITAL COSTS Replacement Reserves 21,500 22,145 22,809 23,494 Capital Improvements 66,250 ----------- ---------- ---------- ---------- TOTAL LEASING & CAPITAL COSTS 87,750 22,145 22,809 23,494 ----------- ---------- ---------- ---------- CASH FLOW BEFORE DEBT SERVICE $198,159 $261,612 $274,932 $277,322 & TAXES ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Year 5 Year 6 Year 7 Year 8 For the Years Ending Apr-09 Apr-2010 Apr-11 Apr-12 ---------- ----------- ----------- --------- OPERATING RATIOS Total Number of Units 86 86 86 86 Average Occupancy 100.00% 100.00% 100.00% 100.00% Avg Monthly Rent per Occ Area 0.52 0.53 0.55 0.56 Avg Monthly Rent per Occ Unit 664.55 677.84 691.40 705.23 Expense Ratio to Operating Inc 53.58% 54.05% 54.52% 54.99% Expenses per Unit Area 3.22 3.31 3.40 3.50 Expenses per Unit 4,078.28 4,196.88 4,319,00 4,444.69 POTENTIAL GROSS REVENUE Potential Market Rent $685,968 $699,684 $713,676 $727,944 Loss to Lease (164) (161) (162) (161) ----------- ---------- ----------- -------- Potential Rental Revenue 685,816 699,535 713,526 727,795 ------------ ---------- ---------- ---------- Scheduled Base Rental Revenue 685,816 699,535 713,526 727,795 Other Income 26,618 27,417 28,239 29,087 Employee Unit Discounts (10,940) (11,268) (11,606) (11,954) Rent Concessions (2,251) (2,319) (2,388) (2,460) ----------- ---------- ---------- ---------- TOTAL POTENTIAL 699,243 713,365 727,771 742,468 GROSS REVENUE General Vacancy (41,149) (41,972) (42,812) (43,668) Collection Loss (3,496) (3,567) (3,639) (3,712) ----------- ---------- ---------- --------- EFFECTIVE GROSS REVENUE 654,598 667,826 681,320 695,088 ----------- ---------- ----------- --------- OPERATING EXPENSES Management Fee 32,730 33,391 34,066 34,754 Total Payroll and Burden 125,832 129,607 133,495 137,500 General and Administrative 12,099 12,462 12,836 13,221 Marketing and Promotion 3,872 3,988 4,108 4,231 Maint & Repair & Contract Serv 38,718 39,879 41,075 42,308 Utilities 49,849 51,344 52,885 54,471 Insurance 29,038 29,909 30,807 31,731 Real Estate Taxes 58,594 60,352 62,162 64,027 ----------- ---------- ---------- --------- TOTAL OPERATING EXPENSES 350,732 360,932 371,434 382,243 ----------- ---------- ---------- --------- NET OPERATING INCOME 303,866 306,894 309,886 312,845 ----------- ---------- ---------- --------- LEASING & CAPITAL COSTS Replacement Reserves 24,198 24,924 25,672 26,442 Capital Improvements ----------- ---------- ---------- --------- TOTAL LEASING & CAPITAL COSTS 24,198 24,924 25,672 26,442 ----------- ---------- ---------- --------- CASH FLOW BEFORE DEBT SERVICE $279,668 $281,970 $284,214 $286,403 & TAXES ----------- ---------- ---------- --------- ----------- ---------- ---------- ---------- Year 9 Year 10 Year 11 For the Years Ending Apr-13 Apr-14 Apr-15 ----------- ---------- ---------- OPERATING RATIOS Total Number of Units 86 86 86 Average Occupancy 100.00% 100.00% 100.00% Avg Monthly Rent per Occ Area 0.57 0.58 0.59 Avg Monthly Rent per Occ Unit 719.33 733.72 748.39 Expense Ratio to Operating Inc 55.47% 55.96% 56.44% Expenses per Unit Area 3.61 3.71 3.82 Expenses per Unit 4,574.08 4,707.23 4,844.36 POTENTIAL GROSS REVENUE Potential Market Rent $742,512 $757,356 $772,512 Loss to Lease (173) (169) (182) ----------- ---------- ---------- Potential Rental Revenue 742,351 757,199 772,342 ----------- ---------- ---------- Scheduled Base Rental Revenue 742,351 757,199 772,342 Other Income 29,959 30,858 31,784 Employee Unit Discounts (12,313) (12,682) (13,063) Rent Concessions (2,534) (2,610) (2,688) ----------- ---------- ---------- TOTAL POTENTIAL GROSS REVENUE 757,463 772,765 788,375 General Vacancy (44,541) (45,432) (46,341) Collection Loss (3,787) (3,864) (3,942) ----------- ---------- --------- EFFECTIVE GROSS REVENUE 709,135 723,469 738,092 ----------- ---------- ---------- OPERATING EXPENSES Management Fee 35,457 36,173 36,905 Total Payroll and Burden 141,625 145,874 150,250 General and Administrative 13,618 14,026 14,447 Marketing and Promotion 4,358 4,488 4,623 Maint & Repair & Contract Serv 43,577 44,884 46,231 Utilities 56,105 57,788 59,522 Insurance 32,683 33,663 34,673 Real Estate Taxes 65,948 67,926 69,964 ----------- ---------- ---------- TOTAL OPERATING EXPENSES 393,371 404,822 416,615 ----------- ---------- ---------- NET OPERATING INCOME 315,764 318,647 321,477 ----------- ---------- ---------- LEASING & CAPITAL COSTS Replacement Reserves 27,236 28,053 28,894 Capital Improvements ----------- ---------- ---------- TOTAL LEASING & CAPITAL COSTS 27,236 28,053 28,894 ----------- ---------- ---------- CASH FLOW BEFORE DEBT SERVICE $288,528 $290,594 $292,583 & TAXES ----------- ---------- ---------- ----------- ---------- ----------
Software : ARGUS Ver. 11.0.04 File : Cascade 2004 ARGUS File Revised Property Type: Apartment Portfolio Cascade Apartments PROSPECTIVE PRESENT VALUE Cash Flow Before Debt Service plus Property Resale Discounted Annually (Endpoint on Cash Flow & Resale) over a 10-Year Period For the P.V. of P.V. of Analysis Year Annual Cash Flow Cash Flow Period Ending Cash Flow @) 10.50% @) 10.75% - -------- --------- ----------- --------- ----------- Year 1 Apr-2005 $198,159 $179,329 $178,925 Year 2 Apr-2006 261,612 214.256 213,289 Year 3 Apr-2007 274,932 203,770 202,393 Year 4 Apr-2008 277,322 186,009 184,335 Year 5 Apr-2009 279,668 169,759 167,852 Year 6 Apr-2010 281,970 154,892 152,806 Year 7 Apr-2011 284,214 141,289 139,071 Year 8 Apr-2012 286,403 128,849 126,540 Year 9 Apr-2013 288,528 117,470 115,105 Year 10 Apr-2014 290,594 107 ,069 104,677 --------- ----------- ---------- ----------- Total Cash Flow 2,723,402 1,602,692 1,584,993 Property Resale @ 10.25% Cap 3,073,634 1,132,477 1,107,171 ----------- ---------- ----------- Total Property Present Value $2,735,169 $2,692,164 ----------- ---------- ----------- Rounded 10 Thousands $2,735,000 $2,692,000 ----------- ---------- ----------- Per Unit 31,804 31,304 PERCENTAGE VALUE DISTRIBUTION Prospective Income 58.60% 58.87% Prospective Property Resale 41.40% 41.13% ----------- ---------- ----------- 100.00% 100.00% For the P.V. of P.V. of P.V. of Analysis Year Cash Flow Cash Flow Cash Flow Period Ending @) 11.00% @) 11.25% @) 11.50% - -------- --------- ----------- ---------- ----------- Year 1 Apr-2005 $178,522 $178,120 $177,721 Year 2 Apr-2006 212,330 211,377 210,430 Year 3 Apr-2007 201,028 199,676 198,336 Year 4 Apr-2008 182,680 181,044 179,426 Year 5 Apr-2009 165,970 164,113 162,281 Year 6 Apr-2010 150,752 148,731 146,742 Year 7 Apr-2011 136,894 134,756 132,654 Year 8 Apr-2012 124,278 122,061 119,889 Year 9 Apr-2013 112,793 110,532 108,321 Year 10 Apr-2014 102,343 100,066 97,845 ----------- ----------- ----------- Total Cash Flow 1,567,590 1,550,476 1,533,645 Property Resale @ 10.25% Cap 1,082,486 1,082,486 1,058,405 ----------- ----------- ----------- Total Property Present Value $2,650,076 $2,608,881 $2,568,557 ----------- ----------- ----------- Rounded 10 Thousands $2,650,000 $2,609,000 $2,569,000 ----------- ----------- ----------- Per Unit 30,815 30,336 29,867 PERCENTAGE VALUE DISTRIBUTION Prospective Income 59.15% 59.43% 59.71% Prospective Property Resale 40.85% 40.57% 40.29% ---------- ---------- ----------- 100.00% 100.00% 100.00%
ASSUMPTIONS AND LIMITING CONDITIONS "Appraisal" means the appraisal report and opinion of value stated therein, to which these Assumptions and Limiting Conditions are annexed. "Property" means the subject of the Appraisal. "C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the Appraisal. "Appraiser" or "Appraisers. means the employee(s) of C&W who prepared and signed the Appraisal. General Assumptions This appraisal is made subject to the following assumptions and limiting conditions: 1. No opinion is intended to be expressed and no responsibility is assumed for the legal description or for any matters, which are legal in nature or require legal expertise or specialized knowledge beyond that of a real estate appraiser. Title to the Property is assumed to be good and marketable and the Property is assumed to be free and clear of all liens unless otherwise stated. No survey of the Property was undertaken. 2. The information contained in the Appraisal or upon which the Appraisal is based has been gathered from sources the Appraiser assumes to be reliable and accurate. Some of such information may have been provided by the owner of the Property. Neither the Appraiser nor C&W shall be responsible for the accuracy or. completeness of such information, including the correctness of opinions, dimensions, sketches, exhibits and factual matters. 3. The opinion of value is only as of the date stated in the Appraisal. Changes since that date in external and market factors or in the Property itself can significantly affect property value. 4. The Appraisal is to be used in whole and not in part. No part of the Appraisal shall be used in conjunction with any other appraisal. Publication of the Appraisal or any portion thereof without the prior written consent of C&W is prohibited. Except as may be otherwise stated in the letter of engagement, the Appraisal may not be used by any person other than the party to whom it is addressed or for purposes other than that for which it was prepared. No part of the Appraisal shall be conveyed to the public through advertising, or used in any sales or promotional material without C&Ws prior written consent. Reference to the Appraisal Institute or to the MAl designation is prohibited, except as it relates to the collaboration between C&W and the Appraisal Institute relative to the Real Estate Outlook publication. 5. Except as may be otherwise stated in the letter of engagement, the Appraiser shall not be required to give testimony in any court or administrative proceeding relating to the Property or the Appraisal. 6. The Appraisal assumes (a) responsible ownership and competent management of the Property; (b) there are no hidden or unapparent conditions of the Property. subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning and environmental regulations and laws, unless noncompliance is stated, defined and analyzed in the Appraisal; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value opinion contained in the Appraisal is based. 7. The physical condition of the improvements analyzed within the Appraisal is based on visual inspection by the Appraiser or other person identified in the Appraisal. C&W assumes no responsibility for the soundness of structural members nor for the condition of mechanical equipment, plumbing or electrical components. 8. The projected potential gross income referred to in the Appraisal may be based on lease summaries provided by the owner or third parties. The Appraiser has not reviewed lease documents and assumes no responsibility for the authenticity or completeness of lease information provided by others. C&W recommends that legal advice be obtained regarding the interpretation of lease provisions and the contractual rights of parties. 9. The projections of income and expenses are not predictions of the future. Rather, they are the Appraiser's opinion of current market thinking on future income and expenses. The Appraiser and C&W make no warranty or representation that these projections will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraise~s task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the Appraisal, envisages for the future in terms of rental rates, expenses, supply and demand. 10. Unless otherwise stated in the Appraisal, the existence of potentially hazardous or toxic materials, which may have been used in the construction or maintenance of the improvements or may be located at or about the Property, was not analyzed in arriving at the opinion of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the Property. The Appraisers are. not qualified to detect such substances. C&W recommends that an environmental expert be employed to determine the impact of these matters on the opinion of value. 11. Unless otherwise stated in the Appraisal, compliance with the requirements of the Americans With Disabilities Act of 1990 (ADA) has not been analyzed in arriving at the opinion of value. Failure to comply with the requirements of the ADA may adversely affect the value of the property. C&W recommends that an expert in this field be employed. 12. Additional work requested by the client beyond the scope of this assignment will be billed at our prevailing hourly rate. Preparation for court testimony, update valuations. additional research, depositions, travel or other proceedings will be billed at our prevailing hourly rate, plus reimbursement of expenses. 13. The reader acknowledges that Cushman & Wakefield Denver has been retained hereunder as an independent contractor to perform the services described herein and nothing in this agreement shall be deemed to create any other relationship between us. This assignment shall be deemed concluded and the services hereunder completed upon delivery to you of the appraisal report discussed herein. 14. This study has not been prepared for use in connection with litigation and this document is not suitable for use in a litigation action. Accordingly, no rights to expert testimony, pretrial or other conferences, deposition, or related services are included with this appraisal. If, as a result of this undertaking, C&W or any of its principals, its appraisers or consultants are requested or required to provide any litigation services, such shall be subject to the provisions of the C&W engagement letter or, if not specified therein, subject to the reasonable availability of C&W and/or said principals or appraisers at the time and shall further be subject to the party or parties requesting or requiring such services paying the then-applicable professional fees and expenses of C&W either in accordance with the provisions of the engagement letter or arrangements at the time, as the case may be. ASSUMPTIONS AND LIMITING CONDITIONS Extraordinary Assumptions An extraordinary assumption is defined as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis: (USPAP2001 Edition, ASS oIThe Appraisal Foundation, 1/1/2001, page 2). Our conversations with the maintenance supervisor indicated that the subject property experienced soil settlement in some of the concrete stairs and carports. We did not receive a copy of structural tests and we assume throughout this analysis that there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them). Hypothetical Conditions A hypothetical condition is defined as "that which is contrary to what exists, but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis: (USPAP 2001 Edition, ASS oIThe Appraisal Foundation, 1/1/2001, page 3). This appraisal employs no hypothetical conditions. CERTIFICATION OF APPRAISAL We certify that, to the best of our knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions. 3. We have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. 4. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. 5. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. 6. Our compensation for completing this assignment is not contingent upon 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. 7. Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Siandards of Professional Appraisal Praclice of the Appraisal Foundation and the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. 8. Arod B. Javier made a personal inspection of the property that is the subject of this report. Guy DiRienzo, MAl, Managing Director, Valuation Advisory Services, reviewed and approved the report but did not inspect the property. 9. No one provided significant real property appraisal assistance to the persons signing this report. 10. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 11. As of the date of this report, Appraisal Institute continuing education for Arod B. Javier and Guy DiRienzo, MAl is current. Arod B. Javier Associate Appraiser Colorado Certified General Appraiser License No. EMPTY arodjavier@cushwake.com 303-813-6493 Office Direct 303-813-6499 Fax Guy DiRienzo, MAl Managing Director Kansas Certified General Appraiser License No. G-1420 guy-dirienzo@cushwake.com 303-813-6443 303-813-6499 Addenda Contents ADDENDUM A: Qualifications of the Appraisers EX-99 6 sir1_sctoi041505exh5.txt EXH 5 APPRAISAL HIDDEN VALLEY COMPLETE APPRAISAL OF REAL PROPERTY Hidden Valley Exchange Retail Center 3010 South State Route 291 Independence, Jackson County, Missouri 64058 IN A RESTRICTED APPRAISAL REPORT As of 4/20/04 Prepared For: SPECS, Inc. 4200 Blue Ridge Boulevard, Suite LH-06 Kansas City, Missouri 64133 Prepared By: Cushman & Wakefield of Illinois, Inc. Valuation Services, Advisory Group 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 C&W File 10: 04-248-04 Cushman & Wakefield Cushman & Wakefield of Illinois, Inc. 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 312.470.1817 Tel 312.470.2317 Fax randal_dawson@cushwake.com April 30, 2004 Jim Hoyt General Partner SPECS, Inc. 4200 Blue Ridge Boulevard, Suite LH-06 Kansas City, Missouri 64133 Re: Complete Appraisal of Real Property In a Restricted Report Hidden Valley Exchange Retail Center 3010 South State Route 291 Independence, Jackson County, Missouri 64058 C&W File ID: 04-248-04 Dear Mr. Hoyt: In fulfillment of our agreement as outlined in the Letter of Engagement, we are pleased to transmit our complete appraisal report on the property referenced above. The value opinion reported below is qualified by certain assumptions, limiting conditions, certifications, and definitions, which are set forth in the report. We particularly call your attention to the following extraordinary assumptions and hypothetical conditions: Extraordinary Assumptions: This appraisal employs no extraordinary assumptions. Hypothetical Conditions: This appraisal employs no hypothetical conditions. This report was prepared for SPECS, Inc. and is intended only for their specified use. It may not be distributed to or relied upon by any other persons or entities without the written permission of Cushman & Wakefield Illinois, Inc. This appraisal report has been prepared in accordance with our interpretation of your institutions guidelines, Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the Uniform Standards of Professional Appraisal Practice (USPAP), including the Competency Provision. The property was inspected by and the report was prepared by Randal D. Dawson, MAI. This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we provide them with a restricted use report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. Jim Hoyt SPECS, Inc. April 30, 2004 Page 2 Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the market value of the leased fee estate of the referenced property, subject to the assumptions and limiting conditions, certifications, extraordinary and hypothetical conditions, if any, and definitions, "as-is" on April 20, 2004 is: ONE MILLION FOUR HUNDRED THOUSAND DOLLARS $1,400,000 Based on recent market transactions, as well as discussions with market participants, a sale of the subject property at the above-stated opinion of market value would have required an exposure time of approximately twenty-four (24) months. Furthermore, a marketing period of approximately twenty-four (24) months is currently warranted for the subject property. This letter is invalid as an opinion of value if detached from the report, which contains the text, exhibits, and Addenda. Respectfully submitted, CUSHMAN & WAKEFIELD OF ILLINOIS, INC. /S/ Randal D. Dawson - ------------------------------ Randal D. Dawson, MAI Associate Director Missouri Certified General Appraiser License No. RA-003304 randal- dawson@cushwake.com 312.470.1817 Office Direct 312.470.2317 Fax Common Property Name: Hidden Valley Exchange Retail Center Location: 3010 South State Route 291 Independence, Jackson County, Missouri 64058 The site is located east of Missouri Highway 291 approximately one mile north of US 70. Property Description: The property consists of a 1-story multi-tenant neighborhood shopping center containing 27,200 square feet of gross leasable area on a 2.08-acre parcel of land. Assessor's Parcel Number: 25-910-09-05-01-1-00-000 Interest Appraised: Leased Fee Estate Date of Value: April 20, 2004 Date of Inspection: April 20, 2004 Ownership: Secured Investment Resources, LP Occupancy: The subject property is 66.8% occupied by 10 tenants. Current Property Taxes Total Assessment: $423,726 2003/2004 Property Taxes:$36,779 Highest and Best Use If Vacant: A retail center developed to the highest density possible As Improved: As it is currently developed Site & Improvements Zoning: CP-2; Planned General Commercial District Land Area: 2.08 acres 90,591 square feet Number of Stories: 1 Year Built: 1986 Type of Construction: Steel and masonry Gross Building Area: 27,200 square feet Gross Leasable Area: - ------------------------ ------------- ------------------- -------------- Component Owned Area % of Total - ------------------------ ------------- ------------------- -------------- - ------------------------ ------------- ------------------- -------------- In-Line 27,200 SF Total Center GLA 27,200 SF 100% Total Owned GLA 27,200 SF 100% - ------------------------ ------------- ------------------- -------------- Parking Type: Surface Number of Parking Spaces: 90 SUMMARY OF SALIENT FACTS VALUE INDICATORS Income Capitalization Approach Discounted Cash Flow Projection Period: 11 years Holding Period: 10 years Terminal Capitalization Rate: 10.50% Internal Rate of Return: 12.50% Indicated Value: $1,400,000 Reconciled Value: $1,400,000 Per Square Foot (GLA): $51.47 FINAL VALUE CONCLUSION Market Value As-Is Leased Fee: $1,400,000 Per Square Foot (GLA): $51.47 Exposure Time: 24 months Marketing Time: 24 months INSURABLE VALUE Conclusion: $1,700,000 Extraordinary Assumptions and Hypothetical Conditions Extraordinary Assumptions An extraordinary assumption is defined by the Uniform Standards of Professional Appraisal Practice as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis." This appraisal employs no extraordinary assumptions. Hypothetical Conditions A hypothetical condition is defined by the Uniform Standards of Professional Appraisal Practice as "that which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis." This appraisal employs no hypothetical conditions. [PHOTO OMITTED] Exterior of Subject [PHOTO OMITTED] Exterior of Subject [PHOTO OMITTED] Street View Facing North [PHOTO OMITTED] Street View Facing South [PHOTO OMITTED] Rear of Subject [PHOTO OMITTED] Rear of Subject TABLE OF CONTENTS INTRODUCTION 1 REGIONAL MAP 5 REGIONAL ANALYSIS 6 LOCAL AREA MAP 13 LOCAL AREA ANALYSIS 14 RETAIL MARKET & TRADE AREA ANALYSIS 15 SITE DESCRIPTION 25 IMPROVEMENTS DESCRIPTION 26 REAL PROPERTY TAXES AND ASSESSMENTS 29 Z0NING 30 HIGHEST AND BEST USE 31 VALUATION PROCESS 33 INCOME CAPITALIZATION APPROACH 35 RECONCILIATION AND FINAL VALUE OPINION 50 INSURABLE VALUE 51 ASSUMPTIONS AND LIMITING CONDITIONS 52 CERTIFICATION 0F APPRAISAL 55 ADDENDA 56 INTRODUCTION Identification of Property Common Property Name: Hidden Valley Exchange Retail Center Location: 3010 South State Route 291 Independence, Jackson County, Missouri 64058 The site is located east of Missouri Highway 291 approximately one mile north of US 70. Property Description: The property consists of a 1-story multi-tenant neighborhood shopping center containing 27,200 square feet of gross leasable area on a 2.08-acre parcel of land. Assessor's Parcel Number: 25-910-09-05-01-1-00-000 Property Ownership and Recent History Current Ownership: Secured Investment Resources, LP Sale History: To the best of our knowledge, the property has not transferred within the past three years Current Disposition: To the best of our knowledge, the property is not under contract of sale nor is it being marketed for sale. Intended Use and Users of the Appraisal This appraisal is intended to provide an opinion of the market value of the leased fee interest in the property for the exclusive use of SPECS, Inc. in evaluating potential financing. All other uses and users are unintended, unless specifically stated in the letter of transmittal. Dates of Inspection and Valuation The value conclusion reported herein is as of April 20, 2004. The property was inspected on April 20, 2004 by Randal D. Dawson, MAI Property Rights Appraised Leased Fee interest. Scope of the Appraisal This is a complete appraisal presented in a Restricted report, intended to comply with the reporting requirements set forth under the Uniform Standards of Professional Appraisal Practice (US PAP) for a Restricted Appraisal Report. In addition, the report was also prepared to conform to the requirements of the Code of Professional Ethics of the Appraisal Institute and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Title XI Regulations. In preparation of this appraisal, we analyzed rental data, and considered the input of buyers, sellers, brokers, property developers and public officials. Additionally, we investigated the general regional economy as well as the specifics of the local area of the subject. The scope of this appraisal required collecting primary and secondary data relative to the subject property. The depth of the analysis is intended to be appropriate in relation to the significance of the appraisal issues as presented herein. The data have been analyzed and confirmed with sources believed to be reliable, whenever possible, leading to the value conclusions set forth in this report. In the context of completing this report, we have made a physical inspection of the subject property. The valuation process involved utilizing generally accepted market-derived methods and procedures considered appropriate to the assignment. This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we provide them with a restricted use report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. Definitions of Value, Interest Appraised and Other Terms The following definitions of pertinent terms are taken from the Dictionary of Real Estate Appraisal, Fourth Edition (2002), published by the Appraisal Institute, as well as other sources. Market Value Market value is one of the central concepts of the appraisal practice. Market value is differentiated from other types of value in that it is created by the collective patterns of the market. A current economic definition agreed upon by agencies that regulate federal financial institutions in the United States of America follows, taken from the glossary of the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and acting in what they consider their own best interests; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Fee Simple Estate Absolute ownership unencumbered by any other interest or estate, subject to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Leased Fee Estate An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease. Leasehold Estate The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions. Market Rent The rental income that a property would most probably command on the open market, indicated by the current rents paid and asked for comparable space as of the date of appraisal. Cash Equivalent A price expressed in terms of cash, as distinguished from a price expressed totally or partly in terms of the face amounts of notes or other securities that cannot be sold at their face amounts. Market Value As Is on Appraisal Date The value of specific ownership rights of an identified parcel of real estate as of the effective date of the appraisal; related to what physically exists and excludes all assumptions concerning hypothetical conditions. Prospective Value Upon Completion of Construction The value of a property on the date that construction is completed, based on market conditions projected to exist as of that completion date. This value is not the market value as of a specified future date, but rather is a projected value based on assumptions that mayor may not occur. This value factors in all costs associated to lease-up the property to stabilized occupancy. Prospective Value Upon Stabilized Occupancy The value of a property at a point in time when all improvements have been physically constructed and the property has been leased to its optimum level of long term occupancy. At such point, all capital outlays for tenant improvements, leasing commissions, marketing costs, and other carrying charges are assumed to have been incurred. Exposure Time and Marketing Time Exposure Time Under Paragraph 3 of the Definition of Market Value, the value opinion presumes that "A reasonable time is allowed for exposure in the open market". Exposure time is defined as the length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at the market value on the effective date of the appraisal. Exposure time is presumed to precede the effective date of the appraisal. The reasonable exposure period is a function of price, time and use. It is not an isolated opinion of time alone. Exposure time is different for various types of real estate and under various market conditions. As noted above, exposure time is always presumed to precede the effective date of appraisal. It is the length of time the property would have been offered prior to a hypothetical market value sale on the effective date of appraisal. It is a retrospective opinion based on an analysis of recent past events, assuming a competitive and open market. It assumes not only adequate, sufficient and reasonable time but adequate, sufficient and a reasonable marketing effort. Exposure time and conclusion of value are therefore interrelated. Based on our review of national investor surveys, discussions with market participants and information gathered during the sales verification process, a reasonable exposure time for the subject property at the value concluded within this report would have been approximately twenty-four (24) months. This assumes an active and professional marketing plan would have been employed by the current owner. Marketing Time Marketing time is an opinion of the time that might be required to sell a real property interest at the appraised value. Marketing time is presumed to start on the effective date of the appraisal and take place subsequent to the effective date of the appraisal. The opinion of marketing time uses some of the same data analyzed in the process of estimating reasonable exposure time and it is not intended to be a prediction of a date of sale. We believe, based on the assumptions employed in our analysis, as well as our selection of investment parameters for the subject, that our value conclusion represents a price achievable within twenty-four (24) months. Legal Description The subject site is identified by Jackson County as 25-910-09-05-01-1-00-000. The legal description is presented in the Addenda of the report. [PHOTO OMITTED] REGIONAL MAP REGIONAL ANALYSIS Introduction The short- and long-term value of real estate is influenced by a variety of factors and forces that interact within a given region. Regional analysis serves to identify those forces that affect property value, and the role they play within the region. The four primary forces that influence real property value include environmental characteristics, governmental forces, social factors, and economic trends. These forces determine the supply and demand for real property, which, in turn, affect market value. . The subject property is located in the City of Independence in eastern portion of the Kansas City MSA. Economic & Demographic Profile The following profile of the Kansas City MSA was provided by Economy.com, a leading provider of economic, financial, and industry information. Economy.com's core assets of proprietary editorial and research content as well as economic and financial databases are a source of information on national and regional economies, industries, financial markets, and demographics. The company is staffed with economists, data specialists, programmers, and online producers who create a proprietary database. Economy.com's approach to the analysis of the U.S. economy consists of building a large-scale, simultaneous-equation econometric models, which they simulate and adjust with local market information, creating a model of the U.S. macro economy that is both top-down and bottom-up. As a result, those variables that are national in nature are modeled nationally while those that are regional in nature are modeled regionally. Thus, interest rates, prices, and business investment are modeled as national variables; key sectors such as labor markets (employment, labor force), demographics (population, households, and migration), and construction activity (housing starts and sales) are modeled regionally and then aggregated to national totals. This approach allows local information to influence the macroeconomic outlook. Therefore, changes in fiscal policy at the national level (changes in tax rates, for example) are translated into their corresponding effects on state economies. At the same time, the growth patterns of large states, such as California, New York, and Texas, playa major role in shaping the national outlook. In addition on a regional basis, the modeling system is explicitly linked to other states through migration flows and unemployment rates. Economy.com's model structure also takes into account migration between states. [GRAPHIC OMITTED] Kansas City Employment Growth Rank Best=1 Worst=325 2002-04 265 5th quintile 2002-07 222 4th quintile MSA Life Cycle Phase Growth/Mature Best=1 Worst=325 Vitality 21 1st quintile Cost of doing business U.S.=100% 95% Cost of Living U.S.=100% 97% - --------------------------------------------------------------- [Graphic Omitted-Line Graph of Relative Employment Performance- 1990-2007 - --------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2002 Indicators 56.7 59.8 63.0 66.3 69.4 69.4 70.8 Gross Metro Product, C$B 4.9 5.3 5.3 5.3 4.6 0.0 2.1 % Change 881.4 916.5 944.2 965.3 981.6 967.2 949.8 Total Employment (000) 2.4 4.0 3.0 2.2 1.7 -1.5 -1.8 % Change 4.1 3.7 3.8 3.0 3.3 4.4 5.7 Unemployment Rate 5.2 5.9 7.9 5.3 7.7 3.4 1.8 Personal Income Growth 1,699.9 1,722.7 1,742.8 1,761.9 1,782.2 1,804.0 1,828.2 Population, (000) 9,695 9,396 10,118 11,231 9,237 9,714 10,746 Single-Fam1ily Permits 2,649 4,116 3,685 5,160 3,640 5,196 3,068 Multifamily, Permits 98.8 106.4 113.7 120.4 125.9 134.6 137.1 Existing Home Price ($Ths) 5,955 6,397 11,220 9,331 8,207 19,181 23,445 Mortgage Originations ($Mil) 12.1 12.0 8.8 7.9 8.4 9.7 11.6 Net Migration (000) 6,709 7,664 8,419 7,528 7,193 9,239 10,811 Personal Bankruptcies
Indicators 2003 2004 2005 2006 2007 Gross Metro Product, C$B 72.3 74.3 76.6 79.1 81.4 % Change 2.1 2.8 3.1 3.2 2.9 Total Employment (000) 936.6 942.6 962.0 980.4 994.4 % Change -1.4 0.6 2.1 1.9 1.4 Unemployment Rate 5.5 5.4 5.3 5.1 4.9 Personal Income Growth 2.2 3.9 4.3 4.4 4.7 Population, (000) 1,846.3 1,854.9 1,866.1 1,877.8 1,886.6 Single- Fam1ily Permits 11,813 10,981 9,631 9,399 9,197 Multifamily, Permits 2,723 4,563 4,104 4,366 4,563 Existing Home Price ($Ths) 145.6 154.3 160.2 164.6 172.2 Mortgage Originations ($Mil) 31,420 15,798 10,267 10,799 11,417 Net Migration (000) 5.3 -4.1 -1.7 -1.2 -4.2 Personal Bankruptcies 11,953 11,417 10,394 10,270 10,380
STRENGTHS & WEAKNESSES STRENGTHS - - Favorable cost structure. - - Well developed transportation and distribution network. - - Very large presence of federal government jobs. WEAKNESSES - - Overwhelming dependence on Sprint and telecom. - - KAN suffers from suburban sprawl. - ------------------------------------------------------------- [GRAPHIC OMITTED] CURRENT EMPLOYMENT TRENDS December 2003 Employment Growth % Change Year Ago Total -1.1 Construction -5.3 Manufacturing 4.1 Trade 0.0 Trans/Utilities 0.0 Information -4.5 Financial Activities 2.0 Prof & Business Svcs -1.9 Edu & Health Svcs -2.4 Leisure & Hospitality -4.7 Other Services -2.1 Government 0.1 - ------------------------------------------------------------- FORECAST RISKS [Graphic Omitted-Down Arrows] Short Term [Down Arrow] Long Term [Down Arrow] Risk-Adjusted Return '02-'07 0.35% UPSIDE - - Development of biotech takes hold beyond current expectations, yielding significant new jobs and high incomes. DOWNSIDE - - Sprint is bought out and its remaining labor force is shifted to other locations. - - New growth industries fail to emerge in the wake of Sprint's downsizing. - ------------------------------------------------------------- Recent Performance. Kansas City's economy continues to weaken. While the state has enjoyed a modest turnaround over the last 12 months, KAN has skidded further into recession due to lingering weakness in the business services, healthcare, tourism and information industries. Manufacturing actually rose in the latter half of 2003 thanks in part to vehicle production, but that growth is not expected to continue. The pace of homebuilding has stabilized at a high level and is expected to decelerate over the next few quarters. Office and industrial markets remain bloated with excess inventory, although vacancy rates are no longer rising. Life sciences. Thanks to its several research institutions, KAN ranks among the top 50 metro areas for biotech research, according to the Brookings Institution. The Stowers Institute for Medical Research, home to around 100 scientists and a $1.6 billion endowment, is the most promising of KAN's facilities. The institute now plans to double its research space within five years. The Midwest Research Institute also carries out pharmaceutical and biotech research for government and industry. The faculty at the university of Kansas Medical Center carries out tens of millions of dollars in externally funded research annually. And Children's Mercy Hospital performs research in pediatric pharmacology. With the expansion of the Stowers Institute, funding inflows will accelerate over the next several years, helping KAN to attract skilled workers and venture capital. Income trends. Personal income growth in KAN is projected to lead the state and region, but lag the national average. However, on a per capita basis, income growth should beat the U.S. average, showing that what will really constrain income growth in KAN is a poor population trend. Kan and the U.S. had a nearly identical pace of population growth over the last decade, but in the coming ten years, KAN's growth is forecast to slow to just over half the U.S. rate, as migration flows, dominated by relocating baby boomers, shift to southern and western states favored by retirees. Boomers waiting longer to retire than had previous cohorts could postpone the migration wave or at least spread its impact over time. Still, the nation's demographic outlook places KAN's income growth at risk, which in turn will handicap the metro's income-driven sectors like the housing market, trade, and locally-oriented services. Economic diversity. One strong advantage for KAN's economy is its diverse industrial mix. According to Economy.com estimates, KAN ranks in the top 10% of metro areas in terms of industrial diversity. A broad industry array affords a measure of employment stability in downturns and also helps usher in recovery by exposing the local economy to the industries that turn around first. The one factor setting KAN apart is the area's large information industry. Telecom carriers alone account for upward of 20,000 local jobs or 2% of employment. And the information industry as a whole occupies twice the share of employment as it does nationally. Sprint's reorganization is ongoing, with the impact of its latest collaboration with IBM's Business Consulting Services likely to be zero to negative net job gains in KAN in the coming year. However, the information industry as a whole should advance by the second half, and its high wages will assure that gains in that industry are dispersed to other sectors of the economy like trade and housing. Kansas City's economy is floundering and its recover will come later and with less vigor than the nation's. Consolidation in telecom and manufacturing is a looming short-term risk. Longer term, KAN's diversity and its promising drivers, such as transportation, information and life sciences will keep the metro area growing on par with the U.S. average. David Givens February 2004 EMPLOYMENT & INDUSTRY TOP EMPLOYERS Sprint Corporation 21,000 Community Health Group 7,326 DST Systems, Inc. 6,232 Ford Motor Company 5,808 Hallmark Cards, Inc. 5,000 Saint Luke's Health System 4,123 General Motors Corporation 3,200 AT&T Corporation 3,154 SBC Communications, Inc. 3,000 Children's Mercy Hospital & Clinics 2,990 Turman Medical Center 2,801 University of Missouri-Kansas City 2,790 Honeywell, Inc. 2,789 KU Med 2,784 Cerner Corporation 2,626 Black & Veatch, LLP 2,552 UMB Financial Corporation 2,507 Applebee's International, Inc. 2,478 American Airlines 2,425 University of Kansas Medical Center 2,376 Source: The Business Journal, March 2003 Public Federal.......................................27,636 State.........................................12,011 Local.........................................97,038 2002 - ----------------------------------------------------------------- INDUSTRY DIVERSITY Most Diverse (U.S.) 1.0 0.80 KAN 0.74 0.60 0.40 0.20 0.00 Least Diverse EMPLOYMENT VOLATILITY DUE TO U.S. FLUCTUATIONS [GRAPHIC OMITTED-Bar Chart] Not due to US = 7% Due to US = 93% RELATIVE TO U.S. [Graphic Omitted-Bar Chart US: 100 KAN: 148 - ----------------------------------------------------------------
COMPARATIVE EMPLOYMENT AND INCOME % of Total Employment Average Annual Earnings Sector KAN MO US KAN MO US Construction 5.2% 5.0% 5.2% $44,724 $37,450 $39,845 Manufacturing 8.4% 12.0% 12.0% $49,004 $43,741 $48,756 Durable 57.0% 60.3% 62.0% nd $44,671 $50,404 Nondurable 43.0% 39.7% 38.0% nd $42,236 $45,969 Transport/Utilities4.9% 4.1% 3.6% $44,192 $39,474 $44,972 Wholesale Trade 5.0% 4.5% 4.4% $53,796 $47,434 $51,842 Retail Trade 11.3% 11.6% 11.7% $22,034 $20,067 $22,635 Information 5.5% 2.6% 2.6% $70,224 $74,881 $69,569 Financial Activities 7.4% 5.9% 6.0% $35,853 $29,676 $41,740 Prof. and Bus. Services 12.9% 11.3% 12.4% $42,515 $40,487 $43,053 Educ. and Health Services 11.1% 13.0% 12.5% $33,988 $31,414 $34,032 Leisure and Hosp. Services 9.3% 9.6% 9.0% $18,331 $17,014 $19,135 Other Services 4.6% 4.4% 3.9% $19,546 $17,992 $19,842 Government 14.4% 15.7% 16.2% $42,663 $37,342 $42,939 Source: Percent of total employment - Economy.com & BLS, 2002; Average annual earnings - BEA, 2001
- ------------------------------------ HOUSE PRICES [GRAPHIC OMITTED-Line Graph (1987-2003)] - ------------------------------------ CREDIT QUALITY Fitch: N/A Moody's: County = Aa1 LEADING INDUSTRIES NAICS Industry Employees (000) GVF Federal Government 27.6 4521 Department Stores 17.2 5171 Wired Telecommunications Carriers 15.6 6216 Home Health Care Services 13.9 5241 Insurance Carriers 13.8 5413 Architectural. Engineering, & Related Services 13.6 5511 Management of Companies and Enterprises 12.9 4529 Other General Merchandise Stores 12.1 5242 Agencies, Brokerages, & Insurance Related Act. 10.6 3231 Printing and Related Support Activities 10.2 4841 General Freight Trucking 10.1 7139 Other Amusement and Recreation industries 9.9 5111 Newspaper, Periodical, Book, & Directory Pub. 9.5 5411 Legal Services 9.2 8121 Personal Care Services 8.3 High-tech employment 54.4 As % of total employment 5.7 Source: BLS, Economy.com, 2002
- ---------------------------------------------------------
MIGRATION FLOWS Into Kansas City Number of Migrants Median Income Lawrence 1,940 24,630 St. Louis 1,492 29,015 Wichita 1,246 26,194 Chicago 1,159 45,833 St. Joseph 1,045 22,271 Topeka 982 26,131 Omaha 973 34,587 Dallas 840 57,084 Springfield 825 20,625 Denver 761 40,345 Total Inmigration 59,099 27,938 From Kansas City Lawrence 1,506 18,287 St. Louis 1,410 33,982 Wichita 1,033 33,148 Chicago 930 31,994 St. Joseph 856 39,506 Topeka 775 27,965 Omaha 724 35,498 Dallas 689 22,391 Springfield 682 20,447 Denver 653 43,280 Total Outmigration 53,170 28,093 Net Migration 5,929 -154
- ------------------------------------- NET MIGRATION, KAN [GRAPHIC OMITTED-Bar Chart] Domestic Foreign Total 1998 4,531 4,235 8,766 1999 3,556 4,324 7,880 2000 2,144 6,297 8,441 2001 4,048 5,690 9,738 2002 5,950 5,664 11,614 Source: IRS (top), 2002; Census Bureau & Economy.com, 2002
- ------------------------------------------------ PER CAPITA INCOME [GRAPHIC OMITTED-Bar Chart] 32,693 KAN 28,221 MO 30,413 US Source: Bureau of Economic Analysis, 2001 KANSAS CITY Homebuilding Due for a Pullback [GRAPHIC OMITTED-Line Graph (1991-2003)] Homebuilding in KAN has surged ahead of the underlying demographic drivers of demand. Residential permits issued over the last three years were nearly double the number of households formed over the same period. The macroeconomic situation has stimulated strong purchasing for several years, but those forces will abate as interest rates rise over the next few quarters. Also contributing to the buildup in housing inventory will be slower KAN population growth. Growth this year will be less than half the pace of 2002, constraining new building and price growth. KAN Gets a Small Share of Defense Funds Reaching Missouri [GRAPHIC OMITTED-Bar Chart] Defense budget increases have been a boon to some areas, but KAN is a comparatively small recipient of federal defense outlays. St. Louis receives a far higher share of Missouri's federal defense dollars. Defense procurement contracts measure less than 1% of gross product in KAN, compared with 3% for Missouri and 5% for St. Louis. Defense wages and salaries in KAN as a share of total are half the national average share. As defense budget increases decelerate over the next few years, the lack of a deep defense agglomeration will be less of a distinguishing characteristic between metro economies. KAN Manufacturing Declines Often More Extreme than U.S. [GRAPHIC OMITTED-Bar Chart] Four of KAN's eight largest manufacturing industries suffered larger percentage declines from 1993 to 2003 than at the U.S. level. Only transportation equipment did not decline over the decade, owing to strong U.S. auto sales. One boon to the industry has been the fact that Ford's Claycomo plant in KAN produces the F-150 pickup, one of the most popular domestic vehicles. That plant recently announced plans to layoff 200, however, after over-hiring last fall for the launch of 2005 models. Region's Manufacturing Outlook Sluggishly Improving [GRAPHIC OMITTED-Bar Chart] The Kansas City Fed's manufacturing survey of the tenth district shows a slow but steady improvement in manufacturers' sentiment. Demand expectations for six months hence, reflected in the new orders index, look better than at any time during 2003. Similar movements in the employment and capital expenditures indexes signal that KAN manufacturers themselves won't be the only ones to benefit from higher demand. Hiring will contribute positively to the overall labor market situation, and capital expenditures will filter through to other manufacturers, and to local trade and services vendors. Critical Observations The following bullet points summarize some of our general observations relating to the subject's region. Social Influences - - Approximately 1,854,900 million people live in the Kansas City metropolitan area. - - The population has increased approximately 1.3% annually and is forecast to reach 1,866,600by 2007. The areas of fastest population growth are located in the southeast, south and southwest portions of the MSA. - - Kansas City has historically had strong migration to the area, although with the reorganization of the telecom industry, migration may turn negative. Forecasts for 2004 indicate the first larger out-migration in over a decade. Most new residents are from Lawrence, St. Louis and Wichita, while residents migrating out of Kansas are going to Lawrence, St. Louis and Phoenix. - - The average per capita income in the MSA is $32,693, which is above the state ($28,221) and national ($30,413) average. The higher per capita may be attributed to a high percentage of skilled or educated workers, especially in the telecom and auto industry. Kansas City's percentage of the population over 25 with a bachelor's degree is higher than Chicago and St. Louis. - - The MSA has a low cost of living and a low cost of doing business. Economic Influences - - The largest employment sectors are Government (14.4%), Professional and Business Services (12.9%) and Retail Trade (11.3%). - - The top employers are Sprint Corporation, Community Health Group (formerly named Health Midwest) and DST Systems, Inc. - - As of January 2004, the unemployment rate for Kansas City was 5.7%, which is slightly above the state average of 5.4% and the national rate of 5.6%. - - The only industries experiencing a growth in employment between December 2002 and December 2003 were Manufacturing (4.1 %) and Financial Activities (2.0%). Construction had the largest decline of -5.3%. - -. Out of a total of 325 metropolitan statistical areas in the United States, Kansas City ranks 222 in terms of expected employment growth between 2002 and 2007. - - Sprint, a major driver of Kansas City's economy, began a major reorganization that included several layoffs, and continues to restructure. The latest attempt for recovery was announced in February 2004 to partner with IBM Business Consulting Services. This latest reorganization is thought to have little effect on job gains in the coming year. Sprint also vacated over 1 million square feet of office space in the downtown area and built a campus in the suburbs, making the downtown office vacancy rate (23%) substantially above the national average (16%). - - The life sciences and biotechnology industries are gaining momentum in the Kansas City area, which is valuable to help offset the area's over reliance on Sprint and the telecom industry. Kansas City ranks among the top 50 metro areas for biotech research. The Stowers Institute for medical Research is the leading company in this industry with over 100 scientists and $1.6 billion endowment. The company also has plans to double its research space within five years. Other promising companies include The Midwest Research Institute, The University of Kansas Medical Center and the Children's Mercy Hospital. Government Influences - - The Kansas City MSA includes the state capital of Kansas and benefits from the presence of government jobs. - - The government is supportive of business and is considered pro-growth. - - The present economic weakness in the economy has had a negative effect on State and local treasuries, resulting in cuts in services and an increased risk of higher taxes. However, it is noted that this circumstance is common among all MSA's. Environmental Influences - - The subject property is located in the Kansas City, Missouri Metropolitan Statistical Area, as defined by the United States Census Bureau. The Kansas City MSA includes 11 counties, 4 in Kansas (Johnson, Leavenworth, Miami, and Wyandotte), and 7 in Missouri (Cass, Clay, Clinton, Jackson, Lafayette, Platte, and Ray). The MSA includes more than 136 cities, the four largest of which are Kansas City, Missouri; Kansas City, Kansas; Overland Park, Kansas; and Independence, Missouri. - - Kansas City is among the most centrally located urban markets in the country, providing for superior marketing and distribution capabilities. It is the only major city located within 250 miles of both the geographic and population centers of the nation. Positioned in the heart of the farm belt at the confluence of the Kansas and Missouri Rivers, the city and its suburbs lie within 1 ,900:!: miles of nearly every point in the continental U.S., or half the distance from coast to coast. The MSA is approximately 793 miles from Atlanta, GA., 501 miles from Chicago, 489 miles from Dallas, 602 miles from Denver, and 435 miles from Minneapolis. - - Kansas City's major Interstates include 1-35 and 1-29, which run north and south, and 1-70,which runs east and west. The MSA also has two loop Interstates, 1-635 and 1-435. Interstate 35 connects with MSA with Wichita and Oklahoma City to the south and Des Moines to the north. Interstate 29 connects with Omaha to the north and terminates in Kansas City. 1-70 connects with St. Louis to the east and Denver to the west. Conclusion In light of the social and economic attributes of the greater Kansas City area, it is clear that the region benefits by the following: - - Favorable cost structure - - A transportation network that is well developed, making the metro area well positioned to further develop as a distribution hub. - - A large presence of government jobs, which adds stability to the local economy. - - Concurrently, there are inherent risks to the economic health of the metropolitan area, including the following: - - Overwhelming dependency on Sprint and the telecommunications industry - - Suburban sprawl In summary, the Precis report forecasts that the area's economic upswing will perform on average with the national average. The downtown office occupancy rate will continue to decrease due to the 10% vacancy left by Sprint and the ongoing decline in professional and business services. The strength of Kansas City before the recession was due to telecom, but because of Sprint's difficulties, that industry is no longer attracting labor to the area. With the poor outlook for Sprint and the lack of other growth drivers, Kansas City may experience the beginnings of a poor population trend. Kansas City needs to replace telecom with a new growth driver. If that is accomplished, the prospects for growth improve dramatically. The transportation, information and the life science industries are all positioned to step forward as major growth drivers for the area. Overall, we are generally reserved as the future outlook of the greater Kansas City area due to its over reliance on an unstable growth driver. [GRAPHIC OMITTED] LOCAL AREA MAP LOCAL AREA ANALYSIS Location The property is located in Jackson County, within the greater Independence area. Generally, the boundaries of the immediate area are Necessary Road on the east, Interstate 78 on the north, Lees Summit Road on the west and Interstate 70 on the south. Access Local area accessibility is generally good, relying on the following transportation arteries: Local: Access is good for north-south bound traffic via M-291 Highway and traffic east-west via Hidden Valley Road. Major roadways in the local area are asphalt paved, and are improved with concrete curbs and gutters, streetlights and sidewalks. Most are two lanes. There are no roadway improvements currently under construction or planned for the subject's neighborhood. On an overall basis, access to the subject's neighborhood is rated average. Regional: Interstate access is good with Interstate 70 located approximately 1 % mile south of the subject site. Nearby and Adjacent Uses The area is dominated by retail and commercial uses, with residential areas on the periphery of the commercial development. Nearby commercial uses in the area include community shopping centers, service stations/mini-marts, restaurants, fast food establishments, and small, professional offices. The area is considered to be in a stable stage of its life cycle. Supply and demand appears well balanced with few vacancies noted. Overall the predominant land use is retail and the local area is defined as a destination shopping district. This location provides convenient visibility and access to the site, and is within a casual dining destination area. The area is a destination shopping district which also includes a number of casual dining restaurants. Overall, the subject benefits from its good local and regional access. Special Hazards or Adverse Influences No hazards were noted in the immediate local area. Land Use Changes None noted. Conclusion The subject is located along a moderately traveled commercial artery with good exposure and accessibility. The interstate system is within close proximity and provides good regional access to the neighboring communities. The local area has experienced moderate growth over the last five years and the community appears stable. For the near term (2004) the area is expected to continue to perform moderately well. RETAIL MARKET & TRAD AREA ANALYSIS Definition of Market/ Trade Area Overview The subject is located in the Independence/Raytown Submarket. A retail center's trade area contains people who are likely to patronize that particular center. These customers are drawn by a given class of goods and services from a particular tenant mix. A center's fundamental drawing power comes from the strength of the anchor tenants, as well as the regional and local tenants, which complement and support the anchors. A successful combination of these elements creates a destination for customers seeking a variety of goods and services while enjoying the comfort and convenience of an integrated shopping environment. The subject is best described as a neighborhood center. A neighborhood center provides for the sale of convenience goods (foods, drugs, and sundries) and personal services (laundry and dry cleaning, barbering, shoe repairing, etc.) for the day-to-day living needs of the immediate neighborhood. It is built around a supermarket as the principal tenant and typically contains a gross leasable area of about 60,000 square feet. In practice, it may range in size from 30,000 to 100,000 square feet. Retail space the Kansas City MSA, as in many locales nationwide, has flourished relative to other commercial real estate sectors during the lingering period of economic weakness. Still, the Kansas City retail market has not escaped from the general real estate malaise. According to Reis's preliminary analysis, first quarter 2004 vacancy in the community and neighborhood center sector was 7.0%, up 60 basis points from a quarter earlier and among the highest averages reported by this source for this market since the early 1990s. No improvement is anticipated for a number of years to come. Still while vacancy remains relatively high, demand has shown some recent improvement, keeping pace with the recent increase in construction. Thus, in 2003 the volume of space added and the net absorption volume were identical at 280,000 square feet. These sums follow two years of minimal activity. Indeed, the delivery of 2.1 million square feet of new community-neighborhood center construction over the four-year period concluding with 2000 were followed by only 44,000 square feet of new space arriving on line over the two years following. For 2004, construction completions and net absorption area projected at 402,000 and 224,000 square feet, respectively. Rents are flat. Reis's early first quarter 2004 data on" "this market include an average asking rent estimate of $13.14 per square foot, down four cents from year-end. For 2003 overall asking and effective prices rose 1.9% and 0.6%, respectively, on average. Indeed, the market might consider itself fortunate to have avoided year-over-year rental losses in the recent period. For 2004 Reis anticipates improvement - increases of 2.4% and 1.5% for asking and effective rents - - CTMTexpects retail development to be led by "specialty stores and unique concepts such as Kansas City Life, and entertainment district proposed for downtown Kansas City that is to open in 2006. - - H&R Block Inc. made "the blockbuster announcement that Kansas City's downtown boosters have awaited for more than a year," according to a recent report in the Journal. Late in 2003 the firm announced plans to move to a 500,000-square-foot headquarters building at Main and 13th streets. "The headquarters' first phase, valued at $120 million, will fuel plans for a $280 million entertainment district that city officials call essential to the Kansas City area's future." - - Detail information on the Kansas City retail Metro area and Submarket data is located in the Addenda section of this report. TRAD AREA DEMOGRAPHICS - -------------------------------------------------------------------------------- 1.0-mile 3.0-mile 6.0-mile Radius Radius Radius Independence County Kansas Jackson City MSA - --------------- POPULATION STATISTICS - --------------- 2000 10,400 54,494 170,218 113,288 654,880 5,595,211 2003 10,445 54,709 169,351 111,957 655,201 5,697,731 2008 10,544 55,076 168,051 109,844 656,166 5,868,211 Compound Annual Change 2000 -2003 0.14% 0.13% -0.17% -0.39% 0.02% 0.61% 2003 - 2008 0.19% 0.13% -0.15% -0.38% 0.03% 0.59% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HOUSEHOLD STATISTICS - ------------- - ------------- 2000 4,357 22,724 69,459 47,390 266,294 2,194,594 2003 4,451 23,084 69,748 47,234 267,986 2,252,100 2008 4,620 23,696 70,250 46,970 271,032 2,349,911 Compound Annual Change 2000 - 2003 0.71% 0.53% 0.14% -0.11% 0.21% 0.87% 2003 -2008 0.75% 0.52% 0.14% -0.11% 0.23% 0.85% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AVERAGE HOUSEHOLD INCOME - ------------- - ------------- 1990 $54,500 $49,858 $51,735 $45,925 $50,583 $50,016 2003 $61,814 $56,077 $58,713 $51,678 $56,825 $55,904 2008 $69,524 $63,270 $67,790 $58,834 $65,587 $64,108 Compound Annual Change 1990 -2003 0.97% 0.91% 0.98% 0.91% 0.90% 0.86% 2003 -2008 2.38% 2.44% 2.92% 2.63% 2.91% 2.78% - ------------- - ------------- RETAIL SALES ANALYSIS Total Retail Sales ($Mil) $ 147 $ 751 $ 2,277 $ 1,527 $ 8,764 $ 73,550 General Merchandise 4 $ 18 $ 56 $ 37 $ 214 $ 1,423 Apparel & Accessory $ 6 $ 28 $ 86 $ 57 $ 333 $ 2,297 Furniture & Home Furnish.** 6 $ 31 $ 94 $ 63 $ 362 $ 2,864$ Other Sales*** 6 $ 32 $ 96 $ 64 $ 368 $ 3,089 - -------------- Total GAFO Sales 21 $ 109 $ 332 $ 221 $ 1,277 $ 9,673 Total Expenditure Potential* 275 $1,294 $ 4,095 $ 2,441 $15,228 $125,901 GAFO % of Total Retail Sales 14.65% 14.54% 14.58% 14.47% 14.58% 13.15% GAFO % of Total Expenditure Potential 7.81% 8.43% 8.11% 9.05% 8.39% 7.68% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SOURCE: Claritas, Inc. * Households x Total Household Income ** Includes Home Appliance, Radio, T.V. Stores *** "Other" Sales Estimated at 4.2% of Total Retail Sales - --------------------------------------------------------------------------------
[GRAPHIC OMITTED] CURRENT POPULATION DISTRIBUTION MAP [GRAPHIC OMITTED] POPULATION GROWTH MAP [GRAPHIC OMITTED] MEDIAN HOUSEHOLD INCOME DISTRIBUTION MAP Market Conditions and Trends Retail activity continues to be vibrant in Kansas City. Although the pace of retail development slowed in 2002, it accelerated again in 2003. Furthermore, developments that are coming on line are experiencing success. Part of the success may be attributed to a shift in focus from big boxes and strip centers to lifestyle centers, "retailtainment" projects and New Urbanism. By combining shopping with entertainment venues, developments are establishing "retailtainment" centers, thereby increasing their ability to draw and hold shoppers. The best Kansas City example of this, and the biggest story in Kansas City retail, continues to be the development around the Kansas International Speedway in Wyandotte County. Nebraska Furniture Mart, Great Wolf Lodge and the T-Bones minor-league baseball franchise opened in 2003. They were preceded by Cabela's. From its opening in August of 2002 to the end of that year Cabela's drew 2.4 million visitors. That made it the top attraction in the State of Kansas in 2002. In metropolitan Kansas City the only attractions to draw more visitors than Cabela's were the area casinos. Meanwhile, plans for the adjacent The Legends shopping center were expanded to more than one million square feet and will include a multi-plex theater. Bass Pro Shops, a direct competitor of Cabela's, is another potential "retailtainment" attraction, and also a highly sought-after retailer. Bass Pro considered several sites in the metro area for a 160,000- square-foot store. At the end of 2003 it appeared that a site in eastern Jackson County, southwest of Interstate 70 and Highway 291, had landed this big fish. However, it was not certain that Bass Pro would proceed. With a store in St. Louis, and its headquarters location in Springfield, Missouri, it may decide that another location in Missouri is not justified. Other developments go beyond "retailtainment" to include residential and office elements. New Urbanism embodies the idea of mixed-use, pedestrian- friendly urban environments similar to the appealing market centers of the past. Kansas City's Country Club Plaza, which was established in 1923, is the epitome of what is now thought of as New Urbanism. Zona Rosa in the Northland and Park Place in Johnson County are two current developments that use the Country Club Plaza as a model while seeking to create aesthetically appealing mixed-use walkable areas. Zona Rosa is a 93-acre development northwest of Interstate 29 and Barry Road. It will have tree-lined sidewalks and a park-like town square for community activities. Phase I, which includes 400,000 square feet of retail space, is to open in April of 2004. Park Place is planned for 29 acres in Leawood, in southeastern Johnson County. It will be a 1.2-million-square-foot project on 29 acres and will include 230,000 square feet of retail space plus office space, a hotel and residential condominiums. In more typical big box and shopping center developments, the home improvement category continues to be a winner. Lowe's plans two new stores in the area. A 135,000-square-foot store is planned for Wyandotte County, at a site close to Kansas City Kansas Community College. In the City of Liberty, in the eastern part of the Northland market, a 160,000-square-foot store has received City approval and will start soon. Specialty retailing has produced a significant part of recent market growth. Ultimate Electronics, a new entrant to Kansas City, opened three stores in 2003. They are in Lenexa (Johnson County), at Hartman Heritage Center in Independence (Eastern Jackson County), and at 1-29 and Barry Road (Northland). Another Johnson County store is planned for 2004. A fifth store will be placed in Lee's Summit, in southeastern Jackson County. Each store is about 32,000 square feet. Pier 1 is another specialty retailer expanding in the area. It added two stores to the nine it already had in the metro area. Cold Stone Creamery, a superpremium ice cream franchise, started with one location in Johnson County early in 2003, but planned eight more throughout the Kansas City area. Borders Books & Music added a sixth store in the metro area. The newest one is a 19,000-square-foot store at The Shops at Boardwalk, in the Northland. Discount marketing seems to be on an endless development path as al-Mart and Target continue to expand. Wal-Mart opened two Wal-Mart Neighborhood Markets in Johnson County. At about 40,000 square feet, these stores offer most of the popular items from standard Wal-Marts, and they include drivethrough pharmacies and half-hour photo service. The Neighborhood Stores are designed for quick shopping and are expected to compete with grocery and convenience stores. Wal-Mart also opened a 200,000-square-foot store at 157th & Metcalf in southern Johnson County. Target opened a 125,000-square-foot store on 151st Street in southern Johnson County The next project to make news in Kansas City will be Kansas City Live, a Downtown project by developer The Cordish Company. The initial phase of the project will include up to 425,000 square feet of retail space, primarily restaurants and night clubs. The trigger for the project was the announcement by H&R Bloc & Company that it would build a 500,000-square-foot office headquarters in the southern part of the Downtown loop. This area has long been a target for redevelopment. Kansas City Live will be created in an area adjacent to Block's headquarters. The Kansas City project will be similar to projects Cordish has done in Baltimore, Houston, Louisville and elsewhere. Every part of the metropolitan area has projects that are under construction or planned. The variety of locations and the range of styles, from big boxes and neighborhood centers to "retailtainment" and New Urbanism, reflect the growth of Kansas City. While some major retailers continue to expand in Kansas City, much of the new development seems to favor specialty retailers and unique concepts. This is the trend to expect over the next few years.
Submarket Activity Johnson County Projects Completed in 2003 Development Location Anchors Wal-Mart 157th & Metcalf Wal-Mart Super Center. Target 51st & Antioch Super Target (the adjacent The Shoppes of 151st to be completed in 2004). Lionsgate Market Place 128,000 sf at 143rd & Dillon's Grocery, Bank of Metcalf Anthony. Shawnee Crossings Kansas Hwy 7 & Mixed Shawnee Mission retail and office. Parkway
Projects Planned or Under Construction Development Location Developer Anchors/Completion Park Place 230,000 sf at 117th Park Place Planned project, no & Nail Partners of anchors named. Kansas City Ironhorse Centre 110,000 sf at 151st Merrill Mixed retail and & Nail Development office. Planned Of Kansas City project, no anchors named. Olathe Terrace 450,000 sf at 119th Maefield Planned project, & Blackbob Development of no anchors named. Bloomington, Indiana Lifestyle center 135th & Metcalf Cormac Co. Planned project, no of Omaha anchors named. Crystal Springs 320,000 sf at Parkway Real Planned project, no Shopping Center 135th & Ptlumm Estate of anchors named. Kansas City Cornerstone of 350,000 sf at RED Development Ultimate Electronics Leawood 135th & Nail of Kansas City Possible completion end of 2004. Ridgeview Falls 240,000 sf at Clements & Drugstore anchor 119th & Ridgeview Linscott of Completion late Kansas City 2004. and Lincoln, Nebraska Hy-Vee shopping 119th & Ridgeview R.H. Johnson Co. Hy-Vee grocery. center of Kansas City Mission Farms 42,000 sf of retail Weltner et ai, Mixed retail, at 105th & Mission Rd Kansas City office and residential Planned project, no anchors named.
Wyandotte County Projects Completed in 2003 Development Location Anchors Village West Kansas International Nebraska Furniture Speedway Mart, 712,000 sf, Great Wolf Lodge, 270 rooms plus 38,000-sf water park, 4,500-seat stadium for T-Bones minor league baseball.
Projects Planned or Under Construction Development Location Developer Anchors/Completion The Legends 800,000 sf in RED Development Possible completion phase one at of Kansas City end of 2004. the Kansas Speedway Lowe's 135,000 sf at Lowe's Home 69th & State Avenue Improvement Warehouse.
South Kansas City Projects Completed in 2003 Development Location Anchors State Line Station 350,000 sf at 135th & Super Target, Pier 1 State Line Imports, Cost Plus/World Market, Linens n Things.
Projects Planned or Under Construction Development Location Developer Anchors/Completion State Line 600,000 sf at Cormac Co. of Construction to Station Expansion 135th & State Omaha start spring 2004, Line no tenants announced.
Eastern Jackson County Projects Completed in 2003 Development Location Anchors Hartman Heritage 1-70 & Little Blue Parkway Pier 1 Imports, Ultimate Electronics, Linens n Things, World Market, Basset Furniture Direct. Crackerneck Plaza 40,000 sf at Hwy 40 & Boutique retail center. Shopping Center Little Blue Parkway
Projects Planned or Under Construction Development Location Developer Anchors/Completion The Shops 190,000 sf at Alsation Land No tenants at Summit Pointe 1-470 & Hwy50 Company announced. / 350 Anchor spaces of up to 60,000 sf. Hy-Vee Grocery 73,000 sf at Redevelopment of Noland Rd & Hwy 40 former K-Mart, to be completed early 2004.
Northland Projects Completed in 2003 Development Location Anchors The Shops at Boardwalk 136,000 sf at 1-29 & Hwy 152 Borders Books & Music, Coldwater Creek, Yankee Candle, Red Star Tavern. Northglen Village Hwy 152 & North Brighton Dickinson's Northglen 14-screen theater.
Projects Planned or Under Construction Development Location Developer Anchors/Completion Zona Rosa Phase one 400,000 sf at Yaromir Steiner of Barnes & Noble 1-29 & Barry Road Columbus, Ohio & Dick's Sporting Goods to open Spring 2004. Lowe's 160,000 sf at 1-35 & Hwy 152 Lowe's Home Improvement Warehouse. Tuileries Plaza 225,000 sf of Prairieview Mixed-use retail at Hwy 45 Development LLC development & North Cosby with 40,000 sf of office and 88 condominiums. Grocery-anchored. Site preparation started. Parkville Commons 250,000 sf of Price Chopper retail/office at Grocery will be Hwy 45 & Hwy 9 completed Spring 2004. Renaissance in 180,000 sf of Stephen Block Planned project, the Northland retail in a no anchors named. mixed-use development at 80th & Prospect/Hwy1
SITE DESCRIPTION Location: 3010 South State Route 291 Independence, Jackson County, Missouri 64058 The site is located east of Missouri Highway 291 approximately one mile north of US 70. The site is located at the intersection of Missouri Highway 291 and Hidden Valley Road. Shape: Irregular Topography: Level Land Area: 2.08 acres 90,591 square feet Frontage, Access, The subject has adequate frontage, access and Visibility: visibility Soil Conditions: We did not receive nor review a soil report. However, we assume that the soil's load-bearing capacity is sufficient to support existing and/or proposed structure(s). We did not observe any evidence to the contrary during our physical inspection of the property. Drainage appears to be adequate. Utilities All utilities are available Site Improvements: The site improvements include asphalt paved parking areas, curbing, signage, landscaping, yard lighting and drainage. Land Use Restrictions: We were not given a title report to review. We do not know of any easements, encroachments, or restrictions that would adversely affect the site's use. However, we recommend a title search to determine whether any adverse conditions exist. Flood Map: National Flood Insurance Rate Map Community Panel Number 290178-005-B (January 3, 1979) Flood Zone: FEMA Zone A: Special flood hazard areas subject to inundation by the 100-year"flood. Because detailed hydraulic analyses have not been performed, no base flood elevations or depths are shown. Mandatory flood insurance purchase requirements apply. Wetlands: We were not given a Wetlands survey. If subsequent engineering data reveal the presence of regulated wetlands, it could materially affect property value. We recommend a wetlands survey by a competent engineering firm. Hazardous Substances: We observed no evidence of toxic or hazardous substances during our inspection of the site. However, we are not trained to perform technical environmental inspections and recommend the services of a professional engineer for this purpose. Overall Functionality: The subject site is functional for its current use. IMPROVEMENTS DESCRIPTION The following description of improvements is based upon our physical inspection of the improvements along with our discussions with the building manager. General Description Year Built: 1986 Number of Buildings: 1 Number of Stories: 1 Land To Building Ratio: 3.33 to 1 Building Class: B Gross Building Area: 27,200 square feet Gross Leasable Area: Component Owned Area % of Total In-Line 27,000 SF Total Center GLA 27,200 SF 100% Total Center GLA 27,200 SF 100%
Construction Detail Basic Construction: Steel and masonry Foundation: Poured concrete slab Framing: Structural steel with masonry and concrete encasement Floors: Concrete poured over metal deck. Exterior Walls: Brick. Roof Cover: Flat roofing system consisting of built-up assemblies with tar and gravel cover. Windows: The windows are thermal windows in aluminum frames. Pedestrian Doors: Glass in aluminum frames. Mechanical Detail Heating: The heating system is assumed to be adequate for existing use and in compliance with local law and building codes. Cooling: The cooling system is assumed to be adequate for existing use and in compliance with local law and building codes. Plumbing: The plumbing system is assumed to be adequate for existing use and in compliance with local law and building codes. Electrical Service: The electrical service system is assumed to be adequate for existing use and in compliance with local law and building codes. Elevator Service: None Fire Protection: The building is fully sprinklered. Interior Detail Layout: The subject property is a 1-building neighborhood shopping center. Loading is available at the rear of each building. Floor Covering: Ceramic tile, carpet or resilient tile. Walls: Painted or wallpapered sheetrock. Ceilings: The ceilings are 2' by 2' suspended acoustical tile. Lighting: A mixture of fluorescent and incandescent light fixtures. Restrooms: The building features adequate restrooms for men and women. Site Improvements Parking: 90 spaces (3.31:1,000 Sq Ft). Open surface parking. On site Landscaping: A variety of shrubbery and grass. Other: Concrete curbs and walkways. Personal Property: Personal property was excluded from our valuation. Capital Improvements: Other than normal routine property maintenance, there are no major capital improvement expenditures planned in the immediate future. Summary Condition: Average The building has been well maintained and provides a good appearance relative to competing buildings within its market. We did not inspect the roof of the building or make a detailed inspection of the mechanical systems. The appraisers, however, are not qualified to render an opinion as to the adequacy or condition of these components. The client is urged to retain an expert in this field if detailed information is needed about the adequacy and condition of mechanical systems. Quality: Average. Design and Functionality: The building is a Class B neighborhood shopping center building that possesses average appeal to prospective tenants. Actual Age: 18 years Effective Age: 20 years Expected Economic Life: 50 years Remaining Economic Life: 30 years Americans With Disabilities Act The Americans With Disabilities Act (ADA) became effective January 26, 1992. We have not made, nor are we qualified to make a compliance survey of this property to determine whether or not it is in conformity with the requirements of the ADA It is possible that a compliance survey 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 upon the value of the property. Since we have not been provided with the results of a survey, we did not analyze the results of possible non-compliance. Hazardous Substances We are not aware of any potentially hazardous materials (such as formaldehyde foam insulation, asbestos insulation, radon gas emitting materials, or other potentially hazardous materials) which may have been used in the construction of the improvements. However, we are not qualified to detect such materials and urge the client to employ an expert in the field to determine if such hazardous materials exist. REAL PROPERTY TAXES AND ASSESSMENTS Current Property Taxes The property is subject to the taxing jurisdiction of Jackson County. The assessors' parcel identification number is 25-910-09-05-01-1-00-000. According to the local assessor's office, taxes are current. The assessment and taxes for the property are presented below:
PROPERTY TAX DATA (2003/2004) 2003/2004 Assessed Value Total: $423,726 Effective Tax Rate 0.0868 Total Property Taxes $36,779 Building Area ( SF ) 27,200 Property Taxes per Square Foot $1.35
Total taxes for the property are $36,779, or $1.35 per square foot. It is our opinion that the subject's real estate taxes are reasonable. Based upon historical trends, we have assumed taxes will increase 3.00 percent per annum over the projection period. ZONING The property is zoned CP-2; Planned General Commercial District by the City of Independence. Permitted uses within this district include office, light industrial, retail and general commercial. Residential development is prohibited in this zoning district. We are not experts in the interpretation of complex zoning ordinances but the property appears to be a conforming use based on our review of public information. The determination of compliance is beyond the scope of a real estate appraisal. We know of no deed restrictions, private or public, that further limit the subject property's use. The research required to determine whether or not such restrictions exist, however, is beyond the scope of this appraisal assignment. Deed restrictions are a legal matter and only a title examination by an attorney or title company can usually uncover such restrictive covenants. Thus, we recommend a title search to determine if any such restrictions do exist. HIGHEST AND BEST USE Definition Of Highest And Best Use According to The Dictionary of Real Estate Appraisal, Fourth Edition (2002), a publication of the Appraisal Institute, the highest and best use is defined as: The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. Highest And Best Use Criteria We have evaluated the site's highest and best use both as currently improved and as if vacant. In both cases, the property's highest and best use must meet four criteria. That use must be (1), legally permissible (2) physically possible, (3) financially feasible, and (4) maximally productive. Legally Permissible The first test concerns permitted uses. According to our understanding of the zoning ordinance, noted earlier in this report, the site may legally be improved with structures that accommodate office, light industrial, retail and general commercial uses. Aside from the site's zoning regulations, we are not aware of any legal restrictions that limit the potential uses of the subject. Physically Possible The second test is what is physically possible. As discussed in the "Site Description," section of the report, the site's size, soil, topography, etc. do not physically limit its use. The subject site is of adequate shape and size to accommodate almost all urban and suburban uses. Financial Feasibility and Maximal Productivity The third and fourth tests are what is financially feasible and what will produce the highest net return. After analyzing the physically possible and legally permissible uses of the property, the highest and best use must be considered in light of financial feasibility and maximum productivity. For a potential use to be seriously considered, it must have the potential to provide a sufficient return to attract investment capital over alternative forms of investment. A positive net income or acceptable rate of return would indicate that a use is financially feasible. Highest and Best Use of Site As Though Vacant Considering the subject site's physical characteristics and location, as well as the state of the local market, it is our opinion that the Highest and Best Use of the subject site as though vacant is A retail center developed to the highest density possible. Highest and Best Use of Property As Improved According to the Dictionary of Real Estate Appraisal, highest and best use of the property as improved is defined as: The use that should be made of a property as it exists. An existing property should be renovated or retained "as is" so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. It is our opinion, the existing building adds value to the site as if vacant, therefore dictating a continuation of its current use. In conclusion, it is our opinion that the Highest and Best Use of the subject property as improved is as it is currently developed. VALUATION PROCESS Methodology There are three generally accepted approaches available in developing. an opinion of value: the Cost, Sales Comparison and Income Capitalization approaches. We have considered each in this appraisal to develop an opinion of the market value of the subject property. In appraisal practice, an approach to value is included or eliminated based on its applicability to the property type being valued and the quality of information available. The reliability of each approach is dependent upon the availability and comparability of the market data uncovered as well as the motivation and thinking of purchasers in the market for a property such as the subject. Each approach is discussed below, and applicability to the subject property is briefly addressed in the following summary. Land Value Developing an opinion of land value is typically accomplished via the Sales Comparison Approach by analyzing recent sales transactions of sites of comparable zoning and utility adjusted for differences which exist between the comparables and the subject. Valuation is typically accomplished using a unit of comparison such as price per square foot of land. Adjustments are applied to the unit of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a value for the subject site. Cost Approach The Cost Approach is based upon the proposition that an informed purchaser would pay no more for the subject than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable when the property being appraised involves relatively new improvements which represent the highest and best use of the land; or when relatively unique or specialized improvements are located on the site, for which there exist few improved sales or leases of comparable properties. In the Cost Approach, the appraiser forms an opinion of the cost of all improvements, depreciating them to reflect any value loss from physical, functional and external causes. Land value, entrepreneurial profit and depreciated improvement costs are then added resulting in a value estimate for the subject property. Sales Comparison Approach The Sales Comparison Approach utilizes sales of comparable properties, adjusted for differences, to indicate a value for the subject property. Valuation is typically accomplished using a unit of comparison such as price per square foot of building area, effective gross income multiplier or net income multiplier. Adjustments are applied to the unit of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a value for the subject property. Income Capitalization Approach This approach first determines the income-producing capacity of a property by utilizing contract rents on leases in place and by estimating market rent from rental activity at competing properties for the vacant space. Deductions then are made for vacancy and collection loss and operating expenses. The resulting net operating income is divided by an overall capitalization rate to derive an opinion of value for the subject property. The capitalization rate represents the relationship between net operating income and value. This method is referred to as Direct Capitalization. Related to the Direct Capitalization Method is the Discounted Cash Flow Method. In this method, periodic cash flows (which consist of net operating income less capital costs) and a reversionary value are developed and discounted to a present value using an internal rate of return that is determined by analyzing current investor yield requirements for similar investments. Summary This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we provide them with a restricted use report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. The valuation process is concluded by analyzing each approach to value used in the appraisal. When more than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or is a correlation of all the approaches used in the appraisal. INCOME CAPITALIZATION APPROACH Methodology The Income Capitalization Approach is a method of converting the anticipated economic benefits of owning property into a value through the capitalization process. The principle of "anticipation" underlies this approach in that investors recognize the relationship between an asset's income and its value. In order to value the anticipated economic benefits of a particular property, potential income and expenses must be projected, and the most appropriate capitalization method must be selected. The two most common methods of converting net income into value are Direct Capitalization and Discounted Cash Flow. In direct capitalization, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the discounted cash flow method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). Based upon the above, discounted cash flow is the most appropriate in this assignment; given the un-stabilized nature of the subject property. Occupancy Status The following chart summarizes the annualized attained base rent and occupancy level of the leases in place as of the appraisal date.
OCCUPANCY PROFILE Space Number of Occupied Total Average Vacant Total Percent Category Tenants Area Rent Rent/SF Space Area In line 10 18,165 SF $178,356 $9.82 9,035 SF 27,200 SF 100.0% Total/ Weighted Average 10 18,165 SF $178,356 $9.82 9,035 SF 27,200SF 100.0% Percent 66.8% 33.2%
On the following page is an attained rent schedule for all tenants in place as of the appraisal date. Please refer to the Addenda of this report for a rent roll of the subject property. Lease Structure The majority of existing leases in the subject property are on a modified gross basis, whereby the tenants are responsible for a semi- or fixed portion of their pro-rata share of all expenses (real estate taxes and operating expenses) excluding management and structural repairs. Lease terms are generally between 3 and 5 years in length.
ATTAINED RENT SCHEDULE As of Apr-04 Tenant Name Suite # Start End Area Base Rent/SF Date Date (Sq Ft) Rent Per Year Inline Tan-Talizer 300 12/1/2000 11/30/2005 1,200 $11,400 $ 9.50 The Last Strand 400 9/1/2002 8/1/2005 1,200 $11,076 $ 9.23 Jacque's Bridal 600 2/1/1999 1/30/2005 1,359 $12,231 $ 9.00 Bogart's Pub 700 10/1/2003 10/30/2008 3,600 $37,800 $ 10.50 Hanger Orthopedic 1000 10/1/2002 9/30/2005 1,920 $17,280 $ 9.00 State Beauty Supply 1200 12/1/2000 11/30/2004 1,680 $15,960 $ 9.50 MO Sewing 2400 6/1/2001 5/30/2006 2,400 $21,600 $ 9.00 Hearing Express Lab 1600 4/1/2004 5/30/2005 1,200 $ 6,240 $ 5.20 Ortho Center 1800 7/1/1999 6/30/2006 1,800 $24,000 $ 13.33 Goodcents 2100 8/1/1999 7/1/2004 1,806 $20,769 $ 11.50 10 tenant sub-total 18,165 $178,356 $ 9.82 GRAND-TOTALS 18,165 $178,356 $ 9.82
Recent Leasing At Subject Property The following chart summarizes recent leasing activity within the subject property.
RECENT LEASING ACTIVITY Tenant Name Suite # Start End Area Base Rent/SF Date Date (Sq Ft) Rent Per Year Inline Bogart's Pub 700 10/1/2003 10/30/2008 3,600 $37,800 $ 10.50 Hearing Express Lab 1600 4/1/2004 5/30/2005 1,200 $ 6,240 $ 5.20 Sub-Total 4,800 $44,040 $ 9.18 GRAND-TOTALS 4,800 $44,040 $ 9.18
Rent Comparables in Competing Centers The following tables summarize rental activity in competing centers for Inline tenant spaces.
INLINE RENT COMPARABLES No. Property Location Area Term Rent/ Rent Vacancy Center Tenant Name Available (years) SF Steps Rate Center Expense Age Recoveries ----- Center Size 1 17331 East 40 Highway Independence, MO 1,512 SF 5 $8.50 Flat 2.1% 1988 - ------------------- ----------- ---------- 40 HI Center Modified Gross 72,000 SF 2 18011 NE 24th Street Independence, MO 6,580 5 $8.00 Flat 9.4% 1987 - ------------------ ----------- ---------- Arrowhead Modified 70.000 SF Shopping Center Gross 3 3617 S Noland Road Independence, MO 680 5 $12.00 Flat 2.1% 1972 - ------------------ ----------- --------- Noland Road Retail Modified 32,380 SF Gross 4 1600 South Noland Road Independence, MO 3,267 5 $7.59 Flat 10.0% 1973 - ------------------ ----------- --------- Carriage Lane Modified 33,000 SF ShoppingCenter Gross 5 1500 South Noland Road Independence, MO 2,175 5 $9.04 Flat 8.7% 1986 - ------------------ ----------- --------- Noland Station Modified 25.000 SF Gross Survey Low: 680 5 $7.59 2.10% Survey High: 6,580 5 $12.00 9.56% Survey Mean: 2,843 5 $9.03 6.45% Free Rent TI/fSF Comments (Months) 1 17331 East 40 2 $5.00 2.11 miles from subject Highway Major tenants- none Independence, MO ------------------- 40 HI Center 2 18011 NE 2 $2.00 0.89 miles from subject. 24th Street Major tenants- Fantastic ------------------ Sams, Iga, little Arrowhead Caesar's Pizza. Shopping Center 3 3617 S Noland Road 2 $5.00 2.26 miles from subject. Independence, MO Major tenants. Color Tile, ------------------ Dollar General Noland Road Retail 4 1600 South 2 $5.00 2.19 miles from subject. Noland Road Major tenants. none ------------------ Carriage Lane ShoppingCenter 5 1500 South 2 $5.00 2.22 miles from subject. Noland Road Major tenants none Independence, MO - ------------------ Noland Station 2 $2.00 2 $5.00 2 $4.40
The rent range exhibited by the com parables is from $7.59 to $12.00 per square foot with an overall average of $9.03 per square foot. Recovery clauses for the comparable leases typically require the tenant to pay a pro-rata share of real estate taxes and operating expenses on a modified gross basis. Landlords are responsible for management and capital expenditures. The comparables have flat rental rates. Greatest reliance has been placed on Rent Com parables 1, 3 and 5 due to their similarity to the subject with respect to location and utility. Based upon the recent leasing activity at the subject property, and our analysis of the com parables, we have concluded to a market rent for the subject's inline tenants of $9.00 per square foot. This assumes a modified gross lease with a 5-year lease term. [GRAPHIC OMITTED] RENTAL MAP Market Rent Synopsis The following chart summarizes our market rent conclusion for each tenant category within the subject property.
MARKET RENT CONCLUSIONS In line Market Rent Per Square Foot $9.00 Contract Rent Increase Flat Lease Type Modified Gross Lease Term (years) 5
Miscellaneous Revenue Miscellaneous revenue is from rooftop antenna income. Based upon the subject's historical performance, we have estimated miscellaneous revenue at $4,000 in Year 1. Expense Reimbursements The existing tenants are responsible for their pro-rata share of real estate taxes and operating expenses on a modified gross basis. Future tenants are assumed to be responsible for their pro rata share of real estate taxes and operating expenses on a modified gross basis while the landlord is responsible for management and capital expenditures. Lease Expirations A lease expiration schedule is contained in the Addenda of this report. Assumptions Regarding Existing Leases We have modeled all leases in accordance with the lease terms provided by ownership. All month to month tenants were assumed to vacate after 12 months of the cash flow start date. Vacancy and Collection Loss Based upon the historical occupancy of the subject, the current vacancy in the market, and our perception of future market vacancy, we have projected a global stabilized vacancy rate of 5.00percent. Based on the creditworthiness of the tenants in the subject building, we have also projected a collection loss of 2.00 percent. The total vacancy and credit loss is therefore 7.00 percent. Absorption of Vacant Space The subject property is presently 66.78 percent occupied. We have estimated the vacant space to be absorbed within 24 months. Operating Expenses We have developed an opinion of the property's annual operating expenses after reviewing its historical performance and reviewing the operating performance of similar buildings. We analyzed each item of expense and developed an opinion as to what a typical informed investor would consider normal. An historical operating history for the property, annualized year-to-date expenses, a budget for the current year, a comparison of the budget to our forecast, and our opinion of year one operating expenses are presented on the following page.
REVENUE AND EXPENSE ANALYSIS 2001 2002 2003 C& W Annualized Forecast (1) Total Per Total Per Total Per Total Per SF SF SF SF POTENTIAL GROSS REVENUE Base Rental $245,548 $9.03 $262,915 $9.67 $270,757 $9.95 $271,159 $9.97 Revenue Miscellaneous Revenue 300 0.01 3,874 0.14 (2.850) (0.10) 4,000 0.15 Expense Reimbursement Revenue 33,740 1.24 33,592 1.24 42,014 1.54 36.549 1.34 ------------- --------------- ------------- -------------- TOTAL POTENTIAL GROSS REVENUE $279,588 10.28 300,381 11.04 $309,921 11.39 $311,708 $11.46 Vacancy and Collection Loss (37,072) (1.36) (23,621) (0.87) (44,550) (1.64) (96,153) (3.54) --------------- --------------- --------------- --------------- EFFECTIVE GROSS REVENUE $242,516 $8.92 $276,760 $10.18 $265,371 $9.76 $215,555 $7.92 OPERATING EXPENSES Total Repair/ Main/Supply $1,494 $0.05 $3,782 $0.14 $4,710 $0.17 $5,000 $0.18 Total Services 2,025 0.07 718 0.03 (700) (0.03) 1,000 0.04 Total Administration 12,160 0.45 11,061 0.41 11,151 0.41 11,500 0.42 Total Marketing 0 0.00 190 0.01 (190) (0.01) 500 0.02 Total Common Area Maintenance 45,799 1.68 35,787 1.32 49,114 1.81 50,000 1.84 Total Utilities 1,176 0.04 1,743 0.06 1,372 0.05 1,500 0.06 Total Insurance 8,084 0.30 10,788 0.40 6,408 0.24 6,500 0.24 Management 13,333 0.49 13,325 0.49 15,243 0.56 8.622 0.32 ------------- --------------- ------------- ------------ Subtotal $84,071 $3.09 $77,394 $2.85 $87,108 $3.20 $84,622 $3.11 Real Estate Taxes 26,754 0.98 26,818 0.99 26,616 0.98 40,000 1.47 ------------- --------------- ------------- ------------- TOTAL EXPENSES $110,825 $4.07 $104,212 $3.83 $113,724 $4.18 $124,622 $4.58 NET OPERATING INCOME $131,691 $4.84 $172,54 $6.34 $151,647 $5.58 $90.933 $3.34 (1)Fiscal Year Beginning: 4/1/2004
Conclusion of Operating Expenses We analyzed each item of expense and developed an opinion of a level of expense we believe a typical investor in a property like this would consider reasonable. We made our projections on a fiscal year basis. Year 1 begins April 1, 2004. Please refer to the following chart for our Year 1 forecast of expenses. Expense C&W Forecast Per SF Analysis Total Repair/Main/Supply $5.000 $0.18 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Services $1,000 $0.04 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Administration $11,500 $0.42 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Marketing $500 $0.02 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Common Area Mainte $50,000 $1.84 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Utilities $1,500 $0.06 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total lnsurance $6,500 $0.24 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Management $8,622 $0.32 Management fees for this type of property typically range from 3 to 4 percent of effective gross income. We have utilized a management fee of 4.0 percent of effective gross income, which we consider to be market oriented. Real Estate Taxes $40,000 $1.47 A complete discussion of the taxes is included in the Real Property Taxes and Assessments section of this report.
Total operating expenses excluding real estate taxes are estimated at $84,622 equating to $3.11 per square foot. The following expense comparisons support our opinion of operating expenses for the subject.
OPERATING EXPENSE COMPARABLES Including Real Estate Taxes Average Operating Publication GLA Region Expenses/SF Dollars & Cents 54,206 Midwest $2.34 National Research Bureau 45,518 Kansas City $2.12 Source: Dollars & Cents of Shopping Centers - 2003, Strip Shopping Centers National Research Bureau 2003, Strip Centers
Income and Expense Pro Forma The following chart is our opinion of income and expenses for Year 1.
SUMMARY OF REVENUE AND EXPENSES 2004/2005 $/SF POTENTIAL GROSS REVENUE Base Rental Revenue $271,159 $9.97 Miscellaneous Revenue 4,000 $0.15 Expense Reimbursement Revenue 36,549 1.34 ----------------------- TOTAL POTENTIAL GROSS REVENUE $311,708 $11.46 Vacancy and Collection Loss (96,153) (3.54) ----------------------- EFFECTIVE GROSS REVENUE $215,555 $7.92 OPERATING EXPENSES Total Repair/Main/Supply $5,000 $0.18 Total Services 1,000 0.04 Total Administration 11 ,500 0.42 Total Marketing 500 0.02 Total Common Area Maintenance 50,000 1.84 Total Utilities 1,500 0.06 Total Insurance 6,500 0.24 Management 8,622 0.32 ----------------------- Subtotal $84,622 $3.11 Real Estate Taxes 40,000 1.47 ----------------------- TOTAL EXPENSES $124,622 $4.58 NET OPERATING INCOME $90,933 $3.34
Capitalization Rate Selection In addition, we have considered Investor Surveys published by Korpacz and Cushman & Wakefield, Inc. for competitive shopping center properties. Discounted Cash Flow Method In the Discounted Cash Flow Method, we employed Argus for Windows software to model the income characteristics of the property and to make a variety of cash flow assumptions. We attempted to reflect the most likely investment assumptions of typical buyers and sellers in this particular market segment. The following table illustrates the assumptions used in the discounted cash flow analysis. Discounted Cash Flow Assumptions DISCOUNTED CASH FLOW MODELING ASSUMPTIONS Holding Period: 10 Years Projection Period: 11 Years Start Date: 4/1/2004 RESERVES FOR REPLACEMENT (PSF) $0.15 VACANCY & COLLECTION LOSS Global Vacancy: 5.00% Collection Loss: 2.00% ----- Total: 7.00% GROWTH RATES Market Rent: 3.00% Consumer Price Index (CPI): 3.00% Expenses: 3.00% Real Estate Taxes: 3.00% RATES OF RETURN Internal Rate of Return: 12.50% Terminal Capitalization Rate: 10.50% Reversionary Sales Cost: 2.00%
- ------------------------------------------------- LEASING ASSUMPTIONS Inline - ------------------------------------------------- Market Rent Per Square Foot $9.00 Contract Rent Increase Flat Lease Type Modified Gross Lease Term (years) 5 Free Rent on New Leases (months) 0 Free Rent on Renewals (months) 0 Downtime Between New Leases 6 Renewal Probability 70.00% - ------------------------------------------------ TENANT IMPROVEMENTS (PSF) Inline - ------------------------------------------------ New Leases $5.00 Renewals $0.00
Leasing Commissions: 6.0 percent of total rent for new leases; 0.0 percent of total rent for renewal leases. Contract Rent Increases: Leases are assumed flat per annum. Expense Reimbursements: Future tenants are assumed to be responsible for their pro rata share of real estate taxes and operating expenses on a modified gross basis while the landlord is responsible for management and capital expenditures. Capital Expenditure: The building was in average condition at the time of our inspection. We do not foresee any major capital expenditures in the near future. Terminal Capitalization Rate Selection A terminal capitalization rate was used to develop an opinion of the market value of the property at the end of the assumed investment holding period. The rate is applied to the net operating income following year 10 before making deductions for leasing commissions, tenant improvement allowances and reserves for replacement. We have developed an opinion of an appropriate terminal capitalization rate based on indicated rates in current investor surveys. Terminal Terminal Survey Date Cap Rate Cap Rate Range Average Korpacz Fourth Quarter 2004 8.0%- 11.5% 9.33% C&W Real Estate Outlook Spring/Summer 2003 9.0%-9.8 9.4% Korpacz - Refers to national strip shopping center market regardless of class or occupancy C&W - Refers to national Class B leased neighborhood/community center market
As a result, we have applied a 10.50 percent terminal capitalization rate in our analysis. Discount Rate Selection We have developed an opinion of future cash flows, including property value at reversion, and discounted that income stream at an internal rate of return (yield rate) currently required by investors for similar-:quality real property. The yield rate (internal rate of return or IRR) is the single rate that discounts all future equity benefits (cash flows and equity reversion) to an opinion of net present value. The Korpacz and Cushman & Wakefield investor surveys indicate the following internal rates of return for competitive shopping center properties: Survey Date IRR IRR Range Average Korpacz Fourth Quarter 2004 8.5%-12.0% 10.19% C&W Real Estate Outlook Spring/Summer 2003 10.0%-11.5% 10.8% Korpacz - Refers to national strip shopping center market regardless of class or occupancy C&W - Refers to national Class B leased neighborhood/community center market
The above table summarizes the investment parameters of some of the most prominent investors currently acquiring similar investment properties in the United States. We realize that this type of survey reflects target rather than transactional rates. Transactional rates are usually difficult to obtain in the verification process and are actually only target rates of the buyer at the time of sale. The property's performance will ultimately determine the actual yield at the time of sale after a specific holding period. We have discounted our cash flow and reversionary value projections at an internal rate of return of 12.50 percent. Discounted Cash Flow Method Conclusion Based on the discount rate selected, market value is estimated at $1,400,000, rounded. The reversion contributes 43.90 percent to this value estimate. Our cash flow projection and valuation matrix are presented at the end of this section.
Software : ARGUS Ver.11.0.02 Date:7/15/04 File : 04-248-04 Argus Independence Time: 3:07pm Property Type: Neighborhood Center Ref#: ASO Portfolio : Page: 1 Hidden Valley Exchange SC 3010 South State Route 290 Independence, MO 64058 SCHEDULE OF PROSPECTIVE CASH FLOW In Inflated Dollars for the Fiscal Year Beginning 4/1/2004 Year 1 Year 2 Year 3 Year 4 Year 5 For the Years Mar-2005 Mar-2006 Mar-2007 Mar-2008 Mar-2009 Ending POTENTIAL GROSS REVENUE Base Rental Revenue $271,159 $287,071 $297,785 $299,189 $301,588 Absorption & Turnover Vacancy (91,754) (60,686) (13,847) (7,260) ------------------------------------------------------ Scheduled Base Rental Revenue 179,405 226,385 283,938 299,189 294,328 Expense Reimbursement Revenue CAM 36,549 38,138 41,300 42,601 40,951 ------------------------------------------------------ Total Reimbursement Revenue 36,549 38,138 41,300 42,601 40,951 Miscellaneous Revenue 4,000 4,120 4,244 4,371 4,502 ------------------------------------------------------ TOTAL POTENTIAL GROSS REVENUE 219,954 268,643 329,482 346,161 339,781 General Vacancy (10,385) (3,151) Collection Loss (4,399) (5,373) (6,590) (6,923) (6,796) ------------------------------------------------------ EFFECTIVE GROSS REVENUE 215,555 263,270 322,892 328,853 329,834 OPERATING EXPENSES CAM 50,000 51,500 53,045 54,636 56,275 Repair/ Main/ Supply 5,000 5,150 5,305 5,464 5,628 Services 1,000 1,030 1,061 1,093 1,126 Administration 11,500 11,845 12,200 12,566 12,943 Marketing 500 515 530 546 563 Utilities 1,500 1,545 1,591 1,639 1,688 Insurance 6,500 6,695 6,896 7,103 7,316 Real Estate Taxes 40,000 41,200 42,436 43,709 45,020 Management 8,622 10,531 12,916 13,154 13,193 ------------------------------------------------------ TOTAL OPERATING EXPENSES 124,622 130,011 135,960 139,910 143,752 ------------------------------------------------------ NET OPERATING INCOME 90,933 133,259 186,912 168,943 166,082 ------------------------------------------------------ LEASING & CAPITAL COSTS Tenant Improvements 16,434 37,408 12,911 6,078 Leasing Commissions 10,599 24,126 6,327 3,920 Reserves 4,080 4,202 4,328 4,458 4,592 ------------------------------------------------------ TOTAL LEASING & CAPITAL COSTS 31,113 65,738 25,566 4,458 14,590 ------------------------------------------------------ CASH FLOW BEFORE DEBT SERVICE & TAXES $59,820 $67,521 $161,346 $184,485 $171,492 & TAXES ------------------------------------------------------ Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Mar-2010 Mar-2011 Mar-2012 Mar-2013 Mar-2014 Mar-2014 POTENTIAL GROSS REVENUE Base Rental Revenue $308,180 $324,880 $345,171 $349,195 $350,930 $358,190 Absorption & Turnover Vacancy (10,648) (24,129) (15,851) (8,416) (6,856) -------------------------------------------------------------- Scheduled Base Rental Revenue 297,532 300,751 329,320 349,195 342,514 351,334 Expense Reiembursement Revenue CAM 39,519 37,981 39,003 40,801 39,901 40,089 -------------------------------------------------------------- Total Reimbursement Revenue 39,519 37,981 39,003 40,801 39,901 40,089 Miscellaneous Revenue 4,637 4,776 4,919 5,067 5,219 5,376 -------------------------------------------------------------- TOTAL POTENTIAL GROSS REVENUE 341,688 343,508 373,242 395,063 387,634 396,799 General Vacancy (11,852) (3,466) (5,254) Collection Loss (6,834) (6,870) (7,465) (7,901) (7,753) (7,936) -------------------------------------------------------------- EFFECTIVE GROSS REVENUE 334,854 336,638 365,777 375,310 376,415 383,609 -------------------------------------------------------------- OPERAINTING EXPENSES CAM 57,964 59,703 61,494 63,339 65,239 67,196 Repair/Main/Supply 5,796 5,970 6,149 6,334 6,524 6,720 Services 1,159 1,194 1,230 1,267 1,305 1,344 Administration 13,332 13,732 14,144 14,568 15,005 15,455 Marketing 580 597 615 633 652 672 Utilities 1,739 1,791 1,845 1,900 1,957 2,016 Insurance 7,535 7,761 7,994 8,234 8,481 8,735 Real Estate Taxes 46,371 47,762 49,195 50,671 52,191 53,757 Management 13,394 13,466 14,631 15,012 15,057 15,344 -------------------------------------------------------------- TOTAL OPERAING EXPENSES 147,870 151,976 157 ,297 161,958 166,411 171,239 -------------------------------------------------------------- NET OPERTING INCOME 186,984 184,662 208,480 213,352 210,004 212,370 LEASING & CAPITAL COSTS Tenant Improvements 4,950 19,628 18,069 7,046 5,740 Leasing Commissions 3,194 12,660 11,655 4,545 3,702 Reserves 4,730 4,872 5,018 5,168 5,323 5,483 -------------------------------------------------------------- TOTAL LEASING & CAPITAL COSTS 12,674 37,160 34,742 5,168 16,914 14,925 -------------------------------------------------------------- CASH FLOW BEFORE DEBT SERVICE & TAXES $174,110 $147,502 $173,738 $208,184 $193,090 $197,445 -------------------------------------------------------------- --------------------------------------------------------------
Software : ARGUS Ver.11.0.02 Date:7/15/04 File : 04-248-04 Argus Independence Time: 3:07pm Property Type: Neighborhood Center Ref#: ASO Portfolio : Page: 3 Hidden Valley Exchange SC 3010 South State Route 290 Independence, MO 64058 RESALE - CAP RATE MATRIX Cash Flow Before Debt Service plus Property Resale in Year 10, Mar-2014 Discounted Annually (Endpoint on Cash Flow & Resale) Net P.V. of P.V. of P.V. of P.V. of P.V. of For the Proceeds Property Property Property Property Property Cap Rates From Sale @ 12.00% @ 12.25% @ 12.50% @ 12.75% @ 13.00% 10.00% $2,081,226 $1,469,078 $1,444,750 $1,420,942 $1,397,640 $1,374,832 10.25% 2,030,464 1,452,734 1,428,766 1,405,310 1,382,351 1,359,878 10.50% 1,982,120 1,437,169 1,413,544 1,390,422 1,367,790 1,345,636 10.75% 1,936,024 1,422,327 1,399,029 1,376,227 1,353,907 1,332,057 11.00% 1,892,024 1,408,160 1,385,175 1,362,677 1,340.655 1,319,095
Reconciliation Within the Income Capitalization Approach SUMMARY OF INCOME CAPITALIZATION METHODS Value Per Sq. Ft. Value Indicated by the Discounted Cash Flow Method: $1,400,000 $51.47 We have placed greater reliance on the discounted cash flow method because this mirrors the methodology used by purchasers of this property type. Therefore, our opinion of market value via the Income Capitalization Approach is as follows: Value Conclusion: $1,400,000 $51.47 RECONCILIATION AND FINAL VALUE OPINION Valuation Methodology Review and Reconciliation This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we provide them with a restricted use report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. The approaches indicated the following: Income Capitalization Approach: $1,400,000 We have given most weight to the Income Capitalization Approach because this mirrors the methodology used by purchasers of this property type. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the "as-is" market value of the leased fee estate of the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, on April 20, 2004 was: ONE MILLION FOUR HUNDRED THOUSAND DOLLARS $1,400,000 INSURABLE VALUE Insurable Value is directly related to the portion of the real estate which is covered under the asset's insurance policy. We have based this opinion on the building's replacement cost new (RCN) which has no direct correlation with its actual market value. The replacement cost new is the total construction cost of a new building built using modern technology, materials, standards and design, but built to the same specifications of and with the same utility as the building being appraised. For insurance purposes, replacement cost new includes all direct costs necessary to construct the building improvements. Items which are not considered include land value, site improvements, indirect costs, accrued depreciation and entrepreneurial profit. To develop an opinion of insurable value, exclusions for below-grade foundations and architectural fees must be deducted from replacement cost new. We developed an opinion of replacement cost new by using the Calculator Cost Method developed by Marshall Valuation Service, a nationally recognized cost estimating company which estimates construction costs for all types of improvements. Marshall Valuation Service revises its cost factors monthly and adjusts them to reflect regional and local cost variations. INSURABLE VALUE Replacement Cost New (RCN) GBA (SF)$/GBA Sub-Total Building Improvements Base Cost 27,200 $60.00 $1,632,000 HVAC 27,200 5.50 149,600 Sprinklers 27,200 2.50 68,000 --------------------- Subtotal 27,200 $68.00 $1,849,600 Multipliers Current Cost 1.030 Local Area 1.150 Perimeter 0.865 Building Height 1.000 ------ Product of Multipliers x 1.025 ---------- Adjusted Base Building Cost $1,895,086 Less: Insurance Exclusions Foundations Below Grade -5.00% Piping Below Grade (Negligible) 0.00% Architect Fees -6.00% ------- Total Insurance Exclusion Adjustment -11.00% ($208,459) ----------- Insurable Value $1,686,627 Rounded to nearest $100,000 $1,700,000 Source: Marshall Valuation Service Section: 15 Quality: Average Page: 17 Class: B Date: 5/00 Type: Retail
ASSUMPTIONS AND LIMITING CONDITIONS "Report" means the appraisal or consulting report and conclusions stated therein, or a letter opinion, to which these Assumptions and Limiting Conditions are annexed. "Property" means the subject of the Report . IIC&W" means Cushman & Wakefield, Inc. or its subsidiary that issued the Report. "Appraiser(s)" means the employee(s) of C&W who prepared and signed the Report. The Report has been made subject to the following assumptions and limiting conditions: 1. No opinion is intended to be expressed and no responsibility is assumed for the legal description or for any matters that are legal in nature or require legal expertise or specialized knowledge beyond that of a real estate appraiser. Title to the Property is assumed to be good and marketable and the Property is assumed to be free and clear of all liens unless otherwise stated. No survey of the Property was undertaken. 2. The information contained in the Report or upon which the Report is based has been gathered from sources the Appraiser assumes to be reliable and accurate. The owner of the Property may have provided some of such information. Neither the Appraiser nor C&W shall be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, sketches, exhibits and factual matters. Any authorized user of the Report is obligated to bring to the attention of C&W any inaccuracies or errors that it believes are contained in the Report. 3. The opinions are only as of the date stated in the Report. Changes since that date in external and market factors or in the Property itself can significantly affect the conclusions. 4. The Report is to be used in whole and not in part. No part of the Report shall be used in conjunction with any other analyses. Publication of the Report or any portion thereof without the prior written consent of C&W is prohibited. Reference to the Appraisal Institute or to the MAl designation is prohibited. Except as may be' otherwise stated in the letter of engagement, the Report may not be used by any person other than the party to whom it is addressed or for purposes other than that for which it was prepared. No part of the Report shall be conveyed to the public through advertising, or used in any sales or promotional or offering or SEC material without C&W's prior written consent. Any authorized user of this Report who provides a copy to, or permits reliance thereon by, any person or entity not authorized by C&W in writing to use or rely thereon, hereby agrees to indemnify and hold C&W, its affiliates and their respective shareholders, directors, officers and employees, harmless from and against all damages, expenses, claims and costs, including attorneys' fees, incurred in investigating and defending any claim arising from or in any way connected to the use of, or reliance upon, the Report by any such unauthorized person or entity. 5. Except as may be otherwise stated in the letter of engagement, the Appraiser shall not be required to give testimony in any court or administrative proceeding relating to the Property or the Appraisal. 6. The Report assumes (a) responsible ownership and competent management of the Property; (b) there are no hidden or unapparent conditions of the Property, subsoil or , structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning and environmental regulations and laws, unless noncompliance is stated, defined and considered in the Report; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimate contained in the Report is based. 7. The physical condition of the improvements considered by the Report is based on visual inspection by the Appraiser or other person identified in the Report. C&W assumes no responsibility for the soundness of structural members nor for the condition of mechanical equipment, plumbing or electrical components. 8. The forecasted potential gross income referred to in the Report may be based on lease summaries provided by the owner or third parties. The Report assumes no responsibility for the authenticity or completeness of lease information provided by others. C&W recommends that legal advice be obtained regarding the interpretation of lease provisions and the contractual rights of parties. 9. The forecasts of income and expenses are not predictions of the future. Rather, they are the Appraiser's best estimates of current market thinking on future income and expenses. The Appraiser and C&W make no warranty or representation that these forecasts will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the Report, envisages for the future in terms of rental rates, expenses, and supply and demand. 10. Unless otherwise stated in the Report, the existence of potentially hazardous or toxic materials that may have been used in the construction or maintenance of the improvements or may be located at or about the Property was not considered in arriving at the opinion of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the Property. The Appraisers are not qualified to detect such substances. C&W recommends that an environmental expert be employed to determine the impact of these matters on the opinion of value. 11. Unless otherwise stated in the' Report, compliance with the requirements of the Americans with Disabilities Act of 1990 (ADA) has not been considered in arriving at the opinion of value. Failure to comply with the requirements of the ADA may adversely affect the value of the Property. C&W recommends that an expert in this field be employed. 12. If the Report is submitted to a lender or investor with the prior approval of C&W, such party should consider this Report as only one factor together with its independent investment considerations and underwriting criteria, in its overall investment decision. Such lender or investor is specifically cautioned to understand all Extraordinary Assumptions and Hypothetical Conditions and the Assumptions and Limiting Conditions incorporated in this Report. 13. In the event of a claim against C&W or its affiliates or their respective officers or employees or the Appraisers in connection with or in any way relating to this Report or this engagement, the maximum damages recoverable shall be the amount of the monies actually collected by C&W or its affiliates for this Report and under no circumstances shall any claim for consequential damages be made. 14. If the Report is referred to or included in any offering material or prospectus, the Report shall be deemed referred to or included for informational purposes only and C&W, its employees and the Appraiser have no liability to such recipients. C&W disclaims any and all liability to any party other than the party which retained C&W to prepare the Report. 15. By use of this Report each party that uses this Report agrees to be bound by all of the Assumptions and Limiting Conditions stated herein. Extraordinary Assumptions An extraordinary assumption is defined as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis" (USPAP). This appraisal employs no extraordinary assumptions. Hypothetical Conditions A hypothetical condition is defined as "that which is contrary to what exists, but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis" (USPAP). This appraisal employs no hypothetical conditions. CERTIFICATON OF APPRAISAL We certify that, to the best of our knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions. and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions. 3. We have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. 4. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. 5. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. 6. Our compensation for completing this assignment is not contingent upon 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. 7. Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. 8. Randal D. Dawson, MAI made a personal inspection of the property that is the subject of this report. 9. No one provided significant real property appraisal assistance to the persons signing this report. 10. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 11. As of the date of this report, Appraisal Institute continuing education for Randal D. Dawson, MAI is current. /S/ RANDAL D. DAWSON - ----------------------- Randal D. Dawson, MAI Associate Director Missouri Certified General Appraiser License No. RA-003304 -----END PRIVACY-ENHANCED MESSAGE-----