EX-99.(C)(9) 11 d07256a1exv99wxcyx9y.txt APPRAISAL OF LAKE FOREST APARTMENTS LAKE FOREST 11402 EVANS STREET OMAHA, NEBRASKA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 12, 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 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: LAKE FOREST 11402 EVANS STREET OMAHA, DOUGLAS COUNTY, NEBRASKA 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 312 units with a total of 300,300 square feet of rentable area. The improvements were built in 1973. The improvements are situated on 21.17775482 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 96% 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 LAKE FOREST, OMAHA, NEBRASKA 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 12, 2003 is: ($12,200,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. June 27, 2003 -s- Jeff W. Briggs #053272 ---------------------- Jeff W. Briggs, MAI Engagement Director, Real Estate Group Nebraska Certified General Real Estate Appraiser #CG230072R Report By: Jeff W. Briggs AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Lake Forest LOCATION: 11402 Evans Street Omaha, Nebraska INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: fee simple DATE OF VALUE: May 12, 2003 DATE OF REPORT: June 27, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 21.1777548209366 acres, or 922,503 square feet Assessor Parcel No.: 0139 1538 16; 0139 1598 16 Floodplain: Community Panel No. 315274 0025 F (February 6, 1991) Flood Zone AE, an area inside the floodplain. Zoning: R2, R6, DR, DR-FP (Single Family Residential District (R2), Low Density Multiple Family Residential District (R6 & R6 PUD), Drainage (DR & DR-FP)) BUILDING: No. of Units: 312 Units Total NRA: 300,300 Square Feet Average Unit Size: 963 Square Feet Apartment Density: 14.7 units per acre Year Built: 1973 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income ----------------------------------------------------------------------- 1 Bd/1 Bath (1A10) 850 $520 $0.61 $ 81,120 $ 973,440 2 Bd/1.5 Ba (2A20) 1,075 $640 $0.60 $ 99,840 $1,198,080 --------------------- Total $180,960 $2,171,520 =====================
OCCUPANCY: 96% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 LAKE FOREST, OMAHA, NEBRASKA REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] EXTERIOR - SIGNAGE AND VIEW FROM WEST MAPLE AVENUE [PICTURE] EXTERIOR - APARTMENT BUILDING AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA PART TWO - ECONOMIC INDICATORS
Amount $/Unit ------------- ---------- INCOME CAPITALIZATION APPROACH DIRECT CAPITALIZATION Potential Rental Income $2,171,520 $6,960 Effective Gross Income $2,284,838 $7,323 Operating Expenses $1,109,522 $3,556 48.6% of EGI Net Operating Income: $1,112,916 $3,567 Capitalization Rate 9.25% DIRECT CAPITALIZATION VALUE $11,900,000 * $38,141 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 9% Stabilized Vacancy & Collection Loss: 8% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.00% Discount Rate 11.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $12,400,000 * $39,744 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $12,200,000 $39,103 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $29,545 to $48,817 Range of Sales $/Unit (Adjusted) $37,444 to $40,615 VALUE INDICATION - PRICE PER UNIT $12,100,000 * $38,782 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.27 to 6.08 Selected EGIM for Subject 5.40 Subject's Projected EGI $2,284,838 EGIM ANALYSIS CONCLUSION $12,200,000 * $39,103 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $11,900,000 * $38,141 / UNIT RECONCILED SALES COMPARISON VALUE $12,000,000 $38,462 / 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 LAKE FOREST, OMAHA, NEBRASKA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $12,100,000 NOI Per Unit $11,900,000 EGIM Multiplier $12,200,000 INDICATED VALUE BY SALES COMPARISON $12,000,000 $38,462 / UNIT INCOME APPROACH: Direct Capitalization Method: $11,900,000 Discounted Cash Flow Method: $12,400,000 INDICATED VALUE BY THE INCOME APPROACH $12,200,000 $39,103 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $12,200,000 $39,103 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 LAKE FOREST, OMAHA, NEBRASKA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 11402 Evans Street, Omaha, Douglas County, Nebraska. Omaha identifies it as 0139 1538 16; 0139 1598 16. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Jeff Briggs, MAI on May 12, 2003. Jeff W. Briggs, MAI made a personal inspection of the subject property, performed the research, valuation analysis and wrote the report. Jeff Briggs, MAI has extensive experience in appraising similar properties and meets 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 12, 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 defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 LAKE FOREST, OMAHA, NEBRASKA "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 4. 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 LAKE FOREST, OMAHA, NEBRASKA 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 Omaha, Nebraska. 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 - North 90th Street West - North 120th Street South - Blondo Street North - Fort Street MAJOR EMPLOYERS Major employers in the subject's area include Offutt Air Force Base, Alergent Health, Omaha Public Schools, First Data Corporation Methodist Health System, Mutual of Omaha Companies, ConAgra Foods Inc., and Union Pacific Railroad. 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 LAKE FOREST, OMAHA, NEBRASKA NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA --------------------------------------------------------------------------------- POPULATION TRENDS Current Population 11,579 82,147 186,606 729,638 5-Year Population 12,714 89,535 198,042 763,780 % Change CY-5Y 9.8% 9.0% 6.1% 4.7% Annual Change CY-5Y 2.0% 1.8% 1.2% 0.9% HOUSEHOLDS Current Households 5,347 35,155 76,296 282,018 5-Year Projected Households 6,057 38,880 82,269 298,876 % Change CY - 5Y 13.3% 10.6% 7.8% 6.0% Annual Change CY-5Y 2.7% 2.1% 1.6% 1.2% INCOME TRENDS Median Household Income $ 50,314 $ 57,569 $ 58,160 $ 45,791 Per Capita Income $ 25,130 $ 30,381 $ 29,064 $ 23,281 Average Household Income $ 54,711 $ 71,004 $ 71,221 $ 60,232
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 55.37% 39.28% 32.16% 31.64% 5-Year Projected % Renting 48.74% 38.39% 32.08% 31.18% % of Households Owning 40.73% 57.17% 64.38% 62.25% 5-Year Projected % Owning 47.78% 58.38% 64.72% 63.04%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 LAKE FOREST, OMAHA, NEBRASKA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - single family residential South - single family residential East - commercial uses West - single family residential CONCLUSIONS The subject is well located within the city of Omaha. 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 LAKE FOREST, OMAHA, NEBRASKA MARKET ANALYSIS The subject property is located in the city of Omaha in Douglas County. The overall pace of development in the subject's market is more or less decreasing. There are no new units under construction in the subject's neighborhood as the area is effectively built out. The following table illustrates historical occupancy rates for the subject's market. HISTORICAL OCCUPANCY
Period Region Submarket --------------------------------- Fall 1998 95.0% 88.0% Spring 1999 98.0% N/A Fall 1999 94.0% 94.0% Spring 2000 94.0% N/A Fall 2000 94.0% 92.0% Spring 2001 94.0% N/A Fall 2001 94.0% 93.0% Spring 2002 93.0% N/A Fall 2002 93.0% 92.0% Spring 2003 93.0% 92.0%
Source: Fall 2002 IREM, & Christopher Mustoe with C. Mustoe Appraisals Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. Concessions in the market are not widespread but are showing up in some projects. Population growth in the area is still occurring, however, the current high unemployment rate probably promotes some doubling up or shared apartments. The economic uncertainty may also be forcing younger people to delay moving out on their own. As this market segment is historically one of the larger segments of apartment dwellers, future "pent-up" demand may be building up, hopefully to surface when the economy recovers. Market rents in the subject's market have been following an increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change -------------------------------------------------------------------- Fall 2001 - 1 Bedroom $536 - $558 - Fall 2002 - 1 Bedroom $540 0.7% $556 -0.4% Fall 2001 - 2 Bedroom $669 23.9% $695 25.0% Fall 2002 - 2 Bedroom $681 1.8% $704 1.3%
AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 LAKE FOREST, OMAHA, NEBRASKA The following table illustrates a summary of the subject's competitive set. COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject --------------------------------------------------------------------------------------------------------------- R-1 Maple Manor 259 90% 1968 1.8 miles east of the subject R-2 Laurelwood Apartment Homes & Townhomes 480 94% 1969 3.0 miles northeast of the subject R-3 Tudor Heights Apartments 418 96% 1970s 1.3-miles northeast of the subject R-4 Hidden Valley Apartments Townhomes 246 96% 1978 1.2-miles northeast of the subject R-5 Picadilly Square Apartments N/A 95% Early 1980s 1 block south of the subject Subject Lake Forest 312 96% 1973
While rents have declined or remained stable over the last two years, there has been a steady progression upward in rents going back to 1991. The data going back 10 years indicates rental rates that are growing in-line with inflation. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 LAKE FOREST, OMAHA, NEBRASKA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 21.1777548209366 acres, or 922,503 square feet Shape Irregular Topography Moderate slope Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 315274 0025 F, dated February 6, 1991 Flood Zone Zone AE Zoning R2, R6, DR, DR-FP, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - ---------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES -------------------------------------------------------------------------------- 0139 1538 16; NA $10,020,100 $10,020,100 $0.02043 $204,685 0139 1598 16
IMPROVEMENT ANALYSIS Year Built 1973 Number of Units 312 Net Rentable Area 300,300 Square Feet Construction: Foundation Reinforced concrete slab 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 swimming pool, spa/jacuzzi, tennis court, gym room, tanning bed, playground, detached garages, meeting hall, laundry room, business office, 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, AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 LAKE FOREST, OMAHA, NEBRASKA dishwasher, and oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) ------------------------------------------------ 1 Bd/1 Bath (1A10) 156 850 2 Bd/1.5 Ba (2A20) 156 1,075
Overall Condition Average Effective Age 25 years Economic Life 45 years Remaining Economic Life 20 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 1973 and consist of a 312-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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ------------------------------------------------------------------------------------------------------------------------ Property Name Lake Forest Chalet Apartments & Townhomes Orchard Park Apartments LOCATION: Address 11402 Evans Street 3810 North 108th Street 7805-7809 Harney Street City, State Omaha, Nebraska Omaha, Nebraska Omaha, Nebraska County Douglas Douglas Douglas PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 300,300 236,510 33,910 Year Built 1973 1978 1980 Number of Units 312 246 44 Unit Mix: Type Total Type Total Type Total 1 Bd/1 Bath (1A10) 156 1 Br/1 Ba - apts. 80 N/A 2 Bd/1.5 Ba (2A20) 156 2 Br/1 Ba - apts. 16 1 Br/1 Ba - twnhm. 24 1 Br/1 Ba - twnhm. 20 1 Br/1.5Ba -twnhm. 52 2 Br/1.5Ba -twnhm. 17 2 Br/1.5Ba -twnhm. 8 2 Br/1.5Ba -twnhm. 12 2 Br/2.5 Ba-twnhm. 5 2 Br/2.5 Ba-twnhm. 12 Average Unit Size (SF) 963 961 771 Land Area (Acre) 21.1778 23.2247 1.7677 Density (Units/Acre) 14.7 10.6 24.9 Parking Ratio (Spaces/Unit) 0.00 N/A 1.64 Parking Type (Gr., Cov., etc.) Garage and open Garage and open Garage and open CONDITION: Average Average Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/Yes Yes/Yes No/No Gym Room Yes Yes No Laundry Room Yes Yes No Secured Parking No No No Sport Courts Yes No No Washer/Dryer Connection No Yes Yes OCCUPANCY: 96% 94% 93% TRANSACTION DATA: Sale Date January, 2003 July, 2002 Sale Price ($) $9,600,000 $1,300,000 Grantor Chalet Investments, LLP LK Company LLC Grantee Hidden Valley Investments, LLC J B Conway, Trustee Sale Documentation Book 2231, Page 258 Book 2217, Page 325 Verification Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF ------- ------ ---- ------- ------ ---- Potential Gross Income $1,979,362 $8,046 $8.37 $253,982 $5,772 $7.49 Vacancy/Credit Loss $ 158,349 $ 644 $0.67 $ 22,858 $ 520 $0.67 ---------- ------ ----- -------- ------ ----- Effective Gross Income $1,821,013 $7,402 $7.70 $231,124 $5,253 $6.82 Operating Expenses $ 905,772 $3,682 $3.83 $112,806 $2,564 $3.33 ---------- ------ ----- -------- ------ ----- Net Operating Income $ 915,241 $3,720 $3.87 $118,318 $2,689 $3.49 ---------- ------ ----- -------- ------ ----- NOTES: Property contains 96 apt. Expenses include $200/unit units, 150 townhome units, reserve. Exposure time was & 15,494 SF comm. bldg. Expenses less than 6 months. include $200/u reserves PRICE PER UNIT $39,024 $29,545 PRICE PER SQUARE FOOT $ 40.59 $38.34 EXPENSE RATIO 49.7% 48.8% EGIM 5.27 5.62 OVERALL CAP RATE 9.53% 9.10% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------------------------------------------------------------------------------------------------------------------------- Property Name Brent Village Apartments Fontenelle Hills Apartments 1001 Apartments LOCATION: Address 1402-1510 Buck Drive 200 Martin Drive 1001 North 90th Street City, State Bellevue, Nebraska Bellevue, Nebraska Omaha, Nebraska County Sarpy Sarpy Doughas PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 147,320 379,819 111,805 Year Built 1971 1974 1969 Number of Units 180 338 110 Unit Mix: Type Total Type Total Type Total N/A N/A 1 Br/1Ba 55 2Br/2Ba 55 3Br/2Ba 110 Average Unit Size (SF) 818 1,124 1,016 Land Area (Acre) 9.2800 35.0700 4.5400 Density (Units/Acre) 19.4 9.6 24.2 Parking Ratio (Spaces/Unit) N/A N/A N/A Parking Type (Gr., Cov., etc.) Garage and open Garage and open Open, Covered CONDITION: Fair Good Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room No Yes No Laundry Room Yes Yes Yes Secured Parking No No No Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 95% 97% 95% TRANSACTION DATA: Sale Date July, 2002 May, 2001 April, 2000 Sale Price ($) $5,970,000 $16,500,000 $4,315,000 Grantor Brent Village Associates, LLC Continental Fontenelle Inc. 90th Street Associates Grantee BV Associates LLC Haley Fontenelle Hills, LP Keystone Properties III, L.L.C. Sale Documentation Book 2002, Page 24483 Book 2002, Page 15007 Book 2150, Page 188 Verification Confidential Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF ---------- ------ ----- ---------- ------ ----- -------- ------ ----- Potential Gross Income $1,155,097 $6,417 $7.84 $2,969,923 $8,787 $7.82 $763,441 $6,940 $6.83 Vacancy/Credit Loss $ 80,857 $ 449 $0.55 $ 207,895 $ 615 $0.55 $ 53,441 $ 486 $0.48 ---------- ------ ----- ---------- ------ ----- -------- ------ ----- Effective Gross Income $1,074,240 $5,968 $7.29 $2,762,028 $8,172 $7.27 $710,000 $6,455 $6.35 Operating Expenses $ 519,408 $2,886 $3.53 $1,196,293 $3,539 $3.15 $304,200 $2,765 $2.72 ---------- ------ ----- ---------- ------ ----- -------- ------ ----- Net Operating Income $ 554,832 $3,082 $3.77 $1,565,735 $4,632 $4.12 $405,800 $3,689 $3.63 ---------- ------ ----- ---------- ------ ----- -------- ------ ----- NOTES: Expenses include $200/unit Expenses include $200/unit Expenses include $200/unit reserve. Exposure time was reserve. Exposure time was reserve. Exposure time is not less than 6 months. Property approx. 12 months. available. underwent moderate rehab. Property was renovated. PRICE PER UNIT $33,167 $48,817 $39,227 PRICE PER SQUARE FOOT $ 40.52 $ 43.44 $ 38.59 EXPENSE RATIO 48.4% 43.3% 42.8% EGIM 5.56 5.97 6.08 OVERALL CAP RATE 9.29% 9.49% 9.40% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 LAKE FOREST, OMAHA, NEBRASKA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $29,545 to $48,817 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 $37,444 to $40,615 per unit with a mean or average adjusted price of $38,977 per unit. The median adjusted price is $39,286 per unit. Based on the following analysis, we have concluded to a value of $39,000 per unit, which results in an "as is" value of $12,100,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 LAKE FOREST, OMAHA, NEBRASKA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ------------------------------------------------------------------------------------------------------------------ Property Name Lake Forest Chalet Apartments & Townhomes Orchard Park Apartments Address 11402 Evans Street 3810 North 108th Street 7805-7809 Harney Street City Omaha, Nebraska Omaha, Nebraska Omaha, Nebraska Sale Date January, 2003 July, 2002 Sale Price ($) $9,600,000 $1,300,000 Net Rentable Area (SF) 300,300 236,510 33,910 Number of Units 312 246 44 Price Per Unit $39,024 $29,545 Year Built 1973 1978 1980 Land Area (Acre) 21.1778 23.2247 1.7677 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 1% 07-2002 3% VALUE AFTER TRANS. ADJUST. ($/UNIT) $39,415 $30,432 Location Comparable 0% Comparable 0% Number of Units 312 246 0% 44 0% Quality / Appeal Average Superior -5% Comparable 0% Age / Condition 1973 1978 / Average 0% 1980 / Average 0% Occupancy at Sale 96% 94% 0% 93% 0% Amenities Pool, tennis, garages Comparable 0% Comparable 0% Average Unit Size (SF) 963 961 0% 771 25% PHYSICAL ADJUSTMENT -5% 25% FINAL ADJUSTED VALUE ($/UNIT) $37,444 $38,040 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 -------------------------------------------------------------------------------------------------------------------- Property Name Brent Village Apartments Fontenelle Hills Apartments 1001 Apartments Address 1402-1510 Buck Drive 200 Martin Drive 1001 North 90th Street City Bellevue, Nebraska Bellevue, Nebraska Omaha, Nebraska Sale Date July, 2002 May, 2001 April, 2000 Sale Price ($) $5,970,000 $16,500,000 $4,315,000 Net Rentable Area (SF) 147,320 379,819 111,805 Number of Units 180 338 110 Price Per Unit $33,167 $48,817 $39,227 Year Built 1971 1974 1969 Land Area (Acre) 9.2800 35.0700 4.5400 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 07-2002 3% 05-2001 4% 04-2000 6% VALUE AFTER TRANS. ADJUST. ($/UNIT) $34,162 $50,769 $41,581 Location Comparable 0% Comparable 0% Comparable 0% Number of Units 180 0% 338 0% 110 0% Quality / Appeal Comparable 0% Superior -5% Superior -5% Age / Condition 1971 / Fair 0% 1974 / Good 0% 1969 / Average 0% Occupancy at Sale 95% 0% 97% 0% 95% 0% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 818 15% 1,124 -15% 1,016 0% PHYSICAL ADJUSTMENT 15% -20% -5% FINAL ADJUSTED VALUE ($/UNIT) $39,286 $40,615 $39,502
SUMMARY VALUE RANGE (PER UNIT) $37,444 TO $40,615 MEAN (PER UNIT) $38,977 MEDIAN (PER UNIT) $39,286 VALUE CONCLUSION (PER UNIT) $39,000
VALUE OF IMPROVEMENT & MAIN SITE $12,168,000 PV OF CONCESSIONS -$ 114,000 VALUE INDICATED BY SALES COMPARISON APPROACH $12,054,000 ROUNDED $12,100,000
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 LAKE FOREST, OMAHA, NEBRASKA 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-1 246 $ 9,600,000 9.53% $ 915,241 $1,112,916 0.959 $37,415 $ 39,024 $ 3,720 $ 3,567 I-2 44 $ 1,300,000 9.10% $ 118,318 $1,112,916 1.327 $39,192 $ 29,545 $ 2,689 $ 3,567 I-3 180 $ 5,970,000 9.29% $ 554,832 $1,112,916 1.157 $38,381 $ 33,167 $ 3,082 $ 3,567 I-4 338 $16,500,000 9.49% $1,565,735 $1,112,916 0.770 $37,590 $ 48,817 $ 4,632 $ 3,567 I-5 110 $ 4,315,000 9.40% $ 405,800 $1,112,916 0.967 $37,929 $ 39,227 $ 3,689 $ 3,567
PRICE/UNIT
Low High Average Median $37,415 $39,192 $38,102 $37,929
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 38,500 Number of Units 312 Value $12,012,000 PV of Concessions -$ 114,000 ----------- Value Based on NOI Analysis $11,898,000 Rounded $11,900,000
The adjusted sales indicate a range of value between $37,415 and $39,192 per unit, with an average of $38,102 per unit. Based on the subject's competitive position within the improved sales, a value of $38,500 per unit is estimated. This indicates an "as is" market value of $11,900,000 (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 LAKE FOREST, OMAHA, NEBRASKA 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-1 246 $ 9,600,000 $1,821,013 $ 905,772 49.74% 5.27 $ 39,024 I-2 44 $ 1,300,000 $ 231,124 $ 112,806 48.81% 5.62 $ 29,545 I-3 180 $ 5,970,000 $1,074,240 $ 519,408 48.35% 48.56% 5.56 $ 33,167 I-4 338 $16,500,000 $2,762,028 $1,196,293 43.31% 5.97 $ 48,817 I-5 110 $ 4,315,000 $ 710,000 $ 304,200 42.85% 6.08 $ 39,227
EGIM
Low High Average Median --- ---- ------- ------ 5.27 6.08 5.70 5.62
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.40 Subject EGI $ 2,284,838 Value $12,338,127 PV of Concessions -$ 114,000 ----------- Value Based on EGIM Analysis $12,224,127 Rounded $12,200,000 Value Per Unit $ 39,103
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 48.56% before reserves. The comparable sales indicate a range of expense ratios from 42.85% to 49.74%, while their EGIMs range from 5.27 to 6.08. Overall, we conclude to an EGIM of 5.40, which results in an "as is" value estimate in the EGIM Analysis of $12,200,000. 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 $12,000,000. Price Per Unit $12,100,000 NOI Per Unit $11,900,000 EGIM Analysis $12,200,000 Sales Comparison Conclusion $12,000,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 ---------------------------------------------------------- 1 Bd/1 Bath (1A10) 850 $534 $0.63 94.9% 2 Bd/1.5 Ba (2A20) 1075 $644 $0.60 96.2%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 LAKE FOREST, OMAHA, NEBRASKA RENT ANALYSIS
COMPARABLE RENTS ---------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ---------------------------------------------------- Laurelwood Hidden Apartments Tudor Valley Picadilly Maple Homes & Heights Apartments Square Manor Townhomes Apartments Townhomes Apartments ---------------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT --------------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly Slightly Slightly DESCRIPTION TYPE RENT RENT Inferior Inferior Similar Similar Superior MIN MAX MEDIAN AVERAGE --------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1 Bd/1 BATH $ 534 $ 517 $ 535 $ 490 $ 465 $ 500 $ 525 $ 465 $ 535 $ 500 $ 503 Unit Area (SF) (1A10) 850 850 830 850 750 780 750 750 850 780 792 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.61 $ 0.64 $ 0.58 $ 0.62 $0.64 $ 0.70 $0.58 $ 0.70 $ 0.64 $ 0.64 Monthly Rent 2 Bd/1.5 Ba $ 644 $ 635 $ 595 $ 587 $ 610 $ 580 $ 650 $ 580 $ 650 $ 595 $ 604 Unit Area (SF) (2A20) 1,075 1,075 1,000 1,025 1,050 850 1,100 850 1,100 1,025 1,005 Monthly Rent Per Sq. Ft. $ 0.60 $ 0.59 $ 0.60 $ 0.57 $ 0.58 $0.68 $ 0.59 $0.57 $ 0.68 $ 0.59 $ 0.60
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 -------------------------------------------------------------------------------------- 1 Bd/1 Bath (1A10) 156 850 $520 $0.61 $ 81,120 $ 973,440 2 Bd/1.5 Ba (2A20) 156 1,075 $640 $0.60 $ 99,840 $1,198,080 ---------------------------- Total $180,960 $2,171,520 ============================
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 LAKE FOREST, OMAHA, NEBRASKA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003 ----------------------------------------------------------------------------------------- ACTUAL ACTUAL ACTUAL MANAGEMENT BUDGET ----------------------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT --------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $2,357,163 $7,555 $2,320,936 $7,439 $2,276,168 $7,295 $2,373,354 $7,607 Vacancy $ 263,182 $ 844 $ 199,296 $ 639 $ 157,997 $ 506 $ 129,800 $ 416 Credit Loss/Concessions $ 269,272 $ 863 $ 104,836 $ 336 $ 55,004 $ 176 $ 52,400 $ 168 ---------------------------------------------------------------------------------------- Subtotal $ 532,454 $1,707 $ 304,132 $ 975 $ 213,001 $ 683 $ 182,200 $ 584 Laundry Income $ 26,294 $ 84 $ 24,455 $ 78 $ 27,174 $ 87 $ 39,931 $ 128 Garage Revenue $ 49,282 $ 158 $ 49,465 $ 159 $ 53,139 $ 170 $ 0 $ 0 Other Misc. Revenue $ 155,339 $ 498 $ 146,828 $ 471 $ 201,324 $ 645 $ 223,274 $ 716 ---------------------------------------------------------------------------------------- Subtotal Other Income $ 230,915 $ 740 $ 220,748 $ 708 $ 281,637 $ 903 $ 263,205 $ 844 ---------------------------------------------------------------------------------------- Effective Gross Income $2,055,624 $6,589 $2,237,552 $7,172 $2,344,804 $7,515 $2,454,359 $7,867 Operating Expenses Taxes $ 177,510 $ 569 $ 169,019 $ 542 $ 216,407 $ 694 $ 176,389 $ 565 Insurance $ 28,234 $ 90 $ 40,885 $ 131 $ 42,453 $ 136 $ 47,032 $ 151 Utilities $ 193,224 $ 619 $ 217,386 $ 697 $ 181,411 $ 581 $ 151,832 $ 487 Repair & Maintenance $ 159,874 $ 512 $ 163,454 $ 524 $ 135,036 $ 433 $ 149,355 $ 479 Cleaning $ 36,198 $ 116 $ 43,965 $ 141 $ 33,788 $ 108 $ 0 $ 0 Landscaping $ 35,905 $ 115 $ 31,035 $ 99 $ 31,913 $ 102 $ 79,040 $ 253 Security $ 5,878 $ 19 $ 6,958 $ 22 $ 1,290 $ 4 $ 0 $ 0 Marketing & Leasing $ 66,314 $ 213 $ 44,948 $ 144 $ 41,133 $ 132 $ 41,960 $ 134 General Administrative $ 283,210 $ 908 $ 368,338 $1,181 $ 284,674 $ 912 $ 318,387 $1,020 Management $ 109,833 $ 352 $ 128,878 $ 413 $ 117,208 $ 376 $ 120,707 $ 387 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------- Total Operating Expenses $1,096,180 $3,513 $1,214,866 $3,894 $1,085,313 $3,479 $1,084,702 $3,477 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------- Net Income $ 959,444 $3,075 $1,022,686 $3,278 $1,259,491 $4,037 $1,369,657 $4,390 ANNUALIZED YEAR 2003 ---------------------- PROJECTION AAA PROJECTION --------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % ------------------------------------------------------------------------------- Revenues Rental Income $2,231,648 $7,153 $2,171,520 $6,960 100.0% Vacancy $ 141,068 $ 452 $ 130,291 $ 418 6.0% Credit Loss/Concessions $ 176,568 $ 566 $ 43,430 $ 139 2.0% -------------------------------------------------- Subtotal $ 317,636 $1,018 $ 173,722 $ 557 8.0% Laundry Income $ 31,536 $ 101 $ 29,640 $ 95 1.4% Garage Revenue $ 56,264 $ 180 $ 54,600 $ 175 2.5% Other Misc. Revenue $ 215,336 $ 690 $ 202,800 $ 650 9.3% -------------------------------------------------- Subtotal Other Income $ 303,136 $ 972 $ 287,040 $ 920 13.2% -------------------------------------------------- Effective Gross Income $2,217,148 $7,106 $2,284,838 $7,323 100.0% Operating Expenses Taxes $ 176,604 $ 566 $ 210,600 $ 675 9.2% Insurance $ 49,328 $ 158 $ 45,240 $ 145 2.0% Utilities $ 304,132 $ 975 $ 202,800 $ 650 8.9% Repair & Maintenance $ 95,884 $ 307 $ 137,280 $ 440 6.0% Cleaning $ 35,932 $ 115 $ 34,320 $ 110 1.5% Landscaping $ 4,500 $ 14 $ 32,760 $ 105 1.4% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 43,500 $ 139 $ 43,680 $ 140 1.9% General Administrative $ 278,996 $ 894 $ 288,600 $ 925 12.6% Management $ 112,368 $ 360 $ 114,242 $ 366 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% -------------------------------------------------- Total Operating Expenses $1,101,244 $3,530 $1,109,522 $3,556 48.6% Reserves $ 0 $ 0 $ 62,400 $ 200 5.6% -------------------------------------------------- Net Income $1,115,904 $3,577 $1,112,916 $3,567 48.7%
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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ------------------------------------------------------- I-1 Jan-03 94% $39,024 9.53% I-2 Jul-02 93% $29,545 9.10% I-3 Jul-02 95% $33,167 9.29% I-4 May-01 97% $48,817 9.49% I-5 Apr-00 95% $39,227 9.40% High 9.53% Low 9.10% Average 9.36%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.25%. 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 10.00%. 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 11.50%. 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 11.50% indicates a value of $12,400,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 LAKE FOREST, OMAHA, NEBRASKA approximately 40% 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 LAKE FOREST, OMAHA, NEBRASKA DISCOUNTED CASH FLOW ANALYSIS LAKE FOREST
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 APR-2010 FISCAL YEAR 1 2 3 4 5 6 7 ------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,171,520 $2,236,666 $2,303,766 $2,372,879 $2,444,065 $2,517,387 $2,592,908 Vacancy $ 130,291 $ 134,200 $ 138,226 $ 142,373 $ 146,644 $ 151,043 $ 155,575 Credit Loss $ 43,430 $ 44,733 $ 46,075 $ 47,458 $ 48,881 $ 50,348 $ 51,858 Concessions $ 86,861 $ 44,733 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------- Subtotal $ 260,582 $ 223,667 $ 184,301 $ 189,830 $ 195,525 $ 201,391 $ 207,433 Laundry Income $ 29,640 $ 30,529 $ 31,445 $ 32,388 $ 33,360 $ 34,361 $ 35,392 Garage Revenue $ 54,600 $ 56,238 $ 57,925 $ 59,663 $ 61,453 $ 63,296 $ 65,195 Other Misc. Revenue $ 202,800 $ 208,884 $ 215,151 $ 221,605 $ 228,253 $ 235,101 $ 242,154 ---------------------------------------------------------------------------------------- Subtotal Other Income $ 287,040 $ 295,651 $ 304,521 $ 313,656 $ 323,066 $ 332,758 $ 342,741 ---------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,197,978 $2,308,650 $2,423,985 $2,496,705 $2,571,606 $2,648,754 $2,728,217 OPERATING EXPENSES: Taxes $ 210,600 $ 216,918 $ 223,426 $ 230,128 $ 237,032 $ 244,143 $ 251,467 Insurance $ 45,240 $ 46,597 $ 47,995 $ 49,435 $ 50,918 $ 52,446 $ 54,019 Utilities $ 202,800 $ 208,884 $ 215,151 $ 221,605 $ 228,253 $ 235,101 $ 242,154 Repair & Maintenance $ 137,280 $ 141,398 $ 145,640 $ 150,010 $ 154,510 $ 159,145 $ 163,919 Cleaning $ 34,320 $ 35,350 $ 36,410 $ 37,502 $ 38,627 $ 39,786 $ 40,980 Landscaping $ 32,760 $ 33,743 $ 34,755 $ 35,798 $ 36,872 $ 37,978 $ 39,117 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 43,680 $ 44,990 $ 46,340 $ 47,730 $ 49,162 $ 50,637 $ 52,156 General Administrative $ 288,600 $ 297,258 $ 306,176 $ 315,361 $ 324,822 $ 334,566 $ 344,603 Management $ 109,899 $ 115,433 $ 121,199 $ 124,835 $ 128,580 $ 132,438 $ 136,411 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,105,179 $1,140,571 $1,177,092 $1,212,405 $1,248,777 $1,286,240 $1,324,827 Reserves $ 62,400 $ 64,272 $ 66,200 $ 68,186 $ 70,232 $ 72,339 $ 74,509 ---------------------------------------------------------------------------------------- NET OPERATING INCOME $1,030,399 $1,103,807 $1,180,693 $1,216,114 $1,252,597 $1,290,175 $1,328,880 Operating Expense Ratio (% of EGI) 50.3% 49.4% 48.6% 48.6% 48.6% 48.6% 48.6% Operating Expense Per Unit $ 3,542 $ 3,656 $ 3,773 $ 3,886 $ 4,002 $ 4,123 $ 4,246
YEAR APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 8 9 10 11 ---------------------------------------------------------------------------------------- REVENUE Base Rent $2,670,696 $2,750,817 $2,833,341 $2,918,341 Vacancy $ 160,242 $ 165,049 $ 170,000 $ 175,100 Credit Loss $ 53,414 $ 55,016 $ 56,667 $ 58,367 Concessions $ 0 $ 0 $ 0 $ 0 ------------------------------------------------- Subtotal $ 213,656 $ 220,065 $ 226,667 $ 233,467 Laundry Income $ 36,453 $ 37,547 $ 38,673 $ 39,834 Garage Revenue $ 67,151 $ 69,166 $ 71,241 $ 73,378 Other Misc. Revenue $ 249,418 $ 256,901 $ 264,608 $ 272,546 ------------------------------------------------- Subtotal Other Income $ 353,023 $ 363,614 $ 374,522 $ 385,758 ------------------------------------------------- EFFECTIVE GROSS INCOME $2,810,063 $2,894,365 $2,981,196 $3,070,632 OPERATING EXPENSES: Taxes $ 259,011 $ 266,782 $ 274,785 $ 283,029 Insurance $ 55,639 $ 57,309 $ 59,028 $ 60,799 Utilities $ 249,418 $ 256,901 $ 264,608 $ 272,546 Repair & Maintenance $ 168,837 $ 173,902 $ 179,119 $ 184,493 Cleaning $ 42,209 $ 43,476 $ 44,780 $ 46,123 Landscaping $ 40,291 $ 41,499 $ 42,744 $ 44,027 Security $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 53,721 $ 55,333 $ 56,992 $ 58,702 General Administrative $ 354,942 $ 365,590 $ 376,558 $ 387,854 Management $ 140,503 $ 144,718 $ 149,060 $ 153,532 Miscellaneous $ 0 $ 0 $ 0 $ 0 ------------------------------------------------- TOTAL OPERATING EXPENSES $1,364,572 $1,405,509 $1,447,674 $1,491,105 Reserves $ 76,744 $ 79,046 $ 81,418 $ 83,860 ------------------------------------------------- NET OPERATING INCOME $1,368,747 $1,409,809 $1,452,104 $1,495,667 Operating Expense Ratio (% of EGI) 48.6% 48.6% 48.6% 48.6% Operating Expense Per Unit $ 4,374 $ 4,505 $ 4,640 $ 4,779
Estimated Stabilized NOI $1,112,916 Sales Expense Rate 2.00% Months to Stabilized 1 Discount Rate 11.50% Stabilized Occupancy 94.0% Terminal Cap Rate 10.00%
Gross Residual Sale Price $14,956,667 Deferred Maintenance $ 0 Less: Sales Expense $ 299,133 Add: Excess Land $ 0 ----------- Other Adjustments $ 0 Net Residual Sale Price $14,657,534 ----------- PV of Reversion $ 4,935,285 Value Indicated By $12,447,178 Add: NPV of NOI $ 7,511,893 "DCF" Rounded $12,400,000 ----------- PV Total $12,447,178
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------------------------ TOTAL VALUE 11.00% 11.25% 11.50% 11.75% 12.00% ------------------------------------------------------------------------------------------ TERMINAL CAP RATE 9.50% $13,126,640 $12,914,486 $12,706,930 $12,503,857 $12,305,154 9.75% $12,987,311 $12,778,256 $12,573,724 $12,373,601 $12,177,776 10.00% $12,854,948 $12,648,838 $12,447,178 $12,249,858 $12,056,768 10.25% $12,729,042 $12,525,733 $12,326,805 $12,132,151 $11,941,662 10.50% $12,609,131 $12,408,489 $12,212,165 $12,020,049 $11,832,038
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 LAKE FOREST, OMAHA, NEBRASKA 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 $114,000 (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 9.25% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 35 LAKE FOREST, OMAHA, NEBRASKA LAKE FOREST
TOTAL PER SQ. FT. PER UNIT %OF EGI --------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,171,520 $ 7.23 $ 6,960 Less: Vacancy & Collection Loss 8.00% $ 173,722 $ 0.58 $ 557 Plus: Other Income Laundry Income $ 29,640 $ 0.10 $ 95 1.30% Garage Revenue $ 54,600 $ 0.18 $ 175 2.39% Other Misc. Revenue $ 202,800 $ 0.68 $ 650 8.88% --------------------------------------------- Subtotal Other Income $ 287,040 $ 0.96 $ 920 12.56% EFFECTIVE GROSS INCOME $ 2,284,838 $ 7.61 $ 7,323 OPERATING EXPENSES: Taxes $ 210,600 $ 0.70 $ 675 9.22% Insurance $ 45,240 $ 0.15 $ 145 1.98% Utilities $ 202,800 $ 0.68 $ 650 8.88% Repair & Maintenance $ 137,280 $ 0.46 $ 440 6.01% Cleaning $ 34,320 $ 0.11 $ 110 1.50% Landscaping $ 32,760 $ 0.11 $ 105 1.43% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 43,680 $ 0.15 $ 140 1.91% General Administrative $ 288,600 $ 0.96 $ 925 12.63% Management 5.00% $ 114,242 $ 0.38 $ 366 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,109,522 $ 3.69 $ 3,556 48.56% Reserves $ 62,400 $ 0.21 $ 200 2.73% --------------------------------------------- NET OPERATING INCOME $ 1,112,916 $ 3.71 $ 3,567 48.71% "GOING IN" CAPITALIZATION RATE 9.25% VALUE INDICATION $12,031,530 $40.07 $38,563 PV OF CONCESSIONS ($ 114,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $11,917,530 ROUNDED $11,900,000 $39.63 $38,141
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 36 LAKE FOREST, OMAHA, NEBRASKA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF ----------------------------------------------------------- 8.50% $12,979,135 $13,000,000 $41,667 $43.29 8.75% $12,605,045 $12,600,000 $40,385 $41.96 9.00% $12,251,739 $12,300,000 $39,423 $40.96 9.25% $11,917,530 $11,900,000 $38,141 $39.63 9.50% $11,600,910 $11,600,000 $37,179 $38.63 9.75% $11,300,528 $11,300,000 $36,218 $37.63 10.00% $11,015,165 $11,000,000 $35,256 $36.63
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $11,900,000. 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 $12,400,000 Direct Capitalization Method $11,900,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $12,200,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 LAKE FOREST, OMAHA, NEBRASKA 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 $12,000,000 Income Approach $12,200,000 Reconciled Value $12,200,000
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 12, 2003 the market value of the fee simple estate in the property is: $12,200,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA LAKE FOREST, OMAHA, NEBRASKA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE FOREST, OMAHA, NEBRASKA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE FOREST, OMAHA, NEBRASKA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - SIGNAGE AND VIEW FROM WEST MAPLE AVENUE EXTERIOR - APARTMENT BUILDING [PICTURE] [PICTURE] EXTERIOR - APARTMENTS AND GARAGES EXTERIOR - CLOSEUP OF APARTMENT ENTRANCE [PICTURE] [PICTURE] EXTERIOR - OFFICE EXTERIOR - SWIMMING POOL AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE FOREST, OMAHA, NEBRASKA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] INTERIOR - OFFICE AND MEETING ROOM SPACE INTERIOR - 1 BEDROOM MODEL UNIT LIVING ROOM [PICTURE] [PICTURE] INTERIOR - 1 BEDROOM MODEL UNIT KITCHEN INTERIOR - 1 BEDROOM MODEL UNIT BATHROOM [PICTURE] [PICTURE] INTERIOR - 2 BEDROOM MODEL UNIT LIVING ROOM INTERIOR - 2 BEDROOM MODEL UNIT BEDROOM AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE FOREST, OMAHA, NEBRASKA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE FOREST, OMAHA, NEBRASKA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CHALET APARTMENTS & TOWNHOMES ORCHARD PARK APARTMENTS BRENT VILLAGE APARTMENTS 3810 North 108th Street 7805-7809 Harney Street 1402-1510 Buck Drive Omaha, Nebraska Omaha, Nebraska Bellevue, Nebraska [PICTURE] [PICTURE] N/A COMPARABLE I-4 COMPARABLE I-5 FONTENELLE HILLS APARTMENTS 1001 APARTMENTS 200 Martin Drive 1001 North 90th Street Bellevue, Nebraska Omaha, Nebraska N/A [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE FOREST, OMAHA, NEBRASKA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Lake Forest Maple Manor Management Company AIMCO The Goodman Group LOCATION: Address 11402 Evans Street 3022 1/2 North 97th Street City, State Omaha, Nebraska Omaha, Nebraska County Douglas Douglas Proximity to Subject 1.8 miles east of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 300,300 N/A Year Built 1973 1968 Effective Age 25 35 Building Structure Type Brick & vinyl siding walls; asphalt shingle Brick veneer, wood frame, asphalt shingle roof roof Parking Type (Gr., Cov., etc.) Garage and open Garage and open Number of Units 312 259 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1 Bd/1 Bath (1A10) 850 156 $534 0 1Bd / 1Ba-Studio #1 520 $460 2 2 Bd/1.5 Ba (2A20) 1,075 156 $644 0 1Bd / 1Ba-Studio #2 540 $485 1 1 Bd / 1 Bath 830 $535 2 2 Bd / 2 Bath 1,000 $595 0 3 Bd / 1.5 Bath 1,250 $815 0 3 Bd / 2 Bath 1,250 $850 Average Unit Size (SF) 963 Unit Breakdown: Efficiency 0% 2-Bedroom 50% Efficiency N/A 2-Bedroom N/A 1-Bedroom 50% 3-Bedroom 0% 1-Bedroom N/A 3-Bedroom N/A CONDITION: Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Ceiling Fans X Balcony X Ceiling Fans X Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Detached Garages X Swimming Pool X Detached Garages X Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room Putting Green X Gym Room Putting Green X Tanning Bed Washer-Dryer Tanning Bed Washer-Dryer X Playground W/D Hookup X Playground X W/D Hookup OCCUPANCY: 96% 90% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions 1/2 month free 1 month free with 12 month lease Pet Deposit $300 non-refundable fee/pet + $20/m pet rent $250 deposit ($150 refundable) + $15/m pet rnt. Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash Water Trash Confirmation May 12, 2003; Ms. Michelle Jackson (Property May 14, 2003; Ms. Lisa Hamernick (Community Telephone Number (402) 493-4131 (402) 572-1414 NOTES: All utility bills are paid by the landlord for the two Studio unit types. Natural gas heat is paid by the landlord for all unit types. Application fee is $25 and the security deposit is $250 for the studio, 1 and 2 bedroom units, and $300 for the 3 bedroom units. Garages rent for $35 per month. COMPARISON TO SUBJECT: Slightly Inferior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Laurelwood Apartment Homes & Townhomes Tudor Heights Apartments Management Company N/A Providence Management Company, LLC LOCATION: Address 5439 North 100th Plaza 10505 Evans Plaza City, State Omaha, Nebraska Omaha, Nebraska County Douglas Douglas Proximity to Subject 3.0 miles northeast of the subject 1.3-miles northeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) N/A N/A Year Built 1969 1970s Effective Age 34 30+ Building Structure Type Brick veneer, wood frame; asphalt shingle roof Brick & stucco sidings; asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage & open Garage, open and covered Number of Units 480 418 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1 Bd / 1 Ba - apt. 850 $490 1 1 Bd / 1Bath 750 $465 2 2 Bd / 2 Ba - apt. 1,000 $575 0 2 Bd / 1 Ba - Type 1 1,000 $565 2 2 Bd / 2 Ba - apt. 1,050 $599 2 2 Bd / 1.5Ba-Type 2 1,050 $610 0 1 Bd / 1 Ba-townhm. 825 $550 0 2 Bd / 2 Ba-townhm. 1,200 $805 Average Unit Size (SF) Unit Breakdown: Efficiency N/A 2-Bedroom N/A Efficiency N/A 2-Bedroom N/A 1-Bedroom N/A 3-Bedroom N/A 1-Bedroom N/A 3-Bedroom N/A CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Ceiling Fans X Balcony Ceiling Fans X Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Detached Garages X Swimming Pool X Detached Garages X 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 X Meeting Hall X Sand Volley Ball X Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room Putting Green Gym Room X Putting Green Tanning Bed Washer-Dryer Tanning Bed Washer-Dryer X Playground W/D Hookup Playground W/D Hookup OCCUPANCY: 94% 96% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions $200 off 1st months rent on certain apt. $200 off 1st months rent units Pet Deposit None, no pets allowed $200 non-refundable deposit/cat + $10/cat rent Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation May 14, 2003; Mr. Eric Henderson (Leasing May 14, 2003; Matt (Leasing Consultant) Telephone Number (402) 572-1000 (402) 493-3777 NOTES: Property has an indoor pool as part of the Select units have been newly remodeled. fitness center. Application fee is $20 and Residents qualify for a membership discount at a security deposits range from $200 to $500 nearby fitness center, no onsite fitness center. depending upon the unit type. Garages rent Laundry facilities in each building. Security for $40 per month. The unit rents above deposit is $250, no application fee and garages reflect units that have had updated rent for $45 per month. Units have electric appliances. Rental rates are approx. $25 less heat, thus tenants pay heating expense. for units where the appliances have not been updated. COMPARISON TO SUBJECT: Slightly Inferior Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Hidden Valley Apartments Townhomes Picadilly Square Apartments Management Company Goldmark Property Management Inc. AMO The Philmoore Company LOCATION: Address 3816 North 109th Plaza 114th & West Maple Avenue City, State Omaha, Nebraska Omaha, Nebraska County Douglas Douglas Proximity to Subject 1.2-miles northeast of the subject 1 block south of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 221,016 N/A Year Built 1978 Early 1980s Effective Age 25 15 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Open, Covered Open surface only Number of Units 246 N/A Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 0 Apt-1Bd/1Ba - #1 670 36 $450 0 1 Bd / 1Ba - Type 1 650 N/A 0 Apt-1Bd/1Ba - #2 680 8 $480 1 1 Bd / 1Ba - Type 2 750 $525 1 Apt-1Bd/1Ba - #3 780 36 $500 2 2 Bd / 1.5 Ba 1,100 $650 2 Apt-2Bd/1Ba 850 16 $580 0 TH-1Bd/1ba - #1 760 24 $580 0 TH-1Bd/1ba - #2 850 20 $610 0 TH-1Bd/1ba - #3 870 52 $630 0 TH-2Bd/1.5ba - #1 1,030 17 $710 0 TH-2Bd/1.5ba - #2 1,050 8 $730 0 TH-2Bd/1.5ba - #3 1,575 12 $775 0 TH-2Bd/2.5ba - #1 1,085 5 $800 0 TH-2Bd/2.5ba - #2 1,630 12 $750 Average Unit Size (SF) 900 Unit Breakdown: Efficiency 0% 2-Bedroom 28% Efficiency N/A 2-Bedroom N/A 1-Bedroom 72% 3-Bedroom 0% 1-Bedroom N/A 3-Bedroom N/A CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities X Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Ceiling Fans X Balcony Ceiling Fans X Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Detached Garages Swimming Pool X Detached Garages Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court 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 X Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room Putting Green Gym Room Putting Green Tanning Bed Washer-Dryer Tanning Bed X Washer-Dryer Playground W/D Hookup Playground W/D Hookup OCCUPANCY: 96% 95% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions Security deposit is lowered to $99 $350 off 1st month on 12 month lease Pet Deposit $250/animal +$10/cat rent; $50/dog (TH only) None, no pets allowed Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash X Water Trash Confirmation May 14, 2003; Ms. Christine Carlson (Community Subject's leasing summary as property management Telephone Number (402) 493-1491 (402) 496-1376 NOTES: Fireplaces are available in 21 of the 670 SF, Units include washer / dryers. Security deposit 1- bedroom units. The two largest 2 bedroom is $250. The property was built in two phases, town-home units have basement space included in 1968 and 1987, although the external as part of the living area. The basement areas inspection shows both phases to be fairly also have washer / dryer hookups. On-site 24 similar in to each other in design and appeal. hour laundry facility. Certain townhome units Also, the complex offers detached garages but include attached garage as part of rent. Apt. no rental information is available on them. garages rent for $40 per month. Tenants pay heat. COMPARISON TO SUBJECT: Similar Slightly Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE FOREST, OMAHA, NEBRASKA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 MAPLE MANOR LAURELWOOD APARTMENT HOMES & TOWNHOMES 3022 1/2 North 97th Street 5439 North 100th Plaza Omaha, Nebraska Omaha, Nebraska [PICTURE] [PICTURE] COMPARABLE R-3 COMPARABLE R-4 TUDOR HEIGHTS APARTMENTS HIDDEN VALLEY APARTMENTS TOWNHOMES 10505 Evans Plaza 3816 North 109th Plaza Omaha, Nebraska Omaha, Nebraska [PICTURE] [PICTURE] COMPARABLE R-5 PICADILLY SQUARE APARTMENTS 114th & West Maple Avenue Omaha, Nebraska [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKE FOREST, OMAHA, NEBRASKA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 LAKE FOREST, OMAHA, NEBRASKA 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 inspect the subject property that is the subject of this report. I am currently in compliance with the Appraisal Institutes continuing education requirements. /s/ Jeff W. Briggs ----------------------- Jeff W. Briggs, MAI Engagement Director, Real Estate Group Nebraska Certified General Real Estate Appraiser #CG230072R AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKE FOREST, OMAHA, NEBRASKA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKE FOREST, OMAHA, NEBRASKA JEFF W. BRIGGS, MAI ENGAGEMENT DIRECTOR, REAL ESTATE GROUP POSITION Jeff W. Briggs is an engagement director for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Briggs' valuation experience includes all types of industrial property, Class A office buildings, regional malls, neighborhood and community shopping centers, apartments, hotels, and both daily fee and private golf facilities. He has appraised the vacant land of farms and ranches, single-family residential subdivisions, commercial subdivisions, commercial urban properties, and conservation easements. Special-purpose property valuations he has performed include a large pork production facility, cemeteries, nursing homes, and outpatient surgical clinics. Purchase price allocation assignments included valuation of the land components of a professional sports stadium and a pork production facility. Mr. Briggs has completed assignments in over 30 states throughout the country. Court Mr. Briggs has testified as an expert witness in federal bankruptcy court and assisted in condemnation assignments for the Texas Highway Department. Business Mr. Briggs joined AAA in 2000. Prior to joining AAA, he was a manager in the Dallas office of Arthur Andersen LLP from 1996 to 1999. Previously, Mr. Briggs had served as a senior appraiser for Wilson K. Mason Company and Integrated Evaluation, both Dallas real estate appraisal companies, and had been employed by Harvey Cornwell and Associates, also a Dallas-based real estate valuation firm.
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKE FOREST, OMAHA, NEBRASKA EDUCATION University of North Texas Bachelor of Business Administration - Real Estate PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #31114 State of Arkansas, State Certified General Appraiser, #CG1588N State of Indiana, Certified General Appraiser, #CG40200493 Commonwealth of Kentucky, Certified General Real Property Appraiser, #002611 State of Michigan, Certified General Appraiser, #1201068301 State of Minnesota, Certified General Real Property Appraiser, #AP-20280553 State of Mississippi, State Certified General Real Estate Appraiser, #GA-625 State of Oregon, State Certified General Appraiser, #C000713 Commonwealth of Pennsylvania, Certified General Appraiser, #GA001870 State of Texas, State Certified General Real Estate Appraiser, #TX-1321403-G State of Washington, Certified General Real Estate Appraiser, #1101000
AMERICAN APPRAISAL ASSOCIATES, INC. LAKE FOREST, OMAHA, NEBRASKA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. LAKE FOREST, OMAHA, NEBRASKA 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.