EX-99.(C)(2) 4 d07267a2exv99wxcyx2y.txt APPRAISAL OF PINE TREE APARTMENTS PINE TREE APARTMENTS 7609 ANTLERS LANE CHARLOTTE, NORTH CAROLINA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 14, 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] JULY 3, 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: PINE TREE APARTMENTS 7609 ANTLERS LANE CHARLOTTE, MECKLENBURG COUNTY, NORTH CAROLINA 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 220 units with a total of 171,140 square feet of rentable area. The improvements were built in 1973. The improvements are situated on 9.08 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 79% 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 14, 2003 is: ($5,100,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach July 3, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group North Carolina Temporary Practice Permit #2578 Report By: John Hayden North Carolina Temporary Practice Permit Pending AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary....................................................... 4 Introduction............................................................ 9 Area Analysis........................................................... 11 Market Analysis ........................................................ 14 Site Analysis .......................................................... 16 Improvement Analysis ................................................... 16 Highest and Best Use ................................................... 17 VALUATION Valuation Procedure..................................................... 18 Sales Comparison Approach............................................... 20 Income Capitalization Approach ......................................... 26 Reconciliation and Conclusion .......................................... 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Pine Tree Apartments LOCATION: 7609 Antlers Lane Charlotte, North Carolina INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee Simple Estate DATE OF VALUE: May 14, 2003 DATE OF REPORT: July 3, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 9.08 acres, or 395,525 square feet Assessor Parcel No.: 17320109 Floodplain: Community Panel No. 3701590028B (February 26, 1982) Flood Zone C, an area outside the floodplain. Zoning: R-17 MF (Multifamily Zoning) BUILDING: No. of Units: 220 Units Total NRA: 171,140 Square Feet Average Unit Size: 778 Square Feet Apartment Density: 24.2 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 ----------------------------------------------------------------------- 1Br/1Ba 509 $409 $0.80 $ 16,360 $ 196,320 1Br/1Ba 655 $489 $0.75 $ 22,494 $ 269,928 1Br/1Ba 805 $529 $0.66 $ 26,450 $ 317,400 2Br/2Ba 900 $599 $0.67 $ 40,732 $ 488,784 3Br/2Ba 1,200 $729 $0.61 $ 11,664 $ 139,968 Total $117,700 $1,412,400
OCCUPANCY: 79% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 30 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA REMAINING ECONOMIC LIFE: 15 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - TYPICAL BUILDING ELEVATION EXTERIOR - TYPICAL BUILDING ELEVATION AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $1,412,400 $ 6,420 Effective Gross Income $1,337,160 $ 6,078 Operating Expenses $754,358 $ 3,429 56.4% of EGI Net Operating Income: $527,802 $ 2,399 Capitalization Rate 10.50% DIRECT CAPITALIZATION VALUE $4,800,000 * $21,818 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 23% Stabilized Vacancy & Collection Loss: 10% Lease-up / Stabilization Period 12 months Terminal Capitalization Rate 11.00% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $5,200,000 * $23,636 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $5,000,000 $22,727 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $40,139 to $48,265 Range of Sales $/Unit (Adjusted) $22,611 to $28,936 VALUE INDICATION - PRICE PER UNIT $5,300,000 * $24,091 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.09 to 6.21 Selected EGIM for Subject 4.00 Subject's Projected EGI $1,337,160 EGIM ANALYSIS CONCLUSION $5,100,000 * $23,182 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $5,300,000 * $24,091 / UNIT RECONCILED SALES COMPARISON VALUE $5,200,000 $23,636 / 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $5,300,000 NOI Per Unit $5,300,000 EGIM Multiplier $5,100,000 INDICATED VALUE BY SALES COMPARISON $5,200,000 $23,636 / UNIT INCOME APPROACH: Direct Capitalization Method: $4,800,000 Discounted Cash Flow Method: $5,200,000 INDICATED VALUE BY THE INCOME APPROACH $5,000,000 $22,727 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $5,100,000 $23,182 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 7609 Antlers Lane, Charlotte, Mecklenburg County, North Carolina. Charlotte identifies it as 17320109. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by John Hayden on May 14, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. John Hayden performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI and John Hayden have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of May 14, 2003. The date of the report is July 3, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." MARKETING/EXPOSURE PERIOD MARKETING PERIOD: 6 to 12 months EXPOSURE PERIOD: 6 to 12 months HISTORY OF THE PROPERTY Ownership in the subject property is currently vested in NPI III. 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 Charlotte, North Carolina. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being apartments. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Little Sugar Creek West - England Street South - Hebron Street North - Starbrook Drive MAJOR EMPLOYERS Major employers in the subject's area include Wachovia Corporation, Charlotte- Mecklenburg Schools, Bank of America, Carolinas Health Care System, Duke Energy Corporation, US Airways, State of North Carolina, City of Charlotte, US Government, and Mecklenburg County, Presbyterian Healthcare, Ruddick/Harris Teeter, and Winn Dixie. 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------ CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ------------------------------------------------------------------------------------ POPULATION TRENDS Current Population 12,497 66,407 151,216 1,561,413 5-Year Population 13,430 70,554 161,989 1,721,386 % Change CY-5Y 7.5% 6.2% 7.1% 10.2% Annual Change CY-5Y 1.5% 1.2% 1.4% 2.0% HOUSEHOLDS Current Households 5,481 28,818 65,015 601,124 5-Year Projected Households 5,973 30,702 70,129 667,464 % Change CY - 5Y 9.0% 6.5% 7.9% 11.0% Annual Change CY-5Y 1.8% 1.3% 1.6% 2.2% INCOME TRENDS Median Household Income $ 41,760 $ 51,511 $ 61,706 $ 48,633 Per Capita Income $ 24,667 $ 32,973 $ 37,852 $ 24,575 Average Household Income $ 54,948 $ 77,048 $ 88,019 $ 63,841
Source: Demographics Now The subject neighborhood's population is expected to show increases below that of the region. The immediate market offers inferior income levels as compared to the broader market. The following table illustrates the housing statistics in the subject's immediate area, as well as the MSA region. HOUSING TRENDS
AREA ------------------------------------------ CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ---------------------------------------------------------------------------------- HOUSING TRENDS % of Households Renting 57.28% 43.24% 38.25% 29.67% 5-Year Projected % Renting 58.61% 43.62% 38.66% 29.33% % of Households Owning 35.63% 50.87% 56.23% 64.90% 5-Year Projected % Owning 34.74% 50.68% 56.05% 65.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Apartments/Single Family Residential South - Apartments East - Single Family Residential West - Apartments CONCLUSIONS The subject is well located within the city of Charlotte. The neighborhood is characterized as being mostly suburban in nature and is currently in the decline 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Charlotte in Mecklenburg County. The overall pace of development in the subject's market is more or less stable. There are currently 319 units under construction at Ballantyne Place on Johnston Road. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket ------------------------------------ Feb-01 8.8% 10.6% Aug-01 9.8% 10.7% Feb-02 12.9% 12.9% Aug-02 11.2% 10.5% Feb-03 12.7% 10.9%
Source: Charlotte Apartment Index March '03 Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. Occupancies have been declining for the Charlotte area, as a whole while the subject's submarket appears to be holding steady in the 10% to 11% vacancy range. Occupancies in the subject's submarket are expected to remain at this level at least for the near future, as recently developed and planned units are absorbed. Market rents in the subject's market have been following a stable trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change --------------------------------------------------------- Feb-01 $700 - $786 - Aug-01 $713 1.9% $791 0.6% Feb-02 $712 -0.1% $797 0.8% Aug-02 $708 -0.6% $805 1.0% Feb-03 $710 0.3% $793 -1.5%
Source: Charlotte Apartment Index March '03 The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject --------------------------------------------------------------------------------------------------- R-1 Andover Woods 392 95% 1987 1 mile southeast of subject R-2 Beacon Hill 349 91% 1985 4 miles north of subject R-3 Doninion @ Sharon 144 97% 1984 1/2 mile south of subject R-4 Grand Oaks 243 92% 1964 2 miles north of subject R-5 Wateford Lakes 694 84% 1991 1 mile west of subject Subject Pine Tree Apartments 220 79% 1973
Rental rates have exhibited an overall increasing trend in the subject's submarket, outperforming the Charlotte regional performance as a whole. However, a recent slight downturn in rents due to new construction is expected to cause rental rates to remain relatively stable in the short run as new development is absorbed. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 9.08 acres, or 395,525 square feet Shape Irregular Topography Rolling Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Poor Flood Zone: Community Panel 3701590028B, dated February 26, 1982 Flood Zone Zone C Zoning R-17 MF, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2003 --------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES --------------------------------------------------------------------------------------- 17320109 $534,000 $2,703,900 $3,237,900 0.01307 $42,320
IMPROVEMENT ANALYSIS Year Built 1973 Number of Units 220 Net Rentable Area 171,140 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Wood or vinyl siding Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, tennis court, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, and oven. Unit Mix: AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA
Unit Area Unit Type Number of Units (Sq. Ft.) ---------------------------------------------------- 1Br/1Ba 40 509 1Br/1Ba 46 655 1Br/1Ba 50 805 2Br/2Ba 68 900 3Br/2Ba 16 1,200
Overall Condition Average Effective Age 30 years Economic Life 45 years Remaining Economic Life 15 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 220-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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ---------------------------------------------------------------------------------------------------------- Property Name Pine Tree Apartments Cedars I Andover Woods LOCATION: Address 7609 Antlers 7139 Winding 7808 Andover Lane Cedar Trail Woods Dr City, State Charlotte,North Carolina Charlotte, NC Charlotte, NC County Mecklenburg Mecklenburg Mecklenburg PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 171,140 340,000 340,300 Year Built 1973 1983 1987 Number of Units 220 360 392 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 40 1Br/1Ba 152 1Br/1Ba 52 1Br/1Ba 46 2Br/2Ba 152 1Br/1Ba 48 1Br/1Ba 50 3Br/2Ba 56 1Br/1Ba 80 2Br/2Ba 68 1Br/1Ba 48 3Br/2Ba 16 2Br/1Ba 34 2Br/2Ba 54 2Br/2Ba 44 2Br/2Ba 32 Average Unit Size (SF) 778 944 868 Land Area (Acre) 9.0800 31.3500 43.6400 Density (Units/Acre) 24.2 11.5 9.0 Parking Ratio (Spaces/Unit) 1.52 N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open, Carport CONDITION: Average Average Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room No Yes Yes Laundry Room Yes Yes Yes Secured Parking No Yes Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 79% 93% 95% TRANSACTION DATA: Sale Date August, 2002 February, 2001 Sale Price ($) $14,800,000 $18,920,000 Grantor CAPREIT Cedars LP GLB Courtyard LP Grantee Cedars Apt Assoc LLC Westdale Fanny Prop. Ltd Sale Documentation Book 13946 Book 11857 Page 148 Page 147 Verification Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,964,816 $8,236 $8.72 $3,670,912 $9,365 $10,79 Vacancy/Credit Loss $ 296,482 $ 824 $ 0.8 $ 367,091 $ 936 $ 1.08 Effective Gross Income $2,668,334 $7,412 $7.85 $3,303,821 $8,428 $ 9.71 Operating Expenses $1,164,660 $3,235 $3.43 $1,268,120 $3,235 $ 3.73 Net Operating Income $1,503,734 $4,177 $4.42 $2,035,701 $5,193 $ 5.98 NOTES: None None PRICE PER UNIT $41,111 $48,265 PRICE PER SQUARE FOOT $ 43.53 $ 55.60 EXPENSE RATIO 43.6% 38.4% EGIM 5.55 5.73 OVERALL CAP RATE 10.16% 10.76% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 -------------------------------------------------------------------------------------------------------------------- Property Name Drake Willow Ridge Cameron @ Hickory Grove LOCATION: Address 1701 Gander Cover Ln 9200 Willow Ridge 5625 Keyway Blvd City, State Charlotte, NC Charlotte, NC Charlotte, NC County Mecklenburg Mecklenburg Mecklenburg PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 223,200 370,728 165,842 Year Built 1988 1986 1987 Number of Units 288 456 202 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 144 1Br/1Ba 190 1Br/1Ba 82 2Br/2Ba 144 2Br/2Ba 266 2Br/2Ba 120 Average Unit Size (SF) 775 813 821 Land Area (Acre) N/A 11.9780 11.3570 Density (Units/Acre) 38.1 17.8 Parking Ratio N/A N/A N/A (Spaces/Unit) Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room Yes Yes No Secured Parking No Yes Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 89% 93% 91% TRANSACTION DATA: Sale Date August, 2001 December, 2002 November, 2000 Sale Price ($) $11,560,000 $20,300,000 $9,700,000 Grantor WTC No One Hundred Willow Ridge Apts LLC SCA North Carolina Grantee Group One Investments New Willow Ridge Assoc. Owings Chase LP Sale Documentation Book 12518, Page 898 Book 14555, Page 549 Book 11714, Page 833 Verification Confidential Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,521,728 $8,756 $11.30 $4,058,846 $8,901 $10.95 $1,734,332 $8,586 $10.46 Vacancy/Credit Loss $ 252,173 $ 876 $ 1.13 $ 405,885 $ 890 $ 1.09 $ 173,433 $ 859 $ 1.05 Effective Gross Income $2,269,555 $7,880 $10.17 $3,652,961 $8,011 $ 9.85 $1,560,899 $7,727 $ 9.41 Operating Expenses $ 931,680 $3,235 $ 4.17 $1,475,160 $3,235 $ 3.98 $ 653,470 $3,235 $ 3.94 Net Operating Income $1,337,875 $4,645 $ 5.99 $2,177,801 $4,776 $ 5.87 $ 907,429 $4,492 $ 5.47 NOTES: None None None PRICE PER UNIT $40,139 $44,518 $48,020 PRICE PER SQUARE FOOT $ 51.79 $ 54.76 $ 58.49 EXPENSE RATIO 41.1% 40.4% 41.9% EGIM 5.09 5.56 6.21 OVERALL CAP RATE 11.57% 10.73% 9.35% Cap Rate based on Pro Forma Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $40,139 to $48,265 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 $22,611 to $28,936 per unit with a mean or average adjusted price of $25,277 per unit. The median adjusted price is $24,806 per unit. Based on the following analysis, we have concluded to a value of $25,000 per unit, which results in an "as is" value of $5,300,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ------------------------------------------------------------------------------------------------------------------------------ Property Name Pine Tree Apartments Cedars I Andover Woods Address 7609 Antlers Lane 7139 Winding Cedar Trail 7808 Andover Woods Dr City Charlotte, North Carolina Charlotte, NC Charlotte, NC Sale Date August, 2002 February, 2001 Sale Price ($) $14,800,000 $18,920,000 Net Rentable Area (SF) 171,140 340,000 340,300 Number of Units 220 360 392 Price Per Unit $41,111 $48,265 Year Built 1973 1983 1987 Land Area (Acre) 9.0800 31.3500 43.6400 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2002 0% 02-2001 3% VALUE AFTER TRANS. ADJUST. ($/UNIT) $41,111 $49,713 Location Superior -10% Superior -10% Number of Units 220 360 5% 392 5% Quality / Appeal Average Superior -20% Superior -20% Age / Condition 1973 1983 / Average 0% 1987 / Average 0% Occupancy at Sale 79% 93% -15% 95% -15% Amenities Average Comparable 0% Comparable 0% Average Unit Size (SF) 778 944 -5% 868 -5% PHYSICAL ADJUSTMENT -45% -45% FINAL ADJUSTED VALUE ($/UNIT) $22,611 $27,342 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ---------------------------------------------------------------------------------------------------------------------------- Property Name Drake Willow Ridge Cameron @ Hickory Grove Address 1701 Gander Cover Ln 9200 Willow Ridge 5625 Keyway Blvd City Charlotte, NC Charlotte, NC Charlotte, NC Sale Date August, 2001 December, 2002 November, 2000 Sale Price ($) $11,560,000 $20,300,000 $9,700,000 Net Rentable Area (SF) 223,200 370,728 165,842 Number of Units 288 456 202 Price Per Unit $40,139 $44,518 $48,020 Year Built 1988 1986 1987 Land Area (Acre) N/A 11.9780 11.3570 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2001 3% 12-2002 0% 11-2000 5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $41,343 $44,518 $50,421 Location Superior -10% Superior -10% Superior -20% Number of Units 288 0% 456 5% 202 0% Quality / Appeal Superior -20% Superior -20% Superior -20% Age / Condition 1988 / Average 0% 1986 / Average 0% 1987 / Average 0% Occupancy at Sale 89% -10% 93% -15% 91% -15% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 775 0% 813 5% 821 0% PHYSICAL ADJUSTMENT -40% -35% -55% FINAL ADJUSTED VALUE ($/UNIT) $24,806 $28,936 $22,689
SUMMARY VALUE RANGE (PER UNIT) $22,611 TO $ 28,936 MEAN (PER UNIT) $25,277 MEDIAN (PER UNIT) $24,806 VALUE CONCLUSION (PER UNIT) $25,000
VALUE OF IMPROVEMENT & MAIN SITE $5,500,000 LESS: LEASE-UP COST -$ 84,000 PV OF CONCESSIONS -$ 123,000 VALUE INDICATED BY SALES COMPARISON APPROACH $5,293,000 ROUNDED $5,300,000
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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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-1 360 $14,800,000 10.16% $ 1,503,734 $ 527,802 0.574 $ 23,612 $ 41,111 $ 4,177 $ 2,399 I-2 392 $18,920,000 10.76% $ 2,035,701 $ 527,802 0.462 $ 22,297 $ 48,265 $ 5,193 $ 2,399 I-3 288 $11,560,000 11.57% $ 1,337,875 $ 527,802 0.516 $ 20,730 $ 40,139 $ 4,645 $ 2,399 I-4 456 $20,300,000 10.73% $ 2,177,801 $ 527,802 0.502 $ 22,363 $ 44,518 $ 4,776 $ 2,399 I-5 202 $ 9,700,000 9.35% $ 907,429 $ 527,802 0.534 $ 25,645 $ 48,020 $ 4,492 $ 2,399
PRICE/UNIT
Low High Average Median $20,730 $25,645 $22,929 $22,363
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 25,000 ---------- Number of Units 220 Value $5,500,000 Less: Lease-Up Cost -$ 84,000 PV of Concessions -$ 123,000 ---------- Value Based on NOI Analysis $5,293,000 Rounded $5,300,000
The adjusted sales indicate a range of value between $20,730 and $25,645 per unit, with an average of $22,929 per unit. Based on the subject's competitive position within the improved sales, a value of $25,000 per unit is estimated. This indicates an "as is" market value of $5,300,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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-1 360 $14,800,000 $2,668,334 $1,164,600 43.65% 5.55 $ 41,111 I-2 392 $18,920,000 $3,303,821 $1,268,120 38.38% 5.73 $ 48,265 I-3 288 $11,560,000 $2,269,555 $ 931,680 41.05% 56.41% 5.09 $ 40,139 I-4 456 $20,300,000 $3,652,961 $1,475,160 40.38% 5.56 $ 44,518 I-5 202 $ 9,700,000 $1,560,899 $ 653,470 41.86% 6.21 $ 48,020
EGIM
Low High Average Median --- ---- ------- ------ 5.09 6.21 5.63 5.56
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 4.00 ---------- Subject EGI $1,337,160 Value $5,348,640 Less: Lease-Up Cost -$ 84,000 PV of Concessions -$ 123,000 ---------- Value Based on EGIM Analysis $5,141,640 Rounded $5,100,000 Value Per Unit $ 23,182
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 56.41% before reserves. The comparable sales indicate a range of expense ratios from 38.38% to 43.65%, while their EGIMs range from 5.09 to 6.21. Overall, we conclude to an EGIM of 4.00, which results in an "as is" value estimate in the EGIM Analysis of $5,100,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $5,200,000. Price Per Unit $5,300,000 NOI Per Unit $5,300,000 EGIM Analysis $5,100,000 Sales Comparison Conclusion $5,200,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area ------------------ Unit Type (Sq. Ft.) Per Unit Per SF % Occupied ----------------------------------------------------------- 1Br/1Ba 509 $363 $0.71 80.0% 1Br/1Ba 655 $438 $0.67 80.4% 1Br/1Ba 805 $498 $0.62 74.0% 2Br/2Ba 900 $563 $0.63 77.9% 3Br/2Ba 1200 $707 $0.59 93.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS --------------------------------------------------------- R-1 R-2 R-3 R-4 R-5 --------------------------------------------------------- Andover Doninion @ Wateford Woods Beacon Hill Sharon Grand Oaks Lakes --------------------------------------------------------- SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING --------------------------------------------------------- DESCRIPTION TYPE RENT RENT Similar Similar Similar Similar Similar ----------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba $ 363 $ 409 $ 600 $ 543 Unit Area (SF) 509 509 530 750 Monthly Rent Per Sq. Ft. $ 0.71 $ 0.80 $ 1.13 $ 0.72 Monthly Rent 1Br/1Ba $ 438 $ 489 $ 625 $ 640 $ 635 $ 696 Unit Area (SF) 655 655 656 652 900 658 Monthly Rent Per Sq. Ft. $ 0.67 $ 0.75 $ 0.95 $ 0.98 $ 0.71 $ 1.06 Monthly Rent 1Br/1Ba $ 498 $ 529 $ 693 $ 715 $ 738 Unit Area (SF) 805 805 795 748 778 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.66 $ 0.87 $ 0.96 $ 0.95 Monthly Rent 2Br/2Ba $ 563 $ 599 $ 765 $ 817 $ 595 $ 863 Unit Area (SF) 900 900 936 920 1,017 976 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.67 $ 0.82 $ 0.89 $ 0.58 $ 0.88 Monthly Rent 3Br/2Ba $ 707 $ 729 $ 907 $ 880 $ 690 $1,030 Unit Area (SF) 1,200 1,200 1,149 1,079 1,200 1,208 Monthly Rent Per Sq. Ft. $ 0.59 $ 0.61 $ 0.79 $ 0.82 $ 0.58 $ 0.85 DESCRIPTION MIN MAX MEDIAN AVERAGE ------------------------------------------------------------- Monthly Rent $ 543 $ 600 $ 572 $ 572 Unit Area (SF) 530 750 640 640 Monthly Rent Per Sq. Ft. $ 0.72 $ 1.13 $ 0.93 $ 0.93 Monthly Rent $ 625 $ 696 $ 638 $ 649 Unit Area (SF) 652 900 657 717 Monthly Rent Per Sq. Ft. $ 0.71 $ 1.06 $ 0.97 $ 0.92 Monthly Rent $ 693 $ 738 $ 715 $ 716 Unit Area (SF) 748 795 778 774 Monthly Rent Per Sq. Ft. $ 0.87 $ 0.96 $ 0.95 $ 0.93 Monthly Rent $ 595 $ 863 $ 791 $ 760 Unit Area (SF) 920 1,017 956 962 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.89 $ 0.85 $ 0.79 Monthly Rent $ 690 $1,030 $ 893 $ 877 Unit Area (SF) 1,079 1,208 1,174 1,159 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.85 $ 0.80 $ 0.76
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows: GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ------------------ Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income ----------------------------------------------------------------------------------------------- 1Br/1Ba 40 509 $409 $0.80 $ 16,360 $ 196,320 1Br/1Ba 46 655 $489 $0.75 $ 22,494 $ 269,928 1Br/1Ba 50 805 $529 $0.66 $ 26,450 $ 317,400 2Br/2Ba 68 900 $599 $0.67 $ 40,732 $ 488,784 3Br/2Ba 16 1,200 $729 $0.61 $ 11,664 $ 139,968 Total $117,700 $1,412,400
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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 $1,574,896 $ 7,159 $1,593,389 $ 7,243 $1,400,058 $ 6,364 $1,305,156 $ 5,933 Vacancy $ 132,378 $ 602 $ 191,460 $ 870 $ 210,946 $ 959 $ 115,692 $ 526 Credit Loss/Concessions $ 51,461 $ 234 $ 122,770 $ 558 $ 115,973 $ 527 $ 46,200 $ 210 ----------------------------------------------------------------------------------------------------- Subtotal $ 183,839 $ 836 $ 314,230 $ 1,428 $ 326,919 $ 1,486 $ 161,892 $ 736 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 59,679 $ 271 $ 66,944 $ 304 $ 73,754 $ 335 $ 60,600 $ 275 ----------------------------------------------------------------------------------------------------- Subtotal Other Income $ 59,679 $ 271 $ 66,944 $ 304 $ 73,754 $ 335 $ 60,600 $ 275 ----------------------------------------------------------------------------------------------------- Effective Gross Income $1,450,736 $ 6,594 $1,346,103 $ 6,119 $1,146,893 $ 5,213 $1,203,864 $ 5,472 Operating Expenses Taxes $ 58,464 $ 266 $ 61,318 $ 279 $ 71,072 $ 323 $ 68,412 $ 311 Insurance $ 18,294 $ 83 $ 40,440 $ 184 $ 32,883 $ 149 $ 33,977 $ 154 Utilities $ 106,576 $ 484 $ 130,965 $ 595 $ 116,048 $ 527 $ 136,200 $ 619 Repair & Maintenance $ 102,062 $ 464 $ 151,811 $ 690 $ 276,876 $ 1,259 $ 234,480 $ 1,066 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 30,172 $ 137 $ 30,978 $ 141 $ 27,193 $ 124 $ 24,720 $ 112 General Administrative $ 191,642 $ 871 $ 220,417 $ 1,002 $ 155,075 $ 705 $ 166,653 $ 758 Management $ 74,694 $ 340 $ 80,160 $ 364 $ 60,211 $ 274 $ 62,080 $ 282 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Total Operating Expenses $ 581,904 $ 2,645 $ 716,089 $ 3,255 $ 739,358 $ 3,361 $ 726,522 $ 3,302 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Net Income $ 868,832 $ 3,949 $ 630,014 $ 2,864 $ 407,535 $ 1,852 $ 477,342 $ 2,170 ANNUALIZED 2003 ------------------------- PROJECTION AAA PROJECTION ---------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % ----------------------------------------------------------------------------------------- Revenues Rental Income $1,256,864 $ 5,713 $1,412,400 $ 6,420 100.0% Vacancy $ 277,664 $ 1,262 $ 112,992 $ 514 8.0% Credit Loss/Concessions $ 67,832 $ 308 $ 28,248 $ 128 2.0% --------------------------------------------------------- Subtotal $ 345,496 $ 1,570 $ 141,240 $ 642 10.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 102,404 $ 465 $ 66,000 $ 300 4.7% --------------------------------------------------------- Subtotal Other Income $ 102,404 $ 465 $ 66,000 $ 300 4.7% --------------------------------------------------------- Effective Gross Income $1,013,772 $ 4,608 $1,337,160 $ 6,078 100.0% Operating Expenses Taxes $ 69,456 $ 316 $ 71,500 $ 325 5.3% Insurance $ 45,600 $ 207 $ 44,000 $ 200 3.3% Utilities $ 124,500 $ 566 $ 124,300 $ 565 9.3% Repair & Maintenance $ 265,744 $ 1,208 $ 220,000 $ 1,000 16.5% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 30,256 $ 138 $ 29,700 $ 135 2.2% General Administrative $ 189,908 $ 863 $ 198,000 $ 900 14.8% Management $ 47,252 $ 215 $ 66,858 $ 304 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% --------------------------------------------------------- Total Operating Expenses $ 772,716 $ 3,512 $ 754,358 $ 3,429 56.4% Reserves $ 0 $ 0 $ 55,000 $ 250 7.3% --------------------------------------------------------- Net Income $ 241,056 $ 1,096 $ 527,802 $ 2,399 39.5%
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 10% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 $250 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 $250 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ---------------------------------------------------------- I-1 Aug-02 93% $41,111 10.16% I-2 Feb-01 95% $48,265 10.76% I-3 Aug-01 89% $40,139 11.57% I-4 Dec-02 93% $44,518 10.73% I-5 Nov-00 91% $48,020 9.35% High 11.57% Low 9.35% Average 10.52%
Based on this information, we have concluded the subject's overall capitalization rate should be 10.50%. 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 11.00%. 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 12.00%. 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 12.00% indicates a value of $5,200,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA approximately 38% 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 CAPITALIZATION APPROACH PAGE 33 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS PINE TREE APARTMENTS
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ----------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,412,400 $1,433,586 $1,476,594 $1,520,891 $1,566,518 $1,613,514 Vacancy $ 211,934 $ 114,687 $ 118,127 $ 121,671 $ 125,321 $ 129,081 Credit Loss $ 28,248 $ 28,672 $ 29,532 $ 30,418 $ 31,330 $ 32,270 Concessions $ 98,868 $ 43,008 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 339,050 $ 186,366 $ 147,659 $ 152,089 $ 156,652 $ 161,351 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 66,000 $ 66,990 $ 69,000 $ 71,070 $ 73,202 $ 75,398 -------------------------------------------------------------------------------- Subtotal Other Income $ 66,000 $ 66,990 $ 69,000 $ 71,070 $ 73,202 $ 75,398 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,139,350 $1,314,210 $1,397,934 $1,439,872 $1,483,068 $1,527,560 OPERATING EXPENSES: Taxes $ 71,500 $ 73,645 $ 75,854 $ 78,130 $ 80,474 $ 82,888 Insurance $ 44,000 $ 45,320 $ 46,680 $ 48,080 $ 49,522 $ 51,008 Utilities $ 124,300 $ 128,029 $ 131,870 $ 135,826 $ 139,901 $ 144,098 Repair & Maintenance $ 220,000 $ 226,600 $ 233,398 $ 240,400 $ 247,612 $ 255,040 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 29,700 $ 30,591 $ 31,509 $ 32,454 $ 33,428 $ 34,430 General Administrative $ 198,000 $ 203,940 $ 210,058 $ 216,360 $ 222,851 $ 229,536 Management $ 56,968 $ 65,710 $ 69,897 $ 71,994 $ 74,153 $ 76,378 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 744,468 $ 773,835 $ 799,265 $ 823,243 $ 847,941 $ 873,379 Reserves $ 55,000 $ 56,650 $ 58,350 $ 60,100 $ 61,903 $ 63,760 -------------------------------------------------------------------------------- NET OPERATING INCOME $ 339,883 $ 483,724 $ 540,319 $ 556,529 $ 573,224 $ 590,421 Operating Expense Ratio (% of EGI) 65.3% 58.9% 57.2% 57.2% 57.2% 57.2% Operating Expense Per Unit $ 3,384 $ 3,517 $ 3,633 $ 3,742 $ 3,854 $ 3,970 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 --------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,661,919 $1,711,777 $1,763,130 $1,816,024 $1,870,505 Vacancy $ 132,954 $ 136,942 $ 141,050 $ 145,282 $ 149,640 Credit Loss $ 33,238 $ 34,236 $ 35,263 $ 36,320 $ 37,410 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 166,192 $ 171,178 $ 176,313 $ 181,602 $ 187,050 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 77,660 $ 79,990 $ 82,389 $ 84,861 $ 87,407 ------------------------------------------------------------------ Subtotal Other Income $ 77,660 $ 79,990 $ 82,389 $ 84,861 $ 87,407 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $1,573,387 $1,620,589 $1,669,206 $1,719,282 $1,770,861 OPERATING EXPENSES: Taxes $ 85,375 $ 87,936 $ 90,574 $ 93,291 $ 96,090 Insurance $ 52,538 $ 54,114 $ 55,738 $ 57,410 $ 59,132 Utilities $ 148,421 $ 152,873 $ 157,460 $ 162,183 $ 167,049 Repair & Maintenance $ 262,692 $ 270,572 $ 278,689 $ 287,050 $ 295,662 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 35,463 $ 36,527 $ 37,623 $ 38,752 $ 39,914 General Administrative $ 236,422 $ 243,515 $ 250,820 $ 258,345 $ 266,095 Management $ 78,669 $ 81,029 $ 83,460 $ 85,964 $ 88,543 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 899,580 $ 926,568 $ 954,365 $ 982,996 $1,012,486 Reserves $ 65,673 $ 67,643 $ 69,672 $ 71,763 $ 73,915 ------------------------------------------------------------------ NET OPERATING INCOME $ 608,134 $ 626,378 $ 645,169 $ 664,524 $ 684,460 Operating Expense Ratio (% of EGI) 57.2% 57.2% 57.2% 57.2% 57.2% Operating Expense Per Unit $ 4,089 $ 4,212 $ 4,338 $ 4,468 $ 4,602
Estimated Stabilized NOI $527,802 Sales Expense Rate 2.00% Months to Stabilized 12 Discount Rate 12.00% Stabilized Occupancy 92.0% Terminal Cap Rate 11.00%
Gross Residual Sale Price $6,222,363 Deferred Maintenance $ 0 Less: Sales Expense $ 124,447 Add: Excess Land $ 0 ---------- Net Residual Sale Price $6,097,916 Other Adjustments $ 0 ---------- PV of Reversion $1,963,366 Value Indicated By "DCF" $5,186,567 Add: NPV of NOI $3,223,201 Rounded $5,200,000 ---------- PV Total $5,186,567
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ---------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% -------------------------------------------------------------------------------------------------- 10.50% $5,453,337 $5,365,761 $5,280,061 $5,196,190 $5,114,105 10.75% $5,403,314 $5,316,846 $5,232,227 $5,149,411 $5,068,355 TERMINAL CAP RATE 11.00% $5,355,565 $5,270,154 $5,186,567 $5,104,758 $5,024,685 11.25% $5,309,939 $5,225,538 $5,142,937 $5,062,090 $4,982,955 11.50% $5,266,295 $5,182,861 $5,101,203 $5,021,277 $4,943,040
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently 79% occupied, below our stabilized occupancy projection. We have estimated a 12-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $84,000 as shown in the following table.
DESCRIPTION YEAR 1 -------------------------------- -------- "As Is" Net Operating Income $339,883 Stabilized Net Operating Income $433,877 -------- Difference $ 93,995 PV of Income Loss During Lease-Up $ 83,924 -------- Rounded $ 84,000 --------
CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $123,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 10.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PINE TREE APARTMENTS
TOTAL PER Sq. Ft. PER UNIT % OF EGI ------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,412,400 $ 8.25 $ 6,420 Less: Vacancy & Collection Loss 10.00% $ 141,240 $ 0.83 $ 642 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 66,000 $ 0.39 $ 300 4.94% ------------------------------------------------ Subtotal Other Income $ 66,000 $ 0.39 $ 300 4.94% EFFECTIVE GROSS INCOME $1,337,160 $ 7.81 $ 6,078 OPERATING EXPENSES: Taxes $ 71,500 $ 0.42 $ 325 5.35% Insurance $ 44,000 $ 0.26 $ 200 3.29% Utilities $ 124,300 $ 0.73 $ 565 9.30% Repair & Maintenance $ 220,000 $ 1.29 $ 1,000 16.45% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 29,700 $ 0.17 $ 135 2.22% General Administrative $ 198,000 $ 1.16 $ 900 14.81% Management 5.00% $ 66,858 $ 0.39 $ 304 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 754,358 $ 4.41 $ 3,429 56.41% Reserves $ 55,000 $ 0.32 $ 250 4.11% ------------------------------------------------ NET OPERATING INCOME $ 527,802 $ 3.08 $ 2,399 39.47% "GOING IN" CAPITALIZATION RATE 10.50% VALUE INDICATION $5,026,686 $29.37 $22,849 LESS: LEASE-UP COST $ (84,000) PV OF CONCESSIONS $ (123,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $4,819,686 ROUNDED $4,800,000 $28.05 $21,818
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF ----------------------------------------------------------- 9.75% $5,206,354 $5,200,000 $23,636 $30.38 10.00% $5,071,020 $5,100,000 $23,182 $29.80 10.25% $4,942,288 $4,900,000 $22,273 $28.63 10.50% $4,819,686 $4,800,000 $21,818 $28.05 10.75% $4,702,786 $4,700,000 $21,364 $27.46 11.00% $4,591,200 $4,600,000 $20,909 $26.88 11.25% $4,484,573 $4,500,000 $20,455 $26.29
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $4,800,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $5,200,000 Direct Capitalization Method $4,800,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $5,000,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA RECONCILIATION AND CONCLUSION This appraisal was made to express an opinion as of the Market Value of the fee simple estate in the property. AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE Cost Approach Not Utilized Sales Comparison Approach $5,200,000 Income Approach $5,000,000 Reconciled Value $5,100,000
The Income 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 14, 2003 the market value of the fee simple estate in the property is: $5,100,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [EXTERIOR - TYPICAL BUILDING [EXTERIOR - TYPICAL BUILDING ELEVATION PICTURE] ELEVATION PICTURE] [EXTERIOR - TYPICAL COMMON/DRAINAGE [EXTERIOR - TYPICAL BUILDING AREA PICTURE] ELEVATION PICTURE] [INTERIOR - CLUBHOUSE PICTURE] [EXTERIOR - DAMAGED UNIT/PATIO AREA PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [INTERIOR - TYPICAL UNIT PICTURE] [INTERIOR - TYPICAL UNIT PICTURE] [EXTERIOR - REPAIRS TO RAILINGS AND [EXTERIOR - REFINISHING OF MAIN STAIRWELLS PICTURE] POOL PICTURE] [EXTERIOR - SECOND POOL AREA PICTURE] [EXTERIOR - TENNIS COURT AREA PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CEDARS I ANDOVER WOODS DRAKE 7139 Winding Cedar Trail 7808 Andover Woods Dr 1701 Gander Cover Ln Charlotte, NC Charlotte, NC Charlotte, NC [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 WILLOW RIDGE CAMERON @ HICKORY GROVE 9200 Willow Ridge 5625 Keyway Blvd Charlotte, NC Charlotte, NC [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ----------------------------------------------------------------------------------------------------------------------------- Property Name Pine Tree Apartments Andover Woods Management Company AIMCO Investcorp Int LOCATION: Address 7609 Antlers Lane 7808 Andover Woods City, State Charlotte, North Carolina Charlotte, North Carolina Mecklenburg Mecklenburg Proximity to Subject 1 mile southeast of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 171,140 340,260 Year Built 1973 1987 Effective Age 30 16 Building Structure Type Brick & wood siding Brick & wood siding walls; asphalt shingle roof walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) Open Open Carports Number of Units 220 392 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1Br/1Ba 509 40 $363 2 1BD/1BH 656 52 $625 2 1Br/1Ba 655 46 $438 3 1BD/1BH 760 48 $685 3 1Br/1Ba 805 50 $498 3 1BD/1BH 784 80 $685 4 2Br/2Ba 900 68 $563 3 1BD/1BH 850 48 $715 5 3Br/2Ba 1,200 16 $707 2BD/1BH 830 34 $755 4 2BD/2BH 936 54 $765 5 2BD/2BH 1,129 44 $890 5 2BD/2BH 1,176 32 $930 Average Unit Size (SF) 778 868 Unit Breakdown: Efficiency 0% 2-Bedroom 22% Efficiency 0% 2-Bedroom 42% 1-Bedroom 78% 3-Bedroom 0% 1-Bedrooom 58% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace X Fireplace X X Cable TV Ready X Cable TV Ready Carports Project Amenities X Swimming Pool X Swimming Pool 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 Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking X Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room X Gym Room OCCUPANCY: 79% 95% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions N/A N/A Pet Deposit $150-$200 $200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ----------------------------------------------------------------------------------------------------------------------------- Property Name Beacon Hill Doninion @ Sharon Management Company Cornerstone Realty United Dominion Realty Trust LOCATION: Address 1322 Beacon Ridge Road 2123 El Verano Circle City, State Charlotte, North Carolina Charlotte, North Carolina County Mecklenburg Mecklenburg Proximity to Subject 4 miles north of subject 1/2 mile south of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 256,200 121,250 Year Built 1985 1984 Effective Age 18 19 Building Structure Type Brick & wood siding Brick & wood siding walls; asphalt shingle roof walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) Open Open Number of Units 349 1441 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BD/1BH 530 69 $600 1 1BD/1BH 750 56 $543 2 1BD/1BH 652 112 $640 2 2BD/1.5BH 900 88 $635 1BD/1BH 745 31 $675 3 1BD/1BH 748 39 $715 2BD/1BH 826 28 $765 4 2BD/2BH 892 16 $800 4 2BD/2BH 958 12 $840 5 2BD/2BH 1,079 42 $880 Average Unit Size (SF) 734 842 Unit Breakdown: Efficiency 0% 2-Bedroom 28% Efficiency 0% 2-Bedroom 61% 1-Bedroom 72% 3-Bedroom 0% 1-Bedroom 39% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment X Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court X Secured Parking X Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 91% 97% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions Up to $200/month off market rent Up to $100/month off market rent Pet Deposit $250 $250 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 --------------------------------------------------------------------------------------------------------------------------- Property Name Grand Oaks Wateford Lakes Management Company Alliance Residential Sentinel Real Estate LOCATION: Address 6614 Wisteria Drive 8000 Waterford Lakes Drive City, State Charlotte, North Carolina Charlotte, North Carolina County Mecklenburg Mecklenburg Proximity to Subject 2 miles north of subject 1 mile west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 249,300 601,700 Year Built 1964 1991 Effective Age 39 12 Building Structure Type Brick & wood siding Brick & wood siding walls; asphalt shingle roof walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) Open Open, Carports, Garages Number of Units 243 694 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1BD/1.5BH 900 35 $530 2 1BD/1BH 622 90 $ 670 4 2BD/1.5BH 832 26 $565 2 1BD/1BH 685 122 $ 715 4 2BD/1.5BH TNHS 1,050 148 $600 3 1BD/1BH 721 84 $ 715 5 3BD/1.5BH TNHS 1,200 34 $690 3 1BD/1BH Loft 926 32 $ 800 4 2BD/2BH 959 90 $ 840 4 2BD/2BH 991 96 $ 885 2BD/2BH 1,023 144 $ 890 5 3BD/2BH 1,208 36 $1,030 Average Unit Size (SF) 1,026 867 Unit Breakdown: Efficiency 0% 2-Bedroom 72% Efficiency 0% 2-Bedroom 48% 1-Bedroom 14% 3-Bedroom 14% 1-Bedroom 47% 3-Bedroom 5% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace X Fireplace X X Cable TV Ready X Cable TV Ready W/D in units Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash X Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room X Gym Room OCCUPANCY: 92% 84% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions $100/month on vacant units No Pet Deposit $200 $275 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 ANDOVER WOODS BEACON HILL DONINION @ SHARON 7808 Andover Woods 1322 Beacon Ridge Road 2123 El Verano Circle Charlotte, North Carolina Charlotte, North Carolina Charlotte, North Carolina [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 GRAND OAKS WATEFORD LAKES 6614 Wisteria Drive 8000 Waterford Lakes Drive Charlotte, North Carolina Charlotte, North Carolina [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. John Hayden provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institute's continuing education requirements. - s - Frank Fehribach ---------------------------------------- Frank Fehribach, MAI Managing Principal, Real Estate Group North Carolina Temporary Practice Permit #2578 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA FRANK A. FEHRIBACH, MAI MANAGING PRINCIPAL, REAL ESTATE GROUP POSITION Frank A. Fehribach is a Managing Principal for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Fehribach has experience in valuations for resort hotels; Class A office buildings; Class A multifamily complexes; industrial buildings and distribution warehousing; multitract mixed-use vacant land; regional malls; residential subdivision development; and special-purpose properties such as athletic clubs, golf courses, manufacturing facilities, nursing homes, and medical buildings. Consulting assignments include development and feasibility studies, economic model creation and maintenance, and market studies. Mr. Fehribach also has been involved in overseeing appraisal and consulting assignments in Mexico and South America. Business Mr. Fehribach joined AAA as an engagement director in 1998. He was promoted to his current position in 1999. Prior to that, he was a manager at Arthur Andersen LLP. Mr. Fehribach has been in the business of real estate appraisal for over ten years. EDUCATION University of Texas - Arlington Master of Science - Real Estate University of Dallas Master of Business Administration - Industrial Management Bachelor of Arts - Economics STATE State of Arizona CERTIFICATIONS Certified General Real Estate Appraiser, #30828 State of Arkansas State Certified General Appraiser, #CG1387N State of Colorado Certified General Appraiser, #CG40000445 State of Georgia Certified General Real Property Appraiser, #218487 State of Michigan Certified General Appraiser, #1201008081 State of Texas Real Estate Salesman License, #407158 (Inactive) State of Texas State Certified General Real Estate Appraiser, #TX-1323954-G AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS Candidate Member of the CCIM Institute pursuing Certified Commercial Investment Member (CCIM) designation PUBLICATIONS "An Analysis of the Determinants of Industrial Property -authored with Dr. Ronald C. Rutherford and Dr. Mark Eakin, The Journal of Real Estate Research, Vol. 8, No. 3, Summer 1993, p. 365. AMERICAN APPRAISAL ASSOCIATES, INC. TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. PINE TREE APARTMENTS, CHARLOTTE, NORTH CAROLINA 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.