AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING I
RICHMOND, VIRGINIA
2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
January 18, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
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 I
7760 PARHAM ROAD
RICHMOND, VIRGINIA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine 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 $10.00 per
rentable 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
January 18, 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 two-story professional office building containing
23,206 rentable square feet of office space. The building is a Class B
facility, with a steel frame and poured-in-place concrete structure and brick
veneer exterior walls. It was constructed in 1977. The building is currently
91 percent occupied.
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 I, as of September 29, 1993, to be:
$2,150,000
==========
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.
4
HealthSouth Corporation
January 18, 1994
Page Three
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
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 requirement of the
Code of Professional Ethics and the Standards of Professional Practice
of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Cheryl Worthy-Pickett, the primary appraiser of this property, has
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 that is the subject of this report.
/s/ Patrick J. Simers /s/ Cheryl Worthy-Pickett
- ------------------------------------ ---------------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
6
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.
7
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.
8
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.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 28, 1993
Property Identification: HealthSouth Professional Office
Building I
Property Location: 7760 Parham Avenue, Richmond, Henrico
County, Virginia
Interest Appraised: Leased Fee Estate
Gross Building Area: 29,516 square feet
Net Rentable Area: 23,206 square feet
Subject Land Size: 6.165 acres or 268,547 square feet
Improvements Description: Two-story, steel frame and concrete structure, Class B professional office
building constructed in 1977.
Occupancy Percentage: 91%
CONCLUSIONS
Cost Approach: $3,450,000
Direct Sales Comparison Approach: $2,200,000
Income Approach: $2,151,000
Final Value Estimate: $2,150,000
==========
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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 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 11
Market Data - Metropolitan Richmond/Henrico County 12
Zoning 13
Real Estate Taxes and Assessments 13
Site Analysis 14
Building and Site Improvements 15
HIGHEST AND BEST USE 17
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 21
Direct Sales Comparison Approach 32
Income Approach 40
CORRELATION AND CONCLUSION 42
11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Location Map
Exhibit D - Area Map
Exhibit E - Tax Plat Map
Exhibit F - Leasing Status Schedule
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparables Summary
Exhibit J - Subject Photographs
12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is HealthSouth Professional Office Building I
located at 7760 Parham Road in Richmond, Henrico County, Virginia. The
building is a two-story, Class B, building constructed in 1977.
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 September 28,
1993, 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 nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property
would be included in that sale.
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
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
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13
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
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].
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14
HISTORY OF THE PROPERTY
The subject professional building was constructed by Humana St. Luke's in 1977.
HealthSouth of Virginia acquired the land in December 1991. This transaction
is recorded in Deed Book 2326, Page 454 for a recorded purchase price of
$2,000,000.
The subject professional office 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.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value 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.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. 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, or an annualized rate of 1.1 percent.
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.
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The value of the business enterprise value 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 economic downturn has 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 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
JUNE 30, 1993 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a
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troubling unemployment rate". Value Line's Quarterly Economic Review
identified the following estimates for selected economic statistics from 1993
to 1995.
1993 1994 1995
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
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DESCRIPTIVE DATA
REGIONAL ANALYSIS
The subject property is in the Richmond-Petersburg Metropolitan Statistical
Area (MSA), which consists of the cities of Richmond, Petersburg, Colonial
Heights and Hopewell; and the surrounding counties of Chesterfield, Henrico,
Hanover, Goochland, Powhatan, New Kent, Charles City, Dinwiddie and Prince
George.
The MSA occupies the center of eastern Virginia. It contains more localities
than any other of the state's eight MSAs as well as more area (nearly 3,000
square miles). It is the third largest in population after the Northern
Virginia and the Norfolk-Virginia Beach-Newport News MSAs.
Population
The following is a summary of population changes for the MSAs of the state of
Virginia:
=======================================================================================================
COMPARISON OF POPULATION CHANGE 1980-87
MSAs IN VIRGINIA
=======================================================================================================
Annual
Percent Total
Area 1980 1987 Change Change
-------------------- ------ ------ ------ ------
Bristol 90,597 90,600 0.0% 3
Charlottesville 113,568 123,300 1.2% 9,732
Danville 111,789 109,100 -0.1% -2,689
Lynchburg 142,000 142,700 0.2% 700
Norfolk 1,160,311 1,346,100 1.5% 185,789
Northern 1,146,184 1,374,400 1.7% 228,216
Richmond 761,311 825,300 0.7% 63,989
Roanoke 220,393 224,200 0.2% 3,807
=======================================================================================================
Source: Center For Public Service
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The Richmond-Petersburg MSA is the third largest of the state's eight MSAs. It
has grown steadily but at a rate significantly less than that of Northern
Virginia and Norfolk. These areas have enjoyed tremendous growth due to the
strong presence of the federal government. Growth has moderated significantly
in recent years due to sluggish economic conditions discussed previously.
As of 1988, the most populous locality in the MSA was the city of Richmond at
214,500 persons followed by the adjacent counties of henrico and Chesterfield
with 205,200 and 187,100 persons, respectively. Chesterfield County is the
fastest growing locality having registered a 32.3 percent population gain since
1980 and an average growth rate of 3.3 percent per year. Projections by local
planning agencies and the Virginia Employment Commission project that the
Chesterfield and Henrico populations will surpass Richmond by the year 2000.
Both population and population growth are concentrated in the northern section
of the MSA. The population is centered in Richmond but growth is highest in
the counties around Richmond.
Transportation Network
The Richmond-Petersburg MSA is well positioned at the center of the "Golden
Crescent" enabling it to be a crossroads of transportation. Interstate 95
(I-95) connects Richmond with Northern Virginia and the major east coast cities
- -- Washington 100 miles to the north and New York 370 miles to the north.
Interstate 64, the principal east-west highway in the state intersects I-95 in
the MSA and heads east to the Norfolk area and west to Charlottesville.
Another interstate, I-85, slants northeast from central North Carolina to meet
I-95 in Petersburg. Several other arterial and primary highways also converge
on the capital city.
Income
Total personal income (TPI) in the Richmond-Petersburg MSA reached $14.4
billion, or approximately 15 percent of the state total in 1987. TPI is
reported by place of residence, rather than by place of employment, and it has
three components: 1) net
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earnings; 2) dividends, interest, and rent by place of residence; and 3)
transfer payments by place of residence.
The Richmond-Petersburg MSA ranked third in the state in TPI behind the
Norfolk-Newport News-Virginia Beach MSA and the Northern Virginia MSA. These
three MSAs accounted for more than two-thirds of the state TPI. Between 1980
and 1987, TPI in the Richmond- Petersburg MSA increased by $6.6 billion, which
translates into an average annual growth rate of 9.2 percent. This is slightly
faster than the 9.0 percent growth rate for the state, but slightly under that
of the Charlottesville MSA, which was the second fastest growing area and
Northern Virginia which, at 10.7 percent, was the fastest growing area. A
large part of the reason for the high TPI in the Richmond-Petersburg MSA is the
size of its population; areas with a high population naturally have high TPI.
The Richmond-Petersburg MSA ranked second in per capita personal income with
$17,448 in 1987. The highest was Northern Virginia with $23,760.
Employment
Employment for the Richmond-Petersburg MSA has expanded by 100,500 jobs, from
373,900 in January of 1980 to 474,400 in May of 1990. This represents an
annual increase of approximately 2.4 percent. Between May 1989 and May 1990,
employment grew 5,900, or 1.3 percent showing the slowdown.
According to the data from the Virginia Employment Commission, the greatest
employment gains for the Richmond-Petersburg MSA have been in the service
industry sector, which increased its share of total employment from 17 percent
in 1980 to 22 percent in 1990. A relative decline in manufacturing employment
is shown from 18 percent in 1980 to 14 percent in 1990. The other sectors
increased at a rate similar with the overall average. There is an apparent
trend of less semi-skilled and blue-collar workers to more white- collar and
government employee workers.
The area economy has good diversity with 81 percent of the employment split
almost evenly among manufacturing (14%), trade (24%), services (22%), and
government (20%). This diversity creates a very healthy economic climate.
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20
Richmond is the home of fourteen Fortune 500 companies and besides being the
State Capitol, the city holds several federal offices such as the Fifth
District Federal Reserve Bank and the Fourth U.S. Circuit Court of Appeals.
The unemployment rate over the last 15 years has averaged 3.9 percent. The
lowest rate was 2.4 percent in the national economic expansion year of 1972 and
the highest rate was 5.8 percent during the recession year of 1982. The rate
has consistently been 2.0 percent to 3.0 percent below the national rate and
slightly below the state rate. Recent rates were as follows:
May 1980 May 1989
-------- --------
Richmond-Petersburg MSA 3.9% 3.9%
Virginia 4.4% 4.5%
United States 5.8% 5.6%
As with population, Richmond places third behind Northern Virginia and Norfolk
in total employment growth with 84,700 new employees between 1980 and 1988.
Northern Virginia had nearly four times this amount with a growth of 294,200
and Norfolk ranked second with 134,400. Northern Virginia experienced a 6.6
percent annual growth versus 3.5 percent for Norfolk and 2.7 percent for
Richmond. Overall, the state had a 4.0 percent increase annually which was
obviously skewed due to the strong performance of Northern Virginia.
Employment changes between October 1988 and October 1989 displayed a slowing of
growth in Norfolk, while Richmond increased at a slightly higher rate than the
previous eight years. Northern Virginia continued to grow with 47,700 new
employees versus 15,200 for Richmond and 5,000 for Norfolk. The decline in
employment growth in Norfolk was likely due to federal cut-backs in defense
spending.
Healthcare
Healthcare facilities abound in the Richmond area. The following is a list of
local hospitals.
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Facility Number of Beds
-------- --------------
Charter Westbrook 175
Children's 36
Chippenham 470
Henrico Doctors' 312
Humana - St. Luke's 160
Hunter Holmes McGuire - Virginia Medical Center 1,508
Johnston - Willis 232
Medical College of Virginia 881
Metropolitan 180
Retreat 230
Richmond Community 102
Richmond Eye and Ear 60
Richmond Memorial 351
St. John's 70
St. Mary's Hospital 401
Stuart Circle 153
Nursing homes in the Richmond area include the following:
Beth Sholom Home Central, Virginia Beth Sholom Woods
Cambridge Manor Convalescent Center Camelot Hall
Chippenham Manor Catshaw Nursing Manor
Eastern Star Home Forest Hill Convalescent Center
Imperial Health Center Lakewood Manor Retirement Community
Libbie Convalescent Center Marywood Apartments
Little Sisters of the Poor Richmond Home for Ladies
Masonic Home of Virginia Snyder Memorial Home
Richmond Nursing Home Summerhill at Stony Point
Stratford Hall Nursing Home The Virginia Home
The Hermitage University Park Nursing Home
The Windsor Westport Convalescent Center
Westminster Canterbury
Conclusion
The Richmond-Petersburg MSA has experienced steady growth during the 1980s. In
relation to the other MSAs in the state of Virginia, it ranks generally third
in most categories behind Northern Virginia and the Norfolk-Newport News MSA.
Northern Virginia, being part of the Washington, D.C. MSA, has been one of the
most active markets in the United States. The large expansion of the federal
government over the
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last several decades has stimulated tremendous growth in this area. This area
of the state will likely continue to exceed other Virginia localities in
population, employment and income growth.
The Norfolk-Newport News-Virginia Beach area will obviously be impacted by the
impending cut-back in defense spending. Due to this, the Richmond-Petersburg
MSA will likely out-perform that MSA in growth during the 1990s. It is,
however, unlikely that the Richmond-Petersburg MSA will experience the
explosive growth that Northern Virginia experienced during the 1980s.
Development over the next decade is expected to be at a pace slightly above
that of the state average, but below that of Northern Virginia. The next
several years will likely be very sluggish until the economy recovers from its
doldrums.
NEIGHBORHOOD ANALYSIS
The neighborhood's area boundaries are Broad Street (Highway 250) to the west,
Staples Road to the east, Parham Road to the south and Hungary Road to the
north.
The area is generally residential with modest single-family homes and
multi-family developments to the north and east of the subject. Development
along Parham Road mainly is office-institutional in nature, such as office
buildings, banks, and county offices. West of the subject, toward Broad
Street, are more commercial or retail developments such as automobile
dealerships, fast food restaurants, and shopping centers.
The area has convenient access to Interstate 64, providing access to downtown
Richmond west of the subject.
The immediate surrounding area is supportive and complementary to the continued
growth potential of the subject facility. The development has also contributed
to a continued growth of the neighborhood.
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MARKET DATA - Metropolitan Richmond/Henrico County
Based upon the 1993 Richmond Commercial Real Estate Market Review prepared by
Harrison and Bates, the suburban office market out- performed the downtown
market during the 1992 fiscal year. Internal market growth particularly in the
northwest quadrant (subject location) was substantial during the 1992 fiscal
year.
Office building sales in 1992 ranged from $30.00 per square to $108.00 per
square foot. Generally, suburban office buildings were selling for $40.00 to
$60.00 per square foot, which in some instances is less than one-half their
replacement (construction) cost. Rental rates appear to be stabilizing in all
markets and even increasing slightly in pockets of the suburban market. Deep
discounts through free rent and other concessions are not always valued, since
many tenants are more interested in the lowest possible rate over the term
rather than increasing the overall rate to cover the often extravagant
concessions and extras.
The Hanover Medical Park was completed in 1992 and contains a total of 110,000
square feet. This property was partially pre-leased with the remaining being
available. Because of the anticipated increase in absorption in the suburban
market, the suburban market is expected to improve faster than the downtown
market. Office building sales will continue to be quite sporadic and will not
truly stabilize until lenders are no longer owners, the RTC is out of the
business and the Banks are willing and /or able to make realistic loans on
speculative office properties.
During the first six months of 1993 the northwest quadrant office market
continued to absorb space and attract leasing and sales activity. Absorption
of the quadrant has been steady with 200,000 square feet of net absorption.
Additionally, the quadrant's appeal to tenants and prospective buyers remains
high. The overall vacancy for the northwest quadrant has been reduced to
almost 13 percent, down considerably from the end of year 1992 vacancy rate of
16.5 percent. Class A office space vacancy rate in the northwest quadrant is
approximately 7.5 percent.
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ZONING
The subject property is zoned "O-I" by the Henrico County Zoning District. The
purpose of this district is to provide for office buildings in attractive
surroundings with types of uses and signs so controlled as to be generally
compatible with high-density residential surroundings.
The subject improvement is considered a legal conforming use. Principle uses
included in this zoning district are as follows:
Office Buildings
General Hospitals
Hotels or Motels
Retail and Service Facilities
Schools
Banks
Maximum Stories: 8
Maximum Height: 110 feet
Minimum Lot Area: 25,000 feet
Minimum Lot Width: 100 feet
Minimum Front Yard Depth: 35 feet
Minimum Side Yard: 15 feet
Minimum Rear Yard: 40 feet
REAL ESTATE TAXES AND ASSESSMENTS
The subject property was assessed in 1993 by the Henrico County Assessment
Office. The property is taxes based upon 100 percent of the assessed value.
The property is identified by real estate account number HE 0110701. The
subject's parcel number is 60-0A-000- 0025. The assessments for the parcel is
presented below:
Parcel Identification Number 60-0A-000-0025
Land $1,074,000
Improvements 6,339,000
----------
$7,413,000
This assessment does include Professional Office Building I and Professional
Office Building II. In 1992 the assessed value for improvements associated
with POB I was
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25
$1,734,000. Since the land parcels are equal in size we have divided them as
such. This would indicate a total assessed value associated with POB I of
$2,271,000 (land $537,000, improvements $1,734,000).
The millage rate applicable to the subject property for the 1993 tax years was
$.98 per $100. This would indicate a total tax amount payable for the 1993 tax
year of $22,255.80.
SITE ANALYSIS
The subject site is located on the north side of Parham Road in the northwest
section of Richmond, Virginia. The street address is 7760 Parham Road,
Richmond, Virginia. As indicate by the plat map included in the Exhibit
Section of this report, the site is irregular in shape and contains a total of
12.33 acres, of which 6.145 acres has been allocated to the subject. Access to
the site is via Broad Street to the west or Staple Road to the east to Parham
Road. Parham Road is a paved four-lane highway.
The subject land is approximately level with grade on Parham Road. The
topography is generally flat with the rear portion approximately ten feet above
grade on Parham Road. Utilities to the site include water, sewer, electricity,
cable, telephone and gas.
The subject property appears to have adequate drainage and soil load-bearing
capabilities to support most development alternatives. A soil report, however,
was not made available to the appraiser and it is assumed, based on existing
improvement, that soil load-bearing capabilities are adequate.
According to the County Planning Office, the subject property is not located in
a flood plain zone.
A legal description of the property and a land configuration plat are included
in the Exhibit Section of this report.
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BUILDING AND SITE IMPROVEMENTS
BUILDING
The medical office building is a two-story structure containing 29,516 gross
square feet constructed in 1977. The building is of good construction and is
in excellent condition. The building is considered competitive in condition to
other office buildings in the area.
The building's foundation consists of concrete walls and footings supporting
exterior walls. The floor is poured-in place concrete with elevated lift slabs
for the upper floor. Exterior walls consist of concrete block walls with brick
cover. Windows and doors are aluminum and glass with some limited solid metal
doors. The roof is flat metal with lightweight concrete.
The building is partitioned by gypsum board on metal stud partitions. Wall
finished are typically paint and vinyl wall covering. Wood and metal doors in
metal door jambs are typical throughout. Ceiling finishes are primarily
drop-down acoustic panels. Floor finishes are primarily carpeting and vinyl
tile with portions of the building having ceramic and quarry tile. Main areas
in the building include office areas and public areas.
Mechanical services consist of standard plumbing fixtures and a central heating
and air conditioning system supported by roof-top units. Electrical wiring is
in conduit with fluorescent and incandescent light fixtures typical throughout.
SITE
Land improvements consist of general landscaping, asphalt paving, concrete
paving and curbing, exterior lighting, and general signage.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
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CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in average to good overall condition. It appears to have been
adequately maintained. No significant deferred maintenance was indicated from
the appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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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.
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.
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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 "O-I", Office-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
medical-oriented uses.
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. Hospital
related development (Professional Office Building II) located just west of the
subject improvement, indicates that development is financially feasible. The
new POB is currently 90 percent occupied.
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 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.
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As Improved
The subject site is currently improved with a 26,203 rentable square foot
office 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 make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to Henrico
County zoning guidelines. Under the zoning, the property could remain as it
is, be torn down or renovated.
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. It would, however,
be financially feasible to correct any deferred maintenance.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exist. This
will enable to the property to remain competitive in the leasing market. The
highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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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.
DIRECT 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 arms-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
Location: 48-OA-0000-0023B; Broad Street
Deed Book/Page: 2330/356
Grantor: Fred and Lavinia Williams, Jr.
Grantee: Broad Street Investment, a Delaware Corporation
Date of Sale: January 1992
Size: 4.644 acres, or 202,293 square feet
Sale Price: $800,000
Unit Price: $3.95 per square foot
Zoning: BU-2
Comments: Improved with shopping center
Land Comparable Number 2
Location: East Broad Street, 38-3-C (78-A2-9)
Deed Book/Page: 2279/1889
Grantor: Rowe Development Company
Grantee: Innsbrook Land Holding Corporation
Date of Sale: February 1991
Size: 14.78 acres, or 643,643 square feet
Sale Price: $2,886,200
Unit Price: $4.48 per square foot
Zoning: Commercial
Comments: Improved with office building
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Land Comparable Number 3
Location: West End Drive, (59-A-6G)
Deed Book/Page: 2252/1843
Grantor: W. Randolph and Elizabeth Cosby
Grantee: Eagles Self Storage Corp.
Date of Sale: July 1990
Size: 2.987 acres, or 130,114 square feet
Sale Price: $552,595
Unit Price: $4.25 per square foot
Zoning: Business
Comments: Improved with mini-storage facility
Land Comparable Number 4
Location: 8250 West Broad Street, 60-A-2 (92-B1-8)
Deed Book/Page: 2186/247
Grantor: Max and Wilma Pearson
Grantee: Holly Brook, Inc. a Virginia Corporation
Date of Sale: April 1989
Size: 7.01 acres, or 305,356 square feet acres
Sale Price: $1,100,000
Unit Price: $3.60 per square foot
Zoning: Commercial
Comments: Improved with a Capitol Lincoln Mercury dealership
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Land Comparable Number 5
Location: Parham Road, north side, west of Hungary Spring; Map 60-A-25
Agent: Ted Austin, Prudential Realty Co., Richmond, Virginia
Size: 6.69 acres, or 291,416 square feet
Asking Price: $1,170,750
Unit Price: $4.02 per square foot
Zoning: Retirement Center
SUMMARY OF LAND COMPARABLES
Sale Date of Size Unit Price
Number Location Sale (acres) (sq. ft.) Zoning
1 Broad Street, north side January 4.644 $3.95 BU-2
1992
2 East Broad Street February 14.780 $4.48 C-2
1991
3 West End Drive July 2.987 $4.25 BU-2
1990
4 West Broad Street April 7.010 $3.60 C-2
1989
5 Parham Road, north side Current 6.690 $4.02 RC
Listing
SUBJECT PARHAM ROAD 6.165 O-I
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Discussion of Land Comparables
LAND SALE NUMBER 1 is a 4.644-acre tract which is now improved with a shopping
center. The comparable's location is superior to the subject's along Parham
Road. Parham Road is developed with more institutional or office improvements
while this section of Broad Street is more commercially improved. We have made
a downward adjustment for this factor to the comparable. An additional
downward adjustment was indicated because of the parcel's smaller size in
comparison to the subject's 6.165 acres. Typically, smaller parcels sell at a
higher unit price than larger tracts. A downward adjustment has been made for
zoning. 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
$3.36 per square foot.
LAND SALE NUMBER 2 is a parcel containing a total of 14.78 acres. This
transaction is approximately two years old, indicating an upward adjustment for
time. An adjustment for location was deemed not necessary. The property was
level throughout indicating a downward adjustment in comparison to the subject
which has a rolling topographical layout. An upward adjustment has been
indicated for the comparable's larger size in comparison to the subject.
Typically, larger tracts sell at a lower unit price than smaller tracts. A
downward adjustment was indicated for zoning in comparison to the subject's
Office-Institutional zoning. The adjusted price per square foot of this
comparable is $4.47.
LAND SALE NUMBER 3 is a 2.987-acre tract located northwest of the subject
improved with a mini-storage facility. Because this transaction is
approximately three years old we have made an upward adjustment for time. An
upward adjustment was indicated for this transaction was based upon location
along a less visible thoroughfare with limited access. Downward adjustments
were indicated for the level topography and the smaller size. An additional
downward adjustment has been made for zoning. The adjusted price for this
comparable is $4.02 per square foot.
LAND SALE NUMBER 4 is a 7.01-acre parcel that was improved with an automobile
dealership. It is located northwest of the subject property along Broad
Street. An upward adjustment was indicated for time. An additional upward
adjustment was made for location. The adjusted price per square foot of this
comparable is $3.97.
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37
LAND SALE NUMBER 5 is a current listing of a site just east of the subject
along Parham Road. This site is zoned for a retirement facility. A downward
adjustment is indicated because this is a listing rather than an actual sale.
Upward adjustments are also indicated due to the inferior zoning. The adjusted
price per square foot of this comparable is $4.19 per square foot.
The adjusted land prices range from $3.36 per square foot to $4.19 per square
foot, with the prices of the most comparable sites being in the middle of this
range. Based on our analysis of the subject versus these comparables, it is
our opinion that a land price of $4.00 per square is representative of the
subject site. The subject land value is estimated as follows:
268,547 SF x $4.00/SF = $1,074,188
Rounded to: $1,074,000
==========
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LAND SALE ADJUSTMENT GRID
Healthsouth Professional Building I
Richmond, Virginia
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4 #5
Sale Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Property Rights Fee Simple Same Same Same Same Same
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Financing Cash Cash Cash Cash Cash Cash
Adjustment -----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Conditions of Sale None None None None Listing
Adjustment -5%
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $3.81
Market/Time
Adjustment 0% 5% 5% 5% 0%
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.70 $4.46 $3.78 $3.81
Other Adjustments:
Location Adjustment -5% 0% 5% 5% 0%
Topography Adjustment 0% -5% -5% 0% 0%
Size Adjustment -5% 5% -5% 0% 0%
Zoning Adjustment -5% -5% -5% 0% 0%
Net Other Adjustments -15% -5% -10% 5% 10%
Final Adjusted Price Per SF $3.36 $4.47 $4.02 $3.97 $4.19
=============================================================================
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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. The total project replacement costs for the subject building are
estimated to be $3,651,670.
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 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 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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40
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were 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
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
Building
The subject property was constructed in 1977 and is in average to good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to its actual age of 16 years. The remaining useful life is
estimated to be 29 years. This translates into a physical depreciation
estimate of 36 percent (16 years divided by 45 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 total depreciation for the building is estimated to be $1,314,601 and the
depreciated value of the building replacement costs is estimated to be
$2,337,069.
Site Improvements
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 seven years, and a remaining useful life
of 13 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 35
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciation rate.
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41
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$3,450,000
==========
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42
SUMMARY OF REPLACEMENT COST NEW
HEALTHSOUTH PROFESSIONAL
BUILDING 1
RICHMONG, VIRGINIA
REPLACEMENT
COST
-----------
Site Preparation 5,902
Foundation 65,645
Frame 304,998
Exterior Walls 236,625
Floors 161,681
Roof 108,695
Roof Cover 31,185
Partitioning and Built-in 724,845
Ceilings 171,067
Floor Coverings 122,471
Plumbing 234,953
HVAC 422,372
Electrical 296,417
Other Features 192,643
----------
Total Replacement Cost $3,079,499
Architect's Fees Plans and Specs 4.4% 135,498
Architect's Fees Supervision 3.4% 104,703
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 331,970
----------
Total of Other Costs 572,171
Total Project Replacement Cost $3,651,670
Accrued Depreciation:
Building Costs 36% Straight Line 16/45ths (1,314,601)
----------
Depreciated Value Building $2,337,069
Site Improvements
Replacement Cost $ 65,000
Depreciated Cost 35% Straight Line 7/20ths (23,400)
----------
Depreciated Value $41,600
Plus Land Value $1,074,000
----------
DEPRECIATED COST APPROACH VALUE $3,452,669
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43
DIRECT SALES COMPARISON APPROACH
The Direct 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 Direct 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 arms-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 four 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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44
IMPROVED SALE NUMBER 1
GENERAL SALE DATA
Location: 1016 Independence Boulevard,
Virginia Beach, Virginia
Date of Sale: May 12, 1992
Deed Book/Page: 3086/1410
Grantor: Diagnostic Center Associates
Grantee: Diagnostic Center of Virginia Beach
Sale Price: $1,586,500
Terms of Sale: Assumption of original note, $568,494 Cash
PROPERTY DATA
Land Size: .93 acres
Building Size: 15,000 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $225,000 $15.00
Vacancy Allowance @ 5%: $(11,250) $(0.75)
--------- -------
Effective Gross Income: $213,750 $14.25
Estimated Expenses @ $3.50/SF $(52,500) $ 3.50
--------- ------
Net Operating Income: $161,250 $10.75
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 105.77
Stabilized Overall Rate: 10.16%
EGIM: 7.42
COMMENTS
Structure is a one-story Class C medical office designed for a
single-tenant user. The building is located adjacent to a hospital.
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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 percent to 45 percent of the total purchase
price.
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46
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: 816 Independence Boulevard, Virginia Beach, Virginia
Date of Sale: August 1991
Deed Book/Page: 3006/1566
Grantor: Humana of Virginia, Inc.
Grantee: MPB, Inc.
Sale Price: $5,011,700
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 3.507 acres (approximate)
Building Size: 35,000 square feet
Year Built: 1977
Occupancy at Sale: 75.0%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $630,000 $18.00
Vacancy Allowance @ 5%: $ 31,500 ($0.90)
-------- -------
Effective Gross Income: $598,500 $17.10
Estimated Expenses @ $5.00/SF $175,000 ($5.00)
-------- -------
Net Operating Income: $423,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 143.19
Stabilized Overall Rate: 8.45%
EGIM: 8.37
COMMENTS
Built as a four-story Class A building located next to hospital. The
construction is steel frame with brick veneer. It is located north side of
Independence Avenue
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These four sales are summarized as follows:
SUMMARY OF IMPROVED SALES
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
1 1016 Independence Blvd 15,000 $1,586,500 $105.77
Virginia Beach, Virginia
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
4 816 Independence Blvd 35,000 $5,011,700 $143.19
Virginia Beach, Virginia
The unadjusted prices of these comparables range from $84.13 per square foot to
$143.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE NUMBER 1 is a Class C professional office building that is located
adjacent to a hospital. The facility was acquired by a physician's group to
provide outpatient service in conjunction with the hospital. This transaction
was reportedly at a market value price. However, a downward adjustment is
still indicated because the building never was marketed as a vacant building
due to this relationship. The building has a substantial setback from
Independence Boulevard and has poor visibility. An upward adjustment is
indicated due to this inferior location compared to the subject. An offsetting
downward adjustment to the price per square foot is indicated because of the
smaller size of this comparable. The adjusted price per square foot of this
comparable is $95.19.
SALE NUMBER 2 is the sale of a building purchased by the University of Alabama
to use as a Medical Genetics Center. An upward adjustment was indicated
because of the time of sale. Upward adjustments were indicated because of the
inferior location as compared to the subject. An additional upward adjustment
was made for size and construction quality. The adjusted price for this
comparable is $101.59 per square foot.
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SALE NUMBER 3 was the sale of a three-building professional office facility
located approximately one-quarter-mile from the North Fulton Medical Center in
Roswell, Georgia. An upward adjustment was made for time of sale. Downward
adjustments to the price per square foot of this comparable are indicated
because it is new and larger than the subject facility. Downward adjustments
are indicated due to the comparable's superior location. The adjusted price
per square foot of this comparable is $111.84.
SALE NUMBER 4 was the August 1992 sale of an office building in Virginia Beach,
Virginia. An upward adjustment was indicated for the time of sale. Downward
adjustments are indicated for location and building condition. The adjusted
price for this comparable is $127.80 per square foot.
The adjusted prices per square foot range from $95.19 to $127.80. An adjusted
price of $95.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject medical office building
by the Direct Sales Comparison Approach, as of September 29, 1993, the
effective date of this report, is calculated as follows:
23,206 SF x $95.00/SF = $2,204,570
Rounded to: $2,200,000
==========
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I M P R O V E D S A L E S A D J U S T M E N T G R I D
Healthsouth Professional Building I
Richmond, Virginia
Subject Bldg Comp Bldg Comp Bldg Comp Bldg Comp
Element #1 #2 #3 #4
Sale Price/SF $105.77 $ 84.13 $139.23 $143.19
Property Rights Fee Simple Same Same Same Same
Adjustment --------------------------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Financing Cash Cash Cash Cash Cash
Adjustment -------------------------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Conditions of Sale None None None
Adjustment -10% -10%
-------------------------------------------------------------
Adjusted Price/SF $ 95.19 $ 84.13 $125.31 $143.19
Market/Time
Adjustment 0% 5% 5% 5%
-------------------------------------------------------------
Adjusted Price/SF $ 95.19 $ 88.34 $131.57 $150.35
Other Adjustments:
Location Adjustment 5% 10% -10% -10%
Topography Adjustment 0% 0% -0% 0%
Size Adjustment -5% 5% -5% -5%
Zoning Adjustment 0% 0% 0% 0%
Net Other Adjustments 0% 15% -15% -15%
FINAL ADJUSTED PRICE PER SF $ 95.19 $101.59 $111.84 $127.80
=============================================================
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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 nine 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
doctor/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 doctors at different rates and terms, or they can use the office space
for hospital purposes. This master lease also guarantees payment regardless of
occupancy levels.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreements 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.
The gross income for the subject property is calculated as follows:
23,206 SF x $10.00/SF = $232,060
Because of the guarantee of payment related to the master lease regardless of
occupancy levels, we have not utilized a vacancy allowance for the property.
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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
$11,603, based on the management experience of other properties. The net
operating income for the property is $232,060 less $11,603, or $220,457.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison Section
of this report are summarized as follows:
Sale No. Property Location Sale Date OAR (%)
1 Independence Boulevard May 1992 7.42%
Virginia Beach, Virginia
2 20th Street South December 1992 9.00%
Birmingham, Alabama
3 Upper Hembree November 1991 10.10%
Roswell, Georgia
4 Independence Boulevard August 1991 8.45%
Virginia Beach, Virginia
The direct capitalization, or overall rates, for these comparables ranged from
7.42 percent to 10.10 percent.
A capitalization rate slightly above the upper end of this range, at 10.25
percent, is considered appropriate because of the current physical condition of
the building as compared to the comparable and the guaranteed rents involved.
Therefore, it is 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
$220,457/.1025 = $2,150,800
Rounded to: $2,151,000
==========
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CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Professional Building I. The three approaches are summarized
as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000
Direct Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . $2,200,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,151,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a sixteen year old building is difficult. For this reasons,
this approach is only considered a fair indicator of value for the subject
property.
The Direct 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 two of the four sales were not properties located in the
Virginia market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyer of
professional office buildings are owner/occupants, these buyers are generally
aware of a 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 property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Professional Building I, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
$2,150,000
==========
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