-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtAN/Mno7tSfhMsF3toZSaClceWDjhWhmISHI5xlBEeO166JZZXJNz81vWrJmN4w AC+T7qgD5zOvYMoXBAPhWA== 0000950134-03-016403.txt : 20031209 0000950134-03-016403.hdr.sgml : 20031209 20031209063433 ACCESSION NUMBER: 0000950134-03-016403 CONFORMED SUBMISSION TYPE: SC TO-T/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20031209 GROUP MEMBERS: AIMCO-GP INC GROUP MEMBERS: APARTMENT INVESTMENT AND MANAGEMENT CO GROUP MEMBERS: SHELTER REALTY V CORP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES V LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000712753 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570721855 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: SC TO-T/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48070 FILM NUMBER: 031043583 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: SHELTER PROPERTIES V DATE OF NAME CHANGE: 19871022 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SHELTER PROPERTIES V LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000712753 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 570721855 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48070 FILM NUMBER: 031043584 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: SHELTER PROPERTIES V DATE OF NAME CHANGE: 19871022 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: AIMCO PROPERTIES LP CENTRAL INDEX KEY: 0000926660 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 841275621 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T/A BUSINESS ADDRESS: STREET 1: 4582 S ULSTER ST PARKWAY STREET 2: SUITE 1100 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 4582 S ULSTER ST PARKWAY STREET 2: SUITE 1100 CITY: DENVER STATE: CO ZIP: 80237 SC TO-T/A 1 d07277a2sctovtza.txt AMENDMENT NO. 2 TO SC TO SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SCHEDULE TO/A (AMENDMENT NO. 2) TENDER OFFER STATEMENT UNDER SECTION 14(D)(1) OR 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 Shelter Properties V Limited Partnership - -------------------------------------------------------------------------------- (Name of Subject Company (Issuer)) Apartment Investment and Management Company AIMCO-GP, Inc. Shelter Realty V Corporation AIMCO Properties, L.P. - -------------------------------------------------------------------------------- (Names of Filing Persons - Offerors) Limited Partnership Units - -------------------------------------------------------------------------------- (Title of Class Securities) None - -------------------------------------------------------------------------------- (CUSIP Number of Class Securities) Patrick J. Foye Apartment Investment and Management Company Colorado Center, Tower Two 2000 South Colorado Boulevard, Suite 2-1000 Denver, Colorado 80222 (303) 757-8101 - -------------------------------------------------------------------------------- (Name, address, and telephone numbers of person authorized to receive notices and communications on behalf of filing persons) Copy to: Joseph A. Coco Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 and Jonathan L. Friedman Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue Los Angeles, California 90071 (213) 687-5000 1 Calculation of Filing Fee
Transaction valuation* Amount of filing fee - ---------------------- -------------------- $3,546,400.16 $ 286.91
* For purposes of calculating the fee only. This amount assumes the purchase of 15,058 units of limited partnership interest of the subject partnership for $235.52 per unit. The amount of the filing fee, calculated in accordance with Section 14(g)(1)(B)(3) and Rule 0-11(d) under the Securities Exchange Act of 1934, as amended, equals $80.90 per million of the aggregate amount of cash offered by the bidder. [X] Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $286.91 Filing Party: AIMCO Properties, L.P. Form or Registration No.: Schedule TO Date Filed: November 13, 2003 [ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [X] third-party tender offer subject to Rule 14d-1 [ ] issuer tender offer subject to Rule 13e-4 [X] going-private transaction subject to Rule 13e-3 [ ] amendment to Schedule 13D under Rule 13d-2 Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ] 2 AMENDMENT NO. 2 TO SCHEDULE TO This Amendment No. 2 amends and supplements the Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO, as amended by Amendment No. 1 thereto (the "Schedule TO"), relating to the offer by AIMCO Properties, L.P., a Delaware limited partnership, to purchase units of limited partnership interest ("Units") of Shelter Properties V Limited Partnership, a South Carolina limited partnership (the "Partnership"), at a price of $235.52 per unit in cash, subject to the conditions set forth in the Offer to Purchase dated November 13, 2003, and in the related Letter of Transmittal (which, together with any supplements or amendments, collectively constitute the "Offer"). Copies of the Offer to Purchase and the Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2), respectively, to the Schedule TO. The item numbers and responses thereto below are in accordance with the requirements of Schedule TO. Unless defined herein, capitalized terms used and not otherwise defined herein have the respective meanings ascribed to such terms in the Offer to Purchase. ITEM 1. SUMMARY TERM SHEET. Item 1 is amended and supplemented as follows: (1) The following paragraph under "THE SUMMARY TERM SHEET" is amended and restated as follows: "Covenant Not to Sue. If you requested exclusion from the settlement but tender your units in this offer, by signing the letter of transmittal, you agree not to bring any action, claim, suit or proceeding against us and those affiliates who were defendants in the class and derivative litigation concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including this Litigation Settlement Offer, other than for violations of federal or state securities laws. If you do not request exclusion from the settlement class, you will already have agreed not to bring any such action, you will already have agreed not to bring any such action, claim, suit or proceeding once the settlement." (2) The following paragraph under "THE SUMMARY TERM SHEET" is amended and restated as follows: "Conflicts of Interest. NHP Management Company (which is our affiliate) receives fees for managing your partnership's property and the general partner of your partnership (which is our affiliate) is entitled to receive asset management fees and reimbursement of certain expenses involving your partnership and its property. As a result, a conflict of interest exists between continuing the partnership and receiving these fees, and the liquidation of the partnership and the termination of these fees. See "The Litigation Settlement Offer -- Section 13. Conflicts of Interest and Transactions with Affiliates" and "-- Section 15. Certain Information Concerning Your Partnership." (3) The following paragraph is added as the eighteenth paragraph under "THE SUMMARY TERM SHEET": "Fairness of the Offer. Although we, Apartment Investment and Management Company ("AIMCO") and AIMCO-GP, Inc. (collectively, the "AIMCO Entities") and your general partner have interests that may conflict with those the partnership's unaffiliated limited partners, each of the AIMCO Entities believes that the offer price and the offer are fair to the unaffiliated limited partners of your partnership. This determination is based on the information and the factors set 3 forth under "The Litigation Settlement Offer -- Section 12. Position of Your General Partner of Your Partnership With Respect to the Offer." ITEM 2. SUBJECT COMPANY INFORMATION. Item 2(a) of the Schedule TO is amended and supplemented as follows: (1) The following paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership" is amended and restated as follows: "Ownership and Voting. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 37,480 units, or 71.34%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we have the ability to control most votes of the limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer" and "-- Section 16. Voting Power."" (2) The chart under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership - Financial Data" is amended by adding the following line items:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------- 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) Income (loss) per unit from continuing operations $ 5.88 $ 17.05 $ 25.32 $ 133.79 $ 62.53 Ratio of earnings to fixed charges (deficit)....... 111.9% 133.2% 137.0% 307.8% 210.5% Book value per limited partnership unit............ (219.29) (215.92) (215.56) (113.75) (67.67)
ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. Item 3(a) - (c) of the Schedule TO is amended and supplemented as follows: (1) The Rule 13e-3 Transaction Statement on Schedule TO is being filed by Apartment Investment and Management Company, a Maryland corporation ("AIMCO"), AIMCO Properties, L.P., a Delaware limited partnership ("AIMCO OP"), AIMCO-GP, Inc. a Delaware corporation ("AIMCO-GP"), and Shelter Realty V Corporation ("Shelter Realty"). AIMCO-GP is the general partner of AIMCO OP and a wholly owned subsidiary of AIMCO. Shelter Realty is the managing general partner of the Partnership and a wholly owned subsidiary of AIMCO. The principal business of AIMCO, AIMCO-GP, and AIMCO OP is the ownership, acquisition, development, expansion and management of multi-family apartment properties. The business address of AIMCO, AIMCO-GP and AIMCO OP is 4582 Ulster Street Parkway, Suite 1100, Denver, Colorado 80237, and their telephone number is (303) 757-8101. The principal address of Shelter Realty is 55 Beattie Place, P.O. Box 1089, Greenville, South Carolina 29602, and its phone number is (864) 239-1000. During the last five years, none of AIMCO, AIMCO-GP, AIMCO OP or Shelter Realty nor, to the best of their knowledge, any of the persons listed in Annex I to the Offer to Purchase (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of or 4 prohibiting activities subject to federal or state securities laws or finding any violation with respect to such laws. (2) The fourth paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 10. Information Concerning Us and Certain of Our Affiliates" is amended and restated as follows: "We and AIMCO are both subject to the information and reporting requirements of the Exchange Act and, in accordance therewith, file reports and other information with the Securities and Exchange Commission relating to our business, financial condition and other matters, including the complete financial statements summarized below. Such reports and other information may be inspected at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Room of the SEC in Washington, D.C. at prescribed rates. The SEC also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. In addition, information filed by AIMCO with the New York Stock Exchange may be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005." (3) The following chart under Annex I is amended and restated as follows:
NAME POSITION -------------------------- ------------------------------------- Terry Considine............ Chairman of the Board of Directors and Chief Executive Officer Peter K. Kompaniez......... Vice Chairman, President and Director Harry G. Alcock............ Executive Vice President and Chief Investment Officer Miles Cortez............... Executive Vice President, General Counsel and Secretary Joseph DeTuno.............. Executive Vice President -- Redevelopment Patti K. Fielding.......... Executive Vice President -- Securities and Debt Patrick J. Foye............ Executive Vice President Lance J. Graber............ Executive Vice President -- AIMCO Capital Paul J. McAuliffe.......... Executive Vice President and Chief Financial Officer Ronald D. Monson........... Executive Vice President and Head of Property Operations David Robertson............ Executive Vice President -- President and Chief Executive Officer of AIMCO Capital Jim Purvis................. Executive Vice President -- Human Resources Randall J. Fein............ Executive Vice President -- Student Housing James N. Bailey............ Director Richard S. Ellwood......... Director J. Landis Martin........... Director Thomas L. Rhodes........... Director
ITEM 4. TERMS OF THE TRANSACTION. Item 4(a) of the Schedule TO is amended and supplemented as follows: (1) The following paragraph under "RISK FACTORS" is amended and restated as follows: "THERE MAY BE A POSSIBLE REDUCTION OF AVAILABLE INFORMATION ABOUT YOUR PARTNERSHIP AS A RESULT OF THIS OFFER. 5 If there are less than 300 unitholders in your partnership upon consummation of the offer, your partnership would no longer be required to file periodic reports with the SEC, such as annual reports on Form 10-KSB containing annual audited financial statements, and quarterly reports on Form 10-QSB containing unaudited quarterly financial statements. Such reports are publicly available and can be obtained on the SEC's web site. The lack of such filings could adversely affect the already limited secondary market which currently exists for units in your partnership and may discourage offers to purchase your units. In such a case, you would regularly have access only to the information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which consists primarily of tax information. See "The Litigation Settlement Offer - Section 7. Effects of the Offer - Effect on Trading Market; Registration Under Section 12(g) of the Exchange Act." (2) Section 1 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "1. TERMS OF THE OFFER; EXPIRATION DATE Upon the terms and subject to the conditions of the offer, we will accept (and thereby purchase) any and all units that are validly tendered on or prior to the expiration date and not withdrawn in accordance with the procedures set forth in "The Litigation Settlement Offer -- Section 4. Withdrawal Rights." For purposes of the offer, the term "expiration date" shall mean midnight, New York City time, on December 19, 2003, unless we in our sole discretion shall have extended the period of time for which the offer is open (which may not exceed 90 business days from the date of commencement, as provided in the settlement). See "The Litigation Settlement Offer -- Section 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period," for a description of our right to extend the period of time during which the offer is open and to amend or terminate the offer. The purchase price per unit will automatically be reduced by the aggregate amount of distributions per unit, if any, made or declared by your partnership on or after the commencement of our offer and prior to the date on which we acquire your units pursuant to our offer. If the offer price is reduced in this manner, we will notify you and, if necessary, we will extend the offer period so that you will have at least ten business days from the date of our notice to withdraw your units. If, prior to the expiration date, we increase the consideration offered pursuant to the offer, the increased consideration will be paid for all units accepted for payment pursuant to the offer, whether or not the units were tendered prior to the increase in consideration. The offer is conditioned on satisfaction of certain conditions. The offer is not conditioned upon any minimum number of units being tendered. See "The Litigation Settlement Offer -- Section 19. Conditions to the Offer," which sets forth in full the conditions of the offer. We reserve the right (but in no event shall we be obligated), in our reasonable discretion, to waive any or all of those conditions. If, on or prior to the expiration date, any or all of the conditions have not been satisfied or waived, we reserve the right to (i) decline to purchase any of the units tendered, terminate the offer and return all tendered units to tendering limited partners, (ii) waive all the unsatisfied conditions and purchase, subject to the terms of the offer, any and all units validly tendered, (iii) extend the offer and, subject to your withdrawal rights, retain the units that have been tendered during the period or periods for which the offer is extended, or (iv) amend the offer. If we are unable to accept the units tendered in this Litigation Settlement Offer due to a failure of any or all of the conditions of our offer to be satisfied, we will conduct another offer in 6 accordance with the terms of the settlement (which will occur no later than six months after the date of the commencement of this offer). We will continue this process until we have accepted for payment all units properly tendered in an offer conducted in accordance with the terms of the settlement. By executing the letter of transmittal, you will agree that the transfer of units will be deemed to take effect as of the first day of the calendar quarter in which the offer expires. Upon expiration of the offer, the books and records of the partnership will reflect the change in ownership as having occurred as of this date. For tax, accounting and financial reporting purposes, the transfer of tendered units will be deemed to take effect on the first day of the calendar quarter. Accordingly, all profits and losses relating to any tendered units will be allocated to us from and after this date. If we waive any material conditions to our offer (other than those relating to necessary governmental approvals), we will notify you and, if necessary, we will extend the offer period so that you will have at least five business days from the date of our notice to withdraw your units. This offer is being mailed on or about November 13, 2003 to the persons shown by your partnership's records to be limited partners or, in the case of units owned of record by Individual Retirement Accounts and qualified plans, beneficial owners of units." Section 2 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR UNITS Upon the terms and subject to the conditions of the offer, we will purchase, by accepting for payment, and will pay for, any and all units validly tendered promptly following the expiration date. A tendering beneficial owner of units whose units are owned of record by an Individual Retirement Account or other qualified plan will not receive direct payment of the offer price; rather, payment will be made to the custodian of such account or plan. In all cases, payment for units purchased pursuant to the offer will be made only after timely receipt by the Information Agent of a properly completed and duly executed letter of transmittal and other documents required by the letter of transmittal. See "The Litigation Settlement Offer -- Section 3. Procedure for Tendering Units." UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE OFFER PRICE BY REASON OF ANY DELAY IN MAKING SUCH PAYMENT. For purposes of the offer, we will be deemed to have accepted for payment pursuant to the offer, and thereby purchased, validly tendered units, if, as and when we give verbal or written notice to the Information Agent of our acceptance of those units for payment pursuant to the offer. Payment for units accepted for payment pursuant to the offer will be made through the Information Agent, which will act as agent for tendering limited partners for the purpose of receiving cash payments from us and transmitting cash payments to tendering limited partners. If any tendered units are not accepted for payment by us for any reason, the letter of transmittal with respect to such units not purchased may be destroyed by the Information Agent or us or returned to you. You may withdraw tendered units until the expiration date (including any extensions). In addition, if we have not accepted units for payment by January 12, 2004 you may then withdraw any tendered units. After the expiration date, the Information Agent may, on our behalf, retain tendered units, and those units may not be otherwise withdrawn, if, for any reason, acceptance for payment of, or payment for, any units tendered pursuant to the offer is delayed or we are unable to accept for payment, purchase or pay for units tendered pursuant to the offer. Any such action is subject, however, to our obligation under Rule 14e-1(c) under the Exchange Act, to pay you the offer price in respect of units tendered or return those units promptly after termination or withdrawal of the offer. 7 We reserve the right to transfer or assign, in whole or in part, to one or more of our affiliates, the right to purchase units tendered pursuant to the offer, but no such transfer or assignment will relieve us of our obligations under the offer or prejudice your rights to receive payment for units validly tendered and accepted for payment pursuant to the offer." (3) The first paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 3. Procedure for Tendering Units - Release of Claims" is amended and restated as follows: "Release of Claims. By executing the letter of transmittal, effective upon acceptance for payment of the units tendered by you, you will, on behalf of yourself, your heirs, estate, executor, administrator, successors and assigns, and your partnership, fully, finally and forever release, relinquish and discharge us and our predecessors, successors and assigns and our present and former parents, subsidiaries, affiliates, investors, insurers, reinsurers, officers, directors, employees, agents, administrators, auditors, attorneys, accountants, information and solicitation agents, investment bankers, and other representatives, including but not limited to AIMCO Properties, L.P. (collectively, the "Releasees"), from any and all claims and causes of action, whether brought individually, on behalf of a class, or derivatively, demands, rights, or liabilities, including, but not limited to, claims for negligence, gross negligence, professional negligence, breach of duty of care or loyalty, or breach of duty of candor, fraud, breach of fiduciary duty, mismanagement, corporate waste, malpractice, misrepresentation, whether intentional or negligent, misstatements and omissions to disclose, breach of contract, violations of any state or federal statutes, rules or regulations, whether known claims or unknown claims that have been asserted or that could have been asserted against the Releasees, that arise out of or relate to (a) those matters and claims set forth in the class and derivative litigation described in this Litigation Settlement Offer, (b) the ownership of one or more units in your partnership, including but not limited to, any and all claims related to the management of your partnership or the properties owned by your partnership (whether currently or previously), the payment of management fees or other monies to the general partner of your partnership and its affiliates, prior acquisitions or tender offers and the prior settlement, (c) the purchase, acquisition, holding, sale, tender or voting of one or more units in your partnership, or (d) any of the facts, circumstances, allegations, claims, causes of action, representations, statements, reports, disclosures, transactions, events, occurrences, acts, omissions or failures to act, of whatever kind or character whatsoever, irrespective of the state of mind of the actor performing or omitting to perform the same, that have been or could have been alleged in any pleadings, amended pleading, argument, complaint, amended complaint, brief, motion, report or filing in the class and derivative litigation described in this Litigation Settlement Offer (collectively, the "Released Claims"); provided, however, that the Released Claims are not intended to include (i) any unrelated claims that are unique to a limited partner or settlement class member (e.g., a settlement class member slips and falls on property owned by one of the defendants in the class and derivative litigation, loses or did not receive a distribution check distributed to other limited partners in such partnership, or is an employee of one of the defendants and has an employee related claim) or (ii) any claim based upon violations of federal or state securities laws in connection with this offer." (4) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 3. Procedure for Tendering Units - Covenant Not to Sue" is amended and restated as follows: "Covenant Not to Sue. By executing the letter of transmittal, you agree not to bring any action, claim, suit or proceeding against us and those affiliates who were defendants in the class and derivative litigation concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including this Litigation Settlement Offer, other than for violations of federal or state securities laws." 8 (5) The paragraph under "THE LITIGATION SETTLEMENT OFFER -- Procedure for Tendering Units - Section 3. Procedure for Tendering Units -- Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects" is amended and restated as follows: "Determination of Validity; Rejection of Units; Waiver of Defects; No Obligation to Give Notice of Defects. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of units pursuant to our offer will be determined by us, in our reasonable discretion, which determination shall be final and binding on all parties. We reserve the absolute right to reject any or all tenders of any particular unit determined by us not to be in proper form or if the acceptance of or payment for that unit may, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive or amend any of the conditions of the offer that we are legally permitted to waive as to the tender of any particular unit and to waive any defect or irregularity in any tender with respect to any particular unit of any particular limited partner. If we waive any of the conditions to the offer with respect to the tender of a particular unit, we will waive such condition with respect to all other tenders of units in this offer as well. Our interpretation of the terms and conditions of the offer (including the letter of transmittal) will be final and binding on all parties. No tender of units will be deemed to have been validly made unless and until all defects and irregularities have been cured or waived. Neither we, the Information Agent, nor any other person will be under any duty to give notification of any defects or irregularities in the tender of any unit or will incur any liability for failure to give any such notification." (6) The first paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period" is amended and restated as follows: "We expressly reserve the right, in our reasonable discretion, at any time and from time to time, (i) to extend the period of time during which our offer is open (but not beyond 90 business days from the date of commencement of the offer) and thereby delay acceptance for payment of, and the payment for, any unit, (ii) to terminate the offer and not accept any units not theretofore accepted for payment or paid for if any of the conditions to the offer are not satisfied or if any event occurs that might reasonably be expected to result in a failure to satisfy such conditions, (iii) upon the occurrence of any of the conditions specified in "The Litigation Settlement Offer -- Section 19. Conditions of the Offer" relating to necessary governmental approvals, to delay the acceptance for payment of, or payment for, any units not already accepted for payment or paid for, and (iv) to amend our offer in any respect (including, without limitation, by increasing or decreasing the consideration offered, increasing or decreasing the units being sought, or both). We will not assert any of the conditions to the offer (other than those relating to necessary governmental approvals) subsequent to the expiration of the offer. Notice of any such extension, termination or amendment will promptly be disseminated to you in a manner reasonably designed to inform you of such change. In the case of an extension of the offer, the extension may be followed by a press release or public announcement which will be issued no later than 9:00 a.m., New York City time, on the next business day after the scheduled expiration date of our offer, in accordance with Rule 14e-1(d) under the Exchange Act." (7) The third paragraph under "THE LITIGATION SETTLEMENT OFFER--Section 8. Valuation of Units -- Determination of Offer Price" is amended and restated as follows: "We relied on the direct capitalization method because we believe this is the valuation methodology most often used by the real estate industry to value income producing property. The 9 court appointed independent appraiser also utilized the direct capitalization method as one its valuation methodologies. However, in comparison to our methodology, the independent appraiser relied on pro forma net operating income as opposed to the current property income of your partnership." (8) The first paragraph and the first bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" are amended and restated as follows: "Notwithstanding any other provisions of our offer, we will not be required to accept for payment and pay for any units tendered pursuant to our offer, may postpone the purchase of, and payment for, units tendered, and may terminate or amend our offer if at any time on or after the date of this Litigation Settlement Offer and at or before the expiration of our offer (including any extension thereof), any of the following shall occur: o any change (or any condition, event or development involving a prospective change) shall have occurred or been threatened in the business, properties, assets, liabilities, indebtedness, capitalization, condition (financial or otherwise), operations, licenses or franchises, management contract, or results of operations or prospects of your partnership or local markets in which your partnership owns or operates its property, including any fire, flood, natural disaster, casualty loss, or act of God that is or could reasonably be expected to be materially adverse to your partnership or the value of your units to us, which change would, individually or in the aggregate, result in, or reasonably be expected to result in, an adverse effect on net operating income of your partnership of more than $10,000 per year, or a decrease in value of an asset of your partnership, or the incurrence of a liability with respect to your partnership, in an amount in excess of $100,000 (a "Material Adverse Effect"), or we shall have become aware of any facts relating to your partnership, its indebtedness or its operations which has had or could reasonably be expected to have a Material Adverse Effect; or" (9) The third bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o there shall have been threatened in writing, instituted or pending any action, proceeding, application or counterclaim by any Federal, state, local or foreign government, governmental authority or governmental agency, or by any other person, before any governmental authority, court or regulatory or administrative agency, authority or tribunal, which (i) challenges or seeks to challenge the acquisition by us of the units, restrains, prohibits or delays the making or consummation of the offer, prohibits the performance of any of the contracts or other arrangements entered into by us (or any of our affiliates) seeks to obtain any material amount of damages as a result of the transactions contemplated by the offer, (ii) seeks to make the purchase of, or payment for, some or all of the units pursuant to the offer illegal or results in a delay in our ability to accept for payment or pay for some or all of the units, (iii) seeks to prohibit or limit the ownership or operation by us or any of our affiliates of the entity serving as your general partner (which is our affiliate) or to remove such entity as the general partner of your partnership, or seeks to impose any material limitation on our ability or any of our affiliates to conduct your partnership's business or own such assets, (iv) seeks to impose material limitations on our ability or any of our affiliates to acquire or hold or to exercise full rights of ownership of the units including, but not limited to, the right to vote the units purchased by us on all matters properly presented to unitholders or (v) could reasonably be expected to result in a Material Adverse Effect; or 10 (10) The fifth bullet point under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o your partnership shall have (i) changed, or authorized a change of, its units or your partnership's capitalization, (ii) issued, distributed, sold or pledged, or authorized, proposed or announced the issuance, distribution, sale or pledge of (A) any equity interests (including, without limitation, units), or securities convertible into any such equity interests or any rights, warrants or options to acquire any such equity interests or convertible securities, or (B) any other securities in respect of, in lieu of, or in substitution for units outstanding on the date hereof, (iii) purchased or otherwise acquired, or proposed or offered to purchase or otherwise acquire, any outstanding units or other securities, (iv) declared or paid any dividend or distribution on any units or issued, authorized, recommended or proposed the issuance of any other distribution in respect of the units, whether payable in cash, securities or other property, (v) authorized, recommended, proposed or announced an agreement, or intention to enter into an agreement, with respect to any merger, consolidation, liquidation or business combination, any acquisition or disposition of a material amount of assets or securities, or any release or relinquishment of any material contract rights, or any comparable event, not in the ordinary course of business, (vi) taken any action to implement such a transaction previously authorized, recommended, proposed or publicly announced, (vii) issued, or announced its intention to issue, any debt securities, or securities convertible into, or rights, warrants or options to acquire, any debt securities, or incurred, or announced its intention to incur, any debt other than in the ordinary course of business and consistent with past practice, (viii) authorized, recommended or proposed, or entered into, any transaction which, has or could reasonably be expected to have a Material Adverse Effect, (ix) proposed, adopted or authorized any amendment of its organizational documents, (x) agreed in writing or otherwise to take any of the foregoing actions, or (xi) been notified that any debt of your partnership or any of its subsidiaries secured by any of its or their assets is in default or has been accelerated (any changes to the offer resulting from the conditions set forth in this paragraph will most likely involve a change in the amount or terms of the consideration offered or the termination of the offer); or" (11) The seventh bullet point of "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "o there shall have occurred any event, circumstance, change, effect or development that, individually or in the aggregate with any other events, circumstances, changes, effects or developments, has had or would reasonably be expected to have an adverse effect on our financial condition in an amount in excess of $10,000,000; or" (12) The following bullet point under "THE LITIGATION SETTLEMENT OFFER - - Section 19. Conditions to the Offer" is deleted in its entirety: "o we shall not have adequate cash or financing commitments available to pay for the units validly tendered, which is the result of events or circumstances beyond our reasonable control." (13) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 19. Conditions to the Offer" is amended and restated as follows: "The foregoing conditions are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to such conditions or may be waived by us at any time in our reasonable discretion prior to the expiration of this offer. The failure by us at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to any particular facts or circumstances shall not be deemed a waiver with respect to any other facts or circumstances. All conditions to our offer will be satisfied or waived on or before the expiration of our offer." 11 (14) The first paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto hereby acknowledges that he or she has received (i) the Purchaser's Litigation Settlement Offer, dated the date set forth above (the "Offer Date"), relating to the offer by AIMCO Properties, L.P. (the "Purchaser") to purchase Limited Partnership Interests (the "Units") in the Partnership and (ii) this Letter of Transmittal and the Instructions hereto, as each may be supplemented or amended from time to time (collectively, the "Offer")." (15) The fourth paragraph of the Letter of Transmittal is amended and restated as follows: "By executing this Letter of Transmittal, the undersigned hereby acknowledges that neither the court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether the undersigned should accept the Offer, and the undersigned hereto represents and warrants to the Purchaser that the undersigned (i) has received the Offer, including the executive summary of the independent appraiser's report attached to the Litigation Settlement Offer, and (ii) has had an opportunity to seek the advice of such undersigned's attorney, tax advisor and/or financial advisor before deciding whether or not to accept the Offer." (16) The sixth paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto, on behalf of himself or herself, his or her heirs, estate, executor, administrator, successors and assigns, and the Partnership, fully, finally and forever releases, relinquishes and discharges the Purchaser and its predecessors, successors and assigns and its present and former parents, subsidiaries, affiliates, investors, insurers, reinsurers, officers, directors, employees, agents, administrators, auditors, attorneys, accountants, information and solicitation agents, investment bankers, and other representatives, including but not limited to Apartment Investment and Management Company and the general partner of the Partnership (collectively, the "Releasees"), from any and all claims and causes of action, whether brought individually, on behalf of a class, or derivatively, demands, rights, or liabilities, including, but not limited to, claims for negligence, gross negligence, professional negligence, breach of duty of care or loyalty, or breach of duty of candor, fraud, breach of fiduciary duty, mismanagement, corporate waste, malpractice, misrepresentation, whether intentional or negligent, misstatements and omissions to disclose, breach of contract, violations of any state or federal statutes, rules or regulations, whether known claims or unknown claims that have been asserted or that could have been asserted against the Releasees, that arise out of or relate to (a) those matters and claims set forth in the class and derivative litigation described in the Litigation Settlement Offer, (b) the ownership of one or more Units in the Partnership, including but not limited to, any and all claims related to the management of the Partnership or the properties owned by the Partnership (whether currently or previously), the payment of management fees or other monies to the general partner of the Partnership and its affiliates, prior acquisitions or tender offers and the prior settlement, (c) the purchase, acquisition, holding, sale, tender or voting of one or more Units in the Partnership, or (d) any of the facts, circumstances, allegations, claims, causes of action, representations, statements, reports, disclosures, transactions, events, occurrences, acts, omissions or failures to act, of whatever kind or character whatsoever, irrespective of the state of mind of the actor performing or omitting to perform the same, that have been or could have been alleged in any pleadings, amended pleading, argument, complaint, amended complaint, brief, motion, report or filing in the class and derivative litigation described in the Litigation Settlement Offer (collectively, the "Released Claims"); provided, however, that the Released Claims are not intended to include (i) any unrelated claims that are unique to a unitholder or settlement class member (e.g., a settlement class member slips and falls on property owned by one of the defendants in the class and derivative litigation, loses or did not receive a distribution check 12 distributed to other limited partners in such partnership, or is an employee of one of the defendants and has an employee related claim), or (ii) any claim based on violations of federal or state securities laws in connection with the Offer." (17) The tenth paragraph of the Letter of Transmittal is amended and restated as follows: "Subject to and effective upon acceptance for payment of any Unit tendered hereby in accordance with the terms of the Offer, the signatory agrees not to bring any action, claim, suit or proceeding against the Purchaser and its affiliates who were defendants in the class and derivative litigation described in the Litigation Settlement Offer concerning any of the matters that are the subject of the Stipulation of Settlement approved by the Court in connection with the settlement of such class and derivative litigation, including the Offer, other than for violations of federal or state securities laws." (18) The eleventh paragraph of the Letter of Transmittal is amended and restated as follows: "The undersigned hereto irrevocably appoints the Purchaser and its designees as his or her proxy, each with full power of substitution, to the fullest extent of the undersigned's rights with respect to the Units tendered by him or her and accepted for payment by the Purchaser. Such proxy shall be considered coupled with an interest in the tendered Units. Such appointment will be effective upon receipt of this Letter of Transmittal. Upon receipt of this Letter of Transmittal, all prior proxies and consents given by undersigned hereto with respect to the Units will, without further action, be revoked, and no subsequent proxies or consents may be given (and if given will not be effective). The Purchaser and its designees are, as to those Units, empowered to exercise all voting as a limited partner as the Purchaser, in its discretion, may deem proper at any meeting of limited partners, by written consent or otherwise. The Purchaser reserves the right to require that, in order for Units to be deemed validly tendered, immediately upon our acceptance for payment of the Units, the Purchaser must be able to exercise full voting rights with respect to the Units, including voting at any meeting of limited partners then scheduled or acting by written consent without a meeting. By executing this Letter of Transmittal, the undersigned agrees to execute all such documents and take such other actions as shall be reasonably required to enable the Units tendered to be voted in accordance with the Purchaser's directions. The proxy granted by the undersigned hereto to the Purchaser will remain effective and be irrevocable for a period of ten years following the Expiration Date of the Offer." (19) The following paragraph in the Letter of Transmittal is deleted in its entirety: "The undersigned hereto irrevocably constitutes and appoints the Purchaser and any designees of the Purchaser as the true and lawful agent and attorney-in-fact of the undersigned with respect to such Units, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to withdraw any or all of such Units that have been previously tendered in response to any tender or exchange offer provided that the price per unit being offered by the Purchaser is equal to or higher than the price per unit being offered in the other tender or exchange offer. This appointment is effective upon execution and receipt of this Letter of Transmittal and shall continue to be effective unless and until such Units are withdrawn from the Offer by the undersigned prior to the Expiration Date." ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. Item 5(a) and (b) of the Schedule TO is amended and supplemented as follows: 13 (1) The first, second and third paragraphs of "THE LITIGATION SETTLEMENT OFFER - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints" is amended and restated as follows: "On December 20, 2002, the parties to the above-entitled litigation executed a Stipulation of Settlement of the two actions. That settlement was the result of over one year of negotiations and the involvement of two separate settlement judges. Class counsel and defendants' counsel first met with the Honorable William J. Cahill, Retired California Superior Court Judge, on two separate occasions. Counsel also met on four separate occasions with the Honorable Margaret J. Kemp, California Superior Court Judge, before reaching a settlement in principle. The parties initially met with Judge Cahill on two occasions in the fall of 2000, but were ultimately unsuccessful in reaching a definitive settlement agreement. At the Court's direction, they renewed formal settlement discussions before Judge Kemp. The parties first attended a settlement conference before Judge Kemp in September or October 2002 and then subsequently met with her on October 28, 2002, November 26, 2002 and December 2, 2002. The parties reached final agreement on the material terms of the settlement at the last settlement conference with Judge Kemp on December 2, 2002 and put the terms of that agreement on the record in open court. In each of the conferences described above, counsel from Lieff Cabraser Heimann & Bernstein LLP, Farella Braun & Martel LLP & Berman Devalerio Pease & Tobacco attended on behalf of the named plaintiffs and the putative settlement class; counsel from Skadden, Arps, Slate, Meagher & Flom LLP attended on behalf of AIMCO and its affiliated entities, including your general partner, and Orrick Herrington & Sutcliffe attended on behalf of the remaining defendants. AIMCO Executive Vice President Patrick Foye also attended each of these meetings. Mr. Vincent Gresham of the Law Offices of Vincent Gresham also participated on behalf of plaintiffs and the putative settlement class in those settlement discussions before the Hon. Cahill, Retired. At these meetings, discussions included possible transactions that could provide liquidity to investors and form the basis of a settlement, the use of a settlement fund and the amount of such fund, the timing and distribution of any settlement fund, selection and use of an appraiser and disclosures that would accompany any contemplated transaction(s). The participants considered but ultimately rejected a merger or roll-up of the various partnerships as possible alternatives to cash tender offers. The parties ultimately concluded, however, that a merger or roll-up could be potentially complicated and time consuming and that a cash tender offer would be a less coercive form of providing liquidity to those investors who desired it. The Settlement Agreement requires each tender offer to attach executive summaries of partnership property appraisals commissioned specifically for the settlement tender offers and to provide an explanation of how the appraised values of the properties compare to the per Unit price(s) being offered. It also requires the payment of an allocable portion of the settlement fund for each unit tendered pursuant to the settlement fund, details the scope of the release and covenants not to sue which will bind class members, requires that tender offers be made no more than one year after final approval of the settlement and imposes certain restrictions on the length of time in which the tender offers can remain open, as well as with regard to other disclosures made therein. On April 4, 2003, the Court preliminarily approved the settlement and, on June 13, 2003, entered an order finally approving the settlement and dismissing both the Heller and Nuanes litigation with prejudice. On August 12, 2003, an objector filed an appeal of the court's order approving the settlement and is seeking to reverse or vacate the Court's order and the judgment entered thereto. Although we reserve our right to terminate or amend our offer if final court approval of the settlement is reversed or vacated, we have nevertheless elected to proceed with this offer under the terms of the settlement. On November 24, 2003, the objector appealing the settlement and judgment entered thereto filed an application requesting the Court order AIMCO to withdraw the settlement tender offers, refrain from making further offers pending the appeal and auction any units tendered to third parties. The objector contends that this offer does not conform with the terms of the Settlement. Alternatively, counsel for the objector has requested the Court on behalf of a settlement class member order AIMCO to pay all non-tendering settlement class members their pro rata share of the Settlement Fund whether or not the settlement and judgment entered thereto is vacated on appeal and to notify settlement class members that the releases and covenant not to sue are not binding unless the settlement and judgment entered thereto is affirmed on appeal. AIMCO asserts that such applications are without merit and is opposing such applications." 14 (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $345.45 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (3) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." (4) The first paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "NHP Management Company (which is our affiliate) received fees of approximately $295,000 and $1,365,000 for the years ended December 31, 2002 and 2001, respectively, for 15 construction management services. The construction management service fees are calculated based on a percentage of current additions to investment properties." ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. Item 6(a), (c)(1) - (7) of the Schedule TO is amended and supplemented as follows: (1) The first two paragraphs under "THE LITIGATION SETTLEMENT OFFER -- Section 7. Effects of the Offer" are amended and restated as follows: "Because the general partner of your partnership is our affiliate, we have control over the management of your partnership. In addition, we, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 37,480, or 71.34%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units and control your partnership's general partner, we control the outcome of most voting decisions with respect to your partnership. In general, we will vote the units owned by us in whatever manner we deem to be in our best interests, which may not be in the interest of other limited partners. This could (1) prevent non-tendering limited partners from taking action that they desire but that we oppose and (2) enable us to take action desired by us but opposed by non-tendering limited partners. We are also affiliated with the company that currently manages, and has managed for some time, the property owned by your partnership. In the event that we acquire a substantial number of units pursuant to this offer, removal of the property manager may become more difficult or impossible. If we acquire all of the units that we are seeking in the offer, our interest in your partnership's net earnings ($308,923 for the nine months ended September 30, 2003) and net book value ($(11,521,000) as of September 30, 2003) will increase to 100%. AIMCO-GP owns a 1% interest in AIMCO Properties, L.P. and AIMCO, through its subsidiaries, owns an 89% in AIMCO Properties." (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 7. Effects of the Offer - Effect on the Trading Market; Registration Under Section 12(g) of the Exchange Act" is amended and restated as follows: "The units are registered under Section 12(g) of the Exchange Act, which means, among other things, that your partnership is required to file periodic reports with the SEC and to comply with the SEC's proxy rules. We do not expect or intend that consummation of the offer will cause the units to cease to be registered under Section 12(g) of the Exchange Act. If the units were to be held by fewer than 300 persons, your partnership could apply to de-register the units under the Exchange Act. Your partnership currently has 1,661 unitholders. The lack of filing periodic 16 reports could affect the already limited secondary market which currently exists for units in your partnership and may result in others not tendering for such units. In such a case, you would regularly have access only to the limited information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which information consists primarily of tax information. In particular, you will continue to receive a Schedule K-1 each year as well as audited financial statements with respect to your partnership. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date."" (3) The first, second and third paragraphs of "THE LITIGATION SETTLEMENT OFFER - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints" is amended and restated as follows: "On December 20, 2002, the parties to the above-entitled litigation executed a Stipulation of Settlement of the two actions. That settlement was the result of over one year of negotiations and the involvement of two separate settlement judges. Class counsel and defendants' counsel first met with the Honorable William J. Cahill, Retired California Superior Court Judge, on two separate occasions. Counsel also met on four separate occasions with the Honorable Margaret J. Kemp, California Superior Court Judge, before reaching a settlement in principle. The parties initially met with Judge Cahill on two occasions in the fall of 2000, but were ultimately unsuccessful in reaching a definitive settlement agreement. At the Court's direction, they renewed formal settlement discussions before Judge Kemp. The parties first attended a settlement conference before Judge Kemp in September or October 2002 and then subsequently met with her on October 28, 2002, November 26, 2002 and December 2, 2002. The parties reached final agreement on the material terms of the settlement at the last settlement conference with Judge Kemp on December 2, 2002 and put the terms of that agreement on the record in open court. In each of the conferences described above, counsel from Lieff Cabraser Heimann & Bernstein LLP, Farella Braun & Martel LLP & Berman Devalerio Pease & Tobacco attended on behalf of the named plaintiffs and the putative settlement class; counsel from Skadden, Arps, Slate, Meagher & Flom LLP attended on behalf of AIMCO and its affiliated entities, including your general partner, and Orrick Herrington & Sutcliffe attended on behalf of the remaining defendants. AIMCO Executive Vice President Patrick Foye also attended each of these meetings. Mr. Vincent Gresham of the Law Offices of Vincent Gresham also participated on behalf of plaintiffs and the putative settlement class in those settlement discussions before the Hon. Cahill, Retired. At these meetings, discussions included possible transactions that could provide liquidity to investors and form the basis of a settlement, the use of a settlement fund and the amount of such fund, the timing and distribution of any settlement fund, selection and use of an appraiser and disclosures that would accompany any contemplated transaction(s). The participants considered but ultimately rejected a merger or roll-up of the various partnerships as possible alternatives to cash tender offers. The parties ultimately concluded, however, that a merger or roll-up could be potentially complicated and time consuming and that a cash tender offer would be a less coercive form of providing liquidity to those investors who desired it. The Settlement Agreement requires each tender offer to attach executive summaries of partnership property appraisals commissioned specifically for the settlement tender offers and to provide an explanation of how the appraised values of the properties compare to the per Unit price(s) being offered. It also requires the payment of an allocable portion of the settlement fund for each unit tendered pursuant to the settlement fund, details the scope of the release and covenants not to sue which will bind class members, requires that tender offers be made no more than one year after final approval of the settlement and imposes certain restrictions on the length of time in which the tender offers can remain open, as well as with regard to other disclosures 17 made therein. On April 4, 2003, the Court preliminarily approved the settlement and, on June 13, 2003, entered an order finally approving the settlement and dismissing both the Heller and Nuanes litigation with prejudice. On August 12, 2003, an objector filed an appeal of the court's order approving the settlement and is seeking to reverse or vacate the Court's order and the judgment entered thereto. Although we reserve our right to terminate or amend our offer if final court approval of the settlement is reversed or vacated, we have nevertheless elected to proceed with this offer under the terms of the settlement. On November 24, 2003, the objector appealing the settlement and judgment entered thereto filed an application requesting the Court order AIMCO to withdraw the settlement tender offers, refrain from making further offers pending the appeal and auction any units tendered to third parties. The objector contends that this offer does not conform with the terms of the Settlement. Alternatively, counsel for the objector has requested the Court on behalf of a settlement class member order AIMCO to pay all non-tendering settlement class members their pro rata share of the Settlement Fund whether or not the settlement and judgment entered thereto is vacated on appeal and to notify settlement class members that the releases and covenant not to sue are not binding unless the settlement and judgment entered thereto is affirmed on appeal. AIMCO asserts that such applications are without merit and is opposing such applications." (4) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $345.45 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (5) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." 18 (6) The fourth and fifth paragraphs under "THE LITIGATION SETTLEMENT OFFER - Section 14. Future Plans of the Purchaser" are amended and restated as follows: "We have been advised that the general partner does not currently expect to consider, on behalf of your partnership any of the following transactions: (i) payment of extraordinary distributions; (ii) refinancing, reducing or increasing existing indebtedness of the partnership; (iii) sales of assets, individually or as part of a complete liquidation; and (iv) mergers or other consolidation transactions involving the partnership. Any such merger or consolidation transaction could involve other limited partnerships in which your general partner or its affiliates serve as general partners, or a combination of the partnership with one or more existing, publicly traded entities (including, possibly, affiliates of AIMCO), in any of which limited partners might receive cash, common stock or other securities or consideration. As discussed under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Investment Objectives and Policies; Sale or Financing of Investments," the general partner regularly evaluates the real estate and capital markets. The general partner may consider refinancing the partnership's existing indebtedness to the extent that the general partner is able to obtain a lower interest rate or if such indebtedness is approaching maturity. Furthermore, in the event that the general partner receives an attractive offer for any of your partnership's properties, the general partner would give due consideration to such an offer. If any of the transactions referred to above occur, and financial benefits accrue to the limited partners, we will participate in those benefits to the extent of our ownership of units. The agreement of limited partnership prohibits limited partners from voting on actions taken by the partnership, unless otherwise specifically permitted therein. Limited partners may vote on a liquidation, and we will be able to significantly influence or control the outcome of any such vote. Our primary objective in seeking to acquire the units pursuant to the offer is not, however, to influence the vote on any particular transaction, but rather to generate a profit on the investment represented by those units." ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. Item 7(a), (b) and (d) of the Schedule TO is amended and supplemented as follows: (1) The following sentence is added to the end of the first paragraph under "THE LITIGATION SETTLEMENT OFFER -Section 21. Fees and Expenses": "The partnership will not be responsible for paying any of the fees or expenses incurred by us in connection with this offer." (2) The second paragraph under "THE LITIGATION SETTLEMENT OFFER -- Section 21. Fees and Expenses" is amended and restated as follows: "The following is an itemized statement of the aggregate estimated expenses incurred and to be incurred in this offer by us: Information Agent Fees............... $ 7,500 Legal Fees........................... 6,675 Printing Fees........................ 5,250 Tax and Accounting Fees.............. 1,500 Postage.............................. 500 Appraiser............................ 15,575 Depositary........................... 500 ------------ Total.............................. $ 37,500" =============
19 ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. Item 8 of the Schedule TO is amended and supplemented as follows: The following paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership" is amended and restated as follows: "Ownership and Voting. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 37,480 units, or 71.34%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we have the ability to control most votes of the limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer" and "-- Section 16. Voting Power."" ITEM 11. ADDITIONAL INFORMATION. Item 11(b) of the Schedule TO is amended and supplemented as follows: Section 16 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "16. VOTING POWER Decisions with respect to the day-to-day management of your partnership are the responsibility of the general partner. Because the general partner of your partnership is our affiliate, we control the management of your partnership. Under your partnership's agreement of limited partnership, limited partners holding a majority of the outstanding units must approve certain extraordinary transactions, including the removal of the general partner, most amendments to the partnership agreement and the sale of all or substantially all of your partnership's assets. We, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates) own 37,480 units, or 71.34%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units, we control most voting decisions made by limited partners. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer."" ITEM 12. EXHIBITS. Item 12 of the Schedule TO is amended and supplemented as follows: (c)(1) Appraisal of Foxfire Apartments (c)(2) Appraisal of Lake Johnson Mews (c)(3) Appraisal of Millhopper Village (c)(4) Appraisal of Old Salem Apartments (c)(5) Appraisal of Tar River Estates 20 (c)(6) Appraisal of The Lexington (c)(7) Appraisal of Woodland Village ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3. Item 13 of the Schedule TO is amended and supplemented as follows: (1) The thirteenth paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 6. Certain Federal Income Tax Matters" is amended and restated as follows: "Tax Consequences to Your Partnership of Our Offer. Section 708 of the Code provides that if there is a sale or exchange of 50% or more of the total interest in capital and profits of a partnership within any 12-month period, such partnership terminates for United States federal income tax purposes. It is possible that our acquisition of units pursuant to the offer alone or in combination with other transfers of interests in your partnership could result in such a termination of your partnership. If your partnership is not deemed to terminate for tax purposes, there will be no tax effect to your partnership. If your partnership is deemed to terminate for tax purposes, however, the following federal income tax events will be deemed to occur: the terminated partnership will be deemed to have contributed all of its assets (subject to its liabilities) to a new partnership in exchange for an interest in the new partnership and, immediately thereafter, the old partnership will be deemed to have distributed interests in the new partnership to the remaining limited partners in proportion to their respective interests in the old partnership in liquidation of the old partnership. A termination of your partnership for federal income tax purposes may also subject the assets of your partnership to longer depreciable lives than those currently applicable to the assets of your partnership. This would generally decrease the annual average depreciation deductions following our offer, but would have no effect on the total depreciation deductions available over the useful lives of the assets of your partnership. Additionally, upon a termination of your partnership, the taxable year of your partnership will close for federal income tax purposes. Elections as to tax matters previously made by the old partnership will not be applicable to the new partnership unless the new partnership chooses to make the same elections. Tax Consequences to Non-Tending and Partially-Tendering Limited Partners. As described above, if 50% or more of such interests are sold or exchanged within a 12 month period, including as a result of our acquisition of units, a deemed tax termination of your partnership will occur for tax purposes. If less than 50% of the total interest in capital and profits of your partnership are sold or exchanged within any 12 month period, there will be no tax effect to you from the offer. You will not recognize any gain or loss upon a deemed tax termination of your partnership, and your capital account in your partnership will carry over to the new partnership. A termination of your partnership for federal income tax purposes may change (and possibly shorten) your holding period with respect to interests in your partnership that you choose to retain. Gain recognized by you on the disposition of retained units with a holding period of 12 months or less may be classified as short-term capital gain and subject to taxation at ordinary income tax rates. A deemed tax termination will also decrease the annual depreciation deductions (as a result of the longer partnership depreciation lives described above) allocable to you (thereby possibly increasing the taxable income allocable to your interests in the partnership each year)." 21 (2) The first two paragraphs under "THE LITIGATION SETTLEMENT OFFER -- Section 7. Effects of the Offer" are amended and restated as follows: "Because the general partner of your partnership is our affiliate, we have control over the management of your partnership. In addition, we, together with Cooper River Properties, L.L.C. and AIMCO IPLP, L.P. (which are our affiliates), own 37,480, or 71.34%, of the outstanding units of your partnership. Because we and our affiliates own a majority of the outstanding units and control your partnership's general partner, we control the outcome of most voting decisions with respect to your partnership. In general, we will vote the units owned by us in whatever manner we deem to be in our best interests, which may not be in the interest of other limited partners. This could (1) prevent non-tendering limited partners from taking action that they desire but that we oppose and (2) enable us to take action desired by us but opposed by non-tendering limited partners. We are also affiliated with the company that currently manages, and has managed for some time, the property owned by your partnership. In the event that we acquire a substantial number of units pursuant to this offer, removal of the property manager may become more difficult or impossible. If we acquire all of the units that we are seeking in the offer, our interest in your partnership's net earnings ($308,923 for the nine months ended September 30, 2003) and net book value ($(1,521,000) as of September 30, 2003) will increase to 100%. AIMCO-GP owns a 1% interest in AIMCO Properties, L.P. and AIMCO, through its subsidiaries, owns an 89% in AIMCO Properties." (3) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 7. Effects of the Offer - Effect on the Trading Market; Registration Under Section 12(g) of the Exchange Act" is amended and restated as follows: "The units are registered under Section 12(g) of the Exchange Act, which means, among other things, that your partnership is required to file periodic reports with the SEC and to comply with the SEC's proxy rules. We do not expect or intend that consummation of the offer will cause the units to cease to be registered under Section 12(g) of the Exchange Act. If the units were to be held by fewer than 300 persons, your partnership could apply to de-register the units under the Exchange Act. Your partnership currently has 1,661 unitholders. The lack of filing periodic reports could affect the already limited secondary market which currently exists for units in your partnership and may result in others not tendering for such units. In such a case, you would regularly have access only to the limited information your partnership's agreement of limited partnership requires your general partner (which is our affiliate) to provide each year, which information consists primarily of tax information. In particular, you will continue to receive a Schedule K-1 each year as well as audited financial statements with respect to your partnership. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date."" (4) The following subsection under "THE LITIGATION SETTLEMENT OFFER - Section 8. Valuation of Units" is amended and restated as follows: 22 ESTIMATED LIQUIDATION PROCEEDS BASED ON INDEPENDENT APPRAISAL SELECTION AND QUALIFICATIONS OF INDEPENDENT APPRAISER. Under the terms of the settlement, your partnership's property was appraised by American Appraisal Associates, Inc. ("AAA"), an independent appraiser appointed by the court. The information set forth below was provided to us by AAA with respect to its appraisals. AAA is an experienced independent valuation consulting firm with more than 50 offices on four continents. AAA provides valuation and consulting services for the real estate industry through its specialized industry focus and operates through a team of professionals with different economical, financial, statistical, legal, architectural, urban and engineering knowledge and expertise. FACTORS CONSIDERED. AAA performed complete appraisals of all of your partnership's properties. AAA has represented that its report was prepared in conformity with the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. We furnished the appraiser with all of the necessary information requested by AAA in connection with the appraisal. The information furnished to the appraiser was true, correct and complete in all material respects. No limitations were imposed on AAA by us or any of our affiliates. In preparing its valuation of your partnership property, AAA: o inspected and analyzed the exterior of all buildings and site improvements and a representative sample of units; o conducted neighborhood and area research, including major employers, demographics (population trends, number of households, and income trends), housing trends, surrounding uses, and general economic outlook of the area; o conducted market research of rental inventory, historical vacancy rates, historical average rental rates, occupancy trends, concessions, and marketing strategies in the submarket, and occupancy rates at competing properties; o reviewed leasing policy, concessions and history of recent occupancy; o reviewed the historical operating statements for your partnership's property and an operating budget forecast for 2003; o prepared an estimate of stabilized income and expense (for capitalization purposes); o conducted market inquiries into recent sales of similar properties to ascertain sales price per unit, effective gross income multipliers and capitalization rates; and o prepared sales comparison and income capitalization approaches to value. AAA was provided by us with the following management budgets for your partnership's property:
FOXFIRE LAKE JOHNSON MEWS MILLHOPPER VILLAGE OLD SALEM FISCAL YEAR 2003 FISCAL YEAR 2003 FISCAL YEAR 2003 FISCAL YEAR 2003 MANAGEMENT BUDGET MANAGEMENT BUDGET MANAGEMENT BUDGET MANAGEMENT BUDGET DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ---------- -------- ---------- -------- ---------- -------- ---------- -------- Revenues Rental Income $2,280,000 $ 8,571 $1,704,536 $ 8,480 $1,183,588 $ 8,703 $3,056,103 $ 8,396 Vacancy 338,000 1,271 111,305 554 47,344 348 113,042 311 CreditLoss/Concessions 63,300 238 32,100 160 60,536 445 27,948 77 Subtotal $ 401,300 $ 1,509 $ 143,405 $ 713 $ 107,880 $ 793 $ 140,990 $ 387 Laundry Income $ 0 $ 0 $ 9,312 $ 46 $ 0 $ 0 $ 28,476 $ 78 Garage Revenue 0 0 0 0 0 0 0 0 Other Misc. Revenue 141,300 531 48,850 243 122,400 900 357,157 981 Subtotal Other $ 141,300 $ 531 $ 58,162 $ 289 $ 122,400 $ 900 $ 385,633 $ 1,059 Income Effective Gross Income $2,020,000 $ 7,594 $1,619,293 $ 8,056 $1,198,108 $ 8,810 $3,300,746 $ 9,068 Operating Expenses Taxes $ 131,316 $ 494 $ 94,775 $ 472 $ 95,354 $ 701 $ 120,099 $ 330 Insurance 54,439 205 38,944 194 45,345 333 65,378 180 Utilities 176,000 662 63,600 316 36,553 269 296,921 816 Repair & Maintenance 172,960 650 86,400 430 101,039 743 32,328 89 Cleaning 69,500 261 0 0 0 0 90,609 249 Landscaping 0 0 39,444 196 0 0 77,784 214 Security 0 0 0 0 0 0 0 0 Marketing & Leasing 43,500 164 34,608 172 39,300 289 12,864 35 General Administrative 220,892 830 154,012 766 178,830 1,315 36,588 101 Management 103,500 389 86,400 430 60,632 446 166,145 456 Miscellaneous 0 0 0 0 0 0 237,064 651 Total Operating Expenses $ 972,107 $ 3,655 $ 598,183 $ 2,976 $ 557,053 $ 4,096 $1,135,780 $ 3,120 Reserves 0 0 0 0 0 0 0 0 Net Income $1,047,893 $ 3,939 $1,021,110 $ 5,080 $ 641,055 $ 4,714 $2,164,966 $ 5,948
23
TAR RIVER ESTATES THE LEXINGTON WOODLAND VILLAGE FISCAL YEAR 2003 FISCAL YEAR 2003 FISCAL YEAR 2003 MANAGEMENT BUDGET MANAGEMENT BUDGET MANAGEMENT BUDGET DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ---------- -------- ---------- -------- ---------- -------- Revenues Rental Income $1,630,608 $ 7,412 $2,298,000 $ 8,607 $2,452,283 $ 7,962 Vacancy 164,825 749 74,775 280 191,000 620 Credit Loss/Concessions 49,000 223 52,800 198 54,200 176 Subtotal $ 213,825 $ 972 $ 127,575 $ 478 $ 245,200 $ 796 Laundry Income $ 2,280 $ 10 $ 28,000 $ 105 $ 0 $ 0 Garage Revenue 0 0 0 0 0 0 Other Misc. Revenue 42,471 193 254,400 953 144,900 470 Subtotal Other $ 44,751 $ 203 $ 282,400 $ 1,058 $ 144,900 $ 470 Income Effective Gross Income $1,461,534 $ 6,643 $2,452,825 $ 9,187 $2,351,983 $ 7,636 Operating Expenses Taxes $ 84,619 $ 385 $ 277,285 $ 1,039 $ 202,760 $ 658 Insurance 40,169 183 87,895 329 68,870 224 Utilities 91,224 415 182,400 683 180,000 584 Repair & Maintenance 132,144 601 247,200 926 198,500 644 Cleaning 0 0 0 0 0 0 Landscaping 74,400 338 0 0 0 0 Security 0 0 0 0 0 0 Marketing & Leasing 17,196 78 30,000 112 19,500 63 General Administrative 247,968 1,127 220,464 826 235,470 765 Management 78,100 355 123,661 463 116,693 379 Miscellaneous 0 0 0 0 0 0 Total Operating Expenses $ 765,820 $ 3,481 $1,168,905 $ 4,378 $1,021,793 $ 3,318 Reserves 0 0 0 0 0 0 Net Income $ 695,714 $ 3,162 $1,283,920 $ 4,809 $1,330,190 $ 4,319
THE ABOVE MANAGEMENT BUDGETS ARE INTERNALLY PREPARED OPERATING PROJECTIONS FOR THE PARTNERSHIP'S PROPERTIES. A MANAGEMENT BUDGET DOES NOT REFLECT A PROPERTY'S ACTUAL PERFORMANCE, OR CHANGES IN THE CONDITION OF A PROPERTY, IN THE LOCAL AREA SURROUNDING A PROPERTY OR IN THE ECONOMY IN GENERAL. SUMMARY OF APPROACHES AND METHODOLOGIES EMPLOYED. The following summary describes the material approaches and analyses employed by AAA in preparing the appraisals. The partnership imposed no conditions or limitations on the scope of AAA's investigation or the methods and procedures to be followed in preparing the appraisal. AAA principally relied on two approaches to valuation: (1) the sales comparison approach and (2) the income capitalization approach. The sales comparison approach uses analysis techniques and sales of comparable improved properties in surrounding or competing areas to derive units of comparison that are then used to indicate a value for the subject 24 property. Under this approach, the primary methods of analysis used by the appraiser were: (1) sales price per unit analysis; (2) net operating income analysis; and (3) effective gross income analysis. The purpose of the income capitalization approach is to value an income-producing property by analyzing likely future income and expenses of the property over a reasonable holding period. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive property value. The direct capitalization analysis determines the value of a property by applying a capitalization rate that takes into account all of the factors influencing the value of such property to the net operating income of such property for a single year. The direct capitalization method is normally more appropriate for properties with relatively stable operating histories and expectations. The discounted cash flow analysis determines the value of a property by discounting to present value the estimated operating cash flow of such property and the estimated proceeds of a hypothetical sale of such property at the end of an assumed holding period. The discounted cash flow method is 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. AAA relied principally on the income capitalization approach to valuation and secondarily on the sales comparison approach. Although the sales comparison approach is considered a reliable method for valuing property, the income capitalization approach is the primary approach used for valuing income producing property, such as your partnership's property. Summary of independent appraisals of your partnership's property. AAA performed complete appraisals of all of your partnership's properties. The summary set forth below describes the material conclusions reached by AAA based on the values determined under the valuation approaches and subject to the assumptions and limitations described below. The estimated total "as is" market value of the fee simple estate of your partnership's property is $79,100,000, which was determined by adding the estimated values determined by AAA for each of your partnership's properties and which is higher than our estimated total gross valuation of $58,312,270. FOXFIRE APARTMENTS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Foxfire Apartments that were sold between August 2000 and July 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of three comparable properties as superior and two comparable properties as comparable to the location of Foxfire Apartments. AAA rated the quality/appeal of one comparable property as superior and four comparable properties as comparable to the quality/appeal of Foxfire Apartments. AAA rated the amenities of four comparable properties as superior and one comparable properties as comparable to the amenities of Foxfire Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Foxfire Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $34,937 to $41,158 per unit with a mean or average adjusted price of $38,336 per unit and a median adjusted price of $39,877 per unit. Thus, the estimated value based on a $40,000 sales price per unit for the 266 units was approximately $10,200,000 after adjustment for lease-up costs and present value of concessions. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Foxfire Apartments' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $28,015 and $48,028 per unit, with an average of $35,788 per unit. The appraiser concluded a value of $40,000 per unit for the 266 units of the property, resulting in an estimated "as is" market value of $10,200,000 using the NOI analysis after adjustment for lease-up costs and present value of concessions. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Foxfire Apartments to be 45.54% before reserves, with the expense ratios of the five comparable 25 properties ranging from 33.08% to 43.51%, resulting in EGIMs ranging from 4.23 to 6.38. Thus, AAA concluded an EGIM of 4.75 for Foxfire Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $10,100,000 after adjustment for lease-up costs and present value of concessions. AAA estimated the value using the price per unit analysis at $10,200,000, the value using the NOI analysis at $10,200,000 and the value using the EGIM analysis at $10,100,000. Based on these three valuation methods, AAA concluded that the reconciled value for Foxfire Apartments under the sales comparison approach was $10,200,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Foxfire Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Foxfire Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $2,198,116. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Foxfire Apartments of approximately $1,130,611. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Foxfire Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 14%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 10.50%; (4) terminal capitalization rate of 11.50%; (5) discount rate of 12.00%; (6) 3.00% cost of sale at reversion; and (7) holding period of 10 years. An adjustment was made for lease-up costs because Foxfire Apartments' occupancy level was below a stabilized occupancy projection Thus, AAA assumed a 12-month lease up period. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $152,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $10,400,000 through the discounted cash flow method. The reversion value contributed approximately 36% of the value. Under the direct capitalization method, utilizing a capitalization rate of 10.50%, the projected NOI resulted in a value (after rounding) of $10,400,000 after adjustments for lease-up costs and present value of concessions. 26 Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Foxfire Apartments was $10,400,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $10,200,000 and the estimated market value under the income capitalization approach was $10,400,000. After reconciling the various factors, AAA determined a final "as is" market value for Foxfire Apartments of $10,300,000 as of May 9, 2003. LAKE JOHNSON MEWS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Lake Johnson Mews that were sold between August 2000 and November 2001 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of one comparable property as superior, two comparable properties as comparable and two comparable properties as inferior to the location of Lake Johnson Mews. AAA rated the quality/appeal of three comparable properties as superior and two comparable properties as comparable to the quality/appeal of Lake Johnson Mews. AAA rated the amenities of four comparable properties as superior and one comparable property as comparable to the amenities of Lake Johnson Mews. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Lake Johnson Mews in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $43,050 to $47,969 per unit with a mean or average adjusted price of $45,977 per unit and a median adjusted price of $45,938 per unit. Thus, the estimated value based on a $46,000 sales price per unit for the 201 units was approximately $9,200,000 after adjustment for present value of concessions. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Lake Johnson Mews' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $43,355 and $53,018 per unit, with an average of $48,615 per unit. The appraiser concluded a value of $48,000 per unit for the 201 units of the property, resulting in an estimated "as is" market value of $9,600,000 using the NOI analysis after adjustment for present value of concessions. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Lake Johnson Mews to be 41.18% before reserves, with the expense ratios of the five comparable properties ranging from 38.90% to 40.00%, resulting in EGIMs ranging from 5.64 to 6.90. Thus, AAA concluded an EGIM of 5.75 for Lake Johnson Mews, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $9,500,000 after adjustment for present value of concessions. AAA estimated the value using the price per unit analysis at $9,200,000, the value using the NOI analysis at $9,600,000 and the value using the EGIM analysis at $9,500,000. Based on these three valuation methods, AAA concluded that the reconciled value for Lake Johnson Mews under the sales comparison approach was $9,200,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Lake Johnson Mews. 27 AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Lake Johnson Mews' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $1,661,028. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Lake Johnson Mews of approximately $926,736. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Lake Johnson Mews under the income approach included: (1) stabilized vacancy and collection loss rate of 9%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.00%; (5) discount rate of 11.50%; (6) 3.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $66,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $9,500,000 through the discounted cash flow method. The reversion value contributed approximately 39% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.50%, the projected NOI resulted in a value (after rounding) of $9,700,000 after adjustments for present value of concessions. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Lake Johnson Mews was $9,500,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $9,200,000 and the estimated market value under the income capitalization approach was $9,500,000. After reconciling the various factors, AAA determined a final "as is" market value for Lake Johnson Mews of $9,500,000 as of May 12, 2003. 28 MILLHOPPER VILLAGE Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Millhopper Village that were sold between August 2001 and January 2003 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of four comparable properties as comparable and one comparable property as inferior to the location of Millhopper Village. AAA rated the quality/appeal of two comparable properties as superior, one comparable property as comparable and two comparable properties as inferior to the quality/appeal of Millhopper Village. AAA rated the amenities of one comparable property as superior, two comparable properties as comparable and two comparable properties as inferior to the amenities of Millhopper Village. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Millhopper Village in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $44,242 to $49,375 per unit with a mean or average adjusted price of $46,774 per unit and a median adjusted price of $46,622 per unit. Thus, the estimated value based on a $47,000 sales price per unit for the 136 units was approximately $6,400,000. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Millhopper Village's NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $43,765 and $49,778 per unit, with an average of $46,239 per unit. The appraiser concluded a value of $46,000 per unit for the 136 units of the property, resulting in an estimated "as is" market value of $6,300,000 using the NOI analysis. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Millhopper Village to be 46.69% before reserves, with the expense ratios of the five comparable properties ranging from 33.57% to 47.99%, resulting in EGIMs ranging from 5.27 to 7.19. Thus, AAA concluded an EGIM of 5.50 for Millhopper Village, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $6,400,000. AAA estimated the value using the price per unit analysis at $6,400,000, the value using the NOI analysis at $6,300,000 and the value using the EGIM analysis at $6,400,000. Based on these three valuation methods, AAA concluded that the reconciled value for Millhopper Village under the sales comparison approach was $6,400,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Millhopper Village. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Millhopper Village's effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $1,166,124. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Millhopper Village of approximately $587,618. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. 29 The assumptions employed by AAA to determine the value of Millhopper Village under the income approach included: (1) stabilized vacancy and collection loss rate of 10%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 10.00%; (4) terminal capitalization rate of 11.00%; (5) discount rate of 12.50%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $6,000,000 through the discounted cash flow method. The reversion value contributed approximately 36% of the value. Under the direct capitalization method, utilizing a capitalization rate of 10.00%, the projected NOI resulted in a value (after rounding) of $5,900,000 after adjustments. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Millhopper Village was $6,000,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $6,400,000 and the estimated market value under the income capitalization approach was $6,000,000. After reconciling the various factors, AAA determined a final "as is" market value for Millhopper Village of $6,100,000 as of May 27, 2003. OLD SALEM APARTMENTS Valuation Under Sales Comparison Approach. AAA compared four apartment complexes with Old Salem Apartments that were sold between July 2000 and October 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of all four comparable properties as inferior to the location of Old Salem Apartments. AAA rated the quality/appeal of one comparable property as superior and three comparable properties as inferior to the quality/appeal of Old Salem Apartments. AAA rated the amenities of two comparable properties as comparable and two comparable properties as inferior to the amenities of Old Salem Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Old Salem Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $41,014 to $56,650 per unit with a mean or average adjusted price of $48,918 per unit and a median adjusted price of $49,005 per unit. Thus, the estimated value based on a $50,000 sales price per unit for the 364 units was approximately $18,200,000 after adjustment for present value of concessions. 30 As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Old Salem Apartments' NOI to the NOI of the four comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $53,342 and $61,169 per unit, with an average of $57,605 per unit. The appraiser concluded a value of $54,000 per unit for the 364 units of the property, resulting in an estimated "as is" market value of $19,600,000 using the NOI analysis after adjustment for present value of concessions. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Old Salem Apartments to be 38.15% before reserves, with the expense ratios of the four comparable properties ranging from 39.80% to 53.86%, resulting in EGIMs ranging from 5.27 to 6.38. Thus, AAA concluded an EGIM of 6.00 for Old Salem Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $18,900,000 after adjustment for present value of concessions. AAA estimated the value using the price per unit analysis at $18,200,000, the value using the NOI analysis at $19,600,000 and the value using the EGIM analysis at $18,900,000. Based on these three valuation methods, AAA concluded that the reconciled value for Old Salem Apartments under the sales comparison approach was $19,000,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Old Salem Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Old Salem Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $3,156,465. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Old Salem Apartments of approximately $1,879,342. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Old Salem Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 7%; (2) replacement reserve of $200 per unit; (3) overall capitalization rate of 9.75%; (4) terminal capitalization rate of 10.25%; (5) discount rate of 12.50%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. 31 No adjustment was made for lease-up costs because the property was near or at a stabilized condition. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $26,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $19,700,000 through the discounted cash flow method. The reversion value contributed approximately 38% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.75%, the projected NOI resulted in a value (after rounding) of $19,200,000 after adjustments for present value of concessions, if any. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Old Salem Apartments was $19,500,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $19,000,000 and the estimated market value under the income capitalization approach was $19,500,000. After reconciling the various factors, AAA determined a final "as is" market value for Old Salem Apartments of $19,500,000 as of May 8, 2003. TAR RIVER ESTATES Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Tar River Estates that were sold between January 1997 and March 2003 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of one comparable property as comparable and four comparable properties as inferior to the location of Tar River Estates. AAA rated the quality/appeal of one comparable property as superior, one comparable property as comparable and three comparable properties as inferior to the quality/appeal of Tar River Estates. AAA rated the amenities of two comparable properties as comparable and three comparable properties as inferior to the amenities of Tar River Estates. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Tar River Estates in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $26,250 to $32,047 per unit with a mean or average adjusted price of $28,702 per unit and a median adjusted price of $28,292 per unit. Thus, the estimated value based on a $29,000 sales price per unit for the 220 units was approximately $6,400,000. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Tar River Estates' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $29,872 and $32,799 per unit, with an average of $31,478 per unit. The appraiser concluded a value of $31,000 per unit for the 220 units of the property, resulting in an estimated "as is" market value of $6,800,000 using the NOI analysis. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense ratio ("OER") of Tar River Estates to be 50.98% before reserves, with the expense ratios of the five comparable properties ranging from 30.00% to 50.00%, resulting in EGIMs ranging from 4.94 to 7.35. Thus, AAA concluded an EGIM of 4.75 for Tar River Estates, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $7,000,000. 32 AAA estimated the value using the price per unit analysis at $6,400,000, the value using the NOI analysis at $6,800,000 and the value using the EGIM analysis at $7,000,000. Based on these three valuation methods, AAA concluded that the reconciled value for Tar River Estates under the sales comparison approach was $6,600,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Tar River Estates. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Tar River Estates' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $1,469,304. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Tar River Estates of approximately $665,219. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Tar River Estates under the income approach included: (1) stabilized vacancy and collection loss rate of 13.00%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 10.00%; (4) terminal capitalization rate of 10.50%; (5) discount rate of 12.00%; (6) 3.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $6,400,000 through the discounted cash flow method. The reversion value contributed approximately 37% of the value. Under the direct capitalization method, utilizing a capitalization rate of 10.00%, the projected NOI resulted in a value (after rounding) of $6,700,000. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Tar River Estates was $6,400,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison 33 approach was $6,600,000 and the estimated market value under the income capitalization approach was $6,400,000. After reconciling the various factors, AAA determined a final "as is" market value for Tar River Estates of $6,400,000 as of May 14, 2003. THE LEXINGTON Valuation Under Sales Comparison Approach. AAA compared three apartment complexes with The Lexington that were sold between July 2000 and August 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of one comparable property as superior and two comparable properties as comparable to the location of The Lexington. AAA rated the quality/appeal of three comparable properties as comparable to the quality/appeal of The Lexington. AAA rated the amenities of three comparable properties as comparable to the amenities of The Lexington. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from The Lexington in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $37,994 to $44,971 per unit with a mean or average adjusted price of $40,925 per unit and a median adjusted price of $39,808 per unit. Thus, the estimated value based on a $40,000 sales price per unit for the 267 units was approximately $10,700,000. AAA did not conduct a net operating income ("NOI") comparison anaylsis due to lack of financial data. AAA did not conduct an effective gross income multiplier ("EGIM") analysis due to lack of finanical data. AAA estimated the value using the price per unit analysis at $10,700,000 and concluded that the value for The Lexington under the sales comparison approach was $10,700,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for The Lexington. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated The Lexington's effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $2,359,675. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for The Lexington of approximately $1,060,216. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of The Lexington under the income approach included: (1) stabilized vacancy and collection loss rate of 8%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.00%; 34 (5) discount rate of 12.00%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $11,600,000 through the discounted cash flow method. The reversion value contributed approximately 39% of the value. Under the direct capitalization method, utilizing a capitalization rate of 9.50%, the projected NOI resulted in a value (after rounding) of $11,200,000. Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for The Lexington was $11,400,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $10,700,000 and the estimated market value under the income capitalization approach was $11,400,000. After reconciling the various factors, AAA determined a final "as is" market value for The Lexington of $11,400,000 as of May 19, 2003. WOODLAND VILLAGE APARTMENTS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Woodland Village Apartments that were sold between April 2000 and January 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of one comparable property as comparable and four comparable properties as inferior to the location of Woodland Village Apartments. AAA rated the quality/appeal of one comparable property as superior and four comparable properties as inferior to the quality/appeal of Woodland Village Apartments. AAA rated the amenities of one comparable property as superior, one comparable property as comparable and three comparable properties as inferior to the amenities of Woodland Village Apartments. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Woodland Village Apartments in location, number of units, quality/appeal, age/condition, occupancy at sale, amenities and average unit size. Based on the available data, AAA concluded a value range of $45,000 to $54,545 per unit with a mean or average adjusted price of $50,567 per unit and a median adjusted price of $50,937 per unit. Thus, the estimated value based on a $50,000 sales price per unit for the 308 units was approximately $15,400,000. As part of the sales comparison approach, AAA also conducted a net operating income ("NOI") analysis. NOI effectively takes into account the various physical, location and operating aspects of the sale. AAA compared Woodland Village Apartments' NOI to the NOI of the five comparable properties and arrived at a percentage adjustment. After applying the percentage adjustment to the sales price per unit of each comparable property, the range of value was between $44,764 and $54,389 per unit, with an average of $48,980 per unit. The appraiser concluded a value of $52,000 per unit for the 308 units of the property, resulting in an estimated "as is" market value of $16,000,000 using the NOI analysis. AAA also performed an effective gross income multiplier ("EGIM") analysis. The EGIM measures the relationship between the sales price of a property and its effective gross income, which is the total annual income that a property would produce after an allowance for vacancy and credit loss. AAA estimated the operating expense 35 ratio ("OER") of Woodland Village Apartments to be 43.28% before reserves, with the expense ratios of the five comparable properties ranging from 40.84% to 52.27%, resulting in EGIMs ranging from 4.91 to 6.68. Thus, AAA concluded an EGIM of 6.00 for Woodland Village Apartments, and applied the EGIM to the stabilized effective gross income for the property (see Income Approach section below), resulting in a value conclusion of approximately $15,100,000. AAA estimated the value using the price per unit analysis at $15,400,000, the value using the NOI analysis at $16,000,000 and the value using the EGIM analysis at $15,100,000. Based on these three valuation methods, AAA concluded that the reconciled value for Woodland Village Apartments under the sales comparison approach was $15,500,000. AAA assumed a marketing and exposure period of 6 to 12 months. Valuation Under Income Capitalization Approach. Under the income capitalization approach, AAA performed: (1) a direct capitalization analysis and (2) a discounted cash flow analysis to derive a value for Woodland Village Apartments. AAA first utilized a discounted cash flow method to analyze the value of the property. Under this method, anticipated future cash flow and a reversionary value are discounted at an appropriate rate of return to arrive at an estimate of present value. AAA also employed a direct capitalization analysis on the property by dividing a forecast of net operating income ("NOI") by an appropriate capitalization rate. AAA performed a market rent analysis for the property to derive a projected rental income. The analysis included both a review of the subject's current asking and actual rent rates as well as a comparison with comparable apartment properties. AAA calculated Woodland Village Apartments' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection loss. Under this analysis, AAA arrived at an EGI of $2,522,224. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Woodland Village Apartments of approximately $1,353,533. AAA performed a pro forma analysis of revenue and expenses for the property to derive the subject's stabilized NOI. AAA relied on the subject's historical and budgeted income and expenses for this estimate. AAA derived appropriate investment criteria, including an overall capitalization rate, terminal capitalization rate and a discount rate based upon analysis of comparable sales and a survey of real estate investors. The assumptions employed by AAA to determine the value of Woodland Village Apartments under the income approach included: (1) stabilized vacancy and collection loss rate of 10%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 8.50%; (4) terminal capitalization rate of 10.00%; (5) discount rate of 11.00%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. No adjustment was made for lease-up costs because the property was near or at a stabilized condition. No adjustment was made for concessions. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $15,800,000 through the discounted cash flow method. The reversion value contributed approximately 40% of the value. Under the direct capitalization method, utilizing a capitalization rate of 8.50%, the projected NOI resulted in a value (after rounding) of $15,900,000. 36 Using the income capitalization approach, AAA determined on an as-is basis that the direct capitalization method and the discounted cash flow method indicated the value for Woodland Village Apartments was $15,900,000. Reconciliation of Values and Conclusions of Appraisal. The final step in the appraisal process was to reconcile the sales comparison approach and the income capitalization approach values to arrive at a final value conclusion. The reconciliation of the two approaches involved weighing the valuation techniques in relation to their substantiation by market and other sources of data, the relativity and applicability of the approaches to the property type, and the purpose of the valuation. AAA concluded that the estimated market value under the sales comparison approach was $15,500,000 and the estimated market value under the income capitalization approach was $15,900,000. After reconciling the various factors, AAA determined a final "as is" market value for Woodland Village Apartments of $15,900,000 as of May 27, 2003. ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF AAA'S VALUATION. In preparing the appraisal, AAA relied, without independent verification, on the accuracy and completeness of all information supplied or otherwise made available to it by or on behalf of the partnership. In arriving at the appraisal, AAA assumed: o good and marketable title to the property; o validity of owner's claim to the property; o no encumbrances which could not be cleared through normal processes, unless otherwise stated; o accuracy of land areas and descriptions obtained from public records; o no subsurface mineral and use rights or conditions; o no substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials in existence or present on or in the property; o full compliance with applicable federal, state and local environmental regulations and laws, unless otherwise stated, defined and considered; o possession of all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization and that the renewal of these items is possible; o compliance with all applicable zoning and use regulations and restrictions, unless a nonconformity has been stated, defined, and considered; o utilization of the land and improvements within property boundaries and no encroachment or trespass of the improvements, unless otherwise stated; o 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 not readily apparent during inspection; and o compliance with the Americans with Disabilities Act of 1992. COMPENSATION OF APPRAISER. AAA was appointed by the court to perform all the real estate appraisals in connection with the settlement and this Litigation Settlement Offer. AAA was paid a fee of $619,100 for the appraisals. We have agreed to pay 50% of the costs of the appraisals, with the other 50% to be paid from the settlement fund. AAA has conducted other appraisals of property in connection with the other offers being made pursuant to the settlement agreement. Other than the appraisals performed in connection with the settlement agreement, during the prior two years, no material relationship has existed between AAA and your partnership or any of its affiliates, including the AIMCO Entities. AVAILABILITY OF APPRAISAL REPORTS. You may obtain a full copy of AAA's appraisals upon request, without charge, by contacting the Information Agent at one of the addresses or the telephone number on the back cover of this Litigation Settlement Offer. Copies of the appraisal for the property are also available for inspection and copying at the principal executive offices of the partnership during regular business hours by any interested unitholder or his or her designated representative at his or her cost. In addition, a copy of the appraisals has been filed with the SEC as an exhibit to the Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO. 37 In estimating the net liquidation proceeds that would be payable per unit based on the total appraised value of your partnership's properties, we applied the same basic methodology as described under "Valuation of Units", except that we did not deduct any amounts that were reflected in the total appraised value nor did we include any payment from the settlement fund. As indicated below, based on the total appraised value of the partnership properties, the estimated net liquidation proceeds per unit is $345.45, which is higher than our offer price of $235.52. Appraised value of partnership properties................... $ 79,100,000 Plus: Cash and cash equivalents (net of tenant security deposits)................................................. 711,444 Plus: Other partnership assets, including any amounts payable by the general partner and its affiliates upon liquidation............................................... 478,063 Less: Mortgage debt, including accrued interest and any prepayment penalty........................................ (59,772,119) Less: Accounts payable and accrued expenses................. (229,846) Less: Other liabilities..................................... (833,496) Less: Distributions to general partners and special limited partners.................................................. (453) ------------ Partnership valuation before taxes and certain costs........ $ 19,453,593 Less: Estimated closing costs............................... (1,304,180) ------------ Estimated net liquidation proceeds of your partnership...... $ 18,149,413 Percentage of estimated net liquidation proceeds allocable to holders of units based on the partnership agreement.... 100% ------------ Estimated net liquidation proceeds of units................. $ 18,149,413 Total number of units..................................... 52,538.00 ------------ Estimated net liquidation proceeds per unit................. $ 345.45 ============
(5) The second paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner -- Liquidation" is amended and restated as follows: "If your partnership was liquidated, and the properties sold at prices equal to the values recently determined by the independent appraiser (see Annex II), we estimate that your net liquidation proceeds would be $345.45 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, in the opinion of your general partner, which is our affiliate, the present time may not be the most desirable time to sell the real estate assets of your partnership in a private transaction, and the proceeds realized from any such sale would be uncertain. Your general partner believes it currently is in the best interest of your partnership to continue holding its real estate assets. Although future operating results and sales prices are uncertain, your general partner believes that the operating performance of your partnership's property may improve in the future. This improvement, should it occur, may result in higher property values. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. However, because your general partner and property manager (which are our affiliates) receive fees for managing your partnership and its property, a conflict of 38 interest exists between continuing the partnership and receiving such fees, on the one hand, and the liquidation of the partnership and the termination of such fees, on the other. See "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership -- Investment Objectives and Policies; Sale or Financing of Investments" and "--Section 13. Conflicts of Interest and Transactions with Affiliates." The term of the partnership will continue until December 31, 2023, unless the partnership is terminated sooner under the provisions of the partnership agreement." (6) The paragraph under "THE LITIGATION SETTLEMENT OFFER - Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" is amended and restated as follows: "Alternative Transactions Considered by Us. At the present time, we have decided to proceed with this offer pursuant to the court approved settlement. From time to time in the past, we have considered proposing a number of alternative transactions, including the purchase of your partnership's property or a merger of your partnership in which you would receive cash in exchange for your units. We decided not to pursue these alternative transactions because, in each case, we determined that a tender offer would be a less expensive means of acquiring additional interests in your partnership, and would not require the consent or approval of any limited partners (other than those who elect to tender their units). In the future, however, we may consider purchasing your partnership's property or effecting such a merger. See "The Litigation Settlement Offer -- Section 14. Future Plans of the Purchaser." We also considered an offer to exchange units in your partnership for limited partnership interests in AIMCO Properties, L.P. However, because of the expense and delay associated with making such an exchange offer, we decided to make an offer for cash only. In addition, our historical experience has been that when we have offered limited partners an opportunity to receive cash or limited partnership interests in AIMCO Properties, L.P., the limited partners who tender usually prefer the cash option." (7) Section 12 under "THE LITIGATION SETTLEMENT OFFER" is amended and restated as follows: "12. POSITION OF THE GENERAL PARTNER OF YOUR PARTNERSHIP WITH RESPECT TO THE OFFER The partnership and the general partner of your partnership (which is our affiliate) have provided the following information for inclusion in this Litigation Settlement Offer: Factors in Favor of Fairness Determination. The general partner of your partnership believes the offer price and the structure of the transaction are fair to the unaffiliated limited partners. In support of such determination, the general partner considered the factors and information set forth below, but did not quantify or otherwise attach particular weight to any such factors or information: o the Court's approval of the settlement pursuant to which the offer is being made; o the fact that the interests of the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement; o the method we used to determine our offer price is a method commonly relied upon by investors to value income producing property; o the offer gives limited partners an opportunity to make an individual decision on whether to tender their units or to continue to hold them; 39 o there is no established trading market for the limited partnership units, and the offer would provide immediate liquidity for tendering limited partners; o the uncertainty of the resulting proceeds from the possible alternative transactions, particularly a property sale or a liquidation of the partnership, o the fact that no unaffiliated limited partners would be able to participate in the future performance of the partnership following such alternative transactions; o the offer price exceeds the book value per unit of $(219.29) at September 30, 2003; o the fact that our offer price does not reflect any discount for minority interests; and o the absence of any other firm offers by third parties for all or substantially all of the partnership's assets, a merger or other extraordinary transaction during the past two years with which to compare the Litigation Settlement Offer. Factors Not in Favor of Fairness Determination. In addition to the foregoing factors, the general partner considered the following countervailing factors: o the recent valuation of your partnership's property by American Appraisal Associates, Inc., an independent appraiser appointed by the Court, which results in an estimate of net liquidation proceeds per unit of $345.45, which is higher than our offer price of $235.52; o the fact that offer prices in our prior tender offers were higher than our current offer price; and o prices at which the units have recently sold were higher than our current offer price. The general partner believes that consideration of the offer was procedurally fair because, among other things, (1) the Court approved the settlement agreement pursuant to which the offer is being made, (2) limited partners are provided the opportunity to retain their units, (3) the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement, and (4) limited partners can evaluate our offer price by comparing it to the net liquidation proceeds per unit derived from the independent appraiser's property valuation. While the general partner believes our offer is fair, the general partner also believes that you must make your own decision whether or not to participate in any offer, based upon a number of factors, including several factors that may be personal to you, such as your financial position, your need or desire for liquidity, your preferences regarding the timing of when you might wish to sell your units, other financial opportunities available to you, and your tax position and the tax consequences to you of selling your units. Consequently, the general partner makes no recommendation as to whether or not you should tender or refrain from tendering your units in this offer. YOU ARE ENCOURAGED TO CAREFULLY REVIEW THIS LITIGATION SETTLEMENT OFFER, THE EXECUTIVE SUMMARY OF THE INDEPENDENT APPRAISER'S REPORT (ATTACHED AS ANNEX II) AND ANY OTHER INFORMATION AVAILABLE TO YOU AND TO SEEK ADVICE FROM YOUR INDEPENDENT LAWYER, TAX ADVISOR AND/OR FINANCIAL ADVISOR BEFORE DECIDING WHETHER OR NOT TO ACCEPT THIS LITIGATION SETTLEMENT OFFER. Neither the general partner of your partnership or its affiliates have any plans or arrangements to tender any units. Except as otherwise provided in "The Litigation Settlement Offer -- Section 14. 40 Future Plans of the Purchaser," the general partner does not have any present plans or proposals which relate to or would result in an extraordinary transaction, such as a merger, reorganization or liquidation, involving your partnership; a purchase or sale or transfer of a material amount of your partnership's assets; or any changes in your partnership's present capitalization, indebtedness or distribution policies. For information relating to certain relationships between your partnership and its general partner, on one hand, and AIMCO and its affiliates, on the other, and conflicts of interests with respect to the tender offer, see "The Litigation Settlement Offer -- Section 11. Background and Reasons for the Offer" and "-- Section 13. Conflicts of Interest and Transactions with Affiliates." See also "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Comparison to Alternative Consideration" for certain information regarding transactions with respect to units of your partnership. Your partnership did not receive any report, opinion or appraisal with respect to the fairness of this Litigation Settlement Offer or the offer price being offered to limited partners. However, the partnership did receive the appraisals prepared by AAA, as described above. Although the AIMCO Entities have interests that may be in conflict with those of the partnership's unaffiliated limited partners, each of the AIMCO Entities believes that the offer price and the structure of the transaction are fair to the unaffiliated limited partners based on the information and factors considered by the general partner of your partnership. Each of AIMCO Entities expressly adopts the analysis, and the factors underlying such analysis, of the general partner of your partnership." (8) The first paragraph of "THE LITIGATION SETTLEMENT OFFER - Section 13. Conflicts of Interest and Transactions with Affiliates -- Transactions with Affiliates" is amended and restated as follows: "NHP Management Company (which is our affiliate) received fees of approximately $295,000 and $1,365,000 for the years ended December 31, 2002 and 2001, respectively, for construction management services. The construction management service fees are calculated based on a percentage of current additions to investment properties." (9) The fourth and fifth paragraphs under "THE LITIGATION SETTLEMENT OFFER - Section 14. Future Plans of the Purchaser" are amended and restated as follows: "We have been advised that the general partner does not currently expect to consider, on behalf of your partnership any of the following transactions: (i) payment of extraordinary distributions; (ii) refinancing, reducing or increasing existing indebtedness of the partnership; (iii) sales of assets, individually or as part of a complete liquidation; and (iv) mergers or other consolidation transactions involving the partnership. Any such merger or consolidation 41 transaction could involve other limited partnerships in which your general partner or its affiliates serve as general partners, or a combination of the partnership with one or more existing, publicly traded entities (including, possibly, affiliates of AIMCO), in any of which limited partners might receive cash, common stock or other securities or consideration. As discussed under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Investment Objectives and Policies; Sale or Financing of Investments," the general partner regularly evaluates the real estate and capital markets. The general partner may consider refinancing the partnership's existing indebtedness to the extent that the general partner is able to obtain a lower interest rate or if such indebtedness is approaching maturity. Furthermore, in the event that the general partner receives an attractive offer for any of your partnership's properties, the general partner would give due consideration to such an offer. If any of the transactions referred to above occur, and financial benefits accrue to the limited partners, we will participate in those benefits to the extent of our ownership of units. The agreement of limited partnership prohibits limited partners from voting on actions taken by the partnership, unless otherwise specifically permitted therein. Limited partners may vote on a liquidation, and we will be able to significantly influence or control the outcome of any such vote. Our primary objective in seeking to acquire the units pursuant to the offer is not, however, to influence the vote on any particular transaction, but rather to generate a profit on the investment represented by those units." (10) The chart under "THE LITIGATION SETTLEMENT OFFER - Section 15. Certain Information Concerning Your Partnership - Financial Data" is amended by adding the following line items:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31, ---------------------------- -------------------------------------- 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) Income (loss) per unit from continuing operations $ 5.88 $ 17.05 $ 25.32 $ 133.79 $ 62.53 Ratio of earnings to fixed charges (deficit)....... 111.9% 133.2% 137.0% 307.8% 210.5% Book value per limited partnership unit............ (219.29) (215.92) (215.56) (113.75) (67.67)
(11) The following chart under Annex I is amended and restated as follows:
NAME POSITION - -------------------------- ------------------------------------------------------------------ Terry Considine............ Chairman of the Board of Directors and Chief Executive Officer Peter K. Kompaniez......... Vice Chairman, President and Director Harry G. Alcock............ Executive Vice President and Chief Investment Officer Miles Cortez............... Executive Vice President, General Counsel and Secretary Joseph DeTuno.............. Executive Vice President -- Redevelopment Patti K. Fielding.......... Executive Vice President -- Securities and Debt Patrick J. Foye............ Executive Vice President Lance J. Graber............ Executive Vice President -- AIMCO Capital Paul J. McAuliffe.......... Executive Vice President and Chief Financial Officer Ronald D. Monson........... Executive Vice President and Head of Property Operations David Robertson............ Executive Vice President -- President and Chief Executive Officer of AIMCO Capital Jim Purvis................. Executive Vice President -- Human Resources Randall J. Fein............ Executive Vice President -- Student Housing James N. Bailey............ Director Richard S. Ellwood......... Director J. Landis Martin........... Director Thomas L. Rhodes........... Director
42 SIGNATURE After due inquiry and to the best of its knowledge and belief, the undersigned hereby certify that the information set forth in this statement is true, complete and correct. Date: December 9, 2003 AIMCO PROPERTIES, L.P. By: AIMCO-GP, INC. Its General Partner By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President 43 SCHEDULE 13E-3 After due inquiry and to the best of its knowledge and belief, the undersigned hereby certify that the information set forth in this statement is true, complete and correct. Date: December 9, 2003 AIMCO-GP, INC. By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President SHELTER REALTY V LIMITED PARTNERSHIP By: /s/ Patrick J. Foye ------------------------------- Patrick J. Foye Executive Vice President 44 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- (c)(1) Appraisal of Foxfire Apartments (c)(2) Appraisal of Lake Johnson Mews (c)(3) Appraisal of Millhopper Village (c)(4) Appraisal of Old Salem Apartments (c)(5) Appraisal of Tar River Estates (c)(6) Appraisal of The Lexington (c)(7) Appraisal of Woodland Village
45 EX-99.(C)(1) 3 d07277a2exv99wxcyx1y.txt APPRAISAL OF FOXFIRE APARTMENTS FOXFIRE APARTMENTS 6664 PEACHTREE INDUSTRIAL BLVD. DORAVILLE, GEORGIA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 9, 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 17, 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: FOXFIRE APARTMENTS 6664 PEACHTREE INDUSTRIAL BLVD. DORAVILLE, DEKALB COUNTY, GEORGIA 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 266 units with a total of 280,700 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 24 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 67% 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 9, 2003 is: ($10,300,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Michael Bates July 17, 2003 Michael Bates, MAI #053272 Assistant Manager, Real Estate Group State of Georgia, Certified General Real Property Appraiser #CG00685 Report By: Phillip McGinnis AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Foxfire Apartments LOCATION: 6664 Peachtree Industrial Blvd. Doraville, Georgia 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 9, 2003 DATE OF REPORT: July 17, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 24 acres, or 1,045,440 square feet Assessor Parcel No.: 18-356-01-025 Floodplain: Community Panel No. 1300650016H (May 7, 2001) Flood Zone X, an area outside the floodplain. Zoning: RM-100 (Multifamily Residential) BUILDING: No. of Units: 266 Units Total NRA: 280,700 Square Feet Average Unit Size: 1,055 Square Feet Apartment Density: 11.1 units per acre Year Built: 1972 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-1A10 900 $630 $0.70 $ 90,720 $1,088,640 2BR/2BA-2A20 1,150 $750 $0.65 $ 37,500 $ 450,000 3BR/2BA-3A20 1,300 $900 $0.69 $ 64,800 $ 777,600 Total $193,020 $2,316,240
OCCUPANCY: 67% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUBJECT PHOTOGRAPHS [VIEW OF ENTRANCE SIGNAGE PICTURE] [VIEW OF LEASING OFFICE PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $2,316,240 $8,708 Effective Gross Income $2,198,116 $8,264 Operating Expenses $1,001,006 $3,763 45.5% of EGI Net Operating Income: $1,130,611 $4,250 Capitalization Rate 10.50% DIRECT CAPITALIZATION VALUE $10,400,000 * $39,098 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 18% Stabilized Vacancy & Collection Loss: 14% Lease-up / Stabilization Period 12 months Terminal Capitalization Rate 11.50% Discount Rate 12.00% Selling Costs 3.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $10,400,000 * $39,098 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $10,400,000 $39,098 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $35,473 to $49,847 Range of Sales $/Unit (Adjusted) $34,937 to $41,158 VALUE INDICATION - PRICE PER UNIT $10,200,000 * $38,346 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.23 to 6.38 Selected EGIM for Subject 4.75 Subject's Projected EGI $2,198,116 EGIM ANALYSIS CONCLUSION $10,100,000 * $37,970 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $10,200,000 * $38,346 / UNIT RECONCILED SALES COMPARISON VALUE $10,200,000 $38,346 / 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $10,200,000 NOI Per Unit $10,200,000 EGIM Multiplier $10,100,000 INDICATED VALUE BY SALES COMPARISON $10,200,000 $38,346 / UNIT INCOME APPROACH: Direct Capitalization Method: $10,400,000 Discounted Cash Flow Method: $10,400,000 INDICATED VALUE BY THE INCOME APPROACH $10,400,000 $39,098 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $10,300,000 $38,722 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 6664 Peachtree Industrial Blvd., Doraville, DeKalb County, Georgia. Doraville identifies it as 18-356-01-025. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Phillip McGinnis on May 9, 2003. Michael Bates, MAI has not made a personal inspection of the subject property. Phillip McGinnis performed the research, valuation analysis and wrote the report. Michael Bates, MAI reviewed the report and concurs with the value. Michael Bates, MAI and Phillip McGinnis 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 9, 2003. The date of the report is July 17, 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 Shelter Properties V, LP. 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 Doraville, Georgia. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being multi-family residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Winters Chapel Road West - Peeler Road South - I-285 North - Jimmy Carter Blvd. MAJOR EMPLOYERS Major employers in the subject's area include Home Depot, Delta Air Lines, and United Parcel Service. Delta Air Lines continues to reduce their work force due to the downturn in the air transportation sector. The unemployment rate in Atlanta is up, but is still much lower than nationally. 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA - ------------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 9,043 79,336 183,538 4,326,075 5-Year Population 10,284 85,147 196,525 4,877,672 % Change CY-5Y 13.7% 7.3% 7.1% 12.8% Annual Change CY-5Y 2.7% 1.5% 1.4% 2.6% HOUSEHOLDS Current Households 4,995 37,664 79,503 1,580,438 5-Year Projected Households 5,658 40,011 84,746 1,773,314 % Change CY - 5Y 13.3% 6.2% 6.6% 12.2% Annual Change CY-5Y 2.7% 1.2% 1.3% 2.4% INCOME TRENDS Median Household Income $ 53,019 $ 55,021 $ 59,653 $ 61,400 Per Capita Income $ 32,579 $ 34,473 $ 37,883 $ 25,922 Average Household Income $ 63,672 $ 73,622 $ 87,077 $ 70,955
Source: Demographics Now The subject neighborhood's population is expected to show increases above 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 70.36% 57.37% 47.33% 30.54% 5-Year Projected % Renting 70.84% 56.67% 47.34% 29.71% % of Households Owning 14.23% 28.39% 40.99% 61.85% 5-Year Projected % Owning 14.74% 29.35% 41.40% 63.29%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Apartments South - Residential East - Office West - Apartments CONCLUSIONS The subject is well located within the city of Doraville. 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA MARKET ANALYSIS The subject property is located in the city of Doraville in DeKalb County. The overall pace of development in the subject's market is more or less stable. There are currently no apartment complexes under construction in the submarket. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - -------------------------------------------------------------------------- 1Q03 11.3% 9.9% 4Q02 10.5% 9.2% 1 Year 9.4% 8.6% 3 Years 7.5% 7.2% 5 Years 7.3% 6.9% 5 Year Forecast 11.7% 10.4%
Source: Reis, Atlanta, Apartment: Sandy Springs/Dunwoody - 1st Quarter 2003 Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. Occupancy Rates have been decreasing over the past 5 years and are anticipated to continue to decline. Current economic conditions have made home ownership easier therefore many apartment residents are leaving to buy single-family residences. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ---------------------------------------------------------------------------------- 1998 N/A - $866 - 1999 N/A N/A $894 3.2% 2000 N/A N/A $930 4.0% 2001 N/A N/A $894 -3.9% 2002 N/A N/A $851 -4.8% 2003 Forecast N/A N/A $831 -2.4% 2004 Forecast N/A N/A $838 0.8% 2005 Forecast N/A N/A $855 2.0% 2006 Forecast N/A N/A $876 2.5% 2007 Forecast N/A N/A $902 3.0%
The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - ------------------------------------------------------------------------------------------- R-1 The Landings 490 90% 1980 Less than .5 mile. R-2 Kendal Creek 308 85% 1973 Less than .5 mile. R-3 North Chase 519 90% 1970 Less than .5 miles. R-4 Peachtree Place North 309 85% 1970 Less than .5 miles. Subject Foxfire Apartments 266 67% 1972
Since 2000, average rents have declined at nearly 4% per year. The market rate is forecast to begin a slow climb, however over the next five years is not expected to reach the high established in 2000. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 24 acres, or 1,045,440 square feet Shape Generally rectangular 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 Average Flood Zone: Community Panel 1300650016H, dated May 7, 2001 Flood Zone Zone X Zoning RM-100, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ----------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - -------------------------------------------------------------------------------------------------------------- 18-356-01-025 $6,408,300 $4,168,800 $10,577,100 $0.04 $159,968
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 266 Net Rentable Area 280,700 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Stucco wall Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, tennis court, gym room, car wash, barbeque equipment, meeting hall, business office, and parking area. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, washer/dryer and oven. Washer & Dryers are included in 1Br/1Ba units AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA only. All other units have connections for washers & dryers. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - --------------------------------------------------------- 1BR/1BA-1A10 144 900 2BR/2BA-2A20 50 1,150 3BR/2BA-3A20 72 1,300
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 1972 and consist of a 266-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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ----------------------------------------------------------------------------------------------------------------------------------- Property Name Foxfire Apartments Concord Crossing Meadowrun Apartments LOCATION: Address 6664 Peachtree Industrial Blvd. 2935 Old Concord Rd, SE 3800 Brockett Trail City, State Doraville, Georgia Smyrna, GA Clarkston, Georgia County DeKalb Cobb DeKalb PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 280,700 207,460 328,050 Year Built 1972 1975 1973 Number of Units 266 190 276 Unit Mix: Type Total Type Total Type Total 1BR/1BA-1A10 144 1BR/1BA 30 1BR/1BA 42 2BR/2BA-2A20 50 2BR/2BA 127 2BR/2BA 138 3BR/2BA-3A20 72 3BR/2BA 33 3BR/2BA 96 Average Unit Size (SF) 1,055 1,092 1,189 Land Area (Acre) 24.0000 15.7800 19.1500 Density (Units/Acre) 11.1 12.0 14.4 Parking Ratio (Spaces/Unit) 2.07 N/A 2.78 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open CONDITION: 0 Good Good APPEAL: 0 Fair Good AMENITIES: Pool/Spa Yes/No Yes/Yes Yes/Yes Gym Room Yes Yes No Laundry Room No No Yes Secured Parking No No No Sport Courts Yes Yes Yes Fireplace No No No Balcony Yes No Yes OCCUPANCY: 67% 91% 90% TRANSACTION DATA: Sale Date July, 2002 August, 2000 Sale Price ($) $9,200,000 $10,150,000 Grantor Garden Woodsong Thurman Dallas 1976 Grantee Woodsong Apartments Graoch Associates #69 Sale Documentation 13561/2533 11552/0794 Verification Public Records Public Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,601,328 $8,428 $7.72 N/A Vacancy/Credit Loss $ 160,133 $ 843 $0.77 N/A Effective Gross Income $1,441,195 $7,585 $6.95 $2,329,560 $8,440 $7.10 Operating Expenses $ 627,000 $3,300 $3.02 $ 966,000 $3,500 $2.94 Net Operating Income $ 814,195 $4,285 $3.92 $1,363,560 $4,940 $4.16 NOTES: PRICE PER UNIT $48,421 $36,775 PRICE PER SQUARE FOOT $ 44.35 $ 30.94 EXPENSE RATIO 43.5% 41.5% EGIM 6.38 4.36 OVERALL CAP RATE 8.85% 13.43% 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 Highland Heights Apartments Lincoln Parc Apartments Kenridge Apartments LOCATION: Address 3028 Chamblee Tucker Road 2100 Winters Park Drive 3893 Kensington Road City, State Chamblee, Georgia Atlanta, Georgia Decatur, Georgia County DeKalb DeKalb DeKalb PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 220,665 407,670 319,150 Year Built 1970 1986 1988 Number of Units 181 444 326 Unit Mix: Type Total Type Total Type Total 1BR/1BA 20 1BR/1BA 216 1BR/1BA 40 2BR/2BA 161 2BR/2BA 228 2BR/1BA 80 2BR/2BA 206 Average Unit Size (SF) 1,219 918 979 Land Area (Acre) 11.5000 27.7400 24.8500 Density (Units/Acre) 15.7 16.0 13.1 Parking Ratio (Spaces/Unit) 2.54 2.20 2.44 Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Good Good Good APPEAL: Good Good Good AMENITIES: Pool/Spa Yes/Yes Yes/Yes Gym Room Yes Yes Laundry Room Yes Yes Secured Parking no Yes Sport Courts Yes Yes Fireplace No No Balcony No No OCCUPANCY: 90% 90% 90% TRANSACTION DATA: Sale Date December, 2000 November, 2000 May, 2001 Sale Price ($) $8,568,000 $15,750,000 $16,250,000 Grantor Chapelwood Apartments, LP Park Associates, Ltd. Kenridge, Ltd. Grantee Miles - Barrington, LLC I.S. Lincoln Parc LP F.P.C./Kenridge Apartments, LP Sale Documentation 11728/0592 11693/0188 12094/0615 Verification Public Records Public Records Public Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income N/A N/A N/A Vacancy/Credit Loss N/A N/A N/A Effective Gross Income $1,751,016 $9,674 $7.94 $3,721,608 $8,382 $9.13 $2,629,560 $8,066 $8.24 Operating Expenses $ 579,200 $3,200 $2.62 $1,332,000 $3,000 $3.27 $ 910,568 $2,793 $2.85 Net Operating Income $1,171,816 $6,474 $5.31 $2,389,608 $5,382 $5.86 $1,718,992 $5,273 $5.39 NOTES: PRICE PER UNIT $47,337 $35,473 $49,847 PRICE PER SQUARE FOOT $ 38.83 $38.63 $ 50.92 EXPENSE RATIO 33.1% 35.8% 34.6% EGIM 4.89 4.23 6.18 OVERALL CAP RATE 13.68% 15.17% 10.58% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $35,473 to $49,847 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 $34,937 to $41,158 per unit with a mean or average adjusted price of $38,336 per unit. The median adjusted price is $39,877 per unit. Based on the following analysis, we have concluded to a value of $40,000 per unit, which results in an "as is" value of $10,200,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - -------------------------------------------------------------------------------------------------------------------- Property Name Foxfire Apartments Concord Crossing Meadowrun Apartments Address 6664 Peachtree 2935 Old Concord Rd, SE 3800 Brockett Trail Industrial Blvd. City Doraville, Georgia Smyrna, GA Clarkston, Georgia Sale Date July, 2002 August, 2000 Sale Price ($) $9,200,000 $10,150,000 Net Rentable Area (SF) 280,700 207,460 328,050 Number of Units 266 190 276 Price Per Unit $48,421 $36,775 Year Built 1972 1975 1973 Land Area (Acre) 24.0000 15.7800 19.1500 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 07-2002 0% 08-2000 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $48,421 $36,775 Location Superior -10% Comparable 0% Number of Units 266 190 0% 276 0% Quality / Appeal Good Comparable 0% Comparable 0% Age / Condition 1972 1975 / Good 0% 1973 / Good 0% Occupancy at Sale 67% 91% 0% 90% 0% Amenities Good Superior -5% Superior -5% Average Unit Size (SF) 1,055 1,092 0% 1,189 0% PHYSICAL ADJUSTMENT -15% -5% FINAL ADJUSTED VALUE ($/UNIT) $41,158 $34,937 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - ---------------------------------------------------------------------------------------------------------------------------------- Property Name Highland Heights Lincoln Parc Apartments Kenridge Apartments Apartments Address 3028 Chamblee Tucker Road 2100 Winters Park 3893 Kensington Drive Road City Chamblee, Georgia Atlanta, Georgia Decatur, Georgia Sale Date December, 2000 November, 2000 May, 2001 Sale Price ($) $8,568,000 $15,750,000 $16,250,000 Net Rentable Area (SF) 220,665 407,670 319,150 Number of Units 181 444 326 Price Per Unit $47,337 $35,473 $49,847 Year Built 1970 1986 1988 Land Area (Acre) 11.5000 27.7400 24.8500 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 12-2000 0% 11-2000 0% 05-2001 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $47,337 $35,473 $49,847 Location Superior -5% Comparable 0% Superior -5% Number of Units 181 0% 444 0% 326 0% Quality / Appeal Comparable 0% Comparable 0% Superior -5% Age / Condition 1970 / Good -5% 1986 / Good 0% 1988 / Good 0% Occupancy at Sale 90% 0% 90% 0% 90% 0% Amenities Superior -5% Comparable 0% Superior -10% Average Unit Size (SF) 1,219 0% 918 0% 979 0% PHYSICAL ADJUSTMENT -15% 0% -20% FINAL ADJUSTED VALUE ($/UNIT) $40,236 $35,473 $39,877
SUMMARY VALUE RANGE (PER UNIT) $34,937 TO $41,158 MEAN (PER UNIT) $38,336 MEDIAN (PER UNIT) $39,877 VALUE CONCLUSION (PER UNIT) $40,000
VALUE OF IMPROVEMENT & MAIN SITE $10,640,000 LESS: LEASE-UP COST -$ 239,000 PV OF CONCESSIONS -$ 152,000 VALUE INDICATED BY SALES COMPARISON APPROACH $10,249,000 ROUNDED $10,200,000
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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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-1 190 $ 9,200,000 8.85% $ 814,195 $1,130,611 0.992 $48,028 $ 48,421 $ 4,285 $ 4,250 I-2 276 $10,150,000 13.43% $1,363,560 $1,130,611 0.860 $31,639 $ 36,775 $ 4,940 $ 4,250 I-3 181 $ 8,568,000 13.68% $1,171,816 $1,130,611 0.657 $31,078 $ 47,337 $ 6,474 $ 4,250 I-4 444 $15,750,000 15.17% $2,389,608 $1,130,611 0.790 $28,015 $ 35,473 $ 5,382 $ 4,250 I-5 326 $16,250,000 10.58% $1,718,992 $1,130,611 0.806 $40,180 $ 49,847 $ 5,273 $ 4,250
PRICE/UNIT
Low High Average Median $28,015 $48,028 $35,788 $31,639
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 40,000 Number of Units 266 Value $10,640,000 Less: Lease-Up Cost -$ 239,000 PV of Concessions -$ 152,000 ----------- Value Based on NOI Analysis $10,249,000 Rounded $10,200,000
The adjusted sales indicate a range of value between $28,015 and $48,028 per unit, with an average of $35,788 per unit. Based on the subject's competitive position within the improved sales, a value of $40,000 per unit is estimated. This indicates an "as is" market value of $10,200,000 (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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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-1 190 $ 9,200,000 $ 1,441,195 $ 627,000 43.51% 6.38 $ 48,421 I-2 276 $10,150,000 $ 2,329,560 $ 966,000 41.47% 4.36 $ 36,775 I-3 181 $ 8,568,000 $ 1,751,016 $ 579,200 33.08% 4.89 45.54% $ 47,337 I-4 444 $15,750,000 $ 3,721,608 $1,332,000 35.79% 4.23 $ 35,473 I-5 326 $16,250,000 $ 2,629,560 $ 910,568 34.63% 6.18 $ 49,847
EGIM
Low High Average Median - --- ---- ------- ------ 4.23 6.38 5.21 4.89
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 4.75 Subject EGI $ 2,198,116 Value $10,441,053 Less: Lease-Up Cost -$ 239,000 PV of Concessions -$ 152,000 ------------ Value Based on EGIM Analysis $10,050,053 Rounded $10,100,000 Value Per Unit $ 37,970
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 45.54% before reserves. The comparable sales indicate a range of expense ratios from 33.08% to 43.51%, while their EGIMs range from 4.23 to 6.38. Overall, we conclude to an EGIM of 4.75, which results in an "as is" value estimate in the EGIM Analysis of $10,100,000. 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 $10,200,000. Price Per Unit $10,200,000 NOI Per Unit $10,200,000 EGIM Analysis $10,100,000 Sales Comparison Conclusion $10,200,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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-1A10 900 $602 $0.67 62.5% 2BR/2BA-2A20 1150 $697 $0.61 74.0% 3BR/2BA-3A20 1300 $837 $0.64 69.4%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------- R-1 R-2 R-3 R-4 ------------------------------------------- The Kendal Peachtree Landings Creek North Chase Place North ------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Similar Similar Similar Superior - ------------------------------------------------------------------------------------------------------ Monthly Rent 1BR/1BA-1A10 $ 602 $ 691 $ 635 $ 655 $ 625 $ 600 Unit Area (SF) 900 900 880 710 700 800 Monthly Rent Per Sq. Ft. $ 0.67 $ 0.77 $ 0.72 $ 0.92 $ 0.89 $ 0.75 Monthly Rent 2BR/2BA-2A20 $ 697 $ 801 $ 818 $ 790 $ 625 $ 755 Unit Area (SF) 1,150 1,150 1,215 880 775 1,152 Monthly Rent Per Sq. Ft. $ 0.61 $ 0.70 $ 0.67 $ 0.90 $ 0.81 $ 0.66 Monthly Rent 3BR/2BA-3A20 $ 837 $ 911 $ 958 $ 978 $ 690 $ 850 Unit Area (SF) 1,300 1,300 1,410 1,337 1,338 1,352 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.70 $ 0.68 $ 0.73 $ 0.52 $ 0.63 DESCRIPTION MIN MAX MEDIAN AVERAGE - --------------------------------------------------------------- Monthly Rent $ 600 $ 655 $ 630 $ 629 Unit Area (SF) 700 880 755 773 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.92 $ 0.82 $ 0.82 Monthly Rent $ 625 $ 818 $ 773 $ 747 Unit Area (SF) 775 1,215 1,016 1,006 Monthly Rent Per Sq. Ft. $ 0.66 $ 0.90 $ 0.74 $ 0.76 Monthly Rent $ 690 $ 978 $ 904 $ 869 Unit Area (SF) 1,337 1,410 1,345 1,359 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.73 $ 0.65 $ 0.64
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-1A10 144 900 $630 $0.70 $ 90,720 $1,088,640 2BR/2BA-2A20 50 1,150 $750 $0.65 $ 37,500 $ 450,000 3BR/2BA-3A20 72 1,300 $900 $0.69 $ 64,800 $ 777,600 -------- ---------- Total $193,020 $2,316,240 ======== ==========
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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 $2,268,475 $ 8,528 $2,357,095 $ 8,861 $2,301,640 $ 8,653 $2,280,000 $ 8,571 Vacancy $ 121,535 $ 457 $ 171,109 $ 643 $ 327,081 $ 1,230 $ 338,000 $ 1,271 Credit Loss/Concessions $ 49,442 $ 186 $ 87,275 $ 328 $ 98,007 $ 368 $ 63,300 $ 238 ----------------------------------------------------------------------------------------------------- Subtotal $ 170,977 $ 643 $ 258,384 $ 971 $ 425,088 $ 1,598 $ 401,300 $ 1,509 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 103,944 $ 391 $ 92,477 $ 348 $ 202,306 $ 761 $ 141,300 $ 531 ----------------------------------------------------------------------------------------------------- Subtotal Other Income $ 103,944 $ 391 $ 92,477 $ 348 $ 202,306 $ 761 $ 141,300 $ 531 ----------------------------------------------------------------------------------------------------- Effective Gross Income $2,201,442 $ 8,276 $2,191,188 $ 8,238 $2,078,858 $ 7,815 $2,020,000 $ 7,594 Operating Expenses Taxes $ 146,542 $ 551 $ 161,745 $ 608 $ 160,306 $ 603 $ 131,316 $ 494 Insurance $ 34,247 $ 129 $ 51,599 $ 194 $ 51,260 $ 193 $ 54,439 $ 205 Utilities $ 152,986 $ 575 $ 160,596 $ 604 $ 183,873 $ 691 $ 176,000 $ 662 Repair & Maintenance $ 61,568 $ 231 $ 75,015 $ 282 $ 142,884 $ 537 $ 172,960 $ 650 Cleaning $ 63,903 $ 240 $ 80,761 $ 304 $ 100,200 $ 377 $ 69,500 $ 261 Landscaping $ 30,120 $ 113 $ 29,100 $ 109 $ 45,125 $ 170 $ 0 $ 0 Security $ 27,801 $ 105 $ 24,960 $ 94 $ 6,648 $ 25 $ 0 $ 0 Marketing & Leasing $ 23,076 $ 87 $ 13,675 $ 51 $ 35,999 $ 135 $ 43,500 $ 164 General Administrative $ 285,032 $ 1,072 $ 293,831 $ 1,105 $ 269,050 $ 1,011 $ 220,892 $ 830 Management $ 110,452 $ 415 $ 115,767 $ 435 $ 106,588 $ 401 $ 103,500 $ 389 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Total Operating Expenses $ 935,727 $ 3,518 $1,007,049 $ 3,786 $1,101,933 $ 4,143 $ 972,107 $ 3,655 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Net Income $1,265,715 $ 4,758 $1,184,139 $ 4,452 $ 976,925 $ 3,673 $1,047,893 $ 3,939 ----------------------------------------------------------------------------------------------------- ANNUALIZED 2003 ----------------------- PROJECTION AAA PROJECTION ----------------------- -------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - --------------------------------------------------------------------------------------- Revenues Rental Income $2,277,552 $ 8,562 $2,316,240 $ 8,708 100.0% Vacancy $ 761,868 $ 2,864 $ 254,786 $ 958 11.0% Credit Loss/Concessions $ 59,524 $ 224 $ 69,487 $ 261 3.0% --------------------------------------------------------- Subtotal $ 821,392 $ 3,088 $ 324,274 $ 1,219 14.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 213,628 $ 803 $ 206,150 $ 775 8.9% --------------------------------------------------------- Subtotal Other Income $ 213,628 $ 803 $ 206,150 $ 775 8.9% --------------------------------------------------------- Effective Gross Income $1,669,788 $ 6,277 $2,198,116 $ 8,264 100.0% Operating Expenses Taxes $ 132,008 $ 496 $ 133,000 $ 500 6.1% Insurance $ 52,680 $ 198 $ 53,200 $ 200 2.4% Utilities $ 162,612 $ 611 $ 172,900 $ 650 7.9% Repair & Maintenance $ 115,240 $ 433 $ 133,000 $ 500 6.1% Cleaning $ 90,704 $ 341 $ 79,800 $ 300 3.6% Landscaping $ 35,932 $ 135 $ 34,580 $ 130 1.6% Security $ 8,292 $ 31 $ 7,980 $ 30 0.4% Marketing & Leasing $ 41,952 $ 158 $ 37,240 $ 140 1.7% General Administrative $ 262,636 $ 987 $ 239,400 $ 900 10.9% Management $ 78,588 $ 295 $ 109,906 $ 413 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% --------------------------------------------------------- Total Operating Expenses $ 980,644 $ 3,687 $1,001,006 $ 3,763 45.5% Reserves $ 0 $ 0 $ 66,500 $ 250 6.6% --------------------------------------------------------- Net Income $ 689,144 $ 2,591 $1,130,611 $ 4,250 51.4% ----------------------------------------------------------
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 14% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------------------------------------------------------- I-1 Jul-02 91% $ 48,421 8.85% I-2 Aug-00 90% $ 36,775 13.43% I-3 Dec-00 90% $ 47,337 13.68% I-4 Nov-00 90% $ 35,473 15.17% I-5 May-01 90% $ 49,847 10.58% High 15.17% Low 8.85% Average 12.34%
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 11.50%. 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 3.00% 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 $10,400,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA approximately 36% 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA DISCOUNTED CASH FLOW ANALYSIS FOXFIRE 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 $2,316,240 $2,339,402 $2,374,493 $2,421,983 $2,482,533 $2,557,009 Vacancy $ 536,559 $ 257,334 $ 261,194 $ 266,418 $ 273,079 $ 281,271 Credit Loss $ 69,487 $ 70,182 $ 71,235 $ 72,659 $ 74,476 $ 76,710 Concessions $ 146,300 $ 26,600 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 752,347 $ 354,116 $ 332,429 $ 339,078 $ 347,555 $ 357,981 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 206,150 $ 208,212 $ 211,335 $ 215,561 $ 220,950 $ 227,579 -------------------------------------------------------------------------------- Subtotal Other Income $ 206,150 $ 208,212 $ 211,335 $ 215,561 $ 220,950 $ 227,579 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,770,043 $2,193,498 $2,253,399 $2,298,467 $2,355,929 $2,426,607 OPERATING EXPENSES: Taxes $ 133,000 $ 136,990 $ 141,100 $ 145,333 $ 149,693 $ 154,183 Insurance $ 53,200 $ 54,796 $ 56,440 $ 58,133 $ 59,877 $ 61,673 Utilities $ 172,900 $ 178,087 $ 183,430 $ 188,932 $ 194,600 $ 200,438 Repair & Maintenance $ 133,000 $ 136,990 $ 141,100 $ 145,333 $ 149,693 $ 154,183 Cleaning $ 79,800 $ 82,194 $ 84,660 $ 87,200 $ 89,816 $ 92,510 Landscaping $ 34,580 $ 35,617 $ 36,686 $ 37,786 $ 38,920 $ 40,088 Security $ 7,980 $ 8,219 $ 8,466 $ 8,720 $ 8,982 $ 9,251 Marketing & Leasing $ 37,240 $ 38,357 $ 39,508 $ 40,693 $ 41,914 $ 43,171 General Administrative $ 239,400 $ 246,582 $ 253,979 $ 261,599 $ 269,447 $ 277,530 Management $ 88,502 $ 109,675 $ 112,670 $ 114,923 $ 117,796 $ 121,330 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 979,602 $1,027,508 $1,058,038 $1,088,652 $1,120,737 $1,154,359 Reserves $ 66,500 $ 68,495 $ 70,550 $ 72,666 $ 74,846 $ 77,092 -------------------------------------------------------------------------------- NET OPERATING INCOME $ 723,941 $1,097,495 $1,124,811 $1,137,148 $1,160,345 $1,195,155 ================================================================================ Operating Expense Ratio (% of EGI) 55.3% 46.8% 47.0% 47.4% 47.6% 47.6% Operating Expense Per Unit $ 3,683 $ 3,863 $ 3,978 $ 4,093 $ 4,213 $ 4,340 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ---------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,633,719 $2,712,731 $2,794,113 $2,877,936 $2,964,274 Vacancy $ 289,709 $ 298,400 $ 307,352 $ 316,573 $ 326,070 Credit Loss $ 79,012 $ 81,382 $ 83,823 $ 86,338 $ 88,928 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 368,721 $ 379,782 $ 391,176 $ 402,911 $ 414,998 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 234,406 $ 241,438 $ 248,682 $ 256,142 $ 263,826 ------------------------------------------------------------------ Subtotal Other Income $ 234,406 $ 241,438 $ 248,682 $ 256,142 $ 263,826 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $2,499,405 $2,574,387 $2,651,618 $2,731,167 $2,813,102 OPERATING EXPENSES: Taxes $ 158,809 $ 163,573 $ 168,480 $ 173,535 $ 178,741 Insurance $ 63,524 $ 65,429 $ 67,392 $ 69,414 $ 71,496 Utilities $ 206,452 $ 212,645 $ 219,025 $ 225,595 $ 232,363 Repair & Maintenance $ 158,809 $ 163,573 $ 168,480 $ 173,535 $ 178,741 Cleaning $ 95,285 $ 98,144 $ 101,088 $ 104,121 $ 107,245 Landscaping $ 41,290 $ 42,529 $ 43,805 $ 45,119 $ 46,473 Security $ 9,529 $ 9,814 $ 10,109 $ 10,412 $ 10,724 Marketing & Leasing $ 44,467 $ 45,801 $ 47,175 $ 48,590 $ 50,047 General Administrative $ 285,856 $ 294,432 $ 303,265 $ 312,363 $ 321,734 Management $ 124,970 $ 128,719 $ 132,581 $ 136,558 $ 140,655 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,188,990 $1,224,660 $1,261,400 $1,299,242 $1,338,219 Reserves $ 79,404 $ 81,787 $ 84,240 $ 86,767 $ 89,370 ------------------------------------------------------------------ NET OPERATING INCOME $1,231,010 $1,267,940 $1,305,979 $1,345,158 $1,385,513 ================================================================== Operating Expense Ratio (% of EGI) 47.6% 47.6% 47.6% 47.6% 47.6% Operating Expense Per Unit $ 4,470 $ 4,604 $ 4,742 $ 4,884 $ 5,031
Estimated Stabilized NOI $1,130,611 Sales Expense Rate 3.00% Months to Stabilized 12 Discount Rate 12.00% Stabilized Occupancy 89.0% Terminal Cap Rate 11.50%
Gross Residual Sale Price $12,047,936 Deferred Maintenance $ 0 Less: Sales Expense $ 361,438 Add: Excess Land $ 0 ----------- Net Residual Sale Price $11,686,498 Other Adjustments $ 0 ----------- PV of Reversion $ 3,762,740 Value Indicated By "DCF" $10,442,544 Add: NPV of NOI $ 6,679,805 Rounded $10,400,000 ----------- PV Total $10,442,544
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE --------------------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - ---------------------------------------------------------------------------------------------------------- 11.00% $10,955,228 $10,782,566 $10,613,578 $10,448,173 $10,286,264 11.25% $10,863,811 $10,693,173 $10,526,161 $10,362,684 $10,202,655 TERMINAL CAP RATE 11.50% $10,776,368 $10,607,667 $10,442,544 $10,280,911 $10,122,681 11.75% $10,692,646 $10,525,800 $10,362,486 $10,202,618 $10,046,111 12.00% $10,612,413 $10,447,343 $10,285,763 $10,127,587 $ 9,972,731
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA INCOME LOSS DURING LEASE-UP The subject is currently 67% 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 $239,000 as shown in the following table.
DESCRIPTION YEAR 1 - -------------------------------------------------- "As Is" Net Operating Income $723,941 Stabilized Net Operating Income $991,626 -------- Difference $267,684 PV of Income Loss During Lease-Up $239,004 -------- Rounded $239,000 --------
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 $152,000 (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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA FOXFIRE APARTMENTS
TOTAL PER Sq. Ft. PER UNIT %OF EGI - ------------------------------------------------------------------------------------------------------------------ REVENUE Base Rent $ 2,316,240 $ 8.25 $ 8,708 Less: Vacancy & Collection Loss 14.00% $ 324,274 $ 1.16 $ 1,219 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 206,150 $ 0.73 $ 775 9.38% ----------------------------------------------------------- Subtotal Other Income $ 206,150 $ 0.73 $ 775 9.38% EFFECTIVE GROSS INCOME $ 2,198,116 $ 7.83 $ 8,264 OPERATING EXPENSES: Taxes $ 133,000 $ 0.47 $ 500 6.05% Insurance $ 53,200 $ 0.19 $ 200 2.42% Utilities $ 172,900 $ 0.62 $ 650 7.87% Repair & Maintenance $ 133,000 $ 0.47 $ 500 6.05% Cleaning $ 79,800 $ 0.28 $ 300 3.63% Landscaping $ 34,580 $ 0.12 $ 130 1.57% Security $ 7,980 $ 0.03 $ 30 0.36% Marketing & Leasing $ 37,240 $ 0.13 $ 140 1.69% General Administrative $ 239,400 $ 0.85 $ 900 10.89% Management 5.00% $ 109,906 $ 0.39 $ 413 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,001,006 $ 3.57 $ 3,763 45.54% Reserves $ 66,500 $ 0.24 $ 250 3.03% ----------------------------------------------------------- NET OPERATING INCOME $ 1,130,611 $ 4.03 $ 4,250 51.44% =========================================================== "GOING IN" CAPITALIZATION RATE 10.50% VALUE INDICATION $ 10,767,720 $ 38.36 $ 40,480 LESS: LEASE-UP COST ($ 239,000) PV OF CONCESSIONS ($ 152,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 10,376,720 ROUNDED $ 10,400,000 $ 37.05 $ 39,098
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ----------------------------------------------------------------------- 9.75% $11,205,006 $11,200,000 $42,105 $39.90 10.00% $10,915,106 $10,900,000 $40,977 $38.83 10.25% $10,639,347 $10,600,000 $39,850 $37.76 10.50% $10,376,720 $10,400,000 $39,098 $37.05 10.75% $10,126,308 $10,100,000 $37,970 $35.98 11.00% $ 9,887,278 $ 9,900,000 $37,218 $35.27 11.25% $ 9,658,872 $ 9,700,000 $36,466 $34.56
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $10,400,000. 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 $10,400,000 Direct Capitalization Method $10,400,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $10,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 $10,200,000 Income Approach $10,400,000 Reconciled Value $10,300,000
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 9, 2003 the market value of the fee simple estate in the property is: $10,300,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA FOXFIRE APARTMENTS, DORAVILLE, GEORGIA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUBJECT PHOTOGRAPHS [VIEW OF ENTRANCE SIGNAGE PICTURE] [VIEW OF LEASING OFFICE PICTURE] [TYPICAL VIEW OF POOL & [EXTERIOR - APARTMENT BUILDING PICTURE] TENNIS COURT PICTURE] [TYPICAL VIEW OF CLUBHOUSE PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUBJECT PHOTOGRAPHS [TYPICAL VIEW OF KITCHEN PICTURE] [TYPICAL VIEW OF BEDROOM PICTURE] [TYPICAL VIEW OF LIVING ROOM PICTURE] [TYPICAL VIEW OF BATHROOM PICTURE] [TYPICAL VIEW ALONG PEACHTREE INDUSTRIAL [TYPICAL VIEW OF PARKING AREAS PICTURE] BLVD. PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B FOXFIRE APARTMENTS, DORAVILLE, GEORGIA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CONCORD CROSSING MEADOWRUN APARTMENTS HIGHLAND HEIGHTS APARTMENTS 2935 Old Concord Rd, SE 3800 Brockett Trail 3028 Chamblee Tucker Road Smyrna, GA Clarkston, Georgia Chamblee, Georgia [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 LINCOLN PARC APARTMENTS KENRIDGE APARTMENTS 2100 Winters Park Drive 3893 Kensington Road Atlanta, Georgia Decatur, Georgia [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B FOXFIRE APARTMENTS, DORAVILLE, GEORGIA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ----------------------------------------------------------------------------------------------------------------------------------- Property Name Foxfire Apartments The Landings Management Company AIMCO LOCATION: Address 6664 Peachtree Industrial Blvd. 6520 Hillandal Drive City, State Doraville, Georgia Doraville, Georgia County DeKalb DeKalb Proximity to Subject Less than .5 mile. PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 280,700 537,685 Year Built 1972 1980 Effective Age 25 20 Building Structure Type Brick Brick Parking Type (Gr., Cov., etc.) Open Open Number of Units 266 490 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1BR/1BA-1A10 900 144 $602 1 1BR/1BA 880 235 $635 2 2BR/2BA-2A20 1,150 50 $697 2 2BR/2BA 1,215 147 $818 3 3BR/2BA-3A20 1,300 72 $837 3 3BR/2BA 1,410 108 $958 Average Unit Size (SF) 1,055 1,097 Unit Breakdown: Efficiency 2-Bedroom 19% Efficiency 2-Bedroom 30% 1-Bedroom 54% 3-Bedroom 27% 1-Bedroom 48% 3-Bedroom 22% CONDITION: Fair Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi X Car Wash Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room X Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball Laundry Room X Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room X Gym Room OCCUPANCY: 67% 90% LEASING DATA: Available Leasing Terms 6, 9 & 12 Months 6, 9 & 12 Months Concessions 1 month free Pet Deposit $300/$100 Refundable $300/$100 Refundable Utilities Paid by Tenant: Electric Natural Gas Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number 877-740-7145 NOTES: COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ---------------------------------------------------------------------------------------------------------------------------------- Property Name Kendal Creek North Chase Management Company Waterton Property Management B&M Management LOCATION: Address 1700 Hunter Ridge Lane 6750 Peachtree Industrial Blvd. City, State Norcross, Georgia Doraville, Georgia County Gwinnett DeKalb Proximity to Subject Less than .5 mile. Less than .5 miles. PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 283,599 394,101 Year Built 1973 1970 Effective Age 25 25 Building Structure Type Frame/Siding Brick/Siding Parking Type (Gr., Cov., etc.) Open Open Number of Units 308 519 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BR/1BA 710 160 $655 1 1BR/1BA 700 311 $625 2 2BR/2BA 880 61 $790 2 2BR/2BA 775 181 $625 3 3BR/2BA 1,337 87 $978 3 3BR/2BA 1,338 27 $690 Average Unit Size (SF) 921 759 Unit Breakdown: Efficiency 2-Bedroom 20% Efficiency 2-Bedroom 35% 1-Bedroom 52% 3-Bedroom 28% 1-Bedroom 60% 3-Bedroom 5% CONDITION: Fair Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X Balcony Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room Gym Room OCCUPANCY: 85% 90% LEASING DATA: Available Leasing Terms 6, 9 & 12 month leases 6, 9 & 12 month leases Concessions 1 month free 1 month free Pet Deposit None required N/A Utilities Paid by Tenant: Electric Natural Gas Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number 866-361-2777 866-272-8117 NOTES: COMPARISON TO SUBJECT: Similar Similar COMPARABLE DESCRIPTION R - 4 - ----------------------------------------------------------------------------------- Property Name Peachtree Place North Management Company Community Living Concepts LOCATION: Address 4600 Peachtree Place Parkway City, State Doraville, Georgia County DeKalb Proximity to Subject Less than .5 miles. PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 318,888 Year Built 1970 Effective Age 30 Building Structure Type Brick Parking Type (Gr., Cov., etc.) Open Number of Units 309 Unit Mix: Type Unit Qty. Mo. 1 1BR/1BA 800 140 $600 2 2BR/2BA 1,152 108 $755 3 3BR/2BA 1,352 61 $850 Average Unit Size (SF) 1,032 Unit Breakdown: Efficiency 2-Bedroom 35% 1-Bedroom 45% 3-Bedroom 20% CONDITION: APPEAL: AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X Fireplace X Cable TV Ready Project Amenities X Swimming Pool Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office Gym Room OCCUPANCY: 85% LEASING DATA: Available Leasing Terms 12 month leases Concessions 1 month free Pet Deposit $200/$100 refundable Utilities Paid by Tenant: Electric Natural Gas Water Trash Confirmation Telephone Number 866-459-8419 NOTES: COMPARISON TO SUBJECT: Slightly Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B FOXFIRE APARTMENTS, DORAVILLE, GEORGIA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 THE LANDINGS KENDAL CREEK NORTH CHASE 6520 Hillandal Drive 1700 Hunter Ridge Lane 6750 Peachtree Industrial Blvd. Doraville, Georgia Norcross, Georgia Doraville, Georgia [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 PEACHTREE PLACE NORTH N/A 4600 Peachtree Place Parkway Doraville, Georgia [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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 Appraisal Institute 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 FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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. Phillip McGinnis 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- Michael Bates ---------------------------- Michael Bates, MAI Assistant Manager, Real Estate Group State of Georgia, Certified General Real Property Appraiser #CG00685 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EXHIBIT E QUALIFICATIONS OF APPRAISER (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E FOXFIRE APARTMENTS, DORAVILLE, GEORGIA MICHAEL P. BATES, MAI DIRECTOR - HEALTHCARE REAL ESTATE AND ASSISTANT MANAGER, REAL ESTATE GROUP POSITION Michael P. Bates is the Assistant Manager of the Atlanta Real Estate Group of American Appraisal Associates, Inc. ("AAA"). He shares responsibility for the management, quality control, and review of commercial real estate assignments principally in the southeast United States. Mr. Bates is also the national Director - Healthcare Real Estate for AAA and is responsible for the management and valuation process for specialty health care facility assignments. EXPERIENCE Valuation Mr. Bates has 17 years of commercial appraisal experience. He has performed appraisals in 43 states and Canada, and he is currently a certified general appraiser in 21 states. Court Mr. Bates has been accepted as an expert witness and given testimony in federal bankruptcy court in Delaware. He has prepared many other appraisals that were submitted as expert evidence to federal bankruptcy court, but those cases were settled prior to testimony being required. Mr. Bates has testified in property tax appeal cases in California, Missouri, and Texas, and his hospital appraisals have been submitted in tax appeal cases in Pennsylvania, South Carolina, and South Dakota. Business Mr. Bates joined AAA in 1997. Prior to joining AAA, he was president of his own valuation company and was previously a vice president for both Gulf/Atlantic Valuation Services, Inc., and Valuation Counselors. Prior to gaining his appraisal experience, Mr. Bates worked seven years in commercial mortgage financing. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E FOXFIRE APARTMENTS, DORAVILLE, GEORGIA EDUCATION University of Tennessee - Knoxville Master of Business Administration - Finance and Management Bachelor of Science - Marketing STATE State of Alabama, Certified General Real Property CERTIFICATIONS Appraiser, #G00503 State of Arizona, Certified General Real Estate Appraiser, #31067 State of Arkansas, State Certified General Appraiser, #CG1414N State of California, Certified General Real Estate Appraiser, #AG026120 State of Colorado, Certified General Appraiser, #CG40023849 State of Delaware, Certified General Appraiser, #X1-0000352 State of Florida, Certified General Appraiser, #0002494 State of Georgia, Certified General Real Property Appraiser, #CG00685 State of Illinois, State Certified General Real Estate Appraiser, #153001243 State of Maryland, Certified General Real Estate Appraiser, #10814 State of Michigan, Certified General Appraiser, #1201069262 State of Mississippi, State Certified General Real Estate Appraiser, #GA-629 State of New Jersey, General Appraiser, #42KG00195600 State of New York, Real Estate General Appraiser, #46000041317 State of North Carolina, Certified General Real Estate Appraiser, #A4095 Commonwealth of Pennsylvania, Certified General Appraiser, #GA001817R State of South Carolina, Certified Real Estate Appraiser, #CG3059 State of Tennessee, Certified General Real Estate Appraiser, AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E FOXFIRE APARTMENTS, DORAVILLE, GEORGIA #00051881 State of Texas, State Certified General Real Estate Appraiser, #TX-1328483-G Commonwealth of Virginia, Certified General Real Estate Appraiser, #4001005254 State of Washington, Certified General Real Estate Appraiser, #1100998 PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS VALUATION AND Appraisal Institute SPECIAL COURSES All required courses Standards of Professional Practice, Parts A and B The Appraiser as an Expert Witness: Preparation and Testimony Litigation Appraising: Specialized Topics and Applications Separating Real and Personal Property from Intangible Business Assets Specialty Courses Hotel/Motel Valuation and Investment Seminar Valuation of Special-Purpose Properties PUBLICATIONS "Estimating Hospital Real Property Values for Ad Valorem Tax Purposes," Journal of Property Tax Management, Fall 1997, republished by Appraisal Institute in A Business Enterprise Value Anthology, 2001 Co-authored "Abnormal Investor Returns Resulting from the Burroughs and Memorex Merger," Mergers & Acquisitions, June 1984 AMERICAN APPRAISAL ASSOCIATES, INC. FOXFIRE APARTMENTS, DORAVILLE, GEORGIA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. FOXFIRE APARTMENTS, DORAVILLE, GEORGIA 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. EX-99.(C)(2) 4 d07277a2exv99wxcyx2y.txt APPRAISAL OF LAKE JOHNSON MEWS LAKE JOHNSON MEWS 4233 AVENT FERRY ROAD RALEIGH, NORTH CAROLINA 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] JULY 2, 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 JOHNSON MEWS 4233 AVENT FERRY ROAD RALEIGH, WAKE 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 201 units with a total of 188,440 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 20.13 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 91% 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 JOHNSON MEWS, RALEIGH, 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 12, 2003 is: ($9,500,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach July 2, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group North Carolina Temporary Practice Permit #2578 Report By: Jimmy Pat James, MAI North Carolina Temporary Practice Permit #2603 Assisted By: J. Chad Walker AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 LAKE JOHNSON MEWS, RALEIGH, 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 .................................. 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 JOHNSON MEWS, RALEIGH, NORTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Lake Johnson Mews LOCATION: 4233 Avent Ferry Road Raleigh, 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 12, 2003 DATE OF REPORT: July 2, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 20.13 acres, or 876,863 square feet Assessor Parcel No.: 783525953 Floodplain: Community Panel No. 37183C0507E (March 3, 1992) Flood Zone X, an area outside the floodplain. Zoning: R-10 (Residential-10 Continued Use District) BUILDING: No. of Units: 201 Units Total NRA: 188,440 Square Feet Average Unit Size: 938 Square Feet Apartment Density: 10.0 units per acre Year Built: 1972 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square --------------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - --------------------------------------------------------------------------------------------- 1A10 - The Ashe 748 $ 629 $ 0.84 $ 65,416 $ 784,992 2A20 - The Burke 1,070 $ 759 $ 0.71 $ 45,540 $ 546,480 2A25 - The Dave 1,224 $ 839 $ 0.69 $ 14,263 $ 171,156 3A20 - The Franklin 1,282 $ 1,096 $ 0.85 $ 21,920 $ 263,040 - --------------------------------------------------------------------------------------------- Total $ 147,139 $ 1,765,668 =============================================================================================
OCCUPANCY: 91% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - PROPERTY SIGN EXTERIOR - OFFICE AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $ 1,765,668 $ 8,784 Effective Gross Income $ 1,661,028 $ 8,264 Operating Expenses $ 684,041 $ 3,403 41.2% of EGI Net Operating Income: $ 926,736 $ 4,611 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $ 9,700,000 * $ 48,259 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 10% Stabilized Vacancy & Collection Loss: 9% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.00% Discount Rate 11.50% Selling Costs 3.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 9,500,000 * $ 47,264 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 9,500,000 $ 47,264 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $ 38,375 to $ 61,500 Range of Sales $/Unit (Adjusted) $ 43,050 to $ 47,969 VALUE INDICATION - PRICE PER UNIT $ 9,200,000 * $ 45,771 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.64 to 6.90 Selected EGIM for Subject 5.75 Subject's Projected EGI $ 1,661,028 EGIM ANALYSIS CONCLUSION $ 9,500,000 * $ 47,264 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 9,600,000 * $ 47,761 / UNIT RECONCILED SALES COMPARISON VALUE $ 9,200,000 $ 45,771 / 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 JOHNSON MEWS, RALEIGH, NORTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 9,200,000 NOI Per Unit $ 9,600,000 EGIM Multiplier $ 9,500,000 INDICATED VALUE BY SALES COMPARISON $ 9,200,000 $ 45,771 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 9,700,000 Discounted Cash Flow Method: $ 9,500,000 INDICATED VALUE BY THE INCOME APPROACH $ 9,500,000 $ 47,264 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 9,500,000 $ 47,264 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 4233 Avent Ferry Road, Raleigh, Wake County, North Carolina. Raleigh identifies it as 783525953. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by J. Chad Walker on May 12, 2003. Jimmy Pat James, MAI and Frank Fehribach, MAI have not made a personal inspection of the subject property. J. Chad Walker assisted Jimmy Pat James, MAI in the research, valuation analysis and writing the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI, Jimmy Pat James, MAI, and J. Chad Walker 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 12, 2003. The date of the report is July 2, 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 & AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA 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: "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 Shelter Properties V, LP. 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 JOHNSON MEWS, RALEIGH, 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 Raleigh, North Carolina. 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 - Gorman Street West - Interstate Highway 440 South - Interstate Highway 40 North - Western Boulevard MAJOR EMPLOYERS Major employers in the subject's area include MCI Telecommunications; Nortel; Cisco Systems; IBM; State of North Carolina; Wake County Public School; North Carolina State University; Wake County: and the City of Raleigh. 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 JOHNSON MEWS, RALEIGH, NORTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA - ------------------------------------------------------------------------------------------------ POPULATION TRENDS Current Population 8,525 58,057 155,883 1,249,659 5-Year Population 9,099 64,871 169,642 1,408,794 % Change CY-5Y 6.7% 11.7% 8.8% 12.7% Annual Change CY-5Y 1.3% 2.3% 1.8% 2.5% HOUSEHOLDS Current Households 4,064 21,716 61,981 484,776 5-Year Projected Households 4,267 24,169 67,356 545,189 % Change CY - 5Y 5.0% 11.3% 8.7% 12.5% Annual Change CY-5Y 1.0% 2.3% 1.7% 2.5% INCOME TRENDS Median Household Income $ 38,591 $ 37,512 $ 48,687 $ 55,832 Per Capita Income $ 23,719 $ 19,514 $ 25,647 $ 25,814 Average Household Income $ 51,832 $ 52,920 $ 64,839 $ 66,544
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 60.41% 56.66% 46.41% 33.18% 5-Year Projected % Renting 58.59% 56.55% 46.04% 32.28% % of Households Owning 31.95% 37.22% 47.45% 61.69% 5-Year Projected % Owning 33.89% 37.65% 48.05% 63.00%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Apartments South - Lake Johnson East - Residential Condominiums West - Avent Ferry Road and single-family residential CONCLUSIONS The subject is well located within the city of Raleigh. 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 JOHNSON MEWS, RALEIGH, NORTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Raleigh in Wake County. The overall pace of development in the subject's market is more or less stable. 48 units were completed over the past six months at Trinity Commons. There were 72 units started at the same time period at the Bostic Brothers site at Gorman Street and Avent Ferry Road. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------ ------ --------- 1Q01 8.1% 5.2% 3Q01 9.6% 8.2% 1Q02 12.5% 8.8% 3Q02 12.0% 13.3% 1Q03 12.6% 13.8%
Source: REAL DATA Real Estate Information Services Apartment Index 1Q03 Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. The Raleigh-Durham apartment as a whole is reporting a high vacancy rate of 12.6% for 1Q03. Vacancy rates in the Triangle (Raleigh, Durham, Chapel Hill) area have steadily been steadily rising since 1996, according to REAL DATA Real Estate Information Services Apartment Index 1Q03. In comparison, the Raleigh-Central Submarket is posting vacancy rates of 13.8%. The vacancy rate has continued to increase in this submarket as more apartment complexes have been built. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ------ ------ -------- --------- -------- 1Q01 $ 746 - $ 663 - 3Q01 $ 763 2.3% $ 677 2.1% 1Q02 $ 764 0.1% $ 683 0.9% 3Q02 $ 761 -0.4% $ 667 -2.3% 1Q03 $ 758 -0.4% $ 664 -0.4%
Source: REAL DATA Real Estate Information Services Apartment Index 1Q03 The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject --- ------------- ----- ----- ---------- -------------------- R-1 Summit at Avent Ferry 222 86% 1985 0.50 mile east of the subject R-2 Dominion Walnut Creek 576 92% 1985 0.50 mile southeast of the subject R-3 Remington Place 136 99% 1985 0.75 mile southeast of the subject R-4 Clarion Crossing 260 90% 1972 0.75 mile east of the subject R-5 Sumter Square 391 86% 1970 0.90 mile northwest of the subject Subject Lake Johnson Mews 201 91% 1972
The Raleigh-Central submarket as well as the Triangle as a whole has experienced declining apartment rental rates over the past two years. This is due in part to the economic slowdown of the national economy and low interest rates currently being offered. As of 1Q03, the average rental rate for the Southwest submarket was $664, which is $94 above the Region at $758. However, rates are currently stabilizing and remain at these levels in the short-term. As the national economy improves so should contract rental rates. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 20.13 acres, or 876,863 square feet Shape Irregular Topography Slightly 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 37183C0507E, dated March 3, 1992 Flood Zone Zone X Zoning R-10, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ---------------------------------------------------------------------------------------------- 783525953 $ 1,407,000 $ 7,555,115 $ 8,962,115 0.00994 $ 89,070
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 201 Net Rentable Area 188,440 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, jogging track, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, vaulted ceiling, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, washer/dryer, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - -------------------------------------------------- 1A10 -The Ashe 104 748 2A20 - The Burke 60 1,070 2A25 - The Dave 17 1,224 3A20 - The Franklin 20 1,282
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 1972 and consist of a 201-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 JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 - ---------------------- ------------------------- -------------------------- ------------------------ ----------------------- Property Name Lake Johnson Mews Calibre Chase Cardinal Woods Treybrooke LOCATION: Address 4233 Avent Ferry Road 231 Calibre Chase Drive 1331 Wicklow Drive 201 Treybrooke City, State Raleigh, North Carolina Raleigh, North Carolina Cary, North Carolina Raleigh, North Carolina County Wake Wake Wake Wake PHYSICAL CHARACTERISTICS: Net Rentable Area(SF) 188,440 171,312 140,480 228,000 Year Built 1972 1988 1977 1989 Number of Units 201 192 184 200 Unit Mix: Type Total Type Total Type Total Type Total 1A10 - The Ashe 104 1Br/1Ba - Type 1 48 1Br/1Ba 88 1Br/1Ba 40 2A20 - The Burke 60 1Br/1Ba - Type 2 48 2Br/1.5Ba 96 2Br/1.5Ba 40 2A25 - The Dave 17 1Br/1Ba - Type 3 24 2Br/2Ba 80 3A20 - The Franklin 20 2Br/2Ba 72 3Br/2.5Ba 40 Average Unit Size(SF) 938 892 763 1,140 Land Area (Acre) 20.1300 23.4800 14.7700 20.2000 Density (Units/ Acre) 10.0 8.2 12.5 9.9 Parking Ratio (Spaces/Unit) 1.67 N/A N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open Open CONDITION: Average Average Average Average APPEAL: Average Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Yes/No Gym Room No Yes No Yes Laundry Room Yes No Yes Yes Secured Parking No No No Yes Sport Courts No Yes No No Washer/Dryer Connection Yes Yes Yes Yes Other Other OCCUPANCY: 91% 98% 90% 92% TRANSACTION DATA: Sale Date November, 2001 October, 2001 April, 2001 Sale Price ($) $11,755,000 $7,061,000 $12,300,000 Grantor SWA Acquisitions LTD Excel Realty Richard M. Trust Drew Grantee Wilson Investment CK Cardinal Treybrooke Properties Inc. Woods LLC Associates LTD Partnership Sale Documentation Book 9142, Book 9100, Book 8875, Page 2745 Page 1740 Page 2226 Verification Wake County Wake County Wake County Records Records Records Telephone Number ESTIMATED PRO-FORMA: Total$ $/Unit $/SF Total$ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,890,720 $9,848 $11.04 $1,390,560 $7,557 $9.90 $1,937,760 $9,689 $8.50 Vacancy/Credit Loss $ 75,629 $ 394 $ 0.44 $ 139,056 $ 756 $0.99 $ 155,021 $ 775 $0.68 Effective Gross Income $1,815,091 $9,454 $10.60 $1,251,504 $6,802 $8.91 $1,782,739 $8,914 $7.82 Operating Expenses $ 706,073 $3,677 $ 4.12 $ 500,602 $2,721 $3.56 $ 713,096 $3,565 $3.13 Net Operating Income $1,109,018 $5,776 $ 6.47 $ 750,902 $4,081 $5.35 $1,069,643 $5,348 $4.69 NOTES: None None None PRICE PER UNIT $ 61,224 $ 38,375 $ 61,500 PRICE PER SQUARE FOOT $ 68.62 $ 50.26 $ 53.95 EXPENSE RATIO 38.9% 40.0% 40.0% EGIM 6.48 5.64 6.90 OVERALL CAP RATE 9.43% 10.63% 8.70% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA PRO FORMA COMPARABLE COMPARABLE DESCRIPTION I - 4 I - 5 - ---------------------- ------------------------ ---------------------- Property Name Oxford Square Oak Hollow LOCATION: Address 1000 Village Greenway 100 Kempwood Drive City, State Raleigh, North Carolina Raleigh, North Carolina County Wake Wake PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 155,560 213,200 Year Built 1975 1985 Number of Units 184 240 Unit Mix: Type Total Type Total 1Br/1Ba - Type 1 8 1Br/1Ba - Type 1 40 1Br/1Ba - Type 2 12 1Br/1Ba - Type 2 20 1Br/1Ba - Type 3 8 1Br/1Ba - Type 3 10 1Br/1Ba - Type 4 12 1Br/1Ba - Type 4 90 2Br/1Ba - Type 1 36 2Br/2Ba 80 2Br/1Ba - Type 2 18 2Br/1Ba - Type 3 12 2Br/2Ba 54 3Br/1.5Ba - Type1 12 3Br/1.5Ba - Type2 4 3Br/1.5Ba - Type3 6 3Br/1.5Ba - Type4 2 Average Unit Size(SF) 845 888 Land Area (Acre) 15.1900 27.3300 Density (Units/ Acre) 12.1 8.8 Parking Ratio (Spaces/Unit) N/A N/A Parking Type (Gr., Cov., etc.) Open Open CONDITION: Average Good APPEAL: Average Average AMENITIES: Pool/Spa Yes/No Yes/Yes Gym Room Yes No Laundry Room Yes Yes Secured Parking No No Sport Courts No Yes Washer/Dryer Connection Yes Yes Other Other OCCUPANCY: 89% 83% TRANSACTION DATA: Sale Date August, 2000 December, 2000 Sale Price ($) $8,650,000 $12,250,000 Grantor Oxford Square LLC Affiliates Equities Real Estate Trust Grantee Oxford Square Cary BNP Realty LLC LLC Sale Documentation Book 8648, Page 1690 Book 8782, Page 2508 Verification Wake County Records Wake County Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,470,528 $7,992 $9.45 $2,196,480 $9,152 $10.30 Vacancy/Credit Loss $ 117,642 $ 639 $0.76 $ 263,578 $1,098 $ 1.24 Effective Gross Income $1,352,886 $7,353 $8.70 $1,932,902 $8,054 $ 9.07 Operating Expenses $ 541,154 $2,941 $3.48 $ 773,161 $3,222 $ 3.63 Net Operating Income $ 811,732 $4,412 $5.22 $1,159,741 $4,832 $ 5.44 NOTES: None None PRICE PER UNIT $ 47,011 $ 51,042 PRICE PER SQUARE FOOT $ 55.61 $ 57.46 EXPENSE RATIO 40.0% 40.0% EGIM 6.39 6.34 OVERALL CAP RATE 9.38% 9.47% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $38,375 to $61,500 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 $43,050 to $47,969 per unit with a mean or average adjusted price of $45,977 per unit. The median adjusted price is $45,938 per unit. Based on the following analysis, we have concluded to a value of $46,000 per unit, which results in an "as is" value of $9,200,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 - ---------------------- ----------------- ------------------- ------------------ ----------------- Property Name Lake Johnson Mews Calibre Chase Cardinal Woods Treybrooke Address 4233 Avent 231 Calibre 1331 201 Ferry Road Chase Drive Wicklow Treybrooke Drive City Raleigh, Raleigh, Cary, Raleigh, North Carolina North North North Carolina Carolina Carolina Sale Date November, 2001 October, 2001 April, 2001 Sale Price ($) $11,755,000 $7,061,000 $12,300,000 Net Rentable Area (SF) 188,440 171,312 140,480 228,000 Number of Units 201 192 184 200 Price Per Unit $61,224 $38,375 $61,500 Year Built 1972 1988 1977 1989 Land Area (Acre) 20.1300 23.4800 14.7700 20.2000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Fee Simple Fee Simple Fee Simple Fee Simple Conveyed Estate Estate 0% Estate 0% Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 11-2001 0% 10-2001 0% 04-2001 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $61,224 $38,375 $61,500 Location Comparable 0% Inferior 20% Superior - 5% Number of Units 201 192 0% 184 0% 200 0% Quality / Appeal Good Superior - 5% Comparable 0% Superior - 5% Age / Condition 1972 1988/Average -10% 1977/Average 0% 1989/Average -10% Occupancy at Sale 91% 98% - 5% 90% 0% 92% 0% Amenities Good Superior - 5% Comparable 0% Superior - 5% Average Unit Size (SF) 938 892 0% 763 5% 1,140 - 5% PHYSICAL ADJUSTMENT -25% 25% -30% FINAL ADJUSTED VALUE ($/UNIT) $45,918 $47,969 $43,050 COMPARABLE COMPARABLE DESCRIPTION I - 4 I - 5 - ---------------------- ------------------- ------------------ Property Name Oxford Square Oak Hollow Address 1000 Village Greenway 100 Kempwood Drive City Raleigh, Raleigh, North North Carolina Carolina Sale Date August, 2000 December, 2000 Sale Price ($) $8,650,000 $12,250,000 Net Rentable Area (SF) 155,560 213,200 Number of Units 184 240 Price Per Unit $47,011 $51,042 Year Built 1975 1985 Land Area (Acre) 15.1900 27.3300 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Fee Simple Fee Simple Conveyed Estate 0% Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2000 0% 12-2000 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $47,011 $51,042 Location Inferior 5% Comparable 0% Number of Units 184 0% 240 0% Quality / Appeal Comparable 0% Superior - 5% Age / Condition 1975/Average 0% 1985 / Good - 5% Occupancy at Sale 89% 0% 83% 5% Amenities Superior -5% Superior - 5% Average Unit Size (SF) 845 0% 888 0% PHYSICAL ADJUSTMENT 0% -10% FINAL ADJUSTED VALUE ($/UNIT) $47,011 $45,938
SUMMARY VALUE RANGE (PER UNIT) $43,050 to $47,969 MEAN (PER UNIT) $45,977 MEDIAN (PER UNIT) $45,938 VALUE CONCLUSION (PER UNIT) $46,000
VALUE OF IMPROVEMENT & MAIN SITE $9,246,000 PV OF CONCESSIONS -$ 66,000 VALUE INDICATED BY SALES COMPARISON APPROACH $9,180,000 ROUNDED $9,200,000
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 JOHNSON MEWS, RALEIGH, 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-1 192 $11,755,000 9.43% $ 1,109,018 $ 926,736 0.798 $ 48,870 $ 61,224 $ 5,776 $ 4,611 I-2 184 $ 7,061,000 10.63% $ 750,902 $ 926,736 1.130 $ 43,355 $ 38,375 $ 4,081 $ 4,611 I-3 200 $12,300,000 8.70% $ 1,069,643 $ 926,736 0.862 $ 53,018 $ 61,500 $ 5,348 $ 4,611 I-4 184 $ 8,650,000 9.38% $ 811,732 $ 926,736 1.045 $ 49,132 $ 47,011 $ 4,412 $ 4,611 I-5 240 $12,250,000 9.47% $ 1,159,741 $ 926,736 0.954 $ 48,701 $ 51,042 $ 4,832 $ 4,611
PRICE/UNIT Low High Average Median $43,355 $53,018 $48,615 $48,870
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 48,000 ---------- Number of Units 201 Value $9,648,000 PV of Concessions -$ 66,000 ---------- Value Based on NOI Analysis $9,582,000 Rounded $9,600,000
The adjusted sales indicate a range of value between $43,355 and $53,018 per unit, with an average of $48,615 per unit. Based on the subject's competitive position within the improved sales, a value of $48,000 per unit is estimated. This indicates an "as is" market value of $9,600,000 (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 JOHNSON MEWS, RALEIGH, 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-1 192 $11,755,000 $ 1,815,091 $ 706,073 38.90% 6.48 $ 61,224 I-2 184 $ 7,061,000 $ 1,251,504 $ 500,602 40.00% 5.64 $ 38,375 I-3 200 $12,300,000 $ 1,782,739 $ 713,096 40.00% 41.18% 6.90 $ 61,500 I-4 184 $ 8,650,000 $ 1,352,886 $ 541,154 40.00% 6.39 $ 47,011 I-5 240 $12,250,000 $ 1,932,902 $ 773,161 40.00% 6.34 $ 51,042
EGIM Low High Average Median 5.64 6.90 6.35 6.39
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.75 -------------- Subject EGI $ 1,661,028 Value $ 9,550,910 PV of Concessions - $ 66,000 -------------- Value Based on EGIM Analysis $ 9,484,910 Rounded $ 9,500,000 Value Per Unit $ 47,264
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 41.18% before reserves. The comparable sales indicate a range of expense ratios from 38.90% to 40.00%, while their EGIMs range from 5.64 to 6.90. Overall, we conclude to an EGIM of 5.75, which results in an "as is" value estimate in the EGIM Analysis of $9,500,000. 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 $9,200,000. Price Per Unit $9,200,000 NOI Per Unit $9,600,000 EGIM Analysis $9,500,000 Sales Comparison Conclusion $9,200,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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 - ------------------- ---------------------------------------------- 1A10 - The Ashe 748 $ 626 $ 0.84 91.3% 2A20 - The Burke 1070 $ 755 $ 0.71 95.0% 2A25 - The Dave 1224 $ 832 $ 0.68 94.1% 3A20 - The Franklin 1282 $1,096 $ 0.85 75.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS ----------------------------------------------- R-1 R-2 R-3 R-4 R-5 ----------------------------------------------- Dominion Summit at Walnut Remington Clarion Sumter Avent Ferry Creek Place Crossing Square ----------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ----------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Superior Similar Similar Similar Similar MIN MAX MEDIAN AVERAGE - ----------------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1A10 -THE ASHE $ 626 $ 649 $ 685 $ 541 $ 715 $ 615 $ 565 $ 541 $ 715 $ 615 $ 624 Unit Area (SF) 748 748 700 701 933 696 700 696 933 700 746 Monthly Rent Per Sq. Ft. $ 0.84 $ 0.87 $ 0.98 $ 0.77 $ 0.77 $ 0.88 $ 0.81 $ 0.77 $ 0.98 $ 0.81 $ 0.84 Monthly Rent 2A20 - THE $ 755 $ 799 $ 835 $ 720 $ 815 $ 720 $ 835 $ 815 $ 790 Unit Area (SF) BURKE 1,070 1,070 1,050 963 1,060 963 1,060 1,050 1,024 Monthly Rent Per Sq. Ft. $ 0.71 $ 0.75 $ 0.80 $ 0.75 $ 0.77 $ 0.75 $ 0.80 $ 0.77 $ 0.77 Monthly Rent 2A25 - THE DAVE $ 832 $ 899 $ 895 $ 635 $ 635 $ 895 $ 765 $ 765 Unit Area (SF) 1,224 1,224 1,343 800 800 1,343 1,072 1,072 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.73 $ 0.67 $ 0.79 $0.67 $ 0.79 $ 0.73 $ 0.73 Monthly Rent 3A20 - THE $ 1,096 $ 1,029 $ 1,024 $ 1,037 $1,024 $1,037 $1,031 $ 1,031 Unit Area (SF) FRANKLIN 1,282 1,282 1,100 1,184 1,100 1,184 1,142 1,142 Monthly Rent Per Sq. Ft. $ 0.85 $ 0.80 $ 0.93 $ 0.88 $ 0.88 $ 0.93 $ 0.90 $ 0.90
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 - --------------------------------------------------------------------------------------------------- 1A10 -The Ashe 104 748 $ 629 $ 0.84 $ 65,416 $ 784,992 2A20 - The Burke 60 1,070 $ 759 $ 0.71 $ 45,540 $ 546,480 2A25 - The Dave 17 1,224 $ 839 $ 0.69 $ 14,263 $ 171,156 3A20 - The Franklin 20 1,282 $ 1,096 $ 0.85 $ 21,920 $ 263,040 Total $147,139 $1,765,668
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 JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003 ------------------------------------------------------------------------------------------- DESCRIPTION ACTUAL ACTUAL ACTUAL MANAGEMENT BUDGET ------------------------------------------------------------------------------------------- TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT - ------------------------ ------------------------------------------------------------------------------------------- Revenues Rental Income $1,822,332 $ 9,066 $1,843,700 $ 9,173 $1,704,498 $ 8,480 $ 1,704,536 $ 8,480 Vacancy $ 112,623 $ 560 $ 144,414 $ 718 $ 124,550 $ 620 $ 111,305 $ 554 Credit Loss/Concessions $ 54,885 $ 273 $ 101,627 $ 506 $ 39,022 $ 194 $ 32,100 $ 160 ------------------------------------------------------------------------------------------ Subtotal $ 167,508 $ 833 $ 246,041 $ 1,224 $ 163,572 $ 814 $ 143,405 $ 713 Laundry Income $ 3,752 $ 19 $ 2,012 $ 10 $ 2,995 $ 15 $ 9,312 $ 46 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 24,158 $ 120 $ 48,776 $ 243 $ 59,693 $ 297 $ 48,850 $ 243 ------------------------------------------------------------------------------------------ Subtotal Other Income $ 27,910 $ 139 $ 50,788 $ 253 $ 62,688 $ 312 $ 58,162 $ 289 ------------------------------------------------------------------------------------------ Effective Gross Income $1,682,734 $ 8,372 $1,648,447 $ 8,201 $1,603,614 $ 7,978 $ 1,619,293 $ 8,056 ------------------------------------------------------------------------------------------ Operating Expenses Taxes $ 94,297 $ 469 $ 46,734 $ 233 $ 134,881 $ 671 $ 94,775 $ 472 Insurance $ 24,322 $ 121 $ 38,100 $ 190 $ 36,458 $ 181 $ 38,944 $ 194 Utilities $ 65,054 $ 324 $ 63,091 $ 314 $ 71,271 $ 355 $ 63,600 $ 316 Repair & Maintenance $ 102,117 $ 508 $ 107,540 $ 535 $ 95,723 $ 476 $ 86,400 $ 430 Cleaning $ 3,136 $ 16 $ 2,085 $ 10 $ 1,675 $ 8 $ 0 $ 0 Landscaping $ 21,645 $ 108 $ 21,381 $ 106 $ 19,118 $ 95 $ 39,444 $ 196 Security $ 1,946 $ 10 $ 1,263 $ 6 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 43,084 $ 214 $ 28,612 $ 142 $ 31,028 $ 154 $ 34,608 $ 172 General Administrative $ 212,556 $ 1,057 $ 247,034 $ 1,229 $ 213,028 $ 1,060 $ 154,012 $ 766 Management $ 87,825 $ 437 $ 87,695 $ 436 $ 84,210 $ 419 $ 86,400 $ 430 Miscellaneous ($ 14,649) -$ 73 ($ 8,805) -$ 44 ($ 647) -$ 3 $ 0 $ 0 ------------------------------------------------------------------------------------------ Total Operating Expenses $ 641,333 $ 3,191 $ 634,730 $ 3,158 $ 686,745 $ 3,417 $ 598,183 $ 2,976 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------------------ Net Income $1,041,401 $ 5,181 $1,013,717 $ 5,043 $ 916,869 $ 4,562 $ 1,021,110 $ 5,080 ANNUALIZED 2003 ------------------- DESCRIPTION PROJECTION AAA PROJECTION ---------------------------------------------- TOTAL PER UNIT TOTAL PER UNIT % - ----------------------------------------------------------------------- Revenues Rental Income $1,647,396 $ 8,196 $1,765,668 $ 8,784 100.0% Vacancy $ 194,100 $ 966 $ 123,597 $ 615 7.0% Credit Loss/Concessions $ 44,580 $ 222 $ 35,313 $ 176 2.0% ---------------------------------------------- Subtotal $ 238,680 $ 1,187 $ 158,910 $ 791 9.0% Laundry Income $ 9,188 $ 46 $ 6,030 $ 30 0.3% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 41,804 $ 208 $ 48,240 $ 240 2.7% ---------------------------------------------- Subtotal Other Income $ 50,992 $ 254 $ 54,270 $ 270 3.1% ---------------------------------------------- Effective Gross Income $1,459,708 $ 7,262 $1,661,028 $ 8,264 100.0% Operating Expenses Taxes $ 95,300 $ 474 $ 90,450 $ 450 5.4% Insurance $ 72,120 $ 359 $ 35,175 $ 175 2.1% Utilities $ 86,032 $ 428 $ 75,375 $ 375 4.5% Repair & Maintenance $ 153,112 $ 762 $ 100,500 $ 500 6.1% Cleaning $ 5,820 $ 29 $ 3,015 $ 15 0.2% Landscaping $ 39,524 $ 197 $ 40,200 $ 200 2.4% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 60,312 $ 300 $ 35,175 $ 175 2.1% General Administrative $ 230,096 $ 1,145 $ 221,100 $ 1,100 13.3% Management $ 70,648 $ 351 $ 83,051 $ 413 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% ---------------------------------------------- Total Operating Expenses $ 812,964 $ 4,045 $ 684,041 $ 3,403 41.2% Reserves $ 0 $ 0 $ 50,250 $ 250 7.3% ---------------------------------------------- Net Income $ 646,744 $ 3,218 $ 926,736 $ 4,611 55.8% ----------------------------------------------
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 9% 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 JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------------------------------------------------------------------------------- I-1 Nov-01 98% $61,224 9.43% I-2 Oct-01 90% $38,375 10.63% I-3 Apr-01 92% $61,500 8.70% I-4 Aug-00 89% $47,011 9.38% I-5 Dec-00 83% $51,042 9.47% High 10.63% Low 8.70% Average 9.52%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.50%. 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 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 3.00% 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 $9,500,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA approximately 39% 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 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS LAKE JOHNSON MEWS
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 - -------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,765,668 $1,765,668 $1,792,153 $1,827,996 $1,882,836 $1,939,321 Vacancy $ 123,597 $ 123,597 $ 125,451 $ 127,960 $ 131,799 $ 135,752 Credit Loss $ 35,313 $ 35,313 $ 35,843 $ 36,560 $ 37,657 $ 38,786 Concessions $ 35,313 $ 26,485 $ 17,922 $ 0 $ 0 $ 0 ------------------------------------------------------------------------ Subtotal $ 194,223 $ 185,395 $ 179,215 $ 164,520 $ 169,455 $ 174,539 Laundry Income $ 6,030 $ 6,030 $ 6,120 $ 6,243 $ 6,430 $ 6,623 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 48,240 $ 48,240 $ 48,964 $ 49,943 $ 51,441 $ 52,984 ------------------------------------------------------------------------ Subtotal Other Income $ 54,270 $ 54,270 $ 55,084 $ 56,186 $ 57,871 $ 59,607 EFFECTIVE GROSS INCOME $1,625,715 $1,634,543 $1,668,022 $1,719,662 $1,771,252 $1,824,390 ------------------------------------------------------------------------ OPERATING EXPENSES: Taxes $ 90,450 $ 93,164 $ 95,958 $ 98,837 $ 101,802 $ 104,856 Insurance $ 35,175 $ 36,230 $ 37,317 $ 38,437 $ 39,590 $ 40,777 Utilities $ 75,375 $ 77,636 $ 79,965 $ 82,364 $ 84,835 $ 87,380 Repair & Maintenance $ 100,500 $ 103,515 $ 106,620 $ 109,819 $ 113,114 $ 116,507 Cleaning $ 3,015 $ 3,105 $ 3,199 $ 3,295 $ 3,393 $ 3,495 Landscaping $ 40,200 $ 41,406 $ 42,648 $ 43,928 $ 45,245 $ 46,603 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 35,175 $ 36,230 $ 37,317 $ 38,437 $ 39,590 $ 40,777 General Administrative $ 221,100 $ 227,733 $ 234,565 $ 241,602 $ 248,850 $ 256,315 Management $ 81,286 $ 81,727 $ 83,401 $ 85,983 $ 88,563 $ 91,219 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 682,276 $ 700,747 $ 720,991 $ 742,701 $ 764,982 $ 787,932 Reserves $ 50,250 $ 51,758 $ 53,310 $ 54,910 $ 56,557 $ 58,254 ------------------------------------------------------------------------ NET OPERATING INCOME $ 893,189 $ 882,039 $ 893,720 $ 922,052 $ 949,713 $ 978,204 ======================================================================== Operating Expense Ratio (% of EGI) 42.0% 42.9% 43.2% 43.2% 43.2% 43.2% Operating Expense Per Unit $ 3,394 $ 3,486 $ 3,587 $ 3,695 $ 3,806 $ 3,920 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ----------------------------------------------------------------------------------------------- REVENUE Base Rent $1,997,501 $2,057,426 $2,119,148 $2,182,723 $2,248,205 Vacancy $ 139,825 $ 144,020 $ 148,340 $ 152,791 $ 157,374 Credit Loss $ 39,950 $ 41,149 $ 42,383 $ 43,654 $ 44,964 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------- Subtotal $ 179,775 $ 185,168 $ 190,723 $ 196,445 $ 202,338 Laundry Income $ 6,822 $ 7,026 $ 7,237 $ 7,454 $ 7,678 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 54,574 $ 56,211 $ 57,897 $ 59,634 $ 61,423 ---------------------------------------------------------- Subtotal Other Income $ 61,396 $ 63,238 $ 65,135 $ 67,089 $ 69,101 EFFECTIVE GROSS INCOME $1,879,121 $1,935,495 $1,993,560 $2,053,367 $2,114,968 ---------------------------------------------------------- OPERATING EXPENSES: Taxes $ 108,002 $ 111,242 $ 114,579 $ 118,017 $ 121,557 Insurance $ 42,001 $ 43,261 $ 44,559 $ 45,895 $ 47,272 Utilities $ 90,002 $ 92,702 $ 95,483 $ 98,347 $ 101,298 Repair & Maintenance $ 120,002 $ 123,602 $ 127,310 $ 131,130 $ 135,064 Cleaning $ 3,600 $ 3,708 $ 3,819 $ 3,934 $ 4,052 Landscaping $ 48,001 $ 49,441 $ 50,924 $ 52,452 $ 54,025 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 42,001 $ 43,261 $ 44,559 $ 45,895 $ 47,272 General Administrative $ 264,005 $ 271,925 $ 280,083 $ 288,485 $ 297,140 Management $ 93,956 $ 96,775 $ 99,678 $ 102,668 $ 105,748 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------- TOTAL OPERATING EXPENSES $ 811,570 $ 835,917 $ 860,994 $ 886,824 $ 913,429 Reserves $ 60,001 $ 61,801 $ 63,655 $ 65,565 $ 67,532 ---------------------------------------------------------- NET OPERATING INCOME $1,007,551 $1,037,777 $1,068,910 $1,100,978 $1,134,007 ========================================================== Operating Expense Ratio (% of EGI) 43.2% 43.2% 43.2% 43.2% 43.2% Operating Expense Per Unit $ 4,038 $ 4,159 $ 4,284 $ 4,412 $ 4,544
Gross Residual Sale Price $11,340,071 Deferred Maintenance $ 0 Estimated Stabilized NOI $926,736 Sales Expense Rate 3.00% Less: Sales Expense $ 340,202 Add: Excess Land $ 0 ----------- Months to Stabilized 1 Discount Rate 11.50% Net Residual Sale Price $10,999,869 Other Adjustments $ 0 ----------- Stabilized Occupancy 93.0% Terminal Cap Rate 10.00% PV of Reversion $ 3,703,726 Value Indicated By $ 9,534,848 "DCF" Add: NPV of NOI $ 5,831,122 Rounded $ 9,500,000 ----------- PV Total $ 9,534,848
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------- TOTAL VALUE 11.00% 11.25% 11.50% 11.75% 12.00% - ---------------------------- ------------------------------------------------------------------- TERMINAL 9.50% $10,046,921 $9,886,618 $9,729,781 $9,576,322 $9,426,157 CAP RATE 9.75% $ 9,942,360 $9,784,384 $9,629,815 $9,478,570 $9,330,566 10.00% $ 9,843,027 $9,687,260 $9,534,848 $9,385,706 $9,239,754 10.25% $ 9,748,540 $9,594,875 $9,444,513 $9,297,372 $9,153,372 10.50% $ 9,658,552 $9,506,889 $9,358,480 $9,213,245 $9,071,103
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently near or at a 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 $66,000 (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 9.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA LAKE JOHNSON MEWS
TOTAL PER SQ. FT. PER UNIT %OF EGI REVENUE Base Rent $1,765,668 $ 9.37 $ 8,784 Less: Vacancy & Collection Loss 9.00% $ 158,910 $ 0.84 $ 791 Plus: Other Income Laundry Income $ 6,030 $ 0.03 $ 30 0.36% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 48,240 $ 0.26 $ 240 2.90% ---------- ----------- -------- ---- Subtotal Other Income $ 54,270 $ 0.29 $ 270 3.27% EFFECTIVE GROSS INCOME $1,661,028 $ 8.81 $ 8,264 OPERATING EXPENSES: Taxes $ 90,450 $ 0.48 $ 450 5.45% Insurance $ 35,175 $ 0.19 $ 175 2.12% Utilities $ 75,375 $ 0.40 $ 375 4.54% Repair & Maintenance $ 100,500 $ 0.53 $ 500 6.05% Cleaning $ 3,015 $ 0.02 $ 15 0.18% Landscaping $ 40,200 $ 0.21 $ 200 2.42% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 35,175 $ 0.19 $ 175 2.12% General Administrative $ 221,100 $ 1.17 $ 1,100 13.31% Management 5.00% $ 83,051 $ 0.44 $ 413 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 684,041 $ 3.63 $ 3,403 41.18% Reserves $ 50,250 $ 0.27 $ 250 3.03% ---------- ----------- -------- ---- NET OPERATING INCOME $ 926,736 $ 4.92 $ 4,611 55.79% "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $9,755,121 $ 51.77 $ 48,533 PV OF CONCESSIONS ($ 66,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $9,689,121 ROUNDED $9,700,000 $ 51.48 $ 48,259
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ----------------------------------------------------------------- 8.75% $10,525,274 $10,500,000 $ 52,239 $55.72 9.00% $10,231,072 $10,200,000 $ 50,746 $54.13 9.25% $ 9,952,773 $10,000,000 $ 49,751 $53.07 9.50% $ 9,689,121 $ 9,700,000 $ 48,259 $51.48 9.75% $ 9,438,990 $ 9,400,000 $ 46,766 $49.88 10.00% $ 9,201,365 $ 9,200,000 $ 45,771 $48.82 10.25% $ 8,975,332 $ 9,000,000 $ 44,776 $47.76
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $9,700,000. 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 $9,500,000 Direct Capitalization Method $9,700,000 Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $9,500,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 LAKE JOHNSON MEWS, RALEIGH, 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 $9,200,000 Income Approach $9,500,000 Reconciled Value $9,500,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 12, 2003 the market value of the fee simple estate in the property is: $9,500,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - PROPERTY SIGN EXTERIOR - OFFICE [PICTURE] [PICTURE] INTERIOR - OFFICE EXTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] EXTERIOR - APARTMENT UNIT EXTERIOR - APARTMENT UNIT AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] INTERIOR - TYPICAL UNIT INTERIOR - TYPICAL KITCHEN [PICTURE] [PICTURE] EXTERIOR - TYPICAL BALCONY EXTERIOR - SWIMMING POOL [PICTURE] [PICTURE] EXTERIOR - MAINTENANCE BUILDING INTERIOR - LAUNDRY FACILITY AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CALIBRE CHASE CARDINAL WOODS TREYBROOKE 231 Calibre Chase Drive 1331 Wicklow Drive 201 Treybrooke Raleigh, North Carolina Cary, North Carolina Raleigh, North Carolina [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 OXFORD SQUARE OAK HOLLOW 1000 Village Greenway 100 Kempwood Drive Raleigh, North Carolina Raleigh, North Carolina [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ----------- ------- ---------- Property Name Lake Johnson Mews Summit at Avent Ferry Management Company AIMCO Northland Investment Corp. LOCATION: Address 4233 Avent Ferry Road 1025 Avent Hill City, State Raleigh, North Carolina Ralegh, North Carolina County Wake Wake Proximity to Subject 0.50 mile east of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 188,440 193,200 Year Built 1972 1985 Effective Age 25 18 Building Structure Type Wood/Vinyl siding walls; composition Brick and wood/vinyl siding walls; composition shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 201 222 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1A10 - The Ashe 748 104 $ 626 1 1BD/1BH - Type 1 700 80 $685 2 2A20 - The Burke 1,070 60 $ 755 1BD/1BH - Type 2 880 70 $740 3 2A25 - The Dave 1,224 17 $ 832 2 2BD/2BH 1,050 72 $835 4 3A20 - The Franklin 1,282 20 $1,096 Average Unit Size (SF) 938 870 Unit Breakdown: Efficiency 0% 2-Bedroom 38% Efficiency 0% 2-Bedroom 32% 1-Bedroom 52% 3-Bedroom 10% 1-Bedroom 68% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi X 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 X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room X Jogging Track Business Office X Jogging Track Business Office Gym Room X Gym Room OCCUPANCY: 91% 86% LEASING DATA: Available Leasing Terms 6 to 18 Months 6 to 12 Months Concessions $400 of 1st months rent with a 12-month lease None Pet Deposit $250 with $150 non-refundable $100 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation Kellie Goldberg Property Manager Lisa Silver Telephone Number 919-851-3200 919-859-1700 NOTES: None COMPARISON TO SUBJECT: Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ----------- ---------- ---------- Property Name Dominion Walnut Creek Remington Place Management Company United Dominion Realty Trust Cornerstone Realty LOCATION: Address 3201 Waslnut Creek Parkway 1909 Eyrie Court City, State Ralegh, North Carolina Ralegh, North Carolina County Wake Wake Proximity to Subject 0.50 mile southeast of the subject 0.75 mile southeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 478,680 256,216 Year Built 1985 1985 Effective Age 18 18 Building Structure Type Brick and wood/vinyl siding walls; Wood/Vinyl siding walls; composition composition shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 576 136 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BD/1BH - Type 1 670 128 $ 494 1 1BD/1BH - Type 1 933 42 $715 1 1BD/1BH - Type 2 720 208 $ 570 1BD/1BH - Type 2 1,093 30 $765 2 2BD/2BH - Type 1 955 104 $ 670 3 2BD/2BH - Type 1 1,343 40 $895 2 2BD/2BH - Type 2 970 104 $ 770 2BD/2BH - Type 2 1,414 24 $965 4 3BD/2BH 1,100 32 $1,024 818 1,174 Average Unit Size (SF) Efficiency 0% 2-Bedroom 36% Efficiency 0% 2-Bedroom 47% Unit Breakdown: 1-Bedroom 58% 3-Bedroom 6% 1-Bedroom 53% 3-Bedroom 0% Average Average CONDITION: Average Average APPEAL: AMENITIES: Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling Unit Amenities X Balcony X X Balcony X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash X Basketball Court BBQ Equipment Basketball Court BBQ Equipment X 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 Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room X Jogging Track Business Office Jogging Track X Business Office X Gym Room X Gym Room OCCUPANCY: 92% 99% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions Move-in special of $399 for 1st 2-months Reduced rents ($50 to $75 off) Pet Deposit $450 $300 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash X Water Trash Confirmation Mara Brown Jennifer Byrd Telephone Number 919-851-5115 919-851-2211 NOTES: None None COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 ----------- ---------- ---------- Property Name Clarion Crossing Sumter Square Management Company Cornerstone Realty Drucker & Falk LLC LOCATION: Address 1141 Crab Orchard Drive 613 Charleston Road City, State Ralegh, North Carolina Ralegh, North Carolina County Wake Wake Proximity to Subject 0.75 mile east of the subject 0.90 mile northwest of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 208,888 368,800 Year Built 1972 1970 Effective Age 31 33 Building Structure Type Wood/Vinyl siding walls; composition Brick and wood/vinyl siding walls; composition shingle roof shingle Parking Type (Gr., Cov., etc.) Open Open Number of Units 260 391 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1EFF 420 40 $ 399 1 1BD/1BH 700 50 $565 1BD/1BH - Type 1 562 20 $ 499 3 2BD/1BH 800 96 $635 1 1BD/1BH - Type 2 606 20 $ 560 2BD/1.5BH - Type 1 1,000 86 $665 1 1BD/1BH - Type 3 706 20 $ 595 2BD/1.5BH - Type 2 1,050 78 $695 1 1BD/1BH - Type 4 776 20 $ 690 3BD/2BH 1,100 81 $760 2BD/1BH 880 60 $ 599 2 2BD/1.5BH 1,100 48 $ 790 2 2BD/2BH 964 20 $ 875 4 3BD/2BH 1,184 12 $1,037 Average Unit Size (SF) 803 943 Unit Breakdown: Efficiency 15% 2-Bedroom 49% Efficiency 0% 2-Bedroom 66% 1-Bedroom 31% 3-Bedroom 5% 1-Bedroom 13% 3-Bedroom 21% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony Fireplace 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 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 Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room X Gym Room OCCUPANCY: 90% 86% LEASING DATA: Available Leasing Terms 3 to 15 Months 6 to 12 Months Concessions Reduced rents Reduced rents ($30 off market rent) Pet Deposit $300 $200 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash Water Trash Confirmation Leasing agent Sara McClure Telephone Number 919-851-1910 919-851-3343 NOTES: None None COMPARISON TO SUBJECT: Similar Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 SUMMIT AT AVENT FERRY DOMINION WALNUT CREEK REMINGTON PLACE 1025 Avent Hill 3201 Waslnut Creek Parkway 1909 Eyrie Court Ralegh, North Carolina Ralegh, North Carolina Ralegh, North Carolina [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 CLARION CROSSING SUMTER SQUARE 1141 Crab Orchard Drive 613 Charleston Road Ralegh, North Carolina Ralegh, North Carolina [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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 LAKE JOHNSON MEWS, RALEIGH, 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. Jimmy Pat James, MAI and J. Chad Walker 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 LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKE JOHNSON MEWS, RALEIGH, 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 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA STATE CERTIFICATIONS State of Arizona, 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 PROFESSIONAL Appraisal Institute, MAI Designated Member Candidate AFFILIATIONS 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. LAKE JOHNSON MEWS, RALEIGH, NORTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. LAKE JOHNSON MEWS, RALEIGH, 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. EX-99.(C)(3) 5 d07277a2exv99wxcyx3y.txt APPRAISAL OF MILLHOPPER VILLAGE MILLHOPPER VILLAGE 507 NW 39TH ROAD GAINESVILLE, FLORIDA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 27, 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 9, 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: MILLHOPPER VILLAGE 507 NW 39TH ROAD GAINESVILLE, ALACHUA COUNTY, FLORIDA 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 136 units with a total of 156,950 square feet of rentable area. The improvements were built in 1969. The improvements are situated on 8.35 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 92% 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 27, 2003 is: ($6,100,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Alice MacQueen July 9, 2003 Alice MacQueen #053272 Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 Assisted By: Michael L. Kersten AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Millhopper Village LOCATION: 507 NW 39th Road Gainesville, Florida 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 27, 2003 DATE OF REPORT: July 9, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 8.35 acres, or 363,726 square feet Assessor Parcel No.: 06498-000-00 Floodplain: Community Panel No. 1251070004B (January 19, 1983) Flood Zone X, an area outside the floodplain. Zoning: RMF-7 (Multiple-family medium density residential district) BUILDING: No. of Units: 136 Units Total NRA: 156,950 Square Feet Average Unit Size: 1,154 Square Feet Apartment Density: 16.3 units per acre Year Built: 1969 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 - 1A10 750 $ 590 $ 0.79 $18,880 $ 226,560 2 Br/1.5 Ba - 2A15 1,400 $ 800 $ 0.57 $ 4,000 $ 48,000 2Br/2Ba - 2A20 1,000 $ 710 $ 0.71 $36,920 $ 443,040 3Br/2.5Ba - 3A25 1,550 $ 810 $ 0.52 $20,250 $ 243,000 3Br/2.5Ba - 3B25 1,600 $ 840 $ 0.53 $18,480 $ 221,760 Total $98,530 $1,182,360
OCCUPANCY: 92% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EFFECTIVE AGE: 20 Years REMAINING ECONOMIC LIFE: 25 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [EXTERIOR - OFFICE PICTURE] [EXTERIOR - PROJECT PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $ 1,182,360 $ 8,694 Effective Gross Income $ 1,166,124 $ 8,574 Operating Expenses $ 544,506 $ 4,004 46.7% of EGI Net Operating Income: $ 587,618 $ 4,321 Capitalization Rate 10.00% DIRECT CAPITALIZATION VALUE $ 5,900,000 * $ 43,382 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 10% Stabilized Vacancy & Collection Loss: 10% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 11.00% Discount Rate 12.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 6,000,000 * $ 44,118 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 6,000,000 $ 44,118 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $36,869 to $74,906 Range of Sales $/Unit (Adjusted) $44,242 to $49,375 VALUE INDICATION - PRICE PER UNIT $ 6,400,000 * $ 47,059 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.27 to 7.19 Selected EGIM for Subject 5.50 Subject's Projected EGI $ 1,166,124 EGIM ANALYSIS CONCLUSION $ 6,400,000 * $ 47,059 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 6,300,000 * $ 46,324 / UNIT RECONCILED SALES COMPARISON VALUE $ 6,400,000 $ 47,059 / 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 6,400,000 NOI Per Unit $ 6,300,000 EGIM Multiplier $ 6,400,000 INDICATED VALUE BY SALES COMPARISON $ 6,400,000 $ 47,059 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 5,900,000 Discounted Cash Flow Method: $ 6,000,000 INDICATED VALUE BY THE INCOME APPROACH $ 6,000,000 $ 44,853 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 6,100,000 $ 44,853 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 507 NW 39th Road, Gainesville, Alachua County, Florida. Gainesville identifies it as 06498-000-00. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Michael L. Kersten on May 27, 2003. Alice MacQueen has not made a personal inspection of the subject property. Michael L. Kersten assisted Alice MacQueen with the research, valuation analysis and writing the report. Alice MacQueen reviewed the report and concurs with the value. Alice MacQueen and Michael L. Kersten 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 27, 2003. The date of the report is July 9, 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 SP V LP. 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 Gainesville, Florida. 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 - NW 34th Street West - Newberry Street (SR 26) South - Newberry Street (SR 26) North - NW 8th Avenue MAJOR EMPLOYERS Major employers in the subject's area include Shands Hospital (9,600), Nationwide Insurance, Alachua County School Board, Energizer, and North Florida Regional Hospital. The University of Florida is Gainesville's largest employer (11,500 employees) and the State's second largest. 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA -------- ------------ ------------ ------------ --- POPULATION TRENDS Current Population 8,188 79,869 149,464 224,369 5-Year Population 8,378 83,813 160,961 241,244 % Change CY-5Y 2.3% 4.9% 7.7% 7.5% Annual Change CY-5Y 0.5% 1.0% 1.5% 1.5% HOUSEHOLDS Current Households 3,639 33,212 62,844 90,722 5-Year Projected Households 3,796 35,725 68,743 99,112 % Change CY - 5Y 4.3% 7.6% 9.4% 9.2% Annual Change CY-5Y 0.9% 1.5% 1.9% 1.8% INCOME TRENDS Median Household Income $ 34,450 $ 26,098 $ 26,952 $ 29,514 Per Capita Income $ 22,332 $ 18,407 $ 18,880 $ 18,899 Average Household Income $ 49,986 $ 44,769 $ 44,796 $ 46,739
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 42.93% 55.33% 51.40% 41.01% 5-Year Projected % Renting 43.72% 56.11% 51.74% 41.03% % of Households Owning 51.81% 36.72% 40.29% 50.29% 5-Year Projected % Owning 51.19% 36.38% 40.58% 50.92%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Single-Family Subdivision - Bartram Woods South - Concordia Condominiums East - Vacant Land West - NW 39th Road, a retail project, and a small multi-family project CONCLUSIONS The subject is well located within the city of Gainesville. 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA MARKET ANALYSIS The subject property is located in the city of Gainesville in Alachua County. The overall pace of development in the subject's market is more or less decreasing. There has not been any new apartment construction in proximity to the subject property over the past several years. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------ ------ --------- 4Q01 5.0% 6.0% 1Q02 6.0% 7.0% 2Q02 4.6% 8.0% 3Q02 7.2% 5.3% 4Q02 8.0% 6.7% 1Q03 7.0% 7.3%
Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. Market rents in the subject's market have been following a decreasing trend. 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 The Oaks Apartments 152 97% 1972 1.5 miles west of subject R-2 Brookwood Terrace 132 97% 1975 1.5 miles northeast of the subject R-3 Covered Bridge 174 97% 1973 1.5 miles northeast of the subject R-4 Madison Pointe 170 96% 1973 1.5 mile northeast of the subject R-5 Creekwood 120 91% 1978 2 miles northeast of the subject Subject Millhopper Village 136 92% 1969
Within Alachua County, there are reportedly more than 165 apartment communities. Rental rates in the area range from $350 to $500 per month for Studio apartments, $350 to $600 for 1 Bedroom units, $550 to $800 per month for 2 Bedroom apartments, $750 to $1,000 per month for 3 Bedroom apartments, and from $900 to $2,000 for 4 Bedroom units. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA Gainesville is one of the few places that have 4-Bedroom, 4-Bathroom apartments. The area has more than 21,000 apartment units. Gainesville is a strong apartment due mainly to the University of Florida. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 8.35 acres, or 363,726 square feet Shape Irregular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 1251070004B, dated January 19, 1983 Flood Zone Zone X Zoning RMF-7, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ----------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ------------- ---- -------- ----- ---------- ----- 06498-000-00 $292,300 $2,090,600 $2,382,900 0.02715 $64,699
IMPROVEMENT ANALYSIS Year Built 1969 Number of Units 136 Net Rentable Area 156,950 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, basketball court, tennis court, gym room, car wash, barbeque equipment, meeting hall, 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 refrigerator, stove, dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) --------- --------------- --------- 1Br/1Ba - 1A10 32 750 2 Br/1.5 Ba - 2A15 5 1,400 2Br/2Ba - 2A20 52 1,000 3Br/2.5Ba - 3A25 25 1,550 3Br/2.5Ba - 3B25 22 1,600
Overall Condition Average Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 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 1969 and consist of a 136-unit multifamily project. The highest and best use as improved is for 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ------------------------------------------------------------------------------------------------------------------- Property Name Millhopper Village Regency Oaks Country Garden LOCATION: Address 507 NW 39th Road 3230 SW Archer Road 2001 SW 16th Street City, State Gainesville, Florida Gainesville, Florida Gainesville, Florida County Alachua Alachua Alachua PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 156,950 155,844 95,000 Year Built 1969 1972 1971 Number of Units 136 148 99 Unit Mix: Type Total Type Total Type Total 1Br/1Ba - 1A10 32 1Br/1Ba N/A 1Br/1Ba N/A 2Br/1.5 Ba - 2A15 5 2Br/2Ba N/A 2Br/2Ba N/A 2Br/2Ba - 2A20 52 3Br/2Ba N/A 3Br/2.5Ba - 3A25 25 3Br/2.5Ba - 3B25 22 Average Unit Size (SF) 1,154 1,053 960 Land Area (Acre) 8.3500 8.4600 4.0200 Density (Units/Acre) 16.3 17.5 24.6 Parking Ratio (Spaces/Unit) 1.90 1.90 1.90 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open CONDITION: Good Average Average APPEAL: Good Fair Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room Yes Yes No Secured Parking No No No Sport Courts Yes Yes Yes Washer/Dryer Connection Yes No Yes Other Other OCCUPANCY: 92% 90% 92% TRANSACTION DATA: Sale Date January, 2003 January, 2003 Sale Price ($) $6,000,000 $3,650,000 Grantor Regency Oaks Apartments, Country Gardens LLC Apartments, LLC Grantee Saul and Netty Silber Saul and Netty Silber Sale Documentation Book 2587, Page 267 Book 2587, Page 130 Verification Smith Equities Smith Equities Telephone Number (407) 422-0704 (407) 422-0704 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF ------------------------------------------------------- Potential Gross Income $1,185,000 $8,007 $7.60 $745,000 $7,525 $7.84 Vacancy/Credit Loss $ 82,950 $ 560 $0.53 $ 52,150 $ 527 $0.55 Effective Gross Income $1,102,050 $7,446 $7.07 $692,850 $6,998 $7.29 Operating Expenses $ 525,000 $3,547 $3.37 $332,500 $3,359 $3.50 Net Operating Income $ 577,050 $3,899 $3.70 $360,350 $3,640 $3.79 NOTES: None None PRICE PER UNIT $ 40,541 $36,869 PRICE PER SQUARE FOOT $ 38.50 $ 38.42 EXPENSE RATIO 47.6% 48.0% EGIM 5.44 5.27 OVERALL CAP RATE 9.62% 9.87% - ------------------------------------------------------------------------------------------------------------------- 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 Covered Bridge Oxford Manor Cobblestone LOCATION: Address 1810 NW 23rd Boulevard 2801 NW 23rd Boulevard 1810 NW 23rd Boulevard City, State Gainesville, Florida Gainesville, Florida Gainesville, Florida County Alachua Alachua Alachua PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 169,276 376,885 225,120 Year Built 1973 1985 1994 Number of Units 176 366 168 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 76 1Br/1Ba N/A 2Br/2Ba 66 2Br/2Ba N/A 2Br/2Ba 84 3Br/2Ba 32 3Br/2Ba N/A 3Br/3Ba 84 Average Unit Size (SF) 962 1,030 1,340 Land Area (Acre) 21.4400 28.8600 15.1200 Density (Units/Acre) 8.2 12.7 11.1 Parking Ratio (Spaces/Unit) 1.85 2.00 2.09 Parking Type (Gr., Cov., etc.) Open Open Open, Covered CONDITION: Average Very Good Very Good APPEAL: Average Very Good Very Good AMENITIES: Pool/Spa Yes/Yes Yes/Yes Yes/Yes Gym Room Yes Yes Yes Laundry Room Yes Yes Yes Secured Parking No No Yes Sport Courts No Yes Yes Washer/Dryer Connection Yes Yes Yes Other Other OCCUPANCY: 95% 92% 94% TRANSACTION DATA: Sale Date August, 2001 January, 2002 January, 2002 Sale Price ($) $7,900,000 $27,415,730 $12,584,270 Grantor NLP Covered Bridge National Oxford Manor Apartments of Cobblestone Apartments of Associates Gainesville, Ltd. Gainesville, Ltd. Grantee Covered Bridge Apartments, Paradigm Properties Paradigm Properties LLC Sale Documentation Book 2380, Page 198 Verification Smith Equities Smith Equities Smith Equities Telephone Number (407) 422-0704 (407) 422-0704 (407) 422-0704 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF ------------------------------------------------------------------------------------------ Potential Gross Income $1,382,500 $7,855 $8.17 $4,100,000 $11,202 $10.88 $2,065,000 $12,292 $9.17 Vacancy/Credit Loss $ 96,775 $ 550 $0.57 $ 287,000 $ 784 $ 0.76 $ 144,550 $ 860 $0.64 Effective Gross Income $1,285,725 $7,305 $7.60 $3,813,000 $10,418 $10.12 $1,920,450 $11,431 $8.53 Operating Expenses $ 600,000 $3,409 $3.54 $1,280,000 $ 3,497 $ 3.40 $ 737,500 $ 4,390 $3.28 Net Operating Income $ 685,725 $3,896 $4.05 $2,533,000 $ 6,921 $ 6.72 $1,182,950 $ 7,041 $5.25 NOTES: This property, at the time None None of sale, had 176 units. It now has 174. PRICE PER UNIT $44,886 $74,906 $74,906 PRICE PER SQUARE FOOT $ 46.67 $ 72.74 $ 55.90 EXPENSE RATIO 46.7% 33.6% 38.4% EGIM 6.14 7.19 6.55 OVERALL CAP RATE 8.68% 9.24% 9.40% - ---------------------------------------------------------------------------------------------------------------------------- Cap Rate based on Pro Forma or PRO FORMA PRO FORMA PRO FORMA Actual Income? - ----------------------------------------------------------------------------------------------------------------------------
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $36,869 to $74,906 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 $44,242 to $49,375 per unit with a mean or average adjusted price of $46,774 per unit. The median adjusted price is $46,622 per unit. Based on the following analysis, we have concluded to a value of $47,000 per unit, which results in an "as is" value of $6,400,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Millhopper Village Regency Oaks Country Garden Address 507 NW 39th Road 3230 SW Archer Road 2001 SW 16th Street City Gainesville, Florida Gainesville, Florida Gainesville, Florida Sale Date January, 2003 January, 2003 Sale Price ($) $6,000,000 $3,650,000 Net Rentable Area (SF) 156,950 155,844 95,000 Number of Units 136 148 99 Price Per Unit $40,541 $36,869 Year Built 1969 1972 1971 Land Area (Acre) 8.3500 8.4600 4.0200 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 0% 01-2003 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $40,541 $36,869 Location Inferior 15% Comparable 0% Number of Units 136 148 0% 99 0% Quality / Appeal Good Comparable 0% Inferior 15% Age / Condition 1969 1972 / Average 0% 1971 / Average 0% Occupancy at Sale 92% 90% -10% 92% -10% Amenities Good Inferior 10% Inferior 10% Average Unit Size (SF) 1,154 1,053 0% 960 5% PHYSICAL ADJUSTMENT 15% 20% FINAL ADJUSTED VALUE ($/UNIT) $46,622 $44,242 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------- ---------- ---------- ---------- Property Name Covered Bridge Oxford Manor Cobblestone Address 1810 NW 23rd Boulevard 2801 NW 23rd Boulevard 1810 NW 23rd Boulevard City Gainesville, Florida Gainesville, Florida Gainesville, Florida Sale Date August, 2001 January, 2002 January, 2002 Sale Price ($) $7,900,000 $27,415,730 $12,584,270 Net Rentable Area (SF) 169,276 376,885 225,120 Number of Units 176 366 168 Price Per Unit $44,886 $74,906 $74,906 Year Built 1973 1985 1994 Land Area (Acre) 21.4400 28.8600 15.1200 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2001 0% 01-2002 0% 01-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $44,886 $74,906 $74,906 Location Comparable 0% Comparable 0% Comparable 0% Number of Units 176 0% 366 10% 168 0% Quality / Appeal Inferior 15% Superior -10% Superior -5% Age / Condition 1973 / Average 0% 1985 / Very Good -15% 1994 / Very Good -20% Occupancy at Sale 95% -10% 92% -10% 94% -10% Amenities Comparable 0% Superior -10% Comparable 0% Average Unit Size (SF) 962 5% 1,030 0% 1,340 -5% PHYSICAL ADJUSTMENT 10% -35% -40% FINAL ADJUSTED VALUE ($/UNIT) $49,375 $48,689 $44,944
SUMMARY VALUE RANGE (PER UNIT) $44,242 TO $49,375 MEAN (PER UNIT) $46,774 MEDIAN (PER UNIT) $46,622 VALUE CONCLUSION (PER UNIT) $47,000
VALUE INDICATED BY SALES COMPARISON APPROACH $6,392,000 ROUNDED $6,400,000
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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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-1 148 $ 6,000,000 9.62% $ 577,050 $ 587,618 1.108 $ 44,926 $ 40,541 $ 3,899 $ 4,321 I-2 99 $ 3,650,000 9.87% $ 360,350 $ 587,618 1.187 $ 43,765 $ 36,869 $ 3,640 $ 4,321 I-3 176 $ 7,900,000 8.68% $ 685,725 $ 587,618 1.109 $ 49,778 $ 44,886 $ 3,896 $ 4,321 I-4 366 $27,415,730 9.24% $ 2,533,000 $ 587,618 0.624 $ 46,765 $ 74,906 $ 6,921 $ 4,321 I-5 168 $12,584,270 9.40% $ 1,182,950 $ 587,618 0.614 $ 45,964 $ 74,906 $ 7,041 $ 4,321
PRICE/UNIT
Low High Average Median - ------- ------- ------- ------- $43,765 $49,778 $46,239 $45,964
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 46,000 Number of Units 136 ---------- Value Based on NOI Analysis $6,256,000 Rounded $6,300,000
The adjusted sales indicate a range of value between $43,765 and $49,778 per unit, with an average of $46,239 per unit. Based on the subject's competitive position within the improved sales, a value of $46,000 per unit is estimated. This indicates an "as is" market value of $6,300,000 (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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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-1 148 $ 6,000,000 $ 1,102,050 $ 525,000 47.64% 5.44 $ 40,541 I-2 99 $ 3,650,000 $ 692,850 $ 332,500 47.99% 5.27 $ 36,869 I-3 176 $ 7,900,000 $ 1,285,725 $ 600,000 46.67% 6.14 $ 44,886 46.69% I-4 366 $27,415,730 $ 3,813,000 $1,280,000 33.57% 7.19 $ 74,906 I-5 168 $12,584,270 $ 1,920,450 $ 737,500 38.40% 6.55 $ 74,906
EGIM
Low High Average Median - ---- ---- ------- ------ 5.27 7.19 6.12 6.14
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.50 Subject EGI $1,166,124 ---------- Value Based on EGIM Analysis $6,413,682 Rounded $6,400,000 Value Per Unit $ 47,059
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 46.69% before reserves. The comparable sales indicate a range of expense ratios from 33.57% to 47.99%, while their EGIMs range from 5.27 to 7.19. Overall, we conclude to an EGIM of 5.50, which results in an "as is" value estimate in the EGIM Analysis of $6,400,000. 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 $6,400,000. Price Per Unit $6,400,000 NOI Per Unit $6,300,000 EGIM Analysis $6,400,000 Sales Comparison Conclusion $6,400,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 - 1A10 750 $589 $ 0.79 93.8% 2 Br/1.5 Ba - 2A15 1400 $811 $ 0.58 60.0% 2Br/2Ba - 2A20 1000 $699 $ 0.70 86.5% 3Br/2.5Ba - 3A25 1550 $820 $ 0.53 100.0% 3Br/2.5Ba - 3B25 1600 $833 $ 0.52 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------ R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------ The Oaks Brookwood Covered Madison Apartment Terrace Bridge Pointe Creekwood ------------------------------------------------------ COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------------------ SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Inferior Superior Superior Superior Inferior - -------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba - 1A10 $ 589 $ 823 $ 570 $ 525 $ 620 $ 610 $ 535 Unit Area (SF) 750 750 750 740 760 729 760 Monthly Rent Per Sq. Ft. $ 0.79 $ 1.10 $ 0.76 $ 0.71 $ 0.82 $ 0.84 $ 0.70 Monthly Rent 2 Br/1.5 Ba - $ 811 $ 838 $ 650 Unit Area (SF) 2A15 1,400 1,400 1,044 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.60 $ 0.62 Monthly Rent 2Br/2Ba - 2A20 $ 699 $ 885 $ 682 $ 720 $ 799 $ 640 Unit Area (SF) 1,000 1,000 1,035 1,070 1,053 1,100 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.89 $ 0.66 $ 0.67 $ 0.76 $ 0.58 Monthly Rent 3Br/2.5Ba - $ 820 $ 1,108 $ 810 $ 800 $ 899 $ 720 Unit Area (SF) 3A25 1,550 1,550 1,389 1,533 1,269 1,300 Monthly Rent Per Sq. Ft. $ 0.53 $ 0.71 $ 0.58 $ 0.52 $ 0.71 $ 0.55 Monthly Rent 3Br/2.5Ba - $ 833 $ 1,110 $ 810 $ 840 3B25 Unit Area (SF) 1,600 1,600 1,389 1,278 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.69 $ 0.58 $ 0.66 DESCRIPTION MIN MAX MEDIAN AVERAGE - -------------------------------------------------------------- Monthly Rent $ 525 $ 620 $ 570 $ 572 Unit Area (SF) 729 760 750 748 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.84 $ 0.76 $ 0.77 Monthly Rent $ 650 $ 650 $ 650 $ 650 Unit Area (SF) 1,044 1,044 1,044 1,044 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.62 $ 0.62 $ 0.62 Monthly Rent $ 640 $ 799 $ 701 $ 710 Unit Area (SF) 1,035 1,100 1,062 1,065 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.76 $ 0.67 $ 0.67 Monthly Rent $ 720 $ 899 $ 805 $ 807 Unit Area (SF) 1,269 1,533 1,345 1,373 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.71 $ 0.57 $ 0.59 Monthly Rent $ 810 $ 840 $ 825 $ 825 Unit Area (SF) 1,278 1,389 1,334 1,334 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.66 $ 0.62 $ 0.62
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 - 1A10 32 750 $590 $0.79 $18,880 $ 226,560 2 Br/1.5 Ba - 2A15 5 1,400 $800 $0.57 $ 4,000 $ 48,000 2Br/2Ba - 2A20 52 1,000 $710 $0.71 $36,920 $ 443,040 3Br/2.5Ba - 3A25 25 1,550 $810 $0.52 $20,250 $ 243,000 3Br/2.5Ba - 3B25 22 1,600 $840 $0.53 $18,480 $ 221,760 ------- ---------- Total $98,530 $1,182,360 ------- ----------
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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 $1,197,529 $ 8,805 $1,243,953 $ 9,147 $1,172,115 $ 8,618 $1,183,588 $ 8,703 Vacancy $ 65,301 $ 480 $ 72,946 $ 536 $ 44,223 $ 325 $ 47,344 $ 348 Credit Loss/Concessions $ 49,455 $ 364 $ 63,406 $ 466 $ 72,984 $ 537 $ 60,536 $ 445 ---------- -------- ---------- -------- ---------- -------- ---------- -------- Subtotal $ 114,756 $ 844 $ 136,352 $ 1,003 $ 117,207 $ 862 $ 107,880 $ 793 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 55,303 $ 407 $ 55,184 $ 406 $ 110,618 $ 813 $ 122,400 $ 900 ---------- -------- ---------- -------- ---------- -------- ---------- -------- Subtotal Other Income $ 55,303 $ 407 $ 55,184 $ 406 $ 110,618 $ 813 $ 122,400 $ 900 ---------- -------- ---------- -------- ---------- -------- ---------- -------- Effective Gross Income $1,138,076 $ 8,368 $1,162,785 $ 8,550 $1,165,526 $ 8,570 $1,198,108 $ 8,810 Operating Expenses Taxes $ 89,267 $ 656 $ 75,555 $ 556 $ 87,609 $ 644 $ 95,354 $ 701 Insurance $ 23,082 $ 170 $ 75,630 $ 556 $ 45,997 $ 338 $ 45,345 $ 333 Utilities $ 40,676 $ 299 $ 40,734 $ 300 $ 32,590 $ 240 $ 36,553 $ 269 Repair & Maintenance $ 70,064 $ 515 $ 101,231 $ 744 $ 87,929 $ 647 $ 101,039 $ 743 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 $ 33,769 $ 248 $ 30,011 $ 221 $ 33,827 $ 249 $ 39,300 $ 289 General Administrative $ 142,195 $ 1,046 $ 163,701 $ 1,204 $ 131,842 $ 969 $ 178,830 $ 1,315 Management $ 59,187 $ 435 $ 61,819 $ 455 $ 57,917 $ 426 $ 60,632 $ 446 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- -------- ---------- -------- ---------- -------- ---------- -------- Total Operating Expenses $ 458,240 $ 3,369 $ 548,681 $ 4,034 $ 477,711 $ 3,513 $ 557,053 $ 4,096 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- -------- ---------- -------- ---------- -------- ---------- -------- Net Income $ 679,836 $ 4,999 $ 614,104 $ 4,515 $ 687,815 $ 5,057 $ 641,055 $ 4,714 ANNUALIZED 2003 --------------------- PROJECTION AAA PROJECTION ---------------------- ------------------------------ DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - --------------------------------------------------------------------------------- Revenues Rental Income $1,163,952 $ 8,558 $1,182,360 $ 8,694 100.0% Vacancy $ 43,052 $ 317 $ 82,765 $ 609 7.0% Credit Loss/Concessions $ 46,932 $ 345 $ 35,471 $ 261 3.0% ---------- -------- ---------- -------- --- Subtotal $ 89,984 $ 662 $ 118,236 $ 869 10.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 72,428 $ 533 $ 102,000 $ 750 8.6% ---------- -------- ---------- -------- --- Subtotal Other Income $ 72,428 $ 533 $ 102,000 $ 750 8.6% ---------- -------- ---------- -------- --- Effective Gross Income $1,146,396 $ 8,429 $1,166,124 $ 8,574 100.0% Operating Expenses Taxes $ 94,808 $ 697 $ 119,000 $ 875 10.2% Insurance $ 63,228 $ 465 $ 47,600 $ 350 4.1% Utilities $ 57,700 $ 424 $ 40,800 $ 300 3.5% Repair & Maintenance $ 79,324 $ 583 $ 95,200 $ 700 8.2% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 18,608 $ 137 $ 34,000 $ 250 2.9% General Administrative $ 143,824 $ 1,058 $ 149,600 $ 1,100 12.8% Management $ 57,768 $ 425 $ 58,306 $ 429 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% ---------- -------- ---------- -------- --- Total Operating Expenses $ 515,260 $ 3,789 $ 544,506 $ 4,004 46.7% Reserves $ 0 $ 0 $ 34,000 $ 250 6.2% ---------- -------- ---------- -------- --- Net Income $ 631,136 $ 4,641 $ 587,618 $ 4,321 50.4%
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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - ------------------------------------------------ I-1 Jan-03 90% $40,541 9.62% I-2 Jan-03 92% $36,869 9.87% I-3 Aug-01 95% $44,886 8.68% I-4 Jan-02 92% $74,906 9.24% I-5 Jan-02 94% $74,906 9.40% High 9.87% Low 8.68% Average 9.36%
Based on this information, we have concluded the subject's overall capitalization rate should be 10.00%. 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 12.50%. 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 12.50% indicates a value of $6,000,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA approximately 36% 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA DISCOUNTED CASH FLOW ANALYSIS MILLHOPPER VILLAGE
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 - ----------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,182,360 $1,217,831 $1,254,366 $1,291,997 $1,330,757 $1,370,679 Vacancy $ 82,765 $ 85,248 $ 87,806 $ 90,440 $ 93,153 $ 95,948 Credit Loss $ 35,471 $ 36,535 $ 37,631 $ 38,760 $ 39,923 $ 41,120 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal $ 118,236 $ 121,783 $ 125,437 $ 129,200 $ 133,076 $ 137,068 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 102,000 $ 105,060 $ 108,212 $ 111,458 $ 114,802 $ 118,246 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 102,000 $ 105,060 $ 108,212 $ 111,458 $ 114,802 $ 118,246 EFFECTIVE GROSS INCOME $1,166,124 $1,201,108 $1,237,141 $1,274,255 $1,312,483 $1,351,857 OPERATING EXPENSES: Taxes $ 119,000 $ 122,570 $ 126,247 $ 130,035 $ 133,936 $ 137,954 Insurance $ 47,600 $ 49,028 $ 50,499 $ 52,014 $ 53,574 $ 55,181 Utilities $ 40,800 $ 42,024 $ 43,285 $ 44,583 $ 45,921 $ 47,298 Repair & Maintenance $ 95,200 $ 98,056 $ 100,998 $ 104,028 $ 107,148 $ 110,363 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 34,000 $ 35,020 $ 36,071 $ 37,153 $ 38,267 $ 39,415 General Administrative $ 149,600 $ 154,088 $ 158,711 $ 163,472 $ 168,376 $ 173,427 Management $ 58,306 $ 60,055 $ 61,857 $ 63,713 $ 65,624 $ 67,593 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $ 544,506 $ 560,841 $ 577,667 $ 594,997 $ 612,847 $ 631,232 Reserves $ 34,000 $ 35,020 $ 36,071 $ 37,153 $ 38,267 $ 39,415 ---------- ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $ 587,618 $ 605,246 $ 623,404 $ 642,106 $ 661,369 $ 681,210 Operating Expense Ratio (% of EGI) 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% Operating Expense Per Unit $ 4,004 $ 4,124 $ 4,248 $ 4,375 $ 4,506 $ 4,641 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - --------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,411,800 $1,454,154 $1,497,778 $1,542,712 $1,588,993 Vacancy $ 98,826 $ 101,791 $ 104,844 $ 107,990 $ 111,230 Credit Loss $ 42,354 $ 43,625 $ 44,933 $ 46,281 $ 47,670 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- Subtotal $ 141,180 $ 145,415 $ 149,778 $ 154,271 $ 158,899 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 121,793 $ 125,447 $ 129,211 $ 133,087 $ 137,079 ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 121,793 $ 125,447 $ 129,211 $ 133,087 $ 137,079 EFFECTIVE GROSS INCOME $1,392,413 $1,434,185 $1,477,211 $1,521,527 $1,567,173 OPERATING EXPENSES: Taxes $ 142,092 $ 146,355 $ 150,746 $ 155,268 $ 159,926 Insurance $ 56,837 $ 58,542 $ 60,298 $ 62,107 $ 63,970 Utilities $ 48,717 $ 50,179 $ 51,684 $ 53,235 $ 54,832 Repair & Maintenance $ 113,674 $ 117,084 $ 120,597 $ 124,214 $ 127,941 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 40,598 $ 41,816 $ 43,070 $ 44,362 $ 45,693 General Administrative $ 178,630 $ 183,989 $ 189,509 $ 195,194 $ 201,050 Management $ 69,621 $ 71,709 $ 73,861 $ 76,076 $ 78,359 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $ 650,169 $ 669,674 $ 689,764 $ 710,457 $ 731,771 Reserves $ 40,598 $ 41,816 $ 43,070 $ 44,362 $ 45,693 ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $ 701,646 $ 722,696 $ 744,377 $ 766,708 $ 789,709 Operating Expense Ratio (% of EGI) 46.7% 46.7% 46.7% 46.7% 46.7% Operating Expense Per Unit $ 4,781 $ 4,924 $ 5,072 $ 5,224 $ 5,381
Estimated Stabilized NOI $587,618 Sales Expense Rate 2.00% Months to Stabilized 1 Discount Rate 12.50% Stabilized Occupancy 93.0% Terminal Cap Rate 11.00%
Gross Residual Sale Price $7,179,174 Deferred Maintenance $ 0 Less: Sales Expense $ 143,583 Add: Excess Land $ 0 ---------- Net Residual Sale Price $7,035,591 Other Adjustments $ 0 ---------- PV of Reversion $2,166,583 Value Indicated By "DCF" $6,008,328 Add: NPV of NOI $3,841,745 Rounded $6,000,000 ---------- PV Total $6,008,328
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE -------------------------------------------------------------- TOTAL VALUE 12.00% 12.25% 12.50% 12.75% 13.00% - ------------------------------------------------------------------------------------------ 10.50% $6,304,082 $6,206,759 $6,111,499 $6,018,249 $5,926,961 10.75% $6,248,893 $6,152,787 $6,058,714 $5,966,623 $5,876,465 TERMINAL CAPRATE 11.00% $6,196,212 $6,101,268 $6,008,328 $5,917,343 $5,828,265 11.25% $6,145,873 $6,052,038 $5,960,182 $5,870,254 $5,782,207 11.50% $6,097,722 $6,004,949 $5,914,129 $5,825,212 $5,738,152
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. 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 10.00% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA MILLHOPPER VILLAGE
TOTAL PER SQ. FT. PER UNIT %OF EGI - ---------------------------------------------------------------------------------------------- REVENUE Base Rent $ 1,182,360 $ 7.53 $ 8,694 Less: Vacancy & Collection Loss 10.00% $ 118,236 $ 0.75 $ 869 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 102,000 $ 0.65 $ 750 8.75% --------------------------------------------- Subtotal Other Income $ 102,000 $ 0.65 $ 750 8.75% EFFECTIVE GROSS INCOME $ 1,166,124 $ 7.43 $ 8,574 OPERATING EXPENSES: Taxes $ 119,000 $ 0.76 $ 875 10.20% Insurance $ 47,600 $ 0.30 $ 350 4.08% Utilities $ 40,800 $ 0.26 $ 300 3.50% Repair & Maintenance $ 95,200 $ 0.61 $ 700 8.16% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 34,000 $ 0.22 $ 250 2.92% General Administrative $ 149,600 $ 0.95 $ 1,100 12.83% Management 5.00% $ 58,306 $ 0.37 $ 429 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 544,506 $ 3.47 $ 4,004 46.69% Reserves $ 34,000 $ 0.22 $ 250 2.92% --------------------------------------------- NET OPERATING INCOME $ 587,618 $ 3.74 $ 4,321 50.39% "GOING IN" CAPITALIZATION RATE 10.00% VALUE INDICATION $ 5,876,178 $ 37.44 $ 43,207 DEFERRED MAINTENANCE "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 5,876,178 ROUNDED $ 5,900,000 $ 37.59 $ 43,382
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ------------------------------------------------- 9.25% $6,352,625 $6,400,000 $47,059 $40.78 9.50% $6,185,451 $6,200,000 $45,588 $39.50 9.75% $6,026,849 $6,000,000 $44,118 $38.23 10.00% $5,876,178 $5,900,000 $43,382 $37.59 10.25% $5,732,857 $5,700,000 $41,912 $36.32 10.50% $5,596,360 $5,600,000 $41,176 $35.68 10.75% $5,466,212 $5,500,000 $40,441 $35.04
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $5,900,000. 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 $6,000,000 Direct Capitalization Method $5,900,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $6,000,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 $ 6,400,000 Income Approach $ 6,000,000 Reconciled Value $ 6,100,000
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 27, 2003 the market value of the fee simple estate in the property is: $6,100,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SUBJECT PHOTOGRAPHS [EXTERIOR - OFFICE PICTURE] [EXTERIOR - PROJECT PICTURE] [EXTERIOR - TYPICAL APARTMENT BUILDING PICTURE] [INTERIOR - TYPICAL APARTMENT UNIT PICTURE] [EXTERIOR - SWIMMING POOL PICTURE] [EXTERIOR - MAIN ENTRANCE PICTURE]
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SUBJECT PHOTOGRAPHS [INTERIOR - COMMUNITY CENTER PICTURE] [EXTERIOR - LANDSCAPE PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [INTERIOR - APARTMENT UNIT PICTURE] [INTERIOR - APARTMENT UNIT PICTURE] [LOOKING NORTHWEST ALONG NW 39TH ROAD PICTURE]
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 REGENCY OAKS COUNTRY GARDEN COVERED BRIDGE 3230 SW Archer Road 2001 SW 16th Street 1810 NW 23rd Boulevard Gainesville, Florida Gainesville, Florida Gainesville, Florida [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 OXFORD MANOR COBBLESTONE 2801 NW 23rd Boulevard 1810 NW 23rd Boulevard Gainesville, Florida Gainesville, Florida [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Millhopper Village The Oaks Apartments Management Company AIMCO Silverwing Management LOCATION: Address 507 NW 39th Road 6519 Newberry Road City, State Gainesville, Florida Gainesville, Florida County Alachua Alachua Proximity to Subject 1.5 miles west of subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 156,950 157,399 Year Built 1969 1972 Effective Age 20 20 Building Structure Type Brick & wood siding walls; asphalt shingle roof Stucco exterior walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Spaces, Covered Open Number of Units 136 152 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1Br/1Ba - 1A10 750 32 $589 1 1Br/1Ba - 1B 750 42 $570 2 2Br/1.5 Ba - 2A15 1,400 5 $811 3 2Br/1Ba - 2A 984 27 $650 3 2Br/2Ba - 2A20 1,000 52 $699 3 2Br/1Ba - 2B 1,064 48 $700 4 3Br/2.5Ba - 3A25 1,550 25 $820 4 3Br/2Ba - 3A 1,389 31 $810 5 3Br/2.5Ba - 3B25 1,600 22 $833 5 3Br/2Ba - 3A 1,389 $810 Effeciency 650 8 $490 Average Unit Size (SF) 1,154 1,009 Unit Breakdown: Efficiency 0% 2-Bedroom 60% Efficiency 6% 2-Bedroom 49% 1-Bedroom 24% 3-Bedroom 16% 1-Bedroom 28% 3-Bedroom 20% CONDITION: Good Good APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony W/D Connect. X Balcony X W/D Connect. Fireplace Other Fireplace Other X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash X Basketball Court X BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall X Sand Volley Ball X Meeting Hall X 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 X Business Office X Gym Room X Gym Room OCCUPANCY: 92% 97% LEASING DATA: Available Leasing Terms 7, 9 and 12 Months 3 to 12 Months Concessions None None Pet Deposit 250 150 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation May 27, 2003; Property Manager May 27, 2003; Property Manager Telephone Number (352) 373-2965 (352) 331-8836 NOTES: None COMPARISON TO SUBJECT: Slightly Inferior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Brookwood Terrace CoveredBridge Management Company Good Neighbor LOCATION: Address 2601 NW 23rd Boulevard 1810 NW 23rd Boulevard City, State Gainesville, Florida Gainesville, Florida County Alachua Alachua Proximity to Subject 1.5 miles northeast of the subject 1.5 miles northeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 156,526 169,276 Year Built 1975 1973 Effective Age 20 20 Building Structure Type Stucco & wood siding walls; asphalt shingle roof Stucco exterior walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 132 174 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba 740 8 $525 1 1Br/1Ba 760 76 $620 2 2Br/1.5Ba 1,044 84 $650 3 2Br/2Ba 1,070 66 $720 4 3Br/2.5Ba 1,533 25 $800 5 3Br/2Ba 1,278 32 $840 4Br/2.5Ba 1,639 15 $875 Average Unit Size (SF) 1,186 973 Unit Breakdown: Efficiency 0% 2-Bedroom 64% Efficiency 0% 2-Bedroom 38% 1-Bedroom 6% 3-Bedroom 19% 1-Bedroom 44% 3-Bedroom 18% CONDITION: Average Average APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace Other Fireplace Other X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi X Car Wash X Spa/Jacuzzi X Car Wash X Basketball Court X BBQ Equipment Basketball Court X 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 X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 97% 97% LEASING DATA: Available Leasing Terms 7 to 12 Months 7 to 12 months Concessions None None Pet Deposit 200 200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation May 27, 2003; Property Manager May 27, 2003; Property Manager Telephone Number (352) 378-9052 (352) 372-2225 NOTES: None None COMPARISON TO SUBJECT: Superior Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Madison Pointe Creekwood Management Company Paradigm Properties Southern Development Management Company LOCATION: Address 2701 NW 23rd Boulevard 2056 NW 55th Boulevard City, State Gainesville, Florida Gainesville, Florida County Alachua Alachua Proximity to Subject 1.5 mile northeast of the subject 2 miles northeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 161,298 207,554 Year Built 1973 1978 Effective Age 20 15 Building Structure Type Stucco & wood siding walls; asphalt shingle roof Stucco & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Open Open Number of Units 170 120 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba 729 84 $610 1 1Br/1Ba 760 32 $535 3 2Br/2Ba 1,053 42 $799 3 2Br/2Ba 1,100 72 $640 4 3Br/2Ba 1,269 44 $899 4 3Br/2Ba 1,300 16 $720 Average Unit Size (SF) 949 1,036 Unit Breakdown: Efficiency 0% 2-Bedroom 25% Efficiency 0% 2-Bedroom 60% 1-Bedroom 49% 3-Bedroom 26% 1-Bedroom 27% 3-Bedroom 13% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities X Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace X Other Fireplace Other X Cable TV Ready Access Gates X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi X Car Wash Spa/Jacuzzi X Car Wash X Basketball Court X BBQ Equipment Basketball Court X 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 X Tennis Court Secured Parking X Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room X Gym Room OCCUPANCY: 96% 91% LEASING DATA: Available Leasing Terms 12 Months 7 to 12 Months Concessions None None Pet Deposit 100, plus $25 per month No Pets Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash Water Trash Confirmation May 27, 2003; Property Manager May 27, 2003; Property Manager Telephone Number (352) 372-0400 (352) 378-8379 NOTES: None None COMPARISON TO SUBJECT: Superior Inferior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 THE OAKS APARTMENTS BROOKWOOD TERRACE COVERED BRIDGE 6519 Newberry Road 2601 NW 23rd Boulevard 1810 NW 23rd Boulevard Gainesville, Florida Gainesville, Florida Gainesville, Florida [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 MADISON POINTE CREEKWOOD 2701 NW 23rd Boulevard 2056 NW 55th Boulevard N.A Gainesville, Florida Gainesville, Florida [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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 report analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the impartial and 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 or bias with respect to the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. The engagement of American Appraisal Associates, Inc., and myself personally in this assignment and compensation for American Appraisal Associates, Inc., are not contingent on the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice and the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers. I personally did not inspect the subject property. Michael L. Kersten provided significant real property appraisal assistance in the preparation of this report. -s- Alice MacQueen --------------------------------- Alice MacQueen Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA ALICE MACQUEEN VICE PRESIDENT AND PRINCIPAL, REAL ESTATE GROUP POSITION Alice MacQueen serves as a Vice President and Principal for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Ms. MacQueen specializes in the appraisal of investment real estate and is annually involved in the valuation of several billion dollars of real property. The purposes of these valuations include allocation of purchase price, charitable donation, financing, purchase, sale, and syndication. She has also been involved in land planning analyses for major mixed-use developments. She has appraised various types of real estate including congregate care facilities, industrial properties, manufacturing facilities, office buildings, recreational subdivisions and planned unit developments, single- and multifamily residential properties, and shopping centers. Special-purpose properties she has appraised include campgrounds, churches, country clubs, golf courses, historic landmarks, proprietary cemeteries, and schools. In addition to market value opinions, Ms. MacQueen has provided feasibility and highest and best use studies. She has also been involved in several research projects, providing background studies involving major property tax appeal cases. These studies included the impact of inflation, rate of return considerations, sales-assessment ratio analyses, and the applicability of income capitalization to commercial and industrial properties. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA Ms. MacQueen has appraised real estate in 46 U.S. states, Mexico, and Puerto Rico. Business Ms. MacQueen joined AAA in 1983. She served as Regional Real Estate Director for the southeastern United States from 1987 to 1992 and as National Director of the Real Estate Valuation Group from 1992 through 1995, when she assumed her current position. Before joining the firm, she was involved in property management for five years and spent an additional five years as an appraiser, consultant, and research analyst. EDUCATION Realtors Institute of Virginia Greenbrier College for Women - Liberal Arts STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30987 State of Florida, Certified General Appraiser, #RZ0002202 State of Georgia, Certified General Real Property Appraiser, #239776 State of Minnesota, Certified General Real Property Appraiser, #AP-20144872 State of New Mexico, General Certified Appraiser, #001626-G State of Utah, State Certified General Appraiser, #CG00057001 PROFESSIONAL AFFILIATIONS American Society of Appraisers, Candidate AMERICAN APPRAISAL ASSOCIATES, INC. MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. MILLHOPPER VILLAGE, GAINESVILLE, FLORIDA 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. EX-99.(C)(4) 6 d07277a2exv99wxcyx4y.txt APPRAISAL OF OLD SALEM APARTMENTS OLD SALEM APARTMENTS 2639 BARRACKS ROAD CHARLOTTESVILLE, VIRGINIA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 8, 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 2, 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: OLD SALEM APARTMENTS 2639 BARRACKS ROAD CHARLOTTESVILLE, ALBEMARLE COUNTY, VIRGINIA 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 364 units with a total of 375,016 square feet of rentable area. The improvements were built in 1969. The improvements are situated on 18.357 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 94% 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 8, 2003 is: ($19,500,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach July 2, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group Virginia Temporary Certified General Real Estate Appraiser #4001 007252 Report By: Brian Johnson, MAI Virginia Temporary Certification Pending Assisted By: Jonathan Hackerman AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary .................................................... 4 Introduction ......................................................... 10 Area Analysis ........................................................ 12 Market Analysis ...................................................... 15 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Old Salem Apartments LOCATION: 2639 Barracks Road Charlottesville, Virginia 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 8, 2003 DATE OF REPORT: July 2, 2003
PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 18.357 acres, or 799,631 square feet Assessor Parcel No.: 60A-9-22; 60A-9-03 Floodplain: Community Panel No. 510006-0210 B (December 16, 1980) Flood Zone C, an area outside the floodplain. Zoning: R-15 (Residential) BUILDING: No. of Units: 364 Units Total NRA: 375,016 Square Feet Average Unit Size: 1,030 Square Feet Apartment Density: 19.8 units per acre Year Built: 1969 UNIT MIX AND MARKET RENT:
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income ======================================================================== 1A10 605 $575 $0.95 $ 11,500 $ 138,000 1B10 786 $630 $0.80 $ 12,600 $ 151,200 1C10 963 $645 $0.67 $ 5,160 $ 61,920 2A10 836 $640 $0.77 $ 32,000 $ 384,000 2A15 1,064 $650 $0.61 $ 49,400 $ 592,800 2B10 903 $658 $0.73 $ 9,870 $ 118,440 2B15 1,117 $675 $0.60 $ 32,400 $ 388,800 2C10 1,002 $720 $0.72 $ 5,760 $ 69,120 2C15 1,173 $720 $0.61 $ 42,480 $ 509,760 2D10 1,114 $705 $0.63 $ 4,230 $ 50,760 3A20 1,291 $730 $0.57 $ 17,520 $ 210,240 3A25 1,324 $855 $0.65 $ 20,520 $ 246,240 EA10 500 $505 $1.01 $ 3,030 $ 36,360 Total $246,470 $2,957,640
OCCUPANCY: 94% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP:
SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - BUSINESS OFFICE AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA AREA MAP [MAP] NEIGHBORHOOD MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 8 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $2,957,640 $8,125 Effective Gross Income $3,156,465 $8,672 Operating Expenses $1,204,323 $3,309 38.2% of EGI Net Operating Income: $1,879,342 $5,163 Capitalization Rate 9.75% DIRECT CAPITALIZATION VALUE $19,200,000 * $52,747 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 5% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.25% Discount Rate 12.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $19,700,000 * $54,121 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $19,500,000 $53,571 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $31,071 to $50,000 Range of Sales $/Unit (Adjusted) $41,014 to $56,650 VALUE INDICATION - PRICE PER UNIT $18,200,000 * $50,000 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.27 to 6.38 Selected EGIM for Subject 6.00 Subject's Projected EGI $3,156,465 EGIM ANALYSIS CONCLUSION $18,900,000 * $51,923 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $19,600,000 * $53,846 / UNIT RECONCILED SALES COMPARISON VALUE $19,000,000 $52,198 / 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 9 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 18,200,000 NOI Per Unit $ 19,600,000 EGIM Multiplier $ 18,900,000 INDICATED VALUE BY SALES COMPARISON $ 19,000,000 $52,198 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 19,200,000 Discounted Cash Flow Method: $ 19,700,000 INDICATED VALUE BY THE INCOME APPROACH $ 19,500,000 $ 53,571 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 19,500,000 $ 53,571 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 2639 Barracks Road, Charlottesville, Albemarle County, Virginia. Charlottesville identifies it as 60A-9-22; 60A-9-03. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Jonathan Hackerman on May 8, 2003. Brian Johnson, MAI and Frank Fehribach have not made a personal inspection of the subject property. Jonathan Hackerman assisted Brian Johnson, MAI in the research, valuation analysis and writing the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI, Brian Johnson, MAI, and Jonathan Hackerman have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of May 8, 2003. The date of the report is July 2, 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 & AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 11 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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: "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 Shelter Properties C/O Aimco. 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 12 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 Charlottesville, Virginia. 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 - Route 29 West - Mechums River South - Route 250 North - South Fork/Mechums River MAJOR EMPLOYERS Major employers in the subject's area include American Safety Razor, City of Carlottsville, Crutchfield, GE-FANUC, Klockner-Pentaplast, Marta Jefferson Hospital, Michie Company, Piedmont Virginia Community College and the University of Virginia. The University of Virginia employs approximately 20% of the labor market.. 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 13 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA NEIGHBORHOOD DEMOGRAPHICS
AREA --------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ============================================================================================= POPULATION TRENDS Current Population 6,574 52,573 82,146 164,622 5-Year Population 6,597 54,972 86,053 177,836 % Change CY-5Y 0.3% 4.6% 4.8% 8.0% Annual Change CY-5Y 0.1% 0.9% 1.0% 1.6% HOUSEHOLDS Current Households 3,442 20,676 32,969 64,025 5-Year Projected Households 3,553 21,484 34,791 70,048 % Change CY - 5Y 3.2% 3.9% 5.5% 9.4% Annual Change CY-5Y 0.6% 0.8% 1.1% 1.9% INCOME TRENDS Median Household Income $39,125 $33,473 $36,059 $ 43,068 Per Capita Income $33,305 $21,278 $22,712 $ 23,870 Average Household Income $63,477 $54,081 $56,580 $ 61,375
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 68.02% 59.65% 51.36% 34.89% 5-Year Projected % Renting 67.94% 59.75% 51.26% 33.89% % of Households Owning 27.68% 35.51% 44.17% 59.99% 5-Year Projected % Owning 27.88% 35.55% 44.46% 61.29%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 14 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Apartment complex South - Apartment complex East - Single Family Dwelling West - Vacant land CONCLUSIONS The subject is well located within the city of Charlottesville. 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 15 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA MARKET ANALYSIS The subject property is located in the city of Charlottesville in Albemarle County. The overall pace of development in the subject's market is more or less increasing. There is limited new construction underway in the City of Charlottesville. In conversations with local professionals, it was reported that the Charlottesville area is about to be saturated with new construction. It was also reported that in the previous 10 years there was no new construction, thus the 'boom' is coming and many think that supply will be significantly higher than demand, at least in the few years after the new construction. According to the Charlottesville city planning department, at least several hundred new market units are expected to either come on line or be under development within the next three to five years. Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. The area is dependent upon the University of Virginia and should continue to exhibit high occupancy rates. Although, as stated above, there is going to be an influx of units, which could very well have a negative impact on the occupancy rates. Market rents in the subject's market have been following a stable trend. The vacancy rates were not available for this market from a third party source. The information gathered was from local appraisers and other real estate professionals. 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 Hessian Hills 184 90% 1966 1/2 mile east of the subject R-2 Westgate Apartments 284 92% 1974 1.5-miles east of the subject R-3 Trophy Chase Apartments 425 93% 1969 2 miles east of subject R-4 Squire Hill 284 96% 1980 Within 6-miles of the subject Subject Old Salem Apartments 364 94% 1969
The vacancy rates were not available for this market. The information gathered was from local appraisers and other real estate professionals. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 18.357 acres, or 799,631 square feet Shape Irregular Topography Steep 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 510006-0210 B, dated December 16, 1980 Flood Zone Zone C Zoning R-15, 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 ======================================================================================== 60A-9-22; 60A-9-03 $2,912,000 $12,882,900 $15,794,900 0.00760 $120,042
IMPROVEMENT ANALYSIS Year Built 1969 Number of Units 364 Net Rentable Area 375,016 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, sand volleyball, tennis court, gym room, laundry room, business office, and parking area. Unit Amenities Individual unit amenities include a balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, washer/dryer,
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA and oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) ============================================= 1A10 20 605 1B10 20 786 1C10 8 963 2A10 50 836 2A15 76 1,064 2B10 15 903 2B15 48 1,117 2C10 8 1,002 2C15 59 1,173 2D10 6 1,114 3A20 24 1,291 3A25 24 1,324 EA10 6 500
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 1969 and consist of a 364-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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUMMARY OF COMPARABLE SALES -IMPROVED
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 ============================================================================================================== Property Name Old Salem Summit @ Roanoke Cinnamon Ridge Apartments Apartments LOCATION: Address 2639 Barracks 4500 Franklin Way 5143 Overland Drive Road City, State Charlottesville, Roanoke, VA Roanoke, VA Virginia County Albemarle Roanoke Roanoke PHYSICAL CHARATERISTICS: Net Rentable Area 375,016 215,188 118,318 (SF) Year Built 1969 1988 1976 Number of Units 364 250 140 Unit Mix: Type Total Type Total Type Total 1A10 20 1Br/1Ba 92 1Br/1Ba 20 1B10 20 2Br/1Ba 8 2Br/1Ba 63 1C10 8 2Br/2Ba 126 3Br/1.5Ba 7 2A10 50 3Br/2Ba 24 2Br/1.5Ba 39 2A15 76 Efficiency 11 2B10 15 2B15 48 2C10 8 2C15 59 2D10 6 3A20 24 3A25 24 EA10 6 Average Unit Size 1,030 861 845 (SF) Land Area (Acre) 18.3570 32.2300 10.3290 Density (Units/Acre) 19.8 7.8 13.6 Parking Ratio 1.37 N/A 1.66 (Spaces/Unit) Parking Type (Gr., Open Open Open Cov., etc.) CONDITION: Good Good Good APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes No Laundry Room Yes No No Secured Parking No No No Sport Courts No Yes Yes Washer/Dryer Yes Yes Yes Connection OCCUPANCY: 94% 93% 99% TRANSACTION DATA: Sale Date October, 2002 July, 2000 Sale Price ($) $12,500,000 $4,350,000 Grantor Gray Property 1101, LLC Charan Industries Grantee Colonial Court Apartments Cinnamon Ridge Apts. Sale Documentation N/A Book 1665 Page 1147 Verification Area Appraiser Grantor Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,184,672 $8,739 $10.15 N/A Vacancy/Credit Loss $ 174,774 $ 699 $ 0.81 N/A Effective Gross Income $2,009,898 $8,040 $ 9.34 $795,827 $5,684 $6.73 Operating Expenses $ 800,000 $3,200 $ 3.72 $428,664 $3,062 $3.62 Net Operating Income $1,209,898 $4,840 $ 5.62 $367,163 $2,623 $3.10 NOTES: PRICE PER UNIT $50,000 $31,071 PRICE PER SQUARE FOOT $ 58.09 $ 36.77 EXPENSE RATIO 39.8% 53.9% EGIM 6.22 5.47 OVERALL CAP RATE 9.68% 8.44% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA DESCRIPTION COMPARABLE COMPARABLE I - 3 I - 4 ======================================================================================= Property Name Craig Manor Apartments Buck Run Apartments LOCATION: Address 128 Rutledge Drive 4689 Buck Run Square City, State Salem, VA Roanoke, VA County Roanoke Roanoke PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 95,090 90,816 Year Built 1973 1990 Number of Units 108 96 Unit Mix: Type Total Type Total 1Br/1Ba 12 1Br/1Ba 13 2Br/1Ba 50 2Br/1Ba 35 2Br/2Ba 10 2Br/2Ba 36 3Bd/2Ba 36 3Bd/1.75Ba 12 Average Unit Size (SF) 880 946 Land Area (Acre) 5.5330 6.2400 Density (Units/Acre) 19.5 15.4 Parking Ratio (Spaces/Unit) N/A N/A Parking Type (Gr., Open Open Cov., etc.) CONDITION: Average Good APPEAL: Average Average AMENITIES: Pool/Spa Yes/No Yes/No Gym Room No No Laundry Room Yes No Secured Parking No No Sport Courts No No Washer/Dryer Connection Yes Yes OCCUPANCY: 90% 94% TRANSACTION DATA: Sale Date November, 2000 March, 2002 Sale Price ($) $3,450,000 $4,300,000 Grantor United Dominion Realty Timberline Condominium Trust Assoc. Grantee Craig Manor Assoc., Sherwood Properties of VA LLC Sale Documentation Book 338 Page 337 N/A Verification Area Appraiser Representative of Buyer Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income N/A $734,000 $7,646 $8.08 Vacancy/Credit Loss N/A $ 60,000 $ 625 $0.66 Effective Gross Income $655,000 $6,065 $6.89 $674,000 $7,021 $7.42 Operating Expenses $340,000 $3,148 $3.58 $300,000 $3,125 $3.30 Net Operating Income $315,000 $2,917 $3.31 $374,000 $3,896 $4.12 NOTES: PRICE PER UNIT $31,944 $44,792 PRICE PER SQUARE FOOT $ 36.28 $ 47.35 EXPENSE RATIO 51.9% 44.5% EGIM 5.27 6.38 OVERALL CAP RATE 9.13% 8.70% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC SALES COMPARISON APPROACH PAGE 22 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $31,071 to $50,000 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 $41,014 to $56,650 per unit with a mean or average adjusted price of $48,918 per unit. The median adjusted price is $49,005 per unit. Based on the following analysis, we have concluded to a value of $50,000 per unit, which results in an "as is" value of $18,200,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SALES ADJUSTMENT GRID
DESCRIPTION SUBJECT COMPARABLE COMPARABLE COMPARABLE COMPARABLE I - 1 I - 2 I - 3 I - 4 ================================================================================================================================= Property Name Old Salem Summit @ Roanoke Cinnamon Ridge Craig Manor Buck Run Apartments Apartments Apartments Apartments Address 2639 Barracks 4500 Franklin Way 5143 Overland 128 Rutledge 4689 Buck Run Road Drive Drive Square City Charlottesville, Roanoke, VA Roanoke, VA Salem, VA Roanoke, VA Virginia Sale Date October, 2002 July, 2000 November, 2000 March, 2002 Sale Price ($) $12,500,000 $4,350,000 $3,450,000 $4,300,000 Net Rentable Area (SF) 375,016 215,188 118,318 95,090 90,816 Number of Units 364 250 140 108 96 Price Per Unit $50,000 $31,071 $31,944 $44,792 Year Built 1969 1988 1976 1973 1990 Land Area (Acre) 18.3570 32.2300 10.3290 5.5330 6.2400 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Fee Simple 0% Fee Simple 0% Fee Simple 0% Fee Simple 0% Estate Estate Estate Estate Estate Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) October, 2002 3% July, 2000 10% November, 2000 10% March, 2002 5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $51,500 $34,179 $35,139 $47,031 Location Inferior 15% Inferior 15% Inferior 15% Inferior 15% Number of Units 364 250 140 -5% 108 -5% 96 -5% Quality / Appeal Good Superior -5% Inferior 5% Inferior 5% Inferior 5% Age / Condition 1969 1988 / Good -5% 1976 / Good 0% 1973 / Average 0% 1990 / Good -5% Occupancy at Sale 94% 93% 0% 99% -5% 90% 5% 94% 0% Amenities Good Comparable 0% Inferior 5% Comparable 0% Inferior 5% Average Unit Size (SF) 1,030 861 5% 845 5% 880 5% 946 0% PHYSICAL ADJUSTMENT 10% 20% 25% 15% FINAL ADJUSTED VALUE ($/UNIT) $56,650 $41,014 $43,924 $54,086
SUMMARY VALUE RANGE (PER UNIT) $41,014 TO $56,650 MEAN (PER UNIT) $48,918 MEDIAN (PER UNIT) $49,005 VALUE CONCLUSION (PER UNIT) $50,000
VALUE OF IMPROVEMENT & MAIN SITE $18,200,000 PV OF CONCESSIONS -$ 26,000 VALUE INDICATED BY SALES COMPARISON APPROACH $18,174,000 ROUNDED $18,200,000
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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA NOI PER UNIT COMPARISON
SALE PRICE NOI/ SUBJECT NOI COMPARABLE NO. OF ----------- OAR ---------- ------------- ADJUSTMENT INDICATED NO. UNITS PRICE/UNIT NOI/UNIT SUBJ NOI/UNIT FACTOR VALUE/UNIT ===================================================================================================== I-1 250 $12,500,000 9.68% $1,209,898 $ 1,879,342 1.067 $53,342 $ 50,000 $ 4,840 $ 5,163 I-2 140 $ 4,350,000 8.44% $ 367,163 $ 1,879,342 1.969 $61,169 $ 31,071 $ 2,623 $ 5,163 I-3 108 $ 3,450,000 9.13% $ 315,000 $ 1,879,342 1.770 $56,547 $ 31,944 $ 2,917 $ 5,163 I-4 96 $ 4,300,000 8.70% $ 374,000 $ 1,879,342 1.325 $59,361 $ 44,792 $ 3,896 $ 5,163
PRICE/UNIT VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT ================================================ ================================================== Low High Average Median Estimated Price Per Unit $ 54,000 Number of Units 364 $53,342 $ 61,169 $ 57,605 $57,954 Value $19,656,000 PV of Concessions -$ 26,000 ----------- Value Based on NOI Analysis $19,630,000 Rounded $19,600,000
The adjusted sales indicate a range of value between $53,342 and $61,169 per unit, with an average of $57,605 per unit. Based on the subject's competitive position within the improved sales, a value of $54,000 per unit is estimated. This indicates an "as is" market value of $19,600,000 (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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
SALE PRICE COMPARABLE NO. OF ----------- EFFECTIVE OPERATING OER SUBJECT EGIM NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE PROJECTED OER ================================================================================================ I-1 250 $12,500,000 $ 2,009,898 $ 800,000 39.80% 6.22 $ 50,000 I-2 140 $ 4,350,000 $ 795,827 $ 428,664 53.86% 5.47 $ 31,071 38.15% I-3 108 $ 3,450,000 $ 655,000 $ 340,000 51.91% 5.27 $ 31,944 I-4 96 $ 4,300,000 $ 674,000 $ 300,000 44.51% 6.38 $ 44,792
EGIM VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES ================================================================================================ Low High Average Median Estimate EGIM 6.00 5.27 6.38 5.83 5.84 Subject EGI $ 3,156,465 Value $18,938,791 PV of Concessions -$ 26,000 ----------- Value Based on EGIM $18,912,791 Analysis Rounded $18,900,000 Value Per Unit $ 51,923
There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 38.15% before reserves. The comparable sales indicate a range of expense ratios from 39.80% to 53.86%, while their EGIMs range from 5.27 to 6.38. Overall, we conclude to an EGIM of 6.00, which results in an "as is" value estimate in the EGIM Analysis of $18,900,000. 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 $19,000,000. Price Per Unit $18,200,000 NOI Per Unit $19,600,000 EGIM Analysis $18,900,000 Sales Comparison Conclusion $19,000,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 - --------- --------- -------- ------ --------- 1A10 605 $ 606 $ 1.00 90.0% 1B10 786 $ 656 $ 0.83 95.0% 1C10 963 $ 674 $ 0.70 100.0% 2A10 836 $ 658 $ 0.79 98.0% 2A15 1064 $ 684 $ 0.64 96.1% 2B10 903 $ 673 $ 0.75 100.0% 2B15 1117 $ 693 $ 0.62 89.6% 2C10 1002 $ 747 $ 0.75 100.0% 2C15 1173 $ 740 $ 0.63 89.8% 2D10 1114 $ 739 $ 0.66 66.7% 3A20 1291 $ 747 $ 0.58 100.0% 3A25 1324 $ 870 $ 0.66 95.8% EA10 500 $ 536 $ 1.07 83.3%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA RENT ANALYSIS
COMPARABLE RENTS ----------------------------------------- R-1 R-2 R-3 R-4 ----------------------------------------- Trophy Hessian Westgate Chase Squire Hills Apartments Apartments Hill ----------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ----------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Superior Inferior Similar Similar MIN MAX MEDIAN AVERAGE - ------------------------ ------------ ------- ------- -------- ---------- ---------- ------- ------ ------ ------ ------- Monthly Rent 1A10 $ 606 $ 793 $ 759 $ 697 $ 697 $ 759 $ 728 $ 728 Unit Area (SF) 605 605 603 659 603 659 631 631 Monthly Rent Per Sq. Ft. $ 1.00 $ 1.31 $ 1.26 $ 1.06 $ 1.06 $ 1.26 $ 1.16 $ 1.16 Monthly Rent 1B10 $ 656 $ 798 $ 789 $ 625 $ 625 $ 789 $ 707 $ 707 Unit Area (SF) 786 786 790 1,100 790 1,100 945 945 Monthly Rent Per Sq. Ft. $ 0.83 $ 1.01 $ 1.00 $ 0.57 $ 0.57 $ 1.00 $ 0.78 $ 0.78 Monthly Rent 1C10 $ 674 $ 868 Unit Area (SF) 963 963 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.90 Monthly Rent 2A10 $ 658 $ 973 $ 739 $ 695 $ 695 $ 739 $ 717 $ 717 Unit Area (SF) 836 836 860 926 860 926 893 893 Monthly Rent Per Sq. Ft. $ 0.79 $ 1.16 $ 0.86 $ 0.75 $ 0.75 $ 0.86 $ 0.80 $ 0.80 Monthly Rent 2A15 $ 684 $ 968 Unit Area (SF) 1,064 1,064 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.91 Monthly Rent 2B10 $ 673 $ 1,055 $ 715 $ 809 $ 771 $ 730 $ 715 $ 809 $ 751 $ 756 Unit Area (SF) 903 903 932 865 922 934 865 934 927 913 Monthly Rent Per Sq. Ft. $ 0.75 $ 1.17 $ 0.77 $ 0.94 $ 0.84 $ 0.78 $ 0.77 $ 0.94 $ 0.81 $ 0.83 Monthly Rent 2B15 $ 693 $ 869 $ 869 $ 869 $ 869 $ 869 Unit Area (SF) 1,117 1,117 964 964 964 964 964 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90 Monthly Rent 2C10 $ 747 Unit Area (SF) 1,002 1,002 Monthly Rent Per Sq. Ft. $ 0.75 Monthly Rent 2C15 $ 740 Unit Area (SF) 1,173 1,173 Monthly Rent Per Sq. Ft. $ 0.63 Monthly Rent 2D10 $ 739 Unit Area (SF) 1,114 1,114 Monthly Rent Per Sq. Ft. $ 0.66 Monthly Rent 3A20 $ 747 $ 715 $ 899 $ 846 $ 769 $ 715 $ 899 $ 808 $ 807 Unit Area (SF) 1,291 1,291 1,117 1,155 1,197 1,155 1,117 1,197 1,155 1,156 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.64 $ 0.78 $ 0.71 $ 0.67 $ 0.64 $ 0.78 $ 0.69 $ 0.70 Monthly Rent 3A25 $ 870 $ 785 $ 785 $ 785 $ 785 $ 785 Unit Area (SF) 1,324 1,324 1,155 1,155 1,155 1,155 1,155 Monthly Rent Per Sq. Ft. $ 0.66 $ 0.68 $ 0.68 $ 0.68 $ 0.68 $ 0.68 Monthly Rent EA10 $ 536
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: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ----------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income - --------- --------------- --------- -------- ------ -------- ---------- 1A10 20 605 $ 575 $ 0.95 $ 11,500 $ 138,000 1B10 20 786 $ 630 $ 0.80 $ 12,600 $ 151,200 1C10 8 963 $ 645 $ 0.67 $ 5,160 $ 61,920 2A10 50 836 $ 640 $ 0.77 $ 32,000 $ 384,000 2A15 76 1,064 $ 650 $ 0.61 $ 49,400 $ 592,800 2B10 15 903 $ 658 $ 0.73 $ 9,870 $ 118,440 2B15 48 1,117 $ 675 $ 0.60 $ 32,400 $ 388,800 2C10 8 1,002 $ 720 $ 0.72 $ 5,760 $ 69,120 2C15 59 1,173 $ 720 $ 0.61 $ 42,480 $ 509,760 2D10 6 1,114 $ 705 $ 0.63 $ 4,230 $ 50,760 3A20 24 1,291 $ 730 $ 0.57 $ 17,520 $ 210,240 3A25 24 1,324 $ 855 $ 0.65 $ 20,520 $ 246,240 EA10 6 500 $ 505 $ 1.01 $ 3,030 $ 36,360 ------ -------- ---------- Total $246,470 $2,957,640
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 30 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 -------------------- -------------------- -------------------- ACTUAL ACTUAL ACTUAL -------------------- -------------------- -------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT - ------------------------ ---------- -------- ---------- -------- ---------- -------- Revenues Rental Income $2,842,748 $ 7,810 $2,937,575 $ 8,070 $3,012,434 $ 8,276 Vacancy $ 71,586 $ 197 $ 76,278 $ 210 $ 114,116 $ 314 Credit Loss/Concessions $ 33,812 $ 93 $ 31,582 $ 87 $ 30,008 $ 82 ---------------------------------------------------------------- Subtotal $ 105,398 $ 290 $ 107,860 $ 296 $ 144,124 $ 396 Laundry Income $ 16,713 $ 46 $ 14,361 $ 39 $ 20,446 $ 56 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 225,410 $ 619 $ 324,237 $ 891 $ 350,066 $ 962 ---------------------------------------------------------------- Subtotal Other Income $ 242,123 $ 665 $ 338,598 $ 930 $ 370,512 $ 1,018 ---------------------------------------------------------------- Effective Gross Income $2,979,473 $ 8,185 $3,168,313 $ 8,704 $3,238,822 $ 8,898 Operating Expenses Taxes $ 96,399 $ 265 $ 113,203 $ 311 $ 117,478 $ 323 Insurance $ 37,807 $ 104 $ 68,245 $ 187 $ 61,883 $ 170 Utilities $ 284,920 $ 783 $ 352,557 $ 969 $ 311,867 $ 857 Repair & Maintenance $ 52,822 $ 145 $ 33,033 $ 91 $ 24,418 $ 67 Cleaning $ 90,531 $ 249 $ 93,547 $ 257 $ 86,698 $ 238 Landscaping $ 77,763 $ 214 $ 74,000 $ 203 $ 78,574 $ 216 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 19,616 $ 54 $ 7,071 $ 19 $ 13,035 $ 36 General Administrative $ 28,562 $ 78 $ 24,324 $ 67 $ 34,060 $ 94 Management $ 149,814 $ 412 $ 159,617 $ 439 $ 160,574 $ 441 Miscellaneous $ 250,434 $ 688 $ 321,841 $ 884 $ 232,153 $ 638 ---------------------------------------------------------------- Total Operating Expenses $1,088,668 $ 2,991 $1,247,438 $ 3,427 $1,120,740 $ 3,079 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------- Net Income $1,890,805 $ 5,195 $1,920,875 $ 5,277 $2,118,082 $ 5,819 FISCAL YEAR 2003 ANNUALIZED 2003 -------------------- -------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION -------------------- -------------------- ---------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % - ------------------------ ---------- -------- ---------- -------- ---------- -------- ------ Revenues Rental Income $3,056,103 $ 8,396 $3,053,800 $ 8,390 $2,957,640 $ 8,125 100.0% Vacancy $ 113,042 $ 311 $ 205,784 $ 565 $ 162,670 $ 447 5.5% Credit Loss/Concessions $ 27,948 $ 77 $ 45,652 $ 125 $ 44,365 $ 122 1.5% ----------------------------------------------------------------------- Subtotal $ 140,990 $ 387 $ 251,436 $ 691 $ 207,035 $ 569 7.0% Laundry Income $ 28,476 $ 78 $ 16,744 $ 46 $ 23,660 $ 65 0.8% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 357,157 $ 981 $ 564,336 $ 1,550 $ 382,200 $ 1,050 12.9% ----------------------------------------------------------------------- Subtotal Other Income $ 385,633 $ 1,059 $ 581,080 $ 1,596 $ 405,860 $ 1,115 13.7% ----------------------------------------------------------------------- Effective Gross Income $3,300,746 $ 9,068 $3,383,444 $ 9,295 $3,156,465 $ 8,672 100.0% Operating Expenses Taxes $ 120,099 $ 330 $ 114,252 $ 314 $ 125,580 $ 345 4.0% Insurance $ 65,378 $ 180 $ 59,952 $ 165 $ 72,800 $ 200 2.3% Utilities $ 296,921 $ 816 $ 616,392 $ 1,693 $ 327,600 $ 900 10.4% Repair & Maintenance $ 32,328 $ 89 $ 47,404 $ 130 $ 41,860 $ 115 1.3% Cleaning $ 90,609 $ 249 $ 65,444 $ 180 $ 91,000 $ 250 2.9% Landscaping $ 77,784 $ 214 $ 96,448 $ 265 $ 81,900 $ 225 2.6% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 12,864 $ 35 $ 10,096 $ 28 $ 12,740 $ 35 0.4% General Administrative $ 36,588 $ 101 $ 40,152 $ 110 $ 38,220 $ 105 1.2% Management $ 166,145 $ 456 $ 163,932 $ 450 $ 157,823 $ 434 5.0% Miscellaneous $ 237,064 $ 651 $ 196,180 $ 539 $ 254,800 $ 700 8.1% ----------------------------------------------------------------------- Total Operating Expenses $1,135,780 $ 3,120 $1,410,252 $ 3,874 $1,204,323 $ 3,309 38.2% Reserves $ 0 $ 0 $ 0 $ 0 $ 72,800 $ 200 6.0% ----------------------------------------------------------------------- Net Income $2,164,966 $ 5,948 $1,973,192 $ 5,421 $1,879,342 $ 5,163 59.5%
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 7% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 32 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------- -------------- ------ ---------- ----- I-1 October, 2002 93% $ 50,000 9.68% I-2 July, 2000 99% $ 31,071 8.44% I-3 November, 2000 90% $ 31,944 9.13% I-4 March, 2002 94% $ 44,792 8.70% I-5 Jan-00 0% N/A High 9.68% Low 8.44% Average 8.99%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.75%. The terminal capitalization rate is applied to the net operating income estimated for the year following the end of the holding period. Based on the concluded overall capitalization rate, the age of the property and the surveyed information, we have concluded the subject's terminal capitalization rate to be 10.25%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.50%. 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 12.50% indicates a value of $19,700,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 34 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA DISCOUNTED CASH FLOW ANALYSIS OLD SALEM 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 $2,957,640 $3,046,369 $3,137,760 $3,231,893 $3,328,850 $3,428,715 Vacancy $ 162,670 $ 167,550 $ 172,577 $ 177,754 $ 183,087 $ 188,579 Credit Loss $ 44,365 $ 45,696 $ 47,066 $ 48,478 $ 49,933 $ 51,431 Concessions $ 29,576 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 236,611 $ 213,246 $ 219,643 $ 226,233 $ 233,019 $ 240,010 Laundry Income $ 23,660 $ 24,370 $ 25,101 $ 25,854 $ 26,630 $ 27,428 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 382,200 $ 393,666 $ 405,476 $ 417,640 $ 430,169 $ 443,075 -------------------------------------------------------------------------------- Subtotal Other Income $ 405,860 $ 418,036 $ 430,577 $ 443,494 $ 456,799 $ 470,503 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $3,126,889 $3,251,159 $3,348,694 $3,449,155 $3,552,629 $3,659,208 OPERATING EXPENSES: Taxes $ 125,580 $ 129,347 $ 133,228 $ 137,225 $ 141,341 $ 145,582 Insurance $ 72,800 $ 74,984 $ 77,234 $ 79,551 $ 81,937 $ 84,395 Utilities $ 327,600 $ 337,428 $ 347,551 $ 357,977 $ 368,717 $ 379,778 Repair & Maintenance $ 41,860 $ 43,116 $ 44,409 $ 45,742 $ 47,114 $ 48,527 Cleaning $ 91,000 $ 93,730 $ 96,542 $ 99,438 $ 102,421 $ 105,494 Landscaping $ 81,900 $ 84,357 $ 86,888 $ 89,494 $ 92,179 $ 94,945 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 12,740 $ 13,122 $ 13,516 $ 13,921 $ 14,339 $ 14,769 General Administrative $ 38,220 $ 39,367 $ 40,548 $ 41,764 $ 43,017 $ 44,307 Management $ 156,344 $ 162,558 $ 167,435 $ 172,458 $ 177,631 $ 182,960 Miscellaneous $ 254,800 $ 262,444 $ 270,317 $ 278,427 $ 286,780 $ 295,383 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,202,844 $1,240,453 $1,277,667 $1,315,997 $1,355,476 $1,396,141 Reserves $ 72,800 $ 74,984 $ 77,234 $ 79,551 $ 81,937 $ 84,395 -------------------------------------------------------------------------------- NET OPERATING INCOME $1,851,244 $1,935,722 $1,993,794 $2,053,608 $2,115,216 $2,178,672 Operating Expense Ratio (% of EGI) 38.5% 38.2% 38.2% 38.2% 38.2% 38.2% Operating Expense Per Unit $ 3,305 $ 3,408 $ 3,510 $ 3,615 $ 3,724 $ 3,836 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ------------------------------------------------------------------------------------------------------- REVENUE Base Rent $3,531,577 $3,637,524 $3,746,650 $3,859,049 $3,974,821 Vacancy $ 194,237 $ 200,064 $ 206,066 $ 212,248 $ 218,615 Credit Loss $ 52,974 $ 54,563 $ 56,200 $ 57,886 $ 59,622 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 247,210 $ 254,627 $ 262,265 $ 270,133 $ 278,237 Laundry Income $ 28,251 $ 29,099 $ 29,972 $ 30,871 $ 31,797 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 456,367 $ 470,058 $ 484,160 $ 498,684 $ 513,645 ------------------------------------------------------------------ Subtotal Other Income $ 484,618 $ 499,157 $ 514,131 $ 529,555 $ 545,442 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $3,768,985 $3,882,054 $3,998,516 $4,118,471 $4,242,025 OPERATING EXPENSES: Taxes $ 149,949 $ 154,448 $ 159,081 $ 163,853 $ 168,769 Insurance $ 86,927 $ 89,535 $ 92,221 $ 94,987 $ 97,837 Utilities $ 391,172 $ 402,907 $ 414,994 $ 427,444 $ 440,267 Repair & Maintenance $ 49,983 $ 51,483 $ 53,027 $ 54,618 $ 56,256 Cleaning $ 108,659 $ 111,919 $ 115,276 $ 118,734 $ 122,296 Landscaping $ 97,793 $ 100,727 $ 103,748 $ 106,861 $ 110,067 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 15,212 $ 15,669 $ 16,139 $ 16,623 $ 17,121 General Administrative $ 45,637 $ 47,006 $ 48,416 $ 49,868 $ 51,364 Management $ 188,449 $ 194,103 $ 199,926 $ 205,924 $ 212,101 Miscellaneous $ 304,245 $ 313,372 $ 322,773 $ 332,456 $ 342,430 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,438,025 $1,481,166 $1,525,601 $1,571,369 $1,618,510 Reserves $ 86,927 $ 89,535 $ 92,221 $ 94,987 $ 97,837 ------------------------------------------------------------------ NET OPERATING INCOME $2,244,033 $2,311,354 $2,380,694 $2,452,115 $2,525,678 Operating Expense Ratio (% of EGI) 38.2% 38.2% 38.2% 38.2% 38.2% Operating Expense Per Unit $ 3,951 $ 4,069 $ 4,191 $ 4,317 $ 4,446
Estimated Stabilized NOI $1,879,342 Sales Expense Rate 2.00% Months to Stabilized 1 Discount Rate 12.50% Stabilized Occupancy 94.5% Terminal Cap Rate 10.25%
Gross Residual Sale Price $24,640,765 Deferred Maintenance $ 0 Less: Sales Expense $ 492,815 Add: Excess Land $ 0 ----------- Net Residual Sale Price $24,147,950 Other Adjustments $ 0 ----------- PV of Reversion $ 7,436,268 Value Indicated By "DCF" $19,698,109 Add: NPV of NOI $12,261,841 Rounded $19,700,000 =========== PV Total $19,698,109
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------ TOTAL VALUE 12.00% 12.25% 12.50% 12.75% 13.00% - ------------------ ------------ ------------ ------------ ------------ ------------ TERMINAL 9.75% $ 20,720,708 $ 20,396,630 $ 20,079,456 $ 19,769,018 $ 19,465,148 CAP RATE 10.00% $ 20,516,366 $ 20,196,792 $ 19,884,016 $ 19,577,868 $ 19,278,186 10.25% $ 20,321,991 $ 20,006,704 $ 19,698,109 $ 19,396,043 $ 19,100,343 10.50% $ 20,136,872 $ 19,825,667 $ 19,521,055 $ 19,222,876 $ 18,930,969 10.75% $ 19,960,363 $ 19,653,050 $ 19,352,236 $ 19,057,763 $ 18,769,473
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA INCOME LOSS DURING LEASE-UP The subject is currently near or at a 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 $26,000 (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 9.75% 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA OLD SALEM APARTMENTS
TOTAL PER SQ. FT. PER UNIT %OF EGI ------------- ----------- ------------ -------- REVENUE Base Rent $ 2,957,640 $ 7.89 $ 8,125 Less: Vacancy & Collection Loss 7.00% $ 207,035 $ 0.55 $ 569 Plus: Other Income Laundry Income $ 23,660 $ 0.06 $ 65 0.75% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 382,200 $ 1.02 $ 1,050 12.11% ----------------------------------------------------- Subtotal Other Income $ 405,860 $ 1.08 $ 1,115 12.86% EFFECTIVE GROSS INCOME $ 3,156,465 $ 8.42 $ 8,672 OPERATING EXPENSES: Taxes $ 125,580 $ 0.33 $ 345 3.98% Insurance $ 72,800 $ 0.19 $ 200 2.31% Utilities $ 327,600 $ 0.87 $ 900 10.38% Repair & Maintenance $ 41,860 $ 0.11 $ 115 1.33% Cleaning $ 91,000 $ 0.24 $ 250 2.88% Landscaping $ 81,900 $ 0.22 $ 225 2.59% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 12,740 $ 0.03 $ 35 0.40% General Administrative $ 38,220 $ 0.10 $ 105 1.21% Management 5.00% $ 157,823 $ 0.42 $ 434 5.00% Miscellaneous $ 254,800 $ 0.68 $ 700 8.07% TOTAL OPERATING EXPENSES $ 1,204,323 $ 3.21 $ 3,309 38.15% Reserves $ 72,800 $ 0.19 $ 200 2.31% ----------------------------------------------------- NET OPERATING INCOME $ 1,879,342 $ 5.01 $ 5,163 59.54% "GOING IN" CAPITALIZATION RATE 9.75% VALUE INDICATION $ 19,275,302 $ 51.40 $ 52,954 PV OF CONCESSIONS ($ 26,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 19,249,302 ROUNDED $ 19,200,000 $ 51.20 $ 52,747
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------- ----------- ----------- ----------- ---------- 9.00% $20,855,577 $20,900,000 $ 57,418 $ 55.73 9.25% $20,291,210 $20,300,000 $ 55,769 $ 54.13 9.50% $19,756,547 $19,800,000 $ 54,396 $ 52.80 9.75% $19,249,302 $19,200,000 $ 52,747 $ 51.20 10.00% $18,767,419 $18,800,000 $ 51,648 $ 50.13 10.25% $18,309,043 $18,300,000 $ 50,275 $ 48.80 10.50% $17,872,495 $17,900,000 $ 49,176 $ 47.73
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $19,200,000. 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 $19,700,000 Direct Capitalization Method $19,200,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $19,500,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 $19,000,000 Income Approach $19,500,000 Reconciled Value $19,500,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 8, 2003 the market value of the fee simple estate in the property is: $19,500,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - BUSINESS OFFICE [PICTURE] [PICTURE] EXTERIOR - POOL EXTERIOR - LANDSCAPING AND APARTMENT [PICTURE] [PICTURE] EXTERIOR - PARKING AREA & LANDSCAPING EXTERIOR - INTERIOR ROAD AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] INTERIOR - BEDROOM INTERIOR - PATIO [PICTURE] [PICTURE] INTERIOR - KITCHEN INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] INTERIOR - BATHROOM INTERIOR - FITNESS CENTER AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 SUMMIT @ ROANOKE CINNAMON RIDGE APARTMENTS CRAIG MANOR APARTMENTS 4500 Franklin Way 5143 Overland Drive 128 Rutledge Drive Roanoke, VA Roanoke, VA Salem, VA [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 BUCK RUN APARTMENTS 4689 Buck Run Square Roanoke, VA N/A N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - -------------------------------- --------------------------------- ---------------------------------- Property Name Old Salem Apartments Hessian Hills Management Company Aimco Equity Mgmt. LOCATION: Address 2639 Barracks Road Hessian Hills Rowad City, State Charlottesville, Virginia Charlottesville, VA County Albemarle Albemarle Proximity to Subject 1/2 mile east of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 375,016 174,078 Year Built 1969 1966 Effective Age 25 26 Building Structure Type Brick walls; asphalt shingle roof Brick veneer; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 364 184 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1A10 605 20 $ 606 6 2Bd/1Ba 932 170 $ 715 2 1B10 786 20 $ 656 11 3Bd/2Ba 1,117 14 $ 715 3 1C10 963 8 $ 674 4 2A10 836 50 $ 658 5 2A15 1,064 76 $ 684 6 2B10 903 15 $ 673 7 2B15 1,117 48 $ 693 8 2C10 1,002 8 $ 747 9 2C15 1,173 59 $ 740 10 2D10 1,114 6 $ 739 11 3A20 1,291 24 $ 747 12 3A25 1,324 24 $ 870 13 EA10 500 6 $ 536 Average Unit Size (SF) 1,030 946 Unit Breakdown: Efficiency 2% 2-Bedroom 72% Efficiency 0% 2-Bedroom 92% 1-Bedroom 13% 3-Bedroom 13% 1-Bedroom 0% 3-Bedroom 8% CONDITION: Good Good APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony Fireplace Fireplace Fireplace 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 Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball Meeting Hall Sand Volley Ball 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 Gym Room OCCUPANCY: 94% 90% LEASING DATA: Available Leasing Terms 3 to 12 months 12 months Concessions 1 bdroom - reduced rent on 12 month lease 2 months free rent Pet Deposit $150 and $20/month $250 plus $15 per month Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water X Trash X Water X Trash Confirmation May 12, 2003; Jamie Hays May 8 2003; Property Manager Telephone Number (540)989-6666 (434)296-8303 NOTES: COMPARISON TO SUBJECT: Slightly Superior
COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - -------------------------------- ------------------------------------------- ------------------------------- Property Name Westgate Apartments Trophy Chase Apartments Management Company Great Eastern Mgmt. Cornerstone LOCATION: Address 2615 Hydraulic Road 2407 Peyton Drive City, State Charlottesville, VA Charlottesville, VA County Albemarle Albemarle Proximity to Subject 1.5-miles east of the subject 2 miles east of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 228,538 316,748 Year Built 1974 1969 Effective Age 20 20 Building Structure Type Brick and wood siding; asphalt shingle roof Wood siding, shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 284 425 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 603 62 $ 759 1 1Bd/1Ba 659 124 $ 697 2 1Bd/1Ba 790 64 $ 789 4 2Bd/1Ba 860 120 $ 739 6 2Bd/1Ba 865 134 $ 809 6 2Bd/1Ba 922 123 $ 771 7 2Bd/1.5Ba 964 16 $ 869 11 3Bd/2Ba 1,197 58 $8416 11 3Bd/2Ba 1,115 8 $ 899 Average Unit Size (SF) 805 865 Unit Breakdown: Efficiency 0% 2-Bedroom 53% Efficiency 0% 2-Bedroom 57% 1-Bedroom 44% 3-Bedroom 3% 1-Bedroom 29% 3-Bedroom 14% CONDITION: Good Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X X Balcony X Fireplace Fire place X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool 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 Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room X Gym Room OCCUPANCY: 92% 93% LEASING DATA: Available Leasing Terms 12 months 3 to 12 months Concessions None Reduced rents on vacants Pet Deposit $250 $200 Utilities Paid by Tenant: Electric Natural Gas X Electric X Natural Gas Water Trash X Water X Trash Confirmation May 8 2003; Property Manager May 8 2003; Property Contact Telephone Number (434)296-4109 (434)973-6432 NOTES: COMPARISON TO SUBJECT: Slightly Inferior Similar
COMPARABLE DESCRIPTION R - 4 - -------------------------------- -------------------------------- Property Name Squire Hill Management Company WMCI LOCATION: Address 1000 Old Brook Road City, State Charlottesville, VA County Charlottesville Proximity to Subject Within 6-miles of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 290,956 Year Built 1980 Effective Age 15 Building Structure Type Brick walls, shingle roof Parking Type (Gr., Cov., etc.) Open Number of Units 284 Unit Mix: Type Unit Qty. Mo. 2 1Bd/1Ba 1,100 126 $625 4 2Bd/1Ba 926 65 $695 6 2Bd/1Ba 934 69 $730 11 3Bd/2Ba 1,155 16 $769 12 3Bd/2Ba 1,155 8 $785 Average Unit Size (SF) 1,024 Unit Breakdown: Efficiency 0% 2-Bedroom 47% 1-Bedroom 44% 3-Bedroom 8% CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X Fire place Project Amenities X Cable TV Ready X Swimming Pool Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track X Business Office Gym Room OCCUPANCY: 96% LEASING DATA: Available Leasing Terms 12 months Concessions Reduced rent/$200 off 1st month Pet Deposit $200-$250 Utilities Paid by Tenant: X Electric Natural Gas X Water X Trash Confirmation May 8 2003; Property Contact Telephone Number (434) 973-3620 NOTES: COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 HESSIAN HILLS WESTGATE APARTMENTS TROPHY CHASE APARTMENTS Hessian Hills Road 2615 Hydraulic Road 2407 Peyton Drive Charlottesville, VA Charlottesville, VA Charlottesville, VA [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 SQUIRE HILL 1000 Old Brook Road Charlottesville, VA [PICTURE] N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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. Brian Johnson, MAI and Jonathan Hackerman 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 Temporary Certified General Real Estate Appraiser #4001 007252 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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 OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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. OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. OLD SALEM APARTMENTS, CHARLOTTESVILLE, VIRGINIA 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. EX-99.(C)(5) 7 d07277a2exv99wxcyx5y.txt APPRAISAL OF TAR RIVER ESTATES TAR RIVER ESTATES 1725 EAST 1ST STREET GREENVILLE, 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] JUNE 30, 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: TAR RIVER ESTATES 1725 EAST 1ST STREET GREENVILLE, PITT 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 210,769 square feet of rentable area. The improvements were built in 1969. The improvements are situated on 14.84 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 94% 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA The opinions expressed in this appraisal cover letter can only be completely understood 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: ($6,400,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach June 30, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group North Carolina Temporary Practice Permit #2578 Report By: Jimmy Pat James, MAI North Carolina Temporary Practice Permit #2603 Assisted by: J. Chad Walker AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 TAR RIVER ESTATES, GREENVILLE, 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 .................................................................. 15 Improvement Analysis............................................................ 15 Highest and Best Use ........................................................... 16 VALUATION Valuation Procedure............................................................. 17 Sales Comparison Approach....................................................... 19 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Tar River Estates LOCATION: 1725 East 1st Street Greenville, 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: June 30, 2003
PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 14.84 acres, or 646,430 square feet Assessor Parcel No.: 22131 Floodplain: Community Panel No. 3701910010B (April 30, 1986) Flood Zone C, an area outside the floodplain. Zoning: R-6 (High Density Residential)
BUILDING: No. of Units: 220 Units Total NRA: 210,769 Square Feet Average Unit Size: 958 Square Feet Apartment Density: 14.8 units per acre Year Built: 1969 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ---------------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - ---------- ------ -------- ----------- --------- ---------- 1A10 700 $ 475 $0.68 $ 40,850 $ 490,200 2A15 1,067 $ 636 $0.60 $ 62,964 $ 755,568 2A20 1,067 $ 659 $0.62 $ 5,272 $ 63,264 3A15 1,200 $ 815 $0.68 $ 12,225 $ 146,700 3A20 1,500 $ 929 $0.62 $ 3,716 $ 44,592 4A25 1,550 $1,279 $0.83 $ 10,232 $ 122,784 ----------------------- Total $ 135,259 $1,623,108 =======================
OCCUPANCY: 94% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PROPERTY SIGN PICTURE] [EXTERIOR - OFFICE PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - --------------------- ------ ------ Potential Rental Income $1,623,108 $7,378 Effective Gross Income $1,469,304 $6,679 Operating Expenses $ 749,085 $ 3,405 51.0% of EGI Net Operating Income: $ 665,219 $ 3,024 Capitalization Rate 10.00% DIRECT CAPITALIZATION VALUE $6,700,000* $30,455 / UNIT
DISCOUNTED CASH FLOW ANALYSIS: - ------------------------------ Holding Period 10 years 2002 Economic Vacancy 14% Stabilized Vacancy & Collection Loss: 13% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.50% Discount Rate 12.00% Selling Costs 3.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $6,400,000* $29,091 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $6,400,000 $29,091 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $19,028 to $40,058 Range of Sales $/Unit (Adjusted) $26,250 to $32,047 VALUE INDICATION - PRICE PER UNIT $6,400,000* $29,091 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.94 to 7.35 Selected EGIM for Subject 4.75 Subject's Projected EGI $ 1,469,304 EGIM ANALYSIS CONCLUSION $ 7,000,000* $31,818 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 6,800,000* $30,909 / UNIT RECONCILED SALES COMPARISON VALUE $ 6,600,000 $30,000 / 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $6,400,000 NOI Per Unit $6,800,000 EGIM Multiplier $7,000,000 INDICATED VALUE BY SALES COMPARISON $6,600,000 $30,000 / UNIT INCOME APPROACH: Direct Capitalization Method: $6,700,000 Discounted Cash Flow Method: $6,400,000 INDICATED VALUE BY THE INCOME APPROACH $6,400,000 $29,091 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $6,400,000 $29,091 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 1725 East 1st Street, Greenville, Pitt County, North Carolina. Greenville identifies it as 22131. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by J. Chad Walker on May 14, 2003. Jimmy Pat James, MAI and Frank Fehribach, MAI have not made a personal inspection of the subject property. J. Chad Walker assisted Jimmy Pat James, MAI in the research, valuation analysis and writing the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Jimmy Pat James, MAI, Frank Fehribach, MAI, and J. Chad Walker 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. The subject property lost eight of its 220 units to fire in January 2003. It is our understanding the city has approved the rebuilding of these units and demolition is currently occurring. The assumption that we used in valuing the subject, which has been approved by the clients, is to assume the cost of rebuilding the damaged units would be handled by the property's insurance. Therefore, we were only concern with the couple of months of down time caused by rebuilding the units. Since the subject is achieving a stabilized occupancy even considering the eight units that is not available, no additional lease up cost is needed. 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 June 30, 2003. AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA 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: "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 New Shelter V Limited Partnership. 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 TAR RIVER ESTATES, GREENVILLE, 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 Greenville, North Carolina. Overall, the neighborhood is characterized as an urban setting with the predominant land use being single family residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Greenville Boulevard West - Evans Street/Green Street South - 10th Street North - Tar River MAJOR EMPLOYERS Major employers in the subject's area include DSM Pharmaceuticals, NACCO Materials Handling, Bank of America, Pitt County Schools, Sprint, East Carolina University, the city of Greenville, and Pitt County Memorial Hospital. 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - -------- ------------ ------------ ------------ --- POPULATION TRENDS Current Population 10,576 45,521 79,490 138,438 5-Year Population 10,587 47,737 87,423 150,575 % Change CY-5Y 0.1% 4.9% 10.0% 8.8% Annual Change CY-5Y 0.0% 1.0% 2.0% 1.8% HOUSEHOLDS Current Households 3,623 18,394 32,592 54,912 5-Year Projected Households 3,847 19,947 36,886 61,050 % Change CY - 5Y 6.2% 8.4% 13.2% 11.2% Annual Change CY-5Y 1.2% 1.7% 2.6% 2.2% INCOME TRENDS Median Household Income $14,699 $23,835 $29,251 $ 30,963 Per Capita Income $ 8,710 $16,788 $19,221 $ 18,916 Average Household Income $26,584 $41,886 $47,395 $ 47,690
Source: Demographics Now The subject neighborhood's population is expected to show increases above 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 76.33% 57.87% 50.02% 39.81% 5-Year Projected % Renting 77.86% 58.44% 50.52% 39.97% % of Households Owning 17.25% 36.94% 45.49% 55.30% 5-Year Projected % Owning 16.04% 36.72% 45.41% 55.57%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Tar River South - East 1st Street and Apartments East - Single family residential West - Single family residential CONCLUSIONS The subject is well located within the city of Greenville. The neighborhood is characterized as being mostly urban 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Greenville in Pitt County. The overall pace of development in the subject's market is more or less decreasing. At this time, Waterford Place Apartments is under construction, however, it is not expected to compete with the subject property. Occupancy trends in the subject's market are a stable. Historically speaking, the subject's submarket has equated the overall market. The subject property is located in an area where the apartment market is fueled by students attending East North Carolina State University. The majority of the complexes are locally or regionally owned. Therefore, the Greenville market is not a primary market for national investors. As a result, market information produced by real estate research groups such as REIS, Colliers, Carolina Real Data, etc., have not been performed. Market rents in the subject's market have been following a stable trend. 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 Eastbrook Apartments 180 95% 1974 1.75 miles southeast of the subject R-2 Dogwood Hollow 99 98% 1998 0.50 mile south of the subject R-3 Pirates Place 144 80% 1997 1.00 mile southwest of the subject R-4 Wilson Acres 113 85% 1982 South across street from the subject R-5 Wesely Commons South 150 95% 1996 0.50 acre southeast of the subject Subject Tar River Estates 220 94% 1969
The following information regarding average rental rates in the Greenville, NC MSA has been obtained from www.universallivingwage.com. The rent for efficiency, 1 bedroom, 2 bedroom, 3 bedroom and 4 bedroom apartments is $441, $448, $580, $783 and $957 respectively. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 15 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 14.84 acres, or 646,430 square feet Shape Irregular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 3701910010B, dated April 30, 1986 Flood Zone Zone C Zoning R-6, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ------------------------------------ TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ------------- ---- -------- ----- --------- ----- 22131 $445,200 $5,015,460 $5,460,660 0.01565 $85,461
IMPROVEMENT ANALYSIS Year Built 1969 Number of Units 220 Net Rentable Area 210,769 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, sand volleyball, gym room, tanning bed, billiards room, laundry room, business office, and parking area. Unit Amenities Individual unit amenities include a cable TV connection, w/d included, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - --------- --------------- --------- 1A10 86 700 2A15 99 1,067 2A20 8 1,067 3A15 15 1,200 3A20 4 1,500 4A25 8 1,550
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 1969 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 17 TAR RIVER ESTATES, GREENVILLE, 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 18 TAR RIVER ESTATES, GREENVILLE, 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 19 TAR RIVER ESTATES, GREENVILLE, 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. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 20 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Tar River Estates Signature Place Apartments Pinebrook LOCATION: Address 1725 East 1st Street 410 Beasley Drive 121 River Bluff Road City, State Greenville, North Carolina Greenville, North Carolina Greenville, North Carolina County Pitt Pitt Pitt PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 210,769 176,608 102,263 Year Built 1969 1980 1972 Number of Units 220 171 120 Unit Mix: Type Total Type Total Type Total 1A10 86 1Br/1Ba 48 1Br/1Ba 40 2A15 99 2Br/1Ba 8 2Br/1.5Ba 80 2A20 8 2Br/1.5Ba 76 3A15 15 3Br/1.5Ba - Type 1 16 3A20 4 3Br/1.5Ba - Type 2 23 4A25 8 Average Unit Size (SF) 958 1,033 852 Land Area (Acre) 14.8400 5.3700 9.1500 Density (Units/Acre) 14.8 31.8 13.1 Parking Ratio (Spaces/Unit) 1.50 N/A N/A Parking Type (Gr., Cov., etc.) Garage Open Open CONDITION: Average Average Average APPEAL: Average Good Average AMENITIES: Pool/Spa Yes/No Yes/No No/No Gym Room Yes Yes No Laundry Room Yes No Yes Secured Parking No No No Sport Courts No No No Washer/Dryer Connection Yes Yes No Basketball Court No No No Volleyball Yes No No OCCUPANCY: 94% 84% N/A TRANSACTION DATA: Sale Date March, 2003 March, 2000 Sale Price ($) $6,850,000 $2,425,000 Grantor Signature Place, LLC Pinebrook Associates LLC Grantee CRIT-NC, LLC Lambe Clarence R. Jr. and Katherine W. Sale Documentation Book 1470 Page 842 Book 1017 Page 51 Verification Pitt County Records Pitt County Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $0 $0 $0.00 $496,800 $4,140 $4.86 Vacancy/Credit Loss $0 $0 $0.00 $ 49,680 $ 414 $0.49 Effective Gross Income $0 $0 $0.00 $447,120 $3,726 $4.37 Operating Expenses $0 $0 $0.00 $223,560 $1,863 $2.19 Net Operating Income $0 $0 $0.00 $223,560 $1,863 $2.19 NOTES: PRICE PER UNIT $40,058 $20,208 PRICE PER SQUARE FOOT $ 38.79 $ 23.71 EXPENSE RATIO N/A 50.0% EGIM N/A 5.42 OVERALL CAP RATE 0.00% 9.22% 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 Kings Row Kingsarms Apartments Wellingham Park LOCATION: Address 200 Verdant Drive Charles Street 151 Wellingham Avenue City, State Greenville, North Carolina Greenville, North Carolina Greenville, North Carolina County Pitt Pitt Pitt PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 90,596 66,348 55,870 Year Built 1974 1984 1999 Number of Units 108 120 80 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 36 1Br/1Ba N/A 1Br/1Ba 60 2Br/2Ba 72 2Br/2Ba N/A 2Br/2Ba 20 3Br/2Ba N/A Average Unit Size (SF) 839 553 698 Land Area (Acre) 5.7600 9.1200 4.6361 Density (Units/Acre) 18.8 13.2 17.3 Parking Ratio (Spaces/Unit) 2.19 N/A 1.73 Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Good APPEAL: Average Average Good AMENITIES: Pool/Spa No/No No/No No/No Gym Room No No Yes Laundry Room Yes Yes No Secured Parking No No No Sport Courts No No No Washer/Dryer Connection No Yes Yes Basketball Court Yes No No Volleyball No No No OCCUPANCY: N/A N/A 95% TRANSACTION DATA: Sale Date December, 1999 January, 1997 April, 2001 Sale Price ($) $2,054,990 $3,000,000 $2,850,000 Grantor Aima R. Wellons and John John L. Causey Jr. and Wellington LLC H. Wellons Sr. Susan P. Causey Grantee KR/O LLC Kings Arms of Greenville, Unistar Outdoor Advertising Inc. Sale Documentation Book 993 Page 98 Book 703 Page 756 Book 1137 Page 623 Verification Pitt County Records Pitt County Records Pitt County Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $462,240 $4,280 $5.10 $0 $0 $0.00 $408,000 $5,100 $7.30 Vacancy/Credit Loss $ 46,224 $ 428 $0.51 $0 $0 $0.00 $ 20,400 $ 255 $0.37 Effective Gross Income $416,016 $3,852 $4.59 $0 $0 $0.00 $387,600 $4,845 $6.94 Operating Expenses $208,008 $1,926 $2.30 $0 $0 $0.00 $116,280 $1,454 $2.08 Net Operating Income $208,008 $1,926 $2.30 $0 $0 $0.00 $271,320 $3,392 $4.86 NOTES: PRICE PER UNIT $19,028 $25,000 $35,625 PRICE PER SQUARE FOOT $ 22.68 $ 45.22 $ 51.01 EXPENSE RATIO 50.0% N/A 30.0% EGIM 4.94 N/A 7.35 OVERALL CAP RATE 10.12% 0.00% 9.52% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA ACTUAL
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $19,028 to $40,058 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 $26,250 to $32,047 per unit with a mean or average adjusted price of $28,702 per unit. The median adjusted price is $28,292 per unit. Based on the following analysis, we have concluded to a value of $29,000 per unit, which results in an "as is" value of $6,400,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ----------------------------------- -------------------------- -------------------------- -------------------------- Property Name Tar River Estates Signature Place Apartments Pinebrook Address 1725 East 1st Street 410 Beasley Drive 121 River Bluff Road City Greenville, North Carolina Greenville, North Carolina Greenville, North Carolina Sale Date March, 2003 March, 2000 Sale Price ($) $6,850,000 $2,425,000 Net Rentable Area (SF) 210,769 176,608 102,263 Number of Units 220 171 120 Price Per Unit $40,058 $20,208 Year Built 1969 1980 1972 Land Area (Acre) 14.8400 5.3700 9.1500 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 03-2003 0% 03-2000 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $40,058 $20,208 Location Comparable 0% Inferior 10% Number of Units 220 171 -5% 120 -5% Quality / Appeal Good Superior -10% Inferior 15% Age / Condition 1969 1980 / Average -10% 1972 / Average 10% Occupancy at Sale 94% 84% 5% N/A 0% Amenities Good Comparable 0% Inferior 10% Average Unit Size (SF) 958 1,033 0% 852 0% PHYSICAL ADJUSTMENT -20% 40% FINAL ADJUSTED VALUE ($/UNIT) $32,047 $28,292
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - ----------------------------------- -------------------------- -------------------------- -------------------------- Property Name Kings Row Kingsarms Apartments Wellingham Park Address 200 Verdant Drive Charles Street 151 Wellingham Avenue City Greenville, North Carolina Greenville, North Carolina Greenville, North Carolina Sale Date December, 1999 January, 1997 April, 2001 Sale Price ($) $2,054,990 $3,000,000 $2,850,000 Net Rentable Area (SF) 90,596 66,348 55,870 Number of Units 108 120 80 Price Per Unit $19,028 $25,000 $35,625 Year Built 1974 1984 1999 Land Area (Acre) 5.7600 9.1200 4.6361 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 12-1999 0% 01-1997 0% 04-2001 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $19,028 $25,000 $35,625 Location Inferior 10% Inferior 10% Inferior 10% Number of Units 108 -5% 120 -5% 80 -10% Quality / Appeal Inferior 15% Inferior 5% Comparable 0% Age / Condition 1974 / Average 10% 1984 / Average -10% 1999 / Good -10% Occupancy at Sale N/A 0% N/A 0% 95% 0% Amenities Inferior 10% Inferior 10% Comparable 0% Average Unit Size (SF) 839 0% 553 -5% 698 -5% PHYSICAL ADJUSTMENT 40% 5% -15% FINAL ADJUSTED VALUE ($/UNIT) $26,639 $26,250 $30,281
SUMMARY VALUE RANGE (PER UNIT) $26,250 TO $ 32,047 MEAN (PER UNIT) $28,702 MEDIAN (PER UNIT) $28,292 VALUE CONCLUSION (PER UNIT) $29,000
VALUE INDICATED BY SALES COMPARISON APPROACH $6,380,000 ROUNDED $6,400,000
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 TAR RIVER ESTATES, GREENVILLE, 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-1 171 $6,850,000 NA $665,219 $ 40,058 $ 3,024 I-2 120 $2,425,000 9.22% $223,560 $665,219 1.623 $ 32,799 $ 20,208 $ 1,863 $ 3,024 I-3 108 $2,054,990 10.12% $208,008 $665,219 1.570 $ 29,872 $ 19,028 $ 1,926 $ 3,024 I-4 120 $3,000,000 NA $665,219 $ 25,000 $ 3,024 I-5 80 $2,850,000 9.52% $271,320 $665,219 0.892 $ 31,762 $ 35,625 $ 3,392 $ 3,024
PRICE/UNIT
Low High Average Median --- ---- ------- ------ $ 29,872 $ 32,799 $ 31,478 $ 31,762
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 31,000 Number of Units 220 ---------- Value Based on NOI Analysis $6,820,000 Rounded $6,800,000
The adjusted sales indicate a range of value between $29,872 and $32,799 per unit, with an average of $31,478 per unit. Based on the subject's competitive position within the improved sales, a value of $31,000 per unit is estimated. This indicates an "as is" market value of $6,800,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 TAR RIVER ESTATES, GREENVILLE, 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-1 171 $6,850,000 $ 40,058 I-2 120 $2,425,000 $ 447,120 $ 223,560 50.00% 5.42 $ 20,208 I-3 108 $2,054,990 $ 416,016 $ 208,008 50.00% 4.94 $ 19,028 50.98% I-4 120 $3,000,000 $ 25,000 I-5 80 $2,850,000 $ 387,600 $ 116,280 30.00% 7.35 $ 35,625
EGIM
Low High Average Median 4.94 7.35 5.91 5.42
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 4.75 Subject EGI $1,469,304 ---------- Value Based on EGIM Analysis $6,979,194 Rounded $7,000,000 Value Per Unit $ 31,818
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 50.98% before reserves. The comparable sales indicate a range of expense ratios from 30.00% to 50.00%, while their EGIMs range from 4.94 to 7.35. Overall, we conclude to an EGIM of 4.75, which results in an "as is" value estimate in the EGIM Analysis of $7,000,000. 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 $6,600,000. Price Per Unit $6,400,000 NOI Per Unit $6,800,000 EGIM Analysis $7,000,000 Sales Comparison Conclusion $6,600,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, 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 - --------- --------- -------- ------ --------- 1A10 700 $ 475 $ 0.68 100.0% 2A15 1067 $ 636 $ 0.60 94.9% 2A20 1067 $ 659 $ 0.62 100.0% 3A15 1200 $ 815 $ 0.68 60.0% 3A20 1500 $ 929 $ 0.62 100.0% 4A25 1550 $1,279 $ 0.83 75.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS --------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ---------- -------- -------- -------- -------- Wesely Eastbrook Dogwood Pirates Wilson Commons Apartments Hollow Place Acres South ---------- -------- -------- -------- -------- COMPARISON TO SUBJECT SUBJECT SUBJECT --------------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Inferior Inferior Superior Inferior Inferior - ------------------------ ------------ ------- ------- ---------- -------- -------- -------- -------- Monthly Rent 1A10 $ 475 $ 459 $ 380 Unit Area (SF) 700 700 600 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.66 $ 0.63 Monthly Rent 2A15 $ 636 $ 629 $ 490 $ 525 $ 640 $ 465 Unit Area (SF) 1,067 1,067 890 928 1,050 760 Monthly Rent Per Sq. Ft. $ 0.60 $ 0.59 $ 0.55 $ 0.57 $ 0.61 $ 0.61 Monthly Rent 2A20 $ 659 $ 669 $ 560 Unit Area (SF) 1,067 1,067 814 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.63 $ 0.69 Monthly Rent 3A15 $ 815 $ 839 $ 840 Unit Area (SF) 1,200 1,200 1,350 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.70 $ 0.62 Monthly Rent 3A20 $ 929 $ 939 $ 595 $ 865 Unit Area (SF) 1,500 1,500 1,050 1,200 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.63 $ 0.57 $ 0.72 Monthly Rent 4A25 $ 1,279 $ 1,279 $1,105 Unit Area (SF) 1,550 1,550 1,200 Monthly Rent Per Sq. Ft. $ 0.83 $ 0.83 $ 0.92
DESCRIPTION MIN MAX MEDIAN AVERAGE - ------------------------ -------- --------- ------ ------- Monthly Rent $ 380 $ 380 $ 380 $ 380 Unit Area (SF) 600 600 600 600 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.63 $ 0.63 $ 0.63 Monthly Rent $ 465 $ 640 $ 508 $ 530 Unit Area (SF) 760 1,050 909 907 Monthly Rent Per Sq. Ft. $ 0.55 $ 0.61 $ 0.59 $ 0.58 Monthly Rent $ 560 $ 560 $ 560 $ 560 Unit Area (SF) 814 814 814 814 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.69 $ 0.69 $ 0.69 Monthly Rent $ 840 $ 840 $ 840 $ 840 Unit Area (SF) 1,350 1,350 1,350 1,350 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.62 $ 0.62 $ 0.62 Monthly Rent $ 595 $ 865 $ 730 $ 730 Unit Area (SF) 1,050 1,200 1,125 1,125 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.72 $ 0.64 $ 0.64 Monthly Rent $ 1,105 $ 1,105 $1,105 $ 1,105 Unit Area (SF) 1,200 1,200 1,200 1,200 Monthly Rent Per Sq. Ft. $ 0.92 $ 0.92 $ 0.92 $ 0.92
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 - --------- --------------- --------- ---------- ------ -------- ---------- 1A10 86 700 $ 475 $ 0.68 $ 40,850 $ 490,200 2A15 99 1,067 $ 636 $ 0.60 $ 62,964 $ 755,568 2A20 8 1,067 $ 659 $ 0.62 $ 5,272 $ 63,264 3A15 15 1,200 $ 815 $ 0.68 $ 12,225 $ 146,700 3A20 4 1,500 $ 929 $ 0.62 $ 3,716 $ 44,592 4A25 8 1,550 $ 1,279 $ 0.83 $ 10,232 $ 122,784 -------- ---------- Total $135,259 $1,623,108
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 TAR RIVER ESTATES, GREENVILLE, 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 $ 2,674,900 $ 12,159 $ 1,668,252 $ 7,583 $ 1,623,734 $ 7,381 $ 1,630,608 $ 7,412 Vacancy $ 1,742,581 $ 7,921 $ 463,052 $ 2,105 $ 175,361 $ 797 $ 164,825 $ 749 Credit Loss/Concessions $ 28,998 $ 132 $ 33,839 $ 154 $ 48,802 $ 222 $ 49,000 $ 223 ----------------------------------------------------------------------------------------------------- Subtotal $ 1,771,579 $ 8,053 $ 496,891 $ 2,259 $ 224,163 $ 1,019 $ 213,825 $ 972 Laundry Income $ 3,498 $ 16 $ 2,614 $ 12 $ 689 $ 3 $ 2,280 $ 10 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 41,255 $ 188 $ 93,725 $ 426 $ 95,045 $ 432 $ 42,471 $ 193 ----------------------------------------------------------------------------------------------------- Subtotal Other Income $ 44,753 $ 203 $ 96,339 $ 438 $ 95,734 $ 435 $ 44,751 $ 203 ----------------------------------------------------------------------------------------------------- Effective Gross Income $ 948,074 $ 4,309 $ 1,267,700 $ 5,762 $ 1,495,305 $ 6,797 $ 1,461,534 $ 6,643 Operating Expenses Taxes $ 66,239 $ 301 $ 78,362 $ 356 $ 87,688 $ 399 $ 84,619 $ 385 Insurance ($ 566,852) -$ 2,577 $ 83,887 $ 381 $ 67,325 $ 306 $ 40,169 $ 183 Utilities $ 78,576 $ 357 $ 91,905 $ 418 $ 118,616 $ 539 $ 91,224 $ 415 Repair & Maintenance $ 107,209 $ 487 $ 85,853 $ 390 $ 147,365 $ 670 $ 132,144 $ 601 Cleaning $ 1,935 $ 9 $ 1,605 $ 7 $ 720 $ 3 $ 0 $ 0 Landscaping $ 36,456 $ 166 $ 48,826 $ 222 $ 36,418 $ 166 $ 74,400 $ 338 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 11,605 $ 53 $ 11,737 $ 53 $ 17,483 $ 79 $ 17,196 $ 78 General Administrative $ 1,076,901 $ 4,895 $ 320,999 $ 1,459 $ 262,405 $ 1,193 $ 247,968 $ 1,127 Management $ 88,607 $ 403 $ 71,879 $ 327 $ 77,241 $ 351 $ 78,100 $ 355 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Total Operating Expenses $ 900,676 $ 4,094 $ 795,053 $ 3,614 $ 815,261 $ 3,706 $ 765,820 $ 3,481 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------------- Net Income $ 47,398 $ 215 $ 472,647 $ 2,148 $ 680,044 $ 3,091 $ 695,714 $ 3,162
ANNUALIZED 2003 --------------------- PROJECTION AAA PROJECTION --------------------- --------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - --------------------------- ---------- -------- ----------- ----------- ------ Revenues Rental Income $1,628,616 $ 7,403 $ 1,623,108 $ 7,378 100.0% Vacancy $ 180,000 $ 818 $ 162,311 $ 738 10.0% Credit Loss/Concessions $ 48,000 $ 218 $ 48,693 $ 221 3.0% -------------------------------------------------------- Subtotal $ 228,000 $ 1,036 $ 211,004 $ 959 13.0% Laundry Income $ 2,400 $ 11 $ 2,200 $ 10 0.1% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 60,000 $ 273 $ 55,000 $ 250 3.4% -------------------------------------------------------- Subtotal Other Income $ 62,400 $ 284 $ 57,200 $ 260 3.5% -------------------------------------------------------- Effective Gross Income $1,463,016 $ 6,650 $ 1,469,304 $ 6,679 100.0% Operating Expenses Taxes $ 84,096 $ 382 $ 85,360 $ 388 5.8% Insurance $ 41,748 $ 190 $ 42,900 $ 195 2.9% Utilities $ 129,248 $ 587 $ 99,000 $ 450 6.7% Repair & Maintenance $ 107,428 $ 488 $ 132,000 $ 600 9.0% Cleaning $ 1,280 $ 6 $ 660 $ 3 0.0% Landscaping $ 39,076 $ 178 $ 39,600 $ 180 2.7% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 10,976 $ 50 $ 17,600 $ 80 1.2% General Administrative $ 274,352 $ 1,247 $ 258,500 $ 1,175 17.6% Management $ 1,420 $ 6 $ 73,465 $ 334 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% -------------------------------------------------------- Total Operating Expenses $ 689,624 $ 3,135 $ 749,085 $ 3,405 51.0% Reserves $ 0 $ 0 $ 55,000 $ 250 7.3% -------------------------------------------------------- Net Income $ 773,392 $ 3,515 $ 665,219 $ 3,024 45.3%
REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on the market analysis previously discussed. Other income consists of forfeited deposits, laundry income, late rent payments, month to month fees, pet fees, vending machine revenue, etc. We forecasted the property's annual operating expenses after reviewing its historical performance at the subject property. We analyzed each item of expense and attempted to forecast amounts a typical informed investor would consider reasonable. VACANCY AND COLLECTION LOSS An investor is primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100% occupied and all tenants were paying their rent in full and on time. An investor normally expects some income loss as tenants vacate, fail to pay rent, or pay their rent late. We have projected a stabilized vacancy and collection loss rate of 13% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
- ------------------------------------------------- COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - -------- --------- ------ ---------- ------ I-1 Mar-03 84% $40,058 NA I-2 Mar-00 N/A $20,208 9.22% I-3 Dec-99 N/A $19,028 10.12% I-4 Jan-97 N/A $25,000 NA I-5 Apr-01 95% $35,625 9.52% High 10.12% Low 9.22% Average 9.62%
Based on this information, we have concluded the subject's overall capitalization rate should be 10.00%. 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 10.50%. 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 3.00% 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 $6,400,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA approximately 37% 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS TAR RIVER ESTATES
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 - ------------------------------------------------------------------------------------------------------------------------------ REVENUE Base Rent $1,623,108 $1,623,108 $1,647,455 $1,680,404 $1,730,816 $1,782,740 Vacancy $ 162,311 $ 162,311 $ 164,745 $ 168,040 $ 173,082 $ 178,274 Credit Loss $ 48,693 $ 48,693 $ 49,424 $ 50,412 $ 51,924 $ 53,482 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------------- Subtotal $ 211,004 $ 211,004 $ 214,169 $ 218,452 $ 225,006 $ 231,756 Laundry Income $ 2,200 $ 2,200 $ 2,233 $ 2,278 $ 2,346 $ 2,416 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 55,000 $ 55,000 $ 55,825 $ 56,942 $ 58,650 $ 60,409 -------------------------------------------------------------------------------------- Subtotal Other Income $ 57,200 $ 57,200 $ 58,058 $ 59,219 $ 60,996 $ 62,826 -------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,469,304 $1,469,304 $1,491,344 $1,521,170 $1,566,806 $1,613,810 OPERATING EXPENSES: Taxes $ 85,360 $ 87,921 $ 90,558 $ 93,275 $ 96,073 $ 98,956 Insurance $ 42,900 $ 44,187 $ 45,513 $ 46,878 $ 48,284 $ 49,733 Utilities $ 99,000 $ 101,970 $ 105,029 $ 108,180 $ 111,425 $ 114,768 Repair & Maintenance $ 132,000 $ 135,960 $ 140,039 $ 144,240 $ 148,567 $ 153,024 Cleaning $ 660 $ 680 $ 700 $ 721 $ 743 $ 765 Landscaping $ 39,600 $ 40,788 $ 42,012 $ 43,272 $ 44,570 $ 45,907 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 17,600 $ 18,128 $ 18,672 $ 19,232 $ 19,809 $ 20,403 General Administrative $ 258,500 $ 266,255 $ 274,243 $ 282,470 $ 290,944 $ 299,672 Management $ 73,465 $ 73,465 $ 74,567 $ 76,059 $ 78,340 $ 80,690 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 749,085 $ 769,354 $ 791,332 $ 814,327 $ 838,757 $ 863,919 Reserves $ 55,000 $ 56,650 $ 58,350 $ 60,100 $ 61,903 $ 63,760 -------------------------------------------------------------------------------------- NET OPERATING INCOME $ 665,219 $ 643,300 $ 641,662 $ 646,744 $ 666,146 $ 686,130 ====================================================================================== Operating Expense Ratio (% of EGI) 51.0% 52.4% 53.1% 53.5% 53.5% 53.5% Operating Expense Per Unit $ 3,405 $ 3,497 $ 3,597 $ 3,701 $ 3,813 $ 3,927 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - --------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,836,223 $1,891,309 $1,948,048 $2,006,490 $2,066,685 Vacancy $ 183,622 $ 189,131 $ 194,805 $ 200,649 $ 206,668 Credit Loss $ 55,087 $ 56,739 $ 58,441 $ 60,195 $ 62,001 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------- Subtotal $ 238,709 $ 245,870 $ 253,246 $ 260,844 $ 268,669 Laundry Income $ 2,489 $ 2,564 $ 2,640 $ 2,720 $ 2,801 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 62,222 $ 64,088 $ 66,011 $ 67,991 $ 70,031 ----------------------------------------------------------------------- Subtotal Other Income $ 64,710 $ 66,652 $ 68,651 $ 70,711 $ 72,832 ----------------------------------------------------------------------- EFFECTIVE GROSS INCOME $1,662,224 $1,712,091 $1,763,453 $1,816,357 $1,870,848 OPERATING EXPENSES: Taxes $ 101,924 $ 104,982 $ 108,131 $ 111,375 $ 114,717 Insurance $ 51,225 $ 52,762 $ 54,344 $ 55,975 $ 57,654 Utilities $ 118,211 $ 121,758 $ 125,410 $ 129,173 $ 133,048 Repair & Maintenance $ 157,615 $ 162,343 $ 167,214 $ 172,230 $ 177,397 Cleaning $ 788 $ 812 $ 836 $ 861 $ 887 Landscaping $ 47,284 $ 48,703 $ 50,164 $ 51,669 $ 53,219 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 21,015 $ 21,646 $ 22,295 $ 22,964 $ 23,653 General Administrative $ 308,663 $ 317,922 $ 327,460 $ 337,284 $ 347,402 Management $ 83,111 $ 85,605 $ 88,173 $ 90,818 $ 93,542 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 889,837 $ 916,532 $ 944,028 $ 972,349 $1,001,519 Reserves $ 65,673 $ 67,643 $ 69,672 $ 71,763 $ 73,915 ----------------------------------------------------------------------- NET OPERATING INCOME $ 706,714 $ 727,916 $ 749,753 $ 772,246 $ 795,413 ======================================================================= Operating Expense Ratio (% of EGI) 53.5% 53.5% 53.5% 53.5% 53.5% Operating Expense Per Unit $ 4,045 $ 4,166 $ 4,291 $ 4,420 $ 4,552
Estimated Stabilized NOI $665,219 Sales Expense Rate 3.00% Months to Stabilized 1 Discount Rate 12.00% Stabilized Occupancy 90.0% Terminal Cap Rate 10.50%
Gross Residual Sale Price $7,575,363 Deferred Maintenance $ 0 Less: Sales Expense $ 227,261 Add: Excess Land $ 0 ---------- Net Residual Sale Price $7,348,102 Other Adjustments $ 0 ---------- PV of Reversion $2,365,892 Value Indicated By "DCF" $6,427,364 Add: NPV of NOI $4,061,472 Rounded $6,400,000 ---------- PV Total $6,427,364
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ---------------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - ------------------------------------------------------------------------------------------------------ 10.00% $6,753,117 $6,648,268 $6,545,658 $6,445,232 $6,346,934 10.25% $6,689,754 $6,586,309 $6,485,069 $6,385,978 $6,288,983 TERMINAL CAP RATE 10.50% $6,629,409 $6,527,300 $6,427,364 $6,329,545 $6,233,793 10.75% $6,571,870 $6,471,036 $6,372,343 $6,275,738 $6,181,169 11.00% $6,516,947 $6,417,330 $6,319,823 $6,224,376 $6,130,937
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. 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 10.00% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA TAR RIVER ESTATES
TOTAL PER SQ. FT. PER UNIT %OF EGI ---------- ----------- -------- ------- REVENUE Base Rent $1,623,108 $ 7.70 $ 7,378 Less: Vacancy & Collection Loss 13.00% $ 211,004 $ 1.00 $ 959 Plus: Other Income Laundry Income $ 2,200 $ 0.01 $ 10 0.15% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 55,000 $ 0.26 $ 250 3.74% -------------------------------------------------- Subtotal Other Income $ 57,200 $ 0.27 $ 260 3.89% EFFECTIVE GROSS INCOME $1,469,304 $ 6.97 $ 6,679 OPERATING EXPENSES: Taxes $ 85,360 $ 0.40 $ 388 5.81% Insurance $ 42,900 $ 0.20 $ 195 2.92% Utilities $ 99,000 $ 0.47 $ 450 6.74% Repair & Maintenance $ 132,000 $ 0.63 $ 600 8.98% Cleaning $ 660 $ 0.00 $ 3 0.04% Landscaping $ 39,600 $ 0.19 $ 180 2.70% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 17,600 $ 0.08 $ 80 1.20% General Administrative $ 258,500 $ 1.23 $ 1,175 17.59% Management 5.00% $ 73,465 $ 0.35 $ 334 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 749,085 $ 3.55 $ 3,405 50.98% Reserves $ 55,000 $ 0.26 $ 250 3.74% -------------------------------------------------- NET OPERATING INCOME $ 665,219 $ 3.16 $ 3,024 45.27% ================================================== "GOING IN" CAPITALIZATION RATE 10.00% VALUE INDICATION $6,652,188 $31.56 $30,237 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $6,652,188 ROUNDED $6,700,000 $31.79 $30,455
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------------------------------------------------------------- 9.25% $7,191,554 $7,200,000 $32,727 $34.16 9.50% $7,002,303 $7,000,000 $31,818 $33.21 9.75% $6,822,757 $6,800,000 $30,909 $32.26 10.00% $6,652,188 $6,700,000 $30,455 $31.79 10.25% $6,489,939 $6,500,000 $29,545 $30.84 10.50% $6,335,417 $6,300,000 $28,636 $29.89 10.75% $6,188,082 $6,200,000 $28,182 $29.42
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $6,700,000. 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 $6,400,000 Direct Capitalization Method $6,700,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $6,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 TAR RIVER ESTATES, GREENVILLE, 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 $6,600,000 Income Approach $6,400,000 Reconciled Value $6,400,000
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 14, 2003 the market value of the fee simple estate in the property is: $6,400,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] PROPERTY SIGN [PICTURE] EXTERIOR - OFFICE [PICTURE] INTERIOR - OFFICE [PICTURE] INTERIOR - OFFICE/BUSINESS CENTER [PICTURE] EXTERIOR - APARTMENT UNIT [PICTURE] EXTERIOR - APARTMENT UNIT AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] INTERIOR - TYPICAL UNIT [PICTURE] INTERIOR - TYPICAL KITCHEN [PICTURE] EXTERIOR - SAND VOLLEYBALL COURT [PICTURE] EXTERIOR - POOL AREA [PICTURE] INTERIOR - FITNESS ROOM [PICTURE] EXTERIOR - BUILDING WITH FIRE DAMAGE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 SIGNATURE PLACE APARTMENTS 410 Beasley Drive Greenville, North Carolina [PICTURE] COMPARABLE I-2 PINEBROOK 121 River Bluff Road Greenville, North Carolina [PICTURE] COMPARABLE I-3 KINGS ROW 200 Verdant Drive Greenville, North Carolina [PICTURE] COMPARABLE I-4 KINGSARMS APARTMENTS Charles Street Greenville, North Carolina [PICTURE] COMPARABLE I-5 WELLINGHAM PARK 151 Wellingham Avenue Greenville, North Carolina [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------ ---------------------------------------------- --------------------------------------------- Property Name Tar River Estates Eastbrook Apartments Management Company AIMCO Fountain, Inc. LOCATION: Address 1725 East 1st Street 204 Eastbrook City, State Greenville, North Carolina Greenville, North Carolina County Pitt Pitt Proximity to Subject 1.75 miles southeast of the Subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 210,769 167,400 Year Built 1969 1974 Effective Age 25 29 Building Structure Type Brick; composition shingle Brick; composition shingle Parking Type (Gr.,Cov., etc.) Open Open Number of Units 220 180 Unit Mix: Type Unit Qty Mo Rent Type Unit Qty Mo 1 1A10 700 86 $ 475 2 2 BR / 1.5 Bath 890 135 $490 2 2A15 1,067 99 $ 636 5 3 BR / 2.5 Bath 1,050 45 $595 3 2A20 1,067 8 $ 659 4 3A15 1,200 15 $ 815 5 3A20 1,500 4 $ 929 6 4A25 1,550 8 $1,279 Average Unit Size (SF) 958 930 Unit Breakdown: Efficiency 0% 2-Bedroom 49% Efficiency 0% 2-Bedroom 75% 1-Bedroom 39% 3-Bedroom 9% 1-Bedroom 25% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connect. Balcony X W/D Connect. Fireplace X W/D Included. Fireplace X W/D Included. 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 Basketball Court BBQ Equipment Volleyball Court Theater Room X Volleyball Court Theater Room X 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 X Business Office Jogging Track Business Office X Gym Room Tanning Facility Gym Room Tanning facility X Tanning Bed Tanning Bed X Billards Room Billards Room OCCUPANCY: 94% 95% LEASING DATA: Available Leasing Terms 6 to 12 months Typically 6 to 12 months Concessions None 1/2 of 1 months rent Pet Deposit $100 to $100 fee, $100 deposit and $20 pet rent $400 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Allan Tugwell Angela Telephone Number 252-752-4225 252-752-5100 NOTES: COMPARISON TO SUBJECT: Inferior
COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ------------------------------ ---------------------------------------------- --------------------------------------------- Property Name Dogwood Hollow Pirates Place Management Company Max R. Joyner, Owner The Barrett Group LOCATION: Address 1110 E 10th 1500 South Charles City, State Greenville, North Carolina Greenville, North Carolina County Pitt Pitt Proximity to Subject 0.50 mile south of the subject 1.00 mile southwest of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 102,858 172,800 Year Built 1998 1997 Effective Age 5 6 Building Structure Type Brick & wood/vinyl siding; composition shingle Brick; composition shingle Open Open Parking Type (Gr.,Cov., etc.) 99 144 Number of Units Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 2 2 BR / 1 Bath 928 24 $525 5 3 BR / 3 Bath TH 1,200 48 $ 865 3 2 BR / 2 Bath 814 99 $560 6 4 BR / 2 Bath Flat 1,200 48 $1,100 6 4 BR / 3 Bath TH 1,200 48 $1,110 Average Unit Size (SF) 836 1,200 Unit Breakdown: Efficiency 0% 2-Bedroom 100% Efficiency 0% 2-Bedroom 33% 1-Bedroom 0% 3-Bedroom 0% 1-Bedroom 0% 3-Bedroom 67% CONDITION: Average Slightly Superior APPEAL: Average Slightly Superior AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connect. Balcony W/D Connect. Fireplace X W/D Included Fireplace X W/D Included X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash x Basketball Court BBQ Equipment X Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room x Sand Volley Ball Meeting Hall X Sand Volley Ball Meeting Hall x Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room Tanning facility X Gym Room Tanning facility Tanning Bed Tanning Bed Billards Room X Billards Room OCCUPANCY: 98% 80% LEASING DATA: Available Leasing Terms 12 months 12 months Concessions None N/A Pet Deposit No pets allowed None Utilities Paid by Tenant: X Electric Natural Gas Electric Natural Gas Water Trash Water Trash Confirmation Diane Leasing Agent Telephone Number 252-752-8900 252-321-7613 NOTES: COMPARISON TO SUBJECT: Inferior Slightly Superior
COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ------------------------------ -------------------------------------------- --------------------------------------------- Property Name Wilson Acres Wesely Commons South Management Company Tom Taft, Owner Pitt Properties LOCATION: Address 1806 E 1st 108 Brownlea City, State Greenville, North Carolina Greenville, North Carolina County Pitt Pitt Proximity to Subject South across street from the subject 0.50 acre southeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 127,350 N/A Year Built 1982 1996 Effective Age 21 7 Building Structure Type Brick; composition shingle Brick; composition shingle Parking Type (Gr.,Cov., etc.) Open Open Number of Units 113 150 Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 2 2 BR / 1.5 Bath 1,050 84 $640 1 1 BR / 1 Bath 600 $380 4 3 BR / 1.5 Bath 1,350 29 $840 2 2 Br / 1.5 Bath 760 $465 Average Unit Size (SF) 1,127 Unit Breakdown: Efficiency 0% 2-Bedroom 74% Efficiency N/A 2-Bedroom N/A 1-Bedroom 0% 3-Bedroom 26% 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 Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace W/D Included Fireplace W/D Included X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool Swimming Pool Spa/Jacuzzi Car Wash 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 X Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room Tanning facility Gym Room Tanning facility Tanning Bed Tanning Bed Billards Room Billards Room OCCUPANCY: 85% 95% LEASING DATA: Available Leasing Terms 12 months 6 or 12 months Concessions 1 month off a 13 month lease N/A Pet Deposit $300 Non-refundable pet fee $200 non-refundable Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Leasing Agent Leasing Agent Telephone Number 252-752-0277 252-758-1921 NOTES: The total property has 146 units however 33 are HUD and are not considered in this analysis. COMPARISON TO SUBJECT: Inferior Inferior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 EASTBROOK APARTMENTS 204 Eastbrook Greenville, North Carolina [PICTURE] COMPARABLE R-2 DOGWOOD HOLLOW 1110 E 10th Greenville, North Carolina [PICTURE] COMPARABLE R-3 PIRATES PLACE 1500 South Charles Greenville, North Carolina [PICTURE] COMPARABLE R-4 WILSON ACRES 1806 E 1st Greenville, North Carolina [PICTURE] COMPARABLE R-5 WESELY COMMONS SOUTH 108 Brownlea Greenville, North Carolina [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, 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 TAR RIVER ESTATES, GREENVILLE, 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. Jimmy Pat James, MAI and J. Chad Walker 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 TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E TAR RIVER ESTATES, GREENVILLE, 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 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA STATE CERTIFICATIONS State of Arizona, 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 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. TAR RIVER ESTATES, GREENVILLE, NORTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. TAR RIVER ESTATES, GREENVILLE, 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. EX-99.(C)(6) 8 d07277a2exv99wxcyx6y.txt APPRAISAL OF THE LEXINGTON THE LEXINGTON 3510 CHESHIRE SQUARE SARASOTA, FLORIDA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 19,2003 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 7, 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: THE LEXINGTON 3510 CHESHIRE SQUARE SARASOTA, SARASOTA COUNTY, FLORIDA 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 267 units with a total of 277,239 square feet of rentable area. The improvements were built in 1974. The improvements are situated on 18.55 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 97% 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 THE LEXINGTON, SARASOTA, FLORIDA 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 19,2003 is: ($11,400,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Alice MacQueen July 7, 2003 Alice MacQueen #053272 Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 Report By: Alice MacQueen AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 THE LEXINGTON, SARASOTA, FLORIDA 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 ............................................................. 15 Improvement Analysis ...................................................... 15 Highest and Best Use ...................................................... 16 VALUATION Valuation Procedure ....................................................... 17 Sales Comparison Approach ................................................. 19 Income Capitalization Approach ............................................ 24 Reconciliation and Conclusion ............................................. 34
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 THE LEXINGTON, SARASOTA, FLORIDA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: The Lexington LOCATION: 3510 Cheshire Square Sarasota, Florida 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 19,2003 DATE OF REPORT: July 7, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 18.55 acres, or 808,038 square feet Assessor Parcel No.: 2202-09-0003 Floodplain: Community Panel No. 125150005B (September 29, 1996) Flood Zone C, an area outside the floodplain. Zoning: RMF-3 (Residential Multifamily) BUILDING: No. of Units: 267 Units Total NRA: 277,239 Square Feet Average Unit Size: 1,038 Square Feet Apartment Density: 14.4 units per acre Year Built: 1974 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income - --------- ------ -------- ------ -------- ---------- 1A10 733 $ 590 $ 0.80 $ 56,640 $ 679,680 2A20 1,114 $ 710 $ 0.64 $ 85,200 $1,022,400 3A20 1,353 $ 860 $ 0.64 $ 23,220 $ 278,640 3B20 1,500 $ 940 $ 0.63 $ 11,280 $ 135,360 4A20 1,555 $ 950 $ 0.61 $ 11,400 $ 136,800 ------------------------------ Total $187,740 $2,252,880 ==============================
OCCUPANCY: 97% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 THE LEXINGTON, SARASOTA, FLORIDA REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 THE LEXINGTON, SARASOTA, FLORIDA 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 THE LEXINGTON, SARASOTA, FLORIDA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------------------ --------------- DIRECT CAPITALIZATION Potential Rental Income $2,252,880 $8,438 Effective Gross Income $2,359,675 $8,838 Operating Expenses $1,232,709 $4,617 52.2% of EGI Net Operating Income: $1,060,216 $3,971 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $11,200,000 * $41,948 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 7% Stabilized Vacancy & Collection Loss: 8% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.00% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $11,600,000 * $43,446 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $11,400,000 $42,697 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $34,137 to $48,539 Range of Sales $/Unit (Adjusted) $37,994 to $44,971 VALUE INDICATION - PRICE PER UNIT $10,700,000 * $40,075 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 0.00 to 0.00 Selected EGIM for Subject 0.00 Subject's Projected EGI $2,359,675 EGIM ANALYSIS CONCLUSION N/A * N/A / UNIT NOI PER UNIT ANALYSIS CONCLUSION N/A * N/A / UNIT RECONCILED SALES COMPARISON VALUE $10,700,000 $40,075 / 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 THE LEXINGTON, SARASOTA, FLORIDA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $10,700,000 NOI Per Unit N/A EGIM Multiplier N/A INDICATED VALUE BY SALES COMPARISON $10,700,000 $40,075 / UNIT INCOME APPROACH: Direct Capitalization Method: $11,200,000 Discounted Cash Flow Method: $11,600,000 INDICATED VALUE BY THE INCOME APPROACH $11,400,000 $42,697 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $11,400,000 $42,697 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 THE LEXINGTON, SARASOTA, FLORIDA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 3510 Cheshire Square , Sarasota, Sarasota County, Florida. Sarasota identifies it as 2202-09-0003. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Alice MacQueen on May 19,2003. Alice MacQueen performed the research, valuation analysis and wrote the report. Alice MacQueen 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 19,2003. The date of the report is July 7, 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 THE LEXINGTON, SARASOTA, FLORIDA "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 SP V LP. 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 THE LEXINGTON, SARASOTA, FLORIDA 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 Sarasota, Florida. 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 - Interstate 75 West - Washington Boulevard South - Clark Road North - University Parkway MAJOR EMPLOYERS As Florida's wealthiest market, Sarasota ranks 1st in effective buying income and 1st in retail sales. Housing is very affordable and household incomes are increasing. The cost of living is in retail sales. Employment throughout the area is very diverse. 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 THE LEXINGTON, SARASOTA, FLORIDA NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - --------------------------- ------------ ------------ ------------ ------------ POPULATION TRENDS Current Population 12,233 83,534 153,775 605,849 5-Year Population 12,538 86,640 161,812 652,633 % Change CY-5Y 2.5% 3.7% 5.2% 7.7% Annual Change CY-5Y 0.5% 0.7% 1.0% 1.5% HOUSEHOLDS Current Households 5,343 36,870 68,289 270,069 5-Year Projected Households 5,523 38,758 72,844 292,607 % Change CY-5Y 3.4% 5.1% 6.7% 8.3% Annual Change CY-5Y 0.7% 1.0% 1.3% 1.7% INCOME TRENDS Median Household Income $ 32,414 $ 35,231 $ 38,899 $ 38,205 Per Capita Income $ 18,606 $ 22,988 $ 25,820 $ 26,617 Average Household Income $ 41,709 $ 52,076 $ 58,012 $ 59,716
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 26.46% 27.03% 24.28% 18.60% 5-Year Projected % Renting 25.69% 26.72% 23.61% 18.04% % of Households Owning 60.51% 58.89% 62.94% 62.97% 5-Year Projected % Owning 61.46% 59.75% 64.28% 64.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 THE LEXINGTON, SARASOTA, FLORIDA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Mini storage facility and multifamily community South - Multifamily community East - Single family West - Single family CONCLUSIONS The subject is well located within the city of Sarasota. 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 THE LEXINGTON, SARASOTA, FLORIDA MARKET ANALYSIS The subject property is located in the city of Sarasota in Sarasota County. The overall pace of development in the subject's market is more or less stable. There has been no new development in the subject's neighborhood in recent months and none known to be in a lease-up state. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------ ------------------ -------------------- 3Q02 5% to 6% estimated Subject Neighborhood
Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. No third party surveys were available. However, we did survey approximately 20 apartment communities throughout the Sarasota area in an effort to determine current market conditions. This survey indicates a very stable existing multifamily market with the vast majority of the communities surveyed indicating current occupancy rates ranging from about 93% to 98%. Rents are considered to be moderately increasing and no new units are known to be under construction or planned that would affect the existing supply/balance in the market. 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 Huntington Place 254 98% 1990 Adjacent R-2 Alahambra 129 95% 1972 A few blocks south R-3 The Colonnade 192 98% 1972 A few blocks south R-4 Coral Club 0 93% 1974 Same neighborhood Subject The Lexington 267 97% 1974
As previously stated, our investigation revealed no current market studies covering the multifamily housing market in Sarasota. However, based on our conversations with on site management and survey of numerous competitive properties, the existing conditions appear to be favorable. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 15 THE LEXINGTON, SARASOTA, FLORIDA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 18.55 acres, or 808,038 square feet Shape Irregular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 125150005B; , dated September 29, 1996 Flood Zone Zone C Zoning RMF-3, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ----------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ------------- ---------- ---------- ----------- ----------- ---------- 2202-09-0003 $1,616,100 $8,469,500 $10,085,600 0.02572 $259,425
IMPROVEMENT ANALYSIS Year Built 1974 Number of Units 267 Net Rentable Area 277,239 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, sand volleyball, tennis court, gym room, playground, boat storage, car wash, laundry room, freshwater lake, 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, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 THE LEXINGTON, SARASOTA, FLORIDA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - --------- --------------- --------- 1A10 96 733 2A20 120 1,114 3A20 27 1,353 3B20 12 1,500 4A20 12 1,555
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 1974 and consist of a 267-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 17 THE LEXINGTON, SARASOTA, FLORIDA 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 18 THE LEXINGTON, SARASOTA, FLORIDA 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 19 THE LEXINGTON, SARASOTA, FLORIDA 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 20 THE LEXINGTON, SARASOTA, FLORIDA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 - ------------------------------------------------------------------------------------------------------------------------- Property Name The Lexington Coral Club Apartments Coconut Bay Capri Villas LOCATION: Address 3510 Cheshire Square 3441 Clark Road 2725 Coconut Bay Lane 1050 Capri City, State Sarasota, Florida Sarasota, FL Sarasota, FL Sarasota, FL County Sarasota Sarasota Sarasota Sarasota PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 277,239 166,210 277,529 183,432 Year Built 1974 1974 1974 1983 Number of Units 267 154 249 180 Unit Mix: Type Total Type Total Type Total Type Total 1A10 96 1Br/1Ba 1Br/1Ba 1Br/1BA 2A20 120 2Br/2BA 2Br/2BA 2Br/2BA 3A20 27 3Br/2BA 3Br/2BA 3B20 12 3Br/2BA 4A20 12 Average Unit Size (SF) 1,038 1,079 1,115 1,019 Land Area (Acre) 18.5500 9.9255 10.0000 14.5400 Density (Units/Acre) 14.4 15.5 24.9 12.4 Parking Ratio (Spaces/Unit) 1.12 Adequate Adequate Adequate Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open Open CONDITION: Average Good Average Average APPEAL: Average Good Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Yes Laundry Room Yes Yes Yes Yes Secured Parking No No No No Sport Courts No No No No Washer/Dryer Connection Yes Yes No No Screened Patios/balconies Yes Yes Yes Yes OCCUPANCY: 97% 93% 90% 95% TRANSACTION DATA: Sale Date July, 2000 June, 2001 August, 2002 Sale Price ($) $7,475,000 $8,500,000 $7,729,800 Grantor Grantee Aspen Coral Club Club Mar Alliance BP, LP Associates, LTD Sale Documentation Public records Public records Public records Verification Public records Public records Public records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $0 $0 $0.0 $0 $0 $0.0 $0 $0 $0.00 Vacancy/Credit Loss $0 $0 $0.0 $0 $0 $0.0 $0 $0 $0.00 Effective Gross Income $0 $0 $0.0 $0 $0 $0.0 $0 $0 $0.00 Operating Expenses $0 $0 $0.0 $0 $0 $0.0 $0 $0 $0.00 Net Operating Income $0 $0 $0.0 $0 $0 $0.0 $0 $0 $0.00 NOTES: Income information Income information Income information at at the time of sale at the time of sale the time of sale was not available was not available was not available PRICE PER UNIT $48,539 $34,137 $42,943 PRICE PER SQUARE FOOT $ 44.97 $ 30.63 $ 42.14 EXPENSE RATIO N/A N/A N/A EGIM N/A N/A N/A OVERALL CAP RATE N/A N/A N/A Cap Rate based on Pro Forma or Actual Income?
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 21 THE LEXINGTON, SARASOTA, FLORIDA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $34,137 to $48,539 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 $37,994 to $44,971 per unit with a mean or average adjusted price of $40,925 per unit. The median adjusted price is $39,808 per unit. Based on the following analysis, we have concluded to a value of $40,000 per unit, which results in an "as is" value of $10,700,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 THE LEXINGTON, SARASOTA, FLORIDA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 I - 3 - ---------------------------------------------------------------------------------------------------------------------------------- Property Name The Lexington Coral Club Apartments Coconut Bay Capri Villas Address 3510 Cheshire Square 3441 Clark Road 2725 Coconut Bay Lane 1050 Capri City Sarasota, Florida Sarasota, FL Sarasota, FL Sarasota, FL Sale Date July, 2000 June, 2001 August, 2002 Sale Price ($) $7,475,000 $8,500,000 $7,729,800 Net Rentable Area (SF) 277,239 166,210 277,529 183,432 Number of Units 267 154 249 180 Price Per Unit $48,539 $34,137 $42,943 Year Built 1974 1974 1974 1983 Land Area (Acre) 18.5500 9.9255 10.0000 14.5400 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 07-2000 9% 06-2001 6% 08-2002 3% VALUE AFTER TRANS. ADJUST. ($/UNIT) $52,907 $36,185 $44,232 Location Superior -10% Comparable 0% Comparable 0% Number of Units 267 154 0% 249 0% 180 0% Quality / Appeal Good Comparable 0% Comparable 0% Comparable 0% Age / Condition 1974 1974 / Good -5% 1974 / Average 0% 1983 / Average -10% Occupancy at Sale 97% 93% 0% 90% 5% 95% 0% Amenities Good Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 1,038 1,079 0% 1,115 0% 1,019 0% PHYSICAL ADJUSTMENT -15% 5% -10% FINAL ADJUSTED VALUE ($/UNIT) $44,971 $37,994 $39,808
SUMMARY VALUE RANGE (PER UNIT) $37,994 TO $44,971 MEAN (PER UNIT) $40,925 MEDIAN (PER UNIT) $39,808 VALUE CONCLUSION (PER UNIT) $40,000
VALUE INDICATED BY SALES COMPARISON APPROACH $10,680,000 ROUNDED $10,700,000
NET OPERATING INCOME (NOI) ANALYSIS We did not conduct a net operating income (NOI) comparison analysis due to the lack of financial data. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS We did not perform an effective gross income multiplier (EGIM) analysis due to the lack of financial data. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 THE LEXINGTON, SARASOTA, FLORIDA 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 $10,700,000. Price Per Unit $10,700,000 NOI Per Unit N/A EGIM Analysis N/A Sales Comparison Conclusion $10,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 24 THE LEXINGTON, SARASOTA, FLORIDA 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 25 THE LEXINGTON, SARASOTA, FLORIDA 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 - ---------------------------------------------------------------------- 1A10 733 $589 $0.80 95.8% 2A20 1114 $708 $0.64 96.7% 3A20 1353 $859 $0.63 100.0% 3B20 1500 $939 $0.63 100.0% 4A20 1555 $943 $0.61 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 THE LEXINGTON, SARASOTA, FLORIDA RENT ANALYSIS
COMPARABLE RENTS ---------------------------------------- R-1 R-2 R-3 R-4 ---------------------------------------- Huntington The Place Alahambra Colonnade Coral Club ----------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ----------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Superior Similar Similar Superior MIN MAX MEDIAN AVERAGE - ------------------------------------------------------------------------------------------------------------------------------ Monthly Rent 1A10 $ 589 $ 623 $ 635 $ 630 $ 679 $ 585 $ 585 $ 679 $ 633 $ 632 Unit Area (SF) 733 733 684 900 680 555 555 900 682 705 Monthly Rent Per Sq. Ft. $ 0.80 $ 0.85 $0.93 $0.70 $ 1.00 $ 1.05 $ 0.70 $ 1.05 $ 0.96 $ 0.92 Monthly Rent 2A20 $ 708 $ 746 $ 745 $ 730 $ 785 $ 745 $ 730 $ 785 $ 745 $ 751 Unit Area (SF) 1,114 1,114 718 900 990 768 718 990 834 844 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.67 $1.04 $0.81 $ 0.79 $ 0.97 $ 0.79 $ 1.04 $ 0.89 $ 0.90 Monthly Rent 3A20 $ 859 $ 878 $ 835 $ 915 $ 760 $ 760 $ 915 $ 835 $ 837 Unit Area (SF) 1,353 1,353 846 990 964 846 990 964 933 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.65 $0.99 $ 0.92 $ 0.79 $ 0.79 $ 0.99 $ 0.92 $ 0.90 Monthly Rent 3B20 $ 939 $ 959 $ 835 $ 965 $ 875 $ 835 $ 965 $ 875 $ 892 Unit Area (SF) 1,500 1,500 846 1,063 1,020 846 1,063 1,020 976 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.64 $0.99 $ 0.91 $ 0.86 $ 0.86 $ 0.99 $ 0.91 $ 0.92 Monthly Rent 4A20 $ 943 $ 979 $ 965 $ 875 $ 875 $ 965 $ 920 $ 920 Unit Area (SF) 1,555 1,555 1,063 1,020 1,020 1,063 1,042 1,042 Monthly Rent Per Sq. Ft. $ 0.61 $ 0.63 $ 0.91 $ 0.86 $ 0.86 $ 0.91 $ 0.88 $ 0.88
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 - ------------------------------------------------------------------------------ 1A10 96 733 $590 $0.80 $ 56,640 $ 679,680 2A20 120 1,114 $710 $0.64 $ 85,200 $1,022,400 3A20 27 1,353 $860 $0.64 $ 23,220 $ 278,640 3B20 12 1,500 $940 $0.63 $ 11,280 $ 135,360 4A20 12 1,555 $950 $0.61 $ 11,400 $ 136,800 ---------------------------- Total $187,740 $2,252,880
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 27 THE LEXINGTON, SARASOTA, FLORIDA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 -------------------------------------------------------------------------- ACTUAL ACTUAL ACTUAL -------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT - --------------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $ 2,072,040 $ 7,760 $2,248,212 $8,420 $2,239,108 $8,386 Vacancy $ 60,620 $ 227 $ 86,350 $ 323 $ 88,419 $ 331 Credit Loss/Concessions $ 41,907 $ 157 $ 53,800 $ 201 $ 60,384 $ 226 ------------------------------------------------------------------------- Subtotal $ 102,527 $ 384 $ 140,150 $ 525 $ 148,803 $ 557 Laundry Income $ 12,565 $ 47 $ 17,019 $ 64 $ 17,759 $ 67 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 121,026 $ 453 $ 233,934 $ 876 $ 266,283 $ 997 ------------------------------------------------------------------------- Subtotal Other Income $ 133,591 $ 500 $ 250,953 $ 940 $ 284,042 $1,064 ------------------------------------------------------------------------- Effective Gross Income $ 2,103,104 $ 7,877 $2,359,015 $8,835 $2,374,347 $8,893 Operating Expenses Taxes $ 191,701 $ 718 $ 227,852 $ 853 $ 252,234 $ 945 Insurance $ 29,634 $ 111 $ 87,091 $ 326 $ 93,067 $ 349 Utilities $ 204,290 $ 765 $ 184,249 $ 690 $ 173,644 $ 650 Repair & Maintenance $ 84,953 $ 318 $ 65,562 $ 246 $ 45,650 $ 171 Cleaning $ 83,986 $ 315 $ 89,953 $ 337 $ 91,896 $ 344 Landscaping $ 136,785 $ 512 $ 109,080 $ 409 $ 136,917 $ 513 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 30,179 $ 113 $ 30,338 $ 114 $ 25,739 $ 96 General Administrative $ 237,755 $ 890 $ 268,798 $1,007 $ 213,591 $ 800 Management $ 111,194 $ 416 $ 123,602 $ 463 $ 118,898 $ 445 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------- Total Operating Expenses $ 1,110,477 $ 4,159 $1,186,525 $4,444 $1,151,636 $4,313 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------- Net Income $ 992,627 $ 3,718 $1,172,490 $4,391 $1,222,711 $4,579 - -------------------------------------------------------------------------------------------------------------------------- FISCAL YEAR 2003 ANNUALIZED 2003 --------------------------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ------------------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % - -------------------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $2,298,000 $8,607 $2,247,348 $8,417 $2,252,880 $8,438 100.0% Vacancy $ 74,775 $ 280 $ 144,840 $ 542 $ 135,173 $ 506 6.0% Credit Loss/Concessions $ 52,800 $ 198 $ 117,036 $ 438 $ 45,058 $ 169 2.0% ------------------------------------------------------------------------------ Subtotal $ 127,575 $ 478 $ 261,876 $ 981 $ 180,230 $ 675 8.0% Laundry Income $ 28,000 $ 105 $ 20,452 $ 77 $ 20,025 $ 75 0.9% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 254,400 $ 953 $ 270,068 $1,011 $ 267,000 $1,000 11.9% ------------------------------------------------------------------------------ Subtotal Other Income $ 282,400 $1,058 $ 290,520 $1,088 $ 287,025 $1,075 12.7% ------------------------------------------------------------------------------ Effective Gross Income $2,452,825 $9,187 $2,275,992 $8,524 $2,359,675 $8,838 100.0% Operating Expenses Taxes $ 277,285 $1,039 $ 273,904 $1,026 $ 267,000 $1,000 11.3% Insurance $ 87,895 $ 329 $ 86,160 $ 323 $ 93,450 $ 350 4.0% Utilities $ 182,400 $ 683 $ 275,884 $1,033 $ 193,575 $ 725 8.2% Repair & Maintenance $ 247,200 $ 926 $ 31,164 $ 117 $ 80,100 $ 300 3.4% Cleaning $ 0 $ 0 $ 78,840 $ 295 $ 93,450 $ 350 4.0% Landscaping $ 0 $ 0 $ 178,524 $ 669 $ 146,850 $ 550 6.2% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 30,000 $ 112 $ 20,488 $ 77 $ 26,700 $ 100 1.1% General Administrative $ 220,464 $ 826 $ 213,632 $ 800 $ 213,600 $ 800 9.1% Management $ 123,661 $ 463 $ 114,244 $ 428 $ 117,984 $ 442 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% ------------------------------------------------------------------------------ Total Operating Expenses $1,168,905 $4,378 $1,272,840 $4,767 $1,232,709 $4,617 52.2% Reserves $ 0 $ 0 $ 0 $ 0 $ 66,750 $ 250 5.4% ------------------------------------------------------------------------------ Net Income $1,283,920 $4,809 $1,003,152 $3,757 $1,060,216 $3,971 44.9% - -------------------------------------------------------------------------------------------------------------------------------
REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on the market analysis previously discussed. Other income consists of forfeited deposits, laundry income, late rent payments, month to month fees, pet fees, vending machine revenue, etc. We forecasted the property's annual operating expenses after reviewing its historical performance at the subject property. We analyzed each item of expense and attempted to forecast amounts a typical informed investor would consider reasonable. VACANCY AND COLLECTION LOSS An investor is primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100% occupied and all tenants were paying their rent in full and on time. An investor normally expects some income loss as tenants vacate, fail to pay rent, or pay their rent late. We have projected a stabilized vacancy and collection loss rate of 8% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 THE LEXINGTON, SARASOTA, FLORIDA 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 29 THE LEXINGTON, SARASOTA, FLORIDA Based on this information and our perception of the market, we have concluded the subject's overall capitalization rate should be 9.50%. 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 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 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 $11,600,000. In this instance, the reversion figure contributes approximately 39% 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 30 THE LEXINGTON, SARASOTA, FLORIDA DISCOUNTED CASH FLOW ANALYSIS THE LEXINGTON
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 $ 2,252,880 $ 2,320,466 $ 2,390,080 $ 2,461,783 $ 2,535,636 $ 2,611,705 $ 2,690,57 Vacancy $ 135,173 $ 139,228 $ 143,405 $ 147,707 $ 152,138 $ 156,702 $ 161,403 Credit Loss $ 45,058 $ 46,409 $ 47,802 $ 49,236 $ 50,713 $ 52,234 $ 53,801 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------- Subtotal $ 180,230 $ 185,637 $ 191,206 $ 196,943 $ 202,851 $ 208,936 $ 215,205 Laundry Income $ 20,025 $ 20,626 $ 21,245 $ 21,882 $ 22,538 $ 23,214 $ 23,911 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 267,000 $ 275,010 $ 283,260 $ 291,758 $ 300,511 $ 309,526 $ 318,812 ----------------------------------------------------------------------------------------------- Subtotal Other Income $ 287,025 $ 295,636 $ 304,505 $ 313,640 $ 323,049 $ 332,741 $ 342,723 ----------------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 2,359,675 $ 2,430,465 $ 2,503,379 $ 2,578,480 $ 2,655,835 $ 2,735,510 $ 2,817,575 OPERATING EXPENSES: Taxes $ 267,000 $ 275,010 $ 283,260 $ 291,758 $ 300,511 $ 309,526 $ 318,812 Insurance $ 93,450 $ 96,254 $ 99,141 $ 102,115 $ 105,179 $ 108,334 $ 111,584 Utilities $ 193,575 $ 199,382 $ 205,364 $ 211,525 $ 217,870 $ 224,406 $ 231,139 Repair & Maintenance $ 80,100 $ 82,503 $ 84,978 $ 87,527 $ 90,153 $ 92,858 $ 95,644 Cleaning $ 93,450 $ 96,254 $ 99,141 $ 102,115 $ 105,179 $ 108,334 $ 111,584 Landscaping $ 146,850 $ 151,256 $ 155,793 $ 160,467 $ 165,281 $ 170,239 $ 175,347 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 26,700 $ 27,501 $ 28,326 $ 29,176 $ 30,051 $ 30,953 $ 31,881 General Administrative $ 213,600 $ 220,008 $ 226,608 $ 233,406 $ 240,409 $ 247,621 $ 255,050 Management $ 117,984 $ 121,523 $ 125,169 $ 128,924 $ 132,792 $ 136,775 $ 140,879 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 1,232,709 $ 1,269,690 $ 1,307,781 $ 1,347,014 $ 1,387,425 $ 1,429,047 $ 1,471,919 Reserves $ 66,750 $ 68,753 $ 70,815 $ 72,940 $ 75,128 $ 77,382 $ 79,703 NET OPERATING INCOME $ 1,060,216 $ 1,092,022 $ 1,124,783 $ 1,158,527 $ 1,193,282 $ 1,229,081 $ 1,265,953 ============================================================================================================================== Operating Expense Ratio (% of EGI) 52.2% 52.2% 52.2% 52.2% 52.2% 52.2% 52.2% Operating Expense Per Unit $ 4,617 $ 4,755 $ 4,898 $ 5,045 $ 5,196 $ 5,352 $ 5,513 ============================================================================================================================== YEAR APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 8 9 10 11 - ----------------------------- ----------- ----------- ----------- ----------- REVENUE Base Rent $ 2,770,58 $ 2,853,881 $ 2,939,497 $ 3,027,682 Vacancy $ 166,745 $ 171,233 $ 176,370 $ 181,661 Credit Loss $ 55,415 $ 57,078 $ 58,790 $ 60,554 Concessions $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------- Subtotal $ 221,661 $ 228,310 $ 235,160 $ 242,215 Laundry Income $ 24,628 $ 25,367 $ 26,128 $ 26,912 Garage Revenue $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 328,376 $ 338,228 $ 348,374 $ 358,826 ----------------------------------------------------- Subtotal Other Income $ 353,005 $ 363,595 $ 374,503 $ 385,738 EFFECTIVE GROSS INCOME $ 2,902,102 $ 2,989,165 $ 3,078,840 $ 3,171,205 ----------------------------------------------------- OPERATING EXPENSES: Taxes $ 328,376 $ 338,228 $ 348,374 $ 358,826 Insurance $ 114,932 $ 118,380 $ 121,931 $ 125,589 Utilities $ 238,073 $ 245,215 $ 252,571 $ 260,149 Repair & Maintenance $ 98,513 $ 101,468 $ 104,512 $ 107,648 Cleaning $ 114,932 $ 118,380 $ 121,931 $ 125,589 Landscaping $ 180,607 $ 186,025 $ 191,606 $ 197,354 Security $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 32,838 $ 33,823 $ 34,837 $ 35,883 General Administrative $ 262,701 $ 270,582 $ 278,700 $ 287,061 Management $ 145,105 $ 149,458 $ 153,942 $ 158,560 Miscellaneous $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------- TOTAL OPERATING EXPENSES $ 1,516,076 $ 1,561,559 $ 1,608,405 $ 1,656,657 Reserves $ 82,094 $ 84,557 $ 87,094 $ 89,706 NET OPERATING INCOME $ 1,303,932 $ 1,343,050 $ 1,383,341 $ 1,424,841 ===================================================================================== Operating Expense Ratio (% of EGI) 52.2% 52.2% 52.2% 52.2% Operating Expense Per Unit $ 5,678 $ 5,849 $ 6,024 $ 6,205 =====================================================================================
Estimated Stabilized NOI $ 1,060,216 Sales Expense Rate 2.00% Months to Stabilized 1% Discount Rate 12.00% Stabilized Occupancy 94.0 Terminal Cap Rate 10.00%
Gross Residual Sale Price $ 14,248,415 Deferred Maintenance $ 0 Less: Sales Expense $ 284,968 Add: Excess Land $ 0 ------------- Net Residual Sale Price $ 13,963,446 Other Adjustments $ 0 ------------- PV of Reversion $ 4,495,856 Value Indicated By "DCF" $ 11,588,298 Add: NPV of NOI $ 7,092,442 Rounded $ 11,600,000 ============= PV Total $ 11,588,298
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - --------------------------- ------------- ------------- ------------- ------------- ------------- TERMINAL CAP RATE 9.50% $ 12,208,278 $ 12,014,517 $ 11,824,922 $ 11,639,388 $ 11,457,815 9.75% $ 12,081,379 $ 11,890,429 $ 11,703,576 $ 11,520,718 $ 11,341,756 10.00% $ 11,960,826 $ 11,772,546 $ 11,588,298 $ 11,407,982 $ 11,231,500 10.25% $ 11,846,153 $ 11,660,413 $ 11,478,643 $ 11,300,745 $ 11,126,622 10.50% $ 11,736,941 $ 11,553,619 $ 11,374,209 $ 11,198,614 $ 11,026,739
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 THE LEXINGTON, SARASOTA, FLORIDA INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. 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 9.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 THE LEXINGTON, SARASOTA, FLORIDA THE LEXINGTON
TOTAL PER SQ. FT. PER UNIT %OF EGI - ---------------------------------- ----- ----------- ----------- ----------- ------------ REVENUE Base Rent $ 2,252,880 $ 8.13 $ 8,438 Less: Vacancy & Collection Loss 8.00% $ 180,230 $ 0.65 $ 675 Plus: Other Income Laundry Income $ 20,025 $ 0.07 $ 75 0.85% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 267,000 $ 0.96 $ 1,000 11.32% -------------------------------------------------------- Subtotal Other Income $ 287,025 $ 1.04 $ 1,075 12.16% EFFECTIVE GROSS INCOME $ 2,359,675 $ 8.51 $ 8,838 OPERATING EXPENSES: Taxes $ 267,000 $ 0.96 $ 1,000 11.32% Insurance $ 93,450 $ 0.34 $ 350 3.96% Utilities $ 193,575 $ 0.70 $ 725 8.20% Repair & Maintenance $ 80,100 $ 0.29 $ 300 3.39% Cleaning $ 93,450 $ 0.34 $ 350 3.96% Landscaping $ 146,850 $ 0.53 $ 550 6.22% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 26,700 $ 0.10 $ 100 1.13% General Administrative $ 213,600 $ 0.77 $ 800 9.05% Management 5.00% $ 117,984 $ 0.43 $ 442 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,232,709 $ 4.45 $ 4,617 52.24% Reserves $ 66,750 $ 0.24 $ 250 2.83% -------------------------------------------------------- NET OPERATING INCOME $ 1,060,216 $ 3.82 $ 3,971 44.93% ======================================================================================================== "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $11,160,167 $ 40.25 $ 41,798 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $11,160,167 ROUNDED $11,200,000 $ 40.40 $ 41,948 ========================================================================================================
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 THE LEXINGTON, SARASOTA, FLORIDA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------- ------------ ------------ -------- ------- 8.75% $ 12,116,753 $ 12,100,000 $ 45,318 $ 43.64 9.00% $ 11,780,176 $ 11,800,000 $ 44,195 $ 42.56 9.25% $ 11,461,793 $ 11,500,000 $ 43,071 $ 41.48 9.50% $ 11,160,167 $ 11,200,000 $ 41,948 $ 40.40 9.75% $ 10,874,009 $ 10,900,000 $ 40,824 $ 39.32 10.00% $ 10,602,159 $ 10,600,000 $ 39,700 $ 38.23 10.25% $ 10,343,569 $ 10,300,000 $ 38,577 $ 37.15
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $11,200,000. 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 $11,600,000 Direct Capitalization Method $11,200,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $11,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 34 THE LEXINGTON, SARASOTA, FLORIDA 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 $10,700,000 Income Approach $11,400,000 Reconciled Value $11,400,000
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 19,2003 the market value of the fee simple estate in the property is: $11,400,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA THE LEXINGTON, SARASOTA, FLORIDA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A THE LEXINGTON, SARASOTA, FLORIDA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A THE LEXINGTON, SARASOTA, FLORIDA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] [PICTURE] [PICTURE] [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A THE LEXINGTON, SARASOTA, FLORIDA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] [PICTURE] [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B THE LEXINGTON, SARASOTA, FLORIDA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B THE LEXINGTON, SARASOTA, FLORIDA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CORAL CLUB APARTMENTS COCONUT BAY CAPRI VILLAS 3441 Clark Road 2725 Coconut Bay Lane 1050 Capri Sarasota, FL Sarasota, FL Sarasota, FL [PICTURE] [PICTURE] N/A N/A N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B THE LEXINGTON, SARASOTA, FLORIDA SUMMARY OF COMPARABLE RENTAL PROPERTIES
DESCRIPTION SUBJECT - -------------------------------- --------------------------------------------------- Property Name The Lexington Management Company Aimco LOCATION: Address 3510 Cheshire Square City, State Sarasota, Florida County Sarasota Proximity to Subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 277,239 Year Built 1974 Effective Age 25 Building Structure Type Wood/Stucco Parking Type (Gr., Cov., etc.) Open Number of Units 267 Unit Mix: Type Unit Qty. Mo.Rent 1 1A10 733 96 $589 2 2A20 1,114 120 $708 3 3A20 1,353 27 $859 4 3B20 1,500 12 $939 5 4A20 1,555 12 $943 Average Unit Size (SF) 1,038 Unit Breakdown: Efficiency 2-Bedroom 1-Bedroom 3-Bedroom CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. Fireplace Other X Cable TV Ready Project Amenities X Swimming Pool X Boat Storage Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room X Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room X Freshwater Lake X Playground OCCUPANCY: 97% LEASING DATA: Available Leasing Terms 6 to 12 months Concessions Pet Deposit Utilities Paid by Tenant: X Electric X Natural Gas Water Trash Confirmation Manager Telephone Number 813-933-2449 NOTES: COMPARISON TO SUBJECT: COMPARABLE DESCRIPTION R - 1 - -------------------------------- --------------------------------------------------- Property Name Huntington Place Management Company JMG Realty LOCATION: Address 3201 Huntington Place Drive City, State Sarasota, FL County Sarasota Proximity to Subject Adjacent PHYSICAL CHARATERISTICS: Net Rentable Area (SF) Unknown Year Built 1990 Effective Age 13 Building Structure Type Wood/stucco Parking Type (Gr., Cov., etc.) Open, controlled access Number of Units 254 Unit Mix: Type Unit Qty. Mo. 1 1Br/1Ba 684 $635 2 2Br/2Ba 718 $745 3 3Br/2Ba 846 $835 4 3Br/2Ba 846 $835 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom X 1-Bedroom X 3-Bedroom X CONDITION: Good APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Fireplace Other X Cable TV Ready Project Amenities X Swimming Pool Boat Storage Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room X Sand Volley Ball Meeting Hall X Tennis Court X Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room X Freshwater Lake X Playground OCCUPANCY: 98% LEASING DATA: Available Leasing Terms 6 to 12 months Concessions None Pet Deposit Yes Utilities Paid by Tenant: X Electric X Natural Gas Water Trash Confirmation Leasing agent Telephone Number 941-951-1033 NOTES: Gated community located adjacent to the subject. Superior in terms of overall curb appeal and age/condition. COMPARISON TO SUBJECT: Superior COMPARABLE DESCRIPTION R - 2 - -------------------------------- --------------------------------------------------- Property Name Alahambra Management Company Lee Management LOCATION: Address 1651 Beneva Road City, State Sarasota, FL County Sarasota Proximity to Subject A few blocks south PHYSICAL CHARATERISTICS: Net Rentable Area (SF) Unknown Year Built 1972 Effective Age 31 Building Structure Type Wood/stucco Parking Type (Gr., Cov., etc.) Open Number of Units 129 Unit Mix: Type Unit Qty. Mo. 1 1Br/1Ba 900 $630 2 2Br/2Ba 900 $730 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom X 1-Bedroom X 3-Bedroom CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. Fireplace Other X Cable TV Ready Project Amenities X Swimming Pool Boat Storage X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court Secured Parking X Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room Freshwater Lake Playground OCCUPANCY: 95% LEASING DATA: Available Leasing Terms 6 to 13 months Concessions 1/2 off 1st and last months rent Pet Deposit Yes Utilities Paid by Tenant: X Electric X Natural Gas Water Trash Confirmation Leasing Agent Telephone Number 941-922-7405 NOTES: Good location along Beneva Road, south of Fruitville Road. Property has good curb appeal and appears to be in average condition. COMPARISON TO SUBJECT: Similar COMPARABLE DESCRIPTION R - 3 - -------------------------------- --------------------------------------------------- Property Name The Colonnade Management Company Owners Management LOCATION: Address 3516 Coronado Drive City, State Sarasota, FL County Sarasota Proximity to Subject A few blocks south PHYSICAL CHARATERISTICS: Net Rentable Area (SF) Unknown Year Built 1972 Effective Age 31 Building Structure Type Stucco Parking Type (Gr., Cov., etc.) Open Number of Units 192 Unit Mix: Type Unit Qty. Mo. 1 1Br/1Ba 680 $679 2 2Br/2Ba 990 $785 3 3Br/2Ba 990 $915 4 3Br/2Ba 1,063 $965 5 3Br/2Ba 1,063 $965 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom X 1-Bedroom X 3-Bedroom X CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. Fireplace Other Cable TV Ready Screened Patios Project Amenities X Swimming Poo l X Boat Storage Spa/Jacuzzi X Car Wash Basketball Court BBQ Equipment X Volleyball Court Theater Room X Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room X Freshwater Lake Playground OCCUPANCY: 98% LEASING DATA: Available Leasing Terms 6 to 12 months Concessions None Pet Deposit Yes Utilities Paid by Tenant: X Electric X Natural Gas Water Trash Confirmation Leasing agent Telephone Number 941-921-4656 NOTES: Good location along Beneva Road, south of Fruitville Road. Property has good curb appeal and appears to be in average condition. Overall, very similar to the subject property. COMPARISON TO SUBJECT: Similar
COMPARABLE DESCRIPTION R - 4 - -------------------------------- -------------------------------------------------- Property Name Coral Club Management Company PCMG LOCATION: Address 3441 Clark Road City, State Sarasota, FL County Sarasota Proximity to Subject Same neighborhood PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 166,210 Year Built 1974 Effective Age 29 Building Structure Type Parking Type (Gr., Cov., etc.) Number of Units Unit Mix: Type Unit Qty. Mo. 1 1Br/1Ba 555 $585 2 2Br/2Ba 768 $745 3 3Br/2Ba 964 $760 4 3Br/2Ba 1,020 $875 5 3Br/2Ba 1,020 $875 Average Unit Size (SF) Unit Breakdown: Efficiency 2-Bedroom X 1-Bedroom X 3-Bedroom X CONDITION: Average APPEAL: Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. Fireplace Other Cable TV Ready Project Amenities X Swimming Pool Boat Storage Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room X Freshwater Lake Playground OCCUPANCY: 93% LEASING DATA: Available Leasing Terms 6 to 12 months Concessions $99 move-in special Pet Deposit Yes Utilities Paid by Tenant: X Electric X Natural Gas Water Trash Confirmation Leasing agent Telephone Number 941-924-3602 NOTES: Located in more upscale area of south Sarasota, nearer to the beaches. COMPARISON TO SUBJECT: Slightly Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B THE LEXINGTON, SARASOTA, FLORIDA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 HUNTINGTON PLACE ALAHAMBRA THE COLONNADE 3201 Huntington Place Drive 1651 Beneva Road 3516 Coronado Drive Sarasota, FL Sarasota, FL Sarasota, FL [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 CORAL CLUB N/A 3441 Clark Road Sarasota, FL [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C THE LEXINGTON, SARASOTA, FLORIDA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C THE LEXINGTON, SARASOTA, FLORIDA 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 THE LEXINGTON, SARASOTA, FLORIDA 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 THE LEXINGTON, SARASOTA, FLORIDA 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 THE LEXINGTON, SARASOTA, FLORIDA 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 report analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the impartial and 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 or bias with respect to the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. The engagement of American Appraisal Associates, Inc., and myself personally in this assignment and compensation for American Appraisal Associates, Inc., are not contingent on the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice and the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers. I personally inspected the property that is the subject of this report. No one provided me with significant real property appraisal. -s- ALICE MAcQUEEN ----------------------------------------------- Alice MacQueen Vice President, Real Estate Group Florida Certified General Real Estate Appraiser #RZ0002202 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E THE LEXINGTON, SARASOTA, FLORIDA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E THE LEXINGTON, SARASOTA, FLORIDA ALICE MAcQUEEN VICE PRESIDENT AND PRINCIPAL, REAL ESTATE GROUP POSITION Alice MacQueen serves as a Vice President and Principal for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Ms. MacQueen specializes in the appraisal of investment real estate and is annually involved in the valuation of several billion dollars of real property. The purposes of these valuations include allocation of purchase price, charitable donation, financing, purchase, sale, and syndication. She has also been involved in land planning analyses for major mixed-use developments. She has appraised various types of real estate including congregate care facilities, industrial properties, manufacturing facilities, office buildings, recreational subdivisions and planned unit developments, single- and multifamily residential properties, and shopping centers. Special-purpose properties she has appraised include campgrounds, churches, country clubs, golf courses, historic landmarks, proprietary cemeteries, and schools. In addition to market value opinions, Ms. MacQueen has provided feasibility and highest and best use studies. She has also been involved in several research projects, providing background studies involving major property tax appeal cases. These studies included the impact of inflation, rate of return considerations, sales-assessment ratio analyses, and the applicability of income capitalization to commercial and industrial properties. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E THE LEXINGTON, SARASOTA, FLORIDA Ms. MacQueen has appraised real estate in 46 U.S. states, Mexico, and Puerto Rico. Business Ms. MacQueen joined AAA in 1983. She served as Regional Real Estate Director for the southeastern United States from 1987 to 1992 and as National Director of the Real Estate Valuation Group from 1992 through 1995, when she assumed her current position. Before joining the firm, she was involved in property management for five years and spent an additional five years as an appraiser, consultant, and research analyst. EDUCATION Realtors Institute of Virginia Greenbrier College for Women - Liberal Arts STATE CERTIFICATIONS State of Arizona, Certified General Real Estate Appraiser, #30987 State of Florida, Certified General Appraiser, #RZ0002202 State of Georgia, Certified General Real Property Appraiser, #239776 State of Minnesota, Certified General Real Property Appraiser, #AP-20144872 State of New Mexico, General Certified Appraiser, #001626-G State of Utah, State Certified General Appraiser, #CG00057001 PROFESSIONAL American Society of Appraisers, Candidate AFFILIATIONS AMERICAN APPRAISAL ASSOCIATES, INC. THE LEXINGTON, SARASOTA, FLORIDA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. THE LEXINGTON, SARASOTA, FLORIDA 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. EX-99.(C)(7) 9 d07277a2exv99wxcyx7y.txt APPRAISAL OF WOODLAND VILLAGE WOODLAND VILLAGE APARTMENTS 2221 BUSH RIVER ROAD COLUMBIA, SOUTH CAROLINA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 27, 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: WOODLAND VILLAGE APARTMENTS 2221 BUSH RIVER ROAD COLUMBIA, LEXINGTON COUNTY, SOUTH 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 308 units with a total of 383,904 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 24.993 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 94% 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 27, 2003 is: ($15,900,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach July 3, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group South Carolina Temporary Practice Permit #095-03 Report By: Jimmy Pat James, MAI South Carolina Temporary Practice Permit #103-03 Assisted By: David Johnsen, MAI AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Woodland Village Apartments LOCATION: 2221 Bush River Road Columbia, South 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 27, 2003 DATE OF REPORT: July 3, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 24.993 acres, or 1,088,695 square feet Assessor Parcel No.: 3697-02-070 Floodplain: Community Panel No. 45063C0161 G (February 9, 2000) Flood Zone X, an area outside the floodplain. Zoning: R3 (High Density Residential) BUILDING: No. of Units: 308 Units Total NRA: 383,904 Square Feet Average Unit Size: 1,246 Square Feet Apartment Density: 12.3 units per acre Year Built: 1972 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 - 1A10 (Pine) 960 $ 610 $ 0.64 $ 43,920 $ 527,040 1Br/1Ba - 1B10 (Birch) 985 $ 620 $ 0.63 $ 4,960 $ 59,520 2Br/2Ba - 2A20 (Maple) 1,200 $ 690 $ 0.58 $ 33,120 $ 397,440 2Br/2Ba - 2B20 (Oak) 1,295 $ 720 $ 0.56 $ 11,520 $ 138,240 2Br/1.5Ba - 2A15 1,370 $ 720 $ 0.53 $ 25,920 $ 311,040 2Br/1.5Ba - 2B15 1,394 $ 700 $ 0.50 $ 39,200 $ 470,400 3Br/2Ba - 3A20 1,260 $ 790 $ 0.63 $ 31,600 $ 379,200 3Br/2Ba - 3B20 (Elm) 1,583 $ 900 $ 0.57 $ 18,000 $ 216,000 3Br/2.5Ba - 3A25 1,595 $ 920 $ 0.58 $ 11,040 $ 132,480 --------- ----------- Total $ 219,280 $ 2,631,360 ========= ===========
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA OCCUPANCY: 94% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 20 Years REMAINING ECONOMIC LIFE: 25 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] ENTRANCE FROM BUSH RIVER ROAD STREET SCENE - SUBJECT IS TO THE LEFT AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - ----------------------- ---------- ------- Potential Rental Income $ 2,631,360 $ 8,543 Effective Gross Income $ 2,522,224 $ 8,189 Operating Expenses $ 1,091,691 $ 3,544 43.3% of EGI Net Operating Income: $ 1,353,533 $ 4,395 Capitalization Rate 8.50% DIRECT CAPITALIZATION VALUE $15,900,000 * $ 51,623 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 17% Stabilized Vacancy & Collection Loss: 10% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.00% Discount Rate 11.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 15,800,000 * $ 51,299 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 15,900,000 $ 51,623 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $ 32,862 to $56,667 Range of Sales $/Unit (Adjusted) $ 45,000 to $54,545 VALUE INDICATION - PRICE PER UNIT $ 15,400,000 * $ 50,000 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.91 to 6.68 Selected EGIM for Subject 6.00 Subject's Projected EGI $ 2,522,224 EGIM ANALYSIS CONCLUSION $ 15,100,000 * $ 49,026 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 16,000,000 * $ 51,948 / UNIT RECONCILED SALES COMPARISON VALUE $ 15,500,000 $ 50,325 / 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 15,400,000 NOI Per Unit $ 16,000,000 EGIM Multiplier $ 15,100,000 INDICATED VALUE BY SALES COMPARISON $ 15,500,000 $ 50,325 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 15,900,000 Discounted Cash Flow Method: $ 15,800,000 INDICATED VALUE BY THE INCOME APPROACH $ 15,900,000 $ 51,623 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 15,900,000 $ 51,623 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 2221 Bush River Road, Columbia, Lexington County, South Carolina. Columbia identifies it as 3697-02-070. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by David Johnsen, MAI on May 27, 2003. Jimmy Pat James, MAI and Frank Fehribach, MAI have not made a personal inspection of the subject property. David Johnsen, MAI assisted Jimmy Pat James, MAI with the research, valuation analysis and writing the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI, Jimmy Pat James, MAI, and David Johnsen, MAI 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 27, 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 & AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA 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: "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 Shelter Properties V Limited Partnership. 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 Columbia, South Carolina. 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 - I-26 West - Saluda River South - I-20 North - St. Andrews Road MAJOR EMPLOYERS Major employers in the subject's area include the Colombiana Mall and the Lexington Medical Center. Downtown Columbia is a ten minute drive from the subject property. 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - ------------------------- ------------ ------------ ------------ -------- POPULATION TRENDS Current Population 4,061 45,930 111,016 551,370 5-Year Population 3,935 46,402 113,554 589,900 % Change CY-5Y -3.1% 1.0% 2.3% 7.0% Annual Change CY-5Y -0.6% 0.2% 0.5% 1.4% HOUSEHOLDS Current Households 1,844 21,027 46,578 211,176 5-Year Projected Households 1,855 21,790 48,958 232,278 % Change CY - 5Y 0.6% 3.6% 5.1% 10.0% Annual Change CY-5Y 0.1% 0.7% 1.0% 2.0% INCOME TRENDS Median Household Income $ 47,073 $ 36,396 $ 36,559 $ 40,596 Per Capita Income $ 24,866 $ 21,795 $ 20,287 $ 21,559 Average Household Income $ 54,682 $ 47,361 $ 48,321 $ 56,291
Source: Demographics Now The subject neighborhood's population is expected to show increases below 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 43.71% 47.30% 41.86% 29.64% 5-Year Projected % Renting 44.72% 47.32% 42.22% 29.06% % of Households Owning 48.56% 44.04% 50.05% 63.62% 5-Year Projected % Owning 47.68% 44.17% 49.98% 64.71%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Single-family South - Commercial/retail East - I-20 West - Multi-family CONCLUSIONS The subject is well located within the city of Columbia. The neighborhood is characterized as being mostly suburban in nature and is currently in the 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Columbia in Lexington County. The overall pace of development in the subject's market is more or less stable. There are no new apartment projects located within the immediate subject area. The newest project (YOC 2003) within the subject submarket (Northwest/St. Andrews) is Crestmont, located near the Columbiana Mall. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - -------- ------ --------- Oct. '00 8.4% 7.5% April '01 8.4% 8.6% Oct. '01 9.2% 9.1% April '02 8.7% 9.8% Oct. '02 8.0% 8.7%
Source: Carolina's Real Data Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. This market has been exhibiting an increase in the overall vacancy rate. The Northwest/St. Andrews submarket is the largest apartment market in Columbia, containing approximately 42.1% of the total market. 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 - --------- ------ -------- --------- -------- Oct. '00 $ 595 - $ 580 - April '01 $ 601 1.0% $ 585 0.9% Oct. '01 $ 613 2.0% $ 598 2.2% April '02 $ 619 1.0% $ 598 0.0% Oct. '02 $ 624 0.8% $ 603 0.8%
Source: Carolina's Real Data The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject - --- -------------------------- ----- ----- ---------- ------------------------------- R-1 Ashland Commons 112 90% 1972 1/2 mile west of the subject R-2 Churchill at St. Andrews 132 89% 1972 1 mile west of the subject R-3 Landmark 336 82% 1972 1/2 mile north of the subject R-4 Stoneycreek 196 90% 1969 1 mile northeast of the subject R-5 St. Andrews Commons 336 90% 1987 1 mile north of the subject Subject Woodland Village Apartments 308 94% 1972
Overall, this market commands slightly lower rates than the overall Columbia market. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 24.993 acres, or 1,088,695 square feet Shape Irregular Topography Slightly 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 Good Flood Zone: Community Panel 45063C0161 G, dated February 9, 2000 Flood Zone Zone X Zoning R3, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 ---------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES - ------------- ----------- ----------- ------------ ---------- --------- 3697-02-070 $ 1,661,012 $ 8,960,238 $ 10,621,250 0.02068 $ 219,699
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 308 Net Rentable Area 383,904 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, 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, dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - ----------------------- --------------- --------- 1Br/1Ba - 1A10 (Pine) 72 960 1Br/1Ba - 1B10 (Birch) 8 985 2Br/2Ba - 2A20 (Maple) 48 1,200 2Br/2Ba - 2B20 (Oak) 16 1,295 2Br/1.5Ba - 2A15 (Aspen) 36 1,370 2Br/1.5Ba - 2B15 (Bradford) 56 1,394 3Br/2Ba - 3A20 (Palmetto) 40 1,260 3Br/2Ba - 3B20 (Elm) 20 1,583 3Br/2.5Ba - 3A25 (Mulberry) 12 1,595
Overall Condition Average Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 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 1972 and consist of a 308-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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ------------------------------ --------------------------- ------------------------ ------------------------ Property Name Woodland Village Apartments Raintree Ashton at Longcreek LOCATION: Address 2221 Bush River Road 3500 Fernandina Road 1401 Longcreek Drive City, State Columbia, South Carolina Columbia, SC Columbia, SC County Lexington Lexington Richland PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 383,904 148,380 220,100 Year Built 1972 1972 1974 Number of Units 308 138 220 Unit Mix: Type Total Type Total Type Total 1Br/1Ba - 1A10 72 1Br/1Ba 20 1Br/1Ba 64 (Pine) 1Br/1Ba - 1B10 8 1Br/1.5Ba 12 2Br/2Ba 140 (Birch) 2Br/2Ba - 2A20 48 2Br/1.5Ba 100 3Br/2Ba 16 (Maple) 2Br/2Ba - 2B20 (Oak) 16 3Br/2.5Ba 6 2Br/1.5Ba - 2A15 36 (Aspen) 2Br/1.5Ba - 2B15 56 (Bradford) 3Br/2Ba - 3A20 40 (Palmetto) 3Br/2Ba - 3B20 (Elm) 20 3Br/2.5Ba - 3A25 12 (Mulberry) Average Unit Size (SF) 1,246 1,075 1,000 Land Area (Acre) 24.9930 7.7700 13.0200 Density (Units/Acre) 12.3 17.8 16.9 Parking Ratio (Spaces/Unit) 0.00 N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Good Good Good APPEAL: Good Good Good AMENITIES: Pool/Spa Yes/Yes Yes/No Yes/No Gym Room No No No Laundry Room Yes Yes Yes Secured Parking No No No Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 94% 91% 93% TRANSACTION DATA: Sale Date January, 2002 February, 2001 Sale Price ($) $4,535,000 $9,600,000 Grantor Raintree Garden Intermark Associates Associates, II Grantee Fernandina AHF-Ahston and Properties Stoneycreek LLC Sale Documentation Book 6944, Book R0483, Page 80 Page 2162 Verification Lexington County Richland County Records Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,015,373 $7,358 $6.84 $1,544,592 $7,021 $7.02 Vacancy/Credit Loss $ 91,384 $ 662 $0.62 $ 108,121 $ 491 $0.49 Effective Gross Income $ 923,989 $6,696 $6.23 $1,436,471 $6,529 $6.53 Operating Expenses $ 483,000 $3,500 $3.26 $ 660,800 $3,004 $3.00 Net Operating Income $ 440,989 $3,196 $2.97 $ 775,671 $3,526 $3.52 NOTES: None None PRICE PER UNIT $32,862 $43,636 PRICE PER SQUARE FOOT $ 30.56 $ 43.62 EXPENSE RATIO 52.3% 46.0% EGIM 4.91 6.68 OVERALL CAP RATE 9.72% 8.08% 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 Stoneycreek St. Andrews Broad River Trace LOCATION: Address 18 Berry Hill Road 601 St. Andrews Road 551 River Hill Circle City, State Columbia, SC Columbia, SC Columbia, SC County Lexington Lexington Richland PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 183,724 255,650 257,340 Year Built 1969 1973 1998 Number of Units 196 224 240 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 88 1Br/1Ba 40 1Br/1Ba 84 2Br/1.5Ba 8 2Br/1.5Ba 64 2Br/2Ba 120 2Br/2Ba 100 2Br/2Ba 88 3Br/2Ba 36 3Br/2Ba 32 Average Unit Size (SF) 937 1,141 1,072 Land Area (Acre) 10.5700 16.8600 38.7400 Density (Units/Acre) 18.5 13.3 6.2 Parking Ratio (Spaces/Unit) N/A N/A N/A Parking Type (Gr., Cov., etc.) Open Open Garage, Open CONDITION: Good Good Excellent APPEAL: Good Good Excellent AMENITIES: Pool/Spa Yes/No Yes/No Yes/Yes Gym Room No No Yes Laundry Room Yes Yes Yes Secured Parking No No Yes Sport Courts No Yes Yes Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 96% 90% 97% TRANSACTION DATA: Sale Date February, 2001 September, 2000 April, 2000 Sale Price ($) $7,249,000 $8,000,000 $13,600,000 Grantor Intermark Alliance GT4 LP Broad River Associates Trace, LLC Grantee AHF-Ashton and UDR South Carolina SG Broad River Trace- Stoneycreek LLC Trust Cola LLC Sale Documentation Book 6191, Book 6014, Book R0403, Page 182 Page 2 Page 1489 Verification Lexington County Lexington County Richland County Records Records Records Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,318,608 $6,728 $7.18 $1,745,280 $7,791 $6.83 $2,163,600 $9,015 $8.41 Vacancy/Credit Loss $ 65,930 $ 336 $0.36 $ 174,528 $ 779 $0.68 $ 108,130 $ 451 $0.42 Effective Gross Income $1,252,678 $6,391 $6.82 $1,570,752 $7,012 $6.14 $2,055,470 $8,564 $7.99 Operating Expenses $ 632,932 $3,229 $3.45 $ 785,376 $3,506 $3.07 $ 839,477 $3,498 $3.26 Net Operating Income $ 619,746 $3,162 $3.37 $ 785,376 $3,506 $3.07 $1,215,993 $5,067 $4.73 NOTES: None None None PRICE PER UNIT $36,985 $35,714 $56,667 PRICE PER SQUARE FOOT $ 39.46 $ 31.29 $ 52.85 EXPENSE RATIO 50.5% 50.0% 40.8% EGIM 5.79 5.09 6.62 OVERALL CAP RATE 8.55% 9.82% 8.94% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $32,862 to $56,667 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 $45,000 to $54,545 per unit with a mean or average adjusted price of $50,567 per unit. The median adjusted price is $50,937 per unit. Based on the following analysis, we have concluded to a value of $50,000 per unit, which results in an "as is" value of $15,400,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ------------------------------------------------------------------------------------------------ Property Name Woodland Village Raintree Ashton at Longcreek Apartments Address 2221 Bush River Road 3500 Fernandina 1401 Longcreek Road Drive City Columbia, South Columbia, SC Columbia, SC Carolina Sale Date January, 2002 February, 2001 Sale Price ($) $4,535,000 $9,600,000 Net Rentable Area (SF) 383,904 148,380 220,100 Number of Units 308 138 220 Price Per Unit $32,862 $43,636 Year Built 1972 1972 1974 Land Area (Acre) 24.9930 7.7700 13.0200 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. - ------------------------------------------------------------------------------------------------ Property Rights Conveyed Fee Simple Estate Fee Simple 0% Fee Simple 0% Estate Estate Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2002 0% 02-2001 0% VALUE AFTER TRANS. ADJUST. $32,862 $43,636 ($/UNIT) Location Inferior 30% Inferior 10% Number of Units 308 138 0% 220 0% Quality / Appeal Good Inferior 20% Inferior 10% Age / Condition 1972 1972 / Good 0% 1974 / Good 0% Occupancy at Sale 94% 91% 0% 93% 0% Amenities Good Inferior 5% Inferior 5% Average Unit Size (SF) 1,246 1,075 0% 1,000 0% - ------------------------------------------------------------------------------------------------ PHYSICAL ADJUSTMENT 55% 25% - ------------------------------------------------------------------------------------------------ FINAL ADJUSTED VALUE ($/UNIT) $50,937 $54,545 - ------------------------------------------------------------------------------------------------ COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 - --------------------------------------------------------------------------------------------------- Property Name Stoneycreek St. Andrews Broad River Trace Address 18 Berry Hill Road 601 St. Andrews Road 551 River Hill Circle City Columbia, SC Columbia, SC Columbia, SC Sale Date February, 2001 September, 2000 April, 2000 Sale Price ($) $7,249,000 $8,000,000 $13,600,000 Net Rentable Area (SF) 183,724 255,650 257,340 Number of Units 196 224 240 Price Per Unit $36,985 $35,714 $56,667 Year Built 1969 1973 1998 Land Area (Acre) 10.5700 16.8600 38.7400 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. - --------------------------------------------------------------------------------------------------- Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple 0% Estate 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) 02-2001 0% 09-2000 5% 04-2000 5% VALUE AFTER TRANS. ADJUST. $36,985 $37,500 $59,500 ($/UNIT) Location Inferior 10% Comparable 0% Inferior 10% Number of Units 196 0% 224 0% 240 0% Quality / Appeal Inferior 20% Inferior 20% Superior -10% Age / Condition 1969 / Good 0% 1973 / Good 0% 1998 / -10% Excellent Occupancy at Sale 96% 0% 90% 0% 97% 0% Amenities Inferior 5% Comparable 0% Superior -5% Average Unit Size (SF) 937 5% 1,141 0% 1,072 0% - --------------------------------------------------------------------------------------------------- PHYSICAL ADJUSTMENT 40% 20% -15% - --------------------------------------------------------------------------------------------------- FINAL ADJUSTED VALUE ($/UNIT) $51,779 $45,000 $50,575 - ---------------------------------------------------------------------------------------------------
SUMMARY VALUE RANGE (PER UNIT) $45,000 TO $54,545 MEAN (PER UNIT) $50,567 MEDIAN (PER UNIT) $50,937 VALUE CONCLUSION (PER UNIT) $50,000
VALUE INDICATED BY SALES COMPARISON APPROACH $15,400,000 ROUNDED $15,400,000
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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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-1 138 $ 4,535,000 9.72% $ 440,989 $ 1,353,533 1.375 $45,193 $ 32,862 $ 3,196 $ 4,395 I-2 220 $ 9,600,000 8.08% $ 775,671 $ 1,353,533 1.246 $54,389 $ 43,636 $ 3,526 $ 4,395 I-3 196 $ 7,249,000 8.55% $ 619,746 $ 1,353,533 1.390 $51,402 $ 36,985 $ 3,162 $ 4,395 I-4 224 $ 8,000,000 9.82% $ 785,376 $ 1,353,533 1.253 $44,764 $ 35,714 $ 3,506 $ 4,395 I-5 240 $13,600,000 8.94% $1,215,993 $ 1,353,533 0.867 $49,150 $ 56,667 $ 5,067 $ 4,395
PRICE/UNIT Low High Average Median $44,764 $54,389 $48,980 $49,150
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 52,000 Number of Units 308 ----------- Value Based on NOI Analysis $16,016,000 Rounded $16,000,000
The adjusted sales indicate a range of value between $44,764 and $54,389 per unit, with an average of $48,980 per unit. Based on the subject's competitive position within the improved sales, a value of $52,000 per unit is estimated. This indicates an "as is" market value of $16,000,000 (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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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-1 138 $ 4,535,000 $ 923,989 $483,000 52.27% 4.91 $ 32,862 I-2 220 $ 9,600,000 $1,436,471 $660,800 46.00% 6.68 $ 43,636 I-3 196 $ 7,249,000 $1,252,678 $632,932 50.53% 5.79 43.28% $ 36,985 I-4 224 $ 8,000,000 $1,570,752 $785,376 50.00% 5.09 $ 35,714 I-5 240 $13,600,000 $2,055,470 $839,477 40.84% 6.62 $ 56,667
EGIM Low High Average Median 4.91 6.68 5.82 5.79
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.00 Subject EGI $ 2,522,224 ----------- Value Based on EGIM Analysis $15,133,344 Rounded $15,100,000 Value Per Unit $ 49,026
There is an inverse relationship,which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 43.28% before reserves. The comparable sales indicate a range of expense ratios from 40.84% to 52.27%, while their EGIMs range from 4.91 to 6.68. Overall, we conclude to an EGIM of 6.00, which results in an "as is" value estimate in the EGIM Analysis of $15,100,000. 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 $15,500,000. Price Per Unit $15,400,000 NOI Per Unit $16,000,000 EGIM Analysis $15,100,000 Sales Comparison Conclusion $15,500,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 - 1A10 (Pine) 960 $605 $0.63 91.7% 1Br/1Ba - 1B10 (Birch) 985 $606 $0.62 87.5% 2Br/2Ba - 2A20 (Maple) 1200 $662 $0.55 93.8% 2Br/2Ba - 2B20 (Oak) 1295 $669 $0.52 100.0% 2Br/1.5Ba - 2A15 (Aspen) 1370 $709 $0.52 97.2% 2Br/1.5Ba - 2B15 (Bradford) 1394 $688 $0.49 89.3% 3Br/2Ba - 3A20 (Palmetto) 1260 $795 $0.63 97.5% 3Br/2Ba - 3B20 (Elm) 1583 $897 $0.57 100.0% 3Br/2.5Ba - 3A25 (Mulberry) 1595 $911 $0.57 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS ----------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ----------------------------------------------------- Ashland Churchill at St. Andrews Commons St. Andrews Landmark Stoneycreek Commons ---------------------------------------------------- SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING ---------------------------------------------------- DESCRIPTION TYPE RENT RENT Inferior Similar Similar Inferior Similar - -------------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba - 1A10 $ 605 $ 619 $ 500 $ 525 $ 530 $ 498 $ 563 Unit Area (SF) (PINE) 960 960 652 720 700 775 744 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.64 $0.77 $ 0.73 $ 0.76 $ 0.64 $ 0.76 Monthly Rent 1Br/1Ba - 1B10 $ 606 $ 639 $ 650 Unit Area (SF) (BIRCH) 985 985 1,142 Monthly Rent Per Sq. Ft. $ 0.62 $ 0.65 $ 0.57 Monthly Rent 2Br/2Ba - 2A20 $ 662 $ 709 $ 612 $ 639 $ 730 $ 599 $ 670 Unit Area (SF) (MAPLE) 1,200 1,200 969 1,074 1,292 1,060 1,023 Monthly Rent Per Sq. Ft. $ 0.55 $ 0.59 $0.63 $ 0.59 $ 0.57 $ 0.57 $ 0.65 Monthly Rent 2Br/2Ba - 2B20 $ 669 $ 739 Unit Area (SF) (OAK) 1,295 1,295 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.57 Monthly Rent 2Br/1.5Ba - $ 709 $ 729 $ 650 Unit Area (SF) 2A15 (ASPEN) 1,370 1,370 1,187 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.53 $ 0.55 Monthly Rent 2Br/1.5Ba - 2B15 $ 688 $ 719 Unit Area (SF) (BRADFORD) 1,394 1,394 Monthly Rent Per Sq. Ft. $ 0.49 $ 0.52 Monthly Rent 3Br/2Ba - 3A20 $ 795 $ 789 $ 732 Unit Area (SF) (PALMETTO) 1,260 1,260 1,315 Monthly Rent Per Sq. Ft. $ 0.63 $ 0.63 $ 0.56 Monthly Rent 3Br/2Ba - 3B20 $ 897 $ 909 Unit Area (SF) (ELM) 1,583 1,583 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.57 Monthly Rent 3Br/2.5Ba - $ 911 $ 959 Unit Area (SF) 3A25 (MULBERRY) 1,595 1,595 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.60 DESCRIPTION MIN MAX MEDIAN AVERAGE - -------------------------------------------------------------------------- Monthly Rent $ 498 $ 563 $ 525 $ 523 Unit Area (SF) 652 775 720 718 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.77 $ 0.76 $ 0.73 Monthly Rent $ 650 $ 650 $ 650 $ 650 Unit Area (SF) 1,142 1,142 1,142 1,142 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.57 $ 0.57 $ 0.57 Monthly Rent $ 599 $ 730 $ 639 $ 650 Unit Area (SF) 969 1,292 1,060 1,084 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.65 $ 0.59 $ 0.60 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 650 $ 650 $ 650 $ 650 Unit Area (SF) 1,187 1,187 1,187 1,187 Monthly Rent Per Sq. Ft. $ 0.55 $ 0.55 $ 0.55 $ 0.55 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 732 $ 732 $ 732 $ 732 Unit Area (SF) 1,315 1,315 1,315 1,315 Monthly Rent Per Sq. Ft. $ 0.56 $ 0.56 $ 0.56 $ 0.56 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft.
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: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA 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 - 1A10 (Pine) 72 960 $ 610 $ 0.64 $ 43,920 $ 527,040 1Br/1Ba - 1B10 (Birch) 8 985 $ 620 $ 0.63 $ 4,960 $ 59,520 2Br/2Ba - 2A20 (Maple) 48 1,200 $ 690 $ 0.58 $ 33,120 $ 397,440 2Br/2Ba - 2B20 (Oak) 16 1,295 $ 720 $ 0.56 $ 11,520 $ 138,240 2Br/1.5Ba - 2A15 (Aspen) 36 1,370 $ 720 $ 0.53 $ 25,920 $ 311,040 56 1,394 $ 700 $ 0.50 $ 39,200 $ 470,400 2Br/1.5Ba2B15(Bradford) 3Br/2Ba - 3A20 (Palmetto) 40 1,260 $ 790 $ 0.63 $ 31,600 $ 379,200 3Br/2Ba - 3B20 (Elm) 20 1,583 $ 900 $ 0.57 $ 18,000 $ 216,000 [ILLEGIBLE] 12 1,595 $ 920 $ 0.58 $ 11,040 $ 132,480 ----------------------------------- Total $ 219,280 $2,631,360 ===================================
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 30 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 ------------------------------------------------------------------- ACTUAL ACTUAL ACTUAL ------------------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT - ---------------------------------------------------------------------------------------------- Revenues Rental Income $2,478,918 $8,048 $2,559,448 $8,310 $2,516,265 $8,170 Vacancy $ 190,983 $ 620 $ 164,811 $ 535 $ 278,106 $ 903 Credit Loss/Concessions $ 146,156 $ 475 $ 138,510 $ 450 $ 146,644 $ 476 ----------------------------------------------------------------- Subtotal $ 337,139 $1,095 $ 303,321 $ 985 $ 424,750 $1,379 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 60,256 $ 196 $ 127,835 $ 415 $ 210,246 $ 683 ----------------------------------------------------------------- Subtotal Other Income $ 60,256 $ 196 $ 127,835 $ 415 $ 210,246 $ 683 ----------------------------------------------------------------- Effective Gross Income $2,202,035 $7,149 $2,383,962 $7,740 $2,301,761 $7,473 Operating Expenses Taxes $ 153,712 $ 499 $ 200,791 $ 652 $ 227,742 $ 739 Insurance $ 40,808 $ 132 $ 59,759 $ 194 $ 63,059 $ 205 Utilities $ 172,149 $ 559 $ 175,993 $ 571 $ 183,284 $ 595 Repair & Maintenance $ 211,569 $ 687 $ 209,205 $ 679 $ 215,543 $ 700 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 30,292 $ 98 $ 24,483 $ 79 $ 28,453 $ 92 General Administrative $ 276,801 $ 899 $ 294,461 $ 956 $ 219,029 $ 711 Management $ 114,710 $ 372 $ 125,501 $ 407 $ 119,794 $ 389 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------- Total Operating Expenses $1,000,041 $3,247 $1,090,193 $3,540 $1,056,904 $3,432 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------- Net Income $1,201,994 $3,903 $1,293,769 $4,201 $1,244,857 $4,042 ----------------------------------------------------------------- FISCAL YEAR 2003 ANNUALIZED 2003 -------------------------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION -------------------------------------------- ------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % - ------------------------------------------------------------------------------------------------------ Revenues Rental Income $2,452,283 $7,962 $2,458,464 $7,982 $2,631,360 $8,543 100.0% Vacancy $ 191,000 $ 620 $ 227,520 $ 739 $ 210,509 $ 683 8.0% Credit Loss/Concessions $ 54,200 $ 176 $ 89,216 $ 290 $ 52,627 $ 171 2.0% ------------------------------------------------------------------------- Subtotal $ 245,200 $ 796 $ 316,736 $1,028 $ 263,136 $ 854 10.0% Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 144,900 $ 470 $ 167,064 $ 542 $ 154,000 $ 500 5.9% ------------------------------------------------------------------------- Subtotal Other Income $ 144,900 $ 470 $ 167,064 $ 542 $ 154,000 $ 500 5.9% ------------------------------------------------------------------------- Effective Gross Income $2,351,983 $7,636 $2,308,792 $7,496 $2,522,224 $8,189 100.0% Operating Expenses Taxes $ 202,760 $ 658 $ 204,728 $ 665 $ 221,760 $ 720 8.8% Insurance $ 68,870 $ 224 $ 67,120 $ 218 $ 67,760 $ 220 2.7% Utilities $ 180,000 $ 584 $ 215,724 $ 700 $ 184,800 $ 600 7.3% Repair & Maintenance $ 198,500 $ 644 $ 205,016 $ 666 $ 231,000 $ 750 9.2% 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 $ 19,500 $ 63 $ 9,288 $ 30 $ 21,560 $ 70 0.9% General Administrative $ 235,470 $ 765 $ 241,968 $ 786 $ 238,700 $ 775 9.5% Management $ 116,693 $ 379 $ 123,644 $ 401 $ 126,111 $ 409 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% ------------------------------------------------------------------------- Total Operating Expenses $1,021,793 $3,318 $1,067,488 $3,466 $1,091,691 $3,544 43.3% Reserves $ 0 $ 0 $ 0 $ 0 $ 77,000 $ 250 7.1% ------------------------------------------------------------------------- Net Income $1,330,190 $4,319 $1,241,304 $4,030 $1,353,533 $4,395 53.7% -------------------------------------------------------------------------
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 10% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 32 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------------------------------------------------------------- I-1 Jan-02 91% $32,862 9.72% I-2 Feb-01 93% $43,636 8.08% I-3 Feb-01 96% $36,985 8.55% I-4 Sep-00 90% $35,714 9.82% I-5 Apr-00 97% $56,667 8.94% High 9.82% Low 8.08% Average 9.02%
Based on this information, we have concluded the subject's overall capitalization rate should be 8.50%. 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 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 11.00%. 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 11.00% indicates a value of $15,800,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA 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 CAPITALIZATION APPROACH PAGE 34 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS WOODLAND VILLAGE 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 $2,631,360 $2,710,301 $2,791,610 $2,875,358 $2,961,619 $3,050,467 Vacancy $ 210,509 $ 216,824 $ 223,329 $ 230,029 $ 236,930 $ 244,037 Credit Loss $ 52,627 $ 54,206 $ 55,832 $ 57,507 $ 59,232 $ 61,009 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 263,136 $ 271,030 $ 279,161 $ 287,536 $ 296,162 $ 305,047 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 154,000 $ 158,620 $ 163,379 $ 168,280 $ 173,328 $ 178,528 -------------------------------------------------------------------------------- Subtotal Other Income $ 154,000 $ 158,620 $ 163,379 $ 168,280 $ 173,328 $ 178,528 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,522,224 $2,597,891 $2,675,827 $2,756,102 $2,838,785 $2,923,949 OPERATING EXPENSES: Taxes $ 221,760 $ 228,413 $ 235,265 $ 242,323 $ 249,593 $ 257,081 Insurance $ 67,760 $ 69,793 $ 71,887 $ 74,043 $ 76,264 $ 78,552 Utilities $ 184,800 $ 190,344 $ 196,054 $ 201,936 $ 207,994 $ 214,234 Repair & Maintenance $ 231,000 $ 237,930 $ 245,068 $ 252,420 $ 259,993 $ 267,792 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 21,560 $ 22,207 $ 22,873 $ 23,559 $ 24,266 $ 24,994 General Administrative $ 238,700 $ 245,861 $ 253,237 $ 260,834 $ 268,659 $ 276,719 Management $ 126,111 $ 129,895 $ 133,791 $ 137,805 $ 141,939 $ 146,197 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,091,691 $1,124,442 $1,158,175 $1,192,920 $1,228,708 $1,265,569 Reserves $ 77,000 $ 79,310 $ 81,689 $ 84,140 $ 86,664 $ 89,264 -------------------------------------------------------------------------------- NET OPERATING INCOME $1,353,533 $1,394,139 $1,435,963 $1,479,042 $1,523,413 $1,569,115 Operating Expense Ratio (% of EGI) 43.3% 43.3% 43.3% 43.3% 43.3% 43.3% Operating Expense Per Unit $ 3,544 $ 3,651 $ 3,760 $ 3,873 $ 3,989 $ 4,109 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 - ------------------------------------------------------------------------------------------------------- REVENUE Base Rent $3,141,981 $3,236,241 $3,333,328 $3,433,328 $3,536,328 Vacancy $ 251,359 $ 258,899 $ 266,666 $ 274,666 $ 282,906 Credit Loss $ 62,840 $ 64,725 $ 66,667 $ 68,667 $ 70,727 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 314,198 $ 323,624 $ 333,333 $ 343,333 $ 353,633 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 183,884 $ 189,401 $ 195,083 $ 200,935 $ 206,963 ------------------------------------------------------------------ Subtotal Other Income $ 183,884 $ 189,401 $ 195,083 $ 200,935 $ 206,963 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $3,011,667 $3,102,017 $3,195,078 $3,290,930 $3,389,658 OPERATING EXPENSES: Taxes $ 264,793 $ 272,737 $ 280,919 $ 289,347 $ 298,027 Insurance $ 80,909 $ 83,336 $ 85,836 $ 88,411 $ 91,064 Utilities $ 220,661 $ 227,281 $ 234,099 $ 241,122 $ 248,356 Repair & Maintenance $ 275,826 $ 284,101 $ 292,624 $ 301,403 $ 310,445 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 25,744 $ 26,516 $ 27,312 $ 28,131 $ 28,975 General Administrative $ 285,020 $ 293,571 $ 302,378 $ 311,449 $ 320,793 Management $ 150,583 $ 155,101 $ 159,754 $ 164,547 $ 169,483 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,303,536 $1,342,642 $1,382,922 $1,424,409 $1,467,142 Reserves $ 91,942 $ 94,700 $ 97,541 $ 100,468 $ 103,482 ------------------------------------------------------------------ NET OPERATING INCOME $1,616,189 $1,664,675 $1,714,615 $1,766,053 $1,819,035 Operating Expense Ratio (% of EGI) 43.3% 43.3% 43.3% 43.3% 43.3% Operating Expense Per Unit $ 4,232 $ 4,359 $ 4,490 $ 4,625 $ 4,763
Estimated Stabilized NOI $1,353,533 Sales Expense Rate 2.00% Months to Stabilized 0 Discount Rate 11.00% Stabilized Occupancy 92.0% Terminal Cap Rate 10.00%
Gross Residual Sale Price $18,190,349 Deferred Maintenance $ 0 Less: Sales Expense $ 363,807 Add: Excess Land $ 0 ----------- Net Residual Sale Price $17,826,542 Other Adjustments $ 0 ----------- PV of Reversion $ 6,278,231 Value Indicated By "DCF" $15,766,593 Add: NPV of NOI $ 9,488,361 Rounded $15,800,000 ----------- PV Total $15,766,593
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE - ------------------------------------------------------------------------------------------------------------------------ TOTAL VALUE 10.50% 10.75% 11.00% 11.25% 11.50% - ------------------------------------------------------------------------------------------------------------------------ 9.50% $16,631,217 $16,361,178 $16,097,026 $15,838,612 $15,585,792 9.75% $16,453,938 $16,187,861 $15,927,573 $15,672,929 $15,423,786 TERMINAL CAP RATE 10.00% $16,285,524 $16,023,210 $15,766,593 $15,515,529 $15,269,881 10.25% $16,125,325 $15,866,590 $15,613,465 $15,365,808 $15,123,483 10.50% $15,972,754 $15,717,429 $15,467,629 $15,223,217 $14,984,057
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 8.50% 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA WOODLAND VILLAGE APARTMENTS
TOTAL PER SQ. FT. PER UNIT %OF EGI - -------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,631,360 $ 6.85 $ 8,543 Less: Vacancy & Collection Loss 10.00% $ 263,136 $ 0.69 $ 854 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 154,000 $ 0.40 $ 500 6.11% ---------------------------------------------- Subtotal Other Income $ 154,000 $ 0.40 $ 500 6.11% EFFECTIVE GROSS INCOME $ 2,522,224 $ 6.57 $ 8,189 OPERATING EXPENSES: Taxes $ 221,760 $ 0.58 $ 720 8.79% Insurance $ 67,760 $ 0.18 $ 220 2.69% Utilities $ 184,800 $ 0.48 $ 600 7.33% Repair & Maintenance $ 231,000 $ 0.60 $ 750 9.16% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 21,560 $ 0.06 $ 70 0.85% General Administrative $ 238,700 $ 0.62 $ 775 9.46% Management 5.00% $ 126,111 $ 0.33 $ 409 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,091,691 $ 2.84 $ 3,544 43.28% Reserves $ 77,000 $ 0.20 $ 250 3.05% ---------------------------------------------- NET OPERATING INCOME $ 1,353,533 $ 3.53 $ 4,395 53.66% ---------------------------------------------- "GOING IN" CAPITALIZATION RATE 8.50% VALUE INDICATION $15,923,915 $ 41.48 $51,701 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $15,923,915 ROUNDED $15,900,000 $ 41.42 $51,623
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ------------------------------------------------------------------------- 7.75% $17,464,939 $17,500,000 $56,818 $45.58 8.00% $16,919,160 $16,900,000 $54,870 $44.02 8.25% $16,406,458 $16,400,000 $53,247 $42.72 8.50% $15,923,915 $15,900,000 $51,623 $41.42 8.75% $15,468,946 $15,500,000 $50,325 $40.37 9.00% $15,039,253 $15,000,000 $48,701 $39.07 9.25% $14,632,787 $14,600,000 $47,403 $38.03
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $15,900,000. 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 $15,800,000 Direct Capitalization Method $15,900,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $15,900,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 $ 15,500,000 Income Approach $ 15,900,000 Reconciled Value $ 15,900,000
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 27, 2003 the market value of the fee simple estate in the property is: $15,900,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUBJECT PHOTOGRAPHS [ENTRANCE FROM BUSH RIVER ROAD PICTURE] [STREET SCENE - SUBJECT IS TO THE LEFT PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [POOL PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUBJECT PHOTOGRAPHS [TENNIS COURTS PICTURE] [INTERIOR - LIVING ROOM PICTURE] [INTERIOR - KITCHEN PICTURE] [INTERIOR - BATHROOM PICTURE] [INTERIOR - BEDROOM PICTURE] [INTERIOR - BEDROOM PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 RAINTREE 3500 Fernandina Road Columbia, SC [PICTURE] COMPARABLE I-2 ASHTON AT LONGCREEK 1401 Longcreek Drive Columbia, SC [PICTURE] COMPARABLE I-3 STONEYCREEK 18 Berry Hill Road Columbia, SC [PICTURE] COMPARABLE I-4 ST. ANDREWS 601 St. Andrews Road Columbia, SC [PICTURE] COMPARABLE I-5 BROAD RIVER TRACE 551 River Hill Circle Columbia, SC [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------ ---------------------------------------------- --------------------------------------------- Property Name Woodland Village Apartments Ashland Commons Management Company AIMCO Carter-Haston LOCATION: Address 2221 Bush River Road 2400 Ashland Road City, State Columbia, South Carolina Columbia, SC County Lexington Lexington Proximity to Subject 1/2 mile west of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 383,904 103,488 Year Built 1972 1972 Effective Age 20 20 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) shingle roof Open Open Number of Units 308 112 Unit Mix: Type Unit Qty Mo Rent Type Unit Qty Mo 1 1Br/1Ba - 1A10 (Pine) 960 72 $605 1 2BD/1BA 652 16 $500 2 1Br/1Ba - 1B10 (Birch) 985 8 $606 3 1BD/2BA - Type 1 966 88 $610 3 2Br/2Ba - 2A20 (Maple) 1,200 48 $662 2BD/2.5BA Type 2 1,003 8 $630 4 2Br/2Ba - 2B20 (Oak) 1,295 16 $669 5 2Br/1.5Ba - 2A15 (Aspen) 1,370 36 $709 6 2Br/1.5Ba - 2B15 1,394 56 $688 (Bradfort) 7 3Br/2Ba - 3A20 (Palmetto) 1,260 40 $795 8 3Br/2Ba - 3B20 (Elm) 1,583 20 $897 9 3Br/2.5Ba - 3A25 (Maple) 1,595 12 $911 Average Unit Size (SF) 1,246 924 Unit Breakdown: Efficiency 0% 2-Bedroom 51% Efficiency 0% 2-Bedroom 86% 1-Bedroom 26% 3-Bedroom 23% 1-Bedroom 14% 3-Bedroom CONDITION: Good Good APPEAL: Good Good 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 Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X 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 X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room Gym Room OCCUPANCY: 94% 90% LEASING DATA: Available Leasing Terms 6 to 15 months 6 and 12 Months Concessions $50 off select units 1/2 month free for 2BR plan Pet Deposit $400 $150 pet Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash Water Trash Confirmation May 27, 2003; (Property Manager) June 4, 2003; (Property Manager) Telephone Number (803) 772-5737 (803) 772-2249 NOTES: None COMPARISON TO SUBJECT: Inferior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ------------------------------ ---------------------------------------------- --------------------------------------------- Property Name Churchill at St. Andrews Landmark Management Company Churchill Forge Properties Minchew Corporation LOCATION: Address 82 Foxrun Lane 19 Landmark Drive City, State Columbia, SC Columbia, SC County Lexington Lexington Proximity to Subject 1 mile west of the subject 1/2 mile north of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 515,236 364,896 Year Built 1972 1972 Effective Age 20 20 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) shingle roof Open Open Number of Units 132 336 Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 1 1BD/1BA 720 16 $525 1 1BD/1BA 700 64 $530 3 2BR/2BA 1,008 40 $620 2 2BD/1.5BA 1,142 208 $650 3 2BR/2.5BA 1,148 36 $660 3 3BD/2BA 1,292 64 $730 7 3BR/2BA 1,296 24 $720 7 3BR/2.5BA 1,344 16 $750 Average Unit Size (SF) 1,104 1,086 Unit Breakdown: Efficiency 0% 2-Bedroom 58% Efficiency 0% 2-Bedroom 62% 1-Bedroom 12% 3-Bedroom 30% 1-Bedroom 19% 3-Bedroom 19% CONDITION: Good Good APPEAL: Good Good 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 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 X Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room Gym Room OCCUPANCY: 89% 82% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 and 12 Months Concessions 1/2 off first month's lease rate $50 off 2BR plan Pet Deposit $300 $300 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash Water Trash Confirmation June 4, 2003; (Property Manager) June 4, 2003; (Property Manager) Telephone Number (803) 798-2150 (803) 798-4400 NOTES: None None COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ------------------------------ ---------------------------------------------- ----------------------------------------------- Property Name Stoneycreek St. Andrews Commons Management Company Intermark Management United Dominion Realty LOCATION: Address 18 Berry Hill Road 1200 St. Andrews Road City, State Columbia, SC Columbia, SC County Lexington Lexington Proximity to Subject 1 mile northeast of the subject 1 mile north of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 183,652 290,304 Year Built 1969 1987 Effective Age 25 10 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof Parking Type (Gr.,Cov., etc.) shingle roof Open Open Number of Units 196 336 Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 1 1BD/1BA 775 88 $498 1 1BD/1BA 712 140 $557 5 2BD/1.5BA 1,187 8 $650 1 1BD/1BA - Type 2 855 40 $585 3 2BD/2BA 1,055 96 $598 0 2BD/1BA 905 28 $648 3 2BD/2BA 1,187 4 $630 3 2BR/2BA 1,023 128 $670 Average Unit Size (SF) 937 864 Unit Breakdown: Efficiency 0% 2-Bedroom 55% Efficiency 0% 2-Bedroom 46% 1-Bedroom 45% 3-Bedroom 1-Bedroom 54% 3-Bedroom 0% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. 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 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 X Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room X Gym Room OCCUPANCY: 90% 90% LEASING DATA: Available Leasing Terms 12 Months 6 to 15 Months Concessions $250 look & lease $200 off for 6-mos. Lease; $400 for 12-mos. Pet Deposit $250 $300 - $500 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash X Water Trash Confirmation June 4, 2003; (Property Manager) June 4, 2003; (Property Manager) Telephone Number (803) 772-4814 (803) 772-0040 NOTES: None Controlled access gates COMPARISON TO SUBJECT: Inferior Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 ASHLAND COMMONS 2400 Ashland Road Columbia, SC [PICTURE] COMPARABLE R-2 CHURCHILL AT ST. ANDREWS 82 Foxrun Lane Columbia, SC [PICTURE] COMPARABLE R-3 LANDMARK 19 Landmark Drive Columbia, SC [PICTURE] COMPARABLE R-4 STONEYCREEK 18 Berry Hill Road Columbia, SC [PICTURE] COMPARABLE R-5 ST. ANDREWS COMMONS 1200 St. Andrews Road Columbia, SC [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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. Jimmy Pat James, MAI and David Johnsen, MAI 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 South Carolina Temporary Practice Permit #095-03 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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. WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. WOODLAND VILLAGE APARTMENTS, COLUMBIA, SOUTH 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 Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer. -----END PRIVACY-ENHANCED MESSAGE-----