EX-99.(C)(2) 4 d07236a2exv99wxcyx2y.txt APPRAISAL OF LAZY HOLLOW LAZY HOLLOW 8782 CLOUDLEAP COURT COLUMBIA, MARYLAND MARKET VALUE - FEE SIMPLE ESTATE AS OF APRIL 25, 2003 PREPARED FOR: APARTMENT INVESTMENT AND MANAGEMENT COMPANY (AIMCO) C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP & LIEFF CABRASER HEIMANN & BERNSTEIN ON BEHALF OF NUANES, ET. AL. [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JUNE 27, 2003 Apartment Investment and Management Company ("AIMCO") c/o Mr. Steven A. Velkei, Esq. Liner Yankelevitz Sunshine & Regenstreif LLP 1100 Glendon Avenue, 14th Floor Los Angeles, California 90024-3503 Nuanes, et al.("Plaintiffs") c/o Ms. Joy Kruse Lieff Cabraser Heimann & Bernstein Embarcadero Center West 275 Battery Street, 30th Floor San Francisco, California 94111 RE: LAZY HOLLOW 8782 CLOUDLEAP COURT COLUMBIA, HOWARD COUNTY, MARYLAND In accordance with your authorization, we have completed the appraisal of the above-referenced property. This complete appraisal is intended to report our analysis and conclusions in a summary format. The subject property consists of an apartment project having 178 units with a total of 176,972 square feet of rentable area. The improvements were built in 1978. The improvements are situated on 9.53 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 95% occupied. It is our understanding the appraisal will be used by the clients to assist the San Mateo Superior Court in the settlement of litigation between the above mentioned clients. The appraisal is intended to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal Standards Board of the Appraisal Foundation and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The appraisal is presented in a summary report, and the Departure Provision of USPAP has not been invoked in this appraisal. It is entirely inappropriate to use this value conclusion or the report for any purpose other than the one stated. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 LAZY HOLLOW, COLUMBIA, MARYLAND The opinions expressed in this appraisal cover letter can only be completely understood by reading the narrative report, addenda, and other data, which is attached. The appraisal is subject to the attached general assumptions and limiting conditions and general service conditions. As a result of our investigation, it is our opinion that the fee simple market value of the subject, effective April 25, 2003 is: ($13,000,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Brian Johnson ----------------- June 27, 2003 Brian Johnson, MAI #053272 Managing Principal, Real Estate Group Report By: Jonathan Hackerman AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 LAZY HOLLOW, COLUMBIA, MARYLAND TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ......................................................... 4 Introduction .............................................................. 9 Area Analysis ............................................................. 11 Market Analysis ........................................................... 14 Site Analysis ............................................................. 16 Improvement Analysis ...................................................... 16 Highest and Best Use ...................................................... 17 VALUATION Valuation Procedure ....................................................... 18 Sales Comparison Approach ................................................. 20 Income Capitalization Approach ............................................ 26 Reconciliation and Conclusion ............................................. 37 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 LAZY HOLLOW, COLUMBIA, MARYLAND EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Lazy Hollow LOCATION: 8782 Cloudleap Court Columbia, Maryland INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee simple estate DATE OF VALUE: April 25, 2003 DATE OF REPORT: June 27, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 9.53 acres, or 415,127 square feet Assessor Parcel No.: 16-101087 Floodplain: Community Panel No. 240044 0034 B (December 4, 1986) Flood Zone C, an area outside the floodplain. Zoning: NT (New Town) BUILDING: No. of Units: 178 Units Total NRA: 176,972 Square Feet Average Unit Size: 994 Square Feet Apartment Density: 18.7 units per acre Year Built: 1978 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square -------------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income ----------------------------------------------------------------------------------- 1Br/1Ba-A1 820 $ 890 $1.09 $ 25,810 $ 309,720 1Br/1Ba - A2 882 $ 900 $1.02 $ 17,100 $ 205,200 2Br/1Ba - B1 993 $ 960 $0.97 $ 46,080 $ 552,960 2Br/2Ba - B2 1,085 $ 990 $0.91 $ 21,780 $ 261,360 2Br/2Ba - B3 1,009 $1,000 $0.99 $ 40,000 $ 480,000 3Bd/2Ba - C1 1,227 $1,180 $0.96 $ 23,600 $ 283,200 ------------------------ Total $174,370 $2,092,440 ========================
OCCUPANCY: 95% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 LAZY HOLLOW, COLUMBIA, MARYLAND EFFECTIVE AGE: 15 Years REMAINING ECONOMIC LIFE: 30 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - LANDSCAPE & PARKING AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 LAZY HOLLOW, COLUMBIA, MARYLAND NEIGHBORHOOD MAP [MAP] HIGHEST AND BEST USE: As Vacant: Hold for future multi-family development As Improved: Continuation as its current use METHOD OF VALUATION: In this instance, the Sales Comparison and Income Approaches to value were utilized. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 LAZY HOLLOW, COLUMBIA, MARYLAND PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $2,092,440 $11,755 Effective Gross Income $1,964,205 $11,035 Operating Expenses $752,422 $4,227 38.3% of EGI Net Operating Income: $1,176,183 $6,608 Capitalization Rate 8.75% DIRECT CAPITALIZATION VALUE $13,300,000 * $74,719 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 5% Stabilized Vacancy & Collection Loss: 8% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 9.25% Discount Rate 11.25% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $13,700,000 * $76,966 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $13,600,000 $76,404 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $49,592 to $118,258 Range of Sales $/Unit (Adjusted) $61,296 to $70,955 VALUE INDICATION - PRICE PER UNIT $11,600,000 * $65,169 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.11 to 9.52 Selected EGIM for Subject 6.50 Subject's Projected EGI $1,964,205 EGIM ANALYSIS CONCLUSION $12,600,000 * $70,787 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $12,300,000 * $69,101 / UNIT RECONCILED SALES COMPARISON VALUE $12,300,000 $69,101 / UNIT
---------------------------------- * Value indications are after adjustments for concessions, deferred maintenance, excess land and lease-up costs, if any. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8 LAZY HOLLOW, COLUMBIA, MARYLAND PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $11,600,000 NOI Per Unit $12,300,000 EGIM Multiplier $12,600,000 INDICATED VALUE BY SALES COMPARISON $12,300,000 $69,101 / UNIT INCOME APPROACH: Direct Capitalization Method: $13,300,000 Discounted Cash Flow Method: $13,700,000 INDICATED VALUE BY THE INCOME APPROACH $13,600,000 $76,404 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $13,000,000 $73,034 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 LAZY HOLLOW, COLUMBIA, MARYLAND INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 8782 Cloudleap Court, Columbia, Howard County, Maryland. Columbia identifies it as 16-101087. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Jonathan Hackerman on April 25, 2003. Brian Johnson, MAI has not made a personal inspection of the subject property. Jonathan Hackerman performed the research, valuation analysis and wrote the report. Brian Johnson, MAI reviewed the report and concurs with the value. Both Brian Johnson, MAI and Jonathan Hackerman have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of April 25, 2003. The date of the report is June 27, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 LAZY HOLLOW, COLUMBIA, MARYLAND defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." MARKETING/EXPOSURE PERIOD MARKETING PERIOD: 6 to 12 months EXPOSURE PERIOD: 6 to 12 months HISTORY OF THE PROPERTY Ownership in the subject property is currently vested in Lazy Hollow Partners C/O Eproperty Tax. To the best of our knowledge, no transfers of ownership or offers to purchase the subject are known to have occurred during the past three years. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 11 LAZY HOLLOW, COLUMBIA, MARYLAND AREA / NEIGHBORHOOD ANALYSIS NEIGHBORHOOD ANALYSIS A neighborhood is a group of complementary land uses. The function of the neighborhood analysis is to describe the immediate surrounding environs. The subject is located in the city of Columbia, Maryland. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Waterloo Road West - Route 175 South - Route 175 North - The Village of Long Reach MAJOR EMPLOYERS Major employers in the subject's area include educational and healthcare as the main source of employment in the area. The overall economic outlook for the area is considered favorable. DEMOGRAPHICS We have reviewed demographic data within the neighborhood. The following table summarizes the key data points. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 12 LAZY HOLLOW, COLUMBIA, MARYLAND NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA ------------------------------------------------------------------------------------------ POPULATION TRENDS Current Population 14,632 81,011 167,025 2,567,693 5-Year Population 15,805 90,007 181,848 2,640,264 % Change CY-5Y 8.0% 11.1% 8.9% 2.8% Annual Change CY-5Y 1.6% 2.2% 1.8% 0.6% HOUSEHOLDS Current Households 5,882 31,533 63,128 986,581 5-Year Projected Households 6,436 35,150 69,403 1,028,973 % Change CY - 5Y 9.4% 11.5% 9.9% 4.3% Annual Change CY-5Y 1.9% 2.3% 2.0% 0.9% INCOME TRENDS Median Household Income $ 86,579 $ 90,656 $ 91,729 $ 56,893 Per Capita Income $ 30,853 $ 31,669 $ 32,285 $ 25,151 Average Household Income $ 79,675 $ 81,748 $ 85,343 $ 65,432
Source: Demographics Now The subject neighborhood's population is expected to show increases above that of the region. The immediate market offers superior income levels as compared to the broader market. The following table illustrates the housing statistics in the subject's immediate area, as well as the MSA region. HOUSING TRENDS
AREA ---------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA ---------------------------------------------------------------------------------------------- HOUSING TRENDS % of Households Renting 29.85% 27.41% 26.43% 30.53% 5-Year Projected % Renting 29.73% 27.28% 26.35% 29.34% % of Households Owning 62.45% 67.51% 68.72% 63.19% 5-Year Projected % Owning 63.28% 68.00% 69.02% 64.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 LAZY HOLLOW, COLUMBIA, MARYLAND SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Sierra Woods Apts. South - Long Reach Village Center East - Bantanna Woods Apts. West - Vacant wooded land/ Route 175 CONCLUSIONS The subject is well located within the city of Columbia. The neighborhood is characterized as being mostly suburban in nature and is currently in the growth stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 LAZY HOLLOW, COLUMBIA, MARYLAND MARKET ANALYSIS The subject property is located in the city of Columbia in Howard County. The overall pace of development in the subject's market is more or less stable. There has not been any recent construction. However, Bentana Apartment complex has recently made upgrades to the interior of the units. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket ----------------------------------------- 4Q01 3.1% 2.9% 1Q02 3.4% 3.2% 2Q02 3.9% 3.8% 3Q02 4.0% 4.0% 4Q02 4.1% 4.2% 1Q03 4.9% 4.6%
Source: REIS Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. The submarket has historically enjoyed lower vacancy rates than the region. Columbia enjoys a great location being between Baltimore and Washington DC and has excellent roadways which allows for quick transportation to points all over Maryland. Columbia has also outperformed other areas inside Howard County. The following chart shows the average asking rents in the Columbia area. Market rents in the subject's market have been following a stable trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change -------------------------------------------------------------------- 3Q02 N/A - $956 - 4Q02 N/A N/A $938 -1.9% 1Q03 N/A N/A $977 4.2%
Source: REIS The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 LAZY HOLLOW, COLUMBIA, MARYLAND COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------------------------------------------------------------------------------------------------------- R-1 Autumn Crest 300 100% 1972 5-miles west of the subject R-2 Cedar Valley 157 84% 1973 5-miles west of the subject R-3 Bentana 300 96% 1971 Next to subject R-4 Hannibal Grove Apartments 293 97% 1969 3-miles west of the subject Subject Lazy Hollow 178 95% 1978
Growth in rents are expected to remain relatively stable in the next few years, remaining around 3%. Vacancy rates also are expected to hold steady around the 5% to 6% in the near future. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 LAZY HOLLOW, COLUMBIA, MARYLAND PROPERTY DESCRIPTION SITE ANALYSIS Site Area 9.53 acres, or 415,127 square feet Shape Generally rectangular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 240044 0034 B, dated December 4, 1986 Flood Zone Zone C Zoning NT, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2003 --------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES -------------------------------------------------------------------------------------------------------------- 16-101087 $2,490,700 $6,825,000 $9,315,700 $0.01341 $124,970
IMPROVEMENT ANALYSIS Year Built 1978 Number of Units 178 Net Rentable Area 176,972 Square Feet Construction: Foundation Concrete block wall Frame Heavy or light wood Exterior Walls Brick or masonry Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a volleyball court, playground, barbeque equipment, business office, and parking area. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, garbage disposal, washer/dryer, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 LAZY HOLLOW, COLUMBIA, MARYLAND Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) --------------------------------------------------------- 1Br/1Ba-A1 29 820 1Br/1Ba - A2 19 882 2Br/1Ba - B1 48 993 2Br/2Ba - B2 22 1,085 2Br/2Ba - B3 40 1,009 3Bd/2Ba - C1 20 1,227
Overall Condition Average Effective Age 15 years Economic Life 45 years Remaining Economic Life 30 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1978 and consist of a 178-unit multifamily project. The highest and best use as improved is for a continued multifamily use. Overall, the highest and best use of the subject property is the continued use of the existing apartment project. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 18 LAZY HOLLOW, COLUMBIA, MARYLAND THE VALUATION PROCEDURE There are three traditional approaches, which can be employed in establishing the market value of the subject property. These approaches and their applicability to the valuation of the subject are summarized as follows: THE COST APPROACH The application of the Cost Approach is based on the principle of substitution. This principle may be stated as follows: no one is justified in paying more for a property than that amount by which he or she can obtain, by purchase of a site and construction of a building, without undue delay, a property of equal desirability and utility. In the case of a new building, no deficiencies in the building should exist. In the case of income-producing real estate, the cost of construction plays a minor and relatively insignificant role in determining market value. The Cost Approach is typically only a reliable indicator of value for: (a) new properties; (b) special use properties; and (c) where the cost of reproducing the improvements is easily and accurately quantified and there is no economic obsolescence. In all instances, the issue of an appropriate entrepreneurial profit - the reward for undertaking the risk of construction, remains a highly subjective factor especially in a market lacking significant speculative development. THE SALES COMPARISON APPROACH The Sales Comparison Approach is an estimate of value based upon a process of comparing recent sales of similar properties in the surrounding or competing areas to the subject property. Inherent in this approach is the principle of substitution. The application of this approach consists of comparing the subject property with similar properties of the same general type, which have been sold recently or currently are available for sale in competing areas. This comparative process involves judgment as to the similarity of the subject property and the comparable sale with respect to many value factors such as location, contract rent levels, quality of construction, reputation and prestige, age and condition, among others. The estimated value through this approach represents the probable price at which a willing seller would sell the subject property to a willing and knowledgeable buyer as of the date of value. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 19 LAZY HOLLOW, COLUMBIA, MARYLAND THE INCOME CAPITALIZATION APPROACH The theory of the Income Capitalization Approach is based on the premise that present value is the value of the cash flow and reversionary value the property will produce over a reasonable holding (ownership) period. The Discounted Cash Flow Analysis will convert equity cash flows (including cash flows and equity reversion) into a present value utilizing an internal rate of return (or discount rate). The Internal Rate of Return (IRR) will be derived from a comparison of alternate investments, a comparative analysis of IRR's used by recent buyers of similar properties, and a review of published industry surveys. The Direct Capitalization Analysis converts one year of income into an overall value using overall capitalization rates from similar sales. The overall rates take into consideration buyers assumptions of the market over the long-term. The results of the Income Capitalization Analysis are usually the primary value indicator for income producing properties. Investors expect a reasonable rate of return on their equity investment based on the ownership risks involved; this approach closely parallels the investment decision process. RECONCILIATION In this instance, we have completed the Sales Comparison and Income Capitalization Approaches to value. As an income producing property, the income approach is a primary approach to value. The Sales Comparison Approach is also considered reliable as investors are buying similar buildings in the market. Our research indicates that market participants are generally not buying, selling, investing, or lending with reliance placed on the methodology of the Cost Approach to establish the value. Therefore, we have decided that the Cost Approach is not a reliable indicator of value for the subject, and this approach has not been utilized. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 20 LAZY HOLLOW, COLUMBIA, MARYLAND SALES COMPARISON APPROACH Use of market or comparable sales requires the collection and analysis of comparable sales data. Similar properties recently sold are compared to the subject and adjusted based on any perceived differences. This method is based on the premise that the costs of acquiring a substitute property would tend to establish a value for the subject property. The premise suggests that if a substitute is unavailable in the market, the reliability of the approach may be subordinate to the other approaches. The reliance on substitute properties produces shortcomings in the validity of this approach. Geographic and demographic characteristics from each submarket restrict which sales may be selected. Recent sales with a similar physical characteristics, income levels, and location are usually limited. The sales we have identified, however, do establish general valuation parameters as well as provide support to our conclusion derived through the income approach method. The standard unit of comparison among similar properties is the sales price per unit and price per square foot of net rentable area. To accurately adjust prices to satisfy the requirements of the sales comparison approach, numerous calculations and highly subjective judgments would be required including consideration of numerous income and expense details for which information may be unreliable or unknown. The sales price per unit and square foot are considered relevant to the investment decision, but primarily as a parameter against which value estimates derived through the income approach can be judged and compared. In examining the comparable sales, we have applied a subjective adjustment analysis, which includes specific adjustments derived from our experience and consulting with the market participants. SALES COMPARISON ANALYSIS Detailed on the following pages are sales transactions involving properties located in the subject's competitive investment market. Photographs of the sale transactions are located in the Addenda. Following the summary of sales is an adjustment grid that is used to arrive at a value. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 21 LAZY HOLLOW, COLUMBIA, MARYLAND SUMMARY OF COMPARABLE SALES -IMPROVED
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 ----------------------------------------------------------------------------------------------------------------------------------- Property Name Lazy Hollow Normandy Woods The Reserve LOCATION: Address 8782 Cloudleap Court 3207 Wheaton Way 7030 Gentle Shade City, State Columbia, Maryland Ellicot City, MD Columbia, MD County Howard Howard Howard PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 176,972 694,430 194,400 Year Built 1978 1973-84 1999 Number of Units 178 858 200 Unit Mix: Type Total Type Total Type Total 1Br/1Ba-A1 29 1Br/1Ba 444 1Br/1Ba 49 1Br/1Ba - A2 19 2Br/1Ba 414 2Br/1Ba 104 2Br/1Ba - B1 48 3Br/2Ba 47 2Br/2Ba - B2 22 2Br/2Ba - B3 40 3Bd/2Ba - C1 20 Average Unit Size (SF) 994 809 972 Land Area (Acre) 9.5300 58.4000 9.5800 Density (Units/Acre) 18.7 14.7 20.9 Parking Ratio (Spaces/Unit) 1.44 N/A 2.25 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open CONDITION: Good Good Good APPEAL: Average Average Good AMENITIES: Pool/Spa No/No Yes/No Yes/No Gym Room No Yes No Laundry Room No Yes No Secured Parking No No No Sport Courts No Yes Yes Washer/Dryer Connection Yes Yes Yes Other Other OCCUPANCY: 95% 94% 92% TRANSACTION DATA: Sale Date August, 2002 June, 2000 Sale Price ($) $42,550,000 $21,250,000 Grantor Security Mgmt. Gateway Commons LLC Grantee Charleston Manor II TGM Stonehaven, Inc. Sale Documentation Book 6344 Page 195 Book 5130 Page 357 Verification Representative of Grantee Buyer Telephone Number (301) 479-1600 (212) 830-9300 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $7,375,894 $8,597 $10.62 $2,500,800 $12,504 $12.86 Vacancy/Credit Loss $ 417,465 $ 487 $ 0.60 $ 200,064 $ 1,000 $ 1.03 Effective Gross Income $6,958,429 $8,110 $10.02 $2,300,736 $11,504 $11.84 Operating Expenses $2,740,066 $3,194 $ 3.95 $ 512,738 $ 2,564 $ 2.64 Net Operating Income $4,218,363 $4,917 $ 6.07 $1,787,998 $ 8,940 $ 9.20 NOTES: This was part of a portfolio Contains a total of 8 transaction. buildings, 7 of which include apartments. PRICE PER UNIT $49,592 $106,250 PRICE PER SQUARE FOOT $ 61.27 $ 109.31 EXPENSE RATIO 39.4% 22.3% EGIM 6.11 9.24 OVERALL CAP RATE 9.91% 8.41% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA DESCRIPTION COMPARABLE COMPARABLE I - 3 I - 4 --------------------------------------------------------------------------------------------------------- Property Name Apartments @ Kendall Ridge Summit Meadows LOCATION: Address 8399 Tamar Drive 8600 Cobblefield City, State Columbia, MD Columbia, MD County Howard Howard PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 173,880 186,331 Year Built 1995 1990 Number of Units 184 178 Unit Mix: Type Total Type Total 1Br/1Ba 80 1Br/1Ba 60 2Br/1Ba 26 2Br/1Ba 43 2Br/2Ba 52 2Br/2Ba 60 3Bd/2Ba 26 3Bd/1.75Ba 15 Average Unit Size (SF) 945 1,047 Land Area (Acre) 12.0200 10.8000 Density (Units/Acre) 15.3 16.5 Parking Ratio (Spaces/Unit) 1.15 1.21 Parking Type (Gr., Cov., etc.) Open, Garage Open CONDITION: Good Good APPEAL: Very Good Good AMENITIES: Pool/Spa Yes/No Yes/No Gym Room Yes Yes Laundry Room Yes No Secured Parking No No Sport Courts Yes No Washer/Dryer Connection Yes Yes Other Playground Other OCCUPANCY: 95% 93% TRANSACTION DATA: Sale Date July, 2001 November, 2002 Sale Price ($) $19,300,000 $21,050,000 Grantor Archstone Communities Summit Properties Part. Grantee Cigna Financial Services UDR Maryland Properties Sale Documentation Book 5606 Page 133 N/A Verification Confidential Representative of Buyer Telephone Number (804) 780-2691 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,528,040 $13,739 $14.54 $2,378,340 $13,361 $12.76 Vacancy/Credit Loss $ 126,402 $ 687 $ 0.73 $ 166,484 $ 935 $ 0.89 Effective Gross Income $2,401,638 $13,052 $13.81 $2,211,856 $12,426 $11.87 Operating Expenses $ 473,796 $ 2,575 $ 2.72 $ 551,800 $ 3,100 $ 2.96 Net Operating Income $1,927,842 $10,477 $11.09 $1,660,056 $ 9,326 $ 8.91 NOTES: Contains 7 total buildings None and is very appealing in physical appearance. PRICE PER UNIT $104,891 $118,258 PRICE PER SQUARE FOOT $ 111.00 $ 112.97 EXPENSE RATIO 19.7% 24.9% EGIM 8.04 9.52 OVERALL CAP RATE 9.99% 7.89% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 LAZY HOLLOW, COLUMBIA, MARYLAND IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $49,592 to $118,258 per unit. Adjustments have been made to the sales to reflect differences in location, age/condition and quality/appeal. Generally speaking, larger properties typically have a lower price per unit when compared to smaller properties, all else being equal. Similarly, those projects with a higher average unit size will generally have a higher price per unit. After appropriate adjustments are made, the improved sales demonstrate an adjusted range for the subject from $61,296 to $70,955 per unit with a mean or average adjusted price of $65,442 per unit. The median adjusted price is $64,758 per unit. Based on the following analysis, we have concluded to a value of $66,000 per unit, which results in an "as is" value of $11,600,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 LAZY HOLLOW, COLUMBIA, MARYLAND SALES ADJUSTMENT GRID
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 ----------------------------------------------------------------------------------------------------------------------------------- Property Name Lazy Hollow Normandy Woods The Reserve Address 8782 Cloudleap Court 3207 Wheaton Way 7030 Gentle Shade City Columbia, Maryland Ellicot City, MD Columbia, MD Sale Date August, 2002 June, 2000 Sale Price ($) $42,550,000 $21,250,000 Net Rentable Area (SF) 176,972 694,430 194,400 Number of Units 178 858 200 Price Per Unit $49,592 $106,250 Year Built 1978 1973-84 1999 Land Area (Acre) 9.5300 58.4000 9.5800 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) August, 2002 3% June, 2000 10% VALUE AFTER TRANS. ADJUST. ($/UNIT) $51,080 $116,875 Location Superior -10% Comparable 0% Number of Units 178 858 30% 200 0% Quality / Appeal Good Comparable 0% Superior -20% Age / Condition 1978 1973-84 / Good 0% 1999 / Good -25% Occupancy at Sale 95% 94% 0% 92% 3% Amenities Average Superior -5% Comparable 0% Average Unit Size (SF) 994 809 5% 972 0% PHYSICAL ADJUSTMENT 20% -42% FINAL ADJUSTED VALUE ($/UNIT) $61,296 $ 67,788 DESCRIPTION COMPARABLE COMPARABLE I - 3 I - 4 ------------------------------------------------------------------------------------------------------- Property Name Apartments @ Kendall Ridge Summit Meadows Address 8399 Tamar Drive 8600 Cobblefield City Columbia, MD Columbia, MD Sale Date July, 2001 November, 2002 Sale Price ($) $19,300,000 $21,050,000 Net Rentable Area (SF) 173,880 186,331 Number of Units 184 178 Price Per Unit $104,891 $118,258 Year Built 1995 1990 Land Area (Acre) 12.0200 10.8000 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) July, 2001 7% November, 2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $112,234 $118,258 Location Comparable 0% Comparable 0% Number of Units 184 0% 178 0% Quality / Appeal Superior -20% Superior -20% Age / Condition 1995 / Good -20% 1990 / Good -15% Occupancy at Sale 95% 0% 93% 0% Amenities Superior -10% Superior -5% Average Unit Size (SF) 945 5% 1,047 0% PHYSICAL ADJUSTMENT -45% -40% FINAL ADJUSTED VALUE ($/UNIT) $ 61,729 $ 70,955
SUMMARY VALUE RANGE (PER UNIT) $61,296 TO $ 70,955 MEAN (PER UNIT) $65,442 MEDIAN (PER UNIT) $64,758 VALUE CONCLUSION (PER UNIT) $66,000
VALUE OF IMPROVEMENT & MAIN SITE $11,748,000 PV OF CONCESSIONS -$ 178,000 VALUE INDICATED BY SALES COMPARISON APPROACH $11,570,000 ROUNDED $11,600,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 LAZY HOLLOW, COLUMBIA, MARYLAND NOI PER UNIT COMPARISON
SALE PRICE NOI/ SUBJECT NOI COMPARABLE NO. OF ---------- -------- -------------- ADJUSTMENT INDICATED NO. UNITS PRICE/UNIT OAR NOI/UNIT SUBJ. NOI/UNIT FACTOR VALUE/UNIT ------------------------------------------------------------------------------------------------------ I-1 858 $42,550,000 9.91% $4,218,363 $1,176,183 1.344 $66,652 $ 49,592 $ 4,917 $ 6,608 I-2 200 $21,250,000 8.41% $1,787,998 $1,176,183 0.739 $78,532 $ 106,250 $ 8,940 $ 6,608 I-3 184 $19,300,000 9.99% $1,927,842 $1,176,183 0.631 $66,152 $ 104,891 $ 10,477 $ 6,608 I-4 178 $21,050,000 7.89% $1,660,056 $1,176,183 0.709 $83,788 $ 118,258 $ 9,326 $ 6,608
PRICE/UNIT
Low High Average Median $66,152 $83,788 $73,781 $72,592
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 70,000 Number of Units 178 Value $12,460,000 PV of Concessions -$ 178,000 ------------ Value Based on NOI Analysis $12,282,000 Rounded $12,300,000
The adjusted sales indicate a range of value between $66,152 and $83,788 per unit, with an average of $73,781 per unit. Based on the subject's competitive position within the improved sales, a value of $70,000 per unit is estimated. This indicates an "as is" market value of $12,300,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 LAZY HOLLOW, COLUMBIA, MARYLAND EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
SALE PRICE COMPARABLE NO. OF ---------- EFFECTIVE OPERATING SUBJECT NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM --------------------------------------------------------------------------------------------------- I-1 858 $42,550,000 $6,958,429 $2,740,066 39.38% 6.11 $ 49,592 I-2 200 $21,250,000 $2,300,736 $ 512,738 22.29% 9.24 $ 106,250 38.31% I-3 184 $19,300,000 $2,401,638 $ 473,796 19.73% 8.04 $ 104,891 I-4 178 $21,050,000 $2,211,856 $ 551,800 24.95% 9.52 $ 118,258
EGIM
Low High Average Median --- ---- ------- ------ 6.11 9.52 8.23 8.64
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.50 Subject EGI $ 1,964,205 Value $12,767,331 PV of Concessions -$ 178,000 ------------ Value Based on EGIM Analysis $12,589,331 Rounded $12,600,000 Value Per Unit $ 70,787
There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 38.31% before reserves. The comparable sales indicate a range of expense ratios from 19.73% to 39.38%, while their EGIMs range from 6.11 to 9.52. Overall, we conclude to an EGIM of 6.50, which results in an "as is" value estimate in the EGIM Analysis of $12,600,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $12,300,000. Price Per Unit $ 11,600,000 NOI Per Unit $ 12,300,000 EGIM Analysis $ 12,600,000 Sales Comparison Conclusion $ 12,300,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 LAZY HOLLOW, COLUMBIA, MARYLAND INCOME CAPITALIZATION APPROACH The income capitalization approach is based on the premise that value is created by the expectation of future benefits. We estimated the present value of those benefits to derive an indication of the amount that a prudent, informed purchaser-investor would pay for the right to receive them as of the date of value. This approach requires an estimate of the NOI of a property. The estimated NOI is then converted to a value indication by use of either the direct capitalization or the discounted cash flow analysis (yield capitalization). Direct capitalization uses a single year's stabilized NOI as a basis for a value indication by dividing the income by a capitalization rate. The rate chosen accounts for a recapture of the investment by the investor and should reflect all factors that influence the value of the property, such as tenant quality, property condition, neighborhood change, market trends, interest rates, and inflation. The rate may be extracted from local market transactions or, when transaction evidence is lacking, obtained from trade sources. A discounted cash flow analysis focuses on the operating cash flows expected from the property and the proceeds of a hypothetical sale at the end of a holding period (the reversion). The cash flows and reversion are discounted to their present values using a market-derived discount rate and are added together to obtain a value indication. Because benefits to be received in the future are worth less than the same benefits received in the present, this method weights income in the early years more heavily than the income and the sale proceeds to be received later. The strength of the discounted cash flow method is its ability to recognize variations in projected net income, such as those caused by inflation, stepped leases, neighborhood change, or tenant turnover. Its weakness is that it requires many judgments regarding the actions of likely buyers and sellers of the property in the future. In some situations, both methods yield a similar result. The discounted cash flow method is typically more appropriate for the analysis of investment properties with multiple or long-term leases, particularly leases with cancellation clauses or renewal options. It is especially useful for multi-tenant properties in volatile markets. The direct capitalization AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 LAZY HOLLOW, COLUMBIA, MARYLAND method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area ----------------- Unit Type (Sq. Ft.) Per Unit Per SF %Occupied --------------------------------------------------------------------------- 1Br/1Ba-A1 820 $ 905 $1.10 96.5% 1Br/1Ba - A2 882 $ 925 $1.05 100.0% 2Br/1Ba - B1 993 $ 965 $0.97 95.8% 2Br/2Ba - B2 1085 $1,009 $0.93 86.4% 2Br/2Ba - B3 1009 $1,039 $1.03 95.0% 3Bd/2Ba - C1 1227 $1,206 $0.98 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 LAZY HOLLOW, COLUMBIA, MARYLAND RENT ANALYSIS
COMPARABLE RENTS --------------------------------------- R-1 R-2 R-3 R-4 --------------------------------------- Hannibal Autumn Cedar Grove Crest Valley Bentana Apartments --------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT --------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Superior Inferior Similar Similar MIN MAX MEDIAN AVERAGE ---------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba-A1 $ 905 $ 792 $ 899 $ 830 $ 792 $ 899 $ 830 $ 840 Unit Area (SF) 820 820 708 815 725 708 815 725 749 Monthly Rent Per Sq. Ft. $ 1.10 $ 1.12 $1.10 $ 1.14 $ 1.10 $ 1.14 $ 1.12 $ 1.12 Monthly Rent 1Br/1Ba - A2 $ 925 $ 845 $ 845 $ 845 $ 845 $ 845 Unit Area (SF) 882 882 851 851 851 851 851 Monthly Rent Per Sq. Ft. $ 1.05 $0.99 $ 0.99 $ 0.99 $ 0.99 $ 0.99 Monthly Rent 2Br/1Ba - B1 $ 965 $ 888 $ 940 $ 950 $ 888 $ 950 $ 940 $ 926 Unit Area (SF) 993 993 904 966 919 904 966 919 930 Monthly Rent Per Sq. Ft. $ 0.97 $ 0.98 $0.97 $ 1.03 $ 0.97 $ 1.03 $ 0.98 $ 1.00 Monthly Rent 2Br/2Ba - B2 $1,009 $ 930 $1,050 $ 930 $1,050 $ 990 $ 990 Unit Area (SF) 1,085 1,085 1,058 1,056 1,056 1,058 1,057 1,057 Monthly Rent Per Sq. Ft. $ 0.93 $ 0.88 $ 0.99 $ 0.88 $ 0.99 $ 0.94 $ 0.94 Monthly Rent 2Br/2Ba - B3 $1,039 $ 994 $1,035 $ 994 $1,035 $1,015 $1,015 Unit Area (SF) 1,009 1,009 1,160 966 966 1,160 1,063 1,063 Monthly Rent Per Sq. Ft. $ 1.03 $ 0.86 $ 1.07 $ 0.86 $ 1.07 $ 0.96 $ 0.96 Monthly Rent 3Bd/2Ba - C1 $1,206 $1,075 $1,344 $1,075 $1,344 $1,210 $1,210 Unit Area (SF) 1,227 1,227 1,250 1,259 1,250 1,259 1,254 1,254 Monthly Rent Per Sq. Ft. $ 0.98 $ 0.86 $ 1.07 $ 0.86 $ 1.07 $ 0.96 $ 0.96
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows: GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ----------------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income --------------------------------------------------------------------------------------------------------------- 1Br/1Ba-A1 29 820 $ 890 $ 1.09 $ 25,810 $ 309,720 1Br/1Ba - A2 19 882 $ 900 $ 1.02 $ 17,100 $ 205,200 2Br/1Ba - B1 48 993 $ 960 $ 0.97 $ 46,080 $ 552,960 2Br/2Ba - B2 22 1,085 $ 990 $ 0.91 $ 21,780 $ 261,360 2Br/2Ba - B3 40 1,009 $ 1,000 $ 0.99 $ 40,000 $ 480,000 3Bd/2Ba - C1 20 1,227 $ 1,180 $ 0.96 $ 23,600 $ 283,200 -------- ---------- ---------- Total $ 174,370 $2,092,440 ========== ==========
PRO FORMA ANALYSIS For purposes of this appraisal, we were provided with income and expense data for the subject property. A summary of this data is presented on the following page. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 LAZY HOLLOW, COLUMBIA, MARYLAND SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 ----------------------------------------------------------------------------------- ACTUAL ACTUAL ACTUAL ----------------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT --------------------------------------------------------------------------------------------------------------- Revenues Rental Income $ 1,817,190 $ 10,209 $ 1,993,980 $ 11,202 $ 2,109,029 $ 11,848 Vacancy $ 31,796 $ 179 $ 56,939 $ 320 $ 158,907 $ 893 Credit Loss/Concessions $ 30,229 $ 170 $ 35,233 $ 198 ($ 48,717) -$ 274 --------------------------------------------------------------------------------- Subtotal $ 62,025 $ 348 $ 92,172 $ 518 $ 110,190 $ 619 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 51,838 $ 291 $ 71,469 $ 402 $ 38,919 $ 219 --------------------------------------------------------------------------------- Subtotal Other Income $ 51,838 $ 291 $ 71,469 $ 402 $ 38,919 $ 219 --------------------------------------------------------------------------------- Effective Gross Income $ 1,807,003 $ 10,152 $ 1,973,277 $ 11,086 $ 2,037,758 $ 11,448 Operating Expenses Taxes $ 143,921 $ 809 $ 140,641 $ 790 $ 157,507 $ 885 Insurance $ 19,990 $ 112 $ 22,727 $ 128 $ 33,523 $ 188 Utilities $ 96,067 $ 540 $ 144,212 $ 810 $ 150,933 $ 848 Repair & Maintenance $ 21,056 $ 118 $ 17,468 $ 98 $ 13,854 $ 78 Cleaning $ 29,545 $ 166 $ 38,847 $ 218 $ 42,955 $ 241 Landscaping $ 45,307 $ 255 $ 34,387 $ 193 $ 41,076 $ 231 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 27,546 $ 155 $ 16,019 $ 90 $ 22,789 $ 128 General Administrative $ 33,402 $ 188 $ 26,483 $ 149 $ 42,528 $ 239 Management $ 101,175 $ 568 $ 137,917 $ 775 $ 109,286 $ 614 Miscellaneous $ 155,864 $ 876 $ 162,946 $ 915 $ 91,500 $ 514 --------------------------------------------------------------------------------- Total Operating Expenses $ 673,873 $ 3,786 $ 741,647 $ 4,167 $ 705,951 $ 3,966 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------- Net Income $ 1,133,130 $ 6,366 $ 1,231,630 $ 6,919 $ 1,331,807 $ 7,482 FISCAL YEAR 2003 ANNUALIZED 2003 ----------------------------------------------------------------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ----------------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % --------------------------------------------------------------------------------------------------------------- Revenues Rental Income $ 2,179,260 $ 12,243 $ 2,197,988 $ 12,348 $ 2,092,440 $ 11,755 100.0% Vacancy $ 119,364 $ 671 $ 132,480 $ 744 $ 125,546 $ 705 6.0% Credit Loss/Concessions $ 276 $ 2 $ 88,592 $ 498 $ 41,849 $ 235 2.0% ----------------------------------------------------------------------------------- Subtotal $ 119,640 $ 672 $ 221,072 $ 1,242 $ 167,395 $ 940 8.0% Laundry Income $ 12,228 $ 69 $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 16,488 $ 93 $ 60,360 $ 339 $ 39,160 $ 220 1.9% ----------------------------------------------------------------------------------- Subtotal Other Income $ 28,716 $ 161 $ 60,360 $ 339 $ 39,160 $ 220 1.9% ----------------------------------------------------------------------------------- Effective Gross Income $ 2,088,336 $ 11,732 $ 2,037,276 $ 11,445 $ 1,964,205 $ 11,035 100.0% Operating Expenses Taxes $ 112,334 $ 631 $ 143,476 $ 806 $ 151,300 $ 850 7.7% Insurance $ 37,547 $ 211 $ 36,668 $ 206 $ 40,940 $ 230 2.1% Utilities $ 142,884 $ 803 $ 302,392 $ 1,699 $ 151,300 $ 850 7.7% Repair & Maintenance $ 14,280 $ 80 $ 61,140 $ 343 $ 15,130 $ 85 0.8% Cleaning $ 44,004 $ 247 $ 86,120 $ 484 $ 44,500 $ 250 2.3% Landscaping $ 44,064 $ 248 $ 151,784 $ 853 $ 48,950 $ 275 2.5% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 25,140 $ 141 $ 20,968 $ 118 $ 26,700 $ 150 1.4% General Administrative $ 34,980 $ 197 $ 51,068 $ 287 $ 40,050 $ 225 2.0% Management $ 111,533 $ 627 $ 110,192 $ 619 $ 117,852 $ 662 6.0% Miscellaneous $ 113,520 $ 638 $ 86,408 $ 485 $ 115,700 $ 650 5.9% ----------------------------------------------------------------------------------- Total Operating Expenses $ 680,286 $ 3,822 $ 1,050,216 $ 5,900 $ 752,422 $ 4,227 38.3% Reserves $ 0 $ 0 $ 0 $ 0 $ 35,600 $ 200 4.7% ----------------------------------------------------------------------------------- Net Income $ 1,408,050 $ 7,910 $ 987,060 $ 5,545 $ 1,176,183 $ 6,608 59.9%
REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on the market analysis previously discussed. Other income consists of forfeited deposits, laundry income, late rent payments, month to month fees, pet fees, vending machine revenue, etc. We forecasted the property's annual operating expenses after reviewing its historical performance at the subject property. We analyzed each item of expense and attempted to forecast amounts a typical informed investor would consider reasonable. VACANCY AND COLLECTION LOSS An investor is primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100% occupied and all tenants were paying their rent in full and on time. An investor normally expects some income loss as tenants vacate, fail to pay rent, or pay their rent late. We have projected a stabilized vacancy and collection loss rate of 8% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 LAZY HOLLOW, COLUMBIA, MARYLAND RESERVES FOR REPLACEMENT "Reserves for replacements" is a contingency account allocated to the expenses of the property to provide for replacement of short-lived items and for unforeseen necessary capital expenditures. We have utilized the Korpacz Real Estate Investor Survey of the national apartment market, which reports a range of replacement reserves between $150 and $400 per unit. For purposes of this analysis, we have included an allowance of $200 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $200 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES ------------------------------------------------------------ GOING-IN TERMINAL ------------------------------------------------------------ LOW HIGH LOW HIGH ----------------------------------------------------------------------------- RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 LAZY HOLLOW, COLUMBIA, MARYLAND SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ------------------------------------------------------------ I-1 August, 2002 94% $ 49,592 9.91% I-2 June, 2000 92% $106,250 8.41% I-3 July, 2001 95% $104,891 9.99% I-4 November, 2002 93% $118,258 7.89% I-5 Jan-00 0% N/A High 9.99% Low 7.89% Average 9.05%
Based on this information, we have concluded the subject's overall capitalization rate should be 8.75%. The terminal capitalization rate is applied to the net operating income estimated for the year following the end of the holding period. Based on the concluded overall capitalization rate, the age of the property and the surveyed information, we have concluded the subject's terminal capitalization rate to be 9.25%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 11.25%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.25% indicates a value of $13,700,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 LAZY HOLLOW, COLUMBIA, MARYLAND approximately 42% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 33 LAZY HOLLOW, COLUMBIA, MARYLAND DISCOUNTED CASH FLOW ANALYSIS LAZY HOLLOW
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 --------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,092,440 $2,155,213 $2,219,870 $2,286,466 $2,355,060 $2,425,711 Vacancy $ 125,546 $ 129,313 $ 133,192 $ 137,188 $ 141,304 $ 145,543 Credit Loss $ 41,849 $ 43,104 $ 44,397 $ 45,729 $ 47,101 $ 48,514 Concessions $ 139,496 $ 64,656 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------- Subtotal $ 306,891 $ 237,073 $ 177,590 $ 182,917 $ 188,405 $ 194,057 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 39,160 $ 40,335 $ 41,545 $ 42,791 $ 44,075 $ 45,397 ------------------------------------------------------------------------------------- Subtotal Other Income $ 39,160 $ 40,335 $ 41,545 $ 42,791 $ 44,075 $ 45,397 ------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,824,709 $1,958,475 $2,083,825 $2,146,340 $2,210,730 $2,277,052 OPERATING EXPENSES: Taxes $ 151,300 $ 155,839 $ 160,514 $ 165,330 $ 170,289 $ 175,398 Insurance $ 40,940 $ 42,168 $ 43,433 $ 44,736 $ 46,078 $ 47,461 Utilities $ 151,300 $ 155,839 $ 160,514 $ 165,330 $ 170,289 $ 175,398 Repair & Maintenance $ 15,130 $ 15,584 $ 16,051 $ 16,533 $ 17,029 $ 17,540 Cleaning $ 44,500 $ 45,835 $ 47,210 $ 48,626 $ 50,085 $ 51,588 Landscaping $ 48,950 $ 50,419 $ 51,931 $ 53,489 $ 55,094 $ 56,746 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 26,700 $ 27,501 $ 28,326 $ 29,176 $ 30,051 $ 30,953 General Administrative $ 40,050 $ 41,252 $ 42,489 $ 43,764 $ 45,077 $ 46,429 Management $ 109,483 $ 117,508 $ 125,029 $ 128,780 $ 132,644 $ 136,623 Miscellaneous $ 115,700 $ 119,171 $ 122,746 $ 126,429 $ 130,221 $ 134,128 ------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 744,053 $ 771,116 $ 798,245 $ 822,192 $ 846,858 $ 872,264 Reserves $ 35,600 $ 36,668 $ 37,768 $ 38,901 $ 40,068 $ 41,270 ------------------------------------------------------------------------------------- NET OPERATING INCOME $1,045,056 $1,150,691 $1,247,812 $1,285,246 $1,323,804 $1,363,518 Operating Expense Ratio (% of EGI) 40.8% 39.4% 38.3% 38.3% 38.3% 38.3% Operating Expense Per Unit $ 4,180 $ 4,332 $ 4,485 $ 4,619 $ 4,758 $ 4,900 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 --------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,498,483 $2,573,437 $2,650,640 $2,730,160 $2,812,064 Vacancy $ 149,909 $ 154,406 $ 159,038 $ 163,810 $ 168,724 Credit Loss $ 49,970 $ 51,469 $ 53,013 $ 54,603 $ 56,241 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------- Subtotal $ 199,879 $ 205,875 $ 212,051 $ 218,413 $ 224,965 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 46,759 $ 48,162 $ 49,607 $ 51,095 $ 52,628 ---------------------------------------------------------------------- Subtotal Other Income $ 46,759 $ 48,162 $ 49,607 $ 51,095 $ 52,628 ---------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,345,363 $2,415,724 $2,488,196 $2,562,842 $2,639,727 OPERATING EXPENSES: Taxes $ 180,660 $ 186,080 $ 191,662 $ 197,412 $ 203,335 Insurance $ 48,885 $ 50,351 $ 51,862 $ 53,417 $ 55,020 Utilities $ 180,660 $ 186,080 $ 191,662 $ 197,412 $ 203,335 Repair & Maintenance $ 18,066 $ 18,608 $ 19,166 $ 19,741 $ 20,333 Cleaning $ 53,135 $ 54,729 $ 56,371 $ 58,062 $ 59,804 Landscaping $ 58,449 $ 60,202 $ 62,008 $ 63,869 $ 65,785 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 31,881 $ 32,838 $ 33,823 $ 34,837 $ 35,883 General Administrative $ 47,822 $ 49,256 $ 50,734 $ 52,256 $ 53,824 Management $ 140,722 $ 144,943 $ 149,292 $ 153,771 $ 158,384 Miscellaneous $ 138,152 $ 142,296 $ 146,565 $ 150,962 $ 155,491 ---------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 898,432 $ 925,385 $ 953,146 $ 981,740 $1,011,193 Reserves $ 42,508 $ 43,784 $ 45,097 $ 46,450 $ 47,843 ---------------------------------------------------------------------- NET OPERATING INCOME $1,404,423 $1,446,556 $1,489,953 $1,534,651 $1,580,691 Operating Expense Ratio (% of EGI) 38.3% 38.3% 38.3% 38.3% 38.3% Operating Expense Per Unit $ 5,047 $ 5,199 $ 5,355 $ 5,515 $ 5,681
Estimated Stabilized NOI $1,176,183 Months to Stabilized 1 Stabilized Occupancy 94.0% Sales Expense Rate 2.00% Discount Rate 11.25% Terminal Cap Rate 9.25%
Gross Residual Sale Price $17,088,551 Less: Sales Expense $ 341,771 ----------- Net Residual Sale Price $16,746,780 PV of Reversion $ 5,766,750 Add: NPV of NOI $ 7,981,349 ----------- PV Total $13,748,099 Deferred Maintenance $ 0 Add: Excess Land $ 0 Other Adjustments $ 0 ----------- Value Indicated By "DCF" $13,748,099 Rounded $13,700,000
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------------- TOTAL VALUE 10.75% 11.00% 11.25% 11.50% 11.75% ------------------------------------------------------------------------------------------------------ 8.75% $14,552,922 $14,312,645 $14,077,627 $13,847,735 $13,622,840 TERMINAL 9.00% $14,375,778 $14,139,451 $13,908,286 $13,682,153 $13,460,925 CAP 9.25% $14,208,210 $13,975,619 $13,748,099 $13,525,521 $13,307,762 RATE 9.50% $14,049,461 $13,820,410 $13,596,342 $13,377,133 $13,162,660 9.75% $13,898,853 $13,673,160 $13,452,368 $13,236,355 $13,025,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 LAZY HOLLOW, COLUMBIA, MARYLAND INCOME LOSS DURING LEASE-UP The subject is currently near or at stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $178,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 8.75% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 35 LAZY HOLLOW, COLUMBIA, MARYLAND LAZY HOLLOW
TOTAL PER SQ. FT. PER UNIT %OF EGI ----------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,092,440 $ 11.82 $ 11,755 Less: Vacancy & Collection Loss 8.00% $ 167,395 $ 0.95 $ 940 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 39,160 $ 0.22 $ 220 1.99% ----------------------------------------------- Subtotal Other Income $ 39,160 $ 0.22 $ 220 1.99% EFFECTIVE GROSS INCOME $ 1,964,205 $ 11.10 $ 11,035 OPERATING EXPENSES: Taxes $ 151,300 $ 0.85 $ 850 7.70% Insurance $ 40,940 $ 0.23 $ 230 2.08% Utilities $ 151,300 $ 0.85 $ 850 7.70% Repair & Maintenance $ 15,130 $ 0.09 $ 85 0.77% Cleaning $ 44,500 $ 0.25 $ 250 2.27% Landscaping $ 48,950 $ 0.28 $ 275 2.49% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 26,700 $ 0.15 $ 150 1.36% General Administrative $ 40,050 $ 0.23 $ 225 2.04% Management 6.00% $ 117,852 $ 0.67 $ 662 6.00% Miscellaneous $ 115,700 $ 0.65 $ 650 5.89% TOTAL OPERATING EXPENSES $ 752,422 $ 4.25 $ 4,227 38.31% Reserves $ 35,600 $ 0.20 $ 200 1.81% ----------------------------------------------- NET OPERATING INCOME $ 1,176,183 $ 6.65 $ 6,608 59.88% "GOING IN" CAPITALIZATION RATE 8.75% VALUE INDICATION $ 13,442,086 $ 75.96 $ 75,517 PV OF CONCESSIONS ($ 178,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 13,264,086 ROUNDED $ 13,300,000 $ 75.15 $ 74,719
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 36 LAZY HOLLOW, COLUMBIA, MARYLAND DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF -------------------------------------------------------------------------- 8.00% $14,524,281 $14,500,000 $81,461 $81.93 8.25% $14,078,758 $14,100,000 $79,213 $79.67 8.50% $13,659,441 $13,700,000 $76,966 $77.41 8.75% $13,264,086 $13,300,000 $74,719 $75.15 9.00% $12,890,695 $12,900,000 $72,472 $72.89 9.25% $12,537,487 $12,500,000 $70,225 $70.63 9.50% $12,202,869 $12,200,000 $68,539 $68.94
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $13,300,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $13,700,000 Direct Capitalization Method $13,300,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $13,600,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 LAZY HOLLOW, COLUMBIA, MARYLAND RECONCILIATION AND CONCLUSION This appraisal was made to express an opinion as of the Market Value of the fee simple estate in the property. AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE Cost Approach Not Utilized Sales Comparison Approach $ 12,300,000 Income Approach $ 13,600,000 Reconciled Value $ 13,000,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of April 25, 2003 the market value of the fee simple estate in the property is: $13,000,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA LAZY HOLLOW, COLUMBIA, MARYLAND ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAZY HOLLOW, COLUMBIA, MARYLAND EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAZY HOLLOW, COLUMBIA, MARYLAND SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - LANDSCAPE & PARKING [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] EXTERIOR - KITCHEN EXTERIOR - ACCESS ROAD AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAZY HOLLOW, COLUMBIA, MARYLAND SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - BEDROOM EXTERIOR - BALCONY AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAZY HOLLOW, COLUMBIA, MARYLAND EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAZY HOLLOW, COLUMBIA, MARYLAND PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 NORMANDY WOODS THE RESERVE APARTMENTS @ KENDALL RIDGE 3207 Wheaton Way 7030 Gentle Shade 8399 Tamar Drive Ellicot City, MD Columbia, MD Columbia, MD [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 SUMMIT MEADOWS N/A 8600 Cobblefield Columbia, MD [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAZY HOLLOW, COLUMBIA, MARYLAND SUMMARY OF COMPARABLE RENTAL PROPERTIES
DESCRIPTION SUBJECT COMPARABLE R - 1 ----------------------------------------------------------------------------------------------------------------------------------- Property Name Lazy Hollow Autumn Crest Management Company Aimco Grady Mgmt. LOCATION: Address 8782 Cloudleap Court 5664 Stevens Forest Road City, State Columbia, Maryland Columbia, MD County Howard Howard Proximity to Subject 5-miles west of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 176,972 304,800 Year Built 1978 1972 Effective Age 15 17 Building Structure Type Brick walls; asphalt shingle roof Brick veneer; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 178 300 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba-A1 820 29 $ 905 1 1Bd/1Ba 708 60 $ 792 2 1Br/1Ba - A2 882 19 $ 925 3 2Bd/1Ba 904 60 $ 888 3 2Br/1Ba - B1 993 48 $ 965 4 2Bd/1.5Ba 1,058 60 $ 930 4 2Br/2Ba - B2 1,085 22 $1,009 5 2Bd/2Ba 1,160 60 $ 994 5 2Br/2Ba - B3 1,009 40 $1,039 6 3Bd/2Ba 1,250 60 $1,075 6 3Bd/2Ba - C1 1,227 20 $1,206 Average Unit Size (SF) 994 1,016 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 0% 2-Bedroom 60% 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 20% 3-Bedroom 20% CONDITION: Good Good APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities Swimming Pool Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court X BBQ Equipment X Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room Gym Room X Playground Playground OCCUPANCY: 95% 100% LEASING DATA: Available Leasing Terms 6 to 15 Months 12 Months Concessions 1 - 1 1/2 Months Free None Pet Deposit $300 - $500 $150 Utilities Paid by Tenant: X Electric X Natural Gas Electric X Natural Gas X Water Trash Water Trash Confirmation May 1, 2003; Joseph Beard (Property Manager) May 15, 2003; Property Manager Telephone Number (972 )234-1231 1-866-537-4541 NOTES: There is a $50 charge to have a 6 month lease. In addition to the pet deposit, the tenant must pay $15/month for keeping a pet. COMPARISON TO SUBJECT: Slightly Superior DESCRIPTION COMPARABLE COMPARABLE R - 2 R - 3 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Cedar Valley Bentana Management Company JMG Realty Realty Management Services LOCATION: Address 5458 Harpers Farm Road 8905 Tamar Drive City, State Columbia, MD Columbia, MD County Howard Howard Proximity to Subject 5-miles west of the subject Next to subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 151,091 274,275 Year Built 1973 1971 Effective Age 18 16 Building Structure Type Brick walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 157 300 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 815 61 $ 899 2 1Bd/1Ba 851 135 $845 4 2Bd/1.5Ba 1,056 96 $1,050 3 2Bd/1Ba 966 165 $940 Average Unit Size (SF) 962 914 Unit Breakdown: Efficiency 0% 2-Bedroom 61% Efficiency 0% 2-Bedroom 55% 1-Bedroom 39% 3-Bedroom 0% 1-Bedroom 45% 3-Bedroom 0% CONDITION: Good Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony W/D Connect. Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room X Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track X Business Office Gym Room Gym Room X Playground X Playground OCCUPANCY: 84% 96% LEASING DATA: Available Leasing Terms 12 Months 6 to 12 Months Concessions 1 Month free before May 31, 2003 $30-$40 off of monthly rent Pet Deposit $300 $250 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash X Water Trash Confirmation May 15, 2003; Property Manager May 15, 2003; Sean Property Contact Telephone Number 1-866-210-5859 1-888-316-0596 NOTES: There is also a $25/month pet fee per month. If you have a pet there is also a $20/month fee per month. COMPARISON TO SUBJECT: Slightly Inferior Similar COMPARABLE DESCRIPTION R - 4 ----------------------------------------------------------------------------------- Property Name Hannibal Grove Apartments Management Company Berkshire Realty Holding, Inc. LOCATION: Address 5361 Brook Way City, State Columbia, MD County Howard Proximity to Subject 3-miles west of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 284,784 Year Built 1969 Effective Age 23 Building Structure Type Stone veneer; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Number of Units 293 Unit Mix: Type Unit Qty. Mo. 1 1Bd/1Ba 725 78 $ 830 3 2Bd/1Ba 919 99 $ 950 5 2Bd/2Ba 966 30 $1,035 6 3Bd/2Ba 1,152 45 $1,165 6 3Bd/2Ba/TH 1,282 34 $1,505 6 4Bd/3Ba/TH 1,835 7 $1,715 Average Unit Size (SF) 972 Unit Breakdown: Efficiency 0% 2-Bedroom 55% 1-Bedroom 29% 3-Bedroom 16% CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. Fireplace X Cable TV Ready Project Amenities Swimming Pool Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track X Business Office Gym Room X Playground OCCUPANCY: 97% LEASING DATA: Available Leasing Terms 3 month minimum Concessions None Pet Deposit $150 - $200 Utilities Paid by Tenant: X Electric X Natural Gas X Water Trash Confirmation May 15, 2003; Toni - Property Contact Telephone Number 1-866-210-5860 NOTES: The tonwhouse tenants do not pay the water utility. COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAZY HOLLOW, COLUMBIA, MARYLAND PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 AUTUMN CREST CEDAR VALLEY BENTANA 5664 Stevens Forest Road 5458 Harpers Farm Road 8905 Tamar Drive Columbia, MD Columbia, MD Columbia, MD [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 HANNIBAL GROVE APARTMENTS N/A 5361 Brook Way Columbia, MD [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAZY HOLLOW, COLUMBIA, MARYLAND EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAZY HOLLOW, COLUMBIA, MARYLAND No responsibility is assumed for matters legal in nature. No investigation has been made of the title to or any liabilities against the property appraised. In this appraisal, it is presumed that, unless otherwise noted, the owner's claim is valid, the property rights are good and marketable, and there are no encumbrances which cannot be cleared through normal processes. To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis. Land areas and descriptions used in this appraisal were obtained from public records and have not been verified by legal counsel or a licensed surveyor. No soil analysis or geological studies were ordered or made in conjunction with this report, nor were any water, oil, gas, or other subsurface mineral and use rights or conditions investigated. Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials could, if present, adversely affect the value of the property. Unless otherwise stated in this report, the existence of hazardous substance, which may or may not be present on or in the property, was not considered by the appraiser in the development of the conclusion of value. The stated value estimate is predicated on the assumption that there is no material on or in the property that would cause such a loss in value. No responsibility is assumed for any such conditions, and the client has been advised that the appraiser is not qualified to detect such substances, quantify the impact on values, or develop the remedial cost. No environmental impact study has been ordered or made. Full compliance with applicable federal, state, and local environmental regulations and laws is assumed unless otherwise stated, defined, and considered in the report. It is also assumed that all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization either have been or can be obtained or renewed for any use which the report covers. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAZY HOLLOW, COLUMBIA, MARYLAND It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless a nonconformity has been stated, defined, and considered in the appraisal report. Further, it is assumed that the utilization of the land and improvements is within the boundaries of the property described and that no encroachment or trespass exists unless noted in the report. The Americans with Disabilities Act ("ADA") became effective January 26, 1992. We have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property together with a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative effect on the value of the property. Since we have no direct evidence relating to this issue, we did not consider the possible noncompliance with the requirements of ADA in estimating the value of the property. We have made a physical inspection of the property and noted visible physical defects, if any, in our report. This inspection was made by individuals generally familiar with real estate and building construction. However, these individuals are not architectural or structural engineers who would have detailed knowledge of building design and structural integrity. Accordingly, we do not opine on, nor are we responsible for, the structural integrity of the property including its conformity to specific governmental code requirements, such as fire, building and safety, earthquake, and occupancy, or any physical defects which were not readily apparent to the appraiser during the inspection. The value or values presented in this report are based upon the premises outlined herein and are valid only for the purpose or purposes stated. The date of value to which the conclusions and opinions expressed apply is set forth in this report. The value opinion herein rendered is based on the status of the national business economy and the purchasing power of the U.S. dollar as of that date. Testimony or attendance in court or at any other hearing is not required by reason of this appraisal unless arrangements are previously made within a reasonable time in advance for AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAZY HOLLOW, COLUMBIA, MARYLAND such testimony, and then such testimony shall be at American Appraisal Associates, Inc.'s, prevailing per diem for the individuals involved. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use, the identity of the appraiser or the firm with which the appraiser is connected, or any reference to the American Society of Appraisers or the designations awarded by this organization) shall be disseminated to the public through prospectus, advertising, public relations, news, or any other means of communication without the written consent and approval of American Appraisal Associates, Inc. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D LAZY HOLLOW, COLUMBIA, MARYLAND EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. Jonathan Hackerman provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institutes continuing education requirements. -s- Brian Johnson ------------------------------ Brian Johnson, MAI Managing Principal, Real Estate Group AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAZY HOLLOW, COLUMBIA, MARYLAND EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAZY HOLLOW, COLUMBIA, MARYLAND F. BRIAN JOHNSON, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION F. Brian Johnson is the Managing Principal of the New York Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Johnson has completed appraisals for securitization and pension funds/insurance industries. Analyses he has performed involve various types of investment-grade real estate throughout the continental United States including apartments, cooperatives, hotels, industrial and research and development parks, office buildings, regional shopping centers, and undeveloped acreage. Additional experience includes the valuation of existing and proposed investment-grade real estate, market and feasibility studies and offering memorandums for debt placement, equity investments and acquisitions, and disposition analysis. Court Mr. Johnson is qualified as an expert witness for the New Jersey Supreme Court. Business Mr. Johnson joined AAA in 1998 and was promoted to his current position in 1999. Prior to joining AAA, Mr. Johnson was a Senior Vice President at Koeppel Tener Real Estate Services and a Vice President at L. W. Ellwood & Co. EDUCATION Fairleigh Dickinson Bachelor of Science - Finance STATE CERTIFICATIONS State of New Jersey, General Appraiser, #42RG00158300 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E COLONY OF SPRINGDALE, SPRINGDALE, OHIO PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS VALUATION AND Several courses are completed on an annual basis as part of SPECIAL COURSES the continuing education requirements of the Appraisal Institute. In addition, Mr. Johnson attends real estate and financial industry-related conferences and seminars. PUBLICATIONS "Operational Items to Consider When Appraising a Regional Mall," Appraisal Journal, 1991 AMERICAN APPRAISAL ASSOCIATES, EXHIBIT E LAZY HOLLOW, COLUMBIA, PROFESSIONAL AFFILIATIONS VALUATION AND SPECIAL COURSES PUBLICATIONS Appraisal Journal, 1991 AMERICAN APPRAISAL ASSOCIATES, INC. LAZY HOLLOW, COLUMBIA, MARYLAND GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. LAZY HOLLOW, COLUMBIA, MARYLAND GENERAL SERVICE CONDITIONS The services(s) provided by AAA will be performed in accordance with professional appraisal standards. Our compensation is not contingent in any way upon our conclusions of value. We assume, without independent verification, the accuracy of all data provided to us. We will act as an independent contractor and reserve the right to use subcontractors. All files, workpapers or documents developed by us during the course of the engagement will be our property. We will retain this data for at least five years. Our report is to be used only for the specific purpose stated herein; and any other use is invalid. No reliance may be made by any third party without our prior written consent. You may show our report in its entirety to those third parties who need to review the information contained herein. No one should rely on our report as a substitute for their own due diligence. We understand that our reports will be described in public tender offer documents distributed to limited partners. We reserve the right to review the public tender offer documents prior to their issuance to confirm that disclosures of facts from the current appraisals are accurate. No reference to our name or our report, in whole or in part, in any other SEC filing or private placement memorandum you prepare and/or distribute to third parties may be made without our prior written consent. The Tender Offer Partnerships, as that term is defined in the Settlement Agreement, agree to indemnify and hold us harmless against and from any and all losses, claims, actions, damages, expenses or liabilities, including reasonable attorneys' fees, to which we may become subject in connection with this engagement except where such losses, claims, actions, damages, expenses or liabilities, including reasonable attorney's fees, arise or result from AAA's misconduct, bad faith or negligence. Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer.