AN APPRAISAL OF
LARKIN ANNEX BUILDING
AND EXCESS LAND
SOUTH MIAMI, FLORIDA
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 11, 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 office building identified as follows:
LARKIN ANNEX BUILDING
AND EXCESS LAND
6129 SOUTHWEST 70TH STREET
SOUTH MIAMI, FLORIDA 33143
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 $11.00 per
rentable square foot of building area associated with the building and 19,787
square feet of land area and $120,000 of annual rental associated with 100,000
square feet of excess land area.
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:
HealthSouth Corporation
February 11, 1994
Page Two
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.]
The subject property includes a two-story specialty office/storage building
which is located on a 119,787 square foot site. The office building is a
two-story, Class C structure containing 10,255 square feet which is currently
100 percent occupied by HealthSouth. Approximately 19,787 square feet is
associated with the building with 100,000 square feet of the land site
associated with parking for the hospital.
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 property
appraised is, as of September 29, 1993, to be reasonably represented as
follows:
Larkin Annex Building Site $1,100,000
==========
Excess Land $1,200,000
==========
HealthSouth Corporation
February 11, 1994
Page Three
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 Certification of the appraiser;
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
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I 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.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My 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.
I have made a personal inspection of the property that is the subject
of this report.
No one provided significant professional assistance to the person
signing this report.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
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.
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.
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.
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
- ------------
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 29, 1993
Property Identification: Larkin Annex Building
Property Location: 6129 SW 70th Street, South Miami, Florida
Interest Appraised: Leased Fee Estate
Gross Building Area: 10,255 square feet
Net Rentable Area: 10,255 square feet
Subject Land Size: 119,787 square feet, or 1.072 acres
Improvements Description: Two-story, Class C office/specialty building that was constructed in 1970
with remodeling to the building conducted in 1980.
Occupancy Percentage: 100%
CONCLUSIONS Building Site Excess Land
- ----------- ------------- -----------
Cost Approach: $800,000 $1,200,000
Direct Sales Comparison Approach: N/A N/A
Income Approach: $1,100,000 $1,200,000
Final Value Estimates: $1,100,000 $1,200,000
TABLE OF CONTENTS
Page
----
Transmittal Letter
Appraiser Certification
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 10
Zoning 11
Real Estate Taxes and Assessments 11
Site Analysis 12
Building and Site Improvements 13
HIGHEST AND BEST USE 15
VALUATION SECTION 19
Valuation Methodology 19
Cost Approach 20
Income Approach 31
CORRELATION AND CONCLUSION 35
TABLE OF CONTENTS
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Metropolitan Area/Neighborhood Map
Exhibit D - Tax Plat Map
Exhibit E - Land Sale Location Map
Exhibit F - Leasing Status Schedule
Exhibit G1 - Building Description
Exhibit G2 - Land Improvements Description
Exhibit H - Office Building Comparables
Exhibit I - Subject Photographs
Exhibit J - Lease Agreement
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the Larkin Annex Building and associated
excess land. The subject property includes a two-story specialty
office/storage building which is located on a 119,787 square foot site. The
office building is a two-story, Class C structure containing 10,255 square feet
which is currently 100 percent occupied by HealthSouth. Approximately 19,787
square feet is associated with the building with 100,000 square feet of the
land site associated with parking for the hospital.
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 29,
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).
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.
-1-
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.]
-2-
HISTORY OF THE PROPERTY
The subject was originally constructed in 1970 with renovation to the building
conducted in 1980. The building and land was purchased by HealthSouth
corporation in 1992 with their purchase of the adjacent hospital. No other
deed transactions were recorded on the property over the last three years. The
building is presently occupied with accounting and housekeeping departments
associated with the hospital.
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.
-3-
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 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%
-4-
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 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%
-5-
DESCRIPTIVE DATA
REGIONAL ANALYSIS
South Miami is located on the southwest border of Coral Gables in Dade County,
Florida. The area is generally known for its fine residential areas,
educational facilities, its quality of life, and is one of the nation's leading
locations for multi-national corporate headquarters.
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
The Dade County region encompasses 26 municipalities with an estimated 1992
popu-lation of 1,982,901. This figure represents a growth estimate of
approximately 22 percent over 1980 levels. The subject facility is located in
the eleventh largest municipality in the county and presently has an estimated
population of 10,459. It is anticipated, by the year 2000, that the
population will continue to expand in the county to an estimated 2,201,836 with
individual communities in the region sharing in this growth.
The median age of the population in the community is estimated at 35.5 with 21
percent of the population represented at under 18 years of age and 13 percent
of the population represented above 65 years of age. This compares to an
overall median age of 34.2 for the county with 24 percent of the population
represented at under age 18 and 14 percent of the population over the age of
65. This would tend to indicate that the South Miami region is occupied by
families with members older than the average in the county.
The racial and ethnic distribution of members in the South Miami community is
estimated at 66.8 percent white, 29.6 percent black, and the remaining 3.6
percent other races. It is estimated that the hispanic community in South
Miami is represented as 23.8 percent of the overall population. These figures
would tend to indicate that the South Miami community is similar in ethnic
diversification as computed to the Dade County region which is 72.9 percent
white, 20.6 percent black, and 6.5 percent other, with the hispanic population
represented at 49.2 percent.
-6-
POPULATION GROWTH BY MUNICIPALITY
1980 1992 %
POPULATION POPULATION GROWTH
DADE COUNTY 1,625,509 1,982,901 22.0
Miami 346,865 359,973 3.8
Hialeah 145,254 195,579 34.6
Miami Beach 96,298 93,461 -2.9
North Miami 42,566 50,090 17.7
Coral Gables 43,241 40,700 -5.9
North Miami Beach 36,553 35,268 -3.5
Homestead 20,688 27,087 31.1
Opa-Locka 14,460 15,255 5.5
Sweetwater 8,251 14,096 70.8
Miami Springs 12,350 13,230 7.1
South Miami 10,944 10,459 -4.4
Miami Shores 9,244 10,097 9.2
Hialeah Gardens 2,700 9,259 242.9
Key Biscayne** -- 8,897 N/A
Florida City 6,174 6,067 -1.7
West Miami 6,076 5,712 -6.0
North Bay Village 4,920 5,550 12.8
Bay Harbor Islands 4,869 4,721 -3.0
Surfside 3,763 4,204 11.7
Biscayne Park 3,088 3,081 -0.2
Bal Harbour 2,973 3,033 2.0
El Portal 2,055 2,461 19.8
Virginia Gardens 2,098 2,199 4.8
Medley 537 821 52.9
Golden Beach 612 805 31.5
Indian Creek Village 103 44 -57.3
Islandia 12 13 8.3
Unincorporated Dade 799,053 1,060,739 32.7
*Population estimates subject to revision. **Key Biscayne incorporated in June 1991.
SOURCE: Dade County Planning Department, and Bureau of Economic Research.
-7-
Dade County Population Growth
1950 - 2000
YEAR POPULATION GROWTH
1950 495,100 --
1955 709,800 43%
1960 935,000 32%
1965 1,097,200 17%
1970 1,267,800 16%
1975 1,452,000 15%
1980 1,625,800 12%
1985 1,775,000 9%
1990 1,937,094 9%
1991* 1,961,694 1%
1992* 1,982,901 1%
1995** 2,083,555 5%
2000** 2,201,836 6%
*Estimate of population, subject to revision.
**Projection of population, which is subject to annual adjustment.
Source: Dade County Planning Department; Bureau of Economic and Business
Research, and U.S. Dept. of Commerce.
-8-
HOUSING
The growth of the region's population has helped to foster a steady residential
market. The total household units have increased over the past four decades
from 348,946 in 1960 to 771,288 in 1990. This represents an overall increase
of 121.0 percent over the period and an annual compound rate of growth of 2.0
percent. The Dade County real estate market reached its peak in 1980 with over
50,145 residences sold. This figure has dipped and climbed over the past
decade, but has generally declined with 36,521 sales reported in 1992. Average
home prices in the region have generally increased though, indicating that the
area has generally been built-out and that demand in the area remains strong.
From 1980 through 1992 the average single-family residential home price
increased 58.3 percent. The average condominium residence price increased 94.2
percent.
EMPLOYMENT
Employment growth grew rapidly in the region from 1980 through 1988 when it
appeared to hit its peak at 891,788. From 1980 through 1988 this represented
an overall growth of 18.69 percent. In 1992 the employment in the region was
estimated at 878,028, or a drop of 1.54 percent. This rate of employment
appears to be stabilized and one would not anticipate further large drops in
this figure. The labor force in the area has continued to increase with an
overall growth rate of 19.4 percent over the period 1980 through 1992. The
present labor force is estimated at 976,024. During the 1980s, the average
annual unemployment rate ranged from a low of 5.3 percent to a high of 10.0
percent with an overall average of 7.67 percent. The average unemployment at
the end of 1992 was estimated at 10.0 percent compared to 7.4 percent for the
U.S.
From 1980 through 1992 the diversity of the employment in the region has
greatly increased with 60,364 firms active in the Dade County market. This
represents a 32.5 percent change over 1980 levels. The service industry is
represented by the largest number of firms, with healthcare firms ranking as
the largest component of this sector. Wholesale and retail trade represents
the next largest employer in the region. The remaining sectors, which follow
in number of companies in their respective order, include finance/real estate,
construction, manufacturing, transportation, communications, public utilities,
and finally agriculture, forestry, and fishing.
-9-
As of April 1993, the top five employers in the Dade County region were:
Dade County Public Schools 38,310
Metropolitan Dade County 23,000
Federal Government 18,800
State of Florida 14,900
Publix Super Markets, Inc. 8,000
INCOME
The per capita income in Dade County, Florida and the United States in 1990 was
$17,823, $18,539, and $18,696, respectively.
In summary, the region of the subject property enjoyed rapid growth in the
early 1980s which has stabilized in the early 1990s. Its economic base is
diverse, which bodes well for stabilized growth patterns in the foreseeable
future. The economy has recovered from Hurricane Andrew, which occurred in
1992, and is well positioned to post economic gains.
NEIGHBORHOOD ANALYSIS
The subject property is located in the center of South Miami approximately
three blocks west of the Central Business District. The immediate neighborhood
of the subject property is characterized by healthcare development including
the HealthSouth Hospital adjacent to the subject and South Miami Hospital two
blocks south of the subject.
The neighborhood boundaries include U.S. 1, which runs diagonally south and
east of the subject property; and the Palmetto Expressway, which runs in a
north-south direction approximately two miles west of the subject. The
northern boundary of the subject's neighborhood extends to Southwest 56th
Street.
The residential neighborhoods surrounding the subject are diverse in character
with the residential area north of the subject generally consisting of lower
income families with the areas immediately west and south of the subject
experiencing higher income families.
-10-
The general neighborhood of the subject can be classified as stable and
providing a good location for a medical office structure serving the medical
community in the immediate area of the subject.
ZONING
The subject property is zoned 'Hospital-MO' by the city of South Miami. This
zoning district generally allows for the development of healthcare properties
including hospital support function structures.
General requirements in the district require a minimum building site of 10,000
square feet, with front, rear, and side setbacks of fifteen feet, ten feet and
ten feet, respectively. Maximum height allowances of four stories or 50 feet
is allowed with a maximum floor ratio of 1.6 feet.
The subject building contains 10,255 square feet. In our determination of the
building's land site, we have estimated that 19,787 feet would be the adequate
amount of land which should be allocated to the subject building to meet all
zoning requirements. The remaining portion of the land would approximate
100,000 square feet.
Based upon our analysis of the zoning regulations, the property under the
proposed allocation scenario would meet zoning requirements.
A letter of zoning compliance from the City of South Miami is recommended for
an official determination regarding any zoning conformity issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in South Miami, and subject to the taxing
authority of the City and Dade County. Commercial properties in the City and
County are assessed at 100 percent of tax-appraised value for tax purposes.
The 1993 millage rate is $28.60 per $1,000 of assessed value. The property is
taxed under thirteen parcel numbers. The amount of the assessment and taxes
for each parcel is shown on the following chart. The total taxes due on the
property $49,901.74.
-11-
Folio Number Assessment Tax Amount
- ----------- ---------- ----------
4025-028-179-00 $ 90,650(L) $ 2,592.59
4025-028-180-00 $ 84,525(L) 2,417.43
4025-028-181-00 $ 84,525(L) 2,417.43
4025-028-182-00 $ 84,525(L) 2,417.43
4025-028-183-00 $169,050(L) 4,834.85
4025-028-183-00 $ 1,000(B) 28.60
4025-028-184-00 $ 84,525(L) 2,417.41
4025-028-184-00 $ 1,000(B) 28.60
4025-028-185-00 $ 84,525(L) 2,417.43
4025-028-186-00 $ 57,428(L) 1,642.44
4025-028-187-00 $202,983(L) 5,805.33
4025-028-187-00 $ 1,000(B) 28.60
4025-028-188-00 127,995(L) 3,660.66
4025-028-188-00 $ 1,000(B) 28.60
4025-028-189-00 $103,500(L) 2,960.10
4025-028-190-00 $200,790(L) 5,742.60
4025-028-190-00 $ 62,791(B) 1,795.83
4025-028-191-00 $103,500(L) 2,960.10
4025-028-1921-00 $199,500(L) 5,705.71
----------
Total $49,901.74
(L) = Land Assessment
(I) = Improvement Assessment
SITE ANALYSIS
The subject site is an L-shaped parcel which is located on the northeast corner
of Southwest 62nd Avenue and Southwest 70th Street. The subject contains 285
feet of frontage on the north side of Southwest 70th Street and 200 feet of
frontage on the south side of Southwest 69th Street. The property contains
138 feet of frontage on the east side of Southwest 62nd Avenue. The building
improvements are located on the southwest portion of the site. The remaining
portion of the site is improved with paved parking areas and concrete dividers.
Adjacent to the site on its east border is vacant land. The northwest
boundaries are also adjacent to a site which is presently unimproved. Across
Southwest 69th Street is
-12-
apartments; across Southwest 70th Street is the HealthSouth Hospital. The
topography of the site is flat and at grade with all road frontages. The site
is accessed from Southwest 70th Street. According to the records contained at
the Tax Assessors Office, the land site contains 119,787 square feet.
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 trees and general signage.
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.
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.
BUILDING AND SITE IMPROVEMENTS
Building
The Larkin Annex Building was originally constructed in 1970 with some
remodeling made to the building in 1980. The building contains 10,255 square
feet in two stories. The building is a Class C structure with concrete
foundations and footings. Exterior walls consist of concrete block walls with
a stucco covering. The building floors consist of concrete on grade with
concrete flooring over metal sheathing for the second level. The roof of the
building is concrete over metal with a built-up tar and gravel covering.
The building's interior walls consist of drywall and concrete block
partitioning. The wall finishes generally consist of paint and paneling.
Portions of the building's ceiling are unfinished with the remaining portion of
the building containing drop-down acoustical panels. Floor finishes consist of
unfinished concrete areas on the first floor with the remaining sections of the
building being carpeted.
-13-
The building contains five water closets, four ceramic sinks, two urinals, one
slop sink and one water cooler. The building is heated and cooled by roof-top
units. The building contains incandescent and fluorescent light fixtures in
conduit. The building houses a two-stop elevator.
Site Improvements
Site improvements consist of asphalt paving, lighting and fencing.
More detail descriptions of the building and site improvements are included in
the Exhibit section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in 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.
-14-
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.
-15-
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.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned 'Hospital-MO'. Permitted uses in this general zoning are
specific and allow for healthcare and hospital-related uses. Potential legal
uses would include specialty and general hospitals, clinics, and hospital
support buildings.
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 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 on the north and east sides of the building indicate that new
development is financially feasible. HealthSouth Medical Center is planning an
additional office adjacent to the subject.
-16-
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 institutional development.
As Improved
The subject site is currently improved with a 10,255 rentable square foot
office/specialty building, with an adjacent parking deck 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 the City
of South Miami, 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
-17-
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 exists.
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.
-18-
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. Due to the specialized nature of the subject property
with its limited zoning and the need to provide parking to the adjacent hospital
few similar transactions could be found to arrive at a reliable comparison.
Therefore, we have not considered the Direct Sales Comparison Approach as being
an appropriate valuation approach for the subject. The application of the Cost
and Income Approaches to value is further discussed in the appropriate sections
which follow.
-19-
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.
-20-
Land Comparable Number 1
Folio Number: 09-4025-028-1970, 1980, 1990, 2020, 2030, 2040, and 2041
Location: 5965 SW 70th Street
Size: 65,550 square feet
Sale Date: May 1991
Deed Book/Page: 15020-0214
Grantor: Francisco Montana and W. Rosario
Grantee: Mauricio Montana
Sale Price: $1,100,000
Price Per Square Foot: $16.78
Terms of Sale: All Cash
Shape: Rectangular
Zoning: South Miami Commercial
Utilities: All utilities are available.
Comments: Property is two blocks east of subject and is presently improved with a five-story
parking garage.
-21-
Land Comparable Number 2
- ------------------------
Folio Number: 09-4025-028-1940, 1960
Location: 6920 SW 59th Avenue
Size: 9,450 square feet
Sale Date: April 29, 1993
Deed Book/Page: 15795-3698
Grantor: Imperial Bank
Grantee: A. Building, Inc.
Sale Price: $140,000
Price Per Square Foot: $14.81
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel is presently vacant.
-22-
Land Comparable Number 3
Folio Number: 03-4120-017-1580
Location: Northeast corner of San Lorenzo and LeJeune Road, 4251 LeJeune Road
Size: 21,805 square feet
Sale Date: February 1993
Deed Book/Page: 15822-3213
Grantor: Commerce Bank
Grantee: Goldcoast Partners Properties Co.
Sale Price: $650,000
Price Per Square Foot: $29.80
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Coral Gables Commercial
Utilities: All utilities are available.
Comments: This parcel is presently being improved with an office building.
-23-
A summary of the land sales is shown as follows:
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMPARABLE LOCATION DATE (SF) PER SF
1 5965 SW 70th Street 05/91 65,550 $16.78
2 6920 SW 59th Avenue 04/93 9,450 $14.81
3 4251 LeJeune Road 02/93 21,805 $29.80
SUBJECT 6129 SW 70TH STREET 119,787
Discussion of Land Comparables
LAND COMPARABLE 1 is approximately two blocks east of the subject in a very
comparable neighborhood as the subject. This sale has been adjusted upward due
to the age of the sale. All factors for location, utility, topography appear
to be equal and no adjustment for these occurrences appeared warranted. A
downward adjustment is warranted for parcel size due to the comparable's
smaller size. An additional downward adjustment has been made due to the
subject's limited zoning classification. 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 $14.10 per square foot.
LAND COMPARABLE 2 is approximately one block east of the subject in a very
comparable neighborhood as the subject. No time adjustments to this sale were
made. All factors for location, utility, topography appear to be equal and no
adjustment for these occurrences appeared warranted. A large downward
adjustment is warranted for parcel size due to the comparable's smaller size.
An additional downward adjustment has been made due to the subject's limited
zoning classification. 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 $10.37 per square foot.
-24-
LAND COMPARABLE 3 is a smaller sized parcel located on a heavily travelled
thoroughfare approximately one mile east of the subject property. No time
adjustment was made to this sale. A significant downward adjustment to this
sale was made for location. A slight downward adjustment was also made for
size. An additional downward adjustment has been made due to the subject's
limited zoning classification. 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 $11.92 per square foot.
The adjusted land prices range from $10.37 per square foot to $14.10 per square
foot, with the prices of sales number one and two being the most representative
of the subject parcel. Based on our analysis of the subject versus these
comparables, it is our opinion that a land price of $12.00 per square is
representative of the subject site in its entirety. The 19,787 square foot
portion of the site which is will be allocated to the building should have a
square foot estimate greater than the entire site due to its smaller size.
Based upon its smaller size it is our opinion that a 25 percent, or $3.00,
premium should be applied to this portion of the site. The value of the
subject sites as portioned would reasonably be represented as follows:
ANNEX BUILDING
19,787 SF x $15.00/SF = $296,805 rounded to $300,000
EXCESS LAND
100,000 SF x $12.00/SF = $1,200,000
-25-
LAND SALE ADJUSTMENT GRID
Larkin Annex Building
South Miami, Florida
Subject Land Comp Land Comp Land Comp
Element #1 #2 #3
Sale Price/SF $16.78 $14.81 $29.80
Property Rights Fee Simple Same Same Same
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Financing Cash Cash Cash Cash
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Conditions of Sale None None None
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Market/Time
Adjustment 5% 0% 0%
------------------------------------
Adjusted Price/SF $17.62 $14.81 $29.80
Other Adjustments:
Location Adjustment 0% 0% -40%
Topography Adjustment 0% 0% 0%
Size Adjustment -15% -25% -15%
Zoning Adjustment -5% -5% -5%
Net Other Adjustments -20% -30% -60%
FINAL ADJUSTED PRICE PER SF $14.10 $10.37 $11.92
====================================
-26-
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 office is
estimated to be $1,006,376.
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 C
building, we have assumed an economic life of 40 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.
-27-
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use 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.
The subject property was originally constructed in 1970 with some renovations
performed in 1980, and it is in fair to good condition. After taking into
consideration all significant physical factors affecting the subject property,
it is judged that the subject office building and parking garage has an
effective age equal to 20 years. The remaining useful life is estimated to be
20 years. This translates into a physical depreciation estimate of 50 percent
(20 years divided by 40 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 15 years with an effective age of seven years and a remaining useful life of
five years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 50
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciate rate.
The total depreciated value for the office building is estimated to be
$428,188.
-28-
COST APPROACH CONCLUSION
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building and improvements 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:
Larkin Annex Building Site $800,000
========
Excess Land Site $1,200,000
==========
-29-
SUMMARY OF REPLACEMENT COSTS
LARKIN ANNEX BUILDING
Replacement
Cost
-----------
Excavation and Site Preparation $ 977
Foundation 20,865
Frame 46,180
Exterior Walls 108,106
Floors 61,935
Roof 38,350
Roof Cover 13,775
Partitioning and Built-In Items 173,242
Ceilings 30,005
Floor Coverings 29,766
Plumbing 53,847
Heating, Ventilation and Air Conditioning (Net) 58,371
Electrical 61,674
Other Features 33,916
----------
Total Labor, Materials, Incidentals and Profit $ 731,009
Architect Fees, Plans and Specifications $ 25,585
Architect Fees, Supervision 21,930
Add: Miscellaneous Fees 77,852
----------
Total Replacement Cost of Building $ 856,376
Less: Depreciation at 50% (428,188)
----------
Total Depreciated Value of Building $ 428,188
Land Improvement Replacement Cost $ 150,000
Less: Depreciation at 50% (5/10) (75,000)
----------
Depreciated Value of Land Improvements $ 75,000
Add: Land Value of Building Site 300,000
----------
Total Value of Building Site $ 803,188
Rounded to: $ 800,000
==========
Land Value of Excess Land Site $1,200,000
==========
-30-
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
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 the 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.
For the purpose of our analysis we have separated the building site from the
excess land site in estimating values for the Income Approach to value.__
-31-
BUILDING SITE
Based upon the lease rental rate provided, the gross income for the subject
property is calculated as follows:
10,255 SF x $11.00/SF = $112,805
The subject appraisal assumes that 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. We have verified
the reasonableness of this rental rate by conducting a return analysis of the
property based upon the expected remaining lives of the improvements and
investments rates of return found in the marketplace. A schedule of this
analysis is found in the Exhibit section of this report. Based upon this
analysis, utilizing a required rate of return of 10 percent on land and 12
percent to 14 percent rate on improvements, the annual rental rate would be
anticipated to approximate $10.39 to $11.20 per square foot. The rate
established in the master lease appears to be reasonable.
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 five percent of effective gross income, or
$5,640, based on the management experience of other properties. The net
operating income for the property is $112,805 less $5,640, or $107,165.
Although we have not utilized the Direct Sales Comparison Approach to arrive at
an indication of value for the subject property, we have conducted a survey of
office building sales in the region of the subject in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit section of this report and are summarized as follows:
Sale No. Property Location Sale Date OAR (%)
1 One 7000 Place, South Miami, Florida October 1992 11.33%
2 Professional Arts Center, Miami, Florida September 1992 10.45%
3 Kingston Plaza, Broward County, Florida August 1992 10.18%
-32-
The direct capitalization, or overall rates, for these comparables ranged from
10.18 percent to 11.33 percent. We believe that the cap rate associated with
the subject property would fall below the rates found above due to the more
stabilized nature of the present market and the overall reduction in interest
rates since these sales occurred. We believe that an overall capitalization
rate of 9.5 percent would be appropriate for the subject property under its
master lease agreement.
Therefore, it is our opinion that the market value of the office site by the
Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$107,165/.095 = $1,128,053
Rounded to: $1,100,000
==========
Excess Land Site
The gross annual rental associated with the excess land site is stated at an
annual rate of $120,000. This rate represents a 10 percent annual return to
the investor and appears appropriate based upon the stability of land prices in
the immediate region of the subject.
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 five percent of effective gross income, or
$6,000, based on the management experience of other properties. The net
operating income for the property is $120,000 less $6,000, or $114,000.
We believe that the overall cap rate associated with this income stream would
be similar to the office building site and have used an overall capitalization
rate of 9.5 percent as being appropriate.
-33-
Therefore, it is our opinion that the market value of the office building site
by the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$114,000/.095 = $1,200,000
Rounded to: $1,200,000
==========
-34-
CORRELATION AND CONCLUSION
We have considered two approaches to value in order to estimate the value of
the Larkin Annex and excess land site. The two approaches are summarized as
follows:
Building Site Excess Land
------------- -----------
Cost Approach . . . . . . . . . . . . . . . . . . . . $ 800,000 . . . . . . $1,200,000
Income Approach . . . . . . . . . . . . . . . . . . $1,100,000 . . . . . . $1,200,000
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 an older building is unreliable. For these reasons, this
approach is considered only 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 buyers 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 Larkin
Annex Building and excess land site, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
Larkin Annex Building Site $1,100,000
==========
Larkin Annex Excess Land Site $1,200,000
==========
-35-
Appraisal of Larkin Annex Building (South Miami, FL) - HealthSouth Corp. and Valuation Counselors Group Inc.
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