-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pz8fzDTVh3pM/M3HELjuPPwrbmxf9qEq1QE2PRWfxsz3G+fVusblrBWKoFW0Rw+C Ta9644vK/rNdymH0z8J66g== 0000892569-96-000721.txt : 19960518 0000892569-96-000721.hdr.sgml : 19960518 ACCESSION NUMBER: 0000892569-96-000721 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960516 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RETIREMENT VILLAS PROPERTIES II CENTRAL INDEX KEY: 0000830156 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330278155 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: 1934 Act SEC FILE NUMBER: 005-45877 FILM NUMBER: 96568813 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE STE D1 CITY: COSTA MESA STATE: CA ZIP: 92626 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 330160968 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 2: 245 FISCHER AVE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 SC 13E3 1 SCHEDULE 13E-3 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934) AMERICAN RETIREMENT VILLAS PROPERTIES II (NAME OF ISSUER) ARV ASSISTED LIVING, INC. (NAME OF PERSON FILING STATEMENT) LIMITED PARTNERSHIP UNITS (TITLE OF CLASS OF SECURITIES) ------------------------------------ (CUSIP NUMBER OF CLASS OF SECURITIES) SHEILA M. MULDOON VICE PRESIDENT AND GENERAL COUNSEL ARV ASSISTED LIVING, INC. 245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626 (714) 751-7400 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT) Copies to: WILLIAM J. CERNIUS, ESQ. LATHAM & WATKINS 650 TOWN CENTER DRIVE, SUITE 2000 COSTA MESA, CALIFORNIA 92626 (714) 540-1235 This statement is filed in connection with (check the appropriate box): a. [ ] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [x] A tender offer. d. [ ] None of the above. Check the following box if soliciting material or information statement referred to in checking box (a) are preliminary copies: CALCULATION OF FILING FEE =============================================================================== TRANSACTION VALUATION* AMOUNT OF FILING FEE - ---------------------- -------------------- $25,117,590.24 ........................................ $ 0 --------- =============================================================================== * This amount is based upon the purchase of 34,855.542 Units at $720 cash per Unit. Pursuant to, and as provided by, Rule 0-11(b)(1), the amount required to be paid with the filing of this Schedule 13E-3 is $0. [x] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $8,662 Filing Party: ARV Assisted Living, Inc. Form or Registration No.: 14D-1 Date Filed: May 16, 1996 ================================================================================ 2 This Rule 13e-3 Transaction Statement (the "Statement") relates to a tender offer by ARV Assisted Living, Inc., a California corporation (the "Company"), to purchase all of the limited partnership units (the "Units") of American Retirement Villas Properties II, a California limited partnership (the "Partnership"), at $720 per Unit, net to the seller in cash and without interest, upon the terms of and subject to the conditions set forth in the Offer to Purchase, dated May 16, 1996 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together constitute the "Offer"). This Statement is being filed by the Company. 2 3 The cross reference sheet below is being supplied pursuant to General Instruction F to Schedule 13E-3 and shows the location in the Schedule 14D-1 (the "Schedule 14D-1") filed by the Company with the Securities and Exchange Commission on the date hereof of the information required to be included in response to the items of this Statement. CROSS REFERENCE SHEET
ITEM IN WHERE LOCATED IN SCHEDULE 13E-3 SCHEDULE 14D-1 - -------------- ---------------- Item 1(a) . . . . . . . . . . . . . . . . . . . . . . . . Item 1(a) Item 1(b) . . . . . . . . . . . . . . . . . . . . . . . . Item 1(b) Item 1(c) . . . . . . . . . . . . . . . . . . . . . . . . Item 1(c) Item 1(d) . . . . . . . . . . . . . . . . . . . . . . . . * Item 1(e) . . . . . . . . . . . . . . . . . . . . . . . . * Item 1(f) . . . . . . . . . . . . . . . . . . . . . . . . * Item 2(a) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(a) Item 2(b) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(b) Item 2(c) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(c) Item 2(d) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(d) Item 2(e) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(e) Item 2(f) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(f) Item 2(g) . . . . . . . . . . . . . . . . . . . . . . . . Item 2(g) Item 3(a)(1). . . . . . . . . . . . . . . . . . . . . . . Item 3(a)(1) Item 3(a)(2). . . . . . . . . . . . . . . . . . . . . . . Item 3(b) Item 3(b) . . . . . . . . . . . . . . . . . . . . . . . . * Item 4. . . . . . . . . . . . . . . . . . . . . . . . . . * Item 5. . . . . . . . . . . . . . . . . . . . . . . . . . Item 5 Item 6(a) . . . . . . . . . . . . . . . . . . . . . . . . Item 4(a) Item 6(b) . . . . . . . . . . . . . . . . . . . . . . . . * Item 6(c) . . . . . . . . . . . . . . . . . . . . . . . . Item 4(b) Item 6(d) . . . . . . . . . . . . . . . . . . . . . . . . Item 4(c) Item 7(a) . . . . . . . . . . . . . . . . . . . . . . . . Item 5 Item 7(b) . . . . . . . . . . . . . . . . . . . . . . . . * Item 7(c) . . . . . . . . . . . . . . . . . . . . . . . . * Item 7(d) . . . . . . . . . . . . . . . . . . . . . . . . * Item 8. . . . . . . . . . . . . . . . . . . . . . . . . . * Item 9. . . . . . . . . . . . . . . . . . . . . . . . . . * Item 10(a). . . . . . . . . . . . . . . . . . . . . . . . Item 6(a) Item 10(b). . . . . . . . . . . . . . . . . . . . . . . . Item 6(b) Item 11 . . . . . . . . . . . . . . . . . . . . . . . . . Item 7 Item 12(a). . . . . . . . . . . . . . . . . . . . . . . . * Item 12(b). . . . . . . . . . . . . . . . . . . . . . . . * Item 13 . . . . . . . . . . . . . . . . . . . . . . . . . * Item 14(a). . . . . . . . . . . . . . . . . . . . . . . . * Item 14(b). . . . . . . . . . . . . . . . . . . . . . . . * Item 15(a). . . . . . . . . . . . . . . . . . . . . . . . * Item 15(b). . . . . . . . . . . . . . . . . . . . . . . . Item 8 Item 16 . . . . . . . . . . . . . . . . . . . . . . . . . Item 10(f) Item 17 . . . . . . . . . . . . . . . . . . . . . . . . . Item 11
- --------- * The Item is located in the Schedule 13E-3 only. 3 4 ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE OFFER. (a) The information set forth on the cover page and in "THE OFFER" -- Section 8 ("Certain Information Concerning the Partnership") of the Offer to Purchase is incorporated herein by reference. (b) The information set forth on the cover page and in the INTRODUCTION of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in "THE OFFER" -- Section 6 ("Market Prices of the Units") of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in "THE OFFER" -- Section 14 ("Distributions") of the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) The information set forth in "SPECIAL FACTORS" -- Interests of Certain Persons" and "THE OFFER" -- Section 6 ("Market Price of the Units") the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d), (g) This Statement is being filed by the Company. The information set forth on the cover page and in the INTRODUCTION, "THE OFFER" -- Section 9 ("Certain Information Concerning the Company") and Schedule I of the Offer to Purchase is incorporated herein by reference. (e)-(f) Neither the Company nor, to the best of its knowledge, any of the persons listed in Schedule I of the Offer to Purchase has during the last five years (i) been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, OFFERS OR NEGOTIATIONS. (a)-(b) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Background of the Offer," "SPECIAL FACTORS -- Interests of Certain Persons" and "THE OFFER" -- Section 9 ("Certain Information Concerning the Company") of the Offer to Purchase is incorporated herein by reference. ITEM 4. TERMS OF THE OFFER. (a) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Plans for the Partnership After the Offer," "THE OFFER" -- Section 1 ("Terms of the Offer"), "THE OFFER" -- Section 7 ("Effects of the Offer on Non-Tendering Unitholder") and "THE OFFER" -- Section 12 ("Certain Conditions of the Offer") of the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Interests of Certain Persons" and "THE OFFER" -- Section 1 ("Terms of the Offer") the Offer to Purchase is incorporated herein by reference. 4 5 ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a)-(g) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Purpose and Structure of the Offer," "SPECIAL FACTORS -- Plans for the Partnership after the Offer, "THE OFFER" -- Section 7 ("Effects of the Offer on Non-Tendering Unitholders") and "THE OFFER" -- Section 9 ("Certain Information Concerning the Company") of the Offer to Purchase is incorporated herein by reference. ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth in "SPECIAL FACTORS -- Source and Amount of Funds" of the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the INTRODUCTION, "THE OFFER" -- Section 15 ("Fees and Expenses") and "SPECIAL FACTORS -- Source and Amount of Funds" of the Offer to Purchase is incorporated herein by reference. (c) Not applicable. (d) Not applicable. ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS. (a)-(d) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Background of the Offer," "SPECIAL FACTORS -- Fairness of the Offer; Position of the General Partners," "SPECIAL FACTORS -- Appraisals," "SPECIAL FACTORS -- Purpose and Structure of the Offer," "SPECIAL FACTORS -- Plans for the Partnership after the Offer," "SPECIAL FACTORS -- Interests of Certain Persons," "SPECIAL FACTORS -- Source and Amount of Funds," "SPECIAL FACTORS -- Certain Federal Income Tax Consequences," "THE OFFER" -- Section 7 ("Effects of the Offer on Non-Tendering Unitholders"), "THE OFFER" -- Section 9 ("Certain Information Concerning the Partnership"), and "THE OFFER -- Section 9 ("Certain Information Concerning the Company") of the Offer to Purchase is incorporated herein by reference. ITEM 8. FAIRNESS OF THE OFFER. (a)-(f) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Background of the Offer," "SPECIAL FACTORS -- Fairness of the Offer; Position of the General Partners" and "SPECIAL FACTORS -- Appraisals" of the Offer to Purchase and in Exhibit (b)(1) hereto is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a)-(c) The information set forth in "SPECIAL FACTORS -- Background of the Offer," "SPECIAL FACTORS -- Fairness of the Offer, Position of the General Partners" and "SPECIAL FACTORS -- Appraisals" of the Offer to Purchase and in Exhibit(b)(1) hereto is incorporated herein by reference. ITEM 10. INTEREST IN SECURITIES OF THE ISSUER. (a)-(b) The information concerning the ownership and transactions in the Units set forth on the cover page and in the INTRODUCTION, "SPECIAL FACTORS -- Interests of Certain Persons" and "THE OFFER" -- Section 9 ("Certain Information Concerning the Company") of the Offer to Purchase is incorporated herein by reference. 5 6 ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES. Not applicable. ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE OFFER. (a) Not applicable because none of the General Partners or affiliates of the Partnership, except the Purchaser, owns any Units. (b) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Fairness of the Offer; Position of the General Partners" and "SPECIAL FACTORS - -- Appraisals" of the Offer to Purchase is incorporated herein by reference. ITEM 13. OTHER PROVISIONS OF THE OFFER. (a) The information set forth in "THE OFFER -- Section 13 ("Dissenters' Rights and Investors Lists") is incorporated herein by reference. (b) The information set forth in "THE OFFER -- Section 13 ("Dissenters' Rights and Investors Lists") is incorporated herein by reference. (c) Not applicable. ITEM 14. FINANCIAL INFORMATION. (a)-(b) The information set forth in "THE OFFER" -- Section 8 ("Certain Information Concerning the Partnership") and Schedules III and IV of the Offer to Purchase is incorporated herein by reference. ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED. (a) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Background of the Offer," "SPECIAL FACTORS -- Plans for the Partnership after the Offer," "SPECIAL FACTORS -- Interests of Certain Persons," "SPECIAL FACTORS - -- Source and Amount of Funds" and "THE OFFER -- Section 8 ("Certain Information Concerning the Partnership") of the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the INTRODUCTION, "SPECIAL FACTORS -- Background of the Offer" and "THE OFFER" -- Section 15 ("Fees and Expenses") of the Offer to Purchase is incorporated herein by reference. ITEM 16. ADDITIONAL INFORMATION. Additional information concerning the Offer is set forth in the Offer to Purchase and the Letter of Transmittal which are incorporated herein by reference. ITEM 17. MATERIAL TO BE FILED AS EXHIBITS. 99 Appraisal Reports by Senior Living Valuation Service, Inc. 99.1 Offer to Purchase dated May 16, 1996 (incorporated by reference to Exhibit 99.1 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 6 7 99.2 Letter of Transmittal (incorporated by reference to Exhibit 99.2 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.3 Form of Letter to Unitholders (incorporated by reference to Exhibit 99.3 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.4 Letter from the Company to Brokers, Dealers, Trust Companies and Other Nominees (incorporated by reference to Exhibit 99.4 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.5 Letter to Clients for use by Brokers, Dealers, Trust Companies and Other Nominees (incorporated by reference to Exhibit 99.5 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.6 Text of Press Release dated May 16, 1996 (incorporated by reference to Exhibit 99.6 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 7 8 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: May 16, 1996 ARV ASSISTED LIVING, INC. BY /S/ GARY L. DAVIDSON ----------------------------- NAME: GARY L. DAVIDSON TITLE: CHAIRMAN OF THE BOARD 9 EXHIBIT INDEX
Sequentially Exhibit Numbered Number Description Page - ------ ----------- ------------ 99 Appraisal Reports by Senior Living Valuation Service, Inc. 99.1 Offer to Purchase dated May 16, 1996 (incorporated by reference to Exhibit 99.1 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.2 Letter of Transmittal (incorporated by reference to Exhibit 99.2 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.3 Form of Letter to Unitholders (incorporated by reference to Exhibit 99.3 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.4 Letter from the Company to Brokers, Dealers, Trust Companies and Other Nominees (incorporated by reference to Exhibit 99.4 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.5 Letter to Clients for use by Brokers, Dealers, Trust Companies and Other Nominees (incorporated by reference to Exhibit 99.5 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996). 99.6 Text of Press Release dated May 16, 1996 (incorporated by reference to Exhibit 99.6 to the Company's Tender Offer Statement on Schedule 14D-1 dated May 16, 1996).
EX-99 2 APPRAISAL REPORT 1 EXHIBIT 99 APPRAISAL REPORT MONTEGO HEIGHTS LODGE 1400 MONTEGO DRIVE WALNUT CREEK, CALIFORNIA AS IS ON JULY 14, 1995 SLVS FILE NO. 95-04-20 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 2 July 24, 1995 American Retirement Villas Properties II, L.P. c/o ARV Housing Group 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Mr. Graham Espley-Jones Re: Montego Heights Lodge 1400 Montego Drive Walnut Creek, California SLVS File No. 95-04-20 Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice. The value stated herein is based on our understanding of the site and improvement descriptions as represented to us by the client and/or the client's representatives and professional consultants as well as other available sources. We direct your attention to the "Introduction," "Site Description," and "Description of Improvements" sections of this appraisal report. It is your responsibility to read the report and inform the appraiser of any errors or omissions you are aware of prior to utilizing the report or making it available to any third party. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of July 14, 1995, the fee simple total going concern interest of the subject, as is, including the value of favorable financing, has a market value of: EIGHT MILLION EIGHT HUNDRED TWENTY FIVE THOUSAND ($8,825,000) DOLLARS 3 Mr. Graham Espley-Jones July 24, 1995 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 7/14/95 ------------ Real Estate Value $6,775,000 Furniture, Fixtures & Equipment 200,000 Business Value 1,225,000 ---------- Total Going Concern Valuation $8,200,000 ========== Plus: Favorable Financing $ 625,000 ---------- Total Reported Valuation $8,825,000 ==========
The narrative appraisal report that follows sets forth the identification of the property and limiting conditions, pertinent facts about the area and the subject property, comparable data, results of our investigation and analyses and the reasoning leading to the conclusions set forth. Should you desire a quick reference to the most important information, I direct your attention to the "Introduction", "Executive Summary" and the "Reconciliation and Conclusion" sections of this report. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 4 SUBJECT PHOTOGRAPHS Subject from Montego Heights Drive, View West Main Entrance of Subject 5 TABLE OF CONTENTS Title Page 1 Letter of Transmittal 2 Subject Photographs 4 Table of Contents 5 Introduction 7 Property Identification 7 Property Ownership and History 7 Scope of the Assignment 7 Purpose of the Appraisal 8 Function of the Appraisal 8 Property Inspection 8 Date of Appraisal 8 Date of Value 8 Property Rights Appraised 8 Definition of Market Value 8 Assumptions and Standard Limiting Conditions 9 Special Conditions 11 Experience/Competency of Appraisal Firm 11 Representative Assisted Living Appraisal Experience 12 Executive Summary 13 Regional and City Analysis 15 Regional Location Map 16 City Location Map 17 Comparative Zip Code Demographic Data 19 Anecdotal Description of Walnut Creek 21 Neighborhood Description 25 Neighborhood Map 26 Neighborhood Zoning Map 28 Neighborhood Photographs 29 Site Description 32 Assessor's Parcel Map 33 Flood Map 35 Taxes and Assessments 37
6 Description of Improvements 38 Site Plan 39 Floor Plans 41 Unit Plans 42 Subject Photographs 43 Market Analysis 48 Subject Amenities 50 Comparable Facilities Map 51 Census of Competitive ACLF/AL Facilities 53 Market Area Saturation Analysis 58 Highest and Best Use 60 Site Valuation 62 Vacant Land Sales Map 64 Cost Approach Analysis 66 Cost Approach Summary 70 Income Approach Analysis 71 Pro Forma Cash Flow Analysis & Capitalization 83 Sales Comparison Approach 84 Improved Sales Map 87 Valuation of Favorable Financing 91 Reconciliation and Conclusion 95 Allocation of Going Concern Value Determination To Components 97 Total Estimated Marketing Time 99 Certification 100 Addenda 102 Comparable ACLF/AL Facility Photographs 103 11/30/89 Title Report 109 Vacant Land Sale Data 115 6/19/95 Rent Roll 119 (1993, 1994, 4 Mos. Ending 4/95) Historical/(1995) Budgeted Operating Statements 126 Senior Housing Investment Survey 138 Improved Sale Data/Photographs 140 Favorable Financing Detail 149 Qualifications of Michael G. Boehm, MAI 150 MGB State of California Appraisal License 151
7 INTRODUCTION PROPERTY IDENTIFICATION The subject site consists of a 213,180 square foot (4.89 gross acres) site located at 1400 Montego Drive in the City of Walnut Creek, Contra Costa County, California. The site is currently improved with a 169 unit/192 bed congregate retirement apartment project known as Montego Heights Lodge. The subject is licensed to accept up to 200 assisted living residents. A detailed legal description of the subject site is provided in the Title Report located in the Addenda of this report. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject property is currently vested in the name of American Retirement Villas Properties II (ARVP II), a California Limited Partnership. The current owners purchased the subject in November, 1989 for approximately $9,000,000. The subject has not been sold/purchased in the past three years. The subject was built as a senior congregate facility which opened in 1978. Montego Heights reportedly took five years to achieve a full occupancy. The subject, as part of the original conditions of approval and a condition necessary to obtain the favorable HUD financing, was required to allocate 20% of the subject units to "very and low" income residents. This restriction was reportedly waived when the subject was purchased by the current owners allowing a market rate to be charged for all units. The subject underwent a $500,000 renovation in the Spring of 1990. The subject is currently approximately 86.5% occupied (166 beds/192 beds) reflecting the large number of subject units, the subject unit mix and a crowded competitive market environment. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a full narrative appraisal report in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of the appraisal was made available. The appraisal was performed so that the analysis, opinions and conclusions are that of a disinterested third party, employing due diligence in the investigation, analyses and conclusions. This appraisal report was developed and prepared to comply with the reporting requirements noted in the "Certification" section of this report. The investigation associated with this report includes the general economy of the industry, the market area, and the local neighborhood. Research and studies include supply and demand factors, comparable land and property sales, competitive property rents/rates and occupancy. Buyers, sellers, developers, public officials, management at competitive facilities, real estate 8 brokers, and the current management of the property were interviewed concerning these and other associated matters. Specific references are made throughout this report. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject partnership for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 9, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Laura Regnier, administrator. The subject was reinspected on July 14, 1995 by Mary Wiederhold, Appraisal Associate. DATE OF APPRAISAL July 24, 1995 DATE OF VALUE July 14, 1995 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in a separate section of this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C-Appraisals, 34.42 Definitions (f), market value is defined as: 9 "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 10 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. 11 SPECIAL CONDITIONS The subject is currently encumbered by an approximately $3,450,000 HUD loan which extends to the year 2018 at a fixed interest rate of 7.5%. Because this interest rate is below the estimated interest rate of current conventional financing (estimated at 9.5%), the subject has a theoretical value over and above the capitalized value of operational cash flows. Caution should be used in interpreting this added value as actual market transactions involving the assumption of below market rate financing are rare. The value of this favorable financing has been added to the going concern value set forth in this report. These issues are discussed and the value of the favorable financing is calculated in a separate section of this report. The subject is licensed as a residential care facility for the elderly (assisted living) for 200 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The subject is currently configured for 192 beds. The inconsistency is explained by the fact that not all of the subject beds provide assisted living services. The appraisers were not provided with a current title report (a 1989 title report is included in the Addenda of this report) to specifically describe all current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Housing Group. EXPERIENCE/COMPETENCY OF APPRAISAL FIRM Senior Living Valuation Services, Inc. is a San Francisco based appraisal firm that exclusively specializes in the appraisal and analysis of all forms of senior housing properties. On the following page is a listing of recent assisted living facility assignments that have been completed by the firm. Qualifications of Michael G. Boehm, MAI are included in the Addenda of this report. 12 EXECUTIVE SUMMARY Property Name: Montego Heights Lodge Location: 1400 Montego Drive Walnut Creek, California Assessor's Parcel No.: 140-250-024 (Contra Costa County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on July 14, 1995 Land Area: 4.89 acres (213,180 square feet) gross; 4.2 acres (182,952 square feet) net developable (estimated) Excess Land: None Zoning: C-O, Limited Commercial District Improvements: Type: One, average quality, 2 and 4 story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1978; Improvement Age - 17 Years; Effective Age - 17 years; Remaining Economic Life - 28 years. Size: 169 congregate retirement units currently configured for 192 beds in 99,897 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion Capitalization Rate: 12.0% Projected Stabilized Net Income: $985,892 (7/95-6/96)
13 Total Going Concern Market Value, as is, as of July 14, 1995: Cost Approach: $ 8,700,000* Income Approach: $ 8,200,000* Sales Comparison Approach: $ 7,950,000- $10,050,000* Value Conclusion: $ 8,200,000* ($48,521/Unit) Allocation of Final Value Determination to Components:
Market Value As Is - 7/14/95 ------------ Real Estate $ 6,775,000 FF&E 200,000 Business Value 1,225,000 ----------- Total Going Concern Valuation $ 8,200,000* =========== *before addition of value of favorable financing Value of Favorable Financing: $625,000 Total Estimated Marketing Time: 6 Months
14 REGIONAL AND CITY ANALYSIS The subject site is located north of Montego Heights Drive, just northwest of La Casa Via and John Muir Hospital in the eastern incorporated portion of the City of Walnut Creek, Contra Costa County, California. The subject is located about one-half mile northeast of downtown Walnut Creek. Walnut Creek is located approximately 20 miles east of San Francisco. COUNTY OVERVIEW Contra Costa County is one of the nine San Francisco Bay Area counties. It is situated northeast of San Francisco, and bordered by the counties of Solano and Sacramento on the north, San Joaquin on the east, Alameda on the south and the San Francisco Bay to the west. The County consists of three distinct regions. Divided by significant topographical obstacles (primarily ranges of hills) and the interstate and state highway system, the western, central, and eastern portions of the County have tended to develop separately. The western portion, with its access to San Francisco Bay, is largely urban and industrialized. This area is dominated by the city of Richmond, with its active, deep water port. The eastern part of the County is undergoing substantial changes, evolving from a wild, agricultural area, to an affordable suburban residential region (Antioch, Pittsburg). The subject is located in the central portion of the County (known as the Diablo Valley at the foot of Mt. Diablo) which follows the path of Interstate 680 and extends from Martinez on the shore of the Carquinez strait of the Sacramento river to the north, south through the cities of Concord, Pleasant Hill, Walnut Creek, Lafayette, Alamo, Orinda, Danville and San Ramon. This central County area evolved as a bedroom community by the 1960's as residents commuted to jobs in San Francisco, Oakland, and other cities. Motivated by an increasingly congested commute and higher rental rates in San Francisco, corporations began locating in central Contra Costa in the late 1970's. Today, the central County has developed into a major suburban commercial and financial headquarters submarket of the larger Bay Area. The climate of Contra Costa County is somewhat similar to other parts of the inland Bay Area, with a year-round mean temperature of 60.4 degrees, and an annual average rainfall of 19 inches. As in the other parts of the region, most rain occurs during the winter months and is rare from May through November. The location of Walnut Creek, southeast of the Berkeley Hills and at a distance from the moderating influence of the San Francisco Bay, allows some light frosts in the winter months and warm to hot summer days. CITY POPULATION AND DEMOGRAPHICS Walnut Creek (population 63,400 in 1995), incorporated in 1914, evolved from a small agricultural town of several hundred residents. In the 1950's and 1960's with the completion of Highway 24 and Interstate 680, Walnut Creek, and many communities in the central County, became "bedroom" suburbs for the core cities of San Francisco and Oakland. It was during this period that Walnut Creek experienced its most rapid population growth. Population growth has 15 slowed as the region has become predominantly built out. Increased resistance to additional growth has (and will continue to) muted recent population expansion. During the past decade, Walnut Creek, along with the adjacent cities of Concord and Pleasant Hill, have become an important suburban employment center in the East Bay. The economy is largely influenced by significant office employment including Federal and County governments. Nevertheless, a large portion of the population continues to commute to Oakland and San Francisco. Today, Walnut Creek is one of the largest cities in the County and the focal point of the central County region. Population trends and forecasts for Walnut Creek are as follows: Population Data
Walnut Creek Contra Costa County ---------------------------- ---------------------------- Year Population % Change Population % Change ---- ---------- -------- ---------- -------- 1960 9,900 - 406,030 - 1970 39,844 302% 558,389 37.5% 1980 53,600 34.5% 650,748 16.5% 1990 60,400 12.7% 797,600 22.6% 1995 63,400 5.0% 883,400 10.8% 2000* 66,634 5.1% 971,300 9.9%
* Estimate - -------------------------------------------------------- Sources: ABAG (Association of Bay Area Governments) Demographically as illustrated in comparative zip code data presented on the following page, the subject zip code has the following characteristics relative to the surrounding region: 1) An older median age (40.2) compared to the surrounding region (except for the zip code which includes Rossmoor) and City as a whole (which is older than regional averages), reflecting a population with 12% of the total population over the age of 65; 2) A higher than average median household income ($71,112). The subject zip code ranks in the 97th percentile in California in per capita income (99th percentile nationally), which is higher than any other Walnut Creek zip code; 3) A slightly more diverse ethnicity with about 89% of its resident consisting of non-minority whites (about 8% Asian). An anecdotal description of Walnut Creek is provided on the following page. 16 HOUSING The Walnut Creek housing stock is concentrated in low-density residential uses, chiefly single-family dwellings, with higher densities allowed in designated areas generally around the downtown core. According to ABAG projections, the City is projected to be built out in about 10 years. Currently, the housing stock consists of approximately 37,000 dwelling units. The City has approximately 350 acres of vacant land designated for residential development which could include about 6,000 additional units (located on the fringes of town to the east and south). An important influence on the City housing stock (20% of total) and the subject is the 2,000 acre Rossmoor Retirement Community located in southwestern Walnut Creek. Rossmoor, begun in 1964, is one of California's largest retirement communities with a current population of about 8,200 residents in 5,900 mostly lower density units (capacity for about an additional 1,500 units). Prices range from $55,000 to $400,000. Rossmoor is restricted to persons 55 and older and has an average resident age population of about 75. The presence of Rossmoor has been a major factor in the recent construction of several new higher density senior housing projects built close to Rossmoor but "outside the gates." The average home price in Walnut Creek for a single family dwelling in 1995 is about $300,000. This is below more exclusive suburban areas such as Blackhawk and Lafayette but above nearby Pleasant Hill and Concord. These statistics reflect a 15% decline in average home price since 1989 peaks which is consistent with regional trends (down about 0% to 5% in the last 12 months). Rental rates of apartments in Walnut Creek are slightly above County averages with a broad range of $500 to $1,000 and up per month. EMPLOYMENT & ECONOMIC DEVELOPMENT Walnut Creek enjoys a diversified economic base. A number of residents commute to other locations in the Bay Area for work, but the City is seen as a major suburban office center. The largest firms in the community are as follows: Major Employers
Name Type of Business Employees - ---- ---------------- --------- Lesher Communications, Inc. Newspaper 1,800 John Muir Hospital Health Care 1,750 Kaiser Permanente Center Health Care 1,250 Safeway Grocer 1,100 Western Temporary Services Temporary Employment 600 Nordstrom Retail 600
- -------------------- Source: Walnut Creek Chamber of Commerce 17 Explosive downtown core (known as the Golden Triangle) commercial growth in the early 1980's made growth control the major issue in Walnut Creek in the late 1980's. In 1985, Walnut Creek voters passed Measure H which approved a citywide moratorium on construction of most buildings greater than 10,000 square feet until certain traffic volume to capacity ratios are met. The measure designed to limit further traffic congestion, has been the subject of court battles but has been incorporated into the City's zoning ordinance. The result of this antigrowth sentiment has been the virtual extinction of new commercial proposals. Current development trends to be enforced by the City include limiting increased traffic whenever possible, concentrating high density development in the downtown core, emphasized retail commercial development and creating open space. The City has been transformed from a progrowth community to one that has become built out and congested and now seeks to maintain its current high quality of life without additional deterioration. Recent development activity has been very modest (some smaller infill projects). TRANSPORTATION Walnut Creek is served by three major highways: Interstate 680, providing north to south access throughout central Contra Costa County; Highway 24, providing highway access east to San Francisco and Oakland via the Caldecott Tunnel; and Highway 4, providing east to west access through northern Contra Costa County. A major redesign and expansion of the 680/24 intersection is underway (a 5 year project) to alleviate severe traffic congestion in the area. The new design will facilitate access to Rossmoor from Walnut Creek. Major north to south thoroughfares in Walnut Creek include Buena Vista, California, Main and Oak/Civic. Major east to west thoroughfares include Olympic, Tice Valley, Treat, Ygnacio Valley and Walnut. A high-speed commuter train service, the Bay Area Rapid Transit (BART), provides public transportation throughout the Bay Area. Walnut Creek is one of 34 BART stops along a network that extends to San Francisco, Oakland, Fremont, Richmond and other cities. Rail service is (Amtrak) available in Martinez or Oakland. Air service is available at Buchanan Field in Concord (regional air service), or at the Oakland International Airport (18 miles to the southwest) and San Francisco International Airport ( 36 miles to the southwest). Local residents can also take advantage of the County Connection, a local bus service. COMMUNITY DATA Walnut Creek's location as a part of the greater nine county San Francisco Bay Area allows its residents to take advantage of all of the cultural and recreational opportunities of the larger Bay Area. Other major local features include a regional center for the arts (with theater) and Mt. Diablo State Park, located southeast of Walnut Creek, offers outdoor activities from trails to camping and picnic sites. Mt. Diablo, with an elevation of 3,849 feet, is the highest peak in the Bay Area and provides a panoramic view from the Pacific Ocean to the Sierras. Located in the foothills of Mt. Diablo is the Concord Pavilion, a popular 8,500 seat open theater for concerts and festivals. 18 Walnut Creek has one general acute hospital, the John Muir Medical Center , with 280 beds and 677 physicians. This hospital is located approximately one block east of the subject property along Ygnacio Valley Boulevard. Additional medical facilities in the area include Rossmoor Medical Clinic (just outside the Rossmoor entrance), Mt. Diablo Medical Center, Kaiser Medical Center (201 beds), and CPC Walnut Creek, the largest psychiatric hospital in the Bay Area. Walnut Creek is located in HSA 5, HFPA 411 with a total of 25 skilled nursing facilities comprising a total approximately 2,328 licensed beds (including several newer facilities). Walnut Creek is also home to a large number of high density congregate senior housing projects (rentals) including the subject and as discussed in detail in the Market Analysis section of this report. CONCLUSION Walnut Creek is primarily built out with an established land use pattern of residential developments surrounding a densely developed downtown core. Future development and population expansion will be slow, focused in infilling vacant or underdeveloped land parcels. Local antigrowth sentiment is still strong and the City has experienced extreme traffic congestion which threatens the City's traditional suburban/bucolic residential character. Nevertheless, the City still has a high quality of life. The City's central location, affluence and extremely large elderly population focused at Rossmoor, make Walnut Creek attractive for elderly housing. 19 NEIGHBORHOOD DESCRIPTION The subject neighborhood is located in the eastern portion of the City of Walnut Creek in the neighborhood or subarea known as Ygnacio Valley. Ygnacio Valley is the largest subarea in Walnut Creek encompassing the northeastern portion of the town and extending to the Mt. Diablo foothills. The subarea is predominately built out with lower density residential development and wide tree lined sloping boulevards although the western portion of the subarea contains higher density housing (including the subject), retail and institutional development. Major subarea development includes three local shopping centers, the Shadelands Business Park, the Heather Farms Park, Diablo Hills Golf Course and John Muir Hospital (with surrounding medical office buildings and related buildings) which dominates the subject's immediate neighborhood. The subject's immediate neighborhood boundaries can be considered as La Casa Via to the northeast, Montego Drive to the south, Tampico to the west and Ygnacio Valley Road to the northwest. This area is characterized by medium to higher density apartment and condominium developments and by medical offices serving John Muir Hospital. The neighborhood appears to be generally built out with a few vacant land parcels including one at the corner of Tampico and Ygnacio Valley Road (just northwest of the subject). The area surrounding the subject is zoned C-O (Limited Commercial District). Medical office buildings and Ygnacio Valley Convalescent Hospital are located to the north of the subject and the San Marcos Convalescent Hospital is located to the southwest. To the south across Montego Drive lie apartments and some single family residential homes in good condition. The subject's good quality two and four story construction is not inconsistent with the overall medium density residential character of the immediate neighborhood. The subject is located approximately 1.5 miles east of Interstate 680 and the Walnut Creek Bart Station, one block southwest of the John Muir Memorial Hospital and four blocks south of the Heather Farms Park. The Diablo Hills Golf Course is located two blocks northwest of the subject. The Shell Ridge Open Space, located one-half mile southeast of the subject, forms the southeasterly boundary of the neighborhood. The Kaiser Permanente Medical Center and the Broadway Shopping Center with various restaurants, department stores and banks, are located approximately one mile southwest of the subject. The site is located about two miles northeast of Rossmoor, meaning that it is not within Rossmoor's sphere of influence and can (and has) relied less upon Rossmoor residents for its resident source than other comparable projects located nearer to Rossmoor. Overall, the subject neighborhood has an attractive, well maintained medium density residential character, excellent access to major medical amenities and fair highway and retail access. The subject neighborhood is adequately suited for the subject development. 20 NEIGHBORHOOD PHOTOGRAPHS View East along Montego Heights Drive, Subject to Left View West along Montego Heights Drive, Subject to Right 21 NEIGHBORHOOD PHOTOGRAPHS View South toward Tampico from Montego Drive, Subject Behind 22 NEIGHBORHOOD PHOTOGRAPHS Western Boundary of Site from Adjacent Parking Lot, Subject to Right Undeveloped Knoll North of Subject 23 SITE DESCRIPTION LOCATION: The subject site is located at 1400 Montego Drive in Walnut Creek, California which is about one block south of the intersection of Ygnacio Valley Road and La Casa Via. The subject site consists of one irregular shaped parcel identified as Contra Costa County Assessor's Parcel Number 140-250-024. An Assessor's Parcel Map and Survey Map are shown on the following pages. A detailed legal description of the site is provided in the Addenda of this report. PHYSICAL CHARACTERISTICS: The subject property consists of an irregularly shaped parcel containing 4.89 acres or 213,180 square feet gross and approximately 4.20 acres or 182,952 square feet net developable. The site is bounded by Montego Drive along its southeasterly boundary (about 550 feet of frontage), medical office/convalescent hospital properties to the north and open space/convalescent hospital to the west/southwest. The topography of the site is highly irregular with elevations ranging from 216 feet to 270 feet above sea level (50 foot variation). The site contains several knolls including one large knoll which dominates the northern portion of the site and reduces the developable area of the total site by about 30,000 square feet. The knoll is visible throughout the immediate neighborhood. The site appears to have adequate drainage and is not located within a flood plain area. The subject is located in Flood Zone C, an area of minimal flooding per Map No. 065070 0001B, dated 5/1/85. No report of soil conditions was provided to the appraisers and it is assumed that there are no adverse soil or subsoil conditions affecting existing developments. No obvious toxic or hazardous conditions were noted during our site inspection. The site can be considered as having the same overall risk of earthquakes as the San Francisco Bay Area although it is not located in an Alquist-Priolo special earthquake zone. EXISTING IMPROVEMENTS: The subject site is developed with a 169 unit, 2 and 4 story U-shaped and multi-tiered, 99,897 square foot residential congregate senior apartment building. The subject site is bordered by asphalt surface residential streets, curbs, gutters and sidewalks along its Montego frontage. The development's main entry is oriented towards Montego Drive (southeast). Additional improvement detail is discussed in the Description of Improvements section of this appraisal. Montego Drive is a wide, two-lane northeast to northwest residential street. Street improvements include asphalt paving, concrete curbs, gutters and sidewalks. The subject site is served by all utilities including water (City of Walnut Creek), natural gas and electrical power (Pacific Gas & Electric) and telephone (Pacific Bell). ACCESS AND EXPOSURE: The subject site can be accessed from Montego Drive, a secondary northeast to northwest residential arterial through eastern Walnut Creek. The subject is located approximately two blocks southeast of Ygnacio Valley Boulevard, just west of La Casa Via and 1.5 miles east of Highway 680. Partial visibility of the subject is possible from Ygnacio Valley Boulevard but visibility from Montego Drive is limited because of surrounding development and the varying topography of the immediate neighborhood. 24 EASEMENTS AND ENCUMBRANCES: According to the older 11/30/89 title report illustrated in the Addenda of this report, the subject is not affected by any significant easements or encumbrances. The site is affected by a City access easement along its southwesterly boundary and circulation road and normal utility easements which do not affect the improvements as existing. The subject is also impacted by an access easement along its western driveway. The access easement was granted to the former owner of the subject site and was designed to allow this owner access to land to the north of the subject (or parcel A per the survey map). As noted in the special conditions section of this report, the site was formerly required to accept 20% "very low and low" income residents as a condition for the $3,696,000 favorable HUD financing obtained in 1978. This restriction was reportedly lifted when the subject's current owner purchased Montego Heights Lodge in 1989. However, the benefit from the remaining term of the favorable financing was assumed by the current owners. ZONING: The subject is classified as a limited care complex for ambulatory senior citizens and is allowed in a C-O (Limited Commercial District) zone. The subject development was built in 1978 and has been operating on the subject site as a legal conforming use since that time. The subject is currently licensed for 200 assisted living beds with the California Department of Health Services as a residential facility for the elderly, also known as residential care or assisted living. This licensing allows the subject to offer nonmedical daily living assistance to these residents. EXCESS LAND: None. The subject is fully built out to the developable portions of its property limits. In June, 1995, the subject was approached by the owner of the site adjacent to the subject (Parcel A), who offered to purchase approximately 9,122 square feet of the northerly portions of the subject site for $38,000. This offer was rejected by the subject owners who indicated a willingness to discuss only 5,822 square feet of the site subject to HUD and City of Walnut Creek approval. This approval is needed as the 5,822 square feet requested currently contain parking spaces for the subject. The potential buyer has some negotiating leverage over the subject, in that they have an existing access easement across the subject site as noted above. Given the tight parking situation on the subject site, City approval is problematic. The subject owners, though not making a counter offer, are thinking of a $10 to $12 per square foot purchase price, suggesting a maximum of $69,864 ($12/SF x 5,822 SF) in extra land value. Despite the above discussion, this report does not add the value of any excess or extra land due to the early stages of this negotiation, the great uncertainty over sale price, the resolution of the parking issue and other conditions. In our opinion, a buyer of the subject in July, 1995 would not pay a material amount for this potential exchange. 25 TAXES AND ASSESSMENTS Since passage of Proposition 13, or the Jarvis-Gann Initiative, in 1978, real property has been assessed at its 1976 value, trended upward at a maximum rate of 2% annually, unless there is a transfer of ownership or new construction. When either of these occur, the property is reassessed at full market value. Furthermore, Proposition 13 limits annual taxes to 1%, plus a small amount for bonded indebtedness of the assessed value. Assessor's Parcel No.: 140-250-024 (Contra Costa County) Assessed Value 1994-95: Land $2,381,350 Improvements $6,714,326 Personal Property Equipment $ 549,791 ---------- Total $9,645,467 ========== 1994-95 Tax Rate: 1.0371% 1994-95 Taxes: $101,205.94 (includes $1,172.82 in direct assessments) Status: Current and paid as due. Our cash flow projections of stabilized real estate taxes assumes a sale and reassessment of the subject to market value ($8,200,000) at July, 1995 (does not include value created by favorable financing).
26 DESCRIPTION OF IMPROVEMENTS The discussion of the improvements addressed below was accumulated through our site inspection, a review of limited site plans and through discussions with the subject's administrator. Detailed architectural drawings were not available. GENERAL TYPE: The existing main improvement known as Montego Heights Lodge consists of one 2 to 4 story, multi-tiered 169-unit, good quality, Class D retirement apartment building containing 99,897 square feet of gross building area. The facility contains 169 units currently configured for a maximum of 192 beds. The U-shaped main building improvement surrounds an open courtyard located at the base of the large knoll. Located to the northwest and northeast are two open paved parking areas. AGE: The subject improvements were constructed and completed in 1978. Since 1978, the subject has been operating as an independent living senior facility. In the Spring of 1990, the subject underwent an approximate $500,000 renovation/upgrading that included new furniture and equipment, new wallpapering/painting, reconfiguration/upgrading of office space and some common areas. Beginning in November 1990, the subject became licensed by the Department of Social Services to provide assisted living to residents in 200 beds. Our site inspection noted a normal amount of wear and tear for a 17 year old building and no material deferred maintenance. The subject improvements have an estimated total economic life of about 45 years. A chronological and effective age of about 17 years suggests a remaining economic life of about 28 years. SIZES: The subject has the following component sizes and unit mix:
Unit No. of Size Unit Type Units S.F. (est.) Total S.F. --------- ------ ---- ---------- A Studios 63 296 18,648 B Studios 75 391 29,325 One Bedroom 31* 687 (avg.) 21,297 ---- ------ Total 169 69,270 (69.3%) Common Areas/Circulation 30,627 (30.7%) ------ Gross Building Area 99,897 ======
*the subject was originally built with 200 studio units in total, however, 62 of these units were converted into 31 "one bedroom" (combined studio units) units for the current mix. 27 STRUCTURAL AND EXTERIOR: The subject improvements are constructed on a multi-tiered concrete slab foundation with a 1-story (central entry wing), 2-story (east wing), and 4-story (west wing) wood frame construction under a sloping clay tile roof. Building exterior consists of stucco, protruding wood balcony decks and wood trim. The building includes a small concrete block basement/storage area. Interior walls are wood frame and painted or wallpapered gypsum board. The main common areas, hallways and room exteriors are carpeted. Unit baths have vinyl tile. Ceilings in units are painted gypsum board with common area ceilings and hallways consisting of dropped acoustical tile with hanging incandescent and fluorescent light fixtures. The entire development is fully sprinklered with smoke and heat alarms. Units include French doors leading to the balconies and patios and sliding windows in aluminum frames. MECHANICAL: The development has average lighting and plumbing fixtures. HVAC in the units consist of individual room heating. HVAC in common areas features hot water boiler central forced air heating system. The subject also features an intercom system with paging. The development includes three elevators. Four stairwells are located throughout the improvement. INTERIORS: Based on our site inspection, the interiors appear to be functional for congregate senior apartment use. Unit plans are presented on a following page. The facility includes 169 apartment units with separate baths. The unit mix was originally a combination of small (296 SF) and large studios (391 SF). 62 of these units were combined to create 31 one bedroom/suite units with two living rooms and two baths (two rooms joined by a door in adjoining wall). Each living unit contains a full bath area with grab bars and a sink with a built-in cabinet, vanity and water closet. Each unit also contains two emergency pull cords, one each in the bath and living area. The units also contain a small kitchenette which consists of a sink, two burners and a half-refrigerator. Each unit has its own outdoor wood picket balcony or patio. The focal point of the development is the facility's common areas located on the centrally located one story ground floor. The facility's main entry area includes the lobby, a reception desk and administrative offices. The common areas include a card room, library, theater with stage, television room, activity room, beauty salon and general store. The subject also has six resident lounges. Laundry rooms with washers and dryers for the residents are located on each floor. The subject also has an employee lounge and restroom and linen closets. The facility's dining area has a tastefully decorated restaurant atmosphere with a maximum seating capacity for approximately 224 individuals. PARKING AND LANDSCAPING: With the exception of 12 spaces located underneath carports, site parking is located in two individual open paved parking areas on east and west of the development accessed from Montego Drive. There are approximately 100 parking spaces (0.59/unit) located in the parking areas. There is a carport for 12 cars located in the eastern parking area. Additionally, there are four individual spaces located under apartment units in the front of the improvement. The facility entry is formed by a concrete turnaround facing Montego Drive. 28 SUBJECT PHOTOGRAPHS Dining Room Typical Interior Corridor 29 SUBJECT PHOTOGRAPHS Typical Unit Interiors 30 SUBJECT PHOTOGRAPHS Rear Courtyard/Aviary Northern Boundary of Site, View West 31 SUBJECT PHOTOGRAPHS Rear Parking Area Main Entry Driveway 32 Approximately 30% of the site is landscaped with mature trees, flowering perennials, landscaped berms along Montego Drive, bushes and grass. Facility landscaping is centered in the open courtyard north of the U-shaped Improvement and common area and at the base of the large knoll dominating the northern portion of the site. The courtyard includes a fully stocked fish pond and aviary. Concrete walkways surround the site's highly variable topography. Overall site landscaping is above average. CONCLUSION: In our opinion the subject property's exteriors, common area interiors, landscaped areas and parking appear average and competitive for residential retirement uses. The subject's relatively small units are typical of 1970's senior housing construction with a more limited unit mix and modest common areas. The subject would fall into the middle to lower middle tier of local senior housing projects. The subject also has a larger number of units/beds than typical (especially for an ARV property). Our site inspection noted no material deferred maintenance and an average to good condition reflecting the subject's 17 year old effective age. 33 MARKET ANALYSIS INTRODUCTION The elderly are by far the fastest growing population segment, whether expressed in percentage increase or actual number of persons. Although not as well documented statistically, the elderly have more money than ever before because of social security, pension programs, savings and the substantial increase in the market value of their residences. Most of them are active and in reasonably good health. This increased health and life expectancy lends them to seek life enriching activities through an independent lifestyle that provides assistance when needed. INDUSTRY OVERVIEW The housing industry for the elderly can be classified by the three major types of buyers: the active elderly (go-gos), intermediate (slow-gos) and the person who needs constant care (no-gos). Active retirees want recreational amenities with the housing they buy. They want a golf course, tennis courts, swimming pool, walking and bicycle path, saunas and spas. They want to be near good places to eat and to be able to enjoy a wide range of cultural activities and travel opportunities. Intermediate retirees want a congregate-type of lifestyle that allows them independence yet gives them the opportunity to take part in quiet activities such as arts and crafts. Retirees in this intermediate classification also will look for transportation to shopping, banking or medical offices, some mild form of recreational activities, such as swimming and golf, plus the opportunity to socialize in a common dining room or lounge area. Retirees who need constant care are concerned with medical assistance. They will look for facilities that offer services and conveniences such as residential care facilities which will make their lives more comfortable. Also, they will want a medical center where they can go when their health fails. The subject property would be targeted at the intermediate and less active elderly. From a real estate and financial perspective, housing for the elderly is complex to analyze as they usually represent a combination of other businesses. The major types of homes for the elderly include: Adult Congregate Living Facilities (ACLF): Specially planned, designed and managed multi-unit rental housing typically with self contained apartments. Supportive services such as meals, housekeeping, transportation, social and recreational activities are usually provided. In California, these facilities are not licensed. Assisted Living Facilities (ALF) (personal care or residential): Group living arrangements that provide staff supervised meals, housekeeping and personal care (assistance with bathing and medication) and private or shared sleeping rooms. These facilities are generally licensed and must meet designated operating standards including minimum staff requirements. In California, these facilities must be licensed by the California Department of Social Services, Division of Community Care. 34 Care Facilities (skilled nursing or intermediate care): Skilled nursing and intermediate care facilities (commonly known as nursing homes) are both operated under the guidance of a licensed administrator with licensed nurses and aids providing around the clock nursing care, generally one step below that offered at an acute care hospital. In California, these facilities must be licensed with the California Department of Health Services. Life Care Complex (life care community, continuing care, campus complex): A housing development planned, designed and operated to provide a full range of accommodations and services for older adults, including independent living, congregate housing and medical care. Residents may move from one level to another as their needs change. Life care complexes typically charge a buy-in fee (sometimes refundable) in addition to a monthly maintenance fee for services. In California, life care contracts must be approved by the State Department of Insurance. Retirement Village: Developments that offer, home ownership and rental units for older persons. Support services often are available for a fee. The subject is a currently existing 169 unit (192 current bed configuration) licensed assisted living (ALF) facility. This suggests that 23 of the subject units are currently configured for 46 semiprivate beds. The subject is licensed to accept 112 nonambulatory residents (200 assisted living bed licensing total). Congregate housing such as the subject is a combination of: a) an apartment project; b) a hotel offering meals, cleaning and transportation facilities; c) a social club offering activities; and d) a supporting living environment providing assisted living amenities (help with bathing, medication, mobility) as needed. A summary of subject amenities is provided on the following page. MARKET DEFINITION Our experience in analyzing congregate housing development indicates that these facilities have a total market area ranging from a 5 to 30 mile radius from the site. This area represents a reasonable driving distance for relatives and friends and also reflects the fact that the elderly do not move great distance when choosing the congregate housing option. Perhaps more important than a strict definition of market area based on distance, is the overall character of the development's environment, whether it is urban, suburban or small town/rural. In our opinion, the primary market area for the subject site extends approximately 5 miles outward from the site in all directions. This would include most of the suburban area of central Contra Costa County including all of Walnut Creek and Alamo and portions of Pleasant Hill, Concord and Lafayette. These areas are not only located in close geographic proximity to the site, but each is a similar, upper middle income bedroom community. This definition of market area is consistent with the former residences of subject residents. RETIREMENT HOUSING SUPPLY During the course of our appraisal, we have identified those existing and proposed elderly retirement facilities in the primary market area which may be considered somewhat competitive 35 to the subject property. Our census of potentially competitive congregate rental housing facilities impacting the total market area is presented on the following pages. Photographs of the rent comparables are illustrated in the Addenda of this report. Each of the surveyed congregate facilities is a for-profit housing development offering two or three meals daily, weekly maid service and many recreational opportunities. Most of the properties surveyed offer licensed assisted living on an as needed basis. The properties can be characterized as follows: BOTH CONGREGATE AND ASSISTED LIVING (MOST SIMILAR TO SUBJECT) 1. Kensington Place 2. Valley View Lodge 3. Byron Park 5. Chateau Pleasant Hill 11. Villa San Ramon ASSISTED LIVING ONLY 4. Family Affair 6. Eden Villa (Alzheimers/heavy care) 7. Concord Royale 8. Diablo Lodge 9. Moraga Royale 10. San Ramon Lodge The subject would be most similar to those projects offering both congregate and assisted living services although it has an overall quality, age and living environment comparability to Comparable No. 7 (Concord Royale) which only accepts the frailer, assisted living resident. Like the subject, this project was built in the late 1970's and has an all studio unit mix. Of the congregate/assisted projects, the subject would be most similar to the older projects with more similar unit mixes such as Comparable No. 2 (Valley View Lodge) - a sister ARV project and Comparable No. 5 (Chateau Pleasant Hill). Valley View Lodge in particular, is similar to the subject in target market and in the a la carte assisted living program. However, this project has a less monolithic unit mix and better layout than the subject. It is also located adjacent to two nursing homes one block from Rossmoor, a competitive advantage. Comparable No. 5 (Chateau Pleasant Hill) has a more varied unit mix than the subject and a slightly superior living environment. The other more comparable congregate/assisted projects surveyed are generally newer projects (Comparable Nos. 1 - Kensington Place, 3 - Byron Park and 11 - Villa San Ramon) with a more varied unit mix and a generally superior living environment to the subject. The subject would be competitively placed in the tier of projects below these newer properties. The assisted living projects are generally less directly comparable to the subject as they target the older, frailer senior exclusively. Of the projects, as noted Concord Royale would be most similar to the subject. Comparable No. 8 - Diablo Lodge, is one of the higher quality assisted living 36 MONTEGO HEIGHTS LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES
Congregate (ACLF) Units Assisted Living (AL) Units Age/ ----------------- ----------------------------- Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- Reported No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private % SSI Occupancy - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- ----- --------- 1. Kensington Place 1988/ 176/44 1BR 450-560 $1,885 $3.37- +$300- N/A 0% 100% 1580 Geary Blvd. 1.5 $4.19 $1,000 Walnut Creek 2BR 760-820 $2,830 $3.45- $3.72 2. Valley View Lodge 1975/ 62/96 Studio 390 $1,375 $3.53 +$150- +$150- 0% 96% 1228 Rossmoor Parkway 2.5 Alcove 533 $1,750 $3.28 $1,000 $1,000 Walnut Creek 1BR 571 $1,950 $3.42 SP $1,175 3. Byron Park 1991/ 187/19 Studio 431 $1,575 $3.65 $2,850 N/A 0% 98% 1700 Tice Valley Blvd. 2.6 1BR 614-834 $1,850- $3.00- $3,300 Walnut Creek $2,500 $3.01 2BR 877-1316 $2,600- $2.51- $4,250 $3,300 $2.96 4. Family Affair Ret. 1975/ 120/160 Studio 450-500 Not Available $2,000- $1,800 0% WND 1081 Mohr Lane 2.5 $2,200 Concord 5. Chateau Pleasant Hill 1985/ 112/38 Studio 400 $1,295- $3.24- +$300-$500 N/A 0% 99% 2770 Pleasant Hill Road 3.0 $1,700 $4.25 Pleasant Hill 1BR 500 $1,650- $3.30- $2,000 $4.00 6. Eden Villa 7-95/ 36/72 Studio 300 (est.) Not Available $2,450- $1,650- 0% 3% 2015 Mt. Diablo Boulevard 1.5 $2,750 $1,950 (Opened Walnut Creek (shared bath) 7/95) $2,650- $2,950 (private bath) 7. Concord Royale 1979/ 120/196 Studio 250 (est.) Not Available $1,200- $850- 25% 98% 4230 Clayton Road 4.5 $1,800 $950 Concord
37 MONTEGO HEIGHTS LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES (CONTINUED)
Congregate (ACLF) Units Assisted Living (AL) Units Age/ ----------------- -------------------------- Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- Reported No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private % SSI Occupancy - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- ----- --------- 8. Diablo Lodge 1990/ 118/118 Studio 360 $1,795- $4.99- +$300- N/A 0% 100% 950 Diablo Road 6.0 $2,095 $5.82 $1,000 Danville 1BR 490 $2,195- $4.48- (avg.) $2,495 $5.09 2BR 658 (avg.) $2,695- $4.10- $2,895 $4.40 9. Moraga Royale 1987/ 95/182 Studio 525 Not Available $1,600- $ 850 0% 98% 1600 Canyon Road 7.5 $2,200 Moraga 10. San Ramon Lodge 1991/ 40/60 Studio 219-365 Not Available $2,000- $1,500- 0% 86% 1888 Bollinger Canyon Rd. 10 $2,500 $1,800 San Ramon 11. Villa San Ramon 1992/ 120/120 Studio 400 $1,650- $4.13- $2,750 N/A 0% 99% 9199 Fircrest Lane 11 $1,795 $4.49 San Ramon 1BR 500-552 $1,825- $2.85- $2,850 N/A $1,995 $3.65 Lg. 1BR 700 $2,000- $2.86- $2,300 $3.29 2BR 850 $2,595- $3.05- $3,600 $1,600 $2,795 $3.21 S. Montego Heights Lodge 1978/ 169/192 Studio 296-391 $1,100- $3.58- +$150- +$150- 8% 87% 1400 Montego Way - $1,400 $3.72 $1,000 $1,000 Walnut Creek 1BR 687 $1,750 $2.55 SP $ 825- $ 850
38 projects in the local market and in the entire region. Comparable No. 6 (Eden Villa) is a recently opened project (a converted nursing home) which targets the heavier care and Alzheimer patient. Our survey of local jurisdictions noted no other active proposed senior housing projects which would pose an imminent competitive threat to the subject. The overall occupancy of the 11 projects surveyed is a strong 96.2% (not including the recently opened Comparable No. 6 - Eden Villa). RETIREMENT HOUSING DEMAND To measure the theoretical size of the subject's target market, we have analyzed demographic statistics obtained from Urban Decision Systems for the relevant target area market which extends about 5 miles outward from the subject site. We obtained income by age population estimates and projections for this area in 1995 and 2000. Our analysis is as follows: 1) Determines the number of households over a minimum age, 75, and minimum income requirement, over $15,000, from 1995 population estimates and 2000 population projections. These parameters establish the different scenarios for calculating the market saturation rates; 2) Calculates total market saturation rates required to fill the subject's 192 beds and all other existing competitive senior facilities (estimated at 1,779 beds); 3) Evaluates the market environment of the subject property given the calculated saturation rates. Our experience in comparable markets, indicates the following regarding saturation rates.
Estimate of Overall Saturation Rate Market Demand --------------- ------------------- 0 - 10% Lightly Competitive 10 - 20% Moderately Competitive 20 - 30% Heavily Competitive 30%+ Extremely Competitive
Our calculated market saturation rates (near 30%) for the subject market area suggest a heavily competitive market. Overall, the subject market area can be characterized as having a large supply of older generation retirement units serving a very large (due to Rossmoor) and affluent, and growing age and income eligible senior population. It is important to note that saturation analysis is only a tool used to measure overall market saturation. It does not consider any potential competitive advantages that a specific facility might offer. Saturation rates can also be calculated using different factors/scenarios. Our methodology of calculating market saturation rates is based on our experience in analyzing the feasibility of numerous congregate senior housing developments. 39 CONCLUSIONS Overall, we noted the following regarding the market environment of Montego Heights Lodge: 1) The calculated saturation rates suggest a heavily competitive market environment. However, market area occupancy rates are strong at most projects although the subject has a soft census. This is due to its older age, large number of units and monolithic unit mix. The overall average occupancy of all projects surveyed was about 96%. The market's strong demographics (size, affluence) are countered somewhat by a weak local economy which makes seniors on fixed incomes more hesitant to consider the congregate senior housing option and less likely to recognize paper losses on homes which have declined in value from 1989 peaks; 2) The subject has a current occupancy of 87% and rising in the past 12 months. The subject has established a market position as a well run, middle market project with reasonable rents. The subject's physical plant is below average in comparison to the other comparable projects in its market. Most of the locally competitive projects are newer and have a less institutional living environment and more varied unit mix than the subject. The subject is also somewhat competitively hurt by its greater distance from the Rossmoor senior subdivision, with its significant concentration of seniors; 3) The subject market area is projected to experience a good increase of 13.4% (7,986/7,045) in the age and income eligible target market in the next five years; 4) The subject is owned and operated by ARV Housing Group, one of the leading owner/operators in highly saturated market areas; 5) The subject offers assisted living amenities on an a la carte basis (three different levels of assisted living care) which is not typical in the market area (most other projects charge one flat higher rent). This is a competitive advantage for the subject as residents only need pay for assisted living amenities when needed and at the level needed. These specific conclusions are addressed more fully and used to project pro forma income and expense cash flows in the Income Approach section of this report. 40 HIGHEST AND BEST USE Highest and best use is defined as that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. The highest and best use concept must also give recognition of that use to community environment and to community development goals, in addition to wealth maximization of individual property owners. The highest and best use of the land or site, if vacant and available for use, may be different from the highest and best use of the existing improved property. This will be true when the improvement is not an optimum use and yet makes a contribution to total property value in excess of the value of the land only. In order to determine the property's highest and best use, it is necessary to analyze the factors discussed below. AS VACANT The site's physical characteristics are similar to those found throughout the area in terms of size (average), topography (sloping), exposure (fair) and access (fair). The total land area is large enough to support most other types of development and it is located near but not on a major thoroughfare. The site is probably too small for a lower density residential subdivision. Therefore, the site's physical characteristics do not seem to limit many development alternatives. The subject site is currently zoned C-O, a commercial office/professional zoning classification. This is not inconsistent with other mixed use development along Montego Drive to the east (including medical offices and a nursing home, both within the sphere of influence of the nearby John Muir Hospital), but is not consistent with our experience with the zoning of most sites for senior housing (usually high density residential). The subject is an appropriate transitional land use to apartments to the west and south. It is likely that Walnut Creek would allow many alternate light office, institutional and residential uses on the subject site. The subject's 40.2 units per acre density is misleading due to its small, all studio unit mix. Extreme high density residential or retail land uses are unlikely for the site. Finally, the site itself is not known to be affected by significant easements or encumbrances. In determining which possible use of the land represents the highest and best use of the site, we have analyzed those physical and legal factors affecting the site. It is then necessary to analyze not only the feasibility of potential alternate development but determine which types of these developments is maximally feasible. Our analysis of the congregate housing market in the area indicates a strengthening local market and generally good occupancies, including the subject's below average current 86% occupancy. Also, a large increase in the number of age and income eligible seniors over the next five years suggests adequate long term demand for well run projects like the subject. The subject is a profitable project though it is in the middle to lower tier of senior housing facilities in its market. The subject, if it can be filled, would be more feasible than alternate residential uses due to its higher margin per unit and higher density. The subject is also more profitable than almost all possible institutional land uses. However, uncertainties about the depth of the local market demand for smaller, lower rent units, a competitive market and a flat 41 regional economy suggest that the subject (or any alternate commercial/apartment land use) would not clearly be built in 1995. Few to no senior housing projects have been built anywhere in California in the last five years although this is beginning to change in 1995. An owner of the subject site would probably develop a senior housing use on the site although the decision is not clear. Therefore, in our opinion, the highest and best use of the site as vacant in early 1995 is probably to develop a senior housing project on the subject site. AS IMPROVED Our experience in comparable projects indicate that a senior project of 192 beds is more than large enough to achieve operating economies of scale. In fact, the subject's larger number of units has been factor in its inability to achieve higher occupancies. Higher densities for the site would generate difficulties in meeting parking and density requirements with Walnut Creek. Also, short term demand for additional middle market assisted living units probably does not exist in the local market as indicated by the subject's SSI census and occupancy. Considering the factors noted above, the purpose of this appraisal (to value the subject as is) and because the subject improvements clearly add value over and above the land alone, we have concluded that the highest and best use of the site, as improved, is probably as the subject site as built and operating. The existing improvements and living environment are competitive and functional for congregate and assisted living uses. The subject's overall quality, unit mix and unit sizes (though not optimal given their smaller size and limited variety), common areas, parking and landscaping are average to below average in the local senior housing market which is dominated by several newer projects. 42 SITE VALUATION In order to estimate the fair market value of the subject site, a Sales Comparison Approach is utilized. Recent sales and listings/offers of vacant land considered somewhat comparable to the subject in location, zoning, and utility were analyzed. Adjustments are made as necessary for: date of sale, location, financing terms, physical characteristics such as size, shape, utilities and topography, and development limitations such as zoning restrictions, easements and encumbrances. A number of sales were reviewed in order to determine the market value of the subject site. We have considered the sales of local vacant land sites with somewhat comparable land uses, zoning and locations. In general, we noted few recent vacant land sales in the area due to the lack of recent development activity. Those sales that were considered most comparable are presented in a summary grid on a following page and detailed in the Addenda of this report. Comparable Sale No. 1 is a current listing located at the southeast corner of Ygnacio Valley Road and Tampico, adjacent to the subject to the northwest. The 43,560 square foot parcel is currently being listed for $653,400 or $15.00 per square foot. The site was to be combined with Sale No. 2 for a medical office building and 12 townhomes development. These plans were recently terminated and this parcel was relisted for sale. The site has major thoroughfare frontage and a smaller size, both factors suggesting downward adjustment to the subject. Comparable Sale No. 2 is located along Ygnacio Valley Road, next Sale No. 1 and just north of the subject. The 43,996 square foot site was formerly in escrow (the contracted sale price was not disclosed) with Sale No. 1. The site was formerly listed for sale at $550,000 or $12.50 per square foot. The site has yet to be relisted for sale. Like Sale No. 1, the site's major street frontage and smaller size suggests downward adjustment to the subject although it has no current (and none would likely be allowed) access from Ygnacio Valley Road. This site was to be combined with Comparable Sale No. 1, however, due to lack of access to the site, the pending sale fell through. Comparable Sale No. 3 is located at 123 Brodia Way about five blocks southeast of the subject. The 49,658 square foot parcel sold in March, 1995 for $720,000 or $14.40 per square foot. The site is zoned for low density residential and several single family lots are available for sale in the adjacent area. In comparison to the subject, this site requires downward adjustment for its smaller parcel size and upward for its less intensive zoning and land use (despite its R-4 zoning). Comparable Sale No. 4 is located at 3073 N. Main Street, about 1.5 miles northwest of the subject near the northern Walnut Creek city limits. The 44,431 square foot site sold in December, 1993 for $19.06 per square foot. The site was developed with 36 apartments although it is zoned for a commercial use in a mixed use commercial/residential neighborhood, along a major thoroughfare. Downward adjustment to the subject is suggested by its smaller parcel size, level topography and major street frontage and location in a commercial area despite a similar land use and density to the subject. 43 MONTEGO HEIGHTS LODGE VACANT LAND SALES
Sale Price Proposed Sale Size-SF Proposed -------------- Density - No. Location/APN Date Sale Price (Acres) Development SF Unit Zoning Units/Acre - --- ------------ ---- ---------- ------- ----------- -- ---- ------ ---------- 1. SEC Ygnacio Valley Road Listing $ 653,400 43,560 Unknown $15.00 N/A P-D N/A & Tampico (1.00) Walnut Creek 140-026-024 2. Ygnacio Valley Road, Formerly $ 550,000 43,996 12 Townhomes $12.50 N/A C-O N/A East of Tampico in Escrow (Old Listed (1.01) (Portion) Walnut Creek (1995) Price) 140-026-021 3. 123 Brodia Way 3/95 $ 720,000 49,658 Low Density $14.50 N/A R-4 N/A Walnut Creek (1.14) Residential 140-170-006-5 4. 3073 N. Main Street 12/93 $ 850,000 44,431 36 Apartments $19.06 $23,611 C-C 35.3 Walnut Creek (1.02) 184-462-018 S. 1400 Montego Drive - - 213,180 169 Senior - - C-O 40.2 Walnut Creek (4.89 gross); Housing Units 140-250-024 182,952 (4.20 net)
44 Before adjustment, the sales discussed above indicate a sale price per square foot range of approximately $12.50 to $19.06. The above adjustments to the comparable sales can be summarized as follows:
Sale Price/ Comp No. SF Material Adjustment - -------- ----------- ------------------- 1 $15.00 Downward (list/sale price differential, major street frontage, parcel size) 2 $12.50 Downward (list/sale price differential, major street frontage, parcel size) Upward (no site access) 3 $14.40 Downward (parcel size); Upward (density) 4 $19.06 Downward (parcel size, zoning, location, topography)
The overall degree of comparability of these sales to the subject is only fair reflecting the lack of recent comparable vacant land sales in the immediate area. Overall, Comparable Land Sale Nos. 1 and 2 are most similar to the subject in location, but neither reflects on actual consummated sale transaction. Sale No. 3 is somewhat similar to the subject in location but has a less intensive land use. Sale No. 4 has a density similar to the subject, but is located on a heavily travelled street and is located in a commercial area. All of the sales are smaller parcels than the subject. After considering the specific location and density of the subject site and the evidence provided by the adjusted comparables and recent trends in land values, it is concluded that the fair market value of the fee simple interest for the subject site as of July, 1995, is at a rate of $15.00 per square foot, or for the subject's 182,952 net square feet, an overall site value of $2,744,280 ($15.00/SF x 182,952/SF) or $16,238 per unit. 45 COST APPROACH The Cost Approach considers an estimate of the fair market value of the land, the direct and indirect replacement costs (new) of the improvements, entrepreneurial profit, and accrued depreciation from all causes. Land value is taken from the Site Valuation section of this appraisal. Sources for replacement costs of improvements include: (1) Cost bids or reported actual recent cost of the subject; (2) Actual costs of recently completed comparable improvements; (3) Local contractors' opinions; (4) Marshall and Swift Computer Data Base; and, (5) Marshall and Swift (monthly updated) Cost Manual. Entrepreneurial profit is a necessary element in the motivation to construct improvements. In estimating any accrued depreciation, the appraiser takes into consideration: age, condition, functional utility, detrimental external factors, and any existing leases with contract rent below fair market (economic) rent. The sum total of land costs, direct improvement costs, indirect costs and entrepreneurial profit is the estimated replacement cost new. Subtracting any required depreciation from the replacement cost new indicates the value by the Cost Approach. DIRECT COSTS The estimated building cost per square foot replacement cost new in 1995 for the subject improvements is derived from the Marshall Cost Data Service (and comparable projects as a part of total costs) as calculated below:
Class D, Average Quality Home for the Elderly (Sec. 11, Page 17) -------------------- Base Cost/SF $ 54.16 Sprinkler Adjustment 1.20 HVAC Adjustment (1.20) ---------- $ 54.16 Location Multiplier x 1.23 Time Multiplier x 1.05 ---------- Adjusted Base Cost/SF $ 69.95 Square Footage - GBA x 99,897 ---------- Adjusted Base Cost $6,987,559 ==========
The indicated base rate for the replacement cost new per square foot in 1995 for the existing improvements is $69.95. Our estimate of the base building cost on a per square foot basis includes architectural and engineering fees, overall construction financing cost and operational 46 overhead. They do not include unusual construction and fixtures, loan points, pre-marketing costs, furniture and city/public utility fees. In addition to the adjusted base construction for the building improvements, an allowance for furniture and equipment was included to arrive at total direct construction costs of the development. The allowance for furniture and equipment was estimated using an analysis of the Marshall Cost Manual allowance and industry experience (as shown below) or $2,500 per unit ($422,500 for 169 units). INDIRECT COSTS Indirect Costs - In addition to these direct building costs, we have estimated indirect costs at 7% of total direct building costs. Indirect costs include legal/accounting/appraisal fees, loan fees, premarketing advertising and promotion, city/public utility fees and a contingency fund. The above estimates reflect a replacement cost new (without land or profit) of $8,120,863 or $81.29 per square foot or $48,052 per unit. This is compared using an overall reasonableness test (no specific adjustment is made) to other recently built comparable congregate senior projects as follows:
Total Total No. of Cost/SF Cost/Unit FF&E Project Units Location (w/o Land)* (w/o Land)* Unit - ------- ------ -------- ----------- ----------- ---- Windsor ALF 75 Windsor $111.89 $71,904 $3,333 Park Ridge 93 Vallejo $79.40 $71,138 $2,688 Palm Court 100 Culver City $97.41 $84,000 $3,000
*Includes FF&E, shown separately for comparison purposes. The estimated replacement cost new for the subject is within the lower end of the range of the costs incurred at these similar projects on a square foot basis and well below the range on a per unit basis which is reconcilable given the subject's smaller units sizes, more modest quality and all studio unit mix (one bedrooms are combined studios). Finally, an entrepreneur or developer will typically expect to be compensated for the time, money, and risk expended in bringing a project to a completed income producing unit. Profit typically ranges from 10% to over 25% of the total construction and land costs, depending on the type of property, anticipated absorption or stabilization period, risk, and the size of the project. A modest allocation of 10% for entrepreneurial profit or toward the bottom of the range is considered appropriate for the subject given that the highest and best use of the subject as vacant in 1995 is to probably develop a senior housing project although this decision is not clear cut. The large number of subject units, its more monolithic unit mix and current overall market conditions mute the project's rent/profit potential as evidenced by the subject's lower estimated stabilized occupancy. 47 DEPRECIATION Our site inspection noted no material physical curable or economic depreciation. We did, however, note the following forms of depreciation. Physical Incurable Depreciation - An amount for physical incurable depreciation (or the normal wear and tear on improvements as they age) is appropriate considering the subject's 17 year chronological and effective age, calculated as follows:
Direct Building Cost FF&E --------------- ---------- Base Cost New $6,987,559 $ 422,500 Plus: Indirect Cost Allocation x 1.07 x 1.07 Plus: Profit Allocation x 1.10 x 1.10 ---------- ---------- Depreciable Base $8,224,357 $ 497,283 Depreciation Estimate (per MVS) 25% 50% ---------- ---------- Total Physical Incurable Depreciation $2,056,089 $ 248,641 ========== ========== Total $2,304,730 ==========
The depreciation percentages are based on our site inspection and Marshall Valuation estimates considering the subject's current 17 year old effective age (5 years for FF&E considering ongoing replacement) and 45 year old total economic life (10 years for FF&E). Physical incurable depreciation must be deducted from estimates of cost new to arrive at an as is valuation. Functional Incurable Depreciation - As mentioned throughout this report, the subject's large number of units and monolithic unit mix are factors in the subject's lower estimated stabilized occupancy and less favorable competitive market position. These influences were factors in our conclusion of a 90% stabilized occupancy rate for the subject as discussed in the Income Approach section of this report. In our opinion, the capitalized value of the lost income from the higher vacancy is a reasonable approximation of the lost value attributable to the subject unit mix. This is calculated as follows: 48 Projected Stabilized Occupancy (90%) - No. of Beds 172.8 Market Area Typical Occupancy (95%) - No. of Beds 182.4 -------- Excess Beds (Small Units) 9.6 Estimated Annual Lost Revenue ($1,305/Month) $150,336 Less: Expenses Savings (25%) ($ 37,584) --------- Estimated Annual Lost Income $112,752 ======== Capitalized Value .12 -------- Estimated Functional Incurable Depreciation $939,600 ========
SUMMARY Our estimate of value by the Cost Approach is summarized on the following page with an indicated value conclusion as is, in July, 1995 of $8,707,327, called $8,700,000. 49 MONTEGO HEIGHTS LODGE COST APPROACH CALCULATION (CALCULATOR METHOD) Total Land Value (182,952 Net SF @ $15.00/SF) $ 2,744,280 DIRECT BUILDING COSTS Building Cost $6,987,559 Furniture & Equipment (169 Units @ $2,500/each) 422,500 ----------- Total Direct Building Costs $ 7,410,059 ----------- Total Direct Building and Land Costs $10,154,339 Indirect Costs - 7% $ 710,804 ------------ Total Construction and Land Costs $10,865,143 Plus Entrepreneurial Profit @ 10% $ 1,086,514 ----------- Total Cost New (Including Land) $11,951,657 LESS DEPRECIATION Physical Curable 0 Physical Incurable ($2,304,730) Functional Curable 0 Functional Incurable (939,600) External Obsolescence 0 ------------- Total Depreciation ($ 3,244,330) ------------- Indicated Value, Cost Approach, As Is $ 8,707,327 =========== Rounded to $ 8,700,000
50 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (7/95 to 6/96) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at July, 1995 based on the projected July, 1995 to June, 1996 net income. The theory is that the investor purchasing the property in July, 1995 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of this appraisal and summarized on a following page. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The June, 1995 census reveals an occupancy of 86.5% or 166 beds out of a maximum current configuration of 192 beds. This occupancy represents an increase from the low 80%'s over the past 12 months. 51 MONTEGO HEIGHTS LODGE SUMMARY OF SUBJECT RENT CENSUS @ 6/19/95
Private-1BR Private-Studio Semi-Private SSI Total (Units) (Units) (Beds) (Beds) ----- ----------- -------------- ------------ ------ Number Units - Rented 23 104 26 13 166(86.5%) Rent Range $1,750-$1,850 $1,100-$1,400 $825-$1,113 $691 $691-$1,850 Rent Average $1,777 $1,337 $972 $691 $1,290 Potential Total Rent-Rented $490,440 $1,668,300 $303,180 $107,796 $2,569,716 Number Units - Vacant (1) 1 18 5 2 26(13.5%) Rent Range $1,750 $1,325-$1,400 $825-$850 $691 $691-$1,750 Rent Average $1,750 $1,358 $843 $691 $1,223 Total Potential Rent-Vacant $21,000 $293,400 $50,600 $16,584 $381,584 Total Units/Beds 24 122 31 15 192(100%) Gross Potential Rent-Total $511,440 $1,961,700 $353,780 $124,380 $2,951,300 Per Unit/Bed $1,776 $1,340 $951 $691 $1,281
NOTES: (1) Vacant units include: Private 1BR - Unit 326/28 (1 Unit); Private Studio - Units 101, 149, 157, 204, 215, 218, 241, 264, 266, 268, 301, 308, 339, 403, 414, 424, 427, 428 (18 Units); Semi-Private - Beds 103, 135, 142, 144, 221, 262, 265 (7 Beds); allocated to SSI in ratio of currently leased beds. 52 Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $691 per month and not market determined. The comparison of the subject rents (with and without the average assisted living surcharge) to the market area projects surveyed accumulates the monthly rental of all facilities, the average of the 11 projects surveyed and the most comparable projects to the existing Montego Heights Lodge. Of the projects surveyed, Comparable Nos. 2 - Valley View Lodge (a sister ARV project), 5 - Chateau Pleasant Hill and 7 - Concord Royale would be most similar to the subject in age, scale, amenities, quality and unit mix. Overall, the subject's private room rents (with and without the assisted living surcharge) are generally within the range of the most comparable properties and below the average (for both congregate and assisted living) of all facilities. The subject's congregate studio and one bedroom rents are slightly below the average of all projects surveyed (about 15% to 20%). Congregate semiprivate living is generally not offered at other projects (with the exception of Valley View Lodge, an ARV sister project). The subject's average assisted living rents are also below the average for semiprivate and private rooms (also about 15% to 20%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is 87% (and rising) at the current rents. In our opinion, the subject's rents have not been material factors in keeping occupancy below the more typical 92% to 95%. The subject's lower rents are reasonable given the subject's age and condition, large number of units and more monolithic unit mix. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 2% during the 7/95 to 6/96 projection period, reflecting market conditions and the subject's history. The 2% estimate in the next 12 months represents an average 4% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $450 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 51 residents pay for living assistance at an approximate average of $439 extra rent per month. Our cash flow projections for the subject estimate a stabilized 31% gross 53 MONTEGO HEIGHTS LODGE COMPARATIVE RENT ANALYSIS ACLF - CONGREGATE RENTS
Private - 1BR Private - Studio ---------------------------------- ---------------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 1 $1,885 2* $1,400-$1,700 2* $1,850 3 $1,575 3 $1,850-$2,500 5* $1,295-$1,700 5* $1,650-$2,000 8 $1,795-$2,095 6 $2,195-$2,495 11 $1,650-$1,795 8 $2,195-$2,495 11 $1,825-$2,300 Range $1,650-$2,500 $1,295-$2,095 Average $2,070 $1,658
AL - ASSISTED LIVING RENTS
Private - 1BR Private (Studio) Semi-Private ------------------------------ ------------------------------ ----------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ --------- ------------ 1 $2,185-$2,885 2* $1,550-$2,700 2* $1,000-$1,850 2* $2,000-$2,850 3 $2,850 3 $2,150-$2,850 3 $3,300 5* $1,595-$2,200 4 $1,800 4 $2,000-$2,200 6 $2,450-$2,950 5* $2,495-$3,495 5* $1,950-$2,500 7* $1,200-$1,800 6 $1,650-$1,950 8 $2,495-$3,495 8 $2,095-$3,195 7* $850-$950 11 $2,850 9 $1,600-$2,200 9 $850 10 $2,000-$2,500 10 $1,500-$1,800 11 $2,750 11 $1,600 Range $1,950-$3,495 $1,200-$3,195 $850-$3,495 Average $2,633 $2,291 $1,724
Private - 1BR Private - Studio Semi-Private ------------- ---------------- ------------ Subject Rented Beds - Subject Range $1,750-$1,850 $1,100-$1,400 $825-$1,113 Subject Average $1,777/$2,227** $1,337/$1,787** $972/$1,422** (23 Units) (104 Units) (26 Beds) Subject Vacant Beds - Subject Range $1,750 $1,325-$1,400 $825-$850 Subject Average $1,750/$2,200** $1,358/$1,808** $843/$1,293** (1 Unit) (19 Units) (6 Beds)
*Comparable Nos. 2 - Valley View Lodge; 5 - Chateau Pleasant Hill; and 7 - Concord Royale are most similar to the subject. **Includes average assisted living surcharge of $450 per month. 54 utilization (60 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income:
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- -------------- at 6/95 $439 51 (net) - at 7/95 to 6/96 $450 60 (gross) $324,000
In addition to total potential gross room revenue, we have included miscellaneous income at 1.5% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 6/95 86.5% 13.5% 7/95 to 6/96 (Stabilization) 90.0% 10.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 172.8 residents or an occupancy/vacancy of 90.0% (172.8/192). This conclusion is slightly above the current occupancy (166 beds) but is consistent with the subject's recent occupancy trends, occupancies at similar projects and operator projections. Because the difference in the currently occupied beds and our stabilized estimate of occupied beds is small (7 beds) and the time needed to achieve this additional occupancy is projected to take less than 6 months, in our opinion, it is not necessary to specifically quantify a discounted cash flow for a few months as the impact on the reported value conclusion would be immaterial. The higher than typical and average market vacancy factor (5% to 8%) reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (lower rents in a more affluent market) and large number of beds (including physical plant deficiencies) mitigate against a lower stabilized vacancy estimate (or higher occupancy). 55 OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1993, 1994, and four months of 1995) and budget (1995) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at July, 1995 ($8,200,000 times the tax rate of 1.0371% plus approximately $1,173 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.0% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 12% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 7% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 4% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 2% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than typical but reflects the subject's lower occupancy, high turnover (relative to all senior properties) and weak local real estate conditions, requiring a more intensive marketing effort; Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; 56 MONTEGO HEIGHTS LODGE HISTORICAL INCOME AND EXPENSE
Historical ------------------------------------------------------------------------ Operator 4 Months Goal Year Ending Year Ending Ending 1995 Budget REVENUES 12/93 12/94 4/30/95 Annualized 1995 - -------- ----------- ----------- --------- ----------- ---------- Rental Income $ 2,409,320 $ 2,424,953 $ 871,676 $ 2,615,028 $ 2,736,955 Assisted Living Income 224,506 271,387 95,162 285,486 396,000 Non-Operating Revenue $ 40,777 $ 38,982 $ 13,569 $ 40,707 $ 34,862 ----------- ----------- --------- ----------- ----------- Total Revenues $ 2,674,603 $ 2,735,322 $ 980,407 $ 2,941,221 $ 3,167,817 EXPENSES (1) Real Estate Taxes $ 103,349 $ 110,291 (2) (2) $ 104,494 Insurance 28,252 31,714 (2) (2) 35,251 G&A 37,374 60,293 (2) (2) 59,794 Utilities 199,945 191,180 (2) (2) 193,440 Payroll/Benefits 866,227 913,460 (2) (2) 962,563 Maintenance 78,684 80,636 (2) (2) 76,320 Activities 17,004 14,889 (2) (2) 17,697 Marketing 21,991 26,654 (2) (2) 28,100 Laundry & Linen 17,121 12,974 (2) (2) 18,738 Dietary 230,260 222,738 (2) (2) 241,106 Supplies 52,634 48,343 (2) (2) 50,904 ----------- ----------- --------- ----------- ----------- Total Operating Expense $ 1,652,841 $ 1,713,172 $ 596,591 $ 1,789,773 $ 1,788,407 (61.8%) (62.6%) (60.9%) (60.9%) (56.5%) Net Operating Income $ 1,021,762 $ 1,022,150 $ 383,816 $ 1,151,448 $1 ,379,410 =========== =========== ========= =========== ==========+
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 57 Dietary - estimated at anticipated dietary costs to a typical operator or $8.50 per day per resident (172.8 occupied beds x $8.50/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 6.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 31% of the residents (about $9.25 per resident day for 54 residents); Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($422,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $63,375 is equal to 2.1% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 60.5% of effective gross income or $10,642 per occupied bed (172.8 beds). A comparison to similar congregate/assisted living properties before management fees and reserves illustrates the following:
Inflated Stabilized Per to 1995 Location Expense Ratio Resident/Yr. at 4%/Yr. -------- ------------- ------------ --------- 10 ARV Properties California 61.7% $ 9,782 (1994) $10,173 13 Angeles Housing Properties National 56.6% $ 8,966 (1993) $ 9,698 Greenhills Millbrae 55.7% $ 8,234 (1992) $ 9,262 Meadows Napa 56.3% $ 8,418 (1992) $ 9,469 Country Inn Fremont 52.5% $ 7,718 (1992) $ 8,682 Westmont Santa Clara 57.7% $ 9,520 (1992) $10,296 Canyon Hills Club Anaheim 61.2% $11,918 (1994) $12,395 Courtyard San Marcos 51.6% $ 9,181 (1993) $ 9,930 6 Facility Averages 55.8% $10,006 Subject - 1993 Historical 61.8% $10,330 Subject - 1994 Historical 62.6% $10,575 Subject - 1995 Historical Annualized 60.9% $10,847 Subject - 1995 Budget 56.5% $10,338 Subject Projected (7/95 to 6/96) 60.5% $10,642
58 As illustrated, the projected expenses for the subject are slightly above the average of the expense histories of the projects listed above and slightly below the averages of 10 other ARV facilities. The subject will always have slightly higher expenses on a percentage of income basis because of its lower revenue base (smaller units, SSI census) and higher on a per patient basis due to the location within a market area of higher operating costs/rents. Our projections consider the experience at the comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The survey indicated a median annual cost per unit of $10,577 before management fees ($11,541 total less $964 in management fees). This compares to our per unit estimate for the subject of $10,882 ($1,839,081/169) in the next 12 months. Finally, a reconciliation of our adjusted period one (7/95 to 6/96) projected expenses to 1995 actual annualized expenses illustrates the following: Actual Total Expenses (1/95 to 4/95 Annualized) $1,789,773 ========== Operator Budget (1995) $1,788,407 ========== Projected Total Expenses Per SLVS (7/95 to 6/96) $2,054,369 Less: Management Fees ($ 151,963) Less: Replacement Reserves ($ 63,375) ---------- Adjusted Projected Total Expenses (7/95 to 6/96) $1,839,031 ========== Difference (over 1995 actual, reflects inflation, higher occupancy) +2.8% (over 1995 budget, reflects inflation) +2.8%
CAPITALIZATION PROCESS Because Montego Heights Lodge is being appraised as of June, 1995 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of July, 1995 to June, 1996 is capitalized at a rate of 12.0% to get an indicated total property value at July, 1995. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 11% to 15%. These are illustrated in sales of comparable facilities in the Sales Comparison Approach of this report and are summarized as follows: 59
Comparable Indicated Sale No. Property Cap Rate -------- ---------- --------- 1 Oak Tree Villa 12.3% 2 El Camino Gardens 11.2% 3 Casa Sandoval 9.0% 4 Lomita Lodge 12.2% 5 Carson Oaks 12.4% 6 Park Ridge 11.3% Range 9.0%-12.4% Average 11.4% 25 Facility Average 12.5%
In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 10.0% interest with an amortization term of 20 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .1158. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 15%. The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .1158 .0811 Equity 0.30 x .15 .0450 ----- 1.0 x Overall Rate .1261 OAR 12.61%
60 These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.4% 25 Statewide Sales 12.5% SLVS Investment Survey 12.1% Band of Investment 12.61%
Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in its lower stable occupancy (90%) and cash flow (including a lower risk SSI census) and considering the subject's market position (below average rents, full assisted living licensing, older physical plant and more monolithic unit mix), which is derived from the subject's established niche as a middle market, average quality assisted living project in the area, and considering the affluent local market, we have concluded that 12.0% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at July 14, 1995 of $8,215,767, rounded to $8,200,000 ($48,521/unit). 61 MONTEGO HEIGHTS LODGE PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (7/95-6/96) Average Occupancy 90.0%(172.8 Beds) Average Net Rental (All Beds) $1,305 Potential Gross Rent Income - 1BR Private - 24 Units @ $1,811/Mo. Avg. $ 521,669 Studio Private - 122 Units @ $1,367/Mo. Avg. 2,000,934 Semiprivate - 31 Beds @ $970/Mo. Avg. 360,856 SSI - 15 Beds @ $691/Mo. Avg. $ 124,380 ---------- Potential Gross Rent Income $3,007,839 Plus: Assisted Living Surcharges (60 Beds @ $450/mo.) $ 324,000 Plus: Miscellaneous Income (1.5% of PGRI) $ 45,118 ---------- Potential Gross Income $3,376,957 Less: Stabilized Vacancy & Collection Losses - 10% ($ 337,696) ---------- Effective Gross Income $3,039,261
% of EGI -------- Expenses - Real Estate Taxes - $ 86,215 Insurance 1.0% 30,393 Management 5.0% 151,963 G&A 12.0% 364,711 Utilities 7.0% 212,748 Maintenance 4.0% 121,570 Activity & Trans. 2.0% 60,785 Marketing 2.0% 60,785 Housekeeping 6.0% 182,356 Dietary $8.50/PRD 536,112 Personal Care 6.0% 182,356 Replacement Reserves - $ 63,375 ---------- Total Expenses $2,053,369 (67.6%) Stabilized Net Operating Income $ 985,892 Capitalization Rate .12 ---------- Capitalized Value (Fee Simple) $8,215,767 ========== Called $8,200,000 Per Unit $ 48,521
62 SALES COMPARISON APPROACH The Sales Comparison Approach is a method of comparing the subject property to recent sales and/or listings of similar types of properties located in the subject or competing areas. Each of these sales must be analyzed to establish estimate elements of comparability. The reliability of this technique depends on 1) the degree of comparability between the subject and the sales properties; 2) the length of time since the sales were consummated; 3) the accuracy of the sales data; and, 4) the absence of unusual conditions affecting the sale. On the following page, we have included 25 sales of congregate senior housing properties which can be considered somewhat similar to the subject. The purpose of including this listing is to provide the reader with some context of western US senior housing sales beyond those specifically discussed below. This additional information can be helpful because of the special purpose nature and general illiquidity of the senior housing market. Some of the sales in the last 18 months represent REO's. Some project buyers present in today's market are still "bottom fishing" where distressed properties can be purchased at substantial discounts from replacement cost. However, these buyers have a shrinking supply of properties available to choose from. This has resulted in an overall trend of decreasing cap rates (higher sale prices). Those more recent transactions considered most comparable to the subject are summarized on the following page and discussed in greater detail in the Addenda of this report. The sale prices noted below are discussed and reported on a sale price per unit (total going concern) basis. Comparable Sale No. 1 is Oak Tree Villa in Scotts Valley which just recently sold in June, 1995 for $11,900,000 or $58,900 per unit. The 202 congregate/assisted living project, built in 1988 was only 72% occupied at the date of sale with an indicated cap rate at a full occupancy of 12.3%. The project has a high quality physical plant although it is located in a relatively less densely populated area (20 mile south of Silicon Valley; about 5 miles north of Santa Cruz). 20% of the units of this project are allocated to low income (HUD) residents. Comparable Sale No. 2 is El Camino Gardens in Carmichael which sold in May, 1995 for a contracted price of $9,350,000. An estimated $650,000 in deferred maintenance makes the effective sale price of the project approximately $10,000,000 or $34,965 per unit. This 286 ACLF/112 ALF, 1984 built project, was about 82% occupied at the time of sale and has an average physical plant. The property had an indicated cap rate at a stabilized occupancy of 11.2%. The property was purchased by entities affiliated with the subject owner (ARV Housing). The lower cap rate of this sale is partially explained by the buyer's plans to substantially upgrade the property in order to increase the assisted living census. Comparable Sale No. 3 is the February, 1995 sale of Casa Sandoval which sold at auction for $15,000,000 or $63,205 per unit. The 1989 built, Hayward project includes 238 total units. The property was only 81% occupied at the sale date, reflecting a slightly forced sale due to the financial difficulties of the prior owner. The property was underperforming at the date of sale and the buyer plans an aggressive conversion of many units of the project to assisted living. The overall quality of this project is average despite its newness. The indicated cap rate of the sale has been estimated at a low 9.0% at a stabilized occupancy (before consideration of any assisted living conversion). 63 MONTEGO HEIGHTS LODGE COMPARABLE IMPROVED SALES
Indicated Age/No. Sale Price/ Sale Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF @ Sale Rate - --- ------------- -------- ---- ---------- ----- -------- ---------- ------- 1. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA 2. El Camino Gardens 1984/ 5/95 $10,000,000 $34,965 $62.19 82% 11.2% (1) 2426 Garfield 286 Carmichael, CA 3. Casa Sandoval 1989/ 2/95 $15,000,000 $63,025 $69.23 81% 9.0% (1) 1200 Russell Way 238 Hayward, CA 4. Lomita Lodge 1970's/ 12/94 $1,350,000 $51,923 $135.00 81% 12.2% (1) 225 N. Lomita 26 Ojai, CA 5. Carson Oaks 1989/ 7/94 $4,200,000 $55,263 $66.95 95% 12.4% 6725 Inglewood Avenue 76 Stockton, CA 6. Park Ridge 1991/ 7/94 $5,785,000 $62,204 $68.10 55% 11.3% (1) 2261 Tuolumne 93 Vallejo, CA
(1) Estimated at 92% occupancy 64 Comparable Sale No. 4 is the December, 1994 sale of Lomita Lodge, a small assisted living project located in Ojai. The 26 unit project sold for $1,350,000 or $51,923 per unit. The property was originally built in the 1940's and expanded in the 1970's. The project has high rents but was only 81% occupied at the date of sale. The indicated cap rate at a stabilized occupancy is 12.2%. Comparable Sale No. 5 is the July, 1994 sale of Carson Oaks, a 76 unit congregate senior project located in Stockton (bought by the same buyer as Comparable No. 1). Stockton is a Central Valley community with an overall affluence below Livermore. The 1989 built project was purchased for $4,200,000 or $55,263 per unit. The project was 95% occupied at the date of sale. This project has an overall average to above quality, a weak location (behind a shopping mall) and can be considered a middle to upper middle market project. The sale price suggested an estimated capitalization rate of 12.4%. Comparable Sale No. 6 is the Park Ridge in Vallejo which sold in July, 1994 for $5,785,000 or $62,204 per unit. The 93 ACLF (including 14 licensed assisted living beds) is a recently built (1991), modern project in a generally less affluent Bay Area suburb. The project was only 55% occupied at the date of sale and has had a very difficult time leasing. The property could be considered mildly distressed. This is attributable to several factors including a crowded local competitive market, a weak real estate market and the project possibly being too high end for its market. The indicated overall capitalization rate of this sale at a 92% occupancy is estimated at 11.3%. The comparables described above indicate unit values of between $34,965 per unit to $63,025 per unit before adjustments. Overall, in reviewing these sales for comparability to the subject, we observed significant differences. Most notably, differences in location, physical plant, occupancy, and unit mix make direct and precise comparison to the subject property difficult. Therefore, in our opinion, the overall degree of comparability of these sales to the subject is only fair. Nevertheless, after the adjustments described below, these comparables should provide approximate parameters for an indicated value of the subject property. The first adjustment to the comparable sales (the yet to stabilize Sale Nos. 1, 2, 3, 4 and 6) reflects the difference in the stabilized occupancy of the comparables at their date of sale to the projected stabilized 90% occupancy of the subject. The amount of the adjustment is interpolated assuming an approximate 20% to 25% difference in value between an empty project and one that is stabilized. On a following page, we have also adjusted each of the comparable sales for the difference in the ratio of net income per the total number of units. These adjustments should provide an approximate value range from the subject. We have adjusted each comparable by the ratio of the estimated stabilized net income per unit of the subject ($5,834) to the net income per unit of the comparables. This ratio should theoretically reflect differences in stabilized occupancy, location and quality (through rents), unit mix and operating efficiencies (through expenses). 65 As illustrated, after adjustment, these sales indicate a value range for the subject of $46,974 per unit to $59,374 per unit (less the outlying Sale No. 3). This range provides approximate parameters for a value indication for the subject. In our opinion, given the above adjustments, the indicated value of the subject as is in July, 1995 is between $46,974 to $59,374 per unit, calculating to a total indicated fee simple value using a Sales Comparison Approach of $7,938,606 ($46,974/unit x 169 units) to $10,034,206 ($59,374/unit x 169 units), rounded to $7,950,000 to $10,050,000. As described in the Reconciliation and Conclusion section of this appraisal, due to significant differences in location, occupancy, quality and amenities package, our final value conclusion does not place great weight on this value estimate reflecting the general lack of comparability, large adjustments and wide range of indicated values. 66 MONTEGO HEIGHTS LODGE COMPARABLE IMPROVED SALES ADJUSTMENTS
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 ----- ----- ----- ----- ----- ----- Sale Price Per Unit $58,911 $34,965 $63,025 $51,923 $55,263 $62,204 Before Adjustment Occupancy Adjustment +10% +5% +5% +5% - +15% Net Income Per Unit -20% +49% +3% -8% -15% -17% Adjustment (Subject (1) ($ 5,834/ ($ 5,834/ ($ 5,834/ ($ 5,834/ ($ 5,834/ ($ 5,834/ NOI/Unit/Comp/NOI/Unit $ 7,256) $ 3,923) $ 5,653) $ 6,314) $ 6,851) $ 7,020) ------- ------- ------- ------- ------- ------- Sale Price Per Unit After Adjustment $51,842 $54,703 $68,162 $50,158 $46,974 $59,374 ======= ======= ======= ======= ======= =======
Range (Less Outlying Sale No. 3): $ 46,974 - $ 59,374 x 169 Units x 169 Units ---------- ----------- Indicated Value Range: $7,938,606 - $10,034,206 ========== =========== Called: $7,950,000 to $10,050,000
(1) Subject stabilized NOI/Unit - $985,892/169 Units 67 VALUATION OF FAVORABLE FINANCING The preceding valuation assumes conventional market financing. However, the subject includes favorable financing in the form of a deed of trust issued in 1978 ($3,683,200, 40 year note). The current balance due of the note is approximately $3,446,920. The present value of this financing must be added to our valuation estimates described above because a third party buyer of the subject should be willing to pay for the debt service savings accruing from this assumable note. Our estimate of the effect of the favorable financing is illustrated on the following page. These assumptions are as follows: Note Principal at 7/95: $3,446,920 Interest Rate: 7.5%, Fixed Note Term: 8/2018, Assumable Conventional Financing - Interest Rate: 9.5%, Fixed
To calculate the value of this favorable financing, we have extensively surveyed leading lenders (REITS, conventional banks, pension funds, FANNIE MAE lenders) in the senior housing industry to determine a conventional financing interest rate. The consensus of these lenders is that although conventional taxable financing of any projects and senior projects in particular is still difficult in mid 1995, that an average taxable interest rate of 9.5% to 10.0% would not be considered unreasonable given the specialized nature of a senior housing project. This is confirmed by a late 1994 survey of lenders as illustrated on the following pages and supporting an approximate 9.5% to 10.0% loan rate for senior housing properties. Therefore, considering recent downward trends in interest rates for senior housing properties, we have estimated a current market interest rate of 9.5%. Our calculations estimate the present value of the remaining monthly interest payment on net funds to be received from the bond financing discounted by the market interest rate less an approximation of the incremental costs to be incurred as part of the HUD financing compared to conventional financing (annual audits) and the current value of the current balance of required reserves. The total differential or contribution to value from the favorable financing is estimated at $621,765, rounded to $625,000 as calculated on the following page. COMPARABLE MARKET TRANSACTION As noted in the Special Conditions section of this report, actual market transactions involving the sale of senior housing properties and tax exempt financing are rare. We are familiar with the August, 1992 of The Meadows, located along Atrium Parkway in Napa. The 1988 built, 221 unit congregate facility was sold by Sacramento Savings and Loan to Old Fellows of Napa, Inc. (a not-for-profit) for $11,945,000 ($11,500,000 contracted sale price plus $445,000 sales transaction charges). The buyer partially funded the purchase with a $6,500,000 tax exempt bond issue 68 MONTEGO HEIGHTS LODGE VALUATION OF FAVORABLE FINANCING Present value of financing at market rate (9.5%): $ 3,446,920 Present value of financing at below market rate (7.5%): Present value of $26,171 (1) monthly payment for 23.05 remaining years at 9.5% market rate $ 2,916,912 ----------- Difference in present value of financing $ 530,008 Less: $6,000/year annual HUD audit charges (through 2018) discounted to 7/95 @ 9.5% ($ 55,325) Plus: Present value of replacement reserve balance @ 7/95 ($204,988) discounted to 7/95 @ 6.0% (9.5% market interest rate less 3.5% estimated interest earned on escrow funds) $ 148,326 ----------- Net Difference in present value of financing $ 623,009 =========== Called $ 625,000
(1) Monthly payment for $3,683,200, 40 years, 7.5% interest rate plus reserve obligations. 69 (floating interest rate, 30 year amortization). The value of this favorable financing was estimated at $1,100,000 using the same market financing comparison described above for the subject. This would suggest that the capitalized cash flow or going concern value of the property was about $10,845,000 ($11,945,000 less $1,100,000). Our appraisal value of the subject's going concern value was within 2% of this figure. This example provides some credibility (in addition to a theoretical analysis) to the methodology and conclusions set forth above for the subject. 70 RECONCILIATION AND CONCLUSION
Market Value As Is - 7/14/95 --------------- Indicated Value, Cost Approach $ 8,700,000* Indicated Value, Income Approach $ 8,200,000* Indicated Value, Sales Comparison Approach $ 7,950,000- $10,050,000*
*before addition of value of favorable financing The development of a final estimate of value involves judgment in a careful and logical analysis of the procedures leading to each indication of value. The judgment criteria are appropriateness, accuracy and quantity of evidence. The Sales Comparison Approach is most applicable when closely comparable properties are bought and sold in the market on a regular basis. We relied on the sales of somewhat comparable facilities to estimate value using this approach. However, due to overall property type illiquidity, differences in occupancy, location and components of income, direct comparison to the subject property is difficult as suggested by the wide range of indicated values. Considering these factors, the Sales Comparison Approach is considered to produce a less reliable indication of value. The Cost Approach is most applicable when the improvements are new or nearly new and where a few number of subjective adjustments must be made to reflect depreciation, if any. In estimating construction cost new, we relied on well documented general cost information provided by the Marshall Valuation Service which was generally supported by actual costs incurred at similar projects. Our estimate of land value is somewhat supported by the sale of similarly zoned vacant land parcels in the region. Adjustments for physical incurable and functional incurable depreciation are approximations but were estimated using reasonable analyses. Considering these factors and our Highest and Best Use conclusions, the Cost Approach is considered to produce a less accurate indication of value. This approach is also rarely relied on by investors in this type of property. The Income Approach is typically considered the strongest value indicator for properties purchased primarily for their income producing potential. This approach most accurately reflects the impact of stabilized occupancy rates for properties such as the subject. Comparable market rental rates and an analysis of the current census were available for the subject units to arrive at an estimate of fair market rent and gross income. Expense data was substantiated by historical data and comparable projects. Finally, our estimate of the capitalization rate is appropriate reflecting current market trends and the subject's overall average cash flow risk and market position. Overall, the Income Approach is considered a strong and only truly reliable indicator of value for the subject property. 71 After considering the factors leading to each indication of value, the Income Approach is considered to be the most appropriate for the purpose of this appraisal. The Sales Comparison Approach is given little to no weight due to the illiquidity of the market, shifting market trends and the wide range of indicated values. The Cost Approach is also given little to no emphasis, based on the deductions for depreciation and our highest and best use discussion. The final market value estimate of the fee simple total going concern interest of the subject property as is, on July 14, 1995, without the value of any favorable financing, is: EIGHT MILLION TWO HUNDRED THOUSAND ($8,200,000) DOLLARS The inclusion of an estimated $625,000 in value attributable to assumable favorable financing suggest a total reported valuation of $8,825,000. 72 ALLOCATION OF FINAL VALUE DETERMINATION TO COMPONENTS We have allocated our total going concern value determination to various components including real estate, business and personal property value. To allocate the going concern value estimate, we have utilized both the Cost and Income Approaches to estimate a reliable and reasonable allocation to each component. A summary of our allocation is illustrated below: Allocation of Final Going Concern Value Determination
As Is - 7/14/95 ------- Total Going Concern Value $8,200,000 (3) Personal Property (1) 200,000 Business Value (2) 1,225,000 ---------- Real Estate Value $6,775,000 ==========
(1) FF&E estimated from Cost Approach estimates less accrued depreciation. (2) Business value estimated from the calculated difference in value of the subject as is (full occupancy) compared to its value as if it were vacant as shown below. (3) Before addition of value of favorable financing. The personal property value is taken from the Cost Approach estimates set forth in Cost Approach section of this report. This estimate reflected a replacement cost new of $2,500 per unit (total of $422,500 FF&E cost new for 169 units) which must be adjusted to its current depreciated value. Given the estimated five year old average age of the subject's personal property items and ongoing replacement, we have estimated a 50% allocation for depreciation at 7/14/95 or an as is value of $422,500 x 50% = $211,500, rounded to $200,000. The business component of the subject value reflects the fact that the subject is a business requiring specialized management services such as meals, housekeeping and social activities represent complications in the operation of a senior housing facility and require specific managerial expertise. An appropriate method to estimate the business value component is to compare the value of the subject as is ($8,200,000) as a fully operating stabilized property to its estimated value as if it were empty, as estimated below ($6,975,000). The estimated business value would be the difference in these values or $1,225,000. 73 Approximate Valuation of Subject As If Empty @ 7/95
Period 1 Period 2 Period 3 (7/95-6/96) (7/96-6/97) (7/97-6/98) ----------- ----------- ----------- Average Occupancy 36.0% 72.0% 90.0% Potential Gross Income $3,376,957 $3,512,035 $3,652,517 Effective Gross Income $1,215,705 $2,528,665 $3,287,265 Total Expenses $1,438,178 $1,923,050 $2,222,191 ---------- ---------- ---------- Net Income ($ 222,473) $ 605,615 $1,065,074 ========== ========== ========== Discounted Value ($ 193,463) $ 457,906 $6,710,854 ========== ========== ========== Total $6,975,297 ========== Called $6,975,000 ==========
Assumptions: 20% preleasing; 5.76 beds/month absorption; 4% annual rent increases; stabilized expense estimated at 67.6% of stabilized effective gross income; expenses decreasing from the stabilized period three at 4%/year for inflation and also for lower occupancy by 10% in period two, 30% in period one; 12.0% terminal cap rate; 15.0% discount rate. The real estate component is the remainder or residual of the final value determination after a subtraction for the personal property and business value components, or as illustrated for the subject: $6,775,000 at July 14, 1995, as is, or 82.6% of the total going concern value. In our opinion, though these allocations are estimates, they can be considered reliable and reasonable given the analysis set forth above. 74 MARKETING PERIOD The subject's estimated marketing time is 6 months. This conclusion is based on discussions with those brokers specializing in the sale of senior housing projects, our knowledge of specific sale transactions (which have had widely variable marketing times) and considering current market conditions and the characteristics of the subject. Marketing times at several similar projects indicate the following: Casa Sandoval Hayward 6 months Fulton Villa Stockton 4 months Pacific Springs Escondido/El Cajon 5 months Park Ridge Vallejo 5 months
In our opinion, the subject would probably experience an average marketing time (regarded as about 6 months). The majority of buyers of senior housing projects are still seeking (and have fewer and fewer available opportunities) distressed properties where large increases in cash flow value are possible. The subject is not a distressed property given the projected 90% stabilized occupancy and as such would have a lesser appeal to some market buyers (subject has some upside potential in occupancy and its assisted living utilization could be increased). Nevertheless, the subject would be viewed as a solid cash flow project with an average physical plant (and a limited unit mix) in a good overall, affluent location. The subject's most likely buyer would be a larger facility owner/operator of other comparable congregate senior housing properties in California (i.e. Holiday Retirement, Manor Care, Leisure Care, Capital Senior Living, Brim, Health Care Group, etc.). 75 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions reached or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Mary Catherine Wiederhold, Appraisal Associate provided significant professional assistance to the person signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Mary Catherine Wiederhold on July 14, 1995. 76 12. The concluded total going concern market value estimate of the fee simple interest of Montego Heights Lodge, including the value of favorable financing, is as follows: MARKET VALUE "AS IS" (JULY 14, 1995): EIGHT MILLION EIGHT HUNDRED TWENTY FIVE THOUSAND ($8,825,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - ---------------------------- Michael G. Boehm, MAI 77 A D D E N D A 78 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 1 - Kensington Place 1580 Geary Boulevard Walnut Creek No. 2 - Valley View Lodge 1228 Rossmoor Walnut Creek 79 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 3 - Byron Park 1700 Tice Valley Boulevard Walnut Creek No. 4 - Family Affair Retirement 1081 Mohr Lane Concord 80 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 5 - Chateau Pleasant Hill 2770 Pleasant Hill Road Pleasant Hill No. 6 - Eden Villa 2015 Mt. Diablo Boulevard Walnut Creek 81 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 7 - Concord Royale 4230 Clayton Road Concord No. 8 - Diablo Lodge 950 Diablo Road Danville 82 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 9 - Moraga Royale 1600 Canyon Road Moraga No. 10 - San Ramon Lodge 18888 Bollinger Canyon Road San Ramon 83 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 11 - Villa San Ramon 9199 Fircrest Lane San Ramon 84 VACANT LAND SALE COMPARABLE NO. 1 Location: SEC Ygnacio Valley Road & Tampico Walnut Creek, CA Assessor's Parcel No.: 140-026-024 (Contra Costa County) Sale Date: Listing Document No.: N/A Listing Price: $653,400 Size: 43,560 Square Feet (1.00 Acres) List Price/SF: $15.00 Topography: Sloping Shape: Irregular Proposed Use/Density: Medical Office Building Zoning: P-D Grantor: Alex Bobbin Grantee: N/A Terms: N/A Comments: This parcel was to be combined with Land Sale No. 2 for a medical office building and 12 townhomes; site has no Ygnacio Valley Road access though it is a corner parcel (at Tampico).
85 VACANT LAND SALE COMPARABLE NO. 2 Location: Ygnacio Valley Road, East of Tampico Walnut Creek, CA Assessor's Parcel No.: 140-026-021 (Contra Costa County) Sale Date: Formerly in Escrow Document No.: N/A List Price: $450,000 (previous list price) Size: 43,996 Square Feet (1.01 Acres) List Price/SF: $12.50 Topography: Sloping Shape: Irregular Proposed Use/Density: 12 Townhomes (Portion) Zoning: C-O Grantor: Carolyn Mitchell Grantee: N/A Terms: N/A Comments: According to the broker, the development to build 12 townhomes and a medical office building (Montego Heights Lodge) on this site and the Sale No. 1 site fell through after the owners of the adjoining lot refused to allow development of the Lodge's parking lot for a driveway onto this site. This site is not currently being listed for sale. The contracted sale price of this parcel was not disclosed; adjacent to subject to north.
86 VACANT LAND SALE COMPARABLE NO. 3 Location: 123 Brodia Way Walnut Creek, CA Assessor's Parcel No.: 140-170-006-5 (Contra Costa County) Sale Date: 3/3/95 Document No.: 35433 Sale Price: $720,000 Size: 49,658 Square Feet (1.14 Acres) Sale Price/SF: $14.50 Topography: Level Shape: Rectangular Proposed Use/Density: Unknown; probable low density residential Zoning: R-4 Grantor: Edward Sonnenberg Grantee: M/M Richard and Lynne Chapman Terms: All Cash to Seller Comments: In large lot, rolling hill residential area; owner holding for future development.
87 VACANT LAND SALE COMPARABLE NO. 4 Location: 3073 North Main Street Walnut Creek, CA Assessor's Parcel No.: 170-100-029-9 (Contra Costa County) Sale Date: 12/8/93 Document No.: 349330 Sale Price: $850,000 Size: 44,605 Square Feet (1.02 Acres) Sale Price/SF: $19.06 Topography: Level Shape: Irregular Proposed Use/Density: 36 Apartments; 35.2 Units/Acre Sale Price Per Unit: $23,611 Zoning: C-C Grantor: Mark & Hillary Gorden Grantee: Three Oaks Housing, L.P. Terms: Would not disclose Comments: Located on a heavily travelled street in a mixed use commercial/residential area.
88 IMPROVED SALE COMPARABLE NO. 1 Name: Oak Tree Villa Location: 100 Lockwood Lane, Scotts Valley, CA Assessor's Parcel No.: 021-052-01 (Santa Cruz County) Sale Date: 6/6/95 Sale Price: $11,900,000 No. of Units: 202 Units (includes 40 assisted living units) Age: 1988 % Private Pay: 100% (includes 20% low income residents) Size (GBA): 172,000 Square Feet Average Unit Size (GBA/Unit): 851 Square Feet Sale Price/Unit: $58,911 Sale Price/SF: $69.19 Occupancy Rate: 72% Gross Operating Income: $3,390,984 (estimated at 90% occupancy) Expenses: $1,925,343 Net Operating Income: $1,465,641 (estimated at 90% occupancy) % Expenses: 56.8% G.I.M.: 3.51 O.A.R.: 12.3 (estimated at 90% occupancy) N.O.I./Unit: $7,256 Grantor: Oak Tree Villa Partnership Grantee: Birtcher Senior Properties Terms: $4,955,000 cash (39%); $7,745,000 assumption of existing debt, 30 year amortization, due in 15 years, 10.25% rate. Comments: 20% of units must be allocated to low income (HUD) residents; unit mix: 102 alcove units (450 SF) and 100 one bedroom units (600 SF); located in lightly populated area. Confirmation: Keith Louie (415) 391-9220
89 IMPROVED SALE COMPARABLE NO. 2 Name: El Camino Gardens Location: 2426 Garfield Avenue, Carmichael, CA Assessor's Parcel No.: 283-0030-14 (Sacramento County) Sale Date: 5/31/95 (Document No. 8309302142) Sale Price: $10,000,000 (includes $650,000 in deferred maintenance) No. of Units: 286 Units (174 ACLF/112 ALF) Age: 1984 Size (GBA): 160,810 Square Feet Average Unit Size (GBA/Unit): 562 Square Feet Sale Price/Unit: $34,965 Sale Price/SF: $62.19 Occupancy Rate: 82% Gross Operating Income: $2,814,240 (estimated at 93% occupancy) Expenses: $1,692,240 Net Operating Income: $1,122,000 (estimated at 93% occupancy) % Expenses: 60.1% G.I.M.: 3.55 O.A.R.: 11.2% (estimated at 93% occupancy) N.O.I./Unit: $3,923 Grantor: Joseph Benvenuti Grantee: Nationwide Health Properties (REIT) Terms: All Cash to Seller Comments: Project had approximately $650,000 in deferred maintenance at time of sale; purchased by REIT and leased to ARV Housing Group; licensed to include up to 224 assisted living beds. Confirmation: Eric Davidson (714) 751-7400
90 IMPROVED SALE COMPARABLE NO. 3 Name: Casa Sandoval Location: 1200 Russell Way, Hayward, CA Assessor's Parcel No.: 415-240-007, 008 (Alameda County) Sale Date: 2/27/95 Sale Price: $15,000,000 No. of Units: 238 Units Age: 1989 Size (GBA): 216,639 Square Feet Average Unit Size (GBA/Unit): 920 Square Feet Sale Price/Unit: $63,025 Sale Price/SF: $69.23 Occupancy Rate: 81% Gross Operating Income: $3,844,396 (estimated at 92% occupancy) Expenses: $2,498,857 Net Operating Income: $1,345,539 % Expenses: 65% (estimated at 92% occupancy) G.I.M.: 3.90 O.A.R.: 9.0% N.O.I./Unit: $5,653 Grantor: Casa Sandoval Investors, L.P. Grantee: Weh Chang Terms: All Cash to Seller Comments: Average quality project in middle income suburban area; sold at auction on 2/9/95; property underperforming at date of sale; buyer plans significant licensing/conversion of many units to assisted living. Confirmation: John Rosenfeld (310) 473-8900 ext. 119
91 IMPROVED SALE COMPARABLE NO. 4 Name: Lomita Lodge Location: 225 N. Lomita Avenue, Ojai, CA Assessor's Parcel No.: 017-083-200 (Ventura County) Sale Date: 12/30/94 (Doc. No. 206073) Sale Price: $1,350,000 No. of Units: 26 Units/36 Beds (Licensed AL) Age: 1940's/1970's Size (GBA): 10,000 Square Feet Average Unit Size (GBA/Unit): 385 Square Feet Sale Price/Unit: $51,923 Sale Price/SF: $135.00 Occupancy Rate: 81% Gross Operating Income: $656,640 (estimated at 95% occupancy) Expenses: $492,480 Net Operating Income: $164,160 (estimated at 95% occupancy) % Expenses: 75.0% G.I.M.: 2.06 O.A.R.: 12.2% (estimated at 95% occupancy) N.O.I./Unit: $6,314 Grantor: Raymond & Judy Berard Grantee: Ojai Retirement Inn #1, Ltd. Terms: $270,000 Cash; $1,080,000 variable rate loan at 8.5%, 20 year amortization. Comments: Property underperformed at date of sale; currently 95% occupied; rents range from $1,500 to $2,350 per month per bed; property includes about 25% SSI. Confirmation: Gerry Meglin (805) 646-5533
92 IMPROVED SALE COMPARABLE NO. 5 Name: Carson Oaks (now called Merrill Gardens at Carson Oaks) Location: 6725 Inglewood Avenue, Stockton, CA Assessor's Parcel No.: 081-260-053 (San Joaquin County) Sale Date: 7/27/94 (Doc. No. 87023) Sale Price: $4,200,000 No. of Units: 76 Units Age: 1989 % Private Pay: 100% Size (GBA): 62,733 Square Feet Average Unit Size (GBA/Unit): 612 Square Feet (average unit) Sale Price/Unit: $55,263 Sale Price/SF: $66.95 Occupancy Rate: 95% Gross Operating Income: $1,301,712 Expenses: $781,027 Net Operating Income: $520,685 % Expenses: 60% G.I.M.: 3.23 O.A.R.: 12.4% N.O.I./Unit: $6,851 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Newer facility with large number of one bedroom with full kitchens in an affluent neighborhood; not licensed for assisted living. Confirmation: Lee Haris (415) 391-9220
93 IMPROVED SALE COMPARABLE NO. 6 Name: Park Ridge (now called Merrill Gardens) Location: 2261 Tuolumne Street, Vallejo, CA Assessor's Parcel No.: 0052-330-008 (Solano County) Sale Date: 7/27/94 (Doc. No. 69837) Sale Price: $5,785,000 No. of Units: 93 ACLF; 14 Beds (Licensed AL) Age: 1991 % Private Pay: 100% Size (GBA): 84,989 Square Feet Average Unit Size (GBA/Unit): 654 Square Feet Sale Price/Unit: $62,204 Sale Price/SF: $68.10 Occupancy Rate: Project stabilized at 90%; at sale date 55% Gross Operating Income: $1,632,150 Expenses: $979,290 Net Operating Income: $652,860 % Expenses: 60% G.I.M.: 3.54 O.A.R.: 11.3% N.O.I./Unit: $7,020 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Modern congregate/assisted living with 15 studios, 59 - 1 bedrooms and 19 - 2 bedrooms; located in residential area and bounded by Sutter Solano Medical Center and Crestwood Convalescent Hospital. Confirmation: Lee Haris (415) 391-9220
94 A D D E N D A 95 APPRAISAL REPORT VALLEY VIEW LODGE 1228 ROSSMOOR PARKWAY WALNUT CREEK, CALIFORNIA AS IS ON JULY 14, 1995 SLVS FILE NO. 95-04-21 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 96 July 25, 1995 American Retirement Villas Properties II, L.P. c/o ARV Housing Group 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Mr. Graham Espley-Jones Re: Valley View Lodge 1228 Rossmoor Parkway Walnut Creek, California SLVS File No. 95-04-21 Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice. The value stated herein is based on our understanding of the site and improvement descriptions as represented to us by the client and/or the client's representatives and professional consultants as well as other available sources. We direct your attention to the "Introduction," "Site Description," and "Description of Improvements" sections of this appraisal report. It is your responsibility to read the report and inform the appraiser of any errors or omissions you are aware of prior to utilizing the report or making it available to any third party. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of July 14, 1995, the fee simple total going concern interest of the subject, as is, including the value of favorable financing, has a market value of: TEN MILLION THREE HUNDRED SEVENTY FIVE THOUSAND ($10,375,000) DOLLARS 97 Mr. Graham Espley-Jones July 25, 1995 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 7/14/95 ------------ Real Estate Value $ 8,725,000 Furniture, Fixtures & Equipment 150,000 Business Value 1,225,000 ----------- Total Going Concern Valuation $10,100,000 =========== Plus: Favorable Financing $ 275,000 ----------- Total Reported Valuation $10,375,000 ===========
The narrative appraisal report that follows sets forth the identification of the property and limiting conditions, pertinent facts about the area and the subject property, comparable data, results of our investigation and analyses and the reasoning leading to the conclusions set forth. Should you desire a quick reference to the most important information, I direct your attention to the "Introduction", "Executive Summary" and the "Reconciliation and Conclusion" sections of this report. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 98 SUBJECT PHOTOGRAPHS Subject from Main Parking Area, View East Main Entrance of Subject 99 TABLE OF CONTENTS Title Page 1 Letter of Transmittal 2 Subject Photographs 4 Table of Contents 5 Introduction 7 Property Identification 7 Property Ownership and History 7 Scope of the Assignment 7 Purpose of the Appraisal 8 Function of the Appraisal 8 Property Inspection 8 Date of Appraisal 8 Date of Value 8 Property Rights Appraised 8 Definition of Market Value 8 Assumptions and Standard Limiting Conditions 9 Special Conditions 10 Experience of Appraisal Firm 11 Representative Assisted Living Appraisal Experience 12 Executive Summary 13 Regional and City Analysis 15 Regional Location Map 16 City Location Map 17 Comparative Zip Code Demographic Data 19 Anecdotal Description of Walnut Creek 21 Neighborhood Description 25 Neighborhood Map 26 Neighborhood Zoning Map 29 Neighborhood Photographs 30 Site Description 32 Assessor's Parcel Map 33 Flood Map 34 Taxes and Assessments 36
100 Description of Improvements 37 Site Plan 38 First Floor Plan 40 Unit Plans 41 Subject Photographs 42 Market Analysis 48 Subject Amenities 50 Census of Market Area ACLF/AL Facilities 53 Comparable Facilities Map 55 Market Area Saturation Analysis 58 Highest and Best Use 60 Site Valuation 62 Vacant Land Sales Map 64 Cost Approach Analysis 66 Cost Approach Summary 69 Income Approach Analysis 70 Pro Forma Cash Flow Analysis & Capitalization 82 Sales Comparison Approach 83 Improved Sales Map 86 Valuation of Favorable Financing 90 Reconciliation and Conclusion 94 Allocation of Going Concern Value Determination To Components 96 Total Estimated Marketing Time 98 Certification 99 Addenda 101 Comparable ACLF/AL Facility Photographs 102 Legal Description 108 Vacant Land Sale Data 110 6/21/95 Rent Roll 114 (1993, 1994, 1/95 to 4/95) Historical/(1995) Budgeted Operating Statements 119 Senior Housing Investment Survey 131 Improved Sale Data/Photographs 133 Favorable Financing Detail 142 Qualifications of Michael G. Boehm, MAI 143 MGB State of California Appraisal License 144
101 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 198,198 square foot (4.55 gross acres) site that is currently improved with a 125 unit congregate senior housing project (including up to 96 licensed assisted living beds) project known as Valley View Lodge. The subject has a designated street address of 1228 Rossmoor Parkway, Walnut Creek, Contra Costa County, California. A detailed legal description of the site is presented in the Addenda of this report. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject property is currently vested in the name of American Retirement Villas Properties II (ARVP II), a California Limited Partnership. The current owners purchased the subject in December, 1989 as part of a purchase of several Retirement Inns of America (Avon Products, Inc.) senior properties. The subject has not been sold/purchased in the past three years. The subject was built as a senior congregate facility which opened in 1976. The subject, as part of the original conditions of approval and a condition necessary to obtain the favorable HUD financing, was required to allocate 20% of the subject units to "very and low" income residents. This restriction was reportedly waived when the subject was purchased by the current owners allowing a market rate to be charged for all units. The subject is currently in the process of increasing its assisted living licensing maximum from 96 to 136 beds. Verbal approval has been received and the formal approval is imminent. It is anticipated that almost immediately the subject's assisted living utilization will increase by 15 to 20 residents. The subject's recent occupancy history includes near 100% occupancy and it is currently approximately 96.1% occupied (123 beds/128 beds). SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a full narrative appraisal report in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of the appraisal was made available. The appraisal was performed so that the analysis, opinions and conclusions are that of a disinterested third party, employing due diligence in the investigation, analyses and conclusions. This appraisal report was developed and prepared to comply with the reporting requirements noted in the "Certification" section of this report. The investigation associated with this report includes the general economy of the industry, the market area, and the local neighborhood. Research and studies include supply and demand factors, comparable land and property sales, competitive property rents/rates and occupancy. Buyers, sellers, developers, public officials, management at competitive facilities, real estate brokers, and the current management of the property were interviewed concerning these and other associated matters. Specific references are made throughout this report. 102 PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject partnership for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 9, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Nancy Peterson, Administrator. The subject was reinspected on July 14, 1995 by Mary Catherine Wiederhold, Appraisal Associate. DATE OF APPRAISAL July 25, 1995 DATE OF VALUE July 14, 1995 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in a separate section of this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C-Appraisals, 34.42 Definitions (f), market value is defined as: "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: 103 (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 104 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. SPECIAL CONDITIONS The subject is currently encumbered by an approximately $2,800,000 HUD loan which extends to the year 2016 at a fixed interest rate of 8.25%. Because this interest rate is below the estimated interest rate of current conventional financing (estimated at 9.5%), the subject has a theoretical value over and above the capitalized value of operational cash flows. Caution should be used in interpreting this added value as actual market transactions involving the assumption of 105 below market rate financing are rare. The value of this favorable financing has been added to the going concern value set forth in this report. These issues are discussed and the value of the favorable financing is calculated in a separate section of this report. The subject is licensed as a residential care facility for the elderly (assisted living) for 96 beds (plus 40 additional beds, pending) with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The appraisers were not provided with a title report describing any current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Housing Group. EXPERIENCE/COMPETENCY OF APPRAISAL FIRM Senior Living Valuation Services, Inc. is a San Francisco based appraisal firm that exclusively specializes in the appraisal and analysis of all forms of senior housing properties. On the following page is a listing of recent assisted living facility assignments that have been completed by the firm. Qualifications of Michael G. Boehm, MAI are included in the Addenda of this report. 106 EXECUTIVE SUMMARY Property Name: Valley View Lodge Location: 1228 Rossmoor Parkway Walnut Creek, California Assessor's Parcel No.: 189-040-045 (Contra Costa County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on July 14, 1995 Land Area: 198,198 Square Feet, 4.55 Acres Gross; 154,638 Square Feet, 3.55 Acres Net (estimated) Excess Land: None Zoning: PD (656), a planned unit development specifically allowing the subject. Improvements: Type: One, average to good quality, one to two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1976; Improvement Age - 19 Years; Effective Age - 19 Years; Remaining Economic Life - 26 Years Size: 125 congregate retirement apartment units (128 currently configured maximum bed count) and common areas in approximately 97,590 square feet of gross building area. Condition: Average to Good H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion Capitalization Rate: 12.0% Projected Stabilized Net Income: $1,212,831 (7/95-6/96)
107 Total Going Concern Market Value, as is, as of July 14, 1995: Cost Approach: $ 8,625,000* Income Approach: $10,100,000* Sales Comparison Approach: $ 9,800,000- $12,350,000* Value Conclusion: $10,100,000* ($80,800/unit) Allocation of Final Value Determination to Components: Market Value As Is - 7/14/95 ------------ Real Estate $ 8,725,000 FF&E 150,000 Business Value 1,225,000 ----------- Total Going Concern Valuation $10,100,000* =========== * before addition of value for favorable financing Value of Favorable Financing: $275,000 Total Estimated Marketing Time: 6 Months
108 REGIONAL AND CITY ANALYSIS The subject site is located east of Rossmoor Parkway (north of Tice Valley Boulevard) about two blocks north of the gated Rossmoor senior subdivision in the southern incorporated portion of the City of Walnut Creek, Contra Costa County, California. The subject is located about one mile south of downtown Walnut Creek. Walnut Creek is located approximately 20 miles east of San Francisco. COUNTY OVERVIEW Contra Costa County is one of the nine San Francisco Bay Area counties. It is situated northeast of San Francisco, and bordered by the counties of Solano and Sacramento on the north, San Joaquin on the east, Alameda on the south and the San Francisco Bay to the west. The County consists of three distinct regions. Divided by significant topographical obstacles (primarily ranges of hills) and the interstate and state highway system, the western, central, and eastern portions of the County have tended to develop separately. The western portion, with its access to San Francisco Bay, is largely urban and industrialized. This area is dominated by the city of Richmond, with its active, deep water port. The eastern part of the County is undergoing substantial changes, evolving from a wild, agricultural area, to an affordable suburban residential region (Antioch, Pittsburg). The subject is located in the central portion of the County (known as the Diablo Valley at the foot of Mt. Diablo) which follows the path of Interstate 680 and extends from Martinez on the shore of the Carquinez strait of the Sacramento river to the north, south through the cities of Concord, Pleasant Hill, Walnut Creek, Lafayette, Alamo, Orinda, Danville and San Ramon. This central County area evolved as a bedroom community by the 1960's as residents commuted to jobs in San Francisco, Oakland, and other cities. Motivated by an increasingly congested commute and higher rental rates in San Francisco, corporations began locating in central Contra Costa in the late 1970's. Today, the central County has developed into a major suburban commercial and financial headquarters submarket of the larger Bay Area. The climate of Contra Costa County is somewhat similar to other parts of the inland Bay Area, with a year-round mean temperature of 60.4 degrees, and an annual average rainfall of 19 inches. As in the other parts of the region, most rain occurs during the winter months and is rare from May through November. The location of Walnut Creek, southeast of the Berkeley Hills and at a distance from the moderating influence of the San Francisco Bay, allows some light frosts in the winter months and warm to hot summer days. CITY POPULATION AND DEMOGRAPHICS Walnut Creek (population 63,400 in 1995), incorporated in 1914, evolved from a small agricultural town of several hundred residents. In the 1950's and 1960's with the completion of Highway 24 and Interstate 680, Walnut Creek, and many communities in the central County, became "bedroom" suburbs for the core cities of San Francisco and Oakland. It was during this 109 period that Walnut Creek experienced its most rapid population growth. Population growth has slowed as the region has become predominantly built out. Increased resistance to additional growth has (and will continue to) muted recent population expansion. During the past decade, Walnut Creek, along with the adjacent cities of Concord and Pleasant Hill, have become an important suburban employment center in the East Bay. The economy is largely influenced by significant office employment including Federal and County governments. Nevertheless, a large portion of the population continues to commute to Oakland and San Francisco. Today, Walnut Creek is one of the largest cities in the County and the focal point of the central County region. Population trends and forecasts for Walnut Creek are as follows: Population Data
Walnut Creek Contra Costa County ---------------------------- ----------------------------- Year Population % Change Population % Change ---- ---------- -------- ---------- -------- 1960 9,900 - 406,030 - 1970 39,844 302% 558,389 37.5% 1980 53,600 34.5% 650,748 16.5% 1990 60,400 12.7% 797,600 22.6% 1995 63,400 5.0% 883,400 10.8% 2000* 66,634 5.1% 971,300 9.9%
* Estimate -------------------------------------------------------- Sources: ABAG (Association of Bay Area Governments) Demographically as illustrated in comparative zip code data presented on the following page, the subject zip code has the following characteristics relative to the surrounding region: 1) A much older median age (66.0) compared to the surrounding region and City as a whole (which is older than regional averages), reflecting a largely retired population with 52% of the total population over the age of 65 (largely influenced by the Rossmoor subdivision); 2) A higher than average median household income ($49,653). The subject zip code ranks in the 80th percentile in California in per capita income (92nd percentile nationally) which is slightly below other Walnut Creek zip codes; 3) A less diverse ethnicity with about 97% of its resident consisting of non-minority whites. An anecdotal description of Walnut Creek is provided on a following page. 110 HOUSING Walnut Creek housing stock is concentrated in low-density residential uses, chiefly single-family dwellings, with higher densities allowed in designated areas generally around the downtown core. According to ABAG projections, the City is projected to be built out in about 10 years. Currently, the housing stock consists of approximately 37,000 dwelling units. The City has approximately 350 acres of vacant land designated for residential development which could include about 6,000 additional units (located on the fringes of town to the east and south). An important influence on the City housing stock (20% of total) and the subject is the 2,000 acre Rossmoor Retirement Community located in southwestern Walnut Creek. Rossmoor, begun in 1964, is one of California's largest retirement communities with a current population of about 8,200 residents in 5,900 mostly lower density units (capacity for about an additional 1,500 units). Prices range from $55,000 to $400,000. Rossmoor is restricted to persons 55 and older and has an average resident age population of about 75. The presence of Rossmoor has been a major factor in the recent construction of several new higher density senior housing projects built close to Rossmoor but "outside the gates", including the subject. Additional detail on Rossmoor is provided in the Neighborhood section of this appraisal. The average home price in Walnut Creek for a single family dwelling in 1995 is about $300,000. This is below more exclusive suburban areas such as Blackhawk and Lafayette but above nearby Pleasant Hill and Concord. These statistics reflect a 15% decline in average home price since 1989 peaks, consistent with regional trends (down about 0% to 5% in the last 12 months). Rental rates of apartments in Walnut Creek are slightly above County averages with a broad range of $500 to $1,000 and up per month. EMPLOYMENT & ECONOMIC DEVELOPMENT Walnut Creek enjoys a diversified economic base. A number of residents commute to other locations in the Bay Area for work, but the City is seen as a major suburban office center. The largest firms in the community are as follows: Major Employers
Name Type of Business Employees - ---- ---------------- --------- Lesher Communications, Inc. Newspaper 1,800 John Muir Hospital Health Care 1,750 Kaiser Permanente Center Health Care 1,250 Safeway Grocer 1,100 Western Temporary Services Temporary Employment 600 Nordstrom Retail 600
- -------------------------------------------------------- Source: Walnut Creek Chamber of Commerce 111 Explosive downtown core (known as the Golden Triangle) commercial growth in the early 1980's made growth control the major issue in Walnut Creek in the late 1980's. In 1985, Walnut Creek voters passed Measure H which approved a citywide moratorium on construction of most buildings greater than 10,000 square feet until certain traffic volume to capacity ratios are met. The measure designed to limit further traffic congestion, has been the subject of court battles but has been incorporated into the City's zoning ordinance. The result of this antigrowth sentiment has been the virtual extinction of new commercial proposals. Current development trends to be enforced by the City include limiting increased traffic whenever possible, concentrating high density development in the downtown core, emphasized retail commercial development and creating open space. The City has been transformed from a progrowth community to one that has become built out and congested and now seeks to maintain its current high quality of life without additional deterioration. Recent development activity has been very modest (some smaller infill projects). TRANSPORTATION Walnut Creek is served by three major highways: Interstate 680, providing north to south access throughout central Contra Costa County; Highway 24, providing highway access east to San Francisco and Oakland via the Caldecott Tunnel; and Highway 4, providing east to west access through northern Contra Costa County. A major redesign and expansion of the 680/24 intersection is underway (a 5 year project) to alleviate severe traffic congestion in the area. The new design will facilitate access to Rossmoor from Walnut Creek. Major north to south thoroughfares in Walnut Creek include Buena Vista, California, Main and Oak/Civic. Major east to west thoroughfares include Olympic, Tice Valley, Treat, Ygnacio Valley and Walnut. A high-speed commuter train service, the Bay Area Rapid Transit (BART), provides public transportation throughout the Bay Area. Walnut Creek is one of 34 BART stops along a network that extends to San Francisco, Oakland, Fremont, Richmond and other cities. Rail service is (Amtrak) available in Martinez or Oakland. Air service is available at Buchanan Field in Concord (regional air service), or at the Oakland International Airport (18 miles to the southwest) and San Francisco International Airport ( 36 miles to the southwest). Local residents can also take advantage of the County Connection, a local bus service. COMMUNITY DATA Walnut Creek's location as a part of the greater nine county San Francisco Bay Area allows its residents to take advantage of all of the cultural and recreational opportunities of the larger Bay Area. Other major local features include a regional center for the arts (with theater) and Mt. Diablo State Park, located southeast of Walnut Creek, offers outdoor activities from trails to camping and picnic sites. Mt. Diablo, with an elevation of 3,849 feet, is the highest peak in the Bay Area and provides a panoramic view from the Pacific Ocean to the Sierras. Located in the foothills of Mt. Diablo is the Concord Pavilion, a popular 8,500 seat open theater for concerts and festivals. 112 Walnut Creek has one general acute hospital, the John Muir Medical Center , with 280 beds and 677 physicians. This hospital is located approximately three miles northeast of the subject property along Ygnacio Valley Boulevard. Additional medical facilities in the area include Rossmoor Medical Clinic (just outside the Rossmoor entrance and adjacent to the subject), Mt. Diablo Medical Center, Kaiser Medical Center (201 beds), and CPC Walnut Creek, the largest psychiatric hospital in the Bay Area. Walnut Creek is located in HSA 5, HFPA 411 with a total of 25 skilled nursing facilities comprising a total approximately 2,328 licensed beds (including several newer facilities). Walnut Creek is also home to a large number of high density congregate senior housing projects (rentals) as discussed in detail in the Market Analysis section of this report. CONCLUSION Walnut Creek is primarily built out with an established land use pattern of residential developments surrounding a densely developed downtown core. Future development and population expansion will be slow, focused in infilling vacant or underdeveloped land parcels. Local antigrowth sentiment is still strong and the City has experienced extreme traffic congestion which threatens the City's traditional suburban/bucolic residential character. Nevertheless, the City still has a high quality of life. The City's central location, affluence and extremely large elderly population focused at Rossmoor, make Walnut Creek attractive for elderly housing. 113 NEIGHBORHOOD DESCRIPTION LARGER NEIGHBORHOOD - ROSSMOOR COMMUNITY The larger subject neighborhood consists of the 2,000 acre, master planned retirement community of Rossmoor which is a separate neighborhood planning district of Walnut Creek within Tice Creek Valley. The northern portions of Tice Creek Valley consist of flat valley land and gently sloping hills while the southern and central portions are characterized by steep hillsides with sloping valleys lying between East Ridge to the east and Las Trampas Ridge to the west and south. The Rossmoor community lies approximately two and one-half miles southwest of downtown Walnut Creek and 20 miles east of San Francisco. Rossmoor is located about two miles south of the Interstate 680 - State Highway 24 interchange. The entrance to Rossmoor is along Rossmoor Parkway, approximately 2,000 feet southwest of the intersection of Rossmoor Parkway and Tice Valley Boulevard and about three blocks south of the subject. Rossmoor is a planned retirement development that dates back to 1963. Originally planned for 11,000 dwelling units, the permitted number was reduced in 1977 to 7,350 units. To date, about 6,000 residential units have been built, most of which are attached, stacked flats. Though UDC Homes is the exclusive builder/developer of Rossmoor, the Golden Rain Foundation is responsible for the management and operation of the ongoing community. The Foundation is composed of elected Rossmoor residents and acts as a homeowners association for all Rossmoor residents. The Rossmoor community is developed with two golf courses laid out in the central flatland of the Tice Creek Valley and condominium buildings built primarily on the surrounding hillsides. The terrain surrounding Rossmoor and the manned, security entry afford considerable security to the residents. Recreational amenities include the two golf courses with a total of 27 holes, four clubhouses, tennis courts, swimming pools, lawn bowling greens, and a variety of special interest activity clubhouses. Bus service is provided within the community as well as to downtown Walnut Creek population for shopping and the area BART station. A fully equipped and staffed medical clinic is located just outside Rossmoor across Tice Valley Boulevard on Rossmoor Parkway and just west of the subject. Additional neighborhood development just outside the Rossmoor gates include the subject; a Bank of America branch; Byron Park, another congregate rental project and the 180-bed Manor Care and 99 bed Guardian Foundation skilled nursing facilities located immediately adjacent to the subject. The Rossmoor Shopping Center is located at the northwest corner of the intersection of Rossmoor Parkway and Tice Valley Boulevard, approximately two blocks southwest of the subject. This neighborhood center is anchored by a Safeway supermarket. The center also contains a travel agency, liquor store, real estate office, restaurant, cleaners, barber, beauty salon, gift shop and five bank branches. This neighborhood center, along with several other nearby retail centers, provide a variety of services for Rossmoor and nearby residents. 114 Based on data provided by UDC Homes, nearly 6,000 housing units have been sold within Rossmoor. The average annual sales of new product over Rossmoor's 26 year history is roughly 250 units per year. Over the last ten years, however, new home sales have fallen to an average of about 80 units annually while reaching a post-1980 high of 122 units in 1987. Reliable absorption figures for 1988 through 1995 are difficult to determine due to limits in available new supply. Development of Neighborhood 4 in southern Rossmoor began in 1992/1993. Conversations with Rossmoor's resale brokers indicate that resales of existing units have slowed somewhat during the past few years. These brokers indicated that units that would previously sell in two weeks might now take up to three months to successfully market. This phenomenon is generally consistent with a recent downturn in the local and larger San Francisco Bay Area housing markets. According to a Rossmoor resale broker, current resale listings within Rossmoor range from a low of $49,000 for a cooperative unit to about $350,000 for a new condominium (average of about $158,000). Rossmoor is reported to have approximately 8,000 residents with an average age of approximately 75 years. The population is 31 percent male and 69 percent female reflecting actuarial reality. The early Covenants, Conditions and Restrictions (CC&Rs) required one owner to be at least 45 years old. That restriction has since been amended to a minimum age of 55 years. IMMEDIATE NEIGHBORHOOD The subject site was originally part of a larger 10.3 acre site which is located just northeast of the medical clinic and about two blocks northeast of Rossmoor. The site is located along the Rossmoor Parkway extension, an approximately 500 foot long east/west roadway extending from Rossmoor Parkway to the west to the cul-de-sac at the western boundary of the subject site. The Guardian nursing home, located to the immediate southwest of the subject was built in the mid 1970's (before the subject which was built in 1975/76). The Manor Care nursing home to the west of the subject was built in the late 1980's. To the north, east and south of the subject, lie open space rolling hills and several large lot single family homes. As noted, the subject is located about three blocks northeast of the entry gates to Rossmoor. The Highway 24/Interstate 680 interchange (which is currently undergoing a major upgrading) is located about one mile to the north and downtown Walnut Creek about 1.5 miles to the north. John Muir Hospital is located about three miles to the northeast. CONCLUSION Overall, the subject's location near Rossmoor and adjacent to a clinic and two nursing homes is a competitive advantage. The subject enjoys good access to recreational and retail amenities and fair highway and acute medical care access. Overall, the subject site is adequately situated for a congregate senior housing project and it is compatible with neighborhood developments. Because the subject is located at the end of a cul-de-sac on a minor street extension, overall exposure is limited. 115 NEIGHBORHOOD PHOTOGRAPHS Guardian Nursing Home Immediately West of Subject View West toward Exit Driveway, Guardian Nursing Home to Left, Manor Care Nursing Home to Right 116 NEIGHBORHOOD PHOTOGRAPHS Open Space/Homes Surrounding Subject 117 SITE DESCRIPTION LOCATION: The subject site is located at 1228 Rossmoor Parkway in Walnut Creek, California which is about two blocks northeast of the intersection of Tice Creek Boulevard and Rossmoor Parkway. The subject is located at the end of the cul-de-sac of the Rossmoor Parkway extension, about 450 feet east of Rossmoor Parkway. The subject site consists of one irregular shaped parcel identified as Contra Costa Assessor's Parcel Number is 189-040-045. An Assessor's Parcel Map is shown on a following page. A detailed legal description of the site is provided in the Addenda of this report. PHYSICAL CHARACTERISTICS: The subject property consists of an irregularly shaped parcel containing 4.55 acres or 198,198 square feet gross and approximately 3.55 acres or 154,638 square feet net developable. The site is bounded by medical office/convalescent hospital properties to the west and open space/single family homes to the north, east and south. The topography of the site is irregular although its developed portion is generally flat. The site slopes downward significantly at its northern and eastern boundaries. The southern portion of the site is currently an open space rolling hill area (an approximately one acre area). The site appears to have adequate drainage and is not located within a flood plain area. The subject is located in a flood zone C, an area of minimal flooding per Map Number 065070 0603B, dated 5/1/85. No report of soil conditions was provided to the appraisers and it is assumed that there are no adverse soil or subsoil conditions affecting existing developments. No obvious toxic or hazardous conditions were noted during our site inspection. The site can be considered as having the same overall risk of earthquakes as the San Francisco Bay Area. The subject is not located in an Alquist-Priolo Special earthquake study zone. EXISTING IMPROVEMENTS: The subject site is developed with a 125 unit, 2 story W-shaped, 97,590 square foot residential congregate senior apartment building. The subject site is bordered by an asphalt surface parking lot to the west. The development's entry is oriented towards the parking lot, Rossmoor Parkway extension and cul-de-sac to the west. Additional improvement detail is discussed in the Description of Improvements section of this appraisal. The Rossmoor Parkway extension is a fully improved but minor, two-lane east to west street extending about 450 feet to the west to Rossmoor Parkway. Street improvements include asphalt paving, concrete curbs, gutters and sidewalks. The subject site is served by all utilities including water (City of Walnut Creek), natural gas and electrical power (Pacific Gas & Electric) and telephone (Pacific Bell). ACCESS AND EXPOSURE: The subject site can be accessed from Rossmoor Parkway to the extension and to the cul-de-sac with one curb cut out. Rossmoor Parkway is a secondary north to south residential street in southern Walnut Creek. The subject is located approximately two blocks northeast of Tice Valley Boulevard and Rossmoor Parkway and about one mile south of Highway 680. The visibility of the subject from Rossmoor Parkway is limited because of surrounding development and the varying topography of the immediate neighborhood. 118 EASEMENTS AND ENCUMBRANCES: Though a title report was not available for the subject, the subject is not affected by any significant easements or encumbrances which affect its operation as a senior housing project. The subject is impacted by right of way easements along its western portions which allow joint usage of the parking lot and overall access with The Guardian nursing home to the immediate west of the subject. The subject also has right of way access along the Rossmoor Parkway extension. As noted in the special conditions section of this report, the site was formerly required to accept 20% "very low and low" income residents as a condition for the $3,696,000 favorable HUD financing obtained in 1978. This restriction was reportedly lifted when the subject's current owner purchased the subject in the 1980's. However, the benefit from the remaining term of the favorable financing was assumed by the current owners. ZONING: The subject is classified as a limited care complex for ambulatory senior citizens and is allowed in the PD - a planned development zone (PD 656), specifically allowing the subject and the adjacent nursing homes. The subject development was built in 1976 and has been operating on the subject site as a legal conforming use since that time. The subject includes up to 96 beds which are currently licensed with the California Department of Health Services as a residential facility for the elderly, also known as residential care or assisted living. This licensing allows the subject to offer nonmedical daily living assistance to these residents. EXCESS LAND: None. The subject is fully built out to the developable portions of its property limits. 119 TAXES AND ASSESSMENTS Since passage of Proposition 13, or the Jarvis Gann Initiative, in 1978, real property has been assessed at its 1976 value, trended upward at a maximum rate of 2% annually, unless there is a transfer of ownership or new construction. When either of these occur, the property is reassessed at full market value. Furthermore, Proposition 13 limits annual taxes to 1%, plus a small amount for bonded indebtedness of the assessed value. Assessor's Parcel No.: 189-040-045 (Contra Costa County) Assessed Value 1994-95: Land $1,478,601 Improvements $4,385,915 Personal Property $ 722,622 ---------- Total $6,587,138 ========== 1994-95 Tax Rate: 1.0626% 1994-95 Taxes: $83,637.72 (includes $13,642.80 in direct assessments) Status: Current and paid as due. Our cash flow projections of stabilized real estate taxes assumes a sale and reassessment of the subject to market value ($10,100,000) at July, 1995 (does not include value created by favorable financing).
120 DESCRIPTION OF IMPROVEMENTS The discussion of the improvements addressed below was accumulated through our site inspection, a review of limited site plans and through discussions with the subject's administrator. Detailed architectural drawings were not available. GENERAL TYPE: The existing main improvement known as Valley View Lodge consists of one, 1 to 2 story, 125-unit, good quality, Class D retirement apartment building containing 97,590 square feet of gross building area. The facility contains 125 units currently configured for 128 beds, including up to 96 licensed assisted living beds. The W-shaped main building improvement fronts the entry cul-de-sac and a parking lot to the west. A site plan is provided on the following page. AGE: The subject improvements were constructed and completed in 1976. Since 1976, the subject has been operating as a congregate senior facility. In the late 1980's, the subject became licensed by the Department of Social Services to provide assisted living to residents in 96 beds. Our site inspection noted a normal amount of wear and tear on a 19 year old building and no material deferred maintenance. The subject improvement have an estimated total economic life of 45 years. A chronological and effective age of 19 years suggests a remaining economic life of approximately 26 years. SIZES: The subject has the following component size and unit mix:
Unit No. of Size Unit Type Units S.F. (est.) Total S.F. --------- ------ ---- ---------- Studios 26 391 10,166 Studios/Alcoves 87 531 46,197 1BR 12 571 6,852 ---- ------ Total 125 63,215 (64.8%) Common Areas/Circulation 34,375 (35.2%) ------ Gross Building Area 97,590 ======
STRUCTURAL AND EXTERIOR: The subject improvements are constructed on a level concrete slab foundation with a 1-story (central entry wing) and 2-story (north and south wings), wood frame construction under a sloping wood shake roof. Building exterior consists of stucco, protruding balcony decks and extensive wood trim. 121 Interior walls are wood frame and painted or wallpapered gypsum board (with wood handrails in corridors). The main common areas, hallways and room exteriors are carpeted. Unit baths have vinyl tile. Ceilings in units are painted gypsum board with common area ceilings and hallways consisting of dropped acoustical tile with hanging incandescent and fluorescent light fixtures. The entire development is fully sprinklered with smoke and heat alarms. Units include sliding glass doors leading to the balconies and patios and sliding windows in aluminum frames. MECHANICAL: The development has average lighting and plumbing fixtures. HVAC in the units consist of individual room heating. HVAC in common areas features hot water boiler central forced air heating system. The subject also features an intercom system with paging. The development includes three elevators. Four stairwells are located throughout the improvement. INTERIORS: Based on our site inspection, the interiors appear to be functional for congregate senior apartment use. Unit plans are presented on a following page. The facility includes 125 apartment units with separate baths. The unit mix includes 26 small size studios (391 SF), 87 larger studio/alcove units (531 SF) and 12 small one bedroom units (571 SF). Each unit contains a full bath area with grab bars and a sink with a built-in cabinet, vanity and water closet. Each unit also contains two emergency pull cords, one each in the bath and living area. The units also contain a small kitchenette which consists of a sink, two burners and a half-refrigerator. Each unit includes an outdoor extended iron rail balcony or open patio. The focal point of the development is the facility's common areas located on the centrally located one story ground floor. The facility's main entry area includes the lobby, main lounge, a reception desk and administrative offices. The common areas include a card room, theater with stage, exercise room, activity room, beauty salon and general store. The subject also has four resident lounges and two day rooms (with larger floor to ceiling windows). Laundry rooms with washers and dryers for the residents are located on each floor. The subject also has an employee lounge and restroom and linen closets. The facility's dining area has a tastefully decorated restaurant atmosphere located off of the commercial kitchen. PARKING AND LANDSCAPING: Site parking is located in one open paved parking areas, west of the development accessed from Rossmoor Parkway extension cul-de-sac. There are approximately 88 parking spaces (.70/unit) located in the parking areas (which are shared with the adjacent Guardian nursing home). Approximately 30% of the site is landscaped with mature trees, flowering perennials, bushes and grass. Facility landscaping is centered in the open courtyard surrounded by the southern wing which includes a covered canopy and seating areas. Concrete walkways surround the building. Overall site landscaping is above average. 122 SUBJECT PHOTOGRAPHS Reception Area Main Dining Room 123 SUBJECT PHOTOGRAPHS Typical Lounge Area Auditorium 124 SUBJECT PHOTOGRAPHS Typical Unit Interiors 125 SUBJECT PHOTOGRAPHS Typical Interior Courtyard/Walkways Typical Interior Corridor 126 SUBJECT PHOTOGRAPHS Main Access Driveway Entry to Subject, View East Parking Lot, View North 127 CONCLUSION: In our opinion the subject property's exteriors, common area interiors, landscaped areas and parking appear average to slightly above average and competitive for residential retirement uses. The subject is an attractive project which shows exceptionally well for one that is 19 years old. The subject's relatively small units are typical of 1970's senior housing construction. The subject has a more varied unit mix than many projects built in the 1970's but its units are still smaller and less varied than competitive projects built in the 1980's. Our site inspection noted no material deferred maintenance and a good condition reflecting its 19 year old chronological and effective age. 128 MARKET ANALYSIS INTRODUCTION The elderly are by far the fastest growing population segment, whether expressed in percentage increase or actual number of persons. Although not as well documented statistically, the elderly have more money than ever before because of social security, pension programs, savings and the substantial increase in the market value of their residences. Most of them are active and in reasonably good health. This increased health and life expectancy lends them to seek life enriching activities through an independent lifestyle that provides assistance when needed. INDUSTRY OVERVIEW The housing industry for the elderly can be classified by the three major types of buyers: the active elderly (go-gos), intermediate (slow-gos) and the person who needs constant care (no-gos). Active retirees want recreational amenities with the housing they buy. They want a golf course, tennis courts, swimming pool, walking and bicycle path, saunas and spas. They want to be near good places to eat and to be able to enjoy a wide range of cultural activities and travel opportunities. Intermediate retirees want a congregate-type of lifestyle that allows them independence yet gives them the opportunity to take part in quiet activities such as arts and crafts. Retirees in this intermediate classification also will look for transportation to shopping, banking or medical offices, some mild form of recreational activities, such as swimming and golf, plus the opportunity to socialize in a common dining room or lounge area. Retirees who need constant care are concerned with medical assistance. They will look for facilities that offer services and conveniences such as residential care facilities which will make their lives more comfortable. Also, they will want a medical center where they can go when their health fails. The subject property would be targeted at the intermediate and less active elderly. From a real estate and financial perspective, housing for the elderly is complex to analyze as they usually represent a combination of other businesses. The major types of homes for the elderly include: Adult Congregate Living Facilities (ACLF): Specially planned, designed and managed multi-unit rental housing typically with self contained apartments. Supportive services such as meals, housekeeping, transportation, social and recreational activities are usually provided. In California, these facilities are not licensed. Assisted Living Facilities (ALF) (personal care or residential): Group living arrangements that provide staff supervised meals, housekeeping and personal care (assistance with bathing and medication) and private or shared sleeping rooms. These facilities are generally licensed and must meet designated operating standards including minimum staff requirements. In California, these facilities must be licensed by the California Department of Social Services, Division of Community Care. 129 Care Facilities (skilled nursing or intermediate care): Skilled nursing and intermediate care facilities (commonly known as nursing homes) are both operated under the guidance of a licensed administrator with licensed nurses and aids providing around the clock nursing care, generally one step below that offered at an acute care hospital. In California, these facilities must be licensed with the California Department of Health Services. Life Care Complex (life care community, continuing care, campus complex): A housing development planned, designed and operated to provide a full range of accommodations and services for older adults, including independent living, congregate housing and medical care. Residents may move from one level to another as their needs change. Life care complexes typically charge a buy-in fee (sometimes refundable) in addition to a monthly maintenance fee for services. In California, life care contracts must be approved by the State Department of Insurance. Retirement Village: Developments that offer, home ownership and rental units for older persons. Support services often are available for a fee. The subject is a currently existing 125 unit (128 current bed configuration) licensed assisted living (ALF) facility. This suggests that only 3 of the subject units are currently configured for 6 semiprivate beds. The subject is licensed to accept 46 nonambulatory residents (96 assisted living bed licensing total). Congregate housing such as the subject is a combination of: a) an apartment project; b) a hotel offering meals, cleaning and transportation facilities; c) a social club offering activities; and d) a supporting living environment providing assisted living amenities (help with bathing, medication, mobility) as needed. A summary of subject amenities is provided on the following page. MARKET DEFINITION Our experience in analyzing congregate housing development indicates that these facilities have a total market area ranging from a 5 to 30 mile radius from the site. This area represents a reasonable driving distance for relatives and friends and also reflects the fact that the elderly do not move great distance when choosing the congregate housing option. Perhaps more important than a strict definition of market area based on distance, is the overall character of the development's environment, whether it is urban, suburban or small town/rural. In our opinion, the primary market area for the subject site extends approximately 5 miles outward from the site in all directions. This would include most of the suburban area of central Contra Costa County including all of Walnut Creek and Alamo and portions of Pleasant Hill, Concord and Lafayette. These areas are not only located in close geographic proximity to the site, but each is a similar, upper middle income bedroom community. This definition of market area is consistent with the former residences of subject residents. About 35% to 40% of subject residents formerly lived within the nearby Rossmoor community. 130 RETIREMENT HOUSING SUPPLY During the course of our appraisal, we have identified those existing and proposed elderly retirement facilities in the primary market area which may be considered somewhat competitive to the subject property. Our census of potentially competitive congregate rental housing facilities impacting the total market area is presented on the following pages. Photographs of the rent comparables are illustrated in the Addenda of this report. Each of the surveyed congregate facilities is a for-profit housing development offering two or three meals daily, weekly maid service and many recreational opportunities. Most of the properties surveyed offer licensed assisted living on an as needed basis. The properties can be characterized as follows: BOTH CONGREGATE AND ASSISTED LIVING (MOST SIMILAR TO SUBJECT) 1. Byron Park 3. Montego Heights Lodge 4. Kensington Place 5. Chateau Pleasant Hill 11. Villa San Ramon ASSISTED LIVING ONLY 2. Eden Villa (Alzheimers/heavy care) 6. Family Affair 7. Moraga Royale 8. Diablo Lodge 9. Concord Royale 10. San Ramon Lodge The subject would be most similar to those projects offering both congregate and assisted living services although it has an overall quality, age and living environment comparability to Comparable No. 9 (Concord Royale) which only accepts the frailer, assisted living resident. Like the subject, this project was built in the late 1970's and has a predominant studio unit mix. Of the congregate/assisted projects, the subject would be most similar to the older projects with more similar unit mixes such as Comparable No. 3 (Montego Heights Lodge) - a sister ARV project - and Comparable No. 5 (Chateau Pleasant Hill). Montego Heights Lodge in particular, is similar to the subject in target market and in the a la carte assisted living program. However, this project has a more monolithic unit mix and inferior layout than the subject. It is also located within one block of John Muir Hospital but further from Rossmoor. Comparable No. 5 (Chateau Pleasant Hill) has a more varied unit mix than the subject and a slightly superior living environment. The other more comparable projects surveyed are generally newer projects (Comparable Nos. 1 - Kensington Place, 3 - Byron Park and 11 - Villa San Ramon) with a more varied unit mix and a generally superior living environment to the subject. The subject would be competitively placed in the tier of projects below these newer properties although it has a strong reputation in the local market and has aged particularly well. 131 VALLEY VIEW LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES
Congregate (ACLF) Units Assisted Living (AL) Units Age/ ------------------- ----------------------- Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- 1. Byron Park 1991/ 187/19 Studio 431 $1,575 $3.65 $2,650- N/A 1700 Tice Valley Blvd. 0.4 1BR 614-834 $1,850- $3.00- $3,095 Walnut Creek $2,500 $3.01 2BR 877-1316 $2,600- $2.51- $3,300 $2.96 2. Eden Villa 7-95/ 36/72 Studio 300 (est.) Not Available $2,450- $1,650- 2015 Mt. Diablo Boulevard 3.5 $2,750 $1,950 Walnut Creek (shared bath) $2,650- $2,950 (private bath) 3. Montego Heights Lodge 1978/ 169/192 Studio 296-391 $1,100- $3.58- +$150- +$150- 1400 Montego 2.4 $1,400 $3.72 $1,000 $1,000 Walnut Creek 1BR 687 $1,750 $2.55 SP $ 825- $ 850 4. Kensington Place 1988/ 176/44 1BR 450-560 $1,885 $3.37- +$300- N/A 1580 Geary Blvd. 3.2 $4.19 $1,000 Walnut Creek 2BR 760-820 $2,830 $3.45- $3.72 5. Chateau Pleasant Hill 1985/ 112/38 Studio 400 $1,295- $3.24- +$300-$500 N/A 2770 Pleasant Hill Road 3.2 $1,700 $4.25 Pleasant Hill 1BR 500 $1,650- $3.30- $2,000 $4.00 6. Family Affair Ret. 1975/ 120/160 Studio 450-500 $1,600 $3.20- $2,000- $1,800 1081 Mohr Lane 4.5 $3.56 $2,200 Concord 7. Moraga Royale 1987/ 95/182 Studio 525 Not Available $1,600- $850 1600 Canyon Road 4.8 $2,200 Moraga
Assisted Living (AL) Units -------------------------------- Reported No. Name/Location % SSI Occupancy - --- ------------- ----- --------- 1. Byron Park 0% 72% 1700 Tice Valley Blvd. Walnut Creek 2. Eden Villa 0% 3% 2015 Mt. Diablo Boulevard (Opened Walnut Creek 7/95) 3. Montego Heights Lodge 8% 87% 1400 Montego Walnut Creek 4. Kensington Place 0% 100% 1580 Geary Blvd. Walnut Creek 5. Chateau Pleasant Hill 0% 99% 2770 Pleasant Hill Road Pleasant Hill 6. Family Affair Ret. 0% WND 1081 Mohr Lane Concord 7. Moraga Royale 0% 98% 1600 Canyon Road Moraga
132 VALLEY VIEW LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES (CONTINUED)
Congregate Age/ (ACLF) Units Assisted Living (AL) Units Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- 8. Diablo Lodge 1990/ 118/128 Studio 360 (avg.) $1,795- $4.99- +$300- N/A 950 Diablo Road 5.5 $2,095 $5.82 $1,000 Danville 1BR 490 $2,195- $4.48- $2,495 $5.09 2BR 658 (avg.) $2,695- $4.10- $2,895 $4.40 9. Concord Royale 1979/ 120/196 Studio 250 (est.) Not Available $1,200- $850- 4230 Clayton Road 6.5 $1,800 $950 Concord 10. San Ramon Lodge 1991/ 40/60 Studio 219-365 Not Available $2,000- $1,500- 18888 Bollinger Canyon Road 8.6 $2,500 $1,800 San Ramon 11. Villa San Ramon 1992/ 120/120 Studio 400 $1,650- $4.13- $2,750 N/A 9199 Fircrest Lane 8.5 $1,795 $4.49 San Ramon 1BR 500-552 $1,825- $2.85- $2,850 N/A $1,995 $3.65 Lg. 1BR 700 $2,000- $2.86- $2,300 $3.29 2BR 850-870 $2,595- $3.05- $3,600 $1,600 $2,795 $3.21 S. Valley View Lodge 1976/- 125/96 Studio 390 $1,375 $3.53 +$150- +$150- 1228 Rossmoor Parkway Alcove 533 $1,750 $3.28 $1,000 $1,000 Walnut Creek 1BR 571 $1,950 $3.42 SP $1,175
Assisted Living (AL) Units Reported No. Name/Location % SSI Occupancy - --- ------------- ----- --------- 8. Diablo Lodge 0% 100% 950 Diablo Road Danville 9. Concord Royale 25% 98% 4230 Clayton Road Concord 10. San Ramon Lodge 0% 86% 18888 Bollinger Canyon Road San Ramon 11. Villa San Ramon 99% 9199 Fircrest Lane San Ramon S. Valley View Lodge 0% 96% 1228 Rossmoor Parkway Walnut Creek
133 The assisted living projects are generally less directly comparable to the subject as they target the older, frailer senior exclusively. Of the projects, as noted Concord Royale would be most similar to the subject. Comparable No. 8 - Diablo Lodge, is one of the higher quality assisted living projects in the local market and in the entire region. Comparable No. 2 (Eden Villa) is a recently opened project (a conventional vacant nursing home) which targets the heavier care and Alzheimer patient. Our survey of local jurisdictions noted no other active proposed senior housing projects which would pose an imminent competitive threat to the subject. The overall occupancy of the 11 projects surveyed is a strong 95.2% (not including the recently opened Comparable No. 6 - Eden Villa). RETIREMENT HOUSING DEMAND To measure the theoretical size of the subject's target market, we have analyzed demographic statistics obtained from Urban Decision Systems for the relevant target area market which extends about 5 miles outward from the subject site. We obtained income by age population estimates and projections for this area in 1995 and 2000. Our analysis is as follows: 1) Determines the number of households over a minimum age, 75, and minimum income requirement, over $15,000, from 1995 population estimates and 2000 population projections. These parameters establish the different scenarios for calculating the market saturation rates; 2) Calculates total market saturation rates required to fill the subject's 128 beds and all other existing competitive senior facilities (estimated at 1,843 beds); 3) Evaluates the market environment of the subject property given the calculated saturation rates. Our experience in comparable markets, indicates the following regarding saturation rates.
Estimate of Overall Saturation Rate Market Demand --------------- ------------------- 0 - 10% Lightly Competitive 10 - 20% Moderately Competitive 20 - 30% Heavily Competitive 30%+ Extremely Competitive
Our calculated market saturation rates (near 30%) for the subject market area suggest a heavily competitive market. Overall, the subject market area can be characterized as having a large supply of older generation retirement units serving a very large (due to Rossmoor) and affluent, and growing age and income eligible senior population. It is important to note that saturation analysis is only a tool used to measure overall market saturation. It does not consider any 134 potential competitive advantages that a specific facility might offer. Saturation rates can also be calculated using different factors/scenarios. Our methodology of calculating market saturation rates is based on our experience in analyzing the feasibility of numerous congregate senior housing developments. CONCLUSIONS Overall, we noted the following regarding the market environment of Valley View Lodge: 1) The calculated saturation rates suggest a heavily competitive market environment. However, market area occupancy rates are strong at most projects and at the subject. This is due to its good location and reputation which offset its older age, large number of smaller units and more monolithic unit mix. Considering its age, however, the subject offers an above average living environment. The overall average occupancy of all projects surveyed was about 95%. The market's strong demographics (size, affluence) are countered somewhat by a weak local economy which makes seniors on fixed incomes more hesitant to consider the congregate senior housing option and less likely to recognize paper losses on homes which have declined in value from 1989 peaks; 2) The subject has a current occupancy of 96%, consistent with its recent history. The subject has established a market position as a well run, middle to upper middle market project with reasonable rents. The subject's physical plant though older can compete with the other newer projects in its market. Most of the locally competitive projects are newer and have a more varied unit mix than the subject. The subject is competitively helped by its closer proximity to the Rossmoor senior subdivision, with its significant concentration of seniors. The two adjacent nursing homes and medical clinic are also neighborhood assets; 3) The subject is projected to experience a good increase of 10.4% (6,828/6,183) in the age and income eligible target market in the next five years; 4) The subject is owned and operated by ARV Housing Group, one of the leading owner/operators in highly saturated market areas; 5) The subject offers assisted living amenities on an a la carte basis (three different levels of assisted living care) which is not typical in the market area (most other projects charge one flat higher rent). This is a competitive advantage for the subject as residents only need pay for assisted living amenities when needed and at the level needed. These specific conclusions are addressed more fully and used to project pro forma income and expense cash flows in the Income Approach section of this report. 135 VALLEY VIEW LODGE SATURATION ANALYSIS
Saturation Rate (1) ------------------- Subject w/o Subject w/Subject Only # H.H. (2) (1,843 Beds)(3) (1,971 Beds) (128 Beds) ---------- --------------- ------------ ---------- 1995 Estimate - ------------- 75+, $15,000 Income 6,183 29.8% 31.9% 2.1% 2000 Projection - --------------- 75+, $15,000 Income 6,828 27.0% 28.9% 1.9%
NOTES: (1) Market saturation rates represent the percentage of total market demand which is necessary to absorb a) existing or proposed units not including the subject, and b) existing or proposed units including the subject. (2) Number of income and age qualifying senior households within 5-mile radius of site per Urban Decision Systems. (3) Number of competitive units estimated at 100% of Comparable Nos. 1 to 7, 50% of Comparable Nos. 8 to 11, and 300 units at The Waterford (senior congregate condominiums). (4) Evaluation of saturation rates:
Saturation Evaluation of Rate Market Environment ---------- ----------------------- 0% - 10% Lightly Competitive 10% - 20% Moderately Competitive 20% - 30% Heavily Competitive 30%+ Extremely Competitive
136 HIGHEST AND BEST USE Highest and best use is defined as that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. The highest and best use concept must also give recognition of that use to community environment and to community development goals, in addition to wealth maximization of individual property owners. The highest and best use of the land or site, if vacant and available for use, may be different from the highest and best use of the existing improved property. This will be true when the improvement is not an optimum use and yet makes a contribution to total property value in excess of the value of the land only. In order to determine the property's highest and best use, it is necessary to analyze the factors discussed below. AS VACANT The site's physical characteristics are similar to those found throughout the area in terms of size (average), topography (basically flat in its developed portions), exposure (poor) and access (fair). The total land area is large enough to support most other types of development and it is not located along a major thoroughfare. The site is probably too small for a lower density residential subdivision. Therefore, the site's physical characteristics do not seem to limit many development alternatives. The subject site is currently zoned P-D, a specific planned development allowing the subject. This is consistent with other mixed use development along Rossmoor Parkway to the east, including a medical clinic and two nursing homes. It is likely that Walnut Creek would allow many alternate medical office, institutional and possibly some light residential land uses on the subject site. The subject's 27.5 units per acre density is misleading due to its small, mostly studio unit mix. Extreme high density residential or heavy retail land uses are unlikely for the site. Finally, the site itself is not known to be affected by significant easements or encumbrances. In determining which possible use of the land represents the highest and best use of the site, we have analyzed those physical and legal factors affecting the site. It is then necessary to analyze not only the feasibility of potential alternate development but determine which types of these developments is maximally feasible. Our analysis of the congregate housing market in the area indicates a crowded local market with generally good occupancies (with some softness), including the subject's current 96% occupancy. Also, a large increase in the number of age and income eligible seniors over the next five years suggests adequate long term demand for well run projects like the subject. The subject is a profitable project and it is in the middle tier of senior housing facilities in its market. The subject, if it can be filled, would be more feasible than alternate residential uses due to its higher margin per unit and higher density. The subject is also more profitable than almost all possible institutional land uses. Though few to no senior housing projects were being built anywhere in California in 1994 (this is beginning to change in 1995), an owner of the site as vacant would probably develop a senior housing use on the subject site. Therefore, in our opinion, the highest and best use of the site as vacant in 1995 is probably to develop a senior housing project on the subject site. 137 AS IMPROVED Our experience in comparable projects indicate that a senior project of 128 beds is large enough to achieve operating economies of scale. Higher densities for the site would generate difficulties in meeting parking and density requirements with Walnut Creek. Considering the factors noted above, the purpose of this appraisal (to value the subject as is) and because the subject improvements clearly add value over and above the land alone, we have concluded that the highest and best use of the site, as improved, is probably as the subject site as built and operating. The existing improvements and living environment are competitive and functional for congregate and assisted living uses. The subject's overall quality, unit mix and unit sizes (though not optimal given their smaller size and limited variety), common areas, parking and landscaping are average to above average in the local senior housing market despite their relatively older age. 138 SITE VALUATION In order to estimate the fair market value of the subject site, a Sales Comparison Approach is utilized. Recent sales and listings/offers of vacant land considered somewhat comparable to the subject in location, zoning, and utility were analyzed. Adjustments are made as necessary for: date of sale, location, financing terms, physical characteristics such as size, shape, utilities and topography, and development limitations such as zoning restrictions, easements and encumbrances. A number of sales were reviewed in order to determine the market value of the subject site. We have considered the sales of local vacant land sites with somewhat comparable land uses, zoning and locations. In general, we noted few recent vacant land sales in the area due to the lack of recent development activity. Those sales that were considered most comparable are presented in a summary grid on a following page and detailed in the Addenda of this report. Comparable Sale No. 1 is located at 1836 San Miguel Drive, about one and a half miles northeast of the subject. This 33,106 square foot parcel is currently being listed for sale at $430,000 or $12.99 per square foot. Although the site has a commercial-office zoning designation, according to the Walnut Creek Planning Department, the zoning can be changed to residential and the site is located in a residential area (a transitional land use). Six townhomes are planned for the site. The subject's higher density suggests upward adjustment although its interior cul-de-sac location and smaller parcel size suggests downward adjustment from the comparable. Comparable Sale No. 2 is located at 123 Brodia Way, approximately three miles northeast of the subject. The 49,658 square foot site sold in March, 1995 for $720,000 or $14.50 per square foot. The site is zoned for low density residential and several single family lots are available for sale in the adjacent area. In comparison to the subject, this site requires downward adjustment for its smaller parcel size and residential neighborhood location and upward for its less intensive zoning. Comparable Sale No. 3 and 4 are part of the same larger transaction. Comparable Sale No. 3 is located along Tice Creek Drive, northwest of Golden Rain Road inside the retirement community of Rossmoor, about three blocks to the south of the subject. Comparable Sale No. 4 is located on Tice Valley Boulevard, southwest of Rossmoor Parkway immediately outside of Rossmoor and about two blocks to the southwest. Manor Healthcare Corporation, had wanted to build a skilled nursing facility inside Rossmoor on the site of Sale No. 3. This plan, however, was derailed by a lawsuit threat from a Rossmoor residents group and Manor Care agreed to exchange its site with a larger UDC site (UDC had originally sold the Sale No. 3 site to Manor Care) located outside the gates (on the site of Sale No. 4). The December, 1994 swap involved the sale of each site for $1,781,500. Sale No. 4 will be developed with a nursing home. Sale No. 3 will be developed with 25 lower density duplex/triplex units. The nature of the transaction (a somewhat forced sale) suggests upward adjustment to the subject. Both sites are also planned for lower density land uses than the subject. Before adjustment, the sales discussed above indicate a sale price per square foot range of approximately $8.18 to $14.50. The above adjustments to the comparable sales can be summarized as follows: 139 VALLEY VIEW LODGE VACANT LAND SALES
Sale Price Sale Size-SF Proposed ----------------- No. Location/APN Date Sale Price (Acres) Development SF Unit --- ------------ ---- ---------- ------- ----------- -- ---- 1. 1836 San Miguel Drive Listing $ 430,000 33,106 6 Townhomes $12.99 $71,667 Walnut Creek (0.76) 180-010-029 2. 123 Brodia Way 3/95 $ 720,000 49,658 Low Density $14.50 N/A Walnut Creek (1.14) Residential 140-170-006-5 3. Tice Creek Drive, 12/94 $1,781,500 185,130 2 Duplexes & $9.62 $71,260 NW of Golden Rain Road (4.25) 7 Triplexes Walnut Creek 189-130-017-8 4. Tice Valley Boulevard, 12/94 $1,781,500 217,800 Nursing Home $8.18 N/A SW of Rossmoor Parkway (5.00) Walnut Creek 189-130-019-4 (Portion) S. 1228 Rossmoor Parkway - - 198,198 125 Senior - - Walnut Creek (4.55) Housing Units 189-040-045 gross; 154,638 (3.55) net
140
Sale Price/ Comp No. SF Material Adjustment -------- ----------- ------------------- 1 $12.99 Downward (list/sale price differential, location, parcel size); Upward (density) 2 $14.50 Downward (neighborhood, parcel size); Upward (density) 3 $ 9.62 Upward (conditions of sale, density) 4 $ 8.18 Upward (conditions of sale, density)
The overall degree of comparability of these sales to the subject is only fair reflecting the lack of recent comparable vacant land sales in the immediate area. Overall, Comparable Land Sale Nos. 3 and 4 are most similar to the subject in general location, but they were part of a slightly forced transaction and are planned for a lower intensity land use. Sale No. 2 is similar to the subject in location but has a less intensive land use. Sale No. 1 is a listing and therefore is given less weight as it is a less precise indication of value. After considering the specific location and density of the subject site and the evidence provided by the adjusted comparables and recent trends in land values, it is concluded that the fair market value of the fee simple interest for the subject site as of July, 1995, is at a rate of $12.50 per square foot, or for the subject's 154,638 net square feet, an overall site value of $1,932,975 ($12.50/SF x 154,638/SF) or $15,464 per unit. 141 COST APPROACH The Cost Approach considers an estimate of the fair market value of the land, the direct and indirect replacement costs (new) of the improvements, entrepreneurial profit, and accrued depreciation from all causes. Land value is taken from the Site Valuation section of this appraisal. Sources for replacement costs of improvements include: (1) Cost bids or reported actual recent cost of the subject; (2) Actual costs of recently completed comparable improvements; (3) Local contractors' opinions; (4) Marshall and Swift Computer Data Base; and, (5) Marshall and Swift (monthly updated) Cost Manual. Entrepreneurial profit is a necessary element in the motivation to construct improvements. In estimating any accrued depreciation, the appraiser takes into consideration: age, condition, functional utility, detrimental external factors, and any existing leases with contract rent below fair market (economic) rent. The sum total of land costs, direct improvement costs, indirect costs and entrepreneurial profit is the estimated replacement cost new. Subtracting any required depreciation from the replacement cost new indicates the value by the Cost Approach. DIRECT COSTS The estimated building cost per square foot replacement cost new in 1995 for the subject improvements is derived from the Marshall Cost Data Service (and comparable projects as a part of total costs) as calculated below:
Class D, Average Quality Home for the Elderly (Sec. 11, Page 17) -------------------- Base Cost/SF $ 54.16 Sprinkler Adjustment 1.20 HVAC Adjustment (1.20) ---------- $ 54.16 Location Multiplier x 1.23 Time Multiplier x 1.05 ---------- Adjusted Base Cost/SF $ 69.95 Square Footage - GBA x 97,590 ---------- Adjusted Base Cost $6,826,190 ==========
The indicated base rate for the replacement cost new per square foot in 1995 for the existing improvements is $69.95. Our estimate of the base building cost on a per square foot basis includes architectural and engineering fees, overall construction financing cost and operational 142 overhead. They do not include unusual construction and fixtures, loan points, pre-marketing costs, furniture and city/public utility fees. In addition to the adjusted base construction for the building improvements, an allowance for furniture and equipment was included to arrive at total direct construction costs of the development. The allowance for furniture and equipment was estimated using an analysis of the Marshall Cost Manual allowance and industry experience (as shown below) or $2,500 per unit ($312,500 for 125 units). INDIRECT COSTS Indirect Costs - In addition to these direct building costs, we have estimated indirect costs at 7% of total direct building costs. Indirect costs include legal/accounting/appraisal fees, loan fees, premarketing advertising and promotion, city/public utility fees and a contingency fund. The above estimates reflect a replacement cost new (without land or profit) of $7,773,707 or $79.66 per square foot or $62,190 per unit. This is compared using an overall reasonableness test (no specific adjustment is made) to other recently built comparable congregate senior projects as follows:
Total Total No. of Cost/SF Cost/Unit FF&E Project Units Location (w/o Land)* (w/o Land)* Unit - ------- ------ -------- ---------- ---------- ---- Windsor ALF 149 Windsor $79.91 $84,117 $2,516 Park Ridge 93 Vallejo $79.40 $71,138 $2,688 Palm Court 100 Culver City $97.41 $84,000 $3,000
*Includes FF&E, shown separately for comparison purposes. The estimated replacement cost new for the subject is within the lower end of the range of the costs incurred at these similar projects on a square foot basis and below the range on a per unit basis which is reconcilable given the subject's smaller units sizes, more modest quality and predominant studio unit mix. Finally, an entrepreneur or developer will typically expect to be compensated for the time, money, and risk expended in bringing a project to a completed income producing unit. Profit typically ranges from 10% to over 25% of the total construction and land costs, depending on the type of property, anticipated absorption or stabilization period, risk, and the size of the project. A modest allocation of 15% for entrepreneurial profit or toward the middle of the range is considered appropriate for the subject given that the highest and best use of the subject as vacant in 1995 is to probably develop a senior housing project given the subject's competitive position and crowded local market conditions. 143 DEPRECIATION Our site inspection noted no material physical curable, functional or economic depreciation. We did, however, note the following form of depreciation. Physical Incurable Depreciation - An amount for physical incurable depreciation (or the normal wear and tear on improvements as they age) is appropriate considering the subject's 19 year chronological and effective age, calculated as follows:
Direct Building Cost FF&E --------------- ---- Base Cost New $6,826,190 $ 312,500 Plus: Indirect Cost Allocation x 1.07 x 1.07 Plus: Profit Allocation x 1.15 x 1.15 ---------- ---------- Depreciable Base $8,399,627 $ 384,531 Depreciation Estimate (per MVS) 28% 50% ---------- ---------- Total Physical Incurable Depreciation $2,351,896 $ 192,266 ========== ========== Total $2,544,162 ==========
The depreciation percentages are based on our site inspection and Marshall Valuation estimates considering the subject's current 19 year old effective age (5 years for FF&E considering ongoing replacement) and 45 year old total economic life (10 years for FF&E). Physical incurable depreciation must be deducted from estimates of cost new to arrive at an as is valuation. SUMMARY Our estimate of value by the Cost Approach is summarized on the following page with an indicated value conclusion as is, in July, 1995 of $8,618,522, called $8,625,000. 144 VALLEY VIEW LODGE COST APPROACH CALCULATION (CALCULATOR METHOD) Total Land Value (154,638 Net SF at $12.50/SF) $ 1,932,975 Direct Building Costs Building Cost $6,826,190 Furniture & Equipment (125 Units at $2,500/each) 312,500 ----------- Total Direct Building Costs $ 7,138,690 ----------- Total Direct Building and Land Costs $ 9,071,665 Indirect Costs - 7% $ 635,017 ------------ Total Construction and Land Costs $ 9,706,682 Plus Entrepreneurial Profit at 15% $ 1,456,002 ----------- Total Cost New (Including Land) $11,162,684 Less Depreciation Physical Curable 0 Physical Incurable ($2,544,162) Functional Curable 0 Functional Incurable 0 External Obsolescence 0 ------------ Total Depreciation ($ 2,544,162) ----------- Indicated Value, Cost Approach, As Is $ 8,618,522 =========== Rounded to $ 8,625,000
145 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (7/95 to 6/96) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at July, 1995 based on the projected July, 1995 to June, 1996 net income. The theory is that the investor purchasing the property in July, 1995 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of this appraisal and summarized on a following page. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The July, 1995 census reveals an occupancy of 96.1% or 123 beds out of a maximum current configuration of 128 beds. 146 VALLEY VIEW LODGE SUMMARY OF SUBJECT RENT CENSUS at 6/21/95
Private-1BR Private-Studio Semi-Private (Units) (Units) (Beds) Total Number Units/Beds - Rented 9 108 6 123 (96.1%) Rent Range $1,925-$1,950 $1,375-$1,750 $1,062-$1,175 $1,062-$1,950 Rent Average $1,942 $1,673 $1,142 $1,667 Potential Total Rent-Rented $209,700 $2,168,700 $82,200 $2,460,600 Number Units/Beds - Vacant (1) 1 4 - 5 (3.9%) Rent Range $1,950 $1,750 - $1,750-$1,950 Rent Average $1,950 $1,750 - $1,790 Total Potential Rent-Vacant $23,400 $84,000 - $107,400 Total Units/Beds 10 112 6 128 (100%) Gross Potential Rent-Total $233,100 $2,252,700 $82,200 $2,568,000 Per Unit/Bed $1,943 $1,676 $1,142 $1,672
NOTES: (1) Vacant units include: Private 1BR - Unit 125 (1 Unit); Private Studio - Units 123, 133, 143, 150 (4 Units) (2) Subject has no SSI residents. 147 Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $691 per month and not market determined. The comparison of the subject rents (with and without the average assisted living surcharge) to the market area projects surveyed accumulates the monthly rental of all facilities, the average of the 11 projects surveyed and the most comparable projects to the existing Valley View Lodge. Of the projects surveyed, Comparable Nos. 3 - Montego Heights Lodge, 5 - Chateau Pleasant Hill and 9 - Concord Royale (assisted living only) would be most similar to the subject in age, scale, amenities, quality and unit mix. Overall, the subject's one bedroom, studio and semiprivate room rents (with and without the assisted living surcharge) are within the range of the most comparable properties and near (within 5%) the averages (for both congregate and assisted living) of all facilities. Congregate semiprivate living is generally not offered at other projects (with the exception of the subject's sister facility Montego Heights Lodge). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is 96% at the current rents. The subject's rents are appropriate given its older age, limited unit mix and good location. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 2% during the 7/95 to 6/96 projection period, reflecting market conditions and the subject's history. The 2% estimate in the next 12 months represents an average 4% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $572 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 52 residents pay for living assistance at an approximate average of $575 extra rent per month. Our cash flow projections for the subject estimate a stabilized 43% gross utilization (55 beds gross) of assisted living amenities at stabilization. This estimate incorporates the current additional licensing of 40 assisted living beds and an almost immediate increase in assisted living utilization among current residents. The gross assisted living surcharge income is estimated as follows: 148 VALLEY VIEW LODGE COMPARATIVE RENT ANALYSIS ACLF - CONGREGATE RENTS
Private - 1BR Private - Studio ---------------------------------- ---------------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 1 $1,850-$2,500 1 $1,575 2 $2,195-$2,495 3* $1,100-$1,400 3* $1,750 5* $1,295-$1,700 4 $1,885 8 $1,795-$2,095 5* $1,650-$2,000 11 $1,650-$1,795 8 $2,195-$2,495 11 $1,825-$2,300 Range $1,650-$2,500 $1,100-$2,095 Average $2,063 $1,598
AL - ASSISTED LIVING RENTS
Private - 1BR Private (Studio) Semi-Private ------------------------------ ------------------------------- ----------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ --------- ------------ 1 $3,300 1 $2,850 1 $2,150-$2,850 3 $2,200-$2,300 2 $2,450-$2,950 2 $1,650-$1,950 4 $2,185-$2,885 3* $1,550-$1,850 3* $1,275-$1,563 5* $1,950-$2,500 5* $1,595-$2,200 5* $2,495-$3,495 6 $2,000-$2,200 7 $1,600-$2,200 6 $1,800 8 $2,495-$3,495 8 $2,095-$3,195 7 $850 11 $2,850 9* $1,200-$1,800 9* $850-$950 10 $2,000-$2,500 10 $1,500-$1,800 11 $2,750 11 $1,600 Range $1,950-$3,495 $1,200-$3,195 $850-$3,495 Average $2,607 $2,243 $1,724
Private - 1BR Private - Studio Semi-Private ------------- ---------------- ------------ Subject Rented Beds - Subject Range $1,925-$1,950 $1,375-$1,750 $1,062-$1,175 Subject Average $1,942/$2,517** $1,673/$2,248** $1,142/$1,717** (9 Units) (108 Units) (6 Beds) Subject Vacant Beds - Subject Range $1,950 $1,750 - Subject Average $1,950/$2,575** $1,750/$2,325** - (1 Unit) (4 Units)
*Comparable Nos. 3 - Montego Heights Lodge; 5 - Chateau Pleasant Hill; and 7 - Concord Royale are most similar to the subject. **Includes average assisted living surcharge of $575 per month. 149
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- ------------- at 6/95 $572 52 (net) - at 7/95 to 6/96 $575 70 (gross) $483,000
In addition to total potential gross room revenue, we have included miscellaneous income at 1.0% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 6/95 96.1% 3.9% 7/95 to 6/96 (Stabilization) 95.0% 5.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 121.6 residents or an occupancy/vacancy of 95.0% (121.6/128). This conclusion is slightly lower than the current occupancy (123 beds) but is consistent with the subject's actual recent occupancy trends, the subject's current higher average of residents, long term occupancy/unit turnover and operator projections. The estimated market vacancy factor (5% to 8%) reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (an older project in a crowded local market) and large number of smaller units mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1993, 1994, 4 months ending 4/95) and budget (1995) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at July, 1995 ($10,100,000 times the tax rate of 1.0626% plus approximately $13,643 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; 150 VALLEY VIEW LODGE HISTORICAL INCOME AND EXPENSE
Historical --------------------------------------------- Operator 4 Months Goal Year Ending Year Ending Ending 1995 Budget Revenues 12/93 12/94 4/30/95 Annualized 1995 - -------- ------------ ------------- --------- ---------- ------ Rental Income $ 2,337,333 $ 2,456,025 $ 831,496 $ 2,494,488 $ 2,507,813 Assisted Living Income 231,250 321,567 123,447 370,341 457,500 Non-Operating Revenue $ 32,024 $ 35,709 $ 9,071 $ 27,213 $ 38,338 ----------- ----------- --------- ----------- ----------- Total Revenues $ 2,600,607 $ 2,813,301 $ 964,014 $ 2,892,042 $ 3,003,651 Expenses (1) - ------------ Real Estate Taxes $ 75,876 $ 82,430 (2) (2) $ 83,092 Insurance 16,912 22,500 (2) (2) 25,276 G&A 45,320 57,592 (2) (2) 55,990 Utilities 159,499 166,783 (2) (2) 162,390 Payroll/Benefits 717,863 798,708 (2) (2) 850,728 Maintenance 69,041 68,679 (2) (2) 71,520 Activities 13,826 11,965 (2) (2) 12,750 Marketing 19,051 16,848 (2) (2) 20,936 Laundry & Linen 12,571 10,195 (2) (2) 14,925 Dietary 178,270 183,906 (2) (2) 183,819 Supplies 42,555 36,469 (2) (2) 34,800 ----------- ----------- ---------- ------------- ----------- Total Operating Expense $ 1,350,784 $ 1,456,075 $ 496,506 $ 1,489,518 $ 1,516,226 (51.9%) (51.8%) (51.5%) (51.5%) (50.5%) Net Operating Income $ 1,249,823 $ 1,357,226 $ 467,508 $ 1,402,524 $ 1,487,425 =========== =========== ==== ===== =====
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 151 Insurance - estimated at 1.0% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 10% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 6% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 3% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 2% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation reflects the costs to a typical operator considering the locally competitive market; Housekeeping - estimated at 4.5% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $8.50 per day per resident (121.6 occupied beds x $8.50/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 8.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 55% of the residents (about $9.73 per resident day for 67 residents); Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($312,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $46,875 is equal to 1.6% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 52.6% of effective gross income or $12,860 per occupied bed (121.6 beds). This percentage is lower than typical because of the subject's high revenue base caused 152 in part by the more modest semiprivate census (and no lower rent SSI's). A comparison to similar congregate/assisted living properties before management fees and reserves illustrates the following:
Inflated Stabilized Per to 1995 Location Expense Ratio Resident/Yr. at 4%/Yr. -------- ------------- ------------ -------- 10 ARV Properties California 61.7% $ 9,782 (1994) $10,173 13 Angeles Housing Properties National 56.6% $ 8,966 (1993) $ 9,698 Greenhills Millbrae 55.7% $ 8,234 (1992) $ 9,262 Meadows Napa 56.3% $ 8,418 (1992) $ 9,469 Country Inn Fremont 52.5% $ 7,718 (1992) $ 8,682 Westmont Santa Clara 57.7% $ 9,520 (1992) $10,296 Canyon Hills Club Anaheim 61.2% $11,918 (1994) $12,395 Courtyard San Marcos 51.6% $ 9,181 (1993) $ 9,930 6 Facility Averages 55.8% $10,006 Subject - 1993 Historical 51.9% $11,164 Subject - 1994 Historical 51.8% $12,034 Subject - 1/95 to 4/95 Historical 51.5% $12,310 Subject - 1995 Budget 50.5% $12,531 Subject Projected (7/95 to 6/96) 52.6% $12,860
As illustrated, the projected expenses for the subject are above the average of the expense histories of the projects listed above and above the averages of 10 other ARV facilities. The subject will always have slightly lower expenses on a percentage of income basis because of its higher revenue base (limited semiprivate and no SSI beds) and higher on a per patient basis due to the location within a market area of higher operating costs/rents and its high assisted living utilization. Our projections consider the experience at the comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The survey indicated a median annual cost per unit of $10,577 before management fees ($11,541 total less $964 in management fees). This compares to our per unit estimate for the subject of $12,510 ($1,563,746/125) in the next 12 months. Finally, a reconciliation of our adjusted period one (7/95 to 6/96) projected expenses to 1995 actual annualized expenses illustrates the following: 153 Actual Total Expenses (1/95 to 4/95 Annualized) $1,489,518 ========== Operator Budget (1995) $1,516,226 ========== Projected Total Expenses Per SLVS (7/95 to 6/96) $1,759,224 Less: Management Fees ($ 148,603) Less: Replacement Reserves ($ 46,875) ---------- Adjusted Projected Total Expenses (7/95 to 6/96) $1,563,746 ========== Difference (over 1995 actual, reflects increase in property taxes, assisted living utilization, inflation) +5.0% (over 1995 budget, reflects increase in property taxes) +3.1%
CAPITALIZATION PROCESS Because Valley View Lodge is being appraised as of July, 1995 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of July, 1995 to June, 1996 is capitalized at a rate of 12.0% to get an indicated total property value at July, 1995. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 11% to 15%. These are illustrated in sales of comparable facilities in the Sales Comparison Approach of this report and are summarized as follows:
Comparable Indicated Sale No. Property Cap Rate -------- ---------- --------- 1 Oak Tree Villa 12.3% 2 El Camino Gardens 11.2% 3 Casa Sandoval 9.0% 4 Lomita Lodge 12.2% 5 Carson Oaks 12.4% 6 Park Ridge 11.3% Range 9.0%-12.4% Average 11.4% 25 Facility Average 12.5%
154 In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 10.0% interest with an amortization term of 20 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .1158. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 15%. The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .1158 .0811 Equity 0.30 x .15 .0450 ----- 1.0 x Overall Rate .1261 OAR 12.61%
These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.4% 25 Statewide Sales 12.5% SLVS Investment Survey 12.1% Band of Investment 12.61%
Based upon the current characteristics of the subject, namely, its overall average to slightly above average cash flow risk as reflected in its higher projected stable occupancy (about 95%), higher average age and cash flow (no SSI beds, all private pay beds) and giving weight to the subject's very high income per bed, which is derived from the subject's established niche as a middle 155 market, good quality assisted living project in the area, and considering the affluent local market and sales in the region in the recent past, we have concluded that 12.0% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. Though the subject has established a strong competitive niche, is a very well maintained property for its age and is located close to Rossmoor (all factors suggesting a lower cap rate), its very high income per bed and indicated sale price ($80,800/unit), almost 20% above the indicated sale price of any other comparable California sale in the 1990's, suggest that a buyer, in our opinion, would moderate any purchase offer to be more consistent with the recent sale of similar properties in California and to compensate him for the greater uncertainty of ownership at this higher price (cash flow risk, resale ability). This increased uncertainty and the probable smaller pool of potential buyers at this price level, both support an upward adjustment in estimating an appropriate capitalization rate for the subject. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at July 14, 1995 of $10,106,925, rounded to $10,100,000 ($80,800/unit). 156 VALLEY VIEW LODGE PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (7/95-6/96) ----------- Average Occupancy (All Beds) 95.0% (121.6 Beds) Average Net Rental (All Beds) $1,705 Potential Gross Rent Income - 1BR Private - 10 Units at $1,982/Mo. Avg. $ 237,823 Studio Private - 112 Units at $1,710/Mo. Avg. 2,297,595 Semiprivate - 6 Beds at $1,165/Mo. Avg. $ 83,868 ----------- Potential Gross Rent Income $ 2,619,286 Plus: Assisted Living Surcharges (70 Beds at $575/mo.) $ 483,000 Plus: Miscellaneous Income (1% of PGRI) $ 26,193 ----------- Potential Gross Income $ 3,128,479 Less: Stabilized Vacancy & Collection Losses - 5% ($ 156,424) ----------- Effective Gross Income $ 2,972,055 Expenses - % of EGI Real Estate Taxes - $ 120,966 Insurance 1.0% 29,721 Management 5.0% 148,603 G&A 10.0% 297,206 Utilities 5.5% 163,467 Maintenance 3.0% 89,162 Activity & Trans. 2.0% 59,441 Marketing 2.0% 59,441 Housekeeping 4.5% 129,318 Dietary $8.50/PRD 377,264 Personal Care 8.0% 237,764 Replacement Reserves - $ 46,875 ------------ Total Expenses $ 1,759,224 (59.2%) Stabilized Net Operating Income $ 1,212,831 Capitalization Rate .12 -------------- Capitalized Value $10,106,925 ====== Called $10,100,000 Per Unit $ 80,800
157 SALES COMPARISON APPROACH The Sales Comparison Approach is a method of comparing the subject property to recent sales and/or listings of similar types of properties located in the subject or competing areas. Each of these sales must be analyzed to establish estimate elements of comparability. The reliability of this technique depends on 1) the degree of comparability between the subject and the sales properties; 2) the length of time since the sales were consummated; 3) the accuracy of the sales data; and, 4) the absence of unusual conditions affecting the sale. On the following page, we have included 25 sales of congregate senior housing properties which can be considered somewhat similar to the subject. The purpose of including this listing is to provide the reader with some context of western US senior housing sales beyond those specifically discussed below. This additional information can be helpful because of the special purpose nature and general illiquidity of the senior housing market. Some of the sales in the last 18 months represent REO's. Some project buyers present in today's market are still "bottom fishing" where distressed properties can be purchased at substantial discounts from replacement cost. However, these buyers have a shrinking supply of properties available to choose from. This has resulted in an overall trend of decreasing cap rates (higher sale prices). Those more recent transactions considered most comparable to the subject are summarized on the following page and discussed in greater detail in the Addenda of this report. The sale prices noted below are discussed and reported on a sale price per unit (total going concern) basis. Comparable Sale No. 1 is Oak Tree Villa in Scotts Valley which just recently sold in June, 1995 for $11,900,000 or $58,900 per unit. The 202 congregate/assisted living project, built in 1988 was only 72% occupied at the date of sale with an indicated cap rate at a full occupancy of 12.3%. The project has a high quality physical plant although it is located in a relatively less densely populated area (20 miles south of Silicon Valley; about 5 miles north of Santa Cruz). 20% of the units of this project are allocated to low income (HUD) residents. Comparable Sale No. 2 is El Camino Gardens in Carmichael which sold in May, 1995 for a contracted price of $9,350,000. An estimated $650,000 in deferred maintenance makes the effective sale price of the project approximately $10,000,000 or $34,965 per unit. This 286 ACLF/112 ALF, 1984 built project, was 82% occupied at the time of sale and has an average physical plant. The property had an indicated cap rate at a stabilized occupancy of 11.2%. The property was purchased by entities affiliated with the subject owner (ARV Housing). The lower cap rate of this sale is partially explained by the buyer's plans to substantially upgrade the property in order to increase the assisted living census. Comparable Sale No. 3 is the February, 1995 sale of Casa Sandoval which sold at auction for $15,000,000 or $63,205 per unit. The 1989 built, Hayward project includes 238 total units. The property was only 81% occupied at the sale date, reflecting a slightly forced sale due to the financial difficulties of the prior owner. The property was underperforming at the date of sale and the buyer plans an aggressive conversion of many units of the project to assisted living. The overall quality of this project is average despite its newness. The indicated cap rate of the sale has been estimated at a low 9.0% at a stabilized occupancy (before consideration of any assisted living conversion). 158 WESTERN US ACLF/AL SENIOR HOUSING SALES SUMMARY LAST 24 MONTHS
Gross Expense Inc. Ratio No. Facility Name Location Age Units $/Unit/Mo (%) Date - --- ----------------------- ------------------ ----- ----- --------- ------- ---- 1. The Highlander Seattle, WA 1979 121 $1,066 55.0% 6/93 2. Almond Avenue Orangevale, CA 1987 39 $1,598 65.2% 7/93 3. Summerfield Tigard, OR 1980 155 $1,100 60.0% 8/93 4. Renton Villa Renton, WA 1983 78 $1,366 66.7% 8/93 5. Sherwood Villa Tacoma, WA 1981 98 $1,328 69.0% 8/93 6. Celeste Villa Modesto, CA 1975 81 $1,080 72.5% 10/93 7. Springs of Napa Napa, CA 1986 102 $1,332 55.0% 11/93 8. Summerhill Puyallup, WA 1987 96 $1,241 59.4% 2/94 9. Chula Vista Inn Chula Vista, CA 1975 112 $1,034 75.0% 6/94 10. Villa San Marcos San Marcos, CA 1986 100 $1,191 65.0% 6/94 11. Camlu Phoenix, AZ 1979 88 $1,153 65.0% 6/94 12. Gold Star Manor Fullerton, CA 1985 80 $1,146 70.0% 6/94 13. Hacienda de Monterey Palm Desert, CA 1989 180 $1,813 65.8% 7/94 14. Park Ridge Vallejo, CA 1991 93 $1,632 60.0% 7/94 15. Carson Oaks Stockton, CA 1989 76 $1,462 60.0% 7/94 16. Villa Ocotillo Scottsdale, AZ 1973 102 $1,242 60.0% 9/94 17. Lomita Lodge Ojai, CA 1970 26 $1,999 75.0% 12/94 18. Brea Residential Brea, CA 1990 98 $1,377 67.0% 1/95 19. Whittier Retirement Whittier, CA 1973 72 $1,187 67.0% 1/95 20. Canyon Hills Club Anaheim, CA 1989 212 $1,661 67.1% 2/95 21. Casa Sandoval Hayward, CA 1989 238 $1,346 65.0% 2/95 22. Valley Crest Apple Valley, CA 1985 37 $1,600 65.0% 2/95 23. Amaryllis Court Anaheim, CA 1969 33 $1,391 75.0% 3/95 24. Fulton Villa Stockton, CA 1973 76 $ 763 72.1% 3/95 25. Oak Tree Villa Scotts Valley, CA 1988 202 $1,399 56.8% 6/95 Low 1969 26 $ 763 55.0% High 1991 238 $1,999 75.0% Low (minus 2 lowest) 1973 37 $1,066 56.8% High (minus 2 highest) 1982 104 $1,340 65.3% Average: 1983 110 $1,330 64.9% Sale Price No. Facility Name (000) $/Unit OAR $/SF GIM - --- ----------------------- ------- -------- --------- -------- --- 1. The Highlander $ 5,200 $41,322 13.4% $52.73 3.36 2. Almond Avenue $ 2,100 $53,864 12.4% $57.00 2.81 3. Summerfield $ 6,550 $42,532 13.2% $80.84 3.20 4. Renton Villa $ 3,000 $38,462 14.2% $46.51 2.35 5. Sherwood Villa $ 2,800 $28,571 17.3% $45.67 1.79 6. Celeste Villa $ 1,900 $23,457 13.7% $32.75 1.81 7. Springs of Napa $ 6,300 $61,765 11.7% $69.23 3.86 8. Summerhill $ 5,500 $57,292 10.5% $62.74 4.40 9. Chula Vista Inn $ 2,675 $23,884 13.0% $41.10 1.92 10. Villa San Marcos $ 3,951 $39,510 12.7% $73.17 2.76 11. Camlu $ 3,800 $43,182 11.2% $83.66 3.12 12. Gold Star Manor $ 2,880 $36,000 11.5% $128.34 2.62 13. Hacienda de Monterey $ 7,250 $40,278 18.5% $41.36 1.85 14. Park Ridge $ 5,785 $62,204 11.3% $68.10 3.54 15. Carson Oaks $ 4,200 $55,263 12.4% $66.95 3.23 16. Villa Ocotillo $ 3,500 $34,314 14.9% $43.34 2.30 17. Lomita Lodge $ 1,350 $51,923 12.2% $135.00 2.06 18. Brea Residential $ 4,800 $48,980 11.1% $84.24 2.96 19. Whittier Retirement $ 2,875 $39,937 11.8% $75.16 2.80 20. Canyon Hills Club $13,450 $63,443 10.3% $65.92 3.18 21. Casa Sandoval $15,000 $63,025 9.0% $69.23 3.90 22. Valley Crest $ 2,200 $59,459 11.3% $118.71 3.10 23. Amaryllis Court $ 1,150 $34,848 11.0% $71.72 2.09 24. Fulton Villa $ 1,450 $19,079 11.5% $25.29 2.08 25. Oak Tree Villa $11,900 $58,911 12.3% $69.18 3.51 Low $ 1,150 $19,079 9.0% $32.75 1.79 High $15,000 $63,443 18.5% $135.00 4.40 Low (minus 2 lowest) $ 1,450 $23,884 10.5% $41.36 1.85 High (minus 2 highest) $11,900 $62,204 14.9% $118.71 3.86 Average: $ 4,863 $44,860 12.5% $68.72 2.82
159 VALLEY VIEW LODGE COMPARABLE IMPROVED SALES
Age/No. Sale Price/ Sale No. Name/Location of Units Date Sale Price Unit Price/SF --- ------------- -------- ---- ---------- ----- -------- 1. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $69.19 100 Lockwood Lane 202 Scotts Valley, CA 2. El Camino Gardens 1984/ 5/95 $10,000,000 $34,965 $62.19 2426 Garfield 286 Carmichael, CA 3. Casa Sandoval 1989/ 2/95 $15,000,000 $63,025 $69.23 1200 Russell Way 238 Hayward, CA 4. Lomita Lodge 1970's/ 12/94 $1,350,000 $51,923 $135.00 225 N. Lomita 26 Ojai, CA 5. Carson Oaks 1989/ 7/94 $4,200,000 $55,263 $66.95 6725 Inglewood Avenue 76 Stockton, CA 6. Park Ridge 1991/ 7/94 $5,785,000 $62,204 $68.10 2261 Tuolumne 93 Vallejo, CA (1) Estimated at 92% occupancy
Indicated Occupancy Overall No. Name/Location at Sale Rate --- ------------- ---------- ------- 1. Oak Tree Villa 72% 12.3% (1) 100 Lockwood Lane Scotts Valley, CA 2. El Camino Gardens 82% 11.2% (1) 2426 Garfield Carmichael, CA 3. Casa Sandoval 81% 9.0% (1) 1200 Russell Way Hayward, CA 4. Lomita Lodge 81% 12.2% (1) 225 N. Lomita Ojai, CA 5. Carson Oaks 95% 12.4% 6725 Inglewood Avenue Stockton, CA 6. Park Ridge 55% 11.3% (1) 2261 Tuolumne Vallejo, CA
160 Comparable Sale No. 4 is the December, 1994 sale of Lomita Lodge, a small assisted living project located in Ojai. The 26 unit project sold for $1,350,000 or $51,923 per unit. The property was originally built in the 1940's and expanded in the 1970's. The project has high rents but was only 81% occupied at the date of sale. The indicated cap rate at a stabilized occupancy is 12.2%. Comparable Sale No. 5 is the July, 1994 sale of Carson Oaks, a 76 unit congregate senior project located in Stockton (bought by the same buyer as Comparable No. 1). Stockton is a Central Valley community with an overall affluence below Livermore. The 1989 built project was purchased for $4,200,000 or $55,263 per unit. The project was 95% occupied at the date of sale. This project has an overall average to above quality, a weak location (behind a shopping mall) and can be considered a middle to upper middle market project. The sale price suggested an estimated capitalization rate of 12.4%. Comparable Sale No. 6 is the Park Ridge in Vallejo which sold in July, 1994 for $5,785,000 or $62,204 per unit. The 93 ACLF (including 14 licensed assisted living beds) is a recently built (1991), modern project in a generally less affluent Bay Area suburb. The project was only 55% occupied at the date of sale and has had a very difficult time leasing. The property could be considered mildly distressed. This is attributable to several factors including a crowded local competitive market, a weak real estate market and the project possibly being too high end for its market. The indicated overall capitalization rate of this sale at a stabilized 92% occupancy is estimated at 11.3%. The comparables described above indicate unit values of between $34,965 per unit to $63,025 per unit before adjustments. Overall, in reviewing these sales for comparability to the subject, we observed significant differences. Most notably, differences in location, physical plant, occupancy, unit mix and income producing ability make direct and precise comparison to the subject property difficult. Therefore, in our opinion, the overall degree of comparability of these sales to the subject is only fair. Nevertheless, after the adjustments described below, these comparables should provide approximate parameters for an indicated value of the subject property. The first adjustment to the comparable sales (the yet to stabilize Sale Nos. 1, 2, 3, 4 and 6) reflects the difference in the stabilized occupancy of the comparables at their date of sale to the 95% projected stabilized occupancy of the subject. The amount of the adjustment is interpolated assuming an approximate 20% to 25% difference in value between an empty project and one that is stabilized. On a following page, we have also adjusted each of the comparable sales for the difference in the ratio of net income per the total number of units. These adjustments should provide an approximate value range from the subject. We have adjusted each comparable by the ratio of the estimated stabilized net income per unit of the subject ($9,703) to the net income per unit of the comparables. This ratio should theoretically reflect differences in stabilized occupancy, location and quality (through rents), unit mix and operating efficiencies (through expenses). 161 VALLEY VIEW LODGE COMPARABLE IMPROVED SALES ADJUSTMENTS
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 ----- ----- ----- ----- ----- ----- Sale Price Per Unit $58,911 $34,965 $ 63,025 $51,923 $55,263 $62,204 Before Adjustment Occupancy Adjustment +10% +5% +5% +5% - +15% Net Income Per Unit +34% +147% +72% +54% +42% +38% Adjustment (Subject (1) ($ 9,703/ ($ 9,703/ ($ 9,703/ ($ 9,703/ ($ 9,703/ ($ 9,703/ NOI/Unit/Comp/NOI/Unit $ 7,246) $ 3,923) $ 5,653) $ 6,314) $ 6,851) $ 7,020) ------- ------- -------- ------- ------- ------- Sale Price Per Unit After Adjustment $86,835 $90,684 $113,823 $83,959 $78,473 $98,718 ======= ======= ======== ======= ======= =======
Range (Less Outlying Sale No. 3): $ 78,473 - $ 98,718 x 125 Units x 125 Units ------------ -------------- Indicated Value Range: $9,809,125 - $12,339,750 ========== =========== Called: $9,800,000 to $12,350,000
(1) Subject stabilized NOI/Unit - $1,212,831/125 Units 162 As illustrated, after adjustment, these sales indicate a value range for the subject of $78,473 per unit to $98,718 per unit (less the outlying Sale No. 3). This range provides approximate parameters for a value indication for the subject. In our opinion, given the above adjustments, the indicated value of the subject as is in July, 1995 is between $78,473 to $98,718 per unit, calculating to a total indicated fee simple value using a Sales Comparison Approach of $9,809,125 ($78,473/unit x 125 units) to $12,339,750 ($98,718/unit x 125 units), rounded to $9,800,000 to $12,350,000. As described in the Reconciliation and Conclusion section of this appraisal, due to significant differences in location, occupancy, quality, income producing ability and amenities package, our final value conclusion does not place great weight on this value estimate reflecting the general lack of comparability, large adjustments and wide range of indicated values. 163 VALUATION OF FAVORABLE FINANCING The preceding valuation assumes conventional market financing. However, the subject includes favorable financing in the form of a deed of trust issued in 1976 ($3,286,200, 40 year note). The current balance due of the note is approximately $2,822,704. The present value of this financing must be added to our valuation estimates described above because a third party buyer of the subject should be willing to pay for the debt service savings accruing from this assumable note. Our estimate of the effect of the favorable financing is illustrated on the following page. These assumptions are as follows: Note Principal at 7/95: $2,822,704 Interest Rate: 8.25%, Fixed Note Term: 11/2016, Assumable Conventional Financing - Interest Rate: 9.5%, Fixed
To calculate the value of this favorable financing, we have extensively surveyed leading lenders (REITS, conventional banks, pension funds, FANNIE MAE lenders) in the senior housing industry to determine a conventional financing interest rate. The consensus of these lenders is that although conventional taxable financing of any projects and senior projects in particular is still difficult in mid 1995, that an average taxable interest rate of 9.5% to 10.0% would not be considered unreasonable given the specialized nature of a senior housing project. This is confirmed by a late 1994 survey of lenders as illustrated on the following pages and supporting an approximate 9.5% to 10.0% loan rate for senior housing properties. Therefore, considering recent downward trends in interest rates for senior housing properties, we have estimated a current market interest rate of 9.5%. Our calculations estimate the present value of the remaining monthly interest payment on net funds to be received from the bond financing discounted by the market interest rate less an approximation of the incremental costs to be incurred as part of the HUD financing compared to conventional financing (annual audits) plus the present value of current replacement reserve balances. The total differential or contribution to value from the favorable financing is estimated at $269,528, rounded to $275,000 as calculated on the following page. COMPARABLE MARKET TRANSACTION As noted in the Special Conditions section of this report, actual market transactions involving the sale of senior housing properties and tax exempt financing are rare. We are familiar with the August, 1992 of The Meadows, located along Atrium Parkway in Napa. The 1988 built, 221 unit congregate facility was sold by Sacramento Savings and Loan to Old Fellows of Napa, Inc. (a not-for-profit) for $11,945,000 ($11,500,000 contracted sale price plus $445,000 sales transaction charges). The buyer partially funded the purchase with a $6,500,000 tax exempt bond issue 164 VALLEY VIEW LODGE VALUATION OF FAVORABLE FINANCING
Present value of financing at market rate (9.5%): $2,822,704 Present value of financing at below market rate (8.25%): Present value of $23,468 (1) monthly payment for 21.3 remaining years at 9.5% market rate $2,555,366 ---------- Difference in present value of financing $ 267,338 Less: $6,000/year annual HUD audit charges (through 2016) discounted to 7/95 at 9.5% ($ 53,766) Plus: Present value of replacement reserve balance at 7/95 ($88,817) discounted to 7/95 at 6.0% (9.5% market interest rate less 3.5% estimated interest earned on escrow funds) $ 55,261 ---------- Net Difference in present value of financing $ 268,833 ========== Called $ 275,000
(1) Monthly payment for $3,286,200, 40 years, 8.25% interest rate plus reserve obligations. 165 (floating interest rate, 30 year amortization). The value of this favorable financing was estimated at $1,100,000 using the same market financing comparison described above for the subject. This would suggest that the capitalized cash flow or going concern value of the property was about $10,845,000 ($11,945,000 less $1,100,000). Our appraisal value of the subject's going concern value was within 2% of this figure. This example provides some credibility (in addition to a theoretical analysis) to the methodology and conclusions set forth above for the subject. 166 RECONCILIATION AND CONCLUSION
Market Value As Is - 7/14/95 --------------- Indicated Value, Cost Approach $ 8,625,000* Indicated Value, Income Approach $10,100,000* Indicated Value, Sales Comparison Approach $ 9,800,000- $12,350,000*
*before addition of value for favorable financing The development of a final estimate of value involves judgment in a careful and logical analysis of the procedures leading to each indication of value. The judgment criteria are appropriateness, accuracy and quantity of evidence. The Sales Comparison Approach is most applicable when closely comparable properties are bought and sold in the market on a regular basis. We relied on the sales of somewhat comparable facilities to estimate value using this approach. However, due to overall property type illiquidity, differences in occupancy, location and income producing ability, direct comparison to the subject property is difficult as suggested by the wide range of indicated values. Considering these factors, the Sales Comparison Approach is considered to produce a less reliable indication of value. The Cost Approach is most applicable when the improvements are new or nearly new and where a few number of subjective adjustments must be made to reflect depreciation, if any. In estimating construction cost new, we relied on well documented general cost information provided by the Marshall Valuation Service which was generally supported by actual costs incurred at similar projects. Our estimate of land value is somewhat supported by the sale of similarly zoned vacant land parcels in the region. Adjustments for physical incurable depreciation are approximations but were estimated using reasonable analyses. Considering these factors and the subject's high income producing ability, the Cost Approach is considered to produce a less accurate indication of value. This approach is also rarely relied on by investors in this type of property. The Income Approach is typically considered the strongest value indicator for properties purchased primarily for their income producing potential. This approach most accurately reflects the impact of stabilized occupancy rates for properties such as the subject. Comparable market rental rates and an analysis of the current census were available for the subject units to arrive at an estimate of fair market rent and gross income. Expense data was substantiated by historical data and comparable projects. Finally, our estimate of the capitalization rate is appropriate reflecting current market conditions, the subject's overall average cash flow risk and market position and the indicated capitalized cash flow sale price in comparison to the sale prices of other similar properties in the recent past. Overall, the Income Approach is considered a strong and only truly reliable indicator of value for the subject property. 167 After considering the factors leading to each indication of value, the Income Approach is considered to be the most appropriate for the purpose of this appraisal. The Sales Comparison Approach is given little to no weight due to the illiquidity of the market, shifting market trends and the wide range of indicated values. The Cost Approach is also given little to no emphasis, based on the deductions for depreciation and our highest and best use discussion. The final market value estimate of the fee simple total going concern interest of the subject property as is, without the value of any favorable financing, on July 14, 1995, is: TEN MILLION ONE HUNDRED THOUSAND ($10,100,000) DOLLARS The inclusion of an estimated $275,000 in value attributable to assumable favorable financing suggest a total reported valuation of $10,375,000. 168 ALLOCATION OF FINAL VALUE DETERMINATION TO COMPONENTS We have allocated our total going concern value determination to various components including real estate, business and personal property value. To allocate the going concern value estimate, we have utilized both the Cost and Income Approaches to estimate a reliable and reasonable allocation to each component. A summary of our allocation is illustrated below: Allocation of Final Going Concern Value Determination
As Is - 7/14/95 ------- Total Going Concern Value $10,100,000(3) Personal Property (1) 150,000 Business Value (2) 1,225,000 ----------- Real Estate Value $ 8,725,000 ===========
(1) FF&E estimated from Cost Approach estimates less accrued depreciation. (2) Business value estimated from the calculated difference in value of the subject as is (full occupancy) compared to its value as if it were vacant as shown below. (3) Before addition of value of favorable financing. The personal property value is taken from the Cost Approach estimates set forth in Cost Approach section of this report. This estimate reflected a replacement cost new of $2,500 per unit (total of $312,500 FF&E cost new for 125 units) which must be adjusted to its current depreciated value. Given the estimated five year old average age of the subject's personal property items and ongoing replacement, we have estimated a 50% allocation for depreciation at 7/14/95 or an as is value of $312,500 x 50% = $156,250, rounded to $150,000. The business component of the subject value reflects the fact that the subject is a business requiring specialized management services such as meals, housekeeping and social activities represent complications in the operation of a senior housing facility and require specific managerial expertise. An appropriate method to estimate the business value component is to compare the value of the subject as is ($10,100,000) as a fully operating stabilized property to its estimated value as if it were empty, as estimated below ($8,875,000). The estimated business value would be the difference in these values or $1,225,000. 169 Approximate Valuation of Subject As If Empty at 7/95
Period 1 Period 2 Period 3 (7/95-6/96) (7/96-6/97) (7/97-6/98) ----------- ----------- ----------- Average Occupancy 38.75% 76.25% 95.0% Potential Gross Income $3,128,479 $3,253,618 $3,383,763 Effective Gross Income $1,212,286 $2,480,884 $3,214,575 Total Expenses $1,231,619 $1,646,851 $1,903,028 ---------- ---------- ---------- Net Income ($ 19,333) $ 834,033 $1,311,547 ========== ========== ========== Discounted Value ($ 16,812) $ 630,612 $8,263,839 ========== ========== ========== Total $8,877,639 ========== Called $8,875,000 ==========
Assumptions: 20% preleasing; 4.0 units/month absorption; 4% annual rent increases; stabilized expense estimated at 59.8% of stabilized effective gross income; expenses decreasing from the stabilized period three at 4%/year for inflation and also for lower occupancy by 10% in period two, 30% in period one; 12.0% terminal cap rate; 15.0% discount rate. The real estate component is the remainder or residual of the final value determination after a subtraction for the personal property and business value components, or as illustrated for the subject: $8,725,000 at July 14, 1995, as is, or 86.4% of the total going concern value. In our opinion, though these allocations are estimates, they can be considered reliable and reasonable given the analysis set forth above. 170 MARKETING PERIOD The subject's estimated marketing time is 6 months. This conclusion is based on discussions with those brokers specializing in the sale of senior housing projects, our knowledge of specific sale transactions (which have had widely variable marketing times) and considering current market conditions and the characteristics of the subject. Marketing times at several similar projects indicate the following: Casa Sandoval Hayward 6 months Fulton Villa Stockton 4 months Pacific Springs Escondido/El Cajon 5 months Park Ridge Vallejo 5 months
In our opinion, the subject would probably experience an average marketing time (regarded as about 6 months). The majority of buyers of senior housing projects are still seeking (and have fewer and fewer available opportunities) distressed properties where large increases in cash flow value are possible. The subject is not a distressed property given the current 96%+/- stabilized occupancy and as such would have a lesser appeal to some market buyers (subject has limited upside potential although its assisted living utilization could be increased). The subject's high indicated sale price per unit would likely cause some potential buyers to be more cautious in any purchase of the subject. Nevertheless, the subject would be viewed as a solid cash flow project with a very well maintained physical plant (albeit with a limited unit mix) in a good overall, affluent location. The subject's most likely buyer would be a larger facility owner/operator of other comparable congregate senior housing properties in California (i.e. Holiday Retirement, Manor Care, Leisure Care, Capital Senior Living, Brim, Health Care Group, etc.). 171 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions reached or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Mary Catherine Wiederhold, Appraisal Associate provided significant professional assistance to the person signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Mary Catherine Wiederhold on July 14, 1995. 172 12. The concluded total going concern market value estimate of the fee simple interest of Valley View Lodge, including the value of favorable financing, is as follows: MARKET VALUE "AS IS" (JULY 14, 1995): TEN MILLION THREE HUNDRED SEVENTY FIVE THOUSAND ($10,375,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - ------------------------------- Michael G. Boehm, MAI 173 A D D E N D A 174 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 1 - Byron Park 1700 Tice Valley Boulevard Walnut Creek No. 2 - Eden Villa 2015 Mt. Diablo Boulevard Walnut Creek
175 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 3 - Montego Heights Lodge 1400 Montego Walnut Creek No. 4 - Kensington Place 1580 Geary Boulevard Walnut Creek
176 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 5 - Chateau Pleasant Hill 2770 Pleasant Hill Road Pleasant Hill No. 6 - Family Affair 1081 Mohr Lane Concord
177 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 7 - Moraga Royale 1600 Canyon Road Moraga No. 8 - Diablo Lodge 950 Diablo Road Danville
178 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 9 - Concord Royale 4230 Clayton Road Concord No. 10 - San Ramon Lodge 18888 Bollinger Canyon Road San Ramon
179 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 11 - Villa San Ramon 9199 Fircrest Lane San Ramon
180 VACANT LAND SALE COMPARABLE NO. 1 Location: 1836 San Miguel Drive Walnut Creek, CA Assessor's Parcel No.: 180-010-029 (Contra Costa County) Sale Date: Listing Document No.: N/A Listing Price: $430,000 Size: 33,106 Square Feet (0.76 Acres) Listing Price/SF: $12.99 Topography: Level Shape: Rectangular Proposed Use/Density: 6 Townhomes; 7.9 Units/Acre Sale Price Per Unit: $71,667 Zoning: C-O Grantor: Kenneth Nazari & Sahrab Firoozeh Nazari Grantee: N/A Terms: N/A Comments: Located across San Miguel Drive from professional offices; in overall residential area; property has been listed for over one year, according to the broker with no offers; listing price includes approved townhome plans.
181 VACANT LAND SALE COMPARABLE NO. 2 Location: 123 Brodia Way Walnut Creek, CA Assessor's Parcel No.: 140-170-006-5 (Contra Costa County) Sale Date: 3/3/95 Document No.: 35433 Sale Price: $720,000 Size: 49,658 Square Feet (1.14 Acres) Sale Price/SF: $14.50 Topography: Level Shape: Rectangular Proposed Use/Density: Unknown Zoning: R-4 Grantor: Edward Sonnenberg Grantee: M/M Richard and Lynne Chapman Terms: N/A Comments: In rolling hill, high end residential area; owner holding for future development.
182 VACANT LAND SALE COMPARABLE NO. 3 Location: Tice Creek Drive, Northwest of Golden Rain Road Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287278 Sale Price: $1,781,500 Size: 185,130 Square Feet (4.25 Acres) Sale Price/SF: $9.62 Topography: Flat to Slightly Sloping Shape: Irregular Proposed Use/Density: 2 Duplexes and 7 Triplexes; 5.88 Units/Acre Sale Price Per Unit: $71,260 at 25 units Zoning: PD-1829 Grantor: Manor Healthcare Corp. Grantee: UDC Homes, Inc. Terms: All Cash to Seller Comments: Site located inside the gated Rossmoor Retirement Community; this transaction was a direct exchange with Land Sale No. 4; development of condominiums underway; parcel is located across Golden Rain Road from The Waterford (congregate senior condos).
183 VACANT LAND SALE COMPARABLE NO. 4 Location: Tice Valley Boulevard, Southwest of Rossmoor Parkway Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287282 Sale Price: $1,781,500 Size: 217,800 Square Feet (5.0 Acres) Sale Price/SF: $8.18 Topography: Sloping Shape: Irregular Proposed Use/Density: 120 Bed Nursing Home; 13 Rooms/Acre (estimated) Zoning: PD Grantor: UDC Homes, Inc. Grantee: Manor Health Care Corp. Terms: All Cash to Seller Comments: Site located outside the gated Rossmoor Retirement Community; sale was a direct exchange with Land Sale No. 3; parcel has 451 feet of frontage along Rossmoor Parkway and 406 feet of frontage along Tice Valley Boulevard.
184 IMPROVED SALE COMPARABLE NO. 1 Name: Oak Tree Villa Location: 100 Lockwood Lane, Scotts Valley, CA Assessor's Parcel No.: 021-052-01 (Santa Cruz County) Sale Date: 6/6/95 Sale Price: $11,900,000 No. of Units: 202 Units (includes 40 assisted living units) Age: 1988 % Private Pay: 100% (includes 20% low income residents) Size (GBA): 172,000 Square Feet Average Unit Size (GBA/Unit): 851 Square Feet Sale Price/Unit: $58,911 Sale Price/SF: $69.19 Occupancy Rate: 72% Gross Operating Income: $3,390,984 (estimated @ 90% occupancy) Expenses: $1,925,343 Net Operating Income: $1,465,641 (estimated @ 90% occupancy) % Expenses: 56.8% G.I.M.: 3.51 O.A.R.: 12.3 (estimated @ 90% occupancy) N.O.I./Unit: $7,256 Grantor: Oak Tree Villa Partnership Grantee: Birtcher Senior Properties Terms: $4,955,000 cash (39%); $7,745,000 assumption of existing debt, 30 year amortization, due in 15 years, 10.25% rate. Comments: 20% of units must be allocated to low income (HUD) residents; unit mix: 102 alcove units (450 SF) and 100 one bedroom units (600 SF); located in lightly populated area. Confirmation: Keith Louie (415) 391-9220
185 IMPROVED SALE COMPARABLE NO. 2 Name: El Camino Gardens Location: 2426 Garfield Avenue, Carmichael, CA Assessor's Parcel No.: 283-0030-14 (Sacramento County) Sale Date: 5/31/95 (Document No. 8309302142) Sale Price: $10,000,000 (includes $650,000 in deferred maintenance) No. of Units: 286 Units (174 ACLF/112 ALF) Age: 1984 Size (GBA): 160,810 Square Feet Average Unit Size (GBA/Unit): 562 Square Feet Sale Price/Unit: $34,965 Sale Price/SF: $62.19 Occupancy Rate: 95% Gross Operating Income: $2,814,240 Expenses: $1,788,544 Net Operating Income: $1,025,696 % Expenses: 63.6% G.I.M.: 3.55 O.A.R.: 10.3% N.O.I./Unit: $3,586 Grantor: Joseph Benvenuti Grantee: Nationwide Health Properties (REIT) Terms: All Cash to Seller Comments: Project had approximately $650,000 in deferred maintenance at time of sale; purchased by REIT and leased to ARV Housing Group; licensed to include up to 224 assisted living beds. Confirmation: Eric Davidson (714) 751-7400
186 IMPROVED SALE COMPARABLE NO. 3 Name: Casa Sandoval Location: 1200 Russell Way, Hayward, CA Assessor's Parcel No.: 415-240-007, 008 (Alameda County) Sale Date: 2/27/95 Sale Price: $15,000,000 No. of Units: 238 Units Age: 1989 Size (GBA): 216,639 Square Feet Average Unit Size (GBA/Unit): 920 Square Feet Sale Price/Unit: $63,025 Sale Price/SF: $69.23 Occupancy Rate: 81% Gross Operating Income: $3,844,396 (estimated @ 92% occupancy) Expenses: $2,498,857 Net Operating Income: $1,345,539 % Expenses: 65% (estimated @ 92% occupancy) G.I.M.: 3.90 O.A.R.: 9.0% N.O.I./Unit: $5,653 Grantor: Casa Sandoval Investors, L.P. Grantee: Weh Chang Terms: All Cash to Seller Comments: Average quality project in middle income suburban area; sold at auction on 2/9/95; property underperforming at date of sale; buyer plans significant licensing/conversion of many units to assisted living. Confirmation: John Rosenfeld (310) 473-8900 ext. 119
187 IMPROVED SALE COMPARABLE NO. 4 Name: Lomita Lodge Location: 225 N. Lomita Avenue, Ojai, CA Assessor's Parcel No.: 017-083-200 (Ventura County) Sale Date: 12/30/94 (Doc. No. 206073) Sale Price: $1,350,000 No. of Units: 26 Units/36 Beds (Licensed AL) Age: 1940's/1970's Size (GBA): 10,000 Square Feet Average Unit Size (GBA/Unit): 385 Square Feet Sale Price/Unit: $51,923 Sale Price/SF: $135.00 Occupancy Rate: 81% Gross Operating Income: $656,640 (estimated @ 95% occupancy) Expenses: $492,480 Net Operating Income: $164,160 (estimated @ 95% occupancy) % Expenses: 75.0% G.I.M.: 2.06 O.A.R.: 12.2% (estimated @ 95% occupancy) N.O.I./Unit: $6,314 Grantor: Raymond & Judy Berard Grantee: Ojai Retirement Inn #1, Ltd. Terms: $270,000 Cash; $1,080,000 variable rate loan at 8.5%, 20 year amortization. Comments: Property underperformed at date of sale; currently 95% occupied; rents range from $1,500 to $2,350 per month per bed; property includes about 25% SSI. Confirmation: Gerry Meglin (805) 646-5533
188 IMPROVED SALE COMPARABLE NO. 5 Name: Carson Oaks (now called Merrill Gardens at Carson Oaks) Location: 6725 Inglewood Avenue, Stockton, CA Assessor's Parcel No.: 081-260-053 (San Joaquin County) Sale Date: 7/27/94 (Doc. No. 87023) Sale Price: $4,200,000 No. of Units: 76 Units Age: 1989 % Private Pay: 100% Size (GBA): 62,733 Square Feet Average Unit Size (GBA/Unit): 612 Square Feet (average unit) Sale Price/Unit: $55,263 Sale Price/SF: $66.95 Occupancy Rate: 95% Gross Operating Income: $1,301,712 Expenses: $781,027 Net Operating Income: $520,685 % Expenses: 60% G.I.M.: 3.23 O.A.R.: 12.4% N.O.I./Unit: $6,851 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Newer facility with large number of one bedroom with full kitchens in an affluent neighborhood; not licensed for assisted living. Confirmation: Lee Haris (415) 391-9220
189 IMPROVED SALE COMPARABLE NO. 6 Name: Park Ridge (now called Merrill Gardens) Location: 2261 Tuolumne Street, Vallejo, CA Assessor's Parcel No.: 0052-330-008 (Solano County) Sale Date: 7/27/94 (Doc. No. 69837) Sale Price: $5,785,000 No. of Units: 93 ACLF; 14 Beds (Licensed AL) Age: 1991 % Private Pay: 100% Size (GBA): 84,989 Square Feet Average Unit Size (GBA/Unit): 654 Square Feet Sale Price/Unit: $62,204 Sale Price/SF: $68.10 Occupancy Rate: Project stabilized at 90%; at sale date 55% Gross Operating Income: $1,632,150 Expenses: $979,290 Net Operating Income: $652,860 % Expenses: 60% G.I.M.: 3.54 O.A.R.: 11.3% N.O.I./Unit: $7,020 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Modern congregate/assisted living with 15 studios, 59 - 1 bedrooms and 19 - 2 bedrooms; located in residential area and bounded by Sutter Solano Medical Center and Crestwood Convalescent Hospital. Confirmation: Lee Haris (415) 391-9220
190 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 1 - Oak Tree Villa 100 Lockwood Lane Scotts Valley No. 2 - El Camino Gardens 2426 Garfield Carmichael 191 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 3 - Casa Sandoval 1200 Russell Way Hayward No. 4 - Lomita Lodge 225 N. Lomita Ojai 192 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 5 - Carson Oaks 6725 Inglewood Avenue Stockton No. 6 - Park Ridge 2261 Tuolumne Vallejo 193 APPRAISAL REPORT RETIREMENT INN - FULLERTON 1621 E. COMMONWEALTH AVENUE FULLERTON, CALIFORNIA AS IS ON AUGUST 1, 1995 SLVS FILE NO. 95-04-23 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 194 August 3, 1995 American Retirement Villas Properties II, L.P. c/o ARV Housing Group 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Mr. Graham Espley-Jones Re: Retirement Inn - Fullerton 1621 East Commonwealth Avenue Fullerton, California SLVS File No. 95-04-23 Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice. The value stated herein is based on our understanding of the site and improvement descriptions as represented to us by the client and/or the client's representatives and professional consultants as well as other available sources. We direct your attention to the "Introduction," "Site Description," and "Description of Improvements" sections of this appraisal report. It is your responsibility to read the report and inform the appraiser of any errors or omissions you are aware of prior to utilizing the report or making it available to any third party. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of August 1, 1995, the fee simple total going concern interest of the subject, as is, has a market value of: TWO MILLION THREE HUNDRED FIFTY THOUSAND ($2,350,000) DOLLARS 195 Mr. Graham Espley-Jones August 3, 1995 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 8/1/95 ------------ Real Estate Value $1,925,000 Furniture, Fixtures & Equipment 100,000 Business Value 325,000 ----------- Total Going Concern Valuation $2,350,000 ==========
The narrative appraisal report that follows sets forth the identification of the property and limiting conditions, pertinent facts about the area and the subject property, comparable data, results of our investigation and analyses and the reasoning leading to the conclusions set forth. Should you desire a quick reference to the most important information, I direct your attention to the "Introduction", "Executive Summary" and the "Reconciliation and Conclusion" sections of this report. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 196 SUBJECT PHOTOGRAPHS Subject from Commonwealth Avenue, View Northeast Main Entrance of Subject 197 TABLE OF CONTENTS Title Page 1 Letter of Transmittal 2 Subject Photographs 4 Table of Contents 5 Introduction 7 Property Identification 7 Property Ownership and History 7 Scope of the Assignment 7 Purpose of the Appraisal 7 Function of the Appraisal 8 Property Inspection 8 Date of Appraisal 8 Date of Value 8 Property Rights Appraised 8 Definition of Market Value 8 Assumptions and Standard Limiting Conditions 9 Special Conditions 10 Experience of Appraisal Firm 11 Representative Assisted Living Appraisal Experience 12 Executive Summary 13 Regional and City Analysis 15 Regional Location Map 16 City Location Map 17 Comparative Zip Code Demographic Data 19 Anecdotal Discussion of Fullerton 21 Neighborhood Description 24 Neighborhood Map 25 Neighborhood Zoning Map 26 Neighborhood Photographs 27 Site Description 30 Assessor's Parcel Map 31 Flood Map 32 Taxes and Assessments 34
198 Description of Improvements 35 Floor Plans 37 Unit Plans 38 Subject Photographs 39 Market Analysis 45 Subject Amenities 47 Census of Market Area ACLF/AL Facilities 50 Comparable Facilities Map 52 Market Area Saturation Analysis 54 Highest and Best Use 57 Site Valuation 59 Vacant Land Sales Map 61 Cost Approach Analysis 63 Cost Approach Summary 66 Income Approach Analysis 67 Pro Forma Cash Flow Analysis & Capitalization 79 Sales Comparison Approach 80 Improved Sales Map 83 Reconciliation and Conclusion 86 Allocation of Going Concern Value Determination To Components 88 Total Estimated Marketing Time 90 Certification 91 Addenda 93 Comparable ACLF/AL Facility Photographs 94 Legal Description 103 Vacant Land Sale Data 104 6/19/95 Rent Roll 108 (1993, 1994, 1/95 to 4/95) Historical/(1995) Budgeted Operating Statements 111 Senior Housing Investment Survey 123 Improved Sale Data/Photographs 125 Qualifications of Michael G. Boehm, MAI 134 MGB State of California Appraisal License 135
199 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 43,124 square foot (0.99 acres) site that is improved with a 68 unit congregate senior housing project (including up to 99 licensed assisted living beds) known as Retirement Inn - Fullerton. The subject has a designated street address of 1621 East Commonwealth Avenue, Fullerton, Orange County, California. A detailed legal description of the site is presented in the Addenda of this report. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject site, all improvements and furnishings comprising Retirement Inn - Fullerton is currently vested in American Retirement Villas Properties II, L.P. (ARVP II). The subject was purchased by ARVP II in the late 1980's as part of a larger group of senior properties from the Retirement Inns of America (Avon Products, Inc.). The subject has not been sold/purchased within the last three years. The subject retirement building was originally planned and developed in the early 1970's. The existing subject improvements became available for occupancy in 1973. The subject's recent history includes effective full occupancies with a current occupancy of 91.7% (77/84 total beds) despite a competitive market area and weak local real estate market and economy. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a full narrative appraisal report in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of the appraisal was made available. The appraisal was performed so that the analysis, opinions and conclusions are that of a disinterested third party, employing due diligence in the investigation, analyses and conclusions. This appraisal report was developed and prepared to comply with the reporting requirements noted in the "Certification" section of this report. The investigation associated with this report includes the general economy of the industry, the market area, and the local neighborhood. Research and studies include supply and demand factors, comparable land and property sales, competitive property rents/rates and occupancy. Buyers, sellers, developers, public officials, management at competitive facilities, real estate brokers, and the current management of the property were interviewed concerning these and other associated matters. Specific references are made throughout this report. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's market value as is. 200 FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P. in an evaluation of the subject for the possible sale to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 4, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Lana Hammers, Administrator. The subject was briefly reinspected on August 1, 1995. DATE OF APPRAISAL August 3, 1995 DATE OF VALUE August 1, 1995 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in a separate section of this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C-Appraisals, 34.42 Definitions (f), market value is defined as: "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; 201 (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 202 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. SPECIAL CONDITIONS The subject is licensed as a residential care facility for the elderly (assisted living) for up to a maximum of 99 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The appraisers were not provided with a title report to specifically describe the site's legal description nor any current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. 203 The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Housing Group. EXPERIENCE/COMPETENCY OF APPRAISAL FIRM Senior Living Valuation Services, Inc. is a San Francisco based appraisal firm that exclusively specializes in the appraisal and analysis of all forms of senior housing properties. On the following page is a listing of recent assisted living facility assignments that have been completed by the firm. Qualifications of Michael G. Boehm, MAI are included in the Addenda of this report. 204 EXECUTIVE SUMMARY Property Name: Retirement Inn - Fullerton Location: 1621 East Commonwealth Avenue Fullerton, California Assessor's Parcel No.: 269-106-016 (Orange County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on August 1, 1995 Land Area: 43,124 Square Feet, 0.99 Acres Excess Land: None Zoning: R-3 (Fullerton) a multi family zoning district Improvements: Type: One, average quality, two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1973; Improvement Age - 22 Years; Effective Age - 22 Years; Remaining Economic Life - 23 Years Size: 68 congregate retirement apartment units (84 currently configured maximum bed count) and common areas in approximately 38,155 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion Capitalization Rate: 12.0% Projected Stabilized Net Income: $283,439 (7/95-6/96)
205 Total Going Concern Market Value, as is, as of August 1, 1995: Cost Approach: $2,825,000 Income Approach: $2,350,000 Sales Comparison Approach: $2,350,000- $2,750,000 Value Conclusion: $2,350,000 ($34,559/unit) Allocation of Final Value Determination to Components: Market Value As Is - 8/1/95 ------------ Real Estate $1,925,000 FF&E 100,000 Business Value 325,000 ---------- Total Going Concern Valuation $2,350,000 ==========
Total Estimated Marketing Time: 6 Months 206 REGIONAL AND CITY ANALYSIS The subject site is located at 1621 East Commonwealth Avenue in southeastern portion of the City of Fullerton, Orange County, California. Fullerton is located in northern Orange County, bounded by the communities of Buena Park to the west, La Habra and Brea to the north, Anaheim to the south and Placentia to the east. The southern portions of the City lie predominantly on the larger flat Los Angeles Basin with the northern portions of the City having rolling hills (Los Coyotes Hills) and view topographies. Fullerton is located 20 miles southeast of downtown Los Angeles, about 12 miles northeast of the Pacific Ocean, 95 miles north of San Diego and about 440 miles south of San Francisco. REGIONAL OVERVIEW Orange County occupies almost all the land south of Los Angeles County and is therefore an integral part of the Los Angeles metropolitan area. Orange County is formed by the coastal mountains to the east and the Pacific Ocean to the west which merge in the southern portions of the County. Orange County is one of the nation's largest counties and has experienced extraordinary population growth since 1950. Orange County has typified the rapid urbanization of the Los Angeles basin which has continued into the 1990's. Orange County, California's second most populated County has passed into an era of increasing resistance to growth as the County matures and its once beautiful rolling hills, clean air and easy lifestyle have been transformed into a place covered with highrise office buildings and rows of houses. As the center portion of the County has developed as a regional employment center, growing transportation problems have led to increasing resistance to growth and linking future development to transportation improvements. This trend combined with recent and ongoing heavy defense industry cutbacks have severely affected the local economy and area real estate. This recession is expected to continue into the immediate future. The recent County investment debacle is also expected to exacerbate weak local market conditions in the short run. Part of the region's attraction is its temperate climate, marked by small median temperature changes, ranging from an average of 55 degrees in January to 71 degrees in July. The region experiences warm, dry summers and temperate, wet winters and a chronic, almost year round smog problem. POPULATION AND DEMOGRAPHICS The City of Fullerton (1995 population 123,700) is located in the north central portion of Orange County and comprises approximately 22 square miles. The City of Fullerton has shared in the rapid growth of the region since construction of regional freeways in the 1950's. Fullerton, which is the fifth largest city in Orange County, projects an ultimate population of about 125,000. The source of this additional population will be the development of the City's few remaining vacant residential acreage and redevelopment of underutilized parcels. Therefore, future population growth is expected to slow as the City has become built-out. City and regional population trends are illustrated below: 207
Fullerton Orange County ---------------------------- -------------------------------- Population % Inc. Population % Inc. ---------- ------ ---------- ------ 1960 56,160 - 688,920 - 1970 84,450 50.4% 1,408,240 104.4% 1980 102,240 21.1% 1,931,570 37.2% 1990 114,144 11.6% 2,238,721 15.9% 1995 123,700 8.4% 2,641,400 17.9% 2000 (est.) 125,000 1.1% 2,866,800 8.5%
Source: Fullerton Chamber of Commerce As illustrated in demographic data presented on the following pages, Fullerton has the following demographic characteristics: 1) A median age close to Statewide averages. This is primarily due to Fullerton's large, middle aged (25 to 44) population and relatively small older and younger, dependent populations; 2) A higher (ranked in the 67th to 95th percentile within all zip codes in California) than average County median income reflecting the City's attraction to educated professionals; 3) A predominantly white ethnicity/racial composition with about 80 percent categorized as non-minority white with a significant and growing Asian community. An anecdotal description of Fullerton is provided on a following page. HOUSING Fullerton's housing stock of approximately 43,000 units can be characterized by its large supply of multi family units (45%), approximate balance of supply and demand, newness (90% built after 1950) and relative affordability. The median price for single-family homes in Fullerton in late 1995 is about $200,000 which is down about 25% from 1989 peaks (down about 10% in the last 12 months). This median price is about 10% below Countywide averages. Recent residential construction (very modest) has been focused in new multi family units in the Coyote Hills areas. Homes north of Commonwealth Avenue tend to be newer and higher priced than those south of Commonwealth Avenue. Rental rates for one and two bedroom apartments range from $475 to $850 a month and up. EMPLOYMENT AND ECONOMIC DEVELOPMENT Total employment in Fullerton accounts for only 1.8% of Orange County's total employment of about 1,400,000 people. Fullerton's major employers (non-manufacturing) include California State University at Fullerton, St. Jude's Hospital, Fullerton College and the Fullerton High School District. Major manufacturing companies in Fullerton include Hughes Aircraft, Hunt-Wesson and Beckman Instruments. The City has over 6,500 licensed businesses dominated by service 208 companies and 900 manufacturing concerns. Leading product group classes are air defense (which has been significantly scaled back), electric components, food and paper processing. Although predominantly a bedroom residential community, Fullerton has significant commercial and industrial districts dispersed throughout the city. The recently completed downtown commercial district is centered along Harbor Boulevard, Commonwealth and Chapman Avenues, located in the south central portion of the City. Recent redevelopment includes the downtown business district, transportation district and Orange Fair Mall. The early 1990's completed Morningside continuing care retirement community was one of the largest ongoing development projects in Fullerton. TRANSPORTATION Fullerton's geographic location in northern Orange County allows its residents to take advantage of the massive and sprawling highway system typical of the Los Angeles basin. The City is served by three major highways: the Orange Freeway (Highway 57) running in a north to south direction providing direct access to eastern Los Angeles County to the north and to central Orange County to the south; the Riverside Freeway (Highway 91) running east to west; and Interstate Highway 5 to the southwest providing direct access to downtown Los Angeles and southern Orange County. These highways experience the extreme traffic congestion common to the Los Angeles metropolitan area freeway system. Major City surface thoroughfares include the east/west Bastanchury, Malvern, Chapman, Commonwealth (subject) and Orangethorpe, and the north/south Gilbert, Brookhurst, Euclid, Harbor, Brea and State College. Fullerton's geographic location allows it a choice of four major airports: Los Angeles International Airport located 30 miles to the west; Ontario International Airport located 20 miles to the northeast; Long Beach Airport located 15 miles to the southwest; and the Orange County/John Wayne Airport located 15 miles to the south. Local residents can also take advantage of the Orange County Transit District bus system providing spotty bus service throughout Orange County. COMMUNITY DATA Because Fullerton is located in Orange County, a major portion of the Los Angeles metropolitan area, its residents can take advantage of an almost unlimited array of recreational and cultural opportunities. The City has its own recreation and cultural centers, two museums, an arboretum, 46 parks, a civic light opera and is the home of California State University at Fullerton. Fullerton is located approximately 18 miles north of the Newport Beach area, about 5 miles northeast of Disneyland and about 25 miles southeast of downtown Los Angeles. Beaches, deserts and mountain resorts are all within easy driving distance from Fullerton. Fullerton has one general hospital, St. Jude, located along Harbor Boulevard about three miles northwest of the subject, with a 331 total bed capacity. Other major hospital facilities are located in nearby Placentia and Anaheim (such as Martin Luther). Fullerton is located in HSA 13, HPFA 1011 having a total of nine skilled nursing facilities with 999 licensed beds and several congregate senior and assisted living projects (including the subject). In fact, northern Orange County has 209 one of the heaviest concentrations of congregate senior housing within California. The recently completed 326 unit Morningside continuing care retirement community is one of the largest senior housing projects in California. These projects are discussed further in the Market Analysis section of this report. CONCLUSION The long-term outlook for Fullerton is positive although the short run outlook is significantly dampened by the current deep regional recession, fueled by cutbacks in the locally dominant defense related industries and the Orange County near bankruptcy which has led to cutbacks in County services. These economic and real estate declines when combined with increased crime in the County has and will continue to contribute to flat to slightly declining population growth in the near future and a general deterioration of the quality of life. However, overall population aging in place and the concentration of a large population and their relative affluence in the immediate area, suggest that long term demand for the subject facility should be good although short term demand is more problematic. 210 NEIGHBORHOOD DESCRIPTION The subject is located in the southeastern portion of the City of Fullerton along Commonwealth Avenue at Acacia Street, about one-half mile east of central Fullerton. Commonwealth Avenue is a major east/west thoroughfare through Fullerton. Acacia Street is a secondary north/south street in eastern Fullerton. The subject neighborhood is in an older portion of Fullerton. The neighborhood is residential in character with pockets of institutional development (mostly schools) along major thoroughfares. The subject neighborhood is about 98% developed and is approximately bounded by Harbor Boulevard to the west, Dorothy Lane to the north, State College Boulevard to the east and Walnut Avenue to the south. To the west of the neighborhood lies Hillcrest and Brea Dam parks. This neighborhood lies just west of Cal State - Fullerton and includes the eastern portions of central Fullerton and Fullerton College. More intensive commercial, office and industrial uses lie to the east and south of the neighborhood. The subject itself is bounded by modest quality two story apartments to the north and west. Apartment uses are typical in the neighborhood along major thoroughfares, buffering lower density interior residential homes. The quality of these homes and apartments are average although they are generally well maintained. Across Commonwealth Avenue to the south lie additional apartments. To the east across Acacia lies the Ladera Vista junior high school. Additional smaller elementary schools dot the neighborhood. Fullerton Guest Home (Rent Comparable No. 2) is located about two blocks to the west. Acacia Villa (Rent Comparable No. 1 and a sister ARV project) is located about two blocks to the north. The subject is located about one-half mile east of central Fullerton. Major retail amenities are located about one-half mile to the northeast. The campus of Cal State - Fullerton is located about one mile to the northeast, as is access to Highway 57 at Chapman or Nutwood. Highway 91 is located about one mile to the southeast via State College. Anaheim Memorial Hospital and Martin Luther Hospital are located about four miles to the southwest. Fullerton Community Hospital is located about two miles to the northwest along Harbor. St. Jude Hospital is located about three miles to the northwest. The Brea Mall is located about three miles to the northeast. Overall, the subject is a corner parcel located in a residential/institutional neighborhood along a major thoroughfare at a significant intersection. Access to retail amenities, recreation, acute medical care and freeways is good although none can be considered as being within easy walking distance. On balance, the subject is adequately situated for a major congregate senior housing project. 211 NEIGHBORHOOD PHOTOGRAPHS View West along Commonwealth Avenue, Subject on Right View East along Commonwealth Avenue, Subject on Left 212 NEIGHBORHOOD PHOTOGRAPHS View South along Acacia Avenue across Commonwealth Avenue, Subject on Right View North on Acacia Avenue, Ladera Vista Junior High School on Right, Subject on Left 213 NEIGHBORHOOD PHOTOGRAPHS High School across Acacia Avenue from Subject, View Northeast Single Family Homes across Commonwealth Avenue from Subject, View Southwest 214 SITE DESCRIPTION LOCATION: The subject property is located at the northwest corner of Commonwealth Avenue and North Acacia Avenue in the southeastern portion of the incorporated City of Fullerton, Orange County, California. The site has a formal street address of 1621 East Commonwealth Avenue. The site consists of Orange County Assessor's Parcel No. 269-103-016. An assessor's parcel map is presented on the following page. A legal description of the site is provided in the Addenda of this report. PHYSICAL CHARACTERISTICS: The subject site is a corner parcel and has a basic rectangular shape (about 270' by 150') with approximately 260 feet of southern frontage along Commonwealth and approximately 125 feet of eastern frontage along Acacia Street to the east. To the north and west of the subject lies an approximately 20 to 30 foot wide paved alleyway. The site has a total land area of approximately 43,124 square feet or 0.99 acres. The topography of the site is flat, consistent with the neighborhood. The subject building pad is slightly above street grade with Commonwealth Avenue to the south. The subject building improvement is built on one level pad. Although no soils report was made available to the appraisers, it is assumed that the soils are capable of continuing to support the existing improvements. No obvious hazardous or toxic conditions were noted during our site inspection. According to the U.S. Department of Housing and Urban Development Flood Insurance Rate Map (Map No. 060591 0007E, dated September 15, 1989), the subject is located in a Flood Zone X, an area of minimal flooding. Flood insurance is not required. The subject is not located in an Alquist-Priolo special earthquake study zone. The subject can be considered as having the same earthquake risk as much of the Los Angeles larger area which is fairly significant. EXISTING IMPROVEMENTS: The subject site is currently improved with one, two story, wood frame, congregate retirement building surrounding an enclosed central courtyard. Parking areas are located in the western portion of the site (off of Commonwealth). The subject building is setback a minimum of about 20 feet north of Commonwealth Avenue and west of Acacia Street. Additional detail is provided in the Description of Improvements section of this report. Commonwealth Avenue and North Acacia Streets are both 80 foot wide, four lane (with turning lane), fully improved commercial streets with curbs, gutters, streetlights and public sidewalks on both sides. The intersection of Commonwealth Avenue and Acacia Street is a four stoplight intersection. A bus stop is located on the eastern public access sidewalk of the subject site. A utility line runs along the northern and eastern boundaries of the site. The subject site is served by underground utilities, including storm and sanitary sewers, natural gas and telephone. Water and sewer service are provided by the City of Fullerton, natural gas by Southern California Gas, electricity by Southern California Edison and telephone by Pacific Bell. Fire and ambulance services is provided by Fullerton. 215 ACCESS AND EXPOSURE: The subject is accessed via one curb cutout along Commonwealth Avenue onto the western parking area. Secondary access is possible via the northern alleyway from Acacia Street. Access to Highway 91 (east/west) and 57 (north/south) is via State College (located two blocks to the east), about 1.5 miles to the southeast and northeast, respectively. Highway 91 (east/west) and 57 (north/south) provide highway access through the northern and central Orange County metropolitan area. Interstate 5 is located about five miles to the southwest. The subject is easily visible from both Commonwealth Avenue and Acacia Street. Exposure and views in other directions (north, west) is blocked by adjacent development. EASEMENTS AND ENCUMBRANCES: No title report was available. No easements and encumbrances are known to materially impact the subject's continued operation as a congregate senior housing business. We recommend a review of a current title report to identify any easements or encumbrances which could affect the subject site and its continued operation as a congregate senior housing project. ZONING: The subject site is zoned R-3, Fullerton, a high density residential zoning classification. Multi family housing up to 27 units per acre are allowed. The subject is consistent with residential and institutional land uses along Commonwealth Avenue and Acacia Street. The existing subject retirement building was approved with a conditional use permit in the early 1970's (allowing its 68.7 unit per acre density). The subject appears to be a legal, nonconforming land use and has been operating on the site since 1973. The subject is licensed to provide 99 beds with the California Department of Social Services as an assisted living facility. EXCESS LAND: None, the subject is fully developed to its boundaries. 216 TAXES AND ASSESSMENTS Since passage of Proposition 13, or the Jarvis-Gann Initiative, in 1978, real property has been assessed at its 1976 value, trended upward at a maximum rate of 2% annually, unless there is a transfer of ownership or new construction. When either of these occur, the property is reassessed at full market value. Furthermore, Proposition 13 limits annual taxes to 1%, plus a small amount for bonded indebtedness of the assessed value. Assessor's Parcel No.: 269-0103-16 (Orange County) Tax Rate Area: 03-0000 Assessed Value 1994-95: Land $ 734,954 Improvements $1,799,371 Personal Property $ 0 ---------- Total $2,534,325 ========= 1994-95 Tax Rate: 1.00968% 1994-95 Taxes: $31,596.24 (includes $6,007.67 in direct assessments) Status: Current and paid as due. Our cash flow projections of stabilized real estate taxes assumes a sale and reassessment of the subject to market value at July, 1995.
217 DESCRIPTION OF IMPROVEMENTS The discussion of the improvements addressed below was accumulated through our site inspection, a review of limited site plans and through discussions with the subject's administrator. Detailed architectural drawings were not available. GENERAL TYPE: The existing main improvement known as Retirement Inn - Fullerton consists of one 2 story, 68-unit, average quality, Class D retirement apartment building containing 38,155 square feet of gross building area. The facility contains 68 units currently configured for 84 beds, including up to 99 licensed assisted living beds. The rectangular shaped building improvement surrounds an interior courtyard and borders a parking lot to the west. AGE: The subject improvements were constructed and completed in 1973. Since 1973, the subject has been operating as an congregate senior facility. The overall condition of the subject is average. Our site inspection noted a normal amount of wear and tear on a 22 year old building and no material deferred maintenance. The subject improvement have an estimated total economic life of 45 years. A chronological and effective age of 22 years suggests a remaining economic life of approximately 23 years. SIZES: The subject has the following component size and unit mix:
Unit No. of Size Unit Type Units S.F. (est.) Total S.F. --------- ------ ----------- ---------- Studios 68 374 25,432 (66.7%) Common Areas/Circulation 12,723 (33.3%) ------ Gross Building Area 38,155 ======
STRUCTURAL AND EXTERIOR: The subject improvements are constructed on a level and slightly raised concrete slab foundation with a 2-story, wood frame construction under a sloping clay tile/flat mansard roof. Building exterior consists of stucco and protruding balcony/patios decks formed by wing walls. The main building entry faces south of Commonwealth Avenue and includes decorative stucco arches. Interior walls are wood frame and painted or wallpapered gypsum board with wood handrails in corridors. The main common areas, hallways and room exteriors are carpeted. Unit baths have vinyl tile. Ceilings in units are painted gypsum board and sprayed acoustical with common area ceilings and hallways consisting of sprayed acoustical with hanging incandescent and fluorescent light fixtures. The entire development is fully sprinklered with smoke and heat alarms. Units include full length sliding glass doors leading to the balconies and patios and sliding windows in aluminum frames. 218 MECHANICAL: The development has average lighting and plumbing fixtures. HVAC in the units consist of individual room heating units. HVAC in common areas features a hot water boiler central forced air heating system. The subject also features an intercom system with paging. The development includes one elevator. Two stairwells are located throughout the improvement. INTERIORS: Based on our site inspection, the interiors appear to be functional for congregate senior apartment use. Floor and unit plans are presented on a following page. The facility includes 68 apartment units with separate baths. The unit mix consists of 68, same size studio units (374 SF). Each unit contains a full bath area with grab bars and a sink with a built-in cabinet, vanity and water closet. Each unit also contains two emergency pull cords, one each in the bath and living area. The units contain no kitchenettes. Each unit has its own outdoor iron railing balcony or patio. The focal point of the development is the facility's modest common areas located on the centrally located one story ground floor. The facility's main entry area includes the small lobby, a reception desk and administrative offices. The common areas include a lounge and dining room adjacent to the commercial kitchen. Laundry rooms with washers and dryers for the residents are located on each floor. The second floor includes a hobby room, billiards room and lounge. Overall interior common areas are modest and less than newer projects in the local market. PARKING AND LANDSCAPING: Site parking is located in one open paved parking areas, west of the building and accessed from Commonwealth Avenue. There are approximately 29 (0.43/unit) parking spaces located in the parking area. Street parking is not available along Commonwealth Avenue (south) but is available along Acacia Street (east). The western building face includes seven partially enclosed first floor garage spaces (no garage door) underneath second floor units (adjacent to the service areas). The site is modestly landscaped with building perimeter mature trees, flowering perennials, bushes and grass. Facility landscaping is centered in the small interior courtyard which includes a large tree and seating areas. Overall site landscaping is average. CONCLUSION: In our opinion, the subject property's exteriors, common area interiors, landscaped areas and parking appear average and competitive for residential retirement uses. The subject's relatively small units are typical of 1970's senior housing construction. The subject has a less varied unit mix and more modest common areas than many projects built in the 1980's. The subject is also smaller than most projects in its market which helps create a more residential, close knit living environment (while preventing full operating economies of scale). Our site inspection noted no material deferred maintenance and a good condition reflecting its 22 year old chronological and effective age. 219 SUBJECT PHOTOGRAPHS Main Entry Lobby Typical Corridor 220 SUBJECT PHOTOGRAPHS Dining Room Activity Room 221 SUBJECT PHOTOGRAPHS Typical Unit Interiors 222 SUBJECT PHOTOGRAPHS Subject's Commonwealth Avenue Frontage, View East Western Site Boundary, Single Family Residence to Right, View South 223 SUBJECT PHOTOGRAPHS Northern Boundary of Subject, Subject to Right, View East Main Parking Lot (West of Subject) 224 MARKET ANALYSIS INTRODUCTION The elderly are by far the fastest growing population segment, whether expressed in percentage increase or actual number of persons. Although not as well documented statistically, the elderly have more money than ever before because of social security, pension programs, savings and the substantial increase in the market value of their residences. Most of them are active and in reasonably good health. This increased health and life expectancy lends them to seek life enriching activities through an independent lifestyle that provides assistance when needed. INDUSTRY OVERVIEW The housing industry for the elderly can be classified by the three major types of buyers: the active elderly (go-gos), intermediate (slow-gos) and the person who needs constant care (no-gos). Active retirees want recreational amenities with the housing they buy. They want a golf course, tennis courts, swimming pool, walking and bicycle path, saunas and spas. They want to be near good places to eat and to be able to enjoy a wide range of cultural activities and travel opportunities. Intermediate retirees want a congregate-type of lifestyle that allows them independence yet gives them the opportunity to take part in quiet activities such as arts and crafts. Retirees in this intermediate classification also will look for transportation to shopping, banking or medical offices, some mild form of recreational activities, such as swimming and golf, plus the opportunity to socialize in a common dining room or lounge area. Retirees who need constant care are concerned with medical assistance. They will look for facilities that offer services and conveniences such as residential care facilities which will make their lives more comfortable. Also, they will want a medical center where they can go when their health fails. The subject property would be targeted at the intermediate and less active elderly. From a real estate and financial perspective, housing for the elderly is complex to analyze as they usually represent a combination of other businesses. The major types of homes for the elderly include: Adult Congregate Living Facilities (ACLF): Specially planned, designed and managed multi-unit rental housing typically with self contained apartments. Supportive services such as meals, housekeeping, transportation, social and recreational activities are usually provided. In California, these facilities are not licensed. Assisted Living Facilities (ALF) (personal care or residential): Group living arrangements that provide staff supervised meals, housekeeping and personal care (assistance with bathing and medication) and private or shared sleeping rooms. These facilities are generally licensed and must meet designated operating standards including minimum staff requirements. In California, these facilities must be licensed by the California Department of Social Services, Division of Community Care. 225 Care Facilities (skilled nursing or intermediate care): Skilled nursing and intermediate care facilities (commonly known as nursing homes) are both operated under the guidance of a licensed administrator with licensed nurses and aids providing around the clock nursing care, generally one step below that offered at an acute care hospital. In California, these facilities must be licensed with the California Department of Health Services. Life Care Complex (life care community, continuing care, campus complex): A housing development planned, designed and operated to provide a full range of accommodations and services for older adults, including independent living, congregate housing and medical care. Residents may move from one level to another as their needs change. Life care complexes typically charge a buy-in fee (sometimes refundable) in addition to a monthly maintenance fee for services. In California, life care contracts must be approved by the State Department of Insurance. Retirement Village: Developments that offer, home ownership and rental units for older persons. Support services often are available for a fee. The subject is a currently existing 68 unit (84 current bed configuration) licensed assisted living (ALF) facility. This suggests that the subject includes 16 units configured for 32 semiprivate beds. The subject is licensed to accept 28 nonambulatory residents (99 assisted living bed licensing maximum). Congregate housing such as the subject is a combination of: a) an apartment project; b) a hotel offering meals, cleaning and transportation facilities; c) a social club offering activities; and d) a supporting living environment providing assisted living amenities (help with bathing, medication, mobility) as needed. A summary of subject amenities is provided on the following page. MARKET DEFINITION Our experience in analyzing congregate housing development indicates that these facilities have a total market area ranging from a 5 to 30 mile radius from the site. This area represents a reasonable driving distance for relatives and friends and also reflects the fact that the elderly do not move great distance when choosing the congregate housing option. Perhaps more important than a strict definition of market area based on distance, is the overall character of the development's environment, whether it is urban, suburban or small town/rural. In our opinion, the primary market area for the subject site extends approximately 5 miles outward from the site in all directions. This would include most of the suburban area of northern Orange County including most of Fullerton and Placentia and portions of Brea, La Habra and Anaheim. These areas are not only located in close geographic proximity to the site, but each is a similar, middle to upper middle income bedroom community. This definition of market area is consistent with the former residences of subject residents and reflects the heavy concentration of senior projects in the area. 226 RETIREMENT HOUSING SUPPLY During the course of our appraisal, we have identified those existing and proposed elderly retirement facilities in the primary market area which may be considered somewhat competitive to the subject property. Our census of potentially competitive congregate rental housing facilities impacting the total market area is presented on the following pages. Photographs of the rent comparables are illustrated in the Addenda of this report. Each of the surveyed congregate facilities is a for-profit housing development offering two or three meals daily, weekly maid service and many recreational opportunities. Most of the properties surveyed offer licensed assisted living on an as needed basis. The properties can be characterized as follows: BOTH CONGREGATE AND ASSISTED LIVING (MOST SIMILAR TO SUBJECT) 2. Acacia Villa (ARV property) 5. Bradford Square (ARV property) 6. Sunnycrest Chalet 7. Villa De Palma (ARV property) 9. Anaheim Gardens 10. Emerald Court 11. Walnut Manor 13. Fullerton Manor 14. La Habra Villa 15. Meadows of La Habra 16. Park Regency 17. Nohl Ranch Inn 18. Canyon Hills Club ASSISTED LIVING ONLY 1. Fullerton Guest Home (Alzheimers, heavy care) 3. Rosewood Court 4. Park Vista 8. La Veranda (Alzheimers) (ARV property) 12. Amaryllis Court The subject would be most similar to those projects offering both congregate and assisted living services although it has an overall quality, age and living environment comparability to Comparable No. 3 (Rosewood Court) which only accepts the frailer, assisted living resident. Like the subject, this project has a smaller, all studio unit mix. Of the congregate/assisted projects, the subject would be most similar to the older projects with more similar unit mixes (mostly or all studios) such as Comparable No. 2 (Acacia Villa), No. 7 (Villa De Palma) and No. 9 (Anaheim Gardens). Acacia Villa and Villa De Palma are sister ARV projects and are similar to the subject in target market and in the a la carte assisted living 227 RETIREMENT INN - FULLERTON CENSUS OF MARKET AREA ACLF/AL FACILITIES
Age/ Congregate Miles (ACLF) Units From Total Units/ Unit Size- --------------------------- No. Name/Location Subject AL Beds Type S.F. Monthly Rent Rental/S.F. - --- ------------- ------- ----------- ---- ---- ------------ ----------- 1. Fullerton Guest Home 1950's/ 36/ Studio 243 Not Available 1510 E. Commonwealth Ave. 1 Block 72 Fullerton 2. Acacia Villa* 1967/ 66/ Studio 320-360 $1,250-$1,800 $3.91-$5.00 1620 E. Chapman Ave. 2 Blocks 99 SP $850-$950 Fullerton 3. Rosewood Court 1985/ 80/ Studio 300 Not Available 411 E. Commonwealth Ave. 0.75 149 1BR 360 Fullerton (est.) 4. Park Vista @ Morningside 1992/ 54/ Studio 410-428 Not Available 2527 Brea Boulevard 1.75 70 1BR 730-840 Fullerton 2BR 1,100-1,300 5. Bradford Square* 1987/ 92/ Studio 288-405 $1,275-$1,850 $4.43-$4.57 1180 N. Bradford Avenue 2.0 120 SP $850 Placentia 6. Sunnycrest Chalet 1988/ 130/ Studio 340-363 $1,125-$1,200 $3.31 1925 Sunny Crest Drive 2.0 210 1BR 563 $1,700-$1,800 $3.02-$3.20 Fullerton 7. Villa De Palma* 1981-84/ 111/ Studio 252-504 $1,150-$1,650 $3.27-$4.56 351 E. Palm Drive 2.25 138 SP $850-$900 Placentia 8. La Veranda* 1974/ 71/ Studio 260 Not Available 312 N. Roosevelt Avenue 2.50 85 Fullerton 9. Anaheim Gardens 1962/ 130/ Studio 240 $1,250-$2,000 $5.21-$8.33 625 W. La Palma 2.50 250 SP $850 Anaheim Assisted Living (AL) Units ----------------------------------- Monthly Rental ----------------------- Total Semi- Reported No. Name/Location Private Private % SSI Occupancy - --- ------------- ------- ------- ----- --------- 1. Fullerton Guest Home $3,375-$3,600 $2,450 0% 86% 1510 E. Commonwealth Ave. Fullerton 2. Acacia Villa* +$150-$1,000 +$150-$1,000 33% 87% 1620 E. Chapman Ave. Fullerton 3. Rosewood Court $1,150-$1,250 $800-$900 15% 75% 411 E. Commonwealth Ave. $1,500 Fullerton 4. Park Vista @ Morningside $2,350-$2,650 N/A 0% 95% 2527 Brea Boulevard $2,750-$3,050 Fullerton $3,500-$3,350 5. Bradford Square* +$150-$1,000 +$150-$1,000 5% 95% 1180 N. Bradford Avenue Placentia 6. Sunnycrest Chalet +$100-$500 N/A 0% 90% 1925 Sunny Crest Drive Fullerton 7. Villa De Palma* +$150-$1,000 +$150-$1,000 20% 96% 351 E. Palm Drive Placentia 8. La Veranda* $2,300-$2,500 $1,900-$2,300 13% 84% 312 N. Roosevelt Avenue (Dementia only) Fullerton 9. Anaheim Gardens $1,500-$2,500 $1,000 50% 85% 625 W. La Palma Anaheim
228 RETIREMENT INN - FULLERTON CENSUS OF MARKET AREA ACLF/AL FACILITIES (CONTINUED)
Age/ Congregate Miles (ACLF) Units From Total Units/ Unit Size- --------------------------- No. Name/Location Subject AL Beds Type S.F. Monthly Rent Rental/S.F. - --- ------------- -------- ----------- ---- ---- ------------ ----------- 10. Emerald Court 1989/ 178/ Studio 400 Not Available 1731 W. Medical Court Center Dr. 3.0 50 1BR 600 $1,395-$1,595 $2.33-$2.66 Anaheim 2BR 900 $1,895-$2,300 $2.11-$2.56 11. Walnut Manor 1937/ 158/ Studio 250 $1,185 $4.74 891 S. Walnut Street 4.0 175 Suite 500 $1,730 $3.46 Anaheim Cottage 600 $1,895 $3.16 12. Amaryllis Court 1969/ 33/ Studio 250 Not Available 1652 W. Broadway 4.0 66 (est.) Anaheim 13. Fullerton Manor 1976/ 90/ Studio 300 (est.) $785-$1,000 $2.62-$3.33 2441 W. Orangethorpe 4.25 100 SP $750 Fullerton 14. La Habra Villa 1981/ 175/ Studio 224 $900-$1,500 $4.02-$6.70 1100 E. Whittier Boulevard 5.0 352 SP $696 La Habra 15. Meadows of La Habra 1987/ 187/ Studio 312-364 $1,200 $3.30-$3.85 200 W. Whittier Boulevard 5.40 190 La Habra 16. Park Regency 1989/ 84/ Studio 300-400 $1,400-$1,800 $4.50-$4.67 1750 W. La Habra Boulevard 6.0 168 La Habra 17. Nohl Ranch Inn 1987/ 133/ Studio 340 $1,195 $3.51 380 S. Anaheim Hills Road 7.15 266 1BR 401-485 $1,450-$1,650 $3.40-$3.62 Anaheim Hills 18. Canyon Hills Club 1989/ 167/ Studio 323-382 $1,025 $2.68-$3.17 525 S. Anaheim Hills Road 7.20 49 1BR 585-664 $1,458-$1,850 $2.49-$2.79 Anaheim Hills 2BR 912 $1,995 $2.19 S. Retirement Inn of Fullerton* 1973/- 68/ Studio 374 $1,250 $3.34 1621 E. Commonwealth Avenue 84 SP $800 Fullerton Assisted Living (AL) Units ------------------------------------ Monthly Rental ----------------------- Total Semi- Reported No. Name/Location Private Private % SSI Occupancy - --- ------------- ------- ------- ----- --------- 10. Emerald Court $1,445 N/A 0% 93% 1731 W. Medical Court Center Dr. $1,735-$1,835 Anaheim $2,095 (+$100-$800) 11. Walnut Manor $2,380 N/A 0% 88% 891 S. Walnut Street (est.) Anaheim 12. Amaryllis Court $1,300-$1,800 $1,000-$1,300 70% 70% 1652 W. Broadway Anaheim 13. Fullerton Manor $960-$1,175 N/A WND 88% 2441 W. Orangethorpe Fullerton 14. La Habra Villa +$60-$125 N/A WND 90% 1100 E. Whittier Boulevard (est.) La Habra 15. Meadows of La Habra $1,300-$1,500 $800-$850 25% 98% 200 W. Whittier Boulevard La Habra 16. Park Regency +$200-$500 N/A 0% 100% 1750 W. La Habra Boulevard La Habra 17. Nohl Ranch Inn +$120-$800 N/A 0% 91% 380 S. Anaheim Hills Road Anaheim Hills 18. Canyon Hills Club $1,995-$2,750 N/A 0% 96% 525 S. Anaheim Hills Road Anaheim Hills S. Retirement Inn of Fullerton* +$150-$1,000 +$150-$1,000 26% 92% 1621 E. Commonwealth Avenue Fullerton
*ARV owned/operated facilities 229 RETIREMENT INN - FULLERTON SATURATION ANALYSIS
Saturation Rate (1) ----------------------------------- Subject w/o Subject w/Subject Only # H.H. (2) (2,100 Beds)(3) (2,184 Beds) (84 Beds) ---------- --------------- ------------ --------- 1995 Estimate 75+, $15,000 Income 6,115 34.3% 35.7% 1.4% 2000 Projection 75+, $15,000 Income 7,409 28.3% 29.5% 1.1%
NOTES: (1) Market saturation rates represent the percentage of total market demand which is necessary to absorb a) existing or proposed units not including the subject, and b) existing or proposed units including the subject. (2) Number of income and age qualifying senior households within 5-mile radius of site per Urban Decision Systems. (3) Number of competitive units estimated at 100% of Comparable Nos. 1 to 9, 50% of Comparable Nos. 10 to 18 and 340 units at Morningside (a CCRC). (4) Evaluation of saturation rates:
Saturation Evaluation of Rate Market Environment ---------- ------------------ 0% - 10% Lightly Competitive 10% - 20% Moderately Competitive 20% - 30% Heavily Competitive 30%+ Extremely Competitive
230 program. The other more comparable congregate/assisted projects surveyed are generally newer projects (Comparable Nos. 5 - Bradford Square (ARV project), 6 - Sunnycrest Chalet, 10 Emerald Court, 15 - Meadows of La Habra, 16 - Park Regency, 17 - Nohl Ranch Inn and 18 Canyon Hills Club) with a more varied unit mix and a generally superior living environment to the subject. The subject would be competitively placed in the tier of projects below these newer properties although it has a good reputation in the local market. The assisted living projects are generally less directly comparable to the subject as they target the older, frailer senior exclusively. Of the projects, as noted Rosewood Court would be most similar to the subject. Comparable No. 1 - Fullerton Guest Home, 4 - Park Vista and 8 - La Veranda (ARV project) generally target the heavier care/Alzheimer patient. Park Vista is part of the larger Morningside CCRC and is combined with a skilled nursing facility, creating a more institutional living environment and catering to the heavier care assisted living project. Our survey of local jurisdictions noted no other active proposed senior housing projects which would pose an imminent competitive threat to the subject. The overall occupancy of the 18 projects surveyed is 89.2% (several market area projects exhibit weak below 90% occupancies). RETIREMENT HOUSING DEMAND To measure the theoretical size of the subject's target market, we have analyzed demographic statistics obtained from Urban Decision Systems for the relevant target area market which extends about 5 miles outward from the subject site. We obtained income by age population estimates and projections for this area in 1995 and 2000. Our analysis is as follows: 1) Determines the number of households over a minimum age, 75, and minimum income requirement, over $15,000, from 1995 population estimates and 2000 population projections. These parameters establish the different scenarios for calculating the market saturation rates; 2) Calculates total market saturation rates required to fill the subject's 84 beds and all other existing competitive senior facilities (estimated at 2,100 beds); 3) Evaluates the market environment of the subject property given the calculated saturation rates. Our experience in comparable markets, indicates the following regarding saturation rates. Estimate of Overall Saturation Rate Market Demand --------------- ------------- 0 - 10% Lightly Competitive 10 - 20% Moderately Competitive 20 - 30% Heavily Competitive 30%+ Extremely Competitive 231 Our calculated market saturation rates (slightly over 30%) for the subject market area suggest an extremely competitive market. Overall, the subject market area can be characterized as having a very large supply of retirement units serving a large and affluent, and growing age and income eligible senior population. Northern Orange County has had the reputation of one of the most competitive senior housing market areas in all of California. This perception is confirmed by the high calculated saturation rates. It is important to note that saturation analysis is only a tool used to measure overall market saturation. However, saturation rates do not consider any potential competitive advantages that a specific facility might offer. Saturation rates can also be calculated using different factors/scenarios. Our methodology of calculating market saturation rates is based on our experience in analyzing the feasibility of numerous congregate senior housing developments. CONCLUSIONS Overall, we noted the following regarding the market environment of Retirement Inn - Fullerton: 1) The calculated saturation rates suggest an extremely competitive market environment. This is supported by soft market area occupancy rates. The subject has been able to maintain a 90% plus occupancy. This is due to its good location and reputation which offset its older age, large number of smaller units and monolithic unit mix. The subject also benefits by its smaller size with fewer units to keep occupied. The overall average occupancy of all projects surveyed was 89%. The market's strong demographics (size, affluence) are countered somewhat by a weak local economy which makes seniors on fixed incomes more hesitant to consider the congregate senior housing option and less likely to recognize paper losses on homes which have declined in value from 1989 peaks; 2) The subject has a current occupancy of 92%, consistent with its recent history. The subject has established a market position as a well run, middle market project with reasonable rents. The subject's physical plant is below average in comparison to most of the other comparable projects in its market. Most of the locally competitive projects are newer and have a less institutional living environment and more varied unit mix than the subject; 3) The subject market area is projected to experience a very good increase of 21.2% (7,409/6,115) in the age and income eligible target market in the next five years; 4) The subject is owned and operated by ARV Housing Group, one of the leading owner/operators in highly saturated market areas (including the subject market area - ARV is involved with five projects in the subject market area); 5) The subject offers assisted living amenities on an a la carte basis (three different levels of assisted living care) which is not typical in the market area (most other projects charge one flat higher rent). This is a competitive advantage for the subject as residents only need pay for assisted living amenities when needed and at the level needed. These specific conclusions are addressed more fully and used to project pro forma income and expense cash flows in the Income Approach section of this report. 232 HIGHEST AND BEST USE Highest and best use is defined as that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. The highest and best use concept must also give recognition of that use to community environment and to community development goals, in addition to wealth maximization of individual property owners. The highest and best use of the land or site, if vacant and available for use, may be different from the highest and best use of the existing improved property. This will be true when the improvement is not an optimum use and yet makes a contribution to total property value in excess of the value of the land only. In order to determine the property's highest and best use, it is necessary to analyze the factors discussed below. AS VACANT The site's physical characteristics are similar to those found throughout the area in terms of size (smaller), topography (flat), exposure (good) and access (good). The total land area is relatively small though it is large enough to support many other types of development and it is located along a major thoroughfare. The site is probably too small for a lower density residential subdivision. Therefore, the site's physical characteristics do not seem to limit most development alternatives. The subject site is currently zoned R-3, a higher density residential zoning classification. This is consistent with other apartment, interior single family and institutional (schools) development in the neighborhood. It is likely that Fullerton would allow many residential and institutional uses on the subject site. The subject's 68.7 units per acre density is misleading due to its small, all studio unit mix. Extreme high density residential, commercial or heavy retail land uses are unlikely for the site. Finally, the site itself is not known to be affected by significant easements or encumbrances. In determining which possible use of the land represents the highest and best use of the site, we have analyzed those physical and legal factors affecting the site. It is then necessary to analyze not only the feasibility of potential alternate development but determine which types of these developments is maximally feasible. Our analysis of the congregate housing market in the area indicates a strengthening local market with variable occupancies (some softness at some projects), including the subject's current 92% occupancy. Also, a large increase in the number of age and income eligible seniors over the next five years suggests adequate long term demand for well run projects like the subject. The subject is a profitable project and it is in the middle tier of senior housing facilities in its market. The subject, if it can be filled, would be more feasible than alternate residential uses due to its higher margin per unit and higher density. The subject is also more profitable than almost all possible institutional land uses. However, uncertainties about the depth of the local market, current depressed housing prices and a flat regional economy suggest that the subject (or any alternate commercial/apartment land use) would not clearly be built in 1995. Few to no senior housing projects were being built anywhere in California in 1994 although this is beginning to change in 1995. An owner of the subject site would probably 233 develop a senior housing use on the site although the decision is not clear. Therefore, in our opinion, the highest and best use of the site as vacant in early 1995 is probably to develop a senior housing project on the subject site. AS IMPROVED Our experience in comparable projects indicate that a senior project of 84 beds is large enough to achieve operating economies of scale though not optional (need about 120 beds). Higher densities for the site would generate difficulties in meeting parking and density requirements with Fullerton. Also, short term demand for additional small unit assisted living units probably does not exist in the local market as indicated by the subject's high SSI census. Considering the factors noted above, the purpose of this appraisal (to value the subject as is) and because the subject improvements clearly add value over and above the land alone, we have concluded that the highest and best use of the site, as improved, is probably as the subject site as built and operating. The existing improvements and living environment are competitive and functional for congregate and assisted living uses. The subject's overall quality, unit mix and unit sizes (though not optimal given their smaller size and limited variety), common areas, parking and landscaping are average to below average in the local senior housing market. 234 SITE VALUATION In order to estimate the fair market value of the subject site, a Sales Comparison Approach is utilized. Recent sales and listings/offers of vacant land considered somewhat comparable to the subject in location, zoning, and utility were analyzed. Adjustments are made as necessary for: date of sale, location, financing terms, physical characteristics such as size, shape, utilities and topography, and development limitations such as zoning restrictions, easements and encumbrances. A number of sales were reviewed in order to determine the market value of the subject site. Overall, we noted few recent vacant land sale transactions in the area reflecting the lack of development activity. We have considered the sales of local vacant land sites with somewhat comparable land uses, zoning and locations. Those sales that were considered most comparable are presented in a summary grid on a following page and detailed in the Addenda of this report. Comparable Sale No. 1 is a current listing located along State College about two blocks east of the subject. The 43,560 square foot parcel is currently being listed for $700,000 or $16.07 per square foot. A commercial/office use is likely on the site. The site has major thoroughfare frontage somewhat similar to the subject (without the corner influence). The comparable site's higher intensity zoning suggests downward adjustment to the subject. Comparable Sale No. 2 is located at 100 North State College, about one mile northeast of the subject. The 154,986 square foot site sold in September, 1994 for $2,245,000 or $14.49 per square foot. The site is located in a mixed use commercial office/residential area along a significant thoroughfare. The site's larger size suggests upward adjustment to the subject. This is somewhat offset by its more intensive zoning and location. Comparable Sale No. 3 is located at 8721 Whitaker Street about five miles southwest of the subject. The 187,308 square foot parcel sold in July, 1994 for $2,300,000 or $12.28 per square foot. The parcel was developed with townhomes and is located in a lesser quality residential neighborhood. Upward adjustment is also suggested by the site's lower density and larger parcel size. Comparable Sale No. 4 is located at 137 West Lincoln Avenue, about four miles southeast of the subject in the northern area of the City of Orange. The 27,007 square foot site sold in July, 1993 for $370,000 or $13.70 per square foot. A 15 unit apartment complex was developed on the site at a calculated density (24.1 units/acre) similar to the subject site (69.7 units/acre) when considering the subject's smaller units. Upward adjustment to the subject is suggested by an overall inferior neighborhood. Before adjustment, the sales discussed above indicate a sale price per square foot range of approximately $12.28 to $16.07. The above adjustments to the comparable sales can be summarized as follows: 235 RETIREMENT INN - FULLERTON VACANT LAND SALES
Sale Size-SF Proposed Price/ Price/ Density - No. Location/APN Date Sale Price (Acres) Development Sq. Ft. Unit Zoning Units/Acre - --- ------------ ---- ---------- ------- ----------- ------- ------ ------ ---------- 1. 600 Block of St. College, Listing $ 700,000 43,560 Probable $16.07 N/A O-P N/A South of Chapman (1.00) Commercial Fullerton 2. 100 N. State College 9/94 $2,245,000 154,986 Probable $14.49 N/A R-2 N/A Fullerton (3.64) Residential 319-011-057 3. 8721 Whitaker Street 7/94 $2,300,000 187,308 116 Units $12.28 $19,827 R-3 26.9 Fullerton (4.30) Allowed 070-241-26+ 4. 137 W. Lincoln Avenue 7/93 $ 370,000 27,007 15 Apartment $13.70 $24,666 R-3 24.1 Orange (0.62) Units 360-031-20 S. 1621 E. Commonwealth Avenue - - 43,124 68 Senior - - R-3 68.7 Fullerton (0.99) Units 269-106-16
236
Sale Price/ Comp No. SF Adjustment -------- ----------- ---------- 1 $16.07 Downward (list/sale price differential, zoning); Upward (corner) 2 $14.49 Downward (land use, location); Upward (parcel size, corner) 3 $12.28 Upward (parcel size, location, density) 4 $13.70 Upward (location)
The overall degree of comparability of these sales to the subject is only fair reflecting the lack of comparable (high density residential) vacant land sales in the immediate area. Overall, Comparable Land Sale Nos. 3 and 4 are most similar to the subject in zoned land use though each site has an inferior neighborhood location. Sale No. 1 is most similar to the subject in location but has a more intensive zoning and is only a listing. Sale No. 2 has more significant locational differences with the subject. Sale Nos. 2 and 3 are also much larger than the subject. After considering the specific location and density of the subject site and the evidence provided by the adjusted comparables and recent trends in land values, it is concluded that the fair market value of the fee simple interest for the subject site as of July, 1995, is at a rate of $15.00 per square foot, or for the subject's 43,124 square feet, an overall site value of $646,860 ($15.00/SF x 43,124/SF) or $9,513 per unit. 237 COST APPROACH The Cost Approach considers an estimate of the fair market value of the land, the direct and indirect replacement costs (new) of the improvements, entrepreneurial profit, and accrued depreciation from all causes. Land value is taken from the Site Valuation section of this appraisal. Sources for replacement costs of improvements include: (1) Cost bids or reported actual recent cost of the subject; (2) Actual costs of recently completed comparable improvements; (3) Local contractors' opinions; (4) Marshall and Swift Computer Data Base; and, (5) Marshall and Swift (monthly updated) Cost Manual. Entrepreneurial profit is a necessary element in the motivation to construct improvements. In estimating any accrued depreciation, the appraiser takes into consideration: age, condition, functional utility, detrimental external factors, and any existing leases with contract rent below fair market (economic) rent. The sum total of land costs, direct improvement costs, indirect costs and entrepreneurial profit is the estimated replacement cost new. Subtracting any required depreciation from the replacement cost new indicates the value by the Cost Approach. DIRECT COSTS The estimated building cost per square foot replacement cost new in 1995 for the subject improvements is derived from the Marshall Cost Data Service (and comparable projects as a part of total costs) as calculated below:
Class D, Average Quality Home for the Elderly (Sec. 11, Page 17) -------------------- Base Cost/SF $ 54.16 Sprinkler Adjustment 1.20 HVAC Adjustment (1.20) ----------- $ 54.16 Location Multiplier x 1.16 Time Multiplier x 1.05 ----------- Adjusted Base Cost/SF $ 65.97 Square Footage - GBA x 38,155 ----------- Adjusted Base Cost $ 2,516,966 ===========
The indicated base rate for the replacement cost new per square foot in 1995 for the existing improvements is $65.97. Our estimate of the base building cost on a per square foot basis includes architectural and engineering fees, overall construction financing cost and operational 238 overhead. They do not include unusual construction and fixtures, loan points, pre-marketing costs, furniture and city/public utility fees. In addition to the adjusted base construction for the building improvements, an allowance for furniture and equipment was included to arrive at total direct construction costs of the development. The allowance for furniture and equipment was estimated using an analysis of the Marshall Cost Manual allowance and industry experience (as shown below) or $3,000 per unit ($204,000 for 68 units). INDIRECT COSTS Indirect Costs - In addition to these direct building costs, we have estimated indirect costs at 7% of total direct building costs. Indirect costs include legal/accounting/appraisal fees, loan fees, premarketing advertising and promotion, city/public utility fees and a contingency fund. The above estimates reflect a replacement cost new (without land or profit) of $2,956,714 or $77.49 per square foot or $43,481 per unit. This is compared using an overall reasonableness test (no specific adjustment is made) to other recently built comparable congregate senior projects as follows:
Total Total No. of Cost/SF Cost/Unit FF&E Project Units Location (w/o Land)* (w/o Land)* Unit - ------- ----- -------- ----------- ----------- ---- Sterling Court 149 San Mateo $79.91 $84,117 $2,516 Park Ridge 93 Vallejo $79.40 $71,138 $2,688 Palm Court 100 Culver City $97.41 $84,000 $3,000
*Includes FF&E, shown separately for comparison purposes. The estimated replacement cost new for the subject is lower than the costs incurred at these similar projects on a square foot basis and on a per unit basis which is reconcilable given the subject's smaller units sizes, more modest quality and all studio unit mix. Finally, an entrepreneur or developer will typically expect to be compensated for the time, money, and risk expended in bringing a project to a completed income producing unit. Profit typically ranges from 10% to over 25% of the total construction and land costs, depending on the type of property, anticipated absorption or stabilization period, risk, and the size of the project. A modest allocation of 10% for entrepreneurial profit or toward the bottom of the range is considered appropriate for the subject given that the highest and best use of the subject as vacant in 1995 is to probably develop a senior housing project although this decision is not clear cut. The crowded local market, the subject's unit mix and current overall market conditions mute the project's rent/profit potential as evidenced by the subject's high SSI census. 239 DEPRECIATION Our site inspection noted no material physical curable, functional or economic depreciation. We did, however, note the following form of depreciation. Physical Incurable Depreciation - An amount for physical incurable depreciation (or the normal wear and tear on improvements as they age) is appropriate considering the subject's 22 year chronological and effective age, calculated as follows:
Direct Building Cost FF&E --------------- ---- Base Cost New $2,516,966 $ 204,000 Plus: Indirect Cost Allocation x 1.07 x 1.07 Plus: Profit Allocation x 1.10 x 1.10 ------------ ---------- Depreciable Base $2,962,469 $ 240,108 Depreciation Estimate (per MVS) 34% 50% ----------- ---------- Total Physical Incurable Depreciation $1,007,239 $ 120,054 ========== ========== Total $1,127,293 ==========
The depreciation percentages are based on our site inspection and Marshall Valuation estimates considering the subject's current 22 year old effective age (5 years for FF&E considering ongoing replacement) and 45 year old total economic life (10 years for FF&E). Physical incurable depreciation must be deducted from estimates of cost new to arrive at an as is valuation. SUMMARY Our estimate of value by the Cost Approach is summarized on the following page with an indicated value conclusion as is, in July, 1995 of $2,836,638, called $2,825,000. 240 RETIREMENT INN - FULLERTON COST APPROACH CALCULATION (CALCULATOR METHOD) Total Land Value (43,124 SF at $15.00/SF) $ 646,860 Direct Building Costs Building Cost $2,516,966 Furniture & Equipment (68 Units at $3,000/each) $ 204,000 ---------- Total Direct Building Costs $2,720,966 Total Direct Building and Land Costs $3,367,826 Indirect Costs - 7% $ 235,748 ---------- Total Construction and Land Costs $3,603,574 Plus Entrepreneurial Profit at 10% $ 360,357 ---------- Total Cost New (Including Land) $3,963,931 Less Depreciation Physical Curable $ 0 Physical Incurable ($1,127,293) Functional Curable $ 0 Functional Incurable $ 0 External Obsolescence $ 0 ------------ Total Depreciation ($1,127,293) ----------- Indicated Value, Cost Approach, As Is $2,836,638 ========== Rounded to $2,825,000
241 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (7/95 to 6/96) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at July, 1995 based on the projected July, 1995 to June, 1996 net income. The theory is that the investor purchasing the property in July, 1995 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of this appraisal and summarized on a following page. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The June, 1995 census reveals an occupancy of 91.7% or 77 beds out of a maximum current configuration of 84 beds. 242 RETIREMENT INN - FULLERTON SUMMARY OF SUBJECT RENT CENSUS at 6/19/95
Private-Studio Semi-Private SSI Total (Units) (Beds) (Beds) ----- -------------- ------------ ------ Number Units/Beds - Rented 48 9 20 77 (91.7%) Rent Range $1,150-$1,415 $800-$905 $671-$691 $671-$1,415 Rent Average $1,318 $871 $688 $1,102 Potential Total Rent-Rented $759,300 $94,020 $165,120 $1,018,440 Number Units/Beds - Vacant (1) 4 1 2 7 (8.3%) Rent Range $1,250 $800 $691 $691-$1,250 Rent Average $1,250 $800 $691 $1,026 Total Potential Rent-Vacant $60,000 $9,600 $16,584 $86,184 Total Units/Beds 52 10 22 84 (100%) Gross Potential Rent-Total $819,300 $103,620 $181,704 $1,104,624 Per Unit/Bed $1,313 $864 $688 $1,096
NOTES: (1) Vacant units include: Private Studio - Units 118, 212, 229, 236 (4 Units); Semi-Private - Beds 214, 222, 228 (3 Beds); vacant beds allocated between semi-private and SSI in ratio of leased semi-private/SSI beds. 243 Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $691 per month and not market determined. The comparison of the subject rents (with and without the average assisted living surcharge) to the market area projects surveyed accumulates the monthly rental of all facilities, the average of the 18 projects surveyed and the most comparable projects to the existing Retirement Inn - Fullerton. Of the projects surveyed, Comparable Nos. 2 - Acacia Villa, 3 - Rosewood Court, 7 Villa De Palma and 9 - Anaheim Gardens would be most similar to the subject in age, scale, amenities, quality and unit mix. As shown, the subject's private room rents (with and without the assisted living surcharge) are within the range of all and the most similar properties and near the averages (for both congregate and assisted living) of all facilities. The subject's congregate studio private and semiprivate rents are near the average of all projects surveyed (within 5%). The subject's average assisted living rents are within the overall range of all projects, similar to the most comparable properties, and slightly below the average of all projects (about 10%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's apparently stabilized occupancy, which is currently 92% at the current rents. We have also considered the subject's relatively higher occupancy rate compared to the other projects in the northern Orange County primary market area and its high SSI census. In our opinion, the subject's rents have been material factors in keeping its occupancy above 90% despite its competitive position (market conditions, competition, project age, small units). Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 2% during the 7/95 to 6/96 projection period, reflecting market conditions and the subject's history. The 2% estimate in the next 12 months represents an average 4% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $400 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 31 residents pay for living assistance at an approximate average of $389 extra rent per month. Our cash flow projections for the subject estimate a stabilized 37% gross utilization (35 beds gross; 32.6 beds net) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income: 244 RETIREMENT INN - FULLERTON COMPARATIVE RENT ANALYSIS ACLF - CONGREGATE RENTS
Private - Studio Semi-Private - Studio ----------------------------------------- --------------------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 2* $1,250-$1,800 2* $850-$950 4 $1,263 5 $850 5 $1,275-$1,850 7* $850-$900 6 $1,125-$1,200 9* $850 7* $1,150-$1,650 13 $750 9* $1,250-$2,000 14 $696 11 $1,185 13 $785-$1,000 14 $900-$1,500 15 $1,200 16 $1,400-$1,800 17 $1,195 18 $1,025 Range $785-$2,000 $696-$950 Average $1,295 $820
AL - ASSISTED LIVING RENTS
Private - Studio Semi-Private - Studio ----------------------------------------- --------------------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 1 $3,375-$3,600 1 $2,450 2* $1,400-$2,800 3 $800-$900 3 $1,150-$1,250 5 $1,425-$1,850 4 $2,350-$2,650 7* $1,000-$1,900 5 $1,425-$2,850 8 $1,900-$2,300 6 $1,225-$1,700 9* $1,000 7* $1,300-$2,650 12 $1,000-$1,300 8 $2,300-$2,500 14 $756-$821 9* $1,500-$2,500 15 $800-$850 10 $1,445 11 $2,380 12 $1,300-$1,800 13 $960-$1,175 14 $960-$1,625 15 $1,300-$1,500 16 $1,600-$2,300 17 $1,315-$1,995 18 $1,995-$2,750 Range $960-$3,600 $756-$2,450 Average $1,910 $1,361
Private - Studio Semi-Private ---------------- ------------ Subject Rented Beds - Subject Range $1,150-$1,415 $800 Subject Average $1,318/$1,718** $800/$1,200** (48 Units) (9 Beds) Subject Vacant Beds - Subject Range $1,250 $800 Subject Average $1,250/$1,650** $800/$1,200** (4 Units) (1 Bed)
*Comparable Nos. 2 - Acacia Villa; 7 - Villa de Palma; and 9 - Anaheim Gardens are most similar to the subject. **Includes average assisted living surcharge of $400 per month. 245
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- ------------- At 6/95 $389 31 (net) - At 7/95 to 6/96 $400 35 (gross) $168,000
In addition to total potential gross room revenue, we have included miscellaneous income at 1.0% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 6/95 91.7% 8.3% 7/95 to 6/96 (Stabilization) 93.0% 7.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 78.1 residents or an occupancy/vacancy of 93.0% (78.1/84). This conclusion is slightly higher than the current occupancy (77 beds) but is consistent with the subject's actual recent occupancy trends and operator projections. The projected stabilized vacancy factor reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions. The subject's market position (lower rents in a more affluent and crowded market) and lesser quality physical plant mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1993, 1994, 4 months ending 4/95 annualized) and budget (1995) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at June, 1995 ($2,350,000 times the tax rate of 1.00968% plus approximately $6,008 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; 246 RETIREMENT INN - FULLERTON HISTORICAL INCOME AND EXPENSE
Historical --------------------------------------------------------------- Operator 4 Months Goal Year Ending Year Ending Ending 1995 Budget Revenues 12/93 12/94 4/95 Annualized 1995 - -------- ------------ ------------- ---------- ---------- ---------- Rental Income $ 936,416 $ 956,057 $346,662 $1,039,986 $1,007,665 Assisted Living Income 48,628 74,403 38,617 115,851 83,300 Non-Operating Revenue $ 8,678 $ 8,967 $ 3,214 $ 9,642 $ 8,280 ---------- ---------- -------- ---------- ---------- Total Revenues $ 993,722 $1,039,427 $388,493 $1,165,479 $1,099,245 Expenses (1) Real Estate Taxes $ 33,465 $ 33,323 (2) $ 33,544 Insurance 12,228 12,518 (2) (2) 12,929 G&A 23,979 36,061 (2) (2) 25,245 Utilities 64,698 73,370 (2) (2) 76,215 Payroll/Benefits 427,038 430,765 (2) (2) 437,214 Maintenance 43,917 37,523 (2) (2) 47,080 Activities 9,952 9,529 (2) (2) 8,208 Marketing 8,682 7,440 (2) (2) 13,029 Laundry & Linen 6,490 8,527 (2) (2) 13,680 Dietary 97,530 103,131 (2) (2) 106,238 Supplies 20,403 24,000 (2) (2) 21,432 ---------- ---------- -------- ---------- ---------- Total Operating Expense $ 748,382 $ 776,187 $276,679 $ 830,037 $ 794,814 (75.0%) (74.7%) (71.2%) (71.2%) (72.3%) Net Operating Income $ 245,340 $ 263,240 $111,814 $ 335,442 $ 304,431 ========== ========== ======== =========== ==========
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 247 Insurance - estimated at 1.0% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 12% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 6.5% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 5% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 3% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2.0% of effective gross income. This allocation reflects the expenses of a typical operator in the locally competitive market. Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $10.00 per day per resident reflecting the lesser number of residents (78.1 occupied beds x $10.00/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred and reflect a lesser economy of scale due to the smaller number of beds; Personal Care - estimated at 8.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 42% of the residents (about $8.17 per resident day for about 33 residents); Replacement Reserve - estimated at 12.5% of the estimated furniture and equipment cost new ($204,000 or $3,000 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $25,500 is equal to 2.1% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 69.5% of effective gross income or $10,777 per occupied bed (78.1 beds). 248 The per bed total expenses are slightly higher than typical because of the subject's smaller number of smaller units preventing economies of scale in operation. A comparison to similar congregate/assisted living properties before management fees and reserves illustrates the following:
Inflated Stabilized Per to 1995 Location Expense Ratio Resident/Yr. at 4%/Yr. -------- ------------- ------------ -------- 10 ARV Properties California 61.7% $ 9,782 (1994) $10,173 13 Angeles Housing Properties National 56.6% $ 8,966 (1993) $ 9,698 Greenhills Millbrae 55.7% $ 8,234 (1992) $ 9,262 Meadows Napa 56.3% $ 8,418 (1992) $ 9,469 Country Inn Fremont 52.5% $ 7,718 (1992) $ 8,682 Westmont Santa Clara 57.7% $ 9,520 (1992) $10,296 Canyon Hills Club Anaheim 61.2% $11,918 (1994) $12,395 Courtyard San Marcos 51.6% $ 9,181 (1993) $ 9,930 6 Facility Averages 55.8% $10,006 Subject - 1993 Historical 75.0% $ 9,719 Subject - 1994 Historical 74.7% $10,080 Subject - 1/95 to 4/95 Historical 71.2% $10,780 Subject - 1995 Budget 72.3% $10,322 Subject Projected - Period 1 - - (7/95 to 6/96) 69.5% $10,777
As illustrated, the projected expenses for the subject are above the average of the expense histories of the projects listed above and above the averages of 10 other ARV facilities. The subject will always have much higher expenses on a percentage of income basis because of its lower revenue base (lower rents, SSI census) and higher on a per patient basis due to the lesser number of beds (preventing greater economies of scale) and higher semiprivate bed (two beds per room) census. Our projections consider these comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The survey indicated a median annual cost per unit of $10,577 before management fees ($11,541 total less $964 in management fees). This compares to our per unit estimate for the subject of $12,377 ($841,640/68) in the next 12 months. Finally, a reconciliation of our adjusted period one (7/95 to 6/96) projected expenses to 1995 actual annualized expenses illustrates the following: 249 Actual Total Expenses (1/95 to 4/95 Annualized) $830,037 ======== Operator Budget (1995) $794,814 ======== Projected Total Expenses Per SLVS (7/95 to 6/96) $927,703 Less: Management Fees ($ 60,557) Less: Replacement Reserves ($ 25,500) -------- Adjusted Projected Total Expenses (7/95 to 6/96) $841,640 ======== Difference (over 1995 actual, reflects inflation) +1.4% (over 1995 budget, reflects an understated budget, inflation) +5.9%
CAPITALIZATION PROCESS Because Retirement Inn - Fullerton is being appraised as of July, 1995 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of July, 1995 to June, 1996 is capitalized at a rate of 12.0% to get an indicated total property value at July, 1995. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 11% to 15%. These are illustrated in sales of comparable facilities in the Sales Comparison Approach of this report and are summarized as follows:
Comparable Indicated Sale No. Property Cap Rate -------- ---------- --------- 1 Valley Crest 11.3% 2 Canyon Hills Club 10.3% 3 Brea Residential 11.1% 4 Whittier 11.8% 5 Lomita Lodge 12.2% 6 Villa San Marcos 12.7% Range 10.3%-12.7% Average 11.6% 25 Facility Average 12.5%
250 In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 10.0% interest with an amortization term of 20 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .1158. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 15%. The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .1158 .0811 Equity 0.30 x .15 .0450 ----- 1.0 x Overall Rate .1261 OAR 12.61%
These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.6% 25 Statewide Sales 12.5% SLVS Investment Survey 12.1% Band of Investment 12.61%
Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in the stabilized occupancy (93%) and less volatile cash flow (including a high SSI census), which is derived from the subject's established niche as a middle market, average quality assisted living project in the area, and conversely, considering the difficult and crowded local market, the subject's full assisted living licensing, the subject's more limited unit mix in an older 251 generation physical plant in an overall affluent market area (albeit with the currently weak local real estate market), we have concluded that 12.0% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at May 4, 1995 of $2,361,992, rounded to $2,350,000 ($34,559/unit). 252 RETIREMENT INN - FULLERTON PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (7/95-6/96) ----------- Average Occupancy (All Beds) 93.0% (78.1 Beds) Average Net Rental (All Beds) $1,115 Potential Gross Rent Income - Studio Private - 52 Beds at $1,339/Mo. Avg. $ 835,686 Semiprivate - 10 Beds at $881/Mo. Avg. 105,754 SSI - 22 Beds at $688/Mo. Avg. $ 181,632 ---------- Potential Gross Rent Income $1,123,072 Plus: Assisted Living Surcharges (35 Beds at $400/mo.) $ 168,000 Plus: Miscellaneous Income (1% of PGRI) $ 11,231 ---------- Potential Gross Income $1,302,303 Less: Stabilized Vacancy & Collection Losses - 7% ($ 91,161) ----------- Effective Gross Income $1,211,142 Expenses - % of EGI -------- Real Estate Taxes - $ 29,735 Insurance 1.0% 12,111 Management 5.0% 60,557 G&A 12.0% 145,337 Utilities 6.5% 78,724 Maintenance 5.0% 60,557 Activity & Trans. 3.0% 36,334 Marketing 2.0% 24,223 Housekeeping 6.0% 72,669 Dietary $10.00/PRD 285,065 Personal Care 8.0% 96,891 Replacement Reserves - $ 25,500 ---------- Total Expenses $ 927,703 (76.6%) Stabilized Net Operating Income $ 283,439 Capitalization Rate .12 ---------- Capitalized Value $2,361,992 ========== Called $2,350,000 Per Unit $ 34,559
253 SALES COMPARISON APPROACH The Sales Comparison Approach is a method of comparing the subject property to recent sales and/or listings of similar types of properties located in the subject or competing areas. Each of these sales must be analyzed to establish estimate elements of comparability. The reliability of this technique depends on 1) the degree of comparability between the subject and the sales properties; 2) the length of time since the sales were consummated; 3) the accuracy of the sales data; and, 4) the absence of unusual conditions affecting the sale. On the following page, we have included 25 sales of congregate senior housing properties which can be considered somewhat similar to the subject. The purpose of including this listing is to provide the reader with some context of western US senior housing sales beyond those specifically discussed below. This additional information can be helpful because of the special purpose nature and general illiquidity of the senior housing market. Some of the sales in the last 18 months represent REO's. Some of the project buyers present in today's market are still "bottom fishing" where distressed properties can be purchased at substantial discounts from replacement cost. However, these buyers have a shrinking supply of properties available to choose from. This suggests a trend of lower capitalization rates (higher sale prices). Those more recent transactions considered most comparable to the subject are summarized on the following page and discussed in greater detail in the Addenda of this report. The sale prices noted below are discussed and reported on a sale price per unit (total going concern) basis. Comparable Sale No. 1 is the February, 1995 sale of Valley Crest, a small assisted living property located in Apple Valley, a less affluent desert city. The high quality property was built in 1985 and sold for $2,200,000 or $59,459 per unit. The property was fully occupied at the date of sale and sold for an indicated capitalization rate of 11.3%. The property includes about 20% SSI residents and was purchased by a national owner/operator of senior properties (Brim Housing), who is actively seeking to expand their portfolio of properties. Comparable Sale No. 2 is the February, 1995 sale of Canyon Hills Club for $13,450,000 or $63,443 per unit. The buyer, Brim Housing (same as Sale No. 1), was the former operator of the project suggesting a slightly higher sales price (due to greater familiarity with the property). The 212 unit project was built in 1989 and has a relatively high quality physical plant with 45 of the total units licensed for assisted living. The overall quality of this project is above the subject. The project was 93% occupied at the date of sale with an indicated cap rate of 10.3%. Comparable Sale No. 3 and 4 are both sales to the national skilled nursing/assisted living Manor Care who converted the two projects to Springhouse Assisted Living projects, Manor Care's national chain of assisted living projects. The purchase of these two similar projects was completed in January, 1995. Brea Residential was built in 1990 and has 98 units. The project sold for $4,800,000 or $48,980 per unit. Whittier Retirement Villa is a slightly older project, built in 1973 and which has 72 units. The project sold for $2,875,474 or $39,937. The indicated cap rates of the two fully occupied properties was 11.1% and 11.8%, respectively. Both of these projects are somewhat comparable to the subject. 254 WESTERN US ACLF/AL SENIOR HOUSING SALES SUMMARY LAST 24 MONTHS
Gross Expense Sale Inc. Ratio Price No. Facility Name Location Age Units $/Unit/Mo (%) Date (000) $/Unit OAR $/SF GIM - --- ---------------------- ------------------ ----- ----- --------- ------- ---- ------- ------- ------ ------- --- 1. The Highlander Seattle, WA 1979 121 $1,066 55.0% 6/93 $ 5,200 $41,322 13.4% $ 52.73 3.36 2. Almond Avenue Orangevale, CA 1987 39 $1,598 65.2% 7/93 $ 2,100 $53,864 12.4% $ 57.00 2.81 3. Summerfield Tigard, OR 1980 155 $1,100 60.0% 8/93 $ 6,550 $42,532 13.2% $ 80.84 3.20 4. Renton Villa Renton, WA 1983 78 $1,366 66.7% 8/93 $ 3,000 $38,462 14.2% $ 46.51 2.35 5. Sherwood Villa Tacoma, WA 1981 98 $1,328 69.0% 8/93 $ 2,800 $28,571 17.3% $ 45.67 1.79 6. Celeste Villa Modesto, CA 1975 81 $1,080 72.5% 10/93 $ 1,900 $23,457 13.7% $ 32.75 1.81 7. Springs of Napa Napa, CA 1986 102 $1,332 55.0% 11/93 $ 6,300 $61,765 11.7% $ 69.23 3.86 8. Summerhill Puyallup, WA 1987 96 $1,241 59.4% 2/94 $ 5,500 $57,292 10.5% $ 62.74 4.40 9. Chula Vista Inn Chula Vista, CA 1975 112 $1,034 75.0% 6/94 $ 2,675 $23,884 13.0% $ 41.10 1.92 10. Villa San Marcos San Marcos, CA 1986 100 $1,191 65.0% 6/94 $ 3,951 $39,510 12.7% $ 73.17 2.76 11. Camlu Phoenix, AZ 1979 88 $1,153 65.0% 6/94 $ 3,800 $43,182 11.2% $ 83.66 3.12 12. Gold Star Manor Fullerton, CA 1985 80 $1,146 70.0% 6/94 $ 2,880 $36,000 11.5% $128.34 2.62 13. Hacienda de Monterey Palm Desert, CA 1989 180 $1,813 65.8% 7/94 $ 7,250 $40,278 18.5% $ 41.36 1.85 14. Park Ridge Vallejo, CA 1991 93 $1,632 60.0% 7/94 $ 5,785 $62,204 11.3% $ 68.10 3.54 15. Carson Oaks Stockton, CA 1989 76 $1,462 60.0% 7/94 $ 4,200 $55,263 12.4% $ 66.95 3.23 16. Villa Ocotillo Scottsdale, AZ 1973 102 $1,242 60.0% 9/94 $ 3,500 $34,314 14.9% $ 43.34 2.30 17. Lomita Lodge Ojai, CA 1970 26 $1,999 75.0% 12/94 $ 1,350 $51,923 12.2% $135.00 2.06 18. Brea Residential Brea, CA 1990 98 $1,377 67.0% 1/95 $ 4,800 $48,980 11.1% $ 84.24 2.96 19. Whittier Retirement Whittier, CA 1973 72 $1,187 67.0% 1/95 $ 2,875 $39,937 11.8% $ 75.16 2.80 20. Canyon Hills Club Anaheim, CA 1989 212 $1,661 67.1% 2/95 $13,450 $63,443 10.3% $ 65.92 3.18 21. Casa Sandoval Hayward, CA 1989 238 $1,346 65.0% 2/95 $15,000 $63,025 9.0% $ 69.23 3.90 22. Valley Crest Apple Valley, CA 1985 37 $1,600 65.0% 2/95 $ 2,200 $59,459 11.3% $118.71 3.10 23. Amaryllis Court Anaheim, CA 1969 33 $1,391 75.0% 3/95 $ 1,150 $34,848 11.0% $ 71.72 2.09 24. Fulton Villa Stockton, CA 1973 76 $ 763 72.1% 3/95 $ 1,450 $19,079 11.5% $ 25.29 2.08 25. Oak Tree Villa Scotts Valley, CA 1988 202 $1,399 56.8% 6/95 $11,900 $58,911 12.3% $ 69.18 3.51 Low 1969 26 $ 763 55.0% $ 1,150 $19,079 9.0% $ 32.75 1.79 High 1991 238 $1,999 75.0% $15,000 $63,443 18.5% $135.00 4.40 Low (minus 2 lowest) 1973 37 $1,066 56.8% $ 1,450 $23,884 10.5% $ 41.36 1.85 High (minus 2 highest) 1989 202 $1,661 72.5% $11,900 $62,204 14.9% $118.71 3.86 Average: 1982 104 $1,340 65.3% $ 4,863 $44,860 12.5% $ 68.72 2.82
255 RETIREMENT INN - FULLERTON COMPARABLE IMPROVED SALES
Indicated Age/No. Sale Price/ Sale Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF at Sale Rate - --- ------------- -------- ---- ---------- ------ -------- --------- --------- 1. Valley Crest 1985/ 2/95 $ 2,200,000 $59,459 $118.71 100% 11.3% 18521 Corwin 37 Apple Valley, CA 2. Canyon Hills Club 1989/ 2/95 $13,450,000 $63,443 $ 65.92 93% 10.3% 525 S. Anaheim Hills Road 212 Anaheim, CA 3. Brea Residential 1990/ 1/95 $ 4,800,000 $48,980 $ 84.24 94% 11.1% 285 W. Central 98 Brea, CA 4. Whittier Retirement Villa 1973/ 1/95 $ 2,875,454 $39,937 $ 75.16 94% 11.8% 8101 S. Painter 72 Whittier, CA 5. Lomita Lodge 1970's/ 12/94 $ 1,350,000 $51,923 $135.00 81% 12.2%(1) 225 N. Lomita 26 Ojai, CA 6. Villa San Marcos 1986/ 6/94 $ 3,951,000 $39,510 $ 73.17 80% 12.7%(1) 1550 Security Place 100 San Marcos, CA
(1) Estimated at 92% occupancy 256 Comparable Sale No. 5 is the December, 1994 sale of Lomita Lodge, a small assisted living project located in Ojai. The 26 unit project sold for $1,350,000 or $51,923 per unit. The property was originally built in the 1940's and expanded in the 1970's. The project has high rents but was only 81% occupied at the date of sale. The indicated cap rate at a stabilized occupancy is 12.2%. Comparable Sale No. 6 is the Villa San Marcos project in San Marcos (San Diego County) which sold in June, 1994 for $3,951,000 or $39,510 per unit. The 100 unit project was built in 1986 and was 80% occupied at the date of sale. The indicated capitalization rate of the sale at an assumed stabilized occupancy is approximately 12.7%. The project has had difficulty achieving full occupancy because of a competing project (Courtyard of San Marcos) located next door. The overall quality of the project is average. The comparables described above indicate unit values of between $39,510 per unit to $63,443 per unit before adjustments. Overall, in reviewing these sales for comparability to the subject, we observed significant differences. Most notably, differences in location, physical plant, occupancy, and unit mix make direct and precise comparison to the subject property difficult. Therefore, in our opinion, the overall degree of comparability of these sales to the subject is only fair. Nevertheless, after the adjustments described below, these comparables should provide approximate parameters for an indicated value of the subject property. The first adjustment to the comparable sales (the yet to stabilized Sale Nos. 5 and 6) reflects the difference in the stabilized occupancy of the comparables at their date of sale to the projected 93% stabilized occupancy of the subject. The amount of the adjustment is interpolated assuming an approximate 20% to 25% difference in value between an empty project and one that is stabilized. On a following page, we have also adjusted each of the comparable sales for the difference in the ratio of net income per the total number of units. These adjustments should provide an approximate value range from the subject. We have adjusted each comparable by the ratio of the estimated stabilized net income per unit of the subject ($4,168) to the net income per unit of the comparables. This ratio should theoretically reflect differences in stabilized occupancy, location and quality (through rents), unit mix and operating efficiencies (through expenses). As illustrated, after adjustment, these sales indicate a value range for the subject of $34,433 per unit to $40,604 per unit. This range provides approximate parameters for a value indication for the subject. In our opinion, given the above adjustments, the indicated value of the subject as is in July, 1995 is between $34,433 to $40,604 per unit, calculating to a total indicated fee simple value using a Sales Comparison Approach of $2,341,444 ($34,433/unit x 68 units) to $2,761,072 ($40,604/unit x 68 units), rounded to $2,350,000 to $2,750,000. As described in the Reconciliation and Conclusion section of this appraisal, due to significant differences in location, occupancy, quality and amenities package, our final value conclusion does not place great weight on this value estimate reflecting the general lack of comparability, large adjustments and wide range of indicated values. 257 RETIREMENT INN - FULLERTON COMPARABLE IMPROVED SALES ADJUSTMENTS
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 ----- ----- ----- ----- ----- ----- Sale Price Per Unit $59,459 $63,443 $48,980 $39,937 $51,923 $39,510 Before Adjustment Occupancy Adjustment - - - - +5% +5% Net Income Per Unit -38% -36% -23% -12% -34% -17% Adjustment (Subject (1) ($ 4,168/ ($ 4,168/ ($ 4,168/ ($ 4,168/ ($ 4,168/ ($ 4,168/ NOI/Unit/Comp/NOI/Unit $ 6,719) $ 6,535) $ 5,437) $ 4,713) $ 6,335) $ 5,003) -------- -------- -------- -------- -------- -------- Sale Price Per Unit After Adjustment $36,865 $40,604 $37,715 $35,145 $35,983 $34,433 ======= ======= ======= ======= ======= =======
Range: $ 34,433 - $ 40,604 x 68 Units x 68 Units ----------- ----------- Indicated Value Range: $2,341,444 - $2,761,072 ========== ========== Called: $2,350,000 to $2,750,000
(1) Subject NOI/Unit - $283,439/68 Units 258 RECONCILIATION AND CONCLUSION
Market Value As Is - 8/1/95 -------------- Indicated Value, Cost Approach $2,825,000 Indicated Value, Income Approach $2,350,000 Indicated Value, Sales Comparison Approach $2,350,000- $2,750,000
The development of a final estimate of value involves judgment in a careful and logical analysis of the procedures leading to each indication of value. The judgment criteria are appropriateness, accuracy and quantity of evidence. The Sales Comparison Approach is most applicable when closely comparable properties are bought and sold in the market on a regular basis. We relied on the sales of somewhat comparable facilities to estimate value using this approach. However, due to overall property type illiquidity, differences in occupancy, location and components of income, direct comparison to the subject property is difficult as suggested by the wide range of indicated values. Considering these factors, the Sales Comparison Approach is considered to produce a less reliable indication of value. The Cost Approach is most applicable when the improvements are new or nearly new and where a few number of subjective adjustments must be made to reflect depreciation, if any. In estimating construction cost new, we relied on well documented general cost information provided by the Marshall Valuation Service which was generally supported by actual costs incurred at similar projects. Our estimate of land value is somewhat supported by the sale of similarly zoned vacant land parcels in the region. Adjustments for physical incurable depreciation are approximations but were estimated using reasonable analyses. Considering these factors and our Highest and Best Use conclusions, the Cost Approach is considered to produce a less accurate indication of value. This approach is also rarely relied on by investors in this type of property. The Income Approach is typically considered the strongest value indicator for properties purchased primarily for their income producing potential. This approach most accurately reflects the impact of stabilized occupancy rates for properties such as the subject. Comparable market rental rates and an analysis of the current census were available for the subject units to arrive at an estimate of fair market rent and gross income. Expense data was substantiated by historical data and comparable projects. Finally, our estimate of the capitalization rate is appropriate reflecting the local competitive market and the subject's overall average cash flow risk and market position. Overall, the Income Approach is considered a strong and only truly reliable indicator of value for the subject property. After considering the factors leading to each indication of value, the Income Approach is considered to be the most appropriate for the purpose of this appraisal. The Sales Comparison Approach is given little to no weight due to the illiquidity of the market, shifting market trends 259 and the wide range of indicated values. The Cost Approach is also given little to no emphasis, based on the deductions for depreciation and our highest and best use discussion. The final market value estimate of the fee simple total going concern interest of the subject property as is, on August 1, 1995, is: TWO MILLION THREE HUNDRED FIFTY THOUSAND ($2,350,000) DOLLARS 260 ALLOCATION OF FINAL VALUE DETERMINATION TO COMPONENTS We have allocated our total going concern value determination to various components including real estate, business and personal property value. To allocate the going concern value estimate, we have utilized both the Cost and Income Approaches to estimate a reliable and reasonable allocation to each component. A summary of our allocation is illustrated below: Allocation of Final Going Concern Value Determination
As Is - 8/1/95 ------ Total Going Concern Value $2,350,000 Personal Property (1) 100,000 Business Value (2) 325,000 ---------- Real Estate Value $1,925,000 ==========
(1) FF&E estimated from Cost Approach estimates less accrued depreciation. (2) Business value estimated from the calculated difference in value of the subject as is (full occupancy) compared to its value as if it were vacant as shown below. The personal property value is taken from the Cost Approach estimates set forth in Cost Approach section of this report. This estimate reflected a replacement cost new of $3,000 per unit (total of $204,000 FF&E cost new for 68 units) which must be adjusted to its current depreciated value. Given the estimated five year old average age of the subject's personal property items and ongoing replacement, we have estimated a 50% allocation for depreciation at 8/1/95 or an as is value of $204,000 x 50% = $102,000, rounded to $100,000. The business component of the subject value reflects the fact that the subject is a business requiring specialized management services such as meals, housekeeping and social activities represent complications in the operation of a senior housing facility and require specific managerial expertise. An appropriate method to estimate the business value component is to compare the value of the subject as is ($2,350,000) as a fully operating stabilized property to its estimated value as if it were empty, as estimated below ($2,025,000). The estimated business value would be the difference in these values or $325,000. 261 Approximate Valuation of Subject As If Empty at 7/95
Period 1 Period 2 Period 3 (7/95-12/95) (1/96-12/96) (1/97-12/97) ------------ ------------ ------------ (6 months) Average Occupancy 32.1% 68.6% 93.0% Potential Gross Income $651,152 $1,315,327 $1,341,634 Effective Gross Income $209,020 $ 902,314 $1,247,720 Total Expenses $270,292 $ 781,145 $ 955,754 -------- ---------- ---------- Net Income ($ 61,272) $ 121,169 $ 291,966 ======== ========== ========== Discounted Value ($ 57,136) $ 98,256 $1,972,960 ======== ========== ========== Total $2,014,080 ========== Called $2,025,000 ==========
Assumptions: 20% preleasing; 3.4 beds/month absorption; 4% annual rent increases; stabilized expense estimated at 76.6% of stabilized effective gross income; expenses decreasing from the stabilized period three at 4%/year for inflation and also for lower occupancy by 15% in period two, 40% in period one; 12.0% terminal cap rate; 15.0% discount rate. The real estate component is the remainder or residual of the final value determination after a subtraction for the personal property and business value components, or as illustrated for the subject: $1,925,000 at May 4, 1995, as is, or 81.9% of the total going concern value. In our opinion, though these allocations are estimates, they can be considered reliable and reasonable given the analysis set forth above. 262 MARKETING PERIOD The subject's estimated marketing time is 6 months. This conclusion is based on discussions with those brokers specializing in the sale of senior housing projects, our knowledge of specific sale transactions (which have had widely variable marketing times) and considering current market conditions and the characteristics of the subject. Marketing times at several similar projects indicate the following: Casa Sandoval Hayward 6 months Fulton Villa Stockton 4 months Pacific Springs Escondido/El Cajon 5 months Park Ridge Vallejo 5 months In our opinion, the subject would probably experience an average marketing time (regarded as about 6 months). The majority of buyers of senior housing projects are still seeking (and have fewer and fewer available opportunities) distressed properties where large increases in cash flow value are possible. The subject is not a distressed property given the current 90%+/- stabilized occupancy and as such would have a lesser appeal to some market buyers (subject has limited upside potential although its assisted living utilization could be increased and its SSI census decreased). Nevertheless, the subject would be viewed as a solid cash flow project with a good physical plant (albeit with a limited unit mix) in a good overall, affluent location. The subject's most likely buyer would be a larger facility owner/operator of other comparable congregate senior housing properties in California (i.e. Holiday Retirement, Manor Care, Leisure Care, Capital Senior Living, Brim, Health Care Group, etc.). 263 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions reached or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Mary Catherine Wiederhold, Appraisal Associate provided significant professional assistance to the person signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 4, 1995 and August 1, 1995. 264 12. The concluded total going concern market value estimate of the fee simple interest of Retirement Inn - Fullerton, is as follows: MARKET VALUE "AS IS" (AUGUST 1, 1995): TWO MILLION THREE HUNDRED FIFTY THOUSAND ($2,350,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - ------------------------------- Michael G. Boehm, MAI 265 A D D E N D A 266 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 1 - Acacia Villa 1620 E. Chapman Fullerton No. 2 - Fullerton Guest Home 1510 E. Commonwealth Fullerton 267 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 3 - Rosewood Court 411 E. Commonwealth Fullerton No. 4 - Bradford Square 1180 N. Bradford Avenue Placentia 268 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 5 - Villa De Palma 351 E. Palm Drive Placentia No. 6 - Park Vista at Morningside 2527 Brea Boulevard Fullerton 269 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 7 - Sunnycrest Chalet 1925 Sunny Crest Drive Fullerton No. 8 - La Veranda 312 N. Roosevelt Avenue Fullerton 270 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 9 - Anaheim Gardens 625 W. La Palma Anaheim No. 10 - Emerald Court 1731 W. Medical Court Center Anaheim 271 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 11 - Walnut Manor 891 S. Walnut Street Anaheim No. 12 - Amaryllis Court 1652 W. Broadway Anaheim 272 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 13 - Fullerton Manor 2441 W. Orangethorpe Fullerton No. 14 - La Habra Villa 1100 E. Whitier Boulevard La Habra 273 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 15 - Meadows of La Habra 200 W. Whittier La Habra No. 16 - Park Regency 1750 W. La Habra Boulevard La Habra 274 COMPARABLE RENTAL FACILITIES PHOTOGRAPHS No. 17 - Nohl Ranch Inn 380 S. Anaheim Hills Road Anaheim Hills No. 18 - Canyon Hills Club 525 S. Anaheim Hills Road Anaheim Hills 275 VACANT LAND SALE COMPARABLE NO. 1 Location: 600 Block of St. College, South of Chapman Avenue Fullerton, CA Assessor's Parcel No.: Could Not Determine (Orange County) Sale Date: Listing Document No.: N/A Sale Price: $700,000 Per Sq. Ft.: $16.07 Per Unit: N/A Size: 43,560 Square Feet (1.00 Acres) Topography: Level Shape: Rectangular Proposed Use/Density: Unknown Zoning: O-P Grantor: Northern California family trust (broker would not identify) Grantee: N/A Terms: N/A Comments: Property is also available for lease at $6,000 per month, broker stated the property has been on the market since March, 1995; along major thoroughfare in mixed use commercial/residential neighborhood.
276 VACANT LAND SALE COMPARABLE NO. 2 Location: 100 North State College Fullerton, CA Assessor's Parcel No.: 319-011-057 (Orange County) Sale Date: 9/30/94 Document No.: 591055 Sale Price: $2,245,000 Per Sq. Ft.: $14.49 Per Unit: N/A Size: 154,986 Square Feet (3.64 Acres) Topography: Level Shape: Irregular Proposed Use: Probable Residential (Apartments/Townhomes) Zoning: R-2 Grantor: Brea Building Site Joint Venture Grantee: Brea Place Associates Terms: All Cash to Seller Comments: In mixed use commercial office neighborhood along a major thoroughfare.
277 VACANT LAND SALE COMPARABLE NO. 3 PHOTO NOT AVAILABLE Location: 8721 Whitaker Street Fullerton, CA Assessor's Parcel No.: 070-241-024, 25, 26, 30 (Orange County) Sale Date: 7/14/94 Document No.: 452125 Sale Price: $2,300,000 Per Sq. Ft.: $12.28 Per Unit: $19,827 Size: 187,308 Square Feet (4.30 Acres) Topography: Flat Shape: Irregular Proposed Use/Density: 116 Units Allowed; 26.9 Units/Acre Zoning: R-3 Grantor: Jean Lamphere (Trustee) Grantee: Fullerton Housing Investor Terms: 1st TD $1,600,000; 2nd TD $450,000; terms unavailable. Comments: In average quality residential area.
278 VACANT LAND SALE COMPARABLE NO. 4 Location: 137 W. Lincoln Avenue Orange, CA Assessor's Parcel No.: 360-031-20 (Orange County) Sale Date: 7/21/93 Document No.: 484756 Sale Price: $370,000 Per Sq. Ft.: $13.70 Per Unit: $24,666 Size: 27,007 Square Feet (0.62 Acres) Topography: Level Shape: Irregular Proposed Use/Density: 15 unit apartment building; 24.1 units/acre Zoning: R-3 Grantor: Arthur & Ruth Paulus (Trustee) Grantee: M/M Joe & Lisa Valenti Terms: Cash to seller; 1st TD Bank of Yorba Linda $844,000 (const.). Comments: In average quality residential area.
279 IMPROVED SALE COMPARABLE NO. 1 Name: Valley Crest Senior Living Center Location: 18521 Corwin Road, Apple Valley, CA Assessor's Parcel No.: 0473-091-10 (San Bernardino County) Sale Date: 2/10/95 (Doc. No. 95-42732) Sale Price: $2,200,000 No. of Units: 37 Units/72 Beds (Licensed AL) Age: 1985 Size (GBA): 18,532 Square Feet Average Unit Size: 257 Square Feet Sale Price/Unit: $59,459 Sale Price/SF: $118.71 Occupancy Rate: 100% Gross Operating Income: $710,700 Expenses: $461,955 Net Operating Income: $248,745 % Expenses: 65% G.I.M.: 3.10 O.A.R.: 11.3% N.O.I./Unit: $6,984 Grantor: Valley Crest Residential Grantee: Brim Homestead Inc. Terms: All Cash to Seller Comments: Higher quality property in less affluent market area; property includes approximate 50/50 split of private and semiprivate beds and about 20% SSI. Confirmation: Bruce Schoen (503) 256-2070
280 IMPROVED SALE COMPARABLE NO. 2 Name: Canyon Hills Club Location: 525 S. Anaheim Hills Road, Anaheim, CA Assessor's Parcel No.: 363-473-01 (Orange County) Sale Date: 2/1/95 (Document No. 42951) Sale Price: $13,450,000 No. of Units: 212 (includes 45 licensed assisted living units) Age: 1989 % Private Pay: 100% Size (GBA): 204,028 Square Feet (GBA) Average Unit Size (GBA/Unit): 962 Square Feet Sale Price/Unit: $63,443 Sale Price/SF: $65.92 Occupancy Rate: 93% Gross Operating Income: $4,225,535 Expenses: $2,894,747 Net Operating Income: $1,390,788 % Expenses: 67.1% G.I.M.: 3.18 O.A.R.: 10.3% N.O.I./Unit: $6,560 Grantor: Obayashi Corporation Grantee: Brim Housing Inc. Terms: All Cash to Seller Comments: Buyer was former operator of subject; property took five years to achieve effective full occupancy. Confirmation: Bruce Schoen (503) 256-2070
281 IMPROVED SALE COMPARABLE NO. 3 Name: Brea Residential (now known as Springhouse Assisted Living) Location: 285 W. Central, Brea, CA Assessor's Parcel No.: 304-042-9 & 12 (Orange County) Sale Date: 1/3/95 Sale Price: $4,800,000 No. of Units: 98 Units Age: 1990 % Private Pay: 80% (Estimated) Size (GBA): 56,981 Square Feet Average Unit Size (GBA/Unit): 581 Square Feet Sale Price/Unit: $48,980 Sale Price/SF: $84.24 Occupancy Rate: 94% Gross Operating Income: $1,618,917 Expenses: $1,084,674 Net Operating Income: $534,243 % Expenses: 67.0% G.I.M.: 2.96 O.A.R.: 11.1% N.O.I./Unit: $5,451 Grantor: Everhealth Foundation Grantee: Manor Care Terms: All Cash to Seller Comments: Average to above average quality project in northern Orange County area; located in heavily competitive market area. Confirmation: Steve Roth (301) 681-9400
282 IMPROVED SALE COMPARABLE NO. 4 Name: Whittier Retirement Villa (now known as Springhouse Assisted Living) Location: 8101 S. Painter, Whittier, CA Assessor's Parcel No.: 8142-032-029 (Los Angeles County) Sale Date: 1/3/95 Sale Price: $2,875,454 No. of Units: 72 ACLF Units (145 Maximum ALF Beds) Age: 1973 % Private Pay: 80% Size (GBA): 38,257 Square Feet Average Unit Size (GBA/Unit): 531 Square Feet Sale Price/Unit: $39,937 Sale Price/SF: $75.16 Occupancy Rate: 94% Gross Operating Income: $1,025,352 Expenses: $686,986 Net Operating Income: $338,366 % Expenses: 67.0% G.I.M.: 2.80 O.A.R.: 11.8% N.O.I./Unit: $4,699 Grantor: Everhealth Foundation Grantee: Manor Care Terms: All Cash to Seller Comments: Average quality project in southern Los Angeles County area; competitive project located across the street (Posada Whittier); on significant thoroughfare. Confirmation: Steve Roth (301) 681-9400
283 IMPROVED SALE COMPARABLE NO. 5 Name: Lomita Lodge Location: 225 N. Lomita Avenue, Ojai, CA Assessor's Parcel No.: 017-083-200 (Ventura County) Sale Date: 12/30/94 (Doc. No. 206073) Sale Price: $1,350,000 No. of Units: 26 Units/36 Beds (Licensed AL) Age: 1940's/1970's Size (GBA): 10,000 Square Feet Average Unit Size (GBA/Unit): 385 Square Feet Sale Price/Unit: $51,923 Sale Price/SF: $135.00 Occupancy Rate: 81% Gross Operating Income: $656,640 (estimated at 95% occupancy) Expenses: $492,480 Net Operating Income: $164,160 (estimated at 95% occupancy) % Expenses: 75.0% G.I.M.: 2.06 O.A.R.: 12.2% (estimated at 95% occupancy) N.O.I./Unit: $6,314 Grantor: Raymond & Judy Berard Grantee: Ojai Retirement Inn #1, Ltd. Terms: $270,000 Cash; $1,080,000 variable rate loan at 8.5%, 20 year amortization. Comments: Property underperformed at date of sale; currently 95% occupied; rents range from $1,500 to $2,350 per month per bed; property includes about 25% SSI. Confirmation: Gerry Meglin (805) 646-5533
284 IMPROVED SALE COMPARABLE NO. 6 Name: Villa San Marcos Location: 1550 Security Place, San Marcos, CA Assessor's Parcel No.: 221-031-34 (San Diego County) Sale Date: 6/1/94 (Doc. No. 94-354892) Sale Price: $3,951,000 No. of Units: 100 Units (160 Licensed Beds ACLF/AL) Age: 1986 Size (GBA): 54,000 Square Feet Average Unit Size (GBA/Unit): 600 Square Feet Sale Price/Unit: $39,510 Sale Price/SF: $73.17 Occupancy Rate: 80% Gross Operating Income: $1,429,349 (at 92% Occupancy) Expenses: $929,077 Net Operating Income: $500,272 % Expenses: 65% G.I.M.: 2.76 O.A.R.: 12.7% N.O.I./Unit: $5,003 Grantor: John Bohannon, Inc. Grantee: American Healthier & Retirement c/o David Petrie Terms: All Cash to Seller Comments: Project has had difficulty achieving full occupancy; major senior housing project (The Courtyard) next door; average quality project in its market place, located adjacent to retail center. Confirmation: David Petrie (619) 744-4484
285 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 1 - Valley Crest 18521 Corwin Apple Valley No. 2 - Canyon Hills Club 525 S. Anaheim Hills Road Anaheim 286 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 3 - Brea Residential Manor 285 W. Central Brea No. 4 - Whittier Retirement Villa 8101 S. Painter Whittier 287 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 5 - Lomita Lodge 225 N. Lomita Ojai No. 6 - Villa San Marcos 1550 Security Place San Marcos 288 APPRAISAL REPORT RETIREMENT INN - DALY CITY 501 KING DRIVE DALY CITY, CALIFORNIA AS IS ON JULY 13, 1995 SLVS FILE NO. 95-04-25 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 289 July 27, 1995 American Retirement Villas Properties II, L.P. c/o ARV Housing Group 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Mr. Graham Espley-Jones Re: Retirement Inn - Daly City 501 King Drive Daly City, California SLVS File No. 95-04-25 Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice. The value stated herein is based on our understanding of the site and improvement descriptions as represented to us by the client and/or the client's representatives and professional consultants as well as other available sources. We direct your attention to the "Introduction," "Site Description," and "Description of Improvements" sections of this appraisal report. It is your responsibility to read the report and inform the appraiser of any errors or omissions you are aware of prior to utilizing the report or making it available to any third party. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of July 13, 1995, the fee simple total going concern interest of the subject, as is, has a market value of: THREE MILLION TWENTY FIVE THOUSAND ($3,025,000) DOLLARS 290 Mr. Graham Espley-Jones July 27, 1995 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 7/13/95 ------------ Real Estate Value $2,380,000 Furniture, Fixtures & Equipment 120,000 Business Value 525,000 ----------- Total Going Concern Valuation $3,025,000 ==========
The narrative appraisal report that follows sets forth the identification of the property and limiting conditions, pertinent facts about the area and the subject property, comparable data, results of our investigation and analyses and the reasoning leading to the conclusions set forth. Should you desire a quick reference to the most important information, I direct your attention to the "Introduction", "Executive Summary" and the "Reconciliation and Conclusion" sections of this report. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 291 SUBJECT PHOTOGRAPHS Subject from King Drive, View East Main Entrance of Subject 292 TABLE OF CONTENTS Title Page 1 Letter of Transmittal 2 Subject Photographs 4 Table of Contents 5 Introduction 7 Property Identification 7 Property Ownership and History 7 Scope of the Assignment 7 Purpose of the Appraisal 7 Function of the Appraisal 8 Property Inspection 8 Date of Appraisal 8 Date of Value 8 Property Rights Appraised 8 Definition of Market Value 8 Assumptions and Standard Limiting Conditions 9 Special Conditions 10 Experience of Appraisal Firm 11 Representative Assisted Living Appraisal Experience 12 Executive Summary 13 Regional and City Analysis 15 Regional Location Map 16 City Location Map 17 Comparative Zip Code Demographic Data 19 Anecdotal Description of Daly City 22 Neighborhood Description 25 Neighborhood Map 26 Neighborhood Zoning Map 29 Neighborhood Photographs 30 Site Description 32 Assessor's Parcel Map 33 Topography/Earthquake Fault Map 34 Taxes and Assessments 36
293 Description of Improvements 37 Floor Plans 39 Subject Photographs 40 Market Analysis 46 Subject Amenities 48 Census of Market Area ACLF/AL Facilities 51 Comparable Facilities Map 53 Market Area Saturation Analysis 55 Highest and Best Use 58 Site Valuation 60 Vacant Land Sales Map 62 Cost Approach Analysis 64 Cost Approach Summary 67 Income Approach Analysis 68 Pro Forma Cash Flow Analysis & Capitalization 80 Sales Comparison Approach 81 Improved Sales Map 84 Reconciliation and Conclusion 88 Allocation of Going Concern Value Determination To Components 90 Total Estimated Marketing Time 92 Certification 93 Addenda 95 Comparable ACLF/AL Facility Photographs 96 Legal Description 101 Vacant Land Sale Data 102 6/21/95 Rent Roll 106 (1993, 1994, 1/95 to 4/95) Historical/(1995) Budgeted Operating Statements 110 Senior Housing Investment Survey 122 Improved Sale Data/Photographs 124 Qualifications of Michael G. Boehm, MAI 133 MGB State of California Appraisal License 134
294 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 50,181 square foot (1.15 acres) site that is improved with a 95 unit congregate senior housing project (including up to 120 licensed assisted living beds) project known as Retirement Inn - Daly City. The subject has a designated street address of 501 King Drive, Daly City, San Mateo County, California. A detailed legal description of the site is presented in the Addenda of this report. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject site, all improvements and furnishings comprising Retirement Inn - Daly City is currently vested in American Retirement Villas Properties II, L.P. (ARVP II). The subject was acquired as part of a larger package of senior properties from Retirement Inns of America (Avon Products, Inc.) in 1989. The subject has not been sold/purchased within the last three years. The subject retirement building was originally planned and developed in the mid 1970's. The existing subject improvements became available for occupancy in 1975. In approximately 1990, a small second floor addition was completed which included the construction of several small administrative offices, adjacent to the auditorium. The subject's recent history includes less than full occupancies in the early 1990's and rising to a current occupancy of 92.6% (100/108 total beds) despite a competitive market area and weak local real estate market and economy. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a full narrative appraisal report in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of the appraisal was made available. The appraisal was performed so that the analysis, opinions and conclusions are that of a disinterested third party, employing due diligence in the investigation, analyses and conclusions. This appraisal report was developed and prepared to comply with the reporting requirements noted in the "Certification" section of this report. The investigation associated with this report includes the general economy of the industry, the market area, and the local neighborhood. Research and studies include supply and demand factors, comparable land and property sales, competitive property rents/rates and occupancy. Buyers, sellers, developers, public officials, management at competitive facilities, real estate brokers, and the current management of the property were interviewed concerning these and other associated matters. Specific references are made throughout this report. 295 PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on July 13, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. May Sunglao, Administrator. DATE OF APPRAISAL July 27, 1995 DATE OF VALUE July 13, 1995 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in a separate section of this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C-Appraisals, 34.42 Definitions (f), market value is defined as: "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: 296 (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 297 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. SPECIAL CONDITIONS The subject is licensed as a residential care facility for the elderly (assisted living) for up to a maximum of 120 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. 298 The appraisers were not provided with a title report describing all current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Housing Group. EXPERIENCE/COMPETENCY OF APPRAISAL FIRM Senior Living Valuation Services, Inc. is a San Francisco based appraisal firm that exclusively specializes in the appraisal and analysis of all forms of senior housing properties. On the following page is a listing of recent assisted living facility assignments that have been completed by the firm. Qualifications of Michael G. Boehm, MAI are included in the Addenda of this report. 299 EXECUTIVE SUMMARY Property Name: Retirement Inn - Daly City Location: 501 King Drive Daly City, California Assessor's Parcel No.: 091-362-006 (San Mateo County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on July 13, 1995 Land Area: 50,181 Square Feet, 1.15 Acres Excess Land: None Zoning: R-3 (Daly City) a multi-family housing zoning district, allowing the subject with a conditional use permit. Improvements: Type: One, average quality, two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1975; Effective Age - 20 Years; Remaining Economic Life - 25 Years Size: 95 congregate retirement apartment units (108 currently configured maximum bed count) and common areas in approximately 36,874 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion Capitalization Rate: 12.0% Projected Stabilized Net Income: $326,016 (7/95-6/96)
300 Total Going Concern Market Value, as is, as of July 13, 1995: Cost Approach: $3,350,000 Income Approach: $3,025,000 Sales Comparison Approach: $2,950,000- $3,675,000 Value Conclusion: $3,025,000 ($31,842/unit)
Allocation of Final Value Determination to Components:
Market Value As Is - 7/13/95 ------------ Real Estate $2,380,000 FF&E 120,000 Business Value 525,000 ---------- Total Going Concern Valuation $3,025,000 ==========
Total Estimated Marketing Time: 6 Months 301 REGIONAL AND CITY ANALYSIS The subject property is located along King Drive in the southern portion of the City of Daly City, California. Daly City is located in northern San Mateo County about 12 miles southwest of downtown San Francisco and 45 miles northwest of San Jose. The City is bounded by the Pacific Ocean to the west, the cities of Pacifica to the southwest, South San Francisco and Colma to the east and San Francisco to the north. REGIONAL OVERVIEW San Mateo County occupies almost all the peninsula south of San Francisco, and is therefore an integral part of the nine county San Francisco Bay Area. The County is bordered by the Pacific Ocean on the west, City of San Francisco on the north, San Francisco Bay on the east and Santa Clara and Santa Cruz Counties on the south. It contains approximately 454 square miles, much of which is mountainous and densely wooded. The urbanized portions of San Mateo County extend in a narrow strip between the hills and the bay, leaving the remainder of the County largely rural. Traditionally, San Mateo County has been categorized into four distinct regions. Along the San Francisco Bay side of the County, the industrial zone surrounding the San Francisco International Airport dominates the northern area. Moving south, the industrial sites gradually merge with the residential suburbs. Further south is the Silicon Valley. On the west side of the mountains, the County is sparsely inhabited with the economy focused on farming and recreational activities. South San Francisco - Historically the industrial overflow from San Francisco was picked up by the northern cities of San Mateo County. The region maintained this growth by establishing new businesses and industries. San Bruno and South San Francisco contain the greatest concentration of heavy manufacturing and construction firms in the County. The location of the San Francisco International Airport makes northern San Mateo County an ideal location for many transportation and distribution related firms. Average incomes and home prices in this area are far below the high levels of communities further south. The economy of northern San Mateo County will continue to be dependent on economic growth in San Francisco. Central San Mateo - The heart of the County centers around the City of San Mateo. Numerous smaller cities and communities, including San Bruno, Millbrae, Burlingame, Hillsborough, Woodside, and Atherton make up the rustic and affluent suburbs that San Mateo County is famous for. These areas are where the first commuters to San Francisco settled. In recent years, a vigorous trade and service economy has developed to support these various cities and towns. This is the most self contained area in the County. Much of the income of the residents, however, is dependent on jobs in either San Francisco or Santa Clara County. Southern San Mateo County - Stanford University, in southern San Mateo County, is closely tied to the nearby Silicon Valley. Redwood City, Menlo Park and northern Palo Alto contain the sites of many high-tech firms as well as their employees' homes. Accordingly, the economy of this area is closely tied to the health of the electronics industry. 302 Pacific Coast Region - Well over half the area of the County, but less than 5% of the population, lies west of the coast mountains. The towns of Pacifica and Half Moon Bay offer homes to a few ambitious commuters and the local work force. Industries consist mostly of agriculture, fishing and recreation. The economy of this area is stable and is likely to remain so as development is highly restricted by zoning regulations. In general, dry, mild summers and moist, cool wind has characterized San Mateo County's climate. The northern and coastal region share San Francisco's foggier weather and tend to be somewhat cooler and receive more rainfall (including the subject) than the mid-peninsula area. Temperatures average a high of 71 degrees in July and a low of 42 degrees in January in the winter, and a few morning frosts may occur in December, January and February. Winter daytime temperatures are generally in the 50's. The summer season is usually sunny and warm, especially in the more highly populated bayside of the County. Summer warmth is tempered both by morning fogs and afternoon seabreezes. For many in the region, the first word that comes to mind when mentioning Daly City is foggy. CITY POPULATION AND DEMOGRAPHICS The City of Daly City (population 99,600 - 1995) was incorporated in 1911 though first settled in the 1840's. Daly City has developed as a suburban bedroom community with many long time residents and is distinct and different from the adjacent City of South San Francisco which is a noted warehouse/distribution and office center. The City is almost built-out with a dwindling supply of available vacant space despite the open space, rolling hill areas which extend throughout the City. Development of Daly City as a modest suburban residential suburb to San Francisco has occurred throughout the 1900's but exploded in the 1960's with the completion of Interstate 280 in the early 1960's. Much of the City's growth has been through the annexation of adjacent unincorporated areas. In the past 10 years, Daly City has been the fastest growing City in San Mateo County. Future population growth is expected to slow from recent levels as the City is approaching buildout. City and regional population trends illustrate the following:
Daly City San Mateo County ---------------------- ---------------------- Pop. % Inc. Pop. % Inc. ------- ------ ------- ------ 1960 45,291 -- 444,387 -- 1970 67,330 48.7% 557,361 25.4% 1980 78,914 17.2% 587,329 5.3% 1990 91,700 16.2% 652,100 11.0% 1995 99,600 8.6% 695,100 6.6% 2000* 106,100 6.5% 740,400 6.5%
*Estimated Source: Association of Bay Area Government (ABAG) 303 On the following pages, we have included major demographic data for Daly City and surrounding zip codes. These statistics indicate that compared to the area as a whole, the City has the following demographic characteristics: 1) A median age close to regional and Statewide averages. The City has approximately 10.6% of the population over 65 years of age; 2) Of the 19 cities in San Mateo County, Daly City would be in the lower half in median income, but similar to nearby Pacifica, South San Francisco and San Bruno (above Brisbane). Nevertheless, the City as a whole ranks in about the 93rd percentile nationally and about the 85th percentile Statewide in median income; 3) A majority and growing Asian racial composition (about 45%). Daly City is the most ethnically diverse City in San Mateo County. An anecdotal description of Daly City is provided on the following page. HOUSING Daly City's housing stock of about 32,000 units can be characterized by its modesty and relative affordability. The City includes new housing located in its southern, western and eastern portions and older (some dilapidated) housing in its central core (a redevelopment area) and northern portions. The City includes an above average percentage of multi-family housing. The median price of home in Daly City is about $250,000, down about 20% from 1989 peaks. The City's median rent of about $670 per month is below regional averages but above Statewide averages. EMPLOYMENT AND ECONOMIC DEVELOPMENT The regional County economy, unlike some other San Francisco Bay Area counties, is not dependent on any one industry for economic stability. The diversity of the economy is demonstrated by the fact that several of the County's top employers are all quite different as indicated below:
Employees --------- United Airlines, San Francisco Airport 9,000 San Mateo County Government 4,300 Raychem Corporation, Menlo Park 3,500 Veterans Administration Medical Center, Menlo Park 3,000 United States Geological Survey, Menlo Park 2,580 Kaiser Foundation Hospitals, Redwood City and South San Francisco 2,200 Dalmo Victor Company 1,250
Source: San Mateo County 304 Major employment areas in the County are in and around the San Francisco International Airport, the Highway 101/92 intersection and the five regional shopping centers including the Serramonte and Westlake shopping districts in Daly City, about one mile north of the subject. Daly City's largest employers are focused at Seton Medical Center and several retail outlets. The City includes some modest commercial office and industrial/development although this is dwarfed by the commercial/industrial areas in adjacent South San Francisco and San Bruno which are bordered by the San Francisco International Airport to the east. TRANSPORTATION San Mateo County is traversed by two major north-south freeways, U.S. Highway 101 and Interstate 280; the latter paralleling U.S. 101 two to four miles to the west. The Pacific Coast Highway 1 parallels the above freeway system from north to south along the Pacific Coast and provides transportation between the coastal communities and rural regions along the western edge of the county. Finally, Interstate 380 links Highway 101 and I-280 in northern San Bruno. El Camino Real is the major north to south non-highway thoroughfare in San Mateo County. Major surface thoroughfares in Daly City include the east/west Geneva, John Daly Boulevard, Eastmoor/San Pedro, Serramonte, Hickey and Westborough, and north/south Skyline Boulevard, Callan and Junipero Serra Boulevard (subject). Northern San Mateo County is the site of the nation's fourth busiest airport, San Francisco International. The airport is located about five miles southeast of the subject. The airport's impact on the economy of San Mateo is great as it is a major source of employment. SamTrans is a County operated express and commuter bus transportation service operating within the County and running to downtown San Francisco to connect with other services. It also operates a connecting service to the BART (rapid transit line) terminal in Daly City (about four miles north of the subject). BART service is proposed to be extended southward, ultimately to San Francisco International Airport. COMMUNITY DATA San Mateo County is a part of the nine County San Francisco Bay Area and its residents can readily enjoy the cultural attainments of San Francisco, the summer water sports of San Francisco Bay and beaches and winter sports of the Sierra Nevada mountains which are within easy traveling distance. Local residents have access to an almost unlimited array of economic and recreational opportunities. San Mateo County has five major regional shopping centers and 102 important neighborhood and downtown shopping areas including the Serramonte Shopping Center, located about one mile north of the subject site. The County features miles of coastal parks along the Pacific Ocean, marinas at Half Moon Bay, Coyote Point in Burlingame, and excellent public and semi-private 18 hole golf courses at Half Moon Bay, Crystal Springs, Coyote Point and the Burlingame Country Club. The County includes horse racing at Bay Meadows and the annual county fair at the fairgrounds in San Mateo. Daly City includes the Cow Palace, a regional and smaller all purpose arena. 305 Seven major hospitals serve the County. In addition, there are smaller satellite hospitals of these major hospitals. The major medical facilities near the subject include Kaiser Permanente along El Camino Real in South San Francisco, about 1.5 miles east of the subject and the 357 bed Seton Medical Center, about 2.5 miles to the northwest along Sullivan. The subject is located in HSA 4, HFPA 425 which includes 5 nursing homes and 564 licensed beds. The subject is one of a group of four to five major congregate senior housing projects serving northern San Mateo County and including the subject's archrival, Westborough Royale. These facilities are discussed further in the Market Analysis section of this report. CONCLUSION The long-term outlook for Daly City is positive. The opportunities for continued stable slow growth (mostly residential and support retail) are good although the City is approaching buildout. The City's lesser affluence compared to the County as a whole is a part of the City's reputation (as is its foggy climate), although the City ranks high in median income nationally and Statewide. The City's significant Asian population requires more directed marketing for properties such as the subject. The City will always benefit by being close to San Francisco and its population/economic concentration. The City already serves as a significant retail destination of many San Franciscans. Overall, the City's large and aging population suggest good long term demand for senior housing. 306 NEIGHBORHOOD DESCRIPTION The subject is located in the southeastern portion of the City of Daly City along Junipero Serra Boulevard and just east of Interstate 280. Junipero Serra Boulevard is a major north/south thoroughfare through northern San Mateo County. The subject neighborhood is characterized by a severely sloping upward topography to the southwest. The subject neighborhood comprises the southern portion of the larger Serramonte district, and is a residential neighborhood bounded by Interstate 280 about one block to the west of the subject to Junipero Serra Boulevard and between Hickey Boulevard to the north and Westborough Boulevard to the south. Across Junipero Serra Boulevard to the east lies a modest quality residential area of the City of South San Francisco. The subject neighborhood is almost totally residential (of average quality) and undeveloped open space. To the north of the neighborhood lie a plethora of cemeteries which define the City of Colma. To the southeast lies the California Golf Club. The subject itself is bounded by Junipero Serra Boulevard to the east, King Drive to the north and west and a two story apartment building (which lies above the subject due to neighborhood topography) to the south. Across King Drive to the west and north lie additional apartment complexes. Extensive retail development is located about one mile to the north along Junipero Serra Boulevard (Serramonte and Westlake shopping areas). Interstate 280 is accessed via Westborough Boulevard about one-half mile to the south. The Pacific Ocean is located about two miles to the west (not visible from subject neighborhood). Central Daly City is located about three miles to the northwest. A Kaiser Permanente Medical Center is located about 1.5 miles to the east along El Camino Real. Seton Medical Center is located about 2.5 miles to the northwest. Overall, the subject is located in a rolling hill, wooded residential/apartment neighborhood along a major thoroughfare. Access to retail and recreational amenities and acute medical care is fair though none is within easy walking distance of the site. Access to freeways is good. On balance, the subject is adequately situated for a major congregate senior housing project. 307 NEIGHBORHOOD PHOTOGRAPHS View of King Drive towards Junipero Serra Boulevard, View Northeast, Subject on Right View Southwest, Subject on Left 308 NEIGHBORHOOD PHOTOGRAPHS View Northwest along King Drive toward Apartments, Subject Behind Apartments Immediately South of Subject, View Southwest 309 SITE DESCRIPTION LOCATION: The subject property is located at the southwest corner of Junipero Serra Boulevard and King Drive, about one-half mile north of Westborough Boulevard, in the southern portion of the incorporated City of Daly City, San Mateo County, California. In fact, Junipero Serra Boulevard to the east of the subject is part of the Daly City/South San Francisco boundary. The site has a formal street address of 501 King Drive. The site consists of San Mateo County Assessor's Parcel No. 091-362-006. An assessor's parcel map is presented on the following page. A legal description of the site is provided in the Addenda of this report. PHYSICAL CHARACTERISTICS: The subject site has a baseball diamond shape with approximately 210 feet of eastern frontage along Junipero Serra Boulevard and about 415 feet of northern/western frontage on King Drive. The subject site follows the curved boundary of King Drive in its northern/western portions. To the immediate north and west (across King Drive) and abutting the site to the south lie apartment projects. The site has a total land area of approximately 50,181 square feet or 1.15 acres. The topography of the site slopes downward significantly to the northeast, consistent with the neighborhood. The site is above street grade with both Junipero Serra Boulevard and King Drive. Total subject site drop-off to Junipero Serra Boulevard/King Drive range from zero at the main entry along King Drive to about 10 feet higher to the southwest to about 20 feet lower to the east (and Junipero Serra Boulevard). The subject building improvements however are built on one level pad. Although no soils report was made available to the appraisers, it is assumed that the soils are capable of continuing to support the existing improvements. No obvious hazardous or toxic conditions were noted during our site inspection. The subject portion of Daly City does not participate in the national flood zone insurance program (no FEMA flood zone designation). The subject is not located in a flood plain or near a waterway. The subject is not located in an Alquist-Priolo special earthquake study zone. The subject can be considered as having the same earthquake risk as much of the larger area which is fairly significant given its proximity to the San Andreas fault (located about one mile to the southwest). A topo/earthquake fault map is shown on a following page. EXISTING IMPROVEMENTS: The subject site is currently improved with one, two story, wood frame, congregate retirement building forming an enclosed central courtyard. Parking areas are located along the western portion of the site (off of King Drive). The subject building rests high above Junipero Serra Boulevard and King Drive and is setback a minimum of about 50 feet. Additional detail is provided in the Description of Improvements section of this report. Junipero Serra Boulevard is a major, four lane (with turning lane and wooded median strip), fully improved, north/south commercial street with curbs, gutters, streetlights (no public sidewalks) on both sides. King Drive is a secondary, meandering, two lane fully improved residential thoroughfare with curbs, gutters and streetlights (sidewalks to the west of the subject site only). The intersection of King Drive and Junipero Serra Boulevard is a three stoplight intersection. 310 The subject site is served by underground utilities, including storm and sanitary sewers, natural gas and telephone. Water service is provided by the City of Daly City, sewer service by the North San Mateo County Sanitation District, natural gas and electricity by Pacific Gas and Electric and telephone by Pacific Bell. Fire and ambulance services is provided by the City of Daly City. ACCESS AND EXPOSURE: The subject is accessed via one curb cutout along King Drive onto the main entry parking lot located west of the building. Access to Interstate 280 is via Junipero Serra Boulevard to Westborough, about one-half mile to the southeast. Access to El Camino Real is also via Westborough, about 1.5 miles to the east. Interstate 280 provides north/south highway access through San Mateo County, the City of San Francisco and points south including San Jose. The subject is not easily visible from Junipero Serra Boulevard due to landscaping and its raised elevation. Exposure from King Drive at the driveway entry is good. EASEMENTS AND ENCUMBRANCES: No title report was available. No easements and encumbrances are known to materially impact the subject's continued operation as a congregate senior housing business. We recommend a review of a current title report to identify any easements or encumbrances which could affect the subject site and its continued operation as a congregate senior housing project. ZONING: The subject site is zoned R-3, Daly City, a high density zoning classification. Between 36 to 50 residential units per acre are allowed. The subject land use is consistent with apartment land uses along King Drive. The existing subject retirement building was approved in the mid 1970's (allowing its 82.6 unit per acre density). The subject appears to be a legal, nonconforming land use and has been operating on the site since 1975. The subject is licensed to include up to 120 beds with the California Department of Social Services as an assisted living facility. EXCESS LAND: None, the subject is fully developed to its boundaries. 311 TAXES AND ASSESSMENTS Since passage of Proposition 13, or the Jarvis-Gann Initiative, in 1978, real property has been assessed at its 1976 value, trended upward at a maximum rate of 2% annually, unless there is a transfer of ownership or new construction. When either of these occur, the property is reassessed at full market value. Furthermore, Proposition 13 limits annual taxes to 1%, plus a small amount for bonded indebtedness of the assessed value. Assessor's Parcel No.: 091-362-060 (San Mateo County) Tax Rate Area: 05-023 Assessed Value 1994-95: Land $ 552,040 Improvements $ 1,324,904 Personal Property $ 329,194 ------------ Total $ 2,206,138 ============
1994-95 Tax Rate: 1.00% 1994-95 Taxes: $34,915.44 (includes $12,854.06 in direct assessments) Status: Current and paid as due. Our cash flow projections of stabilized real estate taxes assumes a sale and reassessment of the subject to market value at July, 1995. 312 DESCRIPTION OF IMPROVEMENTS The discussion of the improvements addressed below was accumulated through our site inspection, a review of limited site plans and through discussions with the subject's administrator. Detailed architectural drawings were not available. GENERAL TYPE: The existing main improvement known as Retirement Inn - Daly City consists of one 2 story, 95-unit, average quality, Class D retirement apartment building containing 36,874 square feet of gross building area. The facility contains 95 units currently configured for 108 beds, including up to 120 licensed assisted living beds. The Q-shaped building improvement surrounds an interior courtyard and borders a parking lot to the west. AGE: The subject improvements were constructed and completed in 1975. Since 1975, the subject has been operating as an congregate senior facility. A small protruding and enclosed second floor balcony deck was added onto the auditorium in the early 1990's and is currently used as administrative offices. The overall condition of the subject is average. Our site inspection noted a normal amount of wear and tear on a 20 year old building and no material deferred maintenance. The subject improvement have an estimated total economic life of 45 years. A chronological and effective age of 20 years suggests a remaining economic life of approximately 25 years. SIZES: The subject has the following component size and unit mix:
No. of Unit Size Unit Type Units S.F. (est.) Total S.F. - --------- ------ ----------- ---------- Studios 95 (1) 215-395 22,230 (60.3%) (234 avg.) Common Areas/Circulation 14,644 (39.7%) ------ Gross Building Area 36,874 ======
(1) 26 of the subject units are currently rented as 13 two room suites. The subject's current total rentable unit count is therefore technically 82. However, due to the shared bathroom configuration of the units and the operators long term intention to no longer offer the suite (two adjoining room) option, we have referred to the subject unit mix throughout this report as 95 total units (has no material impact on value). STRUCTURAL AND EXTERIOR: The subject improvements are constructed on a level concrete slab foundation (built onto a graded level site on the top of the severely sloping subject site) with a 2-story, wood frame construction under a sloping clay tile/flat mansard roof. Building exteriors consists of stucco, wood trim, wood doors out of residential units and at the western building face facing King Drive, large decorative arches. Interior walls are wood frame and painted or wallpapered gypsum board with no wood handrails in corridors. The main common areas, hallways and room exteriors are carpeted. Unit baths have vinyl tile. Ceilings in units are sprayed acoustical with common area ceilings and hallways consisting of sprayed acoustical with hanging incandescent and fluorescent light fixtures. The entire development is fully sprinklered with smoke and heat alarms. Units include sliding 313 windows in aluminum frames, and for first floor units facing west, a wood door allowing outside access (unusual for a senior property). First floor units facing north and east include a sliding glass door. MECHANICAL: The development has average lighting and plumbing fixtures. HVAC in the units consist of individual room heating units. HVAC in common areas features hot water boiler central forced air heating system. The subject also features an intercom system with paging. The development includes one elevator. Two stairwells are located throughout the improvement. INTERIORS: Based on our site inspection, the interiors appear to be functional for congregate senior apartment use. Floor plans are presented on a following page. The facility includes 95 apartment units. The unit mix consists of 95 studio units ranging in size from a puny 215 square feet to 395 square feet (average size about 234 square feet - 44 units at 215 square feet, 46 units at 241 square feet, 2 units at 300 square feet, 2 units at 325 square feet, 1 unit at 395 square feet). The small size of the smallest subject units is a competitive disadvantage (even for assisted living use). Most units share a bath area (70 units) with grab bars and a sink with a built-in cabinet, vanity and water closet. Each unit also contains two emergency pull cords, one each in the bath and living area and a built in closet. The units contain no kitchenettes or balconies. The focal point of the development is the facility's modest common areas located on the centrally located one story ground floor. The facility's main entry area includes the small lobby, a reception desk, staff room and administrative offices. The common areas include a TV room and dining room adjacent to the commercial kitchen. Laundry rooms with washers and dryers for the residents are located on each floor. The second floor includes a lounge, auditorium and additional office space. Overall interior areas are modest and significantly below more recently built senior properties. PARKING AND LANDSCAPING: Site parking is located in one open paved parking area, located west of the building and accessed from King Drive. There are approximately 20 (0.21/unit) parking spaces located in the parking areas. Parking is tight but functional as most residents do not drive. Street parking is generally available along King Drive. The site is modestly landscaped with site perimeter large mature trees, flowering perennials, bushes and grass. Facility landscaping includes a small interior courtyard which includes several shrubs and no seating areas. The site's significantly sloping northern (facing King Drive) and eastern (facing Junipero Serra Boulevard) boundaries are thickly landscaped with ground cover and large trees. The building is surrounded by a concrete walkway which includes an iron railing to the north and east. Overall site landscaping is average. CONCLUSION: In our opinion, the subject property's exteriors, common area interiors, landscaped areas and parking appear average and reasonably competitive for residential retirement uses. The subject's small units are typical of 1970's senior housing construction. The subject has a less varied unit mix, a group of very small units and more modest common areas than many projects built in the 1980's. The subject's shared baths in most units are a competitive disadvantage. The subject's overall scale is also smaller than many projects in its market which helps create a more residential, close knit living environment. Our site inspection noted no material deferred maintenance and an average condition reflecting its 20 year old chronological and effective age. 314 SUBJECT PHOTOGRAPHS Dining Room Typical Lounge Area 315 SUBJECT PHOTOGRAPHS Typical Interior Corridor Auditorium 316 SUBJECT PHOTOGRAPHS Typical Unit Interiors 317 SUBJECT PHOTOGRAPHS Interior Courtyard Western Portion of Parking Lot 318 SUBJECT PHOTOGRAPHS Eastern Site Boundary, View North Southern Site Boundary, View East 319 SUBJECT PHOTOGRAPHS Subject's Junipero Serra Boulevard Frontage, View South, Subject to Right Northern Site Boundary, View East 320 MARKET ANALYSIS INTRODUCTION The elderly are by far the fastest growing population segment, whether expressed in percentage increase or actual number of persons. Although not as well documented statistically, the elderly have more money than ever before because of social security, pension programs, savings and the substantial increase in the market value of their residences. Most of them are active and in reasonably good health. This increased health and life expectancy lends them to seek life enriching activities through an independent lifestyle that provides assistance when needed. INDUSTRY OVERVIEW The housing industry for the elderly can be classified by the three major types of buyers: the active elderly (go-gos), intermediate (slow-gos) and the person who needs constant care (no-gos). Active retirees want recreational amenities with the housing they buy. They want a golf course, tennis courts, swimming pool, walking and bicycle path, saunas and spas. They want to be near good places to eat and to be able to enjoy a wide range of cultural activities and travel opportunities. Intermediate retirees want a congregate-type of lifestyle that allows them independence yet gives them the opportunity to take part in quiet activities such as arts and crafts. Retirees in this intermediate classification also will look for transportation to shopping, banking or medical offices, some mild form of recreational activities, such as swimming and golf, plus the opportunity to socialize in a common dining room or lounge area. Retirees who need constant care are concerned with medical assistance. They will look for facilities that offer services and conveniences such as residential care facilities which will make their lives more comfortable. Also, they will want a medical center where they can go when their health fails. The subject property would be targeted at the intermediate and less active elderly. From a real estate and financial perspective, housing for the elderly is complex to analyze as they usually represent a combination of other businesses. The major types of homes for the elderly include: Adult Congregate Living Facilities (ACLF): Specially planned, designed and managed multi-unit rental housing typically with self contained apartments. Supportive services such as meals, housekeeping, transportation, social and recreational activities are usually provided. In California, these facilities are not licensed. Assisted Living Facilities (ALF) (personal care or residential): Group living arrangements that provide staff supervised meals, housekeeping and personal care (assistance with bathing and medication) and private or shared sleeping rooms. These facilities are generally licensed and must meet designated operating standards including minimum staff requirements. In California, these facilities must be licensed by the California Department of Social Services, Division of Community Care. 321 Care Facilities (skilled nursing or intermediate care): Skilled nursing and intermediate care facilities (commonly known as nursing homes) are both operated under the guidance of a licensed administrator with licensed nurses and aids providing around the clock nursing care, generally one step below that offered at an acute care hospital. In California, these facilities must be licensed with the California Department of Health Services. Life Care Complex (life care community, continuing care, campus complex): A housing development planned, designed and operated to provide a full range of accommodations and services for older adults, including independent living, congregate housing and medical care. Residents may move from one level to another as their needs change. Life care complexes typically charge a buy-in fee (sometimes refundable) in addition to a monthly maintenance fee for services. In California, life care contracts must be approved by the State Department of Insurance. Retirement Village: Developments that offer, home ownership and rental units for older persons. Support services often are available for a fee. The subject is a currently existing 95 unit (108 current bed configuration) licensed assisted living (ALF) facility. This suggests that 13 of the subject units are currently configured for 26 semiprivate beds. The subject is licensed to accept 28 nonambulatory residents (120 assisted living bed licensing total). Congregate housing such as the subject is a combination of: a) an apartment project; b) a hotel offering meals, cleaning and transportation facilities; c) a social club offering activities; and d) a supporting living environment providing assisted living amenities (help with bathing, medication, mobility) as needed. A summary of subject amenities is provided on the following page. MARKET DEFINITION Our experience in analyzing congregate housing development indicates that these facilities have a total market area ranging from a 5 to 30 mile radius from the site. This area represents a reasonable driving distance for relatives and friends and also reflects the fact that the elderly do not move great distance when choosing the congregate housing option. Perhaps more important than a strict definition of market area based on distance, is the overall character of the development's environment, whether it is urban, suburban or small town/rural. In our opinion, the primary market area for the subject site extends approximately 5 miles outward from the site in all directions. This would include most of the suburban area of northern San Mateo County including all of Daly City, South San Francisco and Pacifica. These areas are not only located in close geographic proximity to the site, but each is a similar, middle income bedroom community. This definition of market area is consistent with the former residences of subject residents. The subject as rule does not draw residents from the southern portions of the City of San Francisco (about five miles to the north) as the City/County boundary is a significant local demarcation. 322 RETIREMENT HOUSING SUPPLY During the course of our appraisal, we have identified those existing and proposed elderly retirement facilities in the primary market area which may be considered somewhat competitive to the subject property. Our census of potentially competitive congregate rental housing facilities impacting the total market area is presented on the following pages. Photographs of the rent comparables are illustrated in the Addenda of this report. Each of the surveyed congregate facilities is a for-profit housing development offering two or three meals daily, weekly maid service and many recreational opportunities. Most of the properties surveyed offer licensed assisted living on an as needed basis. The properties can be characterized as follows: BOTH CONGREGATE AND ASSISTED LIVING (MOST SIMILAR TO SUBJECT) 4. University Mound 5. Greenhills 6. Retirement Inn - Burlingame (ARV Property) 7. Sterling Court 8. Hillsdale Manor 9. Glenwood Inn ASSISTED LIVING ONLY 1. Westborough Royale 2. Home Sweet Home (Bryant) 3. Home Sweet Home (Collins) 10. Palo Alto Commons The subject would be most similar to those projects offering both congregate and assisted living services although its proximity and overall quality, age and living environment comparability to Comparable No. 1 (Westborough Royale) make this project a direct competitor to the subject. Like the subject, this project has a predominant studio unit mix. Westborough Royale also has an overall age and living environment comparability to the subject although it is a much larger project. This project and the subject are fierce competitors. Of the congregate/assisted projects, the subject would be most similar to the older projects with more similar unit mixes such as Comparable No. 5 (Greenhills) and Comparable No. 6 (Retirement Inn - Burlingame) - a sister ARV project. Retirement Inn - Burlingame in particular, is similar to the subject in target market and in the a la carte assisted living program. Its distance from the subject mitigates direct competition (serves a different market area). Comparable No. 5 (Greenhills) has a more varied unit mix than the subject and a slightly superior living environment. The other more comparable congregate/assisted projects surveyed are generally newer projects (Comparable Nos. 7 - Sterling Court, 8 - Hillsdale Manor and 9 - Glenwood Inn) with a more varied unit mix and a generally superior living environment to the subject. The subject would be competitively placed in the tier of projects below these newer properties. 323 RETIREMENT INN - DALY CITY CENSUS OF MARKET AREA ACLF/AL FACILITIES
Congregate (ACLF) Units Assisted Living (AL) Units Age/ -------------------- -------------------------- Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- Reported No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private % SSI Occupancy - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- ----- --------- 1. Westborough Royale 1980/ 88/172 Studio 400 (est.) Not Available $1,500 $ 850 10% 89% 89 Westborough 1.0 Suite 500- $1,800 S. San Francisco 600 (est.) 2. Home Sweet Home 1987/ 35/57 Studio 250 (est.) Not Available $3,300 $2,100 0% 95% 1560 Bryant Street 2.5 Daly City 3. Home Sweet Home 1995/ 35/50 Studio 250 (est.) Not Available $3,000 $2,000 0% 64% 205 Collins Avenue 2.7 Colma 4. University Mound 1885/ 74/74 Studio 256 $1,360- $5.31- +$ 100- N/A WND 85% Ladies Home 5.0 $1,940 $7.58 $ 300 350 University Street San Francisco 5. Greenhills Retirement 1986/ 159/30 Studio 208- $1,100- $3.72- $1,965 N/A 0% 98% 1201 Broadway 5.0 456 $1,700 $5.29 Millbrae 1BR 430- $1,800- $3.92- $2,690 522 $2,050 $4.18 6. Retirement Inn - 1980/ 68/90 Studio 204- $1,350- $6.61- +$ 150- +$ 150- 8% 97% Burlingame 8 240 $1,450 $6.04 $1,000 $1,000 250 Myrtle Road Lg. Suite 480 $1,850 $3.85 Burlingame SP $ 850 7. Sterling Court 1990/ 149/20 Studio 422 $1,600- $3.79- $2,700- N/A 0% 100% 850 N. El Camino 9 $1,700 $4.03 $2,965 San Mateo 1BR 583 $1,800- $3.09- $2,300 $3.95 2BR 754 $2,600- $3.45- $2,800 $3.71
324 The assisted living projects are generally less directly comparable to the subject as they target the older, frailer senior exclusively. Of the projects, the two more recently built Home Sweet Home projects (the Collins Avenue project opened in 1995 and is already 64% occupied) are peripheral competitors to the subject although they target the heavier care assisted living resident. Both projects are smaller than the subject and have inferior locations. Comparable No. 10 - Palo Alto Commons, is one of the higher quality assisted living projects in the local market and in the entire region. Our survey of local jurisdictions noted no other active proposed senior housing projects which would pose an imminent competitive threat to the subject. The overall occupancy of the 10 projects surveyed is a strong 92.3%, as almost all market area projects enjoy 90% plus occupancies. RETIREMENT HOUSING DEMAND To measure the theoretical size of the subject's target market, we have analyzed demographic statistics obtained from Urban Decision Systems for the relevant target area market which extends about 5 miles outward from the subject site. We obtained income by age population estimates and projections for this area in 1995 and 2000. Our analysis is as follows: 1) Determines the number of households over a minimum age, 75, and minimum income requirement, over $15,000, from 1995 population estimates and 2000 population projections. These parameters establish the different scenarios for calculating the market saturation rates; 2) Calculates total market saturation rates required to fill the subject's 108 beds and all other existing competitive senior facilities (estimated at 1,025 beds); 3) Evaluates the market environment of the subject property given the calculated saturation rates. Our experience in comparable markets, indicates the following regarding saturation rates. Estimate of Overall Saturation Rate Market Demand --------------- ---------------------- 0 - 10% Lightly Competitive 10 - 20% Moderately Competitive 20 - 30% Heavily Competitive 30%+ Extremely Competitive Our calculated market saturation rates (about 18%) for the subject market area suggest an only moderately competitive market. Overall, the subject market area can be characterized as having a lesser supply of older generation retirement units serving a concentrated but less affluent and growing age and income eligible senior population. It is important to note that saturation analysis is only a tool used to measure overall market saturation. It does not consider any potential 325 RETIREMENT INN - DALY CITY SATURATION ANALYSIS
Saturation Rate (1) ------------------------------------ Subject w/o Subject w/Subject Only # H.H. (2) (1,025 Beds)(3) (1,133 Beds) (108 Beds) ---------- --------------- ------------ ---------- 1995 Estimate - ------------- 75+, $15,000 Income 6,453 15.9% 17.6% 1.7% 2000 Projection - --------------- 75+, $15,000 Income 7,494 13.7% 15.1% 1.4%
NOTES: (1) Market saturation rates represent the percentage of total market demand which is necessary to absorb a) existing or proposed units not including the subject, and b) existing or proposed units including the subject. (2) Number of income and age qualifying senior households within 5-mile radius of site per Urban Decision Systems. (3) Number of competitive units estimated at 100% of Comparable Nos. 1 to 3, 50% of Comparable Nos. 4 to 7, 25% of Comparable Nos. 8. (4) Evaluation of saturation rates: Saturation Evaluation of Rate Market Environment ---------- ------------------ 0% - 10% Lightly Competitive 10% - 20% Moderately Competitive 20% - 30% Heavily Competitive 30%+ Extremely Competitive 326 competitive advantages that a specific facility might offer. Saturation rates can also be calculated using different factors/scenarios. Our methodology of calculating market saturation rates is based on our experience in analyzing the feasibility of numerous congregate senior housing developments. CONCLUSIONS Overall, we noted the following regarding the market environment of Retirement Inn - Daly City: 1) The calculated saturation rates suggest an only moderately competitive market environment. This is consistent with market area occupancy rates which are strong at most projects and the subject (despite a significant SSI resident base). The subject's strong occupancy is due to its older building age, small units, location in an area of relative lower affluence and monolithic unit mix. The overall average occupancy of all projects surveyed was about 92%. The market's strong demographics (concentration) are countered somewhat by a weak local economy which makes seniors on fixed incomes more hesitant to consider the congregate senior housing option and less likely to recognize paper losses on homes which have declined in value from 1989 peaks; 2) The subject has a current occupancy of about 93%, consistent with its recent history. The subject has established a market position as a well run, middle market project with reasonable rents. The subject's physical plant is below average (unit size, shared baths) in comparison to some of the other comparable projects in its market. Many of the locally competitive projects are newer and have a less institutional living environment and more varied unit mix than the subject. The subject is impacted by the nearby Westborough Royale, with its large number of units is a significant competitor to the subject. This project will likely continue to keep rent and occupancy pressure on the subject; 3) The subject market area is projected to experience a good increase of 16.1% (7,494/6,453) in the age and income eligible target market in the next five years; 4) The subject is owned and operated by ARV Housing Group, one of the leading owner/operators in more difficult market areas; 5) The subject offers assisted living amenities on an a la carte basis (three different levels of assisted living care) which is not typical in the market area (most other projects charge one flat higher rent). This is a competitive advantage for the subject as residents only need pay for assisted living amenities when needed and at the level needed. These specific conclusions are addressed more fully and used to project pro forma income and expense cash flows in the Income Approach section of this report. 327 HIGHEST AND BEST USE Highest and best use is defined as that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. The highest and best use concept must also give recognition of that use to community environment and to community development goals, in addition to wealth maximization of individual property owners. The highest and best use of the land or site, if vacant and available for use, may be different from the highest and best use of the existing improved property. This will be true when the improvement is not an optimum use and yet makes a contribution to total property value in excess of the value of the land only. In order to determine the property's highest and best use, it is necessary to analyze the factors discussed below. AS VACANT The site's physical characteristics are similar to those found throughout the area in terms of size (average), topography (significantly sloping), exposure (fair) and access (good). The total land area is large enough to support most other types of development and it is located along a major thoroughfare. The site is probably too small for a lower density residential subdivision. Therefore, the site's physical characteristics do not seem to limit many development alternatives. The subject site is currently zoned R-3, a high density multiple family zoning classification. This is consistent with other development along King Drive (apartments) and it is also consistent with our experience with the zoning of most sites for senior housing (usually high density residential). It is likely that Daly City would allow many alternate density residential and possibly institutional uses on the subject site. The subject's 82.6 units per acre density is misleading due to its small, all studio unit mix. Extreme high density residential, general commercial or heavy retail land uses are unlikely for the site. Finally, the site itself is not known to be affected by significant easements or encumbrances. In determining which possible use of the land represents the highest and best use of the site, we have analyzed those physical and legal factors affecting the site. It is then necessary to analyze not only the feasibility of potential alternate development but determine which types of these developments is maximally feasible. Our analysis of the congregate housing market in the area indicates a fewer number of properties and generally good occupancies, including the subject's current 93% occupancy. Also, a large increase in the number of age and income eligible seniors over the next five years suggests adequate long term demand for well run projects like the subject. The subject is a profitable project and it is in the middle tier of senior housing facilities in its market. The subject, if it can be filled, would be more feasible than alternate residential uses due to its higher margin per unit and higher density. The subject is also more profitable than almost all possible institutional land uses. However, uncertainties about the affluence of the local market, current depressed housing prices and a flat regional economy and the ongoing competitive impact of Westborough Royale, suggest that the subject (or any alternate commercial/apartment land use) would not clearly be built in 1995. Few to no senior housing projects were being built anywhere 328 in California in 1994 although this is beginning to change in 1995. An owner of the subject site would probably develop a senior housing use on the site although the decision is not clear. Therefore, in our opinion, the highest and best use of the site as vacant in early 1995 is probably to develop a senior housing project on the subject site. AS IMPROVED Our experience in comparable projects indicate that a senior project of 108 beds is large enough to achieve some operating economies of scale. Higher densities for the site would generate difficulties in meeting parking and density requirements with Daly City. Also, short term demand for additional small unit assisted living units probably does not exist in the local market as indicated by the subject's high SSI census. Considering the factors noted above, the purpose of this appraisal (to value the subject as is) and because the subject improvements clearly add value over and above the land alone, we have concluded that the highest and best use of the site, as improved, is probably as the subject site as built and operating. The existing improvements and living environment are reasonably competitive and functional for congregate and assisted living uses. The subject's overall quality, unit mix and unit sizes (though not optimal given their smaller size, limited variety and shared baths), common areas, parking and landscaping are average in the local senior housing market. 329 SITE VALUATION In order to estimate the fair market value of the subject site, a Sales Comparison Approach is utilized. Recent sales and listings/offers of vacant land considered somewhat comparable to the subject in location, zoning, and utility were analyzed. Adjustments are made as necessary for: date of sale, location, financing terms, physical characteristics such as size, shape, utilities and topography, and development limitations such as zoning restrictions, easements and encumbrances. A number of sales were reviewed in order to determine the market value of the subject site. We have considered the sales of local vacant land sites with somewhat comparable land uses, zoning and locations. In general, we noted few truly recent comparable vacant land sale transaction in the area reflecting the lack of recent apartment development activity. Those sales that were considered most comparable are presented in a summary grid on a following page and detailed in the Addenda of this report. Comparable Sale No. 1 is located at 6843 Mission Boulevard in Daly City, about three miles north of the subject. The 160,000 square foot parcel is currently being listed for $4,200,000 or $26.25 per square foot. A commercial use is likely on the PD zoned site. The site has major thoroughfare frontage (similar to the subject) with a large supermarket being developed immediately south of this parcel. In comparison to the subject, downward adjustment is suggested by the probable higher intensity land use and the subject site's sloping topography. Comparable Sale No. 2 is located at 901 Oceana Boulevard, about 2.5 miles southwest of the subject in Pacifica. The sloping parcel has no frontage on Oceana, but was granted a permanent easement through the adjacent parking lot (of a school) as a condition of the sale. The 56,628 square foot site sold in June, 1994 for $400,000 or $7.06 per square foot. The site contains 42 noncongregate senior apartments, a very similar land use to the subject. Despite the similar land use, this site requires substantial upward adjustment for its lack of major street frontage. Comparable Sale No. 3 is located at 124 Linden Avenue about three miles east of the subject in South San Francisco. This 24,227 square foot parcel sold in October, 1993 for $465,000 or $19.19 per square foot. The buyer owns a nearby business and plans to construct a parking lot on this site for their business. This parcel is least similar to the subject in proposed use, zoning and overall location. Additional downward adjustment is suggested by this site's level topography. Comparable Sale No. 4 is located at 530 Collins Avenue, about 1.5 miles north of the subject in central Colma. The 46,609 square foot site sold in June, 1992 for $775,000 or $16.61 per square foot. The site was developed with a 35 unit (50 beds) assisted living facility (Rent Comparable No. 3 - Home Sweet Home). Of the sales described above, this parcel is the most similar to the subject in general location, parcel size, land use and density. Downward adjustment is suggesting by the site's level topography but upward adjustment is necessary for the subject's major street frontage. 330 RETIREMENT INN - DALY CITY VACANT LAND SALES
Sale Price Proposed Sale Size-SF Proposed -------------------- Density - No. Location/APN Date Sale Price (Acres) Development SF Unit Zoning Units/Acre - --- ------------ ---- ---------- ------- ----------- -- ---- ------ ---------- 1. 6843 Mission Boulevard Listing $4,200,000 160,000 Probable $26.25 N/A PD N/A Daly City (3.67) Commercial 003-191-001 to 004, 016 2. 901 Oceana Boulevard 9/94 $ 400,000 56,628 42 Senior $7.06 $9,524 R-3 32.3 Pacifica (1.30) Apartments 009-293-090 3. 124 Linden Avenue 10/93 $ 465,000 24,227 Parking Lot $19.19 N/A CH-C3 N/A South San Francisco (0.56) 012-335-590, 600 4. 530 Collins Avenue 6/92 $ 775,000 46,653 35 Unit ALF $16.61 $22,119 C-1 50.5 Colma (1.07) 008-421-160 S. 501 King Drive - - 50,181 95 Unit ALF - - R-3 82.6 Daly City (1.15) 091-362-006
331 Before adjustment, the sales discussed above indicate a wide sale price per square foot range of approximately $7.06 to $26.25. The above adjustments to the comparable sales can be summarized as follows:
Sale Price/ Comp No. SF Adjustment -------- ----------- ---------- 1 $26.25 Downward (list/sale price differential, land use, topography) 2 $ 7.06 Upward (neighborhood, street frontage) 3 $19.19 Downward (topography, location) 4 $16.61 Upward (frontage); Downward (topography)
The overall degree of comparability of these sales to the subject is weak reflecting the lack of comparable vacant land sales in the immediate area. Overall, Comparable Land Sale No. 4 is by far the most similar to the subject in land use though it is a slightly older sale. Sale No. 2 is similar to the subject in land use but has an inferior location. Sale No. 3 is least similar to the subject. Sale No. 1 is a listing and therefore is given less weight as it is a less precise indication of value. This site is also much larger than the subject. After considering the specific location, topography and density of the subject site and the evidence provided by the adjusted comparables and recent trends in land values, it is concluded that the fair market value of the fee simple interest for the subject site as of July, 1995, is at a rate of $17.50 per square foot, or for the subject's 50,181 square feet, an overall site value of $878,168 ($17.50/SF x 50,181/SF) or $9,244 per unit. 332 COST APPROACH The Cost Approach considers an estimate of the fair market value of the land, the direct and indirect replacement costs (new) of the improvements, entrepreneurial profit, and accrued depreciation from all causes. Land value is taken from the Site Valuation section of this appraisal. Sources for replacement costs of improvements include: (1) Cost bids or reported actual recent cost of the subject; (2) Actual costs of recently completed comparable improvements; (3) Local contractors' opinions; (4) Marshall and Swift Computer Data Base; and, (5) Marshall and Swift (monthly updated) Cost Manual. Entrepreneurial profit is a necessary element in the motivation to construct improvements. In estimating any accrued depreciation, the appraiser takes into consideration: age, condition, functional utility, detrimental external factors, and any existing leases with contract rent below fair market (economic) rent. The sum total of land costs, direct improvement costs, indirect costs and entrepreneurial profit is the estimated replacement cost new. Subtracting any required depreciation from the replacement cost new indicates the value by the Cost Approach. DIRECT COSTS The estimated building cost per square foot replacement cost new in 1995 for the subject improvements is derived from the Marshall Cost Data Service (and comparable projects as a part of total costs) as calculated below:
Class D, Average Quality Home for the Elderly (Sec. 11, Page 17) -------------------- Base Cost/SF $ 54.16 Sprinkler Adjustment 1.20 HVAC Adjustment (1.20) ------------- $ 54.16 Location Multiplier x 1.26 Time Multiplier x 1.05 Adjusted Base Cost/SF $ 71.65 Square Footage - GBA x 36,874 ------------- Adjusted Base Cost $ 2,642,022 =============
The indicated base rate for the replacement cost new per square foot in 1995 for the existing improvements is $71.65. Our estimate of the base building cost on a per square foot basis includes architectural and engineering fees, overall construction financing cost and operational 333 overhead. They do not include unusual construction and fixtures, loan points, pre-marketing costs, furniture and city/public utility fees. In addition to the adjusted base construction for the building improvements, an allowance for furniture and equipment was included to arrive at total direct construction costs of the development. The allowance for furniture and equipment was estimated using an analysis of the Marshall Cost Manual allowance and industry experience (as shown below) or $2,500 per unit ($237,500 for 95 units). INDIRECT COSTS Indirect Costs - In addition to these direct building costs, we have estimated indirect costs at 7% of total direct building costs. Indirect costs include legal/accounting/appraisal fees, loan fees, premarketing advertising and promotion, city/public utility fees and a contingency fund. The above estimates reflect a replacement cost new (without land or profit) of $3,142,560 or $85.22 per square foot or $33,080 per unit. This is compared using an overall reasonableness test (no specific adjustment is made) to other recently built comparable congregate senior projects as follows:
Total Total No. of Cost/SF Cost/Unit FF&E Project Units Location (w/o Land)* (w/o Land)* Unit - ------- ------ -------- ----------- ----------- ---- Sterling Court 149 San Mateo $79.91 $84,117 $2,516 Park Ridge 93 Vallejo $79.40 $71,138 $2,688 Palm Court 100 Culver City $97.41 $84,000 $3,000
*Includes FF&E, shown separately for comparison purposes. The estimated replacement cost new for the subject is within the range of costs incurred at these similar projects on a square foot basis, but much lower on a per unit basis which is reconcilable given the subject's smaller units sizes, more modest quality and all studio unit mix. Finally, an entrepreneur or developer will typically expect to be compensated for the time, money, and risk expended in bringing a project to a completed income producing unit. Profit typically ranges from 10% to over 25% of the total construction and land costs, depending on the type of property, anticipated absorption or stabilization period, risk, and the size of the project. A modest allocation of 10% for entrepreneurial profit or toward the bottom of the range is considered appropriate for the subject given that the highest and best use of the subject as vacant in 1995 is to probably develop a senior housing project although this decision is not clear cut. The lesser affluence of the local market and the competitive impact of Westborough Royale mute the project's rent/profit potential as evidenced by the subject's higher SSI census. 334 DEPRECIATION Our site inspection noted no material physical curable, functional or economic depreciation. We did, however, note the following form of depreciation. Physical Incurable Depreciation - An amount for physical incurable depreciation (or the normal wear and tear on improvements as they age) is appropriate considering the subject's 20 year chronological and effective age, calculated as follows:
Direct Building Cost FF&E --------------- ---- Base Cost New $2,642,022 $ 237,500 Plus: Indirect Cost Allocation x 1.07 x 1.07 Plus: Profit Allocation x 1.10 x 1.10 ---------- ---------- Depreciable Base $3,109,660 $ 279,538 Depreciation Estimate (per MVS) 30% 50% ---------- ---------- Total Physical Incurable Depreciation $ 932,898 $ 139,769 ========== ========== Total $1,072,667 ==========
The depreciation percentages are based on our site inspection and Marshall Valuation estimates considering the subject's current 20 year old effective age (5 years for FF&E considering ongoing replacement) and 45 year old total economic life (10 years for FF&E). Physical incurable depreciation must be deducted from estimates of cost new to arrive at an as is valuation. SUMMARY Our estimate of value by the Cost Approach is summarized on the following page with an indicated value conclusion as is, in July, 1995 of $3,350,134, called $3,350,000. 335 RETIREMENT INN - DALY CITY COST APPROACH CALCULATION (CALCULATOR METHOD) Total Land Value (50,181 SF at $17.50/SF) $ 878,168 Direct Building Costs --------------------- Building Cost $ 2,642,022 Furniture & Equipment (95 Units at $2,500/each) 237,500 ----------- Total Direct Building Costs $ 2,879,522 ----------- Total Direct Building and Land Costs $ 3,757,690 Indirect Costs - 7% $ 263,038 ----------- Total Construction and Land Costs $ 4,020,728 Plus Entrepreneurial Profit at 10% $ 402,073 ----------- Total Cost New (Including Land) $ 4,422,801 Less Depreciation Physical Curable 0 Physical Incurable ($1,072,667) Functional Curable 0 Functional Incurable 0 External Obsolescence 0 ----------- Total Depreciation ($1,072,667) Indicated Value, Cost Approach, As Is $ 3,350,134 =========== Rounded to $ 3,350,000
336 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (7/95 to 6/96) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at July, 1995 based on the projected July, 1995 to June, 1996 net income. The theory is that the investor purchasing the property in July, 1995 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of this appraisal and summarized on a following page. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The June, 1995 census reveals an occupancy of 92.6% or 100 beds out of a maximum current configuration of 108 beds. 337 RETIREMENT INN - DALY CITY SUMMARY OF SUBJECT RENT CENSUS at 6/21/95
Private-Studio Semi-Private SSI (Units) (Beds) (Beds) Total -------------- ------------ ------ ----- Number Units/Beds - Rented 76 6 18 100 (92.6%) Rent Range $837-$1,495 $775 $671-$691 $671-$1,495 Rent Average $1,126 $775 $690 $1,026 Potential Total Rent-Rented $1,026,480 $55,800 $149,016 $1,231,296 Number Units/Beds - Vacant (1) 6 1 1 8 (7.4%) Rent Range $1,200-$1,495 $775 $691 $691-$1,495 Rent Average $1,283 $775 $691 $1,145 Total Potential Rent-Vacant $92,340 $9,300 $8,292 $109,932 Total Units/Beds 82 7 19 108 (100%) Gross Potential Rent-Total $1,118,820 $65,100 $157,308 $1,341,228 Per Unit/Bed $1,137 $775 $690 $1,035
NOTES: (1) Vacant units include: Private - Units 112, 113, 116, 209, 211, 216 (6 units); Semiprivate Studio - Beds 103, 234, (2 beds), allocated to SSI in ratio of currently leased beds. 338 Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. The subject operator noted that approximately 26 of the subject's studio units are currently being used as 13 "suites". The total rents collected on these units has been included in our rent census as two studio units. The operator has also noted their long term goal of not offering the suite option (two adjoining studios) to prospective residents as the rent collected for two separate units is higher than the rent for one suite unit (assuming they can be filled). All SSI rents are fixed by governmental agency at $691 per month and not market determined. The comparison of the subject rents (with and without the average assisted living surcharge) to the market area projects surveyed accumulates the monthly rental of all facilities, the average of the 10 projects surveyed and the most comparable projects to the existing Retirement Inn - Daly City. Of the projects surveyed, Comparable Nos. 1 - Westborough Royale, 5 - Greenhills and 6 - Retirement Inn - Burlingame would be most similar to the subject in age, scale, amenities, quality and unit mix. Overall, the subject's private room rents (with and without the assisted living surcharge) are generally at the low end of the range of the most comparable properties and below the average (for both congregate and assisted living) of all facilities. The subject's congregate studio rents are well below the average of all projects surveyed (about 28%). Congregate semiprivate living is generally not offered at other projects with the exception being the subject's sister facility Retirement Inn - Burlingame. The subject's average assisted living rents are within the overall range, although they are below the most comparable properties and the average (about 40%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is 93% at the current rents. In our opinion, the subject's much lower assisted living rents and the higher SSI census have been a factor in keeping occupancy above the 90% level. The subject's lower rents are appropriate for its Daly City location and the overall older age, condition, shared baths configuration in most units and limited unit mix of the subject. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 2% during the 7/95 to 6/96 projection period, reflecting market conditions and the subject's history. The 2% estimate in the next 12 months represents an average 4% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. 339 RETIREMENT INN - DALY CITY COMPARATIVE RENT ANALYSIS ACLF - CONGREGATE RENTS
Private - Studio ----------------------------------------- Comp. No. Monthly Rent --------- ------------ 4 $1,360-$1,940 5* $1,100-$1,700 6* $1,350-$1,450 7 $1,600-$1,700 8 $1,700-$2,040 9 $1,795 Range $1,100-$2,040 Average $1,628
AL - ASSISTED LIVING RENTS
Private (Studio) Semi-Private ------------------------------ ----------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 1* $1,500 1* $850 2 $3,300 2 $2,100 3 $3,000 3 $2,000 4 $1,460-$2,240 6* $1,000-$1,850 5* $1,965 6* $1,500-$2,450 7 $2,700-$2,965 8 $1,765-$3,140 9 $2,045-$2,795 10 $2,000-$2,300 Range $1,460-$3,300 $850-$2,100 Average $2,345 $1,594
Private - Studio Semi-Private ---------------- ------------ Subject Rented Beds - Subject Range $837-$1,495 $775 Subject Average $1,126/$1,446** $775/$1,095** (76 Units) (6 Beds) Subject Vacant Beds - Subject Range $1,200-$1,495 $775 Subject Average $1,283/$1,603** $775/$1,095** (6 Units) (1 Bed)
*Comparable Nos. 1 - Westborough Royale; 5 - Greenhills Retirement and 6 - Retirement Inn - Burlingame are most similar to the subject. **Includes average assisted living surcharge of $320 per month. 340 The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $320 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 25 residents pay for living assistance at an approximate average of $312 extra rent per month. Our cash flow projections for the subject estimate a stabilized 26% gross utilization (28 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income:
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- ------------- at 6/95 $312 25 (net) - at 7/95 to 6/96 $320 28 (gross) $107,520
In addition to total potential gross room revenue, we have included miscellaneous income at 1.5% of effective gross rental income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 6/95 92.6% 7.4% 7/95 to 6/96 (Stabilization) 93.0% 7.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 100.4 residents or an occupancy/vacancy of 93.0% (100.4/108). This conclusion is very close to the current occupancy (100 beds). The projected stabilized vacancy factor reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (lower rents in a less affluent market), age and condition and larger number of small units mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1993, 1994, 1/95 to 4/95 annualized) and budget (1995) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: 341 RETIREMENT INN - DALY CITY HISTORICAL INCOME AND EXPENSE
Historical Operator 4 Months Goal Year Ending Year Ending Ending 1995 Budget Revenues 12/93 12/94 4/30/95 Annualized 1995 - -------- ----------- ----------- -------- ---------- -------- Rental Income $ 1,007,693 $ 1,167,966 $ 396,299 $ 1,188,897 $1,294,739 Assisted Living Income 71,111 88,795 41,796 125,388 136,200 Non-Operating Revenue $ 14,816 $ 15,635 $ 9,237 $ 27,711 $ 17,192 ----------- ----------- --------- ----------- ---------- Total Revenues $ 1,093,620 $ 1,272,396 $ 447,332 $ 1,341,996 $1,448,131 Expenses (1) Real Estate Taxes $ 33,650 $ 33,618 (2) (2) $ 35,264 Insurance 13,358 14,648 (2) (2) 15,660 G&A 11,363 27,415 (2) (2) 25,675 Utilities 74,830 86,722 (2) (2) 84,660 Payroll/Benefits 445,359 469,299 (2) (2) 474,335 Maintenance 25,872 28,588 (2) (2) 29,340 Activities 10,321 9,963 (2) (2) 10,359 Marketing 13,947 12,501 (2) (2) 13,400 Laundry & Linen 6,839 7,306 (2) (2) 9,784 Dietary 119,855 125,372 (2) (2) 131,401 Supplies 30,243 32,172 (2) (2) 30,673 ----------- ----------- --------- ----------- ---------- Total Operating Expense $ 785,637 $ 847,604 $ 309,993 $ 929,979(3) $ 860,551 (71.8%) (66.6%) (69.3%) (69.3%) (59.4%) Net Operating Income $ 307,983 $ 424,792 $ 137,339 $ 412,017 $ 587,580 =========== =========== ========= =========== ==========
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. (3) Includes approximately $25,000 in nonrecurring capital expenditures. 342 Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at July, 1995 ($3,025,000 times the tax rate of 1.00% plus approximately $12,854 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.0% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 12% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 6.5% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 4% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 3% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than historical costs but reflects the costs to a typical operator and the competitive local market; Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $9.00 per day per resident (100.4 occupied beds x $9.50/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 5.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 26% of the residents (about $7.32 per resident day for 26 residents); 343 Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($237,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $35,625 is equal to 2.6% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 66.4% of effective gross income or $9,177 per occupied bed (100.4 beds). This percentage of income is slightly higher than typical because of the subject's larger number of smaller units and significant SSI census. A comparison to similar congregate/assisted living properties before management fees and reserves illustrates the following:
Inflated Stabilized Per to 1995 Location Expense Ratio Resident/Yr. at 4%/Yr. -------- ------------- ------------ --------- 10 ARV Properties California 61.7% $ 9,782 (1994) $10,173 13 Angeles Housing Properties National 56.6% $ 8,966 (1993) $ 9,698 Greenhills Millbrae 55.7% $ 8,234 (1992) $ 9,262 Meadows Napa 56.3% $ 8,418 (1992) $ 9,469 Country Inn Fremont 52.5% $ 7,718 (1992) $ 8,682 Westmont Santa Clara 57.7% $ 9,520 (1992) $10,296 Canyon Hills Club Anaheim 61.2% $11,918 (1994) $12,395 Courtyard San Marcos 51.6% $ 9,181 (1993) $ 9,930 6 Facility Averages 55.8% $10,006 Subject - 1993 Historical 71.8% $ 8,729 Subject - 1994 Historical 66.6% $ 8,649 Subject - 1/95 to 4/95 Annualized 69.3% $ 9,300 Subject - 1995 Budget 59.4% $ 8,606 Subject Projected (7/95 to 6/96) 66.4% $ 9,177
As illustrated, the projected expenses for the subject are below the average of the expense histories of the projects listed above and below the averages of 10 other ARV facilities on a dollars per bed basis. The subject will always have slightly higher expenses on a percentage of income basis because of its lower revenue base (smaller units, SSI census) and lower on a per patient basis due to the location within a market area of lower operating costs/rents, lower assisted living utilization, more modest quality and common areas and slightly lower semiprivate census. Our projections consider the experience at the comparable properties and historical costs incurred. 344 On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The survey indicated a median annual cost per unit of $10,577 before management fees ($11,541 total less $964 in management fees). This compares to our per unit estimate for the subject of $9,698 ($921,336/95) in the next 12 months. Finally, a reconciliation of our adjusted period one (7/95 to 6/96) projected expenses to 1995 actual annualized expenses illustrates the following: Actual Total Expenses (1995 Annualized) $ 904,979 (adjusted for nonrecurring expenditures - $25,000) =========== Operator Budget (1995) $ 860,551 =========== Projected Total Expenses Per SLVS (7/95 to 6/96) $ 1,026,381 Less: Management Fees $ (69,420) Less: Replacement Reserves $ (35,625) ----------- Adjusted Projected Total Expenses (7/95 to 6/96) $ 921,336 =========== Difference (over 1995 actual annualized, reflects inflation) +1.8% (over 1995 budget, reflects inflation, less assisted living utilization) +7.1%
CAPITALIZATION PROCESS Because Retirement Inn - Daly City is being appraised as of July, 1995 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of July, 1995 to June, 1996 is capitalized at a rate of 12.0% to get an indicated total property value at July, 1995. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 11% to 15%. These are illustrated in sales of comparable facilities in the Sales Comparison Approach of this report and are summarized as follows: 345
Comparable Indicated Sale No. Property Cap Rate - -------- ---------- --------- 1 Oak Tree Villa 12.3% 2 El Camino Gardens 11.2% 3 Casa Sandoval 9.0% 4 Lomita Lodge 12.2% 5 Carson Oaks 12.4% 6 Park Ridge 11.3% Range 9.0%-12.4% Average 11.4% 25 Facility Average 12.5%
In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 10.0% interest with an amortization term of 20 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .1158. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 15%. The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .1158 .0811 Equity 0.30 x .15 .0450 ----- 1.0 x Overall Rate .1261 OAR 12.61%
346 These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.25% 25 Statewide Sales 12.5% SLVS Investment Survey 12.1% Band of Investment 12.61%
Based upon the current characteristics of the subject, namely, its overall slightly below average cash flow risk as reflected in its stable occupancy (about 93%) and cash flow (including a higher SSI census) and the long term potential offered by uncoupling current suite units into higher rent separate studios and conversely, considering the subject's older age, less favorable shared bath room and more limited unit mix, the impact of a nearby formidable competitor and less affluent market area, we have concluded that 12.0% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at July 13, 1995 of $3,018,800, rounded to $3,025,000 ($31,842/unit). 347 RETIREMENT INN - DALY CITY PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (7/95-6/96) ----------- Average Occupancy (All Beds) 93.0% (100.4 Beds) Average Net Rental (All Beds) $ 1,053 Potential Gross Rent Income - Studio Private - 82 Units at $1,160/Mo. Avg. $1,141,184 Semiprivate - 7 Beds at $791/Mo. Avg. 66,402 SSI - 19 Beds at $690/Mo. Avg. $ 157,320 ---------- Potential Gross Rent Income $1,364,906 Plus: Assisted Living Surcharges (28 Beds at $320/mo.) $ 107,520 Plus: Miscellaneous Income (1.5% of PGRI) $ 20,474 ---------- Potential Gross Income $1,492,900 Less: Stabilized Vacancy & Collection Losses - 7% $ (104,503) ---------- Effective Gross Income $1,388,397 Expenses - % of EGI -------- Real Estate Taxes - $ 43,104 Insurance 1.0% 13,884 Management 5.0% 69,420 G&A 12.0% 166,608 Utilities 6.5% 90,246 Maintenance 4.0% 55,536 Activity & Trans. 3.0% 41,652 Marketing 2.0% 27,768 Housekeeping 6.0% 83,304 Dietary $9.00/PRD 329,814 Personal Care 5.0% 69,420 Replacement Reserves - $ 35,625 ---------- Total Expenses $1,026,381 (73.9%) Stabilized Net Operating Income $ 362,016 Capitalization Rate .12 ---------- Capitalized Value $3,018,800 ========== Called $3,025,000 Per Unit $ 31,842
348 SALES COMPARISON APPROACH The Sales Comparison Approach is a method of comparing the subject property to recent sales and/or listings of similar types of properties located in the subject or competing areas. Each of these sales must be analyzed to establish estimate elements of comparability. The reliability of this technique depends on 1) the degree of comparability between the subject and the sales properties; 2) the length of time since the sales were consummated; 3) the accuracy of the sales data; and, 4) the absence of unusual conditions affecting the sale. On the following page, we have included 25 sales of congregate senior housing properties which can be considered somewhat similar to the subject. The purpose of including this listing is to provide the reader with some context of western US senior housing sales beyond those specifically discussed below. This additional information can be helpful because of the special purpose nature and general illiquidity of the senior housing market. Some of the sales in the last 18 months represent REO's. Some project buyers present in today's market are still "bottom fishing" where distressed properties can be purchased at substantial discounts from replacement cost. However, these buyers have a shrinking supply of properties available to choose from. This has resulted in an overall trend of decreasing cap rates (higher sale prices). Those more recent transactions considered most comparable to the subject are summarized on the following page and discussed in greater detail in the Addenda of this report. The sale prices noted below are discussed and reported on a sale price per unit (total going concern) basis. Comparable Sale No. 1 is Oak Tree Villa in Scotts Valley which just recently sold in June, 1995 for $11,900,000 or $58,900 per unit. The 202 congregate/assisted living project, built in 1988 was only 72% occupied at the date of sale with an indicated cap rate at a full occupancy of 12.3%. The project has a high quality physical plant although it is located in a relatively less densely populated area (20 mile south of Silicon Valley; about 5 miles north of Santa Cruz). 20% of the units of this project are allocated to low income (HUD) residents. Comparable Sale No. 2 is El Camino Gardens in Carmichael which sold in May, 1995 for a contracted price of $9,350,000. An estimated $650,000 in deferred maintenance makes the effective sale price of the project approximately $10,000,000 or $34,965 per unit. This 286 ACLF/112 ALF, 1984 built project, was 82% occupied at the time of sale and has an average physical plant. The property had an estimate cap rate at a stabilized occupancy of 11.2%. The property was purchased by entities affiliated with the subject owner (ARV Housing). The lower cap rate of this sale is partially explained by the buyer's plans to substantially upgrade the property in order to increase the assisted living census. Comparable Sale No. 3 is the February, 1995 sale of Casa Sandoval which sold at auction for $15,000,000 or $63,205 per unit. The 1989 built, Hayward project includes 238 total units. The property was only 81% occupied at the sale date, reflecting a slightly forced sale due to the financial difficulties of the prior owner. The property was underperforming at the date of sale and the buyer plans an aggressive conversion of many units of the project to assisted living. The overall quality of this project is average despite its newness. The indicated cap rate of the sale has been estimated at a low 9.0% at a stabilized occupancy (before consideration of any assisted living conversion). 349 WESTERN US ACLF/AL SENIOR HOUSING SALES SUMMARY LAST 24 MONTHS
Gross Expense Sale Inc. Ratio Price No. Facility Name Location Age Units $/Unit/Mo (%) Date (000) $/Unit - --- ----------------------- ------------------ ----- ----- --------- ------- ---- ------- -------- 1. The Highlander Seattle, WA 1979 121 $1,066 55.0% 6/93 $ 5,200 $41,322 2. Almond Avenue Orangevale, CA 1987 39 $1,598 65.2% 7/93 $ 2,100 $53,864 3. Summerfield Tigard, OR 1980 155 $1,100 60.0% 8/93 $ 6,550 $42,532 4. Renton Villa Renton, WA 1983 78 $1,366 66.7% 8/93 $ 3,000 $38,462 5. Sherwood Villa Tacoma, WA 1981 98 $1,328 69.0% 8/93 $ 2,800 $28,571 6. Celeste Villa Modesto, CA 1975 81 $1,080 72.5% 10/93 $ 1,900 $23,457 7. Springs of Napa Napa, CA 1986 102 $1,332 55.0% 11/93 $ 6,300 $61,765 8. Summerhill Puyallup, WA 1987 96 $1,241 59.4% 2/94 $ 5,500 $57,292 9. Chula Vista Inn Chula Vista, CA 1975 112 $1,034 75.0% 6/94 $ 2,675 $23,884 10. Villa San Marcos San Marcos, CA 1986 100 $1,191 65.0% 6/94 $ 3,951 $39,510 11. Camlu Phoenix, AZ 1979 88 $1,153 65.0% 6/94 $ 3,800 $43,182 12. Gold Star Manor Fullerton, CA 1985 80 $1,146 70.0% 6/94 $ 2,880 $36,000 13. Hacienda de Monterey Palm Desert, CA 1989 180 $1,813 65.8% 7/94 $ 7,250 $40,278 14. Park Ridge Vallejo, CA 1991 93 $1,632 60.0% 7/94 $ 5,785 $62,204 15. Carson Oaks Stockton, CA 1989 76 $1,462 60.0% 7/94 $ 4,200 $55,263 16. Villa Ocotillo Scottsdale, AZ 1973 102 $1,242 60.0% 9/94 $ 3,500 $34,314 17. Lomita Lodge Ojai, CA 1970 26 $1,999 75.0% 12/94 $ 1,350 $51,923 18. Brea Residential Brea, CA 1990 98 $1,377 67.0% 1/95 $ 4,800 $48,980 19. Whittier Retirement Whittier, CA 1973 72 $1,187 67.0% 1/95 $ 2,875 $39,937 20. Canyon Hills Club Anaheim, CA 1989 212 $1,661 67.1% 2/95 $13,450 $63,443 21. Casa Sandoval Hayward, CA 1989 238 $1,346 65.0% 2/95 $15,000 $63,025 22. Valley Crest Apple Valley, CA 1985 37 $1,600 65.0% 2/95 $ 2,200 $59,459 23. Amaryllis Court Anaheim, CA 1969 33 $1,391 75.0% 3/95 $ 1,150 $34,848 24. Fulton Villa Stockton, CA 1973 76 $ 763 72.1% 3/95 $ 1,450 $19,079 25. Oak Tree Villa Scotts Valley, CA 1988 202 $1,399 56.8% 6/95 $11,900 $58,911 Low 1969 26 $ 763 55.0% $ 1,150 $19,079 High 1991 238 $1,999 75.0% $15,000 $63,443 Low (minus 2 lowest) 1973 37 $1,066 56.8% $ 1,450 $23,884 High (minus 2 highest) 1982 104 $1,340 65.3% $11,900 $62,204 Average: 1983 110 $1,330 64.9% $ 4,863 $44,860
No. Facility Name Location OAR $/SF GIM - --- -------------------------- ------------------ -------- -------- --- 1. The Highlander Seattle, WA 13.4% $52.73 3.36 2. Almond Avenue Orangevale, CA 12.4% $57.00 2.81 3. Summerfield Tigard, OR 13.2% $80.84 3.20 4. Renton Villa Renton, WA 14.2% $46.51 2.35 5. Sherwood Villa Tacoma, WA 17.3% $45.67 1.79 6. Celeste Villa Modesto, CA 13.7% $32.75 1.81 7. Springs of Napa Napa, CA 11.7% $69.23 3.86 8. Summerhill Puyallup, WA 10.5% $62.74 4.40 9. Chula Vista Inn Chula Vista, CA 13.0% $41.10 1.92 10. Villa San Marcos San Marcos, CA 12.7% $73.17 2.76 11. Camlu Phoenix, AZ 11.2% $83.66 3.12 12. Gold Star Manor Fullerton, CA 11.5% $128.34 2.62 13. Hacienda de Monterey Palm Desert, CA 18.5% $41.36 1.85 14. Park Ridge Vallejo, CA 11.3% $68.10 3.54 15. Carson Oaks Stockton, CA 12.4% $66.95 3.23 16. Villa Ocotillo Scottsdale, AZ 14.9% $43.34 2.30 17. Lomita Lodge Ojai, CA 12.2% $135.00 2.06 18. Brea Residential Brea, CA 11.1% $84.24 2.96 19. Whittier Retirement Whittier, CA 11.8% $75.16 2.80 20. Canyon Hills Club Anaheim, CA 10.3% $65.92 3.18 21. Casa Sandoval Hayward, CA 9.0% $69.23 3.90 22. Valley Crest Apple Valley, CA 11.3% $118.71 3.10 23. Amaryllis Court Anaheim, CA 11.0% $71.72 2.09 24. Fulton Villa Stockton, CA 11.5% $25.29 2.08 25. Oak Tree Villa Scotts Valley, CA 12.3% $69.18 3.51 Low 9.0% $32.75 1.79 High 18.5% $135.00 4.40 Low (minus 2 lowest) 10.5% $41.36 1.85 High (minus 2 highest) 14.9% $118.71 3.86 Average: 12.5% $68.72 2.82
350 RETIREMENT INN - DALY CITY COMPARABLE IMPROVED SALES
Indicated Age/No. Sale Price/ Sale Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF at Sale Rate - --- ------------- -------- ---- ---------- ----- -------- --------- -------- 1. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $ 69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA 2. El Camino Gardens 1984/ 5/95 $10,000,000 $34,965 $ 62.19 82% 11.2% (1) 2426 Garfield 286 Carmichael, CA 3. Casa Sandoval 1989/ 2/95 $15,000,000 $63,025 $ 69.23 81% 9.0% (1) 1200 Russell Way 238 Hayward, CA 4. Lomita Lodge 1970's/ 12/94 $ 1,350,000 $51,923 $135.00 81% 12.2% (1) 225 N. Lomita 26 Ojai, CA 5. Carson Oaks 1989/ 7/94 $ 4,200,000 $55,263 $ 66.95 95% 12.4% 6725 Inglewood Avenue 76 Stockton, CA 6. Park Ridge 1991/ 7/94 $ 5,785,000 $62,204 $ 68.10 55% 11.3% (1) 2261 Tuolumne 93 Vallejo, CA
(1) Estimated at 92% occupancy 351 Comparable Sale No. 4 is the December, 1994 sale of Lomita Lodge, a small assisted living project located in Ojai. The 26 unit project sold for $1,350,000 or $51,923 per unit. The property was originally built in the 1940's and expanded in the 1970's. The project has high rents but was only 81% occupied at the date of sale. The indicated cap rate at a stabilized occupancy is 12.2%. Comparable Sale No. 5 is the July, 1994 sale of Carson Oaks, a 76 unit congregate senior project located in Stockton (bought by the same buyer as Comparable No. 1). Stockton is a Central Valley community with an overall affluence below Livermore. The 1989 built project was purchased for $4,200,000 or $55,263 per unit. The project was 95% occupied at the date of sale. This project has an overall average to above quality, a weak location (behind a shopping mall) and can be considered a middle to upper middle market project. The sale price suggested an estimated capitalization rate of 12.4%. Comparable Sale No. 6 is the Park Ridge in Vallejo which sold in July, 1994 for $5,785,000 or $62,204 per unit. The 93 ACLF (including 14 licensed assisted living beds) is a recently built (1991), modern project in a generally less affluent Bay Area suburb. The project was only 55% occupied at the date of sale and has had a very difficult time leasing. The property could be considered mildly distressed. This is attributable to several factors including a crowded local competitive market, a weak real estate market and the project possibly being too high end for its market. The indicated overall capitalization rate of this sale at a stabilized 92% occupancy is estimated at 11.3%. The comparables described above indicate unit values of between $34,965 per unit to $63,025 per unit before adjustments. Overall, in reviewing these sales for comparability to the subject, we observed significant differences. Most notably, differences in location, physical plant, occupancy, and unit mix make direct and precise comparison to the subject property difficult. Therefore, in our opinion, the overall degree of comparability of these sales to the subject is only fair. Nevertheless, after the adjustments described below, these comparables should provide approximate parameters for an indicated value of the subject property. The first adjustment to the comparable sales (the yet to stabilize Sale Nos. 1, 3, 4 and 6) reflects the difference in the stabilized occupancy of the comparables at their date of sale to the as is 93% occupancy of the subject. The amount of the adjustment is interpolated assuming an approximate 20% to 30% difference in value between an empty project and one that is stabilized. On a following page, we have also adjusted each of the comparable sales for the difference in the ratio of net income per the total number of units. These adjustments should provide an approximate value range from the subject. We have adjusted each comparable by the ratio of the estimated stabilized net income per unit of the subject ($3,811) to the net income per unit of the comparables. This ratio should theoretically reflect differences in stabilized occupancy, location and quality (through rents), unit mix and operating efficiencies (through expenses). As illustrated, after adjustment, these sales indicate a value range for the subject of $30,947 per unit to $38,629 per unit (less the outlying Sale No. 3). This range provides approximate parameters for a value indication for the subject. In our opinion, given the above adjustments, 352 the indicated value of the subject as is in July, 1995 is between $30,947 to $38,629 per unit, calculating to a total indicated fee simple value using a Sales Comparison Approach of $2,939,965 ($30,947/unit x 95 units) to $3,669,755 ($38,629/unit x 95 units), rounded to $2,950,000 to $3,675,000. As described in the Reconciliation and Conclusion section of this appraisal, due to significant differences in location, occupancy, quality and amenities package, our final value conclusion does not place great weight on this value estimate reflecting the general lack of comparability, large adjustments and wide range of indicated values. 353 RETIREMENT INN - DALY CITY COMPARABLE IMPROVED SALES ADJUSTMENTS
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 ----- ----- ----- ----- ----- ----- Sale Price Per Unit $58,911 $34,965 $63,025 $51,923 $55,263 $62,204 Before Adjustment Occupancy Adjustment +10% +5% +5% +5% - +15% Net Income Per Unit -47% -3% -33% -40% -44% -46% Adjustment (Subject (1) $(3,811/ $(3,811/ $(3,811/ $(3,811/ $(3,811/ $(3,811/ NOI/Unit/Comp/NOI/Unit $ 7,246) $ 3,923) $ 5,653) $ 6,314) $ 6,851) $ 7,020) ------- ------- ------- ------- ------- ------- Sale Price Per Unit After Adjustment $34,345 $35,612 $44,338 $32,711 $30,947 $38,629 ======= ======= ======= ======= ======= =======
Range (Less Outlying Sale No. 3): $ 30,947 - $ 38,629 x 95 Units x 95 Units ------------ ------------ Indicated Value Range: $ 2,939,965 - $ 3,669,755 ============ ============ Called: $ 2,950,000 to $ 3,675,000
(1) Subject stabilized NOI/Unit - $362,016/95 Units 354 RECONCILIATION AND CONCLUSION
Market Value As Is - 7/13/95 --------------- Indicated Value, Cost Approach $3,350,000 Indicated Value, Income Approach $3,025,000 Indicated Value, Sales Comparison Approach $2,950,000- $3,675,000
The development of a final estimate of value involves judgment in a careful and logical analysis of the procedures leading to each indication of value. The judgment criteria are appropriateness, accuracy and quantity of evidence. The Sales Comparison Approach is most applicable when closely comparable properties are bought and sold in the market on a regular basis. We relied on the sales of somewhat comparable facilities to estimate value using this approach. However, due to overall property type illiquidity, differences in occupancy, location and components of income, direct comparison to the subject property is difficult as suggested by the wide range of indicated values. Considering these factors, the Sales Comparison Approach is considered to produce a less reliable indication of value. The Cost Approach is most applicable when the improvements are new or nearly new and where a few number of subjective adjustments must be made to reflect depreciation, if any. In estimating construction cost new, we relied on well documented general cost information provided by the Marshall Valuation Service which was generally supported by actual costs incurred at similar projects. Our estimate of land value is somewhat supported by the sale of similarly zoned vacant land parcels in the region. Adjustments for physical incurable depreciation are approximations but were estimated using reasonable analyses. Considering these factors and our Highest and Best Use conclusions, the Cost Approach is considered to produce a less accurate indication of value. This approach is also rarely relied on by investors in this type of property. The Income Approach is typically considered the strongest value indicator for properties purchased primarily for their income producing potential. This approach most accurately reflects the impact of stabilized occupancy rates for properties such as the subject. Comparable market rental rates and an analysis of the current census were available for the subject units to arrive at an estimate of fair market rent and gross income. Expense data was substantiated by historical data and comparable projects. Finally, our estimate of the capitalization rate is appropriate reflecting the subject's overall average cash flow risk and market position. Overall, the Income Approach is considered a strong and only truly reliable indicator of value for the subject property. After considering the factors leading to each indication of value, the Income Approach is considered to be the most appropriate for the purpose of this appraisal. The Sales Comparison Approach is given little to no weight due to the illiquidity of the market, shifting market trends and the wide range of indicated values. The Cost Approach is also given little to no emphasis, 355 based on the deductions for depreciation and our highest and best use discussion. The final market value estimate of the fee simple total going concern interest of the subject property as is, on July 13, 1995, is: THREE MILLION TWENTY FIVE THOUSAND ($3,025,000) DOLLARS 356 ALLOCATION OF FINAL VALUE DETERMINATION TO COMPONENTS We have allocated our total going concern value determination to various components including real estate, business and personal property value. To allocate the going concern value estimate, we have utilized both the Cost and Income Approaches to estimate a reliable and reasonable allocation to each component. A summary of our allocation is illustrated below: Allocation of Final Going Concern Value Determination
As Is - 7/13/95 ------- Total Going Concern Value $3,025,000 Personal Property (1) 120,000 Business Value (2) 525,000 ---------- Real Estate Value $2,380,000 ==========
(1) FF&E estimated from Cost Approach estimates less accrued depreciation. (2) Business value estimated from the calculated difference in value of the subject as is (full occupancy) compared to its value as if it were vacant as shown below. The personal property value is taken from the Cost Approach estimates set forth in Cost Approach section of this report. This estimate reflected a replacement cost new of $2,500 per unit (total of $237,500 FF&E cost new for 95 units) which must be adjusted to its current depreciated value. Given the estimated five year old average age of the subject's personal property items and ongoing replacement, we have estimated a 50% allocation for depreciation at 7/13/95 or an as is value of $237,500 x 50% = $118,750, rounded to $120,000. The business component of the subject value reflects the fact that the subject is a business requiring specialized management services such as meals, housekeeping and social activities represent complications in the operation of a senior housing facility and require specific managerial expertise. An appropriate method to estimate the business value component is to compare the value of the subject as is ($3,025,000) as a fully operating stabilized property to its estimated value as if it were empty, as estimated below ($2,500,000). The estimated business value would be the difference in these values or $525,000. 357 Approximate Valuation of Subject As If Empty at 7/95
Period 1 Period 2 Period 3 (7/95-6/96) (7/96-6/97) (7/97-6/98) ----------- ----------- ----------- Average Occupancy 38.25% 74.75% 93.0% Potential Gross Income $ 1,492,900 $1,552,616 $1,614,720 Effective Gross Income $ 571,034 $1,160,580 $1,501,690 Total Expenses $ 718,218 $ 960,360 $1,109,749 ----------- ---------- ---------- Net Income ($ 147,184) $ 200,220 $ 391,941 =========== ========== ========== Discounted Value ($ 127,991) $ 151,386 $2,469,555 =========== ========== ========== Total $ 2,492,950 ========== Called $ 2,500,000 ==========
Assumptions: 20% preleasing; 3.3 units/month absorption; 4% annual rent increases; stabilized expense estimated at 73.9% of stabilized effective gross income; expenses decreasing from the stabilized period three at 4%/year for inflation and also for lower occupancy by 10% in period two, 30% in period one; 12.0% terminal cap rate; 15.0% discount rate. The real estate component is the remainder or residual of the final value determination after a subtraction for the personal property and business value components, or as illustrated for the subject: $2,380,000 at July 13, 1995, as is, or 78.7% of the total going concern value. In our opinion, though these allocations are estimates, they can be considered reliable and reasonable given the analysis set forth above. 358 MARKETING PERIOD The subject's estimated marketing time is 6 months. This conclusion is based on discussions with those brokers specializing in the sale of senior housing projects, our knowledge of specific sale transactions (which have had widely variable marketing times) and considering current market conditions and the characteristics of the subject. Marketing times at several similar projects indicate the following: Casa Sandoval Hayward 6 months Fulton Villa Stockton 4 months Pacific Springs Escondido/El Cajon 5 months Park Ridge Vallejo 5 months
In our opinion, the subject would probably experience an average marketing time (regarded as about 6 months). The majority of buyers of senior housing projects are still seeking (and have fewer and fewer available opportunities) distressed properties where large increases in cash flow value are possible. The subject is not a distressed property given the current 93%+/- stabilized occupancy and as such would have a lesser appeal to some market buyers (subject has limited upside potential although its assisted living utilization could be increased). Nevertheless, the subject would be viewed as a solid cash flow project with an average physical plant and a limited unit mix in a good overall location. The subject's most likely buyer would be a larger facility owner/operator of other comparable congregate senior housing properties in California (i.e. Holiday Retirement, Manor Care, Leisure Care, Capital Senior Living, Brim, Health Care Group, etc.). 359 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions reached or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Mary Catherine Wiederhold, Appraisal Associate provided significant professional assistance to the person signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on July 13, 1995. 360 12. The concluded total going concern market value estimate of the fee simple interest of Retirement Inn - Daly City, is as follows: MARKET VALUE "AS IS" (JULY 13, 1995): THREE MILLION TWENTY FIVE THOUSAND ($3,025,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - -------------------------------------- Michael G. Boehm, MAI 361 A D D E N D A 362 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 1 - Westborough Royale 89 Westborough South San Francisco No. 2 - Home Sweet Home 1560 Bryant Street Daly City 363 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 3 - Home Sweet Home 205 Collins Avenue Daly City No. 4 - University Mound Ladies Home 350 University Street San Francisco 364 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 5 - Greenhills Retirement 1201 Broadway Millbrae No. 6 - Retirement Inn - Burlingame 250 Myrtle Road Burlingame 365 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 7 - Sterling Court 850 N. El Camino Real San Mateo No. 8 - Hillsdale Manor 2883 S. Norfolk San Mateo 366 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 9 - Glenwood Inn 555 Glenwood Menlo Park No. 10 - Palo Alto Commons 4075 El Camino Way Palo Alto 367 VACANT LAND SALE COMPARABLE NO. 1 Location: 6843 Mission Boulevard Daly City, CA Assessor's Parcel No.: 003-191-1, 2, 3, 4, 16 (San Mateo County) Sale Date: Listing Document No.: N/A Listing Price: $4,200,000 Size: 160,000 Square Feet (3.67 Acres) List Price/SF: $26.25 Topography: Flat to Slightly Sloping Shape: Irregular Proposed Use: Unknown; probable commercial Zoning: PD Grantor: Hugh Smith Family Trust Grantee: N/A Terms: N/A Comments: Sale of former Mission Bell Motel site is being combined with additional parcels. Plans were approved by Daly City for a 45,000 square feet supermarket with 27 residential units and a Taco Bell restaurant, but the land was returned to the seller by the developer. A 55,000 square feet Lucky Supersaver is planned for the southern adjacent parcel, according to the Daly City Planning Department. There is an unknown number of underground tanks on the site as well as a small area of contaminated soil due to gas tank leaks from a former gas station immediately north of the site.
368 VACANT LAND SALE COMPARABLE NO. 2 Location: 901 Oceana Boulevard Pacifica, CA Assessor's Parcel No.: 009-293-090 (San Mateo County) Sale Date: 9/29/94 Document No.: 94-153108 Sale Price: $400,000 Size: 56,628 Square Feet (1.30 Acres) Sale Price/SF: $7.06 Topography: Level Shape: Rectangular Proposed Use/Density: 42 Noncongregate Senior Apartments; 32.3 Units/Acre Sale Price/Unit: $9,524 Zoning: R-3 Grantor: Roman Catholic Archbishop Corporation Grantee: Oceana Senior Housing Corporation Terms: All Cash to Seller Comments: Land locked site was formerly a church parking lot and basketball court in between a church and school; sale contains a permanent easement granting access to street.
369 VACANT LAND SALE COMPARABLE NO. 3 Location: 124 Linden Avenue South San Francisco, CA Assessor's Parcel No.: 012-335-590, 600 (San Mateo County) Sale Date: 10/15/93 Document No.: 175497 Sale Price: $465,000 Size: 24,227 Square Feet (0.56 Acres) Sale Price/SF: $19.19 Topography: Level Shape: Rectangular Proposed Use/Density: Construct a Parking Lot Zoning: CH-C3 Grantor: Chevron USA, Inc. Grantee: M/M Robert & Kathleen Giorgi Terms: All Cash to Seller Comments: Site has 140 feet of frontage on Linden Avenue and 175 feet on Baden Avenue in central South San Francisco business district; buyer owns a nearby parcel and the planned parking lot is for their business.
370 VACANT LAND SALE COMPARABLE NO. 4 Location: 530 Collins Colma, CA Assessor's Parcel No.: 008-421-160 (San Mateo County) Sale Date: 6/25/92 Document No.: 099787 List Price: $775,000 Size: 46,653 Square Feet (1.071 Acres) Sale Price/SF: $16.61 Topography: Level Shape: Rectangular Proposed Use/Density: 35 unit/54 bed assisted living project (Home Sweet Home); 32.7 Units/Acre Sale Price/Unit: $22,119 Zoning: C-1 Grantor: Richard Venturini Grantee: Nediljka/Mate Matijas Terms: $325,000 Cash; $450,000 1st TD National Bank of Daly City, reportedly at market. Comments: In mixed use, average quality neighborhood; direct competitor of subject.
371 IMPROVED SALE COMPARABLE NO. 1 Name: Oak Tree Villa Location: 100 Lockwood Lane, Scotts Valley, CA Assessor's Parcel No.: 021-052-01 (Santa Cruz County) Sale Date: 6/6/95 Sale Price: $11,900,000 No. of Units: 202 Units (includes 40 assisted living units) Age: 1988 % Private Pay: 100% (includes 20% low income residents) Size (GBA): 172,000 Square Feet Average Unit Size (GBA/Unit): 851 Square Feet Sale Price/Unit: $58,911 Sale Price/SF: $69.19 Occupancy Rate: 72% Gross Operating Income: $3,390,984 (estimated at 90% occupancy) Expenses: $1,925,343 Net Operating Income: $1,465,641 (estimated at 90% occupancy) % Expenses: 56.8% G.I.M.: 3.51 O.A.R.: 12.3 (estimated at 90% occupancy) N.O.I./Unit: $7,256 Grantor: Oak Tree Villa Partnership Grantee: Birtcher Senior Properties Terms: $4,955,000 cash (39%); $7,745,000 assumption of existing debt, 30 year amortization, due in 15 years, 10.25% rate. Comments: 20% of units must be allocated to low income (HUD) residents; unit mix: 102 alcove units (450 SF) and 100 one bedroom units (600 SF); located in lightly populated area. Confirmation: Keith Louie (415) 391-9220
372 IMPROVED SALE COMPARABLE NO. 2 Name: El Camino Gardens Location: 2426 Garfield Avenue, Carmichael, CA Assessor's Parcel No.: 283-0030-14 (Sacramento County) Sale Date: 5/31/95 (Document No. 8309302142) Sale Price: $10,000,000 (includes $650,000 in deferred maintenance) No. of Units: 286 Units (174 ACLF/112 ALF) Age: 1984 Size (GBA): 160,810 Square Feet Average Unit Size (GBA/Unit): 562 Square Feet Sale Price/Unit: $34,965 Sale Price/SF: $62.19 Occupancy Rate: 82% Gross Operating Income: $2,814,240 (estimated at 93% occupancy) Expenses: $1,692,240 Net Operating Income: $1,122,000 (estimated at 93% occupancy) % Expenses: 60.1% G.I.M.: 3.55 O.A.R.: 11.2% (estimated at 93% occupancy) N.O.I./Unit: $3,923 Grantor: Joseph Benvenuti Grantee: Nationwide Health Properties (REIT) Terms: All Cash to Seller Comments: Project had approximately $650,000 in deferred maintenance at time of sale; purchased by REIT and leased to ARV Housing Group; licensed to include up to 224 assisted living beds. Confirmation: Eric Davidson (714) 751-7400
373 IMPROVED SALE COMPARABLE NO. 3 Name: Casa Sandoval Location: 1200 Russell Way, Hayward, CA Assessor's Parcel No.: 415-240-007, 008 (Alameda County) Sale Date: 2/27/95 Sale Price: $15,000,000 No. of Units: 238 Units Age: 1989 Size (GBA): 216,639 Square Feet Average Unit Size (GBA/Unit): 920 Square Feet Sale Price/Unit: $63,025 Sale Price/SF: $69.23 Occupancy Rate: 81% Gross Operating Income: $3,844,396 (estimated at 92% occupancy) Expenses: $2,498,857 Net Operating Income: $1,345,539 % Expenses: 65% (estimated at 92% occupancy) G.I.M.: 3.90 O.A.R.: 9.0% N.O.I./Unit: $5,653 Grantor: Casa Sandoval Investors, L.P. Grantee: Weh Chang Terms: All Cash to Seller Comments: Average quality project in middle income suburban area; sold at auction on 2/9/95; property underperforming at date of sale; buyer plans significant licensing/conversion of many units to assisted living. Confirmation: John Rosenfeld (310) 473-8900 ext. 119
374 IMPROVED SALE COMPARABLE NO. 4 Name: Lomita Lodge Location: 225 N. Lomita Avenue, Ojai, CA Assessor's Parcel No.: 017-083-200 (Ventura County) Sale Date: 12/30/94 (Doc. No. 206073) Sale Price: $1,350,000 No. of Units: 26 Units/36 Beds (Licensed AL) Age: 1940's/1970's Size (GBA): 10,000 Square Feet Average Unit Size (GBA/Unit): 385 Square Feet Sale Price/Unit: $51,923 Sale Price/SF: $135.00 Occupancy Rate: 81% Gross Operating Income: $656,640 (estimated at 95% occupancy) Expenses: $492,480 Net Operating Income: $164,160 (estimated at 95% occupancy) % Expenses: 75.0% G.I.M.: 2.06 O.A.R.: 12.2% (estimated at 95% occupancy) N.O.I./Unit: $6,314 Grantor: Raymond & Judy Berard Grantee: Ojai Retirement Inn #1, Ltd. Terms: $270,000 Cash; $1,080,000 variable rate loan at 8.5%, 20 year amortization. Comments: Property underperformed at date of sale; currently 95% occupied; rents range from $1,500 to $2,350 per month per bed; property includes about 25% SSI. Confirmation: Gerry Meglin (805) 646-5533
375 IMPROVED SALE COMPARABLE NO. 5 Name: Carson Oaks (now called Merrill Gardens at Carson Oaks) Location: 6725 Inglewood Avenue, Stockton, CA Assessor's Parcel No.: 081-260-053 (San Joaquin County) Sale Date: 7/27/94 (Doc. No. 87023) Sale Price: $4,200,000 No. of Units: 76 Units Age: 1989 % Private Pay: 100% Size (GBA): 62,733 Square Feet Average Unit Size (GBA/Unit): 612 Square Feet (average unit) Sale Price/Unit: $55,263 Sale Price/SF: $66.95 Occupancy Rate: 95% Gross Operating Income: $1,301,712 Expenses: $781,027 Net Operating Income: $520,685 % Expenses: 60% G.I.M.: 3.23 O.A.R.: 12.4% N.O.I./Unit: $6,851 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Newer facility with large number of one bedroom with full kitchens in an affluent neighborhood; not licensed for assisted living. Confirmation: Lee Haris (415) 391-9220
376 IMPROVED SALE COMPARABLE NO. 6 Name: Park Ridge (now called Merrill Gardens) Location: 2261 Tuolumne Street, Vallejo, CA Assessor's Parcel No.: 0052-330-008 (Solano County) Sale Date: 7/27/94 (Doc. No. 69837) Sale Price: $5,785,000 No. of Units: 93 ACLF; 14 Beds (Licensed AL) Age: 1991 % Private Pay: 100% Size (GBA): 84,989 Square Feet Average Unit Size (GBA/Unit): 654 Square Feet Sale Price/Unit: $62,204 Sale Price/SF: $68.10 Occupancy Rate: Project stabilized at 90%; at sale date 55% Gross Operating Income: $1,632,150 Expenses: $979,290 Net Operating Income: $652,860 % Expenses: 60% G.I.M.: 3.54 O.A.R.: 11.3% N.O.I./Unit: $7,020 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Modern congregate/assisted living with 15 studios, 59 - 1 bedrooms and 19 - 2 bedrooms; located in residential area and bounded by Sutter Solano Medical Center and Crestwood Convalescent Hospital. Confirmation: Lee Haris (415) 391-9220
377 RESTRICTED APPRAISAL REPORT MONTEGO HEIGHTS LODGE 1400 MONTEGO DRIVE WALNUT CREEK, CALIFORNIA AS IS ON MARCH 29, 1996 SLVS FILE NO. 96-04-30.1 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 378 April 4, 1996 American Retirement Villas Properties II, L.P. c/o ARV Assisted Living 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Ms. Sheila Muldoon Re: Montego Heights Lodge 1400 Montego Drive Walnut Creek, California SLVS File No. 96-04-30.1 Ladies and Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice as a restricted appraisal report. This letter report updates a full narrative appraisal report prepared by our firm and dated July 14, 1995. The full narrative report discusses the subject region, neighborhood, site, improvements and market in detail. Therefore, this letter should be used in conjunction with the full narrative appraisal report. This report is intended for use by the client only. This letter report cannot be fully understood properly without a review of the previous full narrative appraisal report and additional information currently contained in the work file of the appraiser. AS IS AT 3/29/96 Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of March 29, 1996, the fee simple total going concern interest of the subject, as is, including the value of favorable financing, has a market value of: EIGHT MILLION NINE HUNDRED SEVENTY FIVE THOUSAND ($8,975,000) DOLLARS 379 Ms. Sheila Muldoon April 4, 1996 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 3/29/96 Real Estate Value $7,250,000 Furniture, Fixtures & Equipment 200,000 Business Value 1,250,000 ---------- Total Going Concern Valuation $8,700,000 ========== Plus: Favorable Financing $ 275,000 ---------- Total Reported Valuation $8,975,000 ==========
As required by the Uniform Standards of Professional Appraisal Practice for a restricted appraisal report, the pages that follow set forth the identification of the property, property rights appraised, assumptions and limiting conditions, the scope of appraisal procedures followed in this restricted appraisal report, discussion and summary of cash flow projections and certification page. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 380 INTRODUCTION PROPERTY IDENTIFICATION The subject site consists of a 213,180 square foot (4.89 gross acres) site located at 1400 Montego Drive in the City of Walnut Creek, Contra Costa County, California. The site is currently improved with a 169 unit/187 bed congregate retirement apartment project known as Montego Heights Lodge. The subject is licensed to accept up to 200 assisted living residents. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject property is currently vested in the name of American Retirement Villas Properties II (ARVP II), a California Limited Partnership. The current owners purchased the subject in November, 1989 for approximately $9,000,000. The subject has not been sold/purchased in the past three years. The subject was built as a senior congregate facility which opened in 1978. Montego Heights reportedly took five years to achieve a full occupancy. The subject, as part of the original conditions of approval and a condition necessary to obtain the favorable HUD financing, was required to allocate 20% of the subject units to "very and low" income residents. This restriction was reportedly waived when the subject was purchased by the current owners allowing a market rate to be charged for all units. The subject underwent a $500,000 renovation in the Spring of 1990. The subject is currently approximately 90.4% occupied (169 beds/187 beds) reflecting the large number of subject units, the subject unit mix and a crowded competitive market environment. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a restricted appraisal report in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of this letter update was made available. Specifically, the procedures performed in this limited report included: 1) a 1996 site inspection noting material changes in the subject region, neighborhood, site, improvements and market (none were noted). These influences on value are described in detail in the 1995 full appraisal report; 2) Updated Income Approach analysis using the current market rents, vacancy, expenses and capitalization rates. Our limited narrative appraisal report does not include an updated Market Analysis (although any potentially new competition to the subject was investigated and an overall review of competition was conducted), Cost Approach or Sales Comparison Approach value conclusions. 381 This restricted appraisal report estimates a value of the fee simple interest in the subject property using only an Income Approach. Determining a value estimate for the subject using Cost and Sales Comparison Approaches was deemed inappropriate and unnecessary for the subject property. This conclusion reflects the difficulty of accurately incorporating depreciation and profit in a value estimate using a Cost Approach and the overall lack of truly comparable sales. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's total fee simple going concern market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject partnership for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 9, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Laura Regnier, administrator. The subject was reinspected on July 14, 1995 by Mary Wiederhold, Appraisal Associate and March 29, 1996 by Wilma Koch, Appraisal Associate. DATE OF APPRAISAL April 4, 1996 DATE OF VALUE March 29, 1996 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. 382 DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C- Appraisals, 34.42 Definitions (f), market value is defined as: "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or 383 undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the 384 subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. SPECIAL CONDITIONS The subject is currently encumbered by an approximately $3,400,000 HUD loan which extends to the year 2018 at a fixed interest rate of 7.5%. Because this interest rate is below the estimated interest rate of current conventional financing (estimated at 8.5%), the subject has a theoretical value over and above the capitalized value of operational cash flows. Caution should be used in interpreting this added value as actual market transactions involving the assumption of below market rate financing are rare. The value of this favorable financing has been added to the going concern value set forth in this report. These issues are discussed and the value of the favorable financing is calculated in a separate section of this report. The subject is licensed as a residential care facility for the elderly (assisted living) for 200 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The subject is currently configured for 189 beds. The inconsistency is explained by the fact that not all of the subject beds provide assisted living services. The appraisers were not provided with a current title report (a 1989 title report is included in the Addenda of this report) to specifically describe all current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Assisted Living. 385 EXECUTIVE SUMMARY
Property Name: Montego Heights Lodge Location: 1400 Montego Drive Walnut Creek, California Assessor's Parcel No.: 140-250-024 (Contra Costa County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on March 29, 1996 Land Area: 4.89 acres (213,180 square feet) gross; 4.2 acres (182,952 square feet) net developable (estimated) Excess Land: None Zoning: C-O, Limited Commercial District Improvements: Type: One, average quality, 2 and 4 story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1978; Improvement Age - 18 Years; Effective Age - 18 years; Remaining Economic Life - 27 years. Size: 169 congregate retirement units currently configured for 189 beds in 99,897 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion in 7/95 Full Narrative Appraisal Overall Capitalization Rate: 11.5% Projected Stabilized Net Income: $999,932 (4/96-3/97)
386 Total Going Concern Market Value, as is, as of March 29, 1996: Cost Approach: Not Used Income Approach: $ 8,700,000* Sales Comparison Approach: Not Used Value Conclusion: $ 8,700,000* ($51,479/Unit) Allocation of Final Value Determination to Components: Market Value As Is - 3/29/96 -------------- Real Estate $ 7,250,000 FF&E 200,000 Business Value 1,250,000 -------------- Total Going Concern Valuation $ 8,700,000* ============== *before addition of value of favorable financing Value of Favorable Financing: $275,000 Total Estimated Marketing Time: 4 Months
387 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (4/96 to 3/97) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at March, 1996 based on the projected April, 1996 to March, 1997 net income. The theory is that the investor purchasing the property in March, 1996 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and previously prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of the full narrative appraisal dated July, 1995. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The March, 1996 census reveals an occupancy of 90.4% or 388 MONTEGO HEIGHTS LODGE SUMMARY OF SUBJECT RENT CENSUS AT 3/14/96 -----------------------------------------
Private-1BR Private-Studio Semi-Private SSI Total ----- (Units) (Units) (Beds) (Beds) ------------- -------------- ------------ ------ Number Units - Rented 22 116 20 11 169 (90.4%) Rent Range $1,800-$2,300 $1,300-$1,450 $825-$1,113 $702 $702-$2,300 Rent Average $1,850 $1,371 $1,002 $702 $1,346 Potential Total Rent-Rented $488,520 $1,908,540 $240,480 $92,664 $2,730,204 Number Units - Vacant (1) 2 11 3 2 18 (9.6%) Rent Range $1,850 $1,400-$1,475 $875 $702 $702-$1,850 Rent Average $1,850 $1,432 $875 $702 $1,304 Total Potential Rent-Vacant $44,400 $189,000 $31,500 $16,848 $281,748 Total Units/Beds 24 127 23 13 187 (100%) Gross Potential Rent-Total $532,920 $2,097,540 $271,980 $109,512 $3,011,952 Per Unit/Bed $1,850 $1,376 $985 $702 $1,342
NOTES: - ------ (1) Vacant units include: Private 1BR - Unit 109/111, 246/248 (2 units); Private Studio - Units 130, 134, 204, 241, 262, 268, 301, 306, 308, 403, 409 (11 units); 427, 428 (18 Units); Semi-Private - Beds 142, 154, 219, 265, 325 (5 Beds); allocated to SSI in ratio of currently leased beds. 389 169 beds out of a maximum current configuration of 189 beds. This occupancy represents an increase from the mid 80%'s over the past 9 months. Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $702 per month and not market determined. Overall and based upon mid 1995 market rate surveys, the subject's private room rents (with and without the assisted living surcharge) are still at March, 1996, generally within the range of the most comparable properties and below the average (for both congregate and assisted living) of all facilities. The subject's congregate studio and one bedroom rents are slightly below the average of all projects surveyed (about 15% to 20%). Congregate semiprivate living is generally not offered at other projects (with the exception of Valley View Lodge, an ARV sister project). The subject's average assisted living rents are also below the average for semiprivate and private rooms (also about 15% to 20%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. The subject's average rents have increased about 4.8% from July, 1995 to March, 1996. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is 90% (and rising) at the current rents. In our opinion, the subject's rents have not been material factors in keeping occupancy below the more typical 92% to 95%. The subject's lower rents are reasonable given the subject's age and condition, large number of units and more monolithic unit mix. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 1.5% during the 4/96 to 3/97 projection period, reflecting market conditions and the subject's history. The 1.5% estimate in the next 12 months represents an average 3% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $420 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 59 residents pay for living assistance at an approximate average of $419 extra rent per month. Our cash flow projections for the subject estimate a stabilized 32% gross utilization (60 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income: 390
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------- ----------- ------------- at 3/96 $419 59 (net) - at 4/96 to 3/97 $430 60 (gross) $309,600
In addition to total potential gross room revenue, we have included miscellaneous income at 1.25% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 3/96 90.4% 9.6% 4/96 to 3/97 (Stabilization) 90.0% 10.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 168.3 residents or an occupancy/vacancy of 90.0% (168.3/187). This conclusion is consistent with the subject's recent occupancy trends, occupancies at similar projects and operator projections. The higher than typical and average market vacancy factor (5% to 8%) reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (lower rents in a more affluent market) and large number of beds (including physical plant deficiencies) mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1994, 1995, and two months of 1996) and budget (1996) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at March, 1996 ($8,700,000 times the tax rate of 1.0371% plus approximately $1,173 in direct assessments). This real estate tax expense 391 MONTEGO HEIGHTS LODGE HISTORICAL INCOME AND EXPENSE -----------------------------
Historical Operator -------------------------------------------------------------- 2 Months Goal Year Ending Year Ending Ending 1996 Budget Revenues 12/94 12/95 2/29/96 Annualized 1996 - -------- ---------- ---------- -------- ---------- ------ Rental Income $2,424,953 $2,590,179 $454,939 $2,775,128 $2,843,582 Assisted Living Income 271,387 277,203 45,676 278,624 328,150 Non-Operating Revenue $ 38,982 $ 35,898 $ 5,752 $ 35,087 $ 36,100 ---------- ---------- -------- ---------- ---------- Total Revenues $2,735,322 $2,903,280 $506,367 $3,088,839 $3,207,832 Expenses (1) Real Estate Taxes $ 110,291 $ 102,720 $ 17,396 $ 106,116 $ 105,417 Insurance 31,714 36,602 6,298 38,418 38,922 G&A 60,293 61,038 9,912 60,463 67,475 Utilities 191,180 208,110 32,397 197,622 210,200 Payroll/Benefits 913,460 944,692 160,434 978,647 996,712 Maintenance 80,636 104,735 12,817 78,184 93,660 Activities 14,889 16,674 2,574 15,701 17,918 Marketing 26,654 32,092 5,417 33,044 28,080 Laundry & Linen 12,974 13,965 2,570 15,677 16,864 Dietary 222,738 228,798 39,414 240,425 242,751 Supplies 48,343 50,010 7,532 45,945 50,592 ---------- ---------- -------- ---------- ---------- Total Operating Expense $1,713,172 $1,799,436 $296,761 $1,810,242 $1,868,591 (62.6%) (62.0%) (58.6%) (58.6%) (58.3%) Net Operating Income $1,022,150 $1,103,844 $209,606 $1,278,597 $1,339,241 ========== ========== ======== ========== ==========
NOTES: - ------ (1) Does not include management fee or replacement reserves. 392 reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.25% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 12% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 7% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 4% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 2% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than typical but reflects the subject's lower occupancy, high turnover (relative to all senior properties) and large number of units, requiring a more intensive marketing effort; Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $8.50 per day per resident (168.3 occupied beds x $8.50/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 6.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 32% of the residents (about $9.32 per resident day for 54 residents); Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($422,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $63,375 is equal to 2.1% of the estimate effective gross income. 393 As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 60.3% of effective gross income or $10,970 per occupied bed (168.3 beds). A comparison to similar congregate/assisted living properties before management fees and reserves is shown on the following page. As illustrated, the projected expenses for the subject are slightly above the average of the expense histories of the projects listed. The subject will always have slightly higher expenses on a percentage of income basis because of its lower revenue base (smaller units, SSI census) and higher on a per patient basis due to the location within a market area of higher operating costs/rents. Our projections consider the experience at the comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The subject falls within the median expense indications for a combination congregate/assisted living project. Finally, a reconciliation of our adjusted period one (4/96 to 3/97) projected expenses to 1995 actual expenses and 1996 budgeted expenses illustrates the following:
Actual Total Expenses (1995) $1,799,436 =========== Operator Budget (1996) $1,868,591 =========== Projected Total Expenses Per SLVS (4/96 to 3/97) $ 2,062,823 Less: Management Fees ($ 153,138) Less: Replacement Reserves ($ 63,375) ----------- Adjusted Projected Total Expenses (4/96 to 3/97) $ 1,846,310 =========== Difference (over 1995 actual, reflects inflation, higher occupancy) +2.6% (under 1996 budget) -1.2%
CAPITALIZATION PROCESS Because Montego Heights Lodge is being appraised as of March, 1996 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of April, 1996 to March, 1997 is capitalized at an overall capitalization rate of 11.5% to get an indicated total property value at March, 1996. This calculation is shown on a following page. 394 MONTEGO HEIGHTS LODGE OPERATING EXPENSE COMPARABLES -----------------------------
National Operator #1 - National Operator #2 - Subject 13 Projects (1995) 12 Projects (1995) Projected ------------------------ ------------------------ -------------------- % of Per % of Per % of Per Expense Category Income Unit Income Unit Income Unit - ---------------- ------ ---- ------ ---- ------ ---- Property Taxes 4.4% $ 838 5.2% $ 792 3.0% $ 541 Insurance 1.1% 249 1.4% 208 1.25% 227 Administration 7.2% 1,454 10.7% 1,632 12.0% 2,184 Activities 5.3% 276 (2) (2) 2.0% 364 Marketing 2.3% 276 3.6% 543 2.0% 364 Plant Operations 5.0% 1,788 10.8% 1,640 11.0% 2,002 Housekeeping 3.2% 563 3.9% 587 6.0% 1,092 Dietary 14.0% 3,128 20.2% 3,073 17.0% 3,103 Assisted Living 1.8% 791 10.3% 1,572 6.0% 1,092 ----- ------ ----- ------- ----- ------- Total Expenses (1) 51.3% $9,963 66.1% $10,047 60.3% $10,969 ==== ====== ==== ======= ==== =======
1st Quartile Median 4th Quartile ------------------- -------------------- ------------------ % of Per % of Per % of Per Income Unit Income Unit Income Unit ------ ---- ------ ---- ------ ---- 1995 National ASHA Survey Congregate 57.3% $7,040 61.2% $ 9,031 63.2% $11,245 Assisted Living 69.7% $9,999 65.4% $12,320 64.7% $15,033
NOTES: - ------ (1) Before management fees and replacement reserves. (2) Included in other functional categories. (3) Caution should be used in analyzing the above data as functional categorization of expenses is not always consistent between properties/operators. 395 We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 10% to 12%. These are illustrated in sales of comparable facilities as shown on a following page. In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 8.5% interest with an amortization term of 25 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .0966. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 16% (per our investment survey). The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .0966 .0676 Equity 0.30 x .16 .0480 ----- 1.0 x Overall Rate .1156 OAR 11.56%
These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.0% (Average) SLVS Investment Survey 12.1% (Assisted Living) Band of Investment 11.6%
396 MONTEGO HEIGHTS LODGE COMPARABLE IMPROVED ACLF/ALF SALES ----------------------------------
Indicated Age/No. Sale Price/ Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF at Sale Rate --- ------------- --------- ---- ---------- ------ -------- --------- --------- 1. The Chanate 1984/ 2/96 $ 7,400,000 $61,667 $ 61.67 85% 11.4% (1) 3250 Chanate Road 120 (Cash Santa Rosa, CA Equivalent) 2. Carlton Plaza 1993/ 12/95 $ 8,228,858 $64,288 $ 78.82 70% 11.0% (1) 3800 Walnut 128 Fremont, CA 3. Vinwood Lodge 1974/ 12/95 $ 4,100,000 $55,405 $ 70.09 92% 10.3% 35 Fenton 74 Livermore, CA 4. Carrington Pointe 1989/ 12/95 $11,411,000 $65,580 $ 72.03 95% 10.7% 1715 East Alluvial 174 Fresno, CA 5. Villa at Palm Desert 1989/ 11/95 $ 6,600,000 $85,714 $114.29 95% 10.4% 44-300 San Pasqual 77 Palm Desert, CA 6. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $ 69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA
(1) estimated at projected full occupancy 397 Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in its lower stable occupancy (90%) and cash flow (including a lower risk SSI census) and considering the subject's market position (below average rents, full assisted living licensing, older physical plant and more monolithic unit mix), which is derived from the subject's established niche as a middle market, average quality assisted living project in the area, and considering the affluent local market and overall current market conditions, we have concluded that 11.5% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at March 29, 1996 of $8,695,061, rounded to $8,700,000 ($51,479/unit). 398 MONTEGO HEIGHTS LODGE PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (4/96-3/97) ---------- Average Occupancy 90.0%(168.3 Beds) Average Net Rental (All Beds) $ 1,362 Potential Gross Rent Income - 1BR Private - 24 Units at $1,850/Mo. Avg. $ 540,792 Studio Private - 127 Units at $1,376/Mo. Avg. 2,129,028 Semiprivate - 23 Beds at $985/Mo. Avg. 275,938 SSI - 13 Beds at $702/Mo. Avg. $ 109,512 ---------- Potential Gross Rent Income $3,055,270 Plus: Assisted Living Surcharges (60 Beds at $430/Mo.) $ 309,600 Plus: Miscellaneous Income (1.25% of PGRI) $ 38,191 ---------- Potential Gross Income $3,403,061 Less: Stabilized Vacancy & Collection Losses - 10% $ (340,306) ---------- Effective Gross Income $3,062,755
Expenses - % of EGI -------- Real Estate Taxes - $ 91,401 Insurance 1.25% 38,284 Management 5.0% 153,138 G&A 12.0% 367,531 Utilities 7.0% 214,393 Maintenance 4.0% 122,510 Activity & Trans. 2.0% 61,255 Marketing 2.0% 61,255 Housekeeping 6.0% 183,765 Dietary $8.50/PRD 522,151 Personal Care 6.0% 183,765 Replacement Reserves - $ 63,375 ----------- Total Expenses $2,062,823 (67.4%) Stabilized Net Operating Income $ 999,932 Overall Capitalization Rate .115 ----------- Capitalized Value (Fee Simple) $ 8,695,061 =========== Called $ 8,700,000 Per Unit $ 51,479
399 VALUATION OF FAVORABLE FINANCING The preceding valuation assumes conventional market financing. However, the subject includes favorable financing in the form of a deed of trust issued in 1978 ($3,683,200, 40 year note). The current balance due of the note is approximately $3,403,894. The present value of this financing must be added to our valuation estimates described above because a third party buyer of the subject should be willing to pay for the debt service savings accruing from this assumable note. Our estimate of the effect of the favorable financing is illustrated on the following page. These assumptions are as follows: Note Principal @ 3/96: $3,403,894 Interest Rate: 7.5%, Fixed Note Term: 8/2018, Assumable Conventional Financing - Interest Rate: 8.5%, Fixed To calculate the value of this favorable financing, we have extensively surveyed leading lenders (REITS, conventional banks, pension funds, FANNIE MAE lenders) in the senior housing industry to determine a conventional financing interest rate. The consensus of these lenders is that although conventional taxable financing of any projects and senior projects in particular is still difficult in early 1996, that an average taxable interest rate of 8.5% to 9.0% would not be considered unreasonable given the specialized nature of a senior housing project. Therefore, considering recent downward trends in interest rates for senior housing properties, we have estimated a current market interest rate of 8.5%. Our calculations estimate the present value of the remaining monthly interest payment on net funds to be received from the bond financing discounted by the market interest rate less an approximation of the incremental costs to be incurred as part of the HUD financing compared to conventional financing (annual audits) and the current value of the current balance of required reserves. The total differential or contribution to value from the favorable financing is estimated at $273,056, rounded to $275,000 as calculated on the following page. 400 MONTEGO HEIGHTS LODGE VALUATION OF FAVORABLE FINANCING --------------------------------
Present value of financing at market rate (8.5%): $3,403,896 Present value of financing at below market rate (7.5%): Present value of $26,171 (1) monthly payment for 22.3 remaining years at 8.5% market rate $3,120,267 ---------- Difference in present value of financing $ 283,629 Less: $6,000/year annual HUD audit charges (through 2018) discounted to 4/96 at 8.5% $ (57,395) Plus: Present value of replacement reserve balance at 8/18 ($92,011) discounted to 4/96 at 5.0% (8.5% market interest rate less 3.5% estimated interest earned on escrow funds) $ 46,822 ---------- Net Difference in present value of financing $ 273,056 ========== Called $ 275,000
(1) Monthly payment for $3,683,200, 40 years, 7.5% interest rate plus reserve obligations. 401 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this restricted appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this restricted appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this restricted appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This restricted appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This restricted appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Wilma Koch, Appraisal Associate provided significant professional assistance to the persons signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Wilma Koch, Appraisal Associate on March 29, 1996. 402 12. The concluded total going concern market value estimate of the fee simple interest of Montego Heights Lodge, including the value of favorable financing, is as follows: MARKET VALUE "AS IS" (MARCH 29, 1996): EIGHT MILLION NINE HUNDRED SEVENTY FIVE THOUSAND ($8,975,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - ------------------------- Michael G. Boehm, MAI 403 A D D E N D A 404 RESTRICTED APPRAISAL REPORT RETIREMENT INN - FULLERTON 1621 E. COMMONWEALTH AVENUE FULLERTON, CALIFORNIA AS IS ON APRIL 5, 1996 SLVS FILE NO. 96-04-30.3 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 405 April 5, 1996 American Retirement Villas Properties II, L.P. c/o ARV Assisted Living 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Ms. Sheila Muldoon Re: Retirement Inn - Fullerton 1621 East Commonwealth Avenue Fullerton, California SLVS File No. 96-04-30.3 Ladies and Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice as a restricted appraisal report. This letter report updates a full narrative appraisal report prepared by our firm and dated August 1, 1995. The full narrative report discusses the subject region, neighborhood, site, improvements and market in detail. Therefore, this letter should be used in conjunction with the full narrative appraisal report. This report is intended for use by the client only. This letter report cannot be fully understood properly without a review of the previous full narrative appraisal report and additional information currently contained in the work file of the appraiser. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of April 5, 1996, the fee simple total going concern interest of the subject, as is, has a market value of: TWO MILLION FOUR HUNDRED TWENTY FIVE THOUSAND ($2,425,000) DOLLARS 406 Ms. Sheila Muldoon April 5, 1996 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 4/5/96 ------------ Real Estate Value $1,750,000 Furniture, Fixtures & Equipment 125,000 Business Value 550,000 ---------- Total Going Concern Valuation $2,425,000 ==========
As required by the Uniform Standards of Professional Appraisal Practice for a restricted appraisal report, the pages that follow set forth the identification of the property, property rights appraised, assumptions and limiting conditions, the scope of appraisal procedures followed in this restricted appraisal report, discussion and summary of cash flow projections and certification page. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 407 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 43,124 square foot (0.99 acres) site that is improved with a 68 unit congregate senior housing project (including up to 99 licensed assisted living beds) known as Retirement Inn - Fullerton. The subject has a designated street address of 1621 East Commonwealth Avenue, Fullerton, Orange County, California. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject site, all improvements and furnishings comprising Retirement Inn - Fullerton is currently vested in American Retirement Villas Properties II, L.P. (ARVP II). The subject was purchased by ARVP II in the late 1980's as part of a larger group of senior properties from the Retirement Inns of America (Avon Products, Inc.). The subject has not been sold/purchased within the last three years. The subject retirement building was originally planned and developed in the early 1970's. The existing subject improvements became available for occupancy in 1973. The subject's recent history includes effective full occupancies despite a current slightly depressed occupancy of 83.5% (71/85 total beds) reflecting a competitive market area and weak local real estate market and economy. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a restricted appraisal report in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of this letter update was made available. Specifically, the procedures performed in this limited report included: 1) a 1996 site inspection noting material changes in the subject region, neighborhood, site, improvements and market (none were noted). These influences on value are described in detail in the 1995 full appraisal report; 2) Updated Income Approach analysis using the current market rents, vacancy, expenses and capitalization rates. Our limited narrative appraisal report does not include an updated Market Analysis (although any potentially new competition to the subject was investigated and an overall review of competition was conducted), Cost Approach or Sales Comparison Approach value conclusions. This restricted appraisal report estimates a value of the fee simple interest in the subject property using only an Income Approach. Determining a value estimate for the subject using Cost and Sales Comparison Approaches was deemed inappropriate and unnecessary for the subject property. 408 This conclusion reflects the difficulty of accurately incorporating depreciation and profit in a value estimate using a Cost Approach and the overall lack of truly comparable sales. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's total fee simple going concern market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P. in an evaluation of the subject for the possible sale to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 4, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Lana Hammers, Administrator and April 5, 1996 by Wilma Koch, Appraisal Associate. DATE OF APPRAISAL April 5, 1996 DATE OF VALUE April 5, 1996 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C- Appraisals, 34.42 Definitions (f), market value is defined as: 409 "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility 410 of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. 411 SPECIAL CONDITIONS The subject is licensed as a residential care facility for the elderly (assisted living) for up to a maximum of 99 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The appraisers were not provided with a title report to specifically describe the site's legal description nor any current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Assisted Living. 412 EXECUTIVE SUMMARY
Property Name: Retirement Inn - Fullerton Location: 1621 East Commonwealth Avenue Fullerton, California Assessor's Parcel No.: 269-106-016 (Orange County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on April 5, 1996 Land Area: 43,124 Square Feet, 0.99 Acres Excess Land: None Zoning: R-3 (Fullerton) a multi family zoning district Improvements: Type: One, average quality, two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1973; Improvement Age - 23 Years; Effective Age - 23 Years; Remaining Economic Life - 22 Years Size: 68 congregate retirement apartment units (85 currently configured maximum bed count) and common areas in approximately 38,155 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion in 8/95 Full Narrative Appraisal Report Capitalization Rate: 11.5% Projected Stabilized Net Income: $277,547 (4/96-3/97)
413 Total Going Concern Market Value, as is, as of April 5, 1996: Cost Approach: Not Used Income Approach: $2,425,000 Sales Comparison Approach: Not Used Value Conclusion: $2,425,000 ($35,662/unit) Allocation of Final Value Determination to Components: Market Value As Is - 4/5/96 ---------- Real Estate $1,750,000 FF&E 125,000 Business Value 550,000 ---------- Total Going Concern Valuation $2,425,000 ==========
Total Estimated Marketing Time: 4 Months 414 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (4/96 to 3/97) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at March, 1996 based on the projected April, 1996 to March, 1997 net income. The theory is that the investor purchasing the property in March, 1996 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and previously prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of the full narrative appraisal dated August, 1995. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The March, 1996 census reveals an occupancy of 83.5% or 415 RETIREMENT INN - FULLERTON SUMMARY OF SUBJECT RENT CENSUS AT 3/20/96
Private-Studio Semi-Private SSI Total (Units) (Beds) (Beds) ----- -------------- ------------ ------ Number Units/Beds - Rented 40 11 20 71 (83.5%) Rent Range $1,150-$1,485 $850-$950 $682-$802 $682-$1,415 Rent Average $1,338 $880 $699 $1,087 Potential Total Rent-Rented $642,060 $116,220 $167,760 $926,040 Number Units/Beds - Vacant (1) 11 1 2 14 (16.4%) Rent Range $1,250 $800 $702 $702-$1,250 Rent Average $1,250 $800 $702 $1,140 Total Potential Rent-Vacant $165,000 $9,600 $16,848 $191,448 Total Units/Beds 51 12 22 85 (100%) Gross Potential Rent-Total $807,060 $125,820 $184,608 $1,117,488 Per Unit/Bed $1,319 $874 $699 $1,096
NOTES: (1) Vacant units include: Private Studio - Units 107, 123, 202, 206, 210, 216, 225, 229, 231, 234, 235 (11 Units); Semi-Private - Beds 228, 237, 239 (3 Beds); vacant beds allocated between semi-private and SSI in ratio of leased semi-private/SSI beds. 416 71 beds out of a maximum current configuration of 85 beds. This occupancy represents a decrease from the low 90%'s over the past 9 months. Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $699 per month and not market determined. Overall and based upon mid 1995 market rate surveys, the subject's private room rents (with and without the assisted living surcharge) are still at March, 1996, generally within the range of the most comparable properties and near the average (for both congregate and assisted living) of all facilities. The subject's congregate studio and one bedroom rents are also near the average of all projects surveyed. The subject's average assisted living rents are slightly below the average for semiprivate and private rooms (about 10%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. The subject's average rents have not increased on a net basis from July, 1995 to March, 1996. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history (mid 80%'s to low 90%'s) and its current occupancy, which is temporarily a slightly depressed 83% at the current rents. In our opinion, the subject's rents have not been material factors in keeping occupancy below the more typical 92% to 95%. The subject's lower rents are reasonable given the subject's age and condition and more monolithic unit mix. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 1.5% during the 4/96 to 3/97 projection period, reflecting market conditions and the subject's history. The 1.5% estimate in the next 12 months represents an average 3% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $425 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 21 residents pay for living assistance at an approximate average of $422 extra rent per month. Our cash flow projections for the subject estimate a stabilized 29% gross utilization (25 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income: 417
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------- ----------- ------------- @ 3/96 $422 21 (net) - @ 4/96 to 3/97 $450 25 (gross) $135,000
In addition to total potential gross room revenue, we have included miscellaneous income at 1.0% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is @ 3/96 83.5% 16.5% 4/96 to 3/97 (Stabilization) 90.0% 10.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 76.5 residents or an occupancy/vacancy of 90.0% (76.5/85). This conclusion is consistent with the subject's recent occupancy trends, occupancies at similar projects and operator projections. The difference in our stabilized occupancy level and the current occupancy is not material (5.5 beds) and within month to month occupancy fluctuations. The higher than typical and average market vacancy factor (5% to 8%) reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (lower rents in a more affluent market) and average quality mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1994, 1995, and two months of 1996) and budget (1996) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: 418 RETIREMENT INN - FULLERTON HISTORICAL INCOME AND EXPENSE
Historical Operator 2 Months Goal Year Ending Year Ending Ending 1996 Budget Revenues 12/94 12/95 2/29/96 Annualized 1996 - -------- ----------- ----------- -------- ---------- -------- Rental Income $ 956,057 $1,024,980 $161,465 $ 984,937 $1,087,788 Assisted Living Income 74,403 126,187 20,509 125,105 121,740 Non-Operating Revenue $ 8,967 $ 8,474 $ 785 $ 4,789 $ 10,643 ---------- ---------- -------- ----------- ---------- Total Revenues $1,039,427 $1,159,641 $182,759 $1,114,830 $1,220,171 Expenses (1) Real Estate Taxes $ 33,323 $ 38,391 $ 3,925 $ 23,943 $ 33,327 Insurance 12,518 13,833 2,412 14,713 14,906 G&A 36,061 31,209 5,986 36,515 33,400 Utilities 73,370 75,256 10,677 65,130 77,705 Payroll/Benefits 430,765 421,809 72,510 442,311 453,717 Maintenance 37,523 49,928 8,512 51,923 49,300 Activities 9,529 8,483 1,111 6,777 8,559 Marketing 7,440 11,746 1,876 11,444 10,200 Laundry & Linen 8,527 8,195 1,808 11,029 11,412 Dietary 103,131 106,771 14,518 88,560 107,322 Supplies 24,000 23,164 3,263 19,904 23,845 ---------- ---------- -------- ---------- ---------- Total Operating Expense $ 776,187 $ 788,785 $126,598 $ 772,249 $ 823,693 (74.7%) (68.0%) (69.3%) (69.3%) (67.5%) Net Operating Income $ 263,240 $ 370,856 $ 56,161 $ 342,581 $ 396,478 ========== ========== ======== ========== ==========
NOTES: (1) Does not include management fee or replacement reserves. 419 Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at March, 1996 ($2,425,000 times the tax rate of 1.00968% plus approximately $6,008 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.25% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 12% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 6.5% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 5% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 3% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than typical but reflects the subject's lower occupancy, high turnover (relative to all senior properties) and large number of units, requiring a more intensive marketing effort; Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $10.00 per day per resident (76.5 occupied beds x $10.00/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 6.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 26% of the residents (about $7.27 per resident day for 23 residents); 420 Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($170,000 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $25,500 is equal to 2.2% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 68.7% of effective gross income or $10,322 per occupied bed (76.5 beds). A comparison to similar congregate/assisted living properties before management fees and reserves is shown on the following page. As illustrated, the projected expenses for the subject are slightly above the average of the expense histories of the projects listed. The subject will always have higher expenses on a percentage of income basis because of its lower revenue base (smaller units, lesser number of units, SSI census) and higher on a per patient basis due to the location within a market area of higher operating costs/rents. Our projections consider the experience at the comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The subject falls with the median operating costs for a combination congregate/ assisted living project. Finally, a reconciliation of our adjusted period one (4/96 to 3/97) projected expenses to 1995 actual expenses and 1996 budgeted expenses illustrates the following: Actual Total Expenses (1995) $ 788,785 ========= Operator Budget (1996) $ 823,693 ========= Projected Total Expenses Per SLVS (4/96 to 3/97) $ 872,712 Less: Management Fees $( 57,513) Less: Replacement Reserves $( 25,500) --------- Adjusted Projected Total Expenses (4/96 to 3/97) $ 789,699 ========= Difference (over 1995 actual, reflects lower occupancy) +0.1% (under 1996 budget) -4.2%
421 RETIREMENT INN - FULLERTON OPERATING EXPENSE COMPARABLES
National Operator #1 - National Operator #2 - Subject 13 Projects (1995) 12 Projects (1995) Projected ---------------------- ---------------------- --------------------- % of Per % of Per % of Per Expense Category Income Unit Income Unit Income Unit - ---------------- ------ ---- ------ ---- ------ ---- Property Taxes 4.4% $ 838 5.2% $ 792 2.6% $ 395 Insurance 1.1% 249 1.4% 208 1.25% 188 Administration 7.2% 1,454 10.7% 1,632 12.0% 1,804 Activities 5.3% 276 (2) (2) 3.0% 451 Marketing 2.3% 276 3.6% 543 2.0% 301 Plant Operations 5.0% 1,788 10.8% 1,640 11.5% 1,729 Housekeeping 3.2% 563 3.9% 587 6.0% 902 Dietary 14.0% 3,128 20.2% 3,073 24.3% 3,650 Assisted Living 1.8% 791 10.3% 1,572 6.0% 902 ----- ------ ----- ------- ----- ------- Total Expenses (1) 51.3% $9,963 66.1% $10,047 68.7% $10,322 ===== ====== ===== ======= ===== =======
1st Quartile Median 4th Quartile ------------------- -------------------- ------------------ % of Per % of Per % of Per Income Unit Income Unit Income Unit ------ ---- ------ ---- ------ ---- 1995 National ASHA Survey Congregate 57.3% $7,040 61.2% $ 9,031 63.2% $11,245 Assisted Living 69.7% $9,999 65.4% $12,320 64.7% $15,033
NOTES: (1) Before management fees and replacement reserves. (2) Included in other functional categories. (3) Caution should be used in analyzing the above data as functional categorization of expenses is not always consistent between properties/operators. 422 CAPITALIZATION PROCESS Because Retirement Inn - Fullerton is being appraised as of March, 1996 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of April, 1996 to March, 1997 is capitalized at a rate of 11.5% to get an indicated total property value at April, 1996. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 10% to 12%. These are illustrated in sales of comparable facilities as shown on a following page. In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 8.5% interest with an amortization term of 25 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .0966. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 16% (per our investment survey). The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .0966 .0676 Equity 0.30 x .16 .0480 ----- 1.0 x Overall Rate .1156 OAR 11.56%
423 RETIREMENT INN - FULLERTON COMPARABLE IMPROVED ACLF/ALF SALES
Indicated Age/No. Sale Price/ Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF @ Sale Rate - --- ------------- --------- ---- ---------- ------ -------- --------- --------- 1. The Chanate 1984/ 2/96 $ 7,400,000 $61,667 $61.67 85% 11.4% (1) 3250 Chanate Road 120 (Cash Santa Rosa, CA Equivalent) 2. Carlton Plaza 1993/ 12/95 $ 8,228,858 $64,288 $78.82 70% 11.0% (1) 3800 Walnut 128 Fremont, CA 3. Vinwood Lodge 1974/ 12/95 $ 4,100,000 $55,405 $70.09 92% 10.3% 35 Fenton 74 Livermore, CA 4. Carrington Pointe 1989/ 12/95 $11,411,000 $65,580 $72.03 95% 10.7% 1715 East Alluvial 174 Fresno, CA 5. Villa at Palm Desert 1989/ 11/95 $ 6,600,000 $85,714 $114.29 95% 10.4% 44-300 San Pasqual 77 Palm Desert, CA 6. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA
(1) estimated at projected full occupancy 424 These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.0% (Average) SLVS Investment Survey 12.1% (Assisted Living) Band of Investment 11.6%
Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in its lower stable occupancy (90%) and cash flow (including a lower risk SSI census) and considering the subject's market position (below average rents, full assisted living licensing, older physical plant and more monolithic unit mix), which is derived from the subject's established niche as a middle market, average quality assisted living project in the area, and considering the affluent local market and overall current market conditions, we have concluded that 11.5% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at April 5, 1996 of $2,413,452, rounded to $2,425,000 ($35,662/unit). 425 RETIREMENT INN - FULLERTON PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (4/96-3/97) ----------- Average Occupancy (All Beds) 90.0% (76.5 Beds) Average Net Rental (All Beds) $ 1,110 Potential Gross Rent Income - Studio Private - 51 Beds at $1,319/Mo. Avg. $ 819,468 Semiprivate - 12 Beds at $874/Mo. Avg. 127,744 SSI - 22 Beds at $699/Mo. Avg. $ 184,536 ---------- Potential Gross Rent Income $1,131,748 Plus: Assisted Living Surcharges (25 Beds at $450/Mo.) $ 135,000 Plus: Miscellaneous Income (1% of PGRI) $ 11,317 ---------- Potential Gross Income $1,278,065 Less: Stabilized Vacancy & Collection Losses - 10% ($ 127,806) ---------- Effective Gross Income $1,150,259 Expenses - % of EGI -------- Real Estate Taxes - $ 30,240 Insurance 1.25% 14,378 Management 5.0% 57,513 G&A 12.0% 138,031 Utilities 6.5% 74,767 Maintenance 5.0% 57,513 Activity & Trans. 3.0% 34,508 Marketing 2.0% 23,005 Housekeeping 6.0% 69,016 Dietary $10.00/PRD 279,225 Personal Care 6.0% 69,016 Replacement Reserves - $ 25,500 ---------- Total Expenses $ 872,712 (75.9%) Stabilized Net Operating Income $ 277,547 Overall Capitalization Rate .115 ---------- Capitalized Value $2,413,452 ========== Called $2,425,000 Per Unit $ 35,662
426 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this restricted appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this restricted appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this restricted appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This restricted appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This restricted appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Wilma Koch, Appraisal Associate provided significant professional assistance to the persons signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Wilma Koch, Appraisal Associate on April 5, 1996. 427 12. The concluded total going concern market value estimate of the fee simple interest of Retirement Inn - Fullerton, is as follows: MARKET VALUE "AS IS" (APRIL 5, 1996): TWO MILLION FOUR HUNDRED TWENTY FIVE THOUSAND ($2,425,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - ------------------------- Michael G. Boehm, MAI 428 A D D E N D A 429 RESTRICTED APPRAISAL REPORT RETIREMENT INN - DALY CITY 501 KING DRIVE DALY CITY, CALIFORNIA AS IS ON MARCH 29, 1996 SLVS FILE NO. 96-04-30.4 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 430 April 4, 1996 American Retirement Villas Properties II, L.P. c/o ARV Assisted Living 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Ms. Sheila Muldoon Re: Retirement Inn - Daly City 501 King Drive Daly City, California SLVS File No. 96-04-30.4 Ladies and Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice as a restricted appraisal report. This letter report updates a full narrative appraisal report prepared by our firm and dated July 13, 1995. The full narrative report discusses the subject region, neighborhood, site, improvements and market in detail. Therefore, this letter should be used in conjunction with the full narrative appraisal report. This report is intended for use by the client only. This letter report cannot be fully understood properly without a review of the previous full narrative appraisal report and additional information currently contained in the work file of the appraiser. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of March 29, 1996, the fee simple total going concern interest of the subject, as is, has a market value of: THREE MILLION FOUR HUNDRED SEVENTY FIVE THOUSAND ($3,475,000) DOLLARS 431 Ms. Sheila Muldoon April 4, 1996 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 3/29/96 ------------ Real Estate Value $2,880,000 Furniture, Fixtures & Equipment 120,000 Business Value 475,000 ---------- Total Going Concern Valuation $3,475,000 ==========
As required by the Uniform Standards of Professional Appraisal Practice for a restricted appraisal report, the pages that follow set forth the identification of the property, property rights appraised, assumptions and limiting conditions, the scope of appraisal procedures followed in this restricted appraisal report, discussion and summary of cash flow projections and certification page. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 432 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 50,181 square foot (1.15 acres) site that is improved with a 95 unit congregate senior housing project (including up to 120 licensed assisted living beds) project known as Retirement Inn - Daly City. The subject has a designated street address of 501 King Drive, Daly City, San Mateo County, California. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject site, all improvements and furnishings comprising Retirement Inn - Daly City is currently vested in American Retirement Villas Properties II, L.P. (ARVP II). The subject was acquired as part of a larger package of senior properties from Retirement Inns of America (Avon Products, Inc.) in 1989. The subject has not been sold/purchased within the last three years. The subject retirement building was originally planned and developed in the mid 1970's. The existing subject improvements became available for occupancy in 1975. In approximately 1990, a small second floor addition was completed which included the construction of several small administrative offices, adjacent to the auditorium. The subject's recent history includes less than full occupancies in the early 1990's and rising to a current occupancy of 86.9% (93/107 total beds) reflecting a competitive market area. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a restricted appraisal report in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of this letter update was made available. Specifically, the procedures performed in this limited report included: 1) a 1996 site inspection noting material changes in the subject region, neighborhood, site, improvements and market (none were noted). These influences on value are described in detail in the 1995 full appraisal report; 2) Updated Income Approach analysis using the current market rents, vacancy, expenses and capitalization rates. Our limited narrative appraisal report does not include an updated Market Analysis (although any potentially new competition to the subject was investigated and an overall review of competition was conducted), Cost Approach or Sales Comparison Approach value conclusions. This restricted appraisal report estimates a value of the fee simple interest in the subject property using only an Income Approach. Determining a value estimate for the subject using Cost and 433 Sales Comparison Approaches was deemed inappropriate and unnecessary for the subject property. This conclusion reflects the difficulty of accurately incorporating depreciation and profit in a value estimate using a Cost Approach and the overall lack of truly comparable sales. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's total fee simple going concern market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on July 13, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. May Sunglao, Administrator and on March 29, 1996 by Wilma Koch, Appraisal Associate. DATE OF APPRAISAL April 4, 1996 DATE OF VALUE March 29, 1996 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C-Appraisals, 34.42 Definitions (f), market value is defined as: 434 "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 435 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. 436 SPECIAL CONDITIONS The subject is licensed as a residential care facility for the elderly (assisted living) for up to a maximum of 120 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The appraisers were not provided with a title report describing all current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Assisted Living. 437 EXECUTIVE SUMMARY Property Name: Retirement Inn - Daly City Location: 501 King Drive Daly City, California Assessor's Parcel No.: 091-362-006 (San Mateo County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on March 29, 1996 Land Area: 50,181 Square Feet, 1.15 Acres Excess Land: None Zoning: R-3 (Daly City) a multi-family housing zoning district, allowing the subject with a conditional use permit. Improvements: Type: One, average quality, two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1975; Effective Age - 21 Years; Remaining Economic Life - 24 Years Size: 95 congregate retirement apartment units (107 currently configured maximum bed count) and common areas in approximately 36,874 square feet of gross building area. Condition: Average H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion in 7/95 Full Narrative Appraisal Report Capitalization Rate: 11.5% Projected Stabilized Net Income: $398,383 (4/96-3/97) 438 Total Going Concern Market Value, as is, as of March 29, 1996: Cost Approach: Not Used Income Approach: $3,475,000 Sales Comparison Approach: Not Used Value Conclusion: $3,475,000 ($36,579/unit)
Allocation of Final Value Determination to Components: Market Value As Is - 3/29/96 ------------ Real Estate $2,880,000 FF&E 120,000 Business Value 475,000 ---------- Total Going Concern Valuation $3,475,000 ==========
Total Estimated Marketing Time: 4 Months 439 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (4/96 to 3/97) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at March, 1996 based on the projected April, 1996 to March, 1997 net income. The theory is that the investor purchasing the property in March, 1996 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and previously prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of the full narrative appraisal dated July, 1995. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The March, 1996 census reveals an occupancy of 86.9% or 440 RETIREMENT INN - DALY CITY SUMMARY OF SUBJECT RENT CENSUS at 3/19/96
Private-Studio Semi-Private SSI Total (Units) (Beds) (Beds) ----- ------- ------ ------ Number Units/Beds - Rented 72 9 12 93 (86.9%) Rent Range $838-$1,550 $775-$913 $682-$702 $682-$1,550 Rent Average $1,165 $808 $699 $1,070 Potential Total Rent-Rented $1,006,500 $87,300 $100,608 $1,194,408 Number Units/Beds - Vacant (1) 11 1 2 14 (13.1%) Rent Range $1,925-$1,350 $825 $702 $702-$1,350 Rent Average $1,161 $825 $702 $1,072 Total Potential Rent-Vacant $153,300 $9,900 $16,848 $180,048 Total Units/Beds 83 10 14 107 (100%) Gross Potential Rent-Total $1,159,800 $97,200 $117,456 $1,374,456 Per Unit/Bed $1,164 $810 $699 $1,070
NOTES: (1) Vacant units include: Private - Units 104, 127, 132, 138, 141, 143, 144, 213, 215, 229, 231 (11 units); Semiprivate Studio - Beds 109, 128, 234 (3 beds), allocated to SSI in ratio of currently leased beds. 441 93 beds out of a maximum current configuration of 107 beds. This occupancy represents a slight decrease from the low 90%'s over the past 9 months. Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. All SSI rents are fixed by governmental agency at $699 per month and not market determined. Overall and based upon mid 1995 market rate surveys, the subject's private room rents (with and without the assisted living surcharge) are still at March, 1996, generally within the range of the most comparable properties and below the average (for both congregate and assisted living) of all facilities. The subject's congregate studio and one bedroom rents are well below the average of all projects surveyed (about 25%). Congregate semiprivate living is generally not offered at other projects (with the exception of Retirement Inn - Burlingame, an ARV sister project). The subject's average assisted living rents are also below the average for semiprivate and private rooms (about 40%). Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. The subject's average rents have increased about 2.6% from July, 1995 to March, 1996. In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is 87% (and slightly fluctuating) at the current rents. In our opinion, the subject's rents have not been material factors in keeping occupancy below the more typical 92% to 95%. The subject's lower rents are reasonable given the subject's age and condition, shared baths in most units and more monolithic unit mix. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit/bed type noted above) are forecast to increase 1.5% during the 4/96 to 3/97 projection period, reflecting market conditions and the subject's history. The 1.5% estimate in the next 12 months represents an average 3% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. SSI rates are conservatively forecasted to remain at current levels in the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $440 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 27 residents pay for living assistance at an approximate average of $436 extra rent per month. Our cash flow projections for the subject estimate a stabilized 28% gross utilization (30 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income: 442
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- ------------- at 3/96 $436 27 (net) - at 4/96 to 3/97 $450 30 (gross) $162,000
In addition to total potential gross room revenue, we have included miscellaneous income at 1.5% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is at 3/96 86.9% 13.1% 4/96 to 3/97 (Stabilization) 90.0% 10.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 96.3 residents or an occupancy/vacancy of 90.0% (96.3/107). This conclusion is consistent with the subject's recent occupancy trends, occupancies at similar projects and operator projections. The difference between the projected stabilized occupancy of 96.3 beds and the current occupancy of 93 beds is not material. The higher than typical and average market vacancy factor (5% to 8%) reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (lower rents in a modestly affluent market) and large number of small units (including physical plant deficiencies) mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1994, 1995, and two months of 1996) and budget (1996) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: 443 RETIREMENT INN - DALY CITY HISTORICAL INCOME AND EXPENSE
Historical ----------------------------------------------------------- Operator 2 Months Goal Year Ending Year Ending Ending 1996 Budget Revenues 12/94 12/95 2/29/96 Annualized 1996 - -------- ----- ----- ------- ---------- ---- Rental Income $1,167,966 $1,225,595 $201,347 $1,228,217 $1,338,443 Assisted Living Income 88,795 115,587 25,155 153,446 162,200 Non-Operating Revenue $ 15,675 $ 15,624 $ 3,276 $ 19,984 $ 18,372 ---------- ---------- -------- ---------- ---------- Total Revenues $1,272,396 $1,356,806 $229,778 $1,401,646 $1,518,965 Expenses (1) Real Estate Taxes $ 33,618 $ 34,915 $ 8,991 $ 54,845 $ 56,612 Insurance 14,648 16,343 2,061 12,572 16,921 G&A 27,415 29,247 5,848 35,673 31,560 Utilities 86,722 89,195 14,460 88,206 89,025 Payroll/Benefits 469,298 455,650 67,737 413,196 473,028 Maintenance 28,588 52,055 4,768 29,085 36,240 Activities 9,963 10,501 1,464 8,930 9,927 Marketing 12,501 16,065 2,570 17,507 16,200 Laundry & Linen 7,306 8,538 1,424 8,686 9,927 Dietary 125,372 119,356 20,419 124,556 123,648 Supplies 32,172 30,156 4,211 25,687 27,575 ---------- ---------- -------- ---------- ---------- Total Operating Expense $ 847,604 $ 862,021 $134,253 $ 818,943 $ 890,663 (66.6%) (63.5%) (58.4%) (58.4%) (58.6%) Net Operating Income $ 424,792 $ 494,785 $ 95,525 $ 582,703 $ 628,302 ========== ========== ======== ========== ==========
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 444 Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at March, 1996 ($3,475,000 times the tax rate of 1.00% plus approximately $12,854 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.25% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; General and Administrative - estimated at 10% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 6.5% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 4% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 3% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than typical but reflects the subject's lower occupancy, high turnover (relative to all senior properties) and large number of less attractive units, requiring a more intensive marketing effort; Housekeeping - estimated at 6% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $9.00 per day per resident (96.3 occupied beds x $9.00/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 6.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 28% of the residents (about $8.63 per resident day for 27 residents); 445 Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($267,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $35,625 is equal to 2.5% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 64.4% of effective gross income or $9,484 per occupied bed (96.3 beds). A comparison to similar congregate/assisted living properties before management fees and reserves is shown on the following page. As illustrated, the projected expenses for the subject are slightly below the average of the expense histories of the projects listed. The subject will always have slightly higher expenses on a percentage of income basis because of its lower revenue base (smaller units, SSI census) and lower on a per patient basis due to the location within a market area of lower operating costs/rents. Our projections consider the experience at the comparable properties and historical costs incurred. On the following page, we have illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The subject falls within the median operating costs of a combination congregate/ assisted living project. Finally, a reconciliation of our adjusted period one (4/96 to 3/97) projected expenses to 1995 actual expenses and 1996 budgeted expenses illustrates the following: Actual Total Expenses (1995) $ 862,021 =========== Operator Budget (1996) $ 890,663 =========== Projected Total Expenses Per SLVS (4/96 to 3/97) $ 1,019,761 Less: Management Fees $ (70,907) Less: Replacement Reserves $ (35,625) ----------- Adjusted Projected Total Expenses (4/96 to 3/97) $ 913,229 =========== Difference (over 1995 actual, reflects inflation, higher occupancy) +5.9% (over 1996 budget) +2.5%
446 RETIREMENT INN - DALY CITY OPERATING EXPENSE COMPARABLES
National Operator #1 - National Operator #2 - Subject 13 Projects (1995) 12 Projects (1995) Projected ------------------ ------------------ --------- % of Per % of Per % of Per Expense Category Income Unit Income Unit Income Unit - ---------------- ------ ---- ------ ---- ------ ---- Property Taxes 4.4% $ 838 5.2% $ 792 3.3% $ 492 Insurance 1.1% 249 1.4% 208 1.25% 184 Administration 7.2% 1,454 10.7% 1,632 10.0% 1,473 Activities 5.3% 276 (2) (2) 3.0% 442 Marketing 2.3% 276 3.6% 543 2.0% 295 Plant Operations 5.0% 1,788 10.8% 1,640 10.5% 1,546 Housekeeping 3.2% 563 3.9% 587 6.0% 884 Dietary 14.0% 3,128 20.2% 3,073 22.3% 3,285 Assisted Living 1.8% 791 10.3% 1,572 6.0% 884 ---- ------ ---- -------- ---- ------ Total Expenses (1) 51.3% $9,963 66.1% $ 10,047 64.4% $9,484 ==== ====== ==== ======== ==== ======
1st Quartile Median 4th Quartile ------------ ------ ------------ % of Per % of Per % of Per Income Unit Income Unit Income Unit ------ ---- ------ ---- ------ ---- 1995 National ASHA Survey Congregate 57.3% $7,040 61.2% $ 9,031 63.2% $11,245 Assisted Living 69.7% $9,999 65.4% $12,320 64.7% $15,033
NOTES: (1) Before management fees and replacement reserves. (2) Included in other functional categories. (3) Caution should be used in analyzing the above data as functional categorization of expenses is not always consistent between properties/operators. 447 CAPITALIZATION PROCESS Because Retirement Inn - Daly City is being appraised as of March, 1996 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of April, 1996 to March, 1997 is capitalized at a rate of 11.5% to get an indicated total property value at April, 1996. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 10% to 12%. These are illustrated in sales of comparable facilities as shown on the following page. In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 8.5% interest with an amortization term of 25 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .0966. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 16% (per our investment survey). The indicated overall capitalization rate using this approach is: Band of Investment
Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .0966 .0676 Equity 0.30 x .16 .0480 ----- 1.0 x Overall Rate .1156 OAR 11.56%
448 RETIREMENT INN - DALY CITY COMPARABLE IMPROVED ACLF/ALF SALES
Indicated Age/No. Sale Price/ Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF at Sale Rate - --- ------------- -------- ---- ---------- ---- -------- ------- ---- 1. The Chanate 1984/ 2/96 $ 7,400,000 $61,667 $ 61.67 85% 11.4% (1) 3250 Chanate Road 120 (Cash Santa Rosa, CA Equivalent) 2. Carlton Plaza 1993/ 12/95 $ 8,228,858 $64,288 $ 78.82 70% 11.0% (1) 3800 Walnut 128 Fremont, CA 3. Vinwood Lodge 1974/ 12/95 $ 4,100,000 $55,405 $ 70.09 92% 10.3% 35 Fenton 74 Livermore, CA 4. Carrington Pointe 1989/ 12/95 $11,411,000 $65,580 $ 72.03 95% 10.7% 1715 East Alluvial 174 Fresno, CA 5. Villa at Palm Desert 1989/ 11/95 $ 6,600,000 $85,714 $114.29 95% 10.4% 44-300 San Pasqual 77 Palm Desert, CA 6. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $ 69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA
(1) estimated at projected full occupancy 449 These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.0% (Average) SLVS Investment Survey 12.1% (Assisted Living) Band of Investment 11.6%
Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in its lower stable occupancy (90%) and cash flow (including a lower risk SSI census) and considering the subject's market position (below average rents, full assisted living licensing, older physical plant and more monolithic unit mix), which is derived from the subject's established niche as a middle market, average quality assisted living project in the area, and considering the less affluent local market and overall current market conditions, we have concluded that 11.5% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at March 29, 1996 of $3,464,200, rounded to $3,475,000 ($36,579/unit). 450 RETIREMENT INN - DALY CITY PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (4/96-3/97) Average Occupancy (All Beds) 90.0% (96.3 Beds) Average Net Rental (All Beds) $ 1,085 Potential Gross Rent Income - Studio Private - 83 Units at $1,164/Mo. Avg $ 1,176,734 Semiprivate - 10 Beds at $810/Mo. Avg 98,658 SSI - 14 Beds at $699/Mo. Avg $ 117,432 ----------- Potential Gross Rent Income $ 1,392,824 Plus: Assisted Living Surcharges (30 Beds at $450/Mo.) $ 162,000 Plus: Miscellaneous Income (1.5% of PGRI) $ 20,892 ----------- Potential Gross Income $ 1,575,716 Less: Stabilized Vacancy & Collection Losses - 10% ($ 157,572) ----------- Effective Gross Income $ 1,418,144 Expenses - % of EGI Real Estate Taxes -- $ 47,354 Insurance 1.25% 17,727 Management 5.0% 70,907 G&A 10.0% 141,814 Utilities 6.5% 92,179 Maintenance 4.0% 56,726 Activity & Trans 3.0% 42,544 Marketing 2.0% 28,363 Housekeeping 6.0% 85,087 Dietary $9.00/PRD 316,346 Personal Care 6.0% 85,089 Replacement Reserves -- $ 35,625 ---------- Total Expenses $1,019,761 (71.9%) Stabilized Net Operating Income $ 398,383 Capitalization Rate .115 ---------- Capitalized Value $3,464,200 ========== Called $3,475,000 Per Unit $ 36,579
451 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this restricted appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this restricted appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this restricted appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This restricted appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This restricted appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Wilma Koch, Appraisal Associate provided significant professional assistance to the persons signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Wilma Koch, Appraisal Associate on March 29, 1996. 452 12. The concluded total going concern market value estimate of the fee simple interest of Retirement Inn - Daly City, is as follows: MARKET VALUE "AS IS" (MARCH 29, 1996): THREE MILLION FOUR HUNDRED SEVENTY FIVE THOUSAND ($3,475,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. - -------------------------------------- Michael G. Boehm, MAI 453 RESTRICTED APPRAISAL REPORT VALLEY VIEW LODGE 1228 ROSSMOOR PARKWAY WALNUT CREEK, CALIFORNIA AS IS ON MARCH 29, 1996 SLVS FILE NO. 96-04-30.2 PREPARED FOR AMERICAN RETIREMENT VILLAS PROPERTIES II, L.P. PREPARED BY MICHAEL G. BOEHM, MAI 454 April 4, 1996 American Retirement Villas Properties II, L.P. c/o ARV Assisted Living 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Ms. Sheila Muldoon Re: Valley View Lodge 1228 Rossmoor Parkway Walnut Creek, California SLVS File No. 96-04-30.2 Ladies and Gentlemen: In accordance with your request, we have conducted the required investigation, gathered the necessary data, and made certain analyses that have enabled us to form an opinion of the market value of the above captioned property. This report has been prepared to be in compliance with the requirements of the Uniform Standards of Professional Appraisal Practice as a restricted appraisal report. This letter report updates a full narrative appraisal report prepared by our firm and dated July 14, 1995. The full narrative report discusses the subject region, neighborhood, site, improvements and market in detail. Therefore, this letter should be used in conjunction with the full narrative appraisal report. This report is intended for use by the client only. This letter report cannot be fully understood properly without a review of the previous full narrative appraisal report and additional information currently contained in the work file of the appraiser. Based on an inspection of the property and the investigation and analysis undertaken, we have formed the opinion, subject to the assumptions and limiting conditions set forth in this report, that as of March 29, 1996, the fee simple total going concern interest of the subject, as is, including the value of favorable financing, has a market value of: TEN MILLION NINE HUNDRED TWENTY FIVE THOUSAND ($10,925,000) DOLLARS 455 Ms. Sheila Muldoon April 4, 1996 Page 2 This total going concern value estimate can be allocated to the following components:
Market Value As Is - 3/29/96 Real Estate Value $ 9,475,000 Furniture, Fixtures & Equipment 150,000 Business Value 1,250,000 ----------- Total Going Concern Valuation $10,875,000 =========== Plus: Favorable Financing $ 50,000 ----------- Total Reported Valuation $10,925,000 ===========
As required by the Uniform Standards of Professional Appraisal Practice for a restricted appraisal report, the pages that follow set forth the identification of the property, property rights appraised, assumptions and limiting conditions, the scope of appraisal procedures followed in this restricted appraisal report, discussion and summary of cash flow projections and certification page. Respectfully submitted, SENIOR LIVING VALUATION SERVICES, INC. Michael G. Boehm, MAI President 456 INTRODUCTION PROPERTY IDENTIFICATION The subject property consists of a 198,198 square foot (4.55 gross acres) site that is currently improved with a 125 unit congregate senior housing project (including up to 136 licensed assisted living beds) project known as Valley View Lodge. The subject has a designated street address of 1228 Rossmoor Parkway, Walnut Creek, Contra Costa County, California. PROPERTY OWNERSHIP AND HISTORY The fee simple title to the subject property is currently vested in the name of American Retirement Villas Properties II (ARVP II), a California Limited Partnership. The current owners purchased the subject in December, 1989 as part of a purchase of several Retirement Inns of America (Avon Products, Inc.) senior properties. The subject has not been sold/purchased in the past three years. The subject was built as a senior congregate facility which opened in 1976. The subject, as part of the original conditions of approval and a condition necessary to obtain the favorable HUD financing, was required to allocate 20% of the subject units to "very and low" income residents. This restriction was reportedly waived when the subject was purchased by the current owners allowing a market rate to be charged for all units. The subject's recent occupancy history includes effectively full occupancies and it is currently approximately 93.6% occupied (117 units/125 units). The subject has no semiprivate or SSI residents. SCOPE OF THE ASSIGNMENT The scope of this assignment is to inspect the subject property, conduct an investigation of market data, and prepare a restricted appraisal report in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice. All information deemed pertinent to the completion of this letter update was made available. Specifically, the procedures performed in this limited report included: 1) a 1996 site inspection noting material changes in the subject region, neighborhood, site, improvements and market (none were noted). These influences on value are described in detail in the 1995 full appraisal report; 2) Updated Income Approach analysis using the current market rents, vacancy, expenses and capitalization rates. Our limited narrative appraisal report does not include an updated Market Analysis (although any potentially new competition to the subject was investigated and an overall review of competition was conducted), Cost Approach or Sales Comparison Approach value conclusions. 457 This restricted appraisal report estimates a value of the fee simple interest in the subject property using only an Income Approach. Determining a value estimate for the subject using Cost and Sales Comparison Approaches was deemed inappropriate and unnecessary for the subject property. This conclusion reflects the difficulty of accurately incorporating depreciation and profit in a value estimate using a Cost Approach and the overall lack of truly comparable sales. PURPOSE OF THE APPRAISAL The purpose of the appraisal is to estimate the subject's total fee simple going concern market value as is. FUNCTION OF THE APPRAISAL It is understood the appraisal shall be used by American Retirement Villas Properties II, L.P., in evaluating the subject partnership for possible transfer to an ownership real estate investment trust. PROPERTY INSPECTION The subject property was inspected on May 9, 1995 by Michael G. Boehm, MAI who was accompanied by Ms. Nancy Peterson, Administrator. The subject was reinspected on July 14, 1995 by Mary Catherine Wiederhold, Appraisal Associate and March 29, 1996 by Wilma Koch, Appraisal Associate. DATE OF APPRAISAL April 4, 1996 DATE OF VALUE March 29, 1996 PROPERTY RIGHTS APPRAISED This appraisal estimates the fee simple total going concern market value of the subject operating as a congregate senior housing business. Going concern value is defined by the Appraisal Institute as the value created by a proven property operation; considered a separate entity to be valued with an established business. This total going concern value can be allocated to its real estate, furniture, fixtures and equipment and business value components. An estimated allocation of our total going concern valuation is set forth in this report. Fee Simple is defined by the Appraisal Institute as absolute ownership unencumbered by any other interest or estate subject only to the limitations of eminent domain, escheat, police power, and taxation. 458 DEFINITION OF MARKET VALUE As defined by the Office of the Comptroller of the Currency under 12 CFR, Part 34, Sub-part C- Appraisals, 34.42 Definitions (f), market value is defined as: "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: (i) buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (v) 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." ASSUMPTIONS AND STANDARD LIMITING CONDITIONS 1. The legal description furnished to the appraiser is assumed to be correct, and the title is assumed to be marketable. 2. The appraiser assumes no responsibility for legal matters. 3. Report exhibits are only visual aids. All sizes indicated for land and improvements are from indicated sources and assumed to be correct. 4. Unless otherwise noted herein, it is assumed there are no detrimental easements, encumbrances, encroachments, liens, zoning violations, building code violations, or environmental violations, etc. affecting the subject property. 5. Information, estimates, and opinions furnished to the appraiser are obtained from sources considered reliable; however, no liability for their accuracy can be assumed by the appraiser. 6. It is assumed that there are no hidden or unapparent conditions in the land or improvements that render the property more or less valuable or that would reduce its utility, development potential, marketability. All improvements are assumed to be structurally sound unless otherwise noted. No responsibility is assumed for hidden or undisclosed conditions or for arranging for engineering studies that may be required to discover any defects or uniquely favorable conditions. 459 7. The appraiser has inspected the subject property with the due diligence expected of a professional real estate appraiser. The appraiser is not qualified to detect hazardous waste and/or toxic materials. Any comment by the appraiser that might suggest the possibility of the presence of such substances should not be taken as confirmation of the presence of hazardous waste and/or toxic materials. Such determination would require investigation by a qualified expert in the field of environmental assessment. 8. The presence of substances such as asbestos, urea-formaldehyde foam insulation or other potentially hazardous materials may affect the value of the property. The appraiser's value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. 9. No responsibility is assumed for any environmental conditions, or for any expertise or engineering knowledge required to discover them. The appraiser's description and resulting comments are the result of the routine observations made during the appraisal process. 10. Responsible ownership and competent management are assumed. 11. Where the discounted cash flow analysis is utilized, it has been prepared on the basis of the information and assumptions stipulated in this appraisal report. The achievement of any financial projections will be affected by fluctuating economic conditions and is dependent upon the occurrence of other future events that cannot be assured. Therefore, the actual results achieved may well vary from the projections and such variation may be material. 12. The appraiser is not required to give testimony or appear in court, or at public hearings, or at any special meeting or hearing with reference to the property appraised herein by reason of preparation of this report, unless arrangements have been made prior to preparation of this report. 13. Possession of this report does not carry with it the right of publication. It shall be used for its intended purpose only and by the parties to whom it is addressed. Neither all nor any part of the contents of this report shall be conveyed to the public through advertising, public relations, news, sales, or other media without the written consent or approval of the author. This applies particularly to value conclusions, the identity of the appraiser or firm with which it is connected, and any reference to the Appraisal Institute, or MAI designation. 14. Property values are influenced by a large number of external factors. The information contained in the report comprises the pertinent data considered necessary to support the value estimate. We have not knowingly withheld any pertinent facts, but we do not guarantee that we have knowledge of all factors which might influence the value of the subject property. Due to rapid changes in external factors, the value estimate is considered reliable only as of the effective date of the appraisal. 460 SPECIAL CONDITIONS The subject is currently encumbered by an approximately $2,800,000 HUD loan which extends to the year 2016 at a fixed interest rate of 8.25%. Because this interest rate is below the estimated interest rate of current conventional financing (estimated at 8.5%), the subject has a theoretical value over and above the capitalized value of operational cash flows. Caution should be used in interpreting this added value as actual market transactions involving the assumption of below market rate financing are rare. The value of this favorable financing has been added to the going concern value set forth in this report. These issues are discussed and the value of the favorable financing is calculated in a separate section of this report. The subject is licensed as a residential care facility for the elderly (assisted living) for a maximum of 136 beds with the California Department of Social Services. This appraisal assumes that the subject meets all physical plant and operating requirements as an assisted living facility. The appraisers were not provided with a title report describing any current easements or encumbrances that might affect the subject operation as a congregate senior housing business. This appraisal assumes that there are no adverse easements or encumbrances affecting the subject. We recommend review of a current title report. The estimates of value set forth in this report are partially relying on the current rent roll, historical operating statements and limited building drawings and building statistical data provided to the appraiser by ARV Assisted Living. 461 EXECUTIVE SUMMARY Property Name: Valley View Lodge Location: 1228 Rossmoor Parkway Walnut Creek, California Assessor's Parcel No.: 189-040-045 (Contra Costa County) Property Rights Appraised: Fee Simple (Total Going Concern) Date of Value: As Is on March 29, 1996 Land Area: 198,198 Square Feet, 4.55 Acres Gross; 154,638 Square Feet, 3.55 Acres Net (estimated) Excess Land: None Zoning: PD (656), a planned unit development specifically allowing the subject. Improvements: Type: One, average to good quality, one to two story, Class D congregate retirement apartment building and common areas. Age: Year Built - 1976; Improvement Age - 20 Years; Effective Age - 20 Years; Remaining Economic Life - 25 Years Size: 125 congregate retirement apartment units and common areas in approximately 97,590 square feet of gross building area. Condition: Average to Good H & B Use (if vacant): Senior Housing H & B Use (as improved): See Highest and Best Use Discussion in 7/95 Full Narrative Appraisal Capitalization Rate: 11.5% Projected Stabilized Net Income: $1,251,309 (4/96-3/97) 462 Total Going Concern Market Value, as is, as of March 29, 1996: Cost Approach: Not Used Income Approach: $10,875,000* Sales Comparison Approach: Not Used Value Conclusion: $10,875,000* ($87,000/unit) Allocation of Final Value Determination to Components: Market Value As Is - 3/29/96 ----------- Real Estate $ 9,475,000 FF&E 150,000 Business Value 1,250,000 ----------- Total Going Concern Valuation $10,875,000* =========== *before addition of value for favorable financing Value of Favorable Financing: $50,000 Total Estimated Marketing Time: 4 Months
463 INCOME APPROACH The Income Approach is based upon the economic principle that the value of a property capable of producing real estate income is the present worth of anticipated future net benefits. The net income projection is translated into a present capital value indication using a capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability, and pattern of the income projection. Our Income Approach analysis applies an overall capitalization rate to the subject's projected net income over the next 12 months. This method was considered appropriate as the subject is currently operating at a stabilized cash flow (occupancy and expenses). A discounted cash flow model was not considered of primary usefulness in valuing the subject for the following reasons: 1) buyers of properties like the subject typically do not use discounted cash flow analyses; 2) because the subject is a stabilized property, a discounted cash flow model would simply be inflating revenues and expenses at a fixed rate and then canceling out the inflation estimate using an appropriate discount rate. In other words, if properly applied, a discounted cash flow analysis would arrive at the same value estimate as applying an overall capitalization rate methodology. Net income is calculated by subtracting a vacancy and credit allowance and all fixed and operating expenses from the indicated gross income. The methods utilized to estimate gross income, vacancy, expenses and an overall capitalization rate are discussed in detail in the following paragraphs. PROJECTION PERIOD In our analysis of the subject's net income, we have utilized a projection period of 12 months (4/96 to 3/97) which reflects a stabilized cash flow and occupancy level. Based on this premise, the owner of the property will enjoy the net proceeds of sale (reversion) at March, 1996 based on the projected April, 1996 to March, 1997 net income. The theory is that the investor purchasing the property in March, 1996 would be more interested in the anticipated net income in their first year of ownership than they would be in the previous year's income prior to their ownership. POTENTIAL GROSS ANNUAL INCOME In estimating the potential gross annual income for the subject property over the projection period, we have reviewed the current rent roll and previously prepared our own survey of the properties considered to be most competitive and comparable to the subject. This survey was presented in the Market Analysis section of the full narrative appraisal dated July, 1995. The operators of the subject property have achieved the rental census and occupancy as summarized on the following page. The March, 1996 census reveals an occupancy of 93.6% or 117/125 total units. This occupancy represents a slight decrease from the mid to high 90%'s over the past 9 months. 464 VALLEY VIEW LODGE SUMMARY OF SUBJECT RENT CENSUS AT 3/20/96
Private-1BR Private-Studio (Units) (Units) Total ----------- -------------- ----- Number Units/Beds - Rented 11 106 117 (93.6%) Rent Range $1,950-$2,100 $1,425-$1,825 $1,062-$2,100 Rent Average $1,970 $1,715 $1,739 Potential Total Rent-Rented $260,100 $2,218,600 $2,441,700 Number Units/Beds - Vacant (1) - 8 8 (6.4%) Rent Range - $1,500-$1,825 $1,500-$1,825 Rent Average - $1,753 $1,753 Total Potential Rent-Vacant - $168,300 $168,300 Total Units/Beds 11 114 125 (100%) Gross Potential Rent-Total $260,100 $2,349,900 $2,568,000 Per Unit/Bed $1,970 $1,718 $1,672
NOTES: (1) Vacant units include: Private Studio - Units 132, 170, 204, 205, 216, 222, 247, 250 (8 Units) (2) Subject has no SSI residents. 465 Our review of the subject's rent roll revealed a relatively variable range of rentals with several units having different rents. Discussions with the current operator noted that individual monthly rents were a function of the unit location, when the resident entered the subject and negotiation of the rent when entered. Overall and based upon mid 1995 market rate surveys, the subject's private room rents (with and without the assisted living surcharge) are still at March, 1996, generally within the range of the most comparable properties and near the average (for both congregate and assisted living) of all facilities. Congregate semiprivate living is generally not offered at other projects (with the exception of Montego Heights Lodge, an ARV sister project). The subject's average assisted living rents are also near the average for semiprivate and private rooms. Because the subject offers a la carte pricing for its assisted living amenities, residents can effectively choose their rent level (the assisted living surcharge) as their living assistance needs vary or change. The subject's average rents have increased about 5.9% from July, 1995 to March, 1996 (partially due to no semiprivate residents). In our opinion, the most compelling evidence that the subject's rents are market rents (and not above or below) is the subject's recent occupancy history and its current occupancy, which is a fairly stable 94% at the current rents. Therefore, given the above discussion, in our opinion, the subject's current monthly average rents represent market rental rates and are used in our pro forma estimate of income and expenses shown on a following page. All subject rents (the average per unit type noted above) are forecast to increase 1.5% during the 4/96 to 3/97 projection period, reflecting market conditions and the subject's history. The 1.5% estimate in the next 12 months represents an average 3% rent increase applied at each resident's move-in anniversary date which are assumed to occur evenly over the next 12 months. Our cash flow estimates are shown gross or before a vacancy and collection factor. The above rents are base rents for unlicensed congregate living services. This rent does not include assisted living surcharges which are billed to residents on an a la carte basis. Currently, the subject charges for these extra amenities on a case by case basis with an approximate average of $590 extra per month for medication monitoring, help with bathing and doing personal laundry. Currently, about 61 residents pay for living assistance at an approximate average of $586 extra rent per month. Our cash flow projections for the subject estimate a stabilized 52% gross utilization (65 beds gross) of assisted living amenities at stabilization, calculating to the following gross assisted living surcharge income:
Avg. Surcharge/ Resident Projected Period Month/Bed Utilization Annual Income ------ --------------- ----------- ------------- @ 3/96 $586 61 (net) - @ 4/96 to 3/97 $600 65 (gross) $468,000
466 In addition to total potential gross room revenue, we have included miscellaneous income at 1.25% of effective gross income reflecting historical receipts for guest meals, processing fees, extra services to residents, and beauty shop income. VACANCY AND COLLECTION LOSSES Our cash flow projections deduct a total vacancy and collection loss in the stabilized projection period as follows:
Average Average Occupancy Vacancy --------- ------- As Is @ 3/96 93.6% 6.4% 4/96 to 3/97 (Stabilization) 95.0% 5.0%
The above estimate of stabilized occupancy/vacancy is meant to incorporate 118.75 residents or an occupancy/vacancy of 95.0% (118.75/125). This conclusion is consistent with the subject's recent occupancy trends, occupancies at similar projects and operator projections. The typical and average market vacancy factor reflects the subject's occupancy history and current occupancy, discussions with the current operator, the subject's competitive position and local market conditions as reflected in the occupancies at similar projects in the market. The subject's market position (higher rents in a more affluent market) and large number of assisted living beds mitigate against a lower stabilized vacancy estimate (or higher occupancy). OPERATING EXPENSES In determining pro forma estimates of operating expenses, we have primarily relied on the specific expense histories (1994, 1995, and two months of 1996) and budget (1996) of the subject property as summarized on the following page and the experience at comparable projects. The expenses enumerated below would be those of a typical operator at the subject. We have summarized our expense estimates as follows: Real Estate Taxes - Real estate taxes are estimated to reflect an assumed sale of the subject property and a reassessment at current market rates at March, 1996 ($10,875,000 times the tax rate of 1.0626% plus approximately $13,643 in direct assessments). This real estate tax expense reflects taxes that would have to be incurred by a buyer of the subject wherein the subject would be reassessed to market value; Insurance - estimated at 1.0% of effective gross income, reflecting typical charges for liability/fire insurance, historical costs incurred, and the fixed nature of this expense; Management - estimated at 5% of effective gross income reflecting the current typical or average industry charge which would be appropriate for the subject considering its average complexity of operation; 467 VALLEY VIEW LODGE HISTORICAL INCOME AND EXPENSE
Historical --------------------------------------------------------------- Operator 2 Months Goal Year Ending Year Ending Ending 1996 Budget Revenues 12/94 12/95 2/29/96 Annualized 1996 - -------- ------------ ----------- -------- ---------- -------- Rental Income $2,456,025 $2,493,036 $406,861 $2,481,852 $2,656,586 Assisted Living Income 321,567 368,891 71,718 437,480 385,600 Non-Operating Revenue $ 35,709 $ 28,633 $ 5,240 $ 31,964 $ 34,899 ---------- ---------- -------- ---------- ---------- Total Revenues $2,813,301 $2,890,560 $483,819 $2,951,296 $3,077,085 Expenses (1) Real Estate Taxes $ 82,430 $ 83,638 $ 13,827 $ 84,345 $ 109,702 Insurance 22,500 28,831 5,163 31,494 31,901 G&A 57,592 60,358 9,861 60,152 61,350 Utilities 166,783 155,317 31,088 189,637 155,850 Payroll/Benefits 798,708 810,766 130,659 797,020 865,084 Maintenance 68,679 76,051 11,921 72,718 74,580 Activities 11,965 13,845 1,702 10,382 12,342 Marketing 16,848 19,209 2,212 13,493 18,780 Laundry & Linen 10,195 13,467 2,591 15,805 13,294 Dietary 183,906 177,841 27,407 167,183 126,043 Supplies 36,469 32,670 7,354 44,859 30,492 ---------- ---------- -------- ---------- ---------- Total Operating Expense $1,456,075 $1,471,993 $243,785 $1,487,088 $1,549,918 (51.8%) (50.9%) (50.4%) (50.4%) (50.4%) Net Operating Income $1,357,226 $1,418,567 $240,034 $1,464,208 $1,527,167 ========== ========== ======== ========== ==========
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 468 General and Administrative - estimated at 9% of effective gross income; representing additional on site costs incurred to manage the subject including salaries and benefits for the administrator and assistants and all miscellaneous costs to operate the subject (office supplies, miscellaneous rentals); Utilities - estimated at 5.5% of effective gross income, which is consistent with historical costs incurred. Includes all common area and unit utility costs (telephone, electric, gas, water, sewer); Maintenance - estimated at 3% of effective gross income, including all maintenance/security salary and supplies (including land maintenance and pest control), derived from historical expenses; Activities/Transportation - all social/recreational service costs including salaries and supplies (including van service) are estimated at 2% of effective gross income; Marketing - all advertising, marketing and sales expenses are estimated at 2% of effective gross income. This allocation is higher than typical but reflects the subject's high turnover (relative to all senior properties) and large number of units, requiring a more intensive marketing effort; Housekeeping - estimated at 4.5% of effective gross income to include salaries, supplies, for both an internal laundry and linen service and housekeeping and consistent with historical costs incurred; Dietary - estimated at anticipated dietary costs to a typical operator or $8.50 per day per resident (118.75 occupied beds x $8.50/day x 365 days). This estimate includes all dietary related salaries and benefits and cost of food. These estimates are within current industry averages and historical costs incurred; Personal Care - estimated at 8.0% of effective gross income to include all salaries and supplies necessary to provide assisted living services to approximately 52% of the residents (about $10.09 per resident day for 65 residents); Replacement Reserve - estimated at 15% of the estimated furniture and equipment cost new ($422,500 or $2,500 per unit) to include the annual reserve necessary to replace furniture and equipment and other short lived capital items (carpeting, painting). The stabilized estimate of $63,375 is equal to 2.1% of the estimate effective gross income. As shown, total stabilized expenses (not including management fees and reserves) to a typical operator accumulate to 51.6% of effective gross income or $13,011 per occupied unit (118.75 units). A comparison to similar congregate/assisted living properties before management fees and reserves is shown on the following page. As illustrated, the projected expenses for the subject are well above the average of the expense histories of the projects listed by about 30%. The subject will always have lower expenses on a percentage of income basis because of its higher revenue basis and higher on a per unit basis due to its higher quality/rents, higher assisted living utilization and location within a market area of higher operating costs/rents. Our projections consider the experience at the comparable properties and historical costs incurred. 469 VALLEY VIEW LODGE OPERATING EXPENSE COMPARABLES
National Operator #1 - National Operator #2 - Subject 13 Projects (1995) 12 Projects (1995) Projected ---------------------- ---------------------- --------------------- % of Per % of Per % of Per Expense Category Income Unit Income Unit Income Unit - ---------------- ------ ---- ------ ---- ------ ---- Property Taxes 4.4% $ 838 5.2% $ 792 4.3% $ 1,088 Insurance 1.1% 249 1.4% 208 1.0% 252 Administration 7.2% 1,454 10.7% 1,632 9.0% 2,268 Activities 5.3% 276 (2) (2) 2.0% 504 Marketing 2.3% 276 3.6% 543 2.0% 504 Plant Operations 5.0% 1,788 10.8% 1,640 8.5% 2,142 Housekeeping 3.2% 563 3.9% 587 4.5% 1,134 Dietary 14.0% 3,128 20.2% 3,073 12.3% 3,103 Assisted Living 1.8% 791 10.3% 1,572 8.0% 2,016 ----- ------ ----- ------- ----- ------- Total Expenses (1) 51.3% $9,963 66.1% $10,047 51.6% $13,011 ===== ====== ===== ======= ===== =======
1st Quartile Median 4th Quartile ------------------ -------------------- ------------------- % of Per % of Per % of Per Income Unit Income Unit Income Unit ------ ---- ------ ---- ------ ---- 1995 National ASHA Survey Congregate 57.3% $7,040 61.2% $ 9,031 63.2% $11,245 Assisted Living 69.7% $9,999 65.4% $12,320 64.7% $15,033
NOTES: (1) Before management fees and replacement reserves. (2) Included in other functional categories. (3) Caution should be used in analyzing the above data as functional categorization of expenses is not always consistent between properties/operators. 470 On the previous page, we have also illustrated average annual operating costs per unit as accumulated in a recent national survey of operating expenses for various types of senior facilities including assisted living. The subject falls within the 75th percentile of indicated operating expenses for a combination congregate/assisted living project. Finally, a reconciliation of our adjusted period one (4/96 to 3/97) projected expenses to 1995 actual expenses and 1996 budgeted expenses illustrates the following: Actual Total Expenses (1995) $ 1,471,993 =========== Operator Budget (1996) $ 1,549,918 =========== Projected Total Expenses Per SLVS (4/96 to 3/97) $ 1,741,700 Less: Management Fees $( 149,650) Less: Replacement Reserves $( 46,875) ----------- Adjusted Projected Total Expenses (4/96 to 3/97) $ 1,545,175 =========== Difference (over 1995 actual, reflects higher assisted living utilization) +5.0% (under 1996 budget) -0.3%
CAPITALIZATION PROCESS Because Valley View Lodge is being appraised as of March, 1996 wherein it has reached a stabilized cash flow, we have utilized a procedure where the stabilized net income for the period of April, 1996 to March, 1997 is capitalized at an overall capitalization rate of 11.5% to get an indicated total property value at March, 1996. This calculation is shown on a following page. We have been involved in the analysis and valuation of numerous retirement facilities around California which have generally exhibited overall capitalization rates ranging from 10% to 12%. These are illustrated in sales of comparable facilities as shown on a following page. In April, 1995, Senior Living Valuation Services, Inc. conducted the second annual survey of close to 300 participants in the senior housing industry regarding their investment criteria or perception of criteria used in evaluating different types of senior housing properties. The investment criteria survey polled included capitalization rates, discount rates and returns on equity. A copy of this survey is provided in the Addenda of this report. The survey indicated a capitalization rate range of 9% to 16% and an average of 12.1% for assisted living facilities. Though the survey is not definitive, it does provide some market evidence of the investment criteria being used (or perceived to be used) by industry professionals. 471 VALLEY VIEW LODGE COMPARABLE IMPROVED ACLF/ALF SALES
Indicated Age/No. Sale Price/ Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF at Sale Rate - --- ------------- --------- ---- ---------- ------ -------- --------- ------- 1. The Chanate 1984/ 2/96 $ 7,400,000 $61,667 $61.67 85% 11.4% (1) 3250 Chanate Road 120 (Cash Santa Rosa, CA Equivalent) 2. Carlton Plaza 1993/ 12/95 $8,228,858 $64,288 $78.82 70% 11.0% (1) 3800 Walnut 128 Fremont, CA 3. Vinwood Lodge 1974/ 12/95 $4,100,000 $55,405 $70.09 92% 10.3% 35 Fenton 74 Livermore, CA 4. Carrington Pointe 1989/ 12/95 $11,411,000 $65,580 $72.03 95% 10.7% 1715 East Alluvial 174 Fresno, CA 5. Villa at Palm Desert 1989/ 11/95 $6,600,000 $85,714 $114.29 95% 10.4% 44-300 San Pasqual 77 Palm Desert, CA 6. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA
(1) estimated at projected full occupancy 472 Another method of estimating a capitalization rate is the band of investment weighted average technique. If the available mortgage terms are known, the debt service or mortgage constant can be calculated, and if the equity dividend rate required to attract equity capital is known or can be estimated, the overall rate applicable in direct capitalization can be computed. Available mortgage terms are 70% of value at 8.5% interest with an amortization term of 25 years reflects market terms based on our experience of specific financing transactions and recent national surveys of financing parameters for senior housing properties. Based on these terms, the mortgage constant is .0966. The equity dividend rate required to attract equity capital for properties similar to the subject is approximately 16% (per our investment survey). The indicated overall capitalization rate using this approach is:
Band of Investment ------------------ Portion Weighted of Value Rate Contribution -------- ---- ------------ Mortgage 0.70 x .0966 .0676 Equity 0.30 x .16 .0480 ----- 1.0 x Overall Rate .1156 OAR 11.56%
These sources of capitalization rates can be summarized as follows:
Indicated Cap Rates --------- 6 Detailed Sales 11.0% (Average) SLVS Investment Survey 12.1% (Assisted Living) Band of Investment 11.6%
Based upon the current characteristics of the subject, namely, its overall average cash flow risk as reflected in its stable occupancy and cash flow and considering the subject's market position (higher rents, full assisted living licensing, older physical plant and more monolithic unit mix), which is derived from the subject's established niche as upper tier, above average quality assisted living project in the area, and considering the affluent local market and overall current market conditions, we have concluded that 11.5% or toward the middle portion of the approximate range is an appropriate capitalization rate for the subject property. SUMMARY Our estimate of value by the Income Approach is summarized on the following page and produces an indicated value for the subject property as is, at March 29, 1996 of $10,880,948, rounded to $10,875,000 ($87,000/unit). 473 VALLEY VIEW LODGE PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (4/96-3/97) ----------- Average Occupancy (All Beds) 95.0% (118.75 Beds) Average Net Rental (All Beds) $ 1,766 Potential Gross Rent Income - 1BR Private - 11 Units at $1,970/Mo. Avg. $ 263,941 Studio Private - 114 Units at $1,718/Mo. Avg. $ 2,385,477 ----------- Potential Gross Rent Income $ 2,649,418 Plus: Assisted Living Surcharges (65 Beds at $600/Mo.) $ 468,000 Plus: Miscellaneous Income (1.25% of PGRI) $ 33,118 ----------- Potential Gross Income $ 3,150,536 Less: Stabilized Vacancy & Collection Losses - 5% ($ 157,527) ----------- Effective Gross Income $ 2,993,009
Expenses - % of EGI -------- Real Estate Taxes - $ 129,201 Insurance 1.0% 29,930 Management 5.0% 149,650 G&A 9.0% 269,371 Utilities 5.5% 164,615 Maintenance 3.0% 89,790 Activity & Trans. 2.0% 59,860 Marketing 2.0% 59,860 Housekeeping 4.5% 134,685 Dietary $8.50/PRD 368,422 Personal Care 8.0% 239,441 Replacement Reserves - $ 46,875 ----------- Total Expenses $ 1,741,700 (58.2%) Stabilized Net Operating Income $ 1,251,309 Overall Capitalization Rate .115 ----------- Capitalized Value $10,880,948 =========== Called $10,875,000 Per Unit $ 87,000
474 VALUATION OF FAVORABLE FINANCING The preceding valuation assumes conventional market financing. However, the subject includes favorable financing in the form of a deed of trust issued in 1976 ($3,286,200, 40 year note). The current balance due to the note is approximately $2,789,444. The present value of this financing must be added to our valuation estimates described above because a third party buyer of the subject should be willing to pay for the debt service savings accruing from this assumable note. Our estimate of the effect of the favorable financing is illustrated on the following page. These assumptions are as follows: Note Principal @ 3/96: $2,789,444 Interest Rate: 8.25%, Fixed Note Term: 11/2016, Assumable Conventional Financing - Interest Rate: 8.5%, Fixed
To calculate the value of this favorable financing, we have extensively surveyed leading lenders (REITS, conventional banks, pension funds, FANNIE MAE lenders) in the senior housing industry to determine a conventional financing interest rate. The consensus of these lenders is that although conventional taxable financing of any projects and senior projects in particular is still difficult in early 1996, that an average taxable interest rate of 8.5% to 9.0% would not be considered unreasonable given the specialized nature of a senior housing project. Therefore, considering recent downward trends in interest rates for senior housing properties, we have estimated a current market interest rate of 8.5%. Our calculations estimate the present value of the remaining monthly interest payment on net funds to be received from the bond financing discounted by the market interest rate less an approximation of the incremental costs to be incurred as part of the HUD financing compared to conventional financing (annual audits) plus the present value of current replacement reserve balances. The total differential or contribution to value from the favorable financing is estimated at $41,661, rounded to $50,000 as calculated on the following page. 475 VALLEY VIEW LODGE VALUATION OF FAVORABLE FINANCING Present value of financing at market rate (8.5%): $2,789,444 Present value of financing at below market rate (8.25%): Present value of $23,468 (1) monthly payment for 20.6 remaining years at 8.5% market rate $2,729,724 ---------- Difference in present value of financing $ 59,720 Less: $6,000/year annual HUD audit charges (through 2016) discounted to 4/96 at 8.5% ($ 54,025) Plus: Present value of replacement reserve balance at 11/96 ($100,104) discounted to 4/96 at 5.0% (8.5% market interest rate less 3.5% estimated interest earned on escrow funds) $ 35,966 ---------- Net Difference in present value of financing $ 41,661 ========== Called $ 50,000
(1) Monthly payment for $3,286,200, 40 years, 8.25% interest rate plus reserve obligations. 476 CERTIFICATION 1. We have no present or contemplated future interest in the real estate that is the subject of this restricted appraisal report. 2. We have no personal interest or bias with respect to the subject matter of this restricted appraisal report or the parties involved. 3. To the best of our knowledge and belief, the statements of fact contained in this restricted appraisal report, upon which the analyses, opinions and conclusions expressed herein are based, are true and correct. 4. This restricted appraisal report sets forth all of the limiting conditions (imposed by the terms of my assignment or by the undersigned) affecting the analyses, opinions and conclusions contained in this report. 5. This restricted appraisal report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute and is prepared in accordance with the requirements of the Office of the Comptroller of the Currency and the Uniform Standards of Professional Appraisal Practice. 6. Our compensation is not contingent on an action or event resulting from the analysis, opinions, conclusions or the use of this report. 7. The value estimates set forth in this report are not predetermined or based on any requested minimum valuation, a specific valuation or the approval of a loan. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. Wilma Koch, Appraisal Associate provided significant professional assistance to the persons signing this report. 10. As of the date of this report, Michael G. Boehm, MAI has completed the requirements of the continuing education program of the Appraisal Institute. 11. A personal inspection of the property was made by Michael G. Boehm, MAI on May 9, 1995 and by Wilma Koch, Appraisal Associate on March 29, 1996. 477 12. The concluded total going concern market value estimate of the fee simple interest of Valley View Lodge, including the value of favorable financing, is as follows: MARKET VALUE "AS IS" (MARCH 29, 1996): TEN MILLION NINE HUNDRED TWENTY FIVE THOUSAND ($10,925,000) DOLLARS SENIOR LIVING VALUATION SERVICES, INC. _____________________________ Michael G. Boehm, MAI 478 A D D E N D A 479 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 1 - Canyon Hills Club 525 S. Anaheim Hills Road Anaheim No. 2 - Brea Residential Manor 285 W. Central Brea
480 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 3 - Whittier Retirement Villa 8101 S. Painter Whittier No. 4 - Gold Star Manor 411 E. Commonwealth Fullerton
481 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 5 - Villa San Marcos 1550 Security Place San Marcos No. 6 - Chula Vista Inn 171 4th Avenue Chula Vista
482 VACANT LAND SALE COMPARABLE NO. 4 Location: 9753 Church Street Rancho Cucamonga, CA Assessor's Parcel No.: 1077-332-26 (San Bernardino County) Sale Date: 1/24/92 Document No.: 027852 Sale Price: $1,050,000 Size: 155,074 Square Feet (3.56 Acres) Sale Price/SF: $6.77 Topography: Level Shape: Rectangular Proposed Use/Density: Unknown; 8-14 Units/Acre Allowed Sale Price Per Unit: $75,000-$131,250/Unit Zoning: MR (Medium Density Residential) Grantor: M/M Robert & Barbara Mills, et al Grantee: Archibald Garden Villas Terms: All Cash to Seller Comments: In lesser quality residential area; owner holding for future development.
483 VACANT LAND SALE COMPARABLE NO. 1 Location: 9000 Block Foothill Boulevard, West of Carnelian Rancho Cucamonga, CA Assessor's Parcel No.: 207-101-017 (San Bernardino County) Sale Date: Listing Document No.: N/A List Price: $950,000 Size: 165,500 Square Feet (3.8 Acres) List Price/SF: $5.74 Topography: Flat to Slightly Sloping Shape: Irregular Proposed Use/Density: Unknown; Probable Commercial/Office List Price Per Unit: N/A Zoning: FSP (Foothill Specific Plan) Grantor: Daniel Miksell Grantee: N/A Terms: N/A Comments: On major thoroughfare; adjacent to railroad tracks, a negative site influence.
484 VACANT LAND SALE COMPARABLE NO. 2 Location: North of Alta Vista Street, West of North Rose Drive Placentia, CA Assessor's Parcel No.: 340-021-71 (Orange County) Sale Date: 7/6/94 Document No.: 442192 Sale Price: $4,592,500 Per Sq. Ft.: $10.35 Per Unit: $72,897 Size: 443,746 Square Feet (10.187 Acres) Topography: Level Shape: Irregular Proposed Use/Density: 63 unit townhome subdivision; 6.2 units/acre Zoning: RPC Grantor: Chapman - Wickett Co. Grantee: AM Homes, Ltd. Terms: Cash to Seller Comments: Located near the Alta Vista Golf Course; average quality residential area.
485 VACANT LAND SALE COMPARABLE NO. 4 Location: NWC Plaza Bonita and Bonita Road Chula Vista, CA Assessor's Parcel No.: 570-170-53 (San Diego County) Sale Date: 2/12/92 Document No.: 92-076593 Sale Price: $855,000 Size: 60,984 Square Feet (1.40 Acres) Sale Price/SF: $14.02 Topography: Flat Shape: Irregular Proposed Use/Density: Probable retail Sale Price Per Unit: N/A Zoning: C (Commercial) Grantor: Not Available Grantee: Jamie Bonilla and Jose Gonzales, et al Terms: All Cash to Seller Comments: This site is a moderately busy location on Bonita Road; one block from freeway access.
486 RETIREMENT INN - DALY CITY CENSUS OF MARKET AREA ACLF/AL FACILITIES (CONTINUED)
Congregate (ACLF) Units Assisted Living (AL) Units Age/ ----------------- -------------------------- Miles Total Monthly Monthly From Units/ Unit Size- Rental - Rental/ Rental - Semi- Reported No. Name/Location Subject AL Beds Type S.F. Private S.F. Private Private % SSI Occupancy - --- ------------- ------- ------- ---- ---- ------- ------- ------- ------- ----- --------- 8. Hillsdale Manor 1986/ 147/147 Studio 250 $1,700- $6.80- +$ 65- N/A 0% 100% 2883 South Norfolk 12 $2,040 $8.16 $1,100 San Mateo Suite 484 $2,500- $5.17- $2,955 $6.10 9. Glenwood Inn 1990/ 80/50 Suite 530 $1,795 $3.39 +$ 250- N/A 0% 98% 555 Glenwood 20 Del. 1BR 720 $2,395- $3.33- $1,000 Menlo Park $2,895 $4.02 2BR 940 $2,895- $3.08- $3,300 $3.51 10. Palo Alto Commons 1990/ 121/121 Studio 400 Not Available $2,000- N/A 0% 94% 4075 El Camino Way 21 $2,300 Palo Alto 1BR 500 $2,150- $2,500 S. Retirement Inn of Daly City 1975/ 95/108 Studio 215- $1,200- $3.78- +$ 150- +$ 150- 18% 93% 501 King - 395 $1,495 $5.58 $1,000 $1,000 Daly City SP $ 775
487 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 11 - Redwood Villa 1981 Montecito Avenue Mountain View 488 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 1 - Canyon Hills Club 525 S. Anaheim Hills Road Anaheim No. 2 - Brea Residential Manor 285 W. Central Brea 489 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 3 - Whittier Retirement Villa 8101 S. Painter Whittier No. 4 - Gold Star Manor 411 E. Commonwealth Fullerton 490 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 5 - Villa San Marcos 1550 Security Place San Marcos No. 6 - Chula Vista Inn 171 4th Avenue Chula Vista 491 VACANT LAND SALE COMPARABLE NO. 1 Location: West side of College Drive, 500 Feet South of Sharp Park Road Pacifica, CA Assessor's Parcel No.: 017-470-040 (San Mateo County) Sale Date: Listing Document No.: N/A List Price: $1,100,000 Size: 117,621 Square Feet (2.7 Net Acres) List Price/SF: $9.35 Topography: Flat to Sloping Shape: Irregular Proposed Use/Density: Unknown; Probable Residential List Price/Unit: N/A Zoning: PD Grantor: Manor Healthcare Corporation Grantee: N/A Terms: N/A Comments:
492 VACANT LAND SALE COMPARABLE NO. 6 Location: Francisco and Lakeside Pacifica, CA Assessor's Parcel No.: 016-400-080 & 100 (San Mateo County) Sale Date: 9/17/93 Document No.: 158133 Sale Price: $335,000 Size: 11,945 Square Feet (0.27 Acres) Sale Price/SF: $28.04 Topography: Level Shape: Irregular Proposed Use: 14 Townhomes; 51.8 Units/Acre Zoning: PD Grantor: Pacific Cooperative Housing Grantee: Peninsula Habitat/Humanity Inc. Terms: All Cash to Seller Comments:
493 WESTERN US ACLF/AL SENIOR HOUSING SALES SUMMARY LAST 24 MONTHS
Gross Expense Sale Inc. Ratio Price No. Facility Name Location Age Units $/Unit/Mo (%) Date (000) $/Unit OAR $/SF GIM --- ------------- -------- --- ----- --------- --- ---- ----- ------ --- ---- --- 1. The Highlander Seattle, WA 1979 121 $1,066 55.0% 6/93 $ 5,200 $41,322 13.4% $ 52.73 3.36 2. Almond Avenue Orangevale, CA 1987 39 $1,598 65.2% 7/93 $ 2,100 $53,864 12.4% $ 57.00 2.81 3. Summerfield Tigard, OR 1980 155 $1,100 60.0% 8/93 $ 6,550 $42,532 13.2% $ 80.84 3.20 4. Renton Villa Renton, WA 1983 78 $1,366 66.7% 8/93 $ 3,000 $38,462 14.2% $ 46.51 2.35 5. Sherwood Villa Tacoma, WA 1981 98 $1,328 69.0% 8/93 $ 2,800 $28,571 17.3% $ 45.67 1.79 6. Celeste Villa Modesto, CA 1975 81 $1,080 72.5% 10/93 $ 1,900 $23,457 13.7% $ 32.75 1.81 7. Springs of Napa Napa, CA 1986 102 $1,332 55.0% 11/93 $ 6,300 $61,765 11.7% $ 69.23 3.86 8. Summerhill Puyallup, WA 1987 96 $1,241 59.4% 2/94 $ 5,500 $57,292 10.5% $ 62.74 4.40 9. Chula Vista Inn Chula Vista, CA 1975 112 $1,034 75.0% 6/94 $ 2,675 $23,884 13.0% $ 41.10 1.92 10. Villa San Marcos San Marcos, CA 1986 100 $1,191 65.0% 6/94 $ 3,951 $39,510 12.7% $ 73.17 2.76 11. Camlu Phoenix, AZ 1979 88 $1,153 65.0% 6/94 $ 3,800 $43,182 11.2% $ 83.66 3.12 12. Gold Star Manor Fullerton, CA 1985 80 $1,146 70.0% 6/94 $ 2,880 $36,000 11.5% $ 128.34 2.62 13. Hacienda de Monterey Palm Desert, CA 1989 180 $1,813 65.8% 7/94 $ 7,250 $40,278 18.5% $ 41.36 1.85 14. Park Ridge Vallejo, CA 1991 93 $1,632 60.0% 7/94 $ 5,785 $62,204 11.3% $ 68.10 3.54 15. Carson Oaks Stockton, CA 1989 76 $1,462 60.0% 7/94 $ 4,200 $55,263 12.4% $ 66.95 3.23 16. Villa Ocotillo Scottsdale, AZ 1973 102 $1,242 60.0% 9/94 $ 3,500 $34,314 14.9% $ 43.34 2.30 17. Lomita Lodge Ojai, CA 1970 26 $1,999 75.0% 12/94 $ 1,350 $51,923 12.2% $ 135.00 2.06 18. Brea Residential Brea, CA 1990 98 $1,377 67.0% 1/95 $ 4,800 $48,980 11.1% $ 84.24 2.96 19. Whittier Retirement Whittier, CA 1973 72 $1,187 67.0% 1/95 $ 2,875 $39,937 11.8% $ 75.16 2.80 20. Canyon Hills Club Anaheim, CA 1989 212 $1,661 67.1% 2/95 $13,450 $63,443 10.3% $ 65.92 3.18 21. Casa Sandoval Hayward, CA 1989 238 $1,346 65.0% 2/95 $15,000 $63,025 9.0% $ 69.23 3.90 22. Valley Crest Apple Valley, CA 1985 37 $1,600 65.0% 2/95 $ 2,200 $59,459 11.3% $ 118.71 3.10 23. Amaryllis Court Anaheim, CA 1969 33 $1,391 75.0% 3/95 $ 1,150 $34,848 11.0% $ 71.72 2.09 24. Fulton Villa Stockton, CA 1973 76 $ 763 72.1% 3/95 $ 1,450 $19,079 11.5% $ 25.29 2.08 25. Oak Tree Villa Scotts Valley, CA 1988 202 $1,399 56.8% 6/95 $11,900 $58,911 12.3% $ 69.18 3.51
Low 1969 26 $ 763 55.0% $ 1,150 $19,079 9.0% $ 32.75 1.79 High 1991 238 $1,999 75.0% $15,000 $63,443 18.5% $ 135.00 4.40 Low (minus 2 lowest) 1973 37 $1,066 56.8% $ 1,450 $23,884 10.5% $ 41.36 1.85 High (minus 2 highest) 1989 202 $1,661 72.5% $11,900 $62,204 14.9% $ 118.71 3.86 Average: 1982 104 $1,340 65.3% $ 4,863 $44,860 12.5% $ 68.72 2.82
494 ARVP II SUMMARY OF VALUATIONS ---------------------
7/95 Values 3/96 Values % Increase ----------- ----------- ---------- Montego Heights Lodge $ 8,825,000 $ 8,975,000 +1.7% Valley View Lodge $10,375,000 $10,925,000 +5.3% Retirement Inn - Daly City $ 3,025,000 $ 3,475,000 +14.9% Retirement Inn - Fullerton $ 2,350,000 $ 2,425,000 +3.2% ----------- ----------- ------ Totals $24,575,000 $25,800,000 +5.0% =========== =========== ======
495 VALLEY VIEW LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES
Congregate (ACLF) Units Age/ -------------------- Miles Total Monthly From Units/ Unit Size- Rental - Rental/ No. Name/Location Subject AL Beds Type S.F. Private S.F. - --- ------------- ------- ------- ---- ---- ------- ------- 1. Byron Park 1991/ 187/19 Studio 431 $1,575 $3.65 1700 Tice Valley Blvd. 0.4 1BR 614-834 $1,850- $3.00- Walnut Creek $2,500 $3.01 2BR 877-1316 $2,600- $2.51- $3,300 $2.96 2. Eden Villa 7-95/ 36/72 Studio 300 (est.) Not Available 2015 Mt. Diablo Boulevard 3.5 Walnut Creek 3. Montego Heights Lodge 1978/ 169/192 Studio 296-391 $1,100- $3.58- 1400 Montego 2.4 $1,400 $3.72 Walnut Creek 1BR 687 $1,750 $2.55 SP $ 825- $ 850 4. Kensington Place 1988/ 176/44 1BR 450-560 $1,885 $3.37- 1580 Geary Blvd. 3.2 $4.19 Walnut Creek 2BR 760-820 $2,830 $3.45- $3.72 5. Chateau Pleasant Hill 1985/ 112/38 Studio 400 $1,295- $3.24- 2770 Pleasant Hill Road 3.2 $1,700 $4.25 Pleasant Hill 1BR 500 $1,650- $3.30- $2,000 $4.00 6. Family Affair Ret. 1975/ 120/160 Studio 450-500 $1,600 $3.20- 1081 Mohr Lane 4.5 $3.56 Concord 7. Moraga Royale 1987/ 95/182 Studio 525 Not Available 1600 Canyon Road 4.8 Moraga Assisted Living (AL) Units ----------------------------------------------- Monthly Rental - Semi- Reported No. Name/Location Private Private % SSI Occupancy - --- ------------- ------- ------- ----- --------- 1. Byron Park $2,650- N/A 0% 72% 1700 Tice Valley Blvd. $3,095 Walnut Creek 2. Eden Villa $2,450- $1,650- 0% 3% 2015 Mt. Diablo Boulevard $2,750 $1,950 (Opened Walnut Creek (shared bath) 7/95) $2,650- $2,950 (private bath) 3. Montego Heights Lodge +$150- +$150- 8% 87% 1400 Montego $1,000 $1,000 Walnut Creek 4. Kensington Place +$300- N/A 0% 100% 1580 Geary Blvd. $1,000 Walnut Creek 5. Chateau Pleasant Hill +$300-$500 N/A 0% 99% 2770 Pleasant Hill Road Pleasant Hill 6. Family Affair Ret. $2,000- $1,800 0% WND 1081 Mohr Lane $2,200 Concord 7. Moraga Royale $1,600- $ 850 0% 98% 1600 Canyon Road $2,200 Moraga
496 VALLEY VIEW LODGE CENSUS OF MARKET AREA ACLF/AL FACILITIES (CONTINUED)
Congregate (ACLF) Units Age/ -------------------- Miles Total Monthly From Units/ Unit Size- Rental - Rental/ No. Name/Location Subject AL Beds Type S.F. Private S.F. - --- ------------- ------- ------- ---- ---- ------- ------- 8. Diablo Lodge 1990/ 118/128 Studio 360 (avg.) $1,795- $4.99- 950 Diablo Road 5.5 $2,095 $5.82 Danville 1BR 490 $2,195- $4.48- $2,495 $5.09 2BR 658 (avg.) $2,695- $4.10- $2,895 $4.40 9. Concord Royale 1979/ 120/196 Studio 250 (est.) Not Available 4230 Clayton Road 6.5 Concord 10. San Ramon Lodge 1991/ 40/60 Studio 219-365 Not Available 18888 Bollinger Canyon Road 8.6 San Ramon 11. Villa San Ramon 1992/ 120/120 Studio 400 $1,650- $4.13- 9199 Fircrest Lane 8.5 $1,795 $4.49 San Ramon 1BR 500-552 $1,825- $2.85- $1,995 $3.65 Lg. 1BR 700 $2,000- $2.86- $2,300 $3.29 2BR 850-870 $2,595- $3.05- $2,795 $3.21 S. Valley View Lodge 1976/- 125/96 Studio 390 $1,375 $3.53 1228 Rossmoor Parkway Alcove 533 $1,750 $3.28 Walnut Creek 1BR 571 $1,950 $3.42 SP $1,175 Assisted Living (AL) Units ----------------------------------------------- Monthly Rental - Semi- Reported No. Name/Location Private Private % SSI Occupancy - --- ------------- ------- ------- ----- --------- 8. Diablo Lodge +$300- N/A 0% 100% 950 Diablo Road $1,000 Danville 9. Concord Royale $1,200- $850- 25% 98% 4230 Clayton Road $1,800 $950 Concord 10. San Ramon Lodge $2,000- $1,500- 0% 86% 18888 Bollinger Canyon Road $2,500 $1,800 San Ramon 11. Villa San Ramon $2,750 N/A 99% 9199 Fircrest Lane San Ramon $2,850 N/A $3,600 $1,600 S. Valley View Lodge +$150- +$150- 0% 96% 1228 Rossmoor Parkway $1,000 $1,000 Walnut Creek
497 VALLEY VIEW LODGE VACANT LAND SALES
Sale Price Proposed Sale Size-SF Proposed ------------------ Density - No. Location/APN Date Sale Price (Acres) Development SF Unit Zoning Units/Acre - --- ------------ ---- ---------- ------- ----------- -- ---- ------ ---------- 1. 1836 San Miguel Drive Listing $ 430,000 33,106 6 Townhomes $12.99 $71,667 C-O 7.9 Walnut Creek (0.76) 180-010-029 2. 123 Brodia Way 3/95 $ 720,000 49,658 Low Density $14.50 N/A R-4 N/A Walnut Creek (1.14) Residential 140-170-006-5 3. Tice Creek Drive, 12/94 $1,781,500 185,130 2 Duplexes & $ 9.62 $71,260 PD-1829 5.9 NW of Golden Rain Road (4.25) 7 Triplexes Walnut Creek 189-130-017-8 4. Tice Valley Boulevard, 12/94 $1,781,500 217,800 Nursing Home $ 8.18 N/A PD N/A SW of Rossmoor Parkway (5.00) Walnut Creek 189-130-019-4 (Portion) S. 1228 Rossmoor Parkway - - 198,198 125 Senior - - PD 35.2 Walnut Creek (4.55) Housing Units 189-040-045 gross; 154,638 (3.55) net
498 VALLEY VIEW LODGE COMPARABLE IMPROVED SALES
Indicated Age/No. Sale Price/ Sale Occupancy Overall No. Name/Location of Units Date Sale Price Unit Price/SF @ Sale Rate - --- ------------- -------- ---- ---------- ----- -------- ---------- ------- 1. Oak Tree Villa 1988/ 6/95 $11,900,000 $58,911 $69.19 72% 12.3% (1) 100 Lockwood Lane 202 Scotts Valley, CA 2. El Camino Gardens 1984/ 5/95 $10,000,000 $34,965 $62.19 82% 11.2% (1) 2426 Garfield 286 Carmichael, CA 3. Casa Sandoval 1989/ 2/95 $15,000,000 $63,025 $69.23 81% 9.0% (1) 1200 Russell Way 238 Hayward, CA 4. Lomita Lodge 1970's/ 12/94 $1,350,000 $51,923 $135.00 81% 12.2% (1) 225 N. Lomita 26 Ojai, CA 5. Carson Oaks 1989/ 7/94 $4,200,000 $55,263 $66.95 95% 12.4% 6725 Inglewood Avenue 76 Stockton, CA 6. Park Ridge 1991/ 7/94 $5,785,000 $62,204 $68.10 55% 11.3% (1) 2261 Tuolumne 93 Vallejo, CA
(1) Estimated at 92% occupancy 499 VALLEY VIEW LODGE COMPARATIVE RENT ANALYSIS ACLF - CONGREGATE RENTS
Private - 1BR Private - Studio ---------------------------------- ---------------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ 1 $1,850-$2,500 1 $1,575 2 $2,195-$2,495 3* $1,100-$1,400 3* $1,750 5* $1,295-$1,700 4 $1,885 8 $1,795-$2,095 5* $1,650-$2,000 11 $1,650-$1,795 8 $2,195-$2,495 11 $1,825-$2,300 Range $1,650-$2,500 $1,100-$2,095 Average $2,063 $1,598
AL - ASSISTED LIVING RENTS
Private - 1BR Private (Studio) Semi-Private ------------------------------ ------------------------------ ----------------------------- Comp. No. Monthly Rent Comp. No. Monthly Rent Comp. No. Monthly Rent --------- ------------ --------- ------------ --------- ------------ 1 $3,300 1 $2,850 1 $2,150-$2,850 3 $2,200-$2,300 2 $2,450-$2,950 2 $1,650-$1,950 4 $2,185-$2,885 3* $1,550-$1,850 3* $1,275-$1,563 5* $1,950-$2,500 5* $1,595-$2,200 5* $2,495-$3,495 6 $2,000-$2,200 7 $1,600-$2,200 6 $1,800 8 $2,495-$3,495 8 $2,095-$3,195 7 $850 11 $2,850 9* $1,200-$1,800 9* $850-$950 10 $2,000-$2,500 10 $1,500-$1,800 11 $2,750 11 $1,600 Range $1,950-$3,495 $1,200-$3,195 $850-$3,495 Average $2,607 $2,243 $1,724
Private - 1BR Private - Studio Semi-Private ------------- ---------------- ------------ Subject Rented Beds - Subject Range $1,925-$1,950 $1,375-$1,750 $1,062-$1,175 Subject Average $1,942/$2,517** $1,673/$2,248** $1,142/$1,717** (9 Units) (108 Units) (6 Beds) Subject Vacant Beds - Subject Range $1,950 $1,750 - Subject Average $1,950/$2,575** $1,750/$2,325** - (1 Unit) (4 Units)
*Comparable Nos. 3 - Montego Heights Lodge; 5 - Chateau Pleasant Hill; and 7 - Concord Royale are most similar to the subject. **Includes average assisted living surcharge of $575 per month. 500 VALLEY VIEW LODGE COMPARABLE IMPROVED SALES ADJUSTMENTS
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 ----- ----- ----- ----- ----- ----- Sale Price Per Unit $58,911 $34,965 $ 63,025 $51,923 $55,263 $62,204 Before Adjustment Occupancy Adjustment +10% +5% +5% +5% - +15% Net Income Per Unit +34% +147% +72% +54% +42% +38% Adjustment (Subject (1) $(9,703/ $(9,703/ $ (9,703/ $(9,703/ $(9,703/ $(9,703/ NOI/Unit/Comp/NOI/Unit $ 7,246) $ 3,923) $ 5,653) $ 6,314) $ 6,851) $ 7,020) ------- ------- -------- ------- ------- ------- Sale Price Per Unit After Adjustment $86,835 $90,684 $113,823 $83,959 $78,473 $98,718 ======= ======= ======== ======= ======= =======
Range (Less Outlying Sale No. 3): $ 78,473 - $ 98,718 x 125 Units x 125 Units ----------- ----------------- Indicated Value Range: $9,809,125 - $12,339,750 ========== =========== Called: $9,800,000 to $12,350,000
(1) Subject stabilized NOI/Unit - $1,212,831/125 Units 501 VALLEY VIEW LODGE SUMMARY OF SUBJECT RENT CENSUS AT 6/21/95
Private-1BR Private-Studio Semi-Private (Units) (Units) (Beds) Total ----------- -------------- ------------ ----- Number Units/Beds - Rented 9 108 6 123(96.1%) Rent Range $1,925-$1,950 $1,375-$1,750 $1,062-$1,175 $1,062-$1,950 Rent Average $1,942 $1,673 $1,142 $1,667 Potential Total Rent-Rented $209,700 $2,168,700 $82,200 $2,460,600 Number Units/Beds - Vacant (1) 1 4 - 5(3.9%) Rent Range $1,950 $1,750 - $1,750-$1,950 Rent Average $1,950 $1,750 - $1,790 Total Potential Rent-Vacant $23,400 $84,000 - $107,400 Total Units/Beds 10 112 6 128(100%) Gross Potential Rent-Total $233,100 $2,252,700 $82,200 $2,568,000 Per Unit/Bed $1,943 $1,676 $1,142 $1,672
NOTES: (1) Vacant units include: Private 1BR - Unit 125 (1 Unit); Private Studio - Units 123, 133, 143, 150 (4 Units) (2) Subject has no SSI residents. 502 VALLEY VIEW LODGE SATURATION ANALYSIS
Saturation Rate (1) ------------------------------------ Subject w/o Subject w/Subject Only # H.H. (2) (1,843 Beds)(3) (1,971 Beds) (128 Beds) ---------- --------------- ------------ ---------- 1995 Estimate - ------------- 75+, $15,000 Income 6,183 29.8% 31.9% 2.1% 2000 Projection - --------------- 75+, $15,000 Income 6,828 27.0% 28.9% 1.9%
NOTES: (1) Market saturation rates represent the percentage of total market demand which is necessary to absorb a) existing or proposed units not including the subject, and b) existing or proposed units including the subject. (2) Number of income and age qualifying senior households within 5-mile radius of site per Urban Decision Systems. (3) Number of competitive units estimated at 100% of Comparable Nos. 1 to 7, 50% of Comparable Nos. 8 to 11, and 300 units at The Waterford (senior congregate condominiums). (4) Evaluation of saturation rates:
Saturation Evaluation of Rate Market Environment ---------- ------------------ 0% - 10% Lightly Competitive 10% - 20% Moderately Competitive 20% - 30% Heavily Competitive 30%+ Extremely Competitive
503 VALLEY VIEW LODGE VALUATION OF FAVORABLE FINANCING Present value of financing at market rate (9.5%): $2,822,704 Present value of financing at below market rate (8.25%): Present value of $23,468 (1) monthly payment for 21.3 remaining years at 9.5% market rate $2,555,366 ---------- Difference in present value of financing $ 267,338 Less: $6,000/year annual HUD audit charges (through 2016) discounted to 7/95 @ 9.5% $ (53,766) Plus: Present value of replacement reserve balance @ 7/95 ($88,817) discounted to 7/95 @ 6.0% (9.5% market interest rate less 3.5% estimated interest earned on escrow funds) $ 55,261 ---------- Net Difference in present value of financing $ 268,833 ========== Called $ 275,000
(1) Monthly payment for $3,286,200, 40 years, 8.25% interest rate plus reserve obligations. 504 VALLEY VIEW LODGE HISTORICAL INCOME AND EXPENSE
Historical ------------------------------------------------------------- Operator 4 Months Goal Year Ending Year Ending Ending 1995 Budget Revenues 12/93 12/94 4/30/95 Annualized 1995 - -------- ----------- ------------ -------- ---------- ------ Rental Income $2,337,333 $2,456,025 $831,496 $2,494,488 $2,507,813 Assisted Living Income 231,250 321,567 123,447 370,341 457,500 Non-Operating Revenue $ 32,024 $ 35,709 $ 9,071 $ 27,213 $ 38,338 ---------- ---------- -------- ---------- ---------- Total Revenues $2,600,607 $2,813,301 $964,014 $2,892,042 $3,003,651 Expenses (1) Real Estate Taxes $ 75,876 $ 82,430 (2) (2) $ 83,092 Insurance 16,912 22,500 (2) (2) 25,276 G&A 45,320 57,592 (2) (2) 55,990 Utilities 159,499 166,783 (2) (2) 162,390 Payroll/Benefits 717,863 798,708 (2) (2) 850,728 Maintenance 69,041 68,679 (2) (2) 71,520 Activities 13,826 11,965 (2) (2) 12,750 Marketing 19,051 16,848 (2) (2) 20,936 Laundry & Linen 12,571 10,195 (2) (2) 14,925 Dietary 178,270 183,906 (2) (2) 183,819 Supplies 42,555 36,469 (2) (2) 34,800 ---------- ---------- -------- ---------- ---------- Total Operating Expense $1,350,784 $1,456,075 $496,506 $1,489,518 $1,516,226 (51.9%) (51.8%) (51.5%) (51.5%) (50.5%) Net Operating Income $1,249,823 $1,357,226 $467,508 $1,402,524 $1,487,425 ========== ========== ======== ========== ==========
NOTES: (1) Does not include management fee or replacement reserves. (2) Detail not available. 505 VALLEY VIEW LODGE PRO FORMA INCOME/EXPENSE & CAPITALIZATION
Projected Stabilized (7/95-6/96) ----------- Average Occupancy (All Beds) 95.0% (121.6 Beds) Average Net Rental (All Beds) $1,705 Potential Gross Rent Income - 1BR Private - 10 Units @ $1,982/Mo. Avg. $ 237,823 Studio Private - 112 Units @ $1,710/Mo. Avg. 2,297,595 Semiprivate - 6 Beds @ $1,165/Mo. Avg. $ 83,868 ----------- Potential Gross Rent Income $ 2,619,286 Plus: Assisted Living Surcharges (70 Beds @ $575/mo.) $ 483,000 Plus: Miscellaneous Income (1% of PGRI) $ 26,193 ----------- Potential Gross Income $ 3,128,479 Less: Stabilized Vacancy & Collection Losses - 5% $ (156,424) ----------- Effective Gross Income $ 2,972,055 Expenses - % of EGI -------- Real Estate Taxes - $ 120,966 Insurance 1.0% 29,721 Management 5.0% 148,603 G&A 10.0% 297,206 Utilities 5.5% 163,467 Maintenance 3.0% 89,162 Activity & Trans. 2.0% 59,441 Marketing 2.0% 59,441 Housekeeping 4.5% 129,318 Dietary $8.50/PRD 377,264 Personal Care 8.0% 237,764 Replacement Reserves - $ 46,875 ----------- Total Expenses $ 1,759,224 (59.2%) Stabilized Net Operating Income $ 1,212,831 Capitalization Rate .12 ----------- Capitalized Value $10,106,925 =========== Called $10,100,000 Per Unit $ 80,800
506 VALLEY VIEW LODGE COST APPROACH CALCULATION (CALCULATOR METHOD) Total Land Value (154,638 Net SF at $12.50/SF) $ 1,932,975 Direct Building Costs - --------------------- Building Cost $6,826,190 Furniture & Equipment (125 Units @ $2,500/each) 312,500 ---------- Total Direct Building Costs $ 7,138,690 ----------- Total Direct Building and Land Costs $ 9,071,665 Indirect Costs - 7% $ 635,017 ----------- Total Construction and Land Costs $ 9,706,682 Plus Entrepreneurial Profit @ 15% $ 1,456,002 ----------- Total Cost New (Including Land) $11,162,684 Less Depreciation - ----------------- Physical Curable 0 Physical Incurable $(2,544,162) Functional Curable 0 Functional Incurable 0 External Obsolescence 0 ----------- Total Depreciation $(2,544,162) ----------- Indicated Value, Cost Approach, As Is $ 8,618,522 =========== Rounded to $ 8,625,000
507 SUBJECT PHOTOGRAPHS Subject from Main Parking Area, View East Main Entrance of Subject 508 SUBJECT PHOTOGRAPHS Reception Area Main Dining Room 509 SUBJECT PHOTOGRAPHS Typical Interior Courtyard/Walkways Typical Interior Corridor 510 SUBJECT PHOTOGRAPHS Main Access Driveway Entry to Subject, View East Parking Lot, View North 511 SUBJECT PHOTOGRAPHS Typical Lounge Area Auditorium 512 SUBJECT PHOTOGRAPHS Typical Unit Interiors 513 SUBJECT PHOTOGRAPHS Main Entry Lobby, Open to Second Floor 514 NEIGHBORHOOD PHOTOGRAPHS Open Space/Homes Surrounding Subject 515 NEIGHBORHOOD PHOTOGRAPHS Guardian Nursing Home Immediately West of Subject View West toward Exit Driveway, Guardian Nursing Home to Left, Manor Care Nursing Home to Right 516 COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 1 - Byron Park 1700 Tice Valley Boulevard Walnut Creek No. 2 - Eden Villa 2015 Mt. Diablo Boulevard 517 Walnut Creek COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 3 - Montego Heights Lodge 1400 Montego Walnut Creek No. 4 - Kensington Place 518 1580 Geary Boulevard Walnut Creek COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 5 - Chateau Pleasant Hill 2770 Pleasant Hill Road Pleasant Hill 519 No. 6 - Family Affair 1081 Mohr Lane Concord COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 7 - Moraga Royale 1600 Canyon Road Moraga 520 No. 8 - Diablo Lodge 950 Diablo Road Danville COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 9 - Concord Royale 4230 Clayton Road Concord 521 No. 10 - San Ramon Lodge 18888 Bollinger Canyon Road San Ramon COMPARABLE MARKET AREA SENIOR HOUSING FACILITIES No. 11 - Villa San Ramon 9199 Fircrest Lane San Ramon 522 IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 1 - Canyon Hills Club 525 S. Anaheim Hills Road Anaheim No. 2 - Brea Residential Manor 285 W. Central 523 Brea IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 3 - Whittier Retirement Villa 8101 S. Painter Whittier No. 4 - Gold Star Manor 524 411 E. Commonwealth Fullerton IMPROVED SALE COMPARABLE PHOTOGRAPHS No. 5 - Villa San Marcos 1550 Security Place San Marcos 525 No. 6 - Chula Vista Inn 171 4th Avenue Chula Vista 526 VACANT LAND SALE COMPARABLE NO. 1 Location: 1836 San Miguel Drive Walnut Creek, CA Assessor's Parcel No.: 180-010-029 (Contra Costa County) Sale Date: Listing Document No.: N/A Listing Price: $430,000 Size: 33,106 Square Feet (0.76 Acres) Listing Price/SF: $12.99 Topography: Level Shape: Rectangular Proposed Use/Density: 6 Townhomes; 7.9 Units/Acre Sale Price Per Unit: $71,667 Zoning: C-O Grantor: Kenneth Nazari & Sahrab Firoozeh Nazari Grantee: N/A Terms: N/A Comments: Located across San Miguel Drive from professional offices; in overall residential area; property has been listed for over one year, according to the broker with no offers; listing price includes approved townhome plans.
VACANT LAND SALE COMPARABLE NO. 3 527 Location: Tice Creek Drive, Northwest of Golden Rain Road Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287278 Sale Price: $1,781,500 Size: 185,130 Square Feet (4.25 Acres) Sale Price/SF: $9.62 Topography: Flat to Slightly Sloping Shape: Irregular Proposed Use/Density: 2 Duplexes and 7 Triplexes; 5.88 Units/Acre Sale Price Per Unit: $71,260 @ 25 units Zoning: PD-1829 Grantor: Manor Healthcare Corp. Grantee: UDC Homes, Inc. Terms: All Cash to Seller Comments: Site located inside the gated Rossmoor Retirement Community; this transaction was a direct exchange with Land Sale No. 4; development of condominiums underway; parcel is located across Golden Rain Road from The Waterford (congregate senior condos).
VACANT LAND SALE COMPARABLE NO. 2 528 Location: 123 Brodia Way Walnut Creek, CA Assessor's Parcel No.: 140-170-006-5 (Contra Costa County) Sale Date: 3/3/95 Document No.: 35433 Sale Price: $720,000 Size: 49,658 Square Feet (1.14 Acres) Sale Price/SF: $14.50 Topography: Level Shape: Rectangular Proposed Use/Density: Unknown Zoning: R-4 Grantor: Edward Sonnenberg Grantee: M/M Richard and Lynne Chapman Terms: N/A Comments: In rolling hill, high end residential area; owner holding for future development.
529 VACANT LAND SALE COMPARABLE NO. 4 Location: Tice Valley Boulevard, Southwest of Rossmoor Parkway Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287282 Sale Price: $1,781,500 Size: 217,800 Square Feet (5.0 Acres) Sale Price/SF: $8.18 Topography: Sloping Shape: Irregular Proposed Use/Density: 120 Bed Nursing Home; 13 Rooms/Acre (estimated) Zoning: PD Grantor: UDC Homes, Inc. Grantee: Manor Health Care Corp. Terms: All Cash to Seller Comments: Site located outside the gated Rossmoor Retirement Community; sale was a direct exchange with Land Sale No. 3; parcel has 451 feet of frontage along Rossmoor Parkway and 406 feet of frontage along Tice Valley Boulevard.
530 IMPROVED SALE COMPARABLE NO. 1 Name: Oak Tree Villa Location: 100 Lockwood Lane, Scotts Valley, CA Assessor's Parcel No.: 021-052-01 (Santa Cruz County) Sale Date: 6/6/95 Sale Price: $11,900,000 No. of Units: 202 Units (includes 40 assisted living units) Age: 1988 % Private Pay: 100% (includes 20% low income residents) Size (GBA): 172,000 Square Feet Average Unit Size (GBA/Unit): 851 Square Feet Sale Price/Unit: $58,911 Sale Price/SF: $69.19 Occupancy Rate: 72% Gross Operating Income: $3,390,984 (estimated at 90% occupancy) Expenses: $1,925,343 Net Operating Income: $1,465,641 (estimated at 90% occupancy) % Expenses: 56.8% G.I.M.: 3.51 O.A.R.: 12.3 (estimated at 90% occupancy) N.O.I./Unit: $7,256 Grantor: Oak Tree Villa Partnership Grantee: Birtcher Senior Properties Terms: $4,955,000 cash (39%); $7,745,000 assumption of existing debt, 30 year amortization, due in 15 years, 10.25% rate. Comments: 20% of units must be allocated to low income (HUD) residents; unit mix: 102 alcove units (450 SF) and 100 one bedroom units (600 SF); located in lightly populated area. Confirmation: Keith Louie (415) 391-9220
531 IMPROVED SALE COMPARABLE NO. 2 Name: El Camino Gardens Location: 2426 Garfield Avenue, Carmichael, CA Assessor's Parcel No.: 283-0030-14 (Sacramento County) Sale Date: 5/31/95 (Document No. 8309302142) Sale Price: $10,000,000 (includes $650,000 in deferred maintenance) No. of Units: 286 Units (174 ACLF/112 ALF) Age: 1984 Size (GBA): 160,810 Square Feet Average Unit Size (GBA/Unit): 562 Square Feet Sale Price/Unit: $34,965 Sale Price/SF: $62.19 Occupancy Rate: 82% Gross Operating Income: $2,814,240 (estimated at 93% occupancy) Expenses: $1,692,240 Net Operating Income: $1,122,000 (estimated at 93% occupancy) % Expenses: 60.1% G.I.M.: 3.55 O.A.R.: 11.2% (estimated at 93% occupancy) N.O.I./Unit: $3,923 Grantor: Joseph Benvenuti Grantee: Nationwide Health Properties (REIT) Terms: All Cash to Seller Comments: Project had approximately $650,000 in deferred maintenance at time of sale; purchased by REIT and leased to ARV Housing Group; licensed to include up to 224 assisted living beds. Confirmation: Eric Davidson (714) 751-7400
532 IMPROVED SALE COMPARABLE NO. 3 Name: Casa Sandoval Location: 1200 Russell Way, Hayward, CA Assessor's Parcel No.: 415-240-007, 008 (Alameda County) Sale Date: 2/27/95 Sale Price: $15,000,000 No. of Units: 238 Units Age: 1989 Size (GBA): 216,639 Square Feet Average Unit Size (GBA/Unit): 920 Square Feet Sale Price/Unit: $63,025 Sale Price/SF: $69.23 Occupancy Rate: 81% Gross Operating Income: $3,844,396 (estimated at 92% occupancy) Expenses: $2,498,857 Net Operating Income: $1,345,539 % Expenses: 65% (estimated at 92% occupancy) G.I.M.: 3.90 O.A.R.: 9.0% N.O.I./Unit: $5,653 Grantor: Casa Sandoval Investors, L.P. Grantee: Weh Chang Terms: All Cash to Seller Comments: Average quality project in middle income suburban area; sold at auction on 2/9/95; property underperforming at date of sale; buyer plans significant licensing/conversion of many units to assisted living. Confirmation: John Rosenfeld (310) 473-8900 ext. 119
533 IMPROVED SALE COMPARABLE NO. 4 Name: Lomita Lodge Location: 225 N. Lomita Avenue, Ojai, CA Assessor's Parcel No.: 017-083-200 (Ventura County) Sale Date: 12/30/94 (Doc. No. 206073) Sale Price: $1,350,000 No. of Units: 26 Units/36 Beds (Licensed AL) Age: 1940's/1970's Size (GBA): 10,000 Square Feet Average Unit Size (GBA/Unit): 385 Square Feet Sale Price/Unit: $51,923 Sale Price/SF: $135.00 Occupancy Rate: 81% Gross Operating Income: $656,640 (estimated at 95% occupancy) Expenses: $492,480 Net Operating Income: $164,160 (estimated at 95% occupancy) % Expenses: 75.0% G.I.M.: 2.06 O.A.R.: 12.2% (estimated at 95% occupancy) N.O.I./Unit: $6,314 Grantor: Raymond & Judy Berard Grantee: Ojai Retirement Inn #1, Ltd. Terms: $270,000 Cash; $1,080,000 variable rate loan at 8.5%, 20 year amortization. Comments: Property underperformed at date of sale; currently 95% occupied; rents range from $1,500 to $2,350 per month per bed; property includes about 25% SSI. Confirmation: Gerry Meglin (805) 646-5533
534 IMPROVED SALE COMPARABLE NO. 5 Name: Carson Oaks (now called Merrill Gardens at Carson Oaks) Location: 6725 Inglewood Avenue, Stockton, CA Assessor's Parcel No.: 081-260-053 (San Joaquin County) Sale Date: 7/27/94 (Doc. No. 87023) Sale Price: $4,200,000 No. of Units: 76 Units Age: 1989 % Private Pay: 100% Size (GBA): 62,733 Square Feet Average Unit Size (GBA/Unit): 612 Square Feet (average unit) Sale Price/Unit: $55,263 Sale Price/SF: $66.95 Occupancy Rate: 95% Gross Operating Income: $1,301,712 Expenses: $781,027 Net Operating Income: $520,685 % Expenses: 60% G.I.M.: 3.23 O.A.R.: 12.4% N.O.I./Unit: $6,851 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Newer facility with large number of one bedroom with full kitchens in an affluent neighborhood; not licensed for assisted living. Confirmation: Lee Haris (415) 391-9220
535 IMPROVED SALE COMPARABLE NO. 6 Name: Park Ridge (now called Merrill Gardens) Location: 2261 Tuolumne Street, Vallejo, CA Assessor's Parcel No.: 0052-330-008 (Solano County) Sale Date: 7/27/94 (Doc. No. 69837) Sale Price: $5,785,000 No. of Units: 93 ACLF; 14 Beds (Licensed AL) Age: 1991 % Private Pay: 100% Size (GBA): 84,989 Square Feet Average Unit Size (GBA/Unit): 654 Square Feet Sale Price/Unit: $62,204 Sale Price/SF: $68.10 Occupancy Rate: Project stabilized at 90%; at sale date 55% Gross Operating Income: $1,632,150 Expenses: $979,290 Net Operating Income: $652,860 % Expenses: 60% G.I.M.: 3.54 O.A.R.: 11.3% N.O.I./Unit: $7,020 Grantor: Tuolumne Commons, Limited Partner Grantee: Merrill Associates, Limited Partner Terms: All Cash to Seller Comments: Modern congregate/assisted living with 15 studios, 59 - 1 bedrooms and 19 - 2 bedrooms; located in residential area and bounded by Sutter Solano Medical Center and Crestwood Convalescent Hospital. Confirmation: Lee Haris (415) 391-9220
536 WESTERN US ACLF/AL SENIOR HOUSING SALES SUMMARY LAST 24 MONTHS
Gross Expense Sale Inc. Ratio Price No. Facility Name Location Age Units $/Unit/Mo (%) Date (000) - --- ---------------------- ----------------- ----- ----- --------- ------- ---- ------- 1. The Highlander Seattle, WA 1979 121 $1,066 55.0% 6/93 $ 5,200 2. Almond Avenue Orangevale, CA 1987 39 $1,598 65.2% 7/93 $ 2,100 3. Summerfield Tigard, OR 1980 155 $1,100 60.0% 8/93 $ 6,550 4. Renton Villa Renton, WA 1983 78 $1,366 66.7% 8/93 $ 3,000 5. Sherwood Villa Tacoma, WA 1981 98 $1,328 69.0% 8/93 $ 2,800 6. Celeste Villa Modesto, CA 1975 81 $1,080 72.5% 10/93 $ 1,900 7. Springs of Napa Napa, CA 1986 102 $1,332 55.0% 11/93 $ 6,300 8. Summerhill Puyallup, WA 1987 96 $1,241 59.4% 2/94 $ 5,500 9. Chula Vista Inn Chula Vista, CA 1975 112 $1,034 75.0% 6/94 $ 2,675 10. Villa San Marcos San Marcos, CA 1986 100 $1,191 65.0% 6/94 $ 3,951 11. Camlu Phoenix, AZ 1979 88 $1,153 65.0% 6/94 $ 3,800 12. Gold Star Manor Fullerton, CA 1985 80 $1,146 70.0% 6/94 $ 2,880 13. Hacienda de Monterey Palm Desert, CA 1989 180 $1,813 65.8% 7/94 $ 7,250 14. Park Ridge Vallejo, CA 1991 93 $1,632 60.0% 7/94 $ 5,785 15. Carson Oaks Stockton, CA 1989 76 $1,462 60.0% 7/94 $ 4,200 16. Villa Ocotillo Scottsdale, AZ 1973 102 $1,242 60.0% 9/94 $ 3,500 17. Lomita Lodge Ojai, CA 1970 26 $1,999 75.0% 12/94 $ 1,350 18. Brea Residential Brea, CA 1990 98 $1,377 67.0% 1/95 $ 4,800 19. Whittier Retirement Whittier, CA 1973 72 $1,187 67.0% 1/95 $ 2,875 20. Canyon Hills Club Anaheim, CA 1989 212 $1,661 67.1% 2/95 $13,450 21. Casa Sandoval Hayward, CA 1989 238 $1,346 65.0% 2/95 $15,000 22. Valley Crest Apple Valley, CA 1985 37 $1,600 65.0% 2/95 $ 2,200 23. Amaryllis Court Anaheim, CA 1969 33 $1,391 75.0% 3/95 $ 1,150 24. Fulton Villa Stockton, CA 1973 76 $ 763 72.1% 3/95 $ 1,450 25. Oak Tree Villa Scotts Valley, CA 1988 202 $1,399 56.8% 6/95 $11,900 Low 1969 26 $ 763 55.0% $ 1,150 High 1991 238 $1,999 75.0% $15,000 Low (minus 2 lowest) 1973 37 $1,066 56.8% $ 1,450 High (minus 2 highest) 1982 104 $1,340 65.3% $11,900 Average: 1983 110 $1,330 64.9% $ 4,863 No. Facility Name $/Unit OAR $/SF GIM - --- ---------------------- -------- --------- -------- --- 1. The Highlander $41,322 13.4% $52.73 3.36 2. Almond Avenue $53,864 12.4% $57.00 2.81 3. Summerfield $42,532 13.2% $80.84 3.20 4. Renton Villa $38,462 14.2% $46.51 2.35 5. Sherwood Villa $28,571 17.3% $45.67 1.79 6. Celeste Villa $23,457 13.7% $32.75 1.81 7. Springs of Napa $61,765 11.7% $69.23 3.86 8. Summerhill $57,292 10.5% $62.74 4.40 9. Chula Vista Inn $23,884 13.0% $41.10 1.92 10. Villa San Marcos $39,510 12.7% $73.17 2.76 11. Camlu $43,182 11.2% $83.66 3.12 12. Gold Star Manor $36,000 11.5% $128.34 2.62 13. Hacienda de Monterey $40,278 18.5% $41.36 1.85 14. Park Ridge $62,204 11.3% $68.10 3.54 15. Carson Oaks $55,263 12.4% $66.95 3.23 16. Villa Ocotillo $34,314 14.9% $43.34 2.30 17. Lomita Lodge $51,923 12.2% $135.00 2.06 18. Brea Residential $48,980 11.1% $84.24 2.96 19. Whittier Retirement $39,937 11.8% $75.16 2.80 20. Canyon Hills Club $63,443 10.3% $65.92 3.18 21. Casa Sandoval $63,025 9.0% $69.23 3.90 22. Valley Crest $59,459 11.3% $118.71 3.10 23. Amaryllis Court $34,848 11.0% $71.72 2.09 24. Fulton Villa $19,079 11.5% $25.29 2.08 25. Oak Tree Villa $58,911 12.3% $69.18 3.51 Low $19,079 9.0% $32.75 1.79 High $63,443 18.5% $135.00 4.40 Low (minus 2 lowest) $23,884 10.5% $41.36 1.85 High (minus 2 highest) $62,204 14.9% $118.71 3.86 Average: $44,860 12.5% $68.72 2.82
537 MONTEGO HEIGHTS LODGE SATURATION ANALYSIS
Saturation Rate (1) ----------------------------------- Subject w/o Subject w/Subject Only # H.H. (2) (1,779 Beds)(3) (1,971 Beds) (192 Beds) ---------- --------------- ------------ ---------- 1995 ESTIMATE 75+, $15,000 Income 7,045 25.3% 28.0% 2.7% 2000 PROJECTION 75+, $15,000 Income 7,986 22.3% 24.7% 2.4%
NOTES: (1) Market saturation rates represent the percentage of total market demand which is necessary to absorb a) existing or proposed units not including the subject, and b) existing or proposed units including the subject. (2) Number of income and age qualifying senior households within 5-mile radius of site per Urban Decision Systems. (3) Number of competitive units estimated at 100% of Comparable Nos. 1 to 7, 50% of Comparable Nos. 8 to 11 and 300 units at The Waterford (senior congregate condominiums). (4) Evaluation of saturation rates:
Saturation Evaluation of Rate Market Environment ---------- ------------------ 0% - 10% Lightly Competitive 10% - 20% Moderately Competitive 20% - 30% Heavily Competitive 30%+ Extremely Competitive
538 ARVP II VALUATION SUMMARY
Previous Draft Reported Values Revised Values (1) --------------- ------------------ Montego Heights $ 8,675,000 $ 8,825,000 Valley View $ 9,850,000 $10,375,000 Retirement Inn - Fullerton $ 2,350,000 $ 2,350,000 Retirement Inn - Daly City $ 2,875,000 $ 3,025,000 ----------- ----------- Total $23,750,000 $24,575,000 =========== ===========
(1) Based on discussions with Stanger and additional information. 539 VACANT LAND SALE COMPARABLE NO. 1 Location: San Miguel and Newell Road Walnut Creek, CA Assessor's Parcel No.: 180-010-029 (Contra Costa County) Sale Date: Listing Document No.: N/A Sale Price: $430,000 Size: 33,106 Square Feet (0.76 Acres) Sale Price/SF: $12.99 Topography: Level Shape: Rectangular Proposed Use/Density: 6 townhomes Sale Price Per Unit: $71,667 Zoning: Grantor: Grantee: Terms: N/A Comments:
540 VACANT LAND SALE COMPARABLE NO. 5 Location: Tice Valley Boulevard, Northwest of Rossmoor Parkway Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287278 Sale Price: $1,781,500 Size: 185,130 Square Feet (4.25 Acres) List Price/SF: $9.62 Topography: Flat to Slightly Sloping Shape: Irregular Proposed Use/Density: 2 duplexes and 7 triplexes List Price Per Unit: $71,260 @ 25 units Zoning: PD-1829 Grantor: Manor Healthcare Corp. Grantee: UDC Homes, Inc. Terms: All Cash to Seller Comments: This transaction was a direct exchange.
541 VACANT LAND SALE COMPARABLE NO. 6 Location: Tice Valley Boulevard, Southwest of Rossmoor Parkway Walnut Creek, CA Assessor's Parcel No.: 189-130-019-4 (Contra Costa County) Sale Date: 12/2/94 Document No.: 287282 Sale Price: $1,781,500 Size: 217,800 Square Feet (5.0 Acres) Sale Price/SF: $8.18 Topography: Sloping Shape: Irregular Proposed Use/Density: 120 bed nursing home Zoning: PD Grantor: UDC Homes, Inc. Grantee: Manor Health Care Corp. Terms: All Cash to Seller Comments: Site has 451 feet of frontage along Rossmoor Parkway and 406 feet of frontage along Tice Valley Boulevard.
542
Proposed Density - No. Location/APN Zoning Units/Acre --- ------------ ------ ---------- 1. 1836 San Miguel Drive C-O 7.9 Walnut Creek 180-010-029 2. 123 Brodia Way R-4 N/A Walnut Creek 140-170-006-5 3. Tice Creek Drive, PD-1829 5.9 NW of Golden Rain Road Walnut Creek 189-130-017-8 4. Tice Valley Boulevard, PD N/A SW of Rossmoor Parkway Walnut Creek 189-130-019-4 (Portion) S. 1228 Rossmoor Parkway PD 35.2 Walnut Creek 189-040-045
543 SUBJECT PHOTOGRAPHS Main Entry Lobby, Open to Second Floor -----END PRIVACY-ENHANCED MESSAGE-----