EX-99.(C)(6) 8 d07256a1exv99wxcyx6y.txt APPRAISAL OF CITADEL VILLAGE CITADEL VILLAGE 913 N. CHELTON RD. COLORADO SPRINGS, COLORADO MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 15, 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) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JUNE 28, 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: CITADEL VILLAGE 913 N. CHELTON RD. COLORADO SPRINGS, EL PASO COUNTY, COLORADO 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 122 units with a total of 110,125 square feet of rentable area. The improvements were built in 1974. The improvements are situated on 9.28 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 62% 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 May 15, 2003 is: ($5,500,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Douglas Needham June 28, 2003 Douglas Needham, MAI #053272 Managing Principal, Real Estate Group Colorado State Certified General Real Estate Appraiser #CG40017035 Report By: James Newell AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 ............................................. 38 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Citadel Village LOCATION: 913 N. Chelton Rd. Colorado Springs, Colorado 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: May 15, 2003 DATE OF REPORT: June 28, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 9.28 acres, or 404,237 square feet Assessor Parcel No.: 7412200058 Floodplain: Community Panel No. 08041C0732F (March 17, 1997) Flood Zone X, an area outside the floodplain. Zoning: PUD (Planned Unit Development) BUILDING: No. of Units: 122 Units Total NRA: 110,125 Square Feet Average Unit Size: 903 Square Feet Apartment Density: 13.1 units per acre Year Built: 1974 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 - Jr. 1 Bedroom 520 $ 500 $ 0.96 $ 4,500 $ 54,000 1Br/1Ba 675 $ 600 $ 0.89 $ 30,600 $ 367,200 2Br/1Ba 860 $ 720 $ 0.84 $ 23,040 $ 276,480 3Br/2 1/2Ba - Townhouse 1,450 $1,020 $ 0.70 $ 18,360 $ 220,320 3Br/2 1/2Ba - Sp. 1,450 $1,030 $ 0.71 $ 12,360 $ 148,320 Total $ 88,860 $1,066,320
OCCUPANCY: 62% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 23 Years REMAINING ECONOMIC LIFE: 22 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - OFFICE & LANDSCAPE AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $1,066,320 $8,740 Effective Gross Income $982,757 $8,055 Operating Expenses $428,558 $3,513 43.6% of EGI Net Operating Income: $529,799 $4,343 Capitalization Rate 8.75% DIRECT CAPITALIZATION VALUE $5,600,000 * $45,902 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 17% Stabilized Vacancy & Collection Loss: 13.5% Lease-up / Stabilization Period 20 months 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 $5,300,000 * $43,443 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $5,400,000 $44,262 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $38,889 to $85,514 Range of Sales $/Unit (Adjusted) $46,375 to $51,667 VALUE INDICATION - PRICE PER UNIT $5,600,000 * $45,902 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.23 to 8.50 Selected EGIM for Subject 6.30 Subject's Projected EGI $982,757 EGIM ANALYSIS CONCLUSION $5,700,000 * $46,721 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $5,800,000 * $47,541 / UNIT RECONCILED SALES COMPARISON VALUE $5,700,000 $46,721 / 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $5,600,000 NOI Per Unit $5,800,000 EGIM Multiplier $5,700,000 INDICATED VALUE BY SALES COMPARISON $5,700,000 $46,721 / UNIT INCOME APPROACH: Direct Capitalization Method: $5,600,000 Discounted Cash Flow Method: $5,300,000 INDICATED VALUE BY THE INCOME APPROACH $5,400,000 $44,262 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $5,500,000 $45,082 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 913 N. Chelton Rd., Colorado Springs, El Paso County, Colorado. Colorado Springs identifies it as 7412200058. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by James Newell on May 15, 2003. Douglas Needham, MAI has not made a personal inspection of the subject property. James Newell performed the research, valuation analysis and wrote the report. Douglas Needham, MAI reviewed the report and concurs with the value. Douglas Needham, MAI and James Newell 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 May 15, 2003. The date of the report is June 28, 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CCP/IV Associates, Ltd.. 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 Colorado Springs, Colorado. 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 - Academy Boulevard West - North Circle Drive South - East Platte Ave North - Palmer Park Boulevard MAJOR EMPLOYERS Major employers in the subject's area include Agilent Technologies, WorldCom, and the United States Air Force. 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA --------------------------- ------------ ------------ ------------ -------- POPULATION TRENDS Current Population 16,103 117,646 258,206 538,844 5-Year Population 16,564 122,848 273,246 595,713 % Change CY-5Y 2.9% 4.4% 5.8% 10.6% Annual Change CY-5Y 0.6% 0.9% 1.2% 2.1% HOUSEHOLDS Current Households 6,894 48,797 103,391 201,086 5-Year Projected Households 7,127 51,223 110,061 223,226 % Change CY - 5Y 3.4% 5.0% 6.5% 11.0% Annual Change CY-5Y 0.7% 1.0% 1.3% 2.2% INCOME TRENDS Median Household Income $ 27,748 $ 33,960 $ 37,185 $ 50,108 Per Capita Income $ 16,410 $ 18,644 $ 19,447 $ 22,841 Average Household Income $ 38,301 $ 45,068 $ 48,769 $ 61,206
Source: Demographics Now The subject neighborhood's population is expected to show increases below that of the region. The immediate market offers inferior 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 52.18% 42.31% 38.63% 31.26% 5-Year Projected % Renting 52.19% 41.44% 37.09% 29.31% % of Households Owning 35.34% 46.42% 50.90% 59.98% 5-Year Projected % Owning 35.79% 47.64% 52.85% 62.54%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Single-family residential South - Citadel shopping mall East - Vacant large retail store West - Single-family residential CONCLUSIONS The subject is well located within the city of Colorado Springs. The neighborhood is characterized as being mostly suburban in nature and is currently in the stable 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO MARKET ANALYSIS The subject property is located in the city of Colorado Springs in El Paso County. The overall pace of development in the subject's market is more or less decreasing. Over the last several years there has been ongoing construction in northern Colorado Springs. The Austin Bluffs Apartment project, located on Whetstone Drive, is currently under construction and about 65% complete. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket ------ ------ --------- 1999 5.1% 5.4% 2000 3.1% 2.8% 2001 8.9% 4.7% 2002 8.2% 8.2%
{Source: Hendricks & Partners Apartment Update: Rocky Mountain Region} Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. Due to the large number of military personnel recently deployed, the Colorado Springs apartment market has suffered over the last several months. The local market, especially in the south end of town, will grow with the return of the personnel. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change ------ ------ -------- --------- -------- 2001 $ 693 - $ 637 - 2002 $ 642 -7.4% $ 559 -12.2%
The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------- ---------------------------- ----- ----- ---------- ------------------------------------ R-1 Dove Tree N/A 88% 1980 Approx. 1 mile southeast of subject R-2 Tanager Meadows N/A 79% 1980 Approx. 2 1/2 miles south of subject R-3 Parkside 268 90% 1984 1 mile southwest of subject R-4 The Willows at Printers Park 220 87% 2000 2 miles east of subject R-5 Courtyard Estates 176 88% 1975 Approx. 1 mile southeast of subject Subject Citadel Village 122 62% 1974
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO PROPERTY DESCRIPTION SITE ANALYSIS Site Area 9.28 acres, or 404,237 square feet Shape Irregular Topography Rolling 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 08041C0732F, dated March 17, 1997 Flood Zone Zone X Zoning PUD, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ---------------------------- TAX RATE/ PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES ------------- ------- -------- --------- --------- -------- 7412200058 $80,440 $245,910 $ 326,350 $ 0.0654 $ 21,342
IMPROVEMENT ANALYSIS Year Built 1974 Number of Units 122 Net Rentable Area 110,125 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Stucco wall Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, sand volleyball, gym room, inline skating area, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, microwave dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) ----------------------- --------------- --------- 1Br/1Ba - Jr. 1 Bedroom 9 520 1Br/1Ba 51 675 2Br/1Ba 32 860 3Br/2 1/2Ba - Townhouse 18 1,450 3Br/2 1/2Ba - Sp. 12 1,450
Overall Condition Average Effective Age 23 years Economic Life 45 years Remaining Economic Life 22 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 1974 and consist of a 122-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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 -------------------------------- ------------------------------- --------------------------- -------------------------------- Property Name Citadel Village Cedar Crest Colony Hills LOCATION: Address 913 N. Chelton Rd. 2010 Carmel Drive 3950 Patrick Drive City, State Colorado Springs,Colorado Colorado Springs, Colorado Colorado Springs, Colorado County El Paso County El Paso County El Paso County PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 110,125 61,104 216,000 Year Built 1974 1968 1985 Number of Units 122 78 216 Unit Mix: Type Total Type Total Type Total 1Br/1Ba - Jr. 1 Bedroom 9 1Br/1Ba 18 2Br/1Ba 216 1Br/1Ba 51 2Br/1Ba 60 2Br/1Ba 32 3Br/2 1/2Ba - Townhouse 18 3Br/2 1/2Ba - Sp.Town 12 Average Unit Size (SF) 903 783 1,000 Land Area (Acre) 9.2800 1.6000 6.6700 Density (Units/Acre) 13.1 48.8 32.4 Parking Ratio (Spaces/Unit) 2.05 1.05 1.62 Parking Type (Gr., Cov., etc.) Open Open Some covered CONDITION: 0 Fair Good APPEAL: 0 Fair Good AMENITIES: Pool/Spa Yes/No Yes/Yes Gym Room Yes No Laundry Room Yes No Secured Parking No No Sport Courts No No OCCUPANCY: 62% 95% 93% TRANSACTION DATA: Sale Date January, 2003 July, 2001 Sale Price ($) $3,220,000 $10,500,000 Grantor Cedar Creek Investments, LLC Bigelow Colorado II, LLC Grantee Stanley & Robin Douglas Colony Hills Colorado Springs Apts, LLC Sale Documentation 11028 101636 Verification Buyer's Broker Christina Soliz (Broker) Telephone Number 303-607-9001 602-912-1700 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $536,160 $6,874 $8.77 $1,811,808 $8,388 $8.39 Vacancy/Credit Loss $ 26,808 $ 344 $0.44 $ 126,827 $ 587 $0.59 Effective Gross Income $509,352 $6,530 $8.34 $1,684,981 $7,801 $7.80 Operating Expenses $203,741 $2,612 $3.33 $ 815,269 $3,774 $3.77 Net Operating Income $305,611 $3,918 $5.00 $ 815,712 $3,776 $3.78 NOTES: PRICE PER UNIT $41,282 $48,611 PRICE PER SQUARE FOOT $ 52.70 $ 48.61 EXPENSE RATIO 40.0% 48.4% EGIM 6.32 6.23 OVERALL CAP RATE 9.49% 7.77% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 -------------------------------- -------------------------------- ------------------------------- ------------------------------ Property Name Park Meadows Cheyenne Creek Dakota LOCATION: Address 970 Mount Werner Circle 115 W Cheyenne Road 1224 Delaware Drive City, State Colorado Springs, Colorado Colorado Springs, Colorado Colorado Springs, Colorado County El Paso County El Paso County El Paso County PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 47,179 107,261 37,332 Year Built 1984 1985 1969 Number of Units 60 107 54 Unit Mix: Type Total Type Total Type Total 2Br/1Ba 60 1Bd Den/1Ba 34 1Br/1Ba 36 2Bd/2Ba 73 2Br/1Ba 18 Average Unit Size (SF) 786 1,002 691 Land Area (Acre) 4.0200 4.4010 2.2100 Density (Units/Acre) 14.9 24.3 24.4 Parking Ratio (Spaces/Unit) 2.00 1.75 1.50 Parking Type (Gr., Cov., etc.) Open 107 covered Open CONDITION: Average Very Good Fair APPEAL: Average Very Good Fair AMENITIES: Pool/Spa Gym Room Laundry Room Secured Parking Sport Courts OCCUPANCY: 90% 94% 85% TRANSACTION DATA: Sale Date April, 2002 June, 2002 September, 2002 Sale Price ($) $3,100,000 $9,150,000 $2,100,000 Grantor Park Meadows Apartments, 115 West Cheyenne Road, LLC Raymond Maier LLC Grantee Park Meadows Affordable BP Cheyenne Creek Apts, LLC Two South Mosier, LLC Housing, LLC Sale Documentation 55416 2100444 163709 Verification Buyer CoStar Realty Information Public Records Telephone Number 719-447-9300 800-204-5960 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $405,000 $ 6,750 $8.58 $1,239,540 $11,584 $11.56 $345,960 $ 6,407 $9.27 Vacancy/Credit Loss $40,500 $ 675 $0.86 $ 74,372 $ 695 $ 0.69 $ 51,894 $ 961 $1.39 Effective Gross Income $364,500 $ 6,075 $7.73 $1,165,168 $10,889 $10.86 $294,066 $ 5,446 $7.88 Operating Expenses $135,011 $ 2,250 $2.86 $ 407,809 $ 3,811 $ 3.80 $117,626 $ 2,178 $3.15 Net Operating Income $229,489 $ 3,825 $4.86 $ 757,359 $ 7,078 $ 7.06 $176,440 $ 3,267 $4.73 NOTES: PRICE PER UNIT $51,667 $85,514 $38,889 PRICE PER SQUARE FOOT $ 65.71 $ 85.31 $ 56.25 EXPENSE RATIO 37.0% 35.0% 40.0% EGIM 8.50 7.85 7.14 OVERALL CAP RATE 7.40% 8.28% 8.40% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $38,889 to $85,514 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 $46,375 to $51,667 per unit with a mean or average adjusted price of $49,446 per unit. The median adjusted price is $50,556 per unit. Based on the following analysis, we have concluded to a value of $50,000 per unit, which results in an "as is" value of $5,600,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------------------------------- -------------------------- ---------------------------- -------------------------- Property Name Citadel Village Cedar Crest Colony Hills Address 913 N. Chelton Rd. 2010 Carmel Drive 3950 Patrick Drive City Colorado Springs, Colorado Colorado Springs, Colorado Colorado Springs, Colorado Sale Date January, 2003 July, 2001 Sale Price ($) $3,220,000 $10,500,000 Net Rentable Area (SF) 110,125 61,104 216,000 Number of Units 122 78 216 Price Per Unit $41,282 $48,611 Year Built 1974 1968 1985 Land Area (Acre) 9.2800 1.6000 6.6700 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 0% 07-2001 6% VALUE AFTER TRANS. ADJUST. ($/UNIT) $41,282 $51,528 Location Inferior 5% Inferior 5% Number of Units 122 78 0% 216 0% Quality / Appeal Good Inferior 5% Superior -10% Age / Condition 1974 1968 / Fair 5% 1985 / Good -5% Occupancy at Sale 62% 95% 0% 93% 0% Amenities Good Inferior 10% Comparable 0% Average Unit Size (SF) 903 783 0% 1,000 0% PHYSICAL ADJUSTMENT 25% -10% FINAL ADJUSTED VALUE ($/UNIT) $51,603 $46,375 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------------------------------- -------------------------- -------------------------- -------------------------- Property Name Park Meadows Cheyenne Creek Dakota Address 970 Mount Werner Circle 115 W Cheyenne Road 1224 Delaware Drive City Colorado Springs, Colorado Colorado Springs, Colorado Colorado Springs, Colorado Sale Date April, 2002 June, 2002 September, 2002 Sale Price ($) $3,100,000 $9,150,000 $2,100,000 Net Rentable Area (SF) 47,179 107,261 37,332 Number of Units 60 107 54 Price Per Unit $51,667 $85,514 $38,889 Year Built 1984 1985 1969 Land Area (Acre) 4.0200 4.4010 2.2100 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 04-2002 0% 06-2002 0% 09-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $51,667 $85,514 $38,889 Location Comparable 0% Superior -10% Comparable 0% Number of Units 60 5% 107 0% 54 5% Quality / Appeal Superior -10% Superior -20% Comparable 0% Age / Condition 1984 / Average 0% 1985 / Very Good -10% 1969 / Fair 10% Occupancy at Sale 90% 0% 94% 0% 85% 0% Amenities Inferior 5% Comparable 0% Inferior 10% Average Unit Size (SF) 786 0% 1,002 -5% 691 5% PHYSICAL ADJUSTMENT 0% -45% 30% FINAL ADJUSTED VALUE ($/UNIT) $51,667 $47,033 $50,556
SUMMARY VALUE RANGE (PER UNIT) $46,375 TO $ 51,667 MEAN (PER UNIT) $49,446 MEDIAN (PER UNIT) $50,556 VALUE CONCLUSION (PER UNIT) $50,000
VALUE OF IMPROVEMENT & MAIN SITE $6,100,000 LESS: LEASE-UP COST -$ 205,000 PV OF CONCESSIONS -$ 253,000 VALUE INDICATED BY SALES COMPARISON APPROACH $5,642,000 ROUNDED $5,600,000
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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 78 $ 3,220,000 9.49% $ 305,611 $ 529,799 1.108 $ 45,755 $ 41,282 $ 3,918 $ 4,343 I-2 216 $10,500,000 7.77% $ 815,712 $ 529,799 1.150 $ 55,899 $ 48,611 $ 3,776 $ 4,343 I-3 60 $ 3,100,000 7.40% $ 229,489 $ 529,799 1.135 $ 58,661 $ 51,667 $ 3,825 $ 4,343 I-4 107 $ 9,150,000 8.28% $ 757,359 $ 529,799 0.614 $ 52,465 $ 85,514 $ 7,078 $ 4,343 I-5 54 $ 2,100,000 8.40% $ 176,440 $ 529,799 1.329 $ 51,686 $ 38,889 $ 3,267 $ 4,343
PRICE/UNIT
Low High Average Median $45,755 $58,661 $52,893 $52,465
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 51,500 Number of Units 122 Value $6,283,000 Less: Lease-Up Cost -$ 205,000 PV of Concessions -$ 253,000 ----------- Value Based on NOI Analysis $5,825,000 Rounded $5,800,000
The adjusted sales indicate a range of value between $45,755 and $58,661 per unit, with an average of $52,893 per unit. Based on the subject's competitive position within the improved sales, a value of $51,500 per unit is estimated. This indicates an "as is" market value of $5,800,000 (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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 78 $ 3,220,000 $ 509,352 $ 203,741 40.00% 6.32 $ 41,282 I-2 216 $10,500,000 $1,684,981 $ 815,269 48.38% 6.23 $ 48,611 I-3 60 $ 3,100,000 $ 364,500 $ 135,011 37.04% 8.50 $ 51,667 43.61% I-4 107 $ 9,150,000 $1,165,168 $ 407,809 35.00% 7.85 $ 85,514 I-5 54 $ 2,100,000 $ 294,066 $ 117,626 40.00% 7.14 $ 38,889
EGIM
Low High Average Median --- ---- ------- ------ 6.23 8.50 7.21 7.14
VALUE ANALYSIS BASED ON EGIM's OF COMPARABLE SALES Estimate EGIM 6.30 Subject EGI $ 982,757 Value $6,191,368 Less: Lease-Up Cost -$ 205,000 PV of Concessions -$ 253,000 ----------- Value Based on EGIM Analysis $5,733,368 Rounded $5,700,000 Value Per Unit $ 46,721
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 43.61% before reserves. The comparable sales indicate a range of expense ratios from 35.00% to 48.38%, while their EGIMs range from 6.23 to 8.50. Overall, we conclude to an EGIM of 6.30, which results in an "as is" value estimate in the EGIM Analysis of $5,700,000. 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 $5,700,000. Price Per Unit $5,600,000 NOI Per Unit $5,800,000 EGIM Analysis $5,700,000 Sales Comparison Conclusion $5,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 - Jr. 1 Bedroom 520 $ 520 $ 1.00 77.8% 1Br/1Ba 675 $ 602 $ 0.89 60.8% 2Br/1Ba 860 $ 740 $ 0.86 65.6% 3Br/2 1/2Ba - Townhouse 1450 $1,049 $ 0.72 56.7% 3Br/2 1/2Ba - Sp. 1450 $1,049 $ 0.72 56.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO RENT ANALYSIS
COMPARABLE RENTS ----------------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ------- ------- ------- ------------- ----------------- The Willows at Tanager Printers Courtyard Dove Tree Meadows Parkside Park Estates ----------------- ------- ------------- ----------------- SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING ----------------------------------------------------------- DESCRIPTION TYPE RENT RENT Similar Similar Similar Very Superior Slightly Inferior ----------------------- ----------------- ------- ------- ------- ------- ------- ------------- ----------------- Monthly Rent 1Br/1Ba - Jr. 1 $ 520 $ 499 $ 525 $ 525 $ 710 $ 480 Unit Area (SF) BEDROOM 520 520 540 520 637 500 Monthly Rent Per Sq. Ft. $ 1.00 $ 0.96 $ 0.97 $ 1.01 $ 1.11 $ 0.96 Monthly Rent 1Br/1Ba $ 602 $ 599 $ 600 $ 600 $ 650 $ 765 Unit Area (SF) 675 675 720 700 650 726 Monthly Rent Per Sq. Ft. $ 0.89 $ 0.89 $ 0.83 $ 0.86 $ 1.00 $ 1.05 Monthly Rent 2Br/1Ba $ 740 $ 745 $ 720 $ 720 $ 778 $ 935 $ 605 Unit Area (SF) 860 860 970 965 850 987 750 Monthly Rent Per Sq. Ft. $ 0.86 $ 0.87 $ 0.74 $ 0.75 $ 0.91 $ 0.95 $ 0.81 Monthly Rent 3Br/2 1/2Ba - $1,049 $1,069 Unit Area (SF) TOWNHOUSE 1,450 1,450 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.74 Monthly Rent 3Br/2 1/2Ba - Sp. $1,049 $1,099 $1,300 Unit Area (SF) TOWNHOUSE 1,450 1,450 1,288 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.76 $ 1.01 DESCRIPTION MIN MAX MEDIAN AVERAGE ----------------------- ------ ------ ------ ------- Monthly Rent $ 480 $ 710 $ 525 $ 560 Unit Area (SF) 500 637 530 549 Monthly Rent Per Sq. Ft. $ 0.96 $ 1.11 $ 0.99 $ 1.01 Monthly Rent $ 600 $ 765 $ 625 $ 654 Unit Area (SF) 650 726 710 699 Monthly Rent Per Sq. Ft. $ 0.83 $ 1.05 $ 0.93 $ 0.94 Monthly Rent $ 605 $ 935 $ 720 $ 752 Unit Area (SF) 750 987 965 904 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.95 $ 0.81 $ 0.83 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $1,300 $1,300 $1,300 $ 1,300 Unit Area (SF) 1,288 1,288 1,288 1,288 Monthly Rent Per Sq. Ft. $ 1.01 $ 1.01 $ 1.01 $ 1.01
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 - Jr. 1 Bedroom 9 520 $ 500 $ 0.96 $ 4,500 $ 54,000 1Br/1Ba 51 675 $ 600 $ 0.89 $ 30,600 $ 367,200 2Br/1Ba 32 860 $ 720 $ 0.84 $ 23,040 $ 276,480 3Br/2 1/2Ba - Townhouse 18 1,450 $ 1,020 $ 0.70 $ 18,360 $ 220,320 3Br/2 1/2Ba - Sp. 12 1,450 $ 1,030 $ 0.71 $ 12,360 $ 148,320 -------- ---------- Total $ 88,860 $1,066,320
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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 $ 1,112,536 $ 9,119 $ 1,168,388 $ 9,577 $ 1,140,538 $ 9,349 Vacancy $ 44,366 $ 364 $ 60,325 $ 494 $ 159,114 $ 1,304 Credit Loss/Concessions $ 8,708 $ 71 $ 27,115 $ 222 $ 38,604 $ 316 ---------------------------------------------------------------------------------- Subtotal $ 53,074 $ 435 $ 87,440 $ 717 $ 197,718 $ 1,621 Laundry Income $ 8,717 $ 71 $ 10,745 $ 88 $ 5,999 $ 49 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 40,746 $ 334 $ 59,107 $ 484 $ 21,157 $ 173 ---------------------------------------------------------------------------------- Subtotal Other Income $ 49,463 $ 405 $ 69,852 $ 573 $ 27,156 $ 223 ---------------------------------------------------------------------------------- Effective Gross Income $ 1,108,925 $ 9,090 $ 1,150,800 $ 9,433 $ 969,976 $ 7,951 Operating Expenses Taxes $ 25,318 $ 208 $ 27,429 $ 225 $ 19,143 $ 157 Insurance $ 10,869 $ 89 $ 15,654 $ 128 $ 16,725 $ 137 Utilities $ 75,234 $ 617 $ 86,184 $ 706 $ 83,187 $ 682 Repair & Maintenance $ 27,367 $ 224 $ 26,546 $ 218 $ 29,288 $ 240 Cleaning $ 8,808 $ 72 $ 8,635 $ 71 $ 30,085 $ 247 Landscaping $ 13,512 $ 111 $ 18,477 $ 151 $ 25,860 $ 212 Security $ 3,609 $ 30 $ 2,275 $ 19 $ 1,026 $ 8 Marketing & Leasing $ 40,061 $ 328 $ 45,057 $ 369 $ 37,050 $ 304 General Administrative $ 190,389 $ 1,561 $ 181,256 $ 1,486 $ 111,395 $ 913 Management $ 56,397 $ 462 $ 70,123 $ 575 $ 47,075 $ 386 Miscellaneous ($ 3,035) -$ 25 $ 1,339 $ 11 $ 1,773 $ 15 ----------------------------------------------------------------------------------- Total Operating Expenses $ 448,529 $ 3,676 $ 482,975 $ 3,959 $ 402,607 $ 3,300 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------- Net Income $ 660,396 $ 5,413 $ 667,825 $ 5,474 $ 567,369 $ 4,651 FISCAL YEAR 2003 ANNUALIZED 2003 ------------------------- -------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ------------------------- -------------------------- --------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----- Revenues Rental Income $ 1,107,000 $ 9,074 $ 1,078,752 $ 8,842 $ 1,066,320 $ 8,740 100.0% Vacancy $ 185,550 $ 1,521 $ 432,796 $ 3,548 $ 122,627 $ 1,005 11.5% Credit Loss/Concessions $ 0 $ 0 $ 22,304 $ 183 $ 21,326 $ 175 2.0% ------------------------------------------------------------------------------------------- Subtotal $ 185,550 $ 1,521 $ 455,100 $ 3,730 $ 143,953 $ 1,180 13.5% Laundry Income $ 12,974 $ 106 $ 5,700 $ 47 $ 11,590 $ 95 1.1% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 52,496 $ 430 ($ 9,740) -$ 80 $ 48,800 $ 400 4.6% ------------------------------------------------------------------------------------------- Subtotal Other Income $ 65,470 $ 537 ($ 4,040) -$ 33 $ 60,390 $ 495 5.7% ------------------------------------------------------------------------------------------- Effective Gross Income $ 986,920 $ 8,090 $ 619,612 $ 5,079 $ 982,757 $ 8,055 100.0% Operating Expenses Taxes $ 23,525 $ 193 $ 25,888 $ 212 $ 23,790 $ 195 2.4% Insurance $ 18,698 $ 153 $ 17,976 $ 147 $ 18,300 $ 150 1.9% Utilities $ 81,332 $ 667 $ 63,960 $ 524 $ 81,740 $ 670 8.3% Repair & Maintenance $ 38,706 $ 317 $ 90,088 $ 738 $ 35,380 $ 290 3.6% Cleaning $ 0 $ 0 $ 35,052 $ 287 $ 30,500 $ 250 3.1% Landscaping $ 27,170 $ 223 $ 8,912 $ 73 $ 27,450 $ 225 2.8% Security $ 0 $ 0 $ 588 $ 5 $ 1,220 $ 10 0.1% Marketing & Leasing $ 29,440 $ 241 $ 32,488 $ 266 $ 37,210 $ 305 3.8% General Administrative $ 119,941 $ 983 $ 150,760 $ 1,236 $ 122,000 $ 1,000 12.4% Management $ 56,476 $ 463 $ 32,060 $ 263 $ 49,138 $ 403 5.0% Miscellaneous $ 0 $ 0 $ 13,716 $ 112 $ 1,830 $ 15 0.2% ------------------------------------------------------------------------------------------- Total Operating Expenses $ 395,288 $ 3,240 $ 471,488 $ 3,865 $ 428,558 $ 3,513 43.6% Reserves $ 0 $ 0 $ 0 $ 0 $ 24,400 $ 200 5.7% ------------------------------------------------------------------------------------------- Net Income $ 591,632 $ 4,849 $ 148,124 $ 1,214 $ 529,799 $ 4,343 53.9%
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 13.5% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO
SUMMARY OF OVERALL CAPITALIZATION RATES ---------------------------------------------- COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR --------- --------- ------ ---------- ----- I-1 Jan-03 95% $ 41,282 9.49% I-2 Jul-01 93% $ 48,611 7.77% I-3 Apr-02 90% $ 51,667 7.40% I-4 Jun-02 94% $ 85,514 8.28% I-5 Sep-02 85% $ 38,889 8.40% High 9.49% Low 7.40% Average 8.27%
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 $5,300,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO approximately 45% 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO DISCOUNTED CASH FLOW ANALYSIS
CITADEL VILLAGE ----------------------------------------------------------------------------------------------------------------------- YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- REVENUE Base Rent $1,066,320 $1,066,320 $1,076,983 $1,109,293 $1,142,571 $1,176,849 Vacancy $ 325,136 $ 164,525 $ 123,853 $ 127,569 $ 131,396 $ 135,338 Credit Loss $ 21,326 $ 21,326 $ 21,540 $ 22,186 $ 22,851 $ 23,537 Concessions $ 175,680 $ 117,120 $ 0 $ 0 $ 0 $ 0 Subtotal $ 522,143 $ 302,972 $ 145,393 $ 149,755 $ 154,247 $ 158,875 Laundry Income $ 11,590 $ 11,590 $ 11,706 $ 12,057 $ 12,419 $ 12,791 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 48,800 $ 48,800 $ 49,288 $ 50,767 $ 52,290 $ 53,858 Subtotal Other Income $ 60,390 $ 60,390 $ 60,994 $ 62,824 $ 64,708 $ 66,650 EFFECTIVE GROSS INCOME $ 604,567 $ 823,738 $ 992,584 $1,022,362 $1,053,033 $1,084,624 OPERATING EXPENSES: Taxes $ 23,790 $ 24,504 $ 25,239 $ 25,996 $ 26,776 $ 27,579 Insurance $ 18,300 $ 18,849 $ 19,414 $ 19,997 $ 20,597 $ 21,215 Utilities $ 81,740 $ 84,192 $ 86,718 $ 89,320 $ 91,999 $ 94,759 Repair & Maintenance $ 35,380 $ 36,441 $ 37,535 $ 38,661 $ 39,821 $ 41,015 Cleaning $ 30,500 $ 31,415 $ 32,357 $ 33,328 $ 34,328 $ 35,358 Landscaping $ 27,450 $ 28,274 $ 29,122 $ 29,995 $ 30,895 $ 31,822 Security $ 1,220 $ 1,257 $ 1,294 $ 1,333 $ 1,373 $ 1,414 Marketing & Leasing $ 37,210 $ 38,326 $ 39,476 $ 40,660 $ 41,880 $ 43,137 General Administrative $ 122,000 $ 125,660 $ 129,430 $ 133,313 $ 137,312 $ 141,431 Management $ 30,228 $ 41,187 $ 49,629 $ 51,118 $ 52,652 $ 54,231 Miscellaneous $ 1,830 $ 1,885 $ 1,941 $ 2,000 $ 2,060 $ 2,121 TOTAL OPERATING EXPENSES $ 409,648 $ 431,990 $ 452,156 $ 465,721 $ 479,692 $ 494,083 Reserves $ 24,400 $ 25,132 $ 25,886 $ 26,663 $ 27,462 $ 28,286 NET OPERATING INCOME $ 170,519 $ 366,617 $ 514,543 $ 529,979 $ 545,878 $ 562,254 Operating Expense Ratio (% of EGI) 67.8% 52.4% 45.6% 45.6% 45.6% 45.6% Operating Expense Per Unit $ 3,358 $ 3,541 $ 3,706 $ 3,817 $ 3,932 $ 4,050
CITADEL VILLAGE --------------------------------------------------------------------------------------------------------- YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 ------------------------------------ ---------- ---------- ---------- ---------- ---------- REVENUE Base Rent $1,212,154 $1,248,519 $1,285,974 $1,324,553 $1,364,290 Vacancy $ 139,398 $ 143,580 $ 147,887 $ 152,324 $ 156,893 Credit Loss $ 24,243 $ 24,970 $ 25,719 $ 26,491 $ 27,286 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 Subtotal $ 163,641 $ 168,550 $ 173,607 $ 178,815 $ 184,179 Laundry Income $ 13,175 $ 13,570 $ 13,977 $ 14,397 $ 14,829 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 55,474 $ 57,138 $ 58,852 $ 60,618 $ 62,437 Subtotal Other Income $ 68,649 $ 70,709 $ 72,830 $ 75,015 $ 77,265 EFFECTIVE GROSS INCOME $1,117,162 $1,150,677 $1,185,198 $1,220,754 $1,257,376 OPERATING EXPENSES: Taxes $ 28,407 $ 29,259 $ 30,136 $ 31,041 $ 31,972 Insurance $ 21,851 $ 22,507 $ 23,182 $ 23,877 $ 24,594 Utilities $ 97,602 $ 100,530 $ 103,546 $ 106,652 $ 109,852 Repair & Maintenance $ 42,246 $ 43,513 $ 44,818 $ 46,163 $ 47,548 Cleaning $ 36,419 $ 37,511 $ 38,636 $ 39,796 $ 40,989 Landscaping $ 32,777 $ 33,760 $ 34,773 $ 35,816 $ 36,891 Security $ 1,457 $ 1,500 $ 1,545 $ 1,592 $ 1,640 Marketing & Leasing $ 44,431 $ 45,764 $ 47,137 $ 48,551 $ 50,007 General Administrative $ 145,674 $ 150,045 $ 154,546 $ 159,182 $ 163,958 Management $ 55,858 $ 57,534 $ 59,260 $ 61,038 $ 62,869 Miscellaneous $ 2,185 $ 2,251 $ 2,318 $ 2,388 $ 2,459 TOTAL OPERATING EXPENSES $ 508,905 $ 524,173 $ 539,898 $ 556,095 $ 572,778 Reserves $ 29,135 $ 30,009 $ 30,909 $ 31,836 $ 32,792 NET OPERATING INCOME $ 579,122 $ 596,496 $ 614,391 $ 632,822 $ 651,807 Operating Expense Ratio (% of EGI) 45.6% 45.6% 45.6% 45.6% 45.6% Operating Expense Per Unit $ 4,171 $ 4,296 $ 4,425 $ 4,558 $ 4,695
Estimated Stabilized NOI $529,799 Sales Expense Rate 2.00% Months to Stabilized 20 Discount Rate 11.25% Stabilized Occupancy 88.5% Terminal Cap Rate 9.25%
Gross Residual Sale Price $ 7,046,563 Deferred Maintenance $ 0 Less: Sales Expense $ 140,931 Add: Excess Land $ 0 ----------- Net Residual Sale Price $ 6,905,632 Other Adjustments $ 0 ---------- PV of Reversion $ 2,377,953 Value Indicated By "DCF" $5,347,864 Add: NPV of NOI $ 2,969,911 Rounded $5,300,000 ----------- PV Total $ 5,347,864
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE -------------------------------------------------------------- TOTAL VALUE 10.75% 11.00% 11.25% 11.50% 11.75% ----------------- ---- ---------- ---------- ---------- ---------- ---------- 8.75% $5,677,891 $5,579,737 $5,483,747 $5,389,865 $5,298,038 9.00% $5,604,845 $5,508,320 $5,413,918 $5,321,586 $5,231,272 TERMINAL CAP RATE 9.25% $5,535,748 $5,440,763 $5,347,864 $5,256,998 $5,168,114 9.50% $5,470,287 $5,376,761 $5,285,286 $5,195,809 $5,108,280 9.75% $5,408,183 $5,316,042 $5,225,917 $5,137,758 $5,051,515
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO INCOME LOSS DURING LEASE-UP The subject is currently 62% occupied, below our stabilized occupancy projection. We have estimated a 20-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $205,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 ------------------------------- -------- -------- "As Is" Net Operating Income $170,519 $366,617 Stabilized Net Operating Income $362,903 $406,420 -------- -------- Difference $192,384 $ 39,804 PV of Income Loss During Lease-Up $205,090 Rounded $205,000 --------
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 $253,000 (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. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 35 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 36 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO CITADEL VILLAGE
TOTAL PER SQ. FT. PER UNIT %OF EGI ----------- ---------- -------- ------- REVENUE Base Rent $ 1,066,320 $ 9.68 $ 8,740 Less: Vacancy & Collection Loss 13.50% $ 143,953 $ 1.31 $ 1,180 Plus: Other Income Laundry Income $ 11,590 $ 0.11 $ 95 1.18% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 48,800 $ 0.44 $ 400 4.97% Subtotal Other Income $ 60,390 $ 0.55 $ 495 6.14% EFFECTIVE GROSS INCOME $ 982,757 $ 8.92 $ 8,055 OPERATING EXPENSES: Taxes $ 23,790 $ 0.22 $ 195 2.42% Insurance $ 18,300 $ 0.17 $ 150 1.86% Utilities $ 81,740 $ 0.74 $ 670 8.32% Repair & Maintenance $ 35,380 $ 0.32 $ 290 3.60% Cleaning $ 30,500 $ 0.28 $ 250 3.10% Landscaping $ 27,450 $ 0.25 $ 225 2.79% Security $ 1,220 $ 0.01 $ 10 0.12% Marketing & Leasing $ 37,210 $ 0.34 $ 305 3.79% General Administrative $ 122,000 $ 1.11 $ 1,000 12.41% Management 5.00% $ 49,138 $ 0.45 $ 403 5.00% Miscellaneous $ 1,830 $ 0.02 $ 15 0.19% TOTAL OPERATING EXPENSES $ 428,558 $ 3.89 $ 3,513 43.61% Reserves $ 24,400 $ 0.22 $ 200 2.48% NET OPERATING INCOME $ 529,799 $ 4.81 $ 4,343 53.91% "GOING IN" CAPITALIZATION RATE 8.75% VALUE INDICATION $ 6,054,845 $ 54.98 $ 49,630 LESS: LEASE-UP COST ($ 205,000) PV OF CONCESSIONS ($ 253,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 5,596,845 ROUNDED $ 5,600,000 $ 50.85 $ 45,902
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 37 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF -------- ---------- ---------- ------- ------ 8.00% $6,164,487 $6,200,000 $50,820 $56.30 8.25% $5,963,806 $6,000,000 $49,180 $54.48 8.50% $5,774,929 $5,800,000 $47,541 $52.67 8.75% $5,596,845 $5,600,000 $45,902 $50.85 9.00% $5,428,655 $5,400,000 $44,262 $49.04 9.25% $5,269,556 $5,300,000 $43,443 $48.13 9.50% $5,118,831 $5,100,000 $41,803 $46.31
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $5,600,000. 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 $5,300,000 Direct Capitalization Method $5,600,000 Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $5,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 $ 5,700,000 Income Approach $ 5,400,000 Reconciled Value $ 5,500,000
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 May 15, 2003 the market value of the fee simple estate in the property is: $5,500,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA CITADEL VILLAGE, COLORADO SPRINGS, COLORADO ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CITADEL VILLAGE, COLORADO SPRINGS, COLORADO EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - OFFICE & LANDSCAPE [PICTURE] [PICTURE] INTERIOR - GYM ROOM INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] INTERIOR - APARTMENT UNIT INTERIOR - APARTMENT UNIT AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - POOL AREA EXTERIOR - PAVED INLINE SKATING AREA [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - PLAYGROUND AREA [PICTURE] [PICTURE] INTERIOR - TYPICAL LAUNDRY ROOM EXTERIOR - LANDSCAPING PICTURE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CITADEL VILLAGE, COLORADO SPRINGS, COLORADO EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CITADEL VILLAGE, COLORADO SPRINGS, COLORADO PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 CEDAR CREST COLONY HILLS 2010 Carmel Drive 3950 Patrick Drive Colorado Springs, Colorado Colorado Springs, Colorado COMPARABLE I-3 COMPARABLE I-4 PARK MEADOWS CHEYENNE CREEK 970 Mount Werner Circle 115 W Cheyenne Road Colorado Springs, Colorado Colorado Springs, Colorado COMPARABLE I-5 DAKOTA 1224 Delaware Drive Colorado Springs, Colorado AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CITADEL VILLAGE, COLORADO SPRINGS, COLORADO SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ------------------------------------- ------------------------------------------ ------------------------------------------ Property Name Citadel Village Dove Tree Management Company AIMCO Sevo Miller LOCATION: Address 913 N. Chelton Rd. 255 Lionstone Drive City, State Colorado Springs, Colorado Colorado Springs, Colorado County El Paso County El Paso County Proximity to Subject Approx. 1 mile southeast of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 110,125 Year Built 1974 1980 Effective Age 23 20 Building Structure Type Parking Type (Gr., Cov., etc.) Open Open Number of Units 122 N/A Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba - Jr. 1 Bd 520 9 $ 520 1 1Bd/1Ba 540 $525 2 1Br/1Ba 675 51 $ 602 2 1Bd/1Ba 720 $600 3 2Br/1Ba 860 32 $ 740 3 2Bd/2Ba 970 $720 4 3Br/2 1/2Ba - TH 1,450 18 $1,049 5 3Br/2 1/2Ba - Sp. 1,450 12 $1,049 Average Unit Size (SF) 903 Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room X Inline skating area Inline skating area OCCUPANCY: 62% 88% LEASING DATA: Available Leasing Terms 6-12 month lease 6-12 month leases Concessions 1 month free and $50-120 off each month $1 move-in, $100 off each month Pet Deposit $150 per pet $400 for dog and $10/month rent Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash Water Trash Confirmation Leasing Agent Telephone Number 719-574-1672 NOTES: COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ------------------------------------- ------------------------------------------ ------------------------------------------- Property Name Tanager Meadows Parkside Management Company Sevo Miller Sares-Regis Group LOCATION: Address 1432 Sandalwood Drive 2505 East Pikes Peak Avenue City, State Colorado Springs, Colorado Colorado Springs, Colorado County El Paso County El Paso County Proximity to Subject Approx. 2 1/2 miles south of subject 1 mile southwest of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) Year Built 1980 1984 Effective Age 20 15 Building Structure Type Parking Type (Gr., Cov., etc.) Open Covered and Open Number of Units N/A 268 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 520 $525 2 1Br/1Ba 650 $650 2 1Bd/1Ba 700 $600 3 2Br/1Ba 800 $760 3 2Bd/2Ba 965 $720 3 2Br/2Ba 900 $795 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Good Very Good APPEAL: Good Very Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment X Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall X Sand Volley Ball Meeting Hall Tennis Court Secured Parking X Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room Inline skating area Inline skating area OCCUPANCY: 79% 90% LEASING DATA: Available Leasing Terms 6-12 month leases 6-12 month leases Concessions $50 off/mo. With 6 mo., $100 off w/ 12 mo. $100-200 off each month with 12 month lease Pet Deposit $400 for dog and $10/month rent $200 for 1 pet, $300 for 2 pets Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash X Water X Trash Confirmation Leasing Agent Leasing agent Telephone Number 719-570-7117 719-632-2505 NOTES: Management pays for cable TV All units have W/D hookups 1 covered parking per unit COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 ------------------------------------- --------------------------------------------- -------------------------------------------- Property Name The Willows at Printers Park Courtyard Estates Management Company LOCATION: Address 2205 Willow Tree Grove 4370 East Pikes Peak Avenue City, State Colorado Springs, Colorado Colorado Springs, Colorado County El Paso County El Paso County Proximity to Subject 2 miles east of subject Approx. 1 mile southeast of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) Year Built 2000 1975 Effective Age 2 25 Building Structure Type Parking Type (Gr., Cov., etc.) Garage and Open Open Number of Units 220 176 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 637 $ 710 1 1Bd/1Ba 500 $480 2 1Bd/1Ba 726 $ 765 3 2Bd/1Ba 750 $605 3 2Bd/1Ba 932 $ 885 3 2Bd/2Ba 1,042 $ 985 5 3Bd/2Ba 1,288 $1,300 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom Efficiency 2-Bedroom 1-Bedroom 3-Bedroom 1-Bedroom 3-Bedroom CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Balcony X Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court X Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room Gym Room Inline skating area Inline skating area OCCUPANCY: 87% 88% LEASING DATA: Available Leasing Terms 6-12 month leases 6-12 month leases Concessions 2 mo. free w/13 mo. lease,3 free w/15 mo. Lease $1 deposit, 1 month free,$25-50 off each mo. Pet Deposit $250 none required Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation Leasing agent Leasing Agent Telephone Number 719-578-8333 719-597-4949 NOTES: All units have full-size W/D $40 per month for garage COMPARISON TO SUBJECT: Very Superior Slightly Inferior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B CITADEL VILLAGE, COLORADO SPRINGS, COLORADO PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 DOVE TREE TANAGER MEADOWS 255 Lionstone Drive 1432 Sandalwood Drive Colorado Springs, Colorado Colorado Springs, Colorado [PICTURE] [PICTURE] COMPARABLE R-3 COMPARABLE R-4 PARKSIDE THE WILLOWS AT PRINTERS PARK 2505 East Pikes Peak Avenue 2205 Willow Tree Grove Colorado Springs, Colorado Colorado Springs, Colorado [PICTURE] [PICTURE] COMPARABLE R-5 COURTYARD ESTATES 4370 East Pikes Peak Avenue Colorado Springs, Colorado [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C CITADEL VILLAGE, COLORADO SPRINGS, COLORADO EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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 CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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. James Newell 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- Douglas Needham ------------------------ Douglas Needham, MAI Managing Principal, Real Estate Group Colorado State Certified General Real Estate Appraiser #CG40017035 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E CITADEL VILLAGE, COLORADO SPRINGS, COLORADO EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E CITADEL VILLAGE, COLORADO SPRINGS, COLORADO DOUGLAS A. NEEDHAM, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION Douglas A. Needham is a Managing Principal for the Irvine Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Needham has appraised all types of major commercial real estate including apartments, hotels/motels, light and heavy industrial facilities, self-storage facilities, mobile home parks, offices, retail shopping centers, service stations, special-use properties, and vacant land. Business Mr. Needham joined AAA in 1998. Prior to joining AAA, he was a senior associate at Koeppel Tener, a senior analyst at Great Western Appraisal Group, and an associate appraiser at R. L. McLaughlin & Associates. EDUCATION Texas A&M University Bachelor of Business Administration - Finance STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30943 State of California, Certified General Real Estate Appraiser, #AG025443 State of Colorado, Certified General Appraiser, #CG40017035 State of Oregon, Certified General Appraiser, #C000686 State of Washington, Certified General Real Estate Appraiser, #1101111 PROFESSIONAL AFFILIATIONS Appraisal Institute, MAI Designated Member AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E CITADEL VILLAGE, COLORADO SPRINGS, COLORADO VALUATION AND Appraisal Institute SPECIAL COURSES Advanced Income Capitalization Appraisal Principles Appraisal Procedures Basic Income Capitalization Standards of Professional Practice AMERICAN APPRAISAL ASSOCIATES, INC. CITADEL VILLAGE, COLORADO SPRINGS, COLORADO GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. CITADEL VILLAGE, COLORADO SPRINGS, COLORADO 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.