Close
About
FAQ
Home
Collections
Login
USC Login
Register
0
Selected
Invert selection
Deselect all
Deselect all
Click here to refresh results
Click here to refresh results
USC
/
Digital Library
/
University of Southern California Dissertations and Theses
/
Case studies for real estate valuation
(USC Thesis Other)
Case studies for real estate valuation
PDF
Download
Share
Open document
Flip pages
Contact Us
Contact Us
Copy asset link
Request this asset
Transcript (if available)
Content
CASE STUDIES FOR REAL ESTATE VALUATION by Victoria Deguzman B.A., Communications, Annenberg School for Communication and Journalism University of Southern California, 1986 Master of Real Estate Development, Price School of Public Policy University of Southern California, 2001 Submitted in Partial Fulfillment of the Requirements for the Doctor of Policy, Planning, and Development University of Southern California May, 2018 Academic Introduction P a g e 1 | 18 The requirements of the USC Price School DPPD include a capstone project that advances the state of the practice of a professional field. My field of interest is real property valuation. In this field, there is no publicly accessible case-based training to facilitate learning how to complete an appraisal assignment from start to finish. This project is designed to remedy this deficiency. Case Studies for Real Property Valuation Academic Introduction Real Property is Important It is difficult to understate the importance of real property (commonly known as real estate) and its value to consumers and to the economy as a whole. We continually and continuously occupy real estate – our homes and places of employment, governance, commerce, manufacturing, distribution, and recreation depend on and actively consume it - and real estate continues to be the dominant source of most household wealth in the United States. It is difficult, if not impossible, to find any aspect of our economy which is not directly impacted by the value of real estate. 1 Valuation Facilitates the Real Property Market Property valuation facilitates transacting in real property markets. Professionals who estimate the value of real property are commonly known as “appraisers.” Appraisers are retained and expected to be able to use their knowledge and experience to gather data about the subject and the market, and 1 Chan, Schneider, Tracy, 1999 Academic Introduction P a g e 2 | 18 professionally apply appropriate valuation methods to objectively and impartially estimate these values for their clients, in reports known as “appraisals.” 2 These third party, objective estimates of value are performed by professionals commonly known as “appraisers” and are an integral part of transactions, collateralization, and strategic decision making. 3 “Appraisers are independent, third-party experts with no motive to be biased,” 4 notes the Appraisal Institute, a private, international organization with mission to, “…advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide.” 5 “Appraisers are particularly valuable because they are an objective and unbiased source of real estate information. Unlike some other real estate professionals, appraisers perform a professional service for a flat fee – rather than for a commission contingent on the value conclusion, the approval of a loan or the eventual sale of the property.” They also note that federal regulations and policies require a firewall between appraisers and lenders, further ensuring an unbiased estimate. 6 Appraisers are retained to complete appraisals for various reasons and by various clients, such as lending institutions for estimates of collateral value, government agencies for estimates of compensation due for the taking of real property as part of the exercise of eminent domain for public works projects, legal professionals for the purpose of dissolution of partnerships or acquisition of assets, and the list goes on. 2 Appraisal Institute, 2015 3 Appraisal Institute, 2013 4 Appraisal Institute, 2016 5 Appraisal Institute, 2017 6 Appraisal Institute, 2016 Academic Introduction P a g e 3 | 18 A Brief History of Appraisal Regulations and Training Until the late 20 th century, the appraisal profession was minimally regulated, and training was virtually non-existent, limited to apprenticeships for some, and trial and error for others. While professional appraisal societies had been formed, they were generally for collaboration and promotion, rather than for setting standards or offering education. Untrained and unregulated, appraisers were appraisers simply because they said they were, and were artists, not to be questioned or constrained in their methods, techniques, or conclusions. “Appraisers are born not made,” wrote University of Chicago professor J. W. Wallingfort. “Anyone who does not have the knack of it ought to become a college professor, a newspaper reporter, a banker, or a bureaucrat. When appraisers are trained, they become conservative. Their imaginations are diluted. They are unable to take that long-range view of real estate values which made our country great.” 7 1930s In the late 1930s, the country, and indeed most of the developed world, suffered a deep depression. Bank lending, and the land prices that served as collateral, fell drastically, and for the first time appraisal literature appeared. Reflecting on the causes of the recession, and what might be done to bring us out of it, writers began to question the basis of and methods of estimating value, in both the stock and real property markets. In the late 1930s, literature began to specifically question the appraisal profession and the wide discrepancies increasingly experienced between the value conclusions of different appraisers for the same or similar properties. However, rather than considering a lack of education or 7 Wallingfort, 1947 Academic Introduction P a g e 4 | 18 training as a possible cause of these differences, the common consensus was that significant variations in value conclusions must certainly be the result of fraud caused by bias toward the client’s interests. “Independent appraisals for the same property, for clients have different interests, may vary within a reasonable zone of double and error existing in all appraisals,” wrote professionally designated appraiser Frank Hall in the Journal of the American Institute of Real Estate Appraisers, in late 1938. “but when two appraisers, holding themselves out as experts in the profession, testify to values that vary as much as 50 per cent of more in a condemnation proceeding, I must share the opinion forced upon the judges that one or both of the appraisers are either dishonest in claiming the qualifications of an expert of dishonest in his appraisal… A good appraiser…must be honest.” 8 With the exception of designations conferred by professional associations, the appraisal industry remained chiefly unregulated. 9 1940s to early 80s Through the following decades, the economy recovered While the literature reflects a continued concern for the lack of appraisal training, it seemed that the impetus for real change was missing. In the late 1940s, Arthur Weimer, a designated appraiser, FHA housing economist, professor of real estate and urban economics and Dean of the School of Business at Indian University- Bloomington penned an article for the appraisal journal, addressing the current state of appraiser education and training. He noted that the theoretical basis for valuation estimation is rather simple and universal. “Regardless of time or place, appraising is largely a process of estimating the present value of the future returns or 8 Hall, 1938 9 Bottger, Norris, Sharkey, 2008 Academic Introduction P a g e 5 | 18 benefits which are to be derived from a property.” However, the current system of providing coursework in the theory of valuation was not enough. “The difficult problems which are confronting appraisers of real property today emphasize the importance of adequate training in this field. Such training involves not only formal courses of student in our universities, colleges, and institutes but also a systematic program of self-education on the part of every practicing appraiser.” Weimer further noted that the systematic set of accepted rules and procedures for completing an appraisal report was inadequate. “Unfortunately, the inability to introduce precision and great accuracy into valuations has been obscured,” he cautioned. “Many persons have come to believe that there are sets of rules which, taken together, constitute a science of real estate valuations. Of course, rules are valuable aids in systematizing an appraiser’s work, but if taken too seriously they may lead to errors. The practitioners of a profession need to know not only the rules and procedures to be followed but the “why” of such rules and the reasoning back of them.” Case study, he argued, was needed. “…we are likely to find that theoretical concepts take on real meaning for most students and practicing appraisers only if such concepts are studied in close relation to specific practical problems. This, of course, means a continuation and expansion of the case study method of training in this field.” 10 The next decade saw little change in either appraisal education and training and in fact, the profession was finding competition from those with limited, if any, exposure to real estate, trying to find work of any kind in an environment of high unemployment. Appraisers, who had historically tended to be real estate agents, were now joining the ranks from varied walks of life and entering the profession was limited simply by one’s ability to attain clients, generally by joining a practicing appraisal firm with sufficient work to share 10 Weimer, 1947 Academic Introduction P a g e 6 | 18 it with a newcomer. In fact, in the late 1950s, the supreme court of Minnesota, addressing a request that appraisers have this traditional, sales background, ruled in the contrary, that, “an appraiser, in order to testify in court on matters of value, did not have to sell real estate or having a selling background in order to render a sound opinion of value.” 11 Through about the early/mid-60s, with the exception of guides for setting up and managing a business 12 13 and for creating a written report, 14 there was little to guide the appraisers and appraisal industry. A slow economy in the late 1950s and early sixties limited the demand for valuation services, and therefore attention given the profession, remained limited as well. The industrial boom of the second half of the decade and the resulting demand for appraisal services, however, brought renewed attention to considering promoting completion of at least a minimal level of education and training by appraisers. William Kennard, head of the Business Department of the University of Connecticut School of Business Administration, director of the University’s Institute of Urban Research, and instructor for the American Institute of Real Estate Appraisers, addressed the need to focus attention on educating the appraiser of the future in an article published in the Appraisal Journal. “…the forces of technological and institutional change are constantly at work in the American economy. …the appraiser will have to deal with more complex problems…to cope with all sorts of problems involving the use of reality… and if he is to measure the market appropriately, the appraiser must be capable of adapting and adjusting to these important changes, “ he wrote. 15 Kinnard stressed 11 Shenehon, 1960 12 Ibid, 1960 13 Smith, 1963 14 Rogers, 1960 15 Kinnard, 1965 Academic Introduction P a g e 7 | 18 the importance of education, but took it a step further, and introduced the idea of a college education plus a formal program of appraisal training. “Increasingly, one will need a college education or its equivalent in order to function as a professional appraiser,” he writes, but cautions that a college education alone is not sufficient. “The professional appraiser must make education and training a way of life for himself… There is no fundamental conflict between education and training as ideas. Basically, education involves exposing a student to theory and principles, and equipping him with the fundamentals necessary for application to a wide variety of activities. To this extent, it may be regarded as the general foundation necessary for all practitioners. Training, on the other hand, involves essential presentation of the techniques and methods of approach to specific problems in the field. It involves, therefore, developing the ability to recognize the application of principles to specific problems.” 16 Kinnard’s writing on appraisal education was followed a few years later by that of Carl Tschappat, chairman of the Department of Real Estate and Urban Affairs at George State College, noting continued dissatisfaction with an appraiser preparation model which relies heavily on formal education in the form of college coursework. “Most appraisers have experienced the feeling that our universities are not training men property to be appraisers,” he writes. “Few graduates accept positions with fee appraisers. Those who do seem poorly prepared to function well at assigned tasks.” 17 The stock market low of 1974 saw the next significant fluctuation in real estate values, a corresponding drop in value accompanied by prohibitively high interest rates. Appraisal related education remained limited to general college classes in related topics and coursework provided by professional associations, 16 Ibid, 1965 17 Tschappat, 1969 Academic Introduction P a g e 8 | 18 and training was left to the employer motivated by the need to maintain a sufficient staff of appraisers for business growth. University of Nebraska Omaha Associate Professor of real estate and land use Donald Nielsen and appraiser Frank Wilson wrote, “Recruiting, hiring and training a new appraisal trainee is one of the most important operations with which an appraisal firm must deal. Without the forethought and planning required to insure a smooth and effective training program, the growth of an appraisal firm or replacement of existing personnel can prove awkward and difficult.” 18 Late 80s to present A real estate boom followed in the early to late-1980s, with ever increasing amounts of credit creation and lending secured by real estate collateral. Then came the Savings and Loan Crisis, the greatest collapse of US financial institutions since the 1930s recession. From 1986 through 1995, the number of federally insured thrift institutions dropped by half. Not surprisingly, wealth plummeted, with taxpayers shouldering more than 80 per cent of the estimated total loss of approximately $153 billion. 19 Virtually all aspects of the market were questioned, and appraisers were not immune from scrutiny. Appraiser and Appraisal Institute Chairman Richard Sorenson warned, “Efforts are currently under way to find legislative solutions to perceived problems of faulty, fraudulent, and misused appraisals…” 20 Congress enacted wide spread financial reform. Among those reforms was the Federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. While not directly blaming the appraisal industry, the reforms included appraiser licensing, which required education and training for appraisers. For the first time in our nation’s history, the federal government imposed requirements for 18 Nielsen and Wilson, 1976 19 Curry and Shibut, 2000 20 Sorenson, 1988 Academic Introduction P a g e 9 | 18 state regulation of real estate appraisers (“appraisers”) as well as for the appraisal process and the appraisal report itself. 21 Appraisers now must complete a minimum level of education, demonstrate competency in core concepts, and log supervised work experience to be state licensed or certified to appraise real estate in the United States, and must complete periodic continuing education. Licensing and certification is divided into levels; the lower levels qualify an appraiser to complete assignments of less complex and generally residential type properties, and the higher levels qualify an appraiser to tackle non-residential and complex assignments. 22 Certified Appraiser and author Mark Ratterman details the process and the changes enacted. “In the wake of the Savings and Loan Crisis of the late 1980’s, (FIRREA) restricted appraisals of federal related transactions (FTRs) to state-licensed or state-certified appraisers. Each state was charged with setting up an agency to regulate the licensing of the profession. While FIRREA only required appraisers to be licensed or certified to do federally related transactions, many state agencies used the new licensing requirements as the standard for all appraisals. FIRREA established The Appraisal Foundation (TAF) to set the appraisal rules and minimum requirements for the state programs… The Appraisal Qualifications Board (AQB) established the minimum amount of education and experience required for licensing or certification... Licensed Residential Appraisers are usually limited to one to four-unit property with loans of less than $1 million (transactional value) … Certified Residential Appraisers are usually limited to one to four unit properties but have no limits on transactional value…. (and) Certified General Appraisers are usually licensed to appraise any type of property. 23 From the mid-1990s through 21 Hummel, 2004 22 Appraisal Foundation, 2017 23 Ratterman, 2014 Academic Introduction P a g e 10 | 18 approximately 2005, the real estate market not only recovered, but by pretty much all counts, boomed. Then came the financial meltdown and the subsequent “great recession” of 2007-2008. Despite the significant reforms of the late 1980s regarding valuations, many blame inflated and misleading real property value estimates for significantly contributing to, if not causing, the financial meltdown. “The appraisal reforms of the late 1980s were good reforms,” says Susan Wachter, real estate professor at the University of Pennsylvania’s Wharton School of Business, “but (referring to the Great Recession) they were not sufficient to prevent what we have seen...” 24 This brings us to the present. National Association of Homebuilders (NAHB) Chairman, Bob Nielsen, a strong critic of the state of the appraisal industry and the devastating outcomes of poor appraisal practice directly threatening our economy. “Numerous flaws in the appraisal system have been causing inaccurate home valuations, both in times of housing weakness and strength,” he argues, and puts the blame squarely on inadequate appraiser training. “NAHB has been actively seeking improvements in appraiser education and training… We must resolve a flawed appraisal process that produces inaccurate assessment of home values, because this fosters price instability, puts more families in danger of default or foreclosure, and undermines the housing and economic recovery.” 25 Appraisal Training Today As detailed previously, appraisal training, both for initial licensing/certification and for continuing education, is required in two categories – education in the form of coursework and experience in the form of contribution to appraisal reports under the supervision of a licensed appraiser. 24 Weiss, 2008 25 NAHB, 2012 Academic Introduction P a g e 11 | 18 Coursework is provided by appraisal associations, by on-line providers, and by brick and mortar schools, and to meet regulatory requirements, appraisers must complete education in a list of skill categories, such as market analysis, statistics, modeling, finance, and construction analysis. Education can still be fairly generalized as academic as opposed to practical. Appraisers Jeffrey Johnson and Tony Lesicka write, “…most of the appraisal publications in existence today focus on theory.” 26 The Case for Cases Case based education is not a new phenomenon; it has been used for almost 150 years in legal education, 27 has been the primary method of teaching at Harvard Business School for more than a century, 28 and is a core method of instruction in military intelligence. 29 Legal Education The case method in legal education was invented in the late 1800s by then Dean of Harvard Law School then Christopher Columbus Langdell. In an effort to create a simple procedure for teaching students of law, he wrote a ‘A Selection of Cases on the Law of Contracts,’ a book of cases which students were to review and analyze as part of their studies. 30 Business Education Inspired by the success of Harvard Law School, Harvard Business School adopted the case method soon after its founding in 1908, and he case method soon spread to become the “primary national model for 26 Johnson, 2013 27 Rakoff, 2011 28 Walsh, 2008 29 Shreeve, 2004 30 Harvard Law School, 2017 Academic Introduction P a g e 12 | 18 graduate business education.” 31 Yale School of Management uses what they term an ‘integrated curriculum’ and points to teaching in “an entirely new way, drawing on the complexities of real business challenges to inform broad-reaching discussion and analysis. We needed pedagogical materials that could support this demanding approach to business education. Hence the Yale ‘raw’ case…raw cases present you with extensive data about a real situation. This unique, open approach accomplishes two goals: It teaches you to think broadly when approaching a new problem. It teaches you to excel in fast- moving and complex global organizations.” 32 Military Education US Marine Corps Colonel Thomas Shreeve explains, “Long associated with teaching at the graduate level in business and public administration, the case method represents a structured approach to learning from the past. Learning by the case method is active rather than passive, as students are explicitly made partners in the reduction of ambiguity surrounding complex, realistic issues. Students who learn by the case method improve their analytic skills when instructors ask them to identify the problem sat hand and they fortify their decision making skills when instructors ask them to propose a plan for action to resolve the problems they have identified. The term ‘case’ refers to a description of a dilemma that stops short of the outcome. The term ‘case study’ refers to a description of a past event that has an outcome included it the document and this is known to the student. Both vehicles are equally useful.” 33 31 Barton, 2008 32 Yale School of Management, 2017 33 Shreeve, 2004 Academic Introduction P a g e 13 | 18 Appraisal Education Despite the reliance on traditional coursework, the value of practical application and practice in the preparation of appraisers have finally gained some attention. For real property valuation in particular, case based reasoning in conjunction with rule based reasoning has been shown to measurably improve the quality of real estate appraisals. 34 The Appraisal Institute, widely regarded as the leader in appraiser education, found case studies serve an important function, putting context around information to prepare appraisers for real world assignments and have begun to include more case study learning in their educational offerings. “Since the new examinations test more practical knowledge, the Appraisal Institute is embedding more case studies into classroom and online education to emphasize more hands-on exposure,” shared Magdalene Vasquez, manager, Appraisal Institute Education certification and State Board Relations Team. “As of today, all Appraisal Institute courses rely heavily on case studies to put context around important information, as opposed to presenting isolated facts. This method of teaching and learning reinforces appraisal concepts so student can pass the new state licensing and certification exams, and be prepared to complete duties in the field” 35 Despite these changes, there remains an unfulfilled need to bridge educational curriculum and real world practice. Speaking to the state of appraiser training, in spring of 2017, appraiser and former president of the Saint Paul chapter of the Appraisal Institute Tony Lesicka shared, “I have had several conversations with industry participants, as recent as yesterday, in which the disconnect between the ‘theory’ taught in qualifying and continuing education and the actual, everyday practice of appraisal. 34 Gonzales, Laureno, 1992 35 Barancik, 2006 Academic Introduction P a g e 14 | 18 The limitation remains that, although case based material has been introduced, the cases are limited in scope, being simplified and portions of real world assignments. “Full case studies are needed for the appraisal profession and do …not exist due to the void within training and education areas of the real estate appraisal profession.” noted veteran appraiser and long-time member of the Publications Committee of the Appraisal Institute, Jeffrey Johnson. “…there is no current literature available in the profession that demonstrates an entire appraisal assignment and discusses the entire engagement from initial client contact to designing the scope of service to completing the analysis and writing the report.” 36 But what about the experience component? As also noted previously, experience as it is required is defined as contribution to appraisal reports by an appraiser trainee under the supervision of a licensed appraiser. While the experience requirement attempts to address the need for case-based training, it is limited in efficacy by several factors. 1) Training must be obtained from an increasingly limited number of experienced appraisers. Appraiser numbers have been declining for some time; fewer new entrants have entered than those leaving the profession. “The supply of seasoned, experienced appraisers is diminishing. People have not been coming into the profession in large numbers for some time,” notes economist Brad Finkelstein. “The new people need to be property trained (but) there is a lack of training for those in the business on how to do valuations in the current market conditions,” he added. 37 To be specific, over the past several years, the total number of appraisers has declined by more than 3 per cent annually, a trend 36 Johnson, 2017 37 Finkelstein, 2009 Academic Introduction P a g e 15 | 18 which is expected to accelerate year over year for at least the next decade. Writing in 2014, Appraisal Institute researchers warned, “A broader analysis suggests the rate of decrease (of appraisers) could rise sharply over the next five to 10 years due to retirements, reduced numbers of new people entering the appraisal profession, economic factors and greater use of data analysis technologies. 38 Some have put the total net loss from 2010 – 2020 alone to be more than one third, and the vast majority of those lost to be among the most experience, those who can train others, and those who likely need training the least. Veteran appraiser Sara Stephens explains, “In spite of a high overall level of qualified appraisers, a perceived lack of career prospects for trainees and the low numbers of people entering the profession are legitimate and serious issues. …research indicates that the number of appraisers could decrease 25 to 35% during the next 10 years due to age attrition (more than half of the appraisers in the U.S. are 51 to 65 years old) and the fact that there are too few new entrants to boost the ranks.” 39 2) A limited number of experienced appraisers are available and willing to take on trainees Not surprisingly, the availability and quality of supervised, on-the-job training in the current model is dependent upon there being a sufficient number of licensed appraisers who are willing to provide supervision. Even without the shrinking pool, the number of appraisers at any given point willing to supervise has been historically limited. The reasons are many. “We have all heard (and used) any number of…excuses,” shares California appraiser Jane Currey. “I’m too busy; there’s not enough business; I don’t have enough experience and the biggie: If I mentor someone they will leave and take my best clients.” 40 “Dominated by small firms, the appraisal industry has done little to establish formal 38 Appraisal Institute, 2014 39 Stephens, 2012 40 Currey, 2007 Academic Introduction P a g e 16 | 18 training systems. Many firms do not want to hire or train inexperienced appraisers because it can be too time intensive. In addition, some firms fear that once an appraiser is trained, he or she will be more inclined to leave the organization. Few appraisal firms have formal training programs…” explained appraiser John Simpson. 41 Executive editor of Valuation, and National Appraisal Institute President- Elect James Murrett summed it up. Because so few appraisers are willing to train, “starting out as a trainee is one of the biggest hurdles to the profession.” 42 3) Regulations further limit appraiser willingness to train the next generation. “A never-ending trail of regulatory education requirements issued by dozens of committees, boards and bureaucracies keep making it more difficult to obtain the correct education and experience needed to become an appraiser.” shared Monster.com recruiter, Dona DeZune. “…[now] the master appraiser must accompany the appraiser trainee on all jobs. ‘I’m not going to pay a trainee to go out if I have to do the work myself, [Bill] Johnson [owner of United Residential Appraisals in Davidsonville, Maryland] says. ‘I have a trainee who’s willing to go out with me on an ad-hoc basis, and I pay him to write the appraisal [and] pull the comparables, but nowhere near as much as before. The only people who are going to get jobs are those with an in – a relative in the business – and trainees who have the ability to bring in new business through contacts in the real estate or mortgage banking business.’ “ 43 41 Simpson, 1994 42 Schneider, 2016 43 DeZube, 2017 Academic Introduction P a g e 17 | 18 4) Training is limited in scope, both by convention and by regulation “The individual receives his or her training by performing individual appraisals, and questions or problems are addressed only when brought to the attention of a supervisor.” Simpson notes. “This type of system is inefficient because it does not provide the structure necessary for a novice appraiser to learn at an optimal rate. The most effective ways to present material and foster learning are with computers and case studies. The trainer should present an example or practical application of each concept because a trainee will more likely understand and retain an applied concept than a theoretical one. (Training should include the opportunity to) perform an appraisal of a more advanced property..” he added. 44 Appraisal Institute National Vice-President pointed directly to regulations as impeding the training process. “..the problem partially is a function of the regulatory environment relative to experience requirements.” 45 Murrett explains, “As we all noted earlier, regulations can be restrictive. They limit the amount of work a trainee can perform for an assignment. Trainees should be allowed to progress in their work as their knowledge and experience progress…” 46 5) Training does not require exposure to complexity or variety in assignments There is no provision for a variety in assignments in either property types or complexity in the current training and experience model. Since the trainee must work under a supervisory appraiser, the exposure to real world assignments is understandably limited by the assignments that the supervisory appraiser obtains and is willing to share with the trainee. Since supervised experience is difficult to 44 Simpson, 1994 45 Schneider, 2016 46 Schneider, 2016 Academic Introduction P a g e 18 | 18 obtain, a trainee is unlikely to have had the opportunity to experience valuation of an array of properties and property rights, and even less likely to experience the valuation of complex property. 47 48 My Contribution to Appraisal Practice It is this lack of both case-based education and readily available training assignments which prompt this project. For my professional doctorate project, I create a set of case studies, based on real data, which demonstrate current, complex issues in real estate valuation, and which can be worked through, independently and step by step, from start to finish - from initial client contact, through estimating scope of work, creating and submitting a proposal, completing and submitting the assignment - by appraisers, appraiser trainees, and those interested in considering the profession or attaining a better understanding of the appraisal process. Recent testimonies from two senior industry professionals (attached) make that point that there is nothing like this available to appraisers today. 49 50 47 Appraisal Institute, 2013 48 Harris, 2012 49 Lesicka, 2017 50 Johnson, 2017 Reader Introduction P a g e 1 | 18 Case Studies for Real Property Valuation Congratulations on your decision to learn more about the appraisal of commercial real estate, and welcome to Case Studies for Real Property Valuation, a collection of real world examples of commercial appraisal assignments similar to what you might expect to receive and complete as a commercial appraiser. My goal is to provide you with a set of appraisal problems in a format that allows you to work through them at the level of detail and pace you determine is best for you. Case-based training has long been recognized as a highly effective way to learn to apply concepts to problem solving, and my hope is you will not only gain critical analytical skills necessary for value estimation, but that you will also learn how to complete an appraisal assignment from start to finish – client inquiry to the completed narrative appraisal report. There is no product like this available for appraisers today, and this set of case studies aims to remedy this deficiency. You have chosen a worthwhile profession. Quite simply, real estate is important, and ensuring that appraisals are sound, well-reasoned estimates of value in presented in clear, easy to read appraisal reports with sufficient data and reasoning to back up value conclusions is key to the integrity and relevance of the appraisal profession, and something every client deserves. At this point, we invite you to stay with this section to read a bit about the history of the appraisal profession and some explanation of the particular value of the case study method for learning. But, if you are ready to go, simply skip forward to the next chapter, where we introduce the case studies you will be completing and introduce you to the process and the outline we will follow in each. This chapter will always be here. Reader Introduction P a g e 2 | 18 You Should Know - Real Estate is Important It is difficult to understate the importance of real estate (formally known as real property) and its value to consumers and to the economy as a whole. We continually and continuously occupy real estate – our homes and places of employment, governance, commerce, manufacturing, distribution, and recreation depend on and actively consume it - and real estate continues to be the dominant source of most household wealth in the United States. It is difficult, if not impossible, to find any aspect of our economy which is not directly impacted by the value of real estate. 1 Your Appraisal Valuations Facilitate the Market Quite simply, property valuations, your appraisal reports, facilitate transacting in real property markets. You, as an appraiser, are the professional charged with estimating the value of real property and are retained and expected to be able to use their knowledge and experience to gather data about the subject and the market, and professionally apply appropriate valuation methods to objectively and impartially estimate these values for your clients’ use. 2 Your appraisals are expected to be third party, objective estimates of value, and are an integral part of transactions, collateralization, and strategic decision making. 3 “Appraisers are independent, third-party experts with no motive to be biased,” 4 notes the Appraisal Institute, a private, international organization with mission to, “…advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide.” 5 “Appraisers are particularly valuable because they are an objective and unbiased source of real estate information. Unlike some other real estate 1 Chan, Schneider, Tracy, 1999 2 Appraisal Institute, 2015 3 Appraisal Institute, 2013 4 Appraisal Institute, 2016 5 Appraisal Institute, 2017 Reader Introduction P a g e 3 | 18 professionals, appraisers perform a professional service for a flat fee – rather than for a commission contingent on the value conclusion, the approval of a loan or the eventual sale of the property.” They also note that federal regulations and policies require a firewall between appraisers and lenders, further ensuring an unbiased estimate. 6 As an appraiser, you will be retained to complete appraisals for various reasons and by various clients, such as lending institutions for estimates of collateral value, government agencies for estimates of compensation due for the taking of real property as part of the exercise of eminent domain for public works projects, legal professionals for the purpose of dissolution of partnerships or acquisition of assets, and the list goes on. A Look Back - The Brief History of Appraisal Regulations and Training Until the late 20 th century, the appraisal profession was minimally regulated, and training was virtually non-existent, limited to apprenticeships for some, and trial and error for others. While professional appraisal societies had been formed, they were generally for collaboration and promotion, rather than for setting standards or offering education. Untrained and unregulated, appraisers were appraisers simply because they said they were, and were artists, not to be questioned or constrained in their methods, techniques, or conclusions. “Appraisers are born not made,” wrote University of Chicago professor J. W. Wallingfort. “Anyone who does not have the knack of it ought to become a college professor, a newspaper reporter, a banker, or a bureaucrat. When appraisers are trained, they become conservative. Their imaginations are diluted. They are unable to take that long-range view of real estate values which made our country great.” 7 6 Appraisal Institute, 2016 7 Wallingfort, 1947 Reader Introduction P a g e 4 | 18 1930s In the late 1930s, the country, and indeed most of the developed world, suffered a deep depression. Bank lending, and the land prices that served as collateral, fell drastically, and for the first time appraisal literature appeared. Reflecting on the causes of the recession, and what might be done to bring us out of it, writers began to question the basis of and methods of estimating value, in both the stock and real property markets. In the late 1930s, literature began to specifically question the appraisal profession and the wide discrepancies increasingly experienced between the value conclusions of different appraisers for the same or similar properties. However, rather than considering a lack of education or training as a possible cause of these differences, the common consensus was that significant variations in value conclusions must certainly be the result of fraud caused by bias toward the client’s interests. “Independent appraisals for the same property, for clients have different interests, may vary within a reasonable zone of double and error existing in all appraisals,” wrote professionally designated appraiser Frank Hall in the Journal of the American Institute of Real Estate Appraisers, in late 1938. “but when two appraisers, holding themselves out as experts in the profession, testify to values that vary as much as 50 per cent of more in a condemnation proceeding, I must share the opinion forced upon the judges that one or both of the appraisers are either dishonest in claiming the qualifications of an expert of dishonest in his appraisal… A good appraiser…must be honest.” 8 With the exception of designations conferred by professional associations, the appraisal industry remained chiefly unregulated. 9 8 Hall, 1938 9 Bottger, Norris, Sharkey, 2008 Reader Introduction P a g e 5 | 18 1940s to early 80s Through the following decades, the economy recovered While the literature reflects a continued concern for the lack of appraisal training, it seemed that the impetus for real change was missing. In the late 1940s, Arthur Weimer, a designated appraiser, FHA housing economist, professor of real estate and urban economics and Dean of the School of Business at Indian University- Bloomington penned an article for the appraisal journal, addressing the current state of appraiser education and training. He noted that the theoretical basis for valuation estimation is rather simple and universal. “Regardless of time or place, appraising is largely a process of estimating the present value of the future returns or benefits which are to be derived from a property.” However, the current system of providing coursework in the theory of valuation was not enough. “The difficult problems which are confronting appraisers of real property today emphasize the importance of adequate training in this field. Such training involves not only formal courses of student in our universities, colleges, and institutes but also a systematic program of self-education on the part of every practicing appraiser.” Weimer further noted that the systematic set of accepted rules and procedures for completing an appraisal report was inadequate. “Unfortunately, the inability to introduce precision and great accuracy into valuations has been obscured,” he cautioned. “Many persons have come to believe that there are sets of rules which, taken together, constitute a science of real estate valuations. Of course, rules are valuable aids in systematizing an appraiser’s work, but if taken too seriously they may lead to errors. The practitioners of a profession need to know not only the rules and procedures to be followed but the “why” of such rules and the reasoning back of them.” Case study, he argued, was needed. “…we are likely to find that theoretical concepts take on real meaning for most students and practicing appraisers only if such concepts are studied in close relation to specific practical problems. This, of course, means a Reader Introduction P a g e 6 | 18 continuation and expansion of the case study method of training in this field.” 10 The next decade saw little change in either appraisal education and training and in fact, the profession was finding competition from those with limited, if any, exposure to real estate, trying to find work of any kind in an environment of high unemployment. Appraisers, who had historically tended to be real estate agents, were now joining the ranks from varied walks of life and entering the profession was limited simply by one’s ability to attain clients, generally by joining a practicing appraisal firm with sufficient work to share it with a newcomer. In fact, in the late 1950s, the supreme court of Minnesota, addressing a request that appraisers have this traditional, sales background, ruled in the contrary, that, “an appraiser, in order to testify in court on matters of value, did not have to sell real estate or having a selling background in order to render a sound opinion of value.” 11 Through about the early/mid-60s, with the exception of guides for setting up and managing a business 12 13 and for creating a written report, 14 there was little to guide the appraisers and appraisal industry. A slow economy in the late 1950s and early sixties limited the demand for valuation services, and therefore attention given the profession, remained limited as well. The industrial boom of the second half of the decade and the resulting demand for appraisal services, however, brought renewed attention to considering promoting completion of at least a minimal level of education and training by appraisers. William Kennard, head of the Business Department of the University of Connecticut School of Business Administration, director of the University’s Institute of Urban Research, and instructor for the American Institute of Real Estate Appraisers, addressed the need 10 Weimer, 1947 11 Shenehon, 1960 12 Ibid, 1960 13 Smith, 1963 14 Rogers, 1960 Reader Introduction P a g e 7 | 18 to focus attention on educating the appraiser of the future in an article published in the Appraisal Journal. “…the forces of technological and institutional change are constantly at work in the American economy. …the appraiser will have to deal with more complex problems…to cope with all sorts of problems involving the use of reality… and if he is to measure the market appropriately, the appraiser must be capable of adapting and adjusting to these important changes, “ he wrote. 15 Kinnard stressed the importance of education, but took it a step further, and introduced the idea of a college education plus a formal program of appraisal training. “Increasingly, one will need a college education or its equivalent in order to function as a professional appraiser,” he writes, but cautions that a college education alone is not sufficient. “The professional appraiser must make education and training a way of life for himself… There is no fundamental conflict between education and training as ideas. Basically, education involves exposing a student to theory and principles, and equipping him with the fundamentals necessary for application to a wide variety of activities. To this extent, it may be regarded as the general foundation necessary for all practitioners. Training, on the other hand, involves essential presentation of the techniques and methods of approach to specific problems in the field. It involves, therefore, developing the ability to recognize the application of principles to specific problems.” 16 Kinnard’s writing on appraisal education was followed a few years later by that of Carl Tschappat, chairman of the Department of Real Estate and Urban Affairs at George State College, noting continued dissatisfaction with an appraiser preparation model which relies heavily on formal education in the form of college coursework. “Most appraisers have experienced the feeling that our universities are not 15 Kinnard, 1965 16 Ibid, 1965 Reader Introduction P a g e 8 | 18 training men property to be appraisers,” he writes. “Few graduates accept positions with fee appraisers. Those who do seem poorly prepared to function well at assigned tasks.” 17 The stock market low of 1974 saw the next significant fluctuation in real estate values, a corresponding drop in value accompanied by prohibitively high interest rates. Appraisal related education remained limited to general college classes in related topics and coursework provided by professional associations, and training was left to the employer motivated by the need to maintain a sufficient staff of appraisers for business growth. University of Nebraska Omaha Associate Professor of real estate and land use Donald Nielsen and appraiser Frank Wilson wrote, “Recruiting, hiring and training a new appraisal trainee is one of the most important operations with which an appraisal firm must deal. Without the forethought and planning required to insure a smooth and effective training program, the growth of an appraisal firm or replacement of existing personnel can prove awkward and difficult.” 18 Late 80s to present A real estate boom followed in the early to late-1980s, with ever increasing amounts of credit creation and lending secured by real estate collateral. Then came the Savings and Loan Crisis, the greatest collapse of US financial institutions since the 1930s recession. From 1986 through 1995, the number of federally insured thrift institutions dropped by half. Not surprisingly, wealth plummeted, with taxpayers shouldering more than 80 per cent of the estimated total loss of approximately $153 billion. 19 Virtually all aspects of the market were questioned, and appraisers were not immune from scrutiny. Appraiser 17 Tschappat, 1969 18 Nielsen and Wilson, 976 19 Curry and Shibut, 2001 Reader Introduction P a g e 9 | 18 and Appraisal Institute Chairman Richard Sorenson warned, “Efforts are currently under way to find legislative solutions to perceived problems of faulty, fraudulent, and misused appraisals…” 20 Congress enacted wide spread financial reform. Among those reforms was the Federal Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. While not directly blaming the appraisal industry, the reforms included appraiser licensing, which required education and training for appraisers. For the first time in our nation’s history, the federal government imposed requirements for state regulation of real estate appraisers (“appraisers”) as well as for the appraisal process and the appraisal report itself. 21 Appraisers now must complete a minimum level of education, demonstrate competency in core concepts, and log supervised work experience to be state licensed or certified to appraise real estate in the United States, and must complete periodic continuing education. Licensing and certification is divided into levels; the lower levels qualify an appraiser to complete assignments of less complex and generally residential type properties, and the higher levels qualify an appraiser to tackle non-residential and complex assignments. 22 Certified Appraiser and author Mark Ratterman details the process and the changes enacted. “In the wake of the Savings and Loan Crisis of the late 1980’s, (FIRREA) restricted appraisals of federal related transactions (FTRs) to state-licensed or state-certified appraisers. Each state was charged with setting up an agency to regulate the licensing of the profession. While FIRREA only required appraisers to be licensed or certified to do federally related transactions, many state agencies used the new licensing requirements as the standard for all appraisals. FIRREA established The Appraisal Foundation (TAF) to set the appraisal rules and minimum requirements for the state programs… The Appraisal Qualifications 20 Sorenson, 1988 21 Hummel, 2004 22 Appraisal Foundation, 2017 Reader Introduction P a g e 10 | 18 Board (AQB) established the minimum amount of education and experience required for licensing or certification... Licensed Residential Appraisers are usually limited to one to four-unit property with loans of less than $1 million (transactional value) … Certified Residential Appraisers are usually limited to one to four unit properties but have no limits on transactional value…. (and) Certified General Appraisers are usually licensed to appraise any type of property. 23 From the mid-1990s through approximately 2005, the real estate market not only recovered, but by pretty much all counts, boomed. Then came the financial meltdown and the subsequent “great recession” of 2007-2008. Despite the significant reforms of the late 1980s regarding valuations, many blame inflated and misleading real property value estimates for significantly contributing to, if not causing, the financial meltdown. “The appraisal reforms of the late 1980s were good reforms,” says Susan Wachter, real estate professor at the University of Pennsylvania’s Wharton School of Business, “but (referring to the Great Recession) they were not sufficient to prevent what we have seen...” 24 This brings us to the present. National Association of Homebuilders (NAHB) Chairman, Bob Nielsen, a strong critic of the state of the appraisal industry and the devastating outcomes of poor appraisal practice directly threatening our economy. “Numerous flaws in the appraisal system have been causing inaccurate home valuations, both in times of housing weakness and strength,” he argues, and puts the blame squarely on inadequate appraiser training. “NAHB has been actively seeking improvements in appraiser education and training… We must resolve a flawed appraisal process that produces inaccurate assessment of home values, because this fosters price instability, puts more families in danger of default or foreclosure, and undermines the housing and economic recovery.” 25 23 Ratterman, 2014 24 Weiss, 2008 25 NAHB, 2012 Reader Introduction P a g e 11 | 18 Appraisal Training Today As detailed previously, appraisal training, both for initial licensing/certification and for continuing education, is required in two categories – education in the form of coursework and experience in the form of contribution to appraisal reports under the supervision of a licensed appraiser. Coursework is provided by appraisal associations, by on-line providers, and by brick and mortar schools, and to meet regulatory requirements, appraisers must complete education in a list of skill categories, such as market analysis, statistics, modeling, finance, and construction analysis. Education can still be fairly generalized as academic as opposed to practical. Appraisers Jeffrey Johnson and Tony Lesicka write, “…most of the appraisal publications in existence today focus on theory.” 26 The Case for Cases Case based education is not a new phenomenon; it has been used for almost 150 years in legal education, 27 has been the primary method of teaching at Harvard Business School for more than a century, 28 and is a core method of instruction in military intelligence. 29 Legal Education The case method in legal education was invented in the late 1800s by then Dean of Harvard Law School then Christopher Columbus Langdell. In an effort to create a simple procedure for teaching students of law, he wrote a ‘A Selection of Cases on the Law of Contracts,’ a book of cases which students were to review and analyze as part of their studies. 30 26 Johnson, 2013 27 Rakoff, 2011 28 Walsh, 2008 29 Shreeve, 2004 30 Harvard Law School, 2017 Reader Introduction P a g e 12 | 18 Business Education Inspired by the success of Harvard Law School, Harvard Business School adopted the case method soon after its founding in 1908, and he case method soon spread to become the “primary national model for graduate business education.” 31 Yale School of Management uses what they term an ‘integrated curriculum’ and points to teaching in “an entirely new way, drawing on the complexities of real business challenges to inform broad-reaching discussion and analysis. We needed pedagogical materials that could support this demanding approach to business education. Hence the Yale ‘raw’ case…raw cases present you with extensive data about a real situation. This unique, open approach accomplishes two goals: It teaches you to think broadly when approaching a new problem. It teaches you to excel in fast- moving and complex global organizations.” 32 Military Education US Marine Corps Colonel Thomas Shreeve explains, “Long associated with teaching at the graduate level in business and public administration, the case method represents a structured approach to learning from the past. Learning by the case method is active rather than passive, as students are explicitly made partners in the reduction of ambiguity surrounding complex, realistic issues. Students who learn by the case method improve their analytic skills when instructors ask them to identify the problem sat hand and they fortify their decision making skills when instructors ask them to propose a plan for action to resolve the problems they have identified. The term ‘case’ refers to a description of a dilemma that stops short of the outcome. The term ‘case study’ refers to a description of a past event that has an outcome included it the document and this is known to the student. Both vehicles are equally useful.” 33 31 Barton, 2008 32 Yale School of Management, 2017 33 Shreeve, 2004 Reader Introduction P a g e 13 | 18 Appraisal Education Despite the reliance on traditional coursework, the value of practical application and practice in the preparation of appraisers have finally gained some attention. For real property valuation in particular, case based reasoning in conjunction with rule based reasoning has been shown to measurably improve the quality of real estate appraisals. 34 The Appraisal Institute, widely regarded as the leader in appraiser education, found case studies serve an important function, putting context around information to prepare appraisers for real world assignments and have begun to include more case study learning in their educational offerings. “Since the new examinations test more practical knowledge, the Appraisal Institute is embedding more case studies into classroom and online education to emphasize more hands-on exposure,” shared Magdalene Vasquez, manager, Appraisal Institute Education certification and State Board Relations Team. “As of today, all Appraisal Institute courses rely heavily on case studies to put context around important information, as opposed to presenting isolated facts. This method of teaching and learning reinforces appraisal concepts so student can pass the new state licensing and certification exams, and be prepared to complete duties in the field” 35 Despite these changes, there remains an unfulfilled need to bridge educational curriculum and real world practice. Speaking to the state of appraiser training, in spring of 2017, appraiser and former president of the Saint Paul chapter of the Appraisal Institute Tony Lesicka shared, “I have had several conversations with industry participants, as recent as yesterday, in which the disconnect between the ‘theory’ taught in qualifying and continuing education and the actual, everyday practice of appraisal. The limitation remains that, although case based material has been introduced, the cases are limited in scope, being simplified and portions of real world assignments. “Full case studies are needed for the 34 Gonzales, Ortiz, 1992 35 Barancik, 2006 Reader Introduction P a g e 14 | 18 appraisal profession and do …not exist due to the void within training and education areas of the real estate appraisal profession.” noted veteran appraiser and long-time member of the Publications Committee of the Appraisal Institute, Jeffrey Johnson. “…there is no current literature available in the profession that demonstrates an entire appraisal assignment and discusses the entire engagement from initial client contact to designing the scope of service to completing the analysis and writing the report.” 36 But what about the experience component? As also noted previously, experience as it is required is defined as contribution to appraisal reports by an appraiser trainee under the supervision of a licensed appraiser. While the experience requirement attempts to address the need for case-based training, it is limited in efficacy by several factors. 1) Training must be obtained from an increasingly limited number of experienced appraisers. Appraiser numbers have been declining for some time; fewer new entrants have entered than those leaving the profession. “The supply of seasoned, experienced appraisers is diminishing. People have not been coming into the profession in large numbers for some time,” notes economist Brad Finkelstein. “The new people need to be property trained (but) there is a lack of training for those in the business on how to do valuations in the current market conditions,” he added. 37 To be specific, over the past several years, the total number of appraisers has declined by more than 3 per cent annually, a trend which is expected to accelerate year over year for at least the next decade. Writing in 2014, Appraisal Institute researchers warned, “A broader analysis suggests the rate of decrease (of appraisers) could rise sharply over the next five to 10 years due to retirements, reduced numbers of new people entering the 36 Johnson, 2017 37 Finkelstein, 2009 Reader Introduction P a g e 15 | 18 appraisal profession, economic factors and greater use of data analysis technologies. 38 Some have put the total net loss from 2010 – 2020 alone to be more than one third, and the vast majority of those lost to be among the most experience, those who can train others, and those who likely need training the least. Veteran appraiser Sara Stephens explains, “In spite of a high overall level of qualified appraisers, a perceived lack of career prospects for trainees and the low numbers of people entering the profession are legitimate and serious issues. …research indicates that the number of appraisers could decrease 25 to 35% during the next 10 years due to age attrition (more than half of the appraisers in the U.S. are 51 to 65 years old) and the fact that there are too few new entrants to boost the ranks.” 39 2) A limited number of experienced appraisers are available and willing to take on trainees Not surprisingly, the availability and quality of supervised, on-the-job training in the current model is dependent upon there being a sufficient number of licensed appraisers who are willing to provide supervision. Even without the shrinking pool, the number of appraisers at any given point willing to supervise has been historically limited. The reasons are many. “We have all heard (and used) any number of…excuses,” shares California appraiser Jane Currey. “I’m too busy; there’s not enough business; I don’t have enough experience and the biggie: If I mentor someone they will leave and take my best clients.” 40 “Dominated by small firms, the appraisal industry has done little to establish formal training systems. Many firms do not want to hire or train inexperienced appraisers because it can be too time intensive. In addition, some firms fear that once an appraiser is trained, he or she will be more inclined to leave the organization. Few appraisal firms have formal training programs…” explained appraiser John Simpson. 41 Executive editor of Valuation, and National Appraisal Institute President- 38 Appraisal Institute, 2014 39 Stephens, 2012 40 Currey, 2007 41 Simpson, 1994 Reader Introduction P a g e 16 | 18 Elect James Murrett summed it up. Because so few appraisers are willing to train, “starting out as a trainee is one of the biggest hurdles to the profession.” 42 3) Regulations further limit appraiser willingness to train the next generation. “A never-ending trail of regulatory education requirements issued by dozens of committees, boards and bureaucracies keep making it more difficult to obtain the correct education and experience needed to become an appraiser.” shared Monster.com recruiter, Dona DeZune. “…[now] the master appraiser must accompany the appraiser trainee on all jobs. ‘I’m not going to pay a trainee to go out if I have to do the work myself, [Bill] Johnson [owner of United Residential Appraisals in Davidsonville, Maryland] says. ‘I have a trainee who’s willing to go out with me on an ad-hoc basis, and I pay him to write the appraisal [and] pull the comparables, but nowhere near as much as before. The only people who are going to get jobs are those with an in – a relative in the business – and trainees who have the ability to bring in new business through contacts in the real estate or mortgage banking business.’ “ 43 4) Training is limited in scope, both by convention and by regulation “The individual receives his or her training by performing individual appraisals, and questions or problems are addressed only when brought to the attention of a supervisor.” Simpson notes. “This type of system is inefficient because it does not provide the structure necessary for a novice appraiser to learn at an optimal rate. The most effective ways to present material and foster learning are with computers and case studies. The trainer should present an example or practical application of each concept because a trainee will more likely understand and retain an applied concept than a theoretical one. (Training should include the opportunity to) perform an appraisal of a more advanced property..” 42 Schneider, 2016 43 DeZube, 2017 Reader Introduction P a g e 17 | 18 he added. 44 Appraisal Institute National Vice-President pointed directly to regulations as impeding the training process. “..the problem partially is a function of the regulatory environment relative to experience requirements.” 45 Murrett explains, “As we all noted earlier, regulations can be restrictive. They limit the amount of work a trainee can perform for an assignment. Trainees should be allowed to progress in their work as their knowledge and experience progress…” 46 5) Training does not require exposure to complexity or variety in assignments There is no provision for a variety in assignments in either property types or complexity in the current training and experience model. Since the trainee must work under a supervisory appraiser, the exposure to real world assignments is understandably limited by the assignments that the supervisory appraiser obtains and is willing to share with the trainee. Since supervised experience is difficult to obtain, a trainee is unlikely to have had the opportunity to experience valuation of an array of properties and property rights, and even less likely to experience the valuation of complex property. 47 48 Which Leads Us To This Book It is this lack of both case-based education and readily available training assignments which prompted this book. We have created a set of case studies, based on real data, which demonstrate current, complex issues in real estate valuation, and which can be worked through, independently and step by step, from start to finish - from initial client contact, through estimating scope of work, creating and submitting a proposal, completing and submitting the assignment - by you – an appraiser, an appraiser trainees, or simply someone interested in considering the profession or attaining a better understanding 44 Simpson, 1994 45 Schneider, 2016 46 Schneider, 2016 47 Appraisal Institute, 2013 48 Harris, 2012 Reader Introduction P a g e 18 | 18 of the appraisal process. Recent testimonies from two senior industry professionals (attached) make that point that there is nothing like this available to appraisers today. 49 50 I am proud to be the first to provide this to the market and to you. Now, let’s get started! 49 Lesicka, 2017 50 Johnson, 2017 References and Works Cited Appraisal Institute. N.p., n.d. Web. 18 Jan. 2017. <http://www.appraisalinstitute.org/>. Alderton, Matt. "Flying Solo." Valuation Magazine 22 June 2014: n. pag. Print. "Appraisal Institute MAI designation and SRA designation requirements. (List)." Appraisal Journal 22 Sept. 2007: n. pag. Print. "Appraisal Problems Worsened Meltdown." N.p., 23 Aug. 2008. Web. 05 Feb. 2017. "Appraisers: Don't Blame Us." N.p., 05 Feb. 2017. Web. 05 Feb. 2017. Barancik, Marsha. "Breaking in and getting educated: from the AQB to mentoring to a Master's Degree." Valuation Insights & Perspectives 22 Sept. 2006: n. pag. Print. Bottger, Roy K., Dwight E. Norris, and Eric Sharkey. Real estate appraisal. Chicago, IL: Appraisal Institute, 2008. Print. Weimer, and Arthur M. "Comments on training of appraisers." Appraisal Journal 22 Sept. 2007: n. pag. Print. Weimer, and Arthur M. "Comments on training of appraisers." Appraisal Journal 22 Sept. 2007: n. pag. Print. Currey, Janie. "Mentoring: looking out for future appraisers." Valuation Insights & Perspectives 22 Sept. 2007: n. pag. Print. Curry, Timoth, and Lynn Shibut. "The Cost of the Savings and Loan Crisis: Truth and Consequences." FDIC Banking Review Dec. 2000: 26-35. FDIC Banking Review. Federal Deposit Insurance Corporation. Web. 16 Aug. 2016. <https://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf>. Simpson, and John A. "Developing an appraisal training system." Appraisal Journal 1 Apr. 1994: n. pag. Print. DeZube, Dona. "Real Estate Appraisal Careers." Monster.com. N.p., n.d. Web. 05 Feb. 2017. <https://www.monster.com/career-advice/article/Real-Estate-Appraisal-Careers>. Downey, Kirstin. "Sweeping Legislation Attacks Problem Of Faulty Real Estate Appraisals." The Washington Post. N.p., 29 July 1989. Web. 5 Feb. 2017. "Drop in Us Real Estate Appraisers Slows: Appraisal Institute Research." States News Service. N.p., 31 July 2014. Web. 5 Feb. 2017. "Expert: Appraisers Are Facing Turbulent Times." Origination News 1 Dec. 2009: n. pag. Print. Finkelstein, Brad. "Expert: Appraisers Are Facing Turbulent Times." National Mortgage News (December 14, 2008): n. pag. Web. "GAO STUDY FINDS APPRAISAL PROCESS INADEQUATELY MONITORED." States News Service. N.p., 23 Jan. 2012. Web. 5 Feb. 2017. Gonzalez, Avelino, and Raymon Laureano. "A Case-Based Reasoning Approach to Real Estate Property Appraisal." Expert Systems with Applications 4.2 (December, 1992): 229-46. Print. References and Works Cited National Associate of Home Builders. Gov't admits flaws in real estate appraisal monitoring. N.p.: National Associate of Home Builders, n.d. Floor Trends Magazine, 24 Jan. 2012. Web. 17 May 2017. <http://www.floortrendsmag.com/articles/92134>. Hall, Frank D. "What Makes a Good Appraisal." The Journal of The American Institute of Real Estate Appraisers (October, 1938): 323-28. Web. Harris, Dustin. "The (or at Least “A”) Reason We Are Not Hiring Trainees." The Appraiser Coach. N.p., 2012. Web. 26 Apr. 2016. <https://theappraisercoach.com/the-or-at-least-a-reason-we-are- not-hiring-trainees/>. Harvard Law School: The Case Studies. 2017. MS, The Case Study Teaching Method. Harvard Law School, Boston, MA. Hummel, Alan E. "FIRREA at 15: Is the Profession Stronger or Weaker." A la mode, inc. N.p., n.d. Web. 7 Jan. 2016. <https://news.alamode.com/firrea-at-15-is-the-profession-stronger-or-weaker/>. Hunsperger, Wayne L., Amy Mcguire, and Ron Throupe. "Transit Corridor Valuation: Issues and Methods." Appraisal Journal 22 June 2012: n. pag. Print. Hymer, Dian. "What you need to know about real estate appraisals." Chicago Sun-Times. N.p., 29 Aug. 2003. Web. 5 Feb. 2017. Johnson, Jeffrey. "Letter regarding dissertation, Case Studies for Real Estate Valuation." Letter to Raphael Bostic. 5 Apr. 2017. MS. Saint Paul, Minnesota. Johnson, Jeffrey A., and Tony Lesicka. Real estate appraisal practice: a collection of examples. Minn.: Appraisal Practice Education, 2013. Print. Kinnard, William N. "Educating Tomorrow's Appraiser." The Real Estate Appraiser (July, 1965): 2-11. Web. Lesicka, Anthony. "Letter regarding Case Studies for Real Estate Valuation." Letter to Raphael Bostic. 4 Apr. 2017. MS. MInneapolis, Minnesota. Mckinley, Michael. "The making of the 13th edition of The Appraisal of Real Estate." Appraisal Journal 22 June 2008: n. pag. Print. Mckinley, Michael. " behind-the-scenes look at The Appraisal of Real Estate, 14th edition: technical writer's commentary." Appraisal Journal 22 Sept. 2013: n. pag. Print. Nielsen, Donald A., and Frank D. Wilson. "Training a New Appraisal Employee." The Real Estate Appraiser (September - October, 1976): 23-27. Web. Rakoff, Todd. "Case Method." Harvard Gazette (October 12, 2011): n. pag. Web. Rattermann, Mark. The student handbook to The appraisal of real estate. Chicago, IL: Appraisal Institute, 2014. Print. Rattermann, Mark. "The Student Handbook to the Appraisal of Real Estate, 14th Edition." Appraisal Journal 22 Mar. 2014: n. pag. Print. "Real Estate Appraisers Declining in the U.S." Real Estate Weekly 3 Sept. 2014: n. pag. Print. References and Works Cited Rogers, Russell R. "Technique of Writing the Narrative Report." The Appraisal Journal (October, 1960): 494-500. Web. Schneider, Jay W. "A Framework for the Future." Valuation Insights & Perspectives q4 2016: 10-15. Print. Shenehon, Howard E. "Development and Operation of a Small Appraisal Office." The Residential Appraiser (December, 1960): 2-6. Web. Shreeve, Thomas W., Col. Experiences to Go: Teaching with Intelligence Case Studies. 2004. MS Twelve, Discussion Papers. Joint Military Intelligence College, Washington, DC. Simpson, John A. "Developing an Appraisal Training System." The Appraisal Journal (April, 1994): 229- 33. Web. Smith, James G. "Benefits and Problems of an Appraisal Office." The Real Estate Appraiser (September, 1963): 37-40. Web. Sorenson, Richard C. "On Becoming and Effective Appraiser - Advice to Candidates." The Appraisal Journal (April, 1988): 252 -58. Web. Yale School of Management. The "Raw" Case Approach. N.p.: Yale School of Management, n.d. Yale School of Management. Web. 22 Oct. 2016. <https://www.alumni.som.yale.edu/programs/mba/curriculum/raw-case-approach>. The Appraisal of real estate. Chicago, IL: Appraisal Institute, 2013. Print. The Dictionary of Real Estate Appraisal. Chicago, IL: Appraisal Institute, 2015. Print. The Appraisal Foundation. The Real Property Appraiser Qualification Criteria. Washington, DC: The Appraisal Foundation, 2017. Appraisal Foundation. The Appraisal Foundation, Jan. 2017. Web. 11 Mar. 2017. <https://appraisalfoundation.sharefile.com/share?#/view/sf69aa596c754c6fa>. "The Student Handbook to the Appraisal of Real Estate." Appraisal Journal 22 June 2004: n. pag. Print. Tracy, Joseph, Henry Schneider, and Sewin Chan. "Are Stocks Overtaking Real Estate in Household Portfolios." Current Issues and Economics and Finance 5.5 (April 1999): 1-6. Print. Tschappat, Carl J. "Communication Through Education." The Real Estate Appraiser (July - August, 1969): 5-8. Web. Sara Stephens. U.S.Valuation Profession Fact Sheet - June 2012. Chicago, IL: Sara Stephens, 2012. Print. Appraisal Institute. U.S.Valuation Profession Fact Sheet - June 2014. Chicago, IL: Appraisal Institute, 2014. Print. Wallingfort, J. W. "Comments on comments on training of appraisers." Appraisal Journal Jan. 1947: n. pag. Print. Walsh, Colleen. "From Law School to Business School - evolution of the case method." Harvard Gazette (April 3, 2008): n. pag. Web. Webster, Adam, and Michael Mckinley. "Lucky break: just in time for summer, the 13th edition of the Appraisal of Real Estate hits the shelves." Valuation Insights & Perspectives 22 Mar. 2008: n. pag. Print. References and Works Cited Weiss, Mitch. "Appraisal Problems Worsened Meltdown; Illegal Practices and Poor Oversight Factored Into Real Estate Bust, Critics Say." The Washington Post. N.p., 23 Aug. 2008. Web. 5 Feb. 2017. Appraisal Institute. What Consumers Need to Know About Real Estate Appraisals and Appraisers . Chicago, IL: Appraisal Institute, 2016. Print. The Cases and the Process Page 1 of 12 Appraisal assignments generally follow a logical progression, beginning with a request for a bid for services from the client and ending with a completed and delivered appraisal report to the client. We will work through this process together for each of three case studies, and each case study will differ in three significant ways. First, the subject of each is a different commercial property type. Second, the client defined scope of assignment for each differs in important and relevant ways. Third, each assignment, while complete, is written to focus on one of three major stages of the appraisal. The Multi-Family Residential Case Our first case is that of the appraisal of a multiple family residential property, located in Southern California, specifically the west side of Los Angeles County, in the path of a new light rail commuter line connecting downtown Los Angeles to the coast. Appraisers who are starting out often begin in residential valuation for many reasons, and we are starting with a residential project for similar ones. First, residential properties tend to be those the vast majority (if not, arguably all) are most familiar – for the simple reason that by definition they are our residences, the homes (in all forms) we occupy throughout our lives. They include single family, to condominiums, to small duplexes, to mid- and high-rise complexes, and, while they vary in complexity and by buyer motivation (occupancy aspects or income stream), they are generally compared and contrasted based on livability and amenity characteristics to which most of us can best relate. Second, based on a relative ease of entry to the profession, residential valuation is often the path of choice for those starting out as appraisers. For this case, we have selected a residential property, with three areas of added complexity. First, because there are more than four units, this type of residential property is considered, in all 50 states, to be classified as commercial for licensing standards. From a practical perspective, this means that only certified appraisers are considered to be state and federally qualified to appraise them. Second, in this instance, the appraiser was not granted physical access to the property nor was provided complete information about it. Missing information The Cases and the Process Page 2 of 12 included actually unit size and mix, amenities, actual quality and condition (other than what could be observed from the street), income, and expenses, all very important characteristics directly influencing value. And finally, because the purpose of the appraisal was to estimate value for compensation for possible partial and/ or full acquisition of the property as part of eminent domain proceedings, unusual value definitions were requested. We have also set this case study at a time of uncertainty, in 2013. The Los Angeles area, similar to the country as a whole, was slowly showing signs of recovery from what has been termed the great recession of 2008 – 2009, and market participants are cautiously optimistic. This case will be useful not only to the entering appraiser, but also to one who is considering branching out into providing valuation services for condemnation purposes. This first case will focus most heavily on the earlier sections of an appraisal assignment, essentially defining the scope of the appraisal, gathering information regarding the subject, and making preliminary conclusions about it. While the valuation and conclusions will be provided for you so that you have a complete assignment, less emphasis will be placed on those sections. The Retail Case Our second case is the valuation of a retail property in the Midwest, specifically in a moderate income suburb of Minneapolis Saint Paul, Minnesota. The subject is a new single tenant retail building, with a long term net lease, and the client is requesting valuation services for a loan to be secured by the property. The property is in escrow and the loan will facilitate the close of sale. For this case, we have selected a property, with a relatively straightforward income stream to assist the novice to income valuation, but with two areas of added complexity, an uncertain economic time and a property with utility based on retail sales in a geographic area of traditionally lower income than in surrounding areas – an important factor in retail sales. This case study is set in early 2017, a time of economic uncertainty. While recovery from the recession has been evident for the past several years, and a moderate appreciate rate has been accepted in the market, there is talk of softening terms The Cases and the Process Page 3 of 12 and even some concern regarding a bubble and downward pressure on income, real estate values and investment returns. These concerns are particularly troublesome in this area, where residents are relatively older and of lower income and educational attainment, and there is a consensus that limited, if any growth, is expected for the area. For this case study and the one which follows, you will use the same process introduced and detailed for the first case study, but will complete this appraisal for yourself in the manner and pace you deem best. The case presented for you is in its final form. You may wish to simply read and study the case from beginning to end in the order presented, or you may wish to stop, work ahead on your own, and then check your analysis and conclusions again the case study narrative. The Industrial Case Our third case is the valuation of an industrial property, also in the Midwest, specifically in Wisconsin. The subject is a two-structure, single user industrial building. The property is under contract for sale, and the client, a lender, is requesting valuation services to estimate collateral value for purchase financing. This case study is set in late 2016, another time of some uncertainty about the sustained recovery from recession. This case study is selected as an introduction to industrial valuation, and has several added elements. First, the client has asked for two values with differing conditions. The first value is as of a current date and to reflect the current state of the property. The second value is as of future date of valuation and assuming proposed renovations have been complete, an assumption which will be made and clearly called out to the user of the report. The second element is the existence of significant functional obsolescence in the property, which must be addressed, including its impact on value. And finally, the third added element of this appraisal is that an argument can and will be made to eliminate one of the approaches to value as not relevant for the property. This argument will be explored, and we will show you how to explain its absence from the valuation. Our consistent process for each assignment follows. While the order in which these steps are taken may vary, and appraisal assignment is not complete until each has been addressed. A condensed version of this list of The Cases and the Process Page 4 of 12 steps follows your use both for these case studies and for your application to subsequent assignments. We encourage you to take a moment now to review this list before moving forward to the case studies. Once again, we congratulate you on your decision to learn more about the process of valuation of real property and encourage you to continue your studies beyond these case studies. The references and works cited section is a good source of literature, complete with both reference to both on line and printed works, and several web sites cited include both more rudimentary and advanced materials for you as you continue to explore real property valuation and the profession. We wish you well! The Cases and the Process Page 5 of 12 I. Client initiates request for services A. Appraiser requests the following preliminary information to identify the elements of the assignment, essentially identifying the problem 1. Description and relevant characteristics of the property a) Location (1) Address or other common means of identifying physical location (description of location, assessor parcel number, etc). (2) Legal description (if known by client) b) Property Type c) Occupancy (tenant, owner, and/or vacant) 2. Purpose of the assignment and type of appraisal a) Client b) Intended use c) Intended user(s) d) Type and definition of value to be estimated e) Property rights to be appraised f) Type of report to be produced and delivered g) Effective date of value 3. Special requirements a) Unusual or extraordinary assumptions or limitations b) Timing – when does client need appraisal to be complete c) Additional services outside of typical scope (eg: rent survey for a single family home, possible testimony, etc) 4. Client’s specific needs a) When is final report needed? b) Any interim requirements? (1) Progress reports (2) Preliminary conclusions or discoveries c) Special valuation requirements, if any (1) Extraordinary assumptions (2) Hypothetical conditions d) Production format/delivery requirements? (1) For reports in writing, is there preferred format, required number of originals and copies? (2) For electronic copies, is there a preferred file type and method of delivery? The Cases and the Process Page 6 of 12 (3) Is the first report completed as a draft, with a client review and subsequent production of a final report? (I am not sure if we want to include this very real possibility – Jeff/Tony – your thoughts?). B. Appraiser obtains information needed to offer to complete assignment, essentially determines the solution to the client’s “problem” 1. Research any needed information client could not provide 2. Check capacity and qualification to complete assignment a) Determine qualifications required (1) License type and jurisdiction (2) Expertise with property type or other factors (familiarity with market, proposed construction, partial acquisition, litigation, etc.) b) Determine data needed to complete assignment (1) To be provided by client (studies, reports, leases, plans, etc) (2) To be obtained by appraiser (market data, etc) c) Determine any experts needed to complete assignment (for information not provided by client – surveyors, engineers, legal counsel, etc) d) Estimate time needed to complete assignment 3. Carefully evaluate ability to meet client expectations a) Confirm that appraiser is qualified and has needed data to complete assignment - If not, consider ability to meet requirements by obtaining qualified assistance and/or needed data in terms of ability, time, and cost to obtain. b) Confirm that appraiser has time available to complete assignment within client’s requirements or expectations. If not, consider estimating the additional time needed to complete assignment for the client. The Cases and the Process Page 7 of 12 II. Appraiser formulates proposal to complete assignment, essentially to apply the solution, including: A. Confirmation of client requirements for assignment B. Cost (can be flat fee, time, time and materials) C. Time to complete assignment (date appraiser is available to start and duration - total duration from engagement to completion, duration from inspection to completion, or another defined time-frame) D. Detailed description of any limitations, assumptions, or other information which will be important for the client to understand (requirements for experts, limitations to scope not noted in client requirements) III. Appraiser provides proposal to client – a formal, written solution/contract A. Format 1. In writing – best for complex assignments or those for which there are extraordinary conditions or limitations 2. May be verbal – should typically be followed by written confirmation of most pertinent details and definitely followed later by detailed proposal B. Acceptance, rejection, or negotiation phase IV. Client accepts, Appraiser refines project scope and schedule A. Review timeline and components identified to formulate client contract/bid, and adjust as necessary B. Identify the critical path of the project – what will delay, suspend, or cancel the project – some common examples: 1. Inspection a) Setting inspection appointment. b) Results of inspection – data obtained, etc (1) May be different than expected by client and appraiser, necessitating a revisit to contract (1) May trigger need to consult with client based on contract provision 2. Ability and timing needed to obtain necessary reports, data, or other assistance, and their results (1) Data to be provided by client, owner, tenants, client’s consultants, etc (2) Data to be obtained by appraiser (3) Any additional assistance needed by appraiser The Cases and the Process Page 8 of 12 (a) Subject matter experts (b) Licensees, if appraiser does not have the appropriate license for the property or jurisdiction (c) Technicians to be retained by appraiser 3. Adjust project schedule as needed to set priority C. Conduct assignment, following and adjusting project schedule as needed – a typical project schedule follows. V. Inspection/subject data collection phase- generally conducted concurrently A. Property inspection 1. Schedule subject inspection 2. Conduct subject inspection a) Often includes area and neighborhood inspection. (1) Useful to have early visual understanding of surroundings (2) Often uncovers new market data – listings, obvious vacancies, construction activity often following a sale, etc b) May also wish to view market data collected prior to inspection 3. Collect subject data at inspection a) Observe and investigate physical improvements – eg systems, materials, workmanship, functionality, condition, apparent age, etc b) Observe and investigate site and site improvements – eg topography, soil, hardscape, landscape, paving, fencing, observable utility service, etc. c) Interview property or client representative, as appropriate, to confirm observations and obtain data which cannot be observed d) Carefully record all observations – photographs taken at the inspection are almost always included in both the process and the appraisal report and are often incredibly valuable. B. Macro-level data 1. Types of data a) General economic trends (1) General economy – nation, region, larger area (2) General real estate market (3) Availability of financing b) Wide demographics – nation, region, larger area, consumers of subject property type c) Broad government regulations and jurisdictional borders The Cases and the Process Page 9 of 12 (1) Police power (general plan, zoning, other restrictions) (2) Taxes (3) Other government related services or controls – eg school districts, police/fire jurisdictions, utility districts, etc. d) Overall construction trends and costs 2. Sources of data a) Visual area inspections and observations b) Experts/consultants retained or consulted for the project c) Publicly available data – Census information, city and county sources, credible news and other reporting agency sources, professional journals (examples: aaa, bbb, …. xxx, yyy, zzz) d) Subscription/fee based data (examples: aaa, bbb, …. xxx, yyy, zzz) C. Micro-level data 1. Types of data a) Specific economy and economic trends – for subject property type, use, location b) Specific real estate market and trends for subject property type, use, location c) The subject property – land, improvements, occupants, neighborhood, etc 2. Sources of data a) Provided by client, owner, tenants, other assignment related resources b) Property inspection c) Interviews – occupants, market participants, listing/selling agent, etc d) Experts/consultants retained for the project e) Publicly available data (examples: aaa, bbb, …. xxx, yyy, zzz) f) Subscription/fee based data (examples: aaa, bbb, …. xxx, yyy, zzz) D. Verify, analyze, and inspect data (as necessary and warranted) VI. Highest and Best Use Analysis phase VII. Valuation phase A. Determine approaches to value to be employed 1. Generally based upon appraiser’s judgement as to which are relevant and warranted for the subject 2. Sometimes based upon client contract B. Employ each approach C. Reconcile approaches into point or range value VIII. Complete report per contract The Cases and the Process Page 10 of 12 A. Adhere to agreed report type, value type B. Adhere to any other agreed upon specific client requests C. Include the following components, as applicable 1. Introduction a) Title Page b) Letter of transmittal c) Table of contents d) Certification e) Executive summary 2. Appraisal Problem/Scope of work a) Client and intended users b) Intended use c) Subject property and rights appraised d) Type of value e) Effective date of value f) Extraordinary assumptions, hypothetical conditions, jurisdictional exceptions (if any) g) General assumptions and limiting conditions h) Scope of work 3. Relevant Data a) Legal description b) Tax/assessment data c) Personal property or other non-real property items present on property, noting if included or excluded d) Property history (prior sales, current offers, listings) e) Market data – area, city, neighborhood, location f) Land description – size, shape, zoning, allowable uses, topography, soils, flood risk, etc g) Improvement description – components, systems, materials, layout, size, condition, year constructed or added, etc. 4. Data Analysis, Valuation Approaches, Value Conclusions a) Market analysis and highest and best use b) Land or site value c) Cost approach d) Sales comparison approach e) Income approach f) Reconciliation and final opinion of value g) Estimate of exposure time The Cases and the Process Page 11 of 12 h) Qualifications of the appraiser 5. Addenda a) Subject photographs (if not provided earlier) b) Data sheets for comparable properties (if not provided earlier) c) Necessary or required data or analysis not provided earlier due to size -eg lengthy legal descriptions, title report, copies of leases/lease summaries/rent roles/contracts/reports, statistical analysis, tax information, fold out exhibits, copy of appraisal license, etc. d) Supplemental data not included earlier due to secondary nature of the data but useful to the user of the appraisal report. The Cases and the Process Page 12 of 12 IX. Deliver report per contract X. Collect payment per contract XI. Retain copies of report, data, and analysis as required by law and by client XII. Evaluate the assignment A. Was the time and cost expended consistent with expectations? B. What could have been done to improve the process and/or the product? C. What can be done now to facilitate a better assignment in the future? Eg: 1. Is there any education you have learned might be helpful? If so, either plan to take it now or as continuing education when required. 2. Are there any sources of data which might have been helpful? 3. Are there any aspects of your process which can be improved – either overall or for this particular client, or property/assignment type? XIII. Cultivate the relationship with the client A. Follow up to confirm that report process and product were consistent with client expectations and standards – assuming client was pleased B. Inform client of your availability for future work – timing, assignment types, etc. C. As appropriate, inform client of your interest in expanding your client base – client may be able to refer or suggest other clients Multi-family Residential Chapter Page 1 of 119 I. Client initiates request for services Welcome to your first case study! This first case study is an assignment for appraisal services to assist with acquiring the land necessary for the Los Angeles Metropolitan Transportation Authority (Metro) Westside Subway Extension Project. This project is an extension of a light rail (“Exposition”) line, which at completion will connect Downtown Los Angeles to the coastal city of Santa Monica, both in Los Angeles County. Land acquisition through the use of the power of eminent domain, and increasingly for rail corridors 1 is a common reason for the request for valuation services – less common than for financing, but a significant source of appraisal business nonetheless, in particular in areas of expanding population, typically to facilitate the construction of infrastructure for public services. Valuation services related to condemnation actions (the term for acquisition by the power of eminent domain) are typically required for the condemnor, and often are solicited by the condemnee as well. 2 The client in this case is the condemnor, Metro. Your contact, the Manager of Real Estate Services at Metro, initiates requests for services by phone, calls to discuss the project and provide sufficient preliminary information so that you, the appraiser, can provide a bid for services. 1 Hunsperger, 2012 2 For more reading on valuation for condemnation, we suggest the book, Real Estate Valuation in Litigation, Appraisal Institute, available at appraisalinstitute.org. Multi-family Residential Chapter Page 2 of 119 She shared the following, which you entered into your outline, which is in blue font in the pages which follow. Your notes are in handwriting font. You also call out and reference items needing particular attention, such as information not provided that you may need to obtain to provide your bid, and unusual or potentially problematic aspects of the assignment, and highlight these in yellow. So that the sample report will have the same look and feel as a complete appraisal report, our explanatory notes, references, and suggestions for further study for you are called out and distinct, in the form of either grey highlighted text, as you see here, or footnotes, as you will see at the end of this sentence. 3 Regarding resources needed, each case will include the data necessary to complete it. appraisers generally subscribe to data sources and other professional tools such as mapping software. For these case studies, wherever possible we have used and referenced cost-free, publicly available resources, and have shared them with you, either in the text or as explanatory footnotes. When free, publicly available resources are not available or sufficient to complete the assignment (as will be the case in your career as an appraiser), we have provided you both the actual data and a source from which it or similar data can be obtained. So, let’s get started with your outline and notes! We start with the call from your client, and your notes from that call. 3 This is an example of a footnote. Multi-family Residential Chapter Page 3 of 119 Phase One – Client Requests Bid for Appraisal Services – Appraiser Gathers Preliminary Information Regarding Client, Subject, and Assignment Preliminary information 4 Description of the property Location Address 111 North Gale Drive, Beverly Hills, CA 90211 5 Legal description Assessor’s Parcel Number is 4334-022-063 Client will provide title report with legal description Property Type Multi-family – six-unit apartment building Occupancy (tenant, owner, and/or vacant) Not known to client at this time. Note, if inspection and/or interview with owner are not possible, may need to make assumptions and might add to time/effort needed to complete assignment. 6 4 This is an example of the outline font 5 This is the font which identifies your notes 6 This is an example of a notation you make to yourself regarding missing information or something which needs follow up. Multi-family Residential Chapter Page 4 of 119 Purpose of the assignment and type of appraisal Client Los Angeles County Metropolitan Transportation Authority (Metro) Intended use To facilitate one of two possible scenarios as part of the Westside Subway Extension Project: 1) full acquisition of the property, or 2) acquisition of an eight-year temporary construction easement. Intended user(s) Exclusive use by the Los Angeles County Metropolitan Transportation Authority Type and definition of value to be estimated Fair market value Property rights to be appraised 1. Fee simple value of the property as improved 2. Fee simple value of the land, as if vacant. 3. Estimate of fair market compensation for a temporary construction easement on a specific parcel lasting eight years, with all payments made at the beginning of the period Multi-family Residential Chapter Page 5 of 119 Type of report to be produced and delivered Self-contained report Effective date of value Current date Special requirements Unusual or extraordinary assumptions or limitations Client notes that we may not be able to inspect the property or interview the owner as permission has not been granted for either by the owner. May need to determine how long to wait for inspection and interview before moving forward without either. This might be an inefficient process and cause additional work. Will want to be sure my bid for the assignment considers this. May need to clarify due date should process be delayed waiting for permission to inspect or proceed without inspection. Timing – when does client need appraisal to be complete Draft within two months, final within two weeks of notification to produce final by client after review of draft Additional services outside of typical scope (eg: rent survey for a single family home, possible testimony, etc) Possible testimony opportunity but not required Multi-family Residential Chapter Page 6 of 119 Client’s specific needs When is final report needed? Within two weeks of client approval of draft. Will want to be sure that bid covers the fact that the full fee is due regardless of approval of draft, and that client feedback regarding draft does not require any additional work of appraiser beyond scope of assignment contracted. Any interim requirements? Progress reports Bi-weekly progress reports Preliminary conclusions or discoveries Not required Special valuation requirements, if any Extraordinary assumptions Will need to assume improvement information if inspection is not permitted. May need to assume income information if not provided. Hypothetical conditions Because this assignment is for condemnation, will need to be sure to not include any benefits from the rail extension project. Multi-family Residential Chapter Page 7 of 119 Production format/delivery requirements? For reports in writing, is there preferred format, required number of originals and copies? Two unbound drafts, four bound final reports, no copies For electronic copies, is there a preferred file type and method of delivery? Word for draft, PDF for final, both submitted by email to client Is the first report completed as a draft, with a client review and subsequent production of a final report? Yes Multi-family Residential Chapter Page 8 of 119 Your next step is to gather the information you need to offer a well thought out bid for the assignment. We will now work though that phase of the process, following our process outline in the same manner as above. This time, your notes will also reference what you have done. Phase Two –Appraiser Gathers Additional Information Necessary to Bid Obtain information needed to bid to complete assignment Research any needed information client could not provide Gathered public record and publicly available information - plat map (for site size and configuration), zoning data, improvement data (age, size, probable number of units), and images from free map sources (Google maps and Mapquest). Checked local listing sources to see if property is or has been listed recently (as a possible source of additional information) – none found. Because property is nearby, and the client was not able to provide information, drove by. Learned: property is a two story, walk-up apartment building constructed in 1953. Public records report three 1-bedroom, 1-bath units, and three 2-bedroom, 1-bath units, and a total building area of 4,576 square feet. Gale is a moderately traveled residential street – one lane of traffic in each direction and curb parking on both sides. The subject is one site in from the commercial/retail uses along an adjacent commercial corridor, Wilshire Blvd., running perpendicular to Gale. Subject appears to be in average condition for the area. The surrounding properties along Gale are generally apartment complexes – most are larger and newer than the subject. The site is rectangular, about 6,500 square feet total with 50 feet of frontage along Gale, somewhat less than the norm for apartments in the neighborhood, Multi-family Residential Chapter Page 9 of 119 and is zoned R-4 (multi-family). Based on a quick density calculation for R-4, and assuming 6 units, the subject improvements do not conform to current density requirements. Based on a quick division of building area by estimated number of units, the units average 763 square feet, which is within a reasonable range of unit size for the area and age of the building, drove by property and took photos. Notes are below – yellow highlighting denotes items which could mean that this assignment is more complex than typical – will want to be sure the bid allows for additional work. Check capacity and qualification to complete assignment Determine qualifications required Need state certification because this is a commercial assignment. Determine data needed to complete assignment To be provided by client (studies, reports, leases, plans, etc) I will request: Income/financial information - income and expense records, leases, property tax bills, etc. Title report (ownership, legal description, liens, etc) Studies/inspection reports (soils, etc) Description of the proposed easement area Any other information available to the client Multi-family Residential Chapter Page 10 of 119 To be obtained by appraiser (market data, etc) Unusual things I might need: Building plans – might not be able to inspect the property License type and jurisdiction I hold the appropriate license for 6-unit residential properties in this state. 7 Expertise with property type or other factors (familiarity with market, proposed construction, partial acquisition, litigation, etc.) I am familiar with this market and property type, and have completed relevant coursework and have experience with this type of assignment (condemnation and easement value estimates) 8 7 Note, appraisers must be sure they are qualified both by jurisdiction and by property type/complexity/transaction value. 8 Reference regarding specific education and experience/assistance suggestions for those new to condemnation valuation Multi-family Residential Chapter Page 11 of 119 Experts needed to complete assignment May need input from engineers or other experts to understand the proposed easement Estimate time needed to complete assignment Will be able to complete assignment in two-months (client requirement), assuming no significant delays in obtaining information from client or waiting for go ahead if owner does not allow interview and/or inspection Carefully evaluate ability to meet client expectations Am I qualified and have/can obtain needed data to complete assignment? Yes Do I have time available to complete assignment within client’s requirements? Yes You have scoped the assignment and confirmed that you are qualified to complete it and can conform to the client’s requirements. You now formulate your bid, including confirmation of client requirements, cost, time to complete assignment, and detailed description of any limitations, assumptions, or other information which will be important for the client to understand (requirements for experts, limitations to scope not noted in client requirements). You submit the bid to the client. Your client accepts your terms and formally awards the assignment to you. You send your client an engagement letter, which is subsequently signed by the client and returned to you. We have included a sample bid and engagement letter at the Multi-family Residential Chapter Page 12 of 119 end of this manual. 9 You now begin to complete the assignment. Because of the nature of the assignment, you are not able to schedule the inspection yet, so move to data collection. Once again, we will follow our process outline, adding in your notes as we have in previous sections. 9 See addendum for sample bid and engagement letter. Multi-family Residential Chapter Page 13 of 119 Phase Three – Appraiser Begins Assignment – Gathering and Analyzing Subject Data Inspection/subject data collection phase- generally conducted concurrently Property inspection Schedule subject inspection On site inspection on hold pending client ok. Client has attempted to reach owner for permission to inspect and has not yet been successful. 10 Conduct subject inspection Inspected subject for bid. Will revisit subject exterior and neighborhood concurrently with comp search and inspection phase. Will use last date of exterior inspection for date of valuation should on-site access not be granted. Macro-level data 10 This is not unusual for condemnation related appraisal assignments. Owners are often reluctant to provide access or information due to the risks inherent in providing them. There is also often a lack of trust in the process, and in some cases, a hostile relationship between the condemnee and the condemnor. Understandably, the owner typically had not intended to sell and if forced, generally wants the highest compensation possible, while the condemning agency generally is perceived as an adversary who is not able or willing or expected to be willing to provide it. These are all aspects of litigation related assignments (in which this assignment can be grouped) which appraisers do well to consider in dealing with the parties involved. Multi-family Residential Chapter Page 14 of 119 While waiting for inspection, you can collect data, conduct data analysis, create preliminary exhibits and text. Examples of data which can be gathered, analyzed, and documented while waiting for and without owner interview or inspection are economic trends, the real estate market, demographics, government regulations, subject property information such as property type, use, and location, and quite a bit of information regarding the subject land and improvements, even without the on-site inspection. This is typically based upon your observations, information provided by experts or consultants retained by you or the client, publicly available data such as census information, city and county sources, credible news sources, professional journals, and subscription/fee based data. Your write up of the data, analysis, and conclusions follows. Note, we have also included information which you would not typically have at this point and for which one would typically include a placeholder. For efficiency, and so that each part of the appraisal is given as complete, we have included the appropriate information, but to distinguish it have entered it in italics. Multi-family Residential Chapter Page 15 of 119 Area Analysis – Los Angeles County The subject is located in the city of Beverly Hills, in the County of Los Angeles. Covering over 4,000 square miles, the County of Los Angeles is bordered by Kern County to the north, Ventura County to the west, San Bernardino to the east and Orange County to the southeast. 11 Population Los Angeles County includes 88 cities and nearly 200 communities. It is the highest populated county in the nation. The following table shows the population history for Los Angeles County from 2000 to 2012. Increased population growth occurs during economic growth cycles when there is good demand for employment. Due to the high population figures, minor reported 11 As an experienced appraiser in the area, you are considered an expert, and as such, may make these and other references to data without referencing sources. However, it is highly recommended to keep source materials in your office files, and to update them as appropriate. Multi-family Residential Chapter Page 16 of 119 changes in population may not be meaningful. The population of Los Angeles County is projected to reach over 11.5 million by the year 2020. 12 12 As noted previously, as an expert you are not required to include your sources. For your use, and should you have decided to reference it, the data can be found below, and this comment holds true for subsequent data footnotes and in-text references. http://www.colliers.com/en- us/greaterlosangeles/insights/research Year P opulation % C hange 2000 9,519,330 N/A 2001 9,590,080 0.7% 2002 9,679,212 0.9% 2003 9,756,914 0.8% 2004 9,806,944 0.5% 2005 9,816,153 0.1% 2006 9,798,609 -0.2% 2007 9,780,808 -0.2% 2008 9,785,474 0.0% 2009 9,801,096 0.2% 2010 9,822,121 0.2% 2011 9,858,989 0.4% 2012 9,911,665 0.5% COUNTY POPULATION Multi-family Residential Chapter Page 17 of 119 Employment Data The county experienced a steady increase in unemployment from 2000 through 2003. In 2004 through 2006, a strong national economy and Los Angeles County economy resulted in a steady decrease in the unemployment rate. In 2009, the unemployment rate rose to 11.6%, as a strong recession began. Preliminary data for June 2013 shows that the unemployment rate continues to decline from its high of 12.7% in 2010. The California Employment Development Department reports the following employment statistics for the year 2000 forward. 13 Year Employed Unemployment 2000 4,424,900 5.4% 2001 4,483,400 5.7% 2002 4,447,100 6.8% 2003 4,427,100 7.0% 2004 4,454,100 6.5% 2005 4,516,000 5.4% 2006 4,568,200 4.8% 2007 4,617,100 5.1% 2008 4,557,300 7.5% 2009 4,328,600 11.6% 2010 4,280,400 12.7% 2011 4,318,900 12.3% 2012 4,345,700 10.9% J un-13 4,477,600 9.7% EMPLOYMENT DATA C ounty of Los Angeles Real Estate Market Overview The following tables illustrate various vacancy and price statistics for the retail, office, industrial, and residential markets in Los Angeles. 14 13 http://www.labormarketinfo.edd.ca.gov/data/the-economy.html 14 (http://www.colliers.com/en-us/greaterlosangeles/insights/research Multi-family Residential Chapter Page 18 of 119 Los Angeles County Retail Overview, First Quarter 2013 Weighted- V acancy Average V acancy P rior Lease R ate R etail Type R ate Quarter P S F /Month R egional Malls 3.3% 3.1% $4.80 P ower Centers 7.5% 7.1% $2.84 Lifestyle/Theme Centers 3.7% 4.8% $3.07 Neighborhood Centers 7.3% 7.4% $2.31 S trip Centers 8.9% 9.0% $1.61 S ingle Tenant B uildings 3.2% 3.4% $2.09 S ource: Colliers International The retail market continues a slow recovery, although occupancy and rental rates remain below pre-recession levels. As illustrated in the table above, the two property types that were most impacted by overbuilding leading up to the recession, neighborhood and strip centers, continue to carry a high vacancy rate. 15 Office Market P ct. % S ub-Market 1st Qtr. 13 1st Qtr. 12 Change Downtown L.A. 17.9% 17.2% 4.1% S an F ernando V alley 15.4% 17.1% -9.9% S outh B ay 21.6% 20.8% 3.8% Westside 17.4% 16.9% 3.0% Countywide 17.6% 17.6% 0.0% S ource: Los Angeles Business J ournal V acancy Countywide office vacancy has declined, but the average vacancy rates are still relatively high. The chart above shows a significant improvement in the San Fernando Valley market but small losses in the other areas. As an indication of an improving business climate, this measure has not been very strong. 16 Industrial Market P ct. % S ub-Market 1st Qtr. 13 1st Qtr. 12 Change Central L.A. 3.5% 3.6% -2.8% S outh B ay 5.6% 5.4% 3.7% Countywide 4.7% 4.7% 0.0% S ource: Los Angeles Business J ournal V acancy 15 (http://labusinessjournal.com/news/la-real-estate/) 16 ibid Multi-family Residential Chapter Page 19 of 119 Countywide industrial vacancy remains low. Demand in this sector demonstrates the important part it plays in the local economy. 17 Apartment Market 4th Qtr. 4th Qtr. P ct. % Los Angeles 2012 2011 Change G ross Occupancy 95.8% 95.1% 0.7% Avg. R ent / S q. F t. $2.05 $2.02 1.5% Avg. Monthly R ent $1,733 $1,653 4.8% Residential Market Month Month P ct. % Los Angeles Apr-13 Apr-12 Change S F R Home P rices $415,000 $330,000 25.8% S F R Home S ales 5,572 5,203 7.1% Condo P rices $320,000 $248,000 29.0% Condo S ales 1,292 1,241 4.1% S ource: Los Angeles Business J ournal As is evident from the charts above, the single and multi-family markets are improving. Region Conclusion The diversity of the economy in Southern California, its gateway status to trade with Asia and the high number of immigrants that power the workforce has created a powerful economic engine. It is our opinion that economic growth in the area is slowly recovering based on improvements in employment, and in office and industrial occupancy and rental rates. We expect retail indicators to follow. These conditions and our observations support stable to increasing prices for commercial and industrial property sectors throughout the region. Apartment Market After seeing relative strong gains in rental rates and occupancy, the apartment market is now experiencing a growth in construction of new units. According to Marcus & Millichap’s (M&M) 17 ibid Multi-family Residential Chapter Page 20 of 119 Apartment Research Market Report issued in June, this year will mark the first of two years of above-average apartment development in Los Angeles. While overall vacancy may drift slightly higher as a result of the increase in construction, plus recovery of the housing market, effective rents are expected to increase 3.5% in the market as a whole and the company reports that there are more interested apartment buyers than sellers. 18 Within the Beverly Hills/Brentwood/Westwood submarket, M&M reports that apartment owners took advantage of locally low vacancy rates and increased effective rents 10.4% year over year. Present vacancy rates in the submarket remain the lowest in Los Angeles County at 1.9% according to M&M. Marcus & Millichap, Apartment Research Market Report 3 rd Q 2013 18 (http://www.marcusmillichap.com/research/researchreports) Multi-family Residential Chapter Page 21 of 119 Sales trends in the Westside Cities increased slightly and already low average capitalization rates reportedly moved down approximately 30 basis points into the low-5 percent range. According to the report, “First year returns range approximately 100 basis points on either side of the average, moving from coastal neighborhoods to the eastern stretches of the county.” An outlook for generally increasing interest rates will have an impact, but real estate in the area is some of the most sought-after in the nation, states the Marcus & Millichap report. Multi-family Residential Chapter Page 22 of 119 Neighborhood Description Neighborhood Map 19 19 This is a sample of a simple map which can be made with products typically included in Microsoft Office suite and publicly available, royalty free maps. There is no right or wrong way to make a location map. Most important is that it clearly conveys the information needed and most relevant for the purpose for which it is intended. In this instance, a map is included to orient the reader to the location of the subject and its surrounding area, at least from a mapping perspective. As an aside, when north is up, there is generally no expectation of directional orientation. Multi-family Residential Chapter Page 23 of 119 Aerial Map 20 The subject is in the incorporated city of Beverly Hills, which is located in the western portion of the County of Los Angeles and encompasses just under six square miles. The city of Beverly Hills 20 Similar to maps, aerial exhibits can generally be created sufficiently with low and no cost and widely available tools such as Microsoft office and royalty free image sources. Gone are the days when appraisers must budget in costly aerial photography services, except under unusual circumstances – circumstances which are generally accompanied by fees to cover such services. Multi-family Residential Chapter Page 24 of 119 is surrounded by incorporated areas of the city of Los Angeles, with the exception of a small common border with the city of West Hollywood to the northeast. Surrounding areas of the city of Los Angeles include the Mid-City and Mid-Wilshire districts to the east, Beverly Crest (unincorporated Beverly Hills, or Beverly Hills Post Office) and Bel Air to the north and northwest, Westwood to the west, and West Los Angeles to the south. The city is home to a population of just over 34,000. Commercial properties are concentrated along the major thoroughfares, most notably Wilshire, Santa Monica, and Sunset Boulevards running generally east and west, and Rexford and Beverly Drives running generally north and south. 21 The city is well known for its upscale shopping, residential estate, and office areas, and is included in the "Platinum Triangle" of Los Angeles, which is an exclusive area making a rough triangle of the city of Beverly Hills and the Los Angeles neighborhoods known as Bel Air and Holmby Hills. Beverly Hills often refers to both incorporated and unincorporated areas. The areas within the incorporated city of Beverly Hills are often referred to as the "flats" of Beverly Hills, named for relatively flat terrain as opposed to the hilly areas of the unincorporated areas of Beverly Hills Crest (or often referred to as Beverly Hills Post Office) to the north. The bulk of the land area in the city of Beverly Hills is residential, with the highest home values found to the north of Sunset Boulevard. The remaining southern portion of the city is traversed 21 Again this information is typically based on your existing knowledge as an expert, and in this case is augmented by your inspection of the area, review of maps, and information obtained from the city: http://www.beverlyhills.org/citygovernment/aboutbeverlyhills/demographics/ http://beverlyhills.org/business/businessdevelopment/economicprofileofbeverlyhills/) Multi-family Residential Chapter Page 25 of 119 by Wilshire Boulevard, which runs generally east and west. Residential lots south of Wilshire Boulevard are generally smaller than those to the north, and a higher portion of multi-family uses are interspersed in this portion of the city than others. Commercial properties in the city are generally located south of Santa Monica Boulevard, which runs diagonally across the city in a northeast and southwest direction. Noteworthy is the famed luxury retail street Rodeo Drive, a three-block long collection of world-famous high-end fashion designers and retailers, which runs from Santa Monica Boulevard south to Wilshire Boulevard. The immediate vicinity of the subject property is developed as follows: 22 Intersection of Wilshire Boulevard and Gale Drive: The subject property is located 200 feet north of the northwest corner of the intersection. On the opposite corner is a newer office midrise building, and on the northeast corner is a newer mid-rise office building. The southwest corner is improved with a one-story building, currently occupied by a restaurant. Gale Drive: To the north and south of Wilshire Boulevard, Gale Drive is improved predominantly with mid-century multi-family developments, with newer and typically larger apartment complexes interspersed. 22 Based on your inspection of the neighborhood. There is no substitute for driving the neighborhood to see and understand improvements, trends, etc. Multi-family Residential Chapter Page 26 of 119 East along Wilshire Boulevard: To the east, Wilshire Boulevard is improved with a mix of office and retail of varied heights and densities, including high rise office buildings as well as one-story retail and retail strip malls. Density tends to increase as one travels east, and transitions into a more homogenous, office and office over retail corridor. West along Wilshire Boulevard: To the west, Wilshire Boulevard is characterized by mid-rise and high-rise office, with retail interspersed. Immediately west of the subject, at the adjacent intersection to the west, is a luxury auto sale and repair establishment, and across the street is the historic Saban Theater. Conclusion The subject’s neighborhood is nearly fully developed with limited available land for new construction. There are scattered properties noted that had been constructed in the last decade while most improvements appear to be 40 or more years old. The Wilshire corridor shows increasing signs of redevelopment as new construction replaces older properties that have reached the end of their economic lives. The corridor supports a significant concentration of retail and office development. Multi-family Residential Chapter Page 27 of 119 Subject data gathering and write up phase You learn that owner will not agree to inspection or interview, and appraisal will most likely need to be completed based on information you can gather without owner cooperation or accessing the site. You start the front end of the report with the data you can gather without an inspection. This is a common strategy to employ while waiting for necessary subject information or coping with client delays. Your front end and preliminary subject write up follows: Multi-family Residential Chapter Page 28 of 119 Appraisal Report A Six-Unit Apartment Building on a 6,508 Square Foot Lot 111 North Gale Drive Beverly Hills, California 90211 LACMTA Parcel W-2309 23 Ownership: Twinwood Inc. Prepared for: Ms. Client Manager, Real Estate Services Los Angeles County Metropolitan Transportation Authority One Gateway Plaza Los Angeles, CA 90012 - 2952 Date of Report July 22, 2013 24 Date of Valuation July 15, 2013 25 23 This is typical, and was provided by client. When references like this are provided, it is useful to include them in the report as a courtesy to the client and to clarify the assignment. 24 This is the date that you finished (and typically submitted) the report 25 This is the date of value. You selected this date as it was the last date you saw the subject. This method of date selection is common, and allows you to certify the condition of the improvements. Multi-family Residential Chapter Page 29 of 119 July 22, 2013 Ms. Client Manager, Real Estate Services Los Angeles County Metropolitan Transportation Authority One Gateway Plaza Los Angeles, CA 90012 - 2952 Re: Your Appraisal Company Job No. 13-1234 26 LACMTA Parcel W-2309 Ownership: Twinwood Inc. Property: 111 North Gale Drive, Beverly Hills, California 90211 Assessor’s Parcel Number: 4334-022-063 27 Dear Ms. Client, In accordance with your authorization, the subject has been examined for the purpose of forming the following Fair Market Value opinions: 28 o Fee simple value of the identified, building improved assessor parcel; o Fee simple value of the land, as if vacant; o Estimate the fair market compensation for a temporary construction easement on parcel W-2309 lasting eight years, with all payments made at the beginning of the period. The property consists of a 6,508 square foot multi-residential zoned lot located 200 feet north of the northwest corner of Gale Drive and Wilshire Boulevard. Improvements consist of an 26 Appraisers typically adopt an assignment numbering system for both internal reference and billing purposes. 27 While not a legal description, inclusion of Assessor Parcel Number where they exist is customary and useful for both the appraiser and the user/client. 28 These are the definitions requested by the client and you found them to be appropriate and consistent with the assignment requested. Multi-family Residential Chapter Page 30 of 119 approximate 4,576 square foot, two-story, six-unit apartment building. Public records indicate that the improvements were constructed in 1953. 29 While the owner was contacted and confirmed receipt of the Notice of Intent to Appraise letter, he stopped communicating with the client and an inspection of the property was not authorized. Therefore, this appraisal report is based upon subject information which could be obtained without owner contact or site access. 30 The following is a self-contained report per section 2-2(a) of the Uniform Standards of Professional Appraisal Practice (USPAP). 31 The appraisal will be used to facilitate one of two possible scenarios as part of the Westside Subway Extension Project: 1) full acquisition of the property, or 2) acquisition of an eight-year temporary construction easement. This report is for the exclusive use of the Los Angeles County Metropolitan Transportation Authority, and no other party shall have any right to rely on the Report or any service provided by Your Appraisal Company without prior written consent. This report has been made in conformity with and is subject to the requirements of the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute, 32 the Uniform Standards of Professional Appraisal Practice 29 A short description of the property with simple but pertinent information is useful and customary in the cover letter. 30 This is an example of an important limitation to both the assignment and the report which should be called out clearly at the outset of the assignment. 31 This is the type of the report requested by the client and deemed appropriate based on the assignment. 32 This is an example of reference to a professional organization, in this case the Appraisal Institute. Many appraisers choose to obtain a designation beyond state licensing or certification. More information about the Appraisal Institute can be found here: cccc.cc/cc/c/c/ Multi-family Residential Chapter Page 31 of 119 (USPAP), 33 the rules of the California Office of Real Estate Appraisers, 34 as well as the specific appraisal and reporting requirements relating to this eminent domain action. Conclusion The following opinion of the Fair Market Value is estimated as of July 15, 2013. This opinion is subject to the definitions, certifications, assumptions and limiting conditions summarized in this report. Summary of Just Compensation for Subject, Parcel W-2309 35 Value of the whole $1,900,000 Land $1,370,000 Improvements $ 530,000 Temporary Construction Easement Compensation $1,406,800 Improvements $ 530,000 Rent $ 876,800 The following appraisal report sets forth the data and analysis leading to the above conclusion of value. This letter is considered an integral part of the appraisal report and may not be presented separately. Respectfully submitted, 33 This is required for federally related transactions. More information can be found here: xxxx 34 Reference to and conformance with state requirements is necessary should you be a state licensed or certified appraiser. More information about licensing and certification can be found here at your state certification agency websites. For California, it is drea.gov. 35 As noted previously, information which would not yet be available or conclusions which would not yet be made are included in this sample report so that each section is represented as though completed. Clearly, value conclusions would not have been made at this stage. Multi-family Residential Chapter Page 32 of 119 Your Name Here Your Type of License Your License or Certificate No. Your License or Certification Expiration Date Multi-family Residential Chapter Page 33 of 119 Subject Property Location Map 36 36 This map covers a larger area than the map made specifically for the neighborhood section. This is because the message to be conveyed is different. Rather than orienting the reader to the neighborhood, this map is designed to give the reader a larger picture and a larger view of the subject location and its surroundings. Multi-family Residential Chapter Page 34 of 119 Photograph from Public Right of Way, taken by appraiser on July 15, 2013 37 37 It is useful to include the date the photograph was taken, and can become particularly valuable should there be a subsequent change in the physical features or condition of the property. A good photograph, as with a good map, clearly tells the story intended. For this photograph, the purpose is to give the reader a preliminary ‘picture’ of the subject. Note that property photographs from the street generally include the street, the sky, and the property lines. They are also generally taken at a slight angle to provide depth, and should be taken with the sun in front of or directly above the property. Appraisers often time their photographs to best capture the property based on the property orientation and the expected location of the sun at various times of day. Inclement weather often requires a return trip to the subject, as to persons present who would be visible in the photograph, or perceive themselves to be. On the subject of including persons in photographs, it is important to avoid their inclusion for reasons beyond their comfort or the aesthetics of the photograph. First, while a valid argument can be generally made that there is nothing illegal about including people in photographs, there are privacy concerns. Second, clients are often concerned that there be no information extraneous to the property included which might be viewed as influencing lending or other decisions. People would fall into this category of extraneous information. Multi-family Residential Chapter Page 35 of 119 Summary of Salient Facts and Conclusions Property Location: 111 North Gale Drive, Beverly Hills, California 38 The subject is multi-family residential parcel improved with a six-unit, multi-family building, located on the west side of Gale Drive, in the city of Beverly Hills. 39 Effective Date of the Appraisal July 15, 2013 40 Date of Inspection: July 15, 2013, from public right-of-way 41 Date of Report: July 22, 2013 Type of Report: Self-Contained Interest Appraised: Fee simple Assessor Parcel No.: 4334-022-063 Legal Description: The legal description for the subject property is the addenda of this appraisal report. 42 38 Typically, this is the street address. If there is no street address, describe the property by other methods such as a short legal description or by its relationship to streets or other readily identifiable landmarks, eg southwest corner of First Avenue and Main Street. 39 This is optional information but is useful to include to set the stage for the rest of the report. 40 This is the date on which the value is valid. As noted previously, appraisers often select the date of inspection and if there are multiple inspection dates – the last date of inspection so that the value is as current as possible. 41 It is important to note clearly that the subject was not inspected from anything closer than the street. 42 Short legal descriptions tend to be included in the narrative, here. Longer legal descriptions are typically put in the addenda. Multi-family Residential Chapter Page 36 of 119 Ownership: Per title report issued by Fidelity National Title Company, dated October 25, 2012, ownership is vested as: Twinwood Inc. 43 Flood Hazard Area: According to the National Flood Insurance Map, Community Map Panel No. 06037C1605F dated September 26, 2008, the subject property is in: Zone “X.” 44 Seismic Risks: The subject is not located within a Fault-Rupture Hazard Zone, according to the State of California Division of Mines and Geology; however, most of Southern California is considered to be a seismically active area. 45 Zoning: Per the city, the subject property parcel is zoned R4, a multi- family residential zone. 46 Site Area: 6,508 square of commercially zoned land, also known as 43 Provided by client. If a title report is not provided, appraisers will generally note that fact and make assumptions based on information available from other sources, such as public record. 44 Flood maps are created by FEMA, and provided by local government agencies; these agencies vary by jurisdiction. For Los Angeles County, the relevant agency is the Los Angeles County Department of Public Works, and can be reached here: http://dpw.lacounty.gov/wmd/floodzone/. Their website provides information needed and maps which can be downloaded and modified for use in an appraisal. If the property were in a flood hazard area, it might be useful to provide a map. If not, it is generally unnecessary, and a simple statement as we have here is sufficient. 45 http://www.conservation.ca.gov/CGS/ 46 This information is typically provided by the city/county/jurisdiction which oversees zoning for the subject property. For this jurisdiction, the information needed as well as a map can be found here: http://gis.beverlyhills.org/UNITEGIS/ Multi-family Residential Chapter Page 37 of 119 assessor parcel number 4334-022-063. 47 Improvements: 4,576 square foot, six-unit apartment built in 1953. Highest and Best Use: As Vacant: Multi-family development 48 As Improved: Existing six-unit apartment buildin. Marketing and Exposure Time: Approximately two to six months The following is our opinion of Fair Market Value as of July 15, 2013, subject to the definitions, certifications, assumptions and limiting conditions summarized in this report. Summary of Just Compensation for Subject, Parcel W-2309 Value of the whole $1,900,000 Land $1,370,000 Improvements $ 530,000 Temporary Construction Easement Compensation $1,406,800 Improvements $ 530,000 Rent $ 876,800 47 Assessor parcel numbers (APNs) are typically assigned by the assessor for purposes of taxation. They are not a legal description of the property, but because they are unique, numerical, often conform to a book, page, and parcel-type format and often sequentially issued, they are particularly useful for sorting, indexing, and locating information about corresponding parcels. Note, a legal parcel can share an APN with another legal parcel, or can include several APNs, so it is important to note that this number is simply for convenient reference to a property and to a taxable entity. 48 Note, this is another example of an entry which would not be completed at this time in the assignment. We have included the highest and best use conclusion here for efficiency and so that this section is complete for the purposes of this case study. An appraiser working on this section at this stage would simply insert a placeholder. Multi-family Residential Chapter Page 38 of 119 Table of Contents Transmittal Letter Location Map and Photograph of the Property Summary of Salient Facts and Conclusions Table of Contents .......................................................................................................................... 38 Introduction .................................................................................................................................. 39 Assumptions and Limiting Conditions .......................................................................................... 45 Definitions ..................................................................................................................................... 52 Area Analysis – Los Angeles County .............................................................................................. 15 Apartment Market .................................................................................................................... 19 Neighborhood Description ....................................................................................................... 22 Property Description ..................................................................................................................... 54 Site Data .................................................................................................................................... 54 Real Estate Tax Analysis ............................................................................................................ 62 Improvement Description ......................................................................................................... 63 Valuation Methodology ................................................................................................................ 72 Land Value Analysis ....................................................................................................................... 74 Sales Comparison Approach ............................................................ Error! Bookmark not defined. Income Approach .......................................................................................................................... 94 Reconciliation of Value ............................................................................................................... 109 Analysis of the Proposed Construction Laydown ....................................................................... 111 Summary of Value Conclusions – Parcel W-2309 ....................................................................... 114 Addenda ...................................................................................................................................... 116 Certification Memorandum, Parcel W-2309 Property Legal Description Notice of Intent to Appraise Land Sale Data Sheets Apartment Sale Data Sheets Rate of Return Data Sheets Multi-family Residential Chapter Page 39 of 119 Introduction Property Location: 111 North Gale Drive, Beverly Hills, California 90211 The subject is multi-family residential land with a six-unit, multi-family building, located on the west side of Gale Drive, in the city of Beverly Hills. Assessor’s Parcel Numbers: 4334-022-063 Purpose of Report: To estimate the fair market value of the property. The appraisal will be used to facilitate possible acquisition or use for a temporary construction easement as part of the Westside Subway Extension Project. Client and Intended Users: This report speaks only as of its date in the absence of a specific written update of the Report signed and delivered by Your Appraisal Company. This report is for the exclusive use of the Los Angeles County Metropolitan Transportation Authority, and no other party shall have any right to rely on the Report or any service Multi-family Residential Chapter Page 40 of 119 provided by Your Appraisal Company without prior written consent. Date of Value Opinion: July 15, 2013 Date of Report: July 22, 2013 Property Rights Appraised: Fee simple Non-Realty Rights: There are no non-realty rights valued. Appraisal Scope: As part of this appraisal, a number of independent investigations and analyses were made. Three approaches to value have been considered in this appraisal: the cost approach, the sales comparison approach and the income approach. The summary of the scope of work should be considered in conjunction with the assumptions and limiting conditions set forth in this report. The investigations and analyses undertaken include, but are not limited to, the following: Multi-family Residential Chapter Page 41 of 119 Notification sent to property owner (copy in the addendum). The owner did not permit an inspection or provide information about the property. Therefore, for this appraisal, the property was viewed only from the public right-of-way; An inspection of the comparable sales from at least the street; Collection and verification of relevant market data gathered from sources such as area brokers, CoStar, Loopnet, Fastweb, and MLS. Direct and indirect verification was used for this assignment. Direct verification confirms information with a party directly involved in the transaction. Direct verification is attempted for all sales. Indirect verification uses information obtained from a secondary data source such as a public records database, a secondary data provider or another appraiser; Multi-family Residential Chapter Page 42 of 119 Interviews with knowledgeable professionals as well as local governmental offices and a review of website information regarding real property values, real estate taxes, and zoning issues in the area; A primary field study of potentially competitive properties and projects for sale; and Preparation of an appraisal report, which includes the most pertinent data and analyses used in developing the final value conclusion. Type of Report: Self-contained USPAP Competency: The appraiser has the required knowledge and experience in the appraisal of similar property types. Multi-family Residential Chapter Page 43 of 119 Estimated Marketing and Exposure Period: A review of the marketing and exposure time of similar sales was done as part of the analysis. We concluded that typical marketing and exposure times for similar properties range from two months to six months. Based on a review of the data, we estimated a marketing and exposure time of two to six months for the subject property. Ownership: According to the title report issued by Fidelity National Title Company, dated October 25, 2012, ownership is vested as: Twinwood Inc. Property History: According to public record information, the subject parcel has been owned by the current owner in excess of five years. It was acquired by the current owner on July 18, 1985 for $465,000, per public records. There have been no reported listings, sales or transfers of the property in the past five years. 49 49 A five year listing/sale history is a requirement for multi-family valuations. Multi-family Residential Chapter Page 44 of 119 Legal Description: The legal description for the property from the title report is in the Addenda. Multi-family Residential Chapter Page 45 of 119 Assumptions and Limiting Conditions The certification of the appraisers appearing in this appraisal report is subject to the following extraordinary and general assumptions and limiting conditions: Extraordinary Assumptions USPAP defines an Extraordinary Assumption to be “an assumption directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser’s opinion or conclusion.” Extraordinary Assumption: For this assignment, we were not able to access the property nor were we given information about the subject from the property owner. Therefore, we could not confirm unit mix, building materials, condition, amenities, unit layouts, etc. Per public records, the subject property consists of six apartment units configured as three 1-bedroom, 1-bathroom and three 2-bedroom, 1-bathroom units. Because it was not possible to access the property or the property owner to confirm, this unit mix was used in the property valuation. We have also made Multi-family Residential Chapter Page 46 of 119 assumptions about building materials, condition, amenities, and layout, among other things. Please see improvement section for additional details. 50 Hypothetical Conditions USPAP defines a hypothetical condition as “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.” Hypothetical conditions assume conditions that are contrary to known fact. Hypothetical Condition: As an appraisal prepared as part of the eminent domain process, the appraisal does not take into consideration any benefits from the proposed extension of the Westside Subway except to offset damages, if any. Specific Assumptions 51 No environmental reports were provided for review. This valuation assumes that the site is clear of any environmental issues, and no consideration has been given to any cost or 50 It is important to do everything possible to draw the attention of the user of the report to significant and unusual assumptions. Bolding is one way to do this. 51 Because these are relatively standard assumptions, no bolding is used. This also serves to highlight the relative importance of the extraordinary assumptions and hypothetical conditions, which are bolded. Multi-family Residential Chapter Page 47 of 119 effects of any possible contamination, remediation or environmental limitations which may exist. The summary of the scope of work should be considered in conjunction with the assumptions and limiting conditions set forth in this report. The date of value, for which the opinion of value is expressed in this report, is set forth in the letter of transmittal. The dollar amount of the value opinion is based on the purchasing power of the United States dollar on that date. The property is appraised assuming that all applicable zoning and use regulations and restrictions have been complied with, unless otherwise stated. The appraisers are not experts in interpreting zoning ordinances and are not experts in legal matters. As far as can be ascertained, the zoning and development standards are as presented. A complete zoning study is beyond the scope of work of this assignment. If verification of the zoning and development standards is necessary, it is recommended that a qualified professional make such a determination. No responsibility is assumed for matters legal in character and no opinion is rendered as to title, which is assumed to be good and marketable. The premises are assumed to be free and clear of all leases, use restrictions and reservations, covenants, conditions, Multi-family Residential Chapter Page 48 of 119 easements, cases or actions pending, tax liens, and bonded indebtedness, except as specified. The property is assumed to be under responsible ownership and competent management. This report has been prepared in accordance with USPAP and GLB Act Section 504 regarding privacy. Possession of this report, or a copy of it, does not carry with it the right of publication or distribution. It may not be used for any purposes by any person other than the party to whom it is addressed without the written consent of the appraisers and in any event, only with proper written qualification and only in its entirety. In particular, it may not be referred to in any report or financial statement or in any documents filed with a governmental agency without prior written consent of the appraisers. Neither all nor any part of the contents of this report, or copy thereof, shall be conveyed to the public through advertising, public relations, news, sales, or any other media, without the prior written consent and approval of the appraisers. This limitation pertains to any valuation conclusion(s), the identity of the appraisers or the firm, and any reference to the professional organization of which the appraisers are affiliated or to the designations thereof. No responsibility is assumed for any conditions not readily observable during the customary inspection of the property which might affect the valuation, except those Multi-family Residential Chapter Page 49 of 119 items specifically mentioned in this report. The right is reserved to change the valuation if so warranted, when supplied with further information if that information so dictates. No survey, legal, or engineering analyses of this property have been made. It is assumed that the legal description and area computations furnished are reasonably accurate. However, it is recommended that such analyses be made for exact verification through appropriate professionals before demising, hypothecating, purchasing, or lending occurs, or any decision is made requiring exact survey, legal, or engineering analyses. Maps, plats, and exhibits included in this report are for illustration only, as an aid for the reader in visualizing matters discussed within the report. They should not be considered as surveys or relied upon for any other purpose, nor should they be removed from, reproduced, or used apart from this report. The information furnished by others is believed to be reliable. However, no warranty is given for its accuracy. Oil, gas, mineral, and subsurface rights, if any exist, were not considered in making this appraisal, unless otherwise stated, and are not a part of the appraisal. Multi-family Residential Chapter Page 50 of 119 No responsibility is assumed for economic or physical factors which may occur after the date of this appraisal. In rendering this opinion, no responsibility is assumed for subsequent changes in management, tax laws, or economic or physical factors which may or may not affect said conclusion or opinion. The property is appraised assuming it is in full compliance with all applicable federal, state, and local environmental regulations and laws, unless otherwise stated. The property is appraised assuming that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based, unless otherwise stated. The property is appraised assuming that property taxes will change to reflect the market value of the property, as herein reported. No opinion is intended to be expressed for matters that require legal expertise or specialized investigation or knowledge beyond that customarily employed by real estate appraisers. Multi-family Residential Chapter Page 51 of 119 It is assumed that the condition of the property on the date of value did not differ from its condition on the date of inspection, except as noted. No responsibility is assumed for detecting or evaluating effects of unknown encroachments; making a physical inspection of areas not easily and readily accessible and normally observed during a routine walk-through; detecting latent defects in the property; verifying the presence, type, or effectiveness of insulation on the property; or verifying the working order of systems such as heating, air conditioning, water treatment, plumbing fixtures, electrical circuits, lighting fixtures, and security systems, all of which are assumed to be in working order, unless otherwise noted herein. There is no evidence that the site has special resource value for natural, cultural, recreational, or scientific concerns. Multi-family Residential Chapter Page 52 of 119 Definitions The following definitions are applicable to this appraisal of the property. Fair Market Value 52 Fair Market Value, as defined pursuant to Chapter 1275, Title 7, Part 3 of the California Code of Civil Procedure, entitled: Eminent Domain Law, is as follows: Fair Market Value Article 4. Measure of Compensation for Property Taken. 1263.320 (a) The fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing and able to buy but under no particular necessity for so doing, each dealing with the other with full knowledge of all the uses and purposes for which the property is reasonably adaptable and available. 52 This is the definition requested by the client, and is the definition typically used for eminent domain valuations. Multi-family Residential Chapter Page 53 of 119 (b) The fair market value of the property taken for which there is no relevant market is its value on the date of valuation as determined by any method of valuation that is just and equitable. 1263.330 The fair market value of the property taken shall not include any increase or decrease in the value of the property that is attributable to any of the following: (a) The project for which the property is taken; (b) The eminent domain proceeding in which the property is taken. Fee Simple Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police powers and escheat. Multi-family Residential Chapter Page 54 of 119 Property Description Site Data Location: 111 North Gale Drive Los Angeles, CA 90211 Assessor’s Parcel Number: 4334-022-063 (Los Angeles County) 53 53 This is commonly referred to as a plat map. Plat maps can be obtained by government agencies; these agencies vary by jurisdiction. In this instance, a plat map can be obtained both from the city of Beverly Hills as well as from the Los Angeles County Assessor’s Office. Multi-family Residential Chapter Page 55 of 119 Parcel Area: Per property impact statement provided by the client, the total area of the site is 6,508 square feet. This is consistent with publicly available data. 54 54 This is an important example of an appraiser checking multiple sources to be sure the data is correct. Generally finding two sources in agreement is good practice when verifying many types of data, and this is not exception. Even when provided by the client, it is important to verify the accuracy of data. When client data does not match your observations or other sources, it is Multi-family Residential Chapter Page 56 of 119 Site Frontage: Frontage on Gale Drive is 50 feet. Topography: The site is at grade on Gale Drive. Utilities: All utilities are available to the subject site and appear adequate. Soil Condition: A soils report was not provided for review. It is assumed that the soil is of suitable load-bearing capacity for the existing improvements. The city of Beverly Hills classifies the subject and surrounding areas to be subject to liquefaction. We have not conducted a study to confirm this, and assume that the site is adequate for development to its highest and best use. Flood Hazards: Information for this portion of Beverly Hills is on National Flood Insurance Community Map Panel No. 06037C1605F generally your responsibility to determine the reason for the discrepancy. An exception would be when legal opinion is otherwise, and that legal opinion is accessible to you and either retained by you or by the client. In either case, it is important to note these discrepancies clearly in the report and, in almost all cases, to share them with the client as soon as they are observed or determined to have a material impact on the client or the assignment. Multi-family Residential Chapter Page 57 of 119 dated September 26, 2008; the subject property is in Zone “X,” not a flood hazard area. Seismic Hazards: The subject is not located within a Fault-Rupture Hazard Zone, according to the State of California Division of Mines and Geology; however, most of Southern California is considered to be a seismically active area. The city of Beverly Hills classifies the subject parcel and surrounding areas to be subject to liquefaction. We have not conducted a study to confirm this, and assume that the site is adequate for development to its highest and best use. Environmental Hazards: An environmental report was not provided for review. For purposes of this appraisal, it is assumed that there are no hazardous materials on the site, that the subject site is free of any type of contamination, and that there are no hazardous materials on or in the subject property that would cause a loss in value. The appraisers are not qualified to detect such substances. Multi-family Residential Chapter Page 58 of 119 Zoning: The subject property is located in the City of Beverly Hills. Per the city, the subject parcel is zoned R4, a multifamily residential zone. The R4 zone is described as multi-family high density, and allows for single or multi-family developments, public libraries, small community care facilities, and transitional or supportive housing. For sites such as the subject, with a width of less than 60 feet, one dwelling unit may be constructed for each 1,300 square feet of site area. Should the remaining area exceed 75% of the square footage required for a unit (in this case, 75% of 1,300 square feet), an additional unit may be constructed. While the subject property is located in a District C height district that allows construction up to five stories or 55 feet, the height is limited on sites less than or equal to 60 feet in width to three stories or 33 feet. The subject property is a permitted, nonconforming use due to the presence of six units on a site presently zoned Multi-family Residential Chapter Page 59 of 119 for five units based on the site area of 6,508 square feet (6,508 / 1,300 = 5.006). 55 Parking Requirements: 56 Parking is required based on unit size and bedroom count. One space is required for efficiency units of less than 1,000 square feet. Two spaces are required for a one-bedroom unit, two and a half spaces are required for a two-bedroom unit, three spaces are required for units with three or four bedrooms, and four spaces are required for a unit with five or more bedrooms. Twenty percent of the required spaces may be tandem. A property inspection would be required to determine if the property conforms to the parking requirements, but based on the unit count and comparable properties in the vicinity, 55 This information is typically provided by the planning department of the jurisdiction in which the subject is located. Appraisers typically summarize a very lengthy amount of zoning information to the most pertinent facts - for example, density, setbacks, allowable uses, parking and other significant requirements. If there were an unusual provision or a potential zoning violation which might impact the subject, those elements would be given particular and careful discussion and consideration. 56 Parking is such a significant amenity in this area, and in most, that you have chosen to address it in a separate section. This is common. Parking is typically also governed by zoning and information regarding parking requirements is also provided by the planning department. Multi-family Residential Chapter Page 60 of 119 it is believed to be permitted but nonconforming in this regard. Title Report: A preliminary title report issued by Fidelity National Title Company notes typical utility easements and property taxes. Items 8 and 9 are oil and gas leases that date back to 1978 and 1979. These leases are assumed to be for subterranean access, only, but have not been reviewed. 57 The appraisers are not title experts. It is assumed that there are no other easements, agreements, encroachments or restrictions that would adversely affect the value of the subject property. The reader is advised that the current title of this property should be checked carefully, as title issues can influence value. The right is reserved to adjust the valuation estimate if adverse title items are revealed and would so warrant. 58 57 As with zoning, the appraiser reviews the information available and summarizes the most significant elements found. If there were potentially significant items found in the title report, they would be noted here, and those impacts addressed in summary here and in depth later in the report. 58 This is an example of an area where an appraiser is expected to have a good working understanding of title issues but not to be an expert. While a disclaimer is good and useful, if Multi-family Residential Chapter Page 61 of 119 Street Improvements: Gale Drive has one lane in each direction plus space for street parking at the curb. Other street improvements include sidewalks, curbs, gutters, and street lighting. Ingress and Egress: The subject has frontage and a curb cut on Gale Drive. Visibility: Visibility of the subject property is average. 59 there are significant title issues and the appraiser does not address them, he or she may not be free from scrutiny or liability simply because a disclaimer is used. 59 This is a relative judgement by the appraiser – relative to other properties in the area and market expectations for both the area and the property type. Visibility generally refers to visibility from the public right of way. Though not incredibly important to most residential properties, and often a positive when poorly visible from the street, visibility can be critical to the success of a commercial property which requires clear and inviting visibility for the public. Multi-family Residential Chapter Page 62 of 119 Real Estate Tax Analysis Under California law, properties are assessed at 100% of market value. However, in accordance with Proposition 13, which was passed in 1978, ad valorem tax rates cannot exceed 1% of the property’s assessed value, plus bonded indebtedness, and the assessed value may only be increased by a maximum of 2% per year, unless there is a sale or transfer of the property, or there is substantial new construction. A property sale or other qualified transfer usually triggers a reassessment consistent with the property’s market value. Real estate taxes and assessments for the current tax year are shown in the following table. 60 60 (The client often provides a tax bill. One was not provided to you for this assignment, so you used http://lacountypropertytax.com/portal/default.aspx) TAXE S AND AS S E S S ME NTS - 2012-2013 Assessed Value Taxes and Assessments Tax ID Land Improvements Total Tax R ate Taxes Assessments Total 4334-022-063 $475,642 $261,595 $737,237 $0 $8,270 $629 $8,899 Multi-family Residential Chapter Page 63 of 119 Improvement Description 61 The following description of the subject improvements is based on information gathered from public records and during street-side inspection of the subject property on July 14, 2013. 62 Building Summary: Public records indicate that the building was originally constructed in 1953. It is configured as a six-unit apartment building. Public record information indicates: Three 2-bedroom / 1-bathroom units Three 1-bedroom / 1-bathroom units Total building area: 4,576 square feet. A carport at the back of the site provides a parking area. 63 61 Your sources of information regarding the improvements are your observations and information obtained from the city at http://www.beverlyhills.org/business/constructionlanduse/ 62 This is the exact date you viewed the property from the street and took your photographs. It is very important to be precise about this so that there is a record of exactly when you viewed the property to make your determinations of both condition and amenities. 63 Per building records and consistent with your visual observations from the street Multi-family Residential Chapter Page 64 of 119 Condition: Assumed average (consistent with your observations from the street) Actual Age: 60 years Effective Age: Without an interior inspection of the property, the effective age can only be estimated from observation of the property’s exterior. We estimate an effective age of approximately 30 years. Remaining Economic Life: Marshall & Swift reports a typical building life of 40 to 45 years for average quality buildings similar to the subject property. The effective age of the subject property is estimated to be approximately 30 years. Utilizing an average total economic life of 45 years as estimated by Marshall & Swift, we conclude a remaining economic life of 15 years for the subject improvements. 64 Deferred Maintenance: No deferred maintenance items were noted. 64 http://www.sfrep.com/marshallswift/ Multi-family Residential Chapter Page 65 of 119 Construction Class: The improvements are of wood frame and stucco exterior finish Foundation: Concrete slab Roof: Composition shingle cover in average condition Floor Coverings: Assumed: carpet, vinyl and / or tile Interior Walls: Assumed: painted drywall or plaster. Kitchen: Assumed: wood cabinets, stove/oven, vent, garbage disposal, refrigerator Laundry Room: Assumed: one washer, one dryer Fire Sprinklers: No Windows: Glass in steel frames Parking: Parking spaces at the rear of the building Multi-family Residential Chapter Page 66 of 119 HVAC: Panel heaters (assumed), no air conditioning (assumed) 65 Water: Assumed: One central water heater in average condition ADA Compliance: The Americans with Disabilities Act (ADA) became effective January 26, 1992. A specific compliance survey and analysis of this property was not made to determine whether or not it is in conformity with the various detailed requirements of the ADA. 66 65 Assumed because no inspection was possible and building records did not include this information. 66 This is a common standard assumption. Multi-family Residential Chapter Page 67 of 119 Subject Photographs (taken by appraiser on July 15, 2013) Subject street elevation, looking west from Gale Drive 67 Adjoining multi-family residential property to the north, looking west. Subject at left View north along Gale Drive away from Wilshire Boulevard. Subject at left. View south along Gale Drive toward Wilshire Boulevard. Subject at right. 67 Note that each photograph has a directional orientation as well as description. This is helpful to orient the reader. Multi-family Residential Chapter Page 68 of 119 Entrance to parking area looking west from Gale Drive. Adjoining commercial property to the south, looking west. Subject at right. Multi-family Residential Chapter Page 69 of 119 Highest and Best Use Highest and Best Use is defined as the reasonably probable and legal use of vacant land or an improved property, that is physically possible, appropriately supported, financially feasible, and that results in the highest value. Each of these concepts is examined in this section in order to conclude on an appropriate analysis of the property. As demand for real estate changes over time, the possible uses of a property can change. Highest and Best Use As If Vacant Potential Uses: The potential uses of the underlying land are considered in this section. Private restrictions, zoning, building codes, historical district controls and environmental regulations may preclude many potential uses. In most jurisdictions, zoning has the greatest impact on potential uses of property. The City of Beverly Hills zoning for the subject property is multiple-family residential. This zone provides the city significant control in how the property is developed, but it is clear that a multi-family use would be possible. Physical Possibility: The test of physical possibility addresses the physical characteristics associated with the site that impact its highest and best use. The size, shape, terrain and accessibility of land and the risk of natural disasters such as floods or earthquakes affect the uses to which land can be put. The utility of a parcel may also depend on its frontage and depth. This Multi-family Residential Chapter Page 70 of 119 property is level and has frontage along Gale Drive. The physical characteristics of the site do not appear to limit development. Financial Feasibility: Financially feasible projects are those uses which could produce positive returns. A potential use which has value commensurate with its cost and conforms to the first two tests may be financially feasible. A feasibility analysis of the existing use and all possible development scenarios is not within the scope of work of this assignment. Under current economic and financial conditions, if the site were vacant, surrounding uses suggest that a multi- residential development could be feasible. Maximum Productivity: The test of maximum productivity is applied to the uses that have passed the first three tests. Of the financially feasible uses, the use that produces the highest residual land value consistent with the market’s acceptance of risk and rate of return for that use is considered maximally productive. We note that surrounding uses are generally multi-family. While a more detailed study would be required to reach a definitive conclusion, it appears that a multi-family project would provide the maximum productivity to the land. Conclusion - Highest and Best Use As Vacant Legal, physical and financial conditions are analyzed to evaluate the highest and best use of the site as if vacant. The location of the site appears to indicate that its highest potential is for a multi-family development. Based on a review of the market data and the site’s specific Multi-family Residential Chapter Page 71 of 119 characteristics, the highest and best use of the site, as if vacant, would be to develop a multi- family project or hold for future development. Highest and Best Use As Improved Highest and Best Use of a property as improved considers the existing improvements and their relationship to the site. Based on the analysis as vacant, it appears that the improvements meet one test of highest and best use: the property is improved with apartment units. The number of units presently is in excess of the five units allowed by zoning. While it is possible a new development plan may result in higher overall potential income due to larger units or a better design, at present the property has one unit more than allowed by zoning. Conclusion, Highest and Best Use As Improved The highest and best use of a property as improved considers the existing improvements and the potential use of the site based on zoning, demand and other parameters. Based on the highest and best use as vacant, it does appear that the existing apartment building meets the tests of highest and best use. Multi-family Residential Chapter Page 72 of 119 Valuation Methodology Three approaches are available for an analysis of real estate value: the cost approach, the sales comparison approach and the income approach. Each approach has strengths and weaknesses but not all are appropriate in each instance. Cost Approach This approach is based on the principle that the informed purchaser would pay no more than the cost of producing a substitute property with the same utility. This approach is particularly applicable when the improvements being appraised are proposed or relatively new and represent the highest and best use of the land, or when the property has unique or specialized improvements for which there is little or no sales data from comparable properties. Due to the age of the improvements and the complications in estimating depreciation, market participants do not typically use this approach and it is not considered applicable in the case of the subject property. As part of the property analysis, an estimate of land value is presented. This estimate uses the sales comparison approach and follows this discussion. Sales Comparison Approach In the sales comparison approach, the market value is estimated by comparing the subject property to sales of similar properties. The basis for the approach is the assumption that an informed purchaser would pay no more for the property than the cost of acquiring another Multi-family Residential Chapter Page 73 of 119 property with similar utility. The approach is appropriate in this active market that has sufficient, reliable and comparable sales data available. Income Approach The income approach reflects an investor’s analysis of a property’s capacity to generate monetary benefits. This approach analyzes these benefits and converts them into an indication of present value for the subject property. Elements included in this approach are market-based rents and expenses leading to an estimate of net income, processed into a value estimate using a market-derived capitalization and/or discount rate. The final step in the valuation process is the reconciliation or correlation of the value indications. In the reconciliation, the relative applicability of each approach, as well as the range in indications, is examined. The greatest weight is given to the approach that appears to produce the most reliable solution to the appraisal problem. The purpose of the appraisal, the type of property, and the adequacy and reliability of the data are considered in assessing the credibility of each approach. Multi-family Residential Chapter Page 74 of 119 Land Value Analysis An estimate of the land value is considered in this section. The sales comparison approach is used to provide an indication of the land value. Land Value Analysis The property is composed of a single lot with an area of 6,508 square feet. To determine the value of the subject parcel, a search was conducted in the surrounding market area for sales of similar sites in terms of location, zoning, access, visibility and site size. As most residential sites in Beverly Hills have been developed, it was necessary to widen the search for land sales both geographically and in time. Following is a Land Sales Summary table that shows the primary land sale transactions evaluated. The comparable sales are analyzed primarily on a price per square foot basis with secondary consideration of the price per unit. Multi-family Residential Chapter Page 75 of 119 Sales Price Location APN Sale Date Land Area SF Zoning Price PSF Price / Unit SUBJ ECT 111 N. G ale Drive 6,508 R4 Beverly Hills, C A 90211 5 units possible per zoning Comparable No. 1 938 S . Orange G rove Avenue 5/31/2013 10,824 R3 $1,650,000 Los Angeles, C A 90036 14 units possible $152.44 5086-012-008 $117,857/unit Comparable No. 2 1008-1012 N. Vista Avenue 12/26/2012 12,628 R 3B $1,450,000 West Hollywood, C A 90046 10 units possible $114.82 5531-022-004, -029, -030 $145,000/unit Comparable No. 3 10278 Missouri Avenue 12/19/2012 6,417 R2 $950,000 Los Angeles, C A 90025 2 units possible $148.04 4319-011-001 $475,000/unit Comparable No. 4 120 S . Orlando Avenue 10/25/2012 6,447 R3 $1,010,000 Los Angeles, C A 90048 8 units possible $156.66 5511-015-005 $126,250/unit Comparable No. 5 140-144 S . Oakhurst Dr. 10/9/2007 12,197 R4 $4,250,000 Beverly Hills, C A 90212 C ondominiums developed 11 units possible $348.45 4331-023-033, 034 $386,364/unit Comparable No. 6 1096 S . Bedford Dr. 4/20/2005 6,534 R3 $2,100,000 Los Angeles, C A 90035 C ondominiums developed 5 units possible $321.40 4330-015-022 $420,000/unit MULTI-FAMILY LAND SALES SUMMARY Multi-family Residential Chapter Page 76 of 119 Multi-Family Land Sale Photographs Sale No. 1, 938 S. Orange Grove Avenue 68 Sale No. 2, 1008-1012 N. Vista Avenue Sale No. 3, 10278 Missouri Avenue Sale No. 4, 120 S. Orlando Avenue 68 Because all are in the City of Beverly Hills, it is not necessary to include the city in the caption. Multi-family Residential Chapter Page 77 of 119 Sale No. 5, 140-144 S. Oakhurst Drive Sale No. 6, 1096 S. Bedford Drive Multi-family Residential Chapter Page 78 of 119 The land sales are located in Beverly Hills and in the surrounding community; as well as in the city of Los Angeles and West Hollywood. In these other areas, the R3 zoning provides for greater density than in Beverly Hills. For instance, Los Angeles allows one unit for each 800 square feet of site area and West Hollywood permits one unit for each 1,210 square feet of site. Beverly Hills requires 1,300 square feet of site area per unit for lots less than 60 feet wide and 1,100 square feet of site area for lots in excess of 60 feet wide. Adjustments take into consideration the following issues: Multi-family Residential Chapter Page 79 of 119 o Demolition of existing improvements: In the “Conditions of Sale” category, Sales 2 and 4 are adjusted positively for the buyer’s cost of improvement removal to obtain the vacant site with reference to the Marshall Valuation manual for demolition costs; o Plans and permits that were included in the sale package: In the “Conditions of Sale” category, Sales 5 and 6 are adjusted downward for the estimated value of issued permits and completed development plans using a rounded $750,000 (as value added); o Date of Sale – Sales 1 – 4 occurred within the last year, and a time adjustment is not considered appropriate at the market has been relatively stable. Sale 5 and 6 occurred in 2007 and 2005, respectively, before the strong recession that began just after 2007. While the market has improved substantially since 2008, it is clear from an examination of land sales that prices have not yet reached the levels prior to that. A downward adjustment is made to the sales prior to 2008; o Site Area; o Location – The subject’s location with a Beverly Hills address is generally considered superior to Sales 1, 2, 3, 4 and 6. Sale 5 is in Beverly Hills but closer to the Golden Triangle area and better located than the subject; o Zoning – Higher density zoning for Sales 1, 2, 4 and 5 is superior to the subject. Lower density zoning for Sale 3 is inferior. An adjustment grid on the following page reflects the adjustments discussed above. Multi-family Residential Chapter Page 80 of 119 Subject Comp. No. 1 Comp. No. 2 Comp. No. 3 Comp. No. 4 Comp. No. 5 Comp. No. 6 Location 111 N. G ale Drive 938 S . Orange G rove 1008-12 N. Vista Ave. 10278 Missouri Ave. 120 S . Orlando Ave. 140-144 S . Oakhurst Dr. 1096 S . Bedford Dr. C ity Beverly Hills Los Angeles West Hollywood Los Angeles Los Angeles Beverly Hills Los Angeles S ite Area (square feet) 6,508 10,824 12,628 6,417 6,447 12,197 6,534 Total S ale P rice $1,650,000 $1,450,000 $950,000 $1,010,000 $4,250,000 $2,100,000 P rice/S F of S ite Area $152.44 $114.82 $148.04 $156.66 $348.45 $321.40 F ee S imple F ee S imple F ee S imple F ee S imple F ee S imple F ee S imple 0% 0% 0% 0% 0% 0% C ash C ash C ash C ash C ash C ash 0% 0% 0% 0% 0% 0% None Demolition costs None Demolition costs P lans + E ntitled P lans + E ntitled 0% 2% 0% 3% -20% -35% May-13 December-12 December-12 October-12 October-07 April-05 0% 0% 0% 0% -5% -5% C umulative % Adjustment for S ale Issues 0% 2% 0% 3% -25% -40% Adjusted S ale P rice $152.44 $117.12 $148.04 $161.36 $261.33 $192.84 S ite Area and C onfiguration Larger Larger S imilar S imilar Larger S imilar 5% 5% 0% 0% 5% 0% Location Inferior Inferior Inferior Inferior S light S uperior Inferior 10% 10% 10% 10% -10% 10% Zoning S uperior S uperior Inferior S uperior S uperior story ht. S imilar -10% -10% 10% -10% -15% 0% Total Adjustment 5% 5% 20% 0% -20% 10% Adjusted P rice $160.06 $122.98 $177.65 $161.36 $209.07 $212.12 ADJ USTMENTS R ights C onveyed % Adjustment F inancing Terms % Adjustment C onditions of S ale % Adjustment Date of S ale % Adjustment % Adjustment % Adjustment % Adjustment LAND SALES ADJ USTMENT GRID Multi-family Residential Chapter Page 81 of 119 Land Value Conclusion The sales price range of the six comparable data items before the adjustment process is $114.82 to $348.45 per square foot and $117,857 to $475,000 per unit. These sales range from 6,417 square feet to 12,628 square feet compared to the subject’s 6,508 square feet. There are also variations in zoning among the parcel sales that provide for higher density development than within Beverly Hills. In the adjustment grid above, the price per square foot indication was considered the most appropriate to adjust as the range of the data was tighter. After adjustments for plans and permits, site area, location and zoning, the data range is $122.98 to $212.12 per square foot. While there have been significant changes in the real estate market since Sales 5 and 6 occurred and significant adjustments were necessary to these sales, these are considered the better value indicators for the Beverly Hills area land market. Greatest weight is placed on Sales 5 and 6. The concluded fee simple site value is: $210 / square foot x 6,508 square feet = $1,366,680 Rounded to $1,370,000 Multi-family Residential Chapter Page 82 of 119 Improved Sales Analysis The sales comparison approach consists of a search and an analysis of sales of similarly improved properties which are compared to the subject property to provide an estimate of market value. Consideration was given to significant differences in the items of comparison including, but not limited to, property rights conveyed, financing, conditions of sale expenses after purchase, date of sale, and physical characteristics such as location, quality, average unit size, year built, condition and amenities. A thorough search of the subject property’s local market area was conducted to locate sales of comparable apartment properties. This search revealed the following six recent multi-family comparable closed sales in Beverly Hills, ranging between six and eight units. The comparable properties sales recorded between December 2011 and May 2013. The subject property is valued as if 100% occupied with market level rental rates. As part of the income approach, rental data was collected and analyzed to determine applicable market rental rates for each unit type. The unit of comparison most frequently used in comparing apartment properties is the price per unit, which reflects the relationship of the sale price to the number of units in each complex. The comparable sales prices range from $268,286 to $416,667 per unit. Multi-family Residential Chapter Page 83 of 119 The comparable sales data is summarized on the following pages with a sales summary table, location map, photographs and a Sales Comparison Adjustment Analysis. Data sheets are located in the report addendum. Multi-family Residential Chapter Page 84 of 119 Data No. Sale Date No. of Units Gross Living Area Gross Annual Income Year Built Sales Price NOI GIM Address APN Doc. No. Unit Mix Average Unit Size Averge Rent per Unit & Sq.Ft. Condition Price Per Unit Price per SF Exp. % of EGI OAR Subject Property Income Approach Market R ent 111 N. G ale Dr. N/A 6 4,576 $115,200 1953 N/A N/A N/A Beverly Hills, CA 90211 N/A 3 - 1bd 1ba 763 $1,600 Average N/A 4334-022-063 N/A 3 - 2bd 1ba $2.10 N/A Comparable No. 1 202 N. La P eer Dr. 5/10/2013 8 6,300 $149,660 1931 $2,500,000 $102,572 16.70 Beverly Hills, CA 90211 704373 8 - 1bd 1ba 788 $1,559 Average $312,500 31% 4.10% 4335-021-011 $1.98 $396.83 Comparable No. 2 320 S . R eeves Dr. 3/29/2013 6 5,776 $127,800 1929 $2,500,000 $102,142 19.56 Beverly Hills, CA 90212 469924 4 - 1bd 1ba 963 $1,775 Average $416,667 20% 4.09% 4331-005-032 2 - 2bd 1.75ba $1.84 $432.83 Comparable No. 3 9587 W. Olympic Bl. 8/28/2012 7 9,143 $149,852 1936 $2,385,000 $97,199 15.92 Beverly Hills, CA 90212 1283573 2 - 1bd 1ba 1,306 $1,784 Average $340,714 37% 3.76% 4328-024-015 2 - 2bd 1ba $1.37 $260.86 2 - 2bd 1.5ba 1 - 3bd 3ba Comparable No. 4 328 S . Doheny Dr. 7/9/2012 7 5,966 $149,490 1954 $1,878,000 $101,145 12.56 Beverly Hills, CA 90211 1005836 4 - 1bd 1ba 852 $1,780 Average $268,286 32% 5.39% 4331-025-027 2 - 2bd 1ba $2.09 $314.78 1 - 2bd 2ba Comparable No. 5 203 N. Almont Dr. 5/10/2012 8 6,106 $140,173 1930 $2,200,000 $86,701 15.69 Beverly Hills, CA 90211 768610 8 - 1bd 1ba 763 $1,460 Average $275,000 38% 3.94% 4335-023-010 $1.91 $360.30 Comparable No. 6 272 S . Doheny Dr. 12/30/2011 6 5,751 $115,080 1952 $1,800,000 NA 15.64 Beverly Hills, CA 90211 1784323 1 - 1bd 1ba 959 $1,598 Average $300,000 NA NA 4331-024-020 4 - 2bd 1ba $1.67 $312.99 1 - 3bd 2ba Comparable Apartment Building Sales Summary 111 N. Gale Dr. Beverly Hills, CA 90211 Multi-family Residential Chapter Page 85 of 119 Sales Data Photographs Sale 1, 202 N. La Peer Drive 69 Sale 2, 320 S. Reeves Drive Sale 3, 9587 W. Olympic Boulevard Sale 4, 328 S. Doheny Drive Sale 5, 203 N. Almont Drive Sale 6, 272 S. Doheny Drive 69 Because all of the sales are in the city of Beverly Hills, for brevity’s sake, we have omitted city. If they were in different cities, we would include it. Multi-family Residential Chapter Page 86 of 119 Analysis of Comparable Sales Market Data Six apartment sales are used in the comparison analysis. These transactions are considered to be the most similar recent transactions in the local market. The price per unit is a comparison often used by investors in this marketplace. Unit values reflect the condition and age of the buildings and the sizes of the rental units, as well as the unit mix and overall appeal of the property. Each of the sales is compared with the subject property to derive an indication of value. The sales are analyzed and reviewed for the following transactional elements: property rights conveyed, financing terms, conditions of sale, expenditures made immediately after purchase Multi-family Residential Chapter Page 87 of 119 (deferred maintenance), market conditions (date of sale) and for physical characteristics including location, average unit size, year built and condition. Transactional Adjustments The fee simple interest is conveyed in all of the comparable transactions; no adjustments are indicated for differences in property rights. All of the comparables report cash to seller or equivalent conventional financing and did not report expenses after purchase that would have affected the price; therefore, no adjustments are indicated for these two factors. Additionally, no conditions of sale are reported for the comparable sales. To evaluate changes in market conditions, brokers familiar with the market were interviewed, sales and listing data was examined and trend reports were reviewed. As noted in the Marcus & Millichap report, effective rents have increased substantially in Beverly Hills due to very low vacancy rates. Based on the report and input from local apartment brokers, a five percent positive adjustment is applied to sales over one year old and a seven percent adjustment is applied to sales that went into escrow or closed in 2011 (Sale 4 entered escrow in November 2011, but closed escrow in July 2012). Other Adjustments A location adjustment is made for differences between the subject and comparables regarding the general and specific location. Adjustments are based on a review of the difference in the selling prices within the different areas in addition to other factors such as supply and demand, Multi-family Residential Chapter Page 88 of 119 vacancy, rental rates and proximity to community services, job centers, transportation corridors and nuisances. A positive adjustment was applied to Sale No. 3 for its location on Olympic Boulevard, a main transportation corridor that generates significant traffic noise. The average unit size at the subject property is 763 square feet based on the gross building area; the average unit size for the comparables is also based on gross building area and range in size from 763 to 1,306 square feet. Properties with larger average unit sizes tend to sell for a higher price per unit as they are more desirable and achieve higher rents per unit (but not necessarily per square foot). Conversely, smaller units tend to sell for a lower price per unit. Sales with larger average unit sizes compared to the subject (in excess of 100 square feet) are adjusted downward. The subject property was constructed in 1953. The sales comparables were constructed from 1929 to 1954. At this point in their physical lives, most properties have had various levels of renovation, but some, according to broker comments, have been completed recently. Based on the broker-provided information, appropriate adjustments are applied to the sales with renovation or remodeling that exceeds the assumed average condition of the subject. Multi-family Residential Chapter Page 89 of 119 Multi-family Residential Chapter Page 90 of 119 Subject Comparable No. 1 Comparable No. 2 Comparable No. 3 Comparable No. 4 Comparable No. 5 Comparable No. 6 Property Address 111 N. G ale Dr. 202 N. La P eer Dr. 320 S . R eeves Dr. 9587 W. Olympic Bl. 328 S . Doheny Dr. 203 N. Almont Dr. 272 S . Doheny Dr. City, State Zip Code Beverly Hills, C A 90211 Beverly Hills, C A 90212 Beverly Hills, C A 90212 Beverly Hills, C A 90211 Beverly Hills, C A 90211 Beverly Hills, C A 90211 No. of Units 6 8 6 7 7 8 6 Gross Living Area (SF) 4,576 6,300 5,776 9,143 5,966 6,106 5,751 Gross Income NA $149,660 $127,800 $149,852 $149,490 $140,173 $115,080 GIM - 16.70 19.56 15.92 12.56 15.69 15.64 Reported OAR - 4.10% 4.09% 3.76% 5.39% 3.94% NA Avg. Rent/Month - $1,559 $1,775 $1,784 $1,780 $1,460 $1,598 Total Sales Price $2,500,000 $2,500,000 $2,385,000 $1,878,000 $2,200,000 $1,800,000 Price per Unit $312,500 $416,667 $340,714 $268,286 $275,000 $300,000 Price per SF $396.83 $432.83 $260.86 $314.78 $360.30 $312.99 ADJ USTMENTS R ights C onveyed F ee S imple 0.0% $0.00 F ee S imple 0.0% $0.00 F ee S imple 0.0% $0.00 F ee S imple 0.0% $0.00 F ee S imple 0.0% $0.00 F ee S imple 0.0% $0.00 Adjusted P rice $312,500 $416,667 $340,714 $268,286 $275,000 $300,000 F inancing C onv. 0.0% $0.00 N/A 0.0% $0.00 C onv. 0.0% $0 C onv. 0.0% $0.00 N/A 0.0% $0.00 N/A 0.0% $0.00 Adjusted P rice $312,500 $416,667 $340,714 $268,286 $275,000 $300,000 C ondition of S ale None 0.0% $0 None 0.0% $0 None 0.0% $0 None 0.0% $0 None 0.0% $0 None 0.0% $0 Adjusted P rice $312,500 $416,667 $340,714 $268,286 $275,000 $300,000 E xp. After P urchase None 0.0% $0 None 0.0% $0 None 0.0% $0 None 0.0% $0 N/A 0.0% $0 N/A 0.0% $0 Adjusted P rice $312,500 $416,667 $340,714 $268,286 $275,000 $300,000 Date of S ale 05/10/13 0.0% $0 03/29/13 0.0% $0 08/28/12 0.0% $0 07/09/12 7.0% $18,780 05/10/12 5.0% $13,750 12/30/11 7.0% $21,000 Time Adjustment E sc. 11/2011 Adjusted Price 0.0% $312,500 0.0% $416,667 0.0% $340,714 7.0% $287,066 5.0% $288,750 7.0% $321,000 Location Average S imilar 0.0% $0 S imilar 0.0% $0 Inferior 5.0% $17,036 S imilar 0.0% $0 S imilar 0.0% $0 S imilar 0.0% $0 Avg. Unit Size (SF) 763 788 0.0% $0 963 -5.0% ($20,833) 1,306 -5.0% ($17,036) 852 0.0% $0 763 0.0% $0 959 -5.0% ($16,050) Year Built 1953 1931 0.0% $0 1929 0.0% $0 1936 0.0% $0 1954 0.0% $0 1930 0.0% $0 1952 0.0% $0 Condition Average Deferred Maint. 2.0% $6,250 R emodeled -5.0% ($20,833) S uperior -5.0% ($17,036) S imilar 0.0% $0 Inferior 5.0% $14,438 S imilar 0.0% $0 Net Adjustment 2.0% $6,250 -10.0% ($41,667) -5.0% ($17,036) 0.0% $0 5.0% $14,438 -5.0% ($16,050) Price per Unit $318,750 $375,000 $323,679 $287,066 $303,188 $304,950 Price per SF $404.76 $389.54 $247.81 $314.78 $397.23 $318.15 S ALES COMP ARIS ON ADJ US TMENT ANALYS IS Beverly Hills, CA 90211 111 N. Gale Dr. 6-Unit Apartment Complex Multi-family Residential Chapter Page 91 of 119 The adjusted prices for the primary comparable properties range from $287,066 to $375,000 per unit with an average of $318,772 per unit. The comparable sales available provided a good data set of recent sales proximate to the subject property. Somewhat greater weight is placed on the most recent sales but with lower weight on the high and low of the adjusted sales considering the quality and condition assumptions for the subject. The price per unit value conclusion is as follows: Sales Comparison Approach Price per Unit Conclusion 6 Units x $320,000 per unit = $1,920,000 Value Per Square Foot The comparable sales had unadjusted sale prices on a per square foot basis ranging from $260.86 to $432.83 per square foot. Generally, the higher priced sales also have the highest price per square foot indication, unless their total building area is substantially larger or smaller than the average. Based on the smaller gross building size at the subject property, the indicated value on a price per square foot basis is at the upper end of the range. The price per square foot value conclusion is as follows: Multi-family Residential Chapter Page 92 of 119 Sales Comparison Approach Price per Square Foot Conclusion 4,576 SF x $400 per square foot = $1,830,400 Rounded to: $1,830,000 Gross Income Multiplier Analysis The comparable data indicates a gross income multiplier range from 12.56 to 19.56 with an average of 16.01. Based on a review of average unit income for the sales, the estimated market rent levels for the subject, comparable numbers 1 and 6 with multipliers of 16.7 and 15.64, respectively, set the range of the data. A gross income multiplier of 16 falls within the range indicated by the comparable market data and appears reasonable for the subject property. Gross Income Multiplier Conclusion 16.0 GIM x $115,200 = $1,843,200 Rounded to: $1,845,000 Multi-family Residential Chapter Page 93 of 119 Sales Comparison Approach Reconciliation The following value indications from the Sales Comparison Approach are presented below. Sales Comparison Approach Indicated Values Sale Price per Unit $1,920,000 Sale Price per Square Foot $1,830,000 Gross Income Multiplier $1,845,000 In reconciling the Sales Comparison Approach, most weight is given to the sales comparison approach on a price per unit basis and the gross income multiplier indication. The concluded market value of the subject property, as indicated in the Sales Comparison Approach, is as follows. Sales Comparison Approach Conclusion $1,900,000 Multi-family Residential Chapter Page 94 of 119 Income Approach The income approach to value is based primarily on the theory of anticipation. This approach values the subject property based on the expected future benefits in terms of net operating income to be generated. Due to the relatively consistent nature of the cash flow and expenses in apartment complexes, the direct capitalization method is considered to be appropriate in the analysis of this type of income stream. In the analysis of the subject property, the estimated market rent for the property is derived from an analysis of market rent comparables. Next, market data is analyzed for an estimated vacancy and collection loss on a stabilized basis. Operating expenses are analyzed using local expense guides and observed ratios from sales or listings. Vacancy and operating expenses are deducted from the gross income to derive an estimate of the net operating income for the subject property. The net operating income is then capitalized at an appropriate overall rate as reflected by the market comparables. Scheduled Rental Income At the time the assignment was awarded, a request was sent to the property owner for financial information about the property; however, no information was provided nor was a property inspection arranged. In this estimate, the public record unit mix of 3 2-bedroom units and 3 1- bedroom units is used to estimate market rents. In addition, an estimate of unit area is applied based on the total building area and the unit mix: 2-bedroom units – 800 square feet, 1-bedroom units – 680 square feet. Multi-family Residential Chapter Page 95 of 119 Additional assumptions are: tenants pay for telephone, cable TV, gas and electricity expenses. Water and trash service are paid for by the landlord and are included in the rent. The building is served by a central hot water heater which is paid by the landlord. No rental concessions are being offered at the subject property or other properties in the area. Market Rent Analysis In order to estimate the market rent for the subject property, a survey of similar multi- family apartment complexes in the subject’s market area was conducted. The following page includes a table which summarizes the subject property and the results of the survey of the most comparable properties, followed by a map which provides the location of each data item in relation to the subject property and photographs of the comparables. The survey included apartment complexes within the neighborhood of the subject property. The following table summarizes the market rental range found in the six rental comparables surveyed. Multi-family Residential Chapter Page 96 of 119 Summary of Rent Survey Unit Type Comp Range Comp Average Comp Range / SF Comp Average 1 bed/1 bath $1,275-$1,700 $1,483 $1.37 to $2.58 $1.88 2 bed/1 bath $1,750-$2,095 $1,926 $1.45 to $1.99 $1.75 Multi-family Residential Chapter Page 97 of 119 COMPARABLE RENTAL SUMMARY Property Location Units Year Built Current Vacancy Bed/Bath Unit SF Rent/Mo. Rent Per/Mo./SF Subject Property 111 N. Gale Drive Beverly Hills, CA 90211 6 1953 0% 3, 1/1 3, 2/1 Est. 680 Est. 800 Rental No. 1 113 N. Gale Drive Beverly Hills, CA 90211 Data from current listing 9 1960 11% 2, 1/1 3, 2/1.5 4, 2/1.75 Est. 700 Est. 950 Est. 950 $1,375 $1,750 $1,860 Est. $1.96 $1.84 $1.96 Rental No. 2 224 S. Gale Drive Beverly Hills, 90211 Data from MLS lease info 4 1926 NA 2, 1/1 2, 2/1 504 1,220 Leased 9/2012 $1,300 $2,000 Leased 7/2011 Remodeled kitchen, FP $2.58 $1.64 Rental No. 3 227 S. Gale Drive Beverly Hills, 90211 Data from MLS lease info 4 1926 0% 2/1 2/1 1,292 1,292 Leased 3/2012 $2,095 $1,875 Leased 5/2012 $1.62 $1.45 Rental No. 4 202 N. La Peer Dr. Beverly Hills, 90211 Data from sale listing 3/2012 8 1931 0% 8, 1/1 Est. 788 $1,425 - $1,700 Average $1,556 $1.80 - $2.16 Average $1.97 Rental No. 5 165 N. Swall Drive Beverly Hills, 90211 Data from MLS lease info 18 1965 NA 2/1 991 $1,975 Leased 2/2013 $1.99 Rental No. 6 347 N. Palm Drive Beverly Hills, 90211 Data from MLS lease info 8 1928 0% 1/1 Est. 930 $1,275 - $1,395 Leased 4/2012 and 2/2012 $1.37 - $1.50 Multi-family Residential Chapter Page 98 of 119 Rental Data Location Map Multi-family Residential Chapter Page 99 of 119 ental Data Photographs Rental 1, 113 N. Gale Drive Rental 2, 224 S. Gale Drive Rental 3, 227 S. Gale Drive Rental 4, 202 N. La Peer Drive Rental 5, 165 N. Swall Drive Rental 6, 347 N. Palm Drive Multi-family Residential Chapter Page 100 of 119 The tables below show the analysis of the collected rental data. 1 Bedroom Subject Rental No. 1 Rental No. 2 Rental No. 4 Rental No. 6 111 North G ale Drive 113 N. G ale Drive 224 S . G ale Drive 202 N. La P eer Drive 347 N. P alm Drive Beverly Hills B everly Hills Beverly Hills B everly Hills Beverly Hills ADJ USTMENTS $/S q.F t. $/S q.F t. $/S q.F t. $/S q.F t. Monthly R ent $1.96 $1,375 $2.58 $1,300 $1.97 Avg. $1,556 $1.50 $1,395 Location Average S imilar 0% $0 S imilar 0% $0 S imilar 0% $0 S imilar 0% $0 S ize 680 est. E st. 700 0% $0 504 10% $130 788 -5% ($78) 930 -10% ($140) Age 1953 1960 0% $0 1926 0% $0 1931 0% $0 1928 0% $0 Condition "As If Avg." S imilar 0% $0 S imilar 0% $0 Inferior 5% $78 S imilar 0% $0 Net Adjustment Concluded $1,400 0% $1,375 10% $1,430 0% $1,556 -10% $1,256 $2.05 1 Bedroom Unit RENTAL COMP ARISON ANALYSIS 111 North Gale Drive 2 Bedroom Subject Rental No. 1 Rental No. 2 Rental No. 3 Rental No. 5 111 North G ale Drive 113 N. G ale Drive 224 S . G ale Drive 227 S . G ale Drive 165 N. S wall Drive Beverly Hills B everly Hills Beverly Hills B everly Hills Beverly Hills ADJ USTMENTS $/S q.F t. $/S q.F t. $/S q.F t. $/S q.F t. Monthly R ent $1.84 $1,750 $1.64 $2,000 $1.62 $2,095 $1.99 $1,975 Location Average S imilar 0% $0 S imilar 0% $0 S imilar 0% $0 S imilar 0% $0 S ize 800 est. E st. 950 -5% ($88) 1,220 -15% ($300) 1,292 -15% ($314) 991 -5% ($99) Age 1953 1960 0% $0 1926 0% $0 1926 0% $0 1928 0% $0 Condition "As If Avg." S imilar 0% $0 S imilar 0% $0 Inferior 0% $0 S imilar 0% $0 Net Adjustment Concluded $1,800 -5% $1,663 -15% $1,700 -15% $1,781 -5% $1,876 $2.25 111 North Gale Drive 2 Bedroom Unit RENTAL COMP ARISON ANALYSIS Multi-family Residential Chapter Page 101 of 119 Gross Rental Income Conclusion The client has requested the valuation of the leased fee interest of the subject property. Typically for apartments, the rental agreements are less than one year and rents can be increased to market levels so the leased fee and fee simple values are equal. The concluded rent levels from the previous page provide an indicated gross monthly rent of: 3 x 1 bedroom rent of $1,400 = $4,200 3 x 2 bedroom rent of $1,800 = $5,400 Monthly = $9,600 Annual = $115,200 Other Income A laundry room is assumed to be on-site with one set of coin-operated washer and dryer laundry machines. Based on estimated laundry income for a property with the subject’s unit mix, a monthly income of $20 per unit each month or $1,440 annually (6 x $20 x 12 = $1,440) is used in the income analysis. Vacancy and Collection Allowance The subject property is in an established Beverly Hills neighborhood where demand is high and rental rates have been estimated at market levels. According to the Marcus & Millichap Apartment Research Update for the Beverly Hills submarket, vacancy is 1.9%. The current vacancy rate for the county is 3.7% according to the same survey. Multi-family Residential Chapter Page 102 of 119 In the direct capitalization analysis, a stabilized vacancy plus approximately two percent collection loss for a total of 4% is estimated and considered reasonable for the subject property. Expense Analysis Expenses estimated for the subject property are based on The Apartment Building Operating Expense Guideline as published by Apartment Building Appraisers & Analysts, Inc., and expense ratios from the sales data. Real estate taxes are estimated using the current tax rate (1.12175%) and the special assessment level for this tax year ($629) and calculating a tax amount based on the value estimate. A figure for the insurance cost is estimated based on the information contained in the Operating Expense Guideline. The range provided for post-1940s buildings is $250-$400 per year per unit. A level of $300 per unit annually corresponds to approximately $0.40 per gross square foot per year in the range of $0.35-$0.50 of cost provided by the Guideline. A total of $1,800 ($300/unit annually) is used for the insurance expense in the analysis. The calculation of a utilities estimate requires a number of assumptions about responsibility for payment of these services at the property. In this analysis, it is assumed that the building is individually metered for electricity and natural gas, each of which is paid by tenants. The property owner would pay for water and water heating provided by a central boiler. The owner would also pay for rubbish collection. Multi-family Residential Chapter Page 103 of 119 The Operating Expense Guideline treats each item of the utility expense separately. In the process, consideration is given to the unit mix at the subject. Based on the information provided, the estimated level of cost for utilities expense to the landlord is $450 per unit per year. Grounds maintenance costs are related to the size and complexity of the landscaping. In the subject’s case, landscaping is minimal (see below) and would require limited attention each month. The range for this cost is given as $60-$80 per month for this type facility. A level of $75 per month is estimated or $900 per year ($150/unit/year). Estimates of annual building repairs and maintenance expense are often dependent on the existing condition of the property. In this case, it is assumed to be average, which would include an assumption that finishes have been steadily maintained and renewed. The range Multi-family Residential Chapter Page 104 of 119 provided in the manual is $250-$350 per unit per year. The estimate used in this case is at the upper end based on observation of the property and its age, $350 per unit. Management and Administration costs are quoted to range between 5% and 7%, predominantly 6% for a building of the subject number of units. A 6% rate is applied for this expense. Reserves for replacement are also variable and dependent on the condition of the building components that are frequently renewed such as carpets, blinds and appliances. The unit sizes and mix have an impact on these costs. Considering the range of reserve costs provided in the manual, the unit mix and appliances usually found in apartments of this type, an estimate of $500 per unit annually was concluded. The following table summarizes the projected expenses of the subject property. EXPENSES: P roperty Taxes 1.12175%+ $629 $21,250 Insurance $300 per unit $1,800 Utilities $450 per unit $2,700 G rounds Maintenance $150 per unit $900 Building R epairs & Maintenance $350 per unit $2,100 Management/Admin. 6%of EG I $6,718 R eserve for R eplacements $500 per unit $3,000 Total Expenses EG I 34.4% ($38,468) The total expenses estimated for the subject are $38,468 or 34.4% or effective gross income and 33.3% of potential gross income. As a check on this estimate the comparable sales indicate operating expense ratios as follows: Multi-family Residential Chapter Page 105 of 119 Comparable Expense Summary Data No. % of PGI Comparable No. 1 31% Comparable No. 2 20% Comparable No. 3 37% Comparable No. 4 32% Comparable No. 5 38% Comparable No. 6 NA Average for No. 1 - 5 31.6% The comparable building sales reviewed earlier, report expense ratios ranging from 20% to 38% of potential gross income with an average of 31.6%. In the case of the subject property, the expense estimate is 33.3% of the comparable potential gross income ($38,468 / $115,200 = 33.3%). Multi-family Residential Chapter Page 106 of 119 Direct Capitalization Analysis In the selection of the appropriate market capitalization rate for the subject property, the comparable improved sales data in the sales comparison approach is considered. The rates for the comparable sales are summarized in the following table. Capitalization Rates Comparable No. 1 4.1% Comparable No. 2 4.09% Comparable No. 3 3.76% Comparable No. 4 5.39% Comparable No. 5 3.94% Comparable No. 6 NA The sales identified reflect overall capitalization rates ranging from 3.76% to 5.39%. In addition to the comparable sales local and market reports and secondary investor surveys were reviewed. Capitalization Rates Sales M&M Los Angeles 1 Pricewaterhouse 2 3.76% to 5.39% Low 4% range 3.50% to 7.0% (4.94% average -27 basis points from last year) 1 Marcus and Millichap 3 rd Quarter 2013 Los Angeles (Westside Cities Apartment Market) 2 PricewaterhouseCoopers Pacific Region 1 st Quarter 2013 Multi-family Residential Chapter Page 107 of 119 In concluding an appropriate capitalization rate for the subject property, consideration was given to various factors includingthe current market conditions in which there are more buyers than sellers, low vacancy rates, and the Beverly Hills location. Based on these factors, an overall rate for the subject property of 4.0% is concluded to be appropriate for the direct capitalization value analysis. Direct Capitalization Analysis The direct capitalization analysis of income based on market rental levels, with deductions for vacancy and operating expenses is summarized below. Multi-family Residential Chapter Page 108 of 119 Direct Capitalization – Concluded Value The income approach utilizes market rent levels and estimated expenses for the direct capitalization analysis. This analysis results in an indicated market value for the subject property of $1,840,000 (rounded). INCOME: Number of Units 6 Market Rental Income Annual 1B R /1B A Units (est. 680 sf) $1,400 P er Unit x 3 Units = $4,200 x 12 Months = $50,400 2 B R /1 BA Unit (est. 800 sf) $1,800 P er Unit x 3 Units = $5,400 x 12 Months = $64,800 P er Mo. $9,600 $115,200 Avg./Unit $1,600 Laundry Income $20 P er Unit x 6 Units = x 12 Months = $1,440 TOTAL POTENTIAL GROSS INCOME $116,640 Vacancy and Collection Loss 4% ($4,666) EFFECTIVE GROS S INCOME $111,974 EXP ENSES : P roperty Taxes 1.12175%+ $629 $21,250 Insurance $300 per unit $1,800 Utilities $450 per unit $2,700 G rounds Maintenance $150 per unit $900 Building R epairs & Maintenance $350 per unit $2,100 Management/Admin. 6%of EG I $6,718 R eserve for R eplacements $500 per unit $3,000 Total Expenses EG I 34.4% ($38,468) Net Operating Income $73,506 Capitalization R ate 4.00% Income Approach Value $1,837,648 Income Approach Value Rounded $1,840,000 Value P er Unit (Rounded) $310,000 DIRECT CAPITALIZATION ANALYSIS 6-Unit Apartment Complex 111 North Gale Drive Beverly Hills, California Multi-family Residential Chapter Page 109 of 119 Reconciliation of Value The appraisal has been reviewed to verify that the data and the analytical techniques applied have led to consistent judgments. In addition, the data utilized in the report has been reviewed to ensure that it is authentic, pertinent and sufficient. Finally, mathematical calculations have been verified. Site Valuation The subject property is improved with a 1953-constructed six-unit apartment building. An estimate of the land value was necessary in the process of reaching a compensation estimate for the proposed eight-year temporary construction easement. Land Value Conclusion: $1,370,000 Sales Comparison Approach The sales comparison approach is based on the premise that a purchaser will not pay more for an existing property than for a comparable property of similar utility. This analysis is supported by the sales of similar apartment buildings. There is a sufficient quantity of comparable sales with adequate quality of information. The sales comparison approach result best reflects the unit measures used by apartment investors in the local market and is a strong value indication for the property. Multi-family Residential Chapter Page 110 of 119 Income Approach The income approach is predicated on the principle of anticipated economic benefits. The information available regarding market rents, vacancy, expenses and investor return requirements is sufficient to provide a reliable indication of value. Thus, the income approach to value is considered to provide a well-reasoned indicator of value for the subject property. The analysis presents a conclusion from an investor viewpoint but is felt to have required substantially more assumptions than the sales comparison analysis which is given greatest weight. Summary of Indicated Values Land Value $1,370,000 Sales Comparison Approach $1,900,000 Income Approach $1,840,000 Fair Market Value Conclusion 111 N. Gale Drive, Beverly Hills $1,900,000 Multi-family Residential Chapter Page 111 of 119 Analysis of the Proposed Construction Laydown Indicated Depreciated Value of the Improvements In order to create the construction laydown area and prepare the property for an eight-year temporary construction easement, the building improvements must be demolished. The calculation of the depreciated value of the improvements is: Improved Property Fair Market Value $1,900,000 Less Land Value $1,370,000 Depreciated Value of the Improvements: $530,000 Rental Value of the Temporary Construction Easement During the approximately eight-year time frame necessary for construction of the Purple Line extension west on Wilshire Boulevard, this site consisting of 6,508 square feet will be leased by LACMTA as a temporary construction easement (TCE). LACMTA wants to know what return rate to pay based on the value estimated for the property herein. Research for this estimate included a survey of brokers and other sources plus review of available information from files and in the CoStar database. The data is summarized in the table below with detail sheets provided in the addendum of this report. Multi-family Residential Chapter Page 112 of 119 The ground lease data presented ranges from long-term, land leased retail pads located across the street from a supermarket anchored retail center (Items 1 and 2) to storage and industrial yard space leased on a month-to-month basis. Each rate quoted is based on the land value provided by the data source. Issues such as the size of the land areas leased, the demand for the locations, or the underlying land values vary substantially. Additional data presented relates to the rates of return on long-term leases for improved properties based on recent purchases in reasonable proximity to the subject parcels. Return rates on these investments tend to range somewhat lower based on the credit strength of the tenants. Location Use Land Value Square Feet S igned Terms Escalations Annual Rent Rate 1) La Habra, CA R etail P ad $1,046,280 34,876 1/2013 20-Yr, NNN 10% every 10 yrs $104,628 10.0% 2) La Habra, CA R etail P ad $900,000 30,000 1/2013 20-Yr, NNN 10% every 10 yrs $90,000 10.0% 3) Anaheim, CA S torage Y ard $741,594 17,657 10/2012 5-Y r, IG None $60,000 8.1% 4) S anta Ana, CA Auto S torage $800,000 36,713 10/2012 MTM, IG None $54,000 6.8% 5) F ontana, CA Industrial Y ard $1,742,400 174,240 11/2012 MTM, IG None $109,355 6.3% Location Use P urchased Terms Price Annual Rent Rate 6) 7630 W. S unset Bl., Los Angeles, CA R etail, F edEx P rint/S hip Center 2/2013 73.5% down $5,095,000 $378,168 7.4% 7) 7600 W. S unset Bl., Los Angeles, CA R etail, 7-11 S tore 8/2012 100% down $2,135,000 $106,800 5.0% 8) 2675 E. Olympic B l., Los Angeles, CA F ast F ood, B urger King 10/2012 50% down $2,108,000 $120,000 5.7% Ground Lease Data Long-term Leased Property Return Rates Multi-family Residential Chapter Page 113 of 119 The rate range described by this data reflects the return investors require on their asset. This rate may be impacted by tenant credit strength, division of expenses, lease length and rental rate changes during the lease term. Pricewaterhouse Coopers compiles a quarterly investor survey (PwC Real Estate Investor Survey) for a range of property types, nationwide. The asset type that most closely reflects the rate question is a net leased property, or one in which the tenant is responsible for all expenses. In the first quarter 2013 report, the survey indicates a range of 6.0% to 8.75% with an average of 7.15%. This is a decline of 33 basis points from one year ago and 117 basis points (1.17%) lower than three years ago. Based on the observed data, the location of the property and taking into consideration that the TCE will be leased by LACMTA with payments made at the beginning of the lease term, a reasonably supported rate is considered to be an 8% return on the land value. The calculation of this rental amount is: 8% x $1,370,000 = $109,600 Payment for 8 years 8 x $109,600 = $876,800 Multi-family Residential Chapter Page 114 of 119 Summary of Value Conclusions – Parcel W-2309 The appraisal has been reviewed to verify that the data and the analytical techniques applied have led to consistent judgments. In addition, the data utilized in the report has been reviewed to ensure that it is authentic, pertinent and sufficient. Finally, mathematical calculations have been verified. S ummation of J ust Compensation for P arcel W-2309, Full Acquisition or Temporary Construction Easement A. Value of the whole (P arcel W-2309): $1,900,000 Land $1,370,000 Improvements $530,000 B. Temporary C onstruction E asement C ompensation: $1,406,800 Improvements $530,000 R ent $876,800 C. $1,406,800 TOTAL J US T C OMP E NS ATION F OR THE TE MP OR AR Y C ONS TR UC TION E AS E ME NT: Multi-family Residential Chapter Page 115 of 119 APPRAISER’S CERTIFICATION 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 are my personal, impartial, and unbiased professional analyses, opinions, and conclusions. I have no present or prospective interest in the property that is the subject of this report and no personal interest or bias with respect to the property or parties involved in this assignment. My compensation is not contingent on the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. I have performed no services, as appraisers or in any other capacity, regarding the property that is the subject of this report within the past three-year period immediately preceding acceptance of this assignment. This appraisal assignment is not based on a requested minimum valuation, a specific valuation or the approval of a loan. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with California state law and the Uniform Standards of Professional Appraisal Practice. I viewed the property that is the subject of this report from the public right-of-way and has made a personal inspection of the comparables that were utilized in this report. Your signature Your name Your license Your license number Expiration date Multi-family Residential Chapter Page 116 of 119 Addenda Property Legal Description Multi-family Residential Chapter Page 117 of 119 Multi-family Residential Chapter Page 118 of 119 Multi-family Residential Chapter Page 119 of 119 Industrial Chapter Page 1 of 126 APPRAISAL OF REAL PROPERTY PROPERTY Industrial Property 123 Main Street Hudson, St. Croix County, WI 54016 DATE OF REPORT September 13, 2016 CLIENT Ms. Any Banker Appraisal Review Analyst Any Bank 321 Main Street Hudson, WI 54016 EFFECTIVE DATE(S) OF VALUE September 1, 2016 – “As-Is” March 1, 2017 – “As-Completed” PREPARED BY Appraisal Company, Inc. 123 Main Street St. Paul, MN 55101 Industrial Chapter Page 2 of 126 September 13, 2016 Appraisal Company 123 Main Street Madison, WI 55101 Ms. Any Banker Any Bank 321 Main Street Hudson, WI 54016 RE: Appraisal of the Industrial Property located at 123 Main Street, Hudson, St. Croix County, WI 54016 Insight File Number: 2016-123 Dear Ms. Banker, In accordance with your request, we are pleased to submit the accompanying appraisal of the Industrial Property located at 123 Main Street, Hudson, St. Croix County, WI 54016. The purpose of the appraisal is to estimate the 'as-is' and 'as-completed' market values of Industrial Chapter Page 3 of 126 the subject property. The client for the assignment is Any Bank and the intended use is for mortgage financing. No other use or user is intended. The subject property consists of two industrial buildings on one parcel. The main building steel frame with concrete block/brick encasement, and has a Gross Building Area (GBA) and Net Rentable Area (NRA) of 13,000 square feet (SF), 13% office finish, and 18’ clear heights in the warehouse. The secondary building is an unheated, wood, pole-frame construction warehouse building with metal panel exterior and roof, and has a GBA and NRA of 9,720 SF, with no office finish, and 18’ clear heights. The buyer plans to renovate the secondary building including insulating the walls/ceiling, frame/finish interior walls with metal panels on the interior of building, completing a 400 SF office finish build out, installing space heaters in the warehouse area, and installing a loading dock safety railing. Both building were originally constructed in 2011. The site area of the subject parcel is 2.38 acres (or 103,673 SF), and the site is zoned Industrial. Based on our subject property tour, and after examining and considering the subject’s location, physical and economic characteristics, current market conditions, demographic influences, and other legal, social, economic factors, the details of which are included in the valuation analysis in the accompanying report, subject to the definitions, assumptions, and limiting conditions expressed in the report, our value opinions are as follows: Valuation Premise Interest Appraised Date of Value Value Conclusion per SF of NRA Market Value "As-Is" Fee Simple September 1, 2016 $1,110,000 $48.86 Market Value "As-Completed" Fee Simple March 1, 2017 $1,230,000 $54.14 VALUE CONCLUSIONS Industrial Chapter Page 4 of 126 Exposure Time and Marketing Time Based on our review of national, regional and local investor surveys, discussions with market participants and information gathered during the sales verification process, a reasonable exposure time for the subject property at the value concluded within this report would have been approximately 12 months. This assumes an active and professional marketing plan would have been employed by the current owner. We believe, based on the assumptions employed in our analysis, as well as our selection of investment parameters for the subject, that our value conclusion represents a price achievable within 12 months. Extraordinary Assumptions An extraordinary assumption is defined by the USPAP as “an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.” This appraisal assumes that the proposed renovations will be constructed according to the plans, specifications, costs, and timing that was provided to us and that was applied in this appraisal. Should any of the above information differ from what appears in this appraisal, the value conclusions contained herein could change significantly. Industrial Chapter Page 5 of 126 Hypothetical Conditions A hypothetical condition is defined by the USPAP as “that which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.” There are no Hypothetical Conditions for this appraisal. Other Important Risk Factors The market for smaller, owner-occupied/single tenant industrial building across the Twin Cities, as well as within the Hudson market area, remains strong. The subject’s two-building configuration is less functional than a single building with the equivalent spaces. We have accounted for this in both approaches to value. The proposed renovations will increase the functional utility of the property commensurate with the cost, and are therefore considered financially feasible. This letter is accompanied by an Appraisal Report as defined by the Uniform Standards of Professional Appraisal Practice under Standards Rule 2-2(a). Accordingly, it provides a summary or description of the appraisal process, subject and market data and valuation analyses. The report was also prepared to comply with the requirements of the Code of Professional Ethics of the Appraisal Institute and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Title XI Regulations. The depth of Industrial Chapter Page 6 of 126 discussion contained in this report is specific to the needs of the client and the intended use of the appraisal. This appraisal has been prepared for the client, and may not be used or relied upon by anyone other than the client for any purposes whatsoever without the express written consent of the appraiser and the client. If you have any questions or comments, please contact the undersigned. Thank you for the opportunity to be of service. Respectfully submitted, Joe Appraiser WI Certified General 1234567 Jane Appraiser WI Certified General 7654321 Senior Appraiser Appraisal Company, Inc. 123 Main Street St. Paul, MN 55101 Senior Appraiser Appraisal Company, Inc. 123 Main Street St. Paul, MN 55101 Industrial Chapter Page 7 of 126 TABLE OF CONTENTS SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS ..........................................9 Subject Photos (photos taken September 1, 2016) .................................................. 13 Oblique Aerial Photo - Subject .............. 16 Aerial Photo - Subject ............................ 15 Neighborhood Map ............................... 17 General Location Map ........................... 18 SCOPE OF WORK .................................... 19 Valuation Methodology ........................ 19 Data Research and Analysis .................. 20 Property Tour ........................................ 21 Report Format ....................................... 21 CLIENT, INTENDED USE AND USERS, AND PURPOSE OF THE APPRAISAL .................. 23 PROPERTY TOUR AND DATES OF VALUATION ............................................ 23 IDENTIFICATION OF THE SUBJECT PROPERTY .............................................. 24 OWNERSHIP AND HISTORY OF THE SUBJECT PROPERTY .............................................. 24 PROPERTY DESCRIPTION AND ANALYSIS 26 Site Description ..................................... 26 Tax Map ................................................. 29 Improvements Description .................... 30 ZONING INFORMATION ......................... 35 Zoning Map............................................ 38 REAL ESTATE TAX ANALYSIS ................... 39 Subject Taxes and Assessor’s Estimate of Market Value ......................................... 39 Special Assessments .............................. 40 MARKET ANALYSIS ................................. 41 Introduction........................................... 41 Economic Analysis ................................. 41 Twin Cities Metropolitan Area Economic Analysis .................................................. 43 Hudson Area and Western St. Croix County - CoStar Industrial Market Analysis ....... 51 Subject’s Neighborhood Analysis .......... 53 HIGHEST AND BEST USE ANALYSIS ......... 55 Highest and Best Use – As Though Vacant .................................................... 55 Industrial Chapter Page 8 of 126 Highest and Best Use – As Improved .... 58 THE VALUATION PROCESS ...................... 61 SALES COMPARISON APPROACH .......... 63 INCOME CAPITALIZATION APPROACH .. 81 RECONCILIATION AND FINAL VALUE OPINION ................................................ 93 INSURABLE REPLACEMENT COST ESTIMATE ...... Error! Bookmark not defined. CERTIFICATION AND ADDENDA ............... 97 Certification ........................................... 97 Assumptions and Limiting Conditions ... 99 A: GLOSSARY ........................................ 106 B: APPRAISER QUALIFICATIONS .......... 125 C: ENGAGEMENT LETTER .................... 126 Industrial Chapter Page 9 of 126 SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS Common Property Name: Industrial Property Address: 123 Main Street City: Hudson State: WI Zip Code: 54016 County: St. Croix Property Ownership Entity: Joe and Jane Public Report Type: Appraisal Property Rights Appraised: Fee Simple Date of Property Tour: 9/1/2016 Date of Report: 9/13/2016 Date of Value: "As-Is" 9/1/2016 "As-Completed" 3/1/2017 Legal Description: BASIC INFORMATION Lot 1, Block 2, Main Street Industrial Addition Industrial Chapter Page 10 of 126 Land Area SF: 103,673 Land Area Acres: 2.38 Excess/Surplus Land? No Flood Zone: Zone X Flood Map Number: 123456789E Flood Map Date: 3/16/2009 Site Utility: Average Site Topography: Level Site Shape: Rectangular Lot Location: Interior Frontage: Average Access: Average Visibility: Average Utilities Available: Private Well/Septic Number of Parking Spaces: 20 Parking Ratio (per 1,000 SF): 0.8803 Parking Type: Surface SITE INFORMATION Type of Property: Industrial Type of Construction: Steel frame w/masonry encasement Number of Buildings: Two (2) Gross Building Area (SF): 22,720 Net Rentable Area (SF): 22,720 Number of Stories: One (1), plus storage mezzanine excluded from GBA/NRA Deferred Maintenance: None noted Occupancy Status: 100% owner-occupied Actual Age: 5 years Year Built: 2011 Year Renovated: 2016/2017 Quality: Average Condition: Average Land to Building Ratio: 4.56 : 1 Sprinkler Protection: 0% BUILDING INFORMATION Industrial Chapter Page 11 of 126 Assessing Authority: St. Croix County Assessor's Parcel ID Number: 123-456-789-10 Current Taxes Payable Year: 2016 Current Assessor's Estimated Market Value (as of January 2, 2015): $843,000 Current Tax Liability (Payable 2016): Base Tax: $12,435.16 Special Assessments: $0.00 Service Charges: $0.00 Total: $12,435.16 Current Tax Rate (base tax only): 1.48% Taxes Per SF of NRA (base tax only): $0.55 Are Taxes Current? Yes Is a grievance underway? Not to our knowledge Subject's assessment is: At or near market levels Zoning Authority: Hudson Current Zoning Designation: Industrial Is current use permitted? Yes Zoning Change Pending? No Zoning Variance Applied for? No MUNICIPAL INFORMATION: Special Assessment Summary: According to the readily available property tax statements from the County website, there are no special assessments in place at the subject. As Though Vacant: As Improved: See Highest and Best Use section for additional analysis and detail. HIGHEST AND BEST USE: Immediate industrial development Continued industrial use Industrial Chapter Page 12 of 126 VALUE CONCLUSIONS: Type of Value: Market Value Market Value "As-Is" "As-Completed" Date of Value: 9/1/2016 3/1/2017 Real Property Interest: Fee Simple Fee Simple Sales Comparison Approach: Concluded Value (Rounded): $1,230,000 $1,230,000 LESS: Construction Cost and Profit ($120,000) - Value Indication via Sales Approach: $1,110,000 $1,230,000 Per Square Foot (NRA): $48.86 $54.14 Income Approach: Direct Capitalization: Net Operating Income (Stabilized): $100,507 $100,507 Capitalization Rate: 8.50% 8.50% Preliminary Value: $1,182,439 $1,182,439 Concluded Value (Rounded): $1,180,000 $1,180,000 LESS: Construction Cost and Profit ($120,000) - Value Indication via Direct Capitalization (Rounded): $1,060,000 $1,180,000 Per Square Foot (NRA): $46.65 $51.94 FINAL VALUE CONCLUSION: Concluded Value: $1,110,000 $1,230,000 Exposure Period: 12 months Marketing Period: 12 months Industrial Chapter Page 13 of 126 Subject Photos (photos taken September 1, 2016) – SAMPLE PHOTOS Subject Exterior – Main Building Subject Exterior – Secondary Building Subject Exterior Subject Exterior Subject Exterior Subject Exterior Industrial Chapter Page 14 of 126 Subject Interior – Main Building - Office Subject Interior – Main Building - Office Subject Interior – Warehouse Subject Interior – Warehouse Subject Interior – Warehouse Subject Interior – Warehouse Industrial Chapter Page 15 of 126 Aerial Photo - Subject SUBJECT SAMPLE Industrial Chapter Page 16 of 126 Oblique Aerial Photo - Subject SUBJECT SAMPLE Industrial Chapter Page 17 of 126 Neighborhood Map SUBJECT SAMPLE Industrial Chapter Page 18 of 126 General Location Map SUBJECT SAMPLE Industrial Chapter Page 19 of 126 SCOPE OF WORK To determine the appropriate scope of work for the assignment, we considered the intended use of the appraisal, the needs of the user, the complexity of the property, and other pertinent factors. Our concluded scope of work is described below. Insight Realty Advisors, Inc. requires a “second read” of all appraisals. Assignments are read by another appraiser who is not participating in the assignment. For this assignment, quality control oversight was provided by Jane Appraiser. In addition to a qualitative assessment of the appraisal report, Jane Appraiser is a signatory to the appraisal report and concurs in the value estimate(s) set forth herein. Valuation Methodology Appraisers usually consider the use of three approaches to value when developing a market value opinion for real property. These are the cost approach, sales comparison approach, and income capitalization approach. Use of the approaches in this assignment is summarized as follows: The cost approach was not considered necessary for credible results given the scope of work and intended use of the appraisal, and was therefore omitted. Approach Necessary for Credible Results? Use in Assignment Cost Approach No Not Utilized Sales Comparison Approach Yes Utilized Income Capitalization Approach Yes Utilized APPROACHES TO VALUE Industrial Chapter Page 20 of 126 Data Research and Analysis The process employed to collect, verify, and analyze relevant data is detailed in individual sections of the report, which included the following: Background information on the subject property was obtained relating to ownership, occupancy, property history, financial performance, and site and improvement data. Records and data were reviewed relating to real estate taxes, zoning regulations, flood plain status, and other public and governmental influences. Regional, city and neighborhood data were gathered and examined. Market research was conducted to find the best available comparable improved sales and rental comparables. Unless otherwise stated, the comparables were not personally visited or verified by the appraisers for this assignment. The subject’s competitive position in the appropriate real estate market was examined. The highest and best use of the subject was analyzed. Reconciliation of the values indicated by the approaches to value utilized was completed. A final value conclusion represents our opinion of the subject’s market value as of the effective date of this appraisal. Data sources used in this report included, but are not limited to, the following: The property owner and/or property manager; Government and public sources; Market reports and surveys prepared by national and regional real estate companies; Buyers and sellers of real estate; Real estate brokers and agents; Industrial Chapter Page 21 of 126 Other real estate appraisers; Primary and secondary data published by marketing firms; General information and non-confidential data contained in our own files. Property Tour Joe Appraiser, conducted a physical tour of the interior and exterior of the property on September 1, 2016. Jane Appraiser did not tour the property. Limited building plans were reviewed and analyzed. Report Format This is an Appraisal Report as defined by the Uniform Standards of Professional Appraisal Practice under Standards Rule 2-2(a). Accordingly, it provides a summary or description of the appraisal process, subject and market data and valuation analyses. The report was also prepared to comply with the requirements of the Code of Professional Ethics of the Appraisal Institute and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Title XI Regulations. The depth of discussion contained in this report is specific to the needs of the client and the intended use of the appraisal. Exclusions from Scope of Work The scope of this appraisal did not require us to perform the following: Engage an environmental engineering company to determine if asbestos or other hazardous wastes exist within the subject’s improvements, soil or groundwater. Engage a mechanical engineer or technician to inspect the HVAC or other mechanical systems in place at the subject property. Industrial Chapter Page 22 of 126 Engage a roofing contractor to inspect the roof and estimate the remaining life thereof, or prepare a conditions report with suggested repairs. Engage a soil scientist or engineer to determine soil properties such as load bearing capacity, depth to groundwater, or other characteristics. We assume the subject property does not contain any hazardous wastes and that soil conditions allow commercial development on the site. Industrial Chapter Page 23 of 126 CLIENT, INTENDED USE AND USERS, AND PURPOSE OF THE APPRAISAL Client: The client for this assignment is Any Bank. Purpose of the Appraisal: The purpose of this appraisal is to estimate the 'as-is' and 'as- completed' market values of the subject property, in the Fee Simple interest, as of the effective dates of the appraisal. Intended Use: The intended use of the appraisal is to assist the Client in making a decision for mortgage financing. Intended User: Any Bank is the intended user of this appraisal; the report was prepared for their exclusive use and is not intended for use by any other party. No purchaser or seller of the subject property nor any borrower are intended users of this appraisal and no such parties should use or rely on this appraisal for any purpose. PROPERTY TOUR AND DATES OF VALUATION Effective Date of Valuation: September 1, 2016 – “As-Is” March 1, 2017 “As-Completed” Date of Tour: September 1, 2016 Property Toured By: Joe Appraiser Tour Type: Interior and Exterior Industrial Chapter Page 24 of 126 IDENTIFICATION OF THE SUBJECT PROPERTY Property Name: Industrial Property Location: The subject property is located at 123 Main Street, Hudson, St. Croix County, WI 54016 Legal Description: Lot 1, Block 2, Main Street Industrial Addition Assessor’s Parcel Numbers: 123-456-789-10 OWNERSHIP AND HISTORY OF THE SUBJECT PROPERTY Current Ownership: Joe and Jane Public Occupancy of the Subject Property: The subject is currently 100% owner-occupied. History of the Subject Property: Per readily available county website records, there have been no recorded sales or transfers of the subject property within the past three years. Current Disposition The property is currently under contract for sale. The buyer is Any Corporation, LLC, and the purchase price is $1,100,000, according to the purchase agreement provided to us which is dated July 20, 2016. Industrial Chapter Page 25 of 126 Based on our review of the purchase agreement, as well as our conversation with the listing broker, there appear to be no unusual sale conditions impacting the sale. According to the MLS, the property has been listed since 8/14/2015 and had an original list price of $1,300,000. Industrial Chapter Page 26 of 126 PROPERTY DESCRIPTION AND ANALYSIS The following is a description of the subject property’s physical characteristics of both the site and the improvements. Site Description The subject site is located the north side of Main Street, in an industrial park located on the west side of Hudson, approximately 1.5 miles from Interstate Highway 94. The subject site has a rectangular shape and a generally level topography. The two subject buildings are adjacent to each other, both parallel with the street. The parking area in front of the main building is bituminous (asphalt) with concrete curbing. The parking/storage area in front of the secondary building is gravel. Both Access and Visibility are considered to be average. Specific land features are as follows: Source: County Website Records Land Area (SF): 103,673 Land Area (Acres): 2.38 LAND AREA DIMENSIONS Industrial Chapter Page 27 of 126 Site Utility: Lot Location: Accessibility: Visibility: Frontage: Adjacent Properties/Land Uses: North: Industrial Buildings East: Industrial Buildings South: Industrial Buildings West: Industrial Buildings Street Surface: Bituminous Number of Street Lanes: Main Street - one lane each direction (in Each Direction) Curb and Gutter: None SETTING Average Interior Average Average Average Utilities Available: UTILITIES Private Well/Septic Industrial Chapter Page 28 of 126 Approximate Shape: Flood Zone: Zone X Flood Map Number: 123456789E Flood Map Date: 3/16/2009 Flood Plain Status: Topography: Soils: Drainage: Apparent Easements / Encroachments, or Restrictions: Environmental Conditions: Drains are located in parking lot, and around perimeter of property. Overall the drainage appears adequate. No survey or titlework were provided for review. This appraisal assumes there are no known easements that negatively affect the value of the subject property. An Environmental Assessment was not provided for review. This appraisal assumes that the subject is not affected by any environmental conditions. PHYSICAL FEATURES Rectangular Area of minimal flooding per the following Flood Insurance Rate Map issued by the US Department of Housing and Urban Development (HUD) Level Assumed stable Industrial Chapter Page 29 of 126 Tax Map SAMPLE Industrial Chapter Page 30 of 126 Improvements Description The subject property consists of two industrial buildings on one parcel. The main building steel frame with concrete block/brick encasement, and has a Gross Building Area (GBA) and Net Rentable Area (NRA) of 13,000 square feet (SF), 13% office finish, and 18’ clear heights in the warehouse. The secondary building is an unheated, wood, pole-frame construction warehouse building with metal panel exterior and roof, and has a GBA and NRA of 9,720 SF, with no office finish, and 18’ clear heights. The buyer plans to renovate the secondary building including insulating the walls/ceiling, frame/finish interior walls with metal panels on the interior of building, completing a 400 SF office finish build out, installing space heaters in the warehouse area, and installing a loading dock safety railing. Both building were originally constructed in 2011. Specific improvements features are as follows: Industrial Chapter Page 31 of 126 Source: Listing/Broker, County Website, Tour Existing/Proposed?: Gross Building Area (SF): Net Rentable Area (SF): Usage - "As-Is" Condition: Main Building - Office Finish - 3,000 13% Main Building - Warehouse - 10,000 44% Secondary Building - Office Finish - 0 0% Secondary Building - Warehouse - 9,720 43% Total (SF) - 22,720 100% Usage - "As-Completed" Condition: Main Building - Office Finish - 3,000 13% Main Building - Warehouse - 10,000 44% Secondary Building - Office Finish - 400 2% Secondary Building - Warehouse - 9,320 41% Total (SF) - 22,720 100% Number of Buildings: Land-to-Building Ratio: % of Building Protected by Sprinkler System: 0% Two (2) 4.56 : 1 BUILDING AREA STATISTICS 22,720 22,720 Existing Industrial Chapter Page 32 of 126 Current Occupancy: Type of Building: Type of Construction: Main Building - Secondary Building - Pole frame, metal encasement Quality of Construction: Date of Construction: 2011 Date of Renovation: 2016/2017 Actual Age: 5 Effective Age: 1 ("As-Completed") 3 ("As-Is") Remaining Economic Life: 44 Total Economic Life: 45 Building Condition: Deferred Maintenance None noted Number of Stories: One (1), plus storage mezzanine excluded from GBA/NRA Percent Office Finish: 14.96% ("As-Completed") 13.20% ("As-Is") Clear Height (in feet): 18 Dock Height/Drive-In Doors: 2 dock height, 2 drive-in GENERAL 100% owner-occupied Industrial Steel frame w/masonry encasement Average Average Industrial Chapter Page 33 of 126 BASIC CONSTRUCTION Foundation: Frame: Main Building - Secondary Building - Floor Structure: Exterior Walls: Main Building - Secondary Building - Roof Structure: Main Building - Secondary Building - Roof Cover: Main Building - Secondary Building - Flat with parapet walls Gabled Poured concrete footings/slab Structural steel w/masonry encasement Poured concrete slab Wood post and beam Concrete Block Metal Built-up with tar and gravel Metal INTERIOR Ceiling: Lighting: Floor Coverings: Interior Construction: Plumbing: Fire Protection: Heating/Cooling/Ventilation: Electrical: Windows: Elevators: Stairwells: Basement/Below Grade Spaces: Double pane in anodized aluminum frames None One for access to storage mezzanine in Main Building None Assumed adequate None noted Gas-fired, forced air for office areas; ceiling-mounted radiant heaters for warehouse area Assumed adequate Suspended ceiling tiles in office, open joists in warehouse Recessed and suspended flourescent lights Carpet in the office, and sealed concrete in the warehouse Painted gypsum hung on metal studs Industrial Chapter Page 34 of 126 SITE IMPROVEMENTS General: Landscaping: Number of Parking Spaces: 20 (Not including gravel parking/storage area) Parking Ratio (per 1,000 SF of GBA): 0.8803 Parking Type: Asphalt and gravel parking/storage areas, curbing, signage, landscaping, yard lighting and drainage Minor grass and trees along the perimeter of the site Surface Industrial Chapter Page 35 of 126 ZONING INFORMATION The subject is zoned Industrial, by the Hudson. According to the City, the purpose of the Industrial District: 1. The provisions of this section shall be administered and enforced by the Town of Hudson in a manner to clearly support and locate industrial development in the districts appropriately zoned for industrial uses. 2. To reserve appropriately located areas within the Town of Hudson for industrial development and related activities. 3. To protect areas appropriate for industrial development for intrusion by inappropriate uses. 4. To protect residential and commercial properties from intrusion by industrial uses. 5. To protect nuisance-free, nonhazardous industrial uses from inappropriate noise, odor, dust, dirt, smoke, vibration, glare and other objectionable influences, and from fire, explosion, noxious fumes, radiation and other hazards that are incidental to certain industrial uses. 6. To provide opportunities for certain types of industrial activities to concentrate in mutually beneficial relationships to each other. 7. To provide adequate space to meet the needs of modern industrial development, including areas for off-street parking, truck loading areas and site landscaping. 8. To minimize traffic congestion within the Town of Hudson and to assure that necessary public services are available and that industrial development projects do not exceed the Industrial Chapter Page 36 of 126 capability of the Town of Hudson to provide appropriate and environmentally sound services to industrial development. 9. To provide sufficient open space around industrial structures to protect them from the hazard of fire due to the lack of public water utilities within the Town of Hudson. 10. To establish and maintain high standards of site planning, architecture and landscape design that will create and environment that is attractive to industrial, research and development activities within the Town of Hudson. The subject’s zoning map can be found at the City’s website, here: http://www.townofhudsonwi.com/maps/ The subject’s zoning district code can be found here: http://ecode360.com/9779091 Comprehensive Land Use Plan Based on our review of public information, specifically, the Town of Hudson’s Comprehensive Plan posted on their website, the subject property is guided for Industrial Use through 2030. http://www.co.saint-croix.wi.us/vertical/sites/%7BBC2127FC-9D61-44F6-A557- 17F280990A45%7D/uploads/St_Croix_County_Future_Land_Use_2011.pdf Municipality Governing Zoning: Current Zoning: Current Use: Is current use permitted: Change in Zoning Pending?: Zoning Variance Applied For: Permitted Uses: ZONING: Hudson Industrial Industrial Yes No No Manufacturing, Warehousing, Office or Similar uses Industrial Chapter Page 37 of 126 Zoning Compliance We are not experts in the interpretation of complex zoning ordinances but based on our review of public information, the subject property, as improved, appears to conform to the Industrial district zoning code. To verify compliance, it is recommended that the user obtain a Zoning Compliance letter from the City or hire a third party zoning compliance specialist. A zoning map with the subject property and surrounding properties is found on the next page. Industrial Chapter Page 38 of 126 Zoning Map SAMPLE Industrial Chapter Page 39 of 126 REAL ESTATE TAX ANALYSIS Real estate taxes are a key determinant of value in Wisconsin. Taxes are paid currently in Wisconsin, which means that the taxes payable in 2015 relate to the January 2, 2015 assessor’s estimated market values. The assessed values are typically determined by no later than November of the prior year, and notifications are sent out to taxpayers by mid‐December. Then, taxpayers have until January 31st and July 31st to pay the taxes for the current year. Subject Taxes and Assessor’s Estimate of Market Value The various taxes are summarized in the following tables: PID# Base Tax Effective Tax Rate Special Assessments Service Charges Total Real Estate Taxes Taxes PSF of NRA 123-456-789-10 $12,435.16 1.48% $0.00 $0.00 $12,435.16 Total $12,435.16 1.48% $0.00 $0.00 $12,435.16 $0.55 REAL ESTATE TAXES Payable in 2016 Effective Tax Rate = Base Tax / AEMV PID# Land Value per SF of Land Improvements Value per SF of NRA Total Value per SF of NRA 123-456-789-10 $114,200 $1.10 $728,800 $32.08 $843,000 $37.10 Total $114,200 $1.10 $728,800 $32.08 $843,000 $37.10 ASSESSOR'S ESTIMATED MARKET VALUE - PAYABLE 2016 (as of January 2, 2015) PID# Land Value per SF of Land Improvements Value per SF of NRA Total Value per SF of NRA 123-456-789-10 $114,200 $1.10 $728,800 $32.08 $843,000 $37.10 Total $114,200 $1.10 $728,800 $32.08 $843,000 $37.10 PROPOSED ASSESSOR'S ESTIMATED MARKET VALUE - PAYABLE 2017 (as of January 2, 2016) Industrial Chapter Page 40 of 126 Special Assessments Special assessments are charges levied by the city and/or county on a property to pay for public infrastructure that directly benefits that property. In theory, the value of a property should increase at least by the amount of the special assessment. Special assessments are often charged to property owners for public works such as streets and roads, water lines, sanitary sewer lines, storm sewer lines, and storm water retention areas. Special assessments are paid annually over a specific term and the property owner is charged interest on the unpaid balance. The property owner has the option to pay the principal balance at any time. The value conclusion of this appraisal assumes special assessments are paid in full. Industrial Chapter Page 41 of 126 MARKET ANALYSIS Introduction Market Analysis identifies the interaction of the four forces on supply and demand, which in turn directly influences the value of real property. The four forces are categorized as follows: 1) Economic 2) Governmental 3) Social 4) Environmental The subject property is located in the City of Hudson in the northeast Industrial submarket of the Minneapolis/St. Paul/Bloomington MSA. Economic Analysis The following profile of the Minneapolis/St. Paul/Bloomington MSA was provided by Moody’s Economy.com. Economy.com's core assets of proprietary editorial and research content as well as economic and financial databases are a source of information on national and regional economies, industries, financial markets, and demographics. Economy.com's approach to the analysis of the U.S. economy consists of building a large-scale, simultaneous-equation econometric model, which they simulate and adjust with local market information, creating a model of the U.S. macro economy that is both top-down and bottom-up. In this model, those variables that are national in nature are modeled nationally while those that are regional in nature are modeled regionally. Interest rates, prices, and business investment are Industrial Chapter Page 42 of 126 modeled as national variables; key sectors such as labor markets (employment, labor force), demographics (population, households, and migration), and construction activity (housing starts and sales) are modeled regionally and then aggregated to national totals. This approach allows local information to influence the macroeconomic outlook. Therefore, changes in fiscal policy at the national level (changes in tax rates, for example) are translated into their corresponding effects on state economies. At the same time, the growth patterns of large states, such as California, New York, and Texas, play a major role in shaping the national outlook. In addition, on a regional basis, the modeling system is explicitly linked to other states through migration flows and unemployment rates. Economy.com's model structure also takes into account migration between states. Industrial Chapter Page 43 of 126 Twin Cities Metropolitan Area Economic Analysis Industrial Chapter Page 44 of 126 Industrial Chapter Page 45 of 126 Industrial Chapter Page 46 of 126 Industrial Chapter Page 47 of 126 Twin Cities Industrial Market Overview Vacancy Reaches 15-Year Low Driven by Positive Absorption in East Metro It was a banner six months for the industrial market in the east metro as the Northeast and Southeast submarkets combined for 1 million square feet (msf) of positive absorption. Meanwhile, an overbuilt market in the Northwest and tight supplies in the Southwest put a damper on more robust absorption. In all, the Twin Cities industrial market absorbed 1.35 msf, solidly meeting expectations of 1.25-1.5 msf in the first half of the year. The overall direct vacancy rate dropped from 9.4% at year-end 2015 to 8.2% in the first half of the year, a level not seen in more than 15 years. Vacancy rates for all product types— bulk/warehouse, office/warehouse and office/showroom—also reached notable lows. Strong demand for building sales was evident throughout the metropolitan area. Limited supply of product resulted in upward pressure on sale prices. In new construction, build-to-suit projects are taking precedence over speculative multi-tenant projects. Users are becoming more sophisticated at making build-to-suit projects work for them, with access to more information. This is making it harder for spec builders to launch large projects, so they may shift to smaller ones. Users still want to be closer to the urban core, thus fueling more in-fill redevelopment projects such as Northern Stacks in Fridley and the Midway Stadium site in St. Paul. At the same time, many industrial users have been showing a reluctance to muster the effort and expense to move to new facilities. Industrial Chapter Page 48 of 126 Outlook With strong submarkets in the Southeast and Northeast but slower activity in the Northwest and Southwest, the overall absorption for the second half of 2016 is predicted at 550,000 sf. Landlords in the Southwest and Northwest submarkets are likely to face continuing pressure for concessions. Construction costs, which have been steadily rising for several years, are expected to continue that trajectory through the rest of the year. Industrial Chapter Page 49 of 126 Northeast Submarket Analysis Subject’s Submarket Boundaries The property is located just outside of the Northeast submarket. This market area is generally delineated as follows: North: Southern Portion of Anoka County South: Interstate Highway 94 East: Western Portions of Washington County West: Interstate Highway 94 Highlights The Northeast metro enjoyed possibly its best half-year in recent memory. At the end of the first six months 2016, its vacancy rate stood at a mere 6.2% as 708,462 sf of space was absorbed, reflecting the completion of deals struck in 2015. The most notable sector was office/showroom, which fell to 10.6% vacancy after being as high as 16.5% vacant during the recession. Speculative industrial space that had been vacant for years is finally finding tenants, mostly driven by users who are either new to the Northeast market, have sold their former owner-occupied buildings, or are relocating to suburban locations from the St. Paul Midway. Hyde Development’s Northern Stacks in Fridley, Meritex Enterprises’ Highcrest Distribution Center and IRET’s 3075 Long Lake Road (both in Roseville) all found tenants. Industrial Chapter Page 50 of 126 Some of the notable lease signings in the first half included Tire Rack taking 155,000 sf at 3015 Long Lake Road (Roseville); Murphy Rigging & Erecting leasing 128,000 sf at 807 Hampden Ave. in St. Paul; and Savers Inc.’s lease for 85,000 sf at Energy Park Distribution Center, also in St. Paul. More new construction is on the way, as there are only two options available for users of 100,000 sf or more in the Northeast. United Properties’ Midway Stadium redevelopment is set to open in the second half with Tierney Brothers as lead tenant, while a second phase of Northern Stacks is under construction with plans quickly advancing for a third. Outlook: Absorption in the second half is estimated at 500,000-600,000 sf. Industrial Chapter Page 51 of 126 Hudson Area and Western St. Croix County - CoStar Industrial Market Analysis For this appraisal we conducted a search of the CoStar Commercial Properties Database for all Industrial properties in the Greater Hudson Area in order to analyze market trends. We expanded to a larger geographic area in order to obtain a large enough sample size for meaningful results. The following map shows the area surveyed, and the resulting properties included in the survey: Industrial Chapter Page 52 of 126 Industrial Chapter Page 53 of 126 Subject’s Neighborhood Analysis Subject’s Neighborhood Boundaries The property is located in the central portion of the Town of Hudson. This market area in part of the Greater Hudson Area, which is generally delineated as follows: North: Highway 35/64 South: Interstate Highway 94 corridor East: State Highway 65 West: Wisconsin State line Neighborhood Access and Linkages Neighborhood Land Use Industrial Chapter Page 54 of 126 Other land use characteristics for the subject’s immediate area are summarized below. Predominant Age of Improvements: 8 – 50 years Predominant Quality and Condition: Average Approximate Percent Developed: 25% Life Cycle Stage: Stability Subject’s Immediate Surrounding Land Uses North: Industrial Buildings South: Industrial Buildings East: Industrial Buildings West: Industrial Buildings Industrial Chapter Page 55 of 126 HIGHEST AND BEST USE ANALYSIS HIGHEST AND BEST USE DEFINITION The Dictionary of Real Estate Appraisal, Fifth Edition. (Appraisal Institute, Chicago, 2010), defines the highest and best use as: The most probable use of a property which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued. To determine the highest and best use the subject site is typically evaluated under two scenarios: as though vacant land and as presently improved. In both cases, the property’s highest and best use must meet the four criteria described above. Highest and Best Use – As Though Vacant Physically Possible The physical possibility of a use is dictated by the size, shape, topography, availability of utilities, and any other physical aspects of the site. The subject site contains 2.38 acres, or 103,673 square feet. The site is rectangular in shape, and has a level topography. It has average frontage, access, and visibility. The overall utility of the site is considered to be average. Overall, the site is considered adequate to accommodate most permitted development possibilities. Legally Permissible The zoning regulations in effect at the time of the appraisal determine the legal permissibility of a potential use of the subject site. As described in the Zoning section, the subject site is zoned Industrial Chapter Page 56 of 126 Industrial by the Hudson. Permitted uses within this district include Manufacturing, Warehousing, Office or Similar uses. We are not aware of any further legal restrictions that limit the potential uses of the subject. In addition, rezoning of the site is not likely due to the character of the area. Financially Feasible In order to be seriously considered, a use must have the potential to provide a sufficient return to attract investment capital over alternative forms of investment. A positive net income or acceptable rate of return would indicate that a use is financially feasible. Financially feasible uses are those uses that can generate a profit over and above the cost of acquiring the site, and constructing the improvements. Given the state of the industrial market, including the Hudson market area, the site could accommodate a variety of industrial uses and would likely be developed immediately with some type of industrial use. Maximally Productive Of the uses that are permitted, possible, and financially feasible, the one that will result in the maximum value for the property is considered the highest and best use. There does not appear to be any reasonably probable use of the site that would generate a higher residual land value than immediate industrial development. Accordingly, it is our opinion that immediate industrial development, consistent with the normal market density level permitted by zoning, is the maximally productive use of the property as though vacant. CONCLUSION Industrial Chapter Page 57 of 126 We have considered the legal issues related to zoning and legal restrictions. We also analyzed the physical characteristics of the site to determine what legal uses would be possible, and considered the financial feasibility of these uses to determine the use that is maximally productive. Considering the subject site’s physical characteristics and location, as well as the state of the local market, it is our opinion that the concluded highest and best use of the subject as though vacant, is immediate industrial development. Industrial Chapter Page 58 of 126 Highest and Best Use – As Improved The Dictionary of Real Estate Appraisal, Fifth Edition (Appraisal Institute, Chicago, 2010) defines highest and best use of the property as improved as: The use that should be made of a property as it exists. An existing improvement should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. In analyzing the Highest and Best Use of a property as improved, it is recognized that the improvements should continue to be used until it is financially advantageous to alter physical elements of the structure or to demolish it and build a new one. Physically Possible The subject improvements were constructed in 2011. The improvements are in average condition. We know of no current or pending municipal actions or covenants that would require a change to the current improvements. The subject has two buildings, which results in less functional utility than one building of the same square footage/space types. It is possible for these two buildings to be connected, though the costs would likely be significant. Legally Permissible As described in the Zoning Analysis section of this report, the subject site is zoned Industrial. The site is improved with two existing industrial buildings. In the Zoning section of this appraisal, we determined that the existing improvements represent a legal conforming use. We also Industrial Chapter Page 59 of 126 determined that the existing use is a permitted use in this zone. The current use is consistent with the surrounding uses, as well as the comprehensive plan designation for the area. Financially Feasible The subject property has historically been 100% owner-occupied, and will be owner occupied after the pending sale. The buyer plans to renovate the secondary building by finishing the interior, converting it from unheated storage space into an insulated, heated building with a small amount of office space. The proposed renovations are considered to increase the functional utility of the building at a level commensurate with the cost of the renovations. For these reasons, the current use, including the proposed renovation, is considered financial feasible. Maximally Productive In our opinion, the improvements, including the proposed renovations, contribute significantly to the value of the site. It is likely that no alternate use would result in a higher return. CONCLUSION It is our opinion that the existing improvements add value to the site as though vacant, dictating a continuation of its current use. It is our opinion that the Highest and Best Use of the subject property as improved is an industrial property as it is currently improved, including the proposed renovations. There are no alternative uses that could provide a higher present value than industrial use. Demolition of the existing improvements and redevelopment of the site would not Industrial Chapter Page 60 of 126 be financially feasible or maximally productive. We conclude that continued industrial use is maximally productive and therefore the highest and best use of the site as improved. MOST PROBABLE BUYER Taking into account the size and class of the property, as well as its occupancy (100% owner- occupied), the likely buyer is a local or regional owner-user. Industrial Chapter Page 61 of 126 THE VALUATION PROCESS Valuation Methodology The traditional methods of processing market data into a value indication include: Cost Approach; Sales Comparison Approach; and Income Capitalization Approach. The cost approach assumes that an informed purchaser would pay no more than the cost of producing a substitute property with the same utility. This approach is particularly applicable when the improvements being appraised are relatively new and represent the highest and best use of the land, or when the property has unique or specialized improvements for which there is little or no sales data from comparable properties. The sales comparison approach assumes that an informed purchaser would pay no more for a property than the cost of acquiring another existing property with the same utility. This approach is especially appropriate when an active market provides sufficient reliable data that can be verified from authoritative sources. The sales comparison approach is less reliable in an inactive market, or when estimating the value of properties for which no real comparable sales data is available. It is also questionable when sales data cannot be verified with principals to the transaction. The income capitalization approach reflects the market’s perception of a relationship between a property’s potential income and its market value, a relationship expressed as a capitalization rate. This approach converts the anticipated benefits (dollar income or amenities) to be derived Industrial Chapter Page 62 of 126 from the ownership of property into a value indication through capitalization. This approach is widely applied when appraising income-producing properties. In appraisal practice, an approach to value is included or eliminated based on its applicability to the property type being valued and the quality of information available. The reliability of each approach depends on the availability and comparability of market data as well as the motivation and thinking of purchasers. Use of the approaches in this assignment is summarized as follows: The cost approach was not considered necessary for credible results given the scope of work and intended use of the appraisal, and was therefore omitted. Final Reconciliation Process The valuation process is concluded by analyzing each approach to value used in the appraisal. When more than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or is a correlation of all the approaches used in the appraisal. Approach Necessary for Credible Results? Use in Assignment Cost Approach No Not Utilized Sales Comparison Approach Yes Utilized Income Capitalization Approach Yes Utilized APPROACHES TO VALUE Industrial Chapter Page 63 of 126 SALES COMPARISON APPROACH In the Sales Comparison Approach, sales of comparable properties are adjusted for differences to estimate a value for the subject property. This approach relies on the principle of substitution, which holds that when a property is replaceable in the market, its value tends to be set at the cost of acquiring an equally desirable substitute property, assuming that no costly delay is encountered in making the substitution. A unit of comparison such as price per square foot of building area or effective gross income multiplier is typically used to value the property. Adjustments are applied to the unit of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive an opinion of value for the subject property. The following pages contain a summary of the improved properties that were compared to the subject property, a map showing their locations, detailed write-ups of each sale, as well as the adjustment process. To apply the sales comparison approach, we searched for sale transactions within the following parameters: Property Type: Industrial Location: Throughout the Western Wisconsin Submarket Size: 5,000 to 80,000 square feet of NRA Age/Quality: Ideally within 10 years of the property Transaction Date: 1/1/2014 to present Industrial Chapter Page 64 of 126 Summary of Comparable Sales A search of public records and proprietary data sources was conducted to identify recent improved sales and listings in proximity to the subject and having a similar highest and best use. Out of all data reviewed, the following sales are selected as the best indicators of the subject’s value. We choose price per square foot of Net Rentable Area (NRA) as the most appropriate unit of comparison because market participants typically compare sale prices and values on this basis. We will first analyze the subject property in its “As-Completed” condition, and will then complete a separate analysis for the “As-Is” condition at the end of this approach. Industrial Chapter Page 65 of 126 Condition; Acres; Sale Price; Name GBA (SF); Yr Built; % Office; LTB Ratio; Grantor; Sale Date; $ per SF of # Address NRA (SF) # Stories Clear Height Pkg Ratio Grantee Prop. Rights NRA 1 700 Norflex Drive 11,951 2008 Average 3.40 McPhillips Holdings $1,098,245 $91.90 700 Norflex Drive 11,951 1 17% 12.39 Mark Cangelosi Aug-16 Hudson, WI 54016 18 1.26 Fee Simple Comments: 2 Office/Warehouse 6,400 1983 Average 3.00 Thomas Trost $440,000 $68.75 310 West North Shore Drive 6,400 1 23% 20.39 Bryan Knudtson Jul-14 New Richmond, WI 54017 20 0.26 Fee Simple Comments: 3 2911 Harvey Street 77,508 2004 Average 4.46 Dean Hanson Revocable Trust $3,970,000 $51.22 2911 Harvey Street 77,508 1 10% 2.51 Harvey Street Investments Feb-15 Hudson, WI 54016 18 NAV Fee Simple Comments: 4 Office/Warehouse 10,500 2004 Average 3.36 Bowersox LLC $515,000 $49.05 102 Packer Drive 10,500 1 15% 13.94 RDP Investments LLC Feb-15 Roberts, WI 54023 14 NAV Fee Simple Comments: 5 500 Simmon Drive Building 68,843 2003 Average 6.00 Thelen Real Estate Inc $2,720,000 $39.51 500 Simmon Drive 68,843 1 9% 3.80 Active Listing Active Osceola, WI 54020 24 0.92 Fee Simple Comments: STATISTICS NRA Year Built Parking Ratio LTB Ratio Sale Date Sale Price $ per SF of NRA Low 6,400 1983 0.26 2.51 Jul-14 $440,000 $39.51 High 77,508 2008 1.26 20.39 Aug-16 $3,970,000 $91.90 Average 35,040 2000 0.81 10.61 May-15 $1,748,649 $60.08 Median 11,951 2004 0.92 12.39 Feb-15 $1,098,245 $51.22 SUBJECT Industrial Property 22,720 2011 Average 4.56 123 Main Street 14.96% 0.88 Hudson, WI 54016 18 SUMMARY OF COMPARABLE IMPROVED SALES The purchase price was $775,000, however, the buyer of this property planned a renovation (including replacement of gravel outdoor storage yard w/concrete, fencing modifications, and minor interior office renovations), that were specific to a tenant he had signed for the building prior to the sale. The reported cost for the renovations were $298,245 for the outdoor storage yard and $25,000 for the remaining improvements. Based on an analysis of the property, the proposed renovations and the lease terms, the proposed renovations are considered financially feasible, and are therefore included in the sale price. Buyer plans to operate manfuacturing business as owner-occupant. Property has 1,440 SF mezzanine not included in our GBA/NRA calculation. There are 6 overhead doors. The property, zoned G3, was reportedly partially occupied at the time of the sale. The seller was motivated to divest the property because they were settling some assets from a deceased member of the family's estate. The buyer was interested in the property as both an investment as well as potentially using some of the space for their business in the future. The buyer did not report any sales conditions. This is the sale of an industrial building that was demised for single-tenant occupancy. Active listing of a high quality manufacturing building, suited for warehousing and/or manufactuing. Property is listed at $2,720,000. The property is located on six acres and can be expanded by up to 35,000 additional square feet. Industrial Chapter Page 66 of 126 Improved Sales Map Property Address Subject Property 123 Main Street, Hudson, WI 54016 Improved Comparable # 1 700 Norflex Drive, Hudson, WI 54016 Improved Comparable # 2 310 West North Shore Drive, New Richmond, WI 54017 Improved Comparable # 3 2911 Harvey Street, Hudson, WI 54016 Improved Comparable # 4 102 Packer Drive, Roberts, WI 54023 Improved Comparable # 5 500 Simmon Drive, Osceola, WI 54020 Industrial Chapter Page 67 of 126 IMPROVED COMPARABLE PROFILE COMPARABLE # 1 Property Name: 700 Norflex Drive Sub-Property Type: Office/Warehouse Address: 700 Norflex Drive City, State, Zip: Hudson, WI, 54016 County: St. Croix MSA: Minneapolis/St. Paul Legal/Tax/Parcel ID: Sale Price: $775,000 Effective RE Sale Price: $1,098,245 Sale Date: 8/9/2016 List Date: 1/0/1900 Acres (gross): 3.40 Sale Status: Closed Land SF (gross): 148,104 Acres (usable): 3.40 $/SF (GBA): $91.90 Land SF (usable): 148,104 $/SF (NRA): $91.90 Shape: Irregular Topography: Generally level Grantor/Seller: McPhillips Holdings Access: Average Grantee/Buyer: Mark Cangelosi Visibility: Average Utilities: Property Rights Conveyed: Fee Simple % of Interest Conveyed: 100% Zoning Designation: Terms of Sale: Market-oriented Document Type: 0 GBA SF: 11,951 Verification Type: Verified with Buyer NRA SF: 11,951 Year Built/Renovated: 2008/ Condition of Improvements: Average # Buildings/# Stories: 1 / 1 % Occupied: 100% Occupancy Type: To be single-tenant # of Tenants: 1 # Units: 1 Net Operating Income: $84,469 % Sprinkler System: None Reserves Included: No Elevators: None Operating Data Type: Proforma Yr 1 Land-to-Building Ratio: 12.39 Capitalization Rate: 7.69% Parking Ratio (per 1,000 SF GBA): 1.26 Management Included: Yes Property Information Source: The purchase price was $775,000, however, the buyer of this property planned a renovation (including replacement of gravel outdoor storage yard w/concrete, fencing modifications, and minor interior office renovations), that were specific to a tenant he had signed for the building prior to the sale. The reported cost for the renovations were $298,245 for the outdoor storage yard and $25,000 for the remaining improvements. Based on an analysis of the property, the proposed renovations and the lease terms, the proposed renovations are considered financially feasible, and are therefore included in the sale price. Location & Property Identification 020-1062-10-026 Sale Information Site and Improvement Data Private well/septic Industrial Operating Data and Key Indicators Public Record, property owner Comments: 700 Norflex Drive Industrial Chapter Page 68 of 126 IMPROVED COMPARABLE PROFILE COMPARABLE # 2 Property Name: Office/Warehouse Sub-Property Type: Office/Warehouse Address: 310 West North Shore Drive City, State, Zip: New Richmond, WI, 54017 County: St. Croix MSA: 0 Legal/Tax/Parcel ID: Sale Price: $440,000 Effective RE Sale Price: $440,000 Sale Date: 7/31/2014 List Date: 7/1/2014 Acres (gross): 3.00 Sale Status: Closed Land SF (gross): 130,506 Acres (usable): 3.00 $/SF (GBA): $68.75 Land SF (usable): 130,506 $/SF (NRA): $68.75 Shape: 0 Topography: Generally level Grantor/Seller: Thomas Trost Access: Above Average Grantee/Buyer: Bryan Knudtson Visibility: Above Average Utilities: Property Rights Conveyed: Fee Simple % of Interest Conveyed: 100% Zoning Designation: Terms of Sale: Cash or market oriented Document Type: 0 Verification Type: Reliable Third Party GBA SF: 6,400 NRA SF: 6,400 Year Built/Renovated: 1983/ Condition of Improvements: Average % Occupied: 0% # Buildings/# Stories: 1 / 1 # of Tenants: 0 Occupancy Type: Owner-occupied Net Operating Income: $0 # Units: 0 Reserves Included: 0 % Sprinkler System: 0% Operating Data Type: 0 Elevators: 0 Capitalization Rate: 0.00% Air-conditioning: Office only Management Included: 0 Land-to-Building Ratio: 20.39 Parking Ratio (per 1,000 SF GBA): 0.26 Property Information Source: Location & Property Identification 261-1208-80-050 Sale Information Site and Improvement Data 0 Highway Commercial Operating Data and Key Indicators Comments: Buyer plans to operate manfuacturing business as owner- occupant. Property has 1,440 SF mezzanine not included in our GBA/NRA calculation. There are 6 overhead doors. Public Record, Listing Office/Warehouse Industrial Chapter Page 69 of 126 IMPROVED COMPARABLE PROFILE COMPARABLE # 3 Property Name: 2911 Harvey Street Sub-Property Type: Office/Warehouse Address: 2911 Harvey Street City, State, Zip: Hudson, WI, 54016 County: St. Croix MSA: 0 Legal/Tax/Parcel ID: Sale Price: $3,970,000 Effective RE Sale Price: $3,970,000 Sale Date: 2/27/2015 List Date: 1/0/1900 Acres (gross): 4.46 Sale Status: Closed Land SF (gross): 194,278 Acres (usable): 4.46 $/SF (GBA): $51.22 Land SF (usable): 194,278 $/SF (NRA): $51.22 Shape: 0 Topography: 0 Grantor/Seller: Dean Hanson Revocable Trust Access: Average Grantee/Buyer: Harvey Street Investments Visibility: Average Utilities: Property Rights Conveyed: Fee Simple % of Interest Conveyed: 100% Zoning Designation: Terms of Sale: Market oriented Document Type: 0 Verification Type: Reliable Third Party GBA SF: 77,508 NRA SF: 77,508 Year Built/Renovated: 2004/ Condition of Improvements: Average # Buildings/# Stories: 1 / 1 Occupancy Type: Multi-Tenant # Units: 0 % Sprinkler System: 100% Elevators: 0 Air-conditioning: 0 Land-to-Building Ratio: 2.51 Parking Ratio (per 1,000 SF GBA): NAV Property Information Source: Comments: Public Record, Listing 2911 Harvey Street The property, zoned G3, was reportedly partially occupied at the time of the sale. The seller was motivated to divest the property because they were settling some assets from a deceased member of the family's estate. The buyer was interested in the property as both an investment as well as potentially using some of the space for their business in the future. The buyer did not report any sales conditions. Location & Property Identification 236-1982-27-000 Sale Information Site and Improvement Data 0 0 Industrial Chapter Page 70 of 126 IMPROVED COMPARABLE PROFILE COMPARABLE # 4 Property Name: Office/Warehouse Sub-Property Type: Office/Warehouse Address: 102 Packer Drive City, State, Zip: Roberts, WI, 54023 County: St. Croix MSA: 0 Legal/Tax/Parcel ID: Sale Price: $515,000 Effective RE Sale Price: $515,000 Sale Date: 2/13/2015 List Date: 1/0/1900 Acres (gross): 3.36 Sale Status: Closed Land SF (gross): 146,362 Acres (usable): 3.36 $/SF (GBA): $49.05 Land SF (usable): 146,362 $/SF (NRA): $49.05 Shape: Rectangular Topography: Generally level Grantor/Seller: Bowersox LLC Access: Average Grantee/Buyer: RDP Investments LLC Visibility: Average Utilities: Property Rights Conveyed: Fee Simple % of Interest Conveyed: 100% Zoning Designation: Terms of Sale: Cash to seller Document Type: Warranty Deed Verification Type: Reliable 3rd Party, Public Record GBA SF: 10,500 NRA SF: 10,500 Year Built/Renovated: 2004/ Condition of Improvements: Average % Occupied: 0% # Buildings/# Stories: 1 / 1 # of Tenants: 0 Occupancy Type: Owner-occupied Net Operating Income: $0 # Units: 0 Reserves Included: 0 % Sprinkler System: 0% Operating Data Type: 0 Elevators: 0 Capitalization Rate: 0.00% Air-conditioning: 0 Management Included: 0 Land-to-Building Ratio: 13.94 Parking Ratio (per 1,000 SF GBA): NAV Property Information Source: Location & Property Identification 176-1033-80-020 Sale Information Site and Improvement Data 0 0 Operating Data and Key Indicators Comments: This is the sale of an industrial building that was demised for single-tenant occupancy. Reliable 3rd Party, Public Record Office/Warehouse Industrial Chapter Page 71 of 126 IMPROVED COMPARABLE PROFILE COMPARABLE # 5 Property Name: 500 Simmon Drive Building Sub-Property Type: Office/Warehouse Address: 500 Simmon Drive City, State, Zip: Osceola, WI, 54020 County: Polk MSA: 0 Legal/Tax/Parcel ID: Sale Price: $2,720,000 Effective RE Sale Price: $2,720,000 Sale Date: Active List Date: Active Acres (gross): 6.00 Sale Status: Active Land SF (gross): 261,360 Acres (usable): 6.00 $/SF (GBA): $39.51 Land SF (usable): 261,360 $/SF (NRA): $39.51 Shape: 0 Topography: 0 Grantor/Seller: Thelen Real Estate Inc Access: Average Grantee/Buyer: Active Listing Visibility: Average Utilities: Property Rights Conveyed: Fee Simple % of Interest Conveyed: Active Zoning Designation: Terms of Sale: Active Document Type: N/A Verification Type: Reliable Third Party GBA SF: 68,843 NRA SF: 68,843 Year Built/Renovated: 2003/ Condition of Improvements: Average % Occupied: 0% # Buildings/# Stories: 1 / 1 # of Tenants: 0 Occupancy Type: Single Tenant Net Operating Income: $0 # Units: 0 Reserves Included: 0 % Sprinkler System: 0% Operating Data Type: 0 Elevators: 0 Capitalization Rate: 0.00% Air-conditioning: 0 Management Included: 0 Land-to-Building Ratio: 3.80 Parking Ratio (per 1,000 SF GBA): 0.92 Property Information Source: Location & Property Identification 165-00621-1000 Sale Information Site and Improvement Data All available at site. Industrial Operating Data and Key Indicators Comments: Active listing of a high quality manufacturing building, suited for warehousing and/or manufactuing. Property is listed at $2,720,000. The property is located on six acres and can be expanded by up to 35,000 additional square feet. Public Record 500 Simmon Drive Building Industrial Chapter Page 72 of 126 Adjustment Process – “As-Completed” Adjustments can be applied through quantitative or qualitative analysis, or both. Quantitative adjustments are specific numeric adjustments that are most credible when adequate data and analysis can be performed such as statistical analysis or matched-pair-sales. Consistent with the scope of work for this assignment, we present numerical adjustments (using percentages) in the sales comparison analysis that follows, but note that they are based on qualitative judgment rather than empirical data. This methodology is commonly used by participants that buy and sell property similar to the subject property, therefore, it is considered the appropriate methodology to use in this assignment. Our qualitative adjustments are based on a scale calibrated in 5% increments, with a minor adjustment considered to be 5% and a substantial adjustment considered to be 25%. Downward adjustments were applied to those factors of comparison where the comparables were considered superior to the subject and, conversely, upward adjustments where the comparables considered inferior. Property Rights Conveyed The property rights conveyed in a transaction typically have an impact on the price that is paid. Acquiring the fee simple interest implies that the buyer is acquiring the full bundle of rights. Acquiring a leased fee interest typically means that the property being acquired is encumbered by at least one lease, which is a binding agreement transferring rights of use and occupancy to the tenant. A leasehold interest involves the acquisition of a lease, which conveys the rights to Industrial Chapter Page 73 of 126 use and occupy the property to the buyer for a finite period of time. At the end of the lease term, there is typically no reversionary value to the leasehold interest. In this case, no adjustments are required. Financial Terms The financial terms of a transaction can have an impact on the sale price of a property. A buyer who purchases an asset with favorable financing might pay a higher price, as the reduced cost of debt creates a favorable debt coverage ratio. A transaction involving above-market debt will typically involve a lower purchase price tied to the lower equity returns after debt service. We analyzed all of the transactions to account for atypical financing terms. To the best of our knowledge, all of the sales used in this analysis were accomplished with cash or market-oriented financing. Therefore, no adjustments were required. Conditions of Sale Adjustments for conditions of sale usually reflect the motivations of the buyer and the seller. In many situations the conditions of sale may significantly affect transaction prices. In this case, comparable 5 is an Active Listing and has not been placed under contract yet. Therefore this sale has been adjusted downward 10% to account for the additional price negotiations that are probable. The previous adjustments, if required, are applied sequentially. Industrial Chapter Page 74 of 126 Market Conditions Real estate values normally change over time. The rate of this change fluctuates due to investors’ perceptions of prevailing market conditions. This adjustment category reflects value changes, if any, that have occurred between the date of the sale and the effective date of the appraisal. In this analysis, we determined the as‐stabilized market value using the date of March 2017 “as- completed”. All of the comparables were adjusted to this date. The sales that are included in this analysis occurred between July 2014 to present (active listing). The market has improved over this period; as such, we apply an annual market conditions adjustment of 2.00%. Time - Market Conditions adjustments are applied after the previous adjustments, but before any of the following adjustments. Location Location has a significant impact on property values. This adjustment category considers general market area influences as well as a property’s accessibility and visibility from a main thoroughfare. Differing rent levels or land values are typically good indications that a location adjustment is required. Location adjustments were applied to comparables 2, 4, & 5 to account for overall location differences such as proximity to the core metro area and access points such as Interstate Highway 94. Physical Characteristics Each property has various physical traits that determine its appeal. These traits include size, age, condition, quality, parking ratio and utility. Industrial Chapter Page 75 of 126 Smaller buildings tend to sell for higher prices per square foot, while larger buildings tend to sell for lower prices per square foot. All comparables are adjusted accordingly. All comparables are adjusted for differences in Age/Quality/Condition, as measured by effective age, as follows: All comparables are adjusted for differences in Percent Office Finish, as follows: SALE # 1 SALE # 2 SALE # 3 SALE # 4 SALE # 5 Date of Sale Aug-16 Jul-14 Feb-15 Feb-15 Active Date of Construction 2008 1983 2004 2004 2003 Effective Age at Sale 4 16 6 6 6 Effective Age of Subject Property 1 1 1 1 1 Difference in Age 3 14.5 5 5 5 Annual Depreciation 2.22% 2.22% 2.22% 2.22% 2.22% (45 year economic life) Preliminary Indicated Age Adjustment 6.67% 32.22% 10.00% 10.00% 11.11% Less: Adjustment to Account for Land* 0.75 0.75 0.75 0.75 0.75 Final Indicated Age Adjustment 5.00% 24.17% 7.50% 7.50% 8.33% *Land does not depreciate DERIVATION OF AGE ADJUSTMENT Percent Office Finish - Subject 14.96% Overall Rental Rate Per Square Foot Factor - Subject 1.15 SALE # 1 SALE # 2 SALE # 3 SALE # 4 SALE # 5 % of Comparable Office Finish 17.01% 23.00% 10.32% 15.00% 8.70% Overall Rental Rate/SF Factor - Comp 1.17 1.23 1.10 1.15 1.09 Overall Rental Rate/SF Factor - Subject 1.15 1.15 1.15 1.15 1.15 Ratio: Subject-to-Comparable 0.983 0.935 1.042 1.000 1.058 Adjustment -1.7% -6.5% 4.2% 0.0% 5.8% DERIVATION OF OFFICE FINISH ADJUSTMENT - Rental Rate Factor Comparison Industrial Chapter Page 76 of 126 All comparables are adjusted for differences in Clear Height, as follows: All comparables are adjusted for differences in Land-to-Building Ratio, as follows: Base Cost of Office/Warehouse Bldg. (per SF of GBA) $60.00 Cost of Office Finish (per SF) $45.00 % Office Finish - Subject 14.96% Incremental Cost of Finished Area $6.73 Base Cost of Subject for Derivation of Adjustment $66.73 SALE # 1 SALE # 2 SALE # 3 SALE # 4 SALE # 5 Cost of Office Finish $45.00 $45.00 $45.00 $45.00 $45.00 % Office Finish - Comparables 17% 23% 10% 15% 9% Incremental Cost $7.66 $10.35 $4.64 $6.75 $3.92 Base O/W Cost $60.00 $60.00 $60.00 $60.00 $60.00 Base Cost of Comparable Sale $67.66 $70.35 $64.64 $66.75 $63.92 Base Cost of Subject $66.73 $66.73 $66.73 $66.73 $66.73 Indicated Adjustment -1.36% -5.14% 3.23% -0.02% 4.41% DERIVATION OF OFFICE FINISH ADJUSTMENT - Office Finish Cost Comparison INDICATED OFFICE FINISH ADJUSTMENTS Rental Rate Factor Comparison -1.7% -6.5% 4.2% 0.0% 5.8% Office Finish Cost Comparison -1.4% -5.1% 3.2% 0.0% 4.4% Concluded Adjustments -1.6% -5.8% 3.7% 0.0% 5.1% SALE # 1 SALE # 2 SALE # 3 SALE # 4 SALE # 5 Ceiling Height 18 20 18 14 24 Subject Ceiling Height 18 18 18 18 18 Difference in Ceiling Height 0 2 0 4 6 Less: Initial 2' Difference 2 2 2 2 2 Adjustable Difference in Ceiling Height 0 0 0 2 4 Adjustment Percentage (per foot) 2.00% 2.00% 2.00% 2.00% 2.00% Final Indicated Clear Height Adjustment 0.00% 0.00% 0.00% 4.00% -8.00% DERIVATION OF CLEAR HEIGHT ADJUSTMENT SALE # 1 SALE # 2 SALE # 3 SALE # 4 SALE # 5 Comp's NRA: 11,951 6,400 77,508 10,500 68,843 Subject LTB Ratio: 4.56 4.56 4.56 4.56 4.56 Comp's LTB Ratio: 12.39 20.39 2.51 13.94 3.80 Comp's Land SF: 148,104 130,506 194,278 146,362 261,360 Concluded Land Value: $3.00 $3.00 $3.00 $3.00 $3.00 Weight for Extra Land: 0.5 0.5 0.5 0.5 0.5 Sale Price of Comp: $1,098,245 $440,000 $3,970,000 $515,000 $2,720,000 INDICATED ADJUSTMENT: -12.79% -34.54% 6.01% -28.68% 2.90% DERIVATION OF LAND-TO-BUILDING RATIO ADJUSTMENT Industrial Chapter Page 77 of 126 All comparables were adjusted downward 5% to account for the subject’s inferior functional utility given its two-building configuration. Economic Characteristics The economic characteristics of a property include its occupancy levels, operating expense ratios, tenant quality, and other items not covered under prior adjustments that would have an economic impact on the transaction. In this case, no adjustments are applied. A summary of all the adjustments applied to the comparables is located on the following table: Industrial Chapter Page 78 of 126 Improved Sales Adjustment Grid DESCRIPTION SUBJECT 1 2 3 4 5 Address Industrial Property 700 Norflex Drive Office/Warehouse 2911 Harvey Street Office/Warehouse 500 Simmon Drive Building 123 Main Street 700 Norflex Drive 310 West North Shore Drive 2911 Harvey Street 102 Packer Drive 500 Simmon Drive Hudson, WI 54016 Hudson, WI 54016 New Richmond, WI 54017 Hudson, WI 54016 Roberts, WI 54023 Osceola, WI 54020 Access Average Average Above Average Average Average Average Visibility Average Average Above Average Average Average Average Year Built 2011 2008 1983 2004 2004 2003 NRA (SF) 22,720 11,951 6,400 77,508 10,500 68,843 Land-to-Building Ratio 4.56 12.39 20.39 2.51 13.94 3.80 Unadjusted Price per SF $91.90 $68.75 $51.22 $49.05 $39.51 Sale Date Aug-16 Jul-14 Feb-15 Feb-15 Active Cumulative Adjustments Property Rights Financing Conditions of Sale -10% Market Conditions* 1.1% 5.3% 4.1% 4.1% 0.0% Effective $/SF $92.92 $72.36 $53.30 $51.08 $35.56 Additive Adjustments Location 10% 10% 10% Size -5% -15% 10% -5% 10% Age/Quality/Condition -15% 24% 8% 8% 8% Percent Office Finish -2% -6% 4% 0% 5% Clear Height 0% 0% 0% 4% -8% Land-to-Building Ratio -13% -35% 6% -29% 3% Functional Utility -5% -5% -5% -5% -5% Economics Net Adjustment -39% -26% 22% -17% 23% Adjusted Price per SF $56.36 $53.40 $65.15 $42.29 $43.85 Industrial Chapter Page 79 of 126 “As-Completed” Value Indicated via Sales Comparison Approach Based on the preceding analysis and adjustments, the comparable sales provide adjusted value indications ranging from $42.29 to $65.15 per square foot of NRA. Giving primary (but not exclusive) weight to comparable 1, it is our opinion that the applicable unit value is $54.00 per square foot. This results in the following estimate of value by the sales comparison approach: “As-Is” Value Indicated via Sales Comparison Approach The preceding analysis was of the property in its “as-completed” condition, after the proposed renovation. To arrive at an “as-is” value indication, we deduct the proposed construction costs, plus profit, from the “as-completed” value conclusion, as follows: Construction Costs The proposed renovation costs, presented to us, are summarized as follows: Indicator Range $39.51 - $91.90 $42.29 - $65.15 Average Median Size (NRA SF) 22,720 Market Value "As-Completed" $10,000 Value per SF Total $54.00 $1,226,880 - Rounded to Nearest: $1,230,000 $51.22 $53.40 Unadjusted Price per SF Adjusted Price per SF $60.08 $52.21 Industrial Chapter Page 80 of 126 “As-Is” Value Conclusion Therefore, the following table summarizes our “as-is” value conclusion via the sales comparison approach: CONSTRUCTION COSTS Assumptions Insulate walls in Secondary Building $31,000 Frame and finish walls and ceiling w/Steel Panels in Secondary Building $38,000 Build, insulate and finish 400 SF office in Secondary Building $25,000 Install space heaters in warehouse area in Secondary Building $8,500 Install loading dock safety railing in Secondary Building $2,500 Total Construction Costs $105,000 Plus Entrepreneurial Profit 15% $15,750 Total Construction Costs, with Profit $120,750 Total Construction Costs (With Profit, Rounded) $120,000 Market Value "As-Completed" LESS: Construction Costs and Profit Market Value "As-Is" - Rounded to Nearest: $10,000 ($120,000) $1,110,000 $1,226,880 Industrial Chapter Page 81 of 126 INCOME CAPITALIZATION APPROACH The Income Capitalization Approach determines the value of a property based on the anticipated economic benefits. The principle of “anticipation” is essential to this approach, which recognizes the relationship between an asset’s potential future income and its value. To value the anticipated economic benefits of a property, potential income and expenses must be projected, and the most appropriate capitalization method must be selected. The most common methods of converting net income into value are Direct Capitalization and Yield Capitalization. In direct capitalization, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the yield capitalization method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). Depending on certain factors, each of the income approach methods has merit. Considering all of the aspects that would influence an investment decision in the subject property, including primarily the single owner occupant status of the subject property and the fact that the most likely buyer would be another owner-user, we conclude that only the Direct Capitalization Analysis is appropriate in this assignment, and necessary for a credible value indication. Potential Gross Income Potential gross income is generated by a number of distinct elements: minimum rent determined by lease agreement; reimbursement of certain expenses incurred in the ownership and operation of the real estate; and other miscellaneous revenues. Minimum base rent is a legal contract between landlord and tenant establishing a return to investors in the real estate. The lease terms Industrial Chapter Page 82 of 126 also dictate specific expense reimbursement charges that can be billed to the tenant. Finally, miscellaneous income can be generated from a variety of sources. The first step in this appraisal is to analyze all potential gross income, starting with an analysis of the subject’s tenancy. Subject Tenancy The subject has been operating as an owner-occupied property since its original construction in 2011. Hence there are no subject leases to analyze. As such, we will determine market rent for the property by analyzing rent levels and lease terms at comparable properties. We categorize the subject space into office and warehouse, and for both the main building and the secondary building. We do not allocate specific rent for storage mezzanine space or outdoor storage, but have considered their impact in our concluded market rental rates for the various space types. Expense Structure It is our expectation that typical lease terms for current and future vacant space at the subject would be on a net lease basis with most expenses being paid by the tenant. Industrial Chapter Page 83 of 126 Analysis of Comparable Rents The following table summarizes rental activity for comparable space in competing buildings in the market. Lease Start; Taxes per SF; Name NRA (SF); Lease Type; CAM per SF; TI's per SF; # Address Year Built % Office Finish Tenant Name Term (Months) Initial Rent/SF Total per SF Rent Escalations 1 O'Neil Rd Building 8,100 33.0% 10/1/2013 $5.00 $1.00 NAV 2201 O'Neil Rd 2003 Net $2.00 NAV Hudson, WI 24 $3.00 Comments: 2 Confidential 1,000 - 5,821 25.0% 1/1/2015 $4.92 $0.39 $0.00 Confidential 2001 Net $1.63 Varies Town of Hudson, WI 12 - 60 $2.02 Comments: 3 Concrete Arts Bldg 20,400 20.0% Listing $5.19 $0.49 Negotiable 579 Schommer Dr 2006 Net $2.51 Negotiable Town of Hudson, WI Negotiable $3.00 Comments: 4 Confidential 20,000 - 30,000 NAV 12/1/2012 $4.68 NAV $0.00 Confidential 1995 Net NAV NAV Western Polk County, WI 36 $1.04 Comments: 5 Confidential 60,000 - 80,000 19.0% 2/1/2011 $3.75 $0.00 $0.00 Confidential 2000+/- Net $0.00 Western Polk County, WI 60 $0.00 Comments: 6 Confidential 144,000 3.0% 7/1/2013 $3.25 $0.00 $2.08 Confidential 1970's Net $0.00 Flat Western St. Croix County, WI 84 $0.00 Comments: STATISTICS NRA (SF) Lease Start Date Initial Rent/SF Total Taxes & CAM TI's per SF Low 8,100 Feb-11 $3.25 $0.00 $0.00 High 144,000 Jan-15 $5.19 $3.00 $2.08 Average 57,500 Apr-13 $4.47 $1.51 $0.52 Median 20,400 Jul-13 $4.80 $1.53 $0.00 SUMMARY OF RENT COMPARABLES Buildings Millwork This is an industrial building located within Hudson. Confidential This is a multi-tenant industrial building located within an average industrial area and within the Town of Hudson. Reported lease rate reflects the average lease rate for the in-place six tenants. Actual rate is $6.94 per SF modified gross, less $2.02 per SF CAM = $4.92 per SF effective net. Listing This is an industrial use building. The data reflects the asking lease rate for available space. Asking rates are $8.00 office, $4.50 warehouse. Confidential Lease is technically $5.72 on a Modified Gross basis, but deducting landlord expenses of $1.04 per SF results in a net rent of $4.68. Confidential $4.00 in year 4, $4.15 in year 5 Lease includes 1, 5-year option at $4.35 + 2% annual increases. Landlord paid $50,000 for sprinkler system upgrades. Confidential One 5-year option to renew at same lease rate. Purchase option after three years for $31.25 per SF. Occupancy was phased as TI's were completed. Initial occupancy 12/2012, full occupancy 7/2013. Industrial Chapter Page 84 of 126 Discussion of Comparable Rents We analyzed recent leases negotiated in competitive buildings in the marketplace and considered competitive listings. The comparables range in size from 8,100 square feet to 144,000 square feet. These are all located in buildings similar in class to the subject, and in the subject’s submarket. The comparable leases have terms ranging from 24 to 84 months. The comparables exhibit a range of rents from $3.25 to $5.19 per square foot. Rent escalation clauses vary, and free rent was not observed to be common. Tenant improvement allowances ranged from $0.00 to $2.08, averaging around $0.52. All of these are triple-net leases in which the tenant is required to pay all operating costs. Based on our analysis of the comparables, we conclude to the following market rent for the subject property: Market Rent Main Building - Office Finish - $8.50 Main Building - Warehouse - $4.50 Secondary Building - Office Finish - $8.00 Secondary Building - Warehouse - $4.00 Total (SF) - $4.88 Lease Term (years) 3 Lease Type (reimbursements) Net Contract Rent Increase Projection 2.0% per year MARKET RENT CONCLUSION Industrial Chapter Page 85 of 126 “As-Completed” Revenue and Expenses Analysis We developed an opinion of the property’s annual income and operating expenses after reviewing the operating performance of similar buildings. No historical operating statements for the subject property were reviewed. We analyzed each item of expense and developed an opinion regarding what an informed investor would consider typical. Base Rental Revenue The subject’s potential gross rent for the first forecast year is calculated by multiplying the market rental rates by the entire space. The resulting potential gross rent is $110,980. Expense Reimbursements Tenants in the subject’s market are responsible for their pro-rata share of real estate taxes and operating expenses. Based on our analysis, we estimated total reimbursement revenue for year one at $37,058 , which equates to $1.63 per square foot. Vacancy and Collection Loss Vacancy and collection loss is a function of the interrelationship between absorption, lease expiration, renewal probability, estimated downtime between leases, and a collection loss factor based on the relative stability and credit of the subject’s tenant base. We have included an 5.00% vacancy rate and a 1.00% collection loss for the subject property, based primarily on the reported local/neighborhood vacancy in conjunction with the subject’s historic owner-occupancy. Deducting vacancy and collection loss from potential gross income, we arrive at effective gross income. Industrial Chapter Page 86 of 126 Total Effective Gross Income (EGI) By adding the Potential Gross Rent and Expense Reimbursements, and then deducting for vacancy/collection loss, the resulting subject’s EGI is projected to be $139,156 for the 12-month period following the effective date of the appraisal. Operating Expense Analysis Typical terms of leases in the subject’s submarket are on a Net basis which means that tenants are responsible for most operating expenses. Projected expenses are for the 12-month period following the effective date of the appraisal. We also present the following table from Northmarq’s The Compass report that shows average industrial net rent and expense data: Industrial Market Quoted Average Net Rental Rates - 2nd Quarter 2016 Submarket Avg Warehouse Rate Avg Office Rate Total OE & T Taxes Avg Warehouse Rate Avg Office Rate Total OE & T Taxes Northeast Bulk Warehouse $3.93 $6.59 $2.05 $1.21 $3.90 $6.59 $1.97 $1.13 Office Showroom $5.42 $9.19 $4.35 $2.29 $5.33 $9.21 $5.01 $2.34 Office Warehouse $4.54 $8.17 $2.30 $1.22 $4.59 $8.21 $2.49 $1.18 Total Northeast $4.45 $7.78 $2.48 $1.35 $4.47 $7.83 $2.65 $1.32 Industrial Market Quoted Average Net Rental Rates - 1st Half 2016 Submarket Avg Warehouse Rate Avg Office Rate Total OE & T Taxes Avg Warehouse Rate Avg Office Rate Total OE & T Taxes Total Market Bulk Warehouse $4.27 $7.13 $2.18 $1.26 $4.35 $7.24 $2.22 $1.28 Office Showroom $5.22 $9.29 $4.01 $2.13 $5.23 $9.31 $7.72 $2.15 Office Warehouse $4.68 $8.32 $2.55 $1.36 $4.70 $8.33 $4.08 $1.33 TOTAL MARKET $4.64 $8.09 $2.70 $1.48 $4.69 $8.14 $4.16 $1.48 1st Quarter 2016 2nd Quarter 2016 1st Quarter 2016 2nd Quarter 2016 Industrial Chapter Page 87 of 126 “As-Completed” - Income and Expense Proforma The following chart summarizes our opinion of income and expenses for year one, which is the first stabilized year in this analysis. INCOME AND EXPENSE RECONSTRUCTION Stabilized Proforma per SF Potential Gross Rent $110,980 $4.88 Reimbursements - Real Estate Taxes $12,435 $0.55 Reimbursements - Other Expenses $24,623 $1.08 Potential Gross Income $148,038 $6.52 Vacancy -$7,402 5.00% Collection Loss -$1,480 1.00% Effective Gross Income $139,156 $6.12 EXPENSES: CAM $17,040 $0.75 Property Insurance $3,408 $0.15 Management Fees $4,175 3.00% Professional Fees $1,590 $0.07 Subtotal $26,213 $1.15 RE Taxes $12,435 $0.55 Total Operating Expenses: $38,648 $1.70 Operating Expense Ratio 27.77% Net Operating Income $100,507 $4.42 Industrial Chapter Page 88 of 126 Capitalization Rate Analysis We have used three methods to estimate a capitalization rate applicable to the estimated stabilized NOI for the subject: the band of investment method, a review of investor surveys and an analysis of capitalization rate comparables. Industrial Chapter Page 89 of 126 Capitalization Rates from Band-of-Investment Method Most properties are purchased with financing and equity; therefore, the overall capitalization rate must satisfy the market return requirements of both investment positions. The lender must anticipate a rate of return that is appropriate for the investment’s perceived risk in order to make the loan; the loan principal is typically repaid through periodic amortization payments. The equity investor must also anticipate a rate of return that is commensurate with the investment’s perceived risk or they opt for an alternative investment. Therefore, we analyze capitalization rates for debt and equity. MORTGAGE COMPONENT Mortgage Rate 4.50% Amortization Term (Years) 20 Number of Payments 240 Loan-to-Value Ratio (M) 75.00% Mortgage Constant (Rm) 7.59% EQUITY COMPONENT Equity Ratio (E) 25.00% Equity Dividend Rate (Re) 11.00% RO BY BAND OF INVESTMENT Mortgage Ratio 75.00% Annual Mortgage Constant 7.59% Mortgage Component 5.69% Equity Ratio 25.00% Equity Dividend Rate 11.00% Equity Component 2.75% Indicated Overall Rate (Ro) 8.44% BAND OF INVESTMENT - CAPITALIZATION RATE Industrial Chapter Page 90 of 126 Capitalization Rates from Investor Surveys We considered data extracted from the PwC Real Estate Investor Survey for competitive properties. The most recent information from this survey is summarized below: Capitalization Rates from Comparable Sales We present details on the individual cap rate comparables below. Capitalization Rate Conclusions Survey Date Average PwC Q2-2016 5.75% - 9.00% 7.15% (National Flex/R&D) PwC Q2-2016 - - - - (National Flex/R&D, Non-Institutional) PwC Q2-2016 3.00% - 7.00% 5.38% (National Warehouse Market) CAPITALIZATION RATES Range Property Property Type Year Built Sale Date Sale Price/SF NOI/SF Cap Rate 700 Norflex Drive Office/Warehouse 2008 Aug-16 $91.90 $7.07 7.69% 700 Norflex Drive Hudson, WI 54016 7351 Integrity Way Office/Warehouse 2015 Oct-15 $95.33 $8.73 9.16% 7351 Integrity Way Wisconsin Rapids, WI 308 Wilmont Drive Office/Warehouse 1986 Jun-15 $40.00 $4.33 10.83% 308 Wilmont Drive Waukesha, WI 2855-2905 160h Street S Office/Warehouse 1973 Sep-14 $27.37 $2.22 8.11% 2855-2905 160h Street S New Berlin, WI 835 Broadway Street Office/Warehouse 1959 Sep-14 $20.49 $1.83 8.93% 835 Broadway Street Eau Claire, WI Min: 7.69% Max: 10.83% Average: 8.94% Median: 8.93% CAPITALIZATION RATES Industrial Chapter Page 91 of 126 To reconcile the results of the three methods, considering the subject’s physical, functional and locational characteristics, we conclude a capitalization rate of 8.50% for the subject. “As-Completed” Value via Direct Capitalization In the Direct Capitalization Method, we developed an opinion of market value by dividing year one net operating income by the selected overall capitalization rate. Our conclusion using the Direct Capitalization Method is as follows: “As-Is” Value via Direct Capitalization The preceding analysis was of the property in its “as-completed” condition, after the proposed renovation. To arrive at an “as-is” value indication, we deduct the proposed construction costs, plus profit, from the “as-completed” value conclusion, as follows: Construction Costs The proposed renovation costs, presented to us, are summarized as follows: DIRECT CAPITALIZATION METHOD NET OPERATING INCOME $100,507 $4.42 Sensitivity Analysis Spread of: 0.50% Value $ / SF of NRA Based on Low-Range of 8.00% $1,256,342 $55.30 Based on Most Probable Range of 8.50% $1,182,439 $52.04 Based on High-Range of 9.00% $1,116,748 $49.15 Preliminary Value $1,182,439 $52.04 Market Value "As-Completed" - Rounded to Nearest: $10,000 $1,180,000 $51.94 Industrial Chapter Page 92 of 126 “As-Is” Value Conclusion Therefore, the following table summarizes our “as-is” value conclusion via the direct capitalization approach: CONSTRUCTION COSTS Assumptions Insulate walls in Secondary Building $31,000 Frame and finish walls and ceiling w/Steel Panels in Secondary Building $38,000 Build, insulate and finish 400 SF office in Secondary Building $25,000 Install space heaters in warehouse area in Secondary Building $8,500 Install loading dock safety railing in Secondary Building $2,500 Total Construction Costs $105,000 Plus Entrepreneurial Profit 15% $15,750 Total Construction Costs, with Profit $120,750 Total Construction Costs (With Profit, Rounded) $120,000 $ / SF of NRA Market Value "As-Completed" $1,182,421 $52.04 LESS: Construction Costs ($120,000) Market Value "As-Is" Rounded to Nearest: $10,000 $1,060,000 $46.65 Industrial Chapter Page 93 of 126 RECONCILIATION AND FINAL VALUE OPINION This appraisal employs the Sales Comparison Approach and the Income Capitalization Approach. The approaches indicated the following: We have given primary weight to the Sales Comparison Approach given the subject property’s configuration and use. The Income Approach lends support to the Sales Comparison Approach. The Cost Approach was not necessary for credible results given the intended use and scope of work, and was therefore omitted. VALUE CONCLUSIONS: Type of Value: Market Value Market Value "As-Is" "As-Completed" Date of Value: 9/1/2016 3/1/2017 Real Property Interest: Fee Simple Fee Simple Sales Comparison Approach: Concluded Value (Rounded): $1,230,000 $1,230,000 LESS: Construction Cost and Profit ($120,000) - Value Indication via Sales Approach: $1,110,000 $1,230,000 Per Square Foot (NRA): $48.86 $54.14 Income Approach: Direct Capitalization: Net Operating Income (Stabilized): $100,507 $100,507 Capitalization Rate: 8.50% 8.50% Preliminary Value: $1,182,439 $1,182,439 Concluded Value (Rounded): $1,180,000 $1,180,000 LESS: Construction Cost and Profit ($120,000) - Value Indication via Direct Capitalization (Rounded): $1,060,000 $1,180,000 Per Square Foot (NRA): $46.65 $51.94 FINAL VALUE CONCLUSION: Concluded Value: $1,110,000 $1,230,000 Exposure Period: 12 months Marketing Period: 12 months Industrial Chapter Page 94 of 126 Conclusion of Market Value Based on our tour of the subject property, and after examining and considering the subject’s location, physical and economic characteristics, current market conditions, demographic influences, and other legal, social, economic factors, the details of which are included in the valuation analysis in the accompanying report, subject to the definitions, assumptions, and limiting conditions expressed in the report, our value opinion is as follows: Exposure Time and Marketing Time Based on our review of national, regional and local investor surveys, discussions with market participants and information gathered during the sales verification process, a reasonable exposure time for the subject property at the value concluded within this report would have been approximately 12 months. This assumes an active and professional marketing plan would have been employed by the current owner. We believe, based on the assumptions employed in our analysis, as well as our selection of investment parameters for the subject, that our value conclusion represents a price achievable within 12 months. Valuation Premise Interest Appraised Date of Value Value Conclusion per SF of NRA Market Value "As-Is" Fee Simple September 1, 2016 $1,110,000 $48.86 Market Value "As-Completed" Fee Simple March 1, 2017 $1,230,000 $54.14 VALUE CONCLUSIONS Industrial Chapter Page 95 of 126 Extraordinary Assumptions An extraordinary assumption is defined by the USPAP as “an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.” This appraisal assumes that the proposed renovations will be constructed according to the plans, specifications, costs, and timing that was provided to us and that was applied in this appraisal. Should any of the above information differ from what appears in this appraisal, the value conclusions contained herein could change significantly. Industrial Chapter Page 96 of 126 Hypothetical Conditions A hypothetical condition is defined by the USPAP as “that which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis.” There are no Hypothetical Conditions for this appraisal. Industrial Chapter Page 97 of 126 CERTIFICATION AND ADDENDA Certification We certify that, to the best of our 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 are our personal, impartial, and unbiased professional analyses, opinions, and conclusions. We have no present or prospective interest in the property that is the subject of this report and no personal interest with respect to the parties involved. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. Joe Appraiser made a personal tour of the property that is the subject of this report. Jane Appraiser did not make made a personal tour of the property that is the subject of this report. Amy Lesicka provided significant real property appraisal assistance to the persons signing this certification including various items listed in our Data Research and Analysis portion of our Scope of Work section. We have performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice, as well as the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. Industrial Chapter Page 98 of 126 The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this report, Joe and Jane Appraiser have completed the Standards and Ethics Education Requirements for Candidates of the Appraisal Institute. Joe Appraiser WI Certified General 1234567 Jane Appraiser WI Certified General 7654321 Senior Appraiser Appraisal Company, Inc. 123 Main Street St. Paul, MN 55101 Phone: 123-456-7890 Email: joeappraiser@joeappraiser.com Senior Appraiser Appraisal Company, Inc. 123 Main Street St. Paul, MN 55101 Phone: 123-456-7891 Email: janeappraiser@janeappraiser.com Industrial Chapter Page 99 of 126 Assumptions and Limiting Conditions "Report" means the appraisal report and conclusions stated therein, to which these Assumptions and Limiting Conditions are annexed. "Property" means the subject of the Report. "Appraiser(s)" means the person(s) who prepared and signed the Report. The Report has been made subject to the following assumptions and limiting conditions: No opinion is intended to be expressed and no responsibility is assumed for the legal description or for any matters that are legal in nature or require legal expertise or specialized knowledge beyond that of a real estate appraiser. Title to the Property is assumed to be good and marketable and the Property is assumed to be free and clear of all liens unless otherwise stated. No survey of the Property was undertaken. The information contained in the Report or upon which the Report is based has been gathered from sources the Appraiser assumes to be reliable and accurate. The owner of the Property may have provided some of such information. The Appraiser shall not be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, sketches, exhibits and factual matters. Any authorized user of the Report is obligated to bring to the attention of the Appraiser any inaccuracies or errors that it believes are contained in the Report. The opinions are only as of the date stated in the Report. Changes since that date in external and market factors or in the Property itself can significantly affect the conclusions in the Report. Industrial Chapter Page 100 of 126 The Report is to be used in whole and not in part. No part of the Report shall be used in conjunction with any other analyses. Publication of the Report or any portion thereof without the prior written consent of the Appraiser is prohibited. Reference to the Appraisal Institute or to the MAI designation is prohibited. Except as may be otherwise stated in the letter of engagement, the Report may not be used by any person(s) other than the party(ies) to whom it is addressed or for purposes other than that for which it was prepared. No part of the Report shall be conveyed to the public through advertising, or used in any sales, promotion, offering or SEC material without the Appraiser’s prior written consent. Any authorized user(s) of this Report who provides a copy to, or permits reliance thereon by, any person or entity not authorized by the Appraiser in writing to use or rely thereon, hereby agrees to indemnify and hold the Appraiser harmless from and against all damages, expenses, claims and costs, including attorneys' fees, incurred in investigating and defending any claim arising from or in any way connected to the use of, or reliance upon, the Report by any such unauthorized person(s) or entity(ies). Except as may be otherwise stated in the letter of engagement, the Appraiser shall not be required to give testimony in any court or administrative proceeding relating to the Property or the Appraisal. The Report assumes (a) responsible ownership and competent management of the Property; (b) there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning and Industrial Chapter Page 101 of 126 environmental regulations and laws, unless noncompliance is stated, defined and considered in the Report; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value opinion contained in the Report is based. The physical condition of the improvements considered by the Report is based on visual observation by the Appraiser or other person identified in the Report. The Appraiser assumes no responsibility for the soundness of structural components or for the condition of mechanical equipment, plumbing or electrical components. In this appraisal, we received and relied upon various information provided by other parties including, but not limited to, property owners, property managers, brokers, realtors, appraisers, engineers, assessors, planning officials, etc. Should any of the information provided to us change in any way, then our value conclusions could also change substantially. The forecasted potential gross income referred to in the Report may be based on lease summaries provided by the owner or third parties. The Report assumes no responsibility for the authenticity or completeness of lease information provided by others. The Appraiser recommends that legal advice be obtained regarding the interpretation of lease provisions and the contractual rights of parties. The forecasts of income and expenses are not predictions of the future. Rather, they are the Appraiser's best opinions of current market thinking on future income and expenses. The Appraiser makes no warranty or representation that these forecasts will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task Industrial Chapter Page 102 of 126 to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the Report, envisages for the future in terms of rental rates, expenses, and supply and demand. Unless otherwise stated in the Report, the existence of potentially hazardous or toxic materials that may have been used in the construction or maintenance of the improvements or may be located at or about the Property was not considered in arriving at the opinion of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the Property. The Appraisers are not qualified to detect such substances. The Appraiser recommends that an environmental expert be employed to determine the impact of these matters on the opinion of value. Unless otherwise stated in the Report, compliance with the requirements of the Americans with Disabilities Act of 1990 (ADA) has not been considered in arriving at the opinion of value. Failure to comply with the requirements of the ADA may adversely affect the value of the Property. The Appraiser recommends that an expert in this field be employed to determine the compliance of the Property with the requirements of the ADA and the impact of these matters on the opinion of value. If the Report is submitted to a lender or investor with the prior approval of the Appraiser, such party should consider this Report as only one factor, together with its independent investment considerations and underwriting criteria, in its overall investment decision. Such lender or investor is specifically cautioned to understand all Extraordinary Industrial Chapter Page 103 of 126 Assumptions and Hypothetical Conditions and the Assumptions and Limiting Conditions incorporated in this Report. Appraiser and Client agree that the following mutual limitation of liability is agreed to in consideration of the fees to be charged and the nature of Appraiser’s services under this Agreement. Appraiser and Client agree that to the fullest extent permitted by applicable law, each party’s and its Personnel’s maximum aggregate and joint liability to the other party for claims and causes of action relating to this Agreement or to appraisals or other services under this Agreement shall be limited to the higher of $10,000 or the total fees and costs charged by Appraiser for the services that are the subject of the claim(s) or cause(s) of action. This limitation of liability extends to all types of claims or causes of action, whether in breach of contract or tort, including without limitation claims/causes of action for negligence, professional negligence or negligent misrepresentation on the part of either party or its Personnel, but excluding claims/causes of action for intentionally fraudulent conduct, criminal conduct or intentionally caused injury. The Personnel of each party are intended third-party beneficiaries of this limitation of liability. “Personnel,” as used in this paragraph, means the respective party’s staff, employees, contractors, members, partners and shareholders. Appraiser and Client agree that they each have been free to negotiate different terms than stated above or contract with other parties. If the Report is referred to or included in any offering material or prospectus, the Report shall be deemed referred to or included for informational purposes only and the Industrial Chapter Page 104 of 126 Appraiser has no liability to such recipients. The Appraiser disclaims any and all liability to any party other than the party that retained the Appraiser to prepare the Report. By use of this Report each party that uses this Report agrees to be bound by all of the Assumptions and Limiting Conditions, Hypothetical Conditions and Extraordinary Assumptions stated herein. Industrial Chapter Page 105 of 126 Addenda Contents ADDENDUM A: GLOSSARY ADDENDUM B: APPRAISER QUALIFICATIONS ADDENDUM C: ENGAGEMENT LETTER Industrial Chapter Page 106 of 126 A: GLOSSARY Glossary This glossary contains the definitions of common words and phrases, used throughout the appraisal industry, as applied within this document. Please refer to the publications listed in the Works Cited section below for more information. Works Cited: Appraisal Institute. The Appraisal of Real Estate. 14th ed. Chicago: Appraisal Institute, 2013. Print. Appraisal Institute. The Dictionary of Real Estate Appraisal. 6th ed. 2015. Print. As-Is Market Value The estimate of the market value of real property in its current physical condition, use, and zoning as of the appraisal’s effective date. –Interagency Appraisal and Evaluation Guidelines (12/2010) Band of Investment A technique in which the capitalization rates attributable to components of an investment are weighted and combined to derive a weighted-average rate attributable to the total investment (i.e., debt and equity, land and improvements). (Dictionary, 6th Edition) Common Area 1. The total area within a property that is not designed for sale or rental but is available for common use by all owners, tenants, or their invitees, e.g., parking and its appurtenances, malls, sidewalks, landscaped areas, Industrial Chapter Page 107 of 126 recreation areas, public toilets, truck and service facilities. 2. In a shopping center, the walkways and areas onto which the stores face and which conduct the flow of customer traffic. (ICSC) (Dictionary, 6th Edition) Common Area Maintenance (CAM) 1. The expense of operating and maintaining common areas; may or may not include management charges and usually does not include capital expenditures on tenant improvements or other improvements to the property. 2. The amount of money charged to tenants for their shares of maintaining a [shopping] center’s common area. The charge that a tenant pays for shared services and facilities such as electricity, security, and maintenance of parking lots. The area maintained in common by all tenants, such as parking lots and common passages. Items charged to common area maintenance may include cleaning services, parking lot sweeping and maintenance, snow removal, security, and upkeep. (ICSC) (Dictionary, 6th Edition) Debt Coverage Ratio (DCR) The ratio of net operating income to annual debt service (DCR = NOI/I m), which measures the relative ability of a property to meet its debt service out of net operating income; also called debt service coverage ratio (DSCR). A larger DCR indicates a greater ability for a property to withstand a reduction of income, providing an improved safety margin for a lender. (Dictionary, 6th Edition) Industrial Chapter Page 108 of 126 Depreciation 1. In appraisal, a loss in property value from any cause; the difference between the cost of an improvement on the effective date of the appraisal and the market value of the improvement on the same date. 2. In accounting, an allocation of the original cost of an asset, amortizing the cost over the asset’s life; calculated using a variety of standard techniques. (Dictionary, 6th Edition) Discount Rate A rate of return on capital used to convert future payments or receipts into present value; usually considered to be a synonym for yield rate. (Dictionary, 6th Edition) Effective Age The age of property that is based on the amount of observed deterioration and obsolescence it has sustained, which may be different from its chronological age. (Dictionary, 6th Edition) Effective Date 1. The date on which the appraisal or review opinion apply. 2. In a lease document, the date upon which the lease goes into effect. (Dictionary, 6th Edition) Exposure Time 1. The time a property remains on the market. 2. The estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal. Comment: Exposure time is a retrospective opinion based on an analysis of past events assuming a Industrial Chapter Page 109 of 126 competitive and open market. (Dictionary, 6th Edition) External Obsolescence A type of depreciation; a diminution in value caused by negative external influences and generally incurable on the part of the owner, landlord, or tenant. The external influence may be either temporary or permanent. (Dictionary, 6th Edition) Extraordinary Assumption An assumption, directly related to a specific assignment, as of the date of the assignment results, which, if found to be false, could alter the appraiser’s opinions or conclusions. Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. (USPAP, 2016-2017 ed.) (Dictionary, 6th Edition) Fee Simple Estate 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. (Dictionary, 6th Edition) Functional Obsolescence The impairment of functional capacity of improvements according to market tastes and standards. (Dictionary, 6th Edition) Functional Utility The ability of a property or building to be useful and to perform the function for which it is intended according to current market tastes and standards; the Industrial Chapter Page 110 of 126 efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms. (The Appraisal of Real Estate, 14th Edition) (Dictionary, 6th Edition) Gross Building Area (GBA) 1. Total floor area of a building, excluding unenclosed areas, measured from the exterior of the walls of the abovegrade area. This includes mezzanines and basements if and when typically included in the market area of the type of property involved. 2. Gross leasable area plus all common areas. 3. For residential space, the total area of all floor levels measured from the exterior of the walls and including the superstructure and substructure basement; typically does not include garage space. (Dictionary, 6th Edition) Gross Leasable Area (GLA) Total floor area designed for the occupancy and exclusive use of tenants, including basements and mezzanines; measured from the center of joint partitioning to the outside wall surfaces. (Dictionary, 6th Edition) Highest & Best Use 1. The reasonably probable use of property that results in the highest value. The four criteria that the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. 2. The use of an asset that maximizes its potential and that is possible, legally permissible, and financially feasible. The highest and best use may be for continuation of an asset’s existing Industrial Chapter Page 111 of 126 use or for some alternative use. This is determined by the use that a market participant would have in mind for the asset when formulating the price that it would be willing to bid. (IVS) 3. [The] highest and most profitable use for which the property is adaptable and needed or likely to be needed in the reasonably near future. (Uniform Appraisal Standards for Federal Land Acquisitions) (Dictionary, 6th Edition) Hypothetical Condition 1. A condition that is presumed to be true when it is known to be false. (SVP) 2. A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis. Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. (USPAP, 2016-2017 ed.) (Dictionary, 6th Edition) Leased Fee Interest The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right when the lease expires. (Dictionary, 6th Edition) Leasehold Interest The right held by the lessee to use and occupy real estate for a stated term and under the conditions specified in the lease. (Dictionary, 6th Edition) Industrial Chapter Page 112 of 126 Market Area The geographic region from which a majority of demand comes and in which the majority of competition is located. Depending on the market, a market area may be further subdivided into components such as primary, secondary, and tertiary market areas, or the competitive market area may be distinguished from the general market area. (Dictionary, 6th Edition) Market Rent The most probable rent that a property should bring in a competitive and open market reflecting the conditions and restrictions of a specified lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs). (Dictionary, 6th Edition) Market Value A type of value that is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined, such as the following. 1. The most widely accepted components of market value are incorporated in the following definition: The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting Industrial Chapter Page 113 of 126 prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress. 2. Market value is described, not defined, in the Uniform Standards of Professional Appraisal Practice (USPAP) as follows: A type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. Comment: Forming an opinion of market value is the purpose of many real property appraisal assignments, particularly when the client’s intended use includes more than one intended user. The conditions included in market value definitions establish market perspectives for development of the opinion. These conditions may vary from definition to definition but generally fall into three categories: a. the relationship, knowledge, and motivation of the parties (i.e., seller and buyer); b. the terms of sale (e.g., cash, cash equivalent, or other terms); and c. the conditions of sale (e.g., exposure in a competitive market for a reasonable time prior to sale). Appraisers are cautioned to identify the exact definition of market value, and its authority, applicable in each appraisal completed for the purpose of market value. (USPAP, 2016-2017 ed.) USPAP also requires that certain items be included in every appraisal Industrial Chapter Page 114 of 126 report. Among these items, the following are directly related to the definition of market value: Identification of the specific property rights to be appraised. Statement of the effective date of the value opinion. Specification as to whether cash, terms equivalent to cash, or other precisely described financing terms are assumed as the basis of the appraisal. If the appraisal is conditioned upon financing or other terms, specification as to whether the financing or terms are at, below, or above market interest rates and/or contain unusual conditions or incentives. The terms of above- or below-market interest rates and/or other special incentives must be clearly set forth; their contribution to, or negative influence on, value must be described and estimated; and the market data supporting the opinion of value must be described and explained. 3. The following definition of market value is used by agencies that regulate federally insured financial institutions in the United States: The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and the seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: Industrial Chapter Page 115 of 126 Buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. (12 C.F.R. Part 34.42(g); 55 Federal Register 34696, August 24, 1990, as amended at 57 Federal Register 12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994) 4. The International Valuation Standards Council defines market value for the purpose of international standards as follows: The estimated amount for which a property should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion. (IVS) 5. The Uniform Standards for Federal Land Acquisitions defines market value as follows: Market value is the amount in cash, or on terms reasonably equivalent to cash, for which in all probability the property would have sold on the effective date of the appraisal, after a reasonable Industrial Chapter Page 116 of 126 exposure time on the open competitive market, from a willing and reasonably knowledgeable seller to a willing and reasonably knowledgeable buyer, with neither acting under any compulsion to buy or sell, giving due consideration to all available economic uses of the property at the time of the appraisal. (Uniform Appraisal Standards for Federal Land Acquisitions) (Dictionary, 6th Edition) Marketing Time An opinion of the amount of time it might take to sell a real or personal property interest at the concluded market value level during the period immediately after the effective date of an appraisal. Marketing time differs from exposure time, which is always presumed to precede the effective date of an appraisal. (Advisory Opinion 7 of the Appraisal Standards Board of The Appraisal Foundation and Statement on Appraisal Standards No. 6, “Reasonable Exposure Time in Real Property and Personal Property Market Value Opinions” address the determination of reasonable exposure and marketing time.) (Dictionary, 6th Edition) Net Operating Income (NOI or I o) The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income but before mortgage debt service and book depreciation are deducted. Note: This definition mirrors the convention used in corporate finance and business valuation for EBITDA (earnings before interest, taxes, depreciation, and amortization). (Dictionary, 6th Edition) Obsolescence Industrial Chapter Page 117 of 126 One cause of depreciation; an impairment of desirability and usefulness caused by new inventions, changes in design, improved processes for production, or external factors that make a property less desirable and valuable for a continued use; may be either functional or external. (Dictionary, 6th Edition) Parking Ratio A ratio of parking area or parking spaces to an economic or physical unit of comparison. Minimum required parking ratios of various land uses are often stated in zoning ordinances. (Dictionary, 6th Edition) Prospective Opinion of Value A value opinion effective as of a specified future date. The term does not define a type of value. Instead, it identifies a value opinion as being effective at some specific future date. An opinion of value as of a prospective date is frequently sought in connection with projects that are proposed, under construction, or under conversion to a new use, or those that have not yet achieved sellout or a stabilized level of long-term occupancy. (Dictionary, 6th Edition) Prospective Market Value “As Completed” and “As Stabilized” A prospective market value may be appropriate for the valuation of a property interest related to a credit decision for a proposed development or renovation project. According to USPAP, an appraisal with a prospective market value reflects an effective date that is subsequent to the date of the appraisal report. Prospective value opinions are intended to reflect the current expectations and perceptions of market participants, based on available data. Industrial Chapter Page 118 of 126 Two prospective value opinions may be required to reflect the time frame during which development, construction, and occupancy will occur. The prospective market value—as completed— reflects the property’s market value as of the time that development is expected to be completed. The prospective market value—as stabilized— reflects the property’s market value as of the time the property is projected to achieve stabilized occupancy. For an income- producing property, stabilized occupancy is the occupancy level that a property is expected to achieve after the property is exposed to the market for lease over a reasonable period of time and at comparable terms and conditions to other similar properties. (See USPAP Statement 4* and Advisory Opinion 17.) (Interagency Appraisal and Evaluation Guidelines) (Dictionary, 6th Edition) Rentable Area For office or retail buildings, the tenant’s pro rata portion of the entire office floor, excluding elements of the building that penetrate through the floor to the areas below. The rentable area of a floor is computed by measuring to the inside finished surface of the dominant portion of the permanent building walls, excluding any major vertical penetrations of the floor. Alternatively, the amount of space on which the rent is based; calculated according to local practice. (Dictionary, 6th Edition) Replacement Cost The estimated cost to construct, at current prices as of a specific date, a substitute for a building or other improvements, using modern materials and current standards, design, and layout. (Dictionary, 6th Edition) Industrial Chapter Page 119 of 126 Scope of Work 1. The type of data and the extent of research and analyses. (SVP) 2. The type and extent of research and analyses in an appraisal or appraisal review assignment. (USPAP, 2016- 2017 ed.) (Dictionary, 6th Edition) Stabilized Occupancy 1. The occupancy of a property that would be expected at a particular point in time, considering its relative competitive strength and supply and demand conditions at the time, and presuming it is priced at market rent and has had reasonable market exposure. A property is at stabilized occupancy when it is capturing its appropriate share of market demand. 2. An expression of the average or typical occupancy that would be expected for a property over a specified projection period or over its economic life. (Dictionary, 6th Edition) Tenant Improvements (TIs) 1. Fixed improvements to the land or structures installed and paid for use by a lessee. 2. The original installation of finished tenant space in a construction project; subject to periodic change for succeeding tenants. (Dictionary, 6th Edition) Vacancy and Collection Loss A deduction from potential gross income (PGI) made to reflect income reductions due to vacancies, tenant turnover, and nonpayment of rent; also called vacancy and credit loss or vacancy and contingency loss. (Dictionary, 6th Edition) Industrial Chapter Page 120 of 126 Industrial Chapter Page 121 of 126 Operating Expenses Other Taxes, Fees & Permits - Personal property taxes, sales taxes, utility taxes, fees and permit expenses. Property Insurance – Coverage for loss or damage to the property caused by the perils of fire, lightning, extended coverage perils, vandalism and malicious mischief, and additional perils. Management Fees - The sum paid for management services. Management services may be contracted for or provided by the property owner. Management expenses may include supervision, on-site offices or apartments for resident managers, telephone service, clerical help, legal or accounting services, printing and postage, and advertising. Management fees may occasionally be included among recoverable operating expenses Total Administrative Fees – Depending on the nature of the real estate, these usually include professional fees and other general administrative expenses, such as rent of offices and the services needed to operate the property. Administrative expenses can be provided either in the following expense subcategories or in a bulk total. 1) Professional Fees – Fees paid for any professional services contracted for or incurred in property operation; or 2) Other Administrative – Any other general administrative expenses incurred in property operation. Heating Fuel - The cost of heating fuel purchased from outside producers. The cost of heat is generally a tenant expense in single-tenant, industrial or retail properties, and apartment projects with individual heating units. It is a major expense item shown in operating statements for office buildings and many apartment properties. The fuel consumed may be coal, oil, or public steam. Heating supplies, maintenance, and workers’ wages are included in this expense category under certain accounting methods. Electricity - The cost of electricity purchased from outside producers. Although the cost of electricity for leased space is frequently a tenant expense, and therefore not included in the operating expense statement, the owner may be responsible for lighting public areas and for the power needed to run elevators and other building equipment. Gas - The cost of gas purchased from outside producers. When used for heating and air conditioning, gas can be a major expense item that is either paid by the tenant or reflected in the rent. Water & Sewer - The cost of water consumed, including water specially treated for the circulating ice water system, or purchased for drinking purposes. The cost of water is a major consideration for industrial plants that use processes Industrial Chapter Page 122 of 126 depending on water and for multifamily projects, in which the cost of sewer service usually ties to the amount of water used. It is also an important consideration for laundries, restaurants, taverns, hotels, and similar operations. Other Utilities - The cost of other utilities purchased from outside producers. Total Utilities - The cost of utilities net of energy sales to stores and others. Utilities are services rendered by public and private utility companies (e.g., electricity, gas, heating fuel, water/sewer and other utilities providers). Utility expenses can be provided either in expense subcategories or in a bulk total. Repairs & Maintenance - All expenses incurred for the general repairs and maintenance of the building, including common areas and general upkeep. Repairs and maintenance expenses include elevator, HVAC, electrical and plumbing, structural/roof, and other repairs and maintenance expense items. Repairs and Maintenance expenses can be provided either in the following expense subcategories or in a bulk total. 1) Elevator - The expense of the contract and any additional expenses for elevator repairs and maintenance. This expense item may also include escalator repairs and maintenance. 2) HVAC – The expense of the contract and any additional expenses for heating, ventilation and air-conditioning systems. 3) Electrical & Plumbing – The expense of all repairs and maintenance associated with the property’s electrical and plumbing systems. 4) Structural/Roof - The expense of all repairs and maintenance associated with the property’s building structure and roof. 5) Pest Control – The expense of insect and rodent control. 6). Other Repairs & Maintenance - The cost of any other repairs and maintenance items not specifically included in other expense categories. Common Area Maintenance - The common area is the total area within a property that is not designed for sale or rental, but is available for common use by all owners, tenants, or their invitees, e.g., parking and its appurtenances, malls, sidewalks, landscaped areas, recreation areas, public toilets, truck and service facilities. Common Area Maintenance (CAM) expenses can be entered in bulk or through the sub-categories. 1) Utilities – Cost of utilities that are included in CAM charges and passed through to tenants. 2) Repair & Maintenance – Cost of repair and maintenance items that are included in CAM charges and passed through to tenants. 3) Parking Lot Maintenance – Cost of parking lot maintenance items that are included in CAM charges and passed through to tenants. 4) Snow Removal – Cost of snow removal that are included in CAM charges and passed through to tenants. 5) Grounds Industrial Chapter Page 123 of 126 Maintenance – Cost of ground maintenance items that are included in CAM charges and passed through to tenants. 6) Other CAM expenses are items that are included in CAM charges and passed through to tenants. Painting & Decorating - This expense category is relevant to residential properties where the landlord is required to prepare a dwelling unit for occupancy in between tenancies. Cleaning & Janitorial - The expenses for building cleaning and janitorial services, for both daytime and night-time cleaning and janitorial service for tenant spaces, public areas, atriums, elevators, restrooms, windows, etc. Cleaning and Janitorial expenses can be provided either in the following subcategories or entered in a bulk total. 1) Contract Services - The expense of cleaning and janitorial services contracted for with outside service providers. 2) Supplies, Materials & Misc. - The cost any cleaning materials and any other janitorial supplies required for property cleaning and janitorial services and not covered elsewhere. 3) Trash Removal - The expense of property trash and rubbish removal and related services. Sometimes this expense item includes the cost of pest control and/or snow removal .4) Other Cleaning/Janitorial - Any other cleaning and janitorial related expenses not included in other specific expense categories. Advertising & Promotion - Expenses related to advertising, promotion, sales, and publicity and all related printing, stationary, artwork, magazine space, broadcasting, and postage related to marketing. Professional Fees - All professional fees associated with property leasing activities including legal, accounting, data processing, and auditing costs to the extent necessary to satisfy tenant lease requirements and permanent lender requirements. Total Payroll - The payroll expenses for all employees involved in the ongoing operation of the property, but whose salaries and wages are not included in other expense categories. Payroll expenses can be provided either in the following subcategories or entered in a bulk total. 1) Administrative Payroll – The payroll expenses for all employees involved in on-going property administration. 2) Repair & Maintenance Payroll - The expense of all employees involved in on-going repairs and maintenance of the property. 3) Cleaning Payroll - The expense of all employees involved in providing on-going cleaning and janitorial services to the property 4) Other Payroll - The expense of any other employees involved in providing services to the property not covered in other specific categories. Industrial Chapter Page 124 of 126 Security - Expenses related to the security of the Lessees and the Property. This expense item includes payroll, contract services and other security expenses not covered in other expense categories. This item also includes the expense of maintenance of security systems such as alarms and closed circuit television (CCTV), and ordinary supplies necessary to operate a security program, including batteries, control forms, access cards, and security uniforms. Roads & Grounds - The cost of maintaining the grounds and parking areas of the property. This expense can vary widely depending on the type of property and its total area. Landscaping improvements can range from none to extensive beds, gardens and trees. In addition, hard-surfaced public parking areas with drains, lights, and marked car spaces are subject to intensive wear and can be costly to maintain. Other Operating Expenses - Any other expenses incurred in the operation of the property not specifically covered elsewhere. Real Estate Taxes - The tax levied on real estate (i.e., on the land, appurtenances, improvements, structures and buildings); typically by the state, county and/or municipality in which the property is located. Industrial Chapter Page 125 of 126 B: APPRAISER QUALIFICATIONS Industrial Chapter Page 126 of 126 C: ENGAGEMENT LETTER Retail Chapter Page 1 of 100 Appraisal Company United Pharmacy 1105 S. Division Ave. Grand Portage, Morrison County, Michigan 48004 Prepared For: Becker Insurance Company, Inc. Effective Date of the Appraisal: February 8, 2017 Report Format: Appraisal Report – Standard Format Our File Number: 2017-0009 Retail Chapter Page 2 of 100 February 17, 2017 Mr. Dan Cooper Assistant Vice President/Senior Risk Asset Analyst 4016 Prairie Center Drive, Suite 1308 Stevens Point, MI 48019 SUBJECT: Market Value Appraisal United Pharmacy 1105 S. Division Ave. Grand Portage, Morrison County, Michigan 48004 Appraisal Company File No. 2017-0009 Dear Mr. Cooper: Appraisal Company is pleased to submit the accompanying appraisal of the referenced property. The purpose of the appraisal is to develop an opinion of the market value of the leased fee interest in the property. The client for the assignment is B and the intended use is for loan underwriting purposes. The subject is an existing retail property containing 3,584 square feet of gross leasable area. The improvements were constructed in 2016 and are 100% leased as of the effective appraisal date. The site area is 0.89 acres or 38,950 square feet. The appraisal is intended to conform with the Uniform Standards of Professional Appraisal Practice (USPAP), the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute, applicable state appraisal regulations, and the appraisal guidelines of Becker Insurance Company, Inc. The appraisal is also prepared in accordance Retail Chapter Page 3 of 100 with the appraisal regulations issued in connection with the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). To report the assignment results, we use the Appraisal Report option of Standards Rule 2-2(a) of USPAP. As USPAP gives appraisers the flexibility to vary the level of information in an Appraisal Report depending on the intended use and intended users of the appraisal, we adhere to the Appraisal Company internal standards for an Appraisal Report – Standard Format. This format summarizes the information analyzed, the appraisal methods employed, and the reasoning that supports the analyses, opinions, and conclusions. Based on the valuation analysis in the accompanying report, and subject to the definitions, assumptions, and limiting conditions expressed in the report, our opinion of value is as follows: The opinions of value expressed in this report are based on estimates and forecasts that are prospective in nature and subject to considerable risk and uncertainty. Events may occur that could cause the performance of the property to differ materially from our estimates, such as changes in the economy, interest rates, capitalization rates, financial strength of tenants, and behavior of investors, lenders, and consumers. Additionally, our opinions and forecasts are based partly on data obtained from interviews and third party sources, which are not always completely reliable. Although we are of the opinion that our findings are reasonable based on available evidence, we are not responsible for the effects of future occurrences that cannot reasonably be foreseen at this time. If you have any questions or comments, please contact the undersigned. Thank you for the opportunity to be of service. Respectfully submitted, Appraiser Name Here Appraisal Company Certified General Real Property Appraiser Michigan Certificate # 1234567 Retail Chapter Page 4 of 100 Table of Contents Summary of Salient Facts and Conclusions 1 Quality Assurance 2 General Information 3 Identification of Subject 3 Sale History 3 Pending Transactions 3 Purpose of the Appraisal 3 Definition of Market Value 4 Definition of Property Rights Appraised 4 Intended Use and User 4 Applicable Requirements 4 Report Format 5 Prior Services 5 Scope of Work 5 Economic Analysis 7 Itasca County Area Analysis 7 Surrounding Area Analysis 11 Net Lease Market Analysis 14 Property Analysis 20 Land Description and Analysis 20 Improvements Description and Analysis 23 Real Estate Tax Analysis 29 Highest and Best Use 30 Valuation 32 Valuation Methodology 32 Retail Chapter Page 5 of 100 Land Valuation 33 Analysis and Adjustment of Sales 37 Land Value Conclusion 38 Cost Approach 39 Sales Comparison Approach 41 Analysis and Adjustment of Sales 45 Value Indication 47 Income Capitalization Approach 48 Leased Status of Property 48 Market Rent Analysis 49 Stabilized Income and Expenses 54 Capitalization Rate Selection 55 Direct Capitalization Analysis 58 Reconciliation and Conclusion of Value 59 Exposure Time 59 Marketing Period 60 Certification 61 Assumptions and Limiting Conditions 63 Addenda Appraiser Qualifications Property Information Comparable Data Land Sales Improved Sales Lease Comparables Engagement Letter Retail Chapter Page 6 of 100 Summary of Salient Facts and Conclusions Property Name: United Pharmacy Address: 1105 S. Division Ave Grand Portage, Morrison County, MI Property Owner: Wayzata Bay Holdings, LLC Property Tax Parcel Identification: 12-029-34-44-0006 Land Area: 38,950 SF, or 0.89 acres Gross Building Area: 3,584 Square Feet Gross Leasable Area: 3,584 Square Feet Percentage of Building Area Leased: 100% Building Year Built: 2016 Zoning Designation: GB, General Business Highest and Best Use – As If Vacant: Retail development Highest and Best Use – As Improved: Continued Retail Use Exposure Time; Marketing Period: 3-6 months; 3-6 months Effective Date of the Appraisal: February 8, 2017 Retail Chapter Page 7 of 100 Date of the Report: February 17, 2017 Property Rights Appraised: Leased Fee Market Value Indications Cost Approach: $1,520,000 Sales Comparison Approach: $1,670,000 Income Capitalization Approach: $1,680,000 Market Value Conclusion: $1,680,000 Extraordinary Assumptions and Hypothetical Conditions 1. None 1. None The value conclusions are based on the following hypothetical conditions that may affect the assignment results. A hypothetical condition is a condition contrary to known fact on the effective date of the appraisal but is supposed for the purpose of analysis. The value conclusions are subject to the following extraordinary assumptions that may affect the assignment results. An extraordinary assumption is uncertain information accepted as fact. If the assumption is found to be false as of the effective date of the appraisal, we reserve the right to modify our value conclusions. Retail Chapter Page 8 of 100 General Information Identification of Subject The subject is an existing retail property containing 3,584 square feet of gross leasable area. The improvements were constructed in 2016 and are 100% leased as of the effective appraisal date. The site area is 0.89 acres or 38,950 square feet. A legal description of the property is in the addenda. Property Identification Property Name: United Pharmacy Address: 1105 S. Division Ave Grand Portage, Morrison County, MI Property Owner: Wayzata Bay Holdings, LLC Property Tax Parcel Identification: 12-029-34-44-0006 Legal Description: See Addendum Census Tract Number: 5809.03 Sale History The subject is new construction and to the best of our knowledge, no sale or transfer of ownership of the new improvements and parcel has taken place within a three-year period prior to the effective appraisal date of the new improvements and parcel. Retail Chapter Page 9 of 100 Pending Transactions The property is under contract of sale as of the effective appraisal date. Information about the contract is summarized as follows: Contract Date: January 26, 2017 Seller: Wayzata Bay Holdings, LLC Buyer: Anthony Baukol Revocable Trust Sale Price: $1,681,757 Comments: Purchase price is based upon a negotiated 7.40% overall capitalization rate applied to the current net operating income in place Our value conclusion is generally consistent with the contract price Purpose of the Appraisal The purpose of the appraisal is to develop an opinion of the market value of the leased fee interest in the property as of the effective date of the appraisal, February 8, 2017. The date of the report is February 17, 2017. The appraisal is valid only as of the stated effective date or dates. Definition of Market Value Market value is defined as: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and Retail Chapter Page 10 of 100 knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: Buyer and seller are typically motivated; Both parties are well informed or well advised, and acting in what they consider their own best interests; A reasonable time is allowed for exposure in the open market; Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” (Source: Code of Federal Regulations, Title 12, Chapter I, Part 34.42[g]; also Interagency Appraisal and Evaluation Guidelines, Federal Register, 75 FR 77449, December 10, 2010, page 77472) Definition of Property Rights Appraised Leased fee interest is defined as, “The ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary rights when the lease expires.” Retail Chapter Page 11 of 100 Lease is defined as: “A contract in which rights to use and occupy land, space, or structures are transferred by the owner to another for a specified period of time in return for a specified rent.” Source: Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015) Intended Use and User The intended use of the appraisal is for loan underwriting purposes. The client and intended user is Becker Insurance Company, Inc. The appraisal is not intended for any other use or user. No party or parties other than Becker Insurance Company, Inc. may use or rely on the information, opinions, and conclusions contained in this report. Applicable Requirements This appraisal is intended to conform to the requirements of the following: Uniform Standards of Professional Appraisal Practice (USPAP); Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute; Applicable state appraisal regulations; Appraisal requirements of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), revised June 7, 1994; Interagency Appraisal and Evaluation Guidelines issued December 10, 2010; Appraisal guidelines of Becker Insurance Company, Inc. Retail Chapter Page 12 of 100 Report Format This report is prepared under the Appraisal Report option of Standards Rule 2-2(a) of USPAP. As USPAP gives appraisers the flexibility to vary the level of information in an Appraisal Report depending on the intended use and intended users of the appraisal, we adhere to the Integra Realty Resources internal standards for an Appraisal Report – Standard Format. This format summarizes the information analyzed, the appraisal methods employed, and the reasoning that supports the analyses, opinions, and conclusions. Prior Services USPAP requires appraisers to disclose to the client any other services they have provided in connection with the subject property in the prior three years, including valuation, consulting, property management, brokerage, or any other services. We have not performed any services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment. Scope of Work To determine the appropriate scope of work for the assignment, we considered the intended use of the appraisal, the needs of the user, the complexity of the property, and other pertinent factors. Our concluded scope of work is described below. Valuation Methodology Appraisers usually consider the use of three approaches to value when developing a market value opinion for real property. These are the cost approach, sales comparison approach, and Retail Chapter Page 13 of 100 income capitalization approach. Use of the approaches in this assignment is summarized as follows: The income capitalization approach is the most reliable valuation method for the subject due to the following: The probable buyer of the subject would base a purchase price decision primarily on the income generating potential of the property and an anticipated rate of return. Sufficient market data regarding income, expenses, and rates of return, is available for analysis. This appraisal assignment is to estimate the market value of the lease fee interest in this property; this approach is considered most applicable for a valuation of that interest in real property. The sales comparison approach is an applicable valuation method because: There is an active market for similar properties, and sufficient sales data is available for analysis. This approach directly considers the prices of alternative properties having similar utility. The cost approach is applicable to the assignment considering the following: Approaches to Value Approach Applicability to Subject Use in Assignment Cost Approach Applicable Utilized Sales Comparison Approach Applicable Utilized Income Capitalization Approach Applicable Utilized Retail Chapter Page 14 of 100 The subject represents new construction, which reduces the subjectivity of estimating accrued depreciation. There is an active land market, making estimates of underlying land value reasonably reliable. Research and Analysis The type and extent of our research and analysis is detailed in individual sections of the report. This includes the steps we took to verify comparable sales, which are disclosed in the comparable sale profile sheets in the addenda to the report. Although we make an effort to confirm the arms-length nature of each sale with a party to the transaction, it is sometimes necessary to rely on secondary verification from sources deemed reliable. Inspection “Appraiser Name Here” conducted an exterior and limited interior inspection of the property on February 8, 2017. Retail Chapter Page 15 of 100 Economic Analysis Morrison County Area Analysis Morrison County is located in northern Michigan approximately 150 miles northwest of Detroit. It is 2,624 square miles in size and has a population density of 17.5 persons per square mile. Population Morrison County has an estimated 2016 population of 45,841, which represents an average annual 0.3% increase over the 2010 census of 45,058. Morrison County added an average of 131 residents per year over the 2010-2016 period, but its annual growth rate lagged the State of Michigan rate of 0.6%. Looking forward, Morrison County's population is projected to increase at a 0.4% annual rate from 2016-2021, equivalent to the addition of an average of 204 residents per year. Morrison County's growth rate is expected to lag that of Michigan, which is projected to be 0.7%. Employment Total employment in Morrison County is currently estimated at 15,991 jobs. Between year-end 2005 and the present, employment declined by 136 jobs, equivalent to a 0.8% loss over the entire period. There were declines in employment in seven out of the past ten years, Population Compound Ann. % Chng 2010 Census 2016 Est. 2021 Est. 2010 - 2016 2016 - 2021 Morrison County 45,058 45,841 46,862 0.3% 0.4% Michigan 5,303,925 5,512,145 5,701,956 0.6% 0.7% Source: The Nielsen Company Population Trends Retail Chapter Page 16 of 100 influenced in part by the national economic downturn and slow recovery. Although many areas suffered declines in employment over the last decade, Morrison County underperformed Michigan, which experienced an increase in employment of 4.4% or 119,023 jobs over this period. A comparison of unemployment rates is another way of gauging an area’s economic health. Over the past decade, the Morrison County unemployment rate has been consistently higher than that of Michigan, with an average unemployment rate of 7.8% in comparison to a 5.3% rate for Michigan. A higher unemployment rate is a negative indicator. Recent data shows that the Morrison County unemployment rate is 8.1% in comparison to a 3.3% rate for Michigan, a negative sign that is consistent with the fact that Morrison County has underperformed Michigan in the rate of job growth over the past two years. Major employers in Morrison County are shown in the following table: Employment Trends Total Employment (Year End) Unemployment Rate (Ann. Avg.) Year Morrison County % Change Michigan % Change Morrison Cnty Michigan 2005 16,127 2,688,044 5.9% 4.1% 2006 15,893 -1.5% 2,686,114 -0.1% 6.0% 4.0% 2007 15,807 -0.5% 2,709,013 0.9% 7.3% 4.6% 2008 15,513 -1.9% 2,661,457 -1.8% 7.9% 5.4% 2009 15,148 -2.4% 2,563,109 -3.7% 10.8% 7.8% 2010 15,345 1.3% 2,582,688 0.8% 10.2% 7.4% 2011 15,918 3.7% 2,635,474 2.0% 9.1% 6.5% 2012 15,752 -1.0% 2,676,293 1.5% 7.8% 5.6% 2013 15,621 -0.8% 2,723,561 1.8% 7.6% 4.9% 2014 16,026 2.6% 2,763,734 1.5% 6.6% 4.2% 2015 15,991 -0.2% 2,807,067 1.6% 6.5% 3.7% Overall Change 2005-2015 -136 -0.8% 119,023 4.4% Avg Unemp. Rate 2005-2015 7.8% 5.3% Unemployment Rate - November 2016 8.1% 3.3% Source: Bureau of Labor Statistics and Economy.com. Employment figures are from the Quarterly Census of Employment and Wages (QCEW). Unemployment rates are from the Current Population Survey (CPS). The figures are not seasonally adjusted. Retail Chapter Page 17 of 100 Income, Education and Age Morrison County has a considerably lower level of household income than Michigan. Median household income for Morrison County is $48,632, which is 23.7% less than the corresponding figure for Michigan. Residents of Morrison County have a lower level of educational attainment than those of Michigan. An estimated 21% of Morrison County residents are college graduates with four- year degrees, versus 33% of Michigan residents. People in Morrison County are older than their Michigan counterparts. The median age for Morrison County is 46 years, while the median age for Michigan is 38 years. Name Number of Employees 1 Independent School District #189 675 2 Grand Portage Clinic and Hospital 617 3 Midwest Paper Mill 460 4 Morrison Promotion & Fulfillment Co. 349 5 Morrison County 310 6 Wal-Mart Stores Inc. 300 7 City of Grand Portage 225 8 Mimex Corporation 225 9 Grand Portage Nursing Home 195 10 A & C Fleet Supply 120 Major Employers - Morrison County Source: Grand Portage Economic Development Authority; www.grandrapidseda.com Median Morrison County $48,632 Michigan $63,703 Comparison of Morrison County to Michigan - 23.7% Source: The Nielsen Company Median Household Income - 2016 Retail Chapter Page 18 of 100 Conclusion The Morrison County economy will be affected by a stable to slightly growing population base and lower income and education levels. Morrison County experienced a decline in the number of jobs, and had a consistently higher unemployment rate than Michigan over the past decade. On balance, we anticipate that growth in the Morrison County economy will be limited, resulting in only a modest level of demand for real estate in general. Education & Age - 2016 Source: The Nielsen Company 10% 20% 30% 40% 50% 60% 70% 80% 21% 33% Percent College Graduate Morrison County Michigan 10 15 20 25 30 35 40 45 50 46 38 Median Age Morrison County Michigan Retail Chapter Page 19 of 100 Retail Chapter Page 20 of 100 Surrounding Area Analysis The subject property is located in the southern half of City of Grand Portage. This area is generally delineated as follows: North Hwy 32 (NE 5 th St) South SE 28 th St East Airport Road West Cross Lake Road Access and Linkages Primary access to the area is provided by U.S. Highway 49, a major arterial that crosses the City of Grand Portage in a north/south direction. The subject is located along U.S. Highway 49. Overall, vehicular access is good. Public transportation is provided by Morrison Transit Bus Service and provides access around the Grand Portage area with dial-a-ride services and regular routes. The local market perceives public transportation as average compared to other areas in the region. However, the primary mode of transportation in this area is the automobile. The Grand Portage Airport situated along the eastern border of the neighborhood. The nearest commercial airline airports are in Detroit and East Lansing. Demographics A demographic profile of the surrounding area, including population, households, and income data, is presented in the following table. Retail Chapter Page 21 of 100 As shown above, the current population within a 3-mile radius of the subject is 12,962, and the average household size is 2.2. Population in the area has grown since the 2010 census, and this trend is projected to continue over the next five years. Compared to Morrison County overall, the population within a 3-mile radius is projected to grow at a faster rate. Median household income is $45,580, which is lower than the household income for Morrison County. Residents within a 3-mile radius have a higher level of educational attainment than those of Morrison County, while median owner occupied home values are lower. Land Use The area is urban in character and approximately 80% developed. Surrounding Area Demographics 2016 Estimates 1-Mile Radius 3-Mile Radius 5-Mile Radius Morrison County Michigan Population 2010 3,522 12,455 16,178 45,058 5,303,925 Population 2016 3,730 12,962 16,733 45,841 5,512,145 Population 2021 3,913 13,440 17,290 46,862 5,701,956 Compound % Change 2010-2016 1.0% 0.7% 0.6% 0.3% 0.6% Compound % Change 2016-2021 1.0% 0.7% 0.7% 0.4% 0.7% Households 2010 1,577 5,248 6,732 18,773 2,087,227 Households 2016 1,688 5,533 7,064 19,383 2,190,378 Households 2021 1,781 5,779 7,359 19,977 2,277,294 Compound % Change 2010-2016 1.1% 0.9% 0.8% 0.5% 0.8% Compound % Change 2016-2021 1.1% 0.9% 0.8% 0.6% 0.8% Median Household Income 2016 $40,896 $45,580 $48,847 $48,632 $63,703 Average Household Size 2.1 2.2 2.3 2.3 2.5 College Graduate % 23% 26% 27% 21% 33% Median Age 44 43 44 46 38 Owner Occupied % 58% 67% 72% 80% 73% Renter Occupied % 42% 33% 28% 20% 27% Median Owner Occupied Housing Value $142,316 $154,814 $164,029 $158,111 $200,024 Median Year Structure Built 1977 1975 1976 1976 1977 Avg. Travel Time to Work in Min. 17 17 18 24 25 Source: The Nielsen Company Retail Chapter Page 22 of 100 Land uses immediately surrounding the subject are predominantly commercial with typical ages of building improvements ranging from 1 to 45 years. Property types near the subject include Americana Bank, Aldi Market, McDonalds, Hardee’s, Jimmy John’s and Walgreens. Nearby Retail Uses The following nearby retail properties have significant drawing power that benefits the subject and other retail properties in the area: Americana Bank, Aldi Market, McDonalds, Hardee’s, Jimmy John’s and Walgreens. Outlook and Conclusions The area is in the stability stage of its life cycle. Recent retail development activity includes new construction and redevelopment primarily along the Hwy 49 corridor. We anticipate that property values will exhibit stable to increasing prices into the near future. Surrounding Area Map Retail Chapter Page 23 of 100 Net Lease Market Analysis The subject is encumbered by long-term net lease. The general lease structures and expense responsibilities for various lease types are summarized in the following table. It should be noted however, that the terminology of each lease type may vary among local real estate markets. The subject lease terms best reflect the Triple Net definition, and the subject is a single-tenant asset. The primary financial characteristic of the net lease properties is the obligation of the tenants to be responsible, either by direct or indirect reimbursements, for all or most of the expenses incurred in the operation of that property. The appeal of the net lease market is driven by several factors, some of which include: Predictable returns secured by the tenant's credit rating Limited tenant rollover Minimal management responsibility Lease Structure/Responsibilities Lease Type Utilities Real Estate Taxes Insurance Property Maintenance Structural Repairs Full Service and/or Gross Landlord Landlord Landlord Landlord Landlord Modified Gross Single Net Tenant Landlord Landlord Double Net Tenant Tenant Tenant Landlord Landlord Triple Net Tenant Tenant Tenant Tenant Landlord Absolute Net Tenant Tenant Tenant Tenant Tenant Source: The Appraisal of Real Estate, 12th Edition Tenant and landlord share expenses Tenant or landlord pays one or the other Retail Chapter Page 24 of 100 Long-term holding periods Portfolio diversification Transition to passive ownership Consolidation of smaller properties into a single- investment The deferral of Federal Income Taxes through a 1031 exchange Though most of these characteristics are understandable, further explanation of the 1031 exchange is warranted. Section 1031 of the IRS code authorizes the deferral of capital gains and depreciation recapture taxes on a sold property. Otherwise known as a "tax-deferred exchange", it is typically not a "sale" but rather an exchange that is not taxed. To qualify for the tax benefits of a 1031 exchange, the total purchase price of the “replacement” property must be equal to, or greater than the total net sales price of the relinquished real estate and the transaction must occur within 45 days from the sale of the “relinquished” property. Any equity received from the exchange of a relinquished property must be used to acquire the "replacement" property and the taxpayer must invest all of the taxable dollars for the exchange. To take advantage of the tax benefits in an exchange, all of the equity and the taxable dollars must be spent to acquire the "replacement property". Such transactions of 1031-motivated properties may or may not be considered arm’s length transactions since the exchange may be seller or buyer motivated. Credit Worthiness The credit rating of the tenant is a major impact on the overall value of a net lease property. Rating agencies and their ratings are summarized in the following table. Retail Chapter Page 25 of 100 Credit Ratings Definitions S&P Moody's Fitch Highest Quality Extremely strong, better than U.S. Treasury AAA Aaa AAA High Quality Very strong, risk varies slightly in economic conditions AA Aa AA Upper Quality Strong, somewhat more suscetible in economic stress A A A Medium Upper Quality Adverse economic conditions will likely lead to weakening BBB Baa BBB Non-Investment Grade Below investment grade, but likely to meet obligations BB Ba BB Somewhat Speculative Obligor has capacity to meet commitment, but vulnerable B Ba B Speculative Currently vulnerable to non-payment CCC Caa CCC Very Speculative Highly vulnerable to non-payment CC Ca CC Extremely Speculative Bankruptcy petition may be filed C C C Default or Bankcruptcy C --- DDD Speculative Grade Investment Grade Retail Chapter Page 26 of 100 The less risky tenant, and the one most attractive to investors, is one of investment grade quality. Tenant credit grade is a major factor in the selection of a capitalization rate. The subject tenant does not have a credit rating as it is a privately held company. United Pharmacy Drug Stores are primarily focused in small town locations. The pharmacy chain operates about 60 traditional drugstores in Michigan, Wisconsin, and several other nearby states. While most stores are located in shopping centers or strip malls, some of its Retail Chapter Page 27 of 100 pharmacies operate in supermarkets and health clinics. United Pharmacy Drug Stores typically locates its shops in towns with populations of 1,000 to 90,000 people. The company also has several tele-pharmacies in Iowa to serve communities that are too small to support a full-scale retail pharmacy. The regional pharmacy chain was formed by the acquisition of Hometown Drug by United Drug Stores. Today, United Pharmacy Drug Stores is owned by its employees. Tenant Guarantee In addition to the credit rating of the tenant, an investor must consider the guarantee of the lease. Most net leases tenants are corporate leases, corporate-backed leases, or franchise leases. Corporate leases provide the least risk to a landlord with franchise leases with no guarantor providing the most risk. To the best of our knowledge, the subject lease is with the corporate entity. Current Net Lease Market Trends In their 3 rd Quarter 2016 Investor's Survey, PwC reports that, “As the commercial real estate industry extends its expansion and interest rates linger at historically low levels, investors remain drawn to the national net lease market. ‘Attractive and relatively stable long-term yields compared to other asset classes, combined with the security of a decent residual real estate value, make net lease investments appealing,’ explains a participant.” Retail Chapter Page 28 of 100 In their Q3 2016 Net Lease Drug Store Report, The Boulder Group reports that, “Cap rates for single tenant CVS, Rite Aid and Walgreens properties all increased significantly in the third quarter of 2016. Cap rates for the net lease drug store sector increased by 33 basis points to a 5.96% cap rate when compared to the prior year. Rite Aid and Walgreens cap rates experienced the largest increase by 30 and 37 basis points each due to the investor concern of store closures with the potential Rite Aid acquisition by Walgreens. In the same time frame, CVS cap rates increased 25 basis points.” Retail Chapter Page 29 of 100 Source: The Boulder Group, The Net Lease Drug Store Report Q3 2016 “Transaction volume in drug store sector has been slowed by investor trepidation due to the uncertainty of the potential Walgreens and Rite Aid merger. However, investment sales Retail Chapter Page 30 of 100 activity has been concentrated with drug store assets in core markets with strong sales performance. The concern from the merger has caused the cap rate premiums associated with the drug store sector to decrease. In the third quarter of 2016, the spread between the overall net lease retail market and the drug store sector compressed to 14 basis points. This spread has historically been greater and in the past three years the spread ranged from 62 to 100 basis points. The supply of drug store assets decreased when compared to the prior year by 23.2%. Not only did the availability of drug store assets decrease, closed transaction volume for drug stores decreased by 19.2% when comparing the first three quarters of 2015 and 2016. Rite Aid assets experienced the sharpest decline with 26% less transaction volume during the same time period. Furthermore, the supply of long term leased (20+ years) assets decreased significantly across the sector due to lack of new store development. Transaction velocity for the remainder of 2016 in the net lease drug store sector should remain at a similar pace to the first three quarters of 2016 as uncertainty remains due to the potential Walgreens and Rite Aid merger. However, drug store assets with strong sales performance in top tier markets will garner demand from investors who have preference for the strong credit profiles and residual real estate locations that these drugstore assets provide. Private investors will continue to be the primary buyer of these assets.” Retail Chapter Page 31 of 100 Source: The Boulder Group, The Net Lease Drug Store Report Q3 2016 Retail Chapter Page 32 of 100 Property Analysis Land Description and Analysis Land Description Land Area: 38,950 square feet, or 0.89 acres Primary Street Frontage: South Division Avenue which is US Highway 49 Shape: Irregular Rectangle Corner Lot: No Topography: Generally level and at street grade Drainage: Nor problems reported or observed Environmental Hazards: None reported or observed Ground Stability: No problems reported or observed. Geothechical Evaluation Report recommendations by Brown and Associates and dated March 24, 2016 are assumed to have been followed. Flood Area Panel Number: 270102005B6 Date: December 18, 1984 Zone: C Description: Areas of minimal flooding Insurance Required: No Zoning Description Zoning Jurisdiction: City of Grand Portage Retail Chapter Page 33 of 100 Zoning Designation: GB Description: General Business Legally Conforming: Yes Zoning Change Likely: No Permitted Uses: Banks, savings and loans, loan agencies, restaurants, offices, health care professionals, general retail sales and services, pharmacy. Minimum Lot Area: 10,500 square feet Minimum Lot Width: 75 feet Minimum Setback: Front-30 feet; interior side – 10 feet; side street – 15 feet; rea yard – 10 feet Maximum Building Height: 35 feet Maximum Site Coverage: 90% Parking Requirement: Retail store 1 stall per 250 square feet of gross floor area (minimum of 5 stalls) Utilities Water: City of Grand Portage Public Utilities Commission Sewer: City of Grand Portage Public Utilities Commission Electricity: Northern States Electrical Cooperative power Natural Gas: Michigan Energy Resources, Inc. Local Phone: CenturyLink We are not experts in the interpretation of zoning ordinances. An appropriately qualified land use attorney should be engaged if a determination of compliance with zoning is required. Retail Chapter Page 34 of 100 Easements, Encroachments and Restrictions Based upon a review of the deed and property survey, there do not appear to be any easements, encroachments, or restrictions that would adversely affect value. A Reciprocal Access and Parking Agreement document was referenced in the provided lease for the subject, but actual agreement was not included. Additional information was requested, but was not provided. Our valuation assumes no adverse impacts from easements, encroachments, or restrictions, and further assumes that the subject has clear and marketable title. Conclusion of Land Analysis Overall, the physical characteristics of the site and the availability of utilities result in functional utility suitable for a variety of uses including those permitted by zoning. We are not aware of any other particular restrictions on development. Retail Chapter Page 35 of 100 Site Plan Retail Chapter Page 36 of 100 Improvements Description and Analysis The subject is an existing retail property containing 3,584 square feet of gross leasable area. The improvements were constructed in 2016 and are 100% leased as of the effective appraisal date. The site area is 0.89 acres or 38,950 square feet. Improvement Description Name of Property: United Pharmacy General Property Type: Retail drug store, free standing Occupancy Type: Single Tenant Percentage Leased: 100% Number of tenants: One Number of Buildings: One Number of stories: One Construction Class: D; wood framed Construction Quality: Good Condition: Good Gross Building Area: 3,584 square feet Gross Leasable Area: 3,584 square feet Land Area: 38,950 square feet Floor Area Ratio: 0.09 Land to Building Ratio: 10.87-to-1 Year Built: 2016 Actual Age: 1 year Retail Chapter Page 37 of 100 Estimated Effective Age: 1 year Estimated Economic Life: 35 years Estimated Remaining Life: 34 years Number of Parking Stalls: 35 stalls Parking Type: Surface lot Parking spaces/1,000 SqFT: 9.77 stalls per 1,000 of GLA Special Features: Drive through and pick up window Foundation: Concrete footings below frost line Structural Frame: Wood framed Exterior Walls: LP Smart siding/thin brick veneer Roof: Asphalt shingles HVAC: Two gas forced air units Elevators: None Sprinklers: None Improvements Analysis Quality and Condition The quality and condition of the subject is considered to be consistent that of competing properties. Functional Utility The improvements appear to be adequately suited to their current use, and there do not appear to be any significant items of functional obsolescence. Retail Chapter Page 38 of 100 ADA Compliance Based on our inspection and information provided, we are not aware of any ADA issues. However, we are not expert in ADA matters, and further study by an appropriately qualified professional would be recommended to assess ADA compliance. Hazardous Substances An environmental assessment report was not provided for review and environmental issues are beyond our scope of expertise. No hazardous substances were observed during our inspection of the improvements; however, we are not qualified to detect such substances. Unless otherwise stated, we assume no hazardous conditions exist on or near the subject. Personal Property No personal property items were observed that would have any material contribution to market value. Conclusion of Improvements Analysis In comparison to other competitive properties in the region, the subject improvements are rated as follows: Improvements Ratings Visibility/Exposure: Above average Design and appearance: Average Age/condition: Above average Adaptability of space: Average Interior amenities: Average Retail Chapter Page 39 of 100 Parking Ratio: Average Distance of Parking to store access: Average Landscaping: Average Overall, the quality, condition, and functional utility of the improvements are above average for their age and location. ((Subject photographs would be placed here)) Retail Chapter Page 40 of 100 Aerial Photo of Site Retail Chapter Page 41 of 100 Real Estate Tax Analysis Real estate taxes are a key determinant of value in Michigan, because properties are taxed at rates that are higher than rates for comparable properties in neighboring states. Commercial properties are taxed at about 3.5% to 4.5% of the assessor’s estimated market value of the property each year. Taxes are paid one year in arrears in Michigan, which means that the taxes payable in 2017 relate to the January 2, 2016 assessor’s estimated market values. Real estate assessments for the current tax year are shown in the following table. According to Morrison County, the newly created parcel has not yet been assessed with land and improvements. Special Assessments Special assessments are charges levied by the city and/or county on a property to pay for public infrastructure that directly benefits that property. In theory, the value of a property should increase at least by the amount of the special assessment. Special assessments are often charged to property owners for public works such as streets and roads, water lines, sanitary sewer lines, storm sewer lines, and storm water retention areas. Our value estimate assumes special assessments are paid in full. Taxes and Assessments - 2017 Assessed Value Taxes and Assessments Tax ID Land Improvements Total Tax Rate Ad Valorem Taxes Direct Assessments Total 91-544-0120 $53,700 NA $53,700 NA NA NA NA Retail Chapter Page 42 of 100 Highest and Best Use Process Before a property can be valued, an opinion of highest and best use must be developed for the subject site, both as if vacant, and as improved or proposed. By definition, the highest and best use must be: Physically possible. Legally permissible under the zoning regulations and other restrictions that apply to the site. Financially feasible. Maximally productive, i.e., capable of producing the highest value from among the permissible, possible, and financially feasible uses. As If Vacant Physically Possible The physical characteristics of the site do not appear to impose any unusual restrictions on development. Overall, the physical characteristics of the site and the availability of utilities result in functional utility suitable for a variety of uses. Legally Permissible The site is zoned GB, General Business. Permitted uses include bank, savings and loan, loan agency, etc.; restaurant; office – business; Health care professional, scientific, and technical services; Retail general sales and services, Retail Pharmacy. To our knowledge, there are no legal restrictions such as easements or deed restrictions that would effectively limit the use of the property. Given prevailing Retail Chapter Page 43 of 100 land use patterns in the area, only retail use is given further consideration in determining highest and best use of the site, as though vacant. Financially Feasible Based on our analysis of the market, there is currently adequate demand for retail use in the subject’s area. It appears that a newly developed retail use on the site would have a value commensurate with its cost. Therefore, retail use is considered to be financially feasible. Maximally Productive There does not appear to be any reasonably probable use of the site that would generate a higher residual land value than retail use. Accordingly, it is our opinion that retail use, developed to the normal market density level permitted by zoning, is the maximally productive use of the property. Conclusion Development of the site for retail use is the only use that meets the four tests of highest and best use. Therefore, it is concluded to be the highest and best use of the property as if vacant. As Improved The subject site is developed with retail drug store, which is consistent with the highest and best use of the site as if it were vacant. The existing improvements are currently leased and produce a significant positive cash flow that we expect will continue. Therefore, a continuation of this use is concluded to be financially feasible. Based on our analysis, there does not appear to be any alternative use that could reasonably be expected to provide a higher present value than the current use, and the value of the existing Retail Chapter Page 44 of 100 improved property exceeds the value of the site, as if vacant. For these reasons, continued retail use is concluded to be maximally productive and the highest and best use of the property as improved. Most Probable Buyer Taking into account the size and characteristics of the property, the likely buyer is a regional or national investor such as an individual or partnership. Retail Chapter Page 45 of 100 Valuation Valuation Methodology Appraisers usually consider three approaches to estimating the market value of real property. These are the cost approach, sales comparison approach and the income capitalization approach. The cost approach assumes that the informed purchaser would pay no more than the cost of producing a substitute property with the same utility. This approach is particularly applicable when the improvements being appraised are relatively new and represent the highest and best use of the land or when the property has unique or specialized improvements for which there is little or no sales data from comparable properties. The sales comparison approach assumes that an informed purchaser would pay no more for a property than the cost of acquiring another existing property with the same utility. This approach is especially appropriate when an active market provides sufficient reliable data. The sales comparison approach is less reliable in an inactive market or when estimating the value of properties for which no directly comparable sales data is available. The sales comparison approach is often relied upon for owner-user properties. The income capitalization approach reflects the market’s perception of a relationship between a property’s potential income and its market value. This approach converts the anticipated net income from ownership of a property into a value indication through capitalization. The primary methods are Retail Chapter Page 46 of 100 direct capitalization and discounted cash flow analysis, with one or both methods applied, as appropriate. This approach is widely used in appraising income-producing properties. Reconciliation of the various indications into a conclusion of value is based on an evaluation of the quantity and quality of available data in each approach and the applicability of each approach to the property type. The methodology employed in this assignment is summarized as follows: Approaches to Value Approach Applicability to Subject Use in Assignment Cost Approach Applicable Utilized Sales Comparison Approach Applicable Utilized Income Capitalization Approach Applicable Utilized Retail Chapter Page 47 of 100 Land Valuation To develop an opinion of the subject’s land value, as if vacant and available to be developed to its highest and best use, we utilize the sales comparison approach. Our search for comparable sales focused on transactions within the following parameters: Location: Grand Portage Size: Less than two acres Use: Retail Transaction Date: 2012 to present. All but one sale occurred in the last three years with one in the last and one very recently. The fourth, more dated sale is included given a relatively low volume of retail land activity that occurs in this market. For this analysis, we use price per square foot as the appropriate unit of comparison because market participants typically compare sale prices and property values on this basis. The most relevant sales are summarized in the following table. Retail Chapter Page 48 of 100 Comparable Land Sale Summary Land Area Sale Price Sale No. Location / Address Date of Sale in SqFt per SqFt 1 Proposed Culper's restaurant at 1109 S. Division Ave,; Grand Portage, MI Feb-17 53,560 $8.87 2 Hardy's restaurant at 1250 S. Division Ave,; Grand Portage, MI Jun-16 46,609 $13.95 3 Auto-Parts store site at 2101 S. Division Ave,; Grand Portage, MI Jul-14 25,315 $19.44 4 two-tenant strip center site at 3111 S. Division Ave,; Grand Portage, MI Aug-12 68,787 $5.82 subject United Pharmacy parcel at 1105 S. Division Ave.; Grand Portage, MI Feb-17 38,950 - - - Retail Chapter Page 49 of 100 Comparable Land Sales Map Retail Chapter Page 50 of 100 Land Sale 1 Land Sale 2 Land Sale 3 Land Sale 4 Retail Chapter Page 51 of 100 Analysis and Adjustment of Sales The sales are compared to the subject and adjusted to account for material differences that affect value. Adjustments are considered for the following factors, in the sequence shown below. Adjustment Factor Accounts For Comments Effective Sale Price Atypical economics of a transaction, such as demolition cost or expenditures by buyer at time of purchase. Sale 3 adjusted for demolition. Real Property Rights Fee simple, leased fee, leasehold, partial interest, etc. No adjustment necessary. Financing Terms Seller financing, or assumption of existing financing, at non-market terms. No adjustment necessary. Conditions of Sale Extraordinary motivation of buyer or seller, assemblage, forced sale. No adjustment necessary. Market Conditions Changes in the economic environment over time that affect the appreciation and depreciation of real estate. Sales adjusted up two percent annually to reflect market increases. Retail Chapter Page 52 of 100 Adjustment Factor Accounts For Comments Location Market or submarket area influences on sale price; surrounding land use influences. No adjustment necessary. Access/Exposure Convenience to transportation facilities; ease of site access; visibility; traffic counts. Sale 3 adjusted down for corner location. Sale 4 adjusted up for lack of direct highway access. Size Inverse relationship that often exists between parcel size and unit value. Sales 1, 2 and 4 adjusted up for larger size. Sale 3 adjusted down for smaller size. Shape and Topography Primary physical factors that affect the utility of a site for its highest and best use. No adjustment necessary. Zoning Government regulations that affect the types and intensities of uses allowable on a site. No adjustment necessary. Entitlements The specific level of governmental approvals attained pertaining to development of a site. No adjustment necessary. Retail Chapter Page 53 of 100 The following table summarizes the adjustments we make to each sale. Land Value Conclusion Prior to adjustment, the sales reflect a range of $5.82 - $19.44 per square foot. After adjustment, the range is narrowed to $7.70 - $16.52 per square foot, with an average of $12.20 per square foot and a median of $12.30 per square foot. We give greatest weight to sales 1 and 2 and the median of all sales studied and we reconcile to a value for the subject land as if vacant and available for sales of $12.25 per square foot and arrive at a land value conclusion as follows: Comparable Land Sale - Adjustment Chart - - - - - A d j u s t m e n t s - - - - - Time Adjusted Soils & Net Product Indicated Sale No. Sale Price/SqFt Location Topography Shape Size Adjustment Value/SqFt 1 $8.87 1.00 1.00 1.00 1.10 1.10 $9.76 2 $14.13 1.00 1.00 1.00 1.05 1.05 $14.84 3 $20.46 0.85 1.00 1.00 0.95 0.81 $16.52 4 $6.36 1.10 1.00 1.00 1.10 1.21 $7.70 average: $12.20 median: $12.30 Land Area in SqFt times Estimated Land Value per SqFt equals Indicated Land Market Value 38,950 x $12.25 = $477,138 rounded to Indicated Market Value of Subject Land: $480,000 Retail Chapter Page 54 of 100 Cost Approach The steps taken to apply the cost approach are: Develop an opinion of the value of the land as though vacant and available to be developed to its highest and best use, as of the effective date of the appraisal; Estimate the replacement cost new of the existing improvements using Marshall Valuation Service; Estimate depreciation from all causes and deduct this estimate from replacement cost new to arrive at depreciated replacement cost of the improvements; and Add land value to the depreciated replacement cost of the improvements to arrive at a market value indication for the property overall. The following tables summarize our valuation by the cost approach. Retail Chapter Page 55 of 100 Entrepreneurial profit is applied reflective of value enhancement awarded by the market for leasing coordination with retail properties of this nature. Estimated Replacement Costs of Improvements Source: Marshall Swift Valuation Service Class D; Good Quality Drug Store Building Section 12, Page 10 Base Costs Gross Building Area: 3,584 SqFt x $125.50 / SqFt = $449,792 Heating/Air-conditioning & Climate Adjustment: 3,584 SqFt x $2.25 / SqFt = $8,064 subtotal: $457,856 Adjustments to Base Costs Multi-story Multiplier: 1.000 Story Height Multiplier: 1.000 Area Multiplier: 1.023 Current Cost Multiplier: 1.000 Location Cost Multiplier: 1.065 Product Adjustment Factor: 1.089 x 1.089 Building Improvements Estimated Replacement Costs: $498,605 Miscellaneous Costs Parking Lot, Landscaping, Sidewalks & Exterior Lighting $325,000 $823,605 Indirect Costs ( Mortgage closing, insurance, real estate taxes legal and accounting fees, and miscellaneous; estimated at 5% of $823605 ) $41,180 $864,785 Developer's Profit Developer's Profit estimated at 30% of $864785 $259,436 $1,124,221 rounded to Total Estimated Replacement Costs: $1,120,000 Retail Chapter Page 56 of 100 Estimated Total Accrued Depreciation Estimated Percent Depreciation Good Physical Depreciation: 3.0% 97.0% Functional Obsolescence: 0.0% 100.0% External Obsolescence: 0.0% 100.0% Product Net Condition: 97.0% Total Accrued Depreciation: 3.0% Cost Approach Summary Land Value, as if vacant $480,000 Estimated Replacement Cost $1,120,000 less, Total Accrued Depreciation ($33,600) Improvement Value $1,086,400 $1,566,400 rounded to Estimated Market Value by Cost Approach: $1,570,000 Retail Chapter Page 57 of 100 Sales Comparison Approach The sales comparison approach develops an indication of value by comparing the subject to sales of similar properties. The steps taken to apply this approach are: Identify relevant property sales; Research, assemble, and verify pertinent data for the most relevant sales; Analyze the sales for material differences in comparison to the subject; Reconcile the analysis of the sales into a value indication for the subject. To apply the sales comparison approach, we searched for sale transactions within the following parameters: Property Type: United Pharmacy Location: Midwest Region Size: Bracketing the subject between 3,000 and 4,000 square feet Age/Quality: Bracketing the subject built 2015 to 2017 Transaction Date: Within 36 months For this analysis, we use price per square foot of gross leasable area as the appropriate unit of comparison because market participants typically compare sale prices and property values on this basis. The most relevant sales are summarized in the following table. Retail Chapter Page 58 of 100 Comparable Improved Sale Summary Building Area Sale Price Sale No. Location / Address Date of Sale in Sq Ft per SqFt 1 United Pharmacy at 737 E 12th Street West in Grafton, WS Feb-17 3,500 $401.76 2 Fergus Lake United Pharmacy at 1484 Lincoln Ave; Fergus Lake, MI Sep-16 3,500 $429.44 3 United Pharmacy at 246 Elm St NW in Amysbourgh, MI Nov-16 3,587 $384.93 4 United Pharmacy at 202 S. 2nd Ave. in Virginia, WS Sep-15 3,200 $498.74 subject United Pharmacy at 1105 S. Division Ave.; Grand Portage, MI Feb-17 3,584 - - - Retail Chapter Page 59 of 100 Comparable Improved Sales Map Retail Chapter Page 60 of 100 Sale 1 Sale 2 Sale 3 Sale 4 Retail Chapter Page 61 of 100 Analysis and Adjustment of Sales The sales are compared to the subject and adjusted to account for material differences that affect value. Adjustments are considered for the following factors, in the sequence shown below. Adjustment Factor Accounts For Comments Effective Sale Price Atypical economics of a transaction, such as excess land or non-realty components. No adjustment necessary. Real Property Rights Leased fee, fee simple, leasehold, partial interest, etc. No adjustment necessary. Financing Terms Seller financing, or assumption of existing financing, at non-market terms. No adjustment necessary. Conditions of Sale Extraordinary motivation of buyer or seller. No adjustment necessary. Market Conditions Changes in the economic environment over time that affect the appreciation and depreciation of real estate. Sales adjusted up at 3% annually to reflect market increases. Retail Chapter Page 62 of 100 Location Market or submarket area influences on sale price; surrounding land use influences. Sales 1 and 3 adjusted up for inferior locations with smaller population bases. Access/Exposure Convenience to transportation facilities; ease of site access; visibility; traffic counts. Sale 3 adjusted up for inferior exposure to a heavy traffic corridor. Size Inverse relationship that often exists between building size and unit value. No adjustment necessary. Parking Ratio of parking spaces to building area. No adjustment necessary. Building to Land Ratio Ratio of building area to land area; also known as floor area ratio (FAR). No adjustment necessary. Building Quality Construction quality, amenities, market appeal, functional utility. No adjustment necessary. Age/Condition Effective age; physical condition. No adjustment necessary. Economic Characteristics Non-stabilized occupancy, above/below market rents, and other economic factors. Sales 1 and 2 adjusted down to reflect typical difference between listing and final sale price. Retail Chapter Page 63 of 100 The following table summarizes the adjustments we make to each sale. Value Indication Prior to adjustment, the sales reflect a range of $384.93 - $498.74 per square foot. After adjustment, the range is $412.82 - $519.84 per square foot, with an average of $464.99 per square foot and median of $463.64 per square foot. We give relatively equal weight to all sales after adjustment and consider the central tenancy to arrive at a value indication as follows: Comparable Improved Sale - Adjustment Chart Time - - - - A d j u s t m e n t s - - - - Adjusted General Access & Economic Net Product Indicated No. Price/SqFt Location Exposure Characteristics Adjustment Value/SqFt 1 $401.76 1.15 1.00 0.95 1.09 $438.93 2 $434.55 1.00 1.00 0.95 0.95 $412.82 3 $387.58 1.20 1.05 1.00 1.26 $488.36 4 $519.84 1.00 1.00 1.00 1.00 $519.84 above average average: $464.99 median: $463.64 Building Area in Square Feet times Estimated Market Value per SqFt equals Indicated Market Value 3,584 x $465 = $1,666,560 rounded to Indicated Market Value of Real Estate: $1,670,000 Retail Chapter Page 64 of 100 Income Capitalization Approach The income capitalization approach converts anticipated economic benefits of owning real property into a value estimate through capitalization. The steps taken to apply the income capitalization approach are: Analyze the revenue potential of the property. Consider appropriate allowances for vacancy, collection loss, and operating expenses. Calculate net operating income by deducting vacancy, collection loss, and operating expenses from potential income. Apply the most appropriate capitalization method, either direct capitalization or discounted cash flow analysis, or both, to convert anticipated net income to an indication of value. The two most common capitalization methods are direct capitalization and discounted cash flow analysis. In direct capitalization, a single year’s expected income is divided by an appropriate capitalization rate to arrive at a value indication. In discounted cash flow analysis, anticipated future net income streams and a future resale value are discounted to a present value at an appropriate yield rate. In this analysis, we use only direct capitalization because investors in this property type typically rely more on this method. Leased Status of Property The property is leased to a single tenant. Pertinent lease terms are shown below. Lease Synopsis Retail Chapter Page 65 of 100 Lessor: Wayzata Bay Holdings, LLC Lessee: United Pharmacy, Inc. Leased Building Area: 3,584 square feet Lease Type: Triple Net Tenant Paid Expenses: Taxes, insurance, maintenance, utilities Landlord Paid Expenses: Structural repairs Commencement Date: February 1, 2017 Expiration Date: January 31, 2027 Lease term: 10 years; 120 months Base Rent & Escalations Period Months Rent/sf/yr Annual Rent Base Term 2/1/17 – 1/31/22 1-60 $34.72 $124,450 Base Term 2/1/22 – 1/31/27 61-120 $38.20 $136,395 Option Term 2/1/27 – 1/31/32 121-180 $42.02 $150,585 Option Term 2/1/32 – 1/31/37 181-240 $46.22 $165,643 Option Term 2/1/37 – 1/31/42 241-300 $50.84 $182,207 Current Annual Net Rent $124,450 Estimated Net Operating Income: $124,450 Market Rent Analysis In an appraisal of the leased fee interest in real property, the contract rents typically establish income for leased space, while market rent is the basis for estimating income for current vacant space and Retail Chapter Page 66 of 100 future speculative re-leasing of space due to expired leases. The estimate of market rent also helps to determine the level of risk for the rental income that is currently in place. To estimate market rent, we analyze comparable rentals most relevant to the subject in terms of location, property type, size, and transaction date. Comparables used in our analysis are summarized in the following table. Market Rental Rate Comparables Summary Gross Leaseable Lease Lease Annual Lease No. Location / Address Area Start Date Term (mos.) Tenant Rent/SqFt Type 1 Fergus Lake United Pharmacy at 1484 Lincoln Ave; Fergus Lake, MI 3,500 Sep-16 120 United Pharmacy $30.06 Triple Net 2 United Pharmacy at 737 E 12th Street West in Grafton, WS 3,500 Sep-16 120 United Pharmacy $28.12 Triple Net 3 United Pharmacy at 202 S. 2nd Ave. in Virginia, WS 3,200 Aug-15 120 United Pharmacy $44.72 Triple Net 4 United Pharmacy at 246 Elm St NW in Amysbourgh, MI 3,587 Nov-16 120 United Pharmacy $29.59 Triple Net S United Pharmacy at 1105 S. Division Ave.; Grand Portage, MI 3,584 Feb-17 - - - Triple Net Average: $33.12 Median: $29.83 Retail Chapter Page 67 of 100 Comparable Rentals Map Retail Chapter Page 68 of 100 Rent 1 Rent 2 Rent 3 Rent 4 Retail Chapter Page 69 of 100 Rental Analysis Factors The following elements of comparison are considered in our analysis of the comparable rentals. Rental Analysis Factors Expense Structure Division of expense responsibilities between landlord and tenants. Conditions of Lease Extraordinary motivations of either landlord or tenant to complete the transaction. Market Conditions Changes in the economic environment over time that affect the appreciation and depreciation of real estate. Location Market or submarket area influences on rent; surrounding land use influences. Access/Exposure Convenience to transportation facilities; ease of site access; visibility from main thoroughfares; traffic counts. Size Difference in rental rates that is often attributable to variation in sizes of leased space. Building Quality Construction quality, amenities, market appeal, functional utility. Age/Condition Effective age; physical condition. Economic Characteristics Variations in rental rate attributable to such factors as free rent or other concessions, pattern of rent changes over lease term, or tenant improvement allowances. Retail Chapter Page 70 of 100 Analysis of Comparable Rentals The comparable rentals are compared to the subject and adjusted to account for material differences that affect market rental value. Comparables 2 and 4 adjusted upward 20% for inferior locations with smaller population bases. On the other hand, Comparable 3 is located on a predominant corner intersection of two main highways in a somewhat larger community and it is adjusted downward -20% for location. No other adjustments are considered necessary. The buildings are quite similar. These lease comparables are all recent and are for the same type of use as the subject property. The following table summarizes our analysis of each comparable. Market Rental Rate Comparables Adjustment Chart Lease Annual Location Indicated Lease No. Location / Address Start Date Rent/SqFt Adjustment Rent/SqFt Type 1 Fergus Lake United Pharmacy at 1484 Lincoln Ave; Fergus Lake, MI Sep-16 $30.06 1.00 $30.06 Triple Net 2 United Pharmacy at 737 E 12th Street West in Grafton, WS Sep-16 $28.12 1.20 $33.74 Triple Net 3 United Pharmacy at 202 S. 2nd Ave. in Virginia, WS Aug-15 $44.72 0.80 $35.78 Triple Net 4 United Pharmacy at 246 Elm St NW in Amysbourgh, MI Nov-16 $29.59 1.20 $35.51 Triple Net S United Pharmacy at 1105 S. Division Ave.; Grand Portage, MI Feb-17 - - - Triple Net Average: $33.12 $33.77 Median: $29.83 $34.63 Retail Chapter Page 71 of 100 Market Rent Conclusion Based on the preceding analysis of comparable rentals, we conclude market rent for the subject property is approximately $34.50 to $35.00 per square foot per year on a triple net basis. The current contract rent of $34.72 per square foot per year on a triple net basis is concluded to be at a market rent level. Retail Chapter Page 72 of 100 Stabilized Income and Expenses Potential Gross Rent Potential gross rent is based on contract rent from the existing lease in place. Income is projected for the 12-month period following the effective date of the appraisal. We conclude that the potential gross income in place from the existing lease of the entire property is $124,450. This level of rent will remain in place until February 2022, when the annual rent will increase to $136,895. Expense Reimbursements Operating expenses are directly paid by the tenant; therefore, no reimbursement income is due the owner. Vacancy & Collection Loss Based on the credit quality of the tenant, the length of the lease, and practices of typical investors in the market, no deductions for vacancy and collection loss are appropriate. Effective Gross Income Effective gross income is calculated at $124,450, or $34.72 per square foot. Expenses Investors in the market for this property type do not make a deduction for expenses. Therefore, deductions for expenses are not applied in this appraisal. Retail Chapter Page 73 of 100 Net Operating Income Based on the preceding income and expense projections, stabilized net operating income is estimated at $124,450, or $34.72 per square foot. Retail Chapter Page 74 of 100 Capitalization Rate Selection A capitalization rate is used to convert net income into an indication of value. Selection of an appropriate capitalization rate considers the future income pattern of the property and investment risk associated with ownership. We consider the following data in selecting a capitalization rate for the subject. The following chart provides information on capitalization rates from recognized authoritative sources: Capitalization Rate Comparables Summary Building Area Overall Sale No. Location / Address Date of Sale in Sq Ft Cap Rate 1 United Pharmacy at 737 E 12th Street West in Grafton, WS Feb-17 3,500 7.0% 2 Fergus Lake United Pharmacy at 1484 Lincoln Ave; Fergus Lake, MI Sep-16 3,500 7.0% 3 United Pharmacy at 246 Elm St NW in Amysbourgh, MI Nov-16 3,587 7.5% 4 United Pharmacy at 202 S. 2nd Ave. in Virginia, WS Sep-15 3,200 8.4% S United Pharmacy at 1105 S. Division Ave.; Grand Portage, MI Feb-17 3,584 - - - Average: 7.5% Median: 7.3% Retail Chapter Page 75 of 100 Calkain’s Cap Rate Report Q4 2016 states, “2016 ended with rising interest rates following the presidential election. Cap rates followed a similar trend with an increase of 18 bps for Q4. This was the first increase in single tenant net lease (STNL) since Q4 2015. This increase is largely attributed to the fact that cap rates toward the end of 2016 began to catch up with the upward trending interest rates. As we head into 2017, we expect investor demand to remain strong.” Capitalization Rate Surveys – Retail Properties IRR-ViewPoint Year End 2016 Natl Neighbor Retail IRR-ViewPoint Year End 2016 Natl Community Retail Center PwC 4Q-16 National Strip Shopping Center PwC 4Q-16 National Power Center ACLI 3Q-16 National Retail Range 5.00% - 8.75% 4.75% - 8.50% 4.00 - 9.50 5.00% - 8.00% NA Average 6.94% 6.77% 6.18% 6.37% 5.77% 1 Source: IRR-Viewpoint 2016; PwC Real Estate Investor Survey; American Council of Life Insurers Investment Retail Chapter Page 76 of 100 Another method of estimating an overall capitalization rate is to use the current mortgage terms of available mortgage monies and the equity investor’s minimum rate of return to estimate the capitalization rate using this Band of Investment Method. We find mortgage monies to be available for this property at 70% loan-to-value ratio, 4.25% interest rate, and an amortization period of thirty years. It is our estimate that an equity investor in this property would require a minimum first year dividend rate of 10%. Retail Chapter Page 77 of 100 Based on an analysis of the preceding data, a going-in capitalization rate for the subject is indicated within a range of 7% to 8%. To reach a capitalization rate conclusion, we consider each of the following investment risk factors to gauge its impact on the rate. The direction of each arrow in the following table indicates our judgment of an upward, downward, or neutral influence of each factor. mortgage position times annual mortgage constant equals mortgage band return 0.7000 x 0.0590 = 0.0413 equity position times cash-on-cash equity rate equals equity band return 0.3000 x 0.1000 = 0.0300 0.0713 rounded to and restated as Indicated Capitalization Rate: 7.1% Retail Chapter Page 78 of 100 Risk Factor Issues Impact on Rate Income Characteristics Credit strength of tenant, escalation pattern, above/below market rent, rollover risk. ↔ Competitive Market Position Construction quality, appeal, condition, effective age, functional utility. ↔ Location Market area demographics and life cycle trends; proximity issues; access and support services. ↔ Market Vacancy rates and trends; rental rate trends; supply and demand. ↔ Highest & Best Use Upside potential from redevelopment, adaptation, expansion. ↔ Overall Impact ↔ There is a pending transaction of the subject property that is to occur at a 7.40% overall capitalization rate. This rate is bracketed and supported by the previous information. Furthermore, it is near the average and median rates of the included direct comparables. We conclude it reasonable and a capitalization rate as follows: Capitalization Rate Conclusion Going-In Capitalization Rate 7.40% Retail Chapter Page 79 of 100 Direct Capitalization Analysis Net operating income is divided by the capitalization rate to indicate the stabilized value of the subject. Valuation of the subject by direct capitalization is shown in the following table. Direct Capitalization Analysis SF Space Type Rent Applied $/SF Annual $/SF Bldg. Income Base Rent Thrifty Dgrug Stores Inc. 3,584 Retail Contract $34.72 $124,450 – Potential Gross Rent 3,584 $124,450 $34.72 Vacancy & Collection Loss 0.00% $0 $0.00 Effective Gross Income $124,450 $34.72 Expenses Total Expenses $0 $0.00 Net Operating Income $124,450 $34.72 Capitalization Rate 7.40% Indicated Value $1,681,757 $469.24 Rounded $1,680,000 $468.75 Retail Chapter Page 80 of 100 Reconciliation and Conclusion of Value The values indicated by our analyses are as follows: The income capitalization approach is given the greatest weight because it is the most reliable valuation method for the subject. The sales comparison approach and cost approach are given less weight because they do not directly consider the income characteristics of the property. Accordingly, our value opinion follows. The opinions of value expressed in this report are based on estimates and forecasts that are prospective in nature and subject to considerable risk and uncertainty. Events may occur that could cause the performance of the property to differ materially from our estimates, such as changes in the Summary of Value Indications Cost Approach $1,520,000 Sales Comparison Approach $1,670,000 Income Capitalization Approach $1,680,000 Reconciled $1,680,000 Value Conclusion Appraisal Premise Interest Appraised Date of Value Value Conclusion Market Value Leased Fee February 8, 2017 $1,680,000 Extraordinary Assumptions and Hypothetical Conditions 1. None 1. None The value conclusions are based on the following hypothetical conditions that may affect the assignment results. A hypothetical condition is a condition contrary to known fact on the effective date of the appraisal but is supposed for the purpose of analysis. The value conclusions are subject to the following extraordinary assumptions that may affect the assignment results. An extraordinary assumption is uncertain information accepted as fact. If the assumption is found to be false as of the effective date of the appraisal, we reserve the right to modify our value conclusions. Retail Chapter Page 81 of 100 economy, interest rates, capitalization rates, financial strength of tenants, and behavior of investors, lenders, and consumers. Additionally, our opinions and forecasts are based partly on data obtained from interviews and third party sources, which are not always completely reliable. Although we are of the opinion that our findings are reasonable based on available evidence, we are not responsible for the effects of future occurrences that cannot be reasonably foreseen at this time. Exposure Time Exposure time is the length of time the subject property would have been exposed for sale in the market had it sold on the effective valuation date at the concluded market value. Based on the concluded market value stated previously, it is our opinion that the probable exposure time is 3-6 months. Marketing Period Marketing time is an estimate of the amount of time it might take to sell a property at the concluded market value immediately following the effective date of value. We estimate the subject’s marketing period at 3-6 months. Retail Chapter Page 82 of 100 Certification We certify that, to the best of our knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions. 3. We have no present or prospective interest in the property that is the subject of this report and no personal interest with respect to the parties involved. 4. We have not performed any services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment. 5. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. 6. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. 7. Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. Retail Chapter Page 83 of 100 8. Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice as well as applicable state appraisal regulations. 9. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. 10. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 11. Appraiser Name Here made a personal inspection of the property that is the subject of this report. 12. No one provided significant real property appraisal assistance to the person(s) signing this certification. 13. We have experience in appraising properties similar to the subject and are in compliance with the Competency Rule of USPAP. 14. As of the date of this report, Appraiser Name Here has completed the Standards and Ethics Education Requirements for Candidates/Practicing Affiliates of the Appraisal Institute. Appraiser Name Here Certified General Real Property Appraiser Michigan Certificate # 1234567 Retail Chapter Page 84 of 100 Assumptions and Limiting Conditions This appraisal and any other work product related to this engagement are limited by the following standard assumptions, except as otherwise noted in the report: 1. The title is marketable and free and clear of all liens, encumbrances, encroachments, easements and restrictions. The property is under responsible ownership and competent management and is available for its highest and best use. 2. There are no existing judgments or pending or threatened litigation that could affect the value of the property. 3. There are no hidden or undisclosed conditions of the land or of the improvements that would render the property more or less valuable. Furthermore, there is no asbestos in the property. 4. The revenue stamps placed on any deed referenced herein to indicate the sale price are in correct relation to the actual dollar amount of the transaction. 5. The property is in compliance with all applicable building, environmental, zoning, and other federal, state and local laws, regulations and codes. 6. The information furnished by others is believed to be reliable, but no warranty is given for its accuracy. This appraisal and any other work product related to this engagement are subject to the following limiting conditions, except as otherwise noted in the report: Retail Chapter Page 85 of 100 1. An appraisal is inherently subjective and represents our opinion as to the value of the property appraised. 2. The conclusions stated in our appraisal apply only as of the effective date of the appraisal, and no representation is made as to the effect of subsequent events. 3. No changes in any federal, state or local laws, regulations or codes (including, without limitation, the Internal Revenue Code) are anticipated. 4. No environmental impact studies were either requested or made in conjunction with this appraisal, and we reserve the right to revise or rescind any of the value opinions based upon any subsequent environmental impact studies. If any environmental impact statement is required by law, the appraisal assumes that such statement will be favorable and will be approved by the appropriate regulatory bodies. 5. Unless otherwise agreed to in writing, we are not required to give testimony, respond to any subpoena or attend any court, governmental or other hearing with reference to the property without compensation relative to such additional employment. Retail Chapter Page 86 of 100 6. We have made no survey of the property and assume no responsibility in connection with such matters. Any sketch or survey of the property included in this report is for illustrative purposes only and should not be considered to be scaled accurately for size. The appraisal covers the property as described in this report, and the areas and dimensions set forth are assumed to be correct. 7. No opinion is expressed as to the value of subsurface oil, gas or mineral rights, if any, and we have assumed that the property is not subject to surface entry for the exploration or removal of such materials, unless otherwise noted in our appraisal. 8. We accept no responsibility for considerations requiring expertise in other fields. Such considerations include, but are not limited to, legal descriptions and other legal matters such as legal title, geologic considerations such as soils and seismic stability; and civil, mechanical, electrical, structural and other engineering and environmental matters. Such considerations may also include determinations of compliance with zoning and other federal, state, and local laws, regulations and codes. 9. The distribution of the total valuation in the report between land and improvements applies only under the reported highest and best use of the property. The allocations of value for land and improvements must not be used in conjunction with any other appraisal and are invalid if so used. The appraisal report shall be considered only in its entirety. No part of the appraisal report shall be utilized separately or out of context. 10. Neither all nor any part of the contents of this report (especially any conclusions as to value, the identity of the appraisers, or any reference to the Appraisal Institute) shall be disseminated through advertising media, public relations media, news media or any other Retail Chapter Page 87 of 100 means of communication (including without limitation prospectuses, private offering memoranda and other offering material provided to prospective investors) without the prior written consent of the persons signing the report. 11. Information, estimates and opinions contained in the report and obtained from third-party sources are assumed to be reliable and have not been independently verified. 12. Any income and expense estimates contained in the appraisal report are used only for the purpose of estimating value and do not constitute predictions of future operating results. 13. If the property is subject to one or more leases, any estimate of residual value contained in the appraisal may be particularly affected by significant changes in the condition of the economy, of the real estate industry, or of the appraised property at the time these leases expire or otherwise terminate. 14. Unless otherwise stated in the report, no consideration has been given to personal property located on the premises or to the cost of moving or relocating such personal property; only the real property has been considered. 15. The current purchasing power of the dollar is the basis for the values stated in the appraisal; we have assumed that no extreme fluctuations in economic cycles will occur. 16. The values found herein are subject to these and to any other assumptions or conditions set forth in the body of this report but which may have been omitted from this list of Assumptions and Limiting Conditions. 17. The analyses contained in the report necessarily incorporate numerous estimates and assumptions regarding property performance, general and local business and economic Retail Chapter Page 88 of 100 conditions, the absence of material changes in the competitive environment and other matters. Some estimates or assumptions, however, inevitably will not materialize, and unanticipated events and circumstances may occur; therefore, actual results achieved during the period covered by our analysis will vary from our estimates, and the variations may be material. 18. The Americans with Disabilities Act (ADA) became effective January 26, 1992. We have not made a specific survey or analysis of the property to determine whether the physical aspects of the improvements meet the ADA accessibility guidelines. We claim no expertise in ADA issues, and render no opinion regarding compliance of the subject with ADA regulations. Inasmuch as compliance matches each owner’s financial ability with the cost to cure the non- conforming physical characteristics of a property, a specific study of both the owner’s financial ability and the cost to cure any deficiencies would be needed for the Department of Justice to determine compliance. 19. The appraisal report is prepared for the exclusive benefit of the Client, its subsidiaries and/or affiliates. It may not be used or relied upon by any other party. All parties who use or rely upon any information in the report without our written consent do so at their own risk. 20. No studies have been provided to us indicating the presence or absence of hazardous materials on the subject property or in the improvements, and our valuation is predicated upon the assumption that the subject property is free and clear of any environment hazards including, without limitation, hazardous wastes, toxic substances and mold. No representations or warranties are made regarding the environmental condition of the subject property. Appraisal Company and/or any of their respective officers, owners, managers, Retail Chapter Page 89 of 100 directors, agents, subcontractors or employees, shall not be responsible for any such environmental conditions that do exist or for any engineering or testing that might be required to discover whether such conditions exist. Because we are not experts in the field of environmental conditions, the appraisal report cannot be considered as an environmental assessment of the subject property. 21. The persons signing the report may have reviewed available flood maps and may have noted in the appraisal report whether the subject property is located in an identified Special Flood Hazard Area. We are not qualified to detect such areas and therefore do not guarantee such determinations. The presence of flood plain areas and/or wetlands may affect the value of the property, and the value conclusion is predicated on the assumption that wetlands are non- existent or minimal. 22. Appraisal Company is not a building or environmental inspector. Appraisal Company does not guarantee that the subject property is free of defects or environmental problems. Mold may be present in the subject property and a professional inspection is recommended. 23. The appraisal report and value conclusions for an appraisal assume the satisfactory completion of construction, repairs or alterations in a workmanlike manner. 24. It is expressly acknowledged that in any action which may be brought against any of the Integra Parties, arising out of, relating to, or in any way pertaining to this engagement, the appraisal reports, and/or any other related work product, the Integra Parties shall not be responsible or liable for any incidental or consequential damages or losses, unless the appraisal was fraudulent or prepared with intentional misconduct. It is further acknowledged that the collective liability of the Integra Parties in any such action shall not exceed the fees Retail Chapter Page 90 of 100 paid for the preparation of the appraisal report unless the appraisal was fraudulent or prepared with intentional misconduct. Finally, it is acknowledged that the fees charged herein are in reliance upon the foregoing limitations of liability. 25. Appraisal Company, an independently owned and operated company, has prepared the appraisal for the specific intended use stated elsewhere in the report. The use of the appraisal report by anyone other than the Client is prohibited except as otherwise provided. Accordingly, the appraisal report is addressed to and shall be solely for the Client’s use and benefit unless we provide our prior written consent. We expressly reserve the unrestricted right to withhold our consent to your disclosure of the appraisal report or any other work product related to the engagement (or any part thereof including, without limitation, conclusions of value and our identity), to any third parties. Stated again for clarification, unless our prior written consent is obtained, no third party may rely on the appraisal report (even if their reliance was foreseeable). 26. The conclusions of this report are estimates based on known current trends and reasonably foreseeable future occurrences. These estimates are based partly on property information, data obtained in public records, interviews, existing trends, buyer-seller decision criteria in the current market, and research conducted by third parties, and such data are not always completely reliable. Appraisal Company and its employees, officers, and stock holders are not responsible for these and other future occurrences that could not have reasonably been foreseen on the effective date of this assignment. Furthermore, it is inevitable that some assumptions will not materialize and that unanticipated events may occur that will likely affect actual performance. While we are of the opinion that our findings are reasonable based on Retail Chapter Page 91 of 100 current market conditions, we do not represent that these estimates will actually be achieved, as they are subject to considerable risk and uncertainty. Moreover, we assume competent and effective management and marketing for the duration of the projected holding period of this property. 27. All prospective value opinions presented in this report are estimates and forecasts which are prospective in nature and are subject to considerable risk and uncertainty. In addition to the contingencies noted in the preceding paragraph, several events may occur that could substantially alter the outcome of our estimates such as, but not limited to changes in the economy, interest rates, and capitalization rates, behavior of consumers, investors and lenders, fire and other physical destruction, changes in title or conveyances of easements and deed restrictions, etc. It is assumed that conditions reasonably foreseeable at the present time are consistent or similar with the future. 28. The appraisal is also subject to the following: Extraordinary Assumptions and Hypothetical Conditions 1. None 1. None The value conclusions are based on the following hypothetical conditions that may affect the assignment results. A hypothetical condition is a condition contrary to known fact on the effective date of the appraisal but is supposed for the purpose of analysis. The value conclusions are subject to the following extraordinary assumptions that may affect the assignment results. An extraordinary assumption is uncertain information accepted as fact. If the assumption is found to be false as of the effective date of the appraisal, we reserve the right to modify our value conclusions. Retail Chapter Page 92 of 100 Addendum A Page 93 of 100 Retail Chapter Page 94 of 100 Addendum B Property Information Retail Chapter Page 95 of 100 Legal Description That part of the Southeast Quarter of the Southwest Quarter (SE1/4 of SW1/4) of Section 28, Township 24 North, Range 12 West, Morrison County, Michigan, described as follows: Commencing at the Northeast corner of said SE1/4 of the SW1/4; thence go South along the East line of said SE1/4 of the SW1/4 a distance of 607.79 feet to the place of beginning of the parcel here described; thence deflect to the right 90 degrees 13 minutes and go West 600 feet; thence deflect to the right 89 degrees 47 minutes and go North 607.88 feet; thence deflect to the left 89 degrees 46 minutes 30 seconds and go West 338.26 feet; thence deflect to the left 90 degrees 13 minutes 30 seconds and go South 860.95 feet; thence deflect to the left 89 degrees 58 minutes 04 seconds and go East 938.25 feet; thence deflect to the left 90 degrees 01 minutes 56 seconds and go 450.00 feet North to the place of beginning of the here described. Morrison County, Michigan Abstract Property Retail Chapter Page 96 of 100 Plat Map Retail Chapter Page 97 of 100 Zoning Map Retail Chapter Page 98 of 100 Flood Map Retail Chapter Page 99 of 100 Addendum C Comparable Data \ Retail Chapter Page 100 of 100 Addendum D Engagement Letter
Abstract (if available)
Abstract
The requirements of the USC Price School Doctor of Policy, Planning, and Development degree include a capstone project that advances the state of the practice of a professional field. My field of interest is real property valuation. In this field, there is no publicly accessible case-based training to facilitate learning how to complete an appraisal assignment from start to finish. This project is designed to remedy this deficiency.
Linked assets
University of Southern California Dissertations and Theses
Conceptually similar
PDF
Mitigating the energy efficiency gap through Property Assessed Clean Energy (PACE): an assessment of the HERO Program in Riverside County, CA
PDF
The interactions between housing and business
PDF
An exploratory case study on the social viability of Alvarado Street Bakery’s employee-owned cooperative model
PDF
Elements of a successful multi-sectoral collaborative from a local government perspective: a framework for collaborative governance – dimensions shared by award winning multi-sectoral partnerships
PDF
Workplace conflict and employment retaliation in law enforcement; an examination of the causes, effects and viable solutions
PDF
The impact of mobility and government rental subsidies on the welfare of households and affordability of markets
PDF
Household carbon footprints: how to encourage adoption of emissions‐reducing behaviors and technologies
PDF
Using innovative field model and competency-based student learning outcomes to level the playing field in social work distance learning education
PDF
Three essays in United States real estate markets
PDF
Does organizational culture play a role in aviation safety? A qualitative case study analysis
PDF
Emerging technology and its impact on security policy
PDF
Making it: a strategies primer for African-American entrepreneurs seeking capital in Los Angeles
PDF
Examining the federal credit union model in the 21st century
PDF
Three essays on real estate risk and return
PDF
Research to develop a manual for parents, caregivers, and volunteers to teach children from birth to five years of age with intellectual disability living in rural communities in the Dominican Re...
PDF
A time of crisis: the Australian experience and what can California learn?
PDF
The impact of demographic shifts on automobile travel in the United States: three empirical essays
PDF
Choice neighborhoods: a spatial and exploratory analysis of Housing Authority City of Los Angeles public housing
PDF
Fostering a newly defined entrepreneurship in impoverished communities: a key component of the solution for eradicating poverty in America
PDF
The impact of social capital: a case study on the role of social capital in the restoration and recovery of communities after disasters
Asset Metadata
Creator
Deguzman, Victoria
(author)
Core Title
Case studies for real estate valuation
School
School of Policy, Planning and Development
Degree
Doctor of Policy, Planning & Development
Degree Program
Policy, Planning, and Development
Publication Date
05/04/2020
Defense Date
05/25/2017
Publisher
University of Southern California
(original),
University of Southern California. Libraries
(digital)
Tag
appraisal,appraiser training,OAI-PMH Harvest,real estate valuation
Format
application/pdf
(imt)
Language
English
Contributor
Electronically uploaded by the author
(provenance)
Advisor
Bostic, Raphael (
committee chair
), Gordon, Peter (
committee member
), Moore, James (
committee member
)
Creator Email
victoriavdeguzman@gmail.com,victoriv@usc.edu
Permanent Link (DOI)
https://doi.org/10.25549/usctheses-c40-500177
Unique identifier
UC11266524
Identifier
etd-DeguzmanVi-6308.pdf (filename),usctheses-c40-500177 (legacy record id)
Legacy Identifier
etd-DeguzmanVi-6308.pdf
Dmrecord
500177
Document Type
Dissertation
Format
application/pdf (imt)
Rights
Deguzman, Victoria
Type
texts
Source
University of Southern California
(contributing entity),
University of Southern California Dissertations and Theses
(collection)
Access Conditions
The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the a...
Repository Name
University of Southern California Digital Library
Repository Location
USC Digital Library, University of Southern California, University Park Campus MC 2810, 3434 South Grand Avenue, 2nd Floor, Los Angeles, California 90089-2810, USA
Tags
appraisal
appraiser training
real estate valuation