AN APPRAISAL OF
MIDWAY MEDICAL PLAZA
AND ADJACENT PARKING STRUCTURE
LOS ANGELES, CALIFORNIA
2
(LOGO) VALUATION COUNSELORS GROUP
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
April 8, 1994
Crescent Capital Trust, Inc.
One Perimeter Park South
Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John McRoberts
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building and parking
structure identified as follows:
MIDWAY MEDICAL PLAZA
5901 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA
AND
ADJACENT PARKING STRUCTURE
5975 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA
The purpose of this valuation is to estimate the market value of the subject
properties' leased fee estate as of March 1, 1994, subject to a master lease
from OrNda HealthCorp. The report is to be used for asset valuation purposes.
OrNda HealthCorp is selling this professional office building and adjacent
parking structure for the purpose of incorporating them in a real estate
investment trust (REIT). This valuation assumes that the prospective REIT is
the owner of the property, with OrNda HealthCorp guaranteeing annual net rental
income of $2,142,223 for both structures.
This appraisal investigation includes visits to the facilities, 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.
3
Crescent Capital Trust, Inc.
April 8, 1994
Page Two
"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;
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 consists of a five-story medical office building, which
contains a gross amount of 95,940 square feet with a net rentable amount of
87,008 square feet. The medical office building is located on a 25,825 square
foot land parcel adjacent to Midway Hospital Medical Center. The building was
constructed in 1985. In addition, an adjacent seven-story parking structure
containing 199,340 square feet is included in the appraisal and planned lease
arrangement. The parking structure is located on a 28,224 square foot site.
The parking structure was constructed to serve the hospital complex and was
constructed in 1984. The medical office building is presently 95.74 percent
leased.
4
Crescent Capital Trust, Inc.
April 8, 1994
Page Three
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 Midway Medical
Plaza and adjacent parking structure, as of March 1, 1994, to be:
$21,420,000
===========
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
5
Crescent Capital Trust, Inc.
April 8, 1994
Page Four
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
6
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.
A representative of Valuation Counselors Group, Inc. 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.
/s/ Patrick J. Simers
- ---------------------
Patrick J. Simers
Managing Director
Georgia Certified Appraiser No. 001977
7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc., or
the MAI designation, and the Appraisal Institute, or the SRPA designation shall
be disseminated to the public through public relations media, news media, sales
media or any other public means of communications without the prior written
consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: March 1, 1994
Date of Report: March 1, 1994
Property Identification/ Midway Medical Plaza
Location: 5901 West Olympic Boulevard
Los Angeles, California
Parking Structure
5975 West Olympic Boulevard
Los Angeles, California
Interest Appraised: Leased Fee Estate
Gross Building Area: MOB - 95,040 square feet
Parking Structure - 199,340 square feet
Net Leasable Area: MOB - 87,008 square feet
Improvements Description: MOB - Five-story, concrete frame
structure containing approximately 95,940
gross square feet and 87,008 net square
feet built in 1985.
Parking Structure - Seven-story, steel
frame structure containing 199,340 square
feet and 755 parking spaces, built in 1984.
Subject Land Size: MOB Site - 25,825 SF, or 0.59 acres.
Parking Site - 28,224 SF, or 0.65 acres.
MOB Structure Occupancy: 95.74%
CONCLUSIONS
Cost Approach: $19,200,000
Sales Comparison Approach: $19,860,000
Income Approach: $21,420,000
Final Value Estimate: $21,420,000
===========
11
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 2
Property Rights Appraised 2
Definition of Value 2
Ownership History 3
History and Nature of the Business Environment 3
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Regional Description 7
Neighborhood Description 10
Zoning 11
Real Estate Taxes and Assessments 12
Site Descriptions 13
Buildings and Land Improvements Description 14
HIGHEST AND BEST USE 16
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 21
Sales Comparison Approach 34
Income Approach 43
CORRELATION AND CONCLUSION 45
12
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit B - Metropolitan Area Map
Exhibit C - Neighborhood Map
Exhibit D1 - Plat Map - Medical Office Building
Exhibit D2 - Plat Map - Parking Structure
Exhibit E - Building Description
Exhibit F - Land Improvements Description
Exhibit G - Subject Photographs
Exhibit H - Improved Sales Photographs
13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property is known as the Midway Medical Plaza, which is located at
5901 West Olympic Boulevard in Los Angeles, California. This building is a
five-story medical office structure, which is located on an 0.59-acre site.
The building was constructed in 1985 and contains 95,040 gross square feet and
87,008 net rentable square feet. The building is presently 95.74 percent
leased. In addition to the medical office building, the adjacent parking
structure is included in this appraisal analysis. The parking structure is a
seven-story structure which contains 199,340 square feet. The building was
constructed in 1984 and is located at 5975 West Olympic Boulevard, Los Angeles,
California on an 0.65-acre site.
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 March 1, 1994,
the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The buyers
are considering the purchase of several professional office buildings for the
purpose of establishing a real estate investment trust (REIT). The subject
property would be included in these purchases. It is our understanding that
the REIT will involve mortgage financing.
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14
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.
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;
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15
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].
OWNERSHIP HISTORY
The subject properties were acquired by Summit Acquisition, Inc. on April 30,
1980 from Midway Hospital. On the same date, Summit Acquisition, Inc.
transferred the properties to Summit Properties, a California General
Partnership. In 1983 the properties were transferred to OrNda HealthCorp in
conjunction with the purchase of the entire hospital complex. A segregated
value of the assets appraised has not transpired in the past three years.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
-3-
16
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent 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.
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17
INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
1993 1994 1995
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed
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above are indicating an on-going soft demand for many types of commercial real
estate. This soft demand has caused some property values to remain flat and
some to decline. The lower interest rates in recent periods, however, are
serving to stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation.]
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
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DESCRIPTIVE DATA
REGIONAL DESCRIPTION
GENERAL DATA
This section of our report summarizes the socioeconomic characteristics of the
market area to provide a frame of reference for our subsequent analysis.
The subject property is located in the mid-city section of the city and county
of Los Angeles, in the state of California. The mid- city section is situated
approximately 6.25 miles west of the downtown Los Angeles Civic Center. As a
point of reference, this area is referred to as Zip Code Area 90019 in our
regional analysis.
DEMOGRAPHIC ANALYSIS
Demographic data was obtained from Urban Decision Systems for Los Angeles
County and the Zip Code Area 90019. The following table shows the demographic
trends of the county and 90019 from 1980 through projected 1995.
DEMOGRAPHIC TRENDS OF LOS ANGELES COUNTY AND ZIP CODE AREA 90019
1980 1990 ANNUAL % ANNUAL 1995 ANNUAL %
CENSUS CENSUS CHANGE 80-90 (PROJECTED) CHANGE 90-95
LOS ANGELES COUNTY
Population 7,477,503 8,758,093 1.6% 9,419,223 1.5%
Households 2,730,469 2,974,734 0.9% 3,096,420 0.8%
Household Size 2.74 2.94 3.04
Median Age 31.7
ZIP CODE AREA 90019
Population 53,63 2 62,766 1.6% 67,710 0.8%
Households 21,69 8 24,248 1.1% 25,527 1.0%
Household Size 2.4 2 2.57 2.63
Median Age 33.4
-7-
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In Los Angeles County, total population increased from 7,477,503 in 1980 to
8,758,093 in 1990, which represents an increase of 1.6 percent on an annual
compounded basis. In comparison, the change in total population in Zip Code
Area 90019 was from 53,632 in 1980 to 62,766 in 1990. This change in
population is also 1.6 percent per year.
Total number of households at both geographical levels increased at a slower
rate than their population counterparts. This implies an increase in the total
number of persons per household. At the county level, average household size
increased from 2.74 persons to 2.94. In comparison, average household size is
smaller at the city level. Between 1980 and 1990, average household size in
Zip Code Area 90019 changed from 2.42 to 2.57 persons.
Slow population growth is anticipated between 1990 and 1995. Total population
in Los Angeles County is projected to increase at an annual rate of 1.5
percent, thus indicating a total estimate of 9,419,223 by the year 1995. For
Zip Code Area 90019, annual growth rate is expected to be the same at 1.5
percent per year. By 1995, total population in Zip Code Area 90019 is expected
to be 67,710.
The current median age of residents in Zip Code Area 90019 is older than that
of the county, 33.4 years versus 31.7 years, respectively. The median age
nationwide is 33 years.
ECONOMIC INDICATORS
Between 1980 and 1990, median annual household income in Los Angeles County
increased from $17,563 to $30,525, or 5.7 percent on an annual compounded
basis. During the same period, the median annual household income in Zip Code
Area 90019 increased from $12,818 in 1980 to $26,140 in 1990, an annual
compounded increase of 7.4 percent. Projections to 1995 for the county
indicate an increase of 4.0 percent on an annual compounded basis. The
projected income for Zip Code Area 90019 indicates an increase to $28,860 to
2.0 percent per year on an annual compounded basis.
21
WORK FORCE, TRADE, INDUSTRY
According to the State of California Employment Development Department, the
highest employment demand in 1990 within Los Angeles County derived from
service industries, accounting for 29 percent of the total number of persons
employed. Manufacturing accounted for the second largest industry with 20
percent, followed by retail trade (15.3%), and government (12.5%). Between
1989 and 1990, services, government and FIRE (finance, insurance and real
estate), experienced the largest growth in employment increases.
Between 1986 and 1990, the total number of unemployed and the associated
unemployment rates are presented below:
PERCENTAGE
YEAR NUMBER UNEMPLOYMENT
1990 255,000 5.8
1989 196,300 4.6
1988 203,000 4.9
1987 243,600 5.9
1986 204,000 6.7
Since 1986, the unemployment rate has been between 4.6 percent and 6.7 percent.
However, not shown is the current employment picture in Los Angeles. The
recession has caused numerous large companies such as Hughes Aircraft to layoff
a large percentage of their work force. The unemployment rate is greater than
the 1990 level of 5.8 percent.
Summary
It is questionable how many years it will take for the local economy to
stabilize and start showing some type of improvement. Major construction in
the county has slowed due to lack of demand and because the lenders are not
making construction money available
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to the developers. It is projected that many of the aerospace companies will
continue to layoff more workers over the next year. While some parts of the
country are showing signs of revitalization, it is forecasted that California,
and in particular southern California, will lag behind since it was the last
part of the country to experience the recession.
NEIGHBORHOOD DESCRIPTION
The subject properties are situated on the north side of West Olympic
Boulevard, on the east and west side of Genesee Avenue, on the east side of
Spaulding Avenue, and on the west side of Ogden Drive. The subject properties
lie just east of the intersection of three major arteries; West Olympic and San
Vicente Boulevards and Fairfax Avenue.
Olympic Boulevard is 100 feet wide, asphalt-paved with curbs, gutters,
sidewalks and street lights. Improvements along Olympic Boulevard in the
subject neighborhood consist of commercial structures at Fairfax Avenue and
Olympic Boulevard, the subject medical office building, parking structure,
hospital and parking lots to the east, the West Side Jewish Center and
multi-family dwellings east and beyond.
San Vicente Boulevard is 150 feet wide, asphalt-paved with landscaped median,
curbs, gutters, sidewalks and street lights. Improvements along San Vicente
Boulevard in the subject neighborhood consist of commercial structures at
Fairfax Avenue and San Vicente Boulevard, the subject hospital and parking
lots, small medical office buildings to the east, the West Side Jewish Center
and multi-family dwellings east and beyond.
Ogden, Genesee, Spaulding and Alandele Avenues are minor residential roadways
averaging 50 feet wide, and are asphalt-paved with curbs, gutters, sidewalks
and street lights. These streets are improved with the subject medical office
building, parking structure, parking lots, the SCCIS and a triplex near and at
their intersections with Olympic Boulevard. The balance of the improvements
along these streets consist of single-family dwellings. Fairfax Avenue is 100
feet wide, asphalt-paved with curbs, gutters, sidewalks and street lights.
Improvements consist of commercial structures and Westside Hospital, a 91-bed
acute care facility approximately two blocks from the subject properties.
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Conclusion
The neighborhood is mature with improvements construction dating from the late
1920s forward. While the riots of April 1992 affected adjacent neighborhoods,
the subject neighborhood was not affected and remains well maintained and in
good condition. The presence of the hospital and associated properties creates
a healthcare campus and enhances the community in which it serves. Access to
the subject neighborhood from the Southern California freeway system is good
via the I-10 Freeway/Fairfax Avenue interchange, approximately two miles south
of the subject property.
ZONING
The subject sites are zoned by the city of Los Angeles as C2-1, Commercial.
The following is a description of, and lot restrictions for, each of the zoning
regulations:
C2-1 zoning allows uses such as C1.5 zone uses; department stores,
theaters, broadcasting studios, parking buildings, parks and
playgrounds and R4 uses, retail, limited manufacturing, hospitals,
clinics, auto services, contractors, churches and schools.
Minimum Lot Size - None for commercial use
Minimum Lot Width - Forty feet for commercial use
Size Yards - None for commercial uses
Maximum Building Height - None
Parking - One space per 500 SF of building
area. Hospitals require two spaces
for each patient bed.
The subject improvements are legal uses.
-11-
24
Easements/Encroachments/Restrictions
We are not aware of any easements, encroachments or restrictions that would
adversely affect the development of the subject sites.
Flood Zone
The subject properties are located in Community Panel No. 060137007D, February
4, 1987, Zone C (an area of minimal flooding).
Earthquake Zone
According to the California Department of Conservation, Division of Mines and
Geology, the subject is not located in an Alquist- Prolo Special Study zone.
This indicates that there are no active fault lines at the intersection of San
Vicente Boulevard, Olympic Boulevard and Fairfax Avenue.
Legal Descriptions
The legal descriptions for the subject properties are included in the Exhibit
Section of this report.
REAL ESTATE TAXES AND ASSESSMENTS
The subject properties are assessed by Los Angeles County for the 1992/1993 tax
year at 100 percent of market value. The tax rate for this area is $1.05307
per $100 of assessed value plus special assessments. The assessment and taxes
applicable to the subject properties are shown as follows:
-12-
25
PARCEL NO. 5086-024-025 (MEDICAL OFFICE BUILDING)
Assessed Value:
Land $ 915,008
Buildings 12,207,912
-----------
Total $13,122,920
Taxes: $138,193.78
PARCEL NO. 5086-019-009 (PARKING STRUCTURE)
Assessed Value:
Land $ 982,734
Buildings 5,696,979
-----------
Total $ 6,679,713
Taxes: $ 72,062.26
SITE DESCRIPTIONS
For the purpose of our analyses, we have described the subject sites as
follows:
MEDICAL OFFICE BUILDING SITE
The medical office building (MOB) site consists of one parcel containing 0.59
acres, or approximately 25,825 square feet. It is an irregularly-shaped site
with approximately 221 frontage feet on the north side of Olympic Boulevard,
112 frontage feet on the west side of Spaulding Avenue and 112 frontage feet on
the east side of Genesee Avenue. The frontage on Olympic Boulevard is
interrupted by a 1,279 square foot, wedge-shaped site belonging to others.
-13-
26
PARKING STRUCTURE SITE
This site consists of one parcel containing 0.65 acres, or approximately 28,224
square feet. The site is nearly rectangular in shape with 254 frontage feet on
the north side of Olympic Boulevard, 112 frontage feet on the west side of
Genesee Avenue and 112 frontage feet on the east side of Ogden Avenue.
Both of the sites are level at street grade. However, commencing at about
Genesee Avenue, the terrain ascends upward gently to the crest of a hill
several blocks to the east.
All of the usual and necessary utilities are available to the subject site from
the following suppliers:
Electricity - Southern California Edison Company
Gas - Southern California Gas Company
Water - City of Los Angeles
Sewer - City of Los Angeles
Telephone - Pacific Bell
Summary
The site are well suited to their improvements. The medical office building
has good street visibility from both Olympic and San Vicente Boulevards and
Fairfax Avenue with good access to the parking structure and parking lots.
BUILDINGS AND LAND IMPROVEMENTS DESCRIPTION
The subject properties are comprised of the medical office building and the
parking structure. These improvements are described as follows:
-14-
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Buildings
MEDICAL OFFICE BUILDING
This building is a five-story, concrete frame structure containing 95,940 gross
square feet and 87,008 net leaseable square feet. It was constructed in 1985.
The building is constructed upon a reinforced concrete foundation under masonry
with metal and glass panel exterior walls with a flat lightweight concrete roof
with an insulated rolled cover. The interior of the building is divided into
the lobby, a pharmacy and office suites. There are three five-stop elevators.
Heating and ventilating consists of a computerized double-duct, vari-volume
system. The building appears to be in good condition and the mechanical
components appear to be in working order.
PARKING STRUCTURE
This building is a seven-story, concrete and steel frame structure containing
199,340 square feet. It was constructed in 1984. The building is constructed
upon a reinforced concrete foundation under masonry exterior walls with
concrete floors. The structure has 755 parking spaces, a seven-stop elevator,
a steel stairwell, electric gates and a kiosk. The parking structure appears
to be in good condition.
Land Improvements
Land improvements consist of a concrete patio at the front of the structure
with concrete planters and benches and outdoor lighting. There is minimal
landscaping with an automatic sprinkler system.
-15-
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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.
-16-
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As Vacant
The purpose of this analysis, given the sites ares 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 sites are adequate for the development of a
limited number of uses. These would include the development of residential,
commercial, and office/institutional uses. The small sizes of the parcels
would preclude the development of any industrial use.
LEGALLY PERMISSIBLE
The subject parcels are zoned C2-1, Commercial. This zoning designation allows
for the development of most commercial uses including stores, theaters, parking
buildings retail use, hospitals and multi-family residential uses, etc. This
use would not allow the development of industrial properties and single-family
development.
Surrounding use patterns of the subject sites include the hospital campus,
Westside hospital, and small businesses such as fast food restaurants, dry
cleaners, florists, etc.
FINANCIALLY FEASIBLE
Having established that the sites are physically suited and legally permitted
for the development of medical office building space and parking structure, 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. The subject structures serve the adjacent hospital which has served the
community for 20 years. The surrounding uses of the subject would suggest that
economically feasible uses would be related to support of the healthcare
business community.
-17-
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MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Medical office and parking uses are physically
feasible and legally permissible. Based on this analysis, the highest and best
use of the land, if vacant, would be for the development of their current use
for the support of the hospital campus.
As Improved
The subject sites are currently improved with a 95,040 square foot medial
office building and 199,340 square foot parking structure. 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 improvements and replace them with new improvements, or to
modify existing improvements. The improvements were recently constructed and
considered functional. The medical office building could be converted to
ancillary space for the adjacent hospital facility or converted to more typical
office space. It would be anticipated that, due to recent trends in hospital
care, that ancillary development would be its most likely alternative
conversion. The parking structure can be converted to alternative use but the
cost may be prohibitive, and use of the parking structure is necessary to
continue to support the medical office building and the hospital enterprise.
LEGALLY PERMISSIBLE
The buildings, as improved, are assumed to be a legal conforming use, since the
properties were recently constructed and received an occupancy permit. Under
the current zoning, the property could remain as it is, be torn down, or
renovated.
-18-
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FINANCIALLY FEASIBLE
As improved, the structures provide significant support to the neighboring
hospital facility which gives support to their economic existence in their
present use as-built. The office building is presently 95.74 percent occupied
with physicians who practice at the neighboring hospital facility. It appears
that the improvements in their present use represent the most financially
feasible use of the subjects.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing properties are the financially
feasible uses that produces the greatest property value. The existing use was
the only financially feasible use. The highest and best use, as improved, is
the properties' current use.
-19-
32
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-20-
33
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.
-21-
34
Land Comparable Number 1
APN Number: 5521-007-019
Location: South side of Melrose Avenue one-half block
west of Ardmore.
Size: 0.148 acres, or 6,460 square feet
Sale Date: January 28, 1992
Document Number: 142216
Grantor: Mr. and Mrs. Zalman and Esther Roth
Grantee: Mr. and Mrs. Kyung Hee and In Kyu Lee
Sale Price: $265,000
Price Per Square Foot: $41.02
Terms of Sale: Cash and seller financing at market rates.
Shape: Rectangular
Utilities: All Available
Zoning: C2-2
-22-
35
Land Comparable Number 2
APN Number: 5535-029-010
Location: North side of Melrose Avenue one-half block
west of Hobart
Size: 0.149 acres, or 6,500 square feet
Sale Date: December 19, 1992
Document Number: 2439104, 2439105
Grantor: Charlotte Reed, et al
Grantee: Mr. and Mrs. Mansour and Prichehr Benlevy
Sale Price: $330,000
Price Per Square Foot: $50.77
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C2-2
-23-
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Land Comparable Number 3
APN Number: 5523-012-014
Location: Northwest corner of Larchmont
Boulevard and Clinton Avenue
Size: 0.16 acres, or 7,000 square feet
Sale Date: December 17, 1992
Document Number: 2368714, 2368715
Grantor: Mary Auerback, et al
Grantee: Ellis C. Wong
Sale Price: $550,000
Price Per Square Foot: $78.57
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C2-1
Comments: Currently being utilized for
medical/dental office.
-24-
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Land Comparable Number 4
APN Number: 5088-014-005,006
Location: South side of Wilshire Boulevard, one
block west of Crescent Heights Boulevard
Size: 0.45 acres, or 19,800 square feet
Sale Date: December 31, 1992
Document Number: 2455200
Grantor: Nedjatollah Zarabi, et al
Grantee: 6300 Wilshire Associates
Sale Price: $2,000,000
Price Per Square Foot: $101.01
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C4-4
Comments: Currently being utilized for surface
parking with owner wishing to place
parking structure on site.
-25-
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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 Melrose/Ardmore 01/92 6,460 $41.02
2 Melrose/Hobart 12/92 6,500 $50.77
3 Larchmont/Clinton 12/92 7,000 $78.57
4 Wilshire/Crescent Heights 12/92 19,800 $101.01
SUBJECT MOB SITE 28,825
PARKING STRUCTURE SITE 28,224
Discussion of Land Comparables
Due to the proximity and similar nature of the two subject sites, all
comparisons which apply to the MOB site also apply to the parking structure
site. An adjustment grid which summarizes our findings follows the parcel
discussions.
LAND COMPARABLE NUMBER 1 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subject indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subjects' land parcels.
LAND COMPARABLE NUMBER 2 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subject indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subjects' land parcels.
-26-
39
LAND COMPARABLE NUMBER 3 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subjects, indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subject's land parcels.
LAND COMPARABLE NUMBER 4 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has a superior location to the subject and has been
adjusted downward for this occurrence. The comparable's size is similar to the
subject negating any size adjustment. The sale has a superior zoning over the
subject and downward adjustments for this occurrence have been made. Overall,
this sale has been adjusted upward in comparison to the subjects' land parcels.
The adjusted sales prices per square foot of the comparables range from a low
of $47.99 to a high of $99.00 per square foot with an overall average of $70.35
per square foot. In our opinion, the subject sites would be valued at a value
range slightly above the overall average, or $75.00 per square foot. This
would indicate a total land value for the two parcels in the amount of:
Medical Office Building Site $1,936,875
Parking Structure Site 2,116,800
----------
TOTAL BOTH SITES $4,053,675
-27-
40
L A N D S A L E A D J U S T M E N T G R I D
Midway Medical Office Building & Parking Garage
Los Angeles, California
Subject Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4
Sale Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Property Rights Fee Simple Same Same Same Same
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Financing Cash Cash Cash Cash Cash
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Conditions of Sale None None None None
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Market/Time
Adjustment -10% -10% -10% -10%
--------------------------------------------------
Adjusted Price/SF $ 36.92 $ 45.69 $ 70.71 $ 90.91
Other Adjustments:
Location Adjustment 10% 15% 20% -10%
Topography Adjustment 0% 0% 0% 0%
Size Adjustment 20% 20% 20% 0%
Zoning Adjustment 0% 0% 0% -10%
Net Other Adjustments 30% 35% 40% -20%
FINAL ADJUSTED PRICE PER SF $ 47.99 $ 61.69 $ 99.00 $ 72.73
==================================================
-28-
41
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
calculator cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule at the end of this section derived from the Marshall
Valuation Services shows the estimated replacement cost by category for the
subject building plus estimates of all forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 50 years. For the subject building, we have
assumed an economic life of 50 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-29-
42
Marshall Valuation Services, Inc. was used to estimate the overall economic
life of the improvements. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its young age. Observation of the subject property indicated
that the structure and related component parts have been adequately maintained
through a continuous maintenance service program.
The subject properties were constructed in 1984 and 1985, and are in good
condition. It is judged that the subject buildings have an effective age equal
to eight years. The remaining useful life is estimated to be 42 years. This
translates into a physical depreciation estimate of 16 percent (8 years divided
by 50 years). The amount of depreciation attributable to the property has been
estimated on a straight-line basis, which is founded on the assumption that
depreciation of a property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of three years and a remaining useful life of
12 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be 40 percent.
Entrepreneurial profit and miscellaneous replacement costs are depreciated at a
blended depreciate rate.
The subject building and site improvement replacement costs were calculated to
be $18,040,373. Replacement costs normally include an entrepreneurial profit
of 10 percent to 15 percent to induce the property owner to undergo the
development. Entrepreneurial overhead, profit and miscellaneous fees were
estimated at 10 percent.
-30-
43
Total depreciation is estimated at $2,894,579, based on 16 percent depreciation
of building replacement costs and 40 percent depreciation of site improvements.
There was no functional or economic obsolescence indicated. The total
depreciated value of the subject replacement costs is $15,145,794. The
$4,053,675 land value is added to the depreciated replacement costs, for a
final Cost Approach value of $19,199,469.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of March 1, 1994, is rounded to:
$19,200,000
===========
-31-
44
COST APPROACH SUMMARY
MEDICAL OFFICE BUILDING
Replacement Cost New
Direct Costs:
Main Structure -
Base Square Foot Cost $ 69.00
Adjustments to Base Cost
Elevators 4.00
Sprinklers 1.50
Number of Stories Multiplier 1.00
Perimeter Multiplier 1.00
---------
Adjusted Base Cost $ 74.50
Current Cost Multiplier 1.00
Local Multiplier 1.20
Final Base Cost $ 89.40 Per Sq. Ft.
Gross Building Area 95,940 Square Feet
---------
Total Building Cost $8,577,036
Site Improvements
Surface Parking $ 0
Other 20,000
-------
Total Site Improvement Costs $ 20,000
Total Replacement Cost New Before Indirect
Costs and Entrepreneurial Profit $8,597,036
----------
Estimate of Indirect Costs and
Entrepreneurial Profit
Indirect Costs
Financing Points $ 180,068
Property Taxes on Land
During Construction 28,038
Entrepreneurial Profit 880,511
----------
$1,088,617
Total Replacement Cost New $9,685,653
Estimates of Depreciation
Buildings $1,546,099
Site Improvements 9,013
-----------
Total Depreciation $1,555,112
Summary:
Total Depreciated
Medical Office Building Replacement Depreciation Cost
----------- ------------ -----------
Building $9,663,120 $1,546,099 $8,117,021
Land Improvements 22,533 9,013 13,520
---------- ---------- ----------
Total Medical Office Building $9,685,653 $1,555,112 $8,130,541
Add: Land Value 1,936,875
----------
TOTAL ESTIMATED VALUE VIA THE COST APPROACH $10,067,416
===========
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45
COST APPROACH SUMMARY
PARKING STRUCTURE
Replacement Cost New
Direct Costs:
Main Structure -
Base Square Foot Cost $ 30.00
Adjustments to Base Cost
Elevators 0.00
Sprinklers 1.50
Number of Stories Multiplier 1.00
Perimeter Multiplier 1.00
---------
Adjusted Base Cost $ 31.50
Current Cost Multiplier 0.98
Local Multiplier 1.20
Final Base Cost $ 37.04 Per Sq. Ft.
Gross Building Area 199,340 Square Feet
---------
Total Building Cost $7,384,351
Site Improvements
Surface Parking $ 0
Other 10,000
------
Total Site Improvement Costs $ 10,000
Total Replacement Cost New Before Indirect
Costs and Entrepreneurial Profit $7,394,351
----------
Estimate of Indirect Costs and
Entrepreneurial Profit
Indirect Costs
Financing Points $ 166,502
Property Taxes on Land
During Construction 34,379
Entrepreneurial Profit 759,488
--------
$ 960,369
Total Replacement Cost New $8,354,720
Estimates of Depreciation
Buildings $1,334,947
Site Improvements 4,520
----------
Total Depreciation $1,339,467
Summary:
Total Depreciated
Parking Structure Replacement Depreciation Cost
----------- ------------ --------------
Building $8,343,421 $1,334,947 $7,008,474
Land Improvements 11,299 4,520 6,779
---------- ---------- ----------
Total Parking Structure $8,354,720 $1,339,467 $7,015,253
Add: Land Value 2,116,800
----------
TOTAL ESTIMATED VALUE VIA THE COST APPROACH $9,132,053
==========
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SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, when a property is replaceable in the market, its value tends to be set at
the cost of acquiring an equally desirable substitute property, assuming there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on 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:
-34-
47
IMPROVED SALE NUMBER 1
GENERAL SALE DATA
Location: 8920 Wilshire Boulevard, Beverly Hills, California
Date of Sale: January 15, 1993
Document Number: 0102008
Grantor: Julio Liberman, et al
Grantee: Advent Realty Limited Partnership II
Sale Price: $7,500,000
Adjusted Sales Price: $10,500,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: .536 acres
Building Size: 99,000 square feet of net rentable area
Year Built: 1964
Occupancy at Sale: 70%
STABILIZED OPERATING DATA
Estimated Gross Income $2,376,000
Vacancy Allowance at 10% 237,600
----------
Effective Gross Income $2,138,400
Estimated Expenses @ 38% 812,592
----------
Net Operating Income $1,325,808
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $ 106.06
Stabilized Overall Rate: 12.6 %
COMMENTS
The facility was purchased at low overall occupancy and needed substantial
renovation work in order make the facility marketable. The cost of this
renovation was estimated at $3,000,000.
-35-
48
IMPROVED SALE NUMBER 2
GENERAL SALE DATA
Location: 6840, 6850 Sepulveda Boulevard, Van Nuys, California
Date of Sale: June 25, 1993
Document Number: 1216157
Grantor: Valley Presbyterian Hospital
Grantee: Healthcare Realty Trust, Inc.
Sale Price: $5,250,000
Adjusted Sales Price: $5,250,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.9 acres
Building Size: 29,040 square feet of net rentable area
Year Built: 1961
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Income Data: Not Available
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $180.78
Stabilized Overall Rate: 8.2 %
COMMENTS
The facility is presently utilized as a surgery center and has an interior
build-out superior to the subject. The building is leased on a triple net
basis.
-36-
49
IMPROVED SALE NUMBER 3
GENERAL SALE DATA
Location: 15211, Vanowen St. Van Nuys, California
Date of Sale: June 25, 1993
Document Number: 1216158
Grantor: Valley Presbyterian Hospital
Grantee: Healthcare Realty Trust, Inc.
Sale Price: $7,450,000
Adjusted Sales Price: $7,450,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.111
Building Size: 47,042 square feet of gross rentable area
Year Built: 1981
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Income Data: Not Available
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $158.37
COMMENTS
The facility is presently utilized as a surgery center and has an interior
build-out superior to the subject. The subject is leased on a triple net
basis.
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IMPROVED SALE NUMBER 4
GENERAL SALE DATA
Location: Sherman Oaks Medical Plaza, 4955 Van Nuys, Boulevard, Sherman Oaks, California
Date of Sale: February 23, 1993
Document Number: 0342432
Grantor: Pacprop, Inc.
Grantee: Arthur Gilbert
Sale Price: $8,500,000
Adjusted Sales Price: $8,500,000
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 1.619 acres
Building Size: 72,000 square feet of net rentable area
Year Built: 1968
Occupancy at Sale: 97%
STABILIZED OPERATING DATA
Estimated Gross Income $1,529,280
Vacancy Allowance at 15% 229,392
----------
Effective Gross Income 1,299,888
Estimated Expenses 491,260
---------
Net OperatinIncome $ 808,628
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $118.06
Stabilized Overall Rate: 9.51%
COMMENTS
The facility was purchased at high overall occupancy which is not anticipated
to be sustainable. Parking lot is located on leased land parcel which was not
included in sale.
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SUMMARY OF IMPROVED SALES
SALE RENTABLE SALE PRICE
NUMBER ADDRESS SF PRICE PER SF
1 8920 Wilshire Boulevard 99,000 $10,560,000 $106.06
Beverly Hills, CA
2 6840, 6850 Sepulveda Boulevard 29,040 $ 5,250,000 $180.78
Van Nuys, CA
3 15211 Vanowen Street 47,042 $ 7,450,000 $158.37
Van Nuys, CA
4 4955 Van Nuys Boulevard 72,000 $ 8,500,000 $118.06
Sherman Oaks, CA
The unadjusted prices of these comparables range form $106.06 per square foot
to $180.78 per square foot. Each of the comparable will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Grid is shown at the end of this section.
IMPROVED SALE NUMBER 1 is a Class B structure which was constructed in 1964.
The sale was initially adjusted upward for the renovation costs incurred by the
buyer immediately upon occupancy. The subject's location is slightly inferior
to the comparable's and a downward adjustment for this occurrence has been
made. The sale had a very low occupancy at the time of sale which would
necessitate that an upward adjustment be made. The age of the comparable is
significantly above the subject's and additional upward adjustments were made
for this occurrence. The adjusted sale price of the comparable was $121.97.
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IMPROVED SALE NUMBER 2 is a Class C structure which was constructed in 1961.
This comparable is associated with the neighboring hospital and was sold on a
sale leaseback arrangement on a triple net master lease arrangement. The lease
terms were not disclosed. This sale's location is considered slightly inferior
to the subject's and an upward adjustment for this occurrence has been made.
The sale is significantly smaller than the subject and a downward adjustment
has been made to account for this fact. Due to the older age of the
comparable, additional upward adjustments have been made. The adjusted sale
price of the comparable is $180.78.
IMPROVED SALE NUMBER 3 is a Class B structure which was constructed in 1981.
This comparable is associated with the neighboring hospital and was sold on a
sale leaseback arrangement on a triple net master lease arrangement. The lease
terms were not disclosed. This sale's location is considered slightly inferior
to the subject's and an upward adjustment for this occurrence has been made.
The sale is significantly smaller than the subject and a downward adjustment
has been made to account for this fact. The sale is similar in age to the
subject and no adjustment for age was considered warranted. The adjusted sale
price of this comparable was estimated at $150.45.
IMPROVED SALE NUMBER 4 is a Class B, seven-story, structure with an adjacent
three-story parking garage. The parking garage is located on a land lease and
an upward adjustment for rights transferred has been made. An additional
upward adjustment has been made due to the older age of the comparable. No
other adjustments to this sale appeared warranted indicating an overall
adjusted price of $142.85 per square foot.
The adjusted prices per square foot range from $121.97 to $180.78, with an
overall average of $149.01. It is our opinion, that the subject's medical
office building would sell at a price level above the overall average, or
$160.00 per square foot of rentable area. This would indicate a value for the
medical office building of $13,921,280 ($160.00 x 87,008 square feet).
The adjacent parking structure is utilized to support the office building and
the adjacent medical complex. In our survey of medical office building
comparables the number of parking spaces per 1,000 square feet of rentable area
ranged from 0 to 6.7, with 3 to 4 spaces being typical. The number of spaces
required under the zoning law is 191. The subject parking garage, when
compared to the medical office building's rentable square
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feet, contains 8.67 spaces per 1,000 square feet of rentable area. It is our
belief that an approximate ratio of 3.0 spaces per 1,000 square feet of
rentable area would be associated with the medical office building. This would
represent an overall utilization of the parking garage for the medical office
building of approximately 35 percent. The remaining 65 percent of the parking
garage represents an excess asset and its value should be added to our overall
market findings detailed previously. Based upon our analysis in the Cost
Approach, 60 percent of the parking garage's value would be fairly represented
at $5,935,834.
Based upon this analysis, the market value of the subject property by the Sales
Comparison Approach, as of March 1, 1994, is reasonably represented in the
rounded amount of:
$19,860,000
===========
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I M P R O V E D S A L E A D J U S T M E N T G R I D
The Midway Medical Office Building
Los Angeles, California
Subject Bldg Comp Bldg Comp Bldg Comp Bldg Comp
Element #1 #2 #3 #4
Sale Price/SF $106.06 $180.78 $158.37 $118.06
Property Rights Fee Simple Same Same Same Mixed
Adjustment 10%
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Financing Cash Cash Cash Cash Cash
Adjustment
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Conditions of Sale None None None None
Adjustment
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Market/Time
Adjustment 0% 0% 0% 0%
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Other Adjustments:
Location Adjustment -5% 5% 5% 0%
Occupancy Adjustment 10% 0% 0% 0%
Size Adjustment 0% -15% -10% 0%
Age Adjustment 10% 10% 0% 10%
Net Other Adjustments 15% 0% -5% 10%
FINAL ADJUSTED PRICE PER SF $121.97 $180.78 $150.45 $142.85
================================================
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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 several professional office buildings that
Crescent Capital is purchasing for the purpose of establishing a real estate
investment trust (REIT). OrNda HealthCorp, 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 OrNda HealthCorp leasing
flexibility for the office space. OrNda HealthCorp can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for the property is not yet available. For the
purpose of our Income Approach, the gross income will be the master lease
amount established for the entire development, or $2,142,223. 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 master lease rate implied for the subject property will be $24.62 per
square foot of net rentable area associated with the medical office building.
This rental rate appears at market in comparison to the rates quoted for the
market sales comparisons. The gross income for the subject property is
$2,142,223.
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The subject appraisal assumes 100 percent of the income is guaranteed
throughout the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$107,111 based on the management experience of other properties. The net
operating income for the property is $2,142,223 less $107,111, or $2,035,112.
The estimated direct capitalization rates, or overall rates (OARs), for the
improved sale comparables presented in the Sales Comparison Approach section of
this report ranged from 8.2 percent to 12.6 percent. In Improved Sale Number
1, with a high estimated capitalization rate of 12.6 percent, the buyer had to
put significant improvements in the site. Based on the comparables and this
discussion, a capitalization rate of 9.5 percent is considered appropriate for
the property.
It is, therefore, our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$2,035,112/0.95 = $21,422,231
Rounded to:
$21,420,000
===========
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CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the Midway Medical Plaza and its adjacent parking structure. The values
derived from the three approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . $19,200,000
Sales Comparison Approach . . . . . . . . . . . . . $19,860,000
Income Approach . . . . . . . . . . . . . . . . . . $21,420,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. This approach is
representative of the value in use as part of the hospital complex. The Cost
Approach, however, does not necessarily reflect the value that investors and
users would be willing to pay if the property were to be sold. Overall, this
approach is considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quantity of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject and were significantly older than the subject. The comparable sales,
which were professional office buildings that were physically contiguous to a
hospital, appeared to sell at a higher value because of higher leasing risks.
The appraisers only considered this approach to be a fair indicator of value
for the subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
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Based on this analysis, it is our opinion that the market value of the Midway
Medical Plaza and adjacent parking structure, as of March 1, 1994, subject to
the OrNda HealthCorp lease, and based on the assumptions and limiting
conditions in this report, is the Income Approach value of:
$21,420,000
===========
The values derived in the other approaches support the Income Approach value as
the final value.
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