AN APPRAISAL OF
MOUNTAIN VIEW NURSING CENTER
GREENSBURG, PENNSYLVANIA
FOR
INTEGRATED HEALTH SERVICES, INC.
AS OF MARCH 1, 1994
2
[LOGO] VALUATION COUNSELORS GROUP, INC.
Princeton Pike Office Park, CN30
Princeton, New Jersey 08543-0030
(609) 896-0300
(Fax) 896-1849
March 30, 1994
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills Corporate Campus
Owings Mills, Maryland 21117
Attention: Mr. Daniel J. Booth
Director of Project Finance
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the value of the leased fee interest in the property comprising:
MOUNTAIN VIEW NURSING CENTER
SAND HILL ROAD
GREENSBURG, PENNSYLVANIA
The primary purpose of this valuation is to estimate the market value as of
March 1, 1994.
For the purpose of this report, "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, 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:
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and each acting
in what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
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Integrated Health Services, Inc.
March 30, 1994
Page 2
d) payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
e) 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.
Mountain View Nursing Center is a 137 licensed bed healthcare facility which
provides nursing and rehabilitation care. The facility is presently doing
business as Integrated Health Services at Mountain View. Integrated Health
Services, Inc. has advised us the facility is being acquired by Crescent
Capital in the immediate future for $9,775,000 and will be leased to Integrated
Health Services, Inc. at an initial base rent amount of $1,061,000 with
additional rent provisions based upon several factors including the consumer
price index and increments in net operating income. The term of the lease will
be ten years with two option renewal periods of ten years each. We have
appraised the subject property on a leased fee basis which is defined as
follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession at
the termination of the lease.
This appraisal investigation included: a visit to the facility, discussions
with Management, a study of financial data, analysis of other data and research
of the market.
This appraisal was prepared in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP) requirements.
Based upon the procedures outlined in this report, it is estimated that the
market value of the tangible and intangible assets comprising Mountain View
Nursing Center, as of March 1, 1994, is reasonably represented in the rounded
amount as follows:
$9,800,000
==========
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.
This report considers estimates, assumptions and other information developed
from research of the market, knowledge of the industry and discussions during
which Management and Management's representatives have provided us with certain
information. Management is assumed to be competent and professional healthcare
providers.
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Integrated Health Services, Inc.
March 30, 1994
Page 3
Some assumptions inevitably will not materialize and unanticipated events and
circumstances may occur; therefore, actual results achieved may vary from the
forecasts and the variations may be material. We have not, as part of this
valuation, performed an examination or review in the accounting sense of any of
the financial information used and, therefore, do not express an opinion or
other form of assurance with regard to the same. We have no responsibility to
update our report for events and circumstances occurring after the date of this
report. The information furnished to us by others is believed to be reliable,
but no responsibility for its accuracy is assumed.
This appraisal report consists of the following:
o This letter outlining the services performed;
o A Statement of Basic Assumptions and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o Subject Photographs;
o A Narrative Section detailing the appraisal of the enterprise;
o Certification;
o An Addendum containing supporting schedules; and
o An Exhibit Section containing supplementary data.
Neither the whole, nor any part of this appraisal nor 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.
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Integrated Health Services, Inc.
March 30, 1994
Page 4
A copy of this report and the working papers from which it was prepared will be
kept in our office files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ G. Allen Houpt, III
--------------------------------
G. Allen Houpt, III
Managing Director
Commonwealth of Pennsylvania
Real Estate Broker's License
Number RB-20059
GAH:dvm
6
TABLE OF CONTENTS
Page
Number
-------
Statement of Basic Assumptions and Limiting Conditions
Summary of Salient Facts and Conclusions
Subject Photographs
Introduction 1
Property Identification 1
Purpose of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Asset Rights Appraised 2
Effective Date of the Appraisal 2
Definition of Value 2
Compliance 3
Competency 3
Sale History 4
Reasonable Exposure Time 4
History and Nature of the Business Environment 6
State Nursing Home Environment 14
Regional and Market Analysis 18
Neighborhood and Site Description 23
Real Estate Tax and Assessment Analysis 26
Highest and Best Use 29
Valuation Methodology 32
Income Approach 33
Cost Approach 41
Correlation of Value 66
Certification 67
ADDENDUM
Supporting Schedules A-1
EXHIBIT SECTION
Exhibit A - Legal Description E- 1
Exhibit B - Building Description E- 2
Exhibit C - Land Improvements Description E- 6
Exhibit D - Professional Qualifications E- 7
7
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
The appraisers assume:
1. That the subject property is marketable and that the property is free
and clear of all liens, encumbrances, easements and restrictions
unless otherwise noted.
2. No liability for matters legal in nature.
3. That ownership and management will be in competent and responsible
hands. We have not been engaged to evaluate the effectiveness of
Management and we are not responsible for future marketing efforts and
other Management actions upon which actual results will depend.
4. That the property will not operate in violation of any applicable
government regulations, codes, ordinances or statutes. It is assumed
that all required licenses, certificates of occupancy, consents or
other legislative or administrative authorization from all local,
state or national governmental or private entities or organizations
have been or can be obtained or renewed.
5. Unless otherwise noted, that there will be no changes in reimbursement
or tax regulations.
6. That there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain. We further
assume that there are no regulations of any government entity to
control or restrict the use of the property unless specifically
referred to in the report.
7. That there are no significant changes in the supply and demand
patterns as indicated in this report. It is emphasized that this is
not a study of market feasibility, rather an appraisal of the property
under market conditions as observed as of the date of our market
research. These market conditions have been researched and are
believed to be correct; however, the appraisers assume no liability
should market conditions materially change because of unusual or
unforeseen circumstances.
The following limiting conditions are submitted with this report:
1. All of the facts, conclusions and observations contained herein are
consistent with information available as of the date of valuation.
Value is affected by economic conditions, local and national. We,
therefore, assume no liability for any unforeseen precipitous change
in the economy.
8
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
2. The valuation applies only to the property described herein and was
prepared for the function stated in this report and should not be used
for any other purpose.
3. The appraisers have made no survey of the property. Any and all maps,
sketches and site plans are assumed to be correct, but no guarantee is
made as to their accuracy.
4. Information furnished by others is presumed to be reliable, and where
so specified in the report, has been verified; but no responsibility,
whether legal or otherwise, is assumed for its accuracy, and it cannot
be guaranteed as being certain.
5. The signatories herein shall not be required to give testimony or
attend court or be at any governmental hearing with reference to the
subject property unless prior arrangements have been made with
Valuation Counselors Group, Inc.
6. Disclosure of the contents of this report is governed by the bylaws
and regulations of professional appraisal organizations. Neither this
report nor any portions thereof shall be disseminated to the public
through public relations media, news media, advertising media, sales
media or any other public means of communication without the prior
written consent and approval of the appraisers and Valuation
Counselors Group, Inc.
7. No responsibility is taken for changes in market conditions after the
date of valuation, or for the inability of the property owner to find
a purchaser at the appraised value.
8. The legal description shown herein has been included for the sole
purpose of identifying the subject property. The figures have not
been verified by a licensed surveyor or legal counsel and should not
be used in any conveyance or any other legal document.
9. We were not aware of and the report does not take into consideration
the possibility of the existence of asbestos, PCB transformers, or
other toxic, hazardous, or contaminated substances and/or underground
storage tanks containing hazardous material. The report does not
consider the cost of encapsulation treatment or removal of such
material. If the client/property owner has a concern over the
existence of such conditions in the subject property, the appraisers
consider it imperative to retain the services of a qualified engineer
or contractor to determine the existence and extent of such hazardous
conditions. Such consultation should include the estimated cost
associated with any required treatment or removal of hazardous
material.
9
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
10. The report, the final estimate of value and the prospective financial
analyses included herein are intended for your information. Neither
this report nor its contents nor any reference to Valuation Counselors
Group, Inc. may be included or quoted in any offering circular,
registration statement, prospectus, sales brochure, appraisal, loan
document or other document without Valuation Counselors Group, Inc.'s
prior written permission.
11. The estimate of the market value stated herein is the value of the
subject property as a single entity. No consideration was given to a
bulk sale or group purchase of properties. In the event that this
appraisal is used as a basis to set a market price, no responsibility
is assumed for the seller's inability to obtain a tenant or purchaser
at the value reported herein.
12. It is assumed that there are no outstanding issues related to fraud
and abuse statutes under the Medicare/Medicaid program which would
impact value.
13. It is assumed that the business has an adequate insurance plan.
14. A copy of this report and the working papers from which it was
prepared will be kept in our office files for eight years.
10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value March 1, 1994
Date of Inspection March 17, 1994
Property Identification Mountain View Nursing Center
Property Location Sand Hill Road, Greensburg, Westmoreland County, Pennsylvania
Assets Appraised Tangible and Intangible Assets
Interest Appraised Leased Fee Estate
Number of Licensed Beds 137
Land Size 8.238 Acres
Improvement Description One story plus partial basement, Class C, masonry and wood framed nursing home consisting
of 52,727 gross square feet, built in 1971 with an addition in 1981.
INDICATIONS OF MARKET VALUE
Income Approach $9,800,000
Market Approach N/A
Cost Approach $4,800,000
Final Estimate of Market Value $9,800,000
REASONABLE EXPOSURE TIME Twelve Months
11
SUBJECT PHOTOGRAPHS
(Photo)
EAST VIEW LOOKING WEST
(Photo)
REAR VIEW, WEST LOOKING EAST
12
SUBJECT PHOTOGRAPHS
(Photo)
INTERIOR - HALLWAY
(Photo)
INTERIOR - PATIENT ROOM
13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property, known as Mountain View Nursing Center and doing business
as Integrated Health Services at Mountain View, consists of a 137 licensed bed
nursing home located at Sand Hill Road, in Greensburg, Westmoreland County,
Pennsylvania. For title reference and legal description, see the Exhibit
Section. The improvement consists of a 52,727 square foot building located on
an 8.238 acre site.
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the leased fee
estate as of the date specified within this report.
FUNCTION OF THE APPRAISAL
This report is to be used in connection with financing.
SCOPE OF THE APPRAISAL
This appraisal engagement has been conducted using applicable standard
appraisal techniques and in conformity with the Uniform Standards of
Professional Appraisal Practice (USPAP) as set forth by the Appraisal
Foundation. This appraisal entails the collection, analysis and description of
data pertaining to physical, legal and economic conditions that affect the use
and value of the subject property and any other relevant data that would
pertain to the appraisal of a healthcare facility. In our valuation of the
subject property, we have conducted the Income and Cost Approaches to value.
The Income Approach entailed a present value analysis of lease income. The
Cost Approach involved the estimation of the depreciated replacement cost of
the improvements based upon national cost publications, which was added to the
value of the land as if vacant. The Market Approach has not been utilized due
to the lack of transfers involving similar leased fee estate interests in
nursing facilities. We believe the lease payments include a return on assets
beyond the real
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14
INTRODUCTION
property. In accordance with Uniform Standards of Professional Appraisal
Practice (USPAP), an attempt must be made to estimate the value of the real
property from the value of other assets which may exist. However, an attempt
to ascertain the contribution of the various assets to income is nearly
impossible since the value of the tangible property is highly interrelated to
the business enterprise. Accordingly, as allowed by the departure provision of
USPAP, we have not provided an allocation of value between the real property
and other assets which may exist.
ASSET RIGHTS APPRAISED
The property rights appraised herein is the leased fee interest in the
property.
The interest is defined by the Appraisal Institute as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with
the right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession
at the termination of the lease.
EFFECTIVE DATE OF THE APPRAISAL
The date of this appraisal is March 1, 1994.
DEFINITION OF VALUE
For the purpose of this report, 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, 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:
a) buyer and seller are typically motivated;
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15
INTRODUCTION
b) both parties are well informed or well advised and each
acting in what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
d) payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
e) 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.
COMPLIANCE
To the best of our knowledge, the analyses, opinions and conclusions that were
developed in this report, have been prepared in conformity with the Uniform
Standards of Professional Appraisal Practice (USPAP) of the Appraisal
Foundation and the Appraisal Institute.
COMPETENCY
From our understanding of the assignment to be performed, which we have
addressed in the Scope of this Appraisal, it is our opinion that we are fully
competent to perform this appraisal, due to the fact that:
a. The appraiser has full knowledge and experience in the
nature of this assignment.
b. All necessary and appropriate steps have been taken in order
to complete the assignment competently.
c. There is no lack of knowledge or experience that would
prohibit this assignment from being completed in a
professional competent manner or where an unbiased or
misleading opinion of value would be rendered.
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16
INTRODUCTION
SALE HISTORY
The real estate currently has as its fee titled owner a corporation by the name
of Mountain View Nursing Center, Inc. The operating company is called
Integrated Health Services, Inc., who has operated the facility since 1986.
Integrated Health Services, Inc. has advised us that the facility will be sold
in the immediate future to Crescent Capital for $9,775,000 and subsequently
leased to Integrated Health Services, Inc. pursuant to a ten year lease with
two optional ten year renewal periods. We have also been advised us that the
lease will be based on an initial rent of $1,061,000 with additional rent
provisions based upon general factors including the consumer price index and
net operating income levels of the facility.
According to public records, the subject property has not transferred ownership
in the past five years.
REASONABLE EXPOSURE TIME
Reasonable Exposure Time, for the purpose of this report, is defined as: "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."(1)
-------------------------
(1) Uniform Standards of Professional Appraisal Practice, 1993 Edition,
Washington, DC: The Appraisal Foundation, 1991, page 63 (SMT-6).
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17
INTRODUCTION
The concept of reasonable exposure encompasses not only adequate, sufficient
and reasonable time, but also adequate, sufficient and reasonable effort. This
concept also takes into consideration the type of property being appraised,
supply/demand conditions as of the effective date of the appraisal and the
analysis of historical sales information (sold after exposure and after
completion of negotiations between the seller and buyer). The reasonable
exposure period is, therefore, a function of price, time and use, not an
isolated estimate of time alone.
Reasonable exposure time is always presumed to precede the effective date of
the appraisal and differs for various types of real estate and under various
market conditions. Our estimate of exposure time is, therefore, based on the
subject property's determined Highest and Best Use as a healthcare facility in
a market where there is evidence of demand for such services.
The estimate of reasonable exposure time is not a predication, but rather, is
only a judgment made by the appraiser based on market conditions preceding the
effective date of the appraisal.
Based upon the determination of the subject's Highest and Best Use, with
consideration given to the overall condition and physical characteristics of
the subject, it is estimated that a reasonable exposure time preceding the
actual sale of the property and thus implicit in our value estimate is twelve
months.
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18
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
INDUSTRY OUTLOOK
The elderly care segment of the healthcare industry includes such providers as
nursing homes, personal care facilities and retirement centers. Demand for
elderly care services continues to increase with the growth of the elderly aged
segment of the United States population.
The sixty-five and over aged portion of the population is forecasted to grow an
additional 11% between 1990 and 1995. During 1990, the elderly aged sixty-five
years and over comprised 13.3% of the total United States population, as
compared to 11.3% as of the 1980 census report. Furthermore, the sixty-five
and over aged portion of the population is forecasted to increase to 14.1% of
total population by 1995.
United States population statistics and forecasts are provided on the following
table.
FORECASTED UNITED STATES POPULATION
(THOUSANDS)
PERCENT CHANGE
1980 1990 1995 1980 TO 1990 1990 TO 1995
Total U.S. 226,546 249,958 260,788 10.3% 4.3%
65 Years + 25,549 33,184 36,828 29.9% 11.0%
Percent of 11.3% 13.3% 14.1%
Total U.S.
75 Years + 9,969 14,257 16,935 43.0% 18.8%
Percent of 4.4% 5.7% 6.5%
Total U.S.
Source: Donnelley Demographics
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19
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Another factor which has contributed to growth in demand for elderly care is
the increased life expectancy of the United States population.
As the average life expectancy for both men and women continues to increase, as
illustrated on the following table, the probability of an elderly person
requiring some form of healthcare service also increases.
UNITED STATES LIFE EXPECTANCY
MEN WOMEN
AT BIRTH AT AGE 65 AT BIRTH AT AGE 65
1900 45.6 11.4 49.1 12.0
1910 50.2 11.4 53.7 12.1
1920 54.6 11.8 56.3 12.3
1930 58.0 11.4 61.4 12.9
1940 60.9 11.9 65.3 13.4
1950 65.3 12.8 70.9 15.1
1960 66.6 12.9 73.2 15.9
1970 67.1 13.1 74.8 17.1
1980 69.9 14.0 77.5 18.4
1990 72.3 15.1 79.9 19.9
2000E 73.4 15.7 81.1 20.8
Source: United States Bureau of the Census
7
20
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
While most major healthcare providers will benefit from the graying of America,
the nursing home industry will be the chief beneficiary. According to the
United States Commerce Department, long-term care spending for nursing home and
home care services during the 1988 to 2003 period is expected to increase twice
as quickly as the rate of growth of those receiving the services. Demand for
retirement centers and personal care facilities has also increased due to the
aforementioned demographic factors coupled with the fact that the majority of
young couples are employed full-time and unable to care for elderly parents at
home.
During the late 1980s, the growth of total facilities or number of units per
facility in the retirement industry increased significantly. In a survey
conducted by Contemporary Long-Term Care (CLTC), 72% of the fifty largest
retirement operators reported an increase in their total number of facilities
in 1988. The growth had slowed in 1989 with 55.6% of fifty-four operators
surveyed reporting increases in total facilities and number of units per
facility. The average number of units per facility increased from 84 to 122
units in the same survey.(2)
Growth in the retirement industry is forecasted to continue, but at a much
slower rate in regards to the growth exhibited during the 1980s.
United States healthcare costs have increased dramatically over the past few
years. From 1950 to 1990 healthcare expenditures have grown from 4.4% of gross
national product to 12.2% and are forecasted to grow to 16.4% by the year 2000.
Total federal government outlays for healthcare have increased from $24 per
capita in 1965 to $753 in 1990, with forecasts to increase to $1,810 by the
year 2000. Furthermore, health insurance premiums had increased 1,195% between
1970 and 1990.
- -------------------------
(2) "Growth Slows But Continues", CLTC, June, 1990.
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21
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
The current fiscal policy of the United States Government has left many states
responsible for providing services the federal government previously provided.
This has led to a fiscal crisis in many states. The direct impact of these
changes is seen in reduced Medicaid budgets. The problem is compounded by the
fact that Medicaid has grown faster than any other major state expenditure.
Currently, Medicaid covers slightly less than 50% of total patient days in
nursing homes. In 1989 Medicaid accounted for an average of 14% of the state
budget, compared to 9% a decade ago. A recent survey by the National
Association of State Budget Office indicates that a total of twenty-eight
states face budget deficits and thirty-two states expect Medicaid spending to
exceed current forecasts.(3)
Escalating costs and the faltering reimbursement system has forced many states
to consider decertification and withdrawal from the program. In addition,
long-term care providers in several states have turned to the courts in an
effort to receive fair reimbursement from the Medicaid system. Consequently,
widespread healthcare cost containment may exhibit downward pressure on the
value of long-term care facilities with a high reliance on Medicaid patients.
Long-term care by source of funds from 1960 to 2000 is presented on the
following table.
- -------------------------
(3) Pallarito, Karen, "Budget Deficit Threats to Shut
Out Medicaid Benefits", Modern Healthcare, April 22,
1991.
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22
COST APPROACH
Land Sale Number 2 Photograph
(Photo)
23
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Long-Term Care Expenditures Aggregate, Per Capita and Percent Distribution,
By Source of Funds: Selected Calendar Years 1960-2000
THIRD PARTIES
GOVERNMENT
DIRECT ALL PRIVATE OTHER STATE
PATIENT THIRD HEALTH PRIVATE AND
YEAR TOTAL PAYMENTS PARTIES INSURANCE FUNDS TOTAL FEDERAL LOCAL MEDICARE MEDICAID
1960 100.0% 80.0% 20.0% --- 1.0% 1.0% 1.0% 1.0% --- --
1970 100.0% 46.9% 51.0% 0.0% 4.1% 46.9% 28.6% 18.4% 4.1% 28.6%
1980 100.0% 43.5% 56.5% 1.0% 3.0% 52.5% 30.5% 22.0% 2.0% 48.5%
1985 100.0% 49.5% 51.6% 1.2% 2.1% 48.4% 28.4% 20.0% 1.8% 44.6%
1990 100.0% 45.0% 55.0% 1.1% 1.9% 52.2% 32.4% 19.8% 4.7% 45.4%
1995 100.0% 42.9% 57.0% 1.3% 1.9% 53.8% 33.1% 20.7% 3.7% 48.1%
2000 100.0% 45.0% 55.0% 1.7% 2.0% 51.4% 31.7% 19.6% 3.4% 45.8%
Note: 0.0 denotes values less than $50 million.
Source: Health Care Financing Administration. Office of the Actuary.
Office of National Health Statistics. Baltimore, Maryland: December, 1991.
Forecasts: Sonnefeld, Sally; Waldo, Daniel; Lemieux, Jeffrey; McKusick, David,
Projections of National Health Expenditures Through the Year 2000. Health Care
Financing Review, Fall 1991, Vol. 13, No.1. Health Care Financing
Administration. Baltimore, Maryland: October, 1991.
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24
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
As indicated, healthcare facilities currently derive most of their revenue from
government sources such as Medicaid, Medicare and the Veterans Administration
and from private sources such as personal funds and insurance programs. The
Medicaid program, which accounts for over 45% of the United States nursing home
revenues, typically pays rates significantly lower than Medicare or private
rates.
Medicaid covers the skilled or intermediate nursing home costs of qualified low
income residents for an unlimited period. Medicare only pays part of the
skilled nursing home costs incurred by qualified residents during a limited
period. In addition, nursing homes must meet strict federal guidelines in
order to qualify as Medicare certified for reimbursement. Therefore, only a
low percentage of nursing home patients qualify for Medicare coverage relative
to Medicaid. However, nursing homes that attract a higher percentage of
Medicare or private pay patients typically have higher operating margins than
similar facilities with a higher Medicaid census.
Competition is increasing among nursing homes for the more lucrative Medicare
and private pay patients. For example, many nursing homes have been developing
new services such as multiple levels of care, retirement facilities,
Alzheimer's and ventilator programs and other specialized services for niche
markets.
In addition, as acute care hospitals have experienced lower reimbursement
levels and declining occupancy rates, many have expanded into skilled nursing
services to boost revenues. According to a 1986 survey conducted by the
American Hospital Association, Chicago, approximately 19% of hospitals own or
operate skilled nursing facilities, 14% operate swing bed programs (use empty
acute care beds for long-term care) and 12% own or operate intermediate care
facilities. Competition from swing bed programs is likely to intensify as more
hospitals qualify for Medicare reimbursement under this program.
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25
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Although nursing facilities benefit from increasing demand and changes in
Medicare reimbursement, widespread healthcare inflation concerns will keep
downward pressure on nursing home revenues. Federal, state and local
governments, along with insurance companies and other third party payers, are
continually seeking ways to contain healthcare expenditures. The focus on
acute care cost containment is spreading to all types of healthcare facilities.
CONCLUSION
Although the healthcare industry, as a whole, has experienced good growth over
the past several years, the news is not all good. An estimated thirty-eight
million Americans have no health insurance coverage at all with children
accounting for 36% of this total. Currently, as many as another fifty million
Americans are believed to have inadequate coverage. The percentage of total
healthcare costs of the United States gross national product (GNP) continually
increases every year and it is estimated that it will consume 28% of the GNP by
the year 2010.
There are currently a number of proposals before the Senate and House of
Representatives' committees to change the current structure of the healthcare
industry. Some of these proposals call for a form of national healthcare with
others leaning towards a heavily regulated form of a free-enterprise system.
All the proposals currently being debated have a great number of controversial
issues, which makes the passage of a new healthcare system very unlikely in the
foreseeable future. This plan and the speculation around it suggests the
possible merging of the Medicare and Medicaid programs, putting spending
capitalizations at an 8% level, making greater utilization of managed care and
managed competition and the creation of a National Health Care Board to oversee
the creation of Healthcare Insurance Purchasing Cooperatives (HIPCs). It is
generally felt by the lawmakers like Congressman Stark, that there will be no
interference or cutbacks on long-term care. It is believed that the current
problems will reach a severe crisis level before some action by Congress will
occur.
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26
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Escalating costly regulation and inadequate reimbursement from Medicaid and a
shortage of qualified nurses have squeezed industry profits. In an effort to
remain profitable, many providers have diversified into medical specialty
units, which tend to be more profitable than typical nursing care. In any
case, the elderly care segment of the healthcare industry continues to evolve
in response to profound social and economic influences.
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27
STATE NURSING HOME ENVIRONMENT
Operating currently in the state of Pennsylvania are over 98,800 licensed and
approved nursing home beds in more than 950 nursing homes. The overall
occupancy in the state is estimated to be almost 95%. This percentage can be
compared with the national average of approximately 94%. In addition, Medicaid
patients represent at least 58% of the overall occupancy in Pennsylvania and at
least 70% of the national average.
CERTIFICATE OF NEED OVERVIEW
The Certificate of Need (CON) program was created by the national Health
Resource Planning Act of 1974, which mandated a system of state and local
agencies for the purpose of conducting CON reviews and other duties intended to
control the costs and accessibility of healthcare services. In 1980, the
Reagan Administration took the position that the program was ineffective with
respect to controlling healthcare costs and felt that the state should run the
programs. Although Congress re-authorized the program in 1981, federal funding
was reduced and states were given more control over the planning process. In
1986, Congress voted to end federal involvement in state planning activities.
The Federal Government repealed the CON system, effective January 1, 1987.
By the start of the third year without federal mandates or the assistance of
the CON program, a total of thirty-three states and the District of Columbia
still enforced these regulations. During the past three years, several trends
have developed according to the Healthcare Financing Administration's Office of
Intergovernmental Affairs. States have:
1) Liberalized their requirements by increasing expenditures
thresholds;
2) Streamlined review processes and expedited procedures for
selected projects;
3) Exempted certain types of projects from the review process; and
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STATE NURSING HOME ENVIRONMENT
4) Expanded CON regulations to include specialized nursing
services to include substance abuse treatment, inpatient
psychiatric services and trauma care.
Supporters of this deregulation contend that eliminating market barriers would
expand the number of available nursing beds, improve access in under-served
communities and hold down costs as providers compete with others to attract
patients. Opponents of decontrolled healthcare contend that bed supply would
increase, but in a haphazard manner that favored urban areas. Also, a rapid
increase in capacity would bankrupt the Medicaid program, as excess capacity
would drive up the cost of care.
Although the deregulation of the CON program greatly affected the nursing
industry, the most significant factor which is critical to the survival of
these facilities is the need for innovation. Such factors include
modernization of facilities, marketing to the community, specialization,
personal care of assisted units and contracting with hospitals.
Currently, the state of Pennsylvania still enforces a CON program. Under this
system, state and local planning agencies conduct CON reviews of capital
expenditures and develop state health plans which perform other functions to
ensure access to healthcare services and control rising costs.
For Pennsylvania, a CON is currently required for any new facility and for
expenditures above $2,000,000. Existing nursing homes are permitted every two
years to add up to the lesser of ten beds, or 10% of its certified bed
capacity. In this regard, a CON is a valuable nursing home asset since it is a
prerequisite to opening and operating a facility.
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29
STATE NURSING HOME ENVIRONMENT
BED NEED METHODOLOGY
In May 1991, Pennsylvania adopted a new bed methodology which estimates need by
county. Bed need estimates are based on the number of dependent elderly, their
forecasted population (starting with 1995 planning target year) and the
percentage of the dependents needing institutional care.
PENNSYLVANIA'S NEW CASE-MIX PAYMENT SYSTEM
In order to improve the state's payment system, Pennsylvania plans to change,
effective January 1, 1994, from the current methodology to a classification
methodology. So that this classification methodology is consistent with the
goals of the Omnibus Budget Reconciliation Act of 1987 (OBRA '87), the
Pennsylvania Medical Assistance Program has developed a prospective case-mix
payment system for nursing facilities.
The basis of this proposed case-mix payment system is the Research Utilization
Groups, Version III (RUG III), which will be used to classify residents into
case-mix indices from which rates will be based. Residents will be classified
as to their functions in critical areas of daily living. Activities of daily
living include bathing, eating and transfer. For those residents requiring
higher degrees of care, the facility will receive a greater reimbursement under
the new system. Classifications range from heavy rehabilitation to reduced
physical functioning. Each nursing facility will receive an overall case-mix
based upon the complexity of care offered. This new system is designed to
encourage facilities to take on patients requiring higher levels of care
through rewards for quality resident services and resident rehabilitation.
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STATE NURSING HOME ENVIRONMENT
Capital costs will be reimbursed under a new fair rental payment system. Each
facility in Pennsylvania has been appraised by December 1992 and a depreciated
replacement cost will have been determined. This value is added to a current
land value plus an equipment value to come up with an overall value of the
facility. A yield factor is then applied to impute a fair rental payment
amount. This payment will replace reimbursement for depreciation, interest,
real estate taxes and return on equity.
The new case-mix payment system, as implemented by the Pennsylvania Department
of Public Welfare, has been designed to be budget neutral, however, individual
providers may fair better or worse when the system takes effect. It is unclear
how the subject property will be affected by the change in the Medicaid system,
and our valuation is based upon existing reimbursement methodology.
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31
REGIONAL AND MARKET ANALYSIS
The subject is located in Unity Township, Greensburg, Westmoreland County,
which is situated in the western/central portion of Pennsylvania. The closest
major city is Pittsburgh, which is thirty-one miles west of Greensburg, the
county seat. Major north/south highways serving the area include U.S. 22 and
U.S. Highways 66, 819 and 119, and Routes 30, 136 and 130 which run east/west.
The major occupations within the county include clerical and sales at 13% of
the total work force. Professional, technical and officials/business
owners/administrators each account for 10% of the work force, or 22,000
employees each.
The top seven major employers in the county are Westmoreland Hospital, West
Penn Power Company, Bell of Pennsylvania, Super Value Retail Support Center,
PPG Industries, Stuarts Drug and Surgical Supply and Westinghouse ABB Power T
and D Circuit Breaker Division.
Healthcare facilities in the county include the Westmoreland Hospital, which
contains 294 beds. The county also contains seventeen nursing homes with an
excess of 220 beds. The largest facility is Westmoreland Manor with 540 beds.
A total of thirteen of these facilities have 100 beds or more.
According to Donnelley Demographics, the county's 1991 population is estimated
at 368,762 residents, a slight decrease from the 1980 level of 392,294
residents. In 1991, the elderly population comprised 16.5% of total the
population, or 60,839 residents. This represents a 25% increase from the
number of elderly residents in 1980 which was 48,711 residents, or 12.4% of the
total population.
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32
REGIONAL AND MARKET ANALYSIS
The county's 1996 total population is forecasted to decrease by approximately
3% to 357,757 residents. However, the county's elderly population (age
sixty-five and over) is expected to exhibit an increase of approximately 1.9%
over the 1991 level to 61,997 residents. This upward shift in elderly
residents from 16.5% to 17.3% of the population suggests increased demand for
long-term care services within the county.
Westmoreland County exhibited an average household income of $34,576 in 1991 as
compared with $19,973 in 1980. Average household income is expected to
increase to $41,139 in 1996, representing a growth of 18.9% over a five year
period. The average household income of residents sixty-five and over was
$39,769 in 1991 and was expected to increase to $40,886 in 1996.
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REGIONAL AND MARKET ANALYSIS
The following tables present selected demographic data for Westmoreland County.
An area map follows.
TOTALS AND MEDIANS
1980 1991 % CHANGE 1996
CENSUS ESTIMATE 1980 TO 1991 FORECAST
Total Population 392,294 368,762 -6.0% 357,757
Total Households 139,233 139,642 0.3% 139,825
Household Population 387,739 364,207 -6.1% 353,202
Average Household Size 2.8 2.6 -6.3% 2.5
Average Household Income $19,973 $34,576 73.1% 41,139
Median Household Income $17,955 $28,114 56.6% $32,800
Source: Donnelley Demographics
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REGIONAL AND MARKET ANALYSIS
POPULATION BY AGE
1980 CENSUS 1991 ESTIMATE 1996 FORECAST
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
AGE
Total 392,294 100% 368,762 100% 357,757 100%
0 - 4 24,007 6.1% 23,050 6.3% 21,373 6.0%
5 - 9 27,062 6.9% 22,851 6.2% 22,105 6.2%
10 - 14 32,085 8.2% 21,784 5.9% 22,006 6.2%
15 - 19 33,605 8.6% 24,639 6.7% 21,618 6.0%
20 - 24 31,009 7.9% 29,064 7.9% 23,901 6.7%
25 - 29 30,133 7.7% 29,486 8.0% 27,121 7.6%
30 - 34 28,990 7.4% 27,322 7.4% 28,201 7.9%
35 - 39 23,504 6.0% 26,737 7.3% 26,080 7.3%
40 - 44 20,425 5.2% 25,838 7.0% 25,435 7.1%
45 - 49 20,810 5.3% 21,486 5.8% 24,551 6.9%
50 - 54 24,558 6.3% 18,257 5.0% 20,255 5.7%
55 - 59 25,295 6.4% 17,703 4.8% 16,979 4.7%
60 - 64 22,100 5.6% 19,706 5.3% 16,135 4.5%
65 - 69 18,178 4.6% 19,590 5.3% 17,390 4.9%
70 - 74 12,827 3.3% 16,166 4.4% 16,470 4.6%
75 - 79 8,486 2.2% 11,895 3.2% 12,705 3.6%
80 - 84 5,291 1.3% 7,312 2.0% 8,480 2.4%
85 + 3,929 1.0% 5,876 1.6% 6,952 1.9%
less than 15 83,154 21.2% 67,685 18.4% 65,484 18.3%
65 + 48,711 12.4% 60,839 16.5% 61,997 17.3%
75 + 17,706 4.5% 25,083 6.8% 28,137 7.9%
Median Age 33.1 36.2 37.4
Median Age Adult 44.3 44.0 45.1
Population
Source: Donnelley Demographics
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REGIONAL AND MARKET ANALYSIS
AREA MAP
(MAP)
22
36
NEIGHBORHOOD AND SITE DESCRIPTION
NEIGHBORHOOD ANALYSIS
The subject property is situated on the west side of Sand Hill Road,
approximately six miles from Greensburg, the main business area. Access to the
property is very good via Route 30 to Sand Hill Road. Major arteries serving
the area include Route 30 and U.S. Highway 119, which lead to Pittsburgh to the
west and Harrisburg to the east.
The area consists mainly of farmland, single family residences, small local
businesses and the Westmoreland Mall.
SITE DESCRIPTION
The subject land consists of an 8.238 acre (358,847 square foot) tract located
on Sand Hill Road in Greensburg, Pennsylvania. The parcel is irregularly
shaped with an average depth of 500 feet and frontage on Sand Hill Road of 672
feet. The tract is generally very rolling with adequate drainage.
The site is not located in a floodplain area. Access to the site is good via
two entrance/exits along Sand Hill Road, which are asphalt paved with no curbs
or sidewalks. Adjoining the property to the north is vacant land and a mobile
home property, to the south is a very steep vacant ravine, to the east is Sand
Hill Road then several mobile homes and single family residences and to the
west is vacant land and a steep ravine. The only possible detriment to the
subject site is the large ravine which is a portion of the property. All
utilities are available to the subject site.
Overall, the site is functional, marketable and well suited for the current use
of the property as a skilled nursing home.
A location map and plot plan are provided on the following pages.
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37
NEIGHBORHOOD AND SITE DESCRIPTION
LOCATION MAP
(Map)
24
38
NEIGHBORHOOD AND SITE DESCRIPTION
PLOT PLAN
(Map)
25
39
NEIGHBORHOOD AND SITE DESCRIPTION
ZONING
The city of Unity in the past year has enacted zoning restrictions for the
development of land use. According to zoning officials, the subject property
is located in an R-1 (Residential) zoning classification. Permitted uses in
this classification include single family residences, farms, parks and
recreation facilities, cemeteries, schools and churches. Minimum lot sizes are
40,000 square feet and minimum lot widths are 125 square feet. Since the
subject property was constructed prior to the enactment of the current zoning
regulations, the current use of the subject is a permitted use due to it being
grandfathered.
REAL ESTATE TAX AND ASSESSMENT ANALYSIS
The subject property is referred to on the Greensburg tax map of Westmoreland
County as parcel number 61-18-00-0-256. The property has been assessed at
$36,100 for the land and $524,280 for the building for a total of $560,380.
The county tax assessor has assessed the property at market value in 1994 by
applying a multiplier of 3 to the assessed value. A total millage rate of
54.69 per $1,000 of assessed value is applicable to the subject property. This
can be broken out as follows:
14.99 for County Taxes
2.20 for Township Taxes
37.50 for School Taxes
Therefore, total real estate taxes due in 1994 are calculated as follows:
$560,380 x 54.69 / $1,000 = $30,647
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40
NEIGHBORHOOD AND SITE DESCRIPTION
IMPROVEMENTS DESCRIPTION
The subject site is improved with a one story plus partial basement nursing
home containing 44,064 square feet above grade and 8,663 square feet of
basement area for a total of 52,727 square feet. The structure is a Class C,
wood frame and load bearing masonry wall building in good condition and
constructed in 1971 with an addition in 1981. During 1993 and 1994 certain
areas of the facility were renovated. These renovations consisted of the
replacement of carpeting and vinyl tile in various areas and repainting and
wallpapering throughout hallways and patient rooms. A laundry lift was added
to a rear exterior walkway which was enclosed. The building is constructed of
perimeter concrete footings and piers with the basement wall being concrete
block. The exterior walls are primarily face brick over concrete block with
aluminum frame windows. The floor structure consists of concrete slab for
ground floor areas and wood beam with wood sheathing in the elevated areas
above the partial basement. The roofing system is wood joists with wood
sheathing and composition shingle roof covering.
Partitioning in the building is primarily drywall on wood studs with some areas
containing concrete block partitioning. Wall finishes are primarily painted
block, wallpaper or painted drywall with ceramic tile in the shower/tub rooms.
The building contains seventy patient rooms, three shower/tub rooms, dining
areas, lounges, main lobby, kitchen, administrative offices, nurses' stations,
etc. The ceilings are primarily suspended acoustical panels or painted
drywall. The floor coverings are primarily carpeting in the hallways, offices
and dining areas with vinyl asbestos tile in the patient rooms, quarry tile in
the kitchen and ceramic tile in the shower/tub rooms. Some areas have exposed
concrete.
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41
NEIGHBORHOOD AND SITE DESCRIPTION
Plumbing fixtures are standard including seventy-six water closets, seventy-six
lavatories, six tubs and three showers. The building contains a central
electric heating system which is further serviced by central roof top and
through-wall air conditioning units. Lighting is primarily fluorescent
fixtures. Other features include an emergency generator, a walk-in freezer, a
stone fireplace, entrance canopies and a dry and wet fire sprinkler system.
LAND IMPROVEMENTS
Land improvements consist primarily of asphalt paving, gravel, concrete
sidewalks and general landscaping.
A detailed description and component pricing of the cost to replace the
building and land improvements is included in the Exhibit Section.
EQUIPMENT DESCRIPTION
Typical patient rooms contain triple crank beds, wood high back chairs with
vinyl covering, wood dressers and nightstands and cubicle curtains. Most of
these items are original fixtures, however, approximately one-third of the beds
were purchased within the past year. The overall condition of the equipment
found at the subject is average when compared with other similar facilities
inspected by Valuation Counselors Group, Inc.
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HIGHEST AND BEST USE
The Appraisal Institute defines highest and best use as follows:
The most profitable, likely use to which a property can be put. The
opinion of such use may be based on the highest and most profitable
continuous use to which the property is adapted and needed, or likely
to be in demand in the reasonably near future. However, elements
affecting value which depend upon events or a combination of
occurrences, which, while within the realm of possibility, are not
fairly shown to be reasonably probable, should be excluded from
consideration. Also, if the intended use is dependent upon an
uncertain act of another person, the intention cannot be considered.
The use of the land which may reasonably be expected to produce the
greatest net return to land over a given period of time. That legal
use which will yield to land the highest present value, sometimes
called optimum use.
In estimating the highest and best use, there are essentially four states of
analysis:
1. POSSIBLE USE - Uses which are physically possible for the site
in question.
2. PERMISSIBLE USE (LEGAL) - Uses permitted by zoning and deed
restrictions on the site in questions.
3. FEASIBLE USE - Possible and permissible uses which will produce
a net return to the owner of the site.
4. MAXIMALLY PRODUCTIVE USE - Among the feasible uses, that use
which will produce the highest net return of highest present
worth.
The highest and best use of the land (site) as if vacant and available for use
may be different from the highest and best use of the property as improved.
This will be true when the improvement is not an appropriate use and yet makes
a contribution to total property value in excess of the site.
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43
HIGHEST AND BEST USE
The following conditions must be met in determining the highest and best use:
The use must be legal.
The use must be probable, not speculative or conjectural.
There must be a profitable demand for such use and it must return to
land the highest net return for the longest period of time.
In order for the subject site to fulfill its highest and best use, that use
must meet four criteria. It must be (1) physically possible, (2) legally
permissible, (3) financially feasible, and (4) maximally productive. These
criteria are further explained as follows.
PHYSICALLY POSSIBLE
The size, shape, location, utility availability and terrain impose
physical restraints upon the type of uses possible for the subject.
Any use incompatible with the utility capacity or constraints imposed
by the size, shape or terrain would not be considered physically
possible. As mentioned in the land description section of this
report, the subject is irregularly shaped and contains a gross land
area of 8.238 acres. All utilities are available at the site and all
required site improvements are in place. The physical characteristics
of the site in terms of size, shape and topography are favorable for
flexible development. Overall, the physical aspects of the site are
such that they do not impose any constraints which would prevent the
site from being developed to its highest and best use.
LEGALLY PERMISSIBLE
Uses of the land must be permitted by zoning and deed restrictions and
other legal considerations. The subject site is currently zoned R-1
(Residential) by Unity Township. Nursing home use is a legally
permitted use in this zoning designation. Thus, the present use of
the site for a nursing home is a legal use.
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44
HIGHEST AND BEST USE
FINANCIALLY FEASIBLE
Any use of the subject which provides a financial return to the land
in excess of that required to satisfy operating expenses, financial
expenses and capital amortizations is considered financially feasible.
It is our opinion that the subject's current use as a nursing home is
financially feasible based upon the historic financial performance of
the facility.
MAXIMALLY PRODUCTIVE
Among the feasible uses, that use which will produce the highest net
return at the highest present worth. The subject site is improved
with a licensed 137 bed nursing home. The improvements are in good
condition with a significant remaining economic life. Functional
utility of the structure meets the market standards expected of a
nursing home and demand for this type of development is evident in the
marketplace. Based upon the supply and demand characteristics of the
nursing home industry in Pennsylvania, it is our opinion that the
highest and best use of the property, as improved, is its current use
as the site of a nursing home.
On reviewing the conditions and criteria for establishing the highest and best
use of the subject, we have examined the market for the subject services and
the regional and local economy as well as the existing physical and zoning
characteristics of the site. Additionally, we have considered the quality and
condition of the subject improvements amendable for use as a nursing home.
Based upon our review and analysis of the subject market, it is our opinion
that the highest and best use of the site as vacant would be for healthcare
development such as the subject and as improved would be for the continuation
of its current use as that of a nursing home.
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VALUATION METHODOLOGY
There are three generally accepted approaches to estimate the value of an
asset, which are summarized as follows:
INCOME APPROACH: This approach translates earnings, or expected cash
flows, into an estimate of value. It is based upon the premise that
value is determined by the present value of all future expected
income. Thus, forecasted earnings are converted to value through the
application of discount or capitalization rates derived from the
investment market.
MARKET APPROACH: This valuation approach is based upon the comparison
of the subject to the sales of similar assets in the marketplace. Two
methods of estimating value via this approach are the Primary Sales
Comparison Approach and the Secondary Market Approach. The Primary
Sales Comparison Approach entails the analysis of direct asset
transfers, while the Secondary Market Approach involves the analysis
of multiples derived from equity transfers in public secondary markets
or exchanges.
COST APPROACH: This procedure provides an indication of the value of
an asset by reducing an estimate of the current cost to reproduce or
replace an asset by an estimate of accrued depreciation. Depreciation
includes physical deterioration, functional and external (or economic)
obsolescence.
In general, the Income Approach is the most reliable approach to value an
income producing property. It best considers the income potential and risk
characteristics specific to the subject property. The Market Approach has not
been applied due to the lack of transfers of leased facilities. Nursing homes
typically transfer in fee simple estate, with the assets of the operating
company included. The interest considered in this appraisal is that of a
leased fee estate, and we were unable to locate meaningful sales of similar
interests to compare to the subject. The Cost Approach has limitations due to
the difficulty in quantifying the depreciation and obsolescence in the assets.
The Income and Cost Approaches are presented on the following pages.
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46
INCOME APPROACH
The Income Approach gives consideration to the net income expectancy from
rental of the property, and to the capitalization of this income in accordance
with prevailing returns on properties or investments of similar risks to
determine the amount at which ownership would be justified by a prudent
investor. Since it is the purpose of this appraisal to estimate the market
value of the leased fee estate, the Income Approach is considered to be the
most reliable method of valuation. The first step involves the estimating of
the subject's potential gross income. For this, we deduct reasonable
allowances for expenses to arrive at the indicate net income which is
capitalized into the value estimate.
ESTIMATE OF GROSS INCOME
Integrated Health Services, Inc. has represented that this facility will be
sold to Crescent Capital and leased back to Integrated Health Services, Inc.
The facility, including land, buildings, equipment and furnishings, will be
leased to Integrated Health Services, Inc. for a ten year period, with two, ten
year renewal options. Although we have not been provided with a copy of the
final lease, Integrated Health Services, Inc. has provided us with a lease
synopsis which indicates that the base rent in the first year will be
$1,061,000. In the second and third forecast years, contract rent is adjusted
1% annually. In subsequent years, additional rent has been based upon the
terms of the lease contract which stipulates the subsequent annual increases
will be increased by the greater of 1) 1% of the then-current minimum rent, or
2) the lesser of either 3.75%, or the greater of either 5% of the incremental
net operating income (before corporate allocations), or 67% the consumer price
index from the preceding period.
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47
INCOME APPROACH
In our Discounted Cash Flow forecast, we have assumed an initial ten year
holding period, and have assumed that Integrated Health Services, Inc. will
exercise the two, ten year renewal options. Revenue has been estimated based
upon contract rent comprised of base rent plus additional rent, which we have
assumed to be at market. Because of the scarcity of arm's length leases on
nursing facilities and the multitude of adjustments which would be required to
equate a lease comparable to the subject, revenue has been forecasted based
upon contract rent.
The incremental net operating income factor is calculated based upon the
incremental performance of the most recently ended fiscal year as compared with
the preceding year. The increment is then multiplied by a factor of 0.05.
The lease is a net lease with the lessee responsible for operating expenses.
Management costs have been estimated at 4% of revenue. This charge considers
the cost of collection and accounting for rents. We have also estimated
nominal reserves for replacement at $100 per bed, increasing with inflation.
Total expenses in the first forecasted year are estimated at $57,240, or 5.4%
of revenue. Net income is estimated at $1,003,760 in the first forecasted
year, increasing to $1,229,281 by the tenth year. Schedules A-1 through A-5 in
the Addendum to this report present the subject's historic and prospective
occupancy, payor mix and operating performance of the operating business. The
subject's prospective performance has been estimated based upon information
from Management in conjunction with historic performance. The operating
performance of the business has been analyzed to gauge the potential of the
Company to cover its rent obligations and is a factor in estimating additional
rent. Forecasted net operating income of the business enterprise amounts to
1.6 times lease payments in the first forecasted year, which appears to provide
adequate coverage.
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48
INCOME APPROACH
DISCOUNT RATE CALCULATION
CAPITALIZATION PROCESS AND DISCOUNT RATE
As the annual cash flow and reversionary values are estimated ten years into
the future, it is necessary to discount these values into a present value
estimate. Present value is today's cash lump sum which represents the current
value of the right to collect the future payments and reversion. It is the
aggregate value of the discounted future payments and reversion.
The discount rate used must reflect a sufficient rate of return for a developer
or owner of property over the holding period. The rate must take into
consideration the time value of money and charges for holding costs. The rate
must also reflect an adequate rate of return for the risk involved when
compared to other types of investments.
When analyzing discount rates, it is important to realize that all investments
are in competition with each other for the investment dollar. The investor has
a choice of: (1) bank rate securities such as government bonds, industrial or
municipal bonds and debentures, (2) stocks and other securities, or (3)
selected enterprises or other real estate investments at varying rates of
return. The acceptable rate of return to the investor is affected by
considerations of risk, burden of management, degree of liquidity and other
factors (including personal preference). The analysis quite often follows the
historical summation of these factors, known as a "built-up" rate.
As an example, an adjustment for risk is added to a safe or minimum risk rate
as an increment to compensate for the extent of risk believed to be involved in
the use of the capital sum. Another adjustment is usually made of nonliquidity
due to the time required to realize cash from the resale of the property. The
resale period may vary with the general marketability of the type of property
and the amount of the cash investment required.
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49
INCOME APPROACH
The principle of discounting money to be received in the future is based upon
the fact that today's dollar can be invested to earn a return, while the
expected future dollar not yet generated, cannot. The discount rate must
reflect what is called the opportunity cost of capital. Thus, the investor is
compensated by the discount rate for the current lost opportunity in investing
in alternative assets.
In order to determine the appropriate rate, we have reviewed current monetary
rates as of March 1994.
The following table presents yield rates associated with various types of
government and corporate securities as indicated by the March 1, 1994 Wall
Street Journal.
YIELD RATES AS INDICATED BY THE MARCH 1, 1994
WALL STREET JOURNAL
SECURITY YIELD
Prime Rate 6.00%
Ten Year U.S. Treasury Bonds 6.14%
Corporate Bonds
Aaa, Aa 6.20% to 7.42%
A, Baa 6.52% to 7.58%
Ba, C 9.44%
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50
INCOME APPROACH
As indicated by the following survey conducted by Real Estate Research
Corporation, required rates of return for commercial grade real estate were
approximately 5.6% to 5.9% above year treasury bonds in the first two quarters
of 1993.
Real Estate vis-a-vis Capital Market Returns*
Fourth Third
Quarter Quarter
1993 1993
Real Estate Yield (%) 11.7% 12.0%
Moody's Aa Utilities (%) 7.0% 7.4%
Moody's Aaa Corporate (%) 7.0% 7.2%
10 Year Treasuries (%) 5.3% 5.7%
*This survey was conducted in October, 1993 and reflects desired
returns for fourth quarter 1993 investments.
Source: Real Estate Research Corporation
As the subject property would have less liquidity and more risk than commercial
grade real estate, it is reasonable to expect that the discount rate would be
higher than the real estate yields presented. Several factors which influence
the selection of a discount rate include the following:
o Currently, there are restraints on supply through
licensure requirements which alter normal economics;
and
o The value of the facility is highly related to the
operation of the business which is involved in the
provision of services such as healthcare, dietary and
housekeeping operations which entail a higher level
of Management expertise.
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INCOME APPROACH
Therefore, given the alternative investments available and taking into
consideration the risks associated with real estate development and the
realization of the additional rent revenue, we believe a 12.5% discount rate
for the subject is appropriate. This return is considered equivalent to
investments with comparable risks available today for the same time period.
FINAL CASH FLOW
The earnings and cash flow forecasts in this analysis only cover a ten year
period. In reality, the property will generate earnings and cash flow well
beyond the five year forecast period. Therefore, the value of this distant
cash flow stream, called a "reversion" value, must be estimated.
We have assumed that Integrated Health Services, Inc. will exercise the renewal
options after the initial ten year lease period. Therefore, the reversion
value has been estimated based upon the capitalization of net cash flow in
forecast year eleven. We have used a terminal capitalization rate of 10% in
calculating the reversion value. According to Real Estate Research
Corporation's Fourth Quarter 1993 Investor Survey, terminal capitalization
rates for multifamily housing averaged 9.4%. Since the risk associated with
the subject is believed to be similar but slightly above that on multifamily
housing, we have added a risk premium to the average terminal capitalization
rate exhibited by multifamily housing. The reversion value has been discounted
to present value at the discount rate of 12.5%.
38
52
INCOME APPROACH
INCOME APPROACH CONCLUSION
The sum of the annuity and reversion values estimated within the Discounted
Cash Flow Analysis represent the total value of the property. Based upon our
analysis, this value can be represented in the rounded amount of:
$9,800,000
=========
The following schedule presents the earnings forecast and Discounted Cash Flow
Analysis and indicated value.
39
53
INCOME APPROACH
SCHEDULE A
MOUNTAIN VIEW NURSING CENTER
DISCOUNTED CASH FLOW FORECAST
Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
REVENUE:
Minimum Rent $1,061,000 $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116
Additional Rent 10,610 10,716 29,006 29,784 30,582
--------------------------------------------------------------------------------------
TOTAL REVENUE $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116 $1,171,698
--------------------------------------------------------------------------------------
EXPENSES:
Management Fee: 42,440 42,864 43,293 44,453 45,645 46,868
Replacement Items 14,800 15,392 16,008 16,648 17,314 18,006
--------------------------------------------------------------------------------------
TOTAL EXPENSES 57,240 58,256 59,301 61,101 62,959 64,874
--------------------------------------------------------------------------------------
NET INCOME 1,003,760 1,013,354 1,023,025 1,050,231 1,078,158 1,106,824
DISCOUNT FACTOR 0.8889 0.7901 0.7023 0.6243 0.5549 0.4933
PRESENT VALUE 892,231 800,674 718,503 655,654 598,301 545,963
DISCOUNT RATE 12.5%
TERMINAL CAPITALIZATION RATE 10.0%
CONCLUSION OF VALUE
ANNUITY 5,957,547
REVERSION 3,886,121
==========
FIXED ASSET VALUE $9,843,668
Forecasted Forecasted Forecasted Forecasted Forecasted
Year 7 Year 8 Year 9 Year 10 Year 11
REVENUE:
Minimum Rent $1,171,698 $1,203,100 $1,235,343 $1,268,450 $1,302,444
Additional Rent 31,402 32,243 33,107 33,994 34,906
---------------------------------------------------------------------------------------
TOTAL REVENUE $1,203,100 $1,235,343 $1,268,450 $1,302,444 $1,337,350
---------------------------------------------------------------------------------------
EXPENSES:
Management Fee: 48,124 49,414 50,738 52,098 53,494
Replacement Items 18,727 19,476 20,255 21,065 21,908
---------------------------------------------------------------------------------------
TOTAL EXPENSES 66,851 68,889 70,993 73,163 75,402
---------------------------------------------------------------------------------------
NET INCOME 1,136,249 1,166,453 1,197,457 1,229,281 NET INCOME 1,261,948
CAP. RATE 10%
TERMINAL VALUE 12,619,482
DISCOUNT FACTOR 0.4385 0.3897 0.3464 0.3079 0.3079
PRESENT VALUE 498,202 454,619 414,846 378,552 REVERSION 3,886,121
DISCOUNT RATE
TERMINAL CAPITALIZATION RATE
CONCLUSION OF VALUE
ANNUITY
REVERSION
FIXED ASSET VALUE
40
54
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which the depreciated replacement cost of
the improvements and equipment is added. The replacement cost of the
improvements and equipment 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 Estimation of the replacement cost of the
improvements and equipment.
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
The appraised property consists of approximately 8.238 acres of land situated
along Sand Hill Road in Greensburg, Pennsylvania.
41
55
COST APPROACH
Land valuation, as reported herein, assuming the site 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; and when
necessary, due to a lack of other available data,
segregation of purchase price of improved properties.
The following six 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. To the best of our knowledge, all
property rights transferred were fee simple. The following sales, which were
verified by local brokers and members of the Appraisal Institute and by a
search of the land records of Westmoreland County, were considered arm's length
transactions and did not include any special or creative financing, except
where noted.
42
56
COST APPROACH
LAND SALE NUMBER 1
Location: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-094
Grantor: Walter Z. and Ann M. Dillon
Grantee: Keystone Coca-Cola Bottling Corporation
Date of Transaction: August 5, 1993
Deed Book/Page: 3189/247
Consideration: $240,000
Land Size: 9.7034 Acres
Zoning: R-1B (Residential - Single Family)
Price Per Acre: $24,730
Verified By: County Records
Comments: The site is currently improved with Coca-Cola Bottling Corporation. The parcel has approximately 426
feet of frontage on Georges Station Road and 466 feet of frontage on Donohoe Road. The topography is
level and sloping at the rear.
43
57
COST APPROACH
Land Sale Number 1 (Plat Map)
(Map)
44
58
COST APPROACH
Land Sale Number 1 Photograph
(Photo)
59
COST APPROACH
LAND SALE NUMBER 2
Location: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-196
Grantor: Westmoreland County Industrial Development Corporation
Grantee: C.C. Incorporated Development Company
Date of Transaction: December 20, 1993
Deed Book/Page: 3221/349
Consideration: $200,000
Land Size: 5.565 Acres
Zoning: IND (Industrial)
Price Per Acre: $35,939
Verified By: County Records
Comments: The site is currently being cleared for development of a structure. This parcel is located
approximately one-half mile off of U.S. Highway 30.
45
60
COST APPROACH
Land Sale Number 2 (Plat Map)
(Map)
46
61
COST APPROACH
LAND SALE NUMBER 3
Location: Unity Township, Westmoreland County,
Pennsylvania
Parcel Number: 61-19-00-0-164
Grantor: Keystone Waterproofing Company, Inc.
Grantee: Clyde W. Hood, John A. Onega and David C.
Hunter, Trustees of the Latrube Congregation of
Jehovah's Witness
Date of Transaction: September 10, 1991
Deed Book/Page: 3045/584
Consideration: $40,000
Land Size: 2 Acres
Zoning: R-4 (Apartment-Residential Use)
Price Per Acre: $20,000
Verified By: County Records
Comments: This parcel is currently improved with a
Jehovah's Witness Congregation.
47
62
COST APPROACH
Land Sale Number 3 (Plat Map)
(Map)
48
63
COST APPROACH
Land Sale Number 3 Photograph
(Photo)
64
COST APPROACH
LAND SALE NUMBER 4
Location: U.S. Highway 30, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-189
Grantor: Westmoreland Company (Formerly Westmoreland Hardware Company)
Grantee: Revest Properties
Date of Transaction: August 1, 1990
Deed Book/Page: 2963/84
Consideration: $275,000
Land Size: 7.1469 Acres
Zoning: B-3 (Highway Business)
Price Per Acre: $38,478
Verified By: County Records
Comments: This sale is currently improved with a Comfort Inn hotel. The topography is level and steep in
places.
49
65
COST APPROACH
Land Sale Number 4 (Plat Map)
(Map)
50
66
COST APPROACH
Land Sale Number 4 Photograph
(Photo)
67
COST APPROACH
LAND SALE NUMBER 5
Location: Integrated Drive, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-21-12-0-048
Grantor: William Buildings, Inc.
Grantee: I.H. of Locust Valley Road, Inc.
Date of Transaction: May 30, 1990
Deed Book/Page: 2947/296
Consideration: $175,000
Land Size: 5.208 Acres
Zoning: R-5 (Residential)
Price Per Acre: $33,602
Verified By: County Records
Comments: This parcel is improved with an Integrated Health Services at Laurel View.
51
68
COST APPROACH
Land Sale Number 5 (Plat Map)
(Map)
52
69
COST APPROACH
Land Sale Number 5 Photograph
(Photo)
70
COST APPROACH
LAND SALE NUMBER 6
Location: Ligonier Street, Derry Township, Westmoreland County, Pennsylvania
Parcel Number: 45-34-00-0-119
Grantor: Bruce and Sheryl Hershock, Rodger and Elizabeth Ann Searfuss and Arnold Roger and Theresa Wigle
Grantee: Loyalhanna Health Care Associates
Date of Transaction: September 13, 1990
Deed Book/Page: 2973/219
Consideration: $130,000
Land Size: 6.59 Acres
Zoning: N/A
Price Per Acre: $19,727
Verified By: County Records
Comments: This parcel is improved with Loyalhanna Health Care, which is a competitor of the subject property.
53
71
COST APPROACH
Land Sale Number 6 (Plat Map)
(Map)
54
72
COST APPROACH
Land Sale Number 6 Photograph
(Photo)
73
COST APPROACH
Summary of Sales
SALE SIZE PRICE PER
NUMBER DATE (ACRES) ZONING ACRE
1 08/93 9.7034 R-1B $24,730
2 12/93 5.5650 IN $35,939
3 09/91 2.0000 R-4 $20,000
4 08/90 7.1469 B-3 $38,478
5 05/90 5.2080 R-5 $33,602
6 09/90 6.5900 N/A $19,727
ANALYSIS
In analyzing the land sales, certain elements should be considered when making
adjustments to the price of each comparable property. The elements of
comparison are: 1) market conditions (time); 2) location; and 3) physical
characteristics.
MARKET CONDITIONS (TIME)
The condition of the market may change between the
time of sale and the date of the appraisal and
adjustments would have to be made to reflect the
market. Changed market conditions result from
various causes such as inflation, deflation, changing
demand, changing supply and changing land use
patterns. The tendency over time is for land values
to appreciate. Based on analysis of the recent
economic conditions of the region, there is evidence
that values have trended upward slightly. The supply
of vacant land is somewhat plentiful and demand was
considered average to good.
60
74
COST APPROACH
LOCATION
An adjustment for location may be required if the
locational characteristics of the comparable
properties are significantly different from those of
the subject. A property's location is analyzed in
terms of the relative time/distance relationship
between it and all likely destinations and origins.
The relationship is relative because the location of
a property can only be judged in relation to that of
others.
PHYSICAL CHARACTERISTICS
Physical characteristics differ between properties.
These differences may require a number of comparisons
and adjustments to the subject. An appraiser may be
required to judge the value that is added or lost by
the size and shape, corner influence, utilities, etc.
Size and shape can affect functional utility in
relation to optimum size and frontage to depth ratio.
The appraiser must also recognize that smaller tracts
of land typically sell for a higher unit price.
Typically, corner influence creates a higher unit of
value due to the frontage on two or more streets.
Also, the availability of utilities influences value.
No sale required an adjustment for property rights conveyed, financing, or
conditions of sale, as all were arm's length conveyances of the fee simple
estate with cash or conventional financing.
Land Sale Number 1 is located on Donohoe Road, Hempfield Township, and was
transferred on August 5, 1993. No adjustment was applied for market
conditions. This land sale contains 9.7034 acres and due to the similarity in
size to the subject property, an adjustment for size was not required. The
southern portion of the parcel is considered to be clear and level and has been
improved with the Coca-Cola Bottling Corporation manufacturing plant. Shape
and access features are considered to be comparable to the subject property,
therefore, adjustments for these physical attributes were not applied. Since
all utilities were available to the comparable, no adjustment was applied for
the factor of utilities.
56
75
COST APPROACH
Land Sale Number 2 was transferred on December 20, 1993 and did not require an
adjustment for market conditions. Land Sale Number 2, like Land Sale Number 1,
is located on Donohoe Road, approximately two and one-half miles northwest of
the subject property, requiring no adjustment for location. Typically, parcels
with smaller land areas sell for a higher unit price than a larger parcel of
land. Land Sale Number 2 contains 5.565 acres and a downward adjustment was
applied for its smaller size. The topography is level and is gently sloping at
the northerly portion of the parcel. Currently, the lot has been cleared and
is being developed with a one story structure. Shape and access features are
considered to be comparable to the subject property, therefore, an adjustment
for these attributes was not required. Since all utilities were available to
the comparable, no adjustment was applied for the factor of utilities.
Land Sale Number 3 was transferred on September 10, 1991 and, according to
local appraisers and real estate brokers, land values have increased due to the
migration of development easterly from Pittsburgh. A slight adjustment was
applied to the comparable for market conditions. Land Sale Number 3 is
situated approximately five miles southeast of the subject in Derry Township
and required an upward adjustment for its inferior location. The comparable
sale, which has been improved with a Jehovah's Witness Congregation, is
situated on a two acre parcel. A downward adjustment was applied for the
factor of size. Since the comparable contains only a two acre parcel, its
permissible uses are lessened. Therefore, an upward adjustment was applied for
the factor of utility.
Land Sale Number 4 was transferred on August 1, 1990 and required an upward
adjustment for market conditions for the increase in land values since the sale
date. This comparable, which is located on U.S. Highway 30, is in a highly
commercialized area and warrants a greater land value than a property located
off this major highway. Therefore, a significant downward adjustment was
applied for its superior location. This comparable land sale has been improved
with a Comfort Inn hotel. The improvements have been developed on level
terrain with the remaining excess having a relatively steep topography. An
upward
57
76
COST APPROACH
adjustment was applied for its inferior topography. This land sale contains
7.1469 acres and was considered to be comparable to the subject property,
therefore, an adjustment for land size was not applied.
Land Sale Number 5 was transferred on May 30, 1990 and required an upward
adjustment for market conditions. The comparable sale, located immediately off
U.S. Highway 30, is considered to be in a superior location to the subject
property, therefore, a downward adjustment was applied for location. The
comparable is considered to be level and gently sloping and is improved with an
Integrated Health Services at Mountain View facility. This comparable contains
5.208 acres and a downward adjustment was applied for its smaller land size.
Land Sale Number 6 was transferred on September 13, 1990 and an upward
adjustment was applied for market conditions. This comparable sale, located
approximately six miles northeast of the subject property in Derry Township, is
considered to be in an inferior location. An upward adjustment was applied for
location. The comparable has a similar level and gently sloping topography as
the subject property, therefore, no adjustment for topography was required.
Based upon the above analysis and conversations with local brokers and
authorities familiar with the subject real estate market, it is our opinion
that the subject 8.238 acres of land have a value equivalent to $25,000 per
acre, or the rounded amount of:
$206,000
=======
A land sales adjustment grid and comparable land sales map are provided as
follows:
58
77
COST APPROACH
Land Sales Adjustment Grid
CHARACTERISTICS SUBJECT SALE #1 SALE #2 SALE #3 SALE #4 SALE #5 SALE #6
----------------------------------------------------------------------------------------------------------------------------------
SALE PRICE/ACRE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
PROPERTY RIGHTS FEE SIMPLE SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
FINANCING NORMAL SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
CONDITION OF SALE NORMAL SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
MARKET CONDITIONS 0% 0% 5% 10% 10% 10%
ADJUSTED SALES PRICE $24,730 $35,939 $21,000 $42,326 $36,962 $21,700
LOCATION 0% 0% 20% -30% -10% 15%
PHYSICAL CHARACTERISTICS
TOPOGRAPHY 0% 0% 0% 10% 0% 0%
SIZE 0% -10% -10% 0% -5% 0%
ACCESS 0% 0% 0% 0% 0% 0%
UTILITY 0% 0% 10% 0% 0% 0%
NET ADJUSTMENTS 0% -10% 20% -20% -15% 15%
----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED SALES PRICE $24,730 $32,345 $25,200 $33,861 $31,418 $24,955
59
78
COST APPROACH
Land Sales Map
(Map)
60
79
COST APPROACH
BUILDING AND LAND IMPROVEMENTS VALUATION
The building and land improvements have been valued on the basis of replacement
cost less accrued depreciation. The cost new was estimated using cost factors
obtained from the calculation section of Marshall Valuation Service (MVS), a
nationally recognized cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The soft costs reflect such items as
legal and accounting fees, feasibility studies, architect's fees and plans,
test borings, appraisal fees, superintending, carrying costs and other
contingency costs. To these we have added an amount representing
entrepreneurial profit.
Entrepreneurial profit is a necessary element in the motivation to construct
the improvements and represents an additional amount a developer would expect
to receive for construction of a similar project. The amount of
entrepreneurial profit varies according to the economic conditions and type of
development, but typically ranges from 10% to 20% of total project costs. We
have contacted several developers, contractors and other familiar with real
estate construction. Although each project will vary and each developer
expects a different rate of return, most anticipate a return that falls in the
above stated range. Based on these conversations, we have estimated
entrepreneurial profit to comprise 20% of our estimate of the replacement cost
of the building.
A description and pricing of the cost to replace the building and land
improvements is included in the Exhibit Section of this report.
The overall cost for the subject building was estimated at $5,536,963 inclusive
of all soft costs and entrepreneurial profit. This figure is equivalent to
$105.01 per square foot of gross building area. The land improvements have
been estimated at $74,881.
61
80
COST APPROACH
Depreciation of a structure is its loss in value due to physical deterioration,
functional obsolescence and external (or economic) obsolescence. Economic life
is the period over which the improvements to the real estate 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 within
the property 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 and 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 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: Economic life is the period over
which improvements to real estate contribute to
property value. The economic life of a good quality
healthcare facility is typically forty-five to fifty
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.
In estimating the overall economic life of the improvements, data on economic
lives, published by Marshall Valuation Service and the American Hospital
Association were considered. 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.
62
81
COST APPROACH
In accordance with the guidelines of the MVS manual, it is estimated that the
building will have a total economic life of forty-five years. As stated
earlier, the subject property was constructed during 1971 with an addition in
1981 and renovations in 1993 and 1994. The subject, which has been well
maintained, was considered to be in good overall physical condition. We
estimate that the building has an effective age of twelve years, which equates
to a remaining useful life of approximately thirty-three years. The amount of
physical deterioration attributable to the building is calculated on an
economic age/life method, which is the ratio of the building's effective age to
its total economic life. Based on this premise, total physical deterioration
of 26.7% is imputed to the building.
As stated previously, the improvements have been well maintained, are in good
overall condition and are considered modern and functional in all respects. A
thorough inspection of the subject property revealed that, while typical wear
and tear for a building of this age has occurred, no significant items of
deferred maintenance were noted. Based on this knowledge, it is our opinion
that the subject does not suffer from functional obsolescence. Furthermore, it
is our opinion that the subject property does not suffer from any undue
economic obsolescence.
Based upon the previous analysis, total accrued depreciation from all causes of
26.7% is imputed to the subject building.
The elements that make up the land improvements have shorter economic lives
than that of the building. We have estimated the aggregate economic life of
these items to be twenty years with an effective age of twelve years, which
equates to an average remaining useful life of eight years. The amount of
accrued depreciation attributable to the land improvements has also been
calculated on an economic age/life basis, resulting in a 60% depreciation
estimate.
63
82
COST APPROACH
The estimate of the depreciated replacement costs of the building and land
improvements is presented as follows:
DEPRECIATED
REPLACEMENT REPLACEMENT
ASSET COST DEPRECIATION COST
Building $5,536,963 $1,478,369 $4,058,594
Land Improvements 74,881 44,929 29,952
TOTAL $5,611,844 $1,523,298 $4,088,546
EQUIPMENT VALUATION
Nursing home equipment includes, but is not limited to, items such as: all
patient room furniture; kitchen utensils, appliances, dinnerware and
accessories; office machines, desks, chairs and files; maintenance and
housekeeping machines and tools; laundry appliances; lounge furniture;
audio/visual equipment and chapel furnishings; nursing items including
monitoring devices, chart racks, medication carts; and items for physical
therapy including parallel bars, training steps, pulleys and hydrocollators.
Depreciated equipment values in nursing homes typically range from $2,000 to
$4,000 per bed. Generally the low end of this range represents equipment in
facilities which is either highly depreciated, low in quality or low in volume
due to smaller common areas and office space. A newer facility, or a facility
which has a high percentage of private patients and a location in an affluent
area, will generally have an equipment value at the high end of the range.
64
83
COST APPROACH
The patient rooms are equipped with triple crank beds, metal and laminated wood
overbed tables, wood bedside cabinets and bureaus and vinyl covered wood high
back side chairs. The quality of the equipment found at the subject is good.
Based on our experience, it is estimated that the value of the equipment in use
can be reasonably represented at $3,500 per bed, which when multiplied by 131
operating beds, indicates a market value for all equipment of:
$458,500
=======
CONCLUSION
Based upon the investigation, as previously defined, the results of the Cost
Approach, as of November 1, 1993 are reasonably represented as follows:
Land $ 206,000
Building 4,058,594
Land Improvements 29,952
Equipment 458,500
----------
TOTAL $4,753,046
ROUNDED $4,800,000
==========
65
84
CORRELATION OF VALUE
Each of the three traditional approaches to value have been considered, and we
have applied the Income and Cost Approaches. The Market Approach has not been
applied due to the lack of sales of similar leased fee estate interests as the
subject. While the approaches are independently developed, the same
fundamental principles of valuation and economics form the logical basis for
each approach. The indications of value by the two approaches are as follows:
Income Approach . . . . . . . . . . . . . . . . . . $9,800,000
Market Approach . . . . . . . . . . . . . . . . . . N/A
Cost Approach . . . . . . . . . . . . . . . . . . . $4,800,000
The Income Approach involved a detailed analysis of the earnings potential of
the property. The Income Approach best considers the physical characteristics,
earnings potential and risk specific to the subject entity. Because of the
limitations inherent in the Cost and Market Approaches, the value estimated by
the Income Approach was considered the best representation of value for the
subject.
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, in light of the complexity of estimating the
replacement cost and depreciation of the various components in this approach,
it is not necessarily the most reliable of the value estimates.
Based upon the analysis as presented in this report, it is estimated that the
market value of the leased fee interest in Mountain View Nursing Center, as of
March 1, 1994, can be represented in the rounded amount of:
$9,800,000
=========
66
85
CORRELATION OF VALUE
We certify that, to the best of our knowledge and belief...
o The statements of fact contained in this
report are true and correct, and that this
report has been prepared in conformity with
the Uniform Standards of Professional
Appraisal Practice of The Appraisal
Foundation and the Principles of Appraisal
Practice and Code of Ethics of the American
Society of Appraisers.
o 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.
o We have no present or prospective interest in
the property that is the subject of this
report; we have no personal interest or bias
with respect to the parties involved.
o The appraisal assignment was not based upon a
requested minimum valuation, a specific
valuation, or the approval of a loan.
o Our compensation is not contingent on an
action or event resulting from the analyses,
opinions or conclusions in, or the use of,
this report.
o John A. Van Havere has personally inspected
the property and Wade A. Collins and
Catherine M. Bernard have provided
professional assistance.
/s/ Wade A. Collins
- -------------------------------------------
Wade A. Collins, Vice President, Healthcare
Valuation Counselors Group, Inc.
/s/ Catherine M. Bernard
- -------------------------------------------
Catherine M. Bernard, Manager, Healthcare
Valuation Counselors Group, Inc.
/s/ John A. Van Havere
- -------------------------------------------
John A. Van Havere, Staff Appraiser
Valuation Counselors Group, Inc.
67