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