AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING #2
BIRMINGHAM, ALABAMA
2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
FAX 955-0466
March 2, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Ms. Stacy Pulliam
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH PROFESSIONAL BUILDING #2
1201 11TH AVENUE SOUTH
BIRMINGHAM, ALABAMA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of February 2, 1994, subject to a master lease
from HealthSouth Corporation. The report is to be used for asset valuation
purposes. HealthSouth Corporation is selling many of its professional office
buildings for the purpose of establishing a real estate investment trust
(REIT). This valuation assumes that the prospective REIT is the owner of the
property, with HealthSouth Corporation guaranteeing annual net rental income of
$13.00 per leasable square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"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 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:
o Buyer and seller are typically motivated;
3
HealthSouth Corporation
March 2, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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."
[The Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property is a three-story professional office building containing
109,682 gross square feet and 81,800 leasable square feet. The building is a
Class B+ facility, with a steel frame and poured-in-place concrete structure
and dryvit and brick veneer exterior walls. It was constructed in 1990 to
1991. Floor 1 and Floor 2 of the building are currently occupied by
HealthSouth Rehabilitation and Alabama Sports Medicine, respectively. A lease
is reportedly pending for an ophthalmology practice named Morris/Witherspoon to
occupy the entire third floor of the building. Since HealthSouth is providing
a long-term master lease for the entire building, this report assumes that the
estimated $1,000,000 "to-be-completed" tenant finish work for the third floor
has been completed prior to execution of the sale/lease agreement.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Professional Building #2, as of February 2, 1994, to be:
$11,900,000
===========
4
HealthSouth Corporation
March 2, 1994
Page Three
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:jef
094-1578
5
APPRAISER CERTIFICATION
We, the undersigned, do hereby 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,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Michael P. Bates, the principle appraiser, made a personal inspection
of the property that is the subject of this report. Patrick J. Simers
has not made a personal inspection of the property.
This assignment was made subject to regulations of the State of Alabama Real
Estate Appraisers Board. The undersigned state certified appraiser has met the
requirements of the board that allow this report to be regarded as a "certified
appraisal".
/s/ Patrick J. Simers /s/ Michael P. Bates
- ----------------------------------- -----------------------------------
Patrick J. Simers Michael P. Bates, MAI
Managing Director Georgia Certified Appraiser # 0685
Alabama Certified General Real Estate MAI No. 10277
Appraiser No. CG00375
6
State of Alabama [SEAL]
This is to certify that /s/ Lanett Davis
/s/ W. Phil Fowler
PATRICK J. SIMERS
/s/ F. L. Clark
having given satisfactory evidence of the necessary
/s/ Stu Graham
qualifications required by the laws of the State of Alabama
/s/ James ___ Perry, Jr.
is authorized to transact business in Alabama as a
/s/ George C. Washington
CERTIFIED GENERAL REAL ESTATE APPRAISER /s/ Edward Forand
/s/ Robert E. Nesbin
with all the rights, privileges and obligations
/s/ William R. Sizemore
appurtenant thereto.
ALABAMA REAL ESTATE
APPRAISERS BOARD
Certificate Number: CG00375 Expiration Date: SEPT. 30, 1995
7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: February 2, 1994
Date of Report: February 15, 1994
Property Identification: HealthSouth Professional Building #2
Property Location: 1201 11th Avenue South
Birmingham, Alabama
Interest Appraised: Leased Fee Estate
Gross Building Area: 109,682 square feet
Net Leasable Area: 81,800 square feet
Subject Land Size (Allocated): 108,900 square feet, or 2.5 acres
Improvements Description: Three-story, steel frame and
concrete structure, Class B+
professional office building
constructed in 1990 to 1991.
Physical Occupancy Percentage: 67%
CONCLUSIONS
Cost Approach: $13,980,000
Sales Comparison Approach: $11,045,000
Income Approach: $11,900,000
Final Value Estimate: $11,900,000
===========
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TABLE OF CONTENTS
Page
----
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 4
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Market Data - Metropolitan Birmingham 7
Neighborhood Analysis 11
Zoning 12
Real Estate Taxes and Assessments 13
Site Analysis 13
Building and Site Improvements 16
HIGHEST AND BEST USE 19
VALUATION SECTION 23
Valuation Methodology 23
Cost Approach 24
Sales Comparison Approach 37
Income Approach 49
CORRELATION AND CONCLUSION 51
12
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Metropolitan Area Map
Exhibit C - Neighborhood Map
Exhibit D1 - Site Plan
Exhibit D2 - Plat Map
Exhibit E - Land Sale Location Map
Exhibit F - Building Floor Plans
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparable Location Map
Exhibit J - Rent Comparables Summary
Exhibit K - Subject Photographs
13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is known as, HealthSouth Professional Building
#2, and is located at 1201 11th Avenue South in Birmingham, Alabama. The
subject is a three-story building that is situated on the east side of, and is
contiguous to, the new five-story HealthSouth Hospital. The subject
professional building shares an atrium, mechanical systems and parking with the
hospital. The entire hospital and professional building property is identified
by Jefferson County as tax parcel number 29-1-3-9-1.0.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is February 2,
1994, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of several professional office buildings for the
purpose of establishing a real estate investment trust (REIT). The subject
property would be included in that sale. It is our understanding that the REIT
will involve mortgage financing.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
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final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined as follows:
"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 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
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15
o 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."
[The Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
HISTORY OF THE PROPERTY
HealthSouth Medical Center, Inc., acquired the assets of the South Highlands
Hospital in November 1989 [Deed Book 3726/Page 014]. The purchase consisted of
approximately ten acres of land and improvements. A new main hospital building
and the subject, HealthSouth Professional Building #2, were constructed in
1991. The new hospital and the subject building share a common atrium
entryway, elevators and mechanical systems. From 1990 through 1992,
HealthSouth Medical Center acquired additional parcels around the hospital, and
it now controls approximately 15 acres of land and buildings. The American
Sports Medicine Institute (ASMI) was constructed on 1.7 acres of land just east
of the subject in late 1992 and early 1993.
The top floor of the subject professional office building is currently vacant,
although a lease is reportedly in process for an ophthalmology practice to take
the entire floor. Tenant finish work has not been completed on this space as
of the date of this report. The owners are considering including all medical
office buildings in a new REIT, as mentioned earlier. This report is being
completed for internal valuation purposes and for mortgage financing in
conjunction with the sale to the REIT.
The subject professional building has reportedly not been marketed for sale and
is not currently under an agreement of sale. No other deed transfers were
noted in the last three years. A title search is recommended for official
determination.
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HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent
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annual increase compared to a 4.0 percent increase during 1991. The GDP
Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
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1993 1994 1995
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate. This soft demand has caused some property
values to remain flat and some to decline. The lower interest rates in recent
periods, however, are serving to stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time 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; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation].
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
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DESCRIPTIVE DATA
MARKET DATA - Metropolitan Birmingham
Birmingham is recognized as a leading financial, transportation, communication,
manufacturing, healthcare and distribution center for the southeast United
States. The region's central location within the state of Alabama has been a
major factor in its economic success.
The Birmingham Metropolitan Statistical Area (MSA) consists of five counties
with an estimated 1992 population of 917,100. This ranks the metropolitan area
as the 46th largest in the country. The larger 16-county primary market area
contains a population of 1,341,500. A map of the Birmingham MSA is shown in
the Exhibit Section of this report.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
Historical data and growth projections reflect the economic climate of an area
and have both a direct and indirect impact on property values. Table 1 on the
next page shows the county population totals by decade. Table 1 also shows the
annual percentage increases in population for the individual counties in the
Birmingham MSA.
The fastest annual population growth in the Birmingham MSA occurred in the
decade of the 1980s. The rate of growth in the 1980s, however, was only 1.13
percent per year, compared to 2.0 percent to 3.0 percent per year for many
other large Southeast U.S. metropolitan cities during the decade. The City of
Birmingham, in Jefferson County, and Walker County experienced population
declines during the most recent decade.
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TABLE 1
POPULATION BY COUNTY
1970 1980 1990
COUNTY CENSUS CENSUS CENSUS
Blount 26,853 36,459 39,248
Jefferson 644,991 671,392 651,525
City of Birmingham* 300,910 286,799 265,968
Saint Claire 27,956 41,205 50,009
Shelby 38,037 66,298 99,358
Walker 56,246 68,660 67,670
TOTAL MSA 794,083 884,014 907,810
* City of Birmingham included in Jefferson County totals.
TABLE 1 (CONTINUED)
AVERAGE PERCENTAGE INCREASE
COUNTY 1970S 1980S 1990S
Blount 3.58% 0.76% N/A
Jefferson 0.41% -0.30% N/A
Saint Clair 4.74% 2.14% N/A
Shelby 7.43% 4.99% N/A
Walker 2.21% -0.14% N/A
TOTAL MSA 1.13% 0.27% 0.5%
Source: Birmingham Area Chamber of Commerce
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Jefferson County, excluding the City of Birmingham, grew 1.18 percent per year
in population during the 1970s, but experienced little growth during the 1980s.
The estimated population growth rate so far in the 1990s is still slow, but
faster than experienced in the 1980s.
HOUSING
The growth in housing in the Birmingham MSA was also slow but stable during the
1980s. As was the case in other cities during the decade, much of the new
housing occurred due to a decline in the average household size. In the
Birmingham MSA, there were 3.01 persons per household in 1970, compared to 2.41
persons per household in 1990.
So far in the 1990s, single-family housing sales have been brisk, with record
sales in 1992 and thus far in 1993. The area ranks 48th in new homes built in
1993, with 3,510 new homes the first half of 1993. New apartment construction
totaled over 6,000 units from 1987 through 1990, or an average of 1,545 per
year. New multifamily units only totaled 40 in 1992 and 140 for the first six
months of 1993. Most of the new apartment construction has been concentrated
south of the City of Birmingham along the U.S. Highway 280 and U.S. Highway 31
corridors.
Looking forward, the average household size is not expected to continue to
decline indefinitely. The growth in housing, therefore, should equal the
population growth plus the replacement of obsolete housing.
EMPLOYMENT
In the 1980s, the average annual growth in employment in the MSA was 3,520 per
year, compared to 8,290 per year during the 1970s. So far in the 1990s, the
region is averaging 3,233 new jobs each year. The unemployment rate at the end
of 1992 was 6.1 percent, compared to 7.3 percent and 7.4 percent for the state
of Alabama and the U.S., respectively.
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22
Table 2 shows the diversity in employment in the Birmingham MSA.
TABLE 2
EMPLOYMENT BY SECTOR
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
SECTOR LABOR DOLLARS ESTABLISHMENTS
Health Services 11.7% 6.5%
Other Services 14.0% 26.5%
Manufacturing 15.7% 5.7%
Construction 12.0% 8.8%
Transportation, Communications & Utilities 13.8% 3.6%
Wholesale Trade 10.2% 9.5%
Retail Trade 9.8% 25.2%
Finance, Insurance, & Real Estate 9.1% 9.2%
Mining & Agricultural 3.5% 1.4%
Miscellaneous 0.2% 3.6%
REGION 100.0% 100.0%
Source: Birmingham Chamber of Commerce
In 1970, manufacturing accounted for 28.3 percent of the employment in the MSA.
By 1991, manufacturing only accounted for 13.1 percent of the area's
employment. The manufacturing jobs have been replaced with service jobs. The
service sector accounts for 25.4 percent of all jobs in 1991, versus 14.3
percent in 1970.
As of April 1993, the largest employers in the Birmingham MSA were as follows:
University of Alabama 15,696
U.S. Government 9,501
South Central Bell 7,450
State of Alabama 6,304
Birmingham City Schools 4,733
Alabama Power Company 4,611
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INCOME
Jefferson County and the Birmingham MSA are very representative of the average
per capita income and average household income in the United States. Table 3
below shows the area's income averages compared to the entire U.S.
TABLE 3
PERCENT PERCENT
AVERAGE PER OF U.S. AVERAGE OF U.S.
COUNTY CAPITA COME AVERAGE HOUSEHOLD COME AVERAGE
Blount $13,135 70% $27,219 77%
Jefferson $18,624 100% $34,235 97%
St. Clair $13,056 70% $26,750 76%
Shelby $15,935 85% $44,813 115%
Walker $14,556 78% $26,585 75%
MSA $17,479 94% $34,315 100%
Jefferson County has approximately the same per capita income and household
income as the national average.
In summary, metropolitan Birmingham has experienced a slow but stable growth
rate in recent years. Its economic base is diverse. National trends of a
lower manufacturing work force and lower household size have also been the
experience in Birmingham.
NEIGHBORHOOD ANALYSIS
The subject neighborhood is identified as the "Southside" area of Birmingham.
This area is just south of the Central Business District (CBD) of Birmingham
and west of the Red Mountain Expressway. This neighborhood is bounded on the
north by the University of Alabama at Birmingham (UAB), on the east by the Red
Mountain Expressway (U.S.Highway 31), on the south by Red Mountain with the
famous Vulcan Statue, and on the west by Interstate 65. A map of the
neighborhood is located in the Exhibit Section.
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The Southside includes many of the city's old restored homes. The
Highland/Five-Points area has undergone considerable renovation, and is
becoming a restaurant and entertainment center. The subject medical office
building, which is part of the HealthSouth Medical Center, is located
one-half-mile west of the Highland/Five-Points area, and just north of Red
Mountain. The upscale residential communities of Homewood and Mountain Brook
are located just south and east of the Southside. The property is situated at
1201 11th Avenue South. The block bounded by 13th Place South, 12th Avenue
South and 13th Street South contains the subject building. East and south of
the property are primarily older residential areas. The HealthSouth Medical
Center and the HealthSouth Professional Condominium Building are situated to
the west and south of the property. Some homes have been converted to
commercial uses around the hospital. A few neighboring parcels have been
redeveloped with small apartment buildings, including the site just south of
the property.
North of the HealthSouth Medical Center is the UAB, which is reportedly now the
second largest university in Alabama. The university has been growing rapidly
and has absorbed most of the land uses in a six by fifteen block area. The UAB
Medical Center is considered by some to be in the same class as the Mayo Clinic
in some medical research fields.
In summary, the neighborhood is an older residential area that is undergoing
renovation and restoration. Development in the area is being driven primarily
by hospital growth which includes the subject HealthSouth Medical Center, the
UAB Medical Center and St. Vincent Medical Center. Although medical service
is the focus of new development, new retail, restaurant and residential
development is also active in the area.
ZONING
The subject property is zoned "COI, Conditional Office and Institutional
District", by the City of Birmingham. According to the City zoning
requirements, the office and institutional district provides "for the orderly
arrangement of institutional, clerical and administrative space". Permitted
uses include public, semi-private or private offices; public or semi-private,
religious, educational or charitable institutions; and, other similar uses
consistent with this zoning code's purpose and surrounding uses. This zoning
shall not include properties with industrial characteristics, communal living
facilities or correctional institutions.
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The subject's "conditional" zoning provided for the specific medical services
property that was constructed on the site. The hospital reportedly was granted
setback and parking variances prior to the construction of the building. Since
the site plan was approved prior to construction, and the occupancy permit
received after construction, it is assumed that the property conforms to all
the required conditions of zoning. The zoning variance may have provided for
an easement with the hospital for additional parking spaces on the north side
of the property. A letter of zoning compliance from the City of Birmingham is
recommended for an official determination regarding any zoning conformity
issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in the City of Birmingham, and subject to the
taxing authority of the City and Jefferson County. Commercial properties in
the City and County are assessed at 20 percent of tax appraised value. The
subject building is included with the HealthSouth Medical Center for tax
purposes. The tax appraised market value of the entire hospital and
professional building property in 1993 was $29,368,240. The entire property
recently paid $408,219 in 1993 property taxes.
The market value estimated in this report is $11,900,000. In the City of
Birmingham, properties are assessed at 20% of their tax appraised market
values. The 1993 millage rate is $69.50 per $1,000 of assessed value. The
subject property taxes are estimated as follows:
$11,900,000 x 20% / $1,000 x $69.50 = $165,410
SITE ANALYSIS
The subject site is part of approximately 15 acres owned by HealthSouth Medical
Center. The HealthSouth Professional Building #2 is adjacent and contiguous to
the new hospital on 11th Avenue South. The subject building was constructed
together with the hospital in 1990-1991, and a separate land parcel has not
been surveyed and allocated to the professional building. The appraisers have
not been provided with a survey or legal description for the subject property.
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For the purpose of this valuation, the appraisers have allocated a portion of
the hospital land to the professional building. This allocated land consists
basically of the footprint of the subject building plus a parking lot just east
of the building and 11th Street South. A county tax plat map of the subject
area is included on the next page. The entire hospital property is highlighted
in yellow on that map. The subject land and building footprint are also
identified in orange on that map. A total of 2.5 acres, or 108,900 square
feet, of land has been allocated to the subject property. The appraisers
reserve the right to modify this report if the land is later resurveyed and
found to differ significantly in size from our allocated acreage.
Approximately half of the subject 2.5 acres is situated on the west side of
11th Street South. This parcel is rectangular-shaped, and fronts approximately
240 feet on the west side of 11th Street South. This parcel is approximately
210 feet deep, and slopes upward from its north side toward its south side.
Almost this entire parcel is covered by the footprint of the subject building.
The remaining subject parcel is irregular-shaped. It has approximately 220
feet of frontage on the east side of 11th Street South. This site slopes
slightly from its north end up to its south end, which abuts the new American
Sports Medicine Institute (ASMI) Building. This entire site has asphalt paving
and fencing and is used for hospital and professional office building parking.
Access to this parking lot is via an entrance at the northwest corner of this
site.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. Since the subject building is
contiguous to the hospital, it is likely that the subject property would only
sell along with the hospital. A site plan of the entire hospital is shown in
the Exhibit section.
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Tax Plat Map
(Map)
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Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood. Other site improvements consists of general landscaping, asphalt
paving, concrete paving and curbing, some shrubs and general signage. To our
knowledge, no environmental study has been conducted on the subject site. As
appraisers, we are not qualified to detect hazardous materials. Consequently,
our report assumes that there are no environmentally hazardous materials in the
site or building that would adversely affect the subject property's value.
According the Federal Emergency Management Association (FEMA) panel #010116
0044B, dated January 2, 1992, this site is not located in a flood hazard area.
BUILDING AND SITE IMPROVEMENTS
The HealthSouth Professional Building was constructed in 1990-1991. It
contains 109,682 gross square feet and 81,800 leasable square feet on three
floors. The leasable area excludes the mechanical rooms and vertical
penetrations (stairwells, elevator shafts) and lobby bathrooms. The building
areas are the appraiser's calculations based on the dimensions on the Gould
Turner Group, PC, architectural plans dated February 1, 1990. We assume that
the building was constructed according to these plans. The gross and net
building area by floor are summarized as follows:
BUILDING AREA GROSS SF LEASABLE SF
Floor 1 31,490 26,160
Floor 2 39,096 28,568
Floor 3 39,096 27,072
TOTAL BUILDING 109,682 81,800
The building is a three-story, reinforced concrete and steel structure, with a
dryvit and brick veneer exterior. The entire building is sprinklered. The
building has reinforced concrete floors and roof deck, with a waterproof
membrane and rock covering. Ceiling heights are approximately nine feet on the
first floor and eight and one-half feet on the second and third floors. The
reception area has a 14 foot ceiling and the gym area has
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an eleven-foot ceiling. Ceiling finishes consists of acoustical ceiling tiles
and recessed fluorescent lighting with some cone directional lights. The
interior walls are wall paper on gypsum board over metal studs.
Air conditioning is supplied via three 450-ton Trane chillers and air handlers
(one dedicated to hospital). There are additional chillers located in the
hospital serving only that building. Two, 350-hp gas or diesel-fired Burnham
boilers provide steam heat through a circulating water system to both the
professional building and the hospital. Two, 600 KW/hour Cummins diesel
engines provide emergency power for the hospital and medical building if the
other utilities were to fail. A 10,000 gallon tank for the diesel is located
underground in the alley behind the subject building. In addition, there are
eight Marathon variable air fans and two pneumatic air pumps. Two Siemens
electric panels control up to 13,500 volts each of electric power, and either
panel can control power to both the hospital and professional building. We
assume that the heating and electrical capacity is adequate for the subject
facility.
The interior floors have both carpeting and vinyl tiles. There is ceramic tile
in the labs, pool and bathroom areas. Windows and doors are metal framed, and
interior doors are solid-core wood. Each of the floors has their own lobby.
HealthSouth Rehabilitation on the first floor has two gymnasium areas, a pool
area with a 15 foot by 45 foot pool, a walking track and therapy rooms.
Alabama Sports Medicine on the second floor is heavily partitioned with
examination rooms and doctor's offices. A typical floor plan for the building
is shown in the Exhibit Section of this report.
The third floor of the building is vacant except for the mechanical rooms. A
lease is reportedly being negotiated for an ophthalmologist practice to occupy
the entire floor. The construction company has estimated that it will cost
slightly more than $1,000,000, or approximately $37 per square foot of leasable
area, to complete the tenant finish work on the third floor. This is
considered above average tenant finish costs for some medical buildings, but
consistent with the levels of finish on the first two floors.
Site improvements include asphalt paving and curbing, parking lot fencing, a
flag pole in front of the subject building and ground cover and shrubbery
around the subject building. A detail description of the building and site
improvements are included in the Exhibit section of this report.
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CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is new and in good condition. There is no deferred maintenance,
or functional or economic obsolescence. Since the master lease provides for
HealthSouth guaranteeing income on this space, this report assumes that
HealthSouth will complete the tenant finish work, estimated at $1,000,000 for
the third floor, prior to prospective sale to the REIT.
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HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"The reasonably probable and legal use of vacant land or an
improved property, which is physically possible, appropriately
supported, financially feasible, and that results in the
highest value"
[The Appraisal of Real Estate, P. 45, 10th Ed. published by
The Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market
for a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "COI, Conditional Office and Institutional". Permitted uses in
this general zoning category vary widely. Potential legal uses would include
some retail and restaurants, office/institutional, hotels, hospitals and other
medically-oriented uses. The subject's conditional zoning provided for the
construction of the subject professional office building and the adjacent
hospital. We assume that variances for setbacks and parking were received
prior to construction.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. New hospital
related development in the subject area and near other surrounding hospitals
indicates that new medical development is financially feasible. HealthSouth
Medical Center, UAB Medical Center and St. Vincent Medical Center have all
recently built new medical office facilities. Office business-use facilities,
however, are generally over-built in Birmingham, as is the case in other major
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metropolitan areas. General business space is not considered financially
feasible in the subject market at this time.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new medical-related development is financially
feasible. Based on this analysis, the current highest and best use of the
land, if vacant, would be for office/institutional development based on the
growth needs of the area hospitals.
As Improved
The subject site is currently improved with a 81,800 rentable square foot
professional building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to modify existing improvements. The improvements were
recently constructed and are considered functional. The building could be
converted to additional hospital space. Recent trends in the hospital business
call for more outpatient business and less inpatient stays. Besides, a new
hospital was constructed with the subject building, and additional hospital
capacity is not needed.
LEGALLY PERMISSIBLE
The building, as improved, is assumed to be a legal conforming use, since the
property was recently constructed and received an occupancy permit. Under the
current zoning, the property could remain as it is, be torn down or renovated.
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FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. The only
financially feasible use of the existing improvements is it current use as
professional office space.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The exist use was the
only financially feasible use. The highest and best use, as improved, is the
property's current use.
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VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
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Land Comparable Number 1
Parcel Number: 29-01-3-008-7
Location: East side of 13th Street South across from the
new Alabama Sports Medicine and Orthopedic
Center and the new HealthSouth Hospital.
Size: 7,000 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/195
Grantor: Randall J. Westbrook
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $135,000
Price Per Square Foot: $19.29
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was part of 15 parcels assembled from
1990-1992 for the construction of the Sports
Medicine Institute and additional parking. The
average price for the 15 parcels was $18.16 per
square foot. The Grantor in this transaction is
an employee of the Grantee that acquired the
property on July 10, 1992, from Dwain Pitts, et
al, for the same price [Deed Book 4313/Page 978].
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Land Comparable Number 2
Parcel Number: 29-01-3-010-4
Location: West side of 12th Street South adjacent to an
existing parking lot across from the old entrance
to the HealthSouth Medical Center.
Size: 8,160 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/197
Grantor: Vicki E. Owens
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $66,000
Price Per Square Foot: $8.09
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel was purchased for future parking
needs by the hospital. The hospital purchased
the property based solely on land value and
considered the forty year old house on the site
to be only a temporary use until additional
parking is needed. The Grantor in this
transaction is an employee of the Grantee
that acquired the property on October 30,
1992 from Robert Vests for the same price
[Deed Book 4410/Page 819].
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Land Comparable Number 3
Parcel Number: 29-01-3-005-3
Location: Northeast corner of 12th Street South and 11th
Avenue South, one block north of the
HealthSouth Medical Center.
Size: 45,600 square feet
Sale Date: November 13, 1990
Deed Book/Page: 3972/250
Grantor: Eleventh Avenue United Methodist Church
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $1,500,000
Price Per Square Foot: $32.89
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was a church before being sold to
HealthSouth. Part of the improvements have been
removed and the site is used as overflow parking
by the hospital. The remainder of the building
is scheduled to be removed in the near future.
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Land Comparable Number 4
Location: Northeast corner of 17th Street and 11th Avenue
approximately one-quarter mile south of the
University of Alabama Medical Center and
one-half-mile northeast of the subject.
Size: 16,000 square feet
Sale Date: January 2, 1990
Deed Book/Page: 3951/388
Grantor: Jo Anne Jackson
Grantee: Board of Trustees of University of Alabama
Sale Price: $240,000
Price Per Square Foot: $15.00
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel contains an old doctor's building
that is boarded up and no longer used. The
building does not contribute any value.
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Land Comparable Number 5 - Current Listing
Location: Northwest corner of 19th Street and 5th Avenue
South, just north of the University of Alabama
Medical Center (UAB).
Size: 56,000 square feet
Owner: Mr. Hill
Asking Price: $3,080,000
Price Per Square Foot: $55.00
Shape: Retectangular
Zoning: M-1 Light Industrial, but permitted for the
construction of an 11-story, 220,000 square foot
office building.
Utilities: All utilities are available.
Comments: This vacant parcel is across from UAB and a high
rise apartment building that is currently under
construction. The owner has been offered
approximately $35 per foot.
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A summary of the land sales and listing is shown as follows:
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
1 13th Street South 04/93 7,000 $19.29
2 12th Street South 04/93 8,160 $ 8.09
3 12th Street South 11/90 45,600 $32.89
4 17th Street 01/90 16,000 $15.00
5 19th Street Listing 56,000 $55.00
SUBJECT 11TH AVENUE SOUTH 108,900
Discussion of Land Comparables
LAND COMPARABLE 1 was one parcel of 15 that were assembled by the hospital
around what is now the American Sports Medicine Institute. Downward
adjustments are indicated because of the more level topography of this
comparable parcel and because of its smaller size. The adjustments are shown
on a Land Sale Adjustment Grid at the end of this discussion. The adjusted
price per square foot of this comparable is $16.40 per square foot.
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
by the hospital for future parking needs of the hospital. The improvements
were not considered to have any significant value. A large upward adjustment
is indicated because of the inferior location of this parcel compared to the
subject that is adjacent to the hospital. Downward adjustments are indicated
because of the comparable's level topography and its smaller size. The
adjusted price per square foot of this comparable is $9.30.
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LAND COMPARABLE 3 was a 45,600 square foot parcel north of the hospital that
contained a Methodist Church. The church has relocated and the land is being
used for hospital overflow parking. The remaining building is reportedly
scheduled to be removed in the near future. Downward adjustments are indicated
because of the declining economy since this purchase and because of the level
topography of this site. The adjusted price for this comparable is $28.12 per
square foot.
LAND COMPARABLE 4 is a parcel that UAB purchased for future parking or
development. It is located one-quarter-mile south of the UAB campus. An
upward adjustment is indicated due to the inferior location of this comparable.
A downward adjustment is indicated for size. The adjusted price per square
foot of this comparable is $14.85.
LAND COMPARABLE 5 is the current listing of a site just north of UAB Medical
Center. This site is zoned for high rise development. A significant downward
adjustment is indicated because this is a listing rather than an actual sale.
Downward adjustments are also indicated for location, topography and due to the
superior zoning density of this site. The adjusted price per square foot of
this comparable is $32.73 per square foot.
The adjusted land prices range from $9.30 per square foot to $32.73 per
square foot, with the prices of the most comparable sites being in the middle
of this range. The arithmetic mean adjusted price per square foot was $20.28.
The average price per square foot for the land assembled around what is now the
American Sports Medicine Institute (ASMI) was $18.16 per square foot. The
subject site is a better location because it is closer to the hospital. The
subject 2.5-acre site, however, is larger than the ASMI site, and a net
downward adjustment is indicated for comparison for this reason. Based on our
analysis of the subject versus these comparables, it is our opinion that a land
price of $17.00 per square is representative of the subject site. The subject
land value is estimated as follows:
108,900 SF x $17.00/SF = $1,851,300
Rounded to: $1,850,000
==========
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L A N D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building #2
Birmingham, Alabama
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4 #5
Sale Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Property Rights Fee Simple Same Same Same Same Same
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Financing Cash Cash Cash Cash Cash Cash
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Conditions of Sale None None None None Listing
Adjustment -15%
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $46.25
Market/Time Effective
Adjustment Sep-93 0% 0% -10% -10% 0%
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $29.60 $13.50 $46.25
Other Adjustments:
Location Adjustment 0% 30% 0% 20% -15%
Topography Adjustment -5% -5% -5% 0% -5%
Size Adjustment 44,616 -10% -10% 0% -10% 0%
Zoning Adjustment 0% 0% 0% 0% -10%
Net Other Adjustments -15% 15% -5% 10% -30%
FINAL ADJUSTED PRICE PER SF $16.40 $9.30 $28.12 $14.85 $32.73
===========================================================
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Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule at the end of this section derived from the Marshall
Valuation Services shows the estimated replacement cost by category for the
subject building plus estimates of all forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 45 to 50 years. For the subject Class B+
building, we have assumed an economic life of 50 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
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Marshall Valuation Services, Inc. was used to estimate the overall economic
life of the improvements. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its young age. Observation of the subject property indicated
that the structure and related component parts have been adequately maintained
through a continuous maintenance service program.
The subject property was constructed in 1990-1991, and it is in excellent
condition. It is judged that the subject has an effective age equal to its
actual age of three years. The remaining useful life is estimated to be 47
years. This translates into a physical depreciation estimate of 6.0 percent (3
years divided by 50 years). The amount of depreciation attributable to the
property has been estimated on a straight-line basis, which is founded on the
assumption that depreciation of a property occurs equally throughout its
economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of three years and a remaining useful life of
17 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be 15.0 percent.
Entrepreneurial profit and miscellaneous replacement costs are depreciated at a
blended depreciate rate.
The subject building and site improvement replacement costs, excluding
entrepreneurial profit, were calculated to be $11,756,873. Replacement costs
normally include an entrepreneurial profit of 10 percent to 15 percent to
induce the property owner to undergo the development. Entrepreneurial
overhead, profit and miscellaneous fees were estimated at 10 percent of base
building costs, or $1,125,582. The total replacements costs via the Marshall
Valuation Service, including the entrepreneurial profit, is $12,882,455, or
$117.45 per gross square foot of building area.
-34-
47
The actual construction costs for the subject building by itself were not
available. The building was constructed at the same time as the adjacent
hospital building. The total cost for the hospital and medical building was
reported to be $28.5 million. The subject building represents approximately 45
percent of the combined gross building area for both the subject medical
building and the hospital. The $11,756,873 in building and site costs for the
subject property is approximately 41 percent of the combined costs for the
hospital and professional office building. This seems appropriate since the
hospital costs are estimated to be slightly higher than the office building
costs.
Total depreciation is estimated at $754,896, based on 6.0 percent depreciation
of building replacement costs and 15.0 percent depreciation of site
improvements. There was no functional or economic obsolescence indicated since
the property is new. The total depreciated value of the subject replacement
costs is $12,127,559. The $1,850,000 land value is added to the depreciated
replacement costs, for a final Cost Approach value of $13,977,559.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of February 2, 1994, is rounded to:
$13,980,000
===========
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48
SUMMARY OF TOTAL PROJECT DEVELOPMENT COSTS
HEALTHSOUTH PROFESSIONAL BUILDING #2
MARSHALL
DOLLARS
Site Preparation $ 47,314
Foundation $ 291,754
Frame $ 1,186,759
Exterior Walls $ 431,541
Floors $ 749,783
Roof $ 218,536
Roof Cover $ 119,152
Part. & Blt. in $ 2,172,800
Ceilings $ 592,009
Floor Coverings $ 835,173
Plumbing $ 994,816
HVAC $ 1,372,122
Electrical $ 1,509,224
Other Features $ 613,508
-----------
Total Building Costs $11,134,491
Site Improvement Costs $ 121,330
-----------
Total Cost $11,255,821
Architect's Fees Plans and Specs. (Of Building Costs) 3.00% $ 334,035
Architect's Fees, Supervision (Of Building Costs) 1.50% $ 167,017
Entrepreneural Overhead, Profit, 10.00%
and Other Miscellaneous Fees (Of Total Costs) $ 1,125,582
-----------
Total Other Costs $ 1,626,634
Total Project Cost $12,882,455
Accrued Depreciation:
Building Costs 6.0% (3/50 YEARS) $668,069
Site Costs 15.0% (3/20 Years) $18,200
Enterpreneural Profit 6.1% (Blended Rate) $68,627
----------
Total Physical Depreciation $754,896
Total Functional & Economic Obsolescence $0
---------
Less Total Depreciation (All Forms) $ (754,896)
-----------
Depreciated Building & Site Improvement Costs $12,127,559
Plus Land Value $ 1,850,000
-----------
DEPRECIATED COST APPROACH VALUE $13,977,559
ROUNDED: $13,980,000
===========
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SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on seven professional office building
sales which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
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IMPROVED SALE NUMBER 1
GENERAL SALE DATA
Location: 1770 Independence Court, Homewood,
Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $ 5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 122.69
Stabilized Overall Rate: 8.0%
EGIM: 8.91
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building, so the Grantee/physician would move
his surgical practice to the HealthSouth Medical Center. The location and
building quality for this comparable are very inferior to the subject property.
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IMPROVED SALE NUMBER 2
GENERAL SALE DATA
Location: West side of 20th Street South at the
address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of
Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------- -----
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- -----
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
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IMPROVED SALE NUMBER 3
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in
Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
------- -----
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- -----
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
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IMPROVED SALE NUMBER 4
GENERAL SALE DATA
Location: 2519 Galiano Street, Miami, Dade
County, Florida
Date of Sale: December 29, 1992
Deed Book/Page: 15762/4643
Grantor: American Equeties No. 2, Inc.
Grantee: CAC Properties, Inc.
Sale Price: $12,521,000
Terms of Sale: Third-party financing had no impact on the
purchase price
PROPERTY DATA
Parcel Number: 03-4117-005-1340 & 1330
Building Size: 139,500 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $2,511,000 $18.00
Vacancy Allowance: $ 376,650 $ 2.70
---------- ------
Effective Gross Income: $2,134,350 $15.30
Estimated Expenses @ $6.00/SF: $ 837,000 $ 6.00
---------- ------
Net Operating Income: $1,297,350 $ 9.30
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 89.76
Stabilized Overall Rate: 10.4%
EGIM: 5.87
COMMENTS
This building has six stories of office space over seven stories of parking
deck. The building was purchased by the primary tenant in the building. This
building is not adjacent to a hospital. Sun Bank has bank space in the bottom
floor of the building.
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IMPROVED SALE NUMBER 5
GENERAL SALE DATA
Location: 5 West Sample Road in Pompano
Beach, Broward County, Florida
Date of Sale: July 5, 1991
Deed Book/Page: 18536/769
Grantor: Robert T. Held, Sr.
Grantee: William J. Rand, et al
Sale Price: $3,150,000
Terms of Sale: Third-party conventional financing had no
impact on price.
PROPERTY DATA
Land Size: 15,000 square feet
Building Size: 27,500 square feet - gross
25,000 SF estimated leasable
Year Built: 1991
Occupancy at Sale: Build-to-suit for Rand Eye Institute
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $450,000 $18.00
Vacancy Allowance @ 5%: $ 22,500 $ 0.90
------- -----
Effective Gross Income: $427,500 $17.10
Estimated Expenses @ $5.00: $125,000 $ 5.00
-------- -----
Net Operating Income: $302,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 126.00
Stabilized Overall Rate: 9.6%
EGIM: 7.37
COMMENTS
This is a three-story, Class B, reflective glass and concrete building is
located in the northeast quadrant of the intersection of I-95 and Samples Road
near the campus of the North Broward Medical Center.
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IMPROVED SALE NUMBER 6
GENERAL SALE DATA
Location: 9750 N.W. 33rd Street in Coral
Springs, Broward County, Florida
Date of Sale: September 19, 1991
Deed Book/Page: 18762/194
Grantor: Central Medical Plaza Associates, Inc.
Grantee: Gary V. Caplan, Trustee
Sale Price: $4,790,200
Adjusted Sale Price: $4,550,500
Terms of Sale: Seller provided a 75% mortgage. The
sale price was adjusted downward 5%
for cash equivalency.
PROPERTY DATA
Land Size: 3.5 acres
Building Size: 48,031 square feet - gross
43,500 sf leasable
Year Built: 1988
Occupancy at Sale: 95%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $891,750 $20.50
Vacancy Allowance @ 10%: $ 89,175 $ 2.05
------- ------
Effective Gross Income: $802,575 $18.45
Estimated Expenses @ $6.00: $261,000 $ 6.00
------- ------
Net Operating Income: $541,575 $12.45
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 104.61
Stabilized Overall Rate: 11.9%
EGIM: 5.67
COMMENTS
This is a two-story, steel frame medical office building that was constructed
in 1988. It is located east if University Road and northwest of the Coral
Springs Medical Center. This sale occurred in the recession of 1991 when
conventional financing was difficult to obtain.
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IMPROVED SALE NUMBER 7
GENERAL SALE DATA
Location: South side of SW 8th Street at 4950
SW 8th Street in Coral Gables, Dade
County, Florida
Date of Sale: January 6, 1992
Deed Book/Page: 15338/2902
Grantor: Abbey Health Services Inc.
Grantee: Kendall Health Care Group, Inc.
Sale Price: $10,500,000
Terms of Sale: Third-party financing had no impact
on the purchase price.
PROPERTY DATA
Land Size: 21,250 square feet
Building Size: 37,100 square feet - leasable
Year Built: 1985
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $593,600 $16.00
Vacancy Allowance @ 10%: $ 59,360 $ 1.60
-------- ------
Effective Gross Income: $534,240 $14.40
Estimated Expenses @ $5.00/SF $185,500 $ 5.00
-------- ------
Net Operating Income: $348,740 $ 9.40
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 94.34
Stabilized Overall Rate: 9.9%
EGIM: 5.90
COMMENTS
This building has two stories of office space above a covered, open-air parking
lot. This location is near the Vencor Hospital. The building was reported to
be 100% occupied at the time of sale.
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57
These seven sales are summarized as follows:
SUMMARY OF IMPROVED SALES
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $ 3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $ 4,525,000 $139.23
Roswell, Georgia
4 2519 Galiano Street 139,500 $12,521,000 $ 89.76
Miami, Florida
5 5 West Sample Road 25,000 $ 3,150,000 $126.00
Pompano Beach, Florida
6 9750 N.W. 33rd Street 43,500 $ 4,670,200 $107.60
Coral Springs, Florida
7 4950 SW 8th Street 37,100 $ 10,500,000 $ 94.34
Coral Springs, Florida
The unadjusted prices of these comparables range from $89.76 per square foot to
$153.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Grid is shown at the end of this section.
IMPROVED SALE 1 is a Class C professional office building that is located near
the Brookwood Medical Center. An affiliate of HealthSouth Medical Center
purchased this building to entice its physician/owner to move his practice to
their facility. This transaction was reportedly at a market value price.
However, a downward adjustment is still indicated because the building was not
marketed as a vacant building due to this relationship. A downward adjustment
to the price per square foot is indicated because of the smaller size of this
comparable. The building is located at the end of a steep winding road, and
has poor visibility. An upward adjustment is indicated due to this inferior
location compared to the subject. Large upward adjustments to this comparable
are also indicated because of the subject's superior construction quality and
because the
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58
subject building is newer than this comparable. The adjusted price per square
foot of this comparable is $130.36.
IMPROVED SALE 2 is the sale of a building purchased by UAB to use as a Medical
Genetics Center. Upward adjustments are indicated because of the subject's
superior location and quality, and because of the older age of this comparable.
An upward adjustment is indicated because this sale occurred during the
recession in 1991 when property values were declining and financing restricted.
The adjusted price for this comparable is $123.67 per square foot.
IMPROVED SALE 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. A downward adjustment is indicated because 80
percent of this facility was net leased to the hospital. A downward adjustment
is also indicated due to the smaller size of this comparable. Upward
adjustments are indicated for location and quality of improvements. The
adjusted price per square foot of this comparable is $153.15.
IMPROVED SALE 4 was the December 1992 sale of a 139,500 square foot
professional office building located in Miami, Florida. The sale was to the
main tenant in the building, a healthcare plan operated by Ramsay. An upward
adjustment is indicated because this tenant has such a large economic impact on
the property, and because the sellers were reportedly very motivated to sell.
An upward adjustment to the price per foot of this comparable is indicated
because the building is larger than the subject property. A further upward
adjustment is indicated because the subject building is adjacent to a hospital
and this comparable facility is not near a hospital. The adjusted price per
square foot of this comparable is $123.87.
IMPROVED SALE 5 is a Class B professional office building that is located in
Pompano Beach near the North Broward Medical Center. This building was
constructed for use by the Rand Eye Institute. An upward adjustment is
indicated because this sale occurred during the recession in 1991 when property
values declining and financing restricted. Upward adjustments are also
indicated for location and quality of the improvements. The adjusted price per
square foot of this comparable is $138.92.
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59
IMPROVED SALE 6 was the September 1991 sale of a professional office facility
that is located northwest of the Coral Springs Medical Center. The sale price
was adjusted downward for cash equivalency because of seller financing. Upward
adjustments are indicated due to the improving property values and the economy
since this sale, and because of the subject's superior location and superior
quality of improvements. The adjusted price per square foot of this comparable
is $137.30.
IMPROVED SALE 7 was January 1992 sale of a medical building located near the
Vencor Hospital in Coral Gables, Florida. Small upward adjustments to the
price per square foot of this comparable are indicated for location and size.
Upward adjustment are also indicated due to the older age of this comparable
and the subject's superior quality of improvements. The adjusted price per
square foot of this comparable is $122.64.
The adjusted prices per square foot range from $122.64 to $153.15, with an
arithmetic adjusted price of $132.84. The adjusted price for the comparable
requiring the least adjustments was $138.92 per square foot. An adjusted price
of $135.00 per square foot is representative of the subject property. Based on
this analysis, the market value of the subject property by the Sales Comparison
Approach, as of February 2, 1994, the effective date of this report, is
calculated as follows:
81,800 SF x $135.00/SF = $11,043,000
Rounded to: $11,045,000
===========
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60
I M P R O V E D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building #2
Birmingham, Alabama
Improved Improved Improved Improved Improved Improved Improved
Subject Sale Sale Sale Sale Sale Sale Sale
Element #1 #2 #3 #4 #5 #6 #7
Sale Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $110.12 $ 94.34
Property Rights Fee Simple Same Same Same Same Same Same Same
Adjustment ($5.51)
-----------------------------------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $110.12 $ 94.34
Financing Cash Cash Cash Cash Cash Seller Cash Cash
Adjustment
-----------------------------------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $104.61 $ 94.34
Conditions of Sale Relationship None None Mjr.Teant None None None
Adjustment -10.0% 5.0% 15.0% 5.0% 5.0%
---------------------------------------------------------------------------------
Adjusted Price/SF $104.29 $88.34 $139.23 $103.22 $132.30 $109.84 $ 94.34
Market/Time Effective
Adjustment Feb - 94 0% 0% 0% 0% 0% 0% 0%
---------------------------------------------------------------------------------
Adjusted Price/SF $104.29 $88.34 $139.23 $103.22 $132.30 $109.84 $ 94.34
Other Adjustments
Location Adjustment 25% 20% 10% 5% 5% 10% 5%
Age/Condition Adjustment 0% 5% 0% 5% 0% 0% 10%
Size Adjustment -25% 0% -5% 10% -10% 0% 5%
Quality Adjustment 25% 15% 10% 0% 10% 15% 10%
Leasing
Other Adjustment 0% 0% -5% 0% 0% 0% 0%
Net Other Adjustments 25% 40% 10% 20% 5% 25% 30%
FINAL ADJUSTED PRICE PER SF $130.36 $123.67 $153.15 $123.87 $138.92 $137.30 $122.64
==================================================================================
Arithmetic Mean Adjusted Price/SF: $132.84
============
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61
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for each property are not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for each property times the rentable building area. We reserve the right to
modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
As discussed earlier, this report assumes that the tenant finish work on the
top floor of this building will be completed prior to the prospective sale to
the REIT.
The master lease rate for the subject property will be $13.00 per square foot
of net rentable area. The gross income for the subject property is calculated
as follows:
81,800 SF x $13.00/SF = $1,063,400
-49-
62
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$53,170, based on the management experience of other properties. The net
operating income for the property is $1,063,400 less $53,170, or $1,010,230.
The estimated direct capitalization rates, or overall rates (OARs), for the
seven improved sale comparables presented in the Sales Comparison Approach
Section of this report ranged from 8.0 percent to 11.9 percent. Two of the
capitalization rates in the upper end of this range represent sales that
occurred in 1991 when sales and financing availability were restricted. In
Improved Sale #4, with a high estimated capitalization rate of 10.4 percent,
the buyer was the major tenant in the building, and the sale was reportedly not
completely an arms length sale. The estimated capitalization rates for the two
Birmingham properties were 8.0 percent and 9.0 percent. None of the comparable
sales were professional office buildings physically adjacent to hospitals.
This decreases the risks and reflects a higher potential value for the subject
property. Based on the comparables and this discussion, a capitalization rate
of 8.5 percent is considered appropriate for the property.
It is, therefore, our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$1,010,230/.085 = $11,885,059
Rounded to: $11,900,000
===========
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63
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Professional Building #2. The values derived from the three
approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . $13,980,000
Sales Comparison Approach . . . . . . . . . . . . . $11,045,000
Income Approach . . . . . . . . . . . . . . . . . . $11,900,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. This approach is
representative of the value in use as part of the hospital complex. The Cost
Approach, however, does not necessarily reflect the value that investors and
users would be willing to pay if the property were to be sold. Overall, this
approach is considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject and were in other geographic locations outside the Birmingham market.
None of the comparable sales were professional office buildings that were
physically contiguous to a hospital, which would indicate a higher value
because of lower leasing risks. The appraisers only consider this approach to
be a fair indicator of value for the subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
-51-
64
Based on this analysis, it is our opinion that the market value of the
HealthSouth Professional Building #2, as of February 2, 1994, subject to the
HealthSouth master lease, and based on the assumptions and limiting conditions
in this report, is the Income Approach value of:
$11,900,000
===========
The values derived in the other approaches support the Income Approach value as
the final value.
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