-----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, SSnMFVt1nCuX7Aet6ufhHaucj0WOITBJ1Q44/CNbX2njD+1c0NIMPtAX4A54JSYc Dnvu0bW+yJjow1vg8BvFdg== 0000950134-04-008799.txt : 20040614 0000950134-04-008799.hdr.sgml : 20040611 20040614164831 ACCESSION NUMBER: 0000950134-04-008799 CONFORMED SUBMISSION TYPE: SC TO-T PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20040614 GROUP MEMBERS: AIMCO-GP INC GROUP MEMBERS: APARTMENT INVESTMENT AND MANGEMENT CO GROUP MEMBERS: DAVIDSON DIVERSIFIED PROPERTIES INC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000750258 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 621207077 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-T SEC ACT: 1934 Act SEC FILE NUMBER: 005-51693 FILM NUMBER: 04861915 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: POST OFFICE BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DAVIDSON DIVERSIFIED REAL ESTATE II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000750258 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 621207077 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: 1934 Act SEC FILE NUMBER: 005-51693 FILM NUMBER: 04861916 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: POST OFFICE BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 FORMER COMPANY: FORMER CONFORMED NAME: FREEMAN DIVERSIFIED REAL ESTATE II LP DATE OF NAME CHANGE: 19910501 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 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 1 d16091sctovt.txt SCHEDULE TO-T SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SCHEDULE TO TENDER OFFER STATEMENT UNDER SECTION 14(D)(1) OR 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 Davidson Diversified Real Estate II, L.P. - -------------------------------------------------------------------------------- (Name of Subject Company (Issuer) AIMCO Properties, L.P. -- Offeror Apartment Investment and Management Company AIMCO-GP, Inc. Davidson Diversified Properties, Inc. - -------------------------------------------------------------------------------- (Names of Filing Persons -- Offerors) Limited Partnership Units - -------------------------------------------------------------------------------- (Title of Class Securities) None - -------------------------------------------------------------------------------- (CUSIP Number of Class Securities) Martha L. Long Apartment Investment and Management Company 4582 Ulster Street Parkway, Suite 1100 Denver, Colorado 80237 (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 Calculation of Filing Fee
Transaction valuation* Amount of filing fee - ---------------------- -------------------- $2,480,132.72 $314.23
1 * For purposes of calculating the fee only. This amount assumes the purchase of 604 units of limited partnership interest of the subject partnership for $4,106.18 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 $126.70 per million of the aggregate amount of cash offered by the bidder. [ ] 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: $ Filing Party: Form or Registration No.: Date Filed: [ ] 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 SCHEDULE TO This Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO (the "Schedule TO") relates to the offer by AIMCO Properties, L.P., a Delaware limited partnership, to purchase units of limited partnership interest ("Units") of Davidson Diversified Real Estate II, L.P., a Delaware limited partnership (the "Partnership"), at a price of $4,106.18 per unit in cash, subject to the conditions set forth in the Offer to Purchase dated June 14, 2004, 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 with this Schedule TO as Exhibits (a)(1) and (a)(2), respectively. 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. ITEM 1. SUMMARY TERM SHEET. The information set forth under "SUMMARY TERM SHEET" in the Offer to Purchase is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION (a) The information set forth under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership" in the Offer to Purchase is incorporated herein by reference. The Partnership's principal executive offices are located at 55 Beattie Place, P.O. Box 1089, Greenville, South Carolina 29602, and its phone number is (864) 239-1000. (b) This Schedule TO relates to the units of limited partnership interest of Davidson Diversified Real Estate II, L.P., of which 1,224.25 units were issued and outstanding as of March 31, 2004. (c) Not applicable. ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. (a)-(c) This 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 Davidson Diversified Properties Inc., a Tennessee Corporation ("Davidson Diversified"). AIMCO-GP is the general partner of AIMCO OP and a wholly owned subsidiary of AIMCO. Davidson Diversified 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 Davidson Diversified is 55 Beattie Place, P.O. Box 1089, Greenville, South Carolina 29602, and its phone number is (864) 239-1000. The information set forth under "The Litigation Settlement Offer - Section 15. Information Concerning Us and Certain of Our Affiliates" and Annex I of the Offer to Purchase is incorporated herein by reference. During the last five years, none of AIMCO, AIMCO-GP, AIMCO OP or Davidson Diversified 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 prohibiting activities subject to federal or state securities laws or finding any violation with respect to such laws. 3 ITEM 4. TERMS OF THE TRANSACTION. (a) The information set forth in the Offer to Purchase and in the related Letter of Transmittal is incorporated herein by reference. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. (a) and (b) The information set forth under "The Litigation Settlement Offer - Section 8. Valuation of Units - Prior Tender Offers," "- Section 9. The Lawsuit and the Settlement," "- Section 11. Background and Reasons for the Offer" and "- Section 13. Conflicts of Interest and Transactions with Affiliates" in the Offer to Purchase is incorporated herein by reference. ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. (a), (c)(1)-(7) The information set forth under "The Litigation Settlement Offer - Section 7. Effects of the Offer," "- Section 9. The Lawsuit and the Settlement," "- Section 11. Background and Reasons for the Offer" and "- Section 14. Future Plans of the Purchaser" in the Offer to Purchase is incorporated herein by reference. ITEM 7. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a), (b) and (d) The information set forth under "The Litigation Settlement Offer - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints," "- Section 17. Source of Funds" and "- Section 21. Fees and Expenses" in the Offer to Purchase is incorporated herein by reference. ITEM 8. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. The information set forth under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Beneficial Ownership of Interests in Your Partnership" in the Offer to Purchase is incorporated herein by reference. ITEM 9. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED. Not applicable. ITEM 10. FINANCIAL STATEMENTS. Not applicable. ITEM 11. ADDITIONAL INFORMATION. (a) The information set forth under "The Litigation Settlement Offer - Section 20. Certain Legal Matters" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the Offer to Purchase and in the related Letter of Transmittal is incorporated herein by reference. 4 ITEM 12. EXHIBITS. (a)(1) Offer to Purchase dated June 14, 2004. (a)(2) Letter of Transmittal and related Instructions. (a)(3) Letter from AIMCO OP to the Limited Partners of David Diversified Real Estate II, L.P. (a)(4) Solicitation/Recommendation Statement on Schedule 14d-9, filed by Consolidated Capital Institutional Properties 2 with the Securities and Exchange Commission on June 14, 2004 (incorporated herein by reference). (b) Fourth Amended and Restated Credit Agreement among AIMCO, AIMCO OP, AIMCO/Bethesda Holdings, Inc., and NHP Management Company, Bank of America, N.A., Fleet National Bank, First Union National Bank, and the other financial institutions party thereto, dated as of March 11, 2002 (Exhibit 10.29 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by reference). (c)(1) Appraisal of Big Walnut (c)(2) Appriasal of Reflections (c)(3) Appraisal of The Trails (d) Not applicable. (g) None. (h) None. ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3. ITEM 2. SUBJECT COMPANY INFORMATION. (d) The information set forth under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership - Distributions" in the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) The information set forth under "The Litigation Settlement Offer - Section 8. Valuation of Units - Prior Tender Offers" in the Offer to Purchase is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. (c) The information set forth under "The Litigation Settlement Offer - Section 11. Background and Reasons for the Offer" and "- Section 9. The Lawsuit and the Settlement" of the Revised Litigation Settlement Offer is incorporated herein by reference. (d)-(e) The information set forth under "The Litigation Settlement Offer - Section 18. Dissenters' Rights" in the Revised Litigation Settlement Offer is incorporated herein by reference. (f) Not applicable. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. (c) The information set forth under "The Litigation Settlement Offer - Section 11. Background and Reasons for the Offer" and "- Section 9. The Lawsuit and the Settlement" in the Revised Litigation Settlement Offer is incorporated herein by reference. (e) Not applicable. 5 ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. (b) See Item 6 of the Schedule TO. (c)(8) The information set forth under "The Litigation Settlement Offer - Section 7. Effects of the Offer" of the Offer to Purchase is incorporated herein by reference ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS. (a) The information set forth under "The Litigation Settlement Offer - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints" and "- Section 11. Background and Reasons for the Offer - Settlement of Class Action" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "The Litigation Settlement Offer - Section 9. The Lawsuit and the Settlement - The Settlement of the Nuanes and Heller Complaints," "- Section 11. Background and Reasons for the Offer - Alternatives Considered by Your General Partner" and "- Section 11. Background and Reasons for the Offer - Alternative Transactions Considered by Us" in the Offer to Purchase is incorporated herein by reference. (c) The information set forth under "The Litigation Settlement Offer - Section 11. Background and Reasons for the Offer" of the Offer to Purchase is incorporated herein by reference. (d) The information set forth under "The Litigation Settlement Offer - Section 6. Material Federal Income Tax Matters" and "- Section 7. Effects of the Offer" of the Offer to Purchase is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a)-(f) The information set forth under "The Litigation Settlement Offer - Section 12. Position of the General Partner of Your Partnership with Respect to the Offer" of the Offer to Purchase is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS. (a) The information set forth under "The Litigation Settlement Offer - Section 8. Valuation of Units - Estimated Liquidation Proceeds Based on Independent Appraisal" and "- Section 12. Position of the General Partner of Your Partnership with Respect to the Offer" of the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "The Litigation Settlement Offer - Section 8. Valuation of Units - Estimated Liquidation Proceeds Based on Independent Appraisal" of the Offer to Purchase is incorporated herein by reference. (c) The information set forth under "The Litigation Settlement Offer - Section 8. Valuation of Units - Estimated Liquidation Proceeds Based on Independent Appraisal - Availability of Appraisal Reports" of the Offer to Purchase is incorporated herein by reference. 6 ITEM 10. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (c) See Item 7 of the Schedule TO. ITEM 12. THE SOLICITATION OR RECOMMENDATION. (d)-(e) The information set forth under "The Litigation Settlement Offer - Section 12. Position of the General Partner of Your Partnership with Respect to the Offer" of the Offer to Purchase is incorporated herein by reference. ITEM 13. FINANCIAL STATEMENTS. The information set forth under "The Litigation Settlement Offer - Section 15. Certain Information Concerning Your Partnership" of the Offer to Purchase, Item 7 of Part II of the Partnership's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and Item 1 of Part I of the Partnership's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 is incorporated herein by reference. ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED. (b) Not applicable. ITEM 15. ADDITIONAL INFORMATION. (b) The information set forth under the Offer to Purchase and the related Letter of Transmittal is incorporated herein by reference. ITEM 16. EXHIBITS. (f) Not applicable. 7 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: June 14, 2004 AIMCO PROPERTIES, L.P. By: AIMCO-GP, INC. Its General Partner By: /s/ Martha L. Long ------------------------------- Martha L. Long Senior Vice President APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ Martha L. Long ------------------------------- Martha L. Long Senior Vice President AIMCO-GP, INC. By: /s/ Martha L. Long ------------------------------- Martha L. Long Senior Vice President DAVIDSON DIVERSIFIED PROPERTIES, INC. By: /s/ Martha L. Long ------------------------------- Martha L. Long Senior Vice President 8 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- (a)(1) Offer to Purchase dated June 14, 2004 (a)(2) Letter of Transmittal and related Instructions. (a)(3) Letter from AIMCO OP to the Limited Partners of Davidson Diversified Real Estate II, L.P. (a)(4) Solicitation/Recommendation Statement on Schedule 14d-9, filed by Consolidated Capital Institutional Properties 2 with the Securities and Exchange Commission on June 14, 2004 (incorporated herein by reference). (b) Fourth Amended and Restated Credit Agreement among AIMCO, AIMCO OP, AIMCO/Bethesda Holdings, Inc., and NHP Management Company, Bank of America, N.A., Fleet National Bank, First Union National Bank, and the other financial institutions party thereto, dated as of March 11, 2002 (Exhibit 10.29 to AIMCO's Annual Report on Form 10-K for the year ended December 31, 2001, is incorporated herein by reference). (c)(1) Appraisal of Big Walnut (c)(2) Appraisal of Reflections (c)(3) Appraisal of The Trails
EX-99.(A)(1) 2 d16091exv99wxayx1y.txt OFFER TO PURCHASE LITIGATION SETTLEMENT OFFER (AIMCO LOGO) AIMCO PROPERTIES, L.P. is offering to purchase any and all limited partnership units in DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. FOR $4,106.18 PER UNIT IN CASH This Litigation Settlement Offer is being made as part of a COURT APPROVED SETTLEMENT of class and derivative litigation brought on behalf of limited partners in your partnership and others. FINAL COURT APPROVAL OF THE SETTLEMENT, WHICH REQUIRES THE MAKING OF THIS LITIGATION SETTLEMENT OFFER AS A CONDITION OF SETTLEMENT, HAS BEEN OBTAINED. 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. Under the terms of the settlement, the Court appointed American Appraisal Associates, Inc., as an independent appraiser, to appraise your partnership's properties and we agreed to provide an executive summary of the appraiser's report for each property owned by your partnership, attached as Annex II. A complete copy of the appraiser's report will be provided to you free of charge upon request. THE SETTLEMENT ALSO INCLUDES THE CREATION OF A $9.9 MILLION SETTLEMENT FUND FOR MEMBERS OF THE SETTLEMENT CLASS. AFTER DEDUCTING ATTORNEYS' FEES AND OTHER SETTLEMENT COSTS (INCLUDING A PORTION OF THE COSTS OF THE APPRAISALS AND CERTAIN COSTS OF ADMINISTRATION OF THE SETTLEMENT FUND), WE HAVE ALLOCATED THE REMAINING AMOUNT IN THE SETTLEMENT FUND AMONG THE 44 REMAINING PARTNERSHIPS INVOLVED IN THE SETTLEMENT, PRO RATA BASED ON PARTNERSHIP REVENUE FOR THE YEAR ENDED DECEMBER 31, 2002 ALLOCABLE TO UNITS HELD BY THE MEMBERS OF THE SETTLEMENT CLASS. YOUR PRO RATA SHARE OF THE SETTLEMENT FUND IS $203.23, WHICH IS INCLUDED IN OUR OFFER PRICE ABOVE FOR THOSE WHO TENDER. Upon the terms and subject to the conditions set forth herein, we will accept any and all units validly tendered in response to our offer. You will not pay any partnership transfer fees if you tender your units pursuant to this offer. You will pay any other fees or costs, including any transfer taxes. Our offer price will be reduced for any distributions subsequently made or declared by your partnership prior to the expiration of our offer. Our offer and your withdrawal rights will expire at midnight, New York City time, on July 13, 2004, unless we extend the deadline. Neither the court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether you should accept this Litigation Settlement 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 with respect to your particular circumstances before deciding whether or not to accept this Litigation Settlement Offer. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS LITIGATION SETTLEMENT OFFER FOR A DESCRIPTION OF RISK FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH OUR OFFER, INCLUDING THE FOLLOWING: - If you want to tender your units in the offer, you must sign a letter of transmittal in which you release us from all liability with respect to claims that were brought or that could have been brought in the class and derivative litigation, and assign to us your rights in any future claims. If you requested exclusion from the settlement but tender your units, by signing the letter of transmittal, you will release us from any claims that you would otherwise have preserved by requesting exclusion from the settlement class. If you did not request exclusion, you will release any known or unknown claims arising out of the class and derivative litigation if the judgment approving the settlement is affirmed on appeal. By executing the (Continued on next page) If you decide to accept our offer, you must complete and sign the enclosed letter of transmittal in accordance with the instructions thereto and mail or deliver the signed letter of transmittal and any other required documents to The Altman Group, Inc., which is acting as Information Agent in connection with our offer, at one of its addresses set forth on the back cover of this Litigation Settlement Offer. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THIS LITIGATION SETTLEMENT OFFER, THE LETTER OF TRANSMITTAL OR FOR A COMPLETE COPY OF AN APPRAISAL OF ANY OF YOUR PARTNERSHIP'S PROPERTIES MAY ALSO BE DIRECTED TO THE INFORMATION AGENT AT (800) 467-0821. June 14, 2004 (Continued from prior page) enclosed letter of transmittal, moreover, you will release those claims even if the judgment is reversed or otherwise vacated on appeal. - We determined our offer price without any arms-length negotiations, and independently of the recent appraisals of your partnership's property (an executive summary of each of which is attached as Annex II). Accordingly, our offer price may not reflect the fair market value of your units. In addition, the determination of our offer price has not been approved by the court or counsel for the parties in the class and derivative litigation. - Upon a liquidation of your partnership, if the properties were sold at a price equal to the value determined by the independent appraiser, we estimate that your liquidation proceeds would be approximately $9,066.27 per unit, which is higher than our offer price of $4,106.18 per unit. In order to understand the assumptions and methodology used to determine the liquidation amount, please refer to "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Estimated Liquidation Proceeds Based on Independent Appraisal." - Your general partner and the property manager are affiliates of ours and, therefore, your general partner has substantial conflicts of interest with respect to our offer. - We are making this offer with a view to making a profit and, therefore, there is a conflict between our desire to purchase your units at a low price and your desire to sell your units at a high price. - Continuation of your partnership will result in our affiliates continuing to receive management fees from your partnership. Such fees would not be payable if your partnership were liquidated. - If we do not acquire all of the outstanding units in your partnership, it is possible that we may conduct a future offer at a higher price, although we have no obligation or current intention to do so. - For any units that we acquire from you, you will not receive any future distributions from operating cash flow of your partnership or upon a sale or refinancing of property owned by your partnership. - The general partner makes no recommendation as to whether you should tender your units. NEITHER THE COURT NOR COUNSEL FOR THE PARTIES IN THE CLASS AND DERIVATIVE LITIGATION MAKE ANY RECOMMENDATION REGARDING WHETHER YOU SHOULD ACCEPT THIS LITIGATION SETTLEMENT OFFER. YOU ARE ENCOURAGED TO CAREFULLY REVIEW THIS LITIGATION SETTLEMENT OFFER, THE EXECUTIVE SUMMARY OF THE INDEPENDENT APPRAISER'S REPORT AND ANY OTHER INFORMATION AVAILABLE TO YOU AND TO SEEK THE ADVICE OF YOUR INDEPENDENT LAWYER, TAX ADVISOR AND/OR FINANCIAL ADVISOR WITH RESPECT TO YOUR PARTICULAR CIRCUMSTANCES BEFORE DECIDING WHETHER OR NOT TO ACCEPT THIS LITIGATION SETTLEMENT OFFER. THIS LITIGATION SETTLEMENT OFFER IS BEING OFFERED TO ALL CURRENT UNITHOLDERS WHETHER OR NOT THEY HAVE REQUESTED EXCLUSION FROM THE SETTLEMENT CLASS. IF YOU REQUESTED EXCLUSION FROM THE SETTLEMENT CLASS BUT TENDER YOUR UNITS, BY SIGNING THE LETTER OF TRANSMITTAL, YOU WILL RELEASE US FROM CLAIMS THAT YOU WOULD OTHERWISE HAVE PRESERVED BY REQUESTING EXCLUSION. IF YOU DID NOT REQUEST EXCLUSION, YOU WILL RELEASE ANY KNOWN OR UNKNOWN CLAIMS ARISING OUT OF THE CLASS AND DERIVATIVE LITIGATION IF THE JUDGMENT APPROVING THE SETTLEMENT IS AFFIRMED ON APPEAL. BY EXECUTING THE ENCLOSED LETTER OF TRANSMITTAL, MOREOVER, YOU WILL RELEASE THOSE CLAIMS EVEN IF THE JUDGMENT IS REVERSED OR OTHERWISE VACATED ON APPEAL. THE INFORMATION AGENT FOR THE OFFER IS: THE ALTMAN GROUP, INC. By Mail: By Overnight Courier: By Hand: P.O. Box 238 1275 Valley Brook Avenue 1275 Valley Brook Avenue Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 Lyndhurst, NJ 07071
For information, please call: TOLL FREE: (800) 467-0821 TABLE OF CONTENTS
PAGE ---- SUMMARY TERM SHEET.......................................... 1 RISK FACTORS................................................ 5 If you tender your units in this offer, you will release us from all liability and assign to us your rights in any future claims, whether or not you requested exclusion from the settlement.......................... 5 We have established the terms of our offer without reference to the recent appraisal of your partnership's properties............................................. 5 Our offer price may not represent fair market value....... 5 Our offer price does not reflect future prospects......... 5 The liquidation value of your partnership units exceeds our offer price........................................ 5 Continuation of the partnership; no time frame regarding sale of property....................................... 6 Holding your units may result in greater future value..... 6 The general partner faces conflicts of interest with respect to this offer.................................. 6 Your general partner is not making a recommendation regarding this offer................................... 6 Your general partner faces conflicts of interest relating to management fees..................................... 7 If we do not acquire all of the outstanding units in this offer, we may make a future offer at a higher price.... 7 Your tax liability resulting from a sale of your units could exceed our offer price........................... 7 You may recognize taxable gain on the amount paid from the settlement fund or if you did not request exclusion from the settlement or for release and assignment of claims if you requested exclusion from the settlement............................................. 7 If you tender your units in this offer, you will no longer be entitled to distributions from your partnership..... 8 You could recognize gain in the event of a future reduction in your partnership's liabilities............ 8 You could be precluded from transferring your units for a 12-month period........................................ 8 We could delay acceptance of, and payment for, your units.................................................. 8 There may be a possible reduction of available information about your partnership as a result of this offer....... 9 Your partnership has balloon payments on its mortgage debt................................................... 9 THE LITIGATION SETTLEMENT OFFER............................. 10 1. Terms of the Offer; Expiration Date................... 10 2. Acceptance for Payment and Payment for Units.......... 10 3. Procedure for Tendering Units......................... 11 4. Withdrawal Rights..................................... 14 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period............................. 15 6. Material Federal Income Tax Matters................... 16 7. Effects of the Offer.................................. 19 8. Valuation of Units.................................... 21 9. The Lawsuit and the Settlement........................ 32 10. Information Concerning Us and Certain of Our Affiliates............................................. 38 11. Background and Reasons for the Offer.................. 44 12. Position of the General Partner of Your Partnership With Respect to the Offer.............................. 46 13. Conflicts of Interest and Transactions with Affiliates............................................. 48 14. Future Plans of the Purchaser......................... 50 15. Certain Information Concerning Your Partnership....... 51
PAGE ---- 16. Voting Power.......................................... 55 17. Source of Funds....................................... 55 18. Dissenters' Rights.................................... 56 19. Conditions to the Offer............................... 56 20. Certain Legal Matters................................. 58 21. Fees and Expenses..................................... 58 ANNEX I -- OFFICERS AND DIRECTORS........................... I-1 ANNEX II -- EXECUTIVE SUMMARY OF INDEPENDENT APPRAISER'S REPORT.................................................... II-1
ii SUMMARY TERM SHEET This summary term sheet highlights the most material information regarding our offer, but it does not describe all of the details thereof. We urge you to read this entire Litigation Settlement Offer, which contains the full details of our offer. We have also included in the summary term sheet references to the sections of this Litigation Settlement Offer where a more complete discussion may be found. Unless otherwise indicated, references in this Litigation Settlement Offer to "we", "our", "us" or "AIMCO Properties" refers to AIMCO Properties, L.P. - The Litigation Settlement Offer. As part of the settlement of a class and derivative litigation entitled Nuanes et al. v. Insignia Financial Group, Inc. et al. and Heller v. Insignia Financial Group, Inc., et al. on behalf of your partnership and limited partners in your partnership and others, we are offering to acquire any and all of the limited partnership units of your partnership for $4,106.18 per unit in cash. Under the terms of the settlement, neither we nor our affiliates admit to any wrongdoing, and we deny liability under all claims brought in this litigation. FINAL COURT APPROVAL OF THE SETTLEMENT, WHICH REQUIRES THE MAKING OF THIS LITIGATION SETTLEMENT OFFER AS A CONDITION OF SETTLEMENT, HAS BEEN OBTAINED. 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. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date," "-- Section 7. Effects of the Offer," "-- Section 8. Valuation of Units" and "-- Section 9. The Lawsuit and the Settlement." - The Settlement Fund. The settlement also includes the creation of a $9.9 million settlement fund for members of the settlement class. After deducting attorneys' fees and other settlement costs (including a portion of the costs of the appraisals and certain costs of administration of the settlement fund), we have allocated the remaining amount in the settlement fund among the 44 remaining partnerships involved in the settlement, pro rata based on partnership revenue for the year ended December 31, 2002 allocable to units held by the members of the settlement class. Your partnership's allocated share of the settlement fund is divided by the total number of units owned by members of the settlement class, and the resulting amount is included in our offer price above. Your pro rata share of the settlement fund is $203.23. If you request exclusion from the settlement, you may tender any units in this offer and you will be entitled to receive the same price per unit as those unitholders who have not opted out of the settlement class. However, no portion of the price paid to you will come from the settlement fund. If you do not request exclusion from the settlement and do not tender any units in this offer, you will be entitled to receive your pro rata share of the settlement fund (subject to adjustment) no later than June 2005 if the Court's order approving the settlement and entering judgment thereto is affirmed on appeal. If the Court's order is reversed or vacated by virtue of the appeal, however, you will not be entitled to receive a pro rata share of the settlement fund unless you tender your units in this offer. Under the terms of the settlement, we will pay the costs of printing and mailing this Litigation Settlement Offer to limited partners of your partnership, as well as other costs of notice. In addition, we have agreed to pay 50% of the costs of the appraisals, with the other 50% to be paid from the settlement fund. - Factors in Determining the Offer Price. In determining the offer price per unit we principally considered: - your partnership's property income; - our estimate of an appropriate capitalization rate for such property income; - the location, condition and debt structure of your partnership's property; 1 - our estimate of the fees and expenses expected to be incurred by your partnership if its properties are sold; and - your partnership's other assets and liabilities. - Higher Per Unit Prices. In deciding whether or not accept our offer, you should consider the fact that, based on the recent valuation of your partnership's property by American Appraisal Associates, Inc., we estimate that the net liquidation proceeds per unit would be approximately $9,066.27, which is higher than our offer price of $4,106.18. In addition, in a prior tender offer in 2001, we offered $4,786 per unit for units in your limited partnership. See "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Prior Tender Offers" and "-- Prices on Secondary Market." - Expiration Date. Our offer expires on July 13, 2004, unless extended, and you can tender your units until our offer expires. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date." - Right to Extend the Expiration Date. Under the settlement, we can extend the expiration date of the offer in our sole discretion up to 90 business days from the date of commencement. We reserve the right to extend the offer subject to customary conditions. In the event we extend the offer, we will issue a press release or other public announcement no later than 9:00 a.m., New York City time, on the next business day after the scheduled expiration date of the offer, in accordance with Rule 14e-1(d) of the Securities Exchange Act of 1934. See "The Litigation Settlement Offer -- Section 5. Extension of Tender Period; Termination; Amendment; No Subsequent Offering Period." - How to Tender. To tender your units, complete the accompanying letter of transmittal and send it, along with any other documents required by the letter of transmittal, to the Information Agent, The Altman Group, Inc., at one of the addresses set forth on the back of this Litigation Settlement Offer. See "The Litigation Settlement Offer -- Section 3. Procedure for Tendering Units." - Release and Assignment of Future Claims. If you want to tender your units in the offer, you must sign a letter of transmittal in which you release us from all liability with respect to claims that were brought or that could have been brought in the class and derivative litigation, and assign to us your rights in any future claims. If you requested exclusion from the settlement but tender your units, by signing the letter of transmittal, you will release us from claims that you would otherwise have preserved by requesting exclusion from the settlement class. If you did not request exclusion, you will release any known or unknown claims arising out of the class and derivative litigation if the judgment approving the settlement is affirmed on appeal. By executing the enclosed letter of transmittal, moreover, you will release those claims even if the judgment is reversed or otherwise vacated on appeal. - 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, claim, suit or proceeding once the settlement is final. - Withdrawal Rights. You can withdraw your units at any time on or after August 13, 2004, including any extensions. If you properly withdraw all of the units you previously tendered in the offer, the corresponding letter of transmittal, including your release and assignment of future claims contained therein, will be deemed revoked and of no force or effect. See "The Litigation Settlement Offer -- Section 4. Withdrawal Rights." 2 - How to Withdraw. To withdraw your units, you need to send a notice of withdrawal to the Information Agent, identifying yourself and the units to be withdrawn. See "The Litigation Settlement Offer -- Section 4. Withdrawal Rights." - Tax Consequences. Your sale of units in this offer will be a taxable transaction for federal income tax purposes. The consequences to each limited partner may vary and you should consult your tax advisor on the precise tax consequences to you. See "The Litigation Settlement Offer -- Section 6. Material Federal Income Tax Matters." - Availability of Funds. We intend to pay the purchase price for any units tendered from our existing cash balances or borrowings under our line of credit. See "The Litigation Settlement Offer -- Section 17. Source of Funds." - Conditions to the Offer. There are a number of conditions to our offer, including the absence of competing tender offers, that there be no material change with respect to our financial condition, and the absence of certain changes in the financial markets. 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 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. See "The Litigation Settlement Offer -- Section 19. Conditions to the Offer." - Remaining as a Limited Partner. If you do not tender your units, you will remain a limited partner in your partnership. We have no plans to alter the operations, business or financial position of your partnership. However, if there are fewer than 300 unitholders in your partnership as a result of the offer, your partnership will 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 financial statements. See "The Litigation Settlement Offer -- Section 7. Effects of the Offer." - Who We Are. We are AIMCO Properties, L.P., the operating partnership of Apartment Investment and Management Company, a New York Stock Exchange-listed company. See "The Litigation Settlement Offer -- Section 10. Information Concerning Us and Certain of Our Affiliates." - 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 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." - No General Partner Recommendation. The general partner of your partnership makes no recommendation as to whether you should tender or refrain from tendering your units. Each limited partner should make his or her own decision whether or not to tender. 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 WITH RESPECT TO YOUR PARTICULAR CIRCUMSTANCES BEFORE DECIDING WHETHER OR NOT TO ACCEPT THIS LITIGATION SETTLEMENT OFFER. See "The Litigation Settlement Offer -- Section 12. Position of the General Partner of Your Partnership With Respect to the Offer." - 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, 3 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 forth under "The Litigation Settlement Offer -- Section 12. Position of Your General Partner of Your Partnership With Respect to the Offer." - No Subsequent Offering Period. We do not currently intend to have a subsequent offering period after the expiration date of the initial offering period (including any extensions). See "The Litigation Settlement Offer -- Section 5. Extension of Tender Offer Period; Termination; Amendment; No Subsequent Offering Period." - Additional Information. For assistance in tendering your units, please contact our Information Agent at one of the addresses or the telephone number set forth on the back cover page of this Litigation Settlement Offer. - No Recommendation by Court or Counsel for the Parties. Neither the court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether you should accept this Litigation Settlement Offer. You are encouraged to carefully review this Litigation Settlement Offer, the executive summary of the independent appraiser's report and any other information available to you and to seek the advice of your independent lawyer, tax advisor and/or financial advisor with respect to your particular circumstances before deciding whether or not to accept this Litigation Settlement Offer. 4 RISK FACTORS Before deciding whether or not to tender any of your units, you should consider carefully the following risks and disadvantages of the offer: IF YOU TENDER YOUR UNITS IN THIS OFFER, YOU WILL RELEASE US FROM ALL LIABILITY AND ASSIGN TO US YOUR RIGHTS IN ANY FUTURE CLAIMS, WHETHER OR NOT YOU REQUESTED EXCLUSION FROM THE SETTLEMENT. If you want to tender your units in response to our offer, you must sign a letter of transmittal, in which you release us and our affiliates from all liability with respect to claims that were brought or that could have been brought in the class and derivative litigation, and assign to us your rights in any future claims. If you requested exclusion from the settlement but tender your units, by signing the letter of transmittal, you will release us from claims that you would otherwise have preserved by requesting exclusion from the settlement class. If you did not request exclusion, you will release any known or unknown claims arising out of the class and derivative litigation if the judgment approving the settlement is affirmed on appeal. By executing the enclosed letter of transmittal, moreover, you will release those claims even if the judgment is reversed or otherwise vacated on appeal. WE HAVE ESTABLISHED THE TERMS OF OUR OFFER WITHOUT REFERENCE TO THE RECENT APPRAISAL OF YOUR PARTNERSHIP'S PROPERTIES. We did not base our offer price on any third party valuation or the recent appraisal of your partnership's properties, nor did we derive our offer price from any arms-length negotiation. Our offer price might be higher if it were subject to independent third party negotiations. Thus, it is uncertain whether our offer price reflects the value that would be realized upon a sale of your units to a third party. In order to understand the assumptions and methodology used to determine the liquidation amount, please refer to "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Estimated Liquidation Proceeds Based on Independent Appraisal." OUR OFFER PRICE MAY NOT REPRESENT FAIR MARKET VALUE. There is no established or regular trading market for your units, nor is there another reliable standard for determining the fair market value of the units. Our offer price does not necessarily reflect the price that you would receive in an open market for your units. Such prices could be higher than our offer price. OUR OFFER PRICE DOES NOT REFLECT FUTURE PROSPECTS. We determined our offer price by valuing your partnership's properties. Except for one property, Reflections Apartments, we used the direct capitalization approach to value your partnership's property based on the property income for the twelve months ended March 31, 2004. This method does not ascribe any value to potential future improvements in the operating performance of your partnership's property. In addition, one of your partnership's properties, Reflections Apartments, recently completed a major rehabilitation project and, as a result, a significant number of units were unrentable during the rehabilitation. In determining the value for Reflections Apartments, instead of using the direct capitalization method, which depends on property income, we ascribed a value to this property equal to its outstanding debt. This method does not ascribe any value to the projected future performance of the property. In comparison, the independent appraiser determined the value of Reflections Apartments based on pro forma net operating income. See "The Litigation Settlement Offer -- Section 8. Valuation of Units -- Estimated Liquidation Proceeds Based on Independent Appraisal." THE LIQUIDATION VALUE OF YOUR PARTNERSHIP UNITS EXCEEDS OUR OFFER PRICE. If your partnership was liquidated, and the properties sold at a price equal to their recently appraised value, we estimate that you would receive a liquidating distribution of $9,066.27 per unit, which exceeds our offer price of $4,106.18 per unit. However, the actual proceeds obtained from a liquidation are highly uncertain and could be more or less than our estimate. 5 CONTINUATION OF THE PARTNERSHIP; NO TIME FRAME REGARDING SALE OF PROPERTY. Your general partner, which is our affiliate, is proposing to continue to operate your partnership and not to attempt to liquidate it at the present time. Your partnership's prospectus, dated February 25, 1983, pursuant to which units in your partnership were sold, indicates that your partnership was intended to be self-liquidating and that it was anticipated that the partnership's properties would be sold within 10 years of their acquisition, subject to market conditions. The prospectus also indicated that there could be no assurance that the partnership would be able to so liquidate and that, unless sooner terminated as provided in the partnership agreement, the existence of the partnership would continue until the year 2008. It is not known when the property owned by your partnership may be sold. The market for units in the partnership is illiquid, and it may be difficult to sell your investment in the partnership in the future. The general partner of your partnership continually considers whether a property should be sold or otherwise disposed of after consideration of relevant factors, including prevailing economic conditions, availability of favorable financing and tax considerations, with a view to achieving maximum capital appreciation for your partnership. At the current time, the general partner of your partnership believes that a sale of the property would not be advantageous given market conditions, the condition of the property and tax considerations. In particular, the general partner considered the changes in the local rental market, the potential for appreciation in the value of a property and the tax consequences to you on a sale of property. We cannot predict when your partnership's property will be sold or otherwise disposed of. HOLDING YOUR UNITS MAY RESULT IN GREATER FUTURE VALUE. Although a liquidation of your partnership is not currently contemplated in the near future, you might receive more value if you retain your units until your partnership is liquidated. In addition, at the current time, the general partner of your partnership believes that a sale of the property would not be advantageous given market conditions, the condition of the property and tax considerations. If your partnership's property were sold in the future and the net proceeds realized therefrom were distributed to the limited partners of your partnership, the amount of such distribution might exceed our current offer price. THE GENERAL PARTNER FACES CONFLICTS OF INTEREST WITH RESPECT TO THIS OFFER. The general partner of your partnership is our affiliate and, therefore, has substantial conflicts of interest with respect to our offer. We are making this offer with a view to making a profit. There is a conflict between our desire to purchase your units at a low price and your desire to sell your units at a high price. We determined our offer price without negotiation with any other party, including any general or limited partner. YOUR GENERAL PARTNER IS NOT MAKING A RECOMMENDATION REGARDING THIS OFFER. Your general partner of your partnership (which is our affiliate) makes no recommendation as to whether or not you should tender or refrain from tendering your units. Although the general partner believes the offer is fair, you must make your own decision whether or not to participate in the 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. 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 with respect to your particular circumstances before deciding whether or not to accept this Litigation Settlement Offer. 6 YOUR GENERAL PARTNER FACES CONFLICTS OF INTEREST RELATING TO MANAGEMENT FEES. Because we or our subsidiaries receive fees for managing your partnership and its property, a conflict of interest exists between continuing the partnership and receiving such fees, and the liquidation of the partnership and the termination of such fees. Also, a decision of the limited partners of your partnership to remove, for any reason, the general partner of your partnership or the property manager of the property owned by your partnership would result in a decrease or elimination of the substantial fees to which they are entitled for services provided to your partnership. IF WE DO NOT ACQUIRE ALL OF THE OUTSTANDING UNITS IN THIS OFFER, WE MAY MAKE A FUTURE OFFER AT A HIGHER PRICE. It is possible that we may conduct a future offer at a higher price, although we have no obligation or current intention to do so. In accordance with the terms of the settlement, we may, but are not obligated to, make another Litigation Settlement Offer within 18 months of the order finally approving the settlement. If you decide not to tender in this offer and decide to tender in a future settlement offer, you will receive your pro rata share of the settlement fund at that time. Our decision to conduct a future offer will depend on, among other things, the performance of the partnership, prevailing economic conditions, and our interest in acquiring additional units. In addition, 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 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. YOUR TAX LIABILITY RESULTING FROM A SALE OF YOUR UNITS COULD EXCEED OUR OFFER PRICE. Your sale of units for cash will be a taxable sale, with the result that you will recognize taxable gain or loss measured by the difference between the amount realized on the sale and your adjusted tax basis in the units of limited partnership interest of your partnership you transfer to us. The "amount realized" with respect to a unit of limited partnership interest you transfer to us will be equal to the sum of the amount of cash received by you for the unit sold pursuant to the offer plus the amount of partnership liabilities allocable to your unit. Depending on your basis in the units and your tax position, your tax liability resulting from a sale of units to us pursuant to the offer could exceed our offer price. The particular tax consequences for you of our offer will depend upon a number of factors related to your tax situation, including your tax basis in the units you transfer to us, whether you dispose of all of your units, and whether you have available suspended passive losses, credits or other tax items to offset any gain recognized as a result of your sale of your units. We may also be required by state or local tax laws to withhold a portion of our offer price. Because the income tax consequences of tendering units will not be the same for everyone, you should consult your tax advisor to determine the tax consequences of the offer to you. YOU MAY RECOGNIZE TAXABLE GAIN ON THE AMOUNT PAID FROM THE SETTLEMENT FUND IF YOU DID NOT REQUEST EXCLUSION FROM THE SETTLEMENT OR FOR RELEASE AND ASSIGNMENT OF CLAIMS IF YOU REQUESTED EXCLUSION FROM THE SETTLEMENT. Our offer price includes $203.23, your pro rata share of the settlement fund, unless you request exclusion from the settlement or the Court's order approving the settlement is reversed or vacated by virtue of the appeal. If you request exclusion from the settlement or the Court's order approving the settlement is reversed or vacated by virtue of the appeal, an equivalent portion of the price paid to you may nevertheless be deemed a payment for your release and assignment of claims. We intend to treat the entire offer price as consideration paid to you for your units, regardless of whether you requested exclusion from the settlement. The proper treatment for federal income tax purposes of your receipt of amounts from the settlement fund or deemed payments for your release and assignment of claims is uncertain under current law. No opinion or assurance can be given that the Internal Revenue Service (the "IRS") will not 7 challenge the treatment of the $203.23 portion of the offer price as a separate payment from the settlement fund or as a deemed payment for your release and assignment of claims and not as additional consideration for the units, and assert that, in either case, the $203.23 portion should be treated as an ordinary income payment in exchange for your release and/or assignment of current and future claims. Moreover, while the IRS has stated that it generally will not treat attorneys' fees and costs that are paid directly to class counsel from a settlement fund as constituting income, profit, or gain of a member of the class (so long as the class is an opt-out class and the class member does not have a separate contingency fee arrangement with the class counsel), any special awards paid to claimants who actively aid in the prosecution of a class action or who devote substantial time or expense on behalf of a settlement class will be treated as payments for services rendered and will be includable in that member's gross income. You should consult your tax advisor regarding the tax consequences to you with respect to your right to, and your receipt of, amounts from the settlement fund or deemed payments for your release and assignment of claims, and the treatment of special awards, attorneys' fees and costs. IF YOU TENDER YOUR UNITS IN THIS OFFER, YOU WILL NO LONGER BE ENTITLED TO DISTRIBUTIONS FROM YOUR PARTNERSHIP. If you tender your units in response to our offer, you will transfer to us all right, title and interest in and to all of the units we accept, and the right to receive all distributions in respect of such units on and after the date on which we accept such units for purchase. Accordingly, for any units that we acquire from you, you will not receive any future distributions from operating cash flow of your partnership or upon a sale or refinancing of the property owned by your partnership. YOU COULD RECOGNIZE GAIN IN THE EVENT OF A FUTURE REDUCTION IN YOUR PARTNERSHIP'S LIABILITIES. Generally, a decrease in your share of partnership liabilities is treated, for federal income tax purposes, as a deemed cash distribution. Although the general partner of your partnership does not have any current plan or intention to reduce the liabilities of your partnership, it is possible that future economic, market, legal, tax or other considerations may cause the general partner to reduce your share of the partnership liabilities. If you retain all or a portion of your units and your share of the partnership liabilities were to be reduced, you would be treated as receiving a hypothetical distribution of cash resulting from a decrease in your share of the liabilities of the partnership. Any such hypothetical distribution of cash would be treated as a nontaxable return of capital to the extent of your adjusted tax basis in your units and thereafter as gain. 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. YOU COULD BE PRECLUDED FROM TRANSFERRING YOUR UNITS FOR A 12-MONTH PERIOD. Your partnership's agreement of limited partnership prohibits any transfer of an interest if such transfer, together with all other transfers during the preceding 12 months, would cause 50% or more of the total interest in capital and profits of your partnership to be transferred within such 12-month period. If we acquire a significant percentage of the interest in your partnership, you may not be able to transfer your units for a 12-month period following our offer. WE COULD DELAY ACCEPTANCE OF, AND PAYMENT FOR, YOUR UNITS. We reserve the right to extend the period of time during which our offer is open and thereby delay acceptance for payment of any tendered units. The offer may be extended up to 90 business days from the date of commencement of the offer, and no payment will be made in respect of tendered units until the expiration of the offer and acceptance of units for payment. 8 THERE MAY BE A POSSIBLE REDUCTION OF AVAILABLE INFORMATION ABOUT YOUR PARTNERSHIP AS A RESULT OF THIS OFFER. 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-K containing annual audited financial statements, and quarterly reports on Form 10-Q 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." YOUR PARTNERSHIP HAS BALLOON PAYMENTS ON ITS MORTGAGE DEBT. Your partnership has a balloon payment of approximately $4,946,000 due on its mortgage debt in September 2007 and a balloon payment of approximately $3,010,000 due on its mortgage debt in December 2009. In addition, one of your partnership's lenders can exercise a call option commencing in February 2009 and every fifth anniversary thereafter until maturity in January 2029, in which event the outstanding principal balance and any related interest expense are due and payable on the call date. If the lender's call option is not exercised, the mortgage is fully amortizing through January 2029. Your partnership may have to refinance such debt, sell assets or otherwise obtain additional funds prior to the balloon payment due date, or it will be in a default and could lose the property to foreclosure. 9 THE LITIGATION SETTLEMENT OFFER 1. TERMS OF THE OFFER; EXPIRATION DATE Upon the terms and subject to the conditions to 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 July 13, 2004, 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 to 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 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, 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 June 14, 2004 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. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR UNITS Upon the terms and subject to the conditions to 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 10 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 August 13, 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. 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. PROCEDURE FOR TENDERING UNITS Valid Tender. To validly tender units pursuant to the offer, a properly completed and duly executed letter of transmittal, and any other required documents must be received by the Information Agent, at one of its addresses set forth on the back cover of this Litigation Settlement Offer, on or prior to the expiration date. You may tender all or any portion of your units. No alternative, conditional or contingent tenders will be accepted. Signature Requirements. If the letter of transmittal is signed by the registered holder of a unit and payment is to be made directly to that holder, then no signature guarantee is required on the letter of transmittal. Similarly, if a unit is tendered for the account of a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or a commercial bank, savings bank, credit union, savings and loan association or trust company having an office, branch or agency in the United States (each an "Eligible Institution"), no signature guarantee is required on the letter of transmittal. However, in all other cases, all signatures on the letter of transmittal must be guaranteed by an Eligible Institution. In order for you to tender in the offer, your units must be validly tendered and not withdrawn on or prior to the expiration date. THE METHOD OF DELIVERY OF THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR OPTION AND RISK, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE INFORMATION AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. 11 Appointment as Proxy; Power of Attorney. By executing the letter of transmittal, you are irrevocably appointing us and our designees as your proxy, in the manner set forth in the letter of transmittal and each with full power of substitution, to the fullest extent of your rights with respect to the units tendered by you and accepted for payment by us. Each such proxy shall be considered coupled with an interest in the tendered units. Such appointment will be effective when, and only to the extent that, we accept the tendered units for payment. Upon such acceptance for payment, all prior proxies given by you with respect to the units will, without further action, be revoked, and no subsequent proxies may be given (and if given will not be effective). We and our designees will, as to those units, be empowered to exercise all voting and other rights as a limited partner as we, in our sole discretion, may deem proper at any meeting of limited partners, by written consent or otherwise. We reserve the right to require that, in order for units to be deemed validly tendered, immediately upon our acceptance for payment of the units, we must be able to exercise full voting rights with respect to the units, including voting at any meeting of limited partners and/or limited partners then scheduled or acting by written consent without a meeting. By executing the letter of transmittal, you agree 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 our directions. The proxy granted by you to us will remain effective and be irrevocable for a period of ten years following the termination of our offer. By executing the letter of transmittal, you also irrevocably constitute and appoint us and our designees as your attorneys-in-fact, each with full power of substitution, to the full extent of your rights with respect to the units tendered by you and accepted for payment by us. Such appointment will be effective when, and only to the extent that, we pay for your units and will remain effective and be irrevocable for a period of ten years following the termination of our offer. You will agree not to exercise any rights pertaining to the tendered units without our prior consent. Upon such payment, all prior powers of attorney granted by you with respect to such units will, without further action, be revoked, and no subsequent powers of attorney may be granted (and if granted will not be effective). Pursuant to such appointment as attorneys-in-fact, we and our designees each will have the power, among other things, (i) to transfer ownership of such units on the partnership books maintained by your general partner (and execute and deliver any accompanying evidences of transfer and authenticity it may deem necessary or appropriate in connection therewith), (ii) upon receipt by the Information Agent of the offer consideration, to become a substituted limited partner, to receive any and all distributions made by your partnership on or after the date on which we acquire such units, and to receive all benefits and otherwise exercise all rights of beneficial ownership of such units in accordance with the terms of our offer, (iii) to execute and deliver to the general partner of your partnership a change of address form instructing the general partner to send any and all future distributions to which we are entitled pursuant to the terms of the offer in respect of tendered units to the address specified in such form, and (iv) to endorse any check payable to you or upon your order representing a distribution to which we are entitled pursuant to the terms of our offer, in each case, in your name and on your behalf. Assignment of Interest in Future Distributions. By executing the letter of transmittal, you will irrevocably assign to us and our assigns all of your right, title and interest in and to any and all distributions made by your partnership from any source and of any nature, including, without limitation, distributions in the ordinary course, distributions from sales of assets, distributions upon liquidation, winding-up, or dissolution, payments in settlement of existing or future litigation, and all other distributions and payments from and after the expiration date of our offer, in respect of the units tendered by you and accepted for payment and thereby purchased by us. If, after the unit is accepted for payment and purchased by us, you receive any distribution from any source and of any nature, including, without limitation, distributions in the ordinary course, distributions from sales of assets, distributions upon liquidation, winding-up or dissolution, payments in settlement of existing or future litigation and all other distributions and payments, from your partnership in respect of such unit, you will agree to forward promptly such distribution to us. 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, 12 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. In addition, you will expressly waive and relinquish, to the fullest extent permitted by law and consistent with the releases described herein, the provisions, rights and benefits of Section 1542 of the Civil Code of California ("Section 1542"), which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. You will have also waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, that is similar, comparable or equivalent to Section 1542. You may hereafter discover facts in addition to or different from those you now know or believe to be true with respect to the subject matter of the Released Claims, but you will be deemed to have fully, finally and forever settled and released any and all Released Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, that now exist or heretofore have existed upon any theory of law or equity now existing, including, but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery of the existence of such different or additional facts. You will acknowledge and agree that the releases contained in the letter of transmittal is intended to include the Released Claims, which you may have and which you do not know or suspect to exist in your favor against the Releasees and that the releases contained in the letter of transmittal extinguishes those claims. You will represent and warrant to the Releasees that you have been advised by your attorney of the effect and import of the provisions of Section 1542, and that you have not assigned or otherwise transferred or subrogated any interest in the Released Claims. 13 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. 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, is unlawful. We also reserve the absolute right to waive or amend any of the conditions to 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 or with respect to a particular limited partner, we will waive such condition with respect to all other tenders of units or all other limited partners in this offer as well. Our interpretation of the terms and conditions to 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. Backup Federal Income Tax Withholding. To prevent the possible application of back-up federal income tax withholding with respect to payment of the offer price, you must provide us with your correct taxpayer identification number. See the instructions to the letter of transmittal and "The Litigation Settlement Offer -- Section 6. Material Federal Income Tax Matters." State and Local Withholding. If you tender any units pursuant to this Litigation Settlement Offer, we may be required under state or local tax laws to deduct and withhold a portion of our offer price. You should consult your tax advisor concerning whether any state or local withholding would be required on a disposition of your units and whether such amounts may be available to you as a credit on your state or local tax returns. FIRPTA Withholding. To prevent the withholding of federal income tax in an amount equal to 10% of the amount realized on the disposition (the amount realized is generally the offer price plus the partnership liabilities allocable to each unit purchased), you must certify that you are not a foreign person if you tender units. See the instructions to the letter of transmittal and "The Litigation Settlement Offer -- Section 6. Material Federal Income Tax Matters." Transfer Taxes. The amount of any transfer taxes (whether imposed on the registered holder of units or any person) payable on account of the transfer of units will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. Binding Agreement. A tender of a unit pursuant to any of the procedures described above and the acceptance for payment of such unit will constitute a binding agreement between the tendering limited partner and us on the terms set forth in this Litigation Settlement Offer and the letter of transmittal. 4. WITHDRAWAL RIGHTS You may withdraw your tendered units at any time prior to the expiration date, including any extensions thereof, or on or after August 13, 2004 if the units have not been previously accepted for payment. For a withdrawal to be effective, a written notice of withdrawal must be timely received by the Information Agent at one of its addresses set forth on the back cover of this Litigation Settlement Offer. Any such notice of withdrawal must specify the name of the person who tendered, the number of units to 14 be withdrawn and the name of the registered holder of such units, if different from the person who tendered. In addition, the notice of withdrawal must be signed by the person who signed the letter of transmittal in the same manner as the letter of transmittal was signed. If purchase of, or payment for, a unit is delayed for any reason, or if we are unable to purchase or pay for a unit for any reason, then, without prejudice to our rights under the offer, tendered units may be retained by the Information Agent; subject, however, to our obligation, pursuant to Rule 14e-1(c) under the Exchange Act, to pay the offer price in respect of units tendered or return those units promptly after termination or withdrawal of our offer. Any units properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of our offer. However, withdrawn units may be re-tendered at any time prior to the expiration date by following the procedures described in "The Litigation Settlement Offer -- Section 3. Procedure for Tendering Units." All questions as to the validity and form (including time of receipt) of notices of withdrawal will be determined by us in our reasonable discretion, which determination will be final and binding on all parties. Neither the Information Agent, any other person, nor we will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 5. EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT; NO SUBSEQUENT OFFERING PERIOD 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, (iii) upon the occurrence of any of the conditions specified in "The Litigation Settlement Offer -- Section 19. Conditions to 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. If we extend the offer, or if we delay payment for a unit (whether before or after its acceptance for payment) or are unable to pay for a unit pursuant to our offer for any reason, then, without prejudice to our rights under the offer, the Information Agent may retain tendered units and those units may not be withdrawn except to the extent tendering limited partners are entitled to withdrawal rights as described in "The Litigation Settlement Offer -- Section 4. Withdrawal Rights;" subject, however, to our obligation, pursuant to Rule 14e-1(c) under the Exchange Act, to pay the offer price in respect of units tendered or return those units promptly after termination or withdrawal of the offer. If we make a material change in the terms of our offer, or if we waive a material condition to our offer, we will extend the offer and disseminate additional tender offer materials to the extent required by Rules 14d-4 and 14e-1 under the Exchange Act. The minimum period during which the offer must remain open following any material change in the terms of the offer, other than a change in price or a change in percentage of securities sought or a change in any dealer's soliciting fee, if any, will depend upon the facts and circumstances, including the materiality of the change, but generally will be five business days. With respect to a change in price or, subject to certain limitations, a change in the percentage of securities sought or a change in any dealer's soliciting fee, if any, a minimum of ten business days from the date of 15 such change is generally required to allow for adequate dissemination to limited partners. Accordingly, if, prior to the expiration date, we increase (other than increases of not more than two percent of the outstanding units) or decrease the number of units being sought, or increase or decrease the offer price, and if the offer is scheduled to expire at any time earlier than the tenth business day after the date that notice of such increase or decrease is first published, sent or given to limited partners, the offer will be extended at least until the expiration of such ten business days. As used in this Litigation Settlement Offer, "business day" means any day other than a Saturday, Sunday or a Federal holiday, and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time. Pursuant to Rule 14d-11 under the Exchange Act, subsequent offering periods may be provided in tender offers for "any and all" outstanding units of a partnership. A subsequent offering period is an additional period of from three to twenty business days following the expiration date of the offer, including any extensions, in which limited partners may continue to tender units not tendered in the offer for the offer price. We do not currently intend to offer a subsequent offering period. 6. MATERIAL FEDERAL INCOME TAX MATTERS The following summary is a discussion of the material United States federal income tax consequences of the offer that may be relevant to (i) limited partners who tender some or all of their units for cash pursuant to our offer, and (ii) limited partners who do not tender any of their units pursuant to our offer. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, rulings issued by the IRS, and judicial decisions, all as of the date of this Litigation Settlement Offer. All of the foregoing is subject to change or alternative construction, possibly with retroactive effect, and any such change or alternative construction could affect the continuing accuracy of this summary. This summary is based on the assumption that your partnership is operated in accordance with its organizational documents including its certificate of limited partnership and agreement of limited partnership. This summary does not purport to discuss all aspects of federal income taxation which may be important to a particular person in light of its investment or tax circumstances, or to certain types of investors subject to special tax rules (including financial institutions, broker-dealers, insurance companies, and, except to the extent discussed below, tax-exempt organizations and foreign investors, as determined for United States federal income tax purposes), nor (except as otherwise expressly indicated) does it describe any aspect of state, local, foreign or other tax laws. This summary assumes that the units are held by the limited partners for investment purposes (commonly referred to as "capital assets"), and are not held by the limited partners for sale to customers as dealer property under the Code. No advance ruling has been or will be sought from the IRS regarding any matter discussed in this Litigation Settlement Offer. Further, no opinion of counsel has been obtained with regard to the offer. THE UNITED STATES FEDERAL INCOME TAX TREATMENT OF A LIMITED PARTNER PARTICIPATING IN THE OFFER DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF UNITED STATES FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SELLING THE INTERESTS IN YOUR PARTNERSHIP REPRESENTED BY YOUR UNITS PURSUANT TO OUR OFFER OR OF A DECISION NOT TO SELL IN LIGHT OF YOUR SPECIFIC TAX SITUATION. Tax Consequences to Limited Partners Tendering Units for Cash. The sale of a unit of limited partnership interest pursuant to this offer will be a taxable transaction for United States federal income tax purposes. You will recognize gain or loss on a sale of a unit of limited partnership interest of your partnership equal to the difference, if any, between (i) your "amount realized" on the sale and (ii) your adjusted tax basis in the unit sold. The "amount realized" with respect to a unit will be equal to the sum of the amount of cash received by you for the unit sold pursuant to the offer plus the amount of partnership liabilities allocable to your unit (as determined under Section 752 of the Code). Thus, your tax liability resulting from a sale of a unit could exceed the cash received upon such sale. Adjusted Tax Basis. If you acquired your units for cash, your initial tax basis in such units was generally equal to your cash investment in your partnership increased by your share of partnership 16 liabilities at the time you acquired such units. Your initial tax basis generally has been increased by (i) your share of partnership income and gains, and (ii) any increases in your share of partnership liabilities, and has been decreased (but not below zero) by (i) your share of partnership cash distributions, (ii) any decreases in your share of partnership liabilities, (iii) your share of partnership losses, and (iv) your share of nondeductible partnership expenditures that are not chargeable to capital. For purposes of determining your adjusted tax basis in your units immediately prior to a disposition of your units, your adjusted tax basis in your units will include your allocable share of partnership income, gain or loss for the taxable year of disposition. If your adjusted tax basis is less than your share of partnership liabilities (e.g., as a result of the effect of net loss allocations and/or distributions exceeding the cost of your unit), your gain recognized with respect to a unit pursuant to the offer will exceed the cash proceeds realized upon the sale of such unit, and may result in a tax liability to you that exceeds the cash received upon such sale. Character of Gain or Loss Recognized Pursuant to the Offer. Except as described below, the gain or loss recognized by you on a sale of a unit pursuant to the offer generally will be treated as a long-term capital gain or loss if you held the unit for more than one year. Long-term capital gains recognized by individuals and certain other noncorporate taxpayers generally will be subject to a maximum United States federal income tax rate of 15%. If the amount realized with respect to a unit of limited partnership interest of your partnership that is attributable to your share of "unrealized receivables" of your partnership exceeds the tax basis attributable to those assets, such excess will be treated as ordinary income. Among other things, "unrealized receivables" include depreciation recapture for certain types of property. In addition, the maximum United States federal income tax rate applicable to persons who are noncorporate taxpayers for net capital gains attributable to the sale of depreciable real property (which may be determined to include an interest in a partnership such as your units) held for more than one year is currently 25% (rather than 15%) with respect to that portion of the gain attributable to depreciation deductions previously taken on the property. Certain limitations apply to the use of capital losses. If you tender a unit of limited partnership interest of your partnership in the offer, you will be allocated a share of partnership taxable income or loss for the year of tender with respect to any units sold. You will not receive any future distributions on units tendered on or after the date on which such units are accepted for purchase and, accordingly, you may not receive any distributions with respect to such accreted income. Such allocation and any partnership cash distributions to you for that year will affect your adjusted tax basis in your unit and, therefore, the amount of your taxable gain or loss upon a sale of a unit pursuant to the offer. Passive Activity Losses. The passive activity loss rules of the Code limit the use of losses derived from passive activities, which generally include investments in limited partnership interests such as your units. An individual, as well as certain other types of investors, generally cannot use losses from passive activities to offset nonpassive activity income received during the taxable year. Passive losses that are disallowed for a particular tax year are "suspended" and may be carried forward to offset passive activity income earned by the investor in future taxable years. In addition, such suspended losses may be claimed as a deduction, subject to other applicable limitations, upon a taxable disposition of the investor's interest in such activity. Accordingly, if your investment in your units is treated as a passive activity, you may be able to reduce gain from the sale of your units pursuant to the offer with passive losses in the manner described below. If you sell all or a portion of your units pursuant to the offer and recognize a gain on your sale, you will generally be entitled to use your current and "suspended" passive activity losses (if any) from your partnership and other passive sources to offset that gain. In general, if you sell all or a portion of your units pursuant to the offer and recognize a loss on such sale, you will be entitled to deduct that loss currently (subject to other applicable limitations) against the sum of your passive activity income from your partnership for that year (if any) plus any passive activity income from other sources for that year. If you sell all of your units pursuant to the offer, the balance of any "suspended" losses from your partnership that were not otherwise utilized against passive activity income as described in the two preceding sentences will generally no longer be suspended and will generally therefore be deductible (subject to any other applicable limitations) by you against any other income for that year, regardless of 17 the character of that income. You are urged to consult your tax advisor concerning whether, and the extent to which, you have available "suspended" passive activity losses from your partnership or other investments that may be used to reduce gain from the sale of units pursuant to the offer. Release and Assignment of Claims. Our offer price includes $203.23, your pro rata share of the settlement fund, unless you request exclusion from the settlement or the Court's order approving the settlement is reversed or vacated by virtue of the appeal. If you request exclusion from the settlement or the Court's order approving the settlement is reversed or vacated by virtue of the appeal, an equivalent portion of the price paid to you may nevertheless be deemed a payment for your release and assignment of claims. We intend to treat the entire offer price as consideration paid to you for your units, regardless of whether you requested exclusion from the settlement. The proper treatment for federal income tax purposes of your receipt of amounts from the settlement fund or deemed payments for your release and assignment of claims is uncertain under current law. No opinion or assurance can be given that the IRS will not challenge the treatment of the $203.23 portion of the offer price as a separate payment from the settlement fund or as a deemed payment for your release and assignment of claims and not as additional consideration for the units, and assert that, in either case, the $203.23 portion should be treated as an ordinary income payment in exchange for your release and/or assignment of current and future claims. Moreover, while the IRS has stated that it generally will not treat attorneys' fees and costs that are paid directly to class counsel from a settlement fund as constituting income, profit, or gain of a member of the class (so long as the class is an opt-out class and the class member does not have a separate contingency fee arrangement with the class counsel), any special awards paid to claimants who actively aid in the prosecution of a class action or who devote substantial time or expense on behalf of a settlement class will be treated as payments for services rendered and will be includable in that member's gross income. You should consult your tax advisor regarding the tax consequences to you with respect to your right to, and your receipt of, amounts from the settlement fund or deemed payments for your release and assignment of claims, and the treatment of special awards, attorneys' fees and costs. Information Reporting, Backup Withholding and FIRPTA. If you tender any units, you must report the transaction by filing a statement with your United States federal income tax return for the year of the tender which provides certain required information to the IRS. To prevent the possible application of back-up United States federal income tax withholding with respect to the payment of the offer consideration, you are generally required to provide us with your correct taxpayer identification number. Back-up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules may be refunded or credited against your United States federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service. See the instructions to the letter of transmittal. Gain realized by a foreign person on the sale of a unit pursuant to the offer will be subject to federal income tax under the Foreign Investment in Real Property Tax Act of 1980. Under these provisions of the Code, if we acquire an interest held by a foreign person, we will be required to deduct and withhold 10% of the amount realized by such foreign person on the disposition. Amounts withheld would be creditable against a foreign person's United States federal income tax liability and, if in excess thereof, a refund could be claimed from the Internal Revenue Service by filing a United States income tax return. See the instructions to the letter of transmittal. State and Local Withholding. If you tender any units pursuant to this Litigation Settlement Offer, we may be required under state or local tax laws to deduct and withhold a portion of our offer price. You should consult your tax advisor concerning whether any state or local withholding would be required on a disposition of your units and whether such amounts may be available to you as a credit on your state or local tax returns. 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 18 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-Tendering 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). 7. EFFECTS OF THE OFFER 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., Davidson Diversified Properties, Inc. and AIMCO IPLP, L.P. (which are our affiliates), own 620.25 units, or 50.66%, 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 ($(241,000) for the three months ended March 31, 2004) and net book value ($(3,821,000) as of March 31, 2004) will increase to 100%. AIMCO-GP owns a 1% interest in AIMCO Properties, L.P. and AIMCO, through its subsidiaries, owns an 89% interest in AIMCO Properties. 19 Distributions to Us. If we acquire units in the offer, we will participate in any subsequent distributions to limited partners to the extent of the units purchased. Partnership Status. The rules regarding whether a partnership is treated as a "publicly traded partnership" taxable as a corporation are not certain. We believe that our purchase of units in accordance with the terms of our offer should not adversely affect the issue of whether your partnership is classified as a partnership for federal income tax purposes, because, taking into account all of the facts and circumstances, the general partner of your partnership believes that the partnership interests in your partnership should not be treated as readily tradable on a secondary market or the substantial equivalent thereof. Business. Our offer will not affect the operation of the property owned by your partnership. We will continue to control the general partner of your partnership and the property manager, both of which will remain the same. Consummation of the offer will not affect your agreement of limited partnership, the operations of your partnership, the business and properties owned by your partnership or any other matter relating to your partnership, except it would result in us increasing our ownership of units. We have no current intention of changing the fee structure for your general partner or the manager of your partnership's property. Effect on Trading Market; Registration Under Section 12(g) of the Exchange Act. If a substantial number of units are purchased pursuant to the offer, the result will be a reduction in the number of limited partners in your partnership. In the case of certain kinds of equity securities, a reduction in the number of securityholders might be expected to result in a reduction in the liquidity and volume of activity in the trading market for the security. In the case of your partnership, however, there is no established public trading market for the units and, therefore, we do not believe a reduction in the number of limited partners will materially further restrict your ability to find purchasers for your units through secondary market transactions. 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 783 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. A Schedule K-1 is an information statement that contains tax information for the fiscal year of your partnership, such as your allocation of income, deductions, credits, gains and losses of your partnership for federal income tax purposes. In comparison, the periodic reports filed by your partnership under the Exchange Act contain your partnership's annual and quarterly financial statements prepared in accordance with generally accepted accounting principles. These periodic reports filed under the Exchange Act also include information regarding your partnership's business and property and a discussion regarding your partnership's financial condition and results of operations. Additionally, your partnership will not be required to provide current reports on Form 8-K, describing certain material events. See "The Litigation Settlement Offer -- Section 1. Terms of the Offer; Expiration Date." Accounting Treatment. Upon consummation of the offer, we will account for our investment in any acquired units under the purchase method of accounting. There will be no effect on the accounting treatment of your partnership as a result of the offer. 20 8. VALUATION OF UNITS Determination of Offer Price. We determined the offer price by estimating the net equity value of units of limited partnership interest based on our valuation of your partnership's properties. Except for Reflections Apartments, we used the direct capitalization method to value your partnership's properties. The direct capitalization method involves applying a capitalization rate to the property income. A capitalization rate is a percentage (rate of return), commonly applied by purchasers of residential real estate to property income to determine the present value of income property. The lower the capitalization rate utilized, the higher the value produced, and the higher the capitalization rate utilized, the lower the value produced. Our method for selecting a capitalization rate generally begins with each property being assigned a location and condition rating (e.g., "A" for excellent, "B" for good, "C" for fair, and "D" for poor). We then adjust the capitalization rate based on whether the mortgage debt that the property is subject to bears interest at a rate above or below prevailing market rates and based on the amount of any prepayment penalty. Generally, the capitalization rate would be increased if the mortgage debt bears interest at above market rates. The evaluation of a property's location and condition, and the determination of an appropriate capitalization rate for a property, is subjective in nature, and others evaluating the same property might use a different capitalization rate and derive a different property value. Property income is the difference between the revenues from the property and related costs and expenses, excluding income derived from sources other than regular activities and before income deductions. Income deductions include interest, income taxes, prior-year adjustments, charges to reserves, write-offs of intangibles, adjustments arising from major changes in accounting methods and other material and nonrecurrent items. In this respect, property income differs from net income disclosed in the partnership's financial statements, which does not exclude these income sources and deductions. Although the direct capitalization method is a widely accepted way of valuing real estate, there are a number of other methods available to value real estate, each of which may result in different valuations of a property. 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 court appointed independent appraiser also utilized the direct capitalization method as one of 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. Currently, multifamily net operating income has been in decline making use of higher pro forma net operating income result in increased values compared to use of current property income. Accordingly, we believe that it is more appropriate to rely on current property income in our valuation methodology. Reflections Apartments completed a major rehabilitation project during the year ended December 31, 2003 and, as a result, a significant number of units were unrentable during the rehabilitation. Accordingly, until the property returns to historic occupancy levels, it would not be meaningful to value the property using the direct capitalization method based on property income during this period. For purposes of determining our offer price, we have ascribed a value to this property equal to its outstanding indebtedness. We determined your partnership's value as follows: - First, we estimated the gross value of your partnership's properties. In the case of Reflections Apartments, we valued the property equal to its outstanding indebtedness. In the case of Big Walnut and Trails, we used the direct capitalization method. We determined property income for 21 each of your partnership's properties for the twelve months ended March 31, 2004, and then divided such amount by the property's capitalization rate to derive an estimated gross property value.
ESTIMATED CAPITALIZATION GROSS PROPERTY PROPERTY PROPERTY INCOME RATE VALUE - -------- --------------- -------------- -------------- Big Walnut.................................. $584,247 8.5% $ 6,873,496 Reflections (Debt Value Only)............... N/A N/A 21,854,162 Trails...................................... 770,835 8.75% 8,809,538 ----------- Estimated Total Gross Property Value........ $37,537,196 ===========
- Second, we calculated the value of the equity of your partnership by adding to the aggregate gross property value of all properties the value of the non-real estate assets of your partnership and deducting its liabilities, including mortgage debt and debt owed by your partnership to the general partner or its affiliates. We deducted from these values certain other costs, including required capital expenditures, deferred maintenance and estimated closing costs, to derive the net equity value of your partnership. - Finally, we allocated 99% of this net equity value to limited partners, which is the percentage of net proceeds that would be paid to limited partners in the event of a liquidation of your partnership. Our offer price represents the net equity value per unit determined in this manner, plus a pro rata portion of the settlement fund, as indicated below. Estimated gross valuation of partnership properties......... $ 37,537,196 Plus: Cash and cash equivalents............................. 411,179 Plus: Other partnership assets (net of tenant security deposits)................................................. 627,461 Less: Mortgage debt, including accrued interest............. (23,722,123) Less: Loans owed to general partners and affiliates......... (8,358,576) Less: Accounts payable and accrued expenses................. (95,293) Less: Other liabilities..................................... (658,029) Less: Distributions to general partners and special limited partners.................................................. (4,350) ------------ Partnership valuation before taxes and certain costs........ $ 5,737,465 Less: Estimated state entity taxes and state nonresident withholding............................................... (911,015) ------------ Estimated net equity value of your partnership.............. $ 4,826,449 Percentage of estimated net equity value allocable to holders of units based on the partnership agreement....... 99% ------------ Estimated net equity value of units......................... $ 4,778,185 Total number of units..................................... 1,224.25 ------------ Estimated net equity value per unit......................... $ 3,902.95 ============ Plus: Payment from the settlement fund...................... $ 203.23 ============ Cash consideration per unit................................. $ 4,106.18 ============
Comparison of Offer Price to Alternative Consideration. To assist holders of units in evaluating the offer, your general partner, which is our affiliate, has attempted to compare the offer price against: (a) prices at which the units have sold on the secondary market and (b) the estimated liquidation proceeds payable per unit, assuming a sale of properties at prices equal to appraised values determined by the independent appraiser. The general partner of your partnership believes that analyzing the alternatives in terms of estimated value, based upon currently available data and, where appropriate, reasonable assumptions made in good faith, establishes a reasonable framework for comparing alternatives. Since the value of the consideration for alternatives to the offer is dependent upon varying market conditions, no 22 assurance can be given that the estimated values reflect the actual range of possible values. The results of these comparative analyses are summarized in the chart below.
COMPARISON TABLE PER UNIT - ---------------- --------- Cash offer price............................................ $4,106.18 Alternatives Highest prior cash tender offer price..................... $4,786.00(1) Highest price on secondary market......................... $5,000.00 Estimated liquidation proceeds (based on appraised value)................................................. $9,066.27
- --------------- (1) Highest price offered in our 2000-2002 tender offers to date. PRIOR TENDER OFFERS 2002. On June 25, 2002, we completed a tender offer commenced on May 8, 2002. We acquired 9.75 units in that offer at a price of $2,393.00 per unit. In that case, we used the same valuation methodology that we have used for the current offer. 2001. On March 12, 2001, we completed a tender offer commenced on February 9, 2001. We acquired 17.50 units in that offer at a price of $4,786.00 per unit. In that case, we used the same valuation methodology that we have used for the current offer. 2000. On September 28, 2000, we completed a tender offer commenced on July 24, 2000. We acquired 41.75 units in that offer at a price of $4,228.00 per unit. In that case, we determined the offer price using the valuation methodology that we have used for the current offer. Prices on Secondary Market. Secondary market sales information is not a reliable measure of value because of the limited amount of any known trades. Except for offers made by us and unaffiliated third parties, privately negotiated sales and sales through intermediaries are the only means which may be available to a limited partner to liquidate an investment in units (other than our offer) because the units are not listed or traded on any exchange or quoted on Nasdaq, on the Electronic Bulletin Board, or in "pink sheets." Secondary sales activity for the units, including privately negotiated sales, has been limited and sporadic. Set forth below are the high and low sale prices of units during the years ended December 31, 2004, December 31, 2003 and December 31, 2002, as reported by The Partnership Spectrum, which is an independent, third-party source. The gross sales prices reported by The Partnership Spectrum do not necessarily reflect the net sales proceeds received by sellers of units, which typically are reduced by commissions and other secondary market transaction costs to amounts less than the reported price. The Partnership Spectrum represents only one source of secondary sales information, and other services may contain prices for the units that equal or exceed the sales prices reported in The Partnership Spectrum. We do not know whether the information compiled by The Partnership Spectrum is accurate or complete. SALES PRICES OF PARTNERSHIP UNITS, AS REPORTED BY THE PARTNERSHIP SPECTRUM
HIGH LOW --------- --------- Year Ended December 31, 2004 (through April 30): N/A N/A Year Ended December 31, 2003: N/A N/A Year Ended December 31, 2002: $5,000.00 $3,393.00
Set forth in the table below are the high and low sales prices of units during the years ended December 31, 2004, December 31, 2003 and December 31, 2002, as reported by the American Partnership Board, which is an independent, third-party source. The gross sales prices reported by American Partnership Board do not necessarily reflect the net sales proceeds received by sellers of units, which 23 typically are reduced by commissions and other secondary market transaction costs to amounts less than the reported prices. The American Partnership Board represents one source of secondary sales information, and other services may contain prices for units that equal or exceed the sales prices reported by the American Partnership Board. We do not know whether the information compiled by the American Partnership Board is accurate or complete. SALES PRICES OF PARTNERSHIP UNITS, AS REPORTED BY THE AMERICAN PARTNERSHIP BOARD
HIGH LOW ---- ------- Year Ended December 31, 2004 (through May 31): N/A N/A Year Ended December 31, 2003: N/A N/A Year Ended December 31, 2002: N/A N/A
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: - inspected and analyzed the exterior of all buildings and site improvements and a representative sample of units; - 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; - 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; - reviewed leasing policy, concessions and history of recent occupancy; - reviewed the historical operating statements for your partnership's property and an operating budget forecast for 2003; - prepared an estimate of stabilized income and expense (for capitalization purposes); - conducted market inquiries into recent sales of similar properties to ascertain sales price per unit, effective gross income multipliers and capitalization rates; and - prepared sales comparison and income capitalization approaches to value. 24 AAA was provided by us with the following management budgets for your partnership's property:
BIG WALNUT TRAILS REFLECTIONS ---------------------- ---------------------- ---------------------- 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............... $1,791,420 $7,137 $1,775,764 $7,160 $4,051,853 $6,962 Vacancy..................... 74,000 295 84,000 339 2,291,284 3,937 Credit Loss/Concessions..... 41,650 166 14,540 59 173,052 297 Subtotal................. $ 115,650 $ 461 $ 98,540 $ 397 $2,464,337 $4,234 Laundry Income.............. $ 0 $ 0 $ 6,384 $ 26 $ 0 $ 0 Garage Revenue.............. 0 0 0 0 0 0 Other Misc. Revenue......... 131,863 525 132,080 533 120,442 207 Subtotal Other........... $ 131,863 $ 525 $ 138,464 $ 558 $ 120,442 $ 207 Income Effective Gross Income........ $1,807,633 $7,202 $1,815,688 $7,321 $1,707,958 $2,935 Operating Expenses Taxes....................... $ 153,096 $ 610 $ 131,650 $ 531 $ 270,113 $ 464 Insurance................... 55,680 222 42,753 172 86,051 148 Utilities................... 84,788 338 140,160 565 303,887 522 Repair & Maintenance........ 30,238 120 58,465 236 130,330 224 Cleaning.................... 57,990 231 0 0 99,794 171 Landscaping................. 0 0 48,636 196 76,274 131 Security.................... 0 0 0 0 28 0 Marketing & Leasing......... 29,328 117 16,240 65 92,182 158 General..................... 24,828 99 204,108 823 539,664 927 Administrative Management.................. 90,882 362 90,059 363 86,304 148 Miscellaneous............... 241,157 961 0 0 (609,855) (1,048) Total Operating Expenses...... $ 767,987 $3,060 $ 732,071 $2,952 $1,074,772 $1,847 Reserves.................... 0 0 0 0 0 0 Net Income.................... $1,039,646 $4,142 $1,083,617 $4,369 $ 633,186 $1,088
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 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. 25 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 $44,900,000, 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 $37,537,196. BIG WALNUT Valuation Under Sales Comparison Approach. AAA compared four apartment complexes with Big Walnut that were sold between September 2001 and November 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 comparable to the location of Big Walnut. AAA rated the quality/appeal of all four comparable properties as comparable to the quality/appeal of Big Walnut. AAA rated the amenities of all four comparable properties as comparable to the amenities of Big Walnut. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Big Walnut 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 $34,678 to $43,142 per unit with a mean or average adjusted price of $38,737 per unit and a median adjusted price of $38,565 per unit. Thus, the estimated value based on a $39,000 sales price per unit for the 251 units was approximately $9,600,000 after adjustment for deferred maintenance 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 Big Walnut's 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 $35,931 and $42,728 per unit, with an average of $38,010 per unit. The appraiser concluded a value of $39,000 per unit for the 251 units of the property, resulting in an estimated "as is" market value of $9,600,000 using the NOI analysis after adjustment for deferred maintenance 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 Big Walnut to be 43.16% before reserves, with the 26 expense ratios of the four comparable properties ranging from 39.93% to 42.66%, resulting in EGIMs ranging from 5.39 to 6.37. Thus, AAA concluded an EGIM of 5.50 for Big Walnut, 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 $9,800,000 after adjustment for deferred maintenance and present value of concessions. AAA estimated the value using the price per unit analysis at $9,600,000, the value using the NOI analysis at $9,600,000 and the value using the EGIM analysis at $9,800,000. Based on these three valuation methods, AAA concluded that the reconciled value for Big Walnut under the sales comparison approach was $9,700,000. 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 Big Walnut. 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 Big Walnut'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 $1,808,647. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Big Walnut of approximately $965,215. 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 Big Walnut 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 10.00%; (4) terminal capitalization rate of 10.50%; (5) discount rate of 11.75%; (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. An adjustment was made for concessions due to soft market conditions, and AAA estimated the present value of concessions to be $116,000. An adjustment of $50,000 was made for deferred maintenance. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $9,900,000 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 10.00%, the projected NOI resulted in a value (after rounding) of $9,500,000 after adjustments for deferred maintenance and present value of concessions. 27 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 Big Walnut was $9,800,000. 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 $9,700,000 and the estimated market value under the income capitalization approach was $9,800,000. After reconciling the various factors, AAA determined a final "as is" market value for Big Walnut of $9,800,000 as of April 30, 2003. TRAILS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Trails that were sold between January 1999 and June 2002 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 Trails. AAA rated the quality/appeal of three comparable properties as superior and two comparable properties as inferior to the quality/appeal of Trails. AAA rated the amenities of three comparable properties as comparable and two comparable properties as inferior to the amenities of Trails. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Trails 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 $36,507 to $41,236 per unit with a mean or average adjusted price of $38,564 per unit and a median adjusted price of $38,804 per unit. Thus, the estimated value based on a $38,500 sales price per unit for the 248 units was approximately $9,500,000. 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 Trails to be 46.72% before reserves, with the expense ratios of the five comparable properties ranging from 40.79% to 54.52%, resulting in EGIMs ranging from 4.64 to 6.66. Thus, AAA concluded an EGIM of 5.40 for Trails, 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. AAA estimated the value using the price per unit analysis at $9,500,000, the value using the NOI analysis at $9,400,000 and the value using the EGIM analysis at $9,500,000. Based on these three valuation methods, AAA concluded that the reconciled value for Trails under the sales comparison approach was $9,500,000. 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 Trails. 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 Trails' effective gross income ("EGI") by adding apartment rental collections to other income and then making an adjustment for vacancy and collection 28 loss. Under this analysis, AAA arrived at an EGI of $1,759,362. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Trails of approximately $875,314. 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 Trails under the income approach included: (1) stabilized vacancy and collection loss rate of 7%; (2) replacement reserve of $250 per unit; (3) overall capitalization rate of 9.50%; (4) terminal capitalization rate of 10.50%; (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 $9,400,000 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 9.50%, the projected NOI resulted in a value (after rounding) of $9,200,000. 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 Trails was $9,400,000. 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 $9,500,000 and the estimated market value under the income capitalization approach was $9,400,000. After reconciling the various factors, AAA determined a final "as is" market value for Trails of $9,400,000 as of May 5, 2003. REFLECTIONS Valuation Under Sales Comparison Approach. AAA compared five apartment complexes with Reflections that were sold between December 2000 and September 2002 and located in the property's real estate market area. Based on its qualitative analysis, AAA rated the locations of all five comparable properties as comparable to the location of Reflections. AAA rated the quality/appeal of all five comparable properties as inferior to the quality/appeal of Reflections. AAA rated the amenities of four comparable properties as comparable and one comparable property as inferior to the amenities of Reflections. AAA made adjustments to the sales price per unit of each comparable property to reflect differences from Reflections 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 $41,122 to $48,678 per unit with a mean or average adjusted price of $45,849 per unit and a median adjusted price of 29 $48,350 per unit. Thus, the estimated value based on a $47,000 sales price per unit for the 582 units was approximately $26,500,000 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 Reflections' 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 $41,035 and $54,374 per unit, with an average of $47,295 per unit. The appraiser concluded a value of $46,000 per unit for the 582 units of the property, resulting in an estimated "as is" market value of $26,000,000 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 Reflections to be 45.93% before reserves, with the five comparable properties indicating an expense ratio of 55.00%, resulting in EGIMs ranging from 5.31 to 7.04. Thus, AAA concluded an EGIM of 6.25 for Reflections, 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 $23,600,000 after adjustment for lease-up costs and present value of concessions. AAA estimated the value using the price per unit analysis at $26,500,000, the value using the NOI analysis at $26,000,000 and the value using the EGIM analysis at $23,600,000. Based on these three valuation methods, AAA concluded that the reconciled value for Reflections under the sales comparison approach was $25,800,000. 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 Reflections. 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 Reflections' 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 $3,904,798. Once the EGI was established, operating expenses were deducted from the EGI in order to arrive at an NOI for Reflections of approximately $2,023,963. 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 Reflections under the income approach included: (1) stabilized vacancy and collection loss rate of 7%; (2) replacement reserve of $150 per unit; (3) overall capitalization rate of 7.75%; (4) terminal capitalization rate of 8.25%; 30 (5) discount rate of 10.50%; (6) 2.00% cost of sale at reversion; and (7) holding period of 10 years. An adjustment was made for lease-up costs because Reflections' occupancy level was below a stabilized occupancy projection. Thus, AAA assumed an 18-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 $57,000. Based on these assumptions, AAA's estimate of cash flows for a 10-year period resulted in an indicated value of $25,600,000 through the discounted cash flow method. The reversion value contributed approximately 47% of the value. Under the direct capitalization method, utilizing a capitalization rate of 7.75%, the projected NOI resulted in a value (after rounding) of $25,300,000 after adjustments for lease-up costs and 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 Reflections was $25,600,000. 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 $25,800,000 and the estimated market value under the income capitalization approach was $25,600,000. After reconciling the various factors, AAA determined a final "as is" market value for Reflections of $25,700,000 as of May 7, 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: - good and marketable title to the property; - validity of owner's claim to the property; - no encumbrances which could not be cleared through normal processes, unless otherwise stated; - accuracy of land areas and descriptions obtained from public records; - no subsurface mineral and use rights or conditions; - 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; - full compliance with applicable federal, state and local environmental regulations and laws, unless otherwise stated, defined and considered; - 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; - compliance with all applicable zoning and use regulations and restrictions, unless a nonconformity has been stated, defined, and considered; - utilization of the land and improvements within property boundaries and no encroachment or trespass of the improvements, unless otherwise stated; 31 - 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 - 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. 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 $9,066.27, which is higher than our offer price of $4,106.18. Appraised value of partnership properties................... $ 44,900,000 Plus: Cash and cash equivalents............................. 411,179 Plus: Other partnership assets (net of tenant security deposits)................................................. 627,461 Less: Mortgage debt, including accrued interest............. (24,422,123) Less: Loans owed to general partner and affiliates.......... (8,358,576) Less: Accounts payable and accrued expenses................. (95,293) Less: Other liabilities..................................... (658,029) Less: Distributions to general partner and special limited partners.................................................. (11,160) ------------ Partnership valuation before taxes and certain costs........ $ 12,393,459 Less: Estimated state entity taxes and state nonresident withholding............................................... (1,181,961) ------------ Estimated net liquidation proceeds of your partnership...... $ 11,211,498 Percentage of estimated net liquidation proceeds allocable to holders of units based on the partnership agreement.... 99% ------------ Estimated net liquidation proceeds of units................. $ 11,099,383 Total number of units..................................... 1,224.25 ------------ Estimated net liquidation proceeds per unit................. $ 9,066,27 ============
9. THE LAWSUIT AND THE SETTLEMENT BACKGROUND In March 1998, holders of limited partnership units in the partnerships managed by affiliates of Insignia Financial Group (collectively, "Insignia") commenced an action entitled Rosalie Nuanes, et al. v. 32 Insignia Financial Group, Inc., et al. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo (the "Court"). The plaintiffs named as defendants, among others, your partnership, its general partner and several of their affiliated partnerships and corporate entities, as well as AIMCO, who had announced a merger with Insignia. The action originally asserted claims on behalf of a putative class of limited partners in over 50 limited partnerships, including your partnership (collectively, the "Partnerships") and derivatively on behalf of those same Partnerships (which are named as nominal defendants) challenging, among other things, the acquisition of interests in certain general partner entities by Insignia; past tender offers by Insignia to acquire limited partnership units; Insignia's management of the Partnerships; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO (hereinafter, the "Insignia Merger"). PROCEDURAL HISTORY On June 25, 1998, your general partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The general partner filed demurrers to the amended complaint which were heard in February 1999. Pending the ruling on such demurrers, settlement negotiations commenced. On November 2, 1999, the parties executed and filed a Stipulation of Settlement, settling claims, subject to court approval, on behalf of your partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the general partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiffs' lead and liaison counsel who negotiated the proposed settlement on behalf of plaintiffs. On June 27, 2000, the Court entered an order disqualifying them from the case. An appeal was taken from part of the June 27, 2000 order on October 5, 2000. Subsequently, certain plaintiffs, specifically, BEJ Equity Partners and J-B Investment Partners, withdrew as plaintiffs. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001 and the general partner and its affiliates filed a demurrer to the third amended complaint. On July 10, 2001, the Court issued an order granting in part and denying in part defendants' demurrer. Among other things, the Court sustained defendants' demurrer without leave to amend as to those derivative claims involving partnerships in which the named plaintiffs did not own an interest. The Court subsequently denied plaintiffs' motion for reconsideration. The fourth amended complaint was filed on September 7, 2001. It was brought by plaintiffs who owned interests in four of the Partnerships. Plaintiffs Jeffrey Homburger, Sean O'Reilly and Norman and Doris Rosenberg formally withdrew from the case on August 20, 2001. The general partner and affiliated defendants filed a demurrer to the fourth amended complaint, which the Court granted in part on January 28, 2002. The Court dismissed without leave to amend plaintiffs' state securities fraud claim under California's Corporate Code Section 25400(b), plaintiffs' contract claim arising out of the partnership agreements, plaintiffs' derivative claim for statutory unfair competition as to those partnerships in which plaintiffs lack representation, plaintiffs' conversion claim and plaintiffs' claim under California's Corporation Code Section 15636. Only some of the remaining claims in the fourth amended complaint relate to the partnership. Plaintiffs alleged that affiliates of the general partner have issued false and misleading tender offers beginning in 1998 and continuing through to the present for units in the partnership. Plaintiffs allege 33 violations of state securities fraud statutes and common law fraud against both AIMCO and Insignia. Specifically, plaintiffs allege that the tender offers have been misleading because they failed to disclose: - that third parties would not use a property's historical income, but would instead use a property's projected income, in calculating a property's value based on the capitalization method. - that the property income figures used in the capitalization method were artificially lower because AIMCO charges management fees allegedly in excess of the market. - that AIMCO allegedly deducted all capital expenditures from property income despite an alleged AIMCO policy of deducting only $250 to $300 per apartment unit. - the rating for the condition of each property, any adjustment made to the capitalization rate as a result, the interest rate on mortgage debt for each property and any corresponding adjustments in the capitalization rates. - that AIMCO allegedly negotiated lower capitalization rates for valuing properties it owns in connection with a revolving credit facility. - that AIMCO failed to disclose that the valuation methods and/or policies it used for its own business purposes allegedly differ from those used in the tender offers. - internal valuations of the properties it used in connection with the Insignia merger or the capitalization rates used in connection with those valuations. Plaintiffs alleged that the general partner breached its fiduciary duty by assisting Insignia and AIMCO in making the tender offers by providing financial information, failing to correct supposedly misleading information given to unitholders, recommending that the prices offered were fair and preventing third parties from making tender offers. Plaintiffs have also included a statutory unfair competition claim against all the defendants, a claim for tortious interference with contract, unjust enrichment and judicial dissolution. THE HELLER COMPLAINT During the third quarter of 2001, a complaint was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group, Inc., et al. (the "Heller action"). The Heller complaint was filed in order to preserve derivative claims that were dismissed without leave to amend in the Nuanes action by the Court's July 10, 2001 order. The first amended complaint in the Heller action was brought as a purported derivative action, and asserted claims for, among other things, breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. On January 28, 2002, however, the Court, on motion by the general partner and its affiliates, struck the Heller complaint as a violation of its July 10, 2001 order in the Nuanes action. On March 27, 2002, plaintiffs in the Heller action filed a notice of appeal of the Court's January 28, 2002 order striking the complaint. THE SETTLEMENT OF THE NUANES AND HELLER COMPLAINTS 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. 34 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. Former 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. On December 18, 2003, the Court heard oral argument on the applications brought on behalf of the objector and denied them in their entirety. On February 3, 2004, the objector filed his brief in support of his appeal from the underlying judgment. On March 18, 2004, class plaintiffs filed a respondent's brief in support of the judgment. AIMCO is currently scheduled to file a respondent's brief no later than April 23, 2004. The objector has twenty days from filing of the respondent's briefs to file replies, if any. On February 23, 2004, appeals were also taken from the Court's December 2003 orders denying injunctive relief in connection with the settlement offers. Under the terms of the settlement, we have agreed to make cash tender offers for all outstanding limited partnership interests in your partnership and 43 other partnerships (the "Tender Offer Partnerships") within a year of the Court's final approval of the settlement and to accompany each of those offers with executive summaries of appraisals of partnership properties prepared by an independent appraiser appointed by the Court. Our affiliate has agreed to pay 50% of the costs of the appraisals, with the other 50% to be paid from the settlement fund. The appraiser was paid $619,100 for the appraisals. To 35 the extent if the costs of the appraisals exceeded $2 million, the excess amount would have been paid from the settlement fund. Under the settlement, we have the option of making a second round of tender offers (in our sole and absolute discretion) to purchase all remaining outstanding limited partnership interests, at the same price, or at a higher or lower price, within 18 months of the order finally approving the settlement. In addition, as part of the settlement, we agreed to create a settlement fund for the benefit of settlement class members in the principal amount of $9.9 million. The settlement class members consists of all limited partners in the Tender Offer Partnerships, including your partnership, who owned units as of December 20, 2002, and who did not validly request exclusion from the settlement. After deducting attorneys' fees and other settlement costs, including a portion of the costs of appraisal and certain costs of administration of the settlement fund, we have allocated the remaining amount in the settlement fund among the Tender Offer Partnerships pro rata based on partnership revenue for the year ended December 31, 2002 allocable to units held by members of the settlement class, as set forth below:
(C) OWNERSHIP ALLOCATED PERCENTAGE OF (D) PORTION OF (A) (B) SETTLEMENT ADJUSTED SETTLEMENT PARTNERSHIP REVENUE(1) CLASS(2) REVENUE(3) FUND(4) - ----------- ------------ ------------- -------------- ---------- Angeles Income Properties, Ltd. II....... $ 6,721,398 38.11% $ 2,561,680.99 2.12% Angeles Income Properties, Ltd. III...... 757,234 47.99% 363,400.46 0.30% Angeles Income Properties, Ltd. VI....... 3,314,969 57.18% 1,895,539.00 1.57% Angeles Opportunity Properties, Ltd. .... 2,487,492 50.42% 1,254,256.40 1.04% Angeles Partners VII..................... 1,382,326 32.28% 446,158.51 0.37% Angeles Partners IX...................... 3,053,411 32.79% 1,001,090.64 0.83% Angeles Partners X....................... 2,363,419 40.94% 967,701.17 0.80% Angeles Partners XI...................... 8,102,088 37.05% 3,002,068.40 2.49% Angeles Partners XII..................... 17,579,608 30.85% 5,423,897.42 4.50% Century Properties Fund XIV.............. 5,754,231 33.27% 1,914,451.55 1.59% Century Properties Fund XV............... 7,891,876 35.11% 2,770,502.79 2.30% Century Properties Fund XVI.............. 3,129,310 38.59% 1,207,704.29 1.00% Century Properties Fund XVII............. 13,989,178 39.81% 5,568,998.68 4.62% Century Properties Fund XVIII............ 4,652,589 44.57% 2,073,721.09 1.72% Century Properties Fund XIX.............. 15,838,890 41.77% 6,615,207.49 5.48% Century Properties Growth Fund XXII...... 18,750,167 44.10% 8,268,717.87 6.86% Consolidated Capital Growth Fund......... 11,095,122 35.45% 3,933,281.02 3.26% Consolidated Capital Institutional Properties............................. 17,492,318 34.85% 6,095,971.72 5.05% Consolidated Capital Institutional Properties 2........................... 4,531,076 50.40% 2,283,507.96 1.89% Consolidated Capital Institutional Properties 3........................... 11,898,507 46.92% 5,583,341.99 4.63% Consolidated Capital Properties III...... 3,319,845 48.56% 1,612,222.94 1.34% Consolidated Capital Properties IV....... 26,375,116 43.55% 11,486,890.81 9.52% Consolidated Capital Properties VI....... 1,790,898 49.39% 884,610.64 0.73% Davidson Diversified Real Estate I, L.P. .................................. 926,289 57.35% 531,230.56 0.44% Davidson Diversified Real Estate II, L.P. .................................. 6,679,248 50.21% 3,353,945.59 2.78% Davidson Diversified Real Estate III, L.P. .................................. 4,914,862 59.79% 2,938,470.22 2.44% Davidson Growth Plus, L.P. .............. 5,497,496 42.55% 2,339,052.86 1.94% Davidson Income Real Estate, L.P. ....... 4,824,647 55.50% 2,677,466.62 2.22% Fox Strategic Housing Income Partners.... 2,905,478 59.32% 1,723,635.91 1.43% Johnstown/Consolidated Income Partners... 1,109,711 45.50% 504,939.49 0.42%
36
(C) OWNERSHIP ALLOCATED PERCENTAGE OF (D) PORTION OF (A) (B) SETTLEMENT ADJUSTED SETTLEMENT PARTNERSHIP REVENUE(1) CLASS(2) REVENUE(3) FUND(4) - ----------- ------------ ------------- -------------- ---------- Multi-Benefit Realty Fund 87-1........... 3,584,756 Class A Investors...................... 1,993,125 35.01% 697,750.93 0.58% Class B Investors...................... 1,591,632 47.59% 757,524.59 0.63% National Property Investors III.......... 8,886,583 25.79% 2,291,879.79 1.90% National Property Investors 4............ 7,248,900 24.52% 1,777,282.20 1.47% National Property Investors 5............ 4,610,576 36.17% 1,667,480.41 1.38% National Property Investors 6............ 10,168,298 34.73% 3,531,813.61 2.93% National Property Investors 7............ 7,235,037 31.17% 2,255,187.60 1.87% National Property Investors 8............ 4,334,235 38.98% 1,689,580.96 1.40% Shelter Properties I Limited Partnership............................ 4,908,445 20.51% 1,006,722.11 0.83% Shelter Properties II Limited Partnership............................ 5,148,389 29.25% 1,505,669.73 1.25% Shelter Properties III Limited Partnership............................ 5,155,756 35.20% 1,814,826.22 1.50% Shelter Properties IV Limited Partnership............................ 9,682,744 31.49% 3,048,820.05 2.53% Shelter Properties V Limited Partnership............................ 13,237,273 28.68% 3,796,475.63 3.15% Shelter Properties VI Limited Partnership............................ 8,475,852 34.45% 2,920,007.57 2.42% Shelter Properties VII Limited Partnership............................ 1,497,429 37.87% 567,007.84 0.47% ------------ -------------- ------- Total.................................. $313,303,073 $ 120,611,694 100.00% ============ ============== =======
- --------------- (1) For the year ended December 31, 2002. (2) Excludes units owned by AIMCO and its affiliates and other limited partners who have requested exclusion from the settlement class. (3) Determined, for each partnership, by multiplying the amount of revenue (column (B)) by the percentage of outstanding units held by members of the settlement class (column (C)). (4) Determined, for each partnership, by dividing the amount of adjusted revenue (column (D)) by the total amount of adjusted revenue for all partnerships. The amount allocated to a Tender Offer Partnership is then divided by the total number of outstanding units owned by settlement class members in such Tender Offer Partnership (excluding units held by us and our affiliates), and the resulting amount is included in the offer price for units in that Tender Offer Partnership. For each unit validly tendered in the offers and accepted by us, an amount equal to the portion of the settlement fund included in the per unit offer price will be deducted from the settlement fund and paid to us (other than units tendered by limited partners who have requested exclusion from the settlement class). All limited partners who tender their units in response to the offers will receive the same price per unit, including those persons who may have requested exclusion from the settlement class. If we choose to make a second round of litigation settlement offers, as described above, any amount remaining in the settlement fund will be allocated in the manner described above the first round of litigation settlement offers but calculated using revenue for the most recent 12-month period and more recent information as to the ownership of each partnership. Any balance remaining thereafter or, in the event we do not initiate a second round of litigation settlement offers, the entire balance will be paid to settlement class members who have retained any units based on the allocation method used in the litigation settlement offers no later than June 2005 if the Court's order approving the settlement and entering judgment thereto is affirmed on appeal. If the Court's order is reversed or vacated by virtue of the appeal, however, you will not be entitled to receive a pro rata share of the settlement fund unless you tender your units in this offer. The general partners of the Tender Offer Partnerships have also agreed, as part of the settlement, to waive our right to seek reimbursement and/or indemnification for the full 37 amount of fees and costs incurred in the defense of the class and derivative litigation; provided, however, that they may charge fees and costs to your partnership and the other partnerships involved in the litigation in an amount not to exceed $1,500,000 (which is approximately 50% of the outstanding fees and costs). In consideration for the terms described above, plaintiffs and settlement class members agreed, among other things, to dismiss the Nuanes action and the Heller action with prejudice, release the defendants from all liability with respect to all claims and causes of action, whether brought individually, on behalf of a class, or derivatively, whether known or unknown, that have been asserted or that could have been asserted that arise out of or relate to (i) those matters and claims set forth in the complaints in the Heller and Nuanes actions, (ii) ownership of one or more units in any of the Tender Offer Partnerships, (iii) the purchase, acquisition, holding, sale, tender or voting of one or more units in any of the Tender Offer Partnerships, and (iv) 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 either the Nuanes action or the Heller action, provided, however, that the released claims are not intended to include any unrelated claims that are unique to a particular settlement class member (e.g., a settlement class member slips and falls on property owned by one of our affiliates, loses or did not receive a distribution check distributed to other limited partners in your partnership, or is an employee and has an employee related claim). Settlement class members also covenanted and agreed not to bring any action, claim, suit, or proceeding against any of the defendants in the class and derivative litigation that concerns any of the matters which are the subject of the settlement and that the stipulation of settlement will act as a bar to any such claim, action, suit or proceeding. The plaintiffs and settlement class members also agreed that they would not oppose a request that the Court withdraw the finding regarding Robert A. Stanger & Co. made in the June 27, 2000 order disqualifying lead and liaison counsel. Under the terms of the settlement, neither we nor our affiliates admit to any wrongdoing, and we deny liability under all claims brought in the litigation. The final settlement of the lawsuit is the product of good faith, arm's length negotiations between settlement class counsel and counsel for the defendants. These negotiations resulted in the settlement set forth in the Stipulation. 10. INFORMATION CONCERNING US AND CERTAIN OF OUR AFFILIATES General. We are AIMCO Properties, L.P., a Delaware limited partnership. Together with our subsidiaries, we conduct substantially all of the operations of Apartment Investment and Management Company, a Maryland corporation ("AIMCO"). AIMCO is a real estate investment trust that owns and manages multifamily apartment properties throughout the United States. AIMCO's Class A Common Stock is listed and traded on the New York Stock Exchange under the symbol "AIV." As of March 31, 2004, we owned or managed 283,030 apartment units in 1,605 properties located in 47 states, the District of Columbia and Puerto Rico. Based on apartment unit data compiled by the National Multi Housing Council, we believe that we are one of the largest owners and managers of multi-family apartment properties in the United States. As of March 31, 2004, we: - owned or controlled (consolidated) 174,793 units in 698 apartment properties; - held an equity interest in (unconsolidated) 58,569 units in 406 apartment properties; and - provided services or managed, for third party owner, 49,668 units in 501 apartment properties, primarily pursuant to long term, non-cancelable agreements (including 39,164 units in 411 properties that are asset managed only, and not property managed). Our general partner is AIMCO-GP, Inc., a Delaware corporation, which is a wholly owned subsidiary of AIMCO. Our principal executive offices is located at 4582 South Ulster Street Parkway, Suite 1100, Denver, Colorado 80237, and our telephone number is (303) 757-8101. 38 The names, positions and business addresses of the directors and executive officers of AIMCO and your general partner (which is our affiliate), as well as a biographical summary of the experience of such persons for the past five years or more, are set forth on Annex I attached hereto and are incorporated herein by reference. 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. For more information regarding AIMCO and AIMCO Properties, L.P., please refer to our respective Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and other reports and documents we have filed with the SEC. Except as described in "The Litigation Settlement Offer -- Section 11. Background and Reasons for the Offer," "-- Section 13. Conflicts of Interest and Transactions with Affiliates" and "-- Section 15. Certain Information Concerning Your Partnership -- Ownership and Voting," neither we nor, to the best of our knowledge, any of the persons listed on Annex I attached hereto, (i) beneficially own or have a right to acquire any units, (ii) has effected any transaction in the units in the past 60 days, or (iii) have any contract, arrangement, understanding or relationship with any other person with respect to any securities of your partnership, including, but not limited to, contracts, arrangements, understandings or relationships concerning transfer or voting thereof, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies. Neither we nor our affiliates intend to tender any units beneficially owned in this offer. Summary Selected Financial Information for AIMCO Properties, L.P. The selected historical financial data set forth below for AIMCO Properties for the three months ended March 31, 2004 and 2003 is based on our unaudited financial statements. The historical financial data set forth below for AIMCO Properties, L.P. for the years ended December 31, 2003, 2002 and 2001 is based on our audited financial statements. This information should be read in conjunction with such financial statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in AIMCO Properties' Annual Report on Form 10-K for the year ended December 31, 2003 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 2003 2002(1) 2001(1) ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) OPERATING DATA: Total revenues........................................... $1,516,283 $1,387,831 $1,273,037 Total expenses........................................... 1,059,350 889,372 878,734 Operating income......................................... 456,933 498,459 394,303 Income from continuing operations........................ 78,490 186,924 107,117 Income from discontinued operations, net................. 99,378 19,278 13,947 Net income............................................... 177,868 206,202 121,064
39
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 2003 2002(1) 2001(1) ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) PER SHARE DATA: Earnings (loss) per common unit -- basic: Income (loss) from continuing operations (net of preferred distributions)............................ $ (0.24) $ 0.81 $ 0.80 Net income attributable to common unitholders.......... 0.71 1.00 0.25 Earnings (loss) per common unit -- diluted: Income (loss) from continuing operations (net of preferred distributions)............................ (0.24) 0.80 0.08 Net income attributable to common unitholders.......... 0.71 0.99 0.25 Dividends declared per common unit....................... 2.84 3.28 3.16 BALANCE SHEET DATA (END OF PERIOD): Real estate, net of accumulated depreciation............. 8,753,771 8,615,287 6,330,521 Total assets............................................. 10,124,617 10,355,329 8,200,526 Total indebtedness....................................... 6,197,907 6,021,990 4,420,399 Unitholders' equity...................................... 3,174,815 3,576,083 3,080,071 CASH FLOW DATA: Cash provided by operating activities.................... 430,258 496,670 491,846 Cash provided by (used in) investing activities.......... 313,164 (873,832) (140,638) Cash provided by (used in) financing activities.......... (728,543) 398,637 (430,245) OTHER DATA: Funds from operations available to common unitholders -- diluted(2)............................................. 349,108 498,589 528,655 Weighted average number of common units, common unit equivalents and dilutive preferred securities outstanding............................................ 108,151 109,538 102,147
- --------------- (1) Certain reclassifications have been made to the 2002 and 2001 amounts to conform to the 2003 presentation. These reclassifications primarily represent presentation changes related to discontinued operations resulting from the 2002 adoption of Statement of Financial Accounting Standards No. 144. (2) Funds From Operations, or FFO, is a financial measure not calculated in accordance with generally accepted accounting principles, or GAAP, that we believe, when considered with the financial data determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets such as machinery, computers or other personal property. The Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (loss), computed in accordance with GAAP, excluding gains and losses from extraordinary items, gains on dispositions of depreciable real estate, gains on dispositions of real estate from discontinued operations, net of related income taxes, plus real estate related depreciation and amortization (excluding amortization of financing costs), including depreciation for unconsolidated real estate partnerships, joint ventures and discontinued operations. We calculate FFO based on the NAREIT definition, as further adjusted for amortization of intangibles and deficit distributions to minority partners. We calculate FFO (diluted) by subtracting redemption related preferred OP unit issuance costs and dividends on preferred OP units, adding back dividends/distributions on dilutive preferred securities and adding back the interest expense on dilutive mandatorily redeemable convertible preferred securities. FFO should not be considered an alternative to net income or net cash flows from operating activities, as calculated in accordance with GAAP, as an indication of our performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund 40 future cash needs. In addition, although FFO is a measure used for comparability in assessing the performance of real estate investment trusts, there can be no assurance that our basis for computing FFO is comparable with that of other real estate investment trusts. For the years ended December 31, 2003, 2002 and 2001, our FFO is calculated as follows:
2003 2002 2001 --------- --------- --------- (IN THOUSANDS) NET INCOME ATTRIBUTABLE TO UNITHOLDERS(A)......... $ 74,242 $ 98,556 $ 20,930 Adjustments: Depreciation on rental property, net of minority partners' interest(B)........................ 298,255 241,325 295,113 Depreciation on rental property related to unconsolidated entities...................... 25,817 33,549 57,506 (Gain) loss on dispositions of real estate...... (3,178) 22,362 (18,848) Deficit distributions to minority partners...... 22,672 26,979 46,359 Amortization of intangibles..................... 6,702 4,026 18,729 Income tax arising from disposals............... -- -- 3,202 Gain on disposition of land..................... -- -- 3,843 Discontinued operations:........................ Depreciation on rental property, net of minority partners' interest................ 14,906 29,192 34,552 (Gain) loss on dispositions of real estate, net of minority partners' interest......... (101,849) (4,374) -- Deficit distributions to minority partners... (10,718) 1,401 1,342 Income tax arising from disposals............ 12,134 2,507 -- Preferred OP Unit distributions................... 95,981 107,646 100,134 Redemption related preferred OP Unit costs........ 7,645 -- -- --------- --------- --------- FUNDS FROM OPERATIONS:............................ $ 442,609 $ 563,169 $ 562,832 Preferred OP Unit distributions................... (95,981) (107,646) (100,134) Redemption related preferred OP Unit issuance costs........................................... (7,645) -- -- Distributions on dilutive preferred securities.... 9,138 41,905 64,389 Interest expense on mandatorily redeemable convertible preferred securities................ 987 1,161 1,568 --------- --------- --------- Funds from Operations attributable to common unitholders -- diluted.......................... $ 349,108 $ 498,589 $ 528,655 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF COMMON UNITS, COMMON UNIT EQUIVALENTS AND DILUTIVE PREFERRED SECURITIES OUTSTANDING: Common unit and equivalents(C).................. 104,861 99,168 84,960 Dilutive preferred securities................... 3,290 10,370 17,187 --------- --------- --------- Total...................................... 108,151 109,538 102,147 ========= ========= =========
- --------------- (A) Represents our numerator for earnings per common share calculated in accordance with GAAP. (B) "Minority partners' interest," as referenced on this line item and others in this presentation means minority interest in AIMCO's consolidated real estate partnerships. (C) Represents our denominator for earnings per common share -- diluted, calculated in accordance with GAAP. 41 Beginning with the first quarter of 2004, AIMCO Properties modified the presentation of its consolidated statements of income. The presentation of the income statements for the first quarter of 2003 has also been modified to conform with this new format. These presentation changes do not affect the accounting treatment of amounts reported, only their classification within the income statement.
FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 2004 2003 ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) (UNAUDITED) OPERATING DATA: Total revenues.............................................. $ 376,426 $ 366,425 Total expenses.............................................. 278,767 247,815 Operating income............................................ 97,659 118,610 Income from continuing operations........................... 6,184 25,737 Income from discontinued operations, net.................... 13,426 (606) Net income.................................................. 15,653 25,131 PER SHARE DATA: Earnings (loss) per common unit -- basic: Income (loss) from continuing operations (net of preferred distributions)......................................... $ (0.15) $ 0 Net income attributable to common unitholders............. (0.06) 0 Earnings (loss) per common unit -- diluted: Income (loss) from continuing operations (net of preferred distributions)......................................... (0.15) 0 Net income attributable to common unitholders............. (0.06) 0 Distributions declared per common unit...................... 0.60 0.82 BALANCE SHEET DATA (END OF PERIOD): Real estate, net of accumulated depreciation................ 8,955,902 9,020,991 Total assets................................................ 10,354,820 10,409,464 Total indebtedness.......................................... 6,279,957 6,280,784 Unitholders' equity......................................... 3,289,720 3,494,799 CASH FLOW DATA: Cash provided by operating activities....................... 41,582 122,707 Cash provided by (used in) investing activities............. (77,828) 19,605 Cash provided by (used in) financing activities............. 14,986 (134,948) OTHER DATA: Funds from operations available to common unitholders -- diluted(1)................................. 70,626 92,436 Weighted average number of common units, common unit equivalents and dilutive preferred securities outstanding............................................... 106,164 109,481
- --------------- (1) Funds From Operations, or FFO, is a financial measure not calculated in accordance with generally accepted accounting principles, or GAAP, that we believe, when considered with the financial data determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets such as machinery, computers or other personal property. The Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (loss), computed in accordance with GAAP, excluding gains and losses from extraordinary items, gains on dispositions of depreciable real estate, gains on dispositions of real estate from discontinued operations, net of related income taxes, plus real estate related depreciation and amortization (excluding amortization of financing costs), including depreciation for unconsolidated real estate partnerships, joint ventures and discontinued operations. We calculate FFO based on the 42 NAREIT definition, as further adjusted for amortization of intangibles and deficit distributions to minority partners. We calculate FFO (diluted) by subtracting redemption related preferred OP unit issuance costs and dividends on preferred OP units, adding back dividends/distributions on dilutive preferred securities and adding back the interest expense on dilutive mandatorily redeemable convertible preferred securities. FFO should not be considered an alternative to net income or net cash flows from operating activities, as calculated in accordance with GAAP, as an indication of our performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. In addition, although FFO is a measure used for comparability in assessing the performance of real estate investment trusts, there can be no assurance that our basis for computing FFO is comparable with that of other real estate investment trusts. For the three months ended March 31, 2004 and 2003, our FFO is calculated as follows:
THREE MONTHS ENDED MARCH 31, -------------------- 2004 2003 -------- --------- (IN THOUSANDS) NET LOSS ATTRIBUTABLE TO COMMON UNITHOLDERS(A).............. $ (6,444) $ (193) Adjustments: Depreciation and amortization............................. 90,870 85,467 Depreciation and amortization related to non-real estate assets................................................. (4,920) (5,286) Depreciation of rental property related to minority partners' interest(B).................................. (10,788) (7,273) Depreciation of rental property related to unconsolidated entities............................................... 6,070 6,503 Loss on dispositions of real estate related to unconsolidated entities................................ 17 79 Deficit distributions to minority partners................ 4,438 5,468 Cumulative effect of change in accounting principle....... 3,957 -- Discontinued operations: Depreciation of rental property, net of minority partners' interest(B)................................. 512 6,632 Gain on dispositions of real estate, net of minority partners' interest(B)................................. (11,360) (3,488) Recovery of deficit distributions to minority partners.............................................. (3,313) (225) Income tax arising from disposals...................... 697 1,328 Preferred OP Unit distributions............................. 22,097 25,324 -------- --------- FUNDS FROM OPERATIONS....................................... $ 91,833 $ 114,336 Preferred OP Unit distributions............................. (22,097) (25,324) Distributions on dilutive preferred securities.............. 890 3,177 Interest expense on mandatorily redeemable convertible preferred securities...................................... -- 247 -------- --------- FUNDS FROM OPERATIONS ATTRIBUTABLE TO COMMON UNITHOLDERS -- DILUTED.................................... $ 70,626 $ 92,436 ======== ========= WEIGHTED AVERAGE NUMBER OF COMMON OP UNITS, COMMON OP UNIT EQUIVALENTS AND DILUTIVE PREFERRED SECURITIES OUTSTANDING: Common OP Units and equivalents(C)........................ 104,391 104,809 Dilutive preferred securities............................. 1,773 4,672 -------- --------- Total.................................................. 106,164 109,481 ======== ========= Cash flow provided by operating activities.................. $ 41,582 $ 122,707 Cash flow (used in) provided by investing activities........ (77,828) 19,605 Cash flow provided by (used in) financing activities........ 14,986 (134,948)
- --------------- (A) Represents our numerator for earnings per common unit calculated in accordance with GAAP 43 (B) "Minority partners' interest," as referenced on this line item and others in this presentation means minority interest in our consolidated real estate partnerships (C) Represents our denominator for earnings per common unit -- diluted calculated in accordance with GAAP 11. BACKGROUND AND REASONS FOR THE OFFER Settlement of Class Action. We are making this offer pursuant to the terms of the settlement agreement described in "The Litigation Settlement Offer -- Section 9. The Lawsuit and the Settlement." Our offer provides us with an opportunity to increase our ownership interest in your partnership's property while providing you and other investors with an opportunity to liquidate your current investment. The settlement agreement also provides for the creation of a $9.9 million fund for members of the settlement class, a portion of which will be paid to those who accept this offer and is included in our offer price. If you request exclusion from the settlement, you may tender any units in this offer and you will be entitled to receive the same price per unit as those unitholders who have not opted out of the settlement class. However, no portion of the price paid to you will come from the settlement fund. If you do not request exclusion from the settlement and do not tender any units in this offer, you will be entitled to receive your pro rata share of the settlement fund (subject to adjustment) no later than June 2005 if the Court's order approving the settlement and entering judgment thereto is affirmed on appeal. If the Court's order is reversed or vacated by virtue of the appeal, however, you will not be entitled to receive a pro rata share of the settlement fund unless you tender your units in this offer. Neither the Court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether you should accept our 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 with respect to your particular circumstances before deciding whether or not to accept our offer. Alternatives Considered by Your General Partner. From time to time in the past, we have made offers to acquire units of limited partnership interest in your partnership. Before making this offer and the previous offers, your general partner (which is our affiliate) considered a number of alternative transactions. The following is a brief discussion of the advantages and disadvantages of the alternatives considered by your general partner. LIQUIDATION One alternative would be for the partnership to sell its assets, distribute the net liquidation proceeds to its partners in accordance with the agreement of limited partnership, and thereafter dissolve. Partners would be at liberty to use the net liquidation proceeds after taxes for investment, business, personal or other purposes, at their option. If your partnership were to sell its assets and liquidate, you would not need to rely upon capitalization of income or other valuation methods to estimate the fair market value of partnership assets. Instead, such assets would be valued through negotiations with prospective purchasers (in many cases unrelated third parties). 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 $9,066.27 per unit. See "The Litigation Settlement Offer -- Section 8. Valuation of Units." However, a liquidating sale of all of your partnership's property would be a taxable event for all partners, including your general partner. Furthermore, all partners, including those who wish to retain their units, and your general partner would be forced to participate in the liquidation. Lastly, although the future operating results of your partnership and future sales prices of the property owned by your partnership are uncertain, the operating performance of your partnership's property may improve in the future, which, in turn, may result in higher property values, making a sale of your partnership's properties a more attractive option in the future. Such values are also a function of capitalization rates in the market and the interest 44 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, 2008, unless the partnership is terminated sooner under the provisions of the partnership agreement. CONTINUATION OF THE PARTNERSHIP WITHOUT THE OFFER A second alternative would be for your partnership to continue as a separate legal entity with its own assets and liabilities and continue to be governed by its existing agreement of limited partnership, without our offer. A number of advantages could result from the continued operation of your partnership. Given improving rental market conditions or improved operating performance, the level of distributions might increase over time. It is possible that the private resale market for properties could improve over time, making a sale of the partnership's property at some point in the future a more attractive option than it is currently. The continuation of your partnership will allow you to continue to participate in the net income and any increases in revenue of your partnership and any net proceeds from the sale of the property owned by your partnership. However, no assurance can be given as to future operating results or as to the results of any future attempts to sell the property owned by your partnership. The primary disadvantage of continuing the operations of your partnership without our offer is that you would be limited in your ability to sell your units. Although you could sell your units to a third party, any such sale might be at a price less than our offer price. 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. 45 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 whether or not they tender units in the offer. 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: The general partner considered the following factors in support of the fairness of the offer to unaffiliated limited partners who do not tender units in the offer: - the Court's approval of the settlement pursuant to which the offer is being made; - the fact that the interests of the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement; - the fact that the offer does not require the approval of a majority of unaffiliated limited partners and, as a result, each limited partner has an opportunity to make an individual decision on whether to tender his or her units (and how many to tender) or to continue to hold them; - the fact that no unaffiliated limited partners would be able to participate in the future performance of the partnership or its properties following an alternative transaction such as a property sale or a liquidation of the partnership. The general partner considered following factors in support of the fairness of the offer to unaffiliated limited partners who tender units in the offer: - the Court's approval of the settlement pursuant to which the offer is being made; - the fact that the interests of the unaffiliated limited partners were represented by counsel in the negotiation of the settlement agreement; - the fact that the offer does not require the approval of a majority of unaffiliated limited partners and, as a result, each limited partner has an opportunity to make an individual decision on whether to tender his or her units (and how many to tender) or to continue to hold them; - the method we used to determine our offer price is a method commonly relied upon by investors to value income producing property; - there is no established trading market for the limited partnership units, and the offer would provide immediate liquidity for tendering limited partners; - the offer price exceeds the book value per unit of $(2,962.63) at March 31, 2004; - the uncertainty of the resulting proceeds from the possible alternative transactions, particularly a property sale or a liquidation of the partnership, - the fact that our offer price does not reflect any discount for minority interests; and - 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: - 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 $9,066.27, which is higher than our offer price of $4,106.18; 46 - the fact that an unaffiliated representative was not retained to act solely on behalf of unaffiliated limited partners for purposes of negotiating the terms of the offer; - the fact that the general partner's board of directors is comprised solely of an employee of AIMCO Properties, L.P., and, as a result, the terms of the offer were not approved by a majority of independent directors; - the fact that offer prices in our prior tender offers were higher than our current offer price; and - prices at which the units have recently sold were higher than our current offer price. The general partner does not believe that going concern value of your partnership is relevant to the fairness of the offer because the partnership is not an operating business in the typical sense. Its only assets are its properties; the partnership has no other operations. Going concern value typically reflects independent value for the goodwill of a business as a going concern, over and above its asset value, however, those facts are not present here. Accordingly, the general partner did not consider a separate going concern value of the partnership in determining the fairness of the offer. In this case, the liquidation value was determined based on appraised values of the partnership's properties. These appraised values reflect the value of the properties as a going concern. 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) each limited partner has an opportunity to make an individual decision on whether to tender his or her units (and how many to tender) or to continue to hold them, (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. In making this determination, the general partner took into account the absence of the following procedural safeguards: (1) the requirement of approval of the offer by a majority of the unaffiliated limited partners, (2) an unaffiliated representative to act solely on behalf of unaffiliated limited partners for purposes of negotiating the terms of the offer, and (3) the approval of the offer by a majority of non-employee directors of your general partner's board of directors. The sale of your units pursuant to this offer will not be a taxable transaction for the general partner of your partnership or its affiliates. Consequently, the general partner of your partnership and its affiliates will not recognize gain or loss in connection with this offer. We intend to treat the entire offer price as consideration paid to you for your units, regardless of whether you requested exclusion from the settlement. The general partner makes no recommendation as to whether or not you should tender or refrain from tendering your units in this offer. While the general partner believes that the terms of our offer are fair, the general partner also believes that you must make your own decision whether or not to participate in any offer. The general partner is unable to make a recommendation because each limited partner's circumstances may differ from those of other limited partners. These circumstances, which would impact the desirability of tendering units in the offer, include a limited partner's financial position, his need or desire for liquidity, other financial opportunities available to him, and his tax position and the tax consequences to him of selling his units. 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 WITH RESPECT TO YOUR PARTICULAR CIRCUMSTANCES 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. 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 47 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. 13. CONFLICTS OF INTEREST AND TRANSACTIONS WITH AFFILIATES Conflicts of Interest with Respect to the Offer. The general partner of your partnership is an affiliate of AIMCO. As a result, the general partner has substantial conflicts of interest with respect to the offer. We desire to purchase units at a low price and you desire to sell units at a high price. Such conflicts of interest in connection with the offer differ from those conflicts of interest that exist in connection with the general partner's management of your partnership. Your general partner has filed a Solicitation/ Recommendation Statement on Schedule 14d-9 with the SEC, which indicates that it is remaining neutral and making no recommendation as to whether limited partners should tender their units in the offer. YOU ARE URGED TO READ THIS LITIGATION SETTLEMENT OFFER AND THE SCHEDULE 14D-9 AND THE RELATED MATERIALS CAREFULLY AND IN THEIR ENTIRETY BEFORE DECIDING WHETHER TO TENDER YOUR UNITS. Conflicts of Interest That Currently Exist for Your Partnership. We own the general partner of your partnership and are affiliated with the property manager of your partnership's property. We and the general partner of your partnership received total approximate fees and reimbursements (excluding property management fees) of approximately $581,000 in 2001, $1,027,000 in 2002 and $271,000 in 2003. Total approximate fees and reimbursements (excluding property management fees) for the three months ended March 31, 2004 were $45,000. The property manager is entitled to receive five percent of gross receipts from the partnership's property for providing property management services. It received management fees of approximately $341,000 in 2001, $359,000 in 2002 and $317,000 in 2003. Management fees for the three months ended March 31, 2004 were approximately $81,000. We have no current intention of changing the fee structure for your general partner or the manager of your partnership's property. Competition Among Properties. Because AIMCO and your partnership both invest in apartment properties, these properties may compete with one another for tenants. Furthermore, you should bear in mind that AIMCO may acquire properties in general market areas where your partnership's property is located. We believe that this concentration of properties in a general market area will facilitate overall operations through collective advertising efforts and other operational efficiencies. In managing AIMCO's properties, we will attempt to reduce conflicts between competing properties by referring prospective customers to the property considered to be most conveniently located for the customer's needs. Future Offers. Under the terms of the settlement, we are not obligated to make another tender offer for units in your partnership. We have no current plans to conduct future tender offers for the units in your partnership, but our plans may change based on future circumstances, including tender offers made by third parties. Any such future offers that we make could be at prices that are more or less than the current offer price. Transactions with Affiliates. Your partnership has no employees and is dependent on the general partner and us for the management and administration of all partnership activities. The partnership 48 agreement provides for (i) certain payments to us for services and (ii) reimbursement of certain expenses incurred by us on behalf of the partnership. We and the general partner of your partnership received total fees and reimbursements (excluding property management fees) of approximately $581,000 in 2001, $1,027,000 in 2002 and $271,000 in 2003. Total approximate fees and reimbursements (excluding property management fees) for the three months ended March 31, 2004 were $45,000. We received reimbursement of accountable administrative expenses amounting to approximately $465,000, $815,000 and $207,000 for the years ended December 2001, 2002 and 2003, respectively, and $45,000 for the three months ended March 31, 2004. Included in these amounts are fees related to construction management services provided by NHP Management Company (which is our affiliate), of approximately $192,000, $576,000 and $8,000 for the years ended December 31, 2001, 2002 and 2003, respectively, with none for the three months ended March 31, 2004. The construction management fees are calculated based on a percentage of current year additions to investment properties. The property manager is entitled to receive 5% of gross receipts from all of the partnership's properties as compensation for providing property management services. It received management fees of approximately $341,000, $359,000 and $317,000 for the years ended December 31, 2001, 2002 and 2003 respectively. Management fees for the three months ended March 31, 2004 were approximately $81,000. In addition to reimbursement for services of affiliates, the partnership paid us approximately $10,000 and $57,000 for loan costs related to the refinancing of Big Walnut Apartments during the years ended December 31, 2003 and 2002, respectively. In accordance with the partnership agreement, we advanced the partnership funds to cover operational expenses and to assist in the closing of the refinancing required at Reflections Apartments of approximately $3,778,000, $2,783,000 and $7,243,000 during the years ended December 31, 2001, 2002 and 2003, respectively, and $145,000 during the three months ended March 31, 2004. The partnership repaid approximately $0, $1,015,000, $5,577,000 and $648,000 during the same periods. At March 31, 2004, the amount of the outstanding loans and accrued interest was approximately $8,103,000. Interest on advances is charged at prime plus 1% or 5.00% at March 31, 2004. Interest expense was approximately $416,000, $402,000 and $436,000 for the years ended December 31, 2001, 2002 and 2003, respectively, and $110,000 for the three months ended March 31, 2004. The partnership paid approximately $0, $316,000 and $599,000 in interest during the years ended December 31, 2001, 2002 and 2003, respectively. The general partner is considering the remedies it can pursue including accelerating repayment of the outstanding loans it has made to the partnership to cover operational expenses and to assist in the refinancing of Reflections Apartments. Subsequent to December 31, 2003, the partnership received an advance from us of approximately $145,000 to cover operating expenses. In addition, the partnership repaid approximately $272,000 of such advances. Subsequent to March 31, 2004, the partnership received an advance from us of approximately $195,000 to pay franchise and nonresident withholding taxes. The partnership accrued a real estate commission due to the general partner of $48,000 upon the sale of Shoppes at River Rock during the year ended December 31, 1999. During 2002, the partnership paid $30,000 of this amount to an unaffiliated third party as part of a settlement regarding brokerage services. Approximately $18,000 is accrued at March 31, 2004. Payment of this commission is subordinate to the limited partners receiving their original invested capital plus a cumulative non-compounded annual return of 8% on their adjusted invested capital. The partnership insures its properties up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The partnership insures its properties above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the general partner. During the years ended December 31, 2003 and 2002, the partnership was charged by AIMCO and its affiliates approximately $54,000 and $155,000, respectively, for insurance coverage and fees associated with policy claims administration. During 2004, the partnership anticipates its costs for insurance coverage and fees associated with policy claims administration provided by AIMCO and its affiliates will be approximately $32,000. 49 14. FUTURE PLANS OF THE PURCHASER As described above under "The Litigation Settlement Offer -- Section 11. Background and Reasons for the Offer," your general partner is our affiliate and, therefore, we have the ability to control the management of your partnership. In addition, we are affiliated with the manager of your partnership's property. We currently intend that, upon consummation of the offer, we will hold the units acquired and your partnership will continue its business and operations substantially as they are currently being conducted. The offer is not expected to have any effect on partnership operations. Under the terms of the settlement, although we are not obligated to do so, we may make another litigation settlement offer within 18 months of the order finally approving the settlement. In addition, we may make future tender offers after that time. However, we have no current plans to conduct future tender offers for units in your partnership. We may acquire additional units or sell units after completion or termination of the offer. Any acquisition may be made through private purchases, through one or more future tender or exchange offers, by merger, consolidation or by any other means deemed advisable. Any acquisition may be at a price higher or lower than the price to be paid for the units purchased pursuant to this offer, and may be for cash, limited partnership interests in AIMCO Properties, L.P. or other consideration. We may consider selling some or all of the units we acquire pursuant to this offer to persons not yet determined, which may include our affiliates. We may also buy your partnership's property, although we have no present intention to do so. There can be no assurance, however, that we will initiate or complete, or will cause your partnership to initiate or complete, any subsequent transaction during any specific time period following the expiration of the offer or at all. Except as set forth herein, we do 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; any changes in composition of your partnership's senior management or personnel or their compensation; any changes in your partnership's present capitalization, indebtedness or distribution policy; or any other material changes in your partnership's structure or business. We or our affiliates may loan funds to your partnership which may be secured by your partnership's property. If any such loans are made, upon default of such loans, we or our affiliates could seek to foreclose on the loan and related mortgage or security interest. However, we expect that, consistent with your general partner's fiduciary obligations, the general partner will seek and review opportunities, including opportunities identified by us, to engage in transactions which could benefit your partnership, such as sales or refinancings of assets or a combination of the partnership with one or more other entities, with the objective of seeking to maximize returns to limited partners. 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 50 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. 15. CERTAIN INFORMATION CONCERNING YOUR PARTNERSHIP General. Your partnership was organized on June 29, 1984, under the laws of the State of Delaware. Its primary business is real estate ownership and related operations. Your partnership was formed for the purpose of making investments in income-producing commercial and residential real estate. Your partnership's investment portfolio currently consists of three residential apartment complexes. Your partnership had approximately 783 limited partners as of June 10, 2004. General Partner. The general partner of your partnership is Davidson Diversified Properties, Inc., which is an affiliate of AIMCO. Our affiliate serves as manager of the property owned by your partnership. We and the general partner of your partnership received total fees and reimbursements (excluding property management fees) of approximately $581,000 in 2001, $1,027,000 in 2002 and $271,000 in 2003. Total approximate fees and reimbursements (excluding property management fees) for the three months ended March 31, 2004 were $45,000. The property manager is entitled to receive five percent of gross receipts from the partnership's property for providing property management services. It received management fees of approximately $341,000 in 2001, $359,000 in 2002 and $317,000 in 2003. Management fees for the three months ended March 31, 2004 were approximately $81,000. Ownership and Voting. We, together with Cooper River Properties, L.L.C., Davidson Diversified Properties, Inc. and AIMCO IPLP, L.P. (which are our affiliates), own 620.25 units, or 50.66%, 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." Investment Objectives and Policies; Sale or Financing of Investments. In general, your general partner (which is our affiliate) regularly evaluates the partnership's property by considering various factors, such as the partnership's financial position and real estate and capital markets conditions. The general partner monitors the property's specific locale and sub-market conditions (including stability of the surrounding neighborhood), evaluating current trends, competition, new construction and economic changes. It oversees the property's operating performance and continuously evaluates the physical improvement requirements. In addition, the financing structure for the property (including any prepayment penalties), tax implications, availability of attractive mortgage financing to a purchaser, and the investment climate are all considered. Any of these factors, and possibly others, could potentially contribute to any decision by the general partner to sell, refinance, upgrade with capital improvements or hold the partnership property. If rental market conditions improve, the level of distributions might increase over time. It is possible that the private resale market for properties could improve over time, making a sale of the partnership's property in a private transaction at some point in the future a more viable option than it is currently. After taking into account the foregoing considerations, your general partner is not currently seeking a sale of your partnership's property. Although the future operating results of your partnership and future sales prices of the property owned by your partnership are uncertain, the operating performance of your partnership's property may improve in the future, which, in turn, may result in higher property values, making a sale of your partnership's properties a more attractive option in the future. Such values, however, are also a function of capitalization rates in the market and the interest rate environment at the time. Furthermore, the general partner spent approximately $86,000 for capital improvements at the property in the three months ended March 31, 2004 to repair and update the property. Although there can be no assurance as to effect of these expenditures on the future performance of your partnership's property, these expenditures are expected to improve the desirability of the property to tenants. Another significant factor considered by your general partner is the likely tax consequences of a sale of the property for cash. Such a transaction would likely result in tax liabilities for many limited partners. 51 Term of Your Partnership. Under your partnership's agreement of limited partnership, the term of the partnership will continue until December 31, 2008, unless sooner terminated as provided in the agreement or by law. Capital Replacements. Your partnership has an ongoing program of capital improvements, replacements and renovations, including interior and exterior building improvements, cabinet, floor covering and appliance replacements and other replacements and renovations in the ordinary course of business. All capital improvements and renovation costs, which are budgeted at $594,000 for 2004, are expected to be paid from operating cash flows or cash reserves, or from short-term or long-term borrowings. Competition. There are other residential properties within the market area of your partnership's property. The number and quality of competitive properties in such an area could have a material effect on the rental market for the apartments at your partnership's property and the rents that may be charged for such apartments. While AIMCO is a significant factor in the United States in the apartment industry, competition for apartments is local. According to data published by the National Multi-Housing Council, we believe AIMCO is the largest owner and manager of multifamily apartment properties in the United States. Financial Data. The selected financial information of your partnership set forth below for the three months ended March 31, 2004 and 2003 is based on unaudited financial statements. The selected financial information of your partnership set forth below for the years ended December 31, 2003, 2002 and 2001 is based on audited financial statements. This information should be read in conjunction with such financial statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations of Your Partnership" in the Annual Report on Form 10-KSB of your partnership for the year ended December 31, 2003 and the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004. This report 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.
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, --------------------- ------------------------------------- 2004 2003 2003 2002 2001 --------- --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) OPERATING DATA: Total revenues............ $ 1,617 $ 1,476 $ 6,014 $ 5,516 $ 4,800 Net income (loss)......... (241) 5,220 4,029 (166) (1,448) Net income (loss) per limited partnership unit................... (192.77) 3,923.22 2,965.90 (133.14) (1,159.08) Income (loss) per unit from continuing operations............. (192.77) (36.75) (1,047.17) (12.25) (1,141.92) Distributions per limited partnership unit....... -- -- -- -- -- Ratio of earnings to fixed charges (deficit)...... 32.3% 9.4% 5.8% 82.9% (22.4)%
52
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, --------------------- ------------------------------------- 2004 2003 2003 2002 2001 --------- --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA) BALANCE SHEET DATA: Cash and cash equivalents............ 200 512 746 591 743 Investment property, net of accumulated depreciation........... 26,917 24,261 27,355 27,174 22,961 Total assets.............. 28,117 25,883 29,219 28,758 24,738 Mortgage note payable..... 22,850 20,353 22,986 20,435 24,349 General partners' capital (deficit).............. (194) (167) (189) (587) (584) Limited partners' capital (deficit).............. (3,627) (2,044) (3,391) (7,022) (6,859) Partners' capital (deficit).............. (3,821) (2,211) (3,580) (7,609) (7,443) Book value per limited partnership unit....... 2,962.63 1,669.59 2,769.86 5,735.76 5,602.61 CASH FLOWS: Net increase (decrease) in cash and cash equivalents............ (546) (79) 155 (152) (387) Net cash provided by operating activities... 183 226 522 1,427 1,396
Description of Property. The following shows the location, the date of purchase, the nature of your partnership's ownership interest in and the use of your partnership's property as of December 31, 2003.
DATE OF PROPERTY PURCHASE TYPE OF OWNERSHIP USE - -------- -------- ----------------- --- Big Walnut Apartments.............. 03/28/85 Fee ownership subject to Apartment Columbus, Ohio first mortgage(1) 251 units The Trails Apartments.............. 08/30/85 Fee ownership subject to Apartment Nashville, Tennessee first mortgage(1) 248 units Reflections Apartments............. 09/30/85 Fee ownership subject to Apartment (formerly Greensprings Manor first mortgage(2) 582 units Apartments) Indianapolis, Indiana
- --------------- (1) The property is held by a limited partnership in which the partnership owns a 99.90% interest. (2) The property is held by a limited partnership wholly owned by the partnership. On January 30, 2003, the partnership sold Lafontenay I and II Apartments to an unaffiliated third party for $9,700,000. After payment of closing costs of approximately $254,000, and the assumption of the mortgage debt of approximately $6,899,000 by the purchaser, the net proceeds received by the partnership were approximately $2,547,000. 53 Accumulated Depreciation Schedule. The following shows the gross carrying value and accumulated depreciation of your partnership's property as of December 31, 2003.
GROSS CARRYING ACCUMULATED FEDERAL TAX PROPERTY VALUE DEPRECIATION RATE METHOD BASIS - -------- -------------- ------------ -------- ------ -------------- (IN THOUSANDS) (IN THOUSANDS) Big Walnut Apartments....... $10,088 $ 6,619 5-25 yrs S/L $ 2,004 The Trails Apartments....... 9,859 6,341 5-25 yrs S/L 1,706 Reflections Apartments...... 30,077 9,709 5-25 yrs S/L 20,399 ------- ------- -------- Total.................. $50,024 $22,669 $ 24,109 ======= ======= ========
Schedule of Mortgages. The following shows certain information regarding the outstanding first mortgage encumbering your partnership's property as of December 31, 2003.
PRINCIPAL BALANCE AT STATED DECEMBER 31, INTEREST PERIOD MATURITY PRINCIPAL BALANCE PROPERTY 2003 RATE AMORTIZED DATE DUE AT MATURITY - -------- ------------ -------- ---------- -------- ----------------- (IN THOUSANDS) (IN THOUSANDS) Big Walnut Apartments....... $ 5,594 (1) 360 months 09/01/07 $ 4,946 The Trails Apartments....... 4,713 (2) 240 months 12/01/09 3,010 Reflections Apartments...... 13,500 4.17% 300 months 01/01/29 -- ------- ------- Totals................. $23,807 $ 7,956 ======= Less unamortized discounts................. (821) ------- Total.................. $22,986 =======
- --------------- (1) Adjustable interest rate is based on the Fannie Mae discounted mortgage-backed security index plus 85 basis points. The rate at December 31, 2003 was 1.92%. (2) Adjustable rate based on 75% of the interest rate on new-issue long-term A-rated utility bonds as determined on the first day of each calendar quarter. The rate at December 31, 2003 was 4.43%. On December 11, 2003, the partnership refinanced the construction loan mortgage encumbering Reflections Apartments. The refinancing replaced mortgage indebtedness of approximately $10,379,000 with a new mortgage of approximately $13,500,000. The new mortgage carries a stated interest rate of 4.17% compared to a variable interest rate on the prior mortgage. Payments of principal and interest of approximately $73,000 are due on the first day of each month commencing in February 2004 until January 2029 at which time the mortgage is scheduled to be fully amortized. However, the lender can exercise a call option on the mortgage on February 1, 2009 and every fifth anniversary thereafter until maturity on January 1, 2029. If the lender exercises the call option, the outstanding principal balance and any related interest expense are due and payable on the call date. Capitalized loan costs, which are included in other assets, incurred with the refinancing were approximately $119,000, and are being amortized over the life of the mortgage note payable. Average Rental Rates and Occupancy. The following shows the average rental rates and occupancy percentages for your partnership's property during the periods indicated.
AVERAGE ANNUAL AVERAGE ANNUAL RENTAL RATE OCCUPANCY --------------------------- ----------- PROPERTY 2003 2002 2003 2002 - -------- ------------ ------------ ---- ---- (PER UNIT) Big Walnut Apartments........................ $6,928 $6,948 92% 96% The Trails Apartments........................ $6,996 $7,296 95% 94% Reflections Apartments....................... $6,661 $6,480 66% 45%
54 Property Management. Your partnership's property is managed by one of our affiliates. Pursuant to the management agreement between the property manager and your partnership, the property manager operates your partnership's property, establishes rental policies and rates and directs marketing activities. The property manager also is responsible for maintenance, the purchase of equipment and supplies, and the selection and engagement of all vendors, suppliers and independent contractors. Distributions. The following table shows, for each of the years indicated, the distributions paid per unit for such years.
YEAR AMOUNT - ---- ------- 2001........................................................ $ 0.00 2002........................................................ $ 0.00 2003........................................................ $ 0.00 2004 (through March 31, 2004)............................... $ 0.00
Compensation Paid to the General Partner and its Affiliates. The following table shows, for each of the years indicated, approximate amounts paid to your general partner and its affiliates on a historical basis. The general partner is reimbursed for actual direct costs and expenses incurred in connection with the operation of the partnership. The property manager is entitled to receive fees for transactions involving your partnership and its property and is entitled to receive five percent of the gross receipts from the partnership's property for providing property management services. See "The Litigation Settlement Offer -- Section 13. Conflicts of Interest and Transactions with Affiliates."
PARTNERSHIP PROPERTY FEES AND MANAGEMENT YEAR EXPENSES FEES - ---- ----------- ---------- 2001........................................................ $ 581,000 $341,000 2002........................................................ $1,027,000 $359,000 2003........................................................ $ 271,000 $317,000 2004 (through March 31, 2004)............................... $ 45,000 $ 81,000
Legal Proceedings. From time to time, your partnership may be a party to a variety of legal proceedings related to its ownership of properties which arise in the ordinary course of business. See "The Litigation Settlement Offer -- Section 9. The Lawsuit and the Settlement." 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., Davidson Diversified Properties, Inc. and AIMCO IPLP, L.P. (which are our affiliates), own 620.25 units, or 50.66%, 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." 17. SOURCE OF FUNDS We expect that approximately $2,480,100 will be required to purchase all of the limited partnership units that we are seeking in this offer exclusive of fees and expenses. For more information regarding fees and expenses, see "The Litigation Settlement Offer -- Section 21. Fees and Expenses." In addition to this offer, we are concurrently making offers to acquire interests in approximately 43 other limited partnerships pursuant to the terms of the settlement. If all such offers were fully 55 subscribed for cash, we would be required to pay approximately $107 million for all such units. If for some reason we did not have such funds available we might extend these offers for a period of time sufficient for us to obtain additional funds, or we could terminate the offers. However, we do not expect all such offers to be fully subscribed. Additionally, we believe that we will have sufficient cash on hand and available sources of financing to acquire all units tendered pursuant to such offers. As of March 31, 2004, we had $92.7 million of cash on hand and $294.5 million available for borrowing under existing lines of credit. We intend to repay any amounts borrowed to finance the offer out of future working capital. We have a $445 million revolving credit facility with Bank of America, Fleet National Bank and First Union National Bank with a syndicate comprised of a total of ten lender participants. We are the borrower and all obligations thereunder are guaranteed by AIMCO and certain of its subsidiaries. The obligations under the credit facility are secured, among other things, by our pledge of our stock ownership in certain subsidiaries of AIMCO, and a first priority pledge of certain of our non-real estate assets. The annual interest rate under the credit facility is based on either LIBOR or a base rate which is the higher of Bank of America's reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The margin is 2.85% in the case of LIBOR-based loans and between 0.65% and 1.35% in the case of base rate loans, based upon a fixed charge coverage ratio. The credit facility expires on July 31, 2005 and can be extended at AIMCO's option for a one-year term on a one-time basis. 18. DISSENTERS' RIGHTS Neither the agreement of limited partnership of your partnership nor applicable law provides any right for you to have your units appraised or redeemed in connection with, or as a result of, our offer. You have the opportunity to make an individual decision on whether or not to tender your units in the offer. No provisions have been made with regard to the offer to allow you or other limited partners to inspect the books and records of the partnership or to obtain counsel or, other than as required by the settlement, appraisal services at our expense or at the expense of your partnership. However, you have the right under your partnership's agreement of limited partnership to obtain a list of the limited partners in your partnership. 19. CONDITIONS TO THE 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: - any 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 materially adverse to your partnership or the value of your units to us, which change would, individually or in the aggregate, 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 - there shall have occurred (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or the over-the-counter market in the United States, (ii) a decline in the closing share price of AIMCO's Class A Common Stock of more than 5.0%, measured from the close of business on the last trading day preceding the date of this offer and the close of business on the last trading day preceding the expiration of this offer, (iii) any extraordinary or material adverse change in the financial, real estate or money markets or major equity security indices in the United States such that there shall have occurred at least a 25 basis point increase in LIBOR, or at least a 5.0% decrease in the S&P 500 Index, the Morgan Stanley 56 REIT Index, or the price of the 10-year Treasury Bond or the price of the 30-year Treasury Bond, in each case, measured from the close of business on the last trading day preceding the date of this offer and the close of business on the last trading day preceding the expiration of this offer, (iv) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (v) acts of terrorism or a commencement of a war, armed hostilities or other national or international calamity directly or indirectly involving the United States, (vi) any limitation (whether or not mandatory) by any governmental authority on, or any other material event which, in either case, could reasonably be expected to affect the extension of credit by banks or other lending institutions, or (vii) in the case of any of the foregoing existing at the time of the commencement of the offer, a material acceleration or worsening thereof; or - 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) in the case of any of the foregoing relating to the litigation settlement and existing at the time of the commencement of the offer, a material worsening thereof; or - there shall be any action taken, or any statute, rule, regulation, order or injunction shall be sought, proposed, enacted, promulgated, entered, enforced or deemed applicable to the offer, your partnership, any general partner of your partnership, us or any affiliate of our or your partnership, or any other action shall have been taken, proposed or threatened, by any government, governmental authority or court, that, directly or indirectly, results in any of the consequences referred to in clauses (i) through (v) of the immediately preceding paragraph; or - a tender or exchange offer for any units shall have been commenced or publicly proposed to be made by another person or "group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934), or it shall have been publicly disclosed or we shall have otherwise learned that (i) any person or group shall have acquired or proposed or be attempting to acquire beneficial ownership of more than four percent of the units, or shall have been granted any option, warrant or right, conditional or otherwise, to acquire beneficial ownership of more than four percent of the units, or (ii) any person or group shall have entered into a definitive agreement or an agreement in principle or made a proposal with respect to a merger, consolidation, purchase or lease of assets, debt refinancing or other business combination with or involving your partnership; - 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 an adverse effect on our financial condition in an amount in excess of $10,000,000, which does not result from actions or inactions by us or our affiliates; or - the final court approval of the settlement shall have been reversed or vacated, the parties terminate the settlement or the settlement shall otherwise terminate by its terms. 57 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, and 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. 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. All conditions to our offer will be satisfied or waived on or before the expiration of our offer. We will not waive a material condition to the offer on the expiration date. If we waive any material conditions to our offer, 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. 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 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. 20. CERTAIN LEGAL MATTERS General. Except as set forth in this Section 20, we are not aware of any licenses or regulatory permits that would be material to the business of your partnership, taken as a whole, and that might be adversely affected by our acquisition of units as contemplated herein, or any filings, approvals or other actions by or with any domestic or foreign governmental authority or administrative or regulatory agency that would be required prior to the acquisition of units by us pursuant to the offer, other than the filing of a Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO with the SEC (which has already been filed) and any required amendments thereto. While there is no present intent to delay the purchase of units tendered pursuant to the offer pending receipt of any such additional approval or the taking of any such action, there can be no assurance that any such additional approval or action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to your partnership or its business, or that certain parts of its business might not have to be disposed of or other substantial conditions complied with in order to obtain such approval or action, any of which could cause us to elect to terminate the offer without purchasing units thereunder. Our obligation to purchase and pay for units is subject to certain conditions, including conditions related to the legal matters discussed in this Section 20. Antitrust. We do not believe that the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, is applicable to the acquisition of units contemplated by our offer. Margin Requirements. The units are not "margin securities" under the regulations of the Board of Governors of the Federal Reserve System and, accordingly, those regulations generally are not applicable to our offer. State Laws. We are not aware of any jurisdiction in which the making of our offer is not in compliance with applicable law. If we become aware of any jurisdiction in which the making of the offer would not be in compliance with applicable law, we will make a good faith effort to comply with any such law. If, after such good faith effort, we cannot comply with any such law, the offer will not be made to (nor will tenders be accepted from or on behalf of) limited partners residing in such jurisdiction. In those jurisdictions with securities or blue sky laws that require the offer to be made by a licensed broker or dealer, the offer shall be made on behalf of us, if at all, only by one or more registered brokers or dealers licensed under the laws of that jurisdiction. 21. FEES AND EXPENSES You will not pay any partnership transfer fees if you tender your units. Except as set forth herein, we will not pay any fees or commissions to any broker, dealer or other person for soliciting tenders of units 58 pursuant to the offer. We have retained The Altman Group, Inc. to act as Information Agent in connection with our offer. The Information Agent may contact holders of units by mail, telephone, telex, telegraph and personal interview and may request brokers, dealers and other nominee limited partners to forward materials relating to the offer to beneficial owners of the units. We will pay the Information Agent reasonable and customary compensation for its services in connection with the offer, plus reimbursement for out-of-pocket expenses, and will indemnify it against certain liabilities and expenses in connection therewith, including liabilities under the Federal securities laws. We will also pay all costs and expenses of printing and mailing the offer and any related legal fees and expenses. However, under the terms of the settlement, the offer price has been reduced by the costs and expenses related to making this offer. The partnership will not be responsible for paying any of the fees or expenses incurred by us in connection with this offer. 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.................................................. 11,000 Printing Fees............................................... 7,600 Tax and Accounting Fees..................................... 1,500 Postage..................................................... 500 Appraiser................................................... 6,675 Depositary.................................................. 500 ------- Total..................................................... $35,275 =======
--------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF US NOT CONTAINED HEREIN, OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. NEITHER THE COURT NOR COUNSEL FOR THE PARTIES IN THE CLASS AND DERIVATIVE LITIGATION MAKE ANY RECOMMENDATION REGARDING WHETHER YOU SHOULD ACCEPT THIS LITIGATION SETTLEMENT OFFER. YOU ARE INSTEAD 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 WITH RESPECT TO YOUR PARTICULAR CIRCUMSTANCES BEFORE DECIDING WHETHER OR NOT TO ACCEPT THIS LITIGATION SETTLEMENT OFFER. We have filed with the SEC a Tender Offer Statement and Rule 13e-3 Transaction Statement on Schedule TO, pursuant to Sections 13(e)(4), 14(d)(1) and Rule 14d-3 under the Exchange Act, furnishing certain additional information with respect to our offer, and may file amendments thereto. Your partnership has filed with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 pursuant to Section 14(d)(4) and Rule 14d-9 under the Exchange Act, furnishing certain additional information about your partnership's and the general partner's position concerning our offer, and your partnership may file amendments thereto. The Schedules TO and 14D-9 and any amendments to either Schedule, including exhibits, may be inspected and copies may be obtained at the same place and in the same manner as described in "The Litigation Settlement Offer -- Section 15. Certain Information Concerning Your Partnership." 59 The letter of transmittal and any other required documents should be sent or delivered by each limited partner or such limited partner's broker, dealer, bank, trust company or other nominee to the Information Agent at one of its addresses set forth below. THE INFORMATION AGENT FOR THE OFFER IS: THE ALTMAN GROUP, INC. By Mail: By Overnight Courier: By Hand: 1275 Valley Brook Avenue 1275 Valley Brook Avenue 1275 Valley Brook Avenue Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 Lyndhurst, NJ 07071
For information, please call: TOLL FREE: (800) 467-0821 60 ANNEX I OFFICERS AND DIRECTORS The names and positions of the executive officers of Apartment Investment and Management Company ("AIMCO"); AIMCO-GP, Inc. ("AIMCO-GP") and ConCap Equities, Inc., the general partner of your partnership (the "General Partner") are set forth below. All of the executive officers of AIMCO also serve as executive officers of AIMCO-GP. The directors of AIMCO are also set forth below. The two directors of AIMCO-GP are Terry Considine and Peter K. Kompaniez. The directors of the General Partner of your partnership are Peter K. Kompaniez and Martha L. Long. The executive officers of the General Partner of your partnership are Harry Alcock, Miles Cortez, Patti K. Fielding, Paul J. McAuliffe, Thomas M. Herzog and Martha L. Long. Unless otherwise indicated, the business address of each executive officer and director is 4582 South Ulster Parkway, Suite 1100, Denver, Colorado 80237. Each executive officer and director is a citizen of the United States of America.
NAME POSITION - ---- -------- Terry Considine........................... Chairman of the Board, Chief Executive Officer and President of AIMCO Peter K. Kompaniez........................ Vice Chairman of the Board of AIMCO and Director of the General Partner Jeffrey W. Adler.......................... Executive Vice President -- Conventional Property Operations of AIMCO Harry G. Alcock........................... Executive Vice President and Chief Investment Officer of AIMCO and Executive Vice President of the General Partner Miles Cortez.............................. Executive Vice President, General Counsel and Secretary of AIMCO and the General Partner Joseph DeTuno............................. Executive Vice President -- Redevelopment of AIMCO Randall J. Fein........................... Executive Vice President -- University Housing of AIMCO Patti K. Fielding......................... Executive Vice President -- Securities and Debt of AIMCO and Executive Vice President of the General Partner Lance J. Graber........................... Executive Vice President -- AIMCO Capital Paul J. McAuliffe......................... Executive Vice President and Chief Financial Officer of AIMCO and the General Partner Ronald D. Monson.......................... Executive Vice President of AIMCO James G. Purvis........................... Executive Vice President -- Human Resources of AIMCO David Robertson........................... Executive Vice President of AIMCO; President and Chief Executive Officer of AIMCO Capital Thomas M. Herzog.......................... Senior Vice President and Chief Accounting Officer of AIMCO and the General Partner Martha L. Long............................ Director and Senior Vice President of the General Partner James N. Bailey........................... Director of AIMCO Richard S. Ellwood........................ Director of AIMCO J. Landis Martin.......................... Director of AIMCO Thomas L. Rhodes.......................... Director of AIMCO
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- Terry Considine........................... Mr. Considine has been Chairman of the Board and Chief Executive Officer of AIMCO and AIMCO-GP since July 1994. Upon the effectiveness of Mr. Kompaniez's resignation as President and pending the appointment of a chief operating officer, Mr. Considine will serve as President. Mr. Considine serves as Chairman of the Board of Directors of American Land Lease, Inc. (formerly Asset Investors Corporation and Commercial Asset Investors, Inc.), another public real estate investment trust. Mr. Considine devotes his time to his responsibilities at AIMCO and AIMCO-GP on a full-time basis, and the balance to American Land Lease, Inc. Peter K. Kompaniez........................ Mr. Kompaniez has been Vice Chairman of the Board and a director of AIMCO since July 1994 and was appointed President in July 1997. Mr. Kompaniez has also served as Chief Operating Officer of NHP Incorporated, which was acquired by AIMCO in December 1997. Effective April 1, 2004, Mr. Kompaniez resigned as President of AIMCO. Mr. Kompaniez will continue in his role as Director of the General Partner and Vice Chairman of AIMCO's Board and will serve AIMCO on a variety of special and ongoing projects in an operating role. Jeffery W. Adler.......................... Mr. Adler was appointed Executive Vice President, Conventional Property Operations in February 2004. Previously he served as Senior Vice President of Risk Management of AIMCO from January 2002 until November 2002, when he added the responsibility of Senior Vice President, Marketing. Prior to joining AIMCO, from 2000 to 2002, Mr. Adler was Vice President, Property/Casualty for Channelpoint, a software company. From 1990 to 2000 Mr. Adler held several positions at Progressive Insurance including Colorado General Manager from 1996 to 2000, Product Manager for Progressive Insurance Mountain Division from 1992 to 1996, and Director of Corporate Marketing from 1990 to 1992. Harry G. Alcock........................... Mr. Alcock served as a Vice President of AIMCO from July 1996 to October 1997, when he was promoted to Senior Vice President -- Acquisitions. Mr. Alcock served as Senior Vice President -- Acquisitions until October 1999, when he was promoted to Executive Vice President and Chief Investment Officer. Mr. Alcock has held responsibility for AIMCO's acquisition and financing activities since July 1994. From June 1992 until July 1994, Mr. Alcock served as Senior Financial Analyst for PDI and HFC. From 1988 to 1992, Mr. Alcock worked for Larwin Development Corp., a Los Angeles-based real estate developer, with responsibility for raising debt and joint venture equity to fund land acquisition and development. From 1987 to 1988, Mr. Alcock worked for Ford Aerospace Corp. He received his B.S. from San Jose State University.
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- Miles Cortez.............................. Mr. Cortez was appointed Executive Vice President, General Counsel and Secretary of the General Partner in February 2004 and of AIMCO in August 2001. Prior to joining AIMCO, Mr. Cortez was the senior partner of Cortez Macaulay Bernhardt & Schuetze LLC, a Denver Law firm, from December 1997 through September 2001. From August 1993 through November 1997, Mr. Cortez was a partner in the law firm of McKenna & Cuneo, LLP in Denver. Mr. Cortez was the President of the Colorado Bar Association from 1996 to 1997 and President of the Denver Bar Association from 1982 to 1983. Joseph DeTuno............................. Mr. DeTuno was appointed Executive Vice President -- Redevelopment of AIMCO in February 2001 and previously served as Senior Vice President -- Property Redevelopment of AIMCO from August 1997 to February 2001. Prior to joining AIMCO, Mr. DeTuno was President and founder of JD Associates, his own full service real estate consulting, advisory and project management company that he founded in 1990. Randall J. Fein........................... Mr. Fein was appointed Executive Vice President -- University Housing of AIMCO in October 2003. He is responsible For the operation of AIMCO's student housing related Portfolio, including its joint venture activities. From 1989 through 2003, Mr. Fein served as general partner of Income Apartment Investors L.P., and Texas First Properties L.P., which operated student and non-student housing. Prior to entering the apartment industry, Mr. Fein was engaged in the securities industry as a Director of Jefferies and as a Vice President of Salomon Brothers Inc. Mr. Fein is a member of the State Bar of Texas. Patti K. Fielding......................... Ms. Fielding was appointed Executive Vice President -- Securities and Debt of the General Partner in February 2004 and of AIMCO in February 2003. She is responsible for securities and debt financing and the treasury department. From January 2000 to February 2003, Ms. Fielding served as Senior Vice President -- Securities and Debt. Ms. Fielding joined AIMCO in February 1997 and served as Vice President -- Tenders, Securities and Debt until January 2002. Prior to joining AIMCO, Ms. Fielding was a Vice President with Hanover Capital Partners from 1996 to 1997, Vice Chairman, Senior Vice President and Principal of CapSource Funding Corp from 1993 to 1995, and Group Vice President with Duff & Phelps RatingCo. from 1987 to 1993.
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- Lance J. Graber........................... Mr. Graber was appointed Executive Vice President -- Acquisitions in October 1999. His principal business function is overseeing dispositions, refinancings, redevelopments and other transactions within AIMCO Capital's portfolio of affordable properties. Prior to joining AIMCO, Mr. Graber was an Associate from 1991 through 1992 and then a Vice President from 1992 through 1994 at Credit Suisse First Boston engaged in real estate financial advisory services and principal investing. He was a Director there from 1994 to May 1999, during which time he supervised a staff of seven in the making of principal investments in hotel, multi-family and assisted living properties. Mr. Graber received a B.S. and an M.B.A. from the Wharton School of the University of Pennsylvania. Paul J. McAuliffe......................... Mr. McAuliffe has been Executive Vice President and Chief Financial Officer of the General Partner since April 2002. Mr. McAuliffe has been Executive Vice President of AIMCO since February 1999 and was appointed Chief Financial Officer in October 1999. Prior to joining AIMCO, Mr. McAuliffe was Senior Managing Director of Secured Capital Corporation and prior to that time had been a Managing Director of Smith Barney, Inc. from 1993 to 1996, where he was a key member of the underwriting team that led AIMCO's initial public offering in 1994. Mr. McAuliffe was also a Managing Director and head of the real estate group at CS First Boston from 1990 to 1993 and he was a Principal in the real estate group at Morgan Stanley & Co., Inc. from 1983 to 1990. Mr. McAuliffe received a B.A. from Columbia College and an MBA from University of Virginia, Darden School. Ronald D. Monson.......................... Mr. Monson was appointed Executive Vice President of AIMCO in February 2001. Beginning February 2004, Mr. Monson assumed oversight of four of AIMCO's regional operating centers. From February 2001 to February 2004, Mr. Monson served as the head of AIMCO's conventional property operations. Mr. Monson has been with AIMCO since 1997 and was promoted to Divisional Vice President in 1998. Prior to joining AIMCO, Mr. Monson worked for 13 years in operations management positions in the lawn care and landscaping industries, principally with True Green/Chemlawn. Mr. Monson received a Bachelor of Science from the University of Minnesota and a Masters in Business Administration from Georgia State University.
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- James G. Purvis........................... Mr. Purvis was appointed Executive Vice President in February 2003. He is responsible for AIMCO's Human Resources and People Initiatives. Mr. Purvis has over 20 years of executive strategic human resources experience. Prior to joining AIMCO he was Vice President, HR at SomaLogic, a privately funded biotechnology company. He was a principal in O(3)C Global Organization Solutions, and has held executive human resources and operations management positions in ALCOA (Aluminum Company of America), Texas Air/Eastern Airlines, Starwood/WestinHotels and Resorts, and Tele-Communications (TCI) Technology, Inc. Mr. Purvis holds a BA in communications and modern languages from the University of Notre Dame. David Robertson........................... Mr. Robertson was appointed Executive Vice President -- Affordable Properties in February 2002. He is responsible for affordable property operations, refinancing and other value creation within AIMCO's affordable portfolio. Prior to joining AIMCO, Mr. Robertson was a member of the investment-banking group at Smith Barney from 1991 to 1996, where he was responsible for real estate investment banking transactions in the western United States, and was part of the Smith Barney team that managed AIMCO's initial public offering in 1994. Since February 1996, Mr. Robertson has been Chairman and Chief Executive Officer of Robeks Corporation, a privately held chain of specialty food stores. Thomas M. Herzog.......................... Mr. Herzog was appointed Senior Vice President and Chief Accounting Officer of the General Partner in February 2004 and of AIMCO in January 2004. Prior to joining AIMCO, Mr. Herzog was at GE Real Estate, serving as Chief Accounting Officer & Global Controller from April 2002 to January 2004 and as Chief Technical Advisor from March 2000 to April 2002. Prior to joining GE Real Estate, Mr. Herzog was at Deloitte & Touche LLP from 1990 until 2000, including a two-year assignment in the real estate national office. Martha L. Long............................ Martha L. Long has been with AIMCO since October 1998 and served in various capacities. From 1998 to 2001, she served as Senior Vice President and Controller. During 2002 and 2003, she served as Senior Vice President of Continuous Improvement. Most recently, she has been named Chief Executive Officer and General Partner of AIMCO's affiliated partnerships.
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- James N. Bailey........................... Mr. Bailey was appointed a Director of AIMCO in Cambridge Associates, Inc. June 2000. In 1973, Mr. Bailey co-founded 1 Winthrop Square, Cambridge Associates, Inc., which is an Suite 500 investment consulting firm for non-profit Boston, MA 02110 institutions and wealthy family groups. He is also Co-Founder, Treasurer and Director of The Plymouth Rock Company, Direct Response Corporation and Homeowners' Direct Corporation, each of which is a United States personal lines insurance company. He received his M.B.A. and J.D. degrees in 1973 from Harvard Business School and Harvard Law School. Richard S. Ellwood........................ Mr. Ellwood was appointed a Director of AIMCO in 12 Auldwood Lane July 1994 and is currently Chairman of the Audit Rumson, NJ 07660 Committee and a member of the Compensation Committee. Mr. Ellwood is the founder and President of R.S. Ellwood & Co., Incorporated, a real estate investment banking firm. Prior to forming R.S. Ellwood & Co., Incorporated in 1987, Mr. Ellwood had 31 years experience on Wall Street as an investment banker, serving as: Managing Director and senior banker at Merrill Lynch Capital Markets from 1984 to 1987; Managing Director at Warburg Paribas Becker from 1978 to 1984; general partner and then Senior Vice President and a director at White, Weld & Co. from 1968 to 1978; and in various capacities at J.P. Morgan & Co. from 1955 to 1968. Mr. Ellwood currently serves as a director of FelCor Lodging Trust, Incorporated and Florida East Coast Industries, Inc. J. Landis Martin.......................... Mr. Martin was appointed a Director of AIMCO in 199 Broadway July 1994 and became Chairman of the Suite 4300 Compensation Committee on March 19, 1998. Mr. Denver, CO 80202 Martin is a member of the Audit Committee. Mr. Martin has served as President and Chief Executive Officer of NL Industries, Inc., a manufacturer of titanium dioxide, since 1987. Mr. Martin has served as Chairman of Tremont Corporation ("Tremont"), a holding company operating though its affiliates Titanium Metals Corporation ("TIMET") and NL Industries, Inc. ("NL"), since 1990 and as Chief Executive Officer and a director of Tremont since 1988. Mr. Martin has served as Chairman of TIMET, an integrated producer of titanium, since 1987 and Chief Executive Officer since January 1995. From 1990 until its acquisition by a predecessor of Halliburton Company ("Halliburton") in 1994, Mr. Martin served as Chairman of the Board and Chief Executive Officer of Baroid Corporation, an oilfield services company. In addition to Tremont, NL and TIMET, Mr. Martin is a director of Halliburton, which is engaged in the petroleum services, hydrocarbon and engineering industries, and Crown Castle International Corporation, a communications company.
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NAME PRINCIPAL OCCUPATIONS FOR THE LAST FIVE YEARS - ---- --------------------------------------------- Thomas L. Rhodes.......................... Mr. Rhodes was appointed a Director of AIMCO in 215 Lexington Avenue July 1994 and is a member of the Audit and 4th Floor Compensation Committees. Mr. Rhodes has served New York, NY 10016 as the President and a Director of National Review magazine since November 1992, where he has also served as a Director since 1998. From 1976 to 1992, he held various positions at Goldman, Sachs & Co. and was elected a General Partner in 1986 and served as a General Partner from 1987 until November 1992. He is currently Co-Chairman of the Board, Co-Chief Executive Officer and a Director of American Land Lease, Inc. He also serves as a Director of Delphi Financial Group and its subsidiaries, Delphi International Ltd., Oracle Reinsurance Company and the Lynde and Harry Bradley Foundation.
I-7 ANNEX II EXECUTIVE SUMMARY OF INDEPENDENT APPRAISER'S REPORT THE ATTACHED EXECUTIVE SUMMARY WAS PREPARED SOLELY BY THE INDEPENDENT APPRAISER, AND NEITHER THE COURT, THE PARTIES IN THE CLASS AND DERIVATIVE LITIGATION NOR COUNSEL FOR SUCH PARTIES PARTICIPATED IN THE PREPARATION OF THE EXECUTIVE SUMMARY. II-1 AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 BIG WALNUT, COLUMBUS, OHIO EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Big Walnut LOCATION: 5280 Gatehouse Drive Columbus, Ohio INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee simple estate DATE OF VALUE: April 30, 2003 DATE OF REPORT: June 30, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 19.497 acres, or 849,289 square feet Assessor Parcel No.: 090-005526-00 Floodplain: Community Panel No. 390180-278G (August 2, 1995) Flood Zone X, an area outside the floodplain. Zoning: A2 (Apartment District) BUILDING: No. of Units: 251 Units Total NRA: 303,703 Square Feet Average Unit Size: 1,210 Square Feet Apartment Density: 12.9 units per acre Year Built: 1968
UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ------------------ Monthly Annual Unit Type Feet Per Unit Per SF Income Income - ------------ ------ -------- ------ --------- --------- 1B/1B-1A10 694 $ 519 $ 0.75 $ 12,456 $ 149,472 1B/1B-1B10 705 $ 469 $ 0.67 $ 11,256 $ 135,072 1B/1B-1C10 975 $ 549 $ 0.56 $ 11,529 $ 138,348 1B/1.5B-1A15 733 $ 519 $ 0.71 $ 12,456 $ 149,472 2B/1.5B-2A15 1,282 $ 649 $ 0.51 $ 27,258 $ 327,096 2B/1.5B-2B15 1,395 $ 649 $ 0.47 $ 19,470 $ 233,640 2B/1.5B-2C15 1,649 $ 679 $ 0.41 $ 50,246 $ 602,952 2B/2B-2A20 1,195 $ 649 $ 0.54 $ 7,788 $ 93,456 Total $ 152,459 $1,829,508
OCCUPANCY: 94% AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 BIG WALNUT, COLUMBUS, OHIO ECONOMIC LIFE: 45 YEARS EFFECTIVE AGE: 20 YEARS REMAINING ECONOMIC LIFE: 25 YEARS SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [EXTERIOR - ENTRANCE PICTURE] [EXTERIOR - RESIDENTIAL UNITS PICTURE] AREA MAP [AREA MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 BIG WALNUT, COLUMBUS, OHIO NEIGHBORHOOD MAP [NEIGHBORHOOD 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 BIG WALNUT, COLUMBUS, OHIO PART TWO - ECONOMIC INDICATORS
Amount $/Unit ------ ------ INCOME CAPITALIZATION APPROACH DIRECT CAPITALIZATION Potential Rental Income $1,829,508 $ 7,289 Effective Gross Income $1,808,647 $ 7,206 Operating Expenses $ 780,682 $ 3,110 43.2% of EGI Net Operating Income: $ 965,215 $ 3,845 Capitalization Rate 10.00% DIRECT CAPITALIZATION VALUE $9,500,000 * $37,849 / 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 10.50% Discount Rate 11.75% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $9,900,000 * $39,442 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $9,800,000 $39,044 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $29,377 to $35,814 Range of Sales $/Unit (Adjusted) $34,678 to $43,142 VALUE INDICATION - PRICE PER UNIT $9,600,000 * $38,247 / UNIT EGIM ANALYSIS Range of EGIMS from Improved Sales 5.39 to 6.37 Selected EGIM for Subject 5.50 Subject's Projected EGI $1,808,647 EGIM ANALYSIS CONCLUSION $9,800,000 * $39,044 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $9,600,000 * $38,247 / UNIT RECONCILED SALES COMPARISON VALUE $9,700,000 $38,645 / 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 BIG WALNUT, COLUMBUS, OHIO PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $9,600,000 NOI Per Unit $9,600,000 EGIM Multiplier $9,800,000 INDICATED VALUE BY SALES COMPARISON $9,700,000 $38,645 / UNIT INCOME APPROACH: Direct Capitalization Method: $9,500,000 Discounted Cash Flow Method: $9,900,000 INDICATED VALUE BY THE INCOME APPROACH $9,800,000 $39,044 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $9,800,000 $39,044 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Reflections (Greenspring Manor) LOCATION: 7999 Silverleaf Drive Indianapolis, Indiana 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 7, 2003 DATE OF REPORT: July 9, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 37.749 acres, or 1,644,346 square feet Assessor Parcel No.: 000651 Floodplain: Community Panel No. 18097C0039E (January 5, 2001) Flood Zone X, an area outside the floodplain. Zoning: D-6II (Low Density Multifamily District) BUILDING: No. of Units: 582 Units Total NRA: 459,080 Square Feet Average Unit Size: 789 Square Feet Apartment Density: 15.4 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 - ------------------------------------------------ ---------- ----------- ---------- ---------- ---------- Eff/1Ba - EA10 450 $ 420 $ 0.93 $ 100,800 $1,209,600 1Br/1Ba - 1A10 770 $ 580 $ 0.75 $ 60,320 $ 723,840 1Br/1Ba - 2A15 950 $ 660 $ 0.69 $ 66,000 $ 792,000 2Br/2Ba - 2A25 1,200 $ 770 $ 0.64 $ 66,220 $ 794,640 2Br/2Ba - 3A25 1,400 $ 880 $ 0.63 $ 45,760 $ 549,120 ----- ---------- ---------- ---------- ---------- Total $ 339,100 $4,069,200 ========== ==========
OCCUPANCY: 61% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 15 Years REMAINING ECONOMIC LIFE: 30 Years
\ AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - APARTMENT BUILDING AREA MAP [AREA MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA NEIGHBORHOOD MAP [NEIGHBORHOOD 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - -------------------------------------- ----------- ------- Potential Rental Income $ 4,069,200 $ 6,992 Effective Gross Income $ 3,904,798 $ 6,709 Operating Expenses $ 1,793,535 $ 3,082 45.9% of EGI Net Operating Income: $ 2,023,963 $ 3,478 Capitalization Rate 7.75% DIRECT CAPITALIZATION VALUE $25,300,000 * $43,471 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 61% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period 18 months Terminal Capitalization Rate 8.25% Discount Rate 10.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $25,600,000 * $43,986 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $25,600,000 $43,986 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $34,268 to $61,397 Range of Sales $/Unit (Adjusted) $41,122 to $48,678 VALUE INDICATION - PRICE PER UNIT $ 26,500,000 * $45,533 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.31 to 7.04 Selected EGIM for Subject 6.25 Subject's Projected EGI $ 3,904,798 EGIM ANALYSIS CONCLUSION $ 23,600,000 * $40,550 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 26,000,000 * $44,674 / UNIT RECONCILED SALES COMPARISON VALUE $ 25,800,000 $44,330 / 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $26,500,000 NOI Per Unit $26,000,000 EGIM Multiplier $23,600,000 INDICATED VALUE BY SALES COMPARISON $25,800,000 $44,330 / UNIT INCOME APPROACH: Direct Capitalization Method: $25,300,000 Discounted Cash Flow Method: $25,600,000 INDICATED VALUE BY THE INCOME APPROACH $25,600,000 $43,986 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $25,700,000 $44,158 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 TRAILS, NASHVILLE, TENNESSEE EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Trails LOCATION: 100 Trails Circle Nashville, Tennessee 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 5, 2003 DATE OF REPORT: July 2, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 19.16 acres, or 834,610 square feet Assessor Parcel No.: 109-000-196 Floodplain: Community Panel No. 47037C0308F (April 20, 2001) Flood Zone X, an area outside the floodplain. Zoning: RM-15 (Medium to High Density Apartment District) BUILDING: No. of Units: 248 Units Total NRA: 198,560 Square Feet Average Unit Size: 801 Square Feet Apartment Density: 12.9 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 521 $500 $0.96 $ 12,000 $ 144,000 1Br/1Ba-1B10 631 $530 $0.84 $ 33,920 $ 407,040 1Br/1Ba-1C10 767 $545 $0.71 $ 17,440 $ 209,280 1Br/1Ba-1D10 806 $580 $0.72 $ 18,560 $ 222,720 2Br/1Ba-2A10 933 $640 $0.69 $ 25,600 $ 307,200 2Br/2Ba-2B20 1,036 $665 $0.64 $ 37,240 $ 446,880 - ------------ ----- ---- ----- -------- ---------- Total $144,760 $1,737,120 ===== ======== ==========
OCCUPANCY: 95% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 TRAILS, NASHVILLE, TENNESSEE EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] UNIT TYPE FACADE UNIT TYPE AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE PART TWO - ECONOMIC INDICATORS
Amount $/Unit ------ ------ INCOME CAPITALIZATION APPROACH DIRECT CAPITALIZATION Potential Rental Income $1,737,120 $ 7,005 Effective Gross Income $1,759,362 $ 7,094 Operating Expenses $ 822,048 $ 3,315 46.7% of EGI Net Operating Income: $ 875,314 $ 3,529 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $9,200,000 * $37,097 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 6% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.50% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $9,400,000 * $37,903 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $9,400,000 $37,903 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $17,808 to $82,471 Range of Sales $/Unit (Adjusted) $36,507 to $41,236 VALUE INDICATION - PRICE PER UNIT $9,500,000 * $38,306 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.64 to 6.66 Selected EGIM for Subject 5.40 Subject's Projected EGI $ 1,759,362 EGIM ANALYSIS CONCLUSION $ 9,500,000 * $38,306 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 9,400,000 * $37,903 / UNIT RECONCILED SALES COMPARISON VALUE $ 9,500,000 $38,306 / 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 TRAILS, NASHVILLE, TENNESSEE PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $9,500,000 NOI Per Unit $9,400,000 EGIM Multiplier $9,500,000 INDICATED VALUE BY SALES COMPARISON $9,500,000 $38,306 / UNIT INCOME APPROACH: Direct Capitalization Method: $9,200,000 Discounted Cash Flow Method: $9,400,000 INDICATED VALUE BY THE INCOME APPROACH $9,400,000 $37,903 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $9,400,000 $37,903 / UNIT
Questions and requests for assistance or for additional copies of this Litigation Settlement Offer and the letter of transmittal may be directed to the Information Agent at its telephone number and address listed below. You may also contact your broker, dealer, bank, trust company or other nominee for assistance concerning the offer. The Information Agent for offer is: THE ALTMAN GROUP, INC. By Mail: P.O. Box 238 Lyndhurst, NJ 07071 By Overnight Courier: 1275 Valley Brook Avenue Lyndhurst, NJ 07071 By Hand: 1275 Valley Brook Avenue Lyndhurst, NJ 07071 For information, please call: By Telephone: TOLL FREE: (800) 467-0821 By Fax: (201) 460-0050 EX-99.(A)(2) 3 d16091exv99wxayx2y.txt LETTER OF TRANSMITTAL (AIMCO) LETTER OF TRANSMITTAL TO TENDER UNITS OF LIMITED PARTNERSHIP INTEREST IN DAVIDSON DIVERSIFIED REAL ESTATE II, L.P. (THE "PARTNERSHIP") PURSUANT TO A LITIGATION SETTLEMENT OFFER DATED JUNE 14, 2004 BY AIMCO PROPERTIES, L.P. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT MIDNIGHT, NEW YORK CITY TIME, ON JULY 13, 2004, UNLESS EXTENDED (THE "EXPIRATION DATE") THE OFFER PRICE IS $4,106.18 PER UNIT - -------------------------------------------------------------------------------- IF YOU HAVE THE CERTIFICATE ORIGINALLY ISSUED TO REPRESENT YOUR INTEREST IN THE PARTNERSHIP PLEASE SEND IT TO THE INFORMATION AGENT WITH THIS LETTER OF TRANSMITTAL The Information Agent for the offer is: THE ALTMAN GROUP, INC. By Mail: By Overnight Courier: By Hand: P.O. Box 238 1275 Valley Brook Avenue 1275 Valley Brook Avenue Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 By Telephone: TOLL FREE (800) 467-0821 By Fax: (201) 460-0050
To participate in the offer, you must send a duly executed copy of this Letter of Transmittal and any other documents required by this Letter of Transmittal so that such documents are received by The Altman Group, Inc., the Information Agent, on or prior to the Expiration Date. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT YOUR OPTION AND RISK, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE INFORMATION AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. DELIVERY OF THIS LETTER OF TRANSMITTAL OR ANY OTHER REQUIRED DOCUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE VALID DELIVERY. FOR INFORMATION OR ASSISTANCE IN CONNECTION WITH THE OFFER OR THE COMPLETION OF THIS LETTER OF TRANSMITTAL, PLEASE CONTACT THE INFORMATION AGENT AT (800) 467-0821 (TOLL FREE). THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. WHEN TENDERING, YOU MUST SEND ALL PAGES OF THIS LETTER OF TRANSMITTAL, INCLUDING TAX CERTIFICATIONS (BOXES A AND B).
- ------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF UNITS TENDERED - ------------------------------------------------------------------------------------------------------------------- NAME(S), ADDRESS(ES), NUMBER OF UNITS OWNED AND TAX IDENTIFICATION NUMBER OF REGISTERED HOLDER(S). (PLEASE INDICATE CHANGES OR CORRECTIONS TO THE NAME, ADDRESS, TOTAL NUMBER OF UNITS TENDERED NUMBER OF UNITS OWNED AND TAX IDENTIFICATION NUMBER PRINTED BELOW.) (#) - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 2, 4 AND 8) To be completed ONLY if the consideration for the purchase price of Units accepted for payment is to be issued in the name of someone other than the undersigned. [ ] Issue consideration to: Name: - -------------------------------------------------------------------------------- (Please Type or Print) Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) - -------------------------------------------------------------------------------- (Tax Identification or Social Security No.) (See Substitute Form W-9) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 2, 4 AND 8) To be completed ONLY if the consideration for the purchase price of Units accepted for payment is to be sent to someone other than the undersigned or to the undersigned at an address other than that shown above. [ ] Mail Consideration to: Name: - -------------------------------------------------------------------------------- (Please Type or Print) Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 2 Ladies and Gentlemen: The undersigned hereto hereby acknowledges that he or she has received (i) the Purchaser's Litigation Settlement Offer, dated the date set forth above, 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"). NEITHER THE COURT NOR COUNSEL FOR THE PARTIES IN THE CLASS AND DERIVATIVE LITIGATION MAKE ANY RECOMMENDATION REGARDING WHETHER YOU SHOULD ACCEPT THE OFFER. YOU ARE ENCOURAGED TO CAREFULLY REVIEW THE LITIGATION SETTLEMENT OFFER, THE EXECUTIVE SUMMARY OF THE INDEPENDENT APPRAISER'S REPORT (ATTACHED AS ANNEX II TO THE LITIGATION SETTLEMENT OFFER) 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 THE LITIGATION SETTLEMENT OFFER. Upon the terms and subject to the conditions set forth in the Litigation Settlement Offer, and this Letter of Transmittal, the undersigned hereto hereby tenders to the Purchaser the Units set forth in the box above entitled "Description of Units Tendered," including all interests in any limited partnership represented by such units (collectively, the "Units"), at the price indicated on the Offer and any supplement thereto, less the amount of distributions, if any, made by the Partnership from the Offer Date until the Expiration Date (the "Offer Price"), net to the undersigned in cash, without interest. 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 has received the Offer, including the executive summary of the independent appraiser's report attached to the Litigation Settlement Offer. Subject to and effective upon acceptance for payment of any of the Units tendered hereby in accordance with the terms of the Offer, the undersigned hereto hereby irrevocably sells, assigns, transfers, conveys and delivers to, or upon the order of, the Purchaser all right, title and interest in and to such Units tendered hereby that are accepted for payment pursuant to the Offer, including, without limitation, (i) all of the undersigned's interest in the capital of the Partnership, and the undersigned's interest in all profits, losses and distributions of any kind to which the undersigned shall at any time be entitled in respect of the Units, including, without limitation, distributions in the ordinary course, distributions from sales of assets, distributions upon liquidation, winding-up, or dissolution, payments in settlement of existing or future litigation, and all other distributions and payments from and after the Expiration Date of the Offer, in respect of the Units tendered by the undersigned and accepted for payment and thereby purchased by the Purchaser; (ii) all other payments, if any, due or to become due to the undersigned in respect of the Units, under or arising out of the agreement and certificate of limited partnership of the Partnership (the "Partnership Agreement"), or any agreement pursuant to which the Units were sold (the "Purchase Agreement"), whether as contractual obligations, damages, insurance proceeds, condemnation awards or otherwise; (iii) all of the undersigned's claims, rights, powers, privileges, authority, options, security interests, liens and remedies, if any, under or arising out of the Partnership Agreement or Purchase Agreement or the undersigned's ownership of the Units, including, without limitation, all voting rights, rights of first offer, first refusal or similar rights, and rights to be substituted as a limited partner of the Partnership; and (iv) all present and future claims, if any, of the undersigned whether on behalf of the Partnership, individually or on behalf of a putative class (including without limitation any claims against limited partners of the Partnership, the general partner(s) and/or any affiliates thereof) under, arising out of or related to the Partnership Agreement, the Purchase Agreement, the undersigned's status as a limited partner, the terms or conditions of the Offer, the management of the Partnership, monies loaned or advanced, services rendered to the partnership or its partners, or any other claims arising out of or related to the undersigned's ownership of Units in the Partnership. 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 3 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 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. The undersigned hereto expressly waives and relinquishes, to the fullest extent permitted by law and consistent with the releases contained herein, the provisions, rights and benefits of Section 1542 of the Civil Code of California ("Section 1542"), which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. The undersigned hereto waives any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, that is similar, comparable or equivalent to Section 1542. The undersigned acknowledges and agrees that it may hereafter discover facts in addition to or different from those which it now knows or believes to be true with respect to the subject matter of the Released Claims, but the undersigned shall be deemed to have fully, finally and forever settled and released any and all Released Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, that now exist or heretofore have existed upon any theory of law or equity now existing, including, but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery of the existence of such different or additional facts. The undersigned hereto agrees that the releases contained herein is intended to include the Released Claims, which the undersigned may have and which the undersigned does not know or suspect to exist in its favor against the Releasees and that the releases contained herein extinguishes those claims. The undersigned hereto represents and warrants to the Releasees that the undersigned has been advised by its 4 attorney of the effect and import of the provisions of Section 1542, and that the undersigned has not assigned or otherwise transferred or subrogated any interest in the Released Claims. 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 making of the Offer, other than for violations of federal or state securities laws. 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 rights 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. The undersigned hereto hereby 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 do all such acts and things necessary or expedient to deliver such Units and transfer ownership of such Units on the partnership books maintained by the general partner of the Partnership, together with all accompanying evidence of transfer and authenticity to, or upon the order of, the Purchaser, to sign any and all documents necessary to authorize the transfer of the Units to the Purchaser including, without limitation, the "Transferor's (Seller's) Application for Transfer" created by the National Association of Securities Dealers, Inc., if required, and upon receipt by the Information Agent (as the undersigned's agent) of the Offer Price, to become a substitute limited partner, to receive any and all distributions made or declared by the Partnership from and after the Expiration Date of the Offer (regardless of the record date for any such distribution), and to receive all benefits and otherwise exercise all rights of beneficial ownership of such Units, all in accordance with the terms of the Offer. This appointment is effective upon purchase of the Units by the Purchaser and will remain effective and be irrevocable for a period of ten years following the Expiration Date of the Offer. Upon purchase of the Units pursuant to the Offer, all prior powers of attorney given by the undersigned hereto with respect to such Units will be revoked and no subsequent powers of attorney may be given (and if given will not be deemed effective). In addition to and without limiting the generality of the foregoing, the undersigned hereto hereby irrevocably (i) requests and authorizes (subject to and effective upon acceptance for payment of any Unit tendered hereby) the Partnership and its general partner to take any and all actions as may be required to effect the transfer of the undersigned's Units to the Purchaser (or its designee) and to admit the Purchaser as a substitute limited partner in the Partnership under the terms of the Partnership Agreement; (ii) empowers the Purchaser and its agent to execute and deliver to the general partner a change of address form instructing the general partner to send any and all future distributions to the address specified in the form, and to endorse any check payable to or upon the order of such unitholder representing a 5 distribution to which the Purchaser is entitled pursuant to the terms of the Offer, in each case, in the name and on behalf of the tendering unitholder; (iii) agrees not to exercise any rights pertaining to the Units without the prior consent of the Purchaser; and (iv) requests and consents to the transfer of the Units, to be effective on the books and records of the Partnership as of the effective date set forth in the Offer. NOTWITHSTANDING ANY PROVISION IN THE PARTNERSHIP AGREEMENT OR ANY PURCHASE AGREEMENT TO THE CONTRARY, THE UNDERSIGNED HERETO HEREBY DIRECTS THE GENERAL PARTNER OF THE PARTNERSHIP TO MAKE ALL DISTRIBUTIONS AFTER THE PURCHASER ACCEPTS THE TENDERED UNITS FOR PAYMENT TO THE PURCHASER OR ITS DESIGNEE. Subject to and effective upon acceptance for payment of any Unit tendered hereby, the UNDERSIGNED hereby requests that the Purchaser be admitted to the Partnership as a substitute limited partner under the terms of the Partnership Agreement. Upon request, the undersigned will execute and deliver additional documents deemed by the Information Agent or the Purchaser to be necessary or desirable to complete the assignment, transfer and purchase of Units tendered hereby and will hold any distributions received from the Partnership after the Expiration Date in trust for the benefit of the Purchaser and, if necessary, will promptly forward to the Purchaser any such distributions immediately upon receipt. The Purchaser reserves the right to transfer or assign, in whole or in part, from time to time, to one or more of its affiliates, the right to purchase Units tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Purchaser of its obligations under the Offer or prejudice the rights of tendering unitholders to receive payment for Units validly tendered and accepted for payment pursuant to the Offer. By executing this Letter of Transmittal, the undersigned hereto represents that either (i) the undersigned is not a plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of any such plan, or (ii) the tender and acceptance of Units pursuant to the Offer will not result in a nonexempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. The undersigned hereto understands that a tender of Units to the Purchaser will constitute a binding agreement between the undersigned and the Purchaser upon the terms and subject to the conditions of the Offer. The undersigned recognizes that under certain circumstances set forth in the Offer, the Purchaser may not be required to accept for payment any or all of the Units tendered hereby. In such event, the undersigned understands that any Letter of Transmittal for Units not accepted for payment may be returned to the undersigned or destroyed by the Purchaser (or its agent). THIS TENDER IS IRREVOCABLE, EXCEPT THAT UNITS TENDERED PURSUANT TO THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE, OR UNLESS ALREADY ACCEPTED FOR PAYMENT, ANY TIME AFTER 60 DAYS FROM THE OFFER DATE. THE UNDERSIGNED HAS BEEN ADVISED THAT THE PURCHASER IS AN AFFILIATE OF THE GENERAL PARTNER OF THE PARTNERSHIP. THE UNDERSIGNED HERETO HAS MADE HIS OR HER OWN DECISION TO TENDER UNITS. The undersigned hereto hereby represents and warrants for the benefit of the Partnership and the Purchaser that the undersigned owns the Units tendered hereby and has full power and authority and has taken all necessary action to validly tender, sell, assign, transfer, convey and deliver the Units tendered hereby and that when the same are accepted for payment by the Purchaser, the Purchaser will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges, encumbrances, conditional sales agreements or other obligations relating to the sale or transfer thereof, and such Units will not be subject to any adverse claims and that the transfer and assignment contemplated herein are in compliance with all applicable laws and regulations. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned hereto, and any obligations of the undersigned shall be binding upon the heirs, personal representatives, trustees in bankruptcy, legal representatives, and successors and assigns of the undersigned. The undersigned hereto further represents and warrants that, to the extent a certificate evidencing the Units tendered hereby (the "original certificate") is not delivered by the undersigned together with this Letter of Transmittal, (i) the undersigned represents and warrants to the Purchaser that the undersigned 6 has not sold, transferred, conveyed, assigned, pledged, deposited or otherwise disposed of any portion of the Units, (ii) the undersigned has caused a diligent search of its records to be taken and has been unable to locate the original certificate, (iii) if the undersigned shall find or recover the original certificate evidencing the Units, the undersigned will immediately and without consideration surrender it to the Purchaser; and (iv) the undersigned shall at all times indemnify, defend, and save harmless the Purchaser and the Partnership, its successors, and its assigns from and against any and all claims, actions, and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages, judgments, costs, charges, counsel fees, and other expenses of every nature and character by reason of honoring or refusing to honor the original certificate when presented by or on behalf of a holder in due course of a holder appearing to or believed by the partnership to be such, or by issuance or delivery of a replacement certificate, or the making of any payment, delivery, or credit in respect of the original certificate without surrender thereof, or in respect of the replacement certificate. 7 IMPORTANT: WHEN TENDERING, YOU MUST SEND ALL PAGES OF THIS LETTER OF TRANSMITTAL, INCLUDING TAX CERTIFICATIONS ON NEXT PAGE. SIGNATURE BOX (SEE INSTRUCTION 2) - -------------------------------------------------------------------------------- Please sign exactly as your name is printed on the front of this Letter of Transmittal. For joint owners, each joint owner must sign. (See Instruction 2). The undersigned hereto hereby represents, warrants and agrees as set forth in this Letter of Transmittal and tenders the Units indicated in this Letter of Transmittal to the Purchaser pursuant to the terms of the Offer, and certifies under penalties of perjury that the statements in Box A and Box B are true. The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. X - -------------------------------------------------------------------------------- (Signature of Owner) X - -------------------------------------------------------------------------------- (Signature of Joint Owner) Name and Capacity (if other than individuals): - -------------------------------------------------------------------------------- Title: - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (City) (State) (Zip) Area Code and Telephone No. (Day): - -------------------------------------------------------------------------------- (Evening): - -------------------------------------------------------------------------------- SIGNATURE GUARANTEE (IF REQUIRED) (SEE INSTRUCTION 2) - -------------------------------------------------------------------------------- YOU DO NOT NEED TO HAVE YOUR SIGNATURE GUARANTEED UNLESS YOU ARE A TRUSTEE, EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY. Name and Address of Eligible Institution: - -------------------------------------------------------------------------------- Authorized Signature: X - -------------------------------------------------------------------------------- Name: - -------------------------------------------------------------------------------- Title: --------------- Date: -------------------- 8 TAX CERTIFICATIONS (SEE INSTRUCTION 5) By signing this Letter of Transmittal in the Signature Box, the unitholder certifies as true under penalties of perjury, the representations in Boxes A and B below. Please refer to the attached Instructions for completing this Letter of Transmittal and Boxes A and B below. - -------------------------------------------------------------------------------- BOX A SUBSTITUTE FORM W-9 (SEE INSTRUCTION 5 -- BOX A) - -------------------------------------------------------------------------------- The unitholder hereby certifies the following to the Purchaser under penalties of perjury: (i) The Taxpayer Identification No. ("TIN") printed (or corrected) on the front of this Letter of Transmittal is the correct TIN of the unitholder, unless the Units are held in an Individual Retirement Account ("IRA"); or if this box [ ] is checked, the unitholder has applied for a TIN. If the unitholder has applied for a TIN, a TIN has not been issued to the unitholder, and either (a) the unitholder has mailed or delivered an application to receive a TIN to the appropriate IRS Center or Social Security Administration Office, or (b) the unitholder intends to mail or deliver an application in the near future (it being understood that if the unitholder does not provide a TIN to the Purchaser, a portion of all reportable payments made to the unitholder will be withheld); and (ii) Unless this box [ ] is checked, the unitholder is not subject to backup withholding either because the unitholder: (a) is exempt from backup withholding; (b) has not been notified by the IRS that the unitholder is subject to backup withholding as a result of a failure to report all interest or dividends; or (c) has been notified by the IRS that such unitholder is no longer subject to backup withholding. Note: Place an "X" in the box in (ii) above, only if you are unable to certify that the unitholder is not subject to backup withholding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BOX B FIRPTA AFFIDAVIT (SEE INSTRUCTION 5 -- BOX B) - -------------------------------------------------------------------------------- Under Section 1445(e)(5) of the Internal Revenue Code and Treas. Reg. 1.1445-11T(d), a transferee must withhold tax equal to 10% of the amount realized with respect to certain transfers of an interest in a partnership if 50% or more of the value of its gross assets consists of U.S. real property interests and 90% or more of the value of its gross assets consists of U.S. real property interests plus cash equivalents, and the holder of the partnership interest is a foreign person. To inform the Purchaser that no withholding is required with respect to the unitholder's Units in the Partnership, the person signing this Letter of Transmittal hereby certifies the following under penalties of perjury: (i) Unless this box [ ] is checked, the unitholder, if an individual, is a U.S. citizen or a resident alien for purposes of U.S. income taxation, and if other than an individual, is not a foreign corporation, foreign partnership, foreign estate or foreign trust (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); (ii) The unitholder's U.S. social security number (for individuals) or employer identification number (for non-individuals) is correct as furnished in the blank provided for that purpose on the front of this Letter of Transmittal; (iii) The unitholder's home address (for individuals), or office address (for non-individuals), is correctly printed (or corrected) on the front of this Letter of Transmittal. The person signing this Letter of Transmittal understands that this certification may be disclosed to the IRS by the Purchaser and that any false statements contained herein could be punished by fine, imprisonment, or both. 9 INSTRUCTIONS FOR COMPLETING LETTER OF TRANSMITTAL 1. REQUIREMENTS OF TENDER. To be effective, a duly completed and signed Letter of Transmittal (or facsimile thereof) and any other required documents must be received by the Information Agent at one of its addresses (or its facsimile number) set forth herein on or before the date and time of the Expiration Date, unless extended. To ensure receipt of the Letter of Transmittal and any other required documents, it is suggested that you use overnight courier delivery or, if the Letter of Transmittal and any other required documents are to be delivered by United States mail, that you use certified or registered mail, return receipt requested. Our records indicate that you own the number of Units set forth in the box above entitled "Description of Units Tendered" under the column entitled "Name(s), Address(es), Number of Units Owned and Tax Identification Number of Registered Holder(s)." If you would like to tender only a portion of your Units, please so indicate in the space provided in the box above entitled "Description of Units Tendered." WHEN TENDERING, YOU MUST SEND ALL PAGES OF THE LETTER OF TRANSMITTAL, INCLUDING TAX CERTIFICATIONS (BOXES A AND B). THE METHOD OF DELIVERY OF THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING UNITHOLDER AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE INFORMATION AGENT. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. 2. SIGNATURE REQUIREMENTS. INDIVIDUAL AND JOINT OWNERS. After carefully reading and completing the Letter of Transmittal, to tender Units, unitholders must sign at the "X" in the Signature Box of the Letter of Transmittal. The signature(s) must correspond exactly with the names printed (or corrected) on the front of the Letter of Transmittal. NO SIGNATURE GUARANTEE ON THE LETTER OF TRANSMITTAL IS REQUIRED IF THE LETTER OF TRANSMITTAL IS SIGNED BY THE UNITHOLDER (OR BENEFICIAL OWNER IN THE CASE OF AN IRA). If any tendered Units are registered in the names of two or more joint owners, all such owners must sign this Letter of Transmittal. IRAS/ELIGIBLE INSTITUTIONS. For Units held in an IRA account, the beneficial owner should sign in the Signature Box and no signature guarantee is required. Similarly, no signature guarantee is required if Units are tendered for the account of a member firm of a registered national security exchange, a member firm of the National Association of Securities Dealers, Inc. or a commercial bank, savings bank, credit union, savings and loan association or trust company having an office, branch or agency in the United States (each an "Eligible Institution"). TRUSTEES, CORPORATIONS, PARTNERSHIP AND FIDUCIARIES. Trustees, executors, administrators, guardians, attorneys-in-fact, officers of a corporation, authorized partners of a partnership or other persons acting in a fiduciary or representative capacity must sign at the "X" in the Signature Box and have their signatures guaranteed by an Eligible Institution by completing the signature guarantee set forth in the Signature Box of the Letter of Transmittal. If the Letter of Transmittal is signed by trustees, administrators, guardians, attorneys-in-fact, officers of a corporation, authorized partners of a partnership or others acting in a fiduciary or representative capacity, such persons should, in addition to having their signatures guaranteed, indicate their title in the Signature Box and must submit proper evidence satisfactory to the Purchaser of their authority to so act (see Instruction 3 below). 3. DOCUMENTATION REQUIREMENTS. In addition to the information required to be completed on the Letter of Transmittal, additional documentation may be required by the Purchaser under certain circumstances including, but not limited to, those listed below. Questions 10 on documentation should be directed to the Information Agent at its telephone number set forth herein. DECEASED OWNER (JOINT TENANT) -- Copy of death certificate. DECEASED OWNER (OTHERS) -- Copy of death certificate (see also Executor/ Administrator/Guardian below). EXECUTOR/ADMINISTRATOR/GUARDIAN -- Copy of court appointment documents for executor or administrator; and (a) a copy of applicable provisions of the will (title page, executor(s)' powers, asset distribution); or (b) estate distribution documents. ATTORNEY-IN-FACT -- Current power of attorney. CORPORATION/PARTNERSHIP -- Corporate resolution(s) or other evidence of authority to act. Partnership should furnish a copy of the partnership agreement. TRUST/PENSION PLANS -- Unless the trustee(s) are named in the registration, a copy of the cover page of the trust or pension plan, along with a copy of the section(s) setting forth names and powers of trustee(s) and any amendments to such sections or appointment of successor trustee(s).
4. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If consideration is to be issued in the name of a person other than the person signing the Signature Box of the Letter of Transmittal or if consideration is to be sent to someone other than such signer or to an address other than that set forth on the Letter of Transmittal in the box entitled "Description of Units Tendered," the appropriate boxes on the Letter of Transmittal should be completed. 5. TAX CERTIFICATIONS. The unitholder(s) tendering Units to the Purchaser pursuant to the Offer must furnish the Purchaser with the unitholder(s)' taxpayer identification number ("TIN") and certify as true, under penalties of perjury, the representations in Box A and Box B. By signing the Signature Box, the unitholder(s) certifies that the TIN as printed (or corrected) on this Letter of Transmittal in the box entitled "Description of Units Tendered" and the representations made in Box A and Box B are correct. See attached Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for guidance in determining the proper TIN to give the Purchaser. U.S. PERSONS. A unitholder that is a U.S. citizen or a resident alien individual, a domestic corporation, a domestic partnership, a domestic trust or a domestic estate (collectively, "U.S. Persons"), as those terms are defined in the Code, should follow the instructions below with respect to certifying Box A and Box B. BOX A -- SUBSTITUTE FORM W-9. PART (i), TAXPAYER IDENTIFICATION NUMBER. Tendering unitholders must certify to the Purchaser that the TIN as printed (or corrected) on this Letter of Transmittal in the box entitled "Description of Units Tendered" is correct. If a correct TIN is not provided, penalties may be imposed by the Internal Revenue Service (the "IRS"), in addition to the unitholder being subject to backup withholding. PART (ii), BACKUP WITHHOLDING. In order to avoid Federal income tax backup withholding, the tendering unitholder must certify, under penalty of perjury, that such unitholder is not subject to backup withholding. Certain unitholders (including, among others, all corporations and certain exempt non-profit organizations) are not subject to backup withholding. Backup withholding is not an additional tax. If withholding results in an overpayment of taxes, a refund may be obtained 11 from the IRS. DO NOT CHECK THE BOX IN BOX A, PART (ii), UNLESS YOU HAVE BEEN NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING. When determining the TIN to be furnished, please refer to the following as a guide: Individual accounts -- should reflect owner's TIN. Joint accounts -- should reflect the TIN of the owner whose name appears first. Trust accounts -- should reflect the TIN assigned to the trust. IRA custodial accounts -- should reflect the TIN of the custodian (not necessary to provide). Custodial accounts for the benefit of minors -- should reflect the TIN of the minor. Corporations, partnership or other business entities -- should reflect the TIN assigned to that entity. By signing the Signature Box, the unitholder(s) certifies that the TIN as printed (or corrected) on the front of the Letter of Transmittal is correct. NON-U.S. PERSONS. In order for a unitholder that is not a U.S. Person ("Non-U.S. Person") to qualify as exempt, such unitholder must submit a completed Form W-8BEN "Certificate of Foreign Status," Form W-8ECI "Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a U.S. Trade or Business," or Form W-8IMY "Certificate of Foreign Intermediary, Foreign Flow Through Entity or Certain U.S. Branches for United States Tax Withholding" signed under penalties of perjury attesting to such exempt status. Such forms may be obtained from the IRS at www.irs.gov. BOX B -- FIRPTA AFFIDAVIT. Section 1445 of the Code requires that each unitholder transferring interests in a partnership with real estate assets meeting certain criteria certify under penalty of perjury the representations made in Box B, or be subject to withholding of tax equal to 10% of the amount realized for interests purchased. Tax withheld under Section 1445 of the Code is not an additional tax. If withholding results in an overpayment of tax, a refund may be obtained from the IRS. PART (i) SHOULD BE CHECKED ONLY IF THE TENDERING UNITHOLDER IS NOT A U.S. PERSON, AS DESCRIBED THEREIN. 6. CONDITIONAL TENDERS. No alternative, conditional or contingent tenders will be accepted. 7. VALIDITY OF LETTER OF TRANSMITTAL. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of a Letter of Transmittal and other required documents will be determined by the Purchaser and such determination will be final and binding. The Purchaser's interpretation of the terms and conditions of the Offer (including these Instructions for this Letter of Transmittal) will be final and binding. The Purchaser will have the right to waive any irregularities or conditions as to the manner of tendering. Any irregularities in connection with tenders, unless waived, must be cured within such time as the Purchaser shall determine. This Letter of Transmittal will not be valid until any irregularities have been cured or waived. Neither the Purchaser nor the Information Agent are under any duty to give notification of defects in a Letter of Transmittal and will incur no liability for failure to give such notification. 8. ASSIGNEE STATUS. Assignees must provide documentation to the Information Agent which demonstrates, to the satisfaction of the Purchaser, such person's status as an assignee. 9. TRANSFER TAXES. The amount of any transfer taxes (whether imposed on the registered holder or such person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. 12 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER -- Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer. - ----------------------------------------------------- GIVE THE TAXPAYER FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF -- - ----------------------------------------------------- 1. An individual account The individual 2. Two or more individuals The actual owner of (joint account) the account or, if combined funds, the first individual on the account 3. Husband and wife (joint The actual owner of account) the account or, if joint funds, either person 4. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if the account) minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor or guardian or committee incompetent person(3) for a designated ward, minor or incompetent person(3) 7. a. The usual revocable The grantor trustee(1) savings trust account (grantor is also trustee) b. So-called trust The actual owner(1) account that is not a legal or valid trust under state law 8. Sole proprietorship The owner(4) account - ----------------------------------------------------- - ----------------------------------------------------- GIVE THE TAXPAYER FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF -- - ----------------------------------------------------- 9. A valid trust, estate or The legal entity (Do pension trust not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, The organization or educational organization account 12. Partnership account held The partnership in the name of the business 13. Association, club, or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the The public entity Department of Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - -----------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's or incompetent person's name and furnish such person's social security number or employer identification number. (4) Show your individual name. You may also enter your business name. You may use your social security number or employer identification number. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 13 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 OBTAINING A NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, Application for a Social Security Number Card (for individuals), or Form SS-4, Application for Employer Identification Number (for businesses and all other entities), at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - - A corporation. - - A financial institution. - - An organization exempt from tax under section 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or an individual retirement plan. - - The United States or any agency or instrumentality thereof. - - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - - An international organization or any agency or instrumentality thereof. - - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - - A real estate investment trust. - - A common trust fund operated by a bank under section 584(a) of the Code. - - An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). - - An entity registered at all times under the Investment Company Act of 1940. - - A foreign central bank of issue. - - A futures commission merchant registered with the Commodity Futures Trading Commission. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - - Payments to nonresident aliens subject to withholding under section 1441 of the Code. - - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - - Payments of patronage dividends where the amount received in not paid in money. - - Payments made by certain foreign organizations. - - Payments made to an appropriate nominee. - - Section 404(k) payments made by an ESOP. Payments of interest not generally subject to backup withholding include the following: - - Payments of interest on obligations issued by individuals. - - NOTE: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. Payments of tax exempt interest (including exempt interest dividends under section 852 of the Code). - - Payments described in section 6049(b)(5) of the Code to nonresident aliens. - - Payments on tax-free covenant bonds under section 1451 of the Code. - - Payments made by certain foreign organizations. - - Payments of mortgage interest to you. - - Payments made to an appropriate nominee. Exempt payees described above should file substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. IF YOU ARE A NONRESIDENT ALIEN OR A FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS). Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(A), 6045, and 6050A. PRIVACY ACT NOTICE -- Section 6109 requires most recipients of dividend, interest, or other payments to give correct taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file a tax return. Payers must generally withhold a portion of taxable interest, dividend, and certain other payments to a payee who does not furnish a correct taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you fail to furnish your correct taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING -- If you make a false statement with no reasonable basis that results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE 14 The Information Agent for the offer is: THE ALTMAN GROUP, INC. By Mail: By Overnight Courier: By Hand: P.O. Box 238 1275 Valley Brook Avenue 1275 Valley Brook Avenue Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 Lyndhurst, NJ 07071 By Telephone: TOLL FREE (800) 467-0821 By Fax: (201) 460-0050
15 EX-99.(A)(3) 4 d16091exv99wxayx3y.txt LETTER TO LIMITED PARTNERS LITIGATION SETTLEMENT OFFER (AIMCO LOGO) AIMCO PROPERTIES, L.P. c/o The Altman Group, Inc. 1275 Valley Brook Avenue Lyndhurst, New Jersey 07071 (800) 467-0821 June 14, 2004 Dear Limited Partner: We are pleased to announce the COURT APPROVED SETTLEMENT of the class action and derivative litigation entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. and Dr. Warren Heller v. Insignia Financial Group, Inc., et al., which certain limited partners brought on their own behalf and on behalf of limited partners in partnerships formerly managed by Insignia Financial Group, Inc., including yours. The court approved settlement requires us to make the enclosed Litigation Settlement Offer. - Pursuant to that settlement, we are offering to acquire your units of limited partnership interest in Davidson Diversified Real Estate II, L.P. for $4,106.18 per unit in cash. - Under the terms of the settlement, which are more fully described in the enclosed materials and in the notice of settlement previously distributed to you, the court appointed American Appraisal Associates, Inc., as an independent appraiser, to appraise your partnership's property. An executive summary of the appraiser's report for each property owned by your partnership is attached as Annex II to the enclosed Litigation Settlement Offer. A complete copy of the appraiser's report(s) will be provided to you free of charge upon request. - The settlement also established a $9.9 million settlement fund for members of the settlement class. After deducting attorneys' fees and expenses and other settlement costs (including a portion of the costs of the appraisals and certain costs of administration of the settlement fund), we have allocated the remaining amount among the 44 settling partnerships on a pro rata basis. The amount allocated to your partnership on a per unit basis is $203.23, which is included in our offer price. This amount will be paid as part of the purchase price in this offer even if final court approval of the settlement is reversed or vacated. - You are entitled to participate in this offer whether or not you requested exclusion from the settlement class. If you wish to tender, you must execute the enclosed Letter of Transmittal. By executing the Letter of Transmittal, you will release any known or unknown claims arising out of the class and derivative litigation even if the settlement and judgment in the class and derivative litigation is subsequently reversed or otherwise vacated. - This Litigation Settlement Offer is not subject to any minimum number of units being tendered. - You will not be required to pay any partnership transfer fees in connection with any disposition of your units pursuant to our offer. If you desire to tender any of your units in response to our offer, you should complete and sign the enclosed letter of transmittal in accordance with the enclosed instructions and mail or deliver it and any other required documents to The Altman Group, Inc., which is acting as the Information Agent in connection with our offer, at the address set forth on the back cover of the enclosed Litigation Settlement Offer. The Litigation Settlement Offer will expire at midnight, New York City time, on July 13, 2004, unless extended. Our offer price will be reduced for any distributions subsequently made or declared by your partnership prior to the expiration of our offer. 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 before the expiration date, we have nevertheless elected to proceed with the offer under the terms of the settlement. NO RECOMMENDATION You must make your own decision whether or not to participate in our offer, based upon a number of factors, including your financial position, your need or desire for liquidity, other financial opportunities available to you, and your tax position and the tax consequences to you of selling your units. The general partner of your partnership, which is our affiliate, makes no recommendation as to whether you should tender or refrain from tendering your units. In addition, neither the court nor counsel for the parties in the class and derivative litigation make any recommendation regarding whether you should accept this Litigation Settlement Offer. You are encouraged to carefully review this Litigation Settlement Offer, the executive summary of the independent appraiser's report 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. If you have any questions or require further information, please call the Information Agent, toll free, at (800) 467-0821. Very truly yours, AIMCO PROPERTIES, L.P. EX-99.(C)(1) 5 d16091exv99wxcyx1y.txt APPRAISAL OF BIG WALNUT BIG WALNUT 5280 GATEHOUSE DRIVE COLUMBUS, OHIO MARKET VALUE - FEE SIMPLE ESTATE AS OF APRIL 30, 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: BIG WALNUT 5280 GATEHOUSE DRIVE COLUMBUS, FRANKLIN COUNTY, OHIO 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 251 units with a total of 303,703 square feet of rentable area. The improvements were built in 1968. The improvements are situated on 19.497 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 BIG WALNUT, COLUMBUS, OHIO The opinions expressed in this appraisal cover letter can only be completely understood by reading the narrative report, addenda, and other data, which is attached. The appraisal is subject to the attached general assumptions and limiting conditions and general service conditions. As a result of our investigation, it is our opinion that the fee simple market value of the subject, effective April 30, 2003 is: ($9,800,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Brian Johnson June 30, 2003 Brian Johnson, MAI #053272 Managing Principal, Real Estate Group Report By: Richard Mupo AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Big Walnut LOCATION: 5280 Gatehouse Drive Columbus, Ohio INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee simple estate DATE OF VALUE: April 30, 2003 DATE OF REPORT: June 30, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 19.497 acres, or 849,289 square feet Assessor Parcel No.: 090-005526-00 Floodplain: Community Panel No. 390180-278G (August 2, 1995) Flood Zone X, an area outside the floodplain. Zoning: A2 (Apartment District) BUILDING: No. of Units: 251 Units Total NRA: 303,703 Square Feet Average Unit Size: 1,210 Square Feet Apartment Density: 12.9 units per acre Year Built: 1968
UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ------------------ Monthly Annual Unit Type Feet Per Unit Per SF Income Income - ------------ ------ -------- ------ --------- --------- 1B/1B-1A10 694 $ 519 $ 0.75 $ 12,456 $ 149,472 1B/1B-1B10 705 $ 469 $ 0.67 $ 11,256 $ 135,072 1B/1B-1C10 975 $ 549 $ 0.56 $ 11,529 $ 138,348 1B/1.5B-1A15 733 $ 519 $ 0.71 $ 12,456 $ 149,472 2B/1.5B-2A15 1,282 $ 649 $ 0.51 $ 27,258 $ 327,096 2B/1.5B-2B15 1,395 $ 649 $ 0.47 $ 19,470 $ 233,640 2B/1.5B-2C15 1,649 $ 679 $ 0.41 $ 50,246 $ 602,952 2B/2B-2A20 1,195 $ 649 $ 0.54 $ 7,788 $ 93,456 Total $ 152,459 $1,829,508
OCCUPANCY: 94% AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 BIG WALNUT, COLUMBUS, OHIO ECONOMIC LIFE: 45 YEARS EFFECTIVE AGE: 20 YEARS REMAINING ECONOMIC LIFE: 25 YEARS SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [EXTERIOR - ENTRANCE PICTURE] [EXTERIOR - RESIDENTIAL UNITS PICTURE] AREA MAP [AREA MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 BIG WALNUT, COLUMBUS, OHIO NEIGHBORHOOD MAP [NEIGHBORHOOD 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 BIG WALNUT, COLUMBUS, OHIO PART TWO - ECONOMIC INDICATORS
Amount $/Unit ------ ------ INCOME CAPITALIZATION APPROACH DIRECT CAPITALIZATION Potential Rental Income $1,829,508 $ 7,289 Effective Gross Income $1,808,647 $ 7,206 Operating Expenses $ 780,682 $ 3,110 43.2% of EGI Net Operating Income: $ 965,215 $ 3,845 Capitalization Rate 10.00% DIRECT CAPITALIZATION VALUE $9,500,000 * $37,849 / 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 10.50% Discount Rate 11.75% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $9,900,000 * $39,442 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $9,800,000 $39,044 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $29,377 to $35,814 Range of Sales $/Unit (Adjusted) $34,678 to $43,142 VALUE INDICATION - PRICE PER UNIT $9,600,000 * $38,247 / UNIT EGIM ANALYSIS Range of EGIMS from Improved Sales 5.39 to 6.37 Selected EGIM for Subject 5.50 Subject's Projected EGI $1,808,647 EGIM ANALYSIS CONCLUSION $9,800,000 * $39,044 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $9,600,000 * $38,247 / UNIT RECONCILED SALES COMPARISON VALUE $9,700,000 $38,645 / 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 BIG WALNUT, COLUMBUS, OHIO PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $9,600,000 NOI Per Unit $9,600,000 EGIM Multiplier $9,800,000 INDICATED VALUE BY SALES COMPARISON $9,700,000 $38,645 / UNIT INCOME APPROACH: Direct Capitalization Method: $9,500,000 Discounted Cash Flow Method: $9,900,000 INDICATED VALUE BY THE INCOME APPROACH $9,800,000 $39,044 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $9,800,000 $39,044 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 BIG WALNUT, COLUMBUS, OHIO INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 5280 Gatehouse Drive, Columbus, Franklin County, Ohio. Columbus identifies it as 090-005526-00. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Richard Mupo on April 30, 2003. Brian Johnson, MAI has not made a personal inspection of the subject property. Richard Mupo performed the research, valuation analysis and wrote the report. Brian Johnson, MAI reviewed the report and concurs with the value. Brian Johnson, MAI and Richard Mupo have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of April 30, 2003. The date of the report is June 30, 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 BIG WALNUT, COLUMBUS, OHIO 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 Big Walnut 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 BIG WALNUT, COLUMBUS, OHIO 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 Columbus, Ohio. Overall, the neighborhood is characterized as a suburban setting with the predominant land uses being residential and retail. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - 1-270 West - Route 317 South - East Livingston Avenue North - Columbus Country Club & Golf Course MAJOR EMPLOYERS Major employers in the subject's area include State of Ohio, Ohio State University, Federal Gov., Nationwide Insurance, and Bank One. 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 BIG WALNUT, COLUMBUS, OHIO NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------ CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA -------- ------------ ------------ ------------ ---------- POPULATION TRENDS Current Population 10,349 93,942 208,701 1,572,971 5-Year Population 10,156 93,556 219,352 1,660,843 % Change CY-5Y -1.9% -0.4% 5.1% 5.6% Annual Change CY-5Y -0.4% -0.1% 1.0% 1.1% HOUSEHOLDS Current Households 4,797 41,057 87,494 629,122 5-Year Projected Households 4,822 41,879 93,881 678,975 % Change CY-5Y 0.5% 2.0% 7.3% 7.9% Annual Change CY-5Y 0.1% 0.4% 1.5% 1.6% INCOME TRENDS Median Household Income $ 37,721 $ 35,898 $ 39,758 $ 45,736 Per Capita Income $ 24,563 $ 20,521 $ 22,739 $ 24,105 Average Household Income $ 52,393 $ 46,956 $ 54,232 $ 60,267
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 49.98% 46.69% 41.67% 35.12% 5-Year Projected % Renting 49.90% 46.45% 41.29% 34.33% % of Households Owning 43.68% 47.32% 52.69% 59.14% 5-Year Projected % Owning 43.79% 47.65% 53.42% 60.33%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 BIG WALNUT, COLUMBUS, OHIO SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Country Club & Golf Course South - Retail Center / Parking Lot East - Big Walnut Creek / Residential West - Residential CONCLUSIONS The subject is well located within the city of Columbus. 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 BIG WALNUT, COLUMBUS, OHIO MARKET ANALYSIS The subject property is located in the city of Columbus in Franklin County. The overall pace of development in the subject's market is more or less stable. The pace of multi-family development was strong over the past several years and well into 2002. As a result, occupancy levels have dropped over the past several months. The following table illustrates historical occupancy rates for the subject's market. HISTORICAL OCCUPANCY
Period Region Submarket - ------ ------ --------- Apr-03 91.5% 90.2% Oct-02 92.2% 90.2% Apr-02 93.2% 92.2% Oct-01 94.0% 93.5%
Source - Apartment Realty Advisors Midwest, Inc. Occupancy trends in the subject's market have been decreasing. Historically speaking, the subject's submarket has underperformed the overall market. Occupancy has been on a general decline since early 2001 due to a weak and stagnant economy, increasing new development and declining absorption rates. New construction appears to have slowed and the market is likely to stabilize over the next 12 months. Rental concessions equal to one free month of rent are typical, and are likely to remain in place until the market recovers. The subject's submarket has slightly underperformed the overall market over the past few years due to competition from more desirable submarkets to the north. Occupancy for Class B properties tends to be higher than that of newer Class A product. Market rents in the subject's market have been following a stable trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ------ ------ -------- --------- -------- Apr-01 $610 - $546 - Apr-02 $620 1.6% $557 2.0% Apr-03 $630 1.6% $566 1.6%
Source - Apartment Realty Advisors Midwest, Inc. The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 BIG WALNUT, COLUMBUS, OHIO COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject --- ------------- ----- ----- ---------- -------------------- R-1 Hibernia 348 85% 1986 1/4 Mile south of the subject R-2 Riding Club 405 96% 1968 1/4 Mile south of the subject R-3 Club at Eagle's Pointe 759 92% 1971 1/2 Mile south of the subject R-4 Shaker Square Apartments 194 83% 1970 1/2 Mile north of subject R-5 N/A 0 0% 0 $0 Subject Big Walnut 251 94% 1968
Rents have shown very modest increases over the past two years. Net effective rents have actually declined slightly in recent months due to concessions being offered by most property managers. Rent growth will likely be minimal over the next twelve months but should rebound to pace inflation as the market recovers. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 BIG WALNUT, COLUMBUS, OHIO PROPERTY DESCRIPTION SITE ANALYSIS Site Area 19.497 acres, or 849,289 square feet Shape Irregular Topography Rolling Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 390180-278G, dated August 2, 1995 Flood Zone Zone X Zoning A2, 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 - ------------- -------- ---------- ----------- ---------- --------- 090-005526-00 $313,850 $1,973,620 $ 2,287,470 0.05891 $ 134,752
IMPROVEMENT ANALYSIS Year Built 1968 Number of Units 251 Net Rentable Area 303,703 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Brick or masonry Roof Built-up asphalt with or without gravel over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, volleyball court, tennis court, laundry room, business office, and secured parking. 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 17 BIG WALNUT, COLUMBUS, OHIO Washer/dryer hook-ups are located in the 2-BR units only. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - --------- --------------- --------- 1B/1B-1A10 24 694 1B/1B-1B10 24 705 1B/1B-1C10 21 975 1B/1.5B-1A15 24 733 2B/1.5B-2A15 42 1,282 2B/1.5B-2B15 30 1,395 2B/1.5B-2C15 74 1,649 2B/2B-2A20 12 1,195
Overall Condition Average Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 years Deferred Maintenance The deferred maintenance at the subject property was estimated for a total amount of $50,000. 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 1968 and consist of a 251-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 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Big Walnut The Club at Eagle's Pointe Bolton Estates LOCATION: Address 5280 Gatehouse Drive 6033 Lake Club Court 1150 Norton Road City, State Columbus, Ohio Columbus, Ohio Columbus, Ohio County Franklin Franklin Franklin PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 303,703 579,112 153,232 Year Built 1968 1971 1989 Number of Units 251 759 196 Unit Mix: Type Total Type Total Type Total 1B/1B-1A10 24 1Br/1Ba 306 1Br/1Ba 68 1B/1B-1B10 24 1Br/1.5Ba 32 2Br/1Ba 128 1B/1B-1C10 21 2Br/1Ba 306 1B/1.5B-1A15 24 2Br/1.5Ba 15 2B/1.5B-2A15 42 2Br/2Ba 34 2B/1.5B-2B15 30 Studio 66 2B/1.5B-2C15 74 2B/2B-2A20 12 Average Unit Size (SF) 1,210 763 782 Land Area (Acre) 19.4970 44.5810 12.7140 Density (Units/Acre) 12.9 17.0 15.4 Parking Ratio (Spaces/Unit) 1.14 1.48 1.82 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open, Covered CONDITION: Average Average Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room No No No Laundry Room Yes Yes No Secured Parking Yes No No Sport Courts No No No Washer/Dryer Connection No No Yes Tennis Court Yes Yes No Volleyball Court Yes Yes No OCCUPANCY: 94% 95% 87% TRANSACTION DATA: Sale Date August, 2002 November, 2002 Sale Price ($) $22,297,400 $6,400,000 Grantor W9/PHC Real Estate LP AERC Bolton Inc. Grantee Alliance BP LP Bolton Estates Apartments LLC Sale Documentation Doc # 200208290213585 Doc # 200211250301771 Verification Buyer Seller Telephone Number (410)962-0595 (800) 440-2372 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $4,339,680 $5,718 $7.49 $1,154,640 $5,891 $7.54 Vacancy/Credit Loss $ 216,984 $ 286 $0.37 $ 150,103 $ 766 $0.98 Effective Gross Income $4,122,696 $5,432 $7.12 $1,004,537 $5,125 $6.56 Operating Expenses $1,752,597 $2,309 $3.03 $ 428,537 $2,186 $2.80 Net Operating Income $2,370,099 $3,123 $4.09 $ 576,000 $2,939 $3.76 NOTES: None NOI and OAR based on actual income and expenses provided by the seller. PRICE PER UNIT $29,377 $32,653 PRICE PER SQUARE FOOT $ 38.50 $ 41.77 EXPENSE RATIO 42.5% 42.7% EGIM 5.41 6.37 OVERALL CAP RATE 10.63% 9.00% Cap Rate based on Pro Forma or Actual Income? PRO FORMA ACTUAL COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 ----------- ---------- ---------- Property Name Northgate Apartments Spring Creek LOCATION: Address 6175 Northgate Road 5811 Spring Run Drive City, State Columbus, Ohio Columbus, Ohio County Franklin Franklin PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 375,960 208,491 Year Built 1970 1982 Number of Units 316 288 Unit Mix: Type Total Type Total 1Br/1Ba 48 1Br/1Ba 224 1Br/1.5Ba 48 2Br/2Ba 64 2Br/1.5Ba 164 2Br/2Ba 32 3Br/2.5Ba 24 Average Unit Size (SF) 1,190 724 Land Area (Acre) 19.4300 18.5900 Density (Units/Acre) 16.3 15.5 Parking Ratio (Spaces/Unit) 1.98 1.04 Parking Type (Gr., Cov., etc.) Open Open CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa Yes/Yes Yes/No Gym Room No No Laundry Room Yes No Secured Parking Yes No Sport Courts No No Washer/Dryer Connection No Yes Tennis Court Yes Yes Volleyball Court No No OCCUPANCY: 95% 95% TRANSACTION DATA: Sale Date September, 2001 September, 2001 Sale Price ($) $11,011,986 $10,314,300 Grantor New Plan of Northgate New Plan Excel Realty Trust Grantee C-K Northgate LLC C-K Spring Creek LLC Sale Documentation Doc # 200110020227497 Doc # 200110110235193 Verification Seller Seller Telephone Number (212) 869-3000 (212) 869-3000 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,150,184 $6,804 $5.72 $1,868,160 $6,487 $8.96 Vacancy/Credit Loss $ 107,509 $ 340 $0.29 $ 93,408 $ 324 $0.45 Effective Gross Income $2,042,675 $6,464 $5.43 $1,774,752 $6,162 $8.51 Operating Expenses $ 864,142 $2,735 $2.30 $ 708,690 $2,461 $3.40 Net Operating Income $1,178,533 $3,730 $3.13 $1,066,062 $3,702 $5.11 NOTES: The property also has a The property also has a clubhouse. clubhouse. PRICE PER UNIT $34,848 $35,814 PRICE PER SQUARE FOOT $ 29.29 $ 49.47 EXPENSE RATIO 42.3% 39.9% EGIM 5.39 5.81 OVERALL CAP RATE 10.70% 10.34% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 BIG WALNUT, COLUMBUS, OHIO IMPROVED SALES MAP [IMPROVED SALES MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $29,377 to $35,814 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 $34,678 to $43,142 per unit with a mean or average adjusted price of $38,737 per unit. The median adjusted price is $38,565 per unit. Based on the following analysis, we have concluded to a value of $39,000 per unit, which results in an "as is" value of $9,600,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 BIG WALNUT, COLUMBUS, OHIO SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Big Walnut The Club at Eagle's Pointe Bolton Estates Address 5280 Gatehouse Drive 6033 Lake Club Court 1150 Norton Road City Columbus, Ohio Columbus, Ohio Columbus, Ohio Sale Date August, 2002 November, 2002 Sale Price ($) $22,297,400 $6,400,000 Net Rentable Area (SF) 303,703 579,112 153,232 Number of Units 251 759 196 Price Per Unit $29,377 $32,653 Year Built 1968 1971 1989 Land Area (Acre) 19.4970 44.5810 12.7140 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 08-2002 2% 11-2002 1% VALUE AFTER TRANS. ADJUST. ($/UNIT) $29,965 $33,061 Location Comparable 0% Comparable 0% Number of Units 251 759 15% 196 0% Quality / Appeal Good Comparable 0% Comparable 0% Age / Condition 1968 1971 / Average 0% 1989 / Average -5% Occupancy at Sale 94% 95% 0% 87% 10% Amenities Average Comparable 0% Comparable 0% Average Unit Size (SF) 1,210 763 10% 782 10% Parking Ratio 1.14 Comparable 0% Superior -5% Unit Mix Good Comparable 0% Inferior 10% PHYSICAL ADJUSTMENT 25% 20% FINAL ADJUSTED VALUE ($/UNIT) $37,456 $39,673 COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 ----------- ---------- ---------- Property Name Northgate Apartments Spring Creek Address 6175 Northgate Road 5811 Spring Run Drive City Columbus, Ohio Columbus, Ohio Sale Date September, 2001 September, 2001 Sale Price ($) $11,011,986 $10,314,300 Net Rentable Area (SF) 375,960 208,491 Number of Units 316 288 Price Per Unit $34,848 $35,814 Year Built 1970 1982 Land Area (Acre) 19.4300 18.5900 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 09-2001 5% 09-2001 5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $36,503 $37,515 Location Comparable 0% Comparable 0% Number of Units 316 0% 288 0% Quality / Appeal Comparable 0% Comparable 0% Age / Condition 1970 / Average 0% 1982 / Average -5% Occupancy at Sale 95% 0% 95% 0% Amenities Comparable 0% Comparable 0% Average Unit Size (SF) 1,190 0% 724 10% Parking Ratio Superior -5% Comparable 0% Unit Mix Comparable 0% Inferior 10% PHYSICAL ADJUSTMENT -5% 15% FINAL ADJUSTED VALUE ($/UNIT) $34,678 $43,142
SUMMARY VALUE RANGE (PER UNIT) $34,678 TO $43,142 MEAN (PER UNIT) $38,737 MEDIAN (PER UNIT) $38,565 VALUE CONCLUSION (PER UNIT) $39,000
VALUE OF IMPROVEMENT & MAIN SITE $9,789,000 DEFERRED MAINTENANCE -$ 50,000 PV OF CONCESSIONS -$ 116,000 VALUE INDICATED BY SALES COMPARISON APPROACH $9,623,000 ROUNDED $9,600,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 BIG WALNUT, COLUMBUS, OHIO 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-1 759 $22,297,400 10.63% $2,370,099 $965,215 1.231 $36,177 $ 29,377 $ 3,123 $ 3,845 I-2 196 $ 6,400,000 9.00% $ 576,000 $965,215 1.309 $42,728 $ 32,653 $ 2,939 $ 3,845 I-3 316 $11,011,986 10.70% $1,178,533 $965,215 1.031 $35,931 $ 34,848 $ 3,730 $ 3,845 I-4 288 $10,314,300 10.34% $1,066,062 $965,215 1.039 $37,206 $ 35,814 $ 3,702 $ 3,845
PRICE/UNIT
Low High Average Median $35,931 $42,728 $38,010 $36,692
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 39,000 Number of Units 251 Value $9,789,000 Deferred Maintenance -$ 50,000 PV of Concessions -$ 116,000 ----------- Value Based on NOI Analysis $9,623,000 Rounded $9,600,000
The adjusted sales indicate a range of value between $35,931 and $42,728 per unit, with an average of $38,010 per unit. Based on the subject's competitive position within the improved sales, a value of $39,000 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 BIG WALNUT, COLUMBUS, OHIO EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
COMPARABLE NO. OF SALE PRICE EFFECTIVE OPERATING SUBJECT NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM - ---------- ------ ---------- ------------ ---------- --- ------------- ----- I-1 759 $22,297,400 $4,122,696 $1,752,597 42.51% 5.41 $ 29,377 I-2 196 $ 6,400,000 $1,004,537 $ 428,537 42.66% 6.37 $ 32,653 43.16% I-3 316 $11,011,986 $2,042,675 $ 864,142 42.30% 5.39 $ 34,848 I-4 288 $10,314,300 $1,774,752 $ 708,690 39.93% 5.81 $ 35,814
EGIM
Low High Average Median 5.39 6.37 5.75 5.61
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.50 Subject EGI $1,808,647 Value $9,947,560 Deferred Maintenance -$ 50,000 PV of Concessions -$ 116,000 ----------- Value Based on EGIM Analysis $9,781,560 Rounded $9,800,000 Value Per Unit $ 39,044
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 43.16% before reserves. The comparable sales indicate a range of expense ratios from 39.93% to 42.66%, while their EGIMs range from 5.39 to 6.37. Overall, we conclude to an EGIM of 5.50, which results in an "as is" value estimate in the EGIM Analysis of $9,800,000. 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 $9,700,000. Price Per Unit $9,600,000 NOI Per Unit $9,600,000 EGIM Analysis $9,800,000 Sales Comparison Conclusion $9,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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 --------- --------- -------- ------ ---------- 1B/1B-1A10 694 $ 503 $ 0.73 91.7% 1B/1B-1B10 705 $ 474 $ 0.67 91.7% 1B/1B-1C10 975 $ 520 $ 0.53 85.7% 1B/1.5B-1A15 733 $ 504 $ 0.69 87.5% 2B/1.5B-2A15 1282 $ 618 $ 0.48 100.0% 2B/1.5B-2B15 1395 $ 625 $ 0.45 96.7% 2B/1.5B-2C15 1649 $ 668 $ 0.41 95.9% 2B/2B-2A20 1195 $ 630 $ 0.53 91.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 BIG WALNUT, COLUMBUS, OHIO RENT ANALYSIS
COMPARABLE RENTS ----------------------------------------------------- R-1 R-2 R-3 R-4 R-5 -------- ----------- ------- ---------- --- Club at Shaker Eagle's Square Hibernia Riding Club Pointe Apartments N/A ----------------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ----------------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Superior Superior Similar Similar 0 ----------- ------------ ------- ------- -------- -------- ------- ------- --- Monthly Rent 1B/1B-1A10 $ 503 $ 529 $ 455 $ 410 Unit Area (SF) 694 694 689 626 Monthly Rent Per Sq. Ft. $0.73 $0.76 $0.66 $0.65 Monthly Rent 1B/1B-1B10 $ 474 $ 469 $ 571 Unit Area (SF) 705 705 910 Monthly Rent Per Sq. Ft. $0.67 $0.67 $0.63 Monthly Rent 1B/1B-1C10 $ 520 $ 559 $ 587 $525 Unit Area (SF) 975 975 918 864 Monthly Rent Per Sq. Ft. $0.53 $0.57 $0.64 $0.61 Monthly Rent 1B/1.5B-1A15 $ 504 $ 529 $ 563 $510 Unit Area (SF) 733 733 901 775 Monthly Rent Per Sq. Ft. $0.69 $0.72 $0.62 $0.66 Monthly Rent 2B/1.5B-2A15 $ 618 $649 $ 613 $ 545 $543 $ 635 Unit Area (SF) 1,282 1,282 1,052 925 878 1,072 Monthly Rent Per Sq. Ft. $0.48 $0.51 $0.58 $0.59 $0.62 $0.59 Monthly Rent 2B/1.5B-2B15 $ 625 $ 649 $ 703 Unit Area (SF) 1,395 1,395 1,180 Monthly Rent Per Sq. Ft. $0.45 $0.47 $0.60 Monthly Rent 2B/1.5B-2C15 $ 668 $ 679 Unit Area (SF) 1,649 1,649 Monthly Rent Per Sq. Ft. $0.41 $0.41 Monthly Rent 2B/2B-2A20 $ 630 $ 659 $650 Unit Area (SF) 1,195 1,195 1,104 Monthly Rent Per Sq. Ft. $0.53 $0.55 $0.59 DESCRIPTION MIN MAX MEDIAN AVERAGE ----------- --- --- ------ ------- Monthly Rent $ 410 $ 455 $ 433 $ 433 Unit Area (SF) 626 689 658 658 Monthly Rent Per Sq. Ft. $0.65 $0.66 $0.66 $0.66 Monthly Rent $ 571 $ 571 $ 571 $ 571 Unit Area (SF) 910 910 910 910 Monthly Rent Per Sq. Ft. $0.63 $0.63 $0.63 $0.63 Monthly Rent $ 525 $ 587 $ 556 $ 556 Unit Area (SF) 864 918 891 891 Monthly Rent Per Sq. Ft. $0.61 $0.64 $0.62 $0.62 Monthly Rent $ 510 $ 563 $ 536 $ 536 Unit Area (SF) 775 901 838 838 Monthly Rent Per Sq. Ft. $0.62 $0.66 $0.64 $0.64 Monthly Rent $ 543 $ 635 $ 579 $ 584 Unit Area (SF) 878 1,072 989 982 Monthly Rent Per Sq. Ft. $0.58 $0.62 $0.59 $0.60 Monthly Rent $ 703 $ 703 $ 703 $ 703 Unit Area (SF) 1,180 1,180 1,180 1,180 Monthly Rent Per Sq. Ft. $0.60 $0.60 $0.60 $0.60 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 650 $ 650 $ 650 $ 650 Unit Area (SF) 1,104 1,104 1,104 1,104 Monthly Rent Per Sq. Ft. $0.59 $0.59 $0.59 $0.59
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 --------- --------------- --------- -------- ------ ------- ------ 1B/1B-1A10 24 694 $519 $0.75 $ 12,456 $ 149,472 1B/1B-1B10 24 705 $469 $0.67 $ 11,256 $ 135,072 1B/1B-1C10 21 975 $549 $0.56 $ 11,529 $ 138,348 1B/1.5B-1A15 24 733 $519 $0.71 $ 12,456 $ 149,472 2B/1.5B-2A15 42 1,282 $649 $0.51 $ 27,258 $ 327,096 2B/1.5B-2B15 30 1,395 $649 $0.47 $ 19,470 $ 233,640 2B/1.5B-2C15 74 1,649 $679 $0.41 $ 50,246 $ 602,952 2B/2B-2A20 12 1,195 $649 $0.54 $ 7,788 $ 93,456 Total $152,459 $1,829,508
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 ACTUAL ACTUAL ACTUAL ----------------------- ----------------------- ----------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ----------- ------------ -------- ------------ -------- ------------ -------- Revenues Rental Income $ 1,765,540 $ 7,034 $ 1,506,608 $ 6,002 $ 1,751,166 $ 6,977 Vacancy $ 173,284 $ 690 $ 247,226 $ 985 $ 82,191 $ 327 Credit Loss/Concessions $ 52,252 $ 208 $ 87,768 $ 350 $ 45,990 $ 183 ------------ -------- ------------ -------- ------------ -------- Subtotal $ 225,536 $ 899 $ 334,994 $ 1,335 $ 128,181 $ 511 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 81,810 $ 326 $ 90,924 $ 362 $ 156,164 $ 622 ------------ -------- ------------ -------- ------------ -------- Subtotal Other Income $ 81,810 $ 326 $ 90,924 $ 362 $ 156,164 $ 622 ------------ -------- ------------ -------- ------------ -------- Effective Gross Income $ 1,621,814 $ 6,461 $ 1,262,538 $ 5,030 $ 1,779,149 $ 7,088 Operating Expenses Taxes $ 156,041 $ 622 $ 93,421 $ 372 $ 149,415 $ 595 Insurance $ 31,387 $ 125 $ 41,781 $ 166 $ 50,821 $ 202 Utilities $ 91,303 $ 364 $ 79,077 $ 315 $ 87,639 $ 349 Repair & Maintenance $ 52,895 $ 211 $ 33,417 $ 133 $ 24,872 $ 99 Cleaning $ 77,888 $ 310 $ 48,082 $ 192 $ 61,880 $ 247 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 43,239 $ 172 $ 42,216 $ 168 $ 20,405 $ 81 General Administrative $ 31,998 $ 127 $ 28,067 $ 112 $ 26,264 $ 105 Management $ 84,169 $ 335 $ 66,459 $ 265 $ 90,866 $ 362 Miscellaneous $ 222,211 $ 885 $ 193,569 $ 771 $ 249,812 $ 995 ------------ -------- ------------ -------- ------------ -------- Total Operating Expenses $ 791,131 $ 3,152 $ 626,089 $ 2,494 $ 761,974 $ 3,036 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------ -------- ------------ -------- ------------ -------- Net Income $ 830,683 $ 3,309 $ 636,449 $ 2,536 $ 1,017,175 $ 4,052 FISCAL YEAR 2003 ANNUALIZED 2003 MANAGEMENT BUDGET PROJECTION AAA PROJECTION ----------------------- ----------------------- ----------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ----------- ------------ -------- ------------ -------- ------------ -------- ------ Revenues Rental Income $ 1,791,420 $ 7,137 $ 1,783,888 $ 7,107 $ 1,829,508 $ 7,289 100.0% Vacancy $ 74,000 $ 295 $ 148,620 $ 592 $ 91,475 $ 364 5.0% Credit Loss/Concessions $ 41,650 $ 166 $ 233,496 $ 930 $ 54,885 $ 219 3.0% ------------ -------- ------------ -------- ------------ -------- ----- Subtotal $ 115,650 $ 461 $ 382,116 $ 1,522 $ 146,361 $ 583 8.0% Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 131,863 $ 525 $ 458,860 $ 1,828 $ 125,500 $ 500 6.9% ------------ -------- ------------ -------- ------------ -------- ----- Subtotal Other Income $ 131,863 $ 525 $ 458,860 $ 1,828 $ 125,500 $ 500 6.9% ------------ -------- ------------ -------- ------------ -------- ----- Effective Gross Income $ 1,807,633 $ 7,202 $ 1,860,632 $ 7,413 $ 1,808,647 $ 7,206 100.0% Operating Expenses Taxes $ 153,096 $ 610 $ 140,456 $ 560 $ 153,110 $ 610 8.5% Insurance $ 55,680 $ 222 $ 54,816 $ 218 $ 55,220 $ 220 3.1% Utilities $ 84,788 $ 338 $ 129,308 $ 515 $ 87,850 $ 350 4.9% Repair & Maintenance $ 30,238 $ 120 $ 60,136 $ 240 $ 37,650 $ 150 2.1% Cleaning $ 57,990 $ 231 $ 80,444 $ 320 $ 61,495 $ 245 3.4% Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 29,328 $ 117 $ 22,400 $ 89 $ 31,375 $ 125 1.7% General Administrative $ 24,828 $ 99 $ 46,824 $ 187 $ 25,100 $ 100 1.4% Management $ 90,882 $ 362 $ 79,840 $ 318 $ 90,432 $ 360 5.0% Miscellaneous $ 241,157 $ 961 $ 225,116 $ 897 $ 238,450 $ 950 13.2% ------------ -------- ------------ -------- ------------ -------- ----- Total Operating Expenses $ 767,987 $ 3,060 $ 839,340 $ 3,344 $ 780,682 $ 3,110 43.2% Reserves $ 0 $ 0 $ 0 $ 0 $ 62,750 $ 250 8.0% ------------ -------- ------------ -------- ------------ -------- ----- Net Income $ 1,039,646 $ 4,142 $ 1,021,292 $ 4,069 $ 965,215 $ 3,845 53.4%
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 8% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 BIG WALNUT, COLUMBUS, OHIO 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 some major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an additional $50,000 has been deducted. 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 BIG WALNUT, COLUMBUS, OHIO SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------- --------- ------ ---------- --- I-1 Aug-02 95% $29,377 10.63% I-2 Nov-02 87% $32,653 9.00% I-3 Sep-01 95% $34,848 10.70% I-4 Sep-01 95% $35,814 10.34% I-5 Jan-00 0% N/A High 10.70% Low 9.00% Average 10.17%
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 11.75%. 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 11.75% indicates a value of $9,900,000. In this instance, the reversion figure contributes approximately 38% of the total value. Investors surveyed for this assignment indicated they AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO DISCOUNTED CASH FLOW ANALYSIS BIG WALNUT
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ----------- ------------ ------------ ------------ ------------ ------------ ------------ REVENUE Base Rent $ 1,829,508 $ 1,829,508 $ 1,884,393 $ 1,940,925 $ 1,999,153 $ 2,059,127 Vacancy $ 91,475 $ 91,475 $ 94,220 $ 97,046 $ 99,958 $ 102,956 Credit Loss $ 54,885 $ 54,885 $ 56,532 $ 58,228 $ 59,975 $ 61,774 Concessions $ 112,789 $ 18,295 $ 0 $ 0 $ 0 $ 0 ------------ ------------ ------------ ------------ ------------ ------------ Subtotal $ 259,150 $ 164,656 $ 150,751 $ 155,274 $ 159,932 $ 164,730 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 125,500 $ 125,500 $ 129,265 $ 133,143 $ 137,137 $ 141,251 ------------ ------------ ------------ ------------ ------------ ------------ Subtotal Other Income $ 125,500 $ 125,500 $ 129,265 $ 133,143 $ 137,137 $ 141,251 ------------ ------------ ------------ ------------ ------------ ------------ EFFECTIVE GROSS INCOME $ 1,695,858 $ 1,790,352 $ 1,862,907 $ 1,918,794 $ 1,976,358 $ 2,035,649 OPERATING EXPENSES: Taxes $ 153,110 $ 157,703 $ 162,434 $ 167,307 $ 172,327 $ 177,496 Insurance $ 55,220 $ 56,877 $ 58,583 $ 60,340 $ 62,151 $ 64,015 Utilities $ 87,850 $ 90,486 $ 93,200 $ 95,996 $ 98,876 $ 101,842 Repair & Maintenance $ 37,650 $ 38,780 $ 39,943 $ 41,141 $ 42,375 $ 43,647 Cleaning $ 61,495 $ 63,340 $ 65,240 $ 67,197 $ 69,213 $ 71,290 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 31,375 $ 32,316 $ 33,286 $ 34,284 $ 35,313 $ 36,372 General Administrative $ 25,100 $ 25,853 $ 26,629 $ 27,427 $ 28,250 $ 29,098 Management $ 84,793 $ 89,518 $ 93,145 $ 95,940 $ 98,818 $ 101,782 Miscellaneous $ 238,450 $ 245,604 $ 252,972 $ 260,561 $ 268,378 $ 276,429 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES $ 775,043 $ 800,475 $ 825,432 $ 850,195 $ 875,700 $ 901,971 Reserves $ 62,750 $ 64,633 $ 66,571 $ 68,569 $ 70,626 $ 72,744 ------------ ------------ ------------ ------------ ------------ ------------ NET OPERATING INCOME $ 858,065 $ 925,245 $ 970,904 $ 1,000,031 $ 1,030,032 $ 1,060,933 Operating Expense Ratio (% of EGI) 45.7% 44.7% 44.3% 44.3% 44.3% 44.3% Operating Expense Per Unit $ 3,088 $ 3,189 $ 3,289 $ 3,387 $ 3,489 $ 3,594 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 ----------- ------------ ------------ ------------ ------------ ------------ REVENUE Base Rent $ 2,120,901 $ 2,184,528 $ 2,250,064 $ 2,317,566 $ 2,387,093 Vacancy $ 106,045 $ 109,226 $ 112,503 $ 115,878 $ 119,355 Credit Loss $ 63,627 $ 65,536 $ 67,502 $ 69,527 $ 71,613 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------ ------------ ------------ ------------ ------------ Subtotal $ 169,672 $ 174,762 $ 180,005 $ 185,405 $ 190,967 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 145,489 $ 149,854 $ 154,349 $ 158,980 $ 163,749 ------------ ------------ ------------ ------------ ------------ Subtotal Other Income $ 145,489 $ 149,854 $ 154,349 $ 158,980 $ 163,749 ------------ ------------ ------------ ------------ ------------ EFFECTIVE GROSS INCOME $ 2,096,718 $ 2,159,620 $ 2,224,408 $ 2,291,140 $ 2,359,875 OPERATING EXPENSES: Taxes $ 182,821 $ 188,306 $ 193,955 $ 199,774 $ 205,767 Insurance $ 65,936 $ 67,914 $ 69,951 $ 72,050 $ 74,211 Utilities $ 104,897 $ 108,044 $ 111,286 $ 114,624 $ 118,063 Repair & Maintenance $ 44,956 $ 46,305 $ 47,694 $ 49,125 $ 50,598 Cleaning $ 73,428 $ 75,631 $ 77,900 $ 80,237 $ 82,644 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 37,463 $ 38,587 $ 39,745 $ 40,937 $ 42,165 General Administrative $ 29,971 $ 30,870 $ 31,796 $ 32,750 $ 33,732 Management $ 104,836 $ 107,981 $ 111,220 $ 114,557 $ 117,994 Miscellaneous $ 284,722 $ 293,263 $ 302,061 $ 311,123 $ 320,457 ------------ ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES $ 929,030 $ 956,901 $ 985,608 $ 1,015,177 $ 1,045,632 Reserves $ 74,927 $ 77,175 $ 79,490 $ 81,875 $ 84,331 ------------ ------------ ------------ ------------ ------------ NET OPERATING INCOME $ 1,092,761 $ 1,125,544 $ 1,159,310 $ 1,194,089 $ 1,229,912 Operating Expense Ratio (% of EGI) 44.3% 44.3% 44.3% 44.3% 44.3% Operating Expense Per Unit $ 3,701 $ 3,812 $ 3,927 $ 4,045 $ 4,166 "DCF" Value Analysis Gross Residual Sale Deferred Maintenance -$ 50,000 Price $11,713,446 Estimated Stabilized NOI $965,215 Sales Expense Rate 2.00% Less: Sales Expense $ 234,269 Add: Excess Land $ 0 ----------- Months to Stabilized 1 Discount Rate 11.75% Net Residual Sale Price $11,479,177 Other Adjustments $ 0 ----------- Stabilized Occupancy 95.0% Terminal Cap Rate 10.50% PV of Reversion $ 3,779,509 Value Indicated By Add: NPV of NOI $ 6,128,465 "DCF" $9,857,974 ----------- PV Total $ 9,907,974 Rounded $9,900,000
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------------ TOTAL VALUE 11.25% 11.50% 11.75% 12.00% 12.25% - -------------------------- ----------- ----------- ----------- ---------- ---------- 10.00% $10,425,208 $10,259,295 $10,096,950 $9,938,085 $9,782,612 10.25% $10,323,977 $10,160,310 $10,000,158 $9,843,431 $9,690,046 TERMINAL CAP RATE 10.50% $10,227,565 $10,066,039 $ 9,907,974 $9,753,285 $9,601,888 10.75% $10,135,639 $ 9,976,153 $ 9,820,079 $9,667,332 $9,517,830 11.00% $10,047,890 $ 9,890,352 $ 9,736,179 $9,585,286 $9,437,593
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 BIG WALNUT, COLUMBUS, OHIO 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 $116,000 (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 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 36 BIG WALNUT, COLUMBUS, OHIO BIG WALNUT
TOTAL PER SQ. FT. PER UNIT %OF EGI - ----------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,829,508 $ 6.02 $ 7,289 Less: Vacancy & Collection Loss 8.00% $ 146,361 $ 0.48 $ 583 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 125,500 $ 0.41 $ 500 6.94% -------------------------------------------------------------------------- Subtotal Other Income $ 125,500 $ 0.41 $ 500 6.94% EFFECTIVE GROSS INCOME $1,808,647 $ 5.96 $ 7,206 OPERATING EXPENSES: Taxes $ 153,110 $ 0.50 $ 610 8.47% Insurance $ 55,220 $ 0.18 $ 220 3.05% Utilities $ 87,850 $ 0.29 $ 350 4.86% Repair & Maintenance $ 37,650 $ 0.12 $ 150 2.08% Cleaning $ 61,495 $ 0.20 $ 245 3.40% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 31,375 $ 0.10 $ 125 1.73% General Administrative $ 25,100 $ 0.08 $ 100 1.39% Management 5.00% $ 90,432 $ 0.30 $ 360 5.00% Miscellaneous $ 238,450 $ 0.79 $ 950 13.18% TOTAL OPERATING EXPENSES $ 780,682 $ 2.57 $ 3,110 43.16% Reserves $ 62,750 $ 0.21 $ 250 3.47% -------------------------------------------------------------------------- NET OPERATING INCOME $ 965,215 $ 3.18 $ 3,845 53.37% "GOING IN" CAPITALIZATION RATE 10.00% VALUE INDICATION $9,652,150 $31.78 $38,455 DEFERRED MAINTENANCE ($ 50,000) PV OF CONCESSIONS ($ 116,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $9,486,150 ROUNDED $9,500,000 $31.28 $37,849
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 BIG WALNUT, COLUMBUS, OHIO DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - --------------------------------------------------------------------------------------------------------------------- 9.25% $10,268,757 $10,300,000 $41,036 $33.91 9.50% $ 9,994,158 $10,000,000 $39,841 $32.93 9.75% $ 9,733,641 $ 9,700,000 $38,645 $31.94 10.00% $ 9,486,150 $ 9,500,000 $37,849 $31.28 10.25% $ 9,250,732 $ 9,300,000 $37,052 $30.62 10.50% $ 9,026,524 $ 9,000,000 $35,857 $29.63 10.75% $ 8,812,744 $ 8,800,000 $35,060 $28.98
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $9,500,000. 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 $9,900,000 Direct Capitalization Method $9,500,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $9,800,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 BIG WALNUT, COLUMBUS, OHIO 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 $9,700,000 Income Approach $9,800,000 Reconciled Value $9,800,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of April 30, 2003 the market value of the fee simple estate in the property is: $9,800,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA BIG WALNUT, COLUMBUS, OHIO ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A BIG WALNUT, COLUMBUS, OHIO EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A BIG WALNUT, COLUMBUS, OHIO SUBJECT PHOTOGRAPHS [EXTERIOR - ENTRANCE PICTURE] [EXTERIOR - RESIDENTIAL UNITS PICTURE] [EXTERIOR - POOL PICTURE] [EXTERIOR - TENNIS COURTS PICTURE] [INTERIOR - UNIT PICTURE] [INTERIOR - TYPICAL KITCHEN PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B BIG WALNUT, COLUMBUS, OHIO EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B BIG WALNUT, COLUMBUS, OHIO PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 THE CLUB AT EAGLE'S POINTE BOLTON ESTATES NORTHGATE APARTMENTS 6033 Lake Club Court 1150 Norton Road 6175 Northgate Road Columbus, Ohio Columbus, Ohio Columbus, Ohio N/A [PICTURE] [PICTURE] COMPARABLE I-4 SPRING CREEK 5811 Spring Run Drive Columbus, Ohio [PICTURE] N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B BIG WALNUT, COLUMBUS, OHIO SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ----------------------------------------------------------------------------------------------------------------------------- Property Name Big Walnut Hibernia Management Company Aimco Oakwood Management LOCATION: Address 5280 Gatehouse Drive 5680 Hibernia Drive City, State Columbus, Ohio Columbus, Ohio County Franklin Franklin Proximity to Subject 1/4 Mile south of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 303,703 353,220 Year Built 1968 1986 Effective Age 20 10 Building Structure Type Brick & wood siding walls; asphalt Wood siding; asphalt shingled shingle roof roofs Parking Type (Gr., Cov., etc.) Open, Covered Open, Covered Number of Units 251 348 Unit Mix: Type Unit Qty Mo Rent Type Unit Qty Mo 1 1B/1B-1A10 694 24 $503 2 1Br/1Ba - Type 1 910 87 $571 2 1B/1B-1B10 705 24 $474 3 1Br/1Ba - Type 2 918 87 $587 3 1B/1B-1C10 975 21 $520 5 2Br/1.5Ba - Type 1 1,052 87 $613 4 1B/1.5B-1A15 733 24 $504 6 2Br/1.5Ba - Type 2 1,180 87 $703 5 2B/1.5B-2A15 1,282 42 $618 6 2B/1.5B-2B15 1,395 30 $625 7 2B/1.5B-2C15 1,649 74 $668 8 2B/2B-2A20 1,195 12 $630 Average Unit Size (SF) 1,210 1,015 Unit Breakdown: Efficiency 0% 2-Bedroom 63% Efficiency 0% 2-Bedroom 0% 1-Bedroom 37% 3-Bedroom 0% 1-Bedroom 0% 3-Bedroom 0% CONDITION: Average Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace Other X Fireplace Other 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 X Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court X Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office X Jogging Track X Business Office Gym Room Gym Room OCCUPANCY: 94% 85% LEASING DATA: Available Leasing Terms 6 to 15 Months 3 to 12 Months Concessions 1 Month Free 1 Month Free Pet Deposit $200 $200 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash X Water Trash Confirmation April 30, 2003; Carinne Blackwell April 30, 2003; Carinne Blackwell (PM) and Telephone Number (614) 863-3306 (614) 866-6282 NOTES: This is a younger complex located on the south side of Route 40. COMPARISON TO SUBJECT: Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ----------------------------------------------------------------------------------------------------------------------------- Property Name Riding Club Club at Eagle's Pointe Management Company Plaza Properties Alliance Residential LOCATION: Address 5198 Riding Club Lane 6033 Lake Club Street City, State Columbus, Ohio Columbus, Ohio County Franklin Franklin Proximity to Subject 1/4 Mile south of the subject 1/2 Mile south of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 414,528 579,112 Year Built 1968 1971 Effective Age 20 20 Building Structure Type Masonry veneer walls; composition Wood siding; asphalt shingle roof shingled roofs Parking Type (Gr., Cov., etc.) Open, Covered Open, Covered Number of Units 405 759 Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 1 1Br/1Ba 689 64 $455 1 1Br/1Ba - Type 1 626 276 $410 4 1Br/1.5Ba 733 64 $525 3 1Br/1Ba - Type 2 864 30 $525 2Br/1Ba 965 76 $525 4 1Br/1.5Ba 775 32 $510 5 2Br/1.5Ba - Type 1 925 48 $545 5 2Br/1Ba 856 273 $535 4 2Br/1.5Ba - Type 1 1,045 75 $595 5 2Br/1Ba 1,000 33 $575 3Br/2Ba 1,405 38 $745 5 2Br/1.5Ba 1,000 15 $610 3Br/2.5Ba 1,260 40 $695 8 2Br/2Ba 1,104 34 $650 Studio 504 66 $400 Average Unit Size (SF) 965 759 Unit Breakdown: Efficiency 0% 2-Bedroom Efficiency 9% 2-Bedroom 46% 1-Bedroom 3-Bedroom 1-Bedroom 45% 3-Bedroom 0% CONDITION: Average Average APPEAL: Good Average AMENITIES: Unit Amenities Attach. Garage Vaulted Attach. Vaulted Ceiling Garage Ceiling X Balcony W/D Connect. X Balcony 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 Car Wash Spa/Jacuzzi Car Wash Basketball Court 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 X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room Gym Room OCCUPANCY: 96% 92% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions 1 Month Free 1 Month Free Pet Deposit $200 - $300 $200 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash X Water Trash Confirmation April 30, 2003; Carinne Blackwell April 30, 2003; Carinne (PM) and Plaza Blackwell (PM) and Telephone Number (614) 237-3726 (614) 863-3306 NOTES: Residents have free access to the pool None and tennis courts, and pay a discounted fee to use an adjacent state-of-the-art fitness center. COMPARISON TO SUBJECT: Slightly Superior Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ----------------------------------------------------------------------------------------------------------------------------- Property Name Shaker Square Apartments N/A Management Company Buckingham Properties LOCATION: Address 280 Barkley Place W City, State Columbus, Ohio County Franklin Proximity to Subject 1/2 Mile north of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 207,928 Year Built 1970 Effective Age 20 Building Structure Type Masonry siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open, Covered Number of Units 194 Unit Mix: Type Unit Qty Mo Type Unit Qty Mo 5 2Br/1.5Ba 1,064 138 $625 5 2Br/1.5Ba 1,091 56 $660 Average Unit Size (SF) 1,072 Unit Breakdown: Efficiency 0% 2-Bedroom 100% Efficiency 2-Bedroom 1-Bedroom 0% 3-Bedroom 0% 1-Bedroom 3-Bedroom CONDITION: Slightly Superior Slightly Superior APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Attach. Garage Vaulted Ceiling Ceiling X Balcony X W/D Connect. Balcony W/D Connect. Fireplace Other Fireplace Other X Cable TV Ready Cable TV Ready Project Amenities X Swimming Pool 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 X Meeting Hall Sand Volley Ball Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room Gym Room OCCUPANCY: 83% LEASING DATA: Available Leasing Terms 6 to 15 Months Concessions 1 Month Free Pet Deposit $200 Utilities Paid by Tenant: X Electric X Natural Gas Electric Natural Gas X Water Trash Water Trash Confirmation April 30, 2003; Carinne Blackwell (PM) and Shaker Telephone Number (614) 863-3306 NOTES: None COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B BIG WALNUT, COLUMBUS, OHIO PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 HIBERNIA RIDING CLUB CLUB AT EAGLE'S POINTE 5680 Hibernia Drive 5198 Riding Club Lane 6033 Lake Club Street Columbus, Ohio Columbus, Ohio Columbus, Ohio [PICTURE] [PICTURE] N/A COMPARABLE R-4 COMPARABLE R-5 SHAKER SQUARE APARTMENTS N/A 280 Barkley Place W Columbus, Ohio [PICTURE] N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C BIG WALNUT, COLUMBUS, OHIO EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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 BIG WALNUT, COLUMBUS, OHIO 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. Richard Mupo 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/ Brian Johnson, MAI --------------------------- Brian Johnson, MAI Managing Principal, Real Estate Group AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E BIG WALNUT, COLUMBUS, OHIO EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E BIG WALNUT, COLUMBUS, OHIO F. BRIAN JOHNSON, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION F. Brian Johnson is the Managing Principal of the New York Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Johnson has completed appraisals for securitization and pension funds/insurance industries. Analyses he has performed involve various types of investment-grade real estate throughout the continental United States including apartments, cooperatives, hotels, industrial and research and development parks, office buildings, regional shopping centers, and undeveloped acreage. Additional experience includes the valuation of existing and proposed investment-grade real estate, market and feasibility studies and offering memorandums for debt placement, equity investments and acquisitions, and disposition analysis. Court Mr. Johnson is qualified as an expert witness for the New Jersey Supreme Court. Business Mr. Johnson joined AAA in 1998 and was promoted to his current position in 1999. Prior to joining AAA, Mr. Johnson was a Senior Vice President at Koeppel Tener Real Estate Services and a Vice President at L. W. Ellwood & Co. EDUCATION Fairleigh Dickinson Bachelor of Science - Finance STATE CERTIFICATIONS State of New Jersey, General Appraiser, #42RG00158300 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E COLONY OF SPRINGDALE, SPRINGDALE, OHIO PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS VALUATION AND Several courses are completed on an annual basis as SPECIAL COURSES part of the continuing education requirements of the Appraisal Institute. In addition, Mr. Johnson attends real estate and financial industry-related conferences and seminars. PUBLICATIONS "Operational Items to Consider When Appraising a Regional Mall," Appraisal Journal, 1991 AMERICAN APPRAISAL ASSOCIATES, INC. BIG WALNUT, COLUMBUS, OHIO GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. BIG WALNUT, COLUMBUS, OHIO 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) 6 d16091exv99wxcyx2y.txt APPRAISAL OF REFLECTIONS REFLECTIONS (GREENSPRING MANOR) 7999 SILVERLEAF DRIVE INDIANAPOLIS, INDIANA MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 7, 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 LOGO] [AMERICAN APPRAISAL ASSOCIATES LOGO] 9441 LBJ Freeway Suite 114 Dallas, Texas 75243 Telephone: (972) 994-9100 Fax: (972) 994-0516 UNITED STATES INTERNATIONAL Atlanta Brazil Boston Canada Buffalo China Charlotte Croatia Chicago Czech Republic Cincinnati England Dallas Germany Denver Greece Detroit Hong Kong Houston Hungary Irvine Italy Jacksonville Japan Los Angeles Mexico Milwaukee Morocco Minneapolis Peru New Orleans Philippines New York Poland Oak Lawn Portugal Philadelphia Russia Pittsburgh Spain Princeton Taiwan Schaumburg Thailand St. Louis Turkey San Francisco Venezuela Seattle 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: REFLECTIONS (GREENSPRING MANOR) 7999 SILVERLEAF DRIVE INDIANAPOLIS, MARION COUNTY, INDIANA 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 582 units with a total of 459,080 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 37.749 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 61% 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 7, 2003 is: ($25,700,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. /s/ Kenneth W. Kapecki ---------------------- July 9, 2003 Ken Kapecki, MAI #053272 Managing Principal, Real Estate Group State of Indiana, Certified General Appraiser, #CG49600008 Report By: John Nolan AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Reflections (Greenspring Manor) LOCATION: 7999 Silverleaf Drive Indianapolis, Indiana 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 7, 2003 DATE OF REPORT: July 9, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 37.749 acres, or 1,644,346 square feet Assessor Parcel No.: 000651 Floodplain: Community Panel No. 18097C0039E (January 5, 2001) Flood Zone X, an area outside the floodplain. Zoning: D-6II (Low Density Multifamily District) BUILDING: No. of Units: 582 Units Total NRA: 459,080 Square Feet Average Unit Size: 789 Square Feet Apartment Density: 15.4 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 - ------------------------------------------------ ---------- ----------- ---------- ---------- ---------- Eff/1Ba - EA10 450 $ 420 $ 0.93 $ 100,800 $1,209,600 1Br/1Ba - 1A10 770 $ 580 $ 0.75 $ 60,320 $ 723,840 1Br/1Ba - 2A15 950 $ 660 $ 0.69 $ 66,000 $ 792,000 2Br/2Ba - 2A25 1,200 $ 770 $ 0.64 $ 66,220 $ 794,640 2Br/2Ba - 3A25 1,400 $ 880 $ 0.63 $ 45,760 $ 549,120 ----- ---------- ---------- ---------- ---------- Total $ 339,100 $4,069,200 ========== ==========
OCCUPANCY: 61% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 15 Years REMAINING ECONOMIC LIFE: 30 Years
\ AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - APARTMENT BUILDING AREA MAP [AREA MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA NEIGHBORHOOD MAP [NEIGHBORHOOD 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit - -------------------------------------- ----------- ------- Potential Rental Income $ 4,069,200 $ 6,992 Effective Gross Income $ 3,904,798 $ 6,709 Operating Expenses $ 1,793,535 $ 3,082 45.9% of EGI Net Operating Income: $ 2,023,963 $ 3,478 Capitalization Rate 7.75% DIRECT CAPITALIZATION VALUE $25,300,000 * $43,471 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 61% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period 18 months Terminal Capitalization Rate 8.25% Discount Rate 10.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $25,600,000 * $43,986 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $25,600,000 $43,986 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $34,268 to $61,397 Range of Sales $/Unit (Adjusted) $41,122 to $48,678 VALUE INDICATION - PRICE PER UNIT $ 26,500,000 * $45,533 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.31 to 7.04 Selected EGIM for Subject 6.25 Subject's Projected EGI $ 3,904,798 EGIM ANALYSIS CONCLUSION $ 23,600,000 * $40,550 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 26,000,000 * $44,674 / UNIT RECONCILED SALES COMPARISON VALUE $ 25,800,000 $44,330 / 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $26,500,000 NOI Per Unit $26,000,000 EGIM Multiplier $23,600,000 INDICATED VALUE BY SALES COMPARISON $25,800,000 $44,330 / UNIT INCOME APPROACH: Direct Capitalization Method: $25,300,000 Discounted Cash Flow Method: $25,600,000 INDICATED VALUE BY THE INCOME APPROACH $25,600,000 $43,986 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $25,700,000 $44,158 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 7999 Silverleaf Drive, Indianapolis, Marion County, Indiana. Indianapolis identifies it as 000651. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by John Nolan on May 7, 2003. Ken Kapecki, MAI has not made a personal inspection of the subject property. John Nolan performed the research, valuation analysis and wrote the report. Ken Kapecki, MAI reviewed the report and concurs with the value. Ken Kapecki, MAI and John Nolan 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 7, 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 DDRE II. 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 Indianapolis, Indiana. 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 - U.S. 31 West - I-465 South - W. 73rd, 71st North - I-465 MAJOR EMPLOYERS Major employers in the subject's area include Clarian Health Systems, Eli Lilly and Company, Community Hospitals Indianapolis, Marsh/Village Pantry Supermarkets, St. Vincent Hospital and Health Care, IUPUI, Kroger Central Marketing Area, Rolls Royce, Federal Express, and St. Francis Hospital & Health Centers. 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - --------------------------- ------------ ------------ ------------ ------------ POPULATION TRENDS Current Population 15,442 67,258 159,771 1,646,584 5-Year Population 15,677 71,859 171,159 1,750,376 % Change CY-5Y 1.5% 6.8% 7.1% 6.3% Annual Change CY-5Y 0.3% 1.4% 1.4% 1.3% HOUSEHOLDS Current Households 6,861 29,094 68,734 648,288 5-Year Projected Households 7,027 31,195 74,030 696,995 % Change CY - 5Y 2.4% 7.2% 7.7% 7.5% Annual Change CY-5Y 0.5% 1.4% 1.5% 1.5% INCOME TRENDS Median Household Income $ 36,629 $ 50,853 $ 57,257 $ 47,488 Per Capita Income $ 25,778 $ 32,525 $ 32,618 $ 24,134 Average Household Income $ 57,156 $ 75,023 $ 75,578 $ 61,296
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 56.08% 40.47% 34.61% 29.55% 5-Year Projected % Renting 54.87% 39.66% 33.72% 28.58% % of Households Owning 31.88% 51.56% 59.22% 63.75% 5-Year Projected % Owning 33.29% 52.86% 60.49% 65.18%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Multi-Family Residential (Fountainhead) South - Single-Family Residential East - Single-Family Residential West - Multi-Family Residential (Kensington/Cedar Crossings) CONCLUSIONS The subject is well located within the city of Indianapolis. 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA MARKET ANALYSIS The subject property is located in the city of Indianapolis in Marion County. The overall pace of development in the subject's market is more or less stable. Approximately 2,550 new units are projected to be constructed in the Indianapolis Metro Area in 2003. This would represent a slight increase from 2002 constructed units of 2,439. The new construction is primarily occurring on the northwest side of town, on the southwest suburbs near the airport, and downtown. No new construction is anticipated in the subject's immediate neighborhood. (Source: CB Richard Ellis) The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------ ------ --------- 2002 9.3% 10.4% 2001 9.4% 9.3% 2000 8.8% 9.4% 1999 7.8% 9.2% 1998 7.9% 8.9% 1997 7.8% 6.4% 1996 7.7% 8.1% 1995 7.7% 6.8% 1994 7.7% 6.2%
(Source: CB Richard Ellis, US Census Bureau) Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. Vacancy rates in the area have been increasing for the past three years due primarily to the US recession and decreasing mortgage rates. Low mortgage rates have enticed many former renters to purchase homes. To encourage leasing activity, apartment managers have decreased rents, and offered rent concessions such as free rent or waiving security deposits. In addition, many properties have added/improved amenities such as swimming pools, tennis courts, fitness rooms, and clubhouses. While the Indianapolis economy has been affected by the recession of the early 2000's, its economy is strong relative to other major US cities. 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. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ------ ------ -------- --------- -------- 1993 $609 - N/A - 1994 $637 4.6% N/A N/A 1995 $659 3.5% N/A N/A 1996 $684 3.8% N/A N/A 1997 $703 2.8% N/A N/A 1998 $730 3.8% N/A N/A 1999 $747 2.3% N/A N/A 2000 $767 2.7% N/A N/A 2001 $779 1.6% N/A N/A 2002 $787 1.0% N/A N/A
Source:CB Richard Ellis 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 Carlton Apartments 702 80% N/A 0.75 miles NW of subject R-2 Landmark Apartments 231 80% 1974 0.50 miles S of subject R-3 Kensington Apartments 296 98% 1967 0.50 miles N of subject R-4 Barrington Apartments 144 96% 1966 1 mile N of subject R-5 Chelsea Village 246 91% 1983 1.25 miles N of subject Subject Reflections (Greenspring Manor) 582 61% 1972
The current trend toward low interest rates has increased the percentage of homeowners to renters. Consequently, the market has worsened for rental properties with rents dropping and vacancies increasing. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 37.749 acres, or 1,644,346 square feet Shape Rectangular 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 18097C0039E, dated January 5, 2001 Flood Zone Zone X Zoning D-6II, 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 - ------------- ---------- ---------- ---------- ---------- -------- 000651 $1,330,100 $7,097,800 $8,427,900 $ 0.03261 $274,859
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 582 Net Rentable Area 459,080 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, volleyball court, sand volleyball, jogging track, gym room, barbeque equipment, meeting hall, laundry room, business office, and secured parking. Unit Amenities Individual unit amenities include a balcony, cable TV connection, washer and dryer, and washer/dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal,
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA washer/dryer, and oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) - -------------- --------------- ---------- Eff/1Ba - EA10 240 450 1Br/1Ba - 1A10 104 770 1Br/1Ba - 2A15 100 950 2Br/2Ba - 2A25 86 1,200 2Br/2Ba - 3A25 52 1,400
Overall Condition Average Effective Age 15 years Economic Life 45 years Remaining Economic Life 30 years Deferred Maintenance None
HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1972 and consist of a 582-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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUMMARY OF COMPARABLE SALES - IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 - ------------------------------------------------------------------------------------------------------------------ Property Name Reflections (Greenspring Abington Apartments Cross Creek Apartments Manor) LOCATION: Address 7999 Silverleaf Drive 4656 Edwardian Circle 5756 Cross Creek Dr. City, State Indianapolis, Indiana Indianapolis, IN Indianapolis, IN County Marion Marion Marion PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 459,080 293,676 159,492 Year Built 1972 1980 1990 Number of Units 582 328 208 Unit Mix: Type Total Type Total Type Total Eff/1Ba - EA10 240 1Br/1Ba 156 1Br/1Ba 20 1Br/1Ba - 1A10 104 2Br/1Ba 56 1Br/1Ba 76 1Br/1Ba - 2A15 100 2Br/2Ba 84 1Br/1Ba 36 2Br/2Ba - 2A25 86 3Br/2Ba 32 2Br/2Ba 76 2Br/2Ba - 3A25 52 Average Unit Size (SF) 789 895 767 Land Area (Acre) 37.7490 0.0000 0.0000 Density (Units/Acre) 15.4 Parking Ratio (Spaces/Unit) 2.00 2.00 2.00 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open, Covered Open, Covered CONDITION: Good Good Good APPEAL: Good Good Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes No Laundry Room Yes Yes No Secured Parking Yes Yes Yes Sport Courts Yes Yes No Washer/Dryer Connection Yes Yes Yes Other Other OCCUPANCY: 61% 95% 87% TRANSACTION DATA: Sale Date July, 2002 December, 2000 Sale Price ($) $11,240,000 $8,714,417 Grantor Glenborough Realty Trust Grantee AIMCO GE Capital Sale Documentation Verification Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,276,112 $6,939 $7.75 $1,473,120 $7,082 $9.24 Vacancy/Credit Loss $ 159,328 $ 486 $0.54 $ 103,118 $ 496 $0.65 Effective Gross Income $2,116,784 $6,454 $7.21 $1,370,002 $6,587 $8.59 Operating Expenses $1,164,231 $3,549 $3.96 $ 753,501 $3,623 $4.72 Net Operating Income $ 952,553 $2,904 $3.24 $ 616,501 $2,964 $3.87 NOTES: None None PRICE PER UNIT $34,268 $41,896 PRICE PER SQUARE FOOT $ 38.27 $ 54.64 EXPENSE RATIO 55.0% 55.0% EGIM 5.31 6.36 OVERALL CAP RATE 8.47% 7.07% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 3 I - 4 - ------------------------------------------------------------------------------------------------------------------- Property Name Reflections (Greenspring Arbor Green Apartments Arbor Green Apartments Manor) LOCATION: Address 7999 Silverleaf Drive 3836 Arbor Green Ln. 3836 Arbor Green Ln. City, State Indianapolis, Indiana Indianapolis, IN Indianapolis, IN County Marion Marion Marion PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 459,080 181,152 181,152 Year Built 1972 1989 1989 Number of Units 582 208 208 Unit Mix: Type Total Type Total Type Total Eff/1Ba - EA10 240 1Br/1Ba 48 1Br/1Ba 48 1Br/1Ba - 1A10 104 1Br/1Ba 56 1Br/1Ba 56 1Br/1Ba - 2A15 100 2Br/1Ba 16 2Br/1Ba 16 2Br/2Ba - 2A25 86 2Br/2Ba 72 2Br/2Ba 72 2Br/2Ba - 3A25 52 3Br/2Ba 16 3Br/2Ba 16 Average Unit Size (SF) 789 871 871 Land Area (Acre) 37.7490 20.7750 20.7750 Density (Units/Acre) 15.4 10.0 10.0 Parking Ratio (Spaces/Unit) 2.00 2.00 2.00 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open, Covered Open, Covered CONDITION: Good Good Good APPEAL: Good Good Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room Yes Yes Yes Secured Parking Yes Yes Yes Sport Courts Yes Yes Yes Washer/Dryer Connection Yes Yes Yes Other Other OCCUPANCY: 61% 94% 94% TRANSACTION DATA: Sale Date September, 2002 May, 2001 Sale Price ($) $11,250,000 $9,400,000 Grantor Connor & Murphy Grantee Ritter & Co. Connor & Murphy Sale Documentation Verification Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $1,719,264 $8,266 $9.49 $1,719,264 $8,266 $9.49 Vacancy/Credit Loss $ 120,348 $ 579 $0.66 $ 120,348 $ 579 $0.66 Effective Gross Income $1,598,916 $7,687 $8.83 $1,598,916 $7,687 $8.83 Operating Expenses $ 879,404 $4,228 $4.85 $ 879,404 $4,228 $4.85 Net Operating Income $ 719,512 $3,459 $3.97 $ 719,512 $3,459 $3.97 NOTES: None None PRICE PER UNIT $54,087 $45,192 PRICE PER SQUARE FOOT $ 62.10 $ 51.89 EXPENSE RATIO 55.0% 55.0% EGIM 7.04 5.88 OVERALL CAP RATE 6.40% 7.65% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA COMPARABLE DESCRIPTION SUBJECT I - 5 - ---------------------------------------------------------------------------------------- Property Name Reflections (Greenspring Carriagetree Apartments Manor) (Monon Place Apts) LOCATION: Address 7999 Silverleaf Drive 5900 Carvel Ave. City, State Indianapolis, Indiana Indianapolis, IN County Marion Marion PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 459,080 140,492 Year Built 1972 1966 Number of Units 582 136 Unit Mix: Type Total Type Total Eff/1Ba - EA10 240 1Br/1Ba 16 1Br/1Ba - 1A10 104 2Br/1Ba 16 1Br/1Ba - 2A15 100 2Br/2Ba 84 2Br/2Ba - 2A25 86 3Br/2Ba 20 2Br/2Ba - 3A25 52 Average Unit Size (SF) 789 1,033 Land Area (Acre) 37.7490 8.0000 Density (Units/Acre) 15.4 17.0 Parking Ratio (Spaces/Unit) 2.00 2.00 Parking Type (Gr., Cov., etc.) Garage, Open Covered Open, Covered CONDITION: Good Good APPEAL: Good Very Good AMENITIES: Pool/Spa Yes/No Yes/No Gym Room Yes No Laundry Room Yes Yes Secured Parking Yes Yes Sport Courts Yes Yes Washer/Dryer Connection Yes Yes Other Other OCCUPANCY: 61% 98% TRANSACTION DATA: Sale Date April, 2001 Sale Price ($) $8,350,000 Grantor Grantee Buckingham Management Sale Documentation Verification Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income $1,492,992 $10,978 $10.63 Vacancy/Credit Loss $ 104,509 $ 768 $ 0.74 Effective Gross Income $1,388,483 $10,209 $ 9.88 Operating Expenses $ 763,665 $ 5,615 $ 5.44 Net Operating Income $ 624,817 $ 4,594 $ 4.45 NOTES: None PRICE PER UNIT $61,397 PRICE PER SQUARE FOOT $ 59.43 EXPENSE RATIO 55.0% EGIM 6.01 OVERALL CAP RATE 7.48% Cap Rate based on Pro Forma or Actual Income? PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA IMPROVED SALES MAP [IMPROVED SALES MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $34,268 to $61,397 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 $41,122 to $48,678 per unit with a mean or average adjusted price of $45,849 per unit. The median adjusted price is $48,350 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 $26,500,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SALES ADJUSTMENT GRID
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 - ----------------------------------- ------------------------ -------------------------- --------------------------- Property Name Reflections (Greenspring Abington Apartments Cross Creek Apartments Manor) Address 7999 Silverleaf Drive 4656 Edwardian Circle 5756 Cross Creek Dr. City Indianapolis, Indiana Indianapolis, IN Indianapolis, IN Sale Date July, 2002 December, 2000 Sale Price ($) $11,240,000 $8,714,417 Net Rentable Area (SF) 459,080 293,676 159,492 Number of Units 582 328 208 Price Per Unit $34,268 $41,896 Year Built 1972 1980 1990 Land Area (Acre) 37.7490 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 07-2002 0% 12-2000 5% VALUE AFTER TRANS ADJUST ($/UNIT) $34,268 $43,991 Location Comparable 0% Comparable 0% Number of Units 582 328 -5% 208 -15% Quality / Appeal Good Inferior 5% Inferior 5% Age / Condition 1972 1980 / Good 15% 1990 / Good 20% Occupancy at Sale 61% 95% 0% 87% 0% Amenities Good Inferior 10% Comparable 0% Average Unit Size (SF) 789 895 -5% 767 0% PHYSICAL ADJUSTMENT 20% 10% FINAL ADJUSTED VALUE ($/UNIT) $41,122 $48,390 DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 3 I - 4 - ----------------------------------- ------------------------ --------------------------- --------------------------- Property Name Reflections (Greenspring Arbor Green Apartments Arbor Green Apartments Manor) Address 7999 Silverleaf Drive 3836 Arbor Green Ln. 3836 Arbor Green Ln. City Indianapolis, Indiana Indianapolis, IN Indianapolis, IN Sale Date September, 2002 May, 2001 Sale Price ($) $11,250,000 $9,400,000 Net Rentable Area (SF) 459,080 181,152 181,152 Number of Units 582 208 208 Price Per Unit $54,087 $45,192 Year Built 1972 1989 1989 Land Area (Acre) 37.7490 20.7750 20.7750 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 09-2002 0% 05-2001 5% VALUE AFTER TRANS ADJUST ($/UNIT) $54,087 $47,452 Location Comparable 0% Comparable 0% Number of Units 582 208 -15% 208 -15% Quality / Appeal Good Inferior 5% Inferior 5% Age / Condition 1972 1989 / Good 5% 1989 / Good 5% Occupancy at Sale 61% 94% 0% 94% 0% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 789 871 -5% 871 -5% PHYSICAL ADJUSTMENT -10% -10% FINAL ADJUSTED VALUE ($/UNIT) $48,678 $42,707 DESCRIPTION SUBJECT COMPARABLE I - 5 - ----------------------------------- ------------------------ ---------------------------- Property Name Reflections (Greenspring Carriagetree Apartments Manor) (Monon Place Apts) Address 7999 Silverleaf Drive 5900 Carvel Ave. City Indianapolis, Indiana Indianapolis, IN Sale Date April, 2001 Sale Price ($) $8,350,000 Net Rentable Area (SF) 459,080 140,492 Number of Units 582 136 Price Per Unit $61,397 Year Built 1972 1966 Land Area (Acre) 37.7490 8.0000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Financing Cash To Seller 0% Conditions of Sale Arm's Length 0% Date of Sale (Time) 04-2001 5% VALUE AFTER TRANS ADJUST ($/UNIT) $64,467 Location Comparable 0% Number of Units 582 136 -25% Quality / Appeal Good Inferior 5% Age / Condition 1972 1966 / Good 15% Occupancy at Sale 61% 98% -5% Amenities Good Comparable 0% Average Unit Size (SF) 789 1,033 -15% PHYSICAL ADJUSTMENT -25% FINAL ADJUSTED VALUE ($/UNIT) $48,350
SUMMARY VALUE RANGE (PER UNIT) $41,122 TO $ 48,678 MEAN (PER UNIT) $45,849 MEDIAN (PER UNIT) $48,350 VALUE CONCLUSION (PER UNIT) $47,000 Value of Improvement & Main Site $27,354,000 Less: Lease-Up Cost -$ 756,000 PV of Concessions -$ 57,000 Value Indicated by Sales Comparison Approach $26,541,000 Rounded $26,500,000
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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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-1 328 $11,240,000 8.47% $952,553 $2,023,963 1.197 $ 41,035 $ 34,268 $ 2,904 $ 3,478 I-2 208 $ 8,714,417 7.07% $616,501 $2,023,963 1.173 $ 49,157 $ 41,896 $ 2,964 $ 3,478 I-3 208 $11,250,000 6.40% $719,512 $2,023,963 1.005 $ 54,374 $ 54,087 $ 3,459 $ 3,478 I-4 208 $ 9,400,000 7.65% $719,512 $2,023,963 1.005 $ 45,433 $ 45,192 $ 3,459 $ 3,478 I-5 136 $ 8,350,000 7.48% $624,817 $2,023,963 0.757 $ 46,474 $ 61,397 $ 4,594 $ 3,478
PRICE/UNIT
LOW HIGH AVERAGE MEDIAN --- ---- ------- ------ $41,035 $54,374 $47,295 $46,474
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 46,000 Number of Units 582 Value $26,772,000 Less: Lease-Up Cost -$ 756,000 PV of Concessions -$ 57,000 Value Based on NOI Analysis $25,959,000 Rounded $26,000,000
The adjusted sales indicate a range of value between $41,035 and $54,374 per unit, with an average of $47,295 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 $26,000,000 (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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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-1 328 $11,240,000 $2,116,784 $1,164,231 55.00% 5.31 $ 34,268 I-2 208 $ 8,714,417 $1,370,002 $ 753,501 55.00% 6.36 $ 41,896 I-3 208 $11,250,000 $1,598,916 $ 879,404 55.00% 7.04 45.93% $ 54,087 I-4 208 $ 9,400,000 $1,598,916 $ 879,404 55.00% 5.88 $ 45,192 I-5 136 $ 8,350,000 $1,388,483 $ 763,665 55.00% 6.01 $ 61,397
EGIM
LOW HIGH AVERAGE MEDIAN - --- ---- ------- ------ 5.31 7.04 6.12 6.01
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.25 Subject EGI $ 3,904,798 Value $24,404,988 Less: Lease-Up Cost -$ 756,000 PV of Concessions -$ 57,000 ----------- Value Based on EGIM Analysis $23,591,988 Rounded $23,600,000 Value Per Unit $ 40,550
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 45.93% before reserves. The comparable sales indicate an expense ratio of 55.00%, while their EGIMs range from 5.31 to 7.04. Overall, we conclude to an EGIM of 6.25, which results in an "as is" value estimate in the EGIM Analysis of $23,600,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $25,800,000. Price Per Unit $26,500,000 NOI Per Unit $26,000,000 EGIM Analysis $23,600,000 Sales Comparison Conclusion $25,800,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 - --------- --------- -------- ------ --------- Eff/1Ba - EA10 450 $449 $1.00 70.4% 1Br/1Ba - 1A10 770 $569 $0.74 53.8% 1Br/1Ba - 2A15 950 $659 $0.69 47.0% 2Br/2Ba - 2A25 1200 $729 $0.61 51.2% 2Br/2Ba - 3A25 1400 $829 $0.59 76.9%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------- Carlton Landmark Kensington Barrington Chelsea Apartments Apartments Apartments Apartments Village SUBJECT SUBJECT ------------------------------------------------------- DESCRIPTION SUBJECT UNIT ACTUAL ASKING COMPARISON TO SUBJECT TYPE RENT RENT ------------------------------------------------------- Similar Similar Similar Superior Similar - ------------------------ -------------- ------- ------- ---------- ---------- ---------- ---------- ------- Monthly Rent EFF/1BA - EA10 $ 449 $ 429 $ 478 $ 465 Unit Area (SF) 450 450 498 500 Monthly Rent Per Sq. Ft. $ 1.00 $ 0.95 $ 0.96 $ 0.93 Monthly Rent 1Br/1Ba - 1A10 $ 569 $ 559 $ 517 $ 570 $ 573 $ 660 $ 548 Unit Area (SF) 770 770 612 726 727 685 750 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.73 $ 0.84 $ 0.79 $ 0.79 $ 0.96 $ 0.73 Monthly Rent 1Br/1Ba - 2A15 $ 659 $ 659 $ 625 $ 653 $ 665 $ 705 $ 662 Unit Area (SF) 950 950 923 885 930 907 963 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.69 $ 0.68 $ 0.74 $ 0.72 $ 0.78 $ 0.69 Monthly Rent 2Br/2Ba - 2A25 $ 729 $ 769 $ 700 $ 723 $ 720 $ 857 $ 742 Unit Area (SF) 1,200 1,200 1,140 1,085 1,250 1,118 1,150 Monthly Rent Per Sq. Ft. $ 0.61 $ 0.64 $ 0.61 $ 0.67 $ 0.58 $ 0.77 $ 0.64 Monthly Rent 2Br/2Ba - 3A25 $ 829 $ 929 $ 883 $ 855 $1,045 Unit Area (SF) 1,400 1,400 1,540 1,475 1,496 Monthly Rent Per Sq. Ft. $ 0.59 $ 0.66 $ 0.57 $ 0.58 $ 0.70
DESCRIPTION MIN MAX MEDIAN AVERAGE - ------------------------ ------ ------ ------ ------- Monthly Rent $ 465 $ 478 $ 471 $ 471 Unit Area (SF) 498 500 499 499 Monthly Rent Per Sq. Ft. $ 0.93 $ 0.96 $ 0.94 $ 0.94 Monthly Rent $ 517 $ 660 $ 570 $ 574 Unit Area (SF) 612 750 726 700 Monthly Rent Per Sq. Ft. $ 0.73 $ 0.96 $ 0.79 $ 0.82 Monthly Rent $ 625 $ 705 $ 662 $ 662 Unit Area (SF) 885 963 923 921 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.78 $ 0.72 $ 0.72 Monthly Rent $ 700 $ 857 $ 723 $ 748 Unit Area (SF) 1,085 1,250 1,140 1,149 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.77 $ 0.64 $0.65 Monthly Rent $ 855 $1,045 $ 883 $ 928 Unit Area (SF) 1,475 1,540 1,496 1,504 Monthly Rent Per Sq. Ft. $ 0.57 $ 0.70 $ 0.58 $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 Type Number of Units Unit Area --------------- Monthly Annual (Sq. Ft.) Per Unit Per SF Income Income - -------------- --------------- --------- -------- ------ -------- ---------- Eff/1Ba - EA10 240 450 $420 $0.93 $100,800 $1,209,600 1Br/1Ba - 1A10 104 770 $580 $0.75 $ 60,320 $ 723,840 1Br/1Ba - 2A15 100 950 $660 $0.69 $ 66,000 $ 792,000 2Br/2Ba - 2A25 86 1,200 $770 $0.64 $ 66,220 $ 794,640 2Br/2Ba - 3A25 52 1,400 $880 $0.63 $ 45,760 $ 549,120 Total $339,100 $4,069,200
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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 $ 3,266,793 $ 5,613 $ 2,910,787 $ 5,001 $ 3,933,838 $ 6,759 $ 4,051,853 $ 6,962 Vacancy $ 1,679,636 $ 2,886 $ 1,824,769 $ 3,135 $ 2,224,548 $ 3,822 $ 2,291,284 $ 3,937 Credit Loss/Concessions $ 53,880 $ 93 $ 74,216 $ 128 $ 168,012 $ 289 $ 173,052 $ 297 ------------ --------- ------------ --------- ------------ --------- ------------ --------- Subtotal $ 1,733,516 $ 2,979 $ 1,898,985 $ 3,263 $ 2,392,560 $ 4,111 $ 2,464,337 $ 4,234 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 110 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 101,298 $ 174 $ 67,214 $ 115 $ 116,934 $ 201 $ 120,442 $ 207 ------------ --------- ------------ --------- ------------ --------- ------------ --------- Subtotal Other Income $ 101,298 $ 174 $ 67,324 $ 116 $ 116,934 $ 201 $ 120,442 $ 207 ------------ --------- ------------ --------- ------------ --------- ------------ --------- Effective Gross Income $ 1,634,575 $ 2,809 $ 1,079,126 $ 1,854 $ 1,658,212 $ 2,849 $ 1,707,958 $ 2,935 Operating Expenses Taxes $ 205,441 $ 353 $ 151,567 $ 260 $ 262,246 $ 451 $ 270,113 $ 464 Insurance $ 70,324 $ 121 $ 62,313 $ 107 $ 83,545 $ 144 $ 86,051 $ 148 Utilities $ 249,976 $ 430 $ 224,574 $ 386 $ 295,036 $ 507 $ 303,887 $ 522 Repair & Maintenance $ 65,773 $ 113 $ 51,707 $ 89 $ 126,534 $ 217 $ 130,330 $ 224 Cleaning $ 93,796 $ 161 $ 60,282 $ 104 $ 96,887 $ 166 $ 99,794 $ 171 Landscaping $ 58,012 $ 100 $ 34,520 $ 59 $ 74,052 $ 127 $ 76,274 $ 131 Security $ 0 $ 0 $ 0 $ 0 $ 27 $ 0 $ 28 $ 0 Marketing & Leasing $ 25,906 $ 45 $ 32,730 $ 56 $ 89,497 $ 154 $ 92,182 $ 158 General Administrative $ 366,142 $ 629 $ 344,238 $ 591 $ 523,946 $ 900 $ 539,664 $ 927 Management $ 88,883 $ 153 $ 60,720 $ 104 $ 83,790 $ 144 $ 86,304 $ 148 Miscellaneous ($ 112,132) -$ 193 ($ 207,604) -$ 357 ($ 592,092) -$ 1,017 ($ 609,855) -$ 1,048 ------------ --------- ------------ --------- ------------ --------- ------------ --------- Total Operating Expenses $ 1,112,121 $ 1,911 $ 815,047 $ 1,400 $ 1,043,468 $ 1,793 $ 1,074,772 $ 1,847 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------ --------- ------------ --------- ------------ --------- ------------ --------- Net Income $ 522,454 $ 898 $ 264,079 $ 454 $ 614,744 $ 1,056 $ 633,186 $ 1,088 ------------ --------- ------------ --------- ------------ --------- ------------ ---------
ANNUALIZED YEAR 2003 ----------------------- DESCRIPTION PROJECTION AAA PROJECTION ----------- ----------------------- --------------------------------- TOTAL PER UNIT TOTAL PER UNIT % ----------- -------- ----------- -------- -------- Revenues Rental Income $ 3,906,884 $ 6,713 $ 4,069,200 $ 6,992 100.0% Vacancy $ 1,739,540 $ 2,989 $ 203,460 $ 350 5.0% Credit Loss/Concessions $ 150,476 $ 259 $ 81,384 $ 140 2.0% ------------ --------- ----------- -------- -------- Subtotal $ 1,890,016 $ 3,247 $ 284,844 $ 489 7.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 203,516 $ 350 $ 120,442 $ 207 3.0% ------------ --------- ----------- -------- -------- Subtotal Other Income $ 203,516 $ 350 $ 120,442 $ 207 3.0% ------------ --------- ----------- -------- -------- Effective Gross Income $ 2,220,384 $ 3,815 $ 3,904,798 $ 6,709 100.0% Operating Expenses Taxes $ 416,752 $ 716 $ 270,113 $ 464 6.9% Insurance $ 91,536 $ 157 $ 86,051 $ 148 2.2% Utilities $ 394,152 $ 677 $ 303,887 $ 522 7.8% Repair & Maintenance $ 93,584 $ 161 $ 130,330 $ 224 3.3% Cleaning $ 81,832 $ 141 $ 99,794 $ 171 2.6% Landscaping $ 27,468 $ 47 $ 76,274 $ 131 2.0% Security $ 324 $ 1 $ 0 $ 0 0.0% Marketing & Leasing $ 11,420 $ 20 $ 92,182 $ 158 2.4% General Administrative $ 448,916 $ 771 $ 539,664 $ 927 13.8% Management $ 104,864 $ 180 $ 195,240 $ 335 5.0% Miscellaneous ($ 434,272) -$ 746 $ 0 $ 0 0.0% ------------ --------- ----------- -------- -------- Total Operating Expenses $ 1,236,576 $ 2,125 $ 1,793,535 $ 3,082 45.9% Reserves $ 0 $ 0 $ 87,300 $ 150 4.9% ------------ --------- ----------- -------- -------- Net Income $ 983,808 $ 1,690 $ 2,023,963 $ 3,478 51.8% ------------ --------- ----------- -------- --------
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 7% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 $150 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 $150 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - --------- --------- ------ ---------- ----- I-1 Jul-02 95% $ 34,268 8.47% I-2 Dec-00 87% $ 41,896 7.07% I-3 Sep-02 94% $ 54,087 6.40% I-4 May-01 94% $ 45,192 7.65% I-5 Apr-01 98% $ 61,397 7.48% High 8.47% Low 6.40% Average 7.42%
Based on this information, we have concluded the subject's overall capitalization rate should be 7.75%. 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 8.25%. 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 10.50%. 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 10.50% indicates a value of $25,600,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA approximately 47% 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA DISCOUNTED CASH FLOW ANALYSIS REFLECTIONS (GREENSPRING MANOR)
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ----------- ---------- ---------- ---------- ---------- --------- ---------- REVENUE Base Rent $4,069,200 $4,191,276 $4,317,014 $4,446,525 $4,579,920 $4,717,318 Vacancy $1,003,736 $ 296,882 $ 215,851 $ 222,326 $ 228,996 $ 235,866 Credit Loss $ 81,384 $ 83,826 $ 86,340 $ 88,930 $ 91,598 $ 94,346 Concessions $ 62,856 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal $1,147,976 $ 380,708 $ 302,191 $ 311,257 $ 320,594 $ 330,212 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 120,442 $ 124,055 $ 127,777 $ 131,610 $ 135,559 $ 139,625 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 120,442 $ 124,055 $ 127,777 $ 131,610 $ 135,559 $ 139,625 ---------- ---------- ---------- ---------- ---------- ---------- EFFECTIVE GROSS INCOME $3,041,666 $3,934,624 $4,142,600 $4,266,878 $4,394,885 $4,526,731 OPERATING EXPENSES: Taxes $ 270,113 $ 278,217 $ 286,563 $ 295,160 $ 304,015 $ 313,135 Insurance $ 86,051 $ 88,633 $ 91,292 $ 94,031 $ 96,852 $ 99,757 Utilities $ 303,887 $ 313,004 $ 322,394 $ 332,066 $ 342,028 $ 352,288 Repair & Maintenance $ 130,330 $ 134,240 $ 138,267 $ 142,415 $ 146,688 $ 151,088 Cleaning $ 99,794 $ 102,787 $ 105,871 $ 109,047 $ 112,319 $ 115,688 Landscaping $ 76,274 $ 78,562 $ 80,919 $ 83,346 $ 85,847 $ 88,422 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 92,182 $ 94,947 $ 97,796 $ 100,730 $ 103,752 $ 106,864 General Administrative $ 539,664 $ 555,854 $ 572,530 $ 589,706 $ 607,397 $ 625,619 Management $ 152,083 $ 196,731 $ 207,130 $ 213,344 $ 219,744 $ 226,337 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $1,750,379 $1,842,975 $1,902,761 $1,959,844 $2,018,640 $2,079,199 Reserves $ 87,300 $ 89,919 $ 92,617 $ 95,395 $ 98,257 $ 101,205 ---------- ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $1,203,987 $2,001,729 $2,147,222 $2,211,639 $2,277,988 $2,346,328 ========== ========== ========== ========== ========== ========== Operating Expense Ratio (% of EGI) 57.5% 46.8% 45.9% 45.9% 45.9% 45.9% Operating Expense Per Unit $ 3,008 $ 3,167 $ 3,269 $ 3,367 $ 3,468 $ 3,573 ========== ========== ========== ========== ========== ========== YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 ----------- ---------- ---------- ---------- ---------- --------- REVENUE Base Rent $4,858,838 $5,004,603 $5,154,741 $5,309,383 $5,468,665 Vacancy $ 242,942 $ 250,230 $ 257,737 $ 265,469 $ 273,433 Credit Loss $ 97,177 $ 100,092 $ 103,095 $ 106,188 $ 109,373 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- Subtotal $ 340,119 $ 350,322 $ 360,832 $ 371,657 $ 382,807 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 143,814 $ 148,128 $ 152,572 $ 157,150 $ 161,864 ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 143,814 $ 148,128 $ 152,572 $ 157,150 $ 161,864 ---------- ---------- ---------- ---------- ---------- EFFECTIVE GROSS INCOME $4,662,533 $4,802,409 $4,946,481 $5,094,876 $5,247,722 OPERATING EXPENSES: Taxes $ 322,530 $ 332,205 $ 342,172 $ 352,437 $ 363,010 Insurance $ 102,750 $ 105,832 $ 109,007 $ 112,277 $ 115,646 Utilities $ 362,857 $ 373,743 $ 384,955 $ 396,504 $ 408,399 Repair & Maintenance $ 155,621 $ 160,289 $ 165,098 $ 170,051 $ 175,153 Cleaning $ 119,159 $ 122,734 $ 126,416 $ 130,208 $ 134,114 Landscaping $ 91,075 $ 93,807 $ 96,621 $ 99,520 $ 102,505 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 110,070 $ 113,372 $ 116,773 $ 120,276 $ 123,885 General Administrative $ 644,387 $ 663,719 $ 683,631 $ 704,140 $ 725,264 Management $ 233,127 $ 240,120 $ 247,324 $ 254,744 $ 262,386 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $2,141,575 $2,205,822 $2,271,997 $2,340,157 $2,410,361 Reserves $ 104,241 $ 107,368 $ 110,589 $ 113,907 $ 117,324 ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $2,416,717 $2,489,219 $2,563,896 $2,640,812 $2,720,037 ========== ========== ========== ========== ========== Operating Expense Ratio (% of EGI) 45.9% 45.9% 45.9% 45.9% 45.9% Operating Expense Per Unit $ 3,680 $ 3,790 $ 3,904 $ 4,021 $ 4,142 ========== ========== ========== ========== ==========
Estimated Stabilized NOI $2,023,963 Months to Stabilized 18 Stabilized Occupancy 95.0% Sales Expense Rate 2.00% Discount Rate 10.50% Terminal Cap Rate 8.25%
Gross Residual Sale Price $32,970,143 Deferred Maintenance $ 0 Less: Sales Expense $ 659,403 Add: Excess Land $ 0 ----------- Net Residual Sale Price $32,310,740 Other Adjustments $ 0 ----------- PV of Reversion $11,904,855 Value Indicated By "DCF" $25,625,401 Add: NPV of NOI $13,720,546 Rounded $25,600,000 ----------- PV Total $25,625,401
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------- TOTAL VALUE 10.00% 10.25% 10.50% 10.75% 11.00% - ----------------------------------------------------------------------------------------------------- 7.75% $27,332,688 $26,857,769 $26,393,456 $25,939,479 $25,495,573 8.00% $26,918,286 $26,452,668 $25,997,428 $25,552,300 $25,117,026 TERMINAL CAP RATE 8.25% $26,528,999 $26,072,119 $25,625,401 $25,188,586 $24,761,422 8.50% $26,162,611 $25,713,955 $25,275,258 $24,846,267 $24,426,735 8.75% $25,817,159 $25,376,257 $24,945,124 $24,523,510 $24,111,174
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA INCOME LOSS DURING LEASE-UP The subject is currently 61% occupied, below our stabilized occupancy projection. We have estimated an 18-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 $756,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 ----------- ------ ------ "As Is" Net Operating Income $1,203,987 $2,001,729 Stabilized Net Operating Income $1,964,250 $2,084,682 ---------- ---------- Difference $ 760,262 $ 82,952 PV of Income Loss During Lease-Up $ 755,957 ---------- Rounded $ 756,000 ----------
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 $57,000 (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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 7.75% 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 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA REFLECTIONS (GREENSPRING MANOR)
TOTAL PER SQ. FT. PER UNIT %OF EGI ----- ----------- -------- ------- REVENUE Base Rent $ 4,069,200 $ 8.86 $ 6,992 Less: Vacancy & Collection Loss 7.00% $ 284,844 $ 0.62 $ 489 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 120,442 $ 0.26 $ 207 3.08% ------------ ------ -------- ---- Subtotal Other Income $ 120,442 $ 0.26 $ 207 3.08% EFFECTIVE GROSS INCOME $ 3,904,798 $ 8.51 $ 6,709 OPERATING EXPENSES: Taxes $ 270,113 $ 0.59 $ 464 6.92% Insurance $ 86,051 $ 0.19 $ 148 2.20% Utilities $ 303,887 $ 0.66 $ 522 7.78% Repair & Maintenance $ 130,330 $ 0.28 $ 224 3.34% Cleaning $ 99,794 $ 0.22 $ 171 2.56% Landscaping $ 76,274 $ 0.17 $ 131 1.95% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 92,182 $ 0.20 $ 158 2.36% General Administrative $ 539,664 $ 1.18 $ 927 13.82% Management 5.00% $ 195,240 $ 0.43 $ 335 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,793,535 $ 3.91 $ 3,082 45.93% Reserves $ 87,300 $ 0.19 $ 150 2.24% ------------ ------ -------- ---- NET OPERATING INCOME $ 2,023,963 $ 4.41 $ 3,478 51.83% ============ ====== ======== ===== "GOING IN" CAPITALIZATION RATE 7.75% VALUE INDICATION $ 26,115,649 $56.89 $ 44,872 LESS: LEASE-UP COST ($ 756,000) PV OF CONCESSIONS ($ 57,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 25,302,649 ROUNDED $ 25,300,000 $55.11 $ 43,471
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - -------- ----- ------- ------ ---- 7.00% $28,100,755 $28,100,000 $ 48,282 $61.21 7.25% $27,103,729 $27,100,000 $ 46,564 $59.03 7.50% $26,173,171 $26,200,000 $ 45,017 $57.07 7.75% $25,302,649 $25,300,000 $ 43,471 $55.11 8.00% $24,486,535 $24,500,000 $ 42,096 $53.37 8.25% $23,719,883 $23,700,000 $ 40,722 $51.62 8.50% $22,998,327 $23,000,000 $ 39,519 $50.10
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $25,300,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $25,600,000 Direct Capitalization Method $25,300,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $25,600,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 $25,800,000 Income Approach $25,600,000 Reconciled Value $25,700,000
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 7, 2003 the market value of the fee simple estate in the property is: $25,700,000 ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA ADDENDA EXHIBIT A AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXHIBIT A SUBJECT PHOTOGRAPHS EXHIBIT A AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING EXTERIOR - APARTMENT BUILDING [PICTURE] [PICTURE] EXTERIOR - PLAYGROUND EXTERIOR - POOL [PICTURE] [PICTURE] INTERIOR - LIVING ROOM INTERIOR - BEDROOM EXHIBIT A AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUBJECT PHOTOGRAPHS [PICTURE] INTERIOR - KITCHEN EXHIBIT B AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF OMPARABLES EXHIBIT B AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 ABINGTON APARTMENTS CROSS CREEK APARTMENTS ARBOR GREEN APARTMENTS 4656 Edwardian Circle 5756 Cross Creek Dr. 3836 Arbor Green Ln. Indianapolis, IN Indianapolis, IN Indianapolis, IN [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 ARBOR GREEN APARTMENTS CARRIAGETREE APARTMENTS (MONON PLACE APTS) 3836 Arbor Green Ln. 5900 Carvel Ave. Indianapolis, IN Indianapolis, IN [PICTURE] [PICTURE] EXHIBIT B AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA SUMMARY OF COMPARABLE RENTAL PROPERTIES
DESCRIPTION SUBJECT COMPARABLE R - 1 - ------------------------------------------------------------------------------------------------------------------------ Property Name Reflections (Greenspring Manor) Carlton Apartments Management Company AIMCO LOCATION: Address 7999 Silverleaf Drive 2629 Plaza Dr. City, State Indianapolis, Indiana Indianapolis, IN County Marion Marion Proximity to Subject 0.75 miles NW of subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 459,080 Year Built 1972 N/A Effective Age 15 10 Building Structure Type Wood, w/ brick & siding facade; Wood, w/ brick & siding facade; asphalt shingle roof asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Open Covered Open, Covered Number of Units 582 702 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 Eff/1Ba - EA10 450 240 $449 1 Studio 470 0 $460 2 1Br/1Ba - 1A10 770 104 $569 2 1BD/1BH 660 0 $560 3 1Br/1Ba - 2A15 950 100 $659 2 1BD/1BH 560 0 $495 4 2Br/2Ba - 2A25 1,200 86 $729 1 1BD/1BH 525 0 $495 5 2Br/2Ba - 3A25 1,400 52 $829 2 1BD/1BH 615 0 $495 $900 3 2BD/1BH 870 0 $565 3 2BD/2BH 975 0 $685 4 2BD/2BH 1,140 0 $700 Average Unit Size (SF) 789 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 2-Bedroom 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 3-Bedroom CONDITION: Good Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace X Washer Dryer X Fireplace Washer Dryer X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi X Car Wash Basketball Court X BBQ Equipment X Basketball Court X BBQ Equipment X Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball X Meeting Hall X Sand Volley Ball X Meeting Hall Tennis Court X Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room X Jogging Track X Business Office X Jogging Track X Business Office X Gym Room X Gym Room OCCUPANCY: 61% 80% LEASING DATA: Available Leasing Terms 6 to 15 Months 3 to 12 Months Concessions 1 - 1 1/2 Months Free 1 Month Free Pet Deposit $300 - $500 $ 200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Telephone Number NOTES: None COMPARISON TO SUBJECT: Similar
DESCRIPTION COMPARABLE COMPARABLE R - 2 R - 3 - ------------------------------------------------------------------------------------------------------------------------ Property Name Landmark Apartments Kensington Apartments Management Company LOCATION: Address 7600 Harcourt Rd. 8444 Rothbury Dr. City, State Indianapolis, IN Indianapolis, IN County Marion Marion Proximity to Subject 0.50 miles S of subject 0.50 miles N of subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 215,760 Year Built 1974 1967 Effective Age 25 15 Building Structure Type Wood, w/ brick & siding Wood, w/ brick & siding facade; facade; asphalt shingle roof asphalt shingle roof Parking Type (Gr., Cov., etc.) Open, Covered Open, Covered Number of Units 231 296 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 Studio 500 28 $465 2 1BD/1BH 630 0 $570 2 1BD/1BH 726 60 $570 2 1BD/1BH 750 0 $550 3 1BD/1BH 910 8 $640 2 1BD/1BH 800 0 $600 4 1BD/1BH 1,188 20 $700 3 2BD/1BH 910 0 $650 4 2BD/1BH 1,034 40 $735 3 2BD/2BH 950 0 $680 3 2BD/1BH 880 45 $655 4 2BD/2BH 1,250 0 $720 5 2BD/2BH 1,450 21 $835 5 2BD/2BH 1,350 0 $790 5 3BD/2BH 1,750 9 $995 5 3BD/2BH 1,600 0 $920 Average Unit Size (SF) 934 1,124 Unit Breakdown: Efficiency 12% 2-Bedroom 46% Efficiency 0% 2-Bedroom 0% 1-Bedroom 38% 3-Bedroom 4% 1-Bedroom 0% 3-Bedroom 0% CONDITION: Good Slightly Superior APPEAL: Good Slightly Superior AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. Fireplace Washer Dryer X Fireplace Washer Dryer X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi X Car Wash Basketball Court X BBQ Equipment X Basketball Court X BBQ Equipment Court X Volleyball Court Theater Room Volleyball Court Theater Room X 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 X Business Office X Jogging Track X Business Office X Gym Room X Gym Room OCCUPANCY: 80% 98% LEASING DATA: Available Leasing Terms 9 to 12 Months 6 to 12 Months Concessions None 1 Month Free Pet Deposit $150 $200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Telephone Number NOTES: None COMPARISON TO SUBJECT: Similar Similar
DESCRIPTION COMPARABLE COMPARABLE R - 4 R - 5 - ----------------------------------------------------------------------------------------------------------------------------- Property Name Barrington Apartments Chelsea Village Management Company LOCATION: Address 8717 Old Town West Dr. 9280 Chelsea Village Dr. City, State Indianapolis, IN Indianapolis, IN County Marion Marion Proximity to Subject 1 mile N of subject 1.25 miles N of subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 161,914 227,720 Year Built 1966 1983 Effective Age 25 15 Building Structure Type Wood, w/ brick & siding facade; Wood, w/ brick & siding facade; asphalt shingle roof asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Open, Covered Open, Covered Number of Units 144 246 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 2 1BD/1BH 628 18 $ 640 2 1BD/1BH 730 74 $531 2 1BD/1BH 855 6 $ 720 2 1BD/1BH 830 18 $616 3 2BD/1BH 907 18 $ 705 3 2BD/1BH 930 52 $613 4 2BD/2BH 1,069 36 $ 825 4 2BD/2BH 1,100 28 $655 4 2BD/2BH 1,153 20 $ 875 3 2BD/2BH 1,000 46 $717 4 3BD/2BH 1,295 6 $ 985 4 3BD/2BH 1,200 28 $828 5 3BD/2BH 1,496 40 $1,045 Average Unit Size (SF) 1,124 926 Unit Breakdown: Efficiency 0% 2-Bedroom 51% Efficiency 0% 2-Bedroom 51% 1-Bedroom 17% 3-Bedroom 32% 1-Bedroom 37% 3-Bedroom 11% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities X Attach. Garage Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace Washer Dryer X Fireplace Washer Dryer X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball X BBQ Equipment Basketball Court X BBQ Equipment Court Volleyball X Theater Room X Volleyball Court Theater Room Court Sand Volley X Meeting Hall X Sand Volley Ball Meeting Hall Ball Tennis Court X Secured Parking X Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 96% 91% LEASING DATA: Available Leasing Terms 3 to 12 Months 6 to 12 Months Concessions 1 Month Free 1 Month Free Pet Deposit $200 $200 Utilities Paid by Tenant X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Telephone Number NOTES: None None COMPARISON TO SUBJECT: Superior Similar
EXHIBIT B AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 CARLTON APARTMENTS LANDMARK APARTMENTS KENSINGTON APARTMENTS 2629 Plaza Dr. 7600 Harcourt Rd. 8444 Rothbury Dr. Indianapolis, IN Indianapolis, IN Indianapolis, IN [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 BARRINGTON APARTMENTS CHELSEA VILLAGE 8717 Old Town West Dr. 9280 Chelsea Village Dr. Indianapolis, IN Indianapolis, IN [PICTURE] [PICTURE] EXHIBIT C AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) EXHIBIT C AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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. EXHIBIT C AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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 EXHIBIT C AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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. EXHIBIT D AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) EXHIBIT D AMERICAN APPRAISAL ASSOCIATES, INC. CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. John Nolan 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/ Kenneth W. Kapecki ---------------------- Ken Kapecki, MAI Managing Principal, Real Estate Group State of Indiana, Certified General Appraiser, #CG49600008 EXHIBIT E AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA EXHIBIT E QUALIFICATIONS OF APPRAISER (3 PAGES) EXHIBIT E AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA KENNETH W. KAPECKI, MAI MANAGING PRINCIPAL, REAL ESTATE GROUP POSITION Kenneth W. Kapecki is the Managing Principal for the Chicago Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Kapecki has over 17 years of experience in providing valuation services to clients worldwide. He has a diversified background with considerable expertise in the valuation of special-purpose properties, large multilocational holdings, and investment-grade real estate. He has appraised steel mills, chemical plants, food processing facilities, airports, mines, railroad rights-of-way, hotels, and a variety of commercial and manufacturing facilities. Mr. Kapecki's experience further extends to highest and best use studies, feasibility studies, lease valuation analyses, cost segregation analyses, and insurable value analyses. His reports are most frequently prepared for acquisition, ad valorem tax, divestiture, financing, allocation of purchase price, litigation support, and value reporting. Over the years, he has completed appraisals in 50 states representing over $10 billion in value. Mr. Kapecki has developed a core competency in the valuation of hospitality property. He has appraised more than 150 hotels in the last two years alone for financing, acquisition due diligence, cost segregation, and feasibility. These properties consisted of a mixture of limited-service, full-service, and resort hotels located throughout the United States as well as in the Bahamas, Belize, and Guam. EXHIBIT E AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA Court Mr. Kapecki has testified as an expert witness in state and federal district courts and by deposition statements and interrogatory communications. Business Prior to joining AAA in 2001, Mr. Kapecki was a senior manager in the Chicago Valuation Service Group of Arthur Andersen, where he served as the central regional team leader for real estate staff training, hospitality consulting, and the valuation of real estate. Prior to his employment with Arthur Andersen, Mr. Kapecki served as the manager of real estate valuations for Lloyd-Thomas Coats and Burchard Co. EDUCATION University of Wisconsin - La Crosse Bachelor of Science - Geography STATE CERTIFICATIONS State of Illinois, Certified General Real Estate Appraiser, #153000331 State of Indiana, Certified General Appraiser, #CG49600008 State of Michigan, Certified General Appraiser, #1201003145 State of Wisconsin, Certified General Appraiser and Licensed Appraiser, #641 PROFESSIONAL AFFILIATIONS Appraisal Institute, MAI Designated Member Chicago Chapter, Admissions Committee Member, 1997 - Present EXHIBIT E AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA VALUATION AND SPECIAL COURSES Appraisal Institute Appraisal Principles Case Studies in Real Estate Valuation Fair Lending and the Appraiser Highest & Best Use and Market Analysis Income Capitalization, Parts A and B Litigation Support: The Appraiser as an Expert Witness Partial Interest Valuation Real Estate Disclosure Report Writing Standards of Professional Practice Valuation of Detrimental Conditions Valuation Theory and Techniques Arthur Andersen, Course Developer Income Capitalization Theory and Techniques Introduction to the Cost Approach Property Inspection and Market Data Collection AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. REFLECTIONS (GREENSPRING MANOR), INDIANAPOLIS, INDIANA 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) 7 d16091exv99wxcyx3y.txt APPRAISAL OF THE TRAILS TRAILS 100 TRAILS CIRCLE NASHVILLE, TENNESSEE MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 5, 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: TRAILS 100 TRAILS CIRCLE NASHVILLE, DAVIDSON COUNTY, TENNESSEE 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 248 units with a total of 198,560 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 19.16 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 95% occupied. It is our understanding the appraisal will be used by the clients to assist the San Mateo Superior Court in the settlement of litigation between the above mentioned clients. The appraisal is intended to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal Standards Board of the Appraisal Foundation and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The appraisal is presented in a summary report, and the Departure Provision of USPAP has not been invoked in this appraisal. It is entirely inappropriate to use this value conclusion or the report for any purpose other than the one stated. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 TRAILS, NASHVILLE, TENNESSEE 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 5, 2003 is: ($9,400,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. /s/ Frank Fehribach July 2, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group Tennessee Temporary Practice Permit #00053573 Report By: Daniel Salcedo Tennessee Temporary Practice Permit #00053558 AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Trails LOCATION: 100 Trails Circle Nashville, Tennessee 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 5, 2003 DATE OF REPORT: July 2, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 19.16 acres, or 834,610 square feet Assessor Parcel No.: 109-000-196 Floodplain: Community Panel No. 47037C0308F (April 20, 2001) Flood Zone X, an area outside the floodplain. Zoning: RM-15 (Medium to High Density Apartment District) BUILDING: No. of Units: 248 Units Total NRA: 198,560 Square Feet Average Unit Size: 801 Square Feet Apartment Density: 12.9 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 521 $500 $0.96 $ 12,000 $ 144,000 1Br/1Ba-1B10 631 $530 $0.84 $ 33,920 $ 407,040 1Br/1Ba-1C10 767 $545 $0.71 $ 17,440 $ 209,280 1Br/1Ba-1D10 806 $580 $0.72 $ 18,560 $ 222,720 2Br/1Ba-2A10 933 $640 $0.69 $ 25,600 $ 307,200 2Br/2Ba-2B20 1,036 $665 $0.64 $ 37,240 $ 446,880 - ------------ ----- ---- ----- -------- ---------- Total $144,760 $1,737,120 ===== ======== ==========
OCCUPANCY: 95% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 TRAILS, NASHVILLE, TENNESSEE EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] UNIT TYPE FACADE UNIT TYPE AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE PART TWO - ECONOMIC INDICATORS
Amount $/Unit ------ ------ INCOME CAPITALIZATION APPROACH DIRECT CAPITALIZATION Potential Rental Income $1,737,120 $ 7,005 Effective Gross Income $1,759,362 $ 7,094 Operating Expenses $ 822,048 $ 3,315 46.7% of EGI Net Operating Income: $ 875,314 $ 3,529 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $9,200,000 * $37,097 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 6% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.50% Discount Rate 12.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $9,400,000 * $37,903 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $9,400,000 $37,903 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $17,808 to $82,471 Range of Sales $/Unit (Adjusted) $36,507 to $41,236 VALUE INDICATION - PRICE PER UNIT $9,500,000 * $38,306 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.64 to 6.66 Selected EGIM for Subject 5.40 Subject's Projected EGI $ 1,759,362 EGIM ANALYSIS CONCLUSION $ 9,500,000 * $38,306 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 9,400,000 * $37,903 / UNIT RECONCILED SALES COMPARISON VALUE $ 9,500,000 $38,306 / 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 TRAILS, NASHVILLE, TENNESSEE PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $9,500,000 NOI Per Unit $9,400,000 EGIM Multiplier $9,500,000 INDICATED VALUE BY SALES COMPARISON $9,500,000 $38,306 / UNIT INCOME APPROACH: Direct Capitalization Method: $9,200,000 Discounted Cash Flow Method: $9,400,000 INDICATED VALUE BY THE INCOME APPROACH $9,400,000 $37,903 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $9,400,000 $37,903 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 TRAILS, NASHVILLE, TENNESSEE INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 100 Trails Circle, Nashville, Davidson County, Tennessee. Nashville identifies it as 109-000-196. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Daniel Salcedo on May 5, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. Daniel Salcedo performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Both, Frank Fehribach, MAI and Daniel Salcedo 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 5, 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 & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 TRAILS, NASHVILLE, TENNESSEE 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 DDRE II . 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 TRAILS, NASHVILLE, TENNESSEE 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 Nashville, Tennessee. 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 -J. Perry Priest Lake West -I-40 South -Elm Hill Pike North -I-40 MAJOR EMPLOYERS Major employers in the subject's area include ComPlus, Concetra, Saturn Corporation, Gaylord Entertainment, Nissan Motor Manufacturing Corporation, Kroger Company, Reemay, Inc., United Parcel Service, First American National Bank, and Bridgestone/Firestone. 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 TRAILS, NASHVILLE, TENNESSEE NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA - --------------------------- ------------ ------------ ------------ --- POPULATION TRENDS Current Population 5,992 30,839 87,513 1,275,686 5-Year Population 6,495 33,717 93,450 1,391,452 % Change CY-5Y 8.4% 9.3% 6.8% 9.1% Annual Change CY-5Y 1.7% 1.9% 1.4% 1.8% HOUSEHOLDS Current Households 2,827 14,048 37,586 499,284 5-Year Projected Households 3,126 15,677 40,792 550,820 % Change CY - 5Y 10.6% 11.6% 8.5% 10.3% Annual Change CY-5Y 2.1% 2.3% 1.7% 2.1% INCOME TRENDS Median Household Income $ 41,704 $ 43,385 $ 43,321 $ 45,328 Per Capita Income $ 23,069 $ 24,234 $ 22,449 $ 23,901 Average Household Income $ 51,150 $ 53,259 $ 52,707 $ 61,067
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 37.92% 44.16% 40.71% 31.23% 5-Year Projected % Renting 35.05% 43.30% 39.90% 30.53% % of Households Owning 54.44% 48.17% 51.11% 61.72% 5-Year Projected % Owning 57.48% 49.47% 52.34% 62.91%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 TRAILS, NASHVILLE, TENNESSEE SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Residential South - Vacant Land East - Vacant Land West - Vacant Land CONCLUSIONS The subject is well located within the city of Nashville. 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 TRAILS, NASHVILLE, TENNESSEE MARKET ANALYSIS The subject property is located in the city of Nashville in Davidson County. The overall pace of development in the subject's market is more or less decreasing. Based on our site inspection of the market area, there was no evidence of additional development for multifamily use. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket - ------ ------ --------- 1997 5.5% 5.0% 1998 6.7% 6.0% 1999 5.9% 7.0% 2000 5.9% 7.9% 2001 8.3% 8.6% 2002 8.0% 8.0%
Source: Greater Nashville Apartment Association Occupancy trends in the subject's market are a stable. Historically speaking, the subject's submarket has equated the overall market. Occupancy in the subject's market area is expected to be around 94.0% in average. Any expected changes are caused by the short time fluctuations derived from the current economic situation affecting the local, regional and national markets. Market rents in the subject's market have been following increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change - ------ ------ -------- --------- -------- 1996 $583 - $735 - 1997 $604 3.6% $760 3.4% 1998 $634 5.0% $769 1.2% 1999 $647 2.1% $784 2.0% 2000 $667 3.1% $796 1.5% 2001 $677 1.5% $814 2.3% 2002 $685 1.2% $820 0.7%
Source: Greater Nashville Apartment Association The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 TRAILS, NASHVILLE, TENNESSEE COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject --- ------------- ----- ----- ---------- -------------------- R-1 Polo Park 386 98% 1987 Approx. 3 miles north of subject R-2 Spinnaker Cove 278 93% 1986 Approx.1.8 miles northeast of subject R-3 Oakwell Farms 414 96% 1987 Approx. 1.4 miles north of subject R-4 The Lakes 256 91% 1985 Approx. 0.3 miles south of subject R-5 Park at Hermitage 440 94% 1986 Approx. 2 miles northeast of subject Subject Trails 248 95% 1972
Rental rates are expected to stabilize. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 TRAILS, NASHVILLE, TENNESSEE PROPERTY DESCRIPTION SITE ANALYSIS Site Area 19.16 acres, or 834,610 square feet Shape Irregular Topography Moderate slope Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 47037C0308F, dated April 20,2001 Flood Zone Zone X Zoning RM-15, 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 - ------------- ---- -------- ----- --------- ----- 109-000-196 $396,800 $3,031,800 $3,428,600 0.03840 $131,658
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 248 Net Rentable Area 198,560 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, barbeque equipment, meeting hall, laundry room, business office, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, microwave dishwasher, water heater, garbage disposal, and AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 TRAILS, NASHVILLE, TENNESSEE oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) --------- --------------- --------- 1Br/1Ba-1A10 24 521 1Br/1Ba-1B10 64 631 1Br/1Ba-1C10 32 767 1Br/1Ba-1D10 32 806 2Br/1Ba-2A10 40 933 2Br/2Ba-2B20 56 1,036
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 248-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 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE SUMMARY OF COMPARABLE SALES -IMPROVED
DESCRIPTION SUBJECT COMPARABLE COMPARABLE COMPARABLE I - 1 I - 2 I - 3 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Trails Alta Lake Colonnade Hermitage Gardens LOCATION: Address 100 Trails 3960 Bell Road 4100 Central Pike 4701 Old Circle Hickory Blvd City, State Nashville, Hermitage, TN Nashville, TN Nashville, TN Tennessee County Davidson Davidson Davidson Davidson PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 198,560 360,144 259,776 66,868 Year Built 1972 2001 1998 1962 Number of Units 248 348 288 73 Unit Mix: Type Total Type Total Type Total Type Total 1Br/1Ba - 1A10 24 1Br/1Ba 189 1Br/1Ba 108 1Br/1Ba 25 1Br/1Ba - 1B10 64 2Br/2Ba 129 2Br/2Ba 156 2Br/1Ba 48 1Br/1Ba - 1C10 32 3Br/2Ba 48 3Br/2Ba 24 1Br/1Ba - 1D10 32 2Br/1Ba - 2A10 40 2Br/2Ba - 2B20 56 Average Unit Size (SF) 801 1.035 902 916 Land Area (Acre) 19.1600 31.1500 13.4800 3.0300 Density (Units/Acre) 12.9 11.2 21.4 24.1 Parking Ratio (Spaces/ Unit) 2.50 2.50 2.20 2.00 Parking Type (Gr., Cov., etc.) Open Open, Caroport/garage Open, Carport/garage Open CONDITION: Good Good Good Fair APPEAL: Good Good Good Fair AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Yes/No Gym Room Yes Yes Yes No Laundry Room Yes Yes No Yes Secured Parking No Yes Yes No Sport Courts Yes Yes No No Washer/Dryer Connection Yes Yes Yes Yes Storage No Yes Yes No Other OCCUPANCY: 95% 94% 95% 90% TRANSACTION DATA: Sale Date April, 2002 January, 1999 October, 2001 Sale Price ($) $28,700,000 $17,420,000 $1,300,000 Grantor Wood Partners Nashville 2 Central N/A pike Apts LP Grantee USB Realty Investors United Dominion Hermitage Garden Realty Trust Apartments LP Sale Documentation Deed-20020611-0071164 Deed-00011288-0000152 Deed-20011029-0117743 Verification Blair Carroll Brian Houchin Bruce Graustein Telephone Number 615.874.2400 615.391.2232 615.883.6861 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF - ------------------------------------------------------------------------------------------------------------------------------------ Potential Gross Income $5,214,312 $14,984 $14.48 $2,753,760 $9,562 $10.60 $311,111 $4,262 $4.65 Vacancy/Credit Loss $ 365,002 $ 1,049 $ 1.01 $ 137,688 $ 478 $ 0.53 $ 31,111 $ 426 $0.47 -------------------------------------------------------------------------------- Effective Gross Income $4,849,310 $13,935 $13.46 $2,616,072 $9,084 $10.09 $280,000 $3,836 $4.19 Operating Expenses $2,128,210 $ 6,116 $ 5.91 $1,067,200 $3,706 $ 4.11 $152,650 $2,091 $2.28 -------------------------------------------------------------------------------- Net Operating Income $2,721,100 $ 7,819 $ 7.56 $1,548,872 $5,378 $ 5.96 $127,350 $1,745 $1.90 - ------------------------------------------------------------------------------------------------------------------------------------ NOTES: Overall superior to subject Overall superior to Overall inferior to subject subject - ------------------------------------------------------------------------------------------------------------------------------------ PRICE PER UNIT $82,471 $60,486 $17,808 PRICE PER SQUARE FOOT $ 79.69 $ 67.06 $ 19.44 EXPENSE RATIO 43.9% 40.8% 54.5% EGIM 5.92 6.66 4.64 OVERALL CAP RATE 9.48% 8.89% 9.80% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA DESCRIPTION COMPARABLE COMPARABLE I - 4 I - 5 - ------------------------------------------------------------------------------------- Property Name Berkley Ridge Waterford landing Hermitage (Summittree) LOCATION: Address 308 Plus Park Blvd 5901 Old Hickory Blvd City, State Nashville, TN Hermitage, TN County Davidson Davidson PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 227,408 200,008 Year Built 1972 1998 Number of Units 244 184 Unit Mix: Type Total Type Total - ------------------------------------------------------------------------------------- 1Br/1Ba 90 1Br/1Ba 76 2Br/2Ba 130 2Br/2Ba 82 3Br/2Ba 24 3Br/2Ba 26 Average Unit Size (SF) 932 1,087 Land Area (Acre) 18.1100 14.9600 Density (Units/Acre) 13.5 12.3 Parking Ratio (Spaces/ Unit) 2.80 2.00 Parking Type (Gr., Cov., etc.) Open Open, Caroport/garage CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa Yes/No Yes/No Gym Room No No Laundry Room Yes Yes Secured Parking No Yes Sport Courts No No Washer/Dryer Connection No Yes Storage No Yes Other OCCUPANCY: 90% 94% TRANSACTION DATA: Sale Date June, 2001 June, 2002 Sale Price ($) $6,550,000 $10,200,000 Grantor N/A N/A Grantee RCP Summitree LLC Waterford landing-Hermitage Sale Documentation Deed-20010619-0064950 Deed-20020626-0077077 Verification Ellen Pakrer Tabbetha Muller Telephone Number 615.360.6004 615.884.9948 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF - ------------------------------------------------------------------------------------- Potential Gross Income $1,384,205 $5,673 $6.09 $1,941,769 $10,553 $9.71 Vacancy/Credit Loss $ 138,421 $ 567 $0.61 $ 116,506 $ 633 $0.58 ------------------------------------------------------ Effective Gross Income $1,245,784 $5,106 $5.48 $1,825,263 $ 9,920 $9.13 Operating Expenses $ 671,434 $2,752 $2.95 $ 830,863 $ 4,516 $4.15 ------------------------------------------------------ Net Operating Income $ 574,350 $2,354 $2.53 $ 994,400 $ 5,404 $4.97 - ------------------------------------------------------------------------------------- NOTES: Overall slightly inferior Overall comparable to subject to subject - ------------------------------------------------------------------------------------- Price Per Unit $26,844 $55,435 Price Per Square Foot $ 28.80 $ 51.00 Expense Ratio 53.9% 45.5% EGIM 5.26 5.59 Overall Cap Rate 8.77% 9.75% Cap Rate based on Pro PRO FORMA PRO FORMA Forma Income?
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 TRAILS, NASHVILLE, TENNESSEE [IMPROVED SALES MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $17,808 to $82,471 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 $36,507 to $41,236 per unit with a mean or average adjusted price of $38,564 per unit. The median adjusted price is $38,804 per unit. Based on the following analysis, we have concluded to a value of $38,500 per unit, which results in an "as is" value of $9,500,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 TRAILS, NASHVILLE, TENNESSEE SALES ADJUSTMENT GRID
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 - --------------------------------------------------------------------------------------------- Property Name Trails Alta Lake Colonnade Address 100 Trails Circle 3960 Bell Road 4100 Central Pike City Nashville, Hermitage, TN Nashville, TN Tennessee Sale Date April, 2002 January, 1999 Sale Price ($) $28,700,000 $17,420,000 Net Rentable Area (SF) 198,560 360,144 259,776 Number of Units 248 348 288 Price Per Unit $82,471 $60,486 Year Built 1972 2001 1998 Land Area (Acre) 19,1600 31,1500 13,4800 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple 0% Fee Simple 0% Estate Estate Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 04-2002 0% 01-1999 -5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $82,471 $57,462 Location Comparable 0% Comparable 0% Number of Units 248 348 0% 288 0% Quality / Appeal Good Superior -15% Superior -15% Age / Condition 1972 2001 / Good -20% 1998 / Good -20% Occupancy at Sale 95% 94% 0% 95% 0% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 801 1,035 -15% 902 0% PHYSICAL ADJUSTMENT -50% -35% FINAL ADJUSTED VALUE ($/UNIT) $41,236 $37,350 DESCRIPTION COMPARABLE COMPARABLE COMPARABLE I - 3 I - 4 I - 5 - ---------------------------------------------------------------------------------------------------------- Property Name Hermitage Gardens Berkley Ridge Waterford landing Hermitage (Summittree) Address 4701 Old Hickory 308 Plus Park 5901 Old Hickory Blvd Blvd Blvd City Nashville, TN Nashville, TN Hermitage, TN Sale Date October, 2001 June, 2001 June, 2002 Sale Price ($) $1,300,000 $6,550,000 $10,200,000 Net Rentable Area (SF) 66,868 227,408 200,008 Number of Units 73 244 184 Price Per Unit $17,808 $26,844 $55,435 Year Built 1962 1972 1998 Land Area (Acre) 3,0300 18,1100 14,9600 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. - ---------------------------------------------------------------------------------------------------------- Property Rights Conveyed Fee Simple 0% Fee Simple 0% Fee Simple 0% Estate Estate 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) 10-2001 0% 06-2001 0% 06-2002 0% VALUE AFTER TRANS. ADJUST. $17,808 $26,844 $55,435 ($/UNIT) - ---------------------------------------------------------------------------------------------------------- Location Inferior 15% Comparable 0% Comparable 0% Number of Units 73 20% 244 0% 184 0% Quality / Appeal Inferior 25% Inferior 25% Superior -5% Age / Condition 1962 / Fair 20% 1972 / Average 0% 1998 / Average -20% Occupancy at Sale 90% 0% 90% 0% 94% 10% Amenities Inferior 25% Inferior 20% Comparable 0% Average Unit Size (SF) 916 0% 932 0% 1,087 -15% PHYSICAL ADJUSTMENT 105% 45% -30% FINAL ADJUSTED VALUE ($/UNIT) $36,507 $38,924 $38,804
SUMMARY VALUE RANGE (PER UNIT) $36,507 TO $41,236 MEAN (PER UNIT) $38,564 MEDIAN (PER UNIT) $38,804 VALUE CONCLUSION (PER UNIT) $38,500
VALUE INDICATED BY SALES COMPARISON APPROACH $9,548,000 ROUNDED $9,500,000
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 TRAILS, NASHVILLE, TENNESSEE 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-1 348 $28,700,000 9.48% $2,721,100 $875,314 0.451 $ 37,226 $ 82,471 $ 7,819 $ 3,529 I-2 288 $17,420,000 8.89% $1,548,872 $875,314 0.656 $ 39,696 $ 60,486 $ 5,378 $ 3,529 I-3 73 $ 1,300,000 9.80% $ 127,350 $875,314 2.023 $ 36,029 $ 17,808 $ 1,745 $ 3,529 I-4 244 $ 6,550,000 8.77% $ 574,350 $875,314 1.499 $ 40,251 $ 26,844 $ 2,354 $ 3,529 I-5 184 $10,200,000 9.75% $ 994,400 $875,314 0.653 $ 36,204 $ 55,435 $ 5,404 $ 3,529
PRICE/UNIT
Low High Average Median $36,029 $40,251 $ 37,881 $37,226
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 38,000 Number of Units 248 ---------- Value Based on NOI Analysis $9,424,000 Rounded $9,400,000
The adjusted sales indicate a range of value between $36,029 and $40,251 per unit, with an average of $37,881 per unit. Based on the subject's competitive position within the improved sales, a value of $38,000 per unit is estimated. This indicates an "as is" market value of $9,400,000 (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 TRAILS, NASHVILLE, TENNESSEE 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-1 348 $28,700,000 $4,849,310 $2,128,210 43.89% 5.92 $ 82,471 I-2 288 $17,420,000 $2,616,072 $1,067,200 40.79% 6.66 $ 60,486 I-3 73 $ 1,300,000 $ 280,000 $ 152,650 54.52% 46.72% 4.64 $ 17,808 I-4 244 $ 6,550,000 $1,245,784 $ 671,434 53.90% 5.26 $ 26,844 I-5 184 $10,200,000 $1,825,263 $ 830,863 45.52% 5.59 $ 55,435
EGIM
Low High Average Median 4.64 6.66 5.61 5.59
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.40 Subject EGI $1,759,362 ---------- Value Based on EGIM Analysis $9,500,553 Rounded $9,500,000 Value Per Unit $ 38,306
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 46.72% before reserves. The comparable sales indicate a range of expense ratios from 40.79% to 54.52%, while their EGIMs range from 4.64 to 6.66. Overall, we conclude to an EGIM of 5.40, 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 $9,500,000. Price Per Unit $9,500,000 NOI Per Unit $9,400,000 EGIM Analysis $9,500,000 Sales Comparison Conclusion $9,500,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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 521 $498 $0.96 100.0% 1Br/1Ba - 1B10 631 $529 $0.84 90.6% 1Br/1Ba - 1C10 767 $544 $0.71 96.9% 1Br/1Ba - 1D10 806 $577 $0.72 96.9% 2Br/1Ba - 2A10 933 $634 $0.68 97.5% 2Br/2Ba - 2B20 1036 $664 $0.64 94.6%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 TRAILS, NASHVILLE, TENNESSEE RENT ANALYSIS
COMPARABLE RENTS --------------------------------------------------- R-1 R-2 R-3 R-4 R-5 --------------------------------------------------- Spinnaker Oakwell Park At Polo Park Cove Farms The Lakes Hermitage --------------------------------------------------- SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING --------------------------------------------------- DESCRIPTION TYPE RENT RENT Superior Similar Similar Superior Superior - --------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba -1A10 $ 498 $ 497 $ 767 $ 619 Unit Area (SF) 521 521 832 684 Monthly Rent Per Sq. Ft. $0.96 $ 0.95 $ 0.92 $0.90 Monthly Rent 1Br/1Ba -1B10 $ 529 $ 512 Unit Area (SF) 631 631 Monthly Rent Per Sq. Ft. $0.84 $ 0.81 Monthly Rent 1Br/1Ba - 1C10 $ 544 $ 527 Unit Area (SF) 767 767 Monthly Rent Per Sq. Ft. $0.71 $ 0.69 Monthly Rent 1Br/1Ba - 1D10 $ 577 $ 556 $ 576 $ 602 $ 584 Unit Area (SF) 806 806 657 661 750 Monthly Rent Per Sq. Ft. $0.72 $ 0.69 $0.88 $ 0.91 $ 0.78 Monthly Rent 2Br/1Ba -2A10 $ 634 $ 611 $ 789 $ 697 Unit Area (SF) 933 933 963 950 Monthly Rent Per Sq. Ft. $0.68 $ 0.65 $ 0.82 $ 0.73 Monthly Rent 2Br/2Ba - 2B20 $ 664 $ 667 $ 987 $ 909 $1,010 $ 849 Unit Area (SF) 1,036 1,036 987 1,289 1,300 1,250 Monthly Rent Per Sq. Ft. $0.64 $ 0.64 $1.00 $ 0.71 $ 0.78 $ 0.68 DESCRIPTION MIN MAX MEDIAN AVERAGE - ------------------------------------------------------------------ Monthly Rent $ 619 $ 767 $ 693 $ 693 Unit Area (SF) 684 832 758 758 Monthly Rent Per Sq. Ft. $0.90 $ 0.92 $ 0.91 $ 0.91 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 576 $ 602 $ 584 $ 587 Unit Area (SF) 657 750 661 689 Monthly Rent Per Sq. Ft. $0.78 $ 0.91 $ 0.88 $ 0.86 Monthly Rent $ 697 $ 789 $ 743 $ 743 Unit Area (SF) 950 963 957 957 Monthly Rent Per Sq. Ft. $0.73 $ 0.82 $ 0.78 $ 0.78 Monthly Rent $ 849 $1,010 $ 948 $ 939 Unit Area (SF) 987 1,300 1,270 1,207 Monthly Rent Per Sq. Ft. $0.68 $ 1.00 $ 0.74 $ 0.79
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 24 521 $500 $0.96 $ 12,000 $ 144,000 1Br/1Ba - 1B10 64 631 $530 $0.84 $ 33,920 $ 407,040 1Br/1Ba - 1C10 32 767 $545 $0.71 $ 17,440 $ 209,280 1Br/1Ba - 1D10 32 806 $580 $0.72 $ 18,560 $ 222,720 2Br/1Ba - 2A10 40 933 $640 $0.69 $ 25,600 $ 307,200 2Br/2Ba - 2B20 56 1,036 $665 $0.64 $ 37,240 $ 446,880 - ---------------------------------------------------------------------------------------------------------------------- Total $144,760 $1,737,120 ==========================================
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 TRAILS, NASHVILLE, TENNESSEE 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 $1,857,246 $ 7,489 $1,901,704 $ 7,668 $1,811,009 $ 7,302 $1,775,764 $ 7,160 Vacancy $ 94,548 $ 381 $ 125,641 $ 507 $ 103,093 $ 416 $ 84,000 $ 339 Credit Loss/Concessions $ 23,042 $ 93 $ 40,124 $ 162 $ 14,130 $ 57 $ 14,540 $ 59 -------------------------------------------------------------------------------------------------------- Subtotal $ 117,590 $ 474 $ 165,765 $ 668 $ 117,223 $ 473 $ 98,540 $ 397 Laundry Income $ 11,022 $ 44 $ 7,513 $ 30 $ 6,859 $ 28 $ 6,384 $ 26 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 63,330 $ 255 $ 81,232 $ 328 $ 135,448 $ 546 $ 132,080 $ 533 -------------------------------------------------------------------------------------------------------- Subtotal Other Income $ 74,352 $ 300 $ 88,745 $ 358 $ 142,307 $ 574 $ 138,464 $ 558 -------------------------------------------------------------------------------------------------------- Effective Gross Income $1,814,008 $ 7,315 $1,824,684 $ 7,358 $1,836,093 $ 7,404 $1,815,688 $ 7,321 Operating Expenses Taxes $ 101,124 $ 408 $ 117,392 $ 473 $ 131,658 $ 531 $ 131,650 $ 531 Insurance $ 33,202 $ 134 $ 37,629 $ 152 $ 38,675 $ 156 $ 42,753 $ 172 Utilities $ 130,813 $ 527 $ 132,257 $ 533 $ 143,760 $ 580 $ 140,160 $ 565 Repair & Maintenance $ 58,946 $ 238 $ 57,784 $ 233 $ 38,902 $ 157 $ 58,465 $ 236 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 53,229 $ 215 $ 50,222 $ 203 $ 52,129 $ 210 $ 48,636 $ 196 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 39,477 $ 159 $ 27,422 $ 111 $ 14,972 $ 60 $ 16,240 $ 65 General Administrative $ 181,702 $ 733 $ 216,493 $ 873 $ 212,415 $ 857 $ 204,108 $ 823 Management $ 91,163 $ 368 $ 89,134 $ 359 $ 92,075 $ 371 $ 90,059 $ 363 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------------------------------- Total Operating Expenses $ 689,656 $ 2,781 $ 728,333 $ 2,937 $ 724,586 $ 2,922 $ 732,071 $ 2,952 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------------------------------- Net Income $1,124,352 $ 4,534 $1,096,351 $ 4,421 $1,111,507 $ 4,482 $1,083,617 $ 4,369 ANNUALIZED 2003 ---------------------- PROJECTION AAA PROJECTION ------------------------------------------------------------ DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % - ------------------------------------------------------------------------------------------- Revenues Rental Income $1,733,528 $ 6,990 $1,737,120 $ 7,005 100.0% Vacancy $ 102,024 $ 411 $ 104,227 $ 420 6.0% Credit Loss/Concessions $ 20,580 $ 83 $ 17,371 $ 70 1.0% --------------------------------------------------------------- Subtotal $ 122,604 $ 494 $ 121,598 $ 490 7.0% Laundry Income $ 15,952 $ 64 $ 7,440 $ 30 0.4% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 134,780 $ 543 $ 136,400 $ 550 7.9% --------------------------------------------------------------- Subtotal Other Income $ 150,732 $ 608 $ 143,840 $ 580 8.3% --------------------------------------------------------------- Effective Gross Income $1,761,656 $ 7,103 $1,759,362 $ 7,094 100% Operating Expenses Taxes $ 131,648 $ 531 $ 136,400 $ 550 7.8% Insurance $ 50,476 $ 204 $ 43,400 $ 175 2.5% Utilities $ 161,800 $ 652 $ 155,000 $ 625 8.8% Repair & Maintenance $ 116,100 $ 468 $ 99,200 $ 400 5.6% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 66,316 $ 267 $ 62,000 $ 250 3.5% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 29,804 $ 120 $ 27,280 $ 110 1.6% General Administrative $ 226,280 $ 912 $ 210,800 $ 850 12.0% Management $ 87,536 $ 353 $ 87,968 $ 355 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% --------------------------------------------------------------- Total Operating Expenses $ 869,960 $ 3,508 $ 822,048 $ 3,315 46.7% Reserves $ 0 $ 0 $ 62,000 $ 250 7.5% --------------------------------------------------------------- Net Income $ 891,696 $ 3,596 $ 875,314 $ 3,529 49.8%
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 7% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR - -------------------------------------------------------------------------- I-1 Apr-02 94% $82,471 9.48% I-2 Jan-99 95% $60,486 8.89% I-3 Oct-01 90% $17,808 9.80% I-4 Jun-01 90% $26,844 8.77% I-5 Jun-02 94% $55,435 9.75% ------------------------ High 9.80% ------------------------ Low 8.77% ------------------------ Average 9.34%
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 10.50%. 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 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 $9,400,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 TRAILS, NASHVILLE, TENNESSEE approximately 38% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 TRAILS, NASHVILLE, TENNESSEE DISCOUNTED CASH FLOW ANALYSIS TRAILS
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 FISCAL YEAR 1 2 3 4 5 - ------------------------------------------------------------------------------------------------------------------------ REVENUE Base Rent $1,737,120 $1,789,234 $1,842,911 $1,898,198 $1,955,144 Vacancy $ 104,227 $ 107,354 $ 110,575 $ 113,892 $ 117,309 Credit Loss $ 17,371 $ 17,892 $ 18,429 $ 18,982 $ 19,551 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------ Subtotal $ 121,598 $ 125,246 $ 129,004 $ 132,874 $ 136,860 Laundry Income $ 7,440 $ 7,663 $ 7,893 $ 8,130 $ 8,374 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 136,400 $ 140,492 $ 144,707 $ 149,048 $ 153,519 ------------------------------------------------------------------------------ Subtotal Other Income $ 143,840 $ 148,155 $ 152,600 $ 157,178 $ 161,893 ------------------------------------------------------------------------------ EFFECTIVE GROSS INCOME $1,759,362 $1,812,142 $1,866,507 $1,922,502 $1,980,177 OPERATING EXPENSES: Taxes $ 136,400 $ 140,492 $ 144,707 $ 149,048 $ 153,519 Insurance $ 43,400 $ 44,702 $ 46,043 $ 47,424 $ 48,847 Utilities $ 155,000 $ 159,650 $ 164,440 $ 169,373 $ 174,454 Repair & Maintenance $ 99,200 $ 102,176 $ 105,241 $ 108,399 $ 111,650 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 62,000 $ 63,860 $ 65,776 $ 67,749 $ 69,782 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 27,280 $ 28,098 $ 28,941 $ 29,810 $ 30,704 General Administrative $ 210,800 $ 217,124 $ 223,638 $ 230,347 $ 237,257 Management $ 87,968 $ 90,607 $ 93,325 $ 96,125 $ 99,009 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 822,048 $ 846,710 $ 872,111 $ 898,274 $ 925,222 Reserves $ 62,000 $ 63,860 $ 65,776 $ 67,749 $ 69,782 ------------------------------------------------------------------------------ NET OPERATING INCOME $ 875,314 $ 901,573 $ 928,620 $ 956,479 $ 985,173 ------------------------------------------------------------------------------ Operating Expense Ratio (% of EGI) 46.7% 46.7% 46.7% 46.7% 46.7% Operating Expense Per Unit $ 3,315 $ 3,414 $ 3,517 $ 3,622 $ 3,731 YEAR APR-2009 APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 6 7 8 9 10 11 - ----------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,013,798 $2,074,212 $2,136,438 $2,200,532 $2,266,548 $2,334,544 Vacancy $ 120,828 $ 124,453 $ 128,186 $ 132,032 $ 135,993 $ 140,073 Credit Loss $ 20,138 $ 20,742 $ 21,364 $ 22,005 $ 22,665 $ 23,345 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------------- Subtotal $ 140,966 $ 145,195 $ 149,551 $ 154,037 $ 158,658 $ 163,418 Laundry Income $ 8,625 $ 8,884 $ 9,150 $ 9,425 $ 9,708 $ 9,999 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 158,125 $ 162,869 $ 167,755 $ 172,787 $ 177,971 $ 183,310 --------------------------------------------------------------------------------------------- Subtotal Other Income $ 166,750 $ 171,752 $ 176,905 $ 182,212 $ 187,679 $ 193,309 --------------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,039,582 $2,100,770 $2,163,793 $2,228,707 $2,295,568 $2,364,435 OPERATING EXPENSES: Taxes $ 158,125 $ 162,869 $ 167,755 $ 172,787 $ 177,971 $ 183,310 Insurance $ 50,312 $ 51,822 $ 53,377 $ 54,978 $ 56,627 $ 58,326 Utilities $ 179,687 $ 185,078 $ 190,630 $ 196,349 $ 202,240 $ 208,307 Repair & Maintenance $ 115,000 $ 118,450 $ 122,003 $ 125,664 $ 129,433 $ 133,317 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 71,875 $ 74,031 $ 76,252 $ 78,540 $ 80,896 $ 83,323 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 31,625 $ 32,574 $ 33,551 $ 34,557 $ 35,594 $ 36,662 General Administrative $ 244,375 $ 251,706 $ 259,257 $ 267,035 $ 275,046 $ 283,298 Management $ 101,979 $ 105,038 $ 108,190 $ 111,435 $ 114,778 $ 118,222 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 952,979 $ 981,568 $1,011,015 $1,041,346 $1,072,586 $1,104,764 Reserves $ 71,875 $ 74,031 $ 76,252 $ 78,540 $ 80,896 $ 83,323 --------------------------------------------------------------------------------------------- NET OPERATING INCOME $1,014,728 $1,045,170 $1,076,525 $1,108,821 $1,142,086 $1,176,348 --------------------------------------------------------------------------------------------- Operating Expense Ratio (% of EGI) 46.7% 46.7% 46.7% 46.7% 46.7% 46.7% Operating Expense Per Unit $ 3,843 $ 3,958 $ 4,077 $ 4,199 $ 4,325 $ 4,455
Estimated Stabilized NOI $875,314 Months to Stabilized 3 Stabilized Occupancy 94.0% Sales Expense Rate 2.00% Discount Rate 12.00% Terminal Cap Rate 10.50%
"DCF" Value Analysis Gross Residual Sale Price $11,203,316 Less: Sales Expense $ 224,066 ----------- Net Residual Sale Price $10,979,250 PV of Reversion $ 3,535,025 Add: NPV of NOI $ 5,855,515 ----------- PV Total $ 9,390,540 Deferred Maintenance $ 0 Add: Excess Land $ 0 Other Adjustments $ 0 ----------- Value Indicated By "DCF" $ 9,390,540 Rounded $ 9,400,000
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ---------------------------------------------------------------------------------- TOTAL VALUE 11.50% 11.75% 12.00% 12.25% 12.50% - ------------------------------------------------------------------------------------------------------------------ TERMINAL 10.00% $9,874,850 $9,719,406 $9,567,291 $9,418,422 $9,272,719 CAP RATE 10.25% $9,780,176 $9,626,829 $9,476,760 $9,329,887 $9,186,132 10.50% $9,690,011 $9,538,661 $9,390,540 $9,245,568 $9,103,668 10.75% $9,604,039 $9,454,593 $9,308,330 $9,165,171 $9,025,040 11.00% $9,521,975 $9,374,347 $9,229,857 $9,088,428 $8,949,985
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 TRAILS, NASHVILLE, TENNESSEE 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 35 TRAILS, NASHVILLE, TENNESSEE TRAILS
TOTAL PER SQ. FT. PER UNIT %OF EGI - -------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,737,120 $ 8.75 $ 7,005 Less: Vacancy & Collection Loss 7.00% $ 121,598 $ 0.61 $ 490 Plus: Other Income Laundry Income $ 7,440 $ 0.04 $ 30 0.42% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 136,400 $ 0.69 $ 550 7.75% ---------------------------------------------------------- Subtotal Other Income $ 143,840 $ 0.72 $ 580 8.18% EFFECTIVE GROSS INCOME $1,759,362 $ 8.86 $ 7,094 OPERATING EXPENSES: Taxes $ 136,400 $ 0.69 $ 550 7.75% Insurance $ 43,400 $ 0.22 $ 175 2.47% Utilities $ 155,000 $ 0.78 $ 625 8.81% Repair & Maintenance $ 99,200 $ 0.50 $ 400 5.64% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 62,000 $ 0.31 $ 250 3.52% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 27,280 $ 0.14 $ 110 1.55% General Administrative $ 210,800 $ 1.06 $ 850 11.98% Management 5.00% $ 87,968 $ 0.44 $ 355 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 822,048 $ 4.14 $ 3,315 46.72% Reserves $ 62,000 $ 0.31 $ 250 3.52% ---------------------------------------------------------- NET OPERATING INCOME $ 875,314 $ 4.41 $ 3,529 49.75% "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $9,213,827 $46.40 $37,153 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $9,213,827 ROUNDED $9,200,000 $46.33 $37,097
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 TRAILS, NASHVILLE, TENNESSEE DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF - ----------------------------------------------------------------------------------------------------- 8.75% $10,003,583 $10,000,000 $40,323 $50.36 9.00% $ 9,725,706 $ 9,700,000 $39,113 $48.85 9.25% $ 9,462,849 $ 9,500,000 $38,306 $47.84 9.50% $ 9,213,827 $ 9,200,000 $37,097 $46.33 9.75% $ 8,977,575 $ 9,000,000 $36,290 $45.33 10.00% $ 8,753,135 $ 8,800,000 $35,484 $44.32 10.25% $ 8,539,644 $ 8,500,000 $34,274 $42.81
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $9,200,000. 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 $9,400,000 Direct Capitalization Method $9,200,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $9,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 TRAILS, NASHVILLE, TENNESSEE 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 $9,500,000 Income Approach $9,400,000 Reconciled Value $9,400,000
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 5, 2003 the market value of the fee simple estate in the property is: $9,400,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA TRAILS, NASHVILLE, TENNESSEE ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TRAILS, NASHVILLE, TENNESSEE EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TRAILS, NASHVILLE, TENNESSEE SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] UNIT TYPE FACADE UNIT TYPE [PICTURE] [PICTURE] BEDROOM BEDROOM [PICTURE] [PICTURE] KITCHEN AREA LIVING ROOM AREA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A TRAILS, NASHVILLE, TENNESSEE SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] POOL LAUNDRY ROOM [PICTURE] [PICTURE] SITE IMPROVEMENTS MAIN ENTRANCE [PICTURE] [PICTURE] TRAILS CIRCLE -SOUTH TRAILS CIRCLE-NORTH AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TRAILS, NASHVILLE, TENNESSEE EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TRAILS, NASHVILLE, TENNESSEE PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 ALTA LAKE COLONNADE HERMITAGE GARDENS 3960 Bell Road 4100 Central Pike 4701 Old Hickory Blvd Hermitage, TN Nashville, TN Nashville, TN [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 BERKLEY RIDGE (SUMMITTREE) WATERFORD LANDING HERMITAGE 308 Plus Park Blvd 5901 Old Hickory Blvd Nashville, TN Hermitage, TN [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TRAILS, NASHVILLE, TENNESSEE SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Trails Polo Park Management Company AIMCO Sentinel Real Estate LOCATION: Address 100 Trails Circle 100 Jackson Downs Blvd City, State Nashville, Tennessee Nashville, TN County Davidson Davidosn Proximity to Subject Approx. 3 miles north of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 198,560 271,744 Year Built 1972 1987 Effective Age 25 16 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open, Carport/Garage Number of Units 248 386 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty MO 1 1Br/1Ba-1A10 521 24 $498 4 1Br/1Ba 657 266 $576 2 1Br/1Ba-1B10 631 64 $529 6 2Br/2Ba 987 120 $987 3 1Br/1Ba - 1C10 767 32 $544 4 1Br/1Ba - 1D10 806 32 $577 5 2Br/1Ba-2A10 933 40 $634 6 2Br/2Ba - 2B20 1,036 56 $664 Average Unit Size (SF) 801 760 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 0% 2-Bedroom 31% 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 69% 3-Bedroom 0% CONDITION: Good Good APPEAL: Average Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connection Balcony X W/D Connection X Fireplace Other X Fireplace X Other X Cable TV Ready X Cable TV Ready Storage & Playground Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball X Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room X Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 95% 98% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions 1.0 to 1.5 month off selected units 1 month Pet Deposit $300 Fee/$20Mnth No Pets Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Cindy Payne/Property Manager Laura Owens/Property Manager Telephone Number 615.889.4800 615.889.9210 NOTES: None COMPARISON TO SUBJECT: SUPERIOR COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name Spinnaker Cove Oakwell Farms Management Company Equity Residential America First Properties LOCATION: Address 100 Arbor Lake Blvd 1800 Oakwell Farms Lane City, State Hermitage, TN Hermitage, TN County Davidson Davidson Proximity to Subject Approx. 1.8 miles northeast of subject Approx. 1.4 miles north of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 266,880 330,372 Year Built 1986 1987 Effective Age 17 16 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 278 414 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba 832 176 $767 4 1Br/1Ba 661 244 $ 602 7 2Br/2Ba 1,101 58 $789 5 2Br/2Ba 963 154 $ 789 6 3Br/2Ba 1,289 44 $909 6 3Br/2Ba 1,300 16 $1,010 Average Unit Size (SF) 960 798 Unit Breakdown: Efficiency 0% 2-Bedroom 21% Efficiency 0% 2-Bedroom 37% 1-Bedroom 63% 3-Bedroom 16% 1-Bedroom 59% 3-Bedroom 4% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connection Balcony X W/D Connection X Fireplace X Other X Fireplace X Other X Cable TV Ready Boat Storage X Cable TV Ready Storage Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court 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 Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 93% 96% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions Reduce rates on selected units $99 Deposit Pet Deposit $200 $250 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash Water Trash Confirmation Elaine Yates/Property Manager Lori Kougler/Property Manager Telephone Number 615.889.7117 615.885.0300 NOTES: None None COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 - ------------------------------------------------------------------------------------------------------------------------------------ Property Name The Lakes Park at Hermitage Management Company Brookside Properties Mid-America LOCATION: Address 100 Lincoya Bay Drive 5900 Old Hickory Blvd City, State Nashville, TN Hermitage, TN County Davidson Davidson Proximity to Subject Approx. 0.3 miles south of subject Approx. 2 miles northeast of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 235,264 392,480 Year Built 1985 1986 Effective Age 13 17 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 256 440 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 4 1Br/1Ba 750 88 $584 1 1Br/1Ba 684 216 $619 5 2Br/2Ba 950 136 $697 7 2Br/2Ba 1,093 224 $743 6 3Br/2.5Ba 1,250 32 $849 Average Unit Size (SF) 919 892 Unit Breakdown: Efficiency 0% 2-Bedroom 53% Efficiency 0% 2-Bedroom 51% 1-Bedroom 34% 3-Bedroom 13% 1-Bedroom 49% 3-Bedroom 0% CONDITION: Good Good APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connection Balcony X W/D Connection X Fireplace X Other X Fireplace X Other X Cable TV Ready Storage X Cable TV Ready Storage & Playground 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 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 Business Office X Gym Room X Gym Room OCCUPANCY: 91% 94% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions 2 mnths free on 14 month lease 1 month Pet Deposit $300 $100 to $150 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Diana English/Property Manager Kim Banks/Property Manager Telephone Number 615.889.7400 615.883.0209 NOTES: None None COMPARISON TO SUBJECT: Superior Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B TRAILS, NASHVILLE, TENNESSEE PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 POLO PARK SPINNAKER COVE OAKWELL FARMS 100 Jackson Downs Blvd 100 Arbor Lake Blvd 1800 Oakwell Farms Lane Nashville, TN Hermitage, TN Hermitage, TN [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 THE LAKES PARK AT HERMITAGE 100 Lincoya Bay Drive 5900 Old Hickory Blvd Nashville, TN Hermitage, TN [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C TRAILS, NASHVILLE, TENNESSEE EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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. Daniel Salcedo 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, MAI ------------------------ Frank Fehribach, MAI Managing Principal, Real Estate Group Tennessee Temporary Practice Permit #00053573 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E TRAILS, NASHVILLE, TENNESSEE EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E TRAILS, NASHVILLE, TENNESSEE 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 TRAILS, NASHVILLE, TENNESSEE 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. TRAILS, NASHVILLE, TENNESSEE GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. TRAILS, NASHVILLE, TENNESSEE 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 or negligence. Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer. -----END PRIVACY-ENHANCED MESSAGE-----