-----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, Oah50IuiQPbqWQlLq1l+7Rcn9NFXXHW7ZG1zIAmeeTy30F+7wWqlSYRiX8wf5Snt qaG++CFi68isVjITggmBAw== 0001072761-05-000029.txt : 20051013 0001072761-05-000029.hdr.sgml : 20051013 20051013145248 ACCESSION NUMBER: 0001072761-05-000029 CONFORMED SUBMISSION TYPE: SC TO-T PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20051013 DATE AS OF CHANGE: 20051013 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SECURED INVESTMENT RESOURCES FUND LP II CENTRAL INDEX KEY: 0000797331 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363451000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T SEC ACT: 1934 Act SEC FILE NUMBER: 005-80677 FILM NUMBER: 051136718 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-T 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-T 1 sir2_scto101305.txt SC TO-T SIR II TENDER OFFER SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- SCHEDULE TO 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. II - -------------------------------------------------------------------------------- (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: $1,100,000(1) Amount of Filing Fee: $220 - -------------------------------------------------------------------------------- (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: [X] third-party tender offer subject to Rule 14d-1. [ ] 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 11,000 units ("Units") of limited partnership interests in Secured Investment Resources Fund, L.P. II (the "Partnership") at a cash purchase price of $100 per Unit, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 13, 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. II, a Delaware 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 October 13, 2005. 12.2 Agreement of Transfer and Letter of Transmittal, with Instructions. 12.3 Letter to Unit Holders dated October 13, 2005. 12.4 Appraisal of the Sunwood Village Apartments dated April 13, 2004. 12.5 Appraisal of the Oak Terrace Retirement Apartments dated April 16, 2004. 12.6 Appraisal of the Bayberry Crossing Shopping Center dated June 20, 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: October 13, 2005 MILLENIUM MANAGEMENT, LLC By: /S/ W. ROBERT KOHORST -------------------------- W. Robert Kohorst President EX-99 2 sir2_scto101305exh1.txt EXH 12.1 OFFER TO PURCHASE OFFER TO PURCHASE FOR CASH 11,000 UNITS of Limited Partnership Interest in SECURED INVESTMENT RESOURCES FUND, L.P. II by MILLENIUM MANAGEMENT, LLC at a Cash Purchase Price of $100 per Unit THE OFFER, WITHDRAWAL RIGHTS AND PRORATION PERIOD WILL EXPIRE AT 5:00 P.M., LOS ANGELES TIME, ON TUESDAY, NOVEMBER 15, 2005, UNLESS THE OFFER IS EXTENDED. Millenium Management, LLC ("Millenium" or the "Purchaser"), a California limited liability company, is offering to purchase 11,000 Units of SECURED INVESTMENT RESOURCES FUND, L.P. II (the "Partnership"), at a cash purchase price of $100 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) October 13, 2005 TABLE OF CONTENTS Page INTRODUCTION..................................................................1 SUMMARY OF THE OFFER..........................................................1 BACKGROUND OF THE OFFER.......................................................3 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..................................14 The Purchaser..........................................................14 General................................................................14 Prior Acquisitions of Units and Prior Contacts.........................14 Source of Funds........................................................15 FUTURE PLANS OF THE PURCHASER.................................................15 EFFECTS OF THE OFFER..........................................................16 Future Benefits of Unit Ownership......................................16 Limitations on Resales.................................................16 Influence Over Future Voting Decisions.................................16 FEDERAL INCOME TAX MATTERS....................................................16 CERTAIN LEGAL MATTERS.........................................................18 General................................................................18 State Takeover Statutes................................................18 Fees and Expenses......................................................18 Miscellaneous..........................................................18 SCHEDULE I - EXECUTIVE OFFICERS APPENDIX A - PARTNERSHIP INFORMATION i INTRODUCTION The Purchaser hereby offers to purchase 11,000 Units of limited partnership interest in the Partnership at a cash purchase price of $100 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 $100 in CASH. See "Details of the Offer - Acceptance for Payment and Payment of Purchase Price." o Purchaser calculated a current estimated liquidation value of the Partnership of $120 per Unit, considering the estimated property values and the other assets and liabilities of the Partnership. See "Determination of Offer 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 II, Inc. (the "Former General Partners"), pursuant to the vote of limited partners holding a majority of the units of limited partnership interest. o The offer price is speculative due to the substantial uncertainties and risks that exist at this time. See "Determination of the Offer Price." o One of the Partnership's three remaining properties, the Sunwood Village Apartments, is still tied up in litigation. 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 at a price that we believe does not represent its full value. See "Background of the Offer" and "Appendix A." o The Former General Partners have not obtained audited financials for over five (5) years. The financial information described herein relating to periods prior to the replacement of the Former General Partners is based on unaudited information received from the Former General Partners, which is the only historical 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. Millenium, as general partner, has not yet determined a plan for managing each property held by the Partnership that Millenium believes to be in the best interests of the Partnership. o The Partnership will not be required to terminate before the year 2046, 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 338 Units have been reported over the last 12 months, according to Direct Investment Spectrum, an 1 independent industry publication. Such trades occurred between August 1, 2004 and July 31, 2005 at the average price of $127.16 per Unit, before commissions. 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 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. Also, Unit Holders may obtain a tax benefit from accumulated passive losses that can be used upon the disposition of their interests in the Partnership. Each Unit Holder should consult his tax advisor about this possibility. 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. 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 11,000 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. 2 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 quarterly report for its fiscal quarter ended September 30, 1999, 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. ("SIRF I") seeking access to the books and records of the Partnership and SIRF I. In April 2004, the Purchaser commenced solicitations of Unit Holders in the Partnership and SIRF I 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 I. 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 I 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 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 not been able to review such information. From the materials that have been reviewed so far, it appears that there are potentially significant gaps in information. In March 2005, the Partnership received notice that the foreclosure process for the Sunwood Apartments property had been recommenced. Millenium was able to reach an agreement with the lender by which the lender accepted a partial payment of the total overdue amount on the loan, thereby saving the property from the threat of foreclosure. To perform that agreement, the Partnership borrowed approximately $800,000 from affiliates of Millenium and the property's independent management company that were willing to make such a loan. A company called Mega Ventures has sued to try to enforce an agreement to sell Sunwood signed by the Former General Partners. Millenium believes the contract was terminated or is otherwise not enforceable and believes it is in the best interest of the Partnership not to sell Sunwood for the price to which the Former General Partners agreed. Mega Ventures filed a motion for summary judgment which asked the Court to decide the case in their favor even though the case is only in the early stages. That motion was denied in August 2005. 3 Discovery in that case is ongoing. We cannot predict the outcome of that litigation, however, it is possible for adverse rulings or decisions in that case to have a materially adverse effect on the financial condition of the Partnership. 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 11,000 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 Tuesday, November 15, 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 11,000 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 11,000 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 11,000 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 11,000 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 11,000 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. 4 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 5 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 December 12, 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 11,000 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 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; 7 (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, or results of operations 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 quarterly report on Form 10-Q for the quarter ended September 30, 1999 in January of 2002. Since that date, the only public filings regarding the Partnership have been preliminary and definitive proxy soliciting materials and the Current Report on Form 8-K reporting that Millenium has become the new general partner of the Partnership, and the Tender Offer Statement and amendments filed by Millenium for its offer dated April 20, 2005. 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, 8 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 is information excerpted 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. There are currently 53,661 Units issued and outstanding. The Units are held by approximately 1,962 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 August 1, 2004 and July 31, 2005 (the most recent published information): 338 Units traded at the average price of $127.16 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. Except for the purchases described below in "Certain Information Concerning the Purchaser - Prior Acquisitions of Units and Prior Contacts" the Purchaser is not aware of any trades of units that were not reported in the Direct Investment Spectrum. 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"), and (ii) the financial 9 information provided by the Former General Partners, and (iii) the operating results of the Partnership's properties since the Partnership was taken over by the Purchaser. The Former General Partners had obtained appraisals of the Partnership's properties; however, the Purchaser does not consider the appraisals to be relevant any longer given their age and given the Purchaser's experience managing the Partnership. However, information about the appraisals is provided below. Appraisal of Sunwood Village Apartments. The Former General Partner obtained an appraisal of the Sunwood Village Apartments property on or about April 13, 2004, from Cushman & Wakefield of Arizona, 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 $10,700,000, 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. 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." Potential Sale of Sunwood Village Apartments. The Former General Partner entered into a contract to sell Sunwood Village to a company named Mega Ventures, for a purchase price of $12.6 Million, subject to certain conditions. The purchase contract was signed in March 2004. Although Millenium believes the contract was terminated or is otherwise not enforceable, Mega Ventures has sued to try to enforce the agreement, which Millenium believes indicates that the fair market value of the property is probably higher than the contract price, although Millenium has not made any other estimate of its value. Millenium believes it is in the best interest of the Partnership not to sell Sunwood for the contract price, but we cannot predict the outcome of that litigation. Appraisal of Oak Terrace Retirement Apartments. The Former General Partner obtained an appraisal of the Oak Terrace Retirement Apartments property on or about April 16, 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 $12.5 Million, as of the valuation date, which includes $4.1 Million of going concern value for the business operated at the property. However, because the property has bond financing that is favorable, the appraisal also estimates a value based on such financing of $16.1 Million. 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. 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." 10 Appraisal of Bayberry Crossing Shopping Center. The Former General Partner obtained an appraisal of the Bayberry Crossing Shopping Center property on or about June 20, 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 $3.2 Million, 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. 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. Purchaser's Estimate of Property Values. In order to estimate the proceeds that limited partners would receive if the Partnership were liquidated promptly, the Purchaser estimated a value for each of the Partnership's properties. Purchaser calculated an initial value for each property using a capitalization rate analysis. On the apartment properties, the actual Net Operating Income ("NOI") of the properties from January to July 2005 was used, adjusted to annualize such results and to deduct assumed recurring replacements of $400. For the Bayberry retail property, a pro forma NOI amount was used because the Purchaser believes that the historical revenues have been significantly lower than they should be because the Former General Partners signed leases that did not require tenants to pay for common area maintenance charges, which are normally passed through to tenants. Purchaser annualized the NOI budget for September-December 2005 because that portion of the budget reflects the Partnership's new leases, which have the normal pass-through of common area maintenance charges. Purchaser deducted 5% of pro forma NOI for assumed recurring replacements. Purchaser's calculation is set forth below. Sunwood Oak Terrace Bayberry Village Apts.(1) Apts.(2) Shopping Ctr.(3) NOI $897,470 $1,163,578 $444,000 Recurring replacements (100,800) (51,600) (22,200) Adjusted NOI 796,670 1,111,978 421,800 Capitalization rate 7.70% 9.20% 8.20% Calculated value $10,346,364 $12,086,717 $5,143,902 ---------- (1) Capitalization Rate per National Real Estate Index for "B" apartments in Las Vegas, NV, 2Q05. (2) Capitalization Rate per National Real Estate Index for "B" apartments in St. Louis, MO, 2Q05, plus 1% for Springfield location. (3) Capitalization Rate per National Real Estate Index for retail property in Kansas City, MO, 2Q05.
11 The selection of a capitalization rate for an analysis such as Purchaser's is a matter of subjective judgment. The Purchaser used rates reported in an independent third-party publication, the National Real Estate Index ("NREI"), for the Second Quarter of 2005. However, because NREI does not report rates for Springfield, the Purchaser made a subjective adjustment to the capitalization rate for a nearby market to estimate a rate for Oak Terrace. Purchaser believes the capitalization rates used in its calculation are reasonable, but also believes that NREI rates are often on the higher end of the range of reasonable capitalization rates, thereby yielding lower value estimates than lower capitalization rates would yield. To assist Unit Holders in understanding the effect of using a different capitalization rate, the Purchaser has calculated that each 1% decrease in the selected capitalization rate would result in an increase in the calculated value of approximately $1,544,233 for Sunwood, $1,473,990 for Oak Terrace, and $714,431 for Bayberry. After making the foregoing calculations, Purchaser decided to use, as the estimated value for the Sunwood Village Apartments, the price in the purported March 2004 contract with Mega Ventures, which is the subject of the current litigation described previously in the Offer. Based on its view of the current market in Las Vegas, Nevada, the Purchaser believes that if the Partnership prevails in the litigation, which cannot be predicted, then Sunwood could potentially be sold at a significantly higher price; however, the Purchaser has not made an estimate of such price since that option is not currently available to the Partnership. The Purchaser did not attempt to estimate the effect of the favorable bond financing that Oak Terrace has, although the last appraisal (described above) estimated that the such financing, if assumed, would increase the value of the property by $3.6 Million. The Purchaser does not know and has not determined if the appraiser's opinion was reasonable. 12 Liquidation Value Calculation. Purchaser calculated a current estimated liquidation value of the Partnership of $120 per Unit, considering the estimated property values described above and the other assets and liabilities of the Partnership. In estimating such liquidation value, Purchaser attributed no value to certain intangible assets and receivables: i.e., a promissory note from James Hoyt, a Former General Partner, in the amount of approximately $2.7 Million, a receivable from another partnership, Secured Investment Resources Fund, L.P. of $808,946, and the unamortized portion of debt issuance costs and leasing commissions that have already been spent by the Partnership and would have no value in a liquidation. Purchaser's calculation, including the other estimates and assumptions made by Purchaser in attempting to estimate the results of a current liquidation, is set forth below. Estimated Values(1): Sunwood $12,600,000 Oak Terrace 12,086,717 Bayberry 5,143,902 ----------- Total 29,830,619 ----------- Cash at 7/31/05 2,046,055 Mortgage/Bond Debt at 7/31/05 (21,177,887) Other Liabilities (705,292) Repay Sunwood Class A Units(2) (1,201,500) ------------ $ 8,791,995 Purchaser's Deductions and Reserves Assumed commissions, closing and wind-up cost (5% (1,491,531) of estimated value) Reserve for Deferred Maintenance and Capital (530,666) Expenditures Reserve for loan prepayment or assumption fees (308,814) ------------ Estimated liquidation proceeds $ 6,460,984 =========== Units outstanding 53,661 Per Unit estimated liquidation proceeds $120/Unit ---------- (1) See "Purchaser's Estimate of Property Values" above. (2) In order to reinstate the mortgage loan on Sunwood Village Apartments, the Partnership negotiated to pay the lender $800,000 to compromise and settle the default interest and penalty charges accumulated as a result of the Partnership's loan default. To fund such amount, Class A limited partner interests were issued by the Sunwood Village Joint Venture, L.P. to affiliates of Millenium and the property's independent management company, on terms that require a preferential repayment and preferred return before the Partnership receives any proceeds as a limited partner of the Sunwood Village Joint Venture, L.P., which owns the property.
In determining its Offer price, the Purchaser considered the foregoing calculation. The Purchaser also considered its opinion that, under the present circumstances of the Partnership, a purchase of Units at this time is a highly speculative investment with a substantial risk of a significant or total loss, because of the lawsuit with Mega Ventures, the lack of reliable historical financial information, the possibility of unknown liabilities incurred by the Former General Partners, and the anticipated high operating costs that the 13 Partnership is likely to incur to complete the transition from the Former General Partners to Millenium as the new general partner and to resolve litigation that has resulted and may be commenced over the conduct of the Former General Partners. Furthermore, the Purchaser believes that any third party would offer only a fraction of such net asset value range to purchase the Units, if any third party were willing to make any offer at all, because of the foregoing risks, the inability of third party purchasers to control the Partnership, and the illiquidity of the Units. The Purchaser did not ascribe any specific values or discounts to the foregoing risk considerations. In view of all of the considerations described above in this Section, the Purchaser determined its Offer price by selecting a price that Purchaser is willing to pay, given the risks of its investment compared to the potential return, 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. 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 II, 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 14 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. Mr. Hoyt signed a Promissory Note to repay all advances taken from the Partnership, which amount is initially set at $2.5 Million but shall be adjusted by auditors to ensure that Mr. Hoyt must repay all unrepaid loans or advances made to him and any other amounts taken in contravention of the Partnership's limited partnership agreement. The Promissory Note provides for repayment to be made over ten (10 ) years, with interest being charged at a variable rate of the Prime Rate plus one percent (1%). Millenium owns 14,646 limited partnership units. EPII owns 194 Units (62 of which were acquired pursuant to the Settlement Agreement for $100 per Unit), and other affiliates, Everest Management, LLC, and KM Investments, LLC, own 20 and 32 Units which were acquired several years ago. Millenium acquired its units pursuant to a tender offer dated April 20, 2005, at $100 per Unit, and in private purchases for $100 per Unit. The foregoing Units together represent 27.8% of the 53,661 limited partnership units outstanding. The foregoing 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 $100 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 $1,125,000. 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. 15 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 above, 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 This 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. 16 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 17 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 Delaware, 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 18 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 October 13, 2005 19 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. The last Annual Report on Form 10-K filed by the Partnership was 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. II ("Partnership") is a Delaware limited partnership formed pursuant to the Delaware Revised Uniform Limited Partnership Act on July 1, 1986. 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 real properties with the objectives of (i) preserving and protecting the Partnership's capital; (ii) providing cash distributions from operations; (iii) providing capital growth through property appreciation; and (iv) increasing equity in property ownership by the reduction of mortgage loans on Partnership properties. The term of the partnership is sixty (60) years from the date of the Partnership Agreement 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 September 24, 1988, the Partnership closed its offering, having received gross proceeds of $26,830,500 from the sale of 53,661 units of limited partnership interests. According to the Last Form 10-K, the Partnership originally acquired eight properties, which included four apartment communities, three shopping centers and a health care facility. According to the Last Form 10-K, as of December 31, 1998, the Partnership had made cash distributions to Limited Partners of $5,046,241 for the period April 1, 1987 through December 31, 1998. PART II Item 2. Properties The Partnership owns three properties: Sunwood Village Apartments in Las Vegas, Nevada, which has 252 units and, as of June 30, 2005, had gross scheduled rents of $2,173,944 per annum; Oak Terrace Retirement Apartments in Springfield, Illinois, which has 129 units and, as of June 30, 2005, was 85.3% occupied and had gross scheduled rents of $1,258,980 per annum; and, Bayberry Crossing Shopping Center in Lee's Summit, Missouri, which has 56,113 Sq.Ft. and, as of June 30, 2005, had 20 tenants, occupying approximately 87% of the rentable square feet, with an average rent of $10.08 per Sq. Ft. A-1 In March 2005, the Partnership received notice that the foreclosure process for the Sunwood Apartments property had been recommenced. Millenium was able to reach an agreement with the lender by which the lender accepted a partial payment of the total overdue amount on the loan, thereby saving the property from the threat of foreclosure. To perform that agreement, the Partnership borrowed approximately $800,000 from affiliates of Millenium and the property's independent management company that were willing to make such a loan. A company called Mega Ventures has sued to try to enforce an agreement to sell Sunwood signed by the former general partners, for $12.6 Million. Millenium believes the contract was terminated or is otherwise not enforceable and believes it is in the best interest of the Partnership not to sell Sunwood for the price to which the Former General Partners agreed; therefore, Millenium intends to cause the Partnership to vigorously defend the lawsuit, which is filed in the District Court, Clark County, Nevada, Case No. A500656, and captioned Mega Ventures, LLC v. Sunwood Village Joint Venture, LP, et al. The Partnership's properties have suffered from years of neglect and have substantial deferred maintenance. All three 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 the third quarter of 1999. 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, except information for periods after March 2005 is obtained through the Purchaser's role as the successor general partner of the Partnership. The information is not audited and at this time the Purchaser has no means to verify the accuracy or completeness or compliance with generally accepted accounting principles of any information obtained from the Former General Partners. Nevertheless, it represents the most current available information. A-2
SECURED INVESTMENT RESOURCES FUND, LP II CONSOLIDATED BALANCE SHEETS June 30, December 31, December 31, 2005 2004 2003 (unaudited) (unaudited) (unaudited) ASSETS INVESTMENT PROPERTIES Land and Buildings $24,515,510 $24,491,742 $27,368,719 Furniture ,Fixtures and equipment 2,112,914 2,041,809 2,156,054 -------------------------------------- 26,628,424 26,533,551 29,524,773 Less accumulated depreciation 13,846,147 13,607,054 14,804,685 -------------------------------------- $12,782,277 $12,926,497 $14,720,088 -------------------------------------- CURRENT ASSETS Cash 610,217 $1,448,605 ($116,817) Rent and other receivables less allowance of $54,945 in 2004, $60,600 in 2003, $57,646 in 2002 3,400,518 572,193 237,118 Debt issuance costs, net of accumulated 626,953 645,835 580,080 Amortization of $642,568 in 2004,$567,040 in 2003,and $491,512 in 2002 Commercial commissions, deposits and other 580,187 348,663 432,721 Due from related parties 808,946 3,660,840 3,549,152 Sinking Fund 639,745 568,143 439,535 Restricted deposits 792,518 613,764 525,798 -------------------------------------- $7,459,084 $7,858,043 $5,647,587 -------------------------------------- -------------------------------------- TOTAL ASSETS $20,241,361 $20,784,540 $20,367,675 -------------------------------------- LIABILITIES AND PARTNERSHIP CAPITAL Mortgage debt $12,149,487 $12,337,352 $12,393,479 Bond debt 9,037,800 9,000,000 $9,611,709 Accrued interest 76,669 1,109,471 153,258 Accounts payable and accrued expenses 513,787 442,890 589,113 Due to related parties 0 0 0 Unearned revenue 14,340 16,525 7,981 Tenant security deposits 144,511 139,174 136,514 -------------------------------------- TOTAL LIABILITIES $21,936,594 $23,045,412 $22,892,054 -------------------------------------- PARTNERS CAPITAL (DEFICIT) Capital Contribution $16,755,667 $15,955,667 $15,955,667 Partnership deficit (18,450,750) (18,216,539) (18,480,046) -------------------------------------- TOTAL PARTNER CAPITAL (DEFICIT) ($1,695,083) ($2,260,872) ($2,524,379) -------------------------------------- -------------------------------------- TOTAL LIABILITIES AND PARTNERSHIP CAPITAL $20,241,511 $20,784,540 $20,367,675 --------------------------------------
A-3
SECURED INVESTMENT RESOURCES FUND, LP II CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, Years ended December 31, 2005 2004 2003 (unaudited) (unaudited) (unaudited) REVENUES Rents $2,532,236 $5,163,866 $5,197,166 Interest 11,882 6,459 225,157 Maintenance escalations 41,522 80,557 0 ------------------------------------- TOTAL REVENUE $2,585,640 $5,250,882 $5,422,323 ------------------------------------- OPERATING AND ADMINISTRATIVE EXPENSES Repairs and maintenance $129,034 $419,947 $247,138 Payroll 316,152 725,669 725,430 Utilities 184,097 311,513 283,282 Other operating expenses 340,171 765,198 764,536 General and administrative expenses 433,874 333,736 246,289 Management fees 104,539 248,354 348,347 Insurance 69,574 207,754 204,674 Property Tax 203,849 424,660 395,034 ------------------------------------ TOTAL OPERATING EXPENSES $1,781,290 $3,436,831 $3,214,730 ------------------------------------ NET OPERATING INCOME (LOSS) $804,350 $1,814,051 $2,207,593 NON OPERATING EXPENSES Interest expense $780,589 $1,904,772 $1,450,771 Depreciation and amortization 257,976 776,158 983,176 Profit on sale of property 0 (1,130,387) 0 ------------------------------------ PARTNERSHIP INCOME (LOSS) ($234,215) $263,508 ($226,354) ------------------------------------ Allocation of income (loss): General partners ($2,342) $2,635 ($2,264) Limited partners (231,873) 260,873 (224,090) ------------------------------------ ($234,215) $263,508 ($226,354) ------------------------------------ Partnership income (loss) per limited partner unit ($4.38) $4.92 ($4.23)
A-4
SECURED INVESTMENT RESOURCES FUND, LP II CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended June 30, Years ended December 31, 2005 2004 2003 (unaudited) (unaudited) (unaudited) OPERATING ACTIVITIES Partnership loss ($234,215) $263,508 ($226,354) Adjustments to reconcile loss to net cash provided by operating activities: Depreciation and amortization 257,976 776,158 983,176 Profit on sale of property 0 (1,130,387) 0 Change in assets and liabilities: Rents and other receivables (113,260) (335,075) (221,994) Commercial commissions, deposits and other (231,524) 84,058 (17,899) Accrued interest (1,032,802) 956,213 (254,383) Accounts payable and accrued expenses 70,897 (146,223) 22,408 Unearned revenue (2,185) 8,544 (9,891) Tenant security deposits 5,337 2,660 464 ------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $(1,279,776) $479,456 $275,527 ------------------------------------- INVESTING ACTIVITIES Improvement to investment properties ($94,873) ($33,313) ($160,792) Sale of property 0 1,503,669 0 Restricted deposits (178,754) (87,966) (112,914) ------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ($273,627) $1,382,390 ($273,706) ------------------------------------- FINANCING ACTIVITIES Avances to related parties $136,829 ($111,688) $577,921 Advances from related parties 0 0 0 Principal payments on mortgage debt (188,012) (56,128) (212,745) Principal payments on bond debt 37,800 0 (72,552) Capital contributed 800,000 0 0 Increase in sinking fund (71,602) (128,608) (117,324) ------------------------------------- NET CASH PROVIDEDBY (USED IN) INVESTING ACTIVITIES $715,015 ($296,424) $175,300 ------------------------------------- INCREASE IN CASH ($838,388) $1,565,422 $177,121 CASH AT BEGINNING OF YEAR 1,448,605 (116,817) (293,938) ------------------------------------- CASH AT END OF YEAR $610,217 $1,448,605 ($116,817) -------------------------------------
A-5 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. October 13, 2005 MILLENIUM MANAGEMENT, LLC Millenium Management, 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 sir2_scto101305exh2.txt EXH 12.2 AGMT OF TRANSFER & INSTRUCTIONS AGREEMENT OF TRANSFER AND LETTER OF TRANSMITTAL for Units of SECURED INVESTMENT RESOURCES FUND, L.P. II for $100 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. II, a Delaware limited partnership (the "Partnership"), at the cash purchase price of $100 per Unit, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 13, 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] -----------------------/---------- ____________________/____________________ [Print Name] [Date] [Phone Number] / [Fax or E-mail] [ ] Sell ALL OR NONE _______________ __________________________________ Check Box If You Do Not [If Selling Less [Signature of Co-Owner] Want to Sell Unless All than ALL UNITS, Your Units Will Be Bought Specify Number] _______________________/__________ [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. II ------------------------------------------------ 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 sir2_scto101305exh3.txt EXH 12.3 LTR TO UNIT HOLDERS Millenium Management, LLC 199 S. Los Robles Ave., #200 Pasadena, CA 91101 Tel: 626-585-5920 Fax: 626-585-5929 October 13, 2005 TO UNIT HOLDERS OF SECURED INVESTMENT RESOURCES FUND, L.P. II Re: Offer to Purchase Units for $100 Per Unit Dear Unit Holder: Enclosed is an OFFER TO PURCHASE up to 11,000 Units of limited partnership interests in Secured Investment Resources Fund, L.P. (the "Partnership") at a cash purchase price of $100 per Unit, without interest. 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 $100 per Unit in cash. Millenium calculated a current estimated liquidation value of the Partnership of $120 per Unit, considering the estimated property values and the other assets and liabilities of the Partnership. Such estimate is subject to several material assumptions, as described in the Offer. o The Units are illiquid -trades of only 338 Units were reported over the last 12 months, according to an independent industry publication. Such trades reportedly occurred at the average price of $127.16 per Unit, before commissions were deducted. o There is no current plan to sell the Partnership's properties or liquidate the Partnership. Millenium, as general partner, has not yet determined a plan for managing each property held by the Partnership that Millenium believes to be in the best interests of the Partnership. o One of the Partnership's three remaining properties, the Sunwood Village Apartments, is still tied up in litigation. Millenium cannot predict whether or not the Partnership will succeed in preventing a loss of the property at a price that we believe does not represent its full value. Millenium is the general partner of the Partnership and therefore has a conflict of interest in making this Offer. 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 November 15, 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 sir2_scto101305exh4sunwood.txt EXH 12.4 SUNWOOD VILLAGE APPRAISAL COMPLETE APPRAISAL OF REAL PROPERTY Sunwood Village Apartments 4020 South Arville Las Vegas, Nevada IN A RESTRICTED APPRAISAL REPORT As of 4/13/04 Prepared For: SPECS, Inc. Suite LH-06 4200 Blue Ridge Boulevard Kansas City, Missouri 64133 Prepared By: Cushman & Wakefield of Arizona, Inc. Valuation Services, Advisory Group 2525 East Camelback Road Suite 1000 Phoenix, AZ 85016 C&W File 10: 04-9060 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 26, 2004 Mr. Jim Hoyt SPECS, Inc. 1 Main Street Suite LH-06 4200 Blue Ridge Boulevard Kansas City, Missouri 64133 Re: Complete Appraisal of Real Property In a Self-Contained Report Sunwood Village Apartments 4020 South Arville Las Vegas, Nevada C&W File ID: 04-9060 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. 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 of Arizona. 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 Robert J. Ryan, MAI. 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. Mr. Jim Hoyt Specs, Inc. April 26, 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 Fee Simple 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 13, 2004 is: TEN MILLION SEVEN HUNDRED THOUSAND DOLLARS $10,700,000 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 twelve months. Furthermore, a marketing period of approximately twelve 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 ARIZONA, INC. /S/ ROBERT J. RYAN - ------------------------ Robert J. Ryan, MAI Director Nevada Certified General Appraiser License No. 00789 bob_ryan@cushwake.com 602-229-5904 Office Direct 602-229-5996 Fax SUMMARY OF SALIENT FACTS Common Property Name: Sunwood Village Apartments Location: 4020 South Arville Las Vegas, Clark County, Nevada The site is located on the east side of South Arville Street about 200 feet north of Flamingo Boulevard. Property Description: The property consists of a 22-building, two- story garden apartment community containing 252 units on a 9.8 acre parcel of land. Assessor's Parcel Number: 162-18-801-003 Appraisal Guidelines: This appraisal has been prepared in conformance with The Departure Provision of the Appraisal Institute for a Restricted Report guidelines. Interest Appraised: Fee Simple Estate Date of Value: April 13, 2004 Date of Inspection: April 13, 2004 Ownership: Sunwood Village Joint Venture L.P. Occupancy: Current physical occupancy is 86.51 percent, with 218 occupied units and 34 vacant units or units that are being vacated. Tenants are typically employed by the casino hotels and are either singles, couples, or two people sharing an apartment. The subject does not have many families, but does include some retired couples. Current Property Taxes Total Assessment: $3,556,371 2003/2004 Property Taxes: $108,000 (estimated) Highest and Best Use If Vacant: Residential property development to the highest density possible As Improved: As it is currently employed Site & Improvements Zoning: R-4, Multi-family, 24 units per acre Land Area: 9.80 gross acres (9.80 net) 426,888 gross square feet (426,888 net) Number of Units: 252 Number of Stories: two Number of Buildings: 22 Year Built/Renovated: 1985 (n/a) Type of Construction: Wood frame and stucco exterior finish with flat wood deck roof Net Building Area: 194,975 Parking: 365 spaces (1.45:Unit). Some are covered but none are assigned. INDICATED VALUE STABILIZED (Year 1, 6/1/04) Sales Comparison Approach: Indicated Value: $9,875,000 Per Unit: $39,286 Per Square Foot: $ 50.78 Income Capitalization Approach Direct Capitalization Net Operating Income: $858,809 Capitalization Rate: 8.00% Indicated Value: $10,725,000 Per Unit: $42,560 Per Square Foot: $55.06 Reconciled Income Capitalization Approach Value: $10,700,000 Per Unit: $42,460 Per Square Foot: $54.88 FINAL VALUE CONCLUSION $10,700,000 Per Unit: $38,889 Per Square Foot: $50.26 Implied Capitalization Rate: 8.00% 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." This appraisal employs no extraordinary assumptions. 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] View of subject as it fronts Arville facing south [GRAPHIC OMITTED] Entrance to subject from Arville facing east [GRAPHIC OMITTED] View of clubhouse and leasing/manager's office [GRAPHIC OMITTED] Interior of clubhouse [GRAPHIC OMITTED] Second view of clubhouse interior [GRAPHIC OMITTED] View of the pool facing south from in front of clubhouse [GRAPHIC OMITTED] South Arville facing south [GRAPHIC OMITTED] South Arville facing north [GRAPHIC OMITTED] Close view of typical building [GRAPHIC OMITTED] Another view of typical building and apartment entrances [GRAPHIC OMITTED] View of another building with typical balcony and patio (Note Palms Hotel/Casino in background) [GRAPHIC OMITTED] Typical buildings and covered parking [GRAPHIC OMITTED] View of typical entrance to an apartment [GRAPHIC OMITTED] Typical interior of one of three laundry rooms [GRAPHIC OMITTED] Subject's tennis courts [GRAPHIC OMITTED] View of typical landscaped courtyard between buildings. [GRAPHIC OMITTED] Children's playground area [GRAPHIC OMITTED] Typical covered parking [GRAPHIC OMITTED] Kitchen in model [GRAPHIC OMITTED] Vacant kitchen [GRAPHIC OMITTED] Living room in model [GRAPHIC OMITTED] Living room in vacant unit [GRAPHIC OMITTED] Bedroom in model [GRAPHIC OMITTED] Vacant unit bedroom TABLE OF CONTENTS INTRODUCTION 1 REGIONAL ANALYSIS 6 LOCAL AREA ANALYSIS 12 APARTMENT MARKET ANALYSIS 14 SITE DESCRIPTION 17 IMPROVEMENTS DESCRIPTION 19 HIGHEST AND BEST USE 22 VALUATION PROCESS 24 SALES COMPARISON APPROACH 26 INCOME CAPITALIZATION APPROACH 32 RECONCILIATION AND FINAL VALUE OPINION 45 ASSUMPTIONS AND LIMITING CONDITIONS 46 CERTIFICATION OF APPRAISAL 49 ADDENDA 50 INTRODUCTION Identification of Property Common Property Name: Sunwood Village Apartments Location: 4020 South Arville Las Vegas, Clark County, Nevada 89103 The site is located on the east side of South Arville Street about 200 feet north of Flamingo Boulevard. Property Description: The property consists of a 19 year old, 22-building, two-story garden apartment complex containing 252 units on a 9.8 acre site. Assessor's Parcel Number: 162-18-801-003 Property Ownership and Recent History Current Ownership: Sunwood Village Joint Venture L.P. Sale History: The property has not transferred within the past three years to the best of our knowledge. However, we have been informed by the owners there is an unsolicited offer of over $12,000,000. 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 evaluating potential financing on a sale transaction. 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 13, 2004. The property was inspected on April 13, 2004 by Robert J. Ryan, MAI Property Rights Appraised Since the subject is leased but with short term lease agreements typical of an apartment complex, we are estimating an opinion of the market value of the 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 (USPAP) for a Self-Contained 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 sub-market, 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. 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. 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. 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 Clark County as Parcel Number 162-18-801-003. REGIONAL ANALYSIS [GRAPHIC OMITTED] REGIONAL MAP 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 Las Vegas about two miles west of the Las Vegas strip. Economic & Demographic Profile The following profile of the Las Vegas metropolitan area 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. Las Vegas Employment Growth 2002-04 4 2002-07 4 Best= 1 Worst = 325 MSA Life Cycle Phase Mature Vitality Best = 1 Worst = 325 169 Cost of doing business U.S.=100% 98% Cost of Living U.S.=100% 104% - --------------------------------------------------------------- Relative Employment Performance (1991=100) [GRAPHIC OMITTED-Line graph 1990-2007] - --------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2002 Indicators 38.6 40.9 43.3 46.3 49.5 50.9 52.3 Gross Metro Product, C$B 9.7 6.0 5.8 7.1 6.7 3.0 2.7 % Change 592.1 631.4 630.0 713.3 752.2 783.4 787.9 Total Employment (000) 8.8 6.6 5.0 7.6 5.4 4.1 0.6 % Change 5.5 4.1 4.2 4.4 4.1 5.4 5.7 Unemployment Rate 11.0 10.1 11.3 7.6 8.8 5.0 4.2 Personal Income Growth 1,262.4 1,346.6 1,426.9 1,503.1 1,582.9 1,653.3 1,722.3 Population, (000) 20,513 20,555 21,628 21,823 23,169 24,012 24,702 Single-Fam1ily Permits 11,868 10,321 10,977 6,977 4,993 7,926 7,249 Multifamily, Permits 118.5 122.9 127.9 130.6 137.3 148.5 160.0 Existing Home Price ($Ths) 7,162 7,057 12,580 10,648 9,757 22,129 29,292 Mortgage Originations ($Mil) 63.2 74.6 69.9 65.9 68.9 57.6 56.4 Net Migration (000) 8,192 10,729 12,384 11,322 10,799 14,439 15,882 Personal Bankruptcies
Indicators 2003 2004 2005 2006 2007 Gross Metro Product, C$B 54.6 57.1 59.2 62.3 65.2 % Change 4.3 4.6 3.7 5.1 4.7 Total Employment (000) 806.8 832.7 859.2 896.6 930.9 % Change 2.4 3.2 3.2 4.4 3.8 Unemployment Rate 5.4 5.3 5.0 5.0 4.9 Personal Income Growth 5.7 5.9 6.7 7.6 7.0 Population, (000) 1,790.9 1,851.0 1,905.1 1,980.1 2,054.6 Single-Fam1ily Permits 30,472 28,345 26,045 27,285 27,593 Multifamily, Permits 10,203 6,556 6,315 7,449 8,274 Existing Home Price ($Ths) 179.5 186.4 192.1 196.5 201.4 Mortgage Originations ($Mil) 42,048 23,774 19,340 20,971 22,423 Net Migration (000) 56.7 47.8 41.7 62.3 61.5 Personal Bankruptcies 17,018 15,554 14,194 15,033 16,861
STRENGTHS - - Nevada has no personal income tax. - - Robust population growth supports local industries - - Housing is affordable.. WEAKNESSES - - Over-reliance on tourism makes employment growth volatile and endangers fiscal conditions. - - Low per capita income, and weak income growth. - - Water scarcity may ultimately contain growth. - ------------------------------------------------------------- [GRAPHIC OMITTED-Bar graph] CURRENT EMPLOYMENT TRENDS November 2003 Employment Growth % Change Year Ago Total 4.0 Construction 8.3 Manufacturing 4.6 Trade 4.9 Trans/Utilities 1.8 Information -4.7 Financial Activities 5.3 Prof & Business Svcs 3.6 Edu & Health Svcs 6.3 Leisure & Hospitality 3.1 Other Services 1.4 Government 3.1 - ------------------------------------------------------------- Forecast Risks Short Term [Up Arrow] Long Term [ Down Arrow] Risk-Adjusted Return, '02-07:1.08% UPSIDE - - Industrial base diversifies to a greater extent than anticipated. - - Tourism industry invests more heavily in non-gaming attractions. - - State government broadens the tax base. DOWNSIDE - - Housing market slumps due to unexpectedly slow migration. - - Sustained strong U.S-dollar cuts into foreign arrivals. - ------------------------------------------------------------- Recent Performance. The Las Vegas economy is growing at a strong and accelerating pace, leading the nation's large metro areas in job growth. Visitor arrivals, gaming revenue, and hotel performance are making sustained, incremental improvements, and construction activity is heating up. The housing market is enjoying a robust expansion, with building and prices up strongly over year-ago levels. Population growth is cooling a bit, but demographic forces continue to argue for healthy short and long-term economic expansion. Lack of industrial diversity remains a long term threat to growth, however. The private and public sectors are disproportionately reliant on the continued expansion of tourism. Global recovery. The strength of the global economic recovery is a crucial factor in determining the near-term outlook for LAS. LAS was the sixth most popular destination city in the continental U.S. for foreign tourists in 2002, and foreigners make up a nontrivial portion, around 12%, of LAS's visitor base. But foreigners' share dropped to 8% last year, even as overall visitation was basically flat. An upswing in international visitors is essential to the growth in the tourism industry. Air service to Europe and Asia is increasing, and the metro area set up a tourism promotion office in Beijing in October, signaling a clear intention to tap that market. A downside risk lies in an unexpectedly sharp appreciation of the U.S. dollar which would trim affordability for foreign visitors. Conventions. Convention attendance in LAS has been very strong, up 13% year to date through October. Private convention center additions. such as Mandalay Bay's expansion to 1.8 million sf of meeting space earlier this year, have vaulted LAS to the top three convention markets by capacity. However, while its gargantuan size gives it unique leverage for bigger shows, half of all LAS convention attendees during the first half of 2003 attended conventions of 500 people or fewer. This puts half of the area's convention business in competition with a very large number of smaller venues across the country. Only a quarter of the LAS convention attendees were part of conventions of 15,000 or greater. Thus, while the mammoth capacity of some LAS venues is a compelling factor in a small number of cases, in the majority of cases, LAS actually faces a large number of competitors. Retail. Retail employment growth is picking up in LAS, and this growth reflects two things. First, retail demand is recovering as visitor arrivals and spending rebound; payrolls, wh1ch held flat through 2002, have had to play catch-up. Second, growth reflects a long-term trend of infusing LAS destinations with a higher concentration of retail outlets. Expansions already planned for the Strip will add 1.5 million sf, or about 50% more space, to the existing retail inventory. Mandalay Place, which opened this fall, brings 40 new stores and restaurants to the south end of the Strip. The Strip's glitzy Fashion Show mall will more than double its space to 1.9 million sf next year when its $1 billion expansion wraps up. And Steve Wynn's Revile resort, opening in 2005 will bring the first auto dealership (Maseratis and Ferraris) to the Strip. Retail rents and vacancy rates have remained stable amid the building boom, but will warrant watching. Las Vegas is posting enviable job growth, and will benefit further from the national and global recovery in 2004. Long term, poor income trends present a challenge to the advancement of local industries and make the metro area all the more reliant on the inflow of tourist dollars. Nevertheless, due to strong population trends and low business costs, the outlook calls for exceptionally strong growth. LAS will be one of the top performing metro areas in the U.S. over the forecast horizon. David Givens December 2003 TOP EMPLOYERS MGM Mirage 39,000 Mandalay Bay Resort & Casino 25,000 Park Place Entertainment Corporation 19,620 Station Casinos 10,000 Hanah's Entertainment, Inc. 9,500 Nellis Air Force Base 7,774 Coast Casinos 7,252 Boyd Gaming Corporation 7,000 Venetian Casino Resorts LLC 4,600 University Medical Center of S. Nevada 3,800 Sunrise Hospital and Medical Center 3,500 Aladdin Resort & Casino 2,800 Imperial Palace Hotel and Casino 2,400 University of Nevada-Las Vegas 2,371 Tropicana Hotel 2,360 Icahn Gaming 2,300 St. Rose Dominican Hospitals 2,100 Community College of Southern Nevada 2,000 Riveria Hotel Casino 2,000 GES Exposition Services, Inc. 500 Sources: Economy.com 2003 & Guide to Military Installations, 2003 & Las Vegas Business Press, March 2003 Public Federal 10,501 State 14,029 Local 61,922 2002 - ------------------------------------------------------------- INDUSTRY DIVERSITY Most Diverse (U.S.) 1.0 0.80 0.60 LAS 0.23 0.40 0.20 0.00 Least Diverse EMPLOYMENT VOLATILITY DUE TO U.S. FLUCTUATIONS: 21% Not due to U.S.; 79% Due to U.S. Relative to U.S.: US- 100; LAS =228 [GRAPHIC OMITTED-Bar graphs] - -----------------------------------------------------
COMPARATIVE EMPLOYMENT AND INCOME % of Total Employment Average Annual Earnings Sector LAS NV US LAS NV US Construction 9.6% 8.7% 5.2% $47,727 $47,977 $39,845 Manufacturing 3.1% 4.1% 12.0% $39,795 $44,780 $48,756 Durable 65.9% 64.9% 62.0% nd $46,853 $50,404 Nondurable 34.1% 35.1% 38.0% nd $40,557 $45,969 Transport/Utilities 3.8% 3.9% 3.6% $37,405 $38,715 $44,972 Wholesale Trade 2.8% 3.3% 4.4% $48,433 $48,164 $51,842 Retail Trade 11.3% 10.9% 11.7% $25,161 $25,038 $22,635 Information 1.7% 1.6% 2.6% $53,542 $51,359 $69,569 Financial Activities 5.5% 5.3% 6.0% $26,688 $26,928 $41,740 Prof. and Bus. Services 11.2% 10.8% 12.4% $39,767 $39,576 $43,053 Educ. and Health Services 6.8% 6.8% 12.5% $39,549 $39,589 $34,032 Leisure and Hosp. Services 30.2% 28.3% 9.0% $28,959 $28,196 $19,135 Other Services 2.9% 2.9% 3.9% $20,742 $20,799 $19,842 Government 11.0% 12.4% 16.2% $49,858 $50,829 $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: Aa2 LEADING INDUSTRIES NAICS Industry Employees (000) 7211 Traveler Accommodations 161.5 7221 Full-Service Restaurants 26.7 7222 Limited-Service Eating Places 23.7 2383 Building Finishing Contractors 16.1 2382 Building Equipment Contractors 15.8 2381 Foundation, Struc., & Bldg. Ext. Contractors 14.7 2360 Construction of Buildings 14.0 5617 Services to Buildings and Dwellings 12.7 7139 Other Amusement and Recreation Industries. 10.7 2370 Heavy and Civil Engineering Construction 8.6 4853 Taxi and Limousine Service 7.5 4481 Clothing Stores 7.3 5616 Investigation and Security Services 6.9 5311 Lessors of Real Estate 6.4 2389 Other Specialty Trade Contractors 6.1 High-tech employment 20.7 As % of total employment 2.6 Source: BLS, Economy.com, 2002
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MIGRATION FLOWS Into Las Vegas Number of Migrants Median Income Los Angeles 9,794 20,514 Riverside 4,813 20,744 San Diego 3,374 25,771 Orange County 3,185 29,256 Chicago 2,828 26,533 Phoenix 2,699 24,335 Oakland 1,970 32,285 Salt Lake City 1,824 25,860 San Jose 1,673 34,438 Honolulu 1,412 19,237 Total Inmigration 94,429 22,939 From Las Vegas Los Angeles 4,046 17,362 Riverside 3,472 19,688 Phoenix 2,912 24,405 San Diego 1,738 21,214 Orange County 1,305 22,001 Reno 1,004 19,112 Chicago 984 21,174 Salt Lake City 973 22,787 Denver 821 24,370 Seattle 722 20,579 Total Outmigration 60,549 20,976 Net Migration 60,549 20,976
NET MIGRATION, LAS [GRAPHIC OMITTED-Bar Graph] Domestic Foreign Total 1998 40,760 20,153 69,913 1999 39,375 26,546 65,921 2000 45,120 23,746 68,866 2001 43,922 13,653 57,575 2002 42,765 13,617 56,382 Source: IRS (top), 2002; Census Bureau & Economy.com, 2002
- ------------------------------------------------ PER CAPITA INCOME [GRAPHIC OMITTED-Bar Graph] 27,916 LAS 30,128 NV 30,413 US Source: Bureau of Economic Analysis, 2001 - ---------------------------------------------- LAS VEGAS Construction is Outpacing Demographic Demand [GRAPHIC OMITTED-Line Graph] LAS can expect a deceleration in homebuilding over the next one to two years as the moderation in household formations weighs on the demand for new units. LAS is not an overbuilt market, but inventories have edged upward over the last year in the wake of strong building, especially in the single-family market. In addition, price appreciation in the market has outpaced household income growth for three years, which cannot be sustained indefinitely. Slowing price appreciation will weigh on building activity. Underway but Unfinished [GRAPHIC OMMITED-Bar Graph] LAS's tourism recovery is under way, but the industry is still shy of its pre-recession peak by most measures. Gaming revenue on the Strip showed very strong growth during the third quarter in part because of easy year-over-year comparisons, but also because of a genuine, late summer pickup in travel volume. Hotel performance in LAS is looking better by the week, as room rates and occupancies beat 2002 levels. Forward-looking room rate surveys show strength through the New Year. By mid-2004, with a continued macro recovery, tourism indicators should reach peak levels again. Markets Over the Horizon [GRAPHIC OMITTED-Bar Graph] Far-flung air markets represent growth opportunities for Las Vegas. China's contribution could help to boost Asian visitation tremendously, once direct air service to that country is established. Less than 10% of U.S.-bound Western Europeans come to LAS, although Virgin's service from London has been very well received, suggesting that there is room for growth. Under 5% of South American visitors to the U.S. make it to LAS, in part because the East Coast city of Miami is a hub for much of the U.S.-South American air traffic. With concerted overseas marketing, LAS could strengthen its international visitation and diversify its tourism base. Non-tourism Sectors Grow at Solid Pace [GRAPHIC OMITTED-Bar Graph] LAS's non-tourism industries have held their own through the area's recession and recovery. Growth in total employment, ex leisure and hospitality services, has topped 3% on a year-ago basis on the strength of construction, healthcare and local government. Driven by population growth, these industries were more immune to the recession than were travel-based industries that feed off a prosperous national economy, and they've added a measure of stability to the otherwise volatile expansion of the gaming-based tourism sector. Critical Observations The following bullet points summarize some of our general observations relating to the subject's region. .. Location - The subject is located in an older but central location within the Las Vegas MSA. It is convenient to employment with the casino hotels that are located along the famed Las Vegas Boulevard "strip" about two miles east of the subject. .. Economy - Las Vegas's economy is expanding. Employment is not well diversified and is heavily dependent upon tourism and the gaming industry. However, the subject's proximity to the "strip" and the casino-hotels is a positive for many of the subject's residents and area resident that are employed by them. This is not expected to change in the near future. .. Population - Population growth in the MSA is forecasted to be 3.7 percent per year. .. Income - Income levels are projected to increase at an annual rate of about 5.5 percent per year over the next five years. Per capita income is below statewide levels and below the national average due to a high incidence of lower wage positions in the service and gaming industry, However it has a relatively average cost of living. .. Strengths - Strengths of the region include affordable housing, no personal income tax and a growing population and market. .. Weaknesses - Weaknesses within the MSA include an over-reliance on tourism, low educational levels of much of the work force and low per capital income. A long term problem is water scarcity which will worsen if growth is not either curtailed or better regulated. Conclusion In light of the social and economic attributes of the greater Las Vegas area, we are cautiously optimistic about the short-term outlook. Long-term, the region should see stability and moderate growth, with increasing real estate values. LOCAL AREA MAP [GRAPHIC OMITTED] LOCAL AREA ANALYSIS Location The property is located in a central portion of the City of Las Vegas in Clark County. Generally, the boundaries of the immediate area are Desert Inn to the north, Highway 1-15 to the east, Tropicana Boulevard to the south and Jones Boulevard to the west. Access Local area accessibility is generally good, relying on the following transportation arteries: Local: Most of the Las Vegas area is designed in a grid pattern with major arterials at one mile intervals. The local area is an example. Major east-west thoroughfares include Tropicana and Flamingo Boulevards to the south and Spring Mountain Road, Desert Inn Road and Sahara Avenue to the north. North- South routes include Valley View Boulevard to the east and Decatur and Jones boulevards to the west. Regional: Interstate 15 provides regional access and egress with the nearest access point being about 1.5 miles east of the subject at Flamingo Boulevard. 11 interchanges with highway 95 about seven miles north of Flamingo. There is some public transportation along major arterials like Flamingo. Given the level of build-out, there is little likelihood the current road system will experience any change. Nearby and Adjacent Uses The subject's local area is predominantly composed of apartment complexes with most of the subject's competition located within one to two blocks. Major thoroughfares, such as those mentioned above are commercial in character which is typical of the city in general. Local Area Characteristics The subject's local area developed in the late 1970's through the early to mid 1980's. At that point it was nearly 100 percent developed. The newest addition is the Palm Casino Hotel located about one block to the south on the south side of Flamingo Road. It required the acquisition and demolition of some small and older one story commercial uses. Major arterials like Flamingo Road are commercial. Within one block of the subject, on the southeast corner of Arville and Flamingo is the Palm Hotel and its parking garage. The southwest corner is improved with a mid sized strip center with local retailers and businesses. The northwest corner is improved with a Chevron Station, a "Terrible's" car wash and a bank branch (all are behind the subject). Also within one to three blocks is the Gold Coast Casino and Hotel and the much larger Rio Casino Hotel; both east of the subject and Arville Road. The northwest corner is a walled area separating Flamingo Road from a residential area comprised of one family homes. The interior streets are dominated by two story apartment complexes similar in age to the subject, but with some variation in observable condition and quality. The area also includes two condominium projects and a mobile home park about one half mile northwest of the subject. Improvements in closest proximity to the subject are the following: North: Grandview apartments, one of the subject's competitors East: Wynn Drive and Gold Coast Casino Hotel South: Three story office building, a bank branch, Sonic Restaurant that is under construction (all along the north side of Flamingo and south side of subject site) West: Opposite side of Arville - one family homes Special Hazards or Adverse Influences There are no detrimental influences such as land fill, flood zones, or uses that would result in air and/or noise pollution in the vicinity of the subject. Land Use Changes The pattern of land described above is not likely to change without the acquisition of older buildings and their subsequent demolition. An example is the Palm Hotel and Casino. However, the interior streets have been and will remain residential with little if any change. Conclusion The are can best be described as stable. It is not likely, due to its built-out nature, population or households will increase in the local area. It experiences steady and sometimes heavy traffic patterns because of Flamingo Road being a major arterial and due to the presence of the Palm, Gold Coast and Rio hotel and resorts all within three blocks of the subject. The positive relating to their proximity is the employment they offer and in fact provide to area residents. APARTMENT MARKET ANALYSIS Las Vegas Multifamily Market Overview In order to better analyze the financial feasibility and marketability of residential uses within the subject development, a detailed discussion and analysis of the residential market conditions for metropolitan Las Vegas and the subject's market area are provided. Permit Activity/Demand Historically, metropolitan Las Vegas multifamily residential building activity can be best characterized as a series of cycles. Peaks in new permits occurred in 1988/1989 (13,341 to 18,583) arid 1996/1998 (11,287 to 10,076). This was followed by gradual declines in new construction as demand caught up with the supply. Since 2000, multifamily permits gradually increased through 2002, then declined in 2003. Depending on the source, new units are forecast in 2004 to range from 3,000 to 5,000.
MULTI-FAMILY SUMMARY YEAR Units Units Absorbed Vacancy Permitted completed 1999 5,400 7,800 6,400 4,6% 2000 5,100 5,000 3,700 4,8% 2001 7,900 5,300 1,200 6.1% 2002 7,300 4,700 4,000 8.4% 2003 4,500 4,800 7,150 7.9% 2004 est 5,000 5,000 6,000 6.8% Source: CBRE
The 10-year average for new construction in Las Vegas has been 5,860. Average absorption for the past 10 years is 4,990. In 2004, it is expected that vacancies should decline as absorption exceeds new supply. Vacancy Several different sources track vacancy in Las Vegas, each having slightly different figures. Historical vacancies in Las Vegas are summarized as follows.
HISTORICAL AVERAGE VACANCY - LAS VEGAS 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 3.7% 2.9% 3.2% 5.2% 7.8% 6.7% 4.6% 4.8% 6.1% 8.4% 6.3% Source: Hendricks & Partners
The detailed monthly 2003 vacancy per CBRE is summarized as follows. Overall Year Month (all classes) 2003 January 9.22% February 8.78 March 8.04 April 8.46 May 8.25 June 8.51 July 7.85 August 6.98 September 6.51 October 6.82 November 7.64 December 7.59 AVG 7.89 Source: CBRE
Due to the decreased travel post 9/11/01, which reduced hotel and casino traffic, apartment occupancies suffered in 2002 due to staff reduction at hotels and casinos and continued new supply. However in 2003, as the national economy recovered, normalized travel resumed, and new home prices continued to increase, apartment demand increased, allowing vacancy levels to decrease. Rent Levels The following table summarizes a 12-month comparison of vacancy and rents for the Las Vegas apartment sub-markets compiled by Hendricks & Partners. FOURTH QUARTER 2002/2003 LAS VEGAS APARTMENT MARKET RECAP Vacancy Average Rents 4th Qtr. 4th Qtr. 4th Qtr. 4th Qtr. Annual Market Area 2003 2002 2003 2002 Increase Lone Mountain/ NW Las Vegas 5.8% 7.0% $763 $741 2.9% North Las Vegas 5.8% 7.1% $719 $748 -3.9% Downtown 6.2% 6.0% $576 $579 -0.6% Sunrise Manor/East LV 5.0% 8.8% $661 $658 0.4% Spring Valley/Enterprise 4.1% 7.1% $754 $751 0.4% The Strip 4.6% 8.1% $738 $712 3.6% Paradise 4.6% 6.6% $732 $723 1.2% Green Valley/Henderson 4.7% 7.1% $835 $818 2.1% Totals 4.8% 7.4% 746 $734 1.6% Source: Hendricks & Partners Apartment Update Las Vegas apartment rental rates continue to grow but at a much slower rate, approximately 1.5 percent through 2003 versus 0.9 percent in 2002. The current rent rate per the Marcus & Millichap averages $746 per month. Due to the significant amount of recent supply additions, it appears that rental concessions, primarily in the form of free rent, mitigated a large portion of the rental rate growth, which was as high as 3.7 percent in 1996. CBRE reports increasing rents over the past year, currently averaging $768 per month, or $0.81 per square foot, compared with $755, or $0.82 per square foot in 2002, an increase of 1.7 percent. Overall, it appears that rents increased slightly in 2003, although concessions are widespread. However, all sources expect rent to rebound in 2004, with 2 to 3 percent rent growth. Concluding Citywide Remarks The current market conditions are best summarized as follows: . Unemployment rates, which had increased after 9/11, have again decreased, and employment growth has recently been increasing, and is expected by most economists to have modest growth in 2004. . As new residents move to Clark County, demand for housing stays strong. Mortgage interest rates are still very low relative to the 80s and 90s, and growth in personal income has outpaced job growth, leading to a steady increase in demand for housing in the county. Home prices continued to rise, and the median price of a new single-family home rose to almost $200,000, up 9.3 percent from a year ago. . The gaming industry continues to advance despite volatility within the local and national economy. In general, it appears the Las Vegas' apartment market remains relatively strong, despite the substantial building and increased vacancies that have occurred during the past several years. SITE DESCRIPTION Location: 4020 South Arville Las Vegas, Clark County, Nevada 89103 The site is located on the east side of South Arville Street about 200 feet north of Flamingo Boulevard. Shape: Rectangular Topography: Level at street grade Land Area: 9.80 gross acres (9.80 net acres) 426,888 gross square feet (426,888 net square feet) Frontage, Access, Visibility: The site has average visibility and access from both the east side of South Arville and the west side of South Wynn Drive. The site is long and narrow with an atypical 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 structures. We did not observe any evidence to the contrary during our physical inspection of the property. Drainage appears to be adequate. Utilities Water: City of Las Vegas Sewer: City of Las Vegas Electricity: Nevada Power Gas: S outhwest Gas Telephone/Cable: Numerous/Cox Communications Site Improvements: The site improvements include concrete paved parking areas, curbing, sign age, 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 x dated September 27, 2002. Flood Zone: FEMA Zone X: Areas determined to be outside the 500 year flood plain. 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. Seismic Hazard: According to a 1996 International Conference of Building Officials' map of the United States, the subject is not believed to be in a special seismic hazard zone. 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 has a loner and more narrow that is typical, but it is functional for the current use. Real Estate Taxes The subject's most current assessed value is $3,556,371 resulting in taxes of $27,131 or $107.66 per unit Zoning: The subject site is zoning for multi- family residential use. Although we did not conduct 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. IMPROVEMENTS DESCRIPTION The following description of improvements is based upon our physical inspection of the improvements along with our discussions with the building manager. The unit mix is as follows.
UNIT MIX No. Unit NRA Units Actual No. Plan BR BA Features Units (SF) (SF) Leased Occupancy 1 one bedroom 1 1 CF. BALC/PATIO 107 625 66.875 94 87.9% 2 small 2 bdrm. 2 1 CF. BALC/PATIO 40 840 33.600 35 87.5% 3 large 2 bdrm. 2 2 CF. BALC/PATIO 105 900 94.500 89 84.8% TOTAL AVERAGE 252 774 194.975 218 86.5% KEY TO FEATURES FP - FIREPLACE WDC - W/D CONNECTION TH - TOWNHOUSE/STUDIO WD - WASHER/DRYER CFM - CEILING FAN MASTER GT - GARDEN TUB CFl - CEILING FAN LIVING M - MICROWAVE
General Description Number of Units: 252 Year Built: 1985 Number of Buildings: 22 Number of Stories: two Net Rentable Area: 194.975 square feet Design and Functionality: The subject consists of a garden apartment property of wood frame and stucco exterior finish with flat wood deck roof and flat roof with built-up materials. The subject has Average overall appeal to prospective apartment tenants. Amenities: One swimming pool. one whirlpool. three laundry rooms, exercise room, Barbeque grills. children's playground on-site courtesy patrol and some covered parking Construction Detail Foundation: Poured concrete slab Framing: Wood frame and stucco exterior finish with flat wood deck roof Floors: Upper floors are of wood decking Exterior Walls: The exterior facade of the building consists of stucco over wood. Roof Cover: Flat roofing system consisting of built-up assemblies with composition shingle cover. Windows: Units have thermal windows in aluminum frames. The windows are single paned with screens. Mechanical Detail Heating: Heat to the subject is supplied either by ground mounted or roof mounted, electric single unit forced air heaters. Heating is supplied via baseboard converters with local zone temperature control. Cooling: The subject is cooled by either ground mounted or roof-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: Electricity for the subject is obtained through low voltage power lines. The building features low voltage power with 480-volt electric service. Elevator Service: The subject does not contain elevators. Fire Protection: The building is not fully sprinklered. Security: A tenant, who is a member of the city police force patrols the grounds and is provided a discounted monthly rent. Interior Detail Layout: The subject property is a 22-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 shower/tub with wall mounted showerhead, toilet and sink and sheet vinyl floor covering, and a combination wall papered gypsum board walls. Site Improvements Parking: 365 spaces (1.45:Unit). Some are covered but none are assigned. Onsite Landscaping: A variety of trees, shrubbery and grass. Other: Concrete curbs and walkways. Summary Condition: The subject improvements are in average condition given its competitive position. There are currently no "downed" or unleasable units. In fact, the current deferred maintenance (areas that need paint and upgrade) is estimated herein to be $45,000. The property is being maintained and provides an average appearance relative to competing properties within its sub-market. 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 good and is consistent with the comparables in the micro-market. Layout & Functional Plan: Average Year Built: 1985 Effective Age: 19 years Expected Economic Life: 45 years Remaining Economic Life: 26 years Americans With Disabilities Act The Americans With Disabilities Act (ADA) became effective January 26, 1992. We have not made, nor are we qualified by training to make, a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey and a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect 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 are thought to 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. In both cases, the property's highest and best use must meet four criteria described above. 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 residential uses. Aside from the site's zoning and 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 "Property Description," 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/urban uses. Financial Feasibility and Maximal Productivity The third and fourth tests are, respectively, what is 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 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 residential 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 support 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. 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 particularity 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 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. 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. 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. [GRAPHIC OMITTED] COMPARABLE APARTMENT PROPERTY SALES MAP
APARTMENT SALES Name Grantor Sale Price Average % Occ. Quality SP/SF ------- ------- ----------- -------- -------- ------- ------- No. Address Grantee Date Bldg SqFt # Units Year SP/Unit Built 1. Cypress EQR-Cypress Point Point Vistas $13,850,000 898 92.0% average $72.73 5275 W. Tropicana 15th & Sanchez Partners 12/03 190,440 212 units 1989 $65,330 2. The Ritz The Ritz Apartments, LLC $12,700,000 1,038 98.0% average $62.44 4250 S. Jones Blvd. 4250 S. 5/03 203,408 196 units 1990 $64,796 Jones LLC 3. Sandpebble Legacy $10,880,000 739 91.0% average $52.58 Village Sandpebble 4480 Sirious Sandpebble 4/03 206,920 280 units 1980 $38,857 Avenue Village Apt. Homes (LLC) 4. Woodcreek Royal Palms Apartments $10,600,000 962 85.0% average $47.48 4485 Pennwood Pennwood Partners Avenue (LLC) 12/02 223,240 232 units 1978 $45,690 5. Emerald Emerald Park Parkm Apartments Associates $11,500,000 650 8600.0% average $58.96 4545 DOIT Park Pennwood Associates Avenue (LLC) 11/02 195,040 300 units 1978 $38,333 Expense Name Grantor Ratio NOI/Unit ------- ------- -------- -------- No. Address Grantee EGIM OAR Comments 1. Cypress EQR-Cypress 45% $4,789 Unit mix is one bed- Point Point Vistas room of 720 square feet, and both small 2 bedroom 5275 W. 15th & (970 sf) and large 2 Tropicana Sanchez bedroom of 1,100 square Partners feet. Two to three story, superior amenities and appeal. 2. The Ritz The Ritz Apartments, LLC 34% $5,443 The complex consists of 44 1 bedroom (788 sf), 4250 S. 32 small 2 bedroom Jones Blvd. 4250 S. 7.86 8.40% (1,073 s.f.) and 122 Jones LLC large 2 bedroom of 1,120 sq. ft. it is a Class B project with 2 pools, rec room and some fireplaces in units. 3. Sandpebble Legacy 44% $3,497 It is a two story wood Village Sandpebble frame with studios and 3 bedroom units. The 72 4480 Sirious Sandpebble 6.28 9.0% 1 bedroom units are 600 Avenue Village Apt. square feet and the 2 Homes (LLC) lines of two bedroom units are 800 and 850 square feet. It has one pool and laundry rooms. 4. Woodcreek Royal Palms Apartments 47% $3,413 This is an older complex of wood frame and wood 4485 Pennwood construction. The one Pennwood Partners bedroom units are 674 sf Avenue (LLC) 7.14 7.47% and the 2 two bedroom lines are 807 and 1,080 square feet. it also includes some 3 and 4 bedroom units. it has 2 pools, and washer/dryer hook-ups. 5. Emerald Emerald Park Parkm Apartments Associates N.A. $3,324 This is an older complex of wood frame 4545 DOIT Park construction. The one Pennwood Associates bedroom units are 600 Avenue (LLC) N.A. 8.67% square feet, and there are small and large 2 units of 800 and 850 square feet respectively it has one pool, a tennis court and laundry.
Sale Price Average % Occ. Quality SP/SF Ratio NOI/Unit ------- -------- ------- ------- ----- ------ -------- Date Bldg # Units Year SP/ EGIM OAR SqFt Unit Survey Minimum $10,600,000 650 SF 85.0% N/A $47.48 34% $3,324 Survey Maximum $13,850,000 1,038 SF 8600.0% N/A $72.73 47% $5,443 Survey Average $11,906,000 857 SF 1793.2% N/A $58.84 42% $4,093 Survey Minimum 11/02 190,440 SF 196 units 1978 $38,333 6.28 73.33% Survey Maximum 12/03 223,240 SF 300 units 1990 $65,330 7.50 9.00% Survey Average 4/03 203,810 SF 244 units 1983 $50,601 6.97 8.17% Subject Property N/A 774 SF 86.5% average N/A 54% $3,227 N/A 194,975 SF 252 1985 N/A N/A N/A
- -------------------------------------------------------------------------------- IMPROVED COMPRABLE SALE ADJUSTMENT GRID - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ECONOMIC ADJUSTMENTS (CUMULATIVE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No. $/Unit Date Property Financing & Exp. After Market* Subtotal Rights Conditions of Purchase Conditions Conveyed Sale - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 $65,330 Fee Simple/Mkt. Arms-Length None Similar $65,330 12/03 0.0% 0.0% 0.0% 0.0% 0.0% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 $64,796 Fee Simple/Mkt. Arms-Length None Similar $38,857 5/03 0.0% 0.0% 0.0% 0.0% 0.0% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 $38,857 Fee Simple/Mkt. Arms-Length None Similar $38,857 4/03 0.0% 0.0% 0.0% 0.0% 0.0% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4 $45,690 Fee Simple/Mkt. Arms-Length None Similar $45,690 7/03 0.0% 0.0% 0.0% 0.0% 0.0% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5 $38,333 Fee Simple/Mkt. Arms-Length None Similar $13,914 11/02 0.0% 0.0% 0.0% 0.0% 0.0% - -------------------------------------------------------------------------------- PROPERTY CHARACTERISTIC ADJUSTMENTS (ADDITIVE) No. Location Size Ave, Amenities Unit Utility Economics Quality Size Conditions 1 Superior Smaller Superior Superior Similar Similar Similar -15.0% -10.0% -10.0% -5.0% 10.0% 0.0% 0.0% 2 Superior Smaller Superior Superior Similar Similar Similar -5.0% -10.0% -5.0% -5.0% 0.0% 0.0% 0.0% 3 Similar Similar Similar Similar Similar Similar Similar 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4 Similar Smaller Superior Superior Similar Similar Similar 0.0% -5.0% -5.0% -5.0% 0.0% 0.0% 0.0% 5 Similar Similar Inferior Similar Similar Similar Similar 0.0% 0.0% 5.0% 0.0% 0.0% 0.0% 0.0% No. Other Adj. Overall $/Unit 1 Similar $39,198 Superior 0.0% -40.0% 2 Similar $48,597 Superior 0.0% -25.0% 3 Similar $38,857 Similar 0.0% 0.0% 4 Similar $38,836 Superior 0.0% -15.0% 5 Similar $40,250 Inferior 0.0% 5.0%
SUMMARY Price Range Unadj. Adj. *Market Conditions Adjustment $/Unit $/Unit Low $38,333 $38,836 Compound annual change in market conditions: 2.00% High $65,330 $48,597 Date of Value (for adjustment calculations): Apr-04 Average $50,601 $41,148 Net Adjustment Low -40.0% High 5.0% Average -15.0%
Percentage Adjustment Method Adjustment 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. Property Rights Conveyed All of the sales utilized in this analysis involved the transfer of the Fee Simple interest. Since we are appraising the Fee Simple interest of the subject property, no adjustments were required. Financial Terms To the best of our knowledge, all of the sales utilized in this analysis were accomplished with cash and/or cash and market-oriented financing. Therefore, no adjustment for financial terms is required for the com parables. Conditions of Sale Adjustments for conditions of sale usually reflect the motivations of the buyer and the seller. In many situations the conditions of sale may significantly affect transaction prices. However, all sales used in this analysis are considered to be "arms-length" market transactions between both knowledgeable buyers and sellers on the open market. Therefore, no adjustments for conditions of sale are required for the comparables. Market Conditions The market has generally not measurably improved since the comparables sold. We have not applied an adjustment. Location An adjustment for location is required when the locational characteristics of a comparable property are different from those of the subject property. The subject property is considered an average location, and it has average access and visibility. We have made a negative adjustment to those comparables considered superior in location versus the subject due to the nature of the surrounding area and proximity to more shopping. However, a positive adjustment was not made since none of the comparables were considered inferior. Physical Traits Various physical factors were analyzed including size, age, condition, quality, amenities, unit mix, utility, etc. The adjustment grid separates several of these items in order to better illustrate the nature of adjustment for each category. When an item was determined to be inferior to the subject, a positive adjustment was applied. When an item was determined to be superior to the subject, a negative adjustment was applied. The areas of adjustment pertained to age and observable condition and appeal. Where a size adjustment was made, it addressed the average size of the units, or the larger sizes for the one and two bedroom units as compared to the subject's units. Economic Characteristics/Other This adjustment is used to reflect differences in rent levels, operating expense ratios, occupancy' levels, and other items that would have an economic impact on the transaction. Since the adjustments made should impact some of these considerations another adjustment may seem redundant. No adjustments were applied. Discussion of Comparable Sales In our analysis of the market for comparable apartment properties, we have compared the subject property to apartment properties in the subject's market area. These are discussed below. Comparable Sale No.1 Comparable 1 was superior to the subject property overall. Property rights conveyed, financing and conditions of sale and expenses after purchase required no adjustment. Adjustments were significant for this sale in areas of location, unit size, condition and amenities, all deemed superior. The adjusted unit sale price was $39,198. Comparable Sale NO.2 At the time of sale, the second comparable was generally superior to the subject. No adjustments for property rights conveyed, financing and conditions of sale and expenses after purchase were necessary. Adjustments were again significant for this sale in areas of location, unit size, condition and amenities, all deemed superior. The adjusted unit sale price was $48,597. Comparable Sale NO.3 Comp 3 was similar overall to the subject property. It was not necessary to adjust property rights conveyed, financing and conditions of sale and expenses after purchase. Adjustments were not made since it appeared similar in age, quality, observable condition, sizes for one and two bedroom units and amenities. The adjusted unit sale price remained unchanged at 8,857. Comparable Sale NO.4 The fourth sale was superior to the subject. Property rights conveyed, financing and conditions of sale and expenses after purchase required no adjustment. Adjustments were applied to this sale in areas of unit size, condition and amenities, all deemed superior. The adjusted unit sale price was $38,836. Comparable Sale NO.5 Comp 5 compared to the subject property was inferior. No adjustments for property rights conveyed, financing and conditions of sale and expenses after purchase were necessary. The only adjustment pertained to inferior observable condition and appeal. The adjusted unit sale price was $40,250. Summary of Percentage Adjustment Method After adjusting each comparable sale for differences with the subject property, the adjusted sale price range is $38,836 to $48,597 per unit. However if we exclude the high the four remaining sale, which required less adjustment, fall within a more narrow range of $38,836 per unit to $40,250 per unit and average $39,285 per unit. Sale Three did not require adjustments and sold for $38,857 per unit. This sale and the four in the lower range of adjusted sale are the better guides to an estimated unit value for the subject. Therefore, we conclude that the indicated value by the Sales Comparison Approach is:
ADJUSTMENT METHOD CONCLUSION Rounded to Nearest Per Per $25 000 Unit SqFt Indicated Stabilized Value per Unit $39,500 Number of Units x 252 Indicated Stabilized Value $9,954,000 $9,950,000 $39,484 $51.03 Less: Rent Loss 0 Less: Deferred Maintenance 80,000 Value Prior to Stabilization: $9 874,000 $9 875 000 $39 187 $50.65
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 $9,875,000 $ 50.78 $39.286 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, the direct capitalization analysis method is most appropriate to value the subject property. Investors are looking at actual income and performance and are generally using a discounted cash flow for short-term apartment leased properties. Historical Performance of the Subject Property The following is a summary of historical revenue and expenses as well as our forecast for the subject property.
REVENUE AND EXPENSE ANALYSIS - -------------------------------------------------------------------------------- 2001 2002 Total $/Unit $/SF Total $/Unit $/SF Average Physical Occupancy (%) 11% 11% Economic Occupancy (%) 94% 90% POTENTIAL GROSS INCOME Gross Potential Rental Income $2,185,629 $8,673 $11.21 $2,184,544 $8,669 $11.20 Loss/Gain to Lease 0 N/A N/A 0 N/A N/A Adjusted Rental $2,185,629 N/A N/A $2,184,544 N/A N/A Less: Employee Unit Discounts (20,817) (83) (0.11) (13,675) (54) (0.07) Less: Model Units (16,860) (67) (0.09) (16,860) (67) (0.09) Total Potential Gross Revenue $2,147,952 $8,524 $11.02 $2,154,009 $8,548 $11.05 Vacancy & Credit Loss Vacancy ($248,691) ($987) ($1.28) ($193,892) ($769) ($0.99) Credits Loss (12,029) (48) (0.06) (30,979) (123) (0.16) Rent Concessions (153,484) (609) (0.79) (209,423) (831) (1.07) Other Adjustments (29,075) (115) (0.15) (1,685) (7) (0.01) Total Vacancy & Credit ($443,279) (1,759) ($2.27) (435,979) (1,730) ($2.24) Other Income Other Income $43,338 $172 $0.22 $55,542 $220 $0.28 Vending $13,795 55 0.07 8,507 34 0.04 Total Other Income $57,133 $227 $0.29 $64,049 $254 $0.33 EFFECTIVE GROSS INCOME $1,761,806 $6,991 $9.04 $1,782,079 $7,072 $9.14 OPERATING EXPENSES Management Fee $86,205 $342 $0.44 $86,123 $342 $0.44 Total Payroll & Burden 212,618 844 1.09 238,216 945 1.22 General & Administrative 37,015 147 0.19 36,555 145 0.19 Marketing & Promotion 47,904 190 0.25 71,397 283 0.37 Maint. & Repairs & Contract Svc. 141,622 562 0.73 108,236 430 0.56 Total Utilities 209,595 832 1.07 186,037 738 0.95 Services 69,057 274 0.35 56,291 223 0.29 Insurance 52,230 207 0.27 72,908 289 0.37 Real Estate Taxes 94,283 374 0.48 98,687 392 0.51 Replacement Reserves 0 0 0.00 0 0 0.00 Total Operating Expense $950,429 $3,772 $4.87 $954,450 $3,788 $4.90 NET OPERATING INCOME $811,377 $3,220 $4.16 $827,629 $3,284 $4.2 OTHER CAPITAL $0 $0 $0.00 $0 $0 $0.00 Expense Ratio 53.95% 53.56% Management Fee % of EGI 4.89% 4.83% EGI YTD 2003 Annualized Current Total $/Unit $/SF Average Physical Occupancy (%) 11% Economic Occupancy (%) 72% POTENTIAL GROSS INCOME Gross Potential Rental Income $2,196,420 $2,196,420 $8,716 $11.27 Loss/Gain to Lease 0 N/A N/A 0 Adjusted Rental $2,196,420 $2,196,420 N/A N/A Less: Employee Unit Discounts (37,620) (37,620) (149) (0.19) Less: Model Units (16,860) (16,860) (67) (0.09) Total Potential Gross Revenue $2,141,940 $2,141,940 $8,500 $10.99 Vacancy & Credit Loss Vacancy ($253,151) ($253,151) ($1,005) ($1.30) Credits Loss (63,394) (63,394) (252) (0.33) Rent Concessions (309,474) (309,474) (1,228) (1.59) Other Adjustments 0 0 0 0.00 Total Vacancy & Credit ($626,019) (626,019) ($2,484) (3.21) Other Income Other Income $46,251 $46,251 $184 $0.24 Vending 11,090 $11,090 44 0.06 Total Other Income $57,341 $57,341 EFFECTIVE GROSS INCOME $1,573,262 $1,573,262 $6,243 $8.07 OPERATING EXPENSES Management Fee $78,184 $78,184 $310 $0.40 Total Payroll & Burden 216,972 216,972 861 1.11 General & Administrative 81,181 81,181 322 0.42 Marketing & Promotion 58,890 58,890 234 0.30 Maint. & Repairs & Contract Svc. 79,258 79,258 315 0.41 Total Utilities 192,961 192,961 766 0.99 Services 60,533 60,533 240 0.31 Insurance 53,164 53,164 211 0.27 Real Estate Taxes 94,932 94,932 377 0.491 Replacement Reserves 0 0 0.00 0 Total Operating Expense $916,075 $916,075 $3,635 $4.70 NET OPERATING INCOME $657,187 $657,187 $2,608 $3.37 OTHER CAPITAL $0 $0 $0.00 $0 Expense Ratio 58.23% Management Fee % of EGI 4.97% EGI 2004 budget Total $/Unit $/SF Average Physical 11% Occupancy (%) Economic Occupancy (%) 78% POTENTIAL GROSS INCOME Gross Potential Rental Income $2,196,420 $8,716 $11.27 Loss/Gain to Lease 0 0 0.00 Adjusted Rental $2,196,420 N/A N/A Less: Employee Unit Discounts (22,090) (88) (0.11) Less: Model Units (16,860) (67) (0.09) Total Potential Gross Revenue $2,157,470 $8,561 $11.07 Vacancy & Credit Loss Vacancy ($215,747) ($856) (1.11) Credits Loss (64,724) (257) (0.33) Rent Concessions (164,460) (653) (0.84) Other Adjustments 0 0 0.00 Total Vacancy & Credit ($444,931) ($1,766) ($2.28) Other Income Other Income 78,000 $310 $0.40 Vending 11,400 45 0.06 Total Other Income $89,400 $355 $0.46 EFFECTIVE GROSS INCOME 1,801,939 $7,151 $9.24 OPERATING EXPENSES Management Fee 96,556 $383 $0.50 Total Payroll & Burden 206,954 821 1.06 General & Administrative 32,319 128 0.17 Marketing & Promotion 64,875 257 0.33 Maint. & Repairs & Contract Svc. 68,975 274 0.35 Total Utilities 200,844 797 1.03 Services 76,621 304 0.39 Insurance 72,912 289 0.37 Real Estate Taxes 99,396 394 0.51 Replacement Reserves 0 0 0.00 Total Operating Expense $919,452 $3,649 $4.72 NET OPERATING INCOME $882,487 $3,502 $4.53 OTHER CAPITAL $1 $0 $0.00 Expense Ratio 51.03% Management Fee % of EGI 5.36% EGI Year 1 C&W Forecast Adj Total $/Unit $/SF Average Physical 90% Occupancy (%) Economic Occupancy (%) 90% POTENTIAL GROSS INCOME Gross Potential Rental Income $2,196,420 $8,716 $11.27 Loss/Gain to Lease 0.00% 0 0 0.00 Adjusted Rental $2,196,420 $8,716 $11.27 Less: Employee Unit Discounts (16,860) (67) (0.09) Less: Model Units (16,860) (67) (0.09) Total Rental Revenue $2,162,700 $8,582 $11.09 Vacancy & Credit Loss Vacancy 8.00% ($173,016) ($687) ($0.89) Credits Loss 3.00% (64,881) (257) (0.33) Rent Concessions (200,000) (794) (1.03) Other Adjustments 0 0 0.00 Total Vacancy & Credit ($437,897) ($1,738) ($2.25) Other Income Other Income $89,000 $0 $0.46 Vending 10,500 42 0.05 Total Other Income $99,500 $395 $0.51 EFFECTIVE GROSS INCOME 1,824,303 $7,239 $9.36 OPERATING EXPENSES Management Fee 4.50% $82,094 $326 $0.42 Total Payroll & Burden 210,000 $833 1.086 General & Administrative 40,000 $159 0.21 Marketing & Promotion 60,000 $238 0.31 Maint. & Repairs & Contract Svc. 75,000 $298 0.38 Total Utilities 200,000 $794 1.03 Services 70,000 $278 0.36 Insurance 70,000 $278 0.36 Real Estate Taxes 108,000 $429 0.55 Replacement Reserves 50,400 $200 0.26 Total Operating Expense $965,494 $3,831 $4.95 NET OPERATING INCOME $858,809 $3,408 $4.40 OTHER CAPITAL $44,000 $175 $0.23 Expense Ratio 52.92% Management Fee % of EGI 4.50% EGI - -------------------------------------------------------- *Rents may be adjusted for lagging market conditions. - --------------------------------------------------------
Rental Comps One Bedroom, one Bath 655 (CF, Balc/patio) Square Fee Comp. No Year BR/ Quoted Rent Concessions Effective Rent Built BA SQ /Unit PSF Description % /Unit PSF /Unit PSF 1 1985 1-1 700 $610 $0.871 one mo. free 7.7% $47 $0.067 $563 $0.804 2 1990 1-1 750 $570 $0.760 one free mo. 7.7% $44 $0.058 $526 $0.702 3 1992 1-1 726 $600 $0.826 one free mo. 7.7% $46 $0.064 $554 $0.763 4 1992 1-1 672 $615 $0.916 $599 move in 7.7% $47 $0.070 $568 $0.845 5 1986 1- 625 $575 $0.920 none 0.0% $0 $0.000 $575 $0.920 6 1983 1-1 610 $561 $0.920 $99 move in 7.4% $42 $0.068 $519 $0.852 range Low 610 $561 $0.760 $0 $0.000 $519 $0.702 High 750 $615 $0.920 $47 $0.070 $575 $0.920 Average 681 $589 $0.869 $38 $0.055 $551 $0.814 SUBJECT QUOTED 625 $655 $1.048 one mo. free 7.7% $50 $0.080 $605 $0.968 SUBJECT CONCLUDED 625 $655 $1.048 one mo. free 7.7% $50 $0.080 $605 $0.968
Two Bedroom, One Bath 840 (CF, Balc/patio) Square Fee Comp. No Year BR/ Quoted Rent Concessions Effective Rent Built BA SQ /Unit PSF Description % /Unit PSF /Unit PSF 1 1985 2-1 816 $675 $0.827 one mo. free 7.7% $52 $0.064 $623 $0.764 2 1990 2-1 890 $635 $0.713 one free mo. 7.7% $49 $0.055 $586 $0.659 5 1986 2-1 765 $620 $0.810 none 0.0% $ 0 $0.000 $620 $0.810 6 1983 2-1 810 $691 $0.853 $99 move in 7.4% $51 $0.063 $640 $0.790 range Low 765 $620 $0.713 $0 $0.000 $586 $0.659 High 890 $691 $0.853 $52 $0.064 $640 $0.810 Average 820 $655 $0.801 $38 $0.045 $617 $0.756 SUBJECT QUOTED 840 $750 $0.893 1 mo. free 7.7% $58 $0.069 $692 $0.824 on 13 mo lse SUBJECT CONCLUDED 840 $750 $0.893 1 mo. free 7.7% $58 $0.069 $692 $0.824 on 13 mo lse
Two Bedroom, Two Bath, 900 (CF, Balc/patio)Square Feet Comp. No Year BR/ Quoted Rent Concessions Effective Rent Built BA SQ /Unit PSF Description % /Unit PSF /Unit PSF 1 1985 2-1 978 $720 $0.736 one mo. free 7.7% $55 $0.057 $665 $0.680 2 1990 2-1 900 $680 $0.756 one mo. free 7.7% $52 $0.058 $628 $0.697 3 1992 2-1 957 $730 $0.763 one mo. free 7.7% $56 $0.059 $674 $0.704 4 1992 2-1 923 $735 $0.796 move in spec N.A. N.A. N.A. N.A. N.A. 5 1986 2-1 900 $675 $0.750 none 0.0% $0 $0.000 $675 $0.750 6 1983 2-1 850 $713 $0.839 one mo. free 7.7% $55 $0.065 $658 $0.774 range Low 850 $675 $0.736 $0 $0.000 $628 $0.680 High 978 $735 $0.836 $56 $0.065 $675 $0.774 Average 918 $706 $0.773 $44 $0.048 $660 $0.721 SUBJECT QUOTED 900 $755 $0.839 1 mo. free 7.7% $58 $0.065 $697 $0.774 on 13 mo lse SUBJECT CONCLUDED 900 $755 $0.839 one mo. free 7.7% $58 $0.064 $697 $0.774
Occupancy levels among the comparables vary from 86.00 percent to 92 percent. with an average of about 91 percent. The preceding table illustrates a comparison of the current quoted rents for each type of subject unit relative to similar quoted rents for comparable apartment units contained within the competing complexes surveyed. All of the comparables are leased on a plus electric and water basis, wherein the tenants are responsible for their own consumption of electricity and water. The subject is also individually metered and tenants pay their own electricity and water. This is typical in the market. Of the rental comparables chosen, all are one- and two-bedroom units. The majority are one bedroom followed by two bedroom and two bath. Overall there are 2055 units accounted for, including the subject. The average price per month for one bedroom units is $589 per unit, or $0.87 per square foot, while the subject's rate is $655 per month and $1.05 per square foot. At $1.05 per square foot per month, the average quoted rental rate for the subject is higher than indicated by the comparables. This is expected given the smaller size of the subject's unit. The subject's two bedroom units are also higher than the comparable rents. However, after concessions, the effective rents are closer to the competitive set. Four of the six comparables currently offer some a rental concession of one free month's rent. Terra Cota is offering a move-in special of a lower rent and no application fee. Vista de Valle is not offering a concession, currently, but has in the past. It too was one free month based on a 13 month lease. Evidence for the market has shown concessions are not on the decline. Based on our conversations with leasing agents, most property management companies are planning on using concessions for at least the next several months and through at least the summer. Market wide long-term concessions are not forecasted because they tend to occur on a cyclical basis during times of increased vacancy. The subject is currently offering TWO free months for a 13 month lease, free for the first month and a 13 month free IF the tenant remains current and pays rent on time EVERY month. Otherwise the second free month is not offered. Since the subject appears to have a collection problem, it is unlikely the second free month will be realized by many of the tenants. Analysis of the comparably sized individual units on a per-square-foot basis indicates that the subject's quoted rates are slightly towards the upper-end of the market standards. This is largely due to the relative age of the subject and the smaller than average size of the subject's units. The subject's quoted rates are well supported by not only the market quoted levels, but also by the current in place contract rents. Overall, based on a unit by unit comparison of the comparables to the subject, it appears that the subject's quoted rents are in line with today's market rent levels. [GRAPHIC OMITTED] RENT COMPARABLE MAP 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 MIX No. Unit NRA Units Actual No. Plan BR BA Features Units (SF) (SF) Leased Occupancy 1 one bedroom 1 1 CF, BALC/PATIO 107 625 66,875 94 87.9% 2 small 2 bdrm. 2 1 CF, BALC/PATIO 40 840 33,600 35 87.5% 3 large 2 bdrm. 2 2 CF, BALC/PATIO 105 900 94,500 89 84.8% TOTAL AVERAGE 252 774 194,975 218 86.5%
POTENTIAL RENTAL RATES Potential Potential Average Quoted C&W YR 1. Monthly Annual Contract $/SqFt $/Month $/SqFt Forecast $/SqFt Rent Rent $650 $1.04 $655 $1.05 $655 $1.05 $70,085 $841,020 735 0.88 750 0.89 750 0.89 30,000 360,000 785 0.87 790 0.88 790 0.88 82,950 995,400 KEY TO FEATURES FP- FIREPLACE WDC-W/D CONNECTION TH-TOWNHOUSE/STUDIO WD-WASHER/DRYER CFM-CEILING FAN MASTER GT-GARDEN TUB CFL-CEILING FAN LIVING M-MICROWAVE
At $ 726 per unit per month, the quoted average rental rate for the subject falls slightly above comparable property averages. Naturally, comparable statistics are skewed one way or another by the unit mix. Developments with larger units tend to rent at a lower average rate per square foot, while developments with a majority of smaller units tend to rent at a higher average rate per square foot. However, in the foregoing paragraphs we have analyzed the comparables and compared them to the subject by unit type. 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. These rates are reflected in the previous table as "market' rates. Estimate of Potential Unit Rental Income The potential rental income for the subject property at our projected market rent for all unit types is $2,196,420 on an annualized basis. These figures reflect the subject as if fully occupied and collecting market rent for every unit. Further, the current in place contract rent for the subject is $ .93 per square foot, or $2,176,500 (as applied to all units, not just the occupied units). Given that our estimate is for the upcoming 12 months, this adds moderate support to our potential rental income forecast based upon our estimate of market rent. We expect the market to further recover at inflationary levels. 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 two units for the manager, and lead maintenance engineer. The combined monthly rent abatement for 1 one bedroom and one 2 bedroom unit totals $16,860, which we have deducted from base rental revenue. Model Units Competitive developments in the area typically maintain model units. The development presently retains two apartment units as model, a one bedroom and a small two bedroom. To be consistent with the market, we have deducted $16,860 annual revenue from base rental revenue. Vacancy and Collection Loss Both the investor and the appraiser are primarily interested in the annual revenue an income property is likely to produce over a specified period of time. rather than the income it could produce if it were always 100 percent occupied and all tenants were paying their rent in full and on time. A normally prudent practice is to expect some income loss as tenants vacate. fail to pay rent, or pay their rent late. Model and employee units or other rent loss is addressed separately. The subject. as of the most current rent roll provided, was 86.51 percent leased and occupied. This is lower than current average occupancy levels for the market area overall but similar to several of the competitive properties we surveyed. Rent comparable occupancies range from 86.00 percent to 94 percent. In terms of the subject we note that total vacancy and collection loss during 2001 was 11.9 percent. In 2002 it was 21.36 percent and during 2001 it increased to 14.4 percent. The owner has budgeted rent loss due to vacancy and credit loss of 9.5 percent for 2004. less than actual through three months. In consideration of the above, we have forecasted a stabilized vacancy loss of 8.00 percent and a collection loss of 3.00 percent (11.00 percent total vacancy and collection loss). These conclusions are reasonable based on our review of the available budgetary data from similar quality complexes in the local area, long-term average occupancy levels among the comparables, and the indications derived from buyers in the market. Rent Concessions Rental incentives. usually in the form of free rent up front or prorated over the lease term, are common in some sub-markets, particularly those with significant new construction activity. Due to the transient nature of the market and the construction activity levels drawing some tenants to newer projects, concessions in the subject's sub-market are common under current market conditions. The property manager reported that concessions are offered and now consist of one free month on a 13 month lease with the added bonus of the last month free is rent is paid on time for the preceding 11 months. Given the apparent level of delinquencies, we do not feel many will earn the bonus month. However, we have deducted the equivalent of one free month for a 13 month lease which is 7.7 percent from apartment rental revenue on occupied units plus potential vacant unit income to reflect market leasing parameters. Other Income In addition to rental income, we have combined several miscellaneous sources of income into a category called Other Income. This is a non-rental income category, which typically includes security deposit forfeitures. termination fees, miscellaneous and vending machine revenue, bad check charges, and late charges. Other income was reported at 55,542 in 2001$64,049 in 2002, $57,341 in 2003 and budgeted for $89.400 for 2004. The latter seems high but now includes a non-refundable cleaning fee of $150 per rental. We relied on the actual income for the prior three years but added the new charge being initiated and have estimated $89,000. Effective Gross Income Considering all of the foregoing income and vacancy items, we have estimated an effective gross income of $1,824,303, which is within one percent of 2001, almost identical to 2002, higher than 2003 and within1.1 percent of that set forth in the owners 2004 budget. This adds credibility and support to our independent forecasts. Opinion of Expenses We have developed an opinion of the property's annual operating expenses after reviewing its historical performance and reviewing the operating statements of similar buildings. We analyzed each item of expense and developed an opinion as to what a typical informed investor would consider normal. Expense Conclusion We analyzed each expense item 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 an annual basis with Year 1 beginning May 1,2004. Our estimate of total expenses including capital reserves for the subject property total $965,494 or $3,831 per unit, or $4.95 per square foot of rentable area. These rates equate to an operating expense ratio of 52.92 percent. The subject's actual expenses in 2001 and 2002 were $4.87 and $4.90 per square foot or $3,772 and $3,788 per unit, respectively. In addition, the 2003 expenses are $4.70 per square foot or $3,635 per unit. Given the data suggested by the historical performance, our knowledge of operating data of similar class apartment communities, as well as current trends in the property tax expense area, our expense projections are reasonable. All of the comparable sales included unit replacements as a part of the annual operating and fixed expenses. As is the case with these sales, more and more investors include total interior and exterior replacements in their estimate of net operating income, which results in a capitalization rate that is a truer rate of return. Additional variations in capitalization rates are a function of property specifics, including variances in the age, condition, and quality of each comparable.
OPERATING EXPENSE CONCLUSION C&W Per Per Expense Forecast Unit SqFt Analysis Management Fee $80,226 $318 $0.41 Management fees for the subject ranged from 4.83 percent in 2002 to 4.97 percent in 2003 and are budgeted for 2004 at 53.36 percent of effective gross income. The market is 4.0 to 5.0 percent. We estimated 4.5 percent Total Payroll Burden $210,000 $833 $1.08 The C&W Forecast is $210,000. It covers maintenance and office personnel, but not the apartments discussed previously. Historically the cost has been between $21,618 in 2001 and $238,216 in 2002. The 2004 budget calls for $206,954. General Administration $40,000 $159 $0.21 This cost can vary. In 2002 it was $36,565, but in 2003 it was $81,181. The 2004 budget is $32,319. We have projected $40,000. Marketing & Promotion $60,000 $238 $0.31 This expense has also varied from a low of $47,904 in 2001 to a high of $71,397 in 2002. The 2004 budget calls for $64,875. We feel the market is competitive and the cost should reflect a number close to budget. We estimated $60,000. Maint. & Repairs Contract Svc. $75,000 $298 $0.38 Historically the cost was from a low of $79,258 in 2003 to a high of $141,622 in 2001. We have estimated a cost of $75,000. Total Utilities $200,000 $794 $1.03 Our estimate is based on the historical costs which ranged from a low of $186,037 in 2002 to a high of $209,595 in 2001. The budget is $200,844 and we estimated $200,000. Services $70,000 $278 $0.36 The C&W Forecast is based on various service contracts to outside firms. The historical trend was downward between 2001 and 2003 but the budget increases the total. We looked to the historical trend and estimated $70,000. Insurance $70,000 $278 $0.36 Insurance costs showed a significant increase after 9/11 and a jump is reflected in the subject's historical statements. We based our estimated on the budget at $70,000. Real Estate Taxes $108,000 $429 $0.55 A full description was included in a preceding section of the report. The projected cost is rounded to $108,000. Replacement Reserves $50,400 $200 $0.26 We have selected a reserve of $200 per unit based on reserves at other complexes and market averages.
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.
STABILIZED YEAR 1 PRO FORMA POTENTIAL GROSS INCOME $/Year $/Unit $/SF Gross Potential Rental Income $2,196,420 $8,716 $11.27 Loss/Gain to Lease 0 0 0.00 Adjusted Rental Income $2.196,420 $8,716 $11.27 Less: Employee Unit Discounts -$1,405/Mo. (16,860) (67) (0.09) Less: Model Units -$1,405/Mo. (16,860) (67) (0.09) Total Rental Revenue $2,162,700 $8,582 $11.09 Vacancy & Credit Loss Vacancy 5.00% ($173,016) ($687) ($0.89) Credit Loss 2.00% (64,881) (257) (0.33) Rent Concessions (200,000) (794) (1.03) Other Adjustments 0 0 0.00 Total Vacancy & Credit ($431,897) ($1,738) ($2.25) Other Income Other Income $89,000 $353 $0.46 Vending 10,500 42 0.05 Total Other Income $99,500 $395 $0.51 EFFECTIVE GROSS INCOME $1,824,303 $7,239 $9.36 OPERATING EXPENSES Management Fee 4.50% $82,094 $326 $0,42 Total Payroll & Burden 210,000 833 1.08 General & Administrative 40,000 159 0.21 Marketing & Promotion 60,000 238 0.31 Maint. & Repairs & Contract Svc. 75,000 298 0.38 Total Utilities 200,000 794 1.03 Services 10,000 218 0.36 Insurance 70,000 278 0.36 Real Estate Taxes 108,000 429 0.55 Replacement Reserves 50,400 200 0.26 Total Operating Expenses $965,494 $3,831 $4.95 NET OPERATING INCOME $858,809 $3,408 $4.40
Investor Surveys Prior to discussing the capitalization of income into value, we have summarized the most currently available investor survey results as follows:
GARDEN STYLE APARTMENTS INVESTOR CRITERIA C&W C&W Korpacz Class A Class B National Leased (1) Leased (1) 2004Q1(Vol 16 No2) Spring 2003 Spring 2003 ------------------- ------------ ------------- Range Average Range Average Range Average Projected Holding Low 5 7 5 8.2 4 8.17 Period (Years) High 10 9 11 8.2 10 8.17 Rent Growth Low -2.0% 1.5% 1.5% 2.4% 1.5% 2.5% High 4.0% 2.8% 3.0% 2.4% 30% 2.5% Expense Growth Low 2.0% 2.8% 2.5% 2.9% 2.5% 2.9% High 3.5% 3.1% 3.0% 2.9% 3.0% 2.9% Total Reserves low (Per Unit) Low $150 High $400 Sale Costs Low 1.0% 1.8% High 3.0% 2.3% Going-In Capitalization Rate Low 5.5 7.4% 7.0% 7.9% 8.0% 8.7% High 9.3% 8.4% 9.0% 7.9% 9.3% 8.7% Terminal Capitalization Rate Low 6.0% 7.5% 7.5% 8.5% 8.0% 9.2% High 9.5% 8.4% 9.3% 8.5% 10.0% 9.2% Internal Rate of Return Low 8.O% 9.0% 9.0% 10.7% 10.0% 11.8% High 12.5% 10.8% 14.0% 10.7% 17.0% 11.8% Marketing Time (Months) Low 2 5 High 9 6 Sources: (1) Cushman & Wakefield, Valuation Advisory Services, National Investor Survey Spring 2003 Note: (1) The averages indicated reflect the average low and high investor response.
This will be referenced in the balance of the Income Capitalization Approach in this report as it represents a portrayal of current investor requirements. Going-In Capitalization Rate The overall capitalization rates derived from the improved property sales are as follows.
CAPITALIZATION RATE SUMMARY Date Year Capitalization No. Property Name of Sale Built Occupancy Rate 1 Cypress Point Dec-03 1989 92.00% 7.33% 2 The Ritz May-03 1990 98.00% 8.40% 3 Sandpebble Village Apr-03 1980 91.00% 9.00% 4 Woodcreek Dec-02 1978 85.00% 7.47% 5 Emerald Park Apartments Nov-o2 1978 8600.00% 8.67% Low 7.33% High 9.00% Average 8.17%
Sale Three required no adjustment in the preceding Sales Comparison Approach, which lead one to conclude its overall rate is the most appropriate. However, trends in overall rate shave been on a decline and we cannot apply an overall rate to the subject based on one of the five sales. The rest actually fall in a lower range of 7.33 percent to 8.67 percent with an average of 7.97 percent. In addition, we have considered the foregoing Investor Surveys published by Korpacz and Cushman & Wakefield, Inc. for competitive apartment properties. Our observations and analysis suggest that a going-in capitalization rate of 8.00 percent represents reasonable investor criteria under current market conditions. Extraordinary Capital Costs While at the subject we observed some of the exterior walls, which are stucco over wood, and some balcony and patio walls were in need of paint. We were also told the roof on several buildings are leaking and there is ceiling damage to some of the units. In our opinion these are areas that will be noted by an investor and should be addressed. We were not provided with estimates for the work needed to correct these items. Therefore, we have estimated a cost of $2,000 per roof and $1,500 per building for painting. The total per building is $3,500 or $77,000 for the complex. However, we were told by the owner some of the roof repairs have been completed. This can reduce the amount necessary for capital expenses. By the owners estimate the cost would be about $44,000 for the items noted. It is rounded to $45,000. 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 8.00 percent overall capitalization rate. Our conclusion via the Direct Capitalization Method is as follows:
DIRECT CAPITALIZATION METHOD Net Operating Income $858,809 Rounded to Sensitivity Analysis Nearest (0.25'10 OAR Spread) Value $25.000 $/Unit $/SqFt Based on Low-Range of 7.75% $11,081,406 $11,075,000 $43,974 $56.84 Based on Most Probable Range of 8.00% $10,735,113 $10,725,000 $42,600 $55.06 Based on High-Range of 8.25% $10,409,806 $10,400,000 $41,309 $53.39 Reconciled Stabilized Value $10,735,113 $10,725,000 $42,600 $55.06 Less: Rent Loss $0 $0 $0.00 Less: Deferred Maintenance 44,0OO $175 $0.23 Indicated As Is Value $10,691,113 $10,700,000 $42,425 $54.83
RECONCILIATION AND FINAL VALUE OPINION Valuation Methodology Review and Reconciliation 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. The approaches indicated the following: Cost Approach: Not included Sales Comparison Approach: $9,875,000 Income Capitalization Approach: $10,700,000 We have given most weight to the Income Capitalization Approach because this mirrors the methodology used by purchasers of this property type. However, we feel an investor will also investigate other market transactions. As a result we feel the Sales Comparison Approach lends good support to the conclusion in the Income Approach. 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 Fee Simple estate of the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, on April 13, 2004 was: TEN MILLION SEVEN HUNDRED THOUSAND DOLLARS $10,700,000 The implied "going in" capitalization rate is 8.00 percent, the overall capitalization rates derived from the improved property sales are between 7.33 percent and 9.00 percent, averaging 8.17 percent. The implied going-in capitalization rate is in line with going-in capitalization rates indicated by the sales and the most recent Investor Surveys. 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&W's prior written consent. Reference to the Appraisal Institute or to the MAI 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 Appraisers 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 of Arizona 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. 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 2001 Edition, ASS of The Appraisal Foundation, 1/1/2001. page 2). 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 2001 Edition, ASS of The 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 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. Robert J. Ryan, 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 Robert J. Ryan, MAI is current. /S/ ROBERT J. RYAN - ------------------------- Robert J. Ryan, MAI Director Nevada Certified General Appraiser License No. 00789 bob_ryan@cushwake.com 602-229-5904 Office Direct 602-229-5996 Fax EX-99 6 sir2_scto101305exh5oakter.txt EXH 12.5 OAK TERRACE APPRAISAL COMPLETE APPRAISAL OF THE GOING CONCERN Oak Terrace Retirement Apartments 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 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 Illinois, Inc. Senior Housing/Healthcare Industry Group Valuation Services, Advisory Group 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 C&W File ID: 04-248-01 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 Oak Terrace Retirement Apartments 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 C&W File ID: 04-248-01 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 in this appraisal report 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 other 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 of 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. Jim Hoyt SPECS, Inc. April 30, 2004 Page 2 The property consists of an existing 129 unit, independent living facility known as Oak Terrace Retirement Apartments. The facility has an effective capacity of 137 units and/or residents. The facility contains 117,250:t square feet of gross floor area and is situated on a 1.80 acre parcel of land. The facility occupancy was 88 percent at the time of inspection. The property has been appraised as a going concern and assumes a fair sale, which includes the transfer of a valid operating license, adequate working capital, an assembled workforce, and the transfer of all business assets necessary for the operation of a licensed health care facility. Randal D. Dawson, MAI inspected the property and prepared the report. 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 perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison 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 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 was: TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS $12,500,000 The above value estimate is inclusive of $310,000 in personal property and $4,100,000 in business value as an integral part of the going-concern. Based on recent market transactions, as well as discussions with market participants, a sale of the subject property at our stated opinion of market value would have required an exposure time of approximately twelve (12) months. Furthermore, a marketing period of approximately twelve (12) months is currently warranted for the subject property. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the market value based on the bond financing of the fee simple 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 16, 2004 was: SIXTEEN MILLION ONE HUNRED THOUSAND DOLLARS $16,100,000 Jim Hoyt SPECS, Inc. April 30, 2004 Page 3 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 Senior Housing/Healthcare Industry Group Illinois Certified General Appraiser License No. 153-001098 randal-dawson@cushwake.com 312.4 70.1817 Office Direct 312.470.2317 Fax SUMMARY OF SALIENT FACTS Common Property Name: Oak Terrace Retirement Apartments Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Property Description: The property consists of a 1-building, 6- story independent living facility containing 129 units and 137 beds situated on a 1.80- acre parcel of land. Assessor's Parcel Number: 14-32-127-005, 14-32-127-006 and 14-32-127- 007 Interest Appraised: Fee Simple Estate Date of Value: April 16, 2004 Date of Inspection: April 16, 2004 Ownership: Secured Investment Resources Occupancy: Current physical occupancy is 88 percent based on a stabilized effective capacity of 129 units. Current Property Taxes Total Assessment: $5,088,330 2004 Property Taxes: $129,210 Hiqhest and Best Use If Vacant: Multi-family residential property developed to the highest density possible As Improved: As it is currently utilized as an independent living facility: Site & Improvements Zoning: R-5b Land Area: 1.80 acres or 78,408:t square feet Number of Units: 129 Number of Beds: 137 Number of Stories: 6 Number of Buildings: 1 Year Built: 1987 Type of Construction: Brick Gross Building Area: 117,250:t square feet Parking: 161 spaces (1.25 Unit). VALUE INDICATORS Income Capitalization Approach Direct Capitalization Net Operating Income: $1,123,860 Capitalization Rate: 9.00% Indicated Value: $12,500,000 Reconciled Value: $12,500,000 FINAL VALUE CONCLUSION Market Value As-Is Fee Simple: $12,500,000 Exposure Time: Under 12 months Marketing Time: Under 12 months INSURABLE VALUE Conclusion: $7,400,000 Market Value Based on Bond $16,000,000 Financing Extraordinary Assumptions and Hypothetical Conditions Extraordinary Assumptions An extraordinary assumption is defined by the Uniform Standards of Professional Appraisal Practice (2004 Edition, The Appraisal Foundation, page 2) 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 other extraordinary assumptions. Hvpothetical Conditions A hypothetical condition is defined by the Uniform Standards of Professional Appraisal Practice (2004 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 property [GRAPHIC OMITTED] Exterior view of property [GRAPHIC OMITTED] Interior view of property [GRAPHIC OMITTED] Interior view of property [GRAPHIC OMITTED] Street Scene along Washington Street Facing East [GRAPHIC OMITTED] Street Scene along Washington Street Facing West TABLE OF CONTENTS INTRODUCTION 1 REGIONAL ANALYSIS 5 LOCAL AREA ANALYSIS 12 SENIOR LIVING INDUSTRY OVERVIEW 16 COMPETITIVE MARKET ANALYSIS 21 SITE DESCRIPTION 32 IMPROVEMENTS DESCRIPTI0N 33 REAL PROPERTY TAXES AND ASSESSMENTS 37 ZONING 38 HIGHEST AND BEST USE 39 VALUATION PROCESS 41 INCOME CAPITALIZATION APPROACH 43 RECONCILIATION AND FINAL VALUE OPINION 57 INSURABLE VALUE 59 SUPPLEMENTAL VALUATION - SCENARIO II 60 ASSUMPTIONS AND LIMITING CONDITIONS 62 CERTIFICATION OF APPRAISAL 65 ADDENDA 66 INTRODUCTION Identification of Property Common Property Name: Oak Terrace Retirement Apartments Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Property Description: The property consists of a 1-building, 6-story independent living facility containing 129 units and an effective capacity of 137 units situated on a 1.80 acre site. Assessor's Parcel Number: 14-32-127-005, 14-32-127-006 and 14-32-127-007 Property Ownership and Recent History Current Ownership: Secured Investment Resources 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. Reginald 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. for internal review. 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 16, 2004. The property was inspected on April 16, 2004 by Randal D. Dawson, MAI Property Rights Appraised fee simple interest of the property as a going-concern. 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 (USPAP) 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 sampling of improved sales from a local, regional or national basis. We also 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. 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. The scope of this research, and the analysis contained herein, is reflective of "the amount and type of information researched and the analysis applied in an assignment" (2004 US PAP, page 5). 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 perform a restricted appraisal 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. Goinq-Concern Value The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment. Common going-concern appraisals are conducted for assisted living facilities, nursing homes, hotels and motels, restaurants, bowling alleys, industrial enterprises, retail stores, and similar property uses. For these property types, the physical real estate assets are integral parts of an ongoing business such that the market values from the land and building are difficult, if not impossible, to segregate from the total value of the ongoing business. 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. 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. Prospective Value Upon Reaching Stabilized Occupancy The value of a property as of 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 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 twelve (12) months. This assumes the current owner employed an active and professional marketing plan. 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 consider, 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 twelve (12) months. Legal Description The Sangamon County assessor identifies the subject site as Assessor's Parcel Number 14-32-127-005, 14-32-127-006 and 14-32-127-007. A legal description is located in the Addenda section of this report. REGIONAL ANALYSIS [GRAPHIC OMITTED] REGIONAL MAP Introduction A variety of factors and forces that interact within a given region influence the short- and long-term value of real estate. 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 Springfield, within the central portion of Sangamon County, which is in the central portion of Illinois. Economic & Demographic Profile The following profile of the Springfield 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 staffs 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 model, 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) translate 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. Springfield, IL Employemnt Growth Rank Best=1 Worst=325 2002-04: 309: 5th quintile 2002-07: 266: 5th quintile MSA LIFE CYCLE PHASE:Growth/Mature Vitality (Best-1 Worst=325): 71(2nd quintile) Cost of Doing Business (US=100%):98% Cost of Living (US=100%):85% Relative Employment Performance [Graphic Omitted-Line Graph (1990-2007)] 1996 1997 1998 1999 2000 2001 2002 Indicators 6.6 6.7 6.8 6.9 7.1 7.1 7.1 Gross Metro Product, C$B 3.7 2.4 1.5 1.2 2.4 -0.3 0.7 % Change 112.0 112.1 114.1 113.6 115.3 115.5 115.3 Total Employment (000) 1.0 0.1 1.8 -0.4 1.5 0.2 -0.2 % Change 4.5 4.3 3.9 3.6 3.5 3.9 4.6 Unemployment Rate 6.1 3.8 5.7 2.3 6.5 4.1 2.1 Personal Income Growth 202.1 201.9 201.7 201.3 201.6 202.3 203.2 Population (000) 922 812 848 843 759 806 674 Single-Family Permits 209 121 105 303 170 113 256 Multifamily Permits 81.9 83.2 85.9 86.1 84.5 86.9 90.5 Existing Home Price($Ths) 575 695 1,273 782 589 1,525 1,900 Mortgage Originations($Mil) - -0.2 -1.0 -0.9 -1.1 -0.6 0.0 0.2 Net Migration (000) 799 1,139 1,126 1,022 955 1,258 1,490 Personal Bankruptcies
Indicators 2003 2004 2005 2006 2007 Gross Metro Product, C$B 7.2 7.4 7.6 7.8 8.0 % Change 0.6 2.7 3.0 3.1 2.8 Total Employment (000) 111.9 113.0 115.3 117.7 119.3 % Change -2.9 0.9 2.1 2.0 1.4 Unemployment Rate 5.2 5.3 5.2 5.0 4.8 Personal Income Growth 2.7 3.4 3.8 4.0 4.0 Population (000) 204.1 205.2 206.5 207.8 208.9 Single-Family Permits 734 892 783 764 748 Multifamily Permits 423 125 116 137 153 Existing Home Price($Ths) 93.6 94.7 100.0 101.4 105.6 Mortgage Originations($Mil) 2,455 1,053 627 649 684 Net Migration (000) 0.2 0.3 0.5 0.5 0.3 Personal Bankruptcies 1,625 1,576 1,454 1,436 1 ,450
- ------------------------------------------- STRENGTHS AND WEAKNESSES STRENGTHS .. Below average business and living costs. .. High level of housing affordability. .. Low exposure to downsizing manufacturing industries. .. Concentration of stable employers in healthcare and education. WEAKNESSES .. Lack of a significant economic driver. .. Disproportionate impact from state fiscal crisis. .. Middling population - ---------------------------------------- [GRAPHIC OMITTED-Bar Graph] Current Employment Trends December 2003 Employmnet Growth % Change Year Ago Total -2.6 Construction 3.7 Manufacturing -7.5 Trade 0.7 Trans/Utilities 4.9 Information -5.5 Financial Activities -3.6 Prof & Business Svcs 0.8 Edu & Heatlth Svcs -1.52 Leisure & Hospitality -1.0 Other Services -6.8 - ------------------------------------------ FORECAST RISKS Short Term [Down Arrow] Long Term [Up Arrow] Risk-adjusted Return, '02-07: -0.16% UPSIDE .. The tourism industry recovers and expands more quickly than anticipated. .. Plans to increase state revenue come to fruition, solving budget crisis. DOWNSIDE .. Further restructuring in healthcare industry would have a large effect on SPR. .. Slow recovery of slate economy will necessitate further government cutbacks. - ------------------------------------ ANALYSIS Recent Performance. The Springfield economy has yet to show signs of significant growth. Weakness in government payrolls has been largely responsible for the plight of the local economy, which depends on the government sector for growth. However, the private sector, which also depends on the public sector in a number of ways, is not performing much better, and has continued to suffer from severe losses. As a result, the unemployment rate, while lower than state and national aver-ages, is historically high for the area, at 5.4%. The general malaise settling in on the SPR la-bor market has hurt consumer credit conditions, with the bankruptcy filing rate climbing to well above state and national averages. New budget. Governor Rod Blagojevich recently submitted a $43.5 billion operations budget \\ith the hope of reducing the estimated $1.7 billion deficit looming over the state of Illinois. The budget's solution will involve cutting costs by $840 million and generating $945 million in new revenue on top of $280 million in estimated base revenue growth, without raising the sales or income taxes. While the absence of any increases in sales or income taxes will limit the direct effects of the new budget on consumer spending, other parts of the proposal will have significant ramifications for the SPR economy if approved. Several state agencies will face budget cuts, and as most are located in SPR, the state capital, pay-roll cuts from these agencies will mean more job losses in SPR. Furthermore, because the budget plan does not address the escalating costs of the State Employees Retirement Fund, government employees who have retired in the SPR area may find themselves \\ith reduced pensions from the state government. Government weight. Because of the high proportion of government employees in SPR, losses in that sector will have a more severe effect on the SPR economy than similar losses would have on a metro area more dependent on other industries. A decline in government payrolls means a drop in overall consumer demand, which means that retail and other service sectors will suffer. Moreover, if the State Employees Retirement Fund remains underfunded, retired government employees may be unable to pay for healthcare, lowering demand and muting the growth of the healthcare industry in the area. National Guard. The SPR economy is sup-ported a great deal by the presence of the Illinois National Guard. Aside from being one of the largest employers in the area with 2,700 employees, the Guard is able to attract federal and state funding for projects that help encourage growth in the SPR area. One recent example is a new joint-use armory and field house that should be completed in August 2004. The project received $2.9 million in federal funding and $2 million in state funding, and will provide a home to Company C, 1st Battalion, 178th Infantry, and the East High School Naval Junior Reserve Officer Training Corps program. While the new facility will have a minimal impact on employment growth, it should attract larger numbers of trainees, which "ill support further growth in retail services through greater demand. Net job loss should end in the Springfield economy this year. Concerns over the state budget, however, continue to threaten this outlook. Budget troubles could result in more public sector job cuts and reduced retirement benefits, which would undoubtedly hamper any economic recovery. Longer term, the SPR metro area lacks significant growth drivers to propel itself forward. Furthermore, weak demographic trends and population growth will restrict housing development, labor force growth, and demand for local goods and services. SPR will therefore be a below average performer. Collin Peng-Sue February 2004 - ------------------------------------------ TOP EMPLOYERS Memorial Health System 3,400 St. John's Hospital 2,839 Illinois National Guard 1,700 Roman Catholic Diocese 1,600 Horace Mann Insurance Company 1,280 Blue Cross and Blue Shield Association 1,200 SIU School of Medicine 1,200 SBC Communications, Inc. 900 Springfield Clinic, LLP 900 Cingular Wireless 706 University of Illinois 655 Express Personnel Services 650 McGraw Enterprises, Inc. 650 American General Financial Group 600 Hardees of Springfield 600 Levi Ray & Shoup, Inc. 500 Meijer, Inc. 500 Freeman United Coal Company 470 Lincoln Land Community College 405 Cub Foods of Springfield 400 Source: Springfield Chamber of Commerce, May 2003 Public Federal 2,201 State 19,957 Local 10,627 2002 - -------------------------------------------
COMPARATIVE EMPLOYMENT AND INCOME % of Total Employment Average Annual Earnings Sector SPR IL US SPR IL US Construction 4.8% 4.7% 5.2% $35.292 $48,420 $39,845 Manufacturing 3.4% 12.8% 12.0% $38.464 $49.710 $48.756 Durable 65.9% 60.7% 62.0% nd $50,119 $50,404 Nondurable 34.1% 39.3% 38.0% nd $49,043 $45,969 Transport Utilities 1.8% 4.4% 3.6% nd $45.020 $44,972 Wholesale Trade 3.1% 5.2% 4.4% $45.106 $58,203 $51,842 Retail Trade 10.4% 10.7% 11.7% $19.221 $22,743 $22,635 Information 3.0% 2.5% 2.6% $38.980 $63.325 $69,569 Financial Activities 7.2% 6.8% 6.0% $30.502 $45,883 $41,740 Prof. and Bus. Services 8.9% 13.4% 12.4% $33,149 $51,215 $43,053 Educ.and Health Services 14.5% 12.1% 12.5% $39,281 $34,012 $34.032 Leisure and Hosp. Services 8.9% 8.4% 9.0% $12,721 $19,091 $19,135 Other Services 5.6% 4.3% 3.9% $22,620 $22,568 $19.842 Government 28.4% 14.6% 16.2% $48,121 $44,927 $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: N/A
LEADING INDUSTRIES NAICS Industry Employees (000) GVSL Sale & Local Government 30.6 6221 General Medical and Surgical Hospitals 5.3 5241 Insurance Carriers 3.7 5617 Services to Buildings and Dwellings 3.1 6211 Offices 01 Physicians 2.6 4521 Department Stores 2.0 8139 Bus. Prof. Labor. Political. & Similar Org. 1.8 2360 Construction of Buildings 1.7 6231 Nursing Care Facilities 1.6 5413 Architectural, Engineering, & Related Services 1.4 5412 Accting., Tax Prep., Bookkeeping & Payroll 1.3 8134 Civic and Social Organizations 1.2 4529 Other General Merchandise Stores 1.1 6111 Elementary and Secondary Schools 1.1 3344 Semi. & Other Electronic Component Manuf. 0.9 High-tech employment 4.3 As % of total employment 3.7 Source: BLS, Economy com, 2002
- ---------------------------------- INSUSTRIAL DIVERSITY SPR=0.52 (1.00= Most Diverse (U.S.), 0.00= Least Diverse) EMPLOYEE VOLATILITY Due to U.S. Fluctuations: 60% Not due to U.S. 40% Due to U.S. Relative to U.S. US = 100 SPR = 74
MIGRATION FLOWS Into Springfield Number Median of Migrants Income Chicago 570 23,773 St. Louis 376 22,336 Decatur 301 20,237 Champaign 183 21,874 Peoria 170 22,106 Bloomington 137 27,499 San Diego 46 21,874 Phoenix 43 16,249 Rockford 35 19,499 Indianapolis 34 20,832 Total Inmigration 6,816 20,832 From Springfield Chicago 517 26,739 St. Louis 491 25,328 Decatur 204 22,499 Peoria 177 25,858 Bloomington 161 23,181 Champaign 157 19,999 Phoenix 92 20,555 Indianapolis 46 21,666 Tampa 42 14,622 Houston 36 54,999 Total Outmigration 6,626 21,562 Net Migration 190 -731
- ------------------------------------ Net Migration, SPR [GRAPHIC OMITTED-Bar Graph] Domestic Foreign Total 1998 -1,198 263 .935 1999 -1,428 325 .1.103 2000 .769 210 .559 2001 -159 131 .28 2002 86 129 215 Source: IRS (top), 2002; Census Bureau & Economy. com, 2002
- ---------------------------------------------- PER CAPITA INCOME [GRAPHIC OMITTED] SPR 31,037 IL 32,990 US 30,413 Source: Bureau of Economic Analysis, 2001 - ----------------------------------------------- Springfield, IL [GRAPHIC OMITTED-Line Graph] Low Cost Housing in Springfield One of the reasons behind SPR's low cost of living is the abundance of affordable homes in the area. According to Economy.com's housing affordability index, homes in SPR have been consistently much more affordable than in the u.s. as a whole. This is due in large part to the inability of the SPR economy to create a significant number of jobs. The lack of job growth has depressed demand for housing, limiting the rate of price appreciation. [GRAPHIC OMITTED-Line Graph] Government Protects Springfield During Recessions. While significant job growth has been lacking in the SPR metro area of late, the area has still managed to outperform the nation. One of the main reasons behind the area's apparent immunity to national recessions is its status as the Illinois state capital, which ensures an above average number of government jobs in proportion to total employment in the area. This helped the area keep payrolls relatively steady as lllinois lost jobs more quickly than the nation as a whole. [GRAPHIC OMITTED-Line Graph] But Leaves It Vulnerable to Budget Shortfalls The problem with above average dependence on anyone sector, of course, is that dependence can hurt an economy further down the road. Indeed, even as the national economy pulled itself out of recession, the Illinois state government found itself awash in debt, and was forced to cut payrolls. Thus, the large government presence in SPR has become a hurdle in the way of recovery. With the government facing a budget shortfall of $1.5 to $2 billion for. the fiscal year 2005, it is unlikely that government payroll growth will accelerate any time soon. . [GRAPHIC OMITTED-Line Graph] Migration Turnaround One positive facet of the SPR economy is its positive migration outlook. While it experienced persistent out-migration over the latter part of the 1990s, the negative trends have subsided, and migration is positive once more. Further improvement in SPR's migration trends would help to bolster labor force growth, and thereby help attract new businesses into the area. In addition, stemming the flow of out-migrants will provide support for SPR's housing market, which has faced weak demand in recent years. Critical Observations The following bullet points summarize some of our general observations relating to the subject's region. Social Influences .. Springfield's current population is 205,200 people. .. The population increased 1.94 percent from 1999-2004. Forecasts indicate 1.80 percent total population growth between 2004 and 2007. .. Migration trends have been poor throughout the latter part of the 1990's, although recent trends indicate steady in-migration that could potentially lead to a favorable population growth rate. Those leaving Springfield are going to Chicago, St. Louis and Decatur. .. As of 2003, the average per capita income in the Springfield MSA was $31,037, which is slightly above the National average of $30,413, but lower than the State average of $32,990. Personal income growth is expected to increase by 3.4 percent in 2004. Economic Influences .. The largest employment sectors are Services (32.3%), Government (28.4%) and Retail Trade (10.4%). .. The top three employers are Memorial Health Insurance, St. John's Hospital and Illinois National Guard. .. Springfield's housing affordability has been consistently below the national average for years. Depressed labor force conditions can partially account for the low demand in housing, thus limiting the rate of appreciation. .. As of February 2004, the unemployment rate for Springfield was 5.9 percent, which is above the national average of 5.6 percent, but below the state average of 6.8 percent. .. The only industries experiencing growth between December 2002 and December 2003 were Construction (3.7%) and Trans/Utilities (4.9%). Manufacturing experienced the largest decline in employment of 7.5%. .. Out of a total of 325 metropolitan statistical areas in the United States, Springfield ranks 266th in terms of expected employment growth between 2002-2007. Government Influences .. The government is supportive of business and is considered pro-growth. Government incentives for growth include an enterprise zone; tax increment financing and business incentives are available for qualifying commercial interests. .. 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 most MSA's. Environmental Influences .. The Springfield MSA is located in Sangamon County in central Illinois. The region is served by several interstates including I-55 and 1-72, which provide access to several major markets including St. Louis, Chicago and Indianapolis. 35 Intrastate and 74 Interstate trucking companies serve the region, while the community supports 41 truck terminals. Capital airport provides daily commercial flights and five railroads serve Sangamon County. .. Springfield is approximately 98 miles from St. Louis, 204 miles from Chicago, 207 miles from Indianapolis, 337 miles from Kansas City, 457 miles from Detroit and 635 miles from Atlanta. Conclusion In light of the social and economic attributes of the greater Springfield area, it is clear that the region benefits by the following: .. Below average business and living costs .. High level of housing affordability .. Low exposure to downsizing manufacturing industries .. Concentration of stable employers in healthcare and education Concurrently, there are inherent risks to the economic health of the metropolitan area, including the following: .. Lack of significant economic driver .. Disproportionate impact from state fiscal crisis. .. Middling population trends The Precis report indicates that the Springfield economy is stagnant. The state's fiscal budget crisis is having a disproportionate effect on Springfield due to the large amount of government jobs associated with the state capital. The Governor of Illinois recently submitted a $43.5 billion operations budget with the hope of decreasing the estimated $1.7 billion state deficit. One of the solutions in this plan is to cut spending by $840 million that will undoubtedly cut jobs in Springfield. Since government jobs account for nearly 28 percent of the workforce, the repercussions of a mass layoff would affect numerous industries in Springfield. The presence of the National Guard in Springfield bodes well for the area not only because it is one of the largest employers, but also because projects developed through state and federal funding attracts trainees to the area that support retail services. However, The Base Realignment and Closure (BRAG) Commission is coordinating the Defense Department's effort to assess current military facilities and make recommendations for base closings for 2005. Springfield houses one of three Air National Guard Bases in Illinois that BRAC is assessing with the expectation that at least one will be closed. The economic impact of the Springfield base closing would be highly detrimental to the local economy. Overall, the Springfield region lacks favorable population trends and significant growth drivers that would enable possible long-term growth. The additional threat of severe government cutbacks and the possible closure of the National Guard base dampen an optimistic outlook over the forecast horizon. [GRAPHIC OMITTED-Map] LOCAL AREA ANALYSIS Location .. The property is located in Sangamon County, within the greater Springfield area, which is in central Sangamon County. Springfield is the county seat of Sangamon County and the State Capital of Illinois. Eleventh Street borders the neighborhood to the east, Walnut Street to the west, Carpenter Street to the north, and South Grand Avenue to the south. .. The subject is located in the central portion of Sangamon County. This area is a middle income urban area of average desirability. Access .. The area is accessed by Interstate 55, which runs north and south along the east side of the city. And Interstate 72, which runs east and west intersecting with I-55 south of town cascading around the city on the southeast side of the city. The subject is located at the along West Adams Street between Pasfield Street and College Street, both secondary north/south transportation artery which provides access to the area, and Jefferson and Washington Streets, which are primary east/west thoroughfares. .. The subject property has good exposure from West Adams Street, Pasfield Street, and College Street. Driveways on Pasfield Street and College Street provide vehicle access to the subject site. The subject property also has good access to the area's freeway network with an interchange approximately two miles east of the subject, at Clearlake Avenue and I-55. Neighborhood Characteristics .. A mix of single- and multi-tenant office buildings characterizes the immediate area of the subject property. In general, the properties in the subject's district are generally compatible in nature and were constructed from the early 1960's to late-1980's. The majority of the commercial properties near the subject are average-to-good facilities typical of a secondary street in an urban area. Development in this area includes a mix of commercial and very limited residential uses. The immediate area of the subject property generally compromises commercial land uses. .. Properties adjacent to, or in the immediate vicinity of, the subject includes a few single family homes followed of office development to the south along West Adams Street; office development to the north; to the east is a office development; and to the west is a commercial parking lot. .. Several arterial roads intersect West Adams Street. The roads all lead to well established residential neighborhoods. The subject's immediate area can be described as being in the mature stage of its life cycle. Demographics .. At demographic chart is located at the end of this section. Special Hazards or Adverse Influences .. No special hazards or adverse influences within the subject's immediate neighborhood were noted. Conclusion .. The subject's neighborhood is considered to be a desirable and viable area suitable for office development over the long run, due to its location, relative ease of access and its proximity to a significant population base. It appears that the market in the Springfield area is very strong, due primarily to the recent economic improvement and limited amount of speculative development. .. The trends for the local area appear stable but healthy. The local population is growing slowly because the area is nearly fully developed. Employment is steady with a short-term slowdown in 2003. Housing values are predicted to grow over the next five years. .. The near-term health of the local area is good with stable real estate values. The senior housing developments in the local area should experience a positive influence.
DEMOGRAPHIC PROFILE 1700 WEST WASHINGTON SPRINGFIELD, ILLINOIS 3.0 MILES 6.0 MILES 6.0 MILES Population 2000 Population 76,159 126,730 126,730 2003 Population 75,190 126,060 126,060 2006 Population 73,771 127,237 127,237 % Change 2000 to 2003 -0.43% -0.17% -0.17% % Change 2003 to 2006 -0.36% -0.13% -0.13% Per Capita Personal Income 2000 Per Capita Personal Income $24,162 $22,699 $22,699 2003 Per Capita Personal Income $26,632 $25,773 $25,773 2006 Per Capita Personal Income $31,392 $30,424 $30,424 % Change 2000 to 2003 3.53% 4.02% 4.02% % Change 2003 to 2006 3.19% 3.37% 3.37% Households 2000 No. Households 34,666 56,236 56,236 2003 No. Households 34,521 56,503 56,503 2006 No, Households 34,366 57,069 57,069 % Change 2000 to 2003 -0.14% 0.16% 0.16% % Change 2003 to 2006 -0.09% 0.20% 0.20% Persons Per Household 2000 Persons Per Household 2.14 2.24 2.24 2003 Persons Per Household 2.12 2.22 2.22 2006 Persons Per Household 2.09 2.16 2.16 % Change 2000 to 2003 -0.30% -0.33% -0.33% % Change 2003 to 2006 -0.30% -0.34% -0.34% Average Household Income 2000 Avg Household Income $52,516 $51,642 $51,642 2003 Avg Household Income $56,030 $56,042 $56,042 2006 Avg Household Income $66,975 $67,454 $67,454 % Change 2000 to 2003 3.36% 3.64% 3.64% % Change 2003 to 2006 2.91% 3.05% 3.05% Income Ranges Median Income $42,066 $43,753 $43,753 $150,000 or more 4.95% 4.42% 4.42% $100,000 to $149,000 6.52% 6.55% 6.55% $75,000 to $99,999 9.70% 10.39% 10.39% $50,000 to $74,999 17.43% 19.13% 19.13% $35,000 to $49,999 17.63% 16.01% 16.01% $25,000 to $34,999 13.56% 12.69% 12.69% $15,00010 $24,999 13.43% 13.14% 13.14% Under $15,000 14.57% 13.47% 13.47% 2000 Median Income $37,575 $39,196 $39,196 2006 Median Income $47,707 $49,677 $49,677 Occupancy 2000 Occupied Housing Units 36,556 61,660 61,660 Owner Occupied 52.36% 56.71% 56.71% Renter Occupied 37.52% 32.20% 32.20% Education 2000 Population 25+ by Education level 52,013 67,172 67,172 Bachelors Degree Only 19.47% 17.63% 17.63% Graduate Degree 13.36% 10.90% 10.90% Retail Trade Potential 2002 Total Retail Sales $1,224,020,156 $2,004,250,630 $2,004,250,630 Apparel Accessory $27,132,676 $44,535,079 $44,535,079 Automotive Dealers $259,029,463 $424,529,691 $424,529,691 Automotive & Home Supply Stores $7,674,591 $12,655,772 $12,655,772 Drug & Proprietary Stores $57,093,699 $93,612,066 $93,612,066 Eating & Drinking Places $127,062,757 $206,240,790 $206,240,790 Food Stores $134,167,644 $219,662,610 $219,662,610 Furniture Home Furnishing Stores $26,753,419 $43,940,645 $43,940,645 Home Appliance, Radio, & TV. Stores $35,117,464 $57,516,274 $57,516,274 Gasoline Service Stations $66,242,115 $111,591,977 $111,591,977 General Merchandise $123,566,714 $201,907,916 $201,907,916 Department Store $104,536,339 $170,612,604 $170,612,604 Hardware, lumber & Garden Stores $54,632.204 $69,362,645 $69,362,645 SPRINGFIELD SANGAMON COUNTY, IL Population 2000 Population 111,454 166,951 2003 Population 111,230 169,922 2006 Population 111,003 191,921 % Change 2000 to 2003 -0.07% 0.17% % Change 2003 to 2006 -0.04% 0.21% Per Capita Personal Income 2000 Per Capita Personal Income $23,460 $23,173 2003 Per Capita Personal Income $26,453 $26,359 2006 Per Capita Personal Income $31,373 $31,097 % Change 2000 to 2003 4.05% 4.39% % Change 2003 to 2006 3.47% 3.36% Households 2000 No. Households 46,621 76,722 2003 No. Households 46,999 79,900 2006 No, Households 49,717 62,061 % Change 2000 to 2003 0.26% 0.50% % Change 2003 to 2006 0.29% 0.54% Persons Per Household 2000 Persons Per Household 2.24 2.36 2003 Persons Per Household 2.22 2.34 2006 Persons Per Household 2.16 2.3 % Change 2000 to 2003 -0.33% -0.32% % Change 2003 to 2006 -0.33% -0.33% Average Household Income 2000 Avg Household Income $53,223 $55,094 2003 Avg Household Income $59,641 $62,295 2006 Avg Household Income $69,643 $72,361 % Change 2000 to 2003 3.67% 4.16% % Change 2003 to 2006 3.15% 3.04% Income Ranges Median Income $44,443 $46,413 $150,000 or more 4.62% 4.77% $100,000 to $149,000 9.11% 10.23% $75,000 to $99,999 10.62% 12.34% $50,000 to $74,999 16.65% 20.62% $35,000 to $49,999 17.60% 17.40% $25,000 to $34,999 12.70% 11.60% $15,00010 $24,999 12.55% 11.36% Under $15,000 13.55% 11.26% 2000 Median Income $39,676 $43,606 2006 Median Income $51,030 $56,465 Occupancy 2000 Occupied Housing Units 53,733 65,459 Owner Occupied 56.61% 64.45% Renter Occupied 33.66% 27.66% Education 2000 Population 25+ by Education level 75,366 126,620 Bachelors Degree Only 16.96% 16.26% Graduate Degree 11.62% 10.30% Retail Trade Potential 2002 Total Retail Sales $1,741,970,762 $2,653,331,173 Apparel Accessory $36,604,961 $63,954,523 Automotive Dealers $366,766,624 $604,704,020 Automotive & Home Supply Stores $11,150,360 $16,059,665 Drug & Proprietary Stores $61,469,964 $134,075,764 Eating & Drinking Places $161,199,363 $297,049,674 Food Stores $190,756,663 $311,729,775 Furniture Home Furnishing Stores $36,233,051 $63,044,691 Home Appliance, Radio, & TV. Stores $50,054,607 $62,117 ,324 Gasoline Service Stations $96,666,454 $157,704,662 General Merchandise $175,392,663 $285,647,075 Department Store $146,361,256 $241,655,601 Hardware, lumber & Garden Stores $77 ,600,571 $126,676,002
SENIOR LIVING INDUSTRY OVERVIEW Independent Living Congregate care or independent living units are designed for seniors who pay for some congregate services (Le. housekeeping, transportation, meals, etc.) as part of the monthly fee or rental rate, and who require little, if any, assistance with activities of daily living. Residents of congregate/independent living units may also receive some health care services provided by in-house staff or an outside agency. Congregate units may be part of an "age in place" residence, a property that provides assisted living services, or a continuing care retirement community. The retirement housing industry has matured considerably over the past two decades as the elderly population increased and more senior housing alternatives are sought. Retirement housing expanded beyond the early dominance of life care and continuing care retirement communities (CCRCs). These communities, which typically included independent living and nursing care on a single campus, typically charge residents a high entrance fee and a moderate monthly service fee. Rental retirement communities represented a major area of growth in the 1980s, fueled in part by the Department of Housing and Urban Development's 221 (d)(4) Retirement Service Center mortgage insurance program. Although the program no longer exists, the rental model is still a popular option for newly developed retirement communities. In addition, a small but distinct increase in the number of cooperatives and condominiums occurred, particularly in communities targeting a more affluent segment of the elderly population. Today's retirement community is generally a smaller complex consisting of 100 to 200 independent living units as compared to the 200 to 300 independent living units that characterized the early CCRCs. In some cases, communities are developed in stages to avoid some of the up front risk associated with initial lease-up, and to allow the facility to be more responsive to market needs and preferences. The rental retirement communities of the early 1980s typically offered no nursing care or assistance with daily living. Rather, these facilities were designed to provide hospitality services such as meals, housekeeping, transportation, and recreational activities. These facilities met with slow lease-up rates and exceedingly high turnover due to their inability to meet changing needs of residents. Independent living communities, particularly rental communities, are the least heavily monitored and the least governed by state regulations of all senior housing communities. In some states, this has resulted in a fair degree of flexibility in providing additional services. Over the past ten years, retirement communities have been attracting an older and somewhat frail population than originally anticipated. The average age of entrance into an independent living facility is between the late 70's and early 80's, rather than the late 60's and early 70's as originally anticipated. As a result of the change in resident profile, as well as the experience gained in the 1980s, it is clear that some form of health care or supportive services for the frail elderly is a necessary component of a retirement community. Assisted Living The emergence of assisted living in the 1990s as an option in the long-term care continuum for elders represented the convergence of social, political, economic and treatment trends. Prior to this time, most dependent seniors had only two long-term care options: be cared for by a family member or enter an institutionalized nursing home. Today, these limited options are inadequate to serve the diverse needs of the elderly population. For many elderly, individual nursing homes are overly intensive, expensive and institutional. In response, assisted living is a favored form of long-term care for those seniors with moderate to intermediate care needs. The Assisted Living Facilities Association of America (ALFAA) defines assisted living as a special combination of housing, personalized supportive services and health care designed to respond to the individual needs of those who require help in activities of daily living, but do not need the skilled medical care provided in a nursing home. Assisted living care promotes the maximum independence of dignity for each resident and encourages the involvement of a resident's family, neighbors and friends. Although the general characteristics and philosophy behind assisted living are consistent throughout the country, there is no consensus on a legal definition of this term. Some states enacted laws using the term assisted living; however, in most jurisdictions, licensure statutes contain a variety of programs and services. In referring to residential housing and services, most state licensing laws use terms such as: rest homes, homes for the aged, supportive living facilities, residential care facilities, board and care homes, elderly group homes, congregate care housing and senior housing. Assisted living programs are located in a variety of environments. They may be housed in newly constructed freestanding facilities, retrofitted buildings such as former hotels, units attached to nursing homes, senior apartments with services, units within CCRC developments and congregate care units. Whatever the environment, facilities must provide private units, or at a minimum, companion suite residential living space. Typically, a resident will have a compact studio or efficiency apartment with a private bathroom. The living space mayor may not include a kitchenette (sink and small refrigerator), a living room or storage space. Economics generally dictate the size of the private living space, which can range from a small one-room efficiency of less than 300 square feet to a large two-bedroom apartment of 750:t square feet or larger. Assisted living residences also provide for a considerable amount of common space for the residents. Newer assisted living facilities generally allocate from 30 percent to 40 percent of the total gross square footage of the building to common areas. Such space includes dining rooms, libraries, lounges, activity centers, kitchens and laundry rooms. The size of an assisted living facility depends on many variables, including market forces and site constraints. Most new freestanding facilities typically provide 40 to 100+ units. The level of service in assisted living facilities varies substantially. However, there are certain basic services generally offered including: .. 24-hour a day on-site supervision or access to an emergency call system; . Two or three meals and regular snacks are available; .. Light housekeeping and laundry services are available; .. Some level of daily personal care from the facility staff; .. A personalized health care plan delineating how a resident's health care needs may be addressed; and .. Recreational activities, social services and transportation resources. An objective of assisted living is to enable residents to age in-place. Thus, the level of personal care, congregate services or health care services may be adjusted upwards as needed. However, this may prove difficult if residents increasing amounts of nursing care since state law may limit or prohibit skilled nursing care in assisted living facilities. Despite this issue, there is a growing trend by states to extend the scope of assisted living services far into the long-term care continuum. The typical resident of assisted living is 83 years old, a woman and single or widowed. Today's assisted living residents have care needs and characteristics previously associated with patients in intermediate care nursing homes in the 1970s and 1980s. Senior care needs are gauged by the extent to which an individual requires regular assistance with ongoing activities of daily living (ADLs) such as bathing, eating, walking, toileting and dressing. In order to determine that there is an ADL dependency, a clinician must determine that an individual cannot safely or routinely perform a specific activity without assistance and that individual. Unless such help is provided, the individual is at risk of not meeting an essential daily need. While the number of ADLs with which a person needs assistance is used clinically as a measure of dependency, such dependency does not necessarily mean that medical care is required. In assisted living facilities, residents generally have at least one ADL dependency, and it is not uncommon that they have as many as three or four. Assisted living fees typically include a fixed monthly amount that covers both housing and services. The monthly amount generally includes a base level of personal care with additional personal care charged separately. There also may be entrance fees, typically equivalent to the first and last month's rent. Assisted living facilities do not require the large endowment type entrance fees demanded in some CCRCs. Occupancy Patterns Occupancy data compiled by the American Seniors Housing Association (ASHA) for the various senior housing community types (congregate, assisted and CCRCs) has been summarized in the following table.
Median Occupancy Rates (National) For Profit Senior Housing Facilities Property Type 1996 1997 1998 1999 2000 2001 2002 2003 Independent 98.0% 96.0% 98.0% 95.0% 95.0% 94.5% 93.1% 91.5% Assisted Living 95.0% 95.0% 92.0% 94.0% 90.0% 93.8% 94.2% 91.0% CCRCs 95.0% 94.0% 95.0% 93.2% 93.2% 93.1% 92.4% 92.0% All Communities 96.0% 95.0% 95.0% 93.7% 93.7% 94.0% 93.5% 92.0% Source: American Seniors Housing Association
Independent living facilities in 2003 exhibited one of the lowest occupancy rate of any of the facility types. This represented a moderate decline over the average rate in 2002. Overall, all of the facility types saw average occupancies decline over that reported in 2002. The average length of stay in a senior housing facility also varies with the facility type. Following is a table that sets forth the average length of stay, based on data compiled by ASHA. Average Resident Length of Stay (Stated In Months) Property Type 1999 2000 2001 2002 2003 Independent 43.4 38.1 43.1 33.4 37.8 Assisted Living 18.5 20.5 28.0 17.7 20.7 All CCRCs Independent 45.4 59.8 37.3 37.0 48.5 Assisted Living 18.2 16.8 12.8 12.0 18.8 Nursing 23.2 18.6 9.0 9.0 15.5 Source: American Seniors Housing Association
The average length of stay in an independent living facility nationally in 2003 was 37.8 months, reflecting an increase over the average length of stay for 2002. In 2003, all facility types showed an upward trend in occupancy in contrast to the rather significant decline for independent and assisted living facilities in 2002, the decline of which was the result of increased lateral movement of residents between existing facilities caused by such factors as facility operational problems (e.g., management, staffing), as well as foreclosures and closings of poorly operated facilities. Absorption Trends Net absorption data compiled by ASHA for senior housing facilities is summarized in the following table. We note that this is the most recent information that has been published.
2001 National Average Net Absorption Rates Senior Housing Facilities 1st Months Months 2nd 3rd Property Type Month 2-6 7 -12 Year Year Independent 25.5 6.7 3.7 2.8 2.9 Assisted Living 11.7 5.2 2.9 2.2 5.3 CCRCs 37.4 18.9 9.0 5.5 4.1 All Communities 28.4 10.3 5.2 3.5 4.1 Figures based on number of residents Source: American Seniors Housing Association
As seen, initial absorption of new residents for all facility types is strong in the first month, but then tapers off during the following months. COMPETITIVE MARKET ANALYSIS Primary Market Area The first step in analyzing the competitive market for the subject is delineating its primary market area (PMA). The PMA is typically described as either a defined radius around the subject, zip codes, or it can be the county or township in which the property is located. In order to delineate the subject's PMA, our analysis evaluated industry trends, an interview with the subject's General Manager as well as representatives at the competitive properties we used in our analysis. Industry Trends National surveys conducted by two senior housing associations regarding relocation trends for senior housing is presented below. These figures denote the percentage and distances involved of residents who have relocated to a senior housing project.
Relocation Trends - Senior Living Facilities AAHSA ALFA Independent Assisted Independent Assisted Living Living Living Living Under 5 Miles 25% 55% 22% 29% 5 -10 Miles 21% 15% 18% 24% 10 - 15 Miles 11% 8% 16% 17% 15 - 25 Miles 10% 8% 20% 14% Over 25 Miles 35% 14% 24% 16% Sources: AAHSA - American Association of Homes and Services for the Aging (1998) ALFA - Assisted Living Federation of America (2000)
Both studies show a relatively similar percentage of relocation trends for independent living residents, however, the percentages for assisted living differed greatly on the percentages of residents relocating from under five miles. Local Trends Our discussion with the marketing directors at the subject and the competing facilities indicated that approximately 75 percent of the subject's residents come from Sangamon County. This encompasses a radius of approximately 6 miles. The remaining percentage emanate from the greater Springfield MSA. Residents relocate to Springfield to either retire or be near their adult children that work in the area. Based on the data, we have determined the PMA of the subject to encompass an area of approximately 6 miles with 75 percent of the residents emanating from the PMA. Although a property like the subject may also attract residents from outside of the area, the geographic market area within a radius of 6 miles of the subject is considered to represent the primary draw for the subject. As indicated on the chart, the subject's PMA of 6 miles is similar to the comparables. Most of the marketing directors we interviewed also indicated that adult children in this local market are the driving forces in the decision making process for their parents. Supply/New Construction No new projects are currently under construction; therefore, the market is not expected to have any additional supply Existing Facilities Because of the subject's levels of personal care services, and type of amenities, the personal care homes in the market with less than 20 beds do not generally compete directly with the subject. However, the following charts detail the number of independent living units in the subject's market area that pose direct and indirect competition to the subject. We note that the table includes facilities located in both the subject's primary and secondary market area in Springfield.
MARKET AREA SUPPLY Name Total Units PMA/SMA* Brenden Gardens 112 PMA Montvale Estates 121 PMA SUBJECT 129 ----- Totals 362 . PMA - Primary Market Area; SMA - Secondary Market Area
Proposed Units Regarding planned or pending projects in the subject's PMA, discussions with local providers and municipal planning departments indicated that there are no facilities planned at this time. However, because of the large retirement draw of the market area, it would be reasonable to assume that the PMA could possibly see some new development through the mid-term. Occupancy Patterns Industry Statistics Independent living facilities generally exhibit the highest occupancy patterns of any of the senior housing community types (congregate, assisted and CCRCs). As was noted earlier, independent living facilities had an average occupancy rate of 91.5 percent in 2003 (which represented a decline from 93.1 percent in 2002), and was only slightly higher than assisted living facilities at 91.0 percent. Competitive Market Area The senior living facilities we surveyed for our analysis totaled approximately 233 units and the current reported occupancy of those properties, which were not in lease-up ranged from 84 to 99 percent. Oak Terrace Retirement Apartments was at 88 percent occupancy at the time of inspection. The subject appears to have a good reputation in the market. The following table summarizes the competitive properties and their reported occupancy levels. Please note that not all of these properties may fall within the defined market area of the subject; however, in the Senior Demographics section we defined the total competitive supply in the subject's primary market area.
DEFINED COMPETITIVE FACILITIES Name Total Units Occupancy Level Brenden Gardens * 112 84% Montvale Estates * 121 90% SUBJECT 129 88% * Denotes facilities located in subject's primary market area.
Rental Rates Current rental rates for independent living units in the Springfield area begin at approximately $1,200 per month for a studio unit and increase to approximately $2,500 per month for a two-bedroom unit. In general, independent living facilities provide one two three meals per day, weekly to bi-weekly housekeeping, weekly laundry, all utilities except telephone and cable TV, recreation activities and scheduled transportation. Rent Increases Most independent living facilities in the Springfield market area instigated annual rent increases over the last several years. Although no specific data was available, discussions with several providers indicated that they routinely increase rents between three and five percent per year. Discussions with the subject's Executive Director indicated that the facility also increased rents annually over the last several years. Concessions Rent concessions, or incentives, provide a good indication of the condition, or strength of current local market conditions. Rent concessions are generally found in markets exhibiting high vacancy and diminished absorption levels, as well as being used by new projects as a part of their overall marketing program. At the time of our investigation of the Springfield market area, specific concessions were noted, generally $300 off the 2nd months rent. Similar to the market, Oak Terrace Retirement Apartments reported that they are offering concessions for leasing vacant units. Concessions will likely be part of the market. The use of concessions typically stimulates occupancy in response to unforeseen vacancies. They should, however, not be of any major significance to a property like the subject. Absorption Trends An independent living facility generally exhibits a moderate initial absorption pattern during the first operating year of any of the senior housing community types (independent, assisted and CCRCs). Occupancy data compiled by ASHA was summarized previously. The industry data indicated that initial absorption of new residents for all facility types is strong in the first month, then it tapers off dramatically during the following months. Specifically, net monthly absorption averaged 25.5 residents for the Month 1, 6.7 residents for Months 2 - 6, 3.7 residents for Months 7 - 12, and 2.8 residents during Year 2. Oak Terrace Retirement Apartments opened in 1987 and has shown good success from an occupancy basis. The facility was 88.00 percent occupied at the time of our inspection. Management reported that the facility has been operating at positive occupancy levels for several years. Senior Demographics We evaluated the current and future market potential by analyzing demographic trends and the supply of senior housing in the facility's market area. Most market areas for assisted living comprise up to five miles for the PMA and up to 10 to 20 miles for the SMA. As discussed earlier, the PMA for the subject encompasses an area of approximately [XXX] miles and a SMA of approximately [XXX] miles. This assumption was based on our review of the demographics of the area, trends on where most of the competition is being constructed, as well as from discussions with other similar and competing facilities in the area. Claritas, Inc. compiled the demographic data used in our analysis. The data includes figures for the most recent census year in 2000, 2003 estimates and projections for the year 2008. For purposes of this analysis, we relied upon the 2003 estimates for current demographic information. Additional state and national information was obtained from A Profile of Older Americans: 2001, prepared by the American Association of Retired Persons, the Administration on Aging based on data from the U.S. Bureau of the Census. Through a review of senior demographics, industry surveys and local market characteristics; we utilized the following criteria to determine the subject's market area characteristics.
MARKET CLASSIFICATIONS Market Wide Market Penetration Rent Type of Market Occupancy Rate Concessions Good 90%+ Up to 3.9% None Equilibrium 80 - 89% 4.0% - 6.9% Nominal Saturation 70 - 79% 7.0% - 9.9% Moderate Saturated (Over Built) 69% and Below 10% and Above Substantial
Nationally, it is generally anticipated that 60 to 70 percent of residents will come from the PMA and an additional 15 to 20 percent will be from the secondary market area. The remainder of the residents will generally be from other areas and have relocated to be closer to family members. Primary market residents lost to other market areas generally offset residents coming from the secondary market. The demand for elderly housing is determined by analyzing the relationship between the supply of senior housing units and the number of qualified residents with adequate income to afford the units. In general, a higher ratio of qualified residents, coupled with a high overall occupancy in the area indicates a strong demand for senior housing. At the same time, a low ratio of units to available households coupled with a high occupancy also indicates a high demand. A low occupancy for the area always indicates a low demand. In other words, the ratio of qualified residents is only one component. We calculated the market wide occupancy as of the date of inspection for the subject's PMA. The primary competing facilities in the PMA, including the subject, are shown in the following table. We acknowledge that the following summary of properties may not represent all of the facilities in the market area, but are what we believe to be the most competitive with the subject.
MARKET OCCUPANCY CHARACTERISTICS Primary Market Area Name No. Units Occupancy Occupied Units Brenden Gardens 112 84% 94 Montvale Estates 121 90% 109 SUBJECT 129 88% 114 Totals 362 87% 317
These, along with the previous factors shown will be used in our age and income qualified penetration analysis that follows. Age and Income Qualified Penetration Analysis In our analysis we assumed that 75 percent of the residents will come from the PMA. The population in the area is adequate in size, the general population is increasing and the elderly population is on the rise. This suggests that the subject facility will not have to place greater weight on attracting residents to relocate in order to be closer to family members. Areas where the younger population is expanding would be more apt to attract residents from outside the community to move to be closer to their children. Based on the market classification, penetration rates of up to 3.9 percent were classified for good markets, 4.0 to 6.9 percent signifies the market is at equilibrium, 7.0 to 9.9 percent indicates a market is nearing saturation and rates above 10 percent signify the market is saturated. The subject's indicated penetration rate for 2003 signifies that there is adequate demand in the PMA. Even assuming a 25 percent increase in supply over the next five years indicates good demand in the PMA. Although the average age of an assisted living resident is above 75 years, this analysis is based on a 65+ income qualified population. This was due to maintaining consistency with the penetration study and resultant indices that were based on a 65+ population study. Nonetheless, if only to the 75+ income qualified households are evaluated and the same criteria as shown in the previous table is used, this indicates the following penetration figures: Conclusion Overall, these findings suggest that there appears to be adequate demand for the subject facility in the PMA from both the general population base and the project specific targeting. Based on the current inventory, the subject's PMA is not close to reaching a saturation point. Further, current statistics appear to be leaning towards a greater spend down of assets by the elderly and that traditional income levels may be conservative. With this in mind, there appears to be a adequate marketplace for the subject facility. Market Rate Comparisons On the following pages are data sheets of the facilities we compared with the subject. A map showing their location follows these pages. All of the facilities are noted as being located in the subject's PMA. Senior Housing Rent No. SUBJECT Oak Terrace Retirement Apartments 1700 West Washington Street Springfield Illinois Property Type: ILF Verification: Administrator 217-793-0431 30-Apr-04 No. Units Unit Types Occupancy 129 Independent Living Unit 88% 0 Assisted Living Units 0% 129 Total Units/Beds 88% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio $1,218 to $1,486 380 to 414 -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,914 to $2,447 483 to 810 -- to -- -- to -- Two-Bedroom $2,466 to $2,466 810 to 810 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent -- to -- -- to -- -- to -- -- to -- Additional Personal Care -- to -- -- to -- -- to -- -- to -- Community Fee -- to -- -- to -- -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges [Points] [Ala Carte] [Levels] /Sewer X Electricity X Cable TV X Telephone Incontinence Care: Housekeeping: Weekly Dressing Assistance: Activities: Daily Bathing Assistance Transportallon: Bus Van limo Medication Assistance: Security (Hrs): 24 Alzheimer Dementia Area: Nursing Staff: Improvement Description - -------------------------------------------------------------------------------- Year Opened 1987 Common Construction Areas: Lobby X Dining Room X Type Masonry Wood Frame Activity X Salon X Floors 123 Library X Laundry X Site Suitability Good Unit Amenities: Construction Call System X Fire Detectors X Quality Good Pvt Bath X Shared Bath Exterior Kitchenettes Yes Siding Masonry Roofing Shingles HVAC System: Through-Wall Units Building Area Covered Parking Yes (Sq.Ft.) 117.250 Condition Average Effective Age (Yrs): 15 Site Area (AC) 1.80 Remarks: Senior Housing Rent No. 1 Brenden Gardens 90 Southwind Drive Springfield, IL Property Type: ILF Verification: Administrator 217-529-4586 30-Apr-04 No. Units Unit Types Occupancy 112 Independent Living Unit 84% 0 Assisted Living Units 0% 112 Total Units/Beds 84% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio -- to -- -- to -- -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,350 to $1,475 525 to 525 -- to -- -- to -- Two-Bedroom $1,650 to $1,700 775 to 775 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent $300 to $300 -- to -- Additional Personal Care -- to -- -- to -- Community Fee -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges /Sewer X Electricity X Cable TV X Telephone Incontinence Care:No Housekeeping: Weekly Dressing Assistance:No Activities: Daily Bathing Assistance:No Transportallon: Van Medication Assistance:No Security (Hrs): No Alzheimer Dementia Area:No Nursing Staff: Improvement Description - -------------------------------------------------------------------------------- Year Opened 1994 Common Construction Areas: Lobby X Dining Room Type Masonry Wood Frame Activity X Salon Floors Library X Laundry Site Suitability Average Unit Amenities: Construction Call System X Fire Detectors X Quality Average Pvt Bath X Shared Bath Exterior Kitchenettes Yes No Siding Wood Masonry Roofing Rubber HVAC System: Central Building Area Covered Parking Yes (Sq.Ft.) Condition Average Effective Age (Yrs): 10 Remarks: This property is located 10 miles away from the subject. Senior Housing Rent No. 2 Montvale Estates 2601 Montvale Drive Springfield, IL Property Type: ILF Verification: Administrator 217-546-5577 30-Apr-04 No. Units Unit Types Occupancy 121 Independent Living Unit 90% 0 Assisted Living Units 0% 121 Total Units/Beds 90% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio -- to -- -- to -- -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,650 to $1,925 525 to 530 -- to -- -- to -- Two-Bedroom $2,275 to $2,450 775 to 775 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent $350 to $350 -- to -- Additional Personal Care -- to -- -- to -- Community Fee -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges /Sewer X Electricity X Cable TV X Telephone Incontinence Care:No Housekeeping: Weekly Dressing Assistance:No Activities: Daily Bathing Assistance:No Transportallon: Van Medication Assistance:No Security (Hrs): 24 Alzheimer Dementia Area:No Nursing Staff: Improvement Description - -------------------------------------------------------------------------------- Year Opened 1192 Common Construction Areas: Lobby X Dining Room Type Masonry Wood Frame Activity X Salon Floors Library X Laundry Site Suitability Average Unit Amenities: Construction Call System Fire Detectors X Quality Average Pvt Bath X Shared Bath Exterior Kitchenettes Yes Siding Masonry Roofing Rubber HVAC System: Central Building Area Covered Parking No (Sq.Ft.) Condition Average Effective Age (Yrs): 12 Remarks: This property is located 2 miles away from the subject. [GRAPHIC OMITTED] RENTAL MAP Direct Comparisons As a basis for comparing the subject's asking rental rates to the comparables shown in the previous summary, we classified each comparable in relation to the subject as either similar, inferior, or superior. The overall classification was based on the five primary factors (aside from pricing) used by potential residents in choosing an assisted living facility. We based these factors on our discussions with hundreds of marketing directors and administrators across the nation. The five main factors in order of importance are as follows: reputation for quality care or social status of the facility; age and condition of the building; unit sizes; amenities and planned activities; and location. Rental Rate Analysis The independent living rates at Oak Terrace Retirement Apartments include three meals per day, weekly housekeeping/laundry, utilities (except for telephone and cable TV), activities and scheduled transportation. A summary of the asking or street rents for the subject, as well as the rates for the competitive properties are shown in the following discussions. Companion (Shared) Units -Independent Livinq The following chart indicates the asking rates for independent living companion or shared units at the subject, as well as the comparables: Studio Units -Independent Living The following chart indicates the asking rates for independent living studio units at the subject, as well as the comparables:
Studio Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens -- - -- -- - -- Montvale Estates -- - -- -- - -- SUBJECT 380 - 414 $1,218 - $1,486 Range (Excluding Subject) 0 - 0 $0 - $0 Median (Excluding Subject) #NUM! - #NUM! #NUM! - #NUM!
One-Bedroom Units - Independent Living The following chart indicates the asking rates for independent living one-bedroom units at the subject, as well as the com parables:
One-Bedroom Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens 525 - 525 $1,350 - $1,475 Montvale Estates 525 - 530 $1,650 - $1,925 SUBJECT 483 - 810 $1,914 - $2,447 Range (Excluding Subject) 525 - 530 $1,350 - $1,925 Median (Excluding Subject) 525 - 528 $1,500 - $1,700
Two-Bedroom Units - Independent Living The following chart indicates the asking rates for independent living two-bedroom units at the subject, as well as the comparables:
Two-Bedroom Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens 775 - 775 $1,650 - $1,700 Montvale Estates 825 - 825 $2,275 - $2,450 SUBJECT 810 - 810 $2,466 - $2,466 Range (Excluding Subject) 775 - 825 $1,650 - $2,450 Median (Excluding Subject) 800 - 800 $1,963 - $2,075
Summary/Conclusion The subject is one of several competing facilities in the marketplace and offers independent living units. The subject maintained favorable occupancy levels over the last several years. The subject rates are generally at the middle end of the competition and appear to be reflective of market rates. Concessions are not prevalent in the marketplace. The subject's ability to continue to attract, as well as retain residents suggests that there is a good marketplace for this type of facility, which should continue into the foreseeable future. SITE DESCRIPTION Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Shape: Rectangular Topography: Level Land Area: 1.8000 gross acres (1.8000 net acres) 78,408 gross square feet (78,408 net square feet) Frontage, Access, Visibility: The site has adequate frontage, access and 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 public utilities are available to the site 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 170912-0140-C (January 6,1983) Flood Zone: FEMA Zone C: Areas outside of a 100-year flood hazard. 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 did not note the presence of wetlands during our inspection 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 the current intended use. IMPROVEMENTS DESCRIPTION The following description of improvements is based upon our physical inspection of the improvements along with our discussions with the Administrator. Please refer to the development plan and floor plans in the Addenda. The facility was constructed in 17 and contains 117,250:t square feet of gross building area within 1, 6-story building. The facility has 129 units and an effective capacity of 137 beds and/or residents. The unit mix for the development is as follows.
Oak Terrace Retirement Apartments No. No. Unit Total Description Units Beds Sq.Ft. Sq.Ft. Independent Living Small Studio 5 5 410 2,050 Square Studio 5 5 380 1,900 West Studio 15 15 414 6,210 Regular Studio 10 10 414 4,140 1BR West-Patios 10 10 483 4,830 1 BR -Patios 62 62 483 29,946 1 BR Intermediate-Patio 5 5 782 3,910 1 BR Deluxe - Patio 9 9 810 7,290 2BR - Patio 8 10 810 6,480 Subtotals 129 137 66,756 Totals 129 137 66,756
General Description Year Built: 17 Number of Buildings: 1 Number of Stories: 6 Gross Building Area: 117,25O + square feet Number of Units: 129 Number of Beds: 137 Design and Functionality: The building is an independent living property of brick construction. The improvements have good appeal to prospective independent living residents. Construction Detail Basic Construction: Brick Foundation: Poured concrete slab Framing: Steel. Floors: Reinforced concrete poured over gravel. Each upper floor is bridged by wood stud floor beams. Exterior Walls: The exterior facade of the building consists of brick veneer. Roof Cover: Flat roofing system consisting of built-up assemblies with a sealed membrane cover. Roof Cover: Wood truss roofing system covered with a composition shingle cover. Windows: Units have thermal windows in aluminum frames. The windows are double paned with sliders. 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: The building contains elevators. Fire Protection: The building is fire sprinklered. Each apartment has electric smoke detectors in compliance with local code. Interior Detail Layout: The building is designed in a "L" shape. The resident living units have small kitchenettes with microwaves, a sink and refrigerators. All units have baths with a sink, toilet and prefabricated shower stall. Floor Covering: Carpet in the living, dining and bedroom areas with sheet vinyl tile in the entry, kitchenettes and bathrooms. Walls: Painted and textured gypsum board. Ceilings: Painted and textured gypsum board. Bathrooms: Depending on unit type, each resident unit is equipped with a shared or full bathroom. All bathrooms consist of a walk-in shower with wall-mounted showerhead, toilet and sink and sheet vinyl floor covering, and a combination wall papered gypsum board walls. Kitchen Facilities: All meals for the residents are prepared in a central kitchen. Equipment includes a gas/ range, steel hood with fire suppression system, dishwashers, stainless steel preparation tables, walk-in coolers and walk-in freezers. Site Improvements Parking: 161 spaces (1.25:Unit). Parking is adequate Onsite Landscaping: A variety of trees, shrubbery and grass. Other: Other site improvements include signage, trash enclosures, paved asphalt drives, concrete sidewalks and walking paths, as well as fencing. Summary Condition: The improvements are in average condition given its competitive position in the marketplace. The improvements have been well maintained and provide 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: The overall quality of the improvements is rated as average and is consistent with the competition in the market area. Layout & Functional Plan: Average. The facility is considered to be functional for its intended use. There are adequate common areas and units are considered to be comparable to most competing projects within the area. The furnishings and fixtures appear to be of good quality. Capital Improvements: Other than normal routine property maintenance, there are no major capital improvement expenditures planned in the immediate future. Year Built: 17 Effective Age: 15 years Expected Economic Life: 50 years Remaining Economic Life: 35 years Americans With Disabilities Act The Americans With Disabilities Act (ADA) became effective January 26, 1992. We have not made, nor are we qualified by training to make, a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey and a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since we were not provided with the results of a compliance 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 are thought to exist. REAL PROPERTY TAXES AND ASSESSMENTS Taxes are levied against all real property in this locale for the purpose of providing funding for the various municipalities. The amount of ad valorem taxes is determined by the current assessed value for the property in conjunction with the total combined tax rate for the municipalities. The property is subject to the taxing jurisdiction of Sangamon County. The assessors' parcel identification number is 14-32-127-005, 14-32-127-006 and 14-32-127-007. The 2004 calendar fiscal tax year is the most recent year for both assessed value and tax information for the subject. This data is shown in the following chart.
PROPERTY ASSESSMENT/TAX DATA 2004 Assessor's Market Value: Assessor's Market Value: $5,088,330 Equalization/Assessment Ratio 32.15% Assessed Value $1,635,898 Tax Rate ($/$1,000 AV) 78.9839 Total Property Taxes $129,209.65 Building Area 117,250 Property Taxes per Square Foot $1.10 No. of Units 129 Property Taxes per Unit $1,001.63
Total taxes for the property are $129,209.65, or $1,001.63 per unit. We did not do a direct comparison with other senior housing facilities in the market area. Assessed values are usually poor indicators of market value and in the case of the subject and its higher level of quality, any direct comparison to the existing product in the Springfield market area would not provide any substantial of support towards an assessment estimate. The definition of market value used in this report assumes a sale of the property. If the property were sold, it would be' reassessed according to the county assessor's opinion of its market value, which is typically the sale price. The current assessment of the property of $1,635,898 is considered reasonable based on our market value estimates determined herein. For the purposes of our Year 1 proforma, we have increased the current taxes for the property. A forecast tax liability $150,000. The increased taxes will be reflected in our proforma model in the Income Capitalization Approach. Based on property tax comparisons, it is our opinion that the subject's real estate taxes are reasonable. ZONING The property is zoned R-5b by the City of Springfield [or Sangamon County]. Permitted uses within this district include commercial and multifamily development. 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, 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 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 described above. 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 commercial and residential uses. Aside from the site's zoning and 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 "Property Description," 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 land uses. Financial Feasibility and Maximal Productivity The third and fourth tests are, respectively, what is 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. As stated in the Competitive Market Analysis section, population, income and age statistics would indicate that demand for senior living options in the subject area is considered moderate This relates to the economic feasibility of developing a property similar to the subject. The stabilized facilities in the subject's market area are exhibiting occupancies above 85 percent. As such, market conditions for senior living in the subject's primary market area are considered adequate. Highest and Best Use of Site As Though Vacant Considering the subject site's size, configuration and topography, location among other independent living properties and state of the local independent living market, it is our opinion that the Highest and Best Use of the subject site as though vacant is multi-family residential property 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." As discussed, an independent living facility exists on the site. The design, layout, as well as average unit size of the facility are good and there is no functional obsolescence in the improvements. As will be demonstrated in the Sales Comparison Approach and the Income Capitalization Approach, the operating characteristics of an assisted living facility represent a viable facility from a revenue-producing standpoint. Alternative uses for the existing improvements, however, would be limited due to the overall design (smaller rooms and limited individual cooking facilities). As a result, any conversion to an alternative use would be costly. 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 utilized as an independent living facility. 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 considered and analyzed each in this appraisal to develop an opinion of the market value of the subject. 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 premise 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 .qnd 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 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 the Discounted Cash Flow Method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a selected yield rate (internal rate of return.) 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 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 perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. We conclude the valuation process 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). In our opinion, the direct capitalization analysis method is most appropriate to value the subject property. Historical Financial Performance of the Subject Property The subject is an existing independent living facility. Management provided financial statements for 2001 2002 2003 and a budget projection. The financial statements are summarized on the following chart. Potential Gross Income There is only one type of payment source at the subject for independent living services; private pay residents. This type of payor is generally considered the most desirable since private pay rates allow for greater profitability than any fixed government rate plans. The subject generates revenue from monthly rentals of the living units, as well as from other sources such as second person (double occupancy) fees, move-in or processing fees, as well as other miscellaneous revenue.
OAK TERRACE RETIREMENT APARTMENTS INCOME AND OPERATING EXPENSE SUMMARY - -------------------------------------------------------------------------------- 2001 2002 (January-December) (January-December) Amount $/Unit % of EGI Total $/Unit % of EGI REVENUES Rental Income $2,549,404 $19,763 95.48% $2,636,197 $20,436 95.91% Other Income $ 120,704 $ 936 4.52% $ 112,407 871 4.09% GROSS POTENTIAL REV. $2,670,108 $ 20,699 100.00% $2,748,604 21,307 100.00% Vacancy/ Collection Loss Inc. Above Inc. Above TOTAL NET REVENUE $2,670,108 $20,699 100.00% $2,748,604 $21,307 100.00% OPERATING EXPENSES Departmental Repair/Maint/ Supply $38,997 $302 1.46% $ 44,418 $ 344 1.62% Services $ 561,679 $4,354 21.04% $ 589,826 $ 4,572 21.46% Administrative $ 26,732 $ 207 1.00% $ 27,365 $ 212 1.00% Advertising $ 43,224 $ 335 1.62% $ 41,109 $ 319 1.50% Payroll $ 455,227 $3,529 17.05% $ 483,937 $ 3,781 17.61% Utilities $ 85,031 $ 659 3.18% $ 77,136 $ 600 2.82% Non-Departmental Real Estate Taxes $ 116,745 $ 905 4.37% $ 149,555 $ 1,159 5.44% Insurance $ 40,946 $ 317 15.53% $ 65,546 $ 508 2.38% Management Fees (5% of EGI) $ 133,505 $1,035 5.00% $ 137,430 $ 1,065 5.00% Replacement Reserves $ 38,700 $ 300 1.45% $ 38,700 $ 300 1.41% TOTAL ALL EXPENSES $ 1,540,786 $11,944 57.71% $1,655,322 $12,832 60.22% EXPENSE RATIO 57.7% 60.2% NET OPERATING INCOME $ 1,129,322 $ 8,754 42.29% $1,093,282 $ 8,475 39.78% OCCUPANCY 94.2% 94.2% 2003 2004 (January-December) (January-December) Amount $/Unit % of EGI Total $/Unit % of EGI REVENUES Rental Income $2,569,806 $20,130 96.63% $2,723,203 $21,110 96.13% Other Income $ 90,525 $ 702 3.37% $ 109,680 850 3.87% GROSS POTENTIAL REV. $2,687,331 $20,832 100.00% $2,832,883 21,960 100.00% Vacancy/ Collection Loss Inc. Above Inc. Above TOTAL NET REVENUE $2,687,331 $20,832 100.00% $2,832,883 $21,960 100.00% OPERATING EXPENSES Departmental Repair/Maint/ Supply $30,025 $233 1.12% $ 35,035 $ 272 1.24% Services $ 609,090 $4,722 22.67% $ 657,574 $ 4,722 22.67% Administrative $ 49,914 $ 387 1.86% $ 28,426 $ 220 1.00% Advertising $ 35,624 $ 276 1.33% $ 34,810 $ 270 1.23% Payroll $ 460,270 $3,568 17.13% $ 457,075 $ 3,543 16.13% Utilities $ 86,146 $ 668 3.21% $ 86,940 $ 674 3.07% Non-Departmental Real Estate Taxes $ 141,384 $1,096 5.26% $ 145,620 $ 1,129 5.14% Insurance $ 49,598 $ 384 1.85% $ 86,298 $ 669 3.05% Management Fees (5% of EGI) $ 134,367 $1,042 5.00% $ 141,644 $ 1,098 5.00% Replacement Reserves $ 38,700 $ 300 1.44% $ 38,700 $ 300 1.37% TOTAL ALL EXPENSES $ 1,635,118 $12,675 60.85% $1,712,122 $13,272 60.44% EXPENSE RATIO 60.8% 60.4% NET OPERATING INCOME $ 1,052,213 $ 8,157 39.15% $1,120,761 $ 8,688 39.56% OCCUPANCY 94.2% 94.2% C&W Forecast Stabilized Year Amount $/Unit % of EGI REVENUES Rental Income $3,171,984 $23,153 Other Income $ 110,000 $ 803 GROSS POTENTIAL REV. $3,281,984 $23,956 Vacancy/ Collection Loss ($426,658) TOTAL NET REVENUE $2,855,626 $22,134 OPERATING EXPENSES Departmental Repair/Maint/ Supply $ 335,000 $ 271 1.23% Services $ 660,000 $ 5,116 23.11% Administrative $ 30,000 $ 233 1.05% Advertising $ 35,000 $ 271 1.23% Payroll $ 460,000 $ 3,566 16.11% Utilities $ 90,000 $ 698 3.15% Non-Departmental Real Estate Taxes $ 150,000 $ 1,163 5.25% Insurance $ 90,000 $ 698 3.15% Management Fees (5% of EGI) $ 142,766 $ 1,107 5.00% Replacement Reserves $ 38,700 $ 300 1.36% TOTAL ALL EXPENSES $1,731,466 $13,422 60.64% EXPENSE RATIO 60.6% NET OPERATING INCOME $1,123,860 $ 8,712 39.36% OCCUPANCY 94.2%
Independent Living Rate Analysis The subject has an effective capacity of 137 residents and/or beds. The facility is of average quality construction with a modern layout and design. The following is a description of the types of accommodations that are available at the subject. Independent living residents at the subject have the choice of studio, one-bedroom, and two-bedroom apartment units. All units reflect good design/layout and feature private bathrooms, kitchenettes and adequate closet space. All residents are provided with three daily meals, weekly housekeeping, activities, and scheduled transportation included in their monthly rent. The subject's actual rental rates (rent roll) were tested for reasonableness against similar facilities in the subject's market area. In the Competitive Market Analysis section, we identified several existing facilities considered to provide competition for the subject. Data sheets were provided in the Competitive Market Analysis section presented previously. The complexes we surveyed are all considered comparable given that they all provide independent living units. We note that the facilities are all adequately maintained and they all have a similar amenity package. All of the competing facilities were discussed in detail in the Competitive Market Analysis section of the report. The following table summarizes the subject's unit types and the actual and asking monthly rents.
Oak Terrace Retirement Apartments In House Rents Asking Rents No. Occ. Monthly $/Unit Monthly $/Unit Unit Units Units Revenue Per Mo. Revenue Per Mo. Independent Living Small Studio 5 5 $ 5,985 $ 1,197 $ 6,090 $1,218 Square Studio 5 5 $ 6,562 $ 1,312 $ 6,640 $1,328 West Studio 15 13 $18,374 $ 1,413 $21,540 $1,436 Regular Studio 10 9 $13,202 $ 1,467 $14,860 $1,486 Total- Studio 35 32 $44,123 $ 1,379 $49,130 $1,404 1BR West-Patios 10 10 $18,636 $ 1,864 $19,140 $1,914 1BR -Patios 62 50 $97,072 $ 1,941 $123,318 $1,989 1 BR Intermediate -Patio 5 5 $11,067 $ 2,213 $ 11,265 $2,253 1 BR Deluxe - Patio 9 8 $19,002 $2,375 $ 22,023 $2,447 Total - One- Bedroom 86 73 $145,777 $1,997 $175,746 $2,044 2BR - Patio 8 8 $ 19,152 $2,394 $ 19,728 $2,466 Total- 2 BR 8 8 $ 19,152 $2,394 $ 19,728 $2,466 Independent Totals 129 113 $209,052 $1,850 $ 244,604 $1,896 Totals 129 113 $209,052 $1,850 $ 244,604 $1,896
The subject's current in-house average rates generally fall similar most of the asking rates at the subject. This is reportedly due to recent rent increases. Overall, the average monthly rate is $1,850 per month, which is 2.49 percent below the average asking rate of $1,896. We consider an increase for the in-house rates of approximately 2.00 percent to be reasonable, noting that an additional rate increase will be instigated in the first part of 2004. This increase will not adversely affect the stabilized occupancy level at the subject. Base Rental Rates The following chart details our reconciled base rental rates for all unit types at the subject. These rates were concluded to in the Competitive Market Analysis section of the report.
Oak Terrace Retirement Apartments Reconciled Market Rental Rates Resident No. No. Market Unit Type Type Units Beds Rent Small Studio IL 5 5 $1,218 Square Studio IL 5 5 $1,328 West Studio IL 15 15 $1,436 Regular Studio IL 10 10 $1 ,486 1BR West-Patios IL 10 10 $1,914 1 BR -Patios IL 62 62 $1,989 1 BR Intermediate-Patio IL 5 5 $2,253 1 BR Deluxe - Patio IL 9 9 $2,447 2BR - Patio IL 8 16 $2,466 Totals 129 137
Other Revenues In addition to room revenue, the subject receives additional income from additional personal care, new resident fees (entrance fees), second person fees, as well as miscellaneous revenue from such items as barber/beauty income, laundry services, cable TV revenue, meal and guest fees, food catering, health supplies, parking, etc. Other Income This category includes revenue received from the subject's barber/beauty income, laundry services, cable TV revenue, meal and guest fees, food catering, health supplies, parking, etc. The historic revenue for this category are shown in the following table. Year Total $/Unit 2001 $120,704 $936 2002 $112,407 $871 2003 $90,525 $702 BUDGET 2004 $109,680 $850 C&W Forecast $110,000 $803
Based on the data, we forecast Year 1 revenue from this source at $110,000. Vacancy and Collection Loss Both the investor and the appraiser are primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100 percent occupied and all tenants were paying their rent in full and on time. A normally prudent practice is to expect some income loss as tenants vacate, fail to pay rent, or pay their rent late. Model units or other rent loss, if necessary, is addressed separately. The subject, as of the most current rent roll provided, was 88.00 percent occupied. This is about equal to current average occupancy levels for the market area overall. In consideration of the above, we forecast a stabilized vacancy and collection loss of 13.00 percent for the subject. Effective Gross Income The following table summarizes the projected estimate of stabilized income based on the above findings. The stabilized revenues are based on current market rents and trends and reflect what we consider a typical purchaser would anticipate.
Oak Terrace Retirement Apartments STABILIZED OPERATING INCOME RESIDENT NO. NO. MONTHLY PER UNIT TYPE TYPE UNITS BEDS RATE INCOME RESIDENT Small Studio IL 5 5 $ 1,218 $ 73,080 Square Studio IL 5 5 $ 1,328 $ 79,680 West Studio IL 15 15 $ 1,436 $258,480 Regular Studio IL 10 10 $ 1 ,486 $178,320 1BR West-Patios IL 10 10 $ 1,914 $229,680 1 BR -Patios IL 62 62 $ 1,989 $1,479,816 1 BR Intermediate- Patio IL 5 5 $ 2,253 $135,180 1 BR Deluxe - Patio IL 9 9 $ 2,447 $264,276 2BR - Patio IL 8 16 $ 2,466 $473,472 Total 129 137 $3,171,984 $ 23,153 Other $ 110,000 $ 803 TOTAL POTENTIAL GROSS INCOME $3,281,984 $ 23,956 LESS: VACANCY @ 13.0% $ (426,658) EFFECTIVE GROSS INCOME $ 2,855,326 $ 23,956
Opinion of Expenses We developed an opinion of the property's annual operating expenses after reviewing its historical performance and reviewing the operating statements of similar senior living properties. Management provided operating statements for 2001 2002 2003 and a budget projection. This information was summarized previously. Furthermore, we supported our estimate of projected expenses with other senior living facilities in the region, as well as from overall industry statistics. We also note that the reader is cautioned when reviewing the comparable expenses for individual facilities, in that the reporting of expenses varies by property and that different congregate living facilities offer different services. All comparisons will be made on an actual resident basis. Expense Comparables The expense comparables are summarized in the following chart.
SUMMARY OF COMPARABLE OPERATING EXPENSES INDEPENDENT LIVING FACILITIES Facility Confidential Confidential Confidential Reporting Period 2003 2003 2002 Year Bum 2001 2001 1990 No. of IL Units 42 60 176 No. of AL Unils 72 84 11 No. of AL2 Units 0 0 0 Total Unils 114 144 187 Occupancy 93% 92% 98% Resident Days 38,822 48,198 66,890 Per %of Per %of Per %of Resident EGI Resident EGI Resident EGI TOTAL NET REVENUES $26,055 $23,495 $34,768 EXPENSES General & Administrative $1,518 5.83% $968 4.12% $3,052 8.78% Payroll Taxes & Benefits $1,446 5.55% $895 3.81% $3,882 11.17% Resident Care $3,168 12.16% $2,587 11.01% $1,133 3.26% Food Services $2,264 8.69% $2,107 8.97% $4,949 14.23% Activities $455 1.75% $269 1.15% $461 1.33% Housekeeping $482 1.85% $370 1.57% $1,291 3.71% Plant Operations $745 2.86% $657 2.80% $2,046 5.89% Utities $1,087 4.17% $1,274 5.42% $1,805 5.19% Marketing/Promotions $536 2.06% $290 1.23% $546 1.57% Real Estate Taxes $904 3.47% $839 3.57% $1,257 3.62% Insurance $585 2.24% $882 3.76% $1,154 3.32% ADJUSTED OPERATING EXPENSES $13,188 50.62% $11,138 47.41% $21,576 62.06% Management Fee $1,303 5.00% $1,175 5.00% $1,738 5.00% Expense Ratio Before Reserves 56% 52% 67% Reserves - - - - - - ASHA ASHA ASHA Lower Upper Facility Quartile Median Quartile Reporting Period 2003 2003 2003 Year Bum N/A N/A N/A No. of IL Units N/A N/A N/A No. of AL Unils N/A N/A N/A No. of AL2 Units N/A N/A N/A Total Unils N/A N/A N/A Occupancy N/A N/A N/A Resident Days TOTAL NET REVENUES $19,389 $26,972 $32,078 EXPENSES General & Administrative $885 $1,703 $2,372 Payroll Taxes & Benefits $847 $1,665 $2,143 Resident Care $532 $1,961 $2,924 Food Services $2,717 $3,875 $4,531 Activities N/A N/A N/A Housekeeping $491 $789 $1,085 Plant Operations $511 $1,138 $1,593 Utities $875 $1,352 $1,753 Marketing/Promotions $522 $1,045 $1,431 Real Estate Taxes $489 $1,064 $1,533 Insurance $289 $647 $1,178 ADJUSTED OPERATING EXPENSES $12,424 $18,300 $22,613 Management Fee $673 $1,411 $1,748 Expense Ratio Before Reserves 68% 73% 76% Reserves $193 $580 $977 Source: The State of Seniors Housing, 2003. ASHA. (Data is for Independent Living Facilities) Note: Each line expense for ASHA derived from seperately sorted data columns and may not add up under totals. * All comparable categories based on Actual Unit (Per Resident)
Repair/ Maintenance/ Supply The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $38,997 $302 1.46% 2002 $44,418 $344 1.62% 2003 $30,025 $233 1.12% BUDGET 2004 $35,035 $272 1.24% C&W Forecast $35,000 $271 1.23%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $35,000 or $ 271 per unit. Services The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $561,679 $4,354 21.04% 2002 $589,826 $4,572 21.46% 2003 $609,090 $4,722 22.67% BUDGET 2004 $657,574 $5,097 23.21 % C&W Forecast $660,000 $5,116 23.11 %
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $660,000 or $5,116 per unit. Administrative The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $26,732 $207 1.00% 2002 $27,365 $212 1.00% 2003 $49,914 $387 1.86% BUDGET 2004 $28,426 $220 1.00% C&W Forecast $30,000 $233 1.05%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $30,000 or $ 233 per unit. Advertising The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $43,224 $335 1.62% 2002 $41,109 $319 1.50% 2003 $35,624 $276 1.33% BUDGET 2004 $34,810 $270 1.23% C&W Forecast $35,000 $271 1.23%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $35,000 or $ 271 per unit. Payroll The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $455,227 $3,529 17.05% 2002 $483,937 $3,751 17.61% 2003 $460,270 $668 3.21% BUDGET 2004 $457,075 $3,543 16.13% C&W Forecast $460,000 $3,566 16.11 %
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 activities costs at $460,000 or $3,566 per unit. Utilities The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $85,031 $659 3.18% 2002 $77,436 $600 2.82% 2003 $86,146 $668 3.21% BUDGET 2004 $86,940 $674 3.07% C&W Forecast $90,000 $698 3.15%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $90,000 or $ 698 per unit. Real Estate Taxes This cost is for the annual real and personal property tax liability for the subject. The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $116,745 $905 4.37% 2002 $149,555 $1,159 5.44% 2003 $141,384 $1,096 5.26% BUDGET 2004 $145,620 $1,129 5.14% C&W Forecast $150,000 $1,163 5.25%
Please refer to the Real Estate Taxes and Assessments section of the report for a discussion on how the Year 1 taxes were estimated. We forecast the Year 1 real estate tax expense at $150,000 or $1,163 per unit. Insurance This cost is for the annual liability insurance for the property. The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $40,946 $317 1.53% 2002 $65,546 $508 2.38% 2003 $49,598 $384 1.85% BUDGET 2004 $86,298 $669 3.05% C&W Forecast $90,000 $698 3.15%
The expense comparables showed expenses for this category from $ 585 to $1,154 per resident (average of $ 874 per resident), while the industry data showed a range from $ 289 to $1,178 per resident (median of $ 647 per resident): Insurance costs for senior living properties increased strongly over the last one to two years. The subject's actual expenses are supported by the comparable properties. We forecast Year 1 insurance costs at $90,000 or $ 698 per unit. Management Fee The subject is managed by an operating entity of the ownership at a rate equal to 5.0 percent of effective gross income. According to data by The 2003 State of Senior Housing Report, the median management fee for independent living facilities is 5.1 percent, with a general range from 4.9 to 6.3 percent. We concluded to a 5.0 percent management fee, which equates to a Year 1 expense of $142,766 or $1,107 per resident. Replacement Reserves Replacement reserves are necessary for replacement of roof covering, mechanical systems, furnishings, appliances, etc. For a facility such as the subject, it is reasonable to deduct one to two percent of net resident revenues for replacement reserves. The ASHA industry data shows a range of reserve unit allowances from $ 193 to $ 977 per unit with a median of $ 580 per unit. In the case of the subject and its date of construction, we deducted an amount equal to $300 per unit which equates to a total cost of $38,700 or $ 300 per resident, which is well supported by the industry data. Expense Summary Overall, we project the first year expenses for the subject (including management fees and reserves) at $1,731,466 ($13,422 per resident) and 60.64 percent of effective gross income. Additionally, the subject operated historically at expense ratios ranging from 58 to 61 percent. According to The Senior Care Acquisition Report 2004, the average expense ratio for independent living facilities was 79.0 percent in 2003, which represented a 4.2 percent increase from 75.8 percent in 2002. The survey noted; however, that many of the properties used in the transaction samplings were either troubled or no stabilized, which resulted in a higher reported operating expense basis. Furthermore, operating margins for independent living facilities were reported at 28.3 percent for the median, 18.8 percent for the lower quartile and 34.3 percent for the upper quartile according to the State of Senior Housing Report 2003. Our net operating income estimate is similar than the historical amounts and equates to $8,712 per resident, which is abovethe most recent operating year of $8,688 per resident. The expenses and resultant net operating income estimate are considered reasonable in light of the historical data. A summary of our Year 1 proforma is presented as follows:
Oak Terrace Retirement Apartments STABILIZED OPERATING STATEMENT Total PR % of EGI EFFECTIVE GROSS INCOME $ 2,855,326 $23,956 EXPENSES Repair/Main/Supply $ 35,000 $ 271 1.23% Services $ 660,000 $ 5,116 23.11% Administrative $ 30,000 $ 233 1.05% Advertising $ 35,000 $ 271 1.23% Payroll $ 460,000 $ 3,566 16.11% Utilities $ 90,000 $ 698 3.15% Real Estate Taxes $ 150,000 $ 1,163 5.25% Insurance $ 90,000 $ 698 3.15% TOTAL OPERATING EXPENSES 54.3% $ 1,550,000 $ 12,016 54.28% Management Fees 5.0% $ 142,766 $ 1,107 5.00% Replacement Reserves $ 300 $ 38,700 $ 300 1.36% TOTAL EXPENSES $ 1,731,466 $ 13,422 60.64% NET OPERATING INCOME $ 1,123,860 $ 8,712 39.36% (*) Per Actual Resident
Direct Capitalization Rate Analysis In determining an appropriate capitalization rate, we utilized several different methods: market extraction from the sales comparables; findings reported in The Senior Care Acquisition Report, 2004, published by Irving Levin Associates, Inc.; and findings from the Senior Care Participants Survey completed by Cushman & Wakefield, Inc.; and from the Band-of-Investment Analysis. We analyzed investment rates of return acceptable to buyers in order to determine the capitalization rate. The overall rate on an investment is determined by analyzing several aspects of that investment and then assigning a risk associated with those aspects. Elements usually considered are: .. Reliability of the gross income prediction. How certain is it that the income will be forthcoming? Income is more dependable when the property is leased on a long-term basis to financially responsible tenants than when rented on a month-to-month basis to less reliable tenants. .. Reliability of the expense prediction. Is there great danger of having expenses increase materially, or is there a fair chance that they will remain about the same or even decrease? .. Expense ratio. If the expenses are low in relation to gross income, the quality of the net income may be better, because a moderate reduction in gross income or a moderate increase in expenses does not affect the net income substantially. .. Burden of management. Even when real estate management is employed, a property that requires constant attention, because of either maintenance or rent collection problems, is less desirable than one that needs minimal management. A long-term lease that requires a tenant to take care of all repairs and to pay taxes and insurance presents a situation that is relatively free from this burden of management. .. Marketability of the property. An investment that has marketability and liquidity appeals to a wider group of investors than one lacking those attributes. .. Stability of value. The value or market price of a piece of real property tends to remain within a narrower range for longer periods of time than do most other commodities. As described previously, the gross income projected for the property is subject to such uncertainties as competition from other facilities and fluctuations in demand for the subject's services. Moreover, the subject property has limited marketability and liquidity because a purchaser must have the appropriate operating license from the applicable state regulatory agencies, which limits the number of potential investors and would, in any potential sale of the property, create impediments and delays. Going-In Capitalization Rate Industry Findings To further test the capitalization rates, we consulted data on independent living acquisition trends in The Senior Care Acquisition Report, Eighth Edition, 2004. The report indicated that after seeing two years of declining capitalization rates for independent living properties between 2000 and 2001, 2002 saw an increase in rates to a reported average of 12.20 percent. For 2003, however, the average capitalization rate declined to 11.1 percent. This information is summarized in the graph below. Independent Living Facility Capitalization Rates [GRAPHIC OMITTED] 1995: 10.3% 1996: 10.2% 1997: 9.2% 1998: 10.3% 1999: 10.9% 2000: 10.5% 2001: 9.9% 2002: 10.8% 2003: 9.9% In addition, Cushman & Wakefield, Inc. surveyed senior care participants regarding their investment parameters for senior housing properties. This recent information is summarized in the following table. 2003 Participants Survey Change From Change From Survey 2002 2001 Property Type Survey Range Average Basis % Basis % Point Point Capitalization Rates 55+ Senior Apartments 7.00% - 10.25% 8.15% -7 0.9% -68 -7.6% Independent Living 9.00% - 10.50% 9.55% -5 0.5% -30 -3.0% Assisted Living 10.00% - 12.25% 10.85% -17 1.6% -8 -7.2% Skilled Nursing 11.50% - 18.00% 14.15% 16 -1.1% -61 -4.2% Continuing Care Retirement Community 9.00% - 11.50% 10.40% -35 3.4% -15 -1.4% Internal Rates of Return 55+ Senior Apartments 9.50% - 15.00% 10.60% -15 1.4% -20 -1.8% Independent Living 10.00% - 15.00% 11.90% -25 2.1% -65 -5.7% Assisted Living 12.00% - 17.00% 15.30% 42 -2.7% -22 -1.5% Skilled Nursing 13.00% - 20.00% 16.30% -25 1.5% -165 -9.1% Continuing Care Retirement Community 9.00% - 17.00% 13.00% -25 1.9% -135 -9.2% Source: Senior Care Participants Survey, 2003 by Cushman & Wakefield, Inc.
In reviewing the 2003 survey, capitalization rates for independent living facilities ranged from 9.00 to 10.50 percent with an average indication of 9.55 percent. This data is only 25 basis points below that reported previously in The Senior Care Acquisition Report, Eighth Edition, 2004. The 2003 C&W survey also shows that capitalization rates declined slightly over those reported in 2002 and 2001. In choosing the appropriate capitalization rate for the subject, we considered its location, occupancy, as well as the overall condition and utility of the property. The subject is a mid-sized independent living facility located in a favorable demographic area in Illinois. The market area is considered to be at a equilibrium basis with no under- or over- supply at this time. Based on the data and characteristics of the subject and marketplace, we consider a capitalization rate of between 8.75 to 9.25 percent to be appropriate for the property. Band of Investment The Band of Investment technique accounts for the combination of equity and prevailing financing which are banded together to finance this type of real estate. The rate developed is a weighted average, the weights being percentages of the total value, allocated to the mortgage and equity positions. After surveying several commercial mortgage lenders and consulting the most recent Senior Care Participants Survey, published by Cushman & Wakefield, Inc. and the Senior Care Acquisition Report, published by Irving Levin Associates, it is our opinion that a typical creditworthy owner could obtain financing from a lending source in an amount equal to 75 percent of value at an annual interest rate of 6.0 percent. A typical loan period for this type of real estate ranges from 20 to 30 years. Utilizing a 25-year amortization period at a 6.0 percent interest rate (payable monthly) yields a mortgage constant of 0.0773162. For a review of investor rates of return, we reference the previous table, which showed investment parameters for independent living properties. As shown in the table, internal rates of return or equity dividend rates for senior housing properties ranged from 9.50 to 20.00 percent. Independent living facilities fall within the lower to middle portion of the range from 10.00 to 15.0 percent with an average indicated rate of 11.90 percent. Assisted living facilities fall within the middle portion at 12.00 to 17.0 percent with an average indicated rate of 15.30 percent. Based on the data, we consider a prudent investor in a senior housing property like the subject would accept an initial annual return of between 10 percent and 15 percent of an equity investment in anticipation of a stable income flow and property appreciation over time. From this, and based on the subject's physical, locational and competitive structure, a rate from within the middle portion of the latter range, or 13.0 percent would be reasonable. It should be emphasized that the equity dividend rate is not necessarily the same as an equity yield rate or true rate of return on equity capital. The equity dividend rate is an equity capitalization that reflects all benefits that can be recognized by the equity investor as of the date of purchase. The overall capitalization rate is developed as follows: Band of Investment Technique 75.0% MORTGAGE X 0.0773162 Mortgage Constant = 0.0579 25.0% Equity X 0.1300 Equity Dividend = 0.0325 100.0% Total 0.9.04 OAR = 9.00% Direct Capitalization Method Conclusion We estimated a capitalization rate ranging between 8.75 to 9.25 percent through our direct comparison analysis, while the band-of-investment technique correlated to 9.00 percent. Utilizing both methods to develop a capitalization rate, tempered with investor criteria and the specific attributes of the subject, we consider a rate of 9.00 percent warranted for the property. We note that this rate is applied after reserves. Our conclusion via the Direct Capitalization Method is as follows: DIRECT CAPITALIZATION METHOD Net 0perating Income $1,123,860 Sensitivity Analysis (0.25% OAR Spread) Value $/Unit Based on Low-Range of 8.75% $12,844,112 $99,567 Based on Most Probable Range of 9.00% $12,487,331 $96,801 Based on High-Range of 9.25% $12,149,835 $94,185 Reconciled Value $12,487,331 $96,801 Rounded to nearest $100,000 $12,500,000 $96,899 Value Conclusion: $12,500,000
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 perform a restricted appraisal 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 values: Income Capitalization Approach: $12,500,000 Due to the fact that the subject is an income producing property, investors are primarily concerned with their return on equity. Therefore, we placed most weight on the Income Capitalization Approach in our final value conclusion. Given that investors typically purchase these types of properties based on their income producing capabilities, this approach was useful in providing support for our findings in the Income Capitalization Approach. The Income Capitalization Approach is typically considered the most appropriate approach to utilize when valuing going-concerns such as nursing homes, independent living and independent living facilities. This approach considers the income potential of the property. In our Income Capitalization Approach to value, the anticipated monetary benefits of ownership were converted into a value estimate. Within the Income Capitalization Approach, direct capitalization was used, as it is the most common method used by investors and purchasers in acquiring existing and stabilized properties of this nature. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we developed an opinion that the "as-is" market value of the fee simple estate of the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, on April 16, 2004 was: TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS $12,500,000 Personal Property Allocation Included in the above estimate of market value is the contributing value of the personal property at the subject property, or the furnishings, fixtures and equipment (FF&E). FF&E is generally considered to be part of the independent living facility and is typically sold with the building. It is therefore considered to be a part of the property's total value. FF&E includes the individual unit and public area furnishings, kitchen equipment, service/maintenance equipment and other machinery. Based on previous analysis of the subject, we estimated the value of the FF&E as new to be $519,225, including a 15 percent factor for entrepreneurial profit. Physical deterioration (depreciation) must be deducted for the FF&E. The subject opened in 1987. Based on our physical inspection of the property, we are of the opinion that the property is currently in average physical condition. We estimated that the subject's FF&E has a useful life of 10 years and we estimated the current effective age at 4 years. This equates to a 40 . percent depreciation factor, as summarized in the following table. .
Furniture, Fixtures and Equipment Total Value of FF&E As New $519,225 Physical Life (Yrs) 10 Effective Age (Yrs) 4 Percent Depreciated (%) 40 Percent Value Remaining (%) 60 Depreciated Value $311,535 Rounded $310,000
The contributing value of the FF&E is considered to be the cost of the FF&E less its accrued depreciation. This equates to a value of $310,000 rounded. INSURABLE VALUE Insurable Value is directly related to the portion of the real estate which is covered under the asset's insurance policy. We 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 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.
Oak Terrace Retirement Apartments INSURABLE VALUE Gross Building Area Square Footage (GBA) 117,250 Total Replacement Cost New Of Improvements $7,805,448 Less-Insurance Exclusions Per S.F. Percent Foundations Below Grade $1.66 2.50% $195,136 Piping Below Grade (Negligible) $0.00 0.00% $0 Architect Fees $1.66 2.50% $195,136 Total Insurance Exclusions $390,272 INSURABLE VALUE SUMMARY Total Replacement Cost New $7,805,448 Less: Total Insurance Exclusions ($390,272) Insurable Value $7,415,176 Rounded to nearest $50,000 $7,400,000 Source: Marshall Valuation Service See Cost Approach for calculator details
Therefore, the insurable value for the improvements is estimated to be $7,400,000. SUPPLEMENTAL VALUATION - SCENARIO II VALUATION BY THE DIRECT CAPITALIZATION METHOD AS ENCUMBERED In the previous section, the subject property's Market Value unencumbered, or "free and clear" was estimated. However, as previously stated the purpose of this report is to estimate the Market Value of the subject property, as encumbered with long-term bond financing. The terms of the bond and Letter of Credit are summarized as follows. TERMS OF BOND FINANCING Long-term bond financing issued by the City of Springfield, Illinois encumbers the subject property. The Community Improvement Adjustable Demand Revenue Bonds (Oak Tree Joint Venture, LP) Series 1999. A synopsis of the bond terms is included in the addenda section of this report. Derivation Of Overall Capitalization Rate: Capitalization rates express relationships between net income and total value. The rate employed must be consistent with and reflective of those rates currently employed by investors active in the market place. Therefore, in order to determine the affect favorable bond financing has on the capitalization rates we interviewed a number of active investors and participants so that we may get an understanding as to the methodology applied in the purchasing of such properties. In conducting our research, we interviewed representative from such institutions as Lend Lease, Heitman Capital, and Equity Residential Group. Each of those interviewed were relatively consistent in that their respective companies discounted "unleveraged market-rate overall rates" between 50 and 150 basis points to reflect the benefits of the leverage and favorable financing. Therefore, for properties such as the subject, a "leveraged" capitalization rate of between 6.5 percent and 7.5 percent (8.0 percent less 50 to 200 basis points) is implied. For the purposes of our analysis, we have concluded to 7.0 percent, which is applied to the estimated NOI and results in a value as follows: SUPPLEMENTAL VALUATION - SCENARIO II $1,123,860 + 7.0% = $16,055,143 or $16,100,000 (as rounded) SIXTEEN MILLION ONE HUNDRED THOUSAND DOLLARS ($16,100,000) This value considers the effect of positive leverage and terms attributable to bond financing that encumbers the subject property. The difference between the unencumbered and the estimated Market Value, as encumbered, is $3,600,000, is the implied benefit of the long-term bond financing. This value represents a 28.8 percent increase from our market value conclusion under Scenario I 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 "C&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 legaldescription 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 MAI 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 2001 Edition, ASS of The Appraisal Foundation, 1/1/2001, page 2). This appraisal employs no other extraordinary assumptions. Hypothetical Conditions 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 2004 Edition, ASS of The Appraisal Foundation, 1/1/2004, 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 3. assumptions and limiting conditions, and is 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 Senior Housing/Healthcare Industry Group Illinois Certified General Appraiser License No. 153-001098 EX-99 7 sir2_scto101305exh6bayberry.txt EXH 12.6 BAYBERRY APPRAISAL COMPLETE APPRAISAL OF REAL PROPERTY Bayberry Crossing Shopping Center 523-529 SE Melody Lane Lee's Summit, Jackson County, Missouri 64063 IN A RESTRICTED APPRAISAL REPORT As of 6/20/04 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: 04-248-03 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 Bayberry Crossing Shopping Center 523-529 SE Melody Lane Lee's Summit, Jackson County, Missouri 64063 C&W File 10: 04-248-03 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 June 20, 2004 is: THREE MILLION TWO HUNDRED THOUSAND DOLLARS $3,200,000 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 randaLdawson@cushwake.com 312.470.1817 Office Direct 312.470.2317 Fax SUMMARY OF SALIENT FACTS Common Property Name: Bayberry Crossing Shopping Center Location: 523-529 SE Melody Lane Lee's Summit, Jackson County, Missouri 64063 The site is located east of Missouri Highway 291 approximately one mile North of US 50. Property Description: The property consists of a 1-story multi-tenant neighborhood shopping center containing 54,478 square feet of gross leasable area on a 4.81-acre parcel of land. Assessor's Parcel Number: 61-510-09-01-01-0-00-000 Interest Appraised: Leased Fee Estate Date of Value: June 20, 2004 Date of Inspection: April 20, 2004 Ownership: Secured Investment Resources II, LP Occupancy: The subject property is 92.7% occupied by 20 tenants. Current Property Taxes Total Assessment: $1,513,691 2003/2004 Property Taxes: $148,956 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: CB; Controlled Business District Land Area: 4.81 acres 209,440 square feet Number of Stories: 1 Year Built: 1986 Type of Construction: Steel and masonry Gross Building Area: 57,500 square feet Gross Leasable Area: Component Owned Area Total In-line 54,478 SF Total Center GLA 54,478 SF 100% Total Owned GLA 54,478 SF 100%
Parking Type: Surface Number of Parking Spaces: 312 VALUE INDICATORS Income Capitalization Approach Discounted Cash Flow Projection Period: 11 years Holding Period: 10 years Terminal Capitalization Rate: 9.25% Internal Rate of Return: 10.50% Indicated Value: $3,200,000 Direct Capitalization Net Operating Income: $291,304 Capitalization Rate: 9.00% Indicated Value: $3,200,000 Reconciled Value: $3,200,000 Per Square Foot (GLA): $58.74 FINAL VALUE CONCLUSION Market Value As-Is Leased Fee: $3,200,000 Per Square Foot (GLA): $58.74 Implied Capitalization Rate: 9.10% Exposure Time: 24 months Marketing Time: 24 months INSURABLE VALUE Conclusion: $3,600,000 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. [GRAPHIC OMITTED] Exterior of Subject [GRAPHIC OMITTED] Exterior of Subject [GRAPHIC OMITTED] Street View Facing North [GRAPHIC OMITTED] Street View Facing South [GRAPHIC OMITTED] Rear of Subject [GRAPHIC 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 16 SITE DESCRIPTION 26 IMPROVEMENTS DESCRIPTION 27 REAL PROPERTY TAXES AND ASSESSMENTS 30 ZONING 31 HIGHEST AND BEST USE 32 VALUATION PROCESS 34 INCOME CAPITALIZATION APPROACH 36 RECONCILIATION AND FINAL VALUE OPINION 52 INSURABLE VALUE 53 ASSUMPTIONS AND LIMITING CONDITIONS 54 CERTIFICATION OF APPRAISAL 57 ADDENDA 58 INTRODUCTION Identification of Property Common Property Name: Bayberry Crossing Shopping Center Location: 523-529 SE Melody Lane Lee's Summit, Jackson County, Missouri 64063 The site is located east of Missouri Highway 291 approximately one mile North of US 50. Property Description: The property consists of a 1-story multi-tenant neighborhood shopping center containing 54,478 square feet of gross leasable area on a 4.81-acre parcel of land. Assessor's Parcel Number: 61-510-09-01-01-0-00-000 Property Ownership and Recent History Current Ownership: Secured Investment Resources 11, 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 June 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 (USPAP) 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 61-510-09-01-01-0-00-000. The legal description is presented in the Addenda of the report. [GRAPHIC OMITTED] REGIONAL MAP REGIONAL ANALYSIS Introduction The short- and long-term value of real estate is innuenced 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 Lee's Summit in southeastern 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. 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% - --------------------------------------------------------------- Relative Employment Performance (1991=100) [GRAPHIC OMITTED-Line Graph (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
STRENTHS AND 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 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. - ------------------------------------------------------------- ANALYSIS 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 0.60 KAN 0.74 0.40 0.20 0.00 Least Diverse EMPLOYMENT VOLATILITY DUE TO U.S. FLUCTUATIONS 7% Not Due to U.S. 93% Due to U.S. Relative to U.S. 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 Graph] 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] 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] 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 Graph] 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 Graph] 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-Line Graph] 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. REGIONAL ANALYSIS 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 1,866,600 by 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, SI. Louis and Wichita, while residents migrating out of Kansas are going to Lawrence, SI. 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 Heallh 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:t 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 ARA ANALYSIS Location The property is located in Jackson County, within the greater Lee's Summit area. Generally, the boundaries of the immediate area are Ranson Road on the east, Colborn Road on the north, Douglas Road on the west and Interstate 50 on the south. Access Local area accessibility is generally good, relying on the following transportation arteries: Local: Lees Summit is accessible by Interstate 470 and 50 as well as State Highway 291 . M-291 generally provides access to the subject's neighborhood, which is the primary street artery bisecting the subject's neighborhood. 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 470 is the primary thoroughfare within Jackson County. Interstate 470 is located a 1 mile north if the subject property. Interstate 50 is located 1 mile south of the subject property 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 subject is a freestanding property among many other similar detached commercial structures as well as row stores along M-291. The area is considered to be in a growing 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. Regional grocery stores have located to the immediate south and less than one block north, indicating the area is attractive to this class of retailers. 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 & TRADE AREA ANALYSIS Definition of Market/Trade Area Overview The subject is located in the South Kansas City Jackson County 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 i1self 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 .. CTMT expects 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,OOO-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.
TRADE AREA DEMOGRAPHICS - -------------------------------------------------------------------------------- 1.0-mile 3.0-mile 6.0-mile Radius Radius Radius Independence County Kansas Jackson City MSA - --------------- POPULATION STATISTICS - --------------- 2000 9,768 48,273 79,190 70,700 654,880 1,776,062 2003 9,821 51,204 84,659 75,361 655,201 1,821,109 2008 9,912 55,878 93,385 82,803 656,166 1,895,496 Compound Annual Change 2000 - 2003 0.18% 1.98% 2.25% 2.15% 0.02% 0.84% 2003 - 2008 0.18% 1.76% 1.98% 1.90% 0.03% 0.80% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HOUSEHOLD STATISTICS - ------------- - ------------- 2000 3,908 18,712 29,610 26,417 266,294 694,468 2003 3,964 19,796 31,575 28,087 267,986 715,620 2008 4,055 21,521 34,717 30,770 271,032 751,154 Compound Annual Change 2000 - 2003 0.48% 1.89% 2.16% 2.06% 0.21% 1.01% 2003 -2008 0.45% 1.69% 1.92% 1.84% 0.23% 0.97% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AVERAGE HOUSEHOLD INCOME - ------------- - ------------- 1990 $55,174 $61,388 $70,315 $72,089 $50,583 $50,920 2003 $64,304 $70,589 $81,188 $83,291 $56,825 $66,808 2008 $75,403 $83,541 $95,817 $98,590 $65,587 $77,664 Compound Annual Change 1990 -2003 1.18% 1.08% 1.11% 1.12% 0.90% 0.97% 2003 -2008 3.24% 3.43% 3.37% 3.43% 2.91% 3.06% - ------------- - ------------- RETAIL SALES ANALYSIS Total Retail Sales ($Mil) $ 132 $ 664 $ 1,063 $ 951 $ 8,764 $ 24,682 General Merchandise 3 $ 17 $ 27 $ 24 $ 214 $ 706 Apparel & Accessory $ 5 $ 26 $ 41 $ 37 $ 333 $ 768 Furniture & Home Furnish.** 6 $ 28 $ 45 $ 41 $ 362 $ 1,257 Other Sales*** 6 $ 28 $ 45 $ 40 $ 368 $ 1,037 Total GAFO Sales 20 $ 98 $ 158 $ 142 $ 1,277 $ 3,768 - -------------- Total Expenditure Potential* 255 $1,397 $ 2,564 $ 2,339 $ 15,228 $ 47,809 GAFO % of Total Retail Sales 14.76 14.80% 4.82% 14.88% 14.58% 15.27% GAFO % of Total Expenditure Potential 7.67% 7.03% 6.14% 6.05% 8.39% 7.88% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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: 523-529 SE Melody lane Lee's Summit, Jackson County, Missouri 64063 The site is located east of Missouri Highway 291 approximately one mile North of US 50. The site is sandwiched between 5th Street Terrance and Bayberry lane on access road paralleling Missouri Highway 291. Shape: Irregular Topography: Level land Area: 4.81 acres 209,440 square feet Frontage, Access, Visibility: The subject has adequate frontage, access and 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 290174-0009-C (August 3, 1989) Flood Zone: FEMA Zone C: Areas outside of a 100-year flood hazard. 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: 3.84 to 1 Building Class: B Gross Building Area: 57,500 square feet Gross Leasable Area: Component Owned Area % of Total In-Line 54,478 SF Total Center GLA 54,478 SF 100% Total Center GLA 54,478 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: 312 spaces (5.73:1,000 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 maintained in average condition and provides an average 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 61-510-09-01-01-0-00-000. 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: $1,513,691 Effective Tax Rate 0.0984 Total Property Taxes $ 148,956 Building Area ( SF ) 54,478 Property Taxes per Square Foot $2.73
Total taxes for the property are $148,956, or $2.73 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. The property is zoned CP-2; Planned General Commercial District by the City of Lee's Summit. 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. 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, both methods are appropriate in this assignment. 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 20 50,521 SF $521,180 $10.32 3,957 SF 54,478 SF 100.0% Total/ Weighted Average 20 50,521 SF $521,180 $10.32 3,957 SF 54,478 SF 100.0% Percent 92.7% 7.3%
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 The Tax Shoppe 507 12/1/2003 11/30/2004 1,170 $11,700 $ 10.00 Jazz, Kitchen 511 11/1/2003 10/31/2008 5,109 $52,367 $ 10.25 Wee Tot, Inc. 515 9/1/2002 10/30/2005 2,800 $29,400 $ 10.50 Pizza Street 527 1/15/2003 2/30/2014 4,930 $51,765 $ 10.50 Homebrew Pro Shoppe 531 9/1/2002 10/30/2005 930 $8,835 $ 9.50 Midwest Discount 533 10/1/2002 11/30/2007 1,587 $16,663 $ 10.50 Natures Market 535 5/1/2002 4/30/2005 2,633 $25,672 $ 9.75 Mar Jon Incorporated 537 10/1/1999 11/30/2004 2,633 $25,013 $ 9.50 SOS Staffing Services 539 5/1/2002 6/30/2005 1,235 $13,968 $ 11.31 X IU Yong Chen 541 9/1/2000 1/30/2006 2,200 $23,100 $ 10.50 El Maguey 545-549 7/26/2001 9/1/2006 3,938 $41,349 $ 10.50 Check into Cash 551 4/1/2004 5/30/2005 1,735 $21,000 $ 12.10 Ya's Ya's 553 7/1/2002 8/30/2005 1,222 $12,831 $ 10.50 Kim's Tailoering 557 1/1/2003 2/28/2006 2,587 $27,164 $ 10.50 Edward Jones & Co. 559 1/1/2001 10/31/2006 953 $10,616 $ 11.14 Rent-A-Center, Inc. 561 5/1/2000 6/30/2005 4,665 $48,000 $ 10.29 Karen Magee 565 4/1/2004 5/30/2005 1,270 $13,335 $ 10.50 JADS Investments, Inc. 569 2/1/2003 3/30/2005 4,648 $41,832 $ 9.00 Discount Smoke Shop 571 4/1/2004 5/30/2005 933 $9,797 $ 10.50 Berbiglia 579 7/1/2002 10/30/2007 3,343 $36,773 $ 11.00 20 tenant sub-total 50,521 $521,180 $ 10.32 GRAND-TOTALS 50,521 $521,180 $ 10.32
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 The Tax Shoppe 507 12/1/2003 11/30/2004 1,170 $11,700 $ 10.00 Jazz, Kitchen 511 11/1/2003 10/31/2008 5,109 $52,367 $ 10.25 Pizza Street 527 1/15/2003 2/30/2014 4,930 $51,765 $ 10.50 Kim's Tailoering 557 1/1/2003 2/28/2006 2,587 $27,164 $ 10.50 JADS Investments, Inc. 569 2/1/2003 3/30/2005 4,648 $41,832 $ 9.00 Sub-Total 18,444 $184,828 $ 10.02 GRAND-TOTALS 18,444 $184,828 $ 10.02
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 1 806 SW 50 Highway Lee's Summit, MO 3,232 SF 5 $9.94 Flat 6.0% 1956 - ------------------- ----------- ---------- West Blue Parkway Modified 53,861 SF Shopping Center Gross 2 601 NE Woods Chapel Rd. Lee's Summit 505 5 $11.35 Flat 3.6% 1987 - ------------------ ----------- ---------- Chapel Lake Center Modified 14,038 SF Gross 3 111 SE State Route 291 Lee's Summit, MO 4,989 5 $10.26 Flat 4.1% 1977 - ------------------ ----------- --------- Summit Springs Modified 32,380 SF Shopping Center Gross 4 332 SW Blue Parkway Lee's Summit, MO 3,510 5 $11.73 Flat 2.6% 1987 - ------------------ ----------- --------- Pinetree Plaza Modified 135,000 SF Gross 5 800 SW Blue Parkway Lee's Summit, MO 0 5 $12.25 Flat 0.0% 1959 - ------------------ ----------- --------- Southside Plaza Modified 50,000 SF Survey Low: 0 5 $9.94 2.10% Survey High: 4,989 5 $12.25 9.96% Survey Mean: 2,447 5 $11.11 6.45% No. Property Location Free Rent (Months) Tenant Name T1/fSF Comments 1 806 SW 50 Highway 2 $4.00 0.61 miles from subject Lee's Summit, MO Major tenants- Catter's and Video Place. - ------------------- West Blue Parkway Shopping Center 2 601 NE Woods Chapel Rd. 2 $5.00 4.92 miles from subject. Lee's Summit, MO Major tenants- Circle K - ------------------ Chapel Lake Center 3 111 SE State Route 291 2 $5.00 0.39 miles from subject. Lee's Summit, MO Major tenants-Bowling Alley, Hobby Lobby, - ------------------ Westlake Hardware Summit Springs Shopping Center 4 332 SW Blue Parkway 2 $5.25 1.29 miles from subject. Lee's Summit, MO Major tenants-Baskin 31 Robbins, Pizza Hut, Price Chopper & Tunnee Town - ------------------ Pinetree Plaza 5 800 SW Blue Parkway 0 $6.00 2.56 miles from subject. Lee's Summit, MO Major tenants-Chucks Boots, Chucks Food, Fergies, and Jumpin Catfish - ------------------ Southside Plaza Survey Low: 2 $4.00 Survey High: 2 $6.00 Survey Mean: 2 $5.05
The rent range exhibited by the com parables is from $9.94 to $12.25 per square foot with an overall average of $11.11 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 Comparables 2,and 4 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 comparables, we have concluded to a market rent for the subject's inline tenants of $11.00 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 $11.00 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 3.00 percent. 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 5.00 percent. Absorption of Vacant Space The subject property is presently 92.74 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 $438,381 $8.05 $333,988 $6.13 $459,853 $8.44 $553,819 $10.17 Revenue Miscellaneous Revenue 1,477 0.03 2,362 0.04 3,654 0.07 4,000 0.07 Expense Reimbursement Revenue 65,223 1.20 56,398 1.04 78,680 1.44 73,706 1.54 TOTAL POTENTIAL GROSS REVENUE $505,081 $9.27 $392,748 $7.21 $542,187 $9.95 $641,525 $11.78 Vacancy and Collection Loss 0 0.00 0 0.00 0 0.00 (31,833) (0.58) 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 $9,119 $0.17 $21,456 $0.39 $6,784 $0.12 $10,000 $0.18 Total Services 2,550 0.05 1,200 0.02 375 0.01 500 0.01 Total Administration 23,445 0.43 23,754 0.44 24,968 0.46 25,000 0.46 Total Marketing 661 0.01 1,386 0.03 18 0.00 500 0.01 Total Common Area Maintenance 66,484 1.22 66,052 1.21 86,467 1.59 90,000 1.65 Total Utilities 4,566 0.08 12,034 0.22 4,175 0.08 5,000 0.09 Total Insurance 12,960 0.24 18,384 0.34 12,960 0.24 13,000 0.24 Management 25,255 0.46 19,537 0.36 25,698 0.47 24,388 0.45 Subtotal $145,040 $2.66 $163,803 $3.01 $161,445 $2.96 $168,388 $3.09 Real Estate Taxes 81,623 1.50 83,707 1.54 80,892 1.48 150,000 2.75 TOTAL EXPENSES $226,663 $4.16 $247,510 $4.54 $242,337 $4.45 $318,388 $5.84 NET OPERATING INCOME $278,418 $5.11 $145,238 $2.67 $299,850 $5.50 $291,304 $535 (1) Fiscal Year Beginning: 7/1/2004
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 July 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 $10,000 $0.18 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Services $500 $0.01 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Administration $25,000 $0.46 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Marketing $500 $0.01 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Common Area Mainte $90,000 $1.65 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total Utilities $5,000 $0.09 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Total lnsurance $13,000 $0.24 Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties. Management $24,388 $0.45 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 $150,000 $2.75 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 $168,388 equating to $3.09 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 $553,819 $10.17 Miscellaneous Revenue 4,000 $0.07 Expense Reimbursement Revenue 83,706 1.54 TOTAL POTENTIAL GROSS REVENUE $641,525 $11.78 Vacancy and Collection Loss (31,833) (0.58) EFFECTIVE GROSS REVENUE $609,692 $11.19 OPERATING EXPENSES Total Repair/Main/Supply $10,000 $0.18 Total Services 500 0.01 Total Administration 25,000 0.46 Total Marketing 500 0.01 Total Common Area Maintenance 90,000 1.65 Total Utilities 5,000 0.09 Total Insurance 13,000 0.24 Management 24,388 0.45 Subtotal $168,388 $3.09 Real Estate Taxes 150,000 2.75 TOTAL EXPENSES $318,388 $5.84 NET OPERATING INCOME $291,304 $5.35
Capitalization Rate Selection In addition, we have considered Investor Surveys published by Korpacz and Cushman & Wakefield, Inc. for competitive shopping center properties. Going-ln Going-In Survey Date Cap Rate Cap Rate Range Average Korpacz Fourth Quarter 2004 7.0-11.0% 8.84% C&W Real Estate Outlook Spring/Summer 2003 8.8%-9.5% 9.1% 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
Our observations and analysis suggest that a going-in capitalization rate of 9.00 percent represents reasonable investor criteria under current market conditions. 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 9.00 percent overall capitalization rate. Our conclusion via the Direct Capitalization Method is as follows:
DIRECT CAPITALIZATION METHOD NET OPERATING INCOME $291,304 $5.35 Sensitivity Analysis (0.50% OAR Spread) Value $/SF NRA Based on Low-Range of 8.50% $3,427,106 $62.91 Based on Most Probable Range of 9.00% $3,236,711 $59.41 Based on High-Range of 9.50% $3,066,358 $56.29 Reconciled Value $3,236,711 $59.41 Rounded to nearest $100,000 $3,200,000 $58.74
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: 7/1/2004 RESERVES FOR REPLACEMENT (PSF) $0.15 VACANCY & COLLECTION LOSS Global Vacancy: 3.00% Collection Loss: 2.00% Total: 5.00% 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: 10.50% Terminal Capitalization Rate: 9.25% Reversionary Sales Cost: 2.00%
- ------------------------------------------------- LEASING ASSUMPTIONS Inline - ------------------------------------------------- Market Rent Per Square Foot $11.00 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 9.25 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 10.50 percent. Discounted Cash Flow Method Conclusion Based on the discount rate selected, market value is estimated at $3,200,000, rounded. The reversion contributes 47.05 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 : 04-248-03 Argus Independence Time: 4:10pm Property Type: Neighborhood Center Ref#: AMF Portfolio : Page: 1 Bayberry Crossing SC 523-529 SE Melody Lane Lee's Summit, MO 64063 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 $554,736 $588,761 $596,569 $608,407 $617,659 Absorption & Turnover Vacancy (12,435) (48,882) (12,029) (12,350) (10,542) Scheduled Base Rental Revenue 542,301 539,879 584,540 596,057 607,117 Expense Reimbursement Revenue CAM 83,706 79,650 86,389 87,503 89,756 Total Reimbursement Revenue 83,706 79,650 86,389 87,503 89,756 Miscellaneous Revenue 4,000 4,120 4,244 4,371 4,502 TOTAL POTENTIAL GROSS REVENUE 630,007 623,649 675,173 687,931 701,375 General Vacancy (6,838) (8,587) (8,658) (10,816) Collection Loss (12,600) (12,473) (13,503) (13,759) (14,027) EFFECTIVE GROSS REVENUE 610,569 611,176 653,083 665,514 676,532 OPERATING EXPENSES CAM 90,000 92,700 95,481 98,345 101,296 Repair/ Main/ Supply 10,000 10,300 10,609 10,927 11,255 Services 500 515 530 546 563 Administration 25,000 25,750 26,523 27,318 28,138 Marketing 500 515 530 546 563 Utilities 5,000 5,150 5,305 5,464 5,628 Insurance 13,000 13,390 13,792 14,205 14,632 Real Estate Taxes 150,000 154,500 159,135 163,909 168,826 Management 24,423 24,447 26,123 26,621 27,061 TOTAL OPERATING EXPENSES 318,423 327,267 338,028 347,881 357,962 NET OPERATING INCOME 292,146 283,909 315,055 317,633 318,570 LEASING & CAPITAL COSTS Tenant Improvements 17,705 34,597 15,402 10,104 8,625 Leasing Commissions 11,685 22,834 10,165 6,669 5,693 Reserves 8,172 8,417 8,669 8,929 9,197 TOTAL LEASING & CAPITAL COSTS 37,562 65,848 34,236 25,702 23,515 CASH FLOW BEFORE DEBT SERVICE & TAXES $254,584 $218,061 $280,819 $291,931 $295,055 & 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 $628,453 $660,826 $687,508 $698,156 $709,713 $737,920 Absorption & Turnover Vacancy (13,183) (49,019) (21,821) (14,318) (12,221) (18,060) Scheduled Base Rental Revenue 615,270 611,807 665,687 683,838 697,492 719,860 Expense Reiembursement Revenue CAM 91,884 89,457 95,824 99,592 102,702 106,936 Total Reimbursement Revenue 91,884 89,457 95,824 99,592 102,702 106,936 Miscellaneous Revenue 4,637 4,776 4,919 5,067 5,219 5,376 TOTAL POTENTIAL GROSS REVENUE 711,791 706,040 766,430 788,497 805,413 832,172 General Vacancy (8,566) (1,827) (9,766) (12,308) (7,447) Collection Loss (14,236) (14,121) (15,329) (15,770) (16,108) (16,643) EFFECTIVE GROSS REVENUE 688,989 691,919 749,274 762,961 776,997 808,082 OPERAINTING EXPENSES CAM 104,335 107,465 110,689 114,009 117,430 120,952 Repair/Main/Supply11,593 11,941 12,299 12,668 13,048 13,439 Services 580 597 615 633 652 672 Administration 28,982 29,851 30,747 31,669 32,619 33,598 Marketing 580 597 615 633 652 672 Utilities 5,796 5,970 6,149 6,334 6,524 6,720 Insurance 15,071 15,523 15,988 16,468 16,962 17,471 Real Estate Taxes 173,891 179,108 184,481 190,016 195,716 201,587 Management 27,560 27,677 29,971 30,518 31,080 32,323 TOTAL OPERAING EXPENSES 368,388 378,729 391,554 402,948 414,683 427,434 NET OPERTING INCOME 320,601 313,190 357,720 360,013 362,314 380,648 LEASING & CAPITAL COSTS Tenant Improvements 4,173 46,921 17,855 8,699 13,105 14,776 Leasing Commissions 2,754 30,968 11,784 5,741 8,649 9,752 Reserves 9,473 9,757 10,050 10,352 10,662 10,982 TOTAL LEASING & CAPITAL COSTS 16,400 87,646 39,689 24,792 32,416 35,510 CASH FLOW BEFORE DEBT SERVICE & TAXES $304,201 $225,544 $318,031 $335,221 $329,898 $345,138
Software : ARGUS Ver.11.0.02 Date:7/15/04 File : 04-248-03 Argus Independence Time: 4:10pm Property Type: Neighborhood Center Ref#: AMF Portfolio : Page: 3 Bayberry Crossing SC 523-529 SE Melody Lane Lee's Summit, MO 6406 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 @ 10.00% @ 10.25% @ 10.50% @ 10.75% @ 11.00% 8.75% $4,263,258 $3,354,082 $3,297,997 $3,243,149 $3,189,505 $3,137,035 9.00% 4,144,835 3,308,424 3,253,365 3,199,516 3,146,847 3,095,328 9.25% 4,032,812 3,265,235 3,211,144 3,158,241 3,106,494 3,055,876 9.50% 3,926,685 3,224,318 3,171,146 3,119,139 3,068,266 3,018,500 9.75% 3,826,001 3,185,500 3,133,200 3,082,042 3,031,998 2,983,040
Reconciliation Within the Income Capitalization Approach SUMMARY OF INCOME CAPITALIZATION METHODS Value Per Sq. Ft. Value Indicated by the Discounted Cash Flow Method: $3,200,000 $58.74 Value Indicated by the Direct Capitalization Method: $3,200,000 $58.74 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: $3,200,000 $58.74 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 Calpitalization Approach: $3,200,000 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 June 20, 2004 was: THREE MILLION TWO HUNDRED THOUSAND DOLLARS $3,200,000 INSURABLE VALUE Insurable Value is directly related to the portion of the real estate which is covered under the asset's insurance policy. We have based this opinion on the building's replacement cost new (RCN) which has no direct correlation with its actual market value. The replacement cost new is the total construction cost of a new building built using modern technology, materials, standards and design, but built to the same specifications of and with the same utility as the building being appraised. For insurance purposes, replacement cost new includes all direct costs necessary to construct the building improvements. Items which are not considered include land value, site improvements, indirect costs, accrued depreciation and entrepreneurial profit. To develop an opinion of insurable value, exclusions for below-grade foundations and architectural fees must be deducted from replacement cost new. We developed an opinion of replacement cost new by using the Calculator Cost Method developed by Marshall Valuation Service, a nationally recognized cost estimating company which estimates construction costs for all types of improvements. Marshall Valuation Service revises its cost factors monthly and adjusts them to reflect regional and local cost variations. INSURABLE VALUE Replacement Cost New (RCN) GBA (SF)$/GBA Sub-Total Building Improvements Base Cost 57,500 $60.00 $3,450,000 HVAC 57,500 5.50 316,250 Sprinklers 57,500 2.50 143,750 Subtotal 57,500 $68.00 $3,910,000 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 $4,006,157 Less: Insurance Exclusions Foundations Below Grade -5.00% Piping Below Grade (Negligible) 0.00% Architect Fees -6.00% Total Insurance Exclusion Adjustment -11.00% ($440,677) Insurable Value $3,565,479 Rounded to nearest $100,000 $3,600,000 Source: Marshall Valuation Service Section: 15 Quality: Average Page: 17 Class: B Date: 5/00 Type: Retail
"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. "C&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. 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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. 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-----