\n TABLE OF CONTENTS<\/p>\n Page
\n —-
\n
\nTransmittal Letter
\nAppraiser Certifications
\nStatement of Facts and Limiting Conditions
\nSummary of Salient Facts and Conclusions <\/p>\nINTRODUCTION 1
\n Property Identification 1
\n Purpose and Effective Date of the Appraisal 1
\n Function of the Appraisal 1
\n Scope of the Appraisal 1
\n Property Rights Appraised 2
\n Definition of Value 2
\n History of the Property 3
\n History and Nature of the Business Environment 3
\n Market Data – Metropolitan Birmingham 5 <\/p>\n
DESCRIPTIVE DATA 10
\n Neighborhood Analysis 10
\n Zoning 11
\n Real Estate Taxes and Assessments 11
\n Site Analysis 12
\n Building and Site Improvements 13 <\/p>\n
HIGHEST AND BEST USE 15 <\/p>\n
VALUATION SECTION 18
\n Valuation Methodology 18
\n Cost Approach 19
\n Direct Sales Comparison Approach 32
\n Income Approach 40 <\/p>\n
CORRELATION AND CONCLUSION 43 <\/p>\n
<\/c><\/s><\/caption>\n<\/table>\n
11
\n TABLE OF CONTENTS<\/p>\n
EXHIBIT SECTION<\/p>\n
Exhibit A – Professional Qualifications
\nExhibit B – Legal Description
\nExhibit C1 – Metropolitan Area Map
\nExhibit C2 – Neighborhood Map
\nExhibit D1 – Survey
\nExhibit D2 – Tax Plat Map
\nExhibit E – Land Sale Location Map
\nExhibit F – Building Floor Plans
\nExhibit G – Building Description
\nExhibit H – Land Improvements Description
\nExhibit I – Rent Comparable Location Map
\nExhibit J – Rent Comparables Summary
\nExhibit K – Subject Photographs
\n 12
\n INTRODUCTION<\/p>\n
PROPERTY IDENTIFICATION<\/p>\n
The subject of this appraisal is American Sports Medicine Institute Building
\nlocated at 1313 13th Street South in Birmingham, Alabama. The subject is a
\nthree-story building that is situated just east of the new HealthSouth
\nHospital. The property is identified by Jefferson County as tax parcel number
\n29-0-1-3-008-11.001. The property has a parking lot on its south end, with
\nparking spaces for 26 vehicles.<\/p>\n
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL<\/p>\n
The purpose of this appraisal is to estimate the market value of the real
\nproperty identified above. The effective date of valuation is September 29,
\n1993, the date of our last inspection.<\/p>\n
FUNCTION OF THE APPRAISAL<\/p>\n
The report is to be used for internal financial valuation purposes. The owners
\nare considering the sale of nine professional office buildings for the purpose
\nof establishing a real estate investment trust (REIT). The subject property
\nwould be included in that sale.<\/p>\n
SCOPE OF THE APPRAISAL<\/p>\n
This appraisal engagement includes all three of the standard valuation
\napproaches and is in conformity with the requirements of the Code of
\nProfessional Ethics and Standards of Professional Practice of the Appraisal
\nInstitute and Society of Real Estate Appraisers. The scope of our assignment
\nincluded collecting, verifying and analyzing market and property data
\napplicable to the three approaches and consistent with the property’s highest
\nand best use. The results of the three approaches are then reconciled into a
\nfinal value conclusion considering the relevancy and quality of data presented
\nin each of the approaches.<\/p>\n
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\n 13
\nPROPERTY RIGHTS APPRAISED<\/p>\n
The property right appraised herein is the Leased Fee Estate.<\/p>\n
“Leased Fee Estate” is:<\/p>\n
“an ownership held by the landlord with the right of use and occupancy
\n conveyed by lease to others; the rights of lessor (the leased fee
\n owner) and leased fee are specified by contract terms contained within
\n the lease.”<\/p>\n
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
\n Appraisal Institute].<\/p>\n
DEFINITION OF VALUE<\/p>\n
For the purpose of this valuation, “market value” is defined as follows:<\/p>\n
“The most probable price which a property should bring in a
\n competitive and open market under all conditions requisite to a fair
\n sale, the buyer and seller each acting prudently and knowledgeably,
\n and assuming the price is not affected by undue stimulus. Implicit in
\n this definition is the consummation of a sale as of a specified date
\n and the passing of title from seller to buyer under conditions
\n whereby:<\/p>\n
o Buyer and seller are typically motivated;<\/p>\n
o Both parties are well informed or well advised, and acting
\n in what they consider their own best interests;<\/p>\n
o A reasonable time is allowed for exposure in the open market;<\/p>\n
o Payment is made in terms of cash in U.S. dollars or in terms
\n of financial arrangements comparable thereto; and<\/p>\n
o The price represents the normal consideration for the
\n property sold unaffected by special or creative financing or
\n sales concessions granted by anyone associated with the sale.”<\/p>\n
[The Appraisal of Real Estate, p. 21, 10th Ed., published by The
\nAppraisal Institute].<\/p>\n
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\n 14
\nHISTORY OF THE PROPERTY<\/p>\n
HealthSouth Medical Center, Inc., acquired the assets of the South Highlands
\nHospital in November 1989 [Deed Book 3726\/Page 014]. A new main hospital
\nbuilding and the Alabama Rehabilitation Center were constructed in 1991. From
\n1990 through 1992, HealthSouth Medical Center acquired 15 parcels containing
\n1.7525 acres east of the existing hospital, and assembled and rezoned 1.0242
\nacres for the construction of the American Sports Medicine Institute (ASMI).
\nThe ASMI facility was constructed in late 1992 and early 1993. The top floor
\nof the facility is vacant, and the tenant finish work has not yet been
\ncompleted on this space.<\/p>\n
The subject professional building has reportedly not been marketed for sale and
\nis not currently under an agreement of sale. No other deed transfers were
\nnoted in the last three years. A title search is recommended for official
\ndetermination.<\/p>\n
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
United States Economic Performance and Outlook<\/p>\n
The value of the business enterprise value is influenced by potential returns
\navailable from alternative investments. These return expectations are affected
\nby economic conditions as they impact the ability of a business enterprise to
\ngenerate a return on its invested capital. Perhaps the most important economic
\nindicator affecting potential investor returns is the aggregate demand for
\ngoods and services. Aggregate demand is measured by a country’s Gross Domestic
\nProduct (GDP), which is the sum of all domestic expenditures for consumption,
\ngovernment services, and net exports.<\/p>\n
As of the valuation date, the United States economy is currently mired in a
\nperiod of slow economic growth. Gross Domestic Product (GDP) increased at a
\n2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
\nGDP was 0.7 percent and 1.6 percent, respectively, for the first and second
\nquarters of 1993, or an annualized rate of 1.1 percent.<\/p>\n
The components of GDP indicate that the economic recovery is affecting many
\nsectors of the economy. Personal consumption expenditures, which account for
\napproximately two-thirds of GDP, rose only 1.3 percent during the first half of
\n1993. Non-residential<\/p>\n
-3-
\n 15
\nFixed Investment advanced 2.2 percent and Residential Fixed Investment grew 1.7
\npercent. Federal Government Purchases declined (0.6%) over the same period.
\nFederal Government Purchases account for 7.2 percent of the total GDP, and this
\ndecline is limited to the rate of overall GDP growth.<\/p>\n
The value of the business enterprise value is also affected by the current and
\nexpected levels of inflation and interest rates. Inflation creates uncertainty
\nin the mind of investors as they attempt to estimate future investment returns.
\nThis uncertainty is incorporated into both the required return on equity and
\ndebt capital.<\/p>\n
The economic downturn has resulted in sharply lower inflation. The Consumer
\nPrice Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
\npercent increase during 1991. The CPI for 1993 is currently estimated at 3.3
\npercent. The GDP Deflator, a much broader price level index, ended 1992 with a
\n2.6 percent annual increase compared to a 4.0 percent increase during 1991.
\nThe GDP Deflator is currently estimated at 2.5 percent for 1993.<\/p>\n
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
\nresult of the recession. Interest rates, as represented by long-term Treasury
\nbond yields, declined approximately ten basis points compared to rates existing
\na year earlier. Long-term corporate bond rates have also decreased and the
\nFederal Reserve’s discount rate reductions have prompted commercial banks to
\nlower their prime lending rate to 6.0 percent. Selected monetary statistics
\nare presented in the following table.<\/p>\n
INTEREST RATES AND SELECTED STATISTICS<\/p>\n
JUNE 30, 1993 JANUARY 2, 1992<\/p>\n
Federal Fund Rate 3.0% 3.9%
\n 90-Day Treasury Bill Rate 3.1% 3.9%
\n 30-Year Treasury Bond 6.9% 7.5%
\n Aaa Bond Yield 7.4% 8.2%
\n Prime Rate 6.0% 6.5% <\/p>\n
-4-
\n 16
\nEconomic Outlook<\/p>\n
According to Value Line’s Quarterly Economic Review, dated June 30, 1993, the
\neconomic recovery is now two years old, but shows much slower growth than
\nnormal for a mature recovery. Among factors cited by Value Line for
\ncontributing to the slow growth are “high debt, stagnant personal income, low
\nconsumer confidence and a troubling unemployment rate”. Value Line’s Quarterly
\nEconomic Review identified the following estimates for selected economic
\nstatistics from 1993 to 1995.<\/p>\n
\n\n 1993 1994 1995
\n <\/p>\n Real GDP 2.7% 3.2% 3.3%
\n Personal Consumption Expenditures 2.8% 2.7% 2.5%
\n Federal Government Purchases (5.2%) (3.0%) (4.0%)
\n 30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
\n Prime Rate 6.0% 6.3% 6.7%
\n Consumer Price Index 3.5% 3.5% 3.6%
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
MARKET DATA – METROPOLITAN BIRMINGHAM<\/p>\n
Birmingham is recognized as a leading financial, transportation, communication,
\nmanufacturing, healthcare and distribution center for the southeast United
\nStates. The region’s central location within the state of Alabama has been a
\nmajor factor in its economic success.<\/p>\n
The Birmingham Metropolitan Statistical Area (MSA) consists of five counties
\nwith an estimated 1992 population of 917,100. This ranks the metropolitan area
\nas the 46th largest in the county. The larger 16-county primary market area
\ncontains a population of 1,341,500. A map of the Birmingham MSA is shown in
\nthe Exhibit Section of this report.<\/p>\n
Trends in population, housing, employment and income are contributing social
\nand economic forces that impact property values. Each of these elements is
\ndiscussed separately.<\/p>\n
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\n 17
\nPOPULATION<\/p>\n
Historical data and growth projections reflect the economic climate of an area
\nand have both a direct and indirect impact on property values. Table 1 shows
\nthe county population totals by decade. Table 1 also shows the annual
\npercentage increases in population for the individual counties in the
\nBirmingham MSA.<\/p>\n
The fastest annual population growth in the Birmingham MSA occurred in the
\ndecade of the 1980s. The rate of growth in the 1980s, however, was only 1.13
\npercent per year, compared to 2.0 percent to 3.0 percent per year for many
\nother large Southeast US metropolitan cities during the decade. The City of
\nBirmingham, in Jefferson County, and Walker County experienced population
\ndeclines during the most recent decade.<\/p>\n
TABLE 1
\n POPULATION BY COUNTY<\/p>\n
\n\n 1970 1980 1990
\n COUNTY CENSUS CENSUS CENSUS <\/p>\n
\n Blount 26,853 36,459 39,248
\n Jefferson 644,991 671,392 651,525
\n City of Birmingham* 300,910 286,799 265,968
\n Saint Claire 27,956 41,205 50,009
\n Shelby 38,037 66,298 99,358
\n Walker 56,246 68,660 67,670
\n TOTAL MSA 794,083 884,014 907,810 <\/p>\n * City of Birmingham included in Jefferson County totals.
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
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\n 18
\n AVERAGE PERCENTAGE INCREASE<\/p>\n
COUNTY 1970s 1980s 1990s <\/p>\n
Blount 3.58% 0.76% N\/A
\n Jefferson 0.41% -0.30% N\/A
\n Saint Clair 4.74% 2.14% N\/A
\n Shelby 7.43% 4.99% N\/A
\n Walker 2.21% -0.14% N\/A
\n TOTAL MSA 1.13% 0.27% 0.5% <\/p>\n
Source: Birmingham Area Chamber of Commerce<\/p>\n
Jefferson County, excluding the City of Birmingham, grew 1.18 percent per year
\nin population during the 1970s, but experienced little growth during the 1980s.
\nThe estimated population growth rate so far in the 1990s is still slow, but
\nfaster than experienced in the 1980s.<\/p>\n
HOUSING<\/p>\n
The growth in housing in the Birmingham MSA was also slow but stable during the
\n1980s. As was the case in other cities during the decade, much of the new
\nhousing occurred due to a decline in the average household size. In the
\nBirmingham MSA, there were 3.01 persons per household in 1970, compared to 2.41
\npersons per household in 1990.<\/p>\n
So far in the 1990s, single-family housing sales have been brisk, with record
\nsales in 1992 and thus far in 1993. The area ranks 48th in new homes built in
\n1993, with 3,510 new homes the first half of 1993. New apartment construction
\ntotaled over 6,000 units from 1987 through 1990, or an average of 1,545 per
\nyear. New multifamily units only totaled 40 in 1992 and 140 for the first six
\nmonths of 1993. Most of the new apartment construction has been concentrated
\nsouth of the City of Birmingham along the U.S. Highway 280 and U.S. Highway 31
\ncorridors.<\/p>\n
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\n 19<\/p>\n
Looking forward, the average household size is not expected to continue to
\ndecline indefinitely. The growth in housing, therefore, should equal the
\npopulation growth plus the replacement of obsolete housing.<\/p>\n
EMPLOYMENT<\/p>\n
In the 1980s, the average annual growth in employment in the MSA was 3,520,
\ncompared to 8,290 per year during the 1970s. So far in the 1990s, the region
\nis averaging 3,233 new jobs each year. The unemployment rate at the end of
\n1992 was 6.1 percent, compared to 7.3 percent and 7.4 percent for the state of
\nAlabama and the U.S., respectively.<\/p>\n
Table 2 shows the diversity in employment in the Birmingham MSA.<\/p>\n
TABLE 2
\n EMPLOYMENT BY SECTOR<\/p>\n
\n\n PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL
\nSECTOR LABOR DOLLARS ESTABLISHMENTS <\/p>\n
\nHealth Services 11.7% 6.5%
\nOther Services 14.0% 26.5%
\nManufacturing 15.7% 5.7%
\nConstruction 12.0% 8.8%
\nTransp., Comm. & Utilities 13.8% 3.6%
\nWholesale Trade 10.2% 9.5%
\nRetail Trade 9.8% 25.2%
\nFinance, Insurance, & Real Estate 9.1% 9.2%
\nMining & Agricultural 3.5% 1.4%
\nMiscellaneous 0.2% 3.6%
\nREGION 100.0% 100.0% <\/p>\nSource: Birmingham Chamber of Commerce
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
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\n 20
\nIn 1970, manufacturing accounted for 28.3 percent of the employment in the MSA.
\nBy 1991, manufacturing only accounted for 13.1 percent of the area’s
\nemployment. The manufacturing jobs have been replaced with service jobs. The
\nservice sector accounts for 25.4 percent of all jobs in 1991, versus 14.3
\npercent in 1970.<\/p>\n
As of April 1993, the largest employers in the Birmingham MSA are as follows:<\/p>\n
University of Alabama 15,696
\n U.S. Government 9,501
\n South Central Bell 7,450
\n State of Alabama 6,304
\n Birmingham City Schools 4,733
\n Alabama Power Company 4,611 <\/p>\n
INCOME<\/p>\n
Jefferson County and the Birmingham MSA are very representative of the average
\nper capita income and average household income in the United States. Table 3
\nbelow shows the area’s income averages compared to the entire U.S.<\/p>\n
\n\n TABLE 3 <\/p>\n PERCENT PERCENT
\n AVERAGE PER OF U.S. AVERAGE HOUSEHOLD OF U.S.
\n COUNTY CAPITA INCOME AVERAGE INCOME AVERAGE <\/p>\n
\n Blount $13,135 70% $27,219 77%
\n Jefferson $18,624 100% $34,235 97%
\n St. Clair $13,056 70% $26,750 76%
\n Shelby $15,935 85% $44,813 115%
\n Walker $14,556 78% $26,585 75%
\n MSA $17,479 94% $34,315 100%
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nJefferson County has approximately the same per capita income and household
\nincome as the national average.<\/p>\n
In summary, metropolitan Birmingham has experienced a slow but stable growth
\nrate in recent years. Its economic base is diverse. National trends of a
\nlower manufacturing work force and lower household size have also been the
\nexperience in Birmingham.<\/p>\n
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\n 21
\n DESCRIPTIVE DATA<\/p>\n
NEIGHBORHOOD ANALYSIS<\/p>\n
The subject neighborhood is identified as the “Southside” area of Birmingham.
\nThis area is just south of the Central Business District (CBD) of Birmingham
\nand east of the Red Mountain Expressway. This neighborhood is bounded on the
\nnorth by the University of Alabama at Birmingham (UAB), on the east by the Red
\nMountain Expressway (U.S.Highway 31), on the south by Red Mountain with the
\nfamous Vulcan Statue, and on the west by Interstate 65. A map of the
\nneighborhood is located in the Exhibit Section.<\/p>\n
The Southside includes many of the city’s old restored homes. The
\nHighland\/Five-Points area has undergone considerable renovation, and is
\nbecoming a restaurant and entertainment center. The subject medical office
\nbuilding, which is part of the HealthSouth Medical Center, is located
\none-quarter-mile west of the Highland\/Five-Points area, and just north of Red
\nMountain. The upscale residential communities of Homewood and Mountain Brook
\nare located just south and east of the Southside. The property is situated at
\n1313 13th Street South. The block bounded by 13th Place South, 12th Avenue
\nSouth and 13th Street South contains the subject building. East and south of
\nthe property are primarily older residential areas. The HealthSouth Medical
\nCenter and the HealthSouth Professional Condominium Building are situated to
\nthe west of the property. Some homes have been converted to commercial uses
\naround the hospital. A few neighboring parcels have been redeveloped with
\nsmall apartment buildings, including the site just south of the property.<\/p>\n
North of the HealthSouth Medical Center is UAB, which is reportedly now the
\nsecond largest university in Alabama. The university has been growing rapidly
\nand has absorbed most of the land uses in a six by fifteen block area. The UAB
\nMedical Center is considered by some to be in the same class as the Mayo Clinic
\nin some medical research fields.<\/p>\n
In summary, the neighborhood is an older residential area that is undergoing
\nrenovation and restoration. Development in the area is being driven primarily
\nby hospital growth which includes the subject HealthSouth Medical Center, the
\nUAB Medical Center and St. Vincent Medical Center. Although medical service
\nis the focus of new development, new retail, restaurant and residential
\ndevelopment is also active in the area.<\/p>\n
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\n 22
\nZONING<\/p>\n
The subject property is zoned “COI, Conditional Office and Institutional
\nDistrict”, by the City of Birmingham. According to the City zoning
\nrequirements, the office and institutional district provides “for the orderly
\narrangement of institutional, clerical and administrative space”. Permitted
\nuses include public, semi-private or private office; public or semi-private,
\nreligious, educational or charitable institutions; and, other similar uses
\nconsistent with this zoning code’s purpose and surrounding uses. This zoning
\nshall not include properties with industrial characteristics, communal living
\nfacilities or correctional institutions.<\/p>\n
The subject’s “conditional” zoning provided for the specific medical services
\nproperty that was constructed on the site. The owners of the building were
\nreportedly granted setback and parking variances prior to the construction of
\nthe building. Since the site plan was approved prior to construction, and the
\noccupancy permit received after construction, it is assumed that the property
\nconforms to all the required conditions of zoning. The zoning variance may
\nhave provided for an easement with the hospital for additional parking spaces
\non the north side of the property. A letter of zoning compliance from the City
\nof Birmingham is recommended for an official determination regarding any zoning
\nconformity issues.<\/p>\n
REAL ESTATE TAXES AND ASSESSMENTS<\/p>\n
The subject property is situated in the City of Birmingham, and subject to the
\ntaxing authority of the City and Jefferson County. Commercial properties in
\nthe City and County are assessed at 20 percent of tax-appraised value for tax
\npurposes. The subject’s tax-appraised values and assessed values are
\nsummarized as follows:<\/p>\n
Tax-Appraised Assessment
\n Market Value Values
\n ———— ———-
\n Land $ 192,000 $ 38,400
\n Improvements 2,147,980 429,596
\n ———- ——–
\n Total $2,339,980 $467,996<\/p>\n
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\n 23
\nThe 1993 millage rate is $69.50 per $1,000 of assessed value. The 1993 taxes
\nare calculated as follows:<\/p>\n
$467,996\/$1,000 x $69.50 = $32,526<\/p>\n
SITE ANALYSIS<\/p>\n
The subject site is rectangularly-shaped with frontage of 240 feet on the east
\nside of 13th Street South and 240 feet along the west side of 13th Place South.
\nThe subject site is 185.9 feet deep between the two streets. It contains
\n44,616 square feet, or 1.0242 acres. A survey showing the site containing
\n48,001 square feet is included in the Exhibit Section. The subject site is
\nthis survey site excluding 3,385 square feet that is now a hospital parking lot
\non the north side of the building. This survey is the subject property,
\nexcluding 3,385 square feet that is now a hospital parking lot on the north
\nside of the building.<\/p>\n
A legal description of the 48,001 square foot site was provided to the
\nappraisers and is included in the Exhibit Section. A current survey and legal
\ndescription of the subject 44,616 square feet was not available to the
\nappraisers at the time of this report. We reserve the right to modify our
\nreport if the actual acreage is found to vary significantly from the 44,616
\nsquare feet.<\/p>\n
The topography of the site slopes slightly downward from the parking lot on its
\nsouth end to its north end adjoining the hospital parking lot. The front and
\nmain entrance to the building is on the first or ground floor. Entrance to the
\nbuilding from the south end parking lot is on the second floor of the building.
\nThe subject building is located on a hill and does not contain any flood plain.<\/p>\n
Utilities serving the site include water, sewer, telephone, gas and
\nelectricity. Police services and fire protection are located in the
\nneighborhood.<\/p>\n
Other site improvements consists of general landscaping, asphalt paving,
\nconcrete paving and curbing, some shrubs and general signage. The parking lot
\nto the north of the building contains 26 parking spaces, including two handicap
\nspaces.<\/p>\n
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\n 24
\nWe are not aware of any detrimental easements or encroachments encumbering the
\nsite. Further, we assume that the subject site is not encumbered with
\ndetrimental easements or encroachments. A copy of a Jefferson County tax plat
\nmap is included in the Exhibit Section.<\/p>\n
To our knowledge, no environmental study has been conducted on the subject
\nsite. As appraisers, we are not qualified to detect hazardous materials.
\nConsequently, our report assumes that there are no environmentally hazardous
\nmaterials in the site or building that would adversely affect the subject
\nproperty’s value.<\/p>\n
BUILDING AND SITE IMPROVEMENTS<\/p>\n
The ASMI Building was constructed in 1992. It contains 30,144 gross square
\nfeet and 27,800 leasable square feet on three floors. The rentable area
\nexcludes the mechanical rooms and vertical penetrations (stairwells, elevator
\nshafts). The building area by floor is shown on floor plans included in the
\nExhibit Section of this report.<\/p>\n
The building is a three-story, reinforced concrete and steel structure
\nbuilding, with a dryvit and brick veneer exterior. The entire building is
\nsprinklered. The building has a metal deck roof structure, with a waterproof
\nmembrane roof and large-stone gravel covering. Ceiling heights are
\napproximately nine and one-half feet on the first floor and nine feet on the
\nsecond and third floors. Ceiling finishes consists of acoustical ceiling tiles
\nand recessed fluorescent lighting and cone directional lights. The interior
\nwalls are wall paper on gypsum board over metal studs.<\/p>\n
Air conditioning is supplied via Trane packaged units on each floor. A
\ngas-fired Teledyne boiler provides heated air to the building. A natural gas
\nemergency generator is located in the back of the building. The second floor
\nof the building contains a computer room with raised floors.<\/p>\n
The interior floors are mostly carpeted, with some vinyl and ceramic tile in
\nthe lab and bathroom areas. Windows and doors are metal framed, and interior
\ndoors are solid-core wood. The first floor contains the lobby, office and
\npatient rooms, a laboratory area and a two-story gymnasium or rehab area. The
\nsecond floor contains a library, a conference room, offices, a staff lounge and
\na television studio.<\/p>\n
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\n 25
\nA detail description of the building and site improvements are included in the
\nExhibit Section of this report.<\/p>\n
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE<\/p>\n
The building is new and in good condition. There is no deferred maintenance,
\nfunctional or economic obsolescence. The top floor of the building contains
\n3,091 gross square feet and 2,607 net leasable square feet. The tenant finish
\nwork has not yet been completed on this space, and the floor is currently
\nvacant. Since the master lease provides for HealthSouth guaranteeing income on
\nthis space, this report assumes that HealthSouth will complete the tenant
\nfinish work prior to prospective sale to the REIT.<\/p>\n
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\n 26
\n HIGHEST AND BEST USE<\/p>\n
The Appraisal Institute defines “highest and best use” as follows:<\/p>\n
“The reasonably probable and legal use of vacant land or an improved
\n property, which is physically possible, appropriately supported,
\n financially feasible, and that results in the highest value”<\/p>\n
[The Appraisal of Real Estate, Page 45, 10th Edition published by The Appraisal
\nInstitute].<\/p>\n
The four categories of highest and best use analysis are:<\/p>\n
1. Physically Possible – Uses which are physically possible for
\n the site and improvements being analyzed.<\/p>\n
2. Legally Permissible – Uses permitted by zoning and deed
\n restrictions applicable to the site and improvements being
\n analyzed.<\/p>\n
3. Financially Feasible – This step identifies if the physically
\n possible and legally permitted alternatives produce a net
\n income equal to or greater than the amount needed to satisfy
\n operating expenses.<\/p>\n
4. Maximally Productive – This step clarifies which of the
\n financially feasible alternatives provides the highest value
\n consistent with the rate of return warranted by the market for
\n a particular use.<\/p>\n
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
\nAS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
\nare discussed as follows using the four categories of highest and best use.<\/p>\n
As Vacant<\/p>\n
The purpose of this analysis, given the site is vacant or can easily be made
\nvacant, is to determine if something should be constructed on the site, and, if
\nso, what should be constructed on the site.<\/p>\n
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\n 27
\nPHYSICALLY POSSIBLE<\/p>\n
The size and shape of the subject site is adequate for the development of a
\nnumber of alternative uses including small residential, commercial,
\noffice\/institutional, industrial and special-purpose properties. The site
\npossesses good access and visibility. The size of the parcel would preclude
\nany large developments.<\/p>\n
LEGALLY PERMISSIBLE<\/p>\n
As stated earlier in the Zoning section of this report, the property is
\ncurrently zoned “COI, Conditional Office and Institutional”. Permitted uses in
\nthis general zoning category vary widely. Potential legal uses would include
\nsome retail and restaurants, office\/institutional, hotels, hospitals and other
\nmedically-oriented uses. The subject’s conditional zoning provided for the
\nconstruction of the subject medical facility, with variances for setbacks and
\nparking received prior to construction.<\/p>\n
Surrounding uses include the hospital, other professional office uses, some
\napartments and some old single-family residential properties. These use
\npatterns would likely preclude industrial, retail or future single-family
\ndevelopment on the site.<\/p>\n
FINANCIALLY FEASIBLE<\/p>\n
Having established that the site is physically suited for and legally
\nrestricted to office\/institutional development, the next consideration is
\neconomic feasibility. Financially feasible uses for the site, if vacant, are
\nthose uses that would generate an economic return to the land. New hospital
\nrelated development on the west side of the building indicates that new
\ndevelopment is financially feasible. HealthSouth Medical Center, UAB Medical
\nCenter and St. Vincent Medical Center have all recently built new medical
\noffice facilities.<\/p>\n
MAXIMALLY PRODUCTIVE<\/p>\n
The maximally productive use is a financially feasible use that would produce
\nthe greatest land value. Office\/institutional use is physically possible and
\nlegally permissible, and new development is financially feasible. Based on
\nthis analysis, the current highest and best use of the land, if vacant, would
\nbe for office\/institutional development based on the growth needs of the
\nhospital.<\/p>\n
-16-
\n 28
\nAs Improved<\/p>\n
The subject site is currently improved with a 27,800 rentable square foot
\nprofessional building and associated site improvements. The purpose of this
\ndiscussion is to determine whether to leave the improvements as they are, to
\nmodify the improvements or to remove the improvements.<\/p>\n
PHYSICALLY POSSIBLE<\/p>\n
It would obviously be physically possible to leave the improvements as they
\nare, to demolish the existing improvements and replace them with new
\nimprovements, or to modify existing improvements. The improvements were
\nrecently constructed and are considered functional.<\/p>\n
LEGALLY PERMISSIBLE<\/p>\n
The building, as improved, is assumed to be a legal conforming use, since the
\nproperty was recently constructed and received an occupancy permit. Under the
\ncurrent zoning, the property could remain as it is, be torn down or renovated.<\/p>\n
FINANCIALLY FEASIBLE<\/p>\n
The highest and best use of the land, if vacant, was to develop with an office\/
\ninstitutional use based on the adjacent hospital’s growth needs. Of the
\nphysically possible and legally permissible changes that could be made to the
\nexisting facility, demolishing the building would significantly reduce the
\ncurrent asset value, and would not be financially feasible. The only
\nfinancially feasible use of the existing improvements is it current use as
\nmedical office space.<\/p>\n
MAXIMALLY PRODUCTIVE<\/p>\n
The maximally productive use for the existing property is the financially
\nfeasible use that produces the greatest property value. The exist use was the
\nonly financially feasible use. The highest and best use, as improved, is the
\nproperty’s current use.<\/p>\n
-17-
\n 29
\n VALUATION SECTION<\/p>\n
VALUATION METHODOLOGY<\/p>\n
There are three principal methods to estimate the market value of the assets of
\nthe subject property. These are summarized as follows:<\/p>\n
COST APPROACH: This method is based on the principle of substitution,
\n whereby no investor would prudently pay more for a property than it
\n costs to buy land and build a comparable new building. The market
\n value is estimated by calculating the replacement costs of a new
\n building and subtracting all forms of depreciation and obsolescence
\n present in the existing facility. This provides a depreciated value
\n of the subject improvements if replaced new. The estimate of the
\n current value of the subject land is then added to provide a market
\n value of the property.<\/p>\n
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
\n says that market value can be estimated as the cost of acquiring an
\n equally desirable substitute property, assuming no costly delay in
\n making the substitution. This method analyses the sales of other
\n comparable improved properties. Since two properties are rarely
\n identical, the necessary adjustments for differences in quality,
\n location, size, services and market appeal are a function of appraisal
\n experience and judgment.<\/p>\n
INCOME APPROACH: This method is based on the principle of
\n anticipation, which recognizes that underlying value of the subject
\n property can be estimated by its cash flow or stream of earnings.
\n This approach simulates the future earnings for the property, and
\n converts those earnings into a present market value estimate.<\/p>\n
Consideration has been given to each of the three methods to arrive at a final
\nopinion of value. The application of each approach to value is further
\ndiscussed in the appropriate sections which follow.<\/p>\n
-18-
\n 30
\n COST APPROACH<\/p>\n
In the Cost Approach, the subject property is valued based upon the market
\nvalue of the land, as if vacant, to which is added the depreciated replacement
\ncost of the improvements. The replacement cost new of the improvements is
\nadjusted for accrued depreciation resulting from physical deterioration,
\nfunctional obsolescence, and external (or economic) obsolescence.<\/p>\n
The cost analysis involves three basic steps:<\/p>\n
o Land value estimate.<\/p>\n
o Estimated replacement cost of the improvements.<\/p>\n
o Estimation of the accrued depreciation from all causes.<\/p>\n
The sum of the market value of the land and the depreciated replacement cost of
\nthe improvements and equipment is the estimated market value via the Cost
\nApproach.<\/p>\n
Land Valuation<\/p>\n
Land valuation, assuming the site is vacant, is based upon the following steps:<\/p>\n
o A comparison with recent sales and\/or asking prices for
\n similar land.<\/p>\n
o Interviews with reliable real estate brokers and other
\n informed sources who are familiar with local real estate
\n activity.<\/p>\n
o Our experience in estimating land values.<\/p>\n
The following sales are located within the general market area of the subject
\nproperty and are considered to be representative of market activity and
\nconditions as of the valuation date. Unless otherwise indicated, the sales
\ninvolved arms-length transactions that conveyed a fee simple interest, and only
\nreal property was included in the transactions.<\/p>\n
-19-
\n 31
\nLand Comparable Number 1<\/p>\n
\n
\nParcel Number: 29-01-3-008-7<\/p>\nLocation: East side of 13th Street South across from the new Alabama Sports Medicine and Orthopedic
\n Center and the new HealthSouth Hospital.<\/p>\n
Size: 7,000 square feet<\/p>\n
Sale Date: April 29, 1993<\/p>\n
Deed Book\/Page: 4544\/195<\/p>\n
Grantor: Randall J. Westbrook<\/p>\n
Grantee: HealthSouth Medical Center, Inc.<\/p>\n
Sale Price: $135,000<\/p>\n
Price Per Square Foot: $19.29<\/p>\n
Terms of Sale: All Cash<\/p>\n
Shape: Rectangular<\/p>\n
Zoning: Office\/Institutional<\/p>\n
Utilities: All utilities are available.<\/p>\n
Comments: This parcel was part of 15 parcels assembled from 1990-1992 for the construction of the
\n Sports Medicine Institute and additional parking. The average price for the 15 parcels
\n was $18.16 per square foot. The Grantor in this transaction is an employee of the
\n Grantee that acquired the property on July 10, 1992, from Dwain Pitts, et al, for the
\n same price [Deed Book 4313\/Page 978].
\n<\/c><\/s><\/table>\n
-20-
\n 32
\nLand Comparable Number 2<\/p>\n
\n
\nParcel Number: 29-01-3-010-4<\/p>\nLocation: West side of 12th Street South adjacent to an existing parking lot across from the old
\n entrance to the HealthSouth Medical Center.<\/p>\n
Size: 8,160 square feet<\/p>\n
Sale Date: April 29, 1993<\/p>\n
Deed Book\/Page: 4544\/197<\/p>\n
Grantor: Vicki E. Owens<\/p>\n
Grantee: HealthSouth Medical Center, Inc.<\/p>\n
Sale Price: $66,000<\/p>\n
Price Per Square Foot: $8.09<\/p>\n
Terms of Sale: All Cash<\/p>\n
Shape: Rectangular<\/p>\n
Utilities: All utilities are available.<\/p>\n
Comments: This parcel was purchased for future parking needs by the hospital. The hospital
\n purchased the property based solely on land value and considered the forty year old house
\n on the site to be only a temporary use until additional parking is needed. The Grantor
\n in this transaction is an employee of the Grantee that acquired the property on October
\n 30, 1992 from Robert Vests for the same price [Deed Book 4410\/Page 819].
\n<\/c><\/s><\/table>\n
-21-
\n 33
\nLand Comparable Number 3<\/p>\n
\n
\nParcel Number: 29-01-3-005-3<\/p>\nLocation: Northeast corner of 12th Street South and 11th Avenue South, one block north of the
\n HealthSouth Medical Center.<\/p>\n
Size: 45,600 square feet<\/p>\n
Sale Date: November 13, 1990<\/p>\n
Deed Book\/Page: 3972\/250<\/p>\n
Grantor: Eleventh Avenue United Methodist Church<\/p>\n
Grantee: HealthSouth Medical Center, Inc.<\/p>\n
Sale Price: $1,500,000<\/p>\n
Price Per Square Foot: $32.89<\/p>\n
Terms of Sale: All Cash<\/p>\n
Shape: Rectangular<\/p>\n
Zoning: Office\/Institutional<\/p>\n
Utilities: All utilities are available.<\/p>\n
Comments: This parcel was a church before being sold to HealthSouth. Part of the improvements have
\n been removed and the site is used as overflow parking by the hospital. The remainder of
\n the building is scheduled to be removed in the near future.
\n<\/c><\/s><\/table>\n
-22-
\n 34
\nLand Comparable Number 4<\/p>\n
\n
\nLocation: Northeast corner of 17th Street and 11th Avenue approximately one-quarter mile south of
\n the University of Alabama Medical Center and one-half-mile northeast of the subject.<\/p>\nSize: 16,000 square feet<\/p>\n
Sale Date: January 2, 1990<\/p>\n
Deed Book\/Page: 3951\/388<\/p>\n
Grantor: Jo Anne Jackson<\/p>\n
Grantee: Board of Trustees of University of Alabama<\/p>\n
Sale Price: $240,000<\/p>\n
Price Per Square Foot: $15.00<\/p>\n
Terms of Sale: All Cash<\/p>\n
Shape: Rectangular<\/p>\n
Zoning: Office\/Institutional<\/p>\n
Utilities: All utilities are available.<\/p>\n
Comments: This parcel contains an old doctor’s building that is boarded up and no longer used. The
\n building does not contribute any value.
\n<\/c><\/s><\/table>\n
-23-
\n 35
\nLand Comparable Number 5 – Current Listing<\/p>\n
\n
\nLocation: Northwest corner of 19th Street and 5th Avenue South, just north of the University of
\n Alabama Medical Center (UAB).<\/p>\nSize: 56,000 square feet<\/p>\n
Owner: Mr. Hill<\/p>\n
Asking Price: $3,080,000<\/p>\n
Price Per Square Foot: $55.00<\/p>\n
Shape: Rectangular<\/p>\n
Zoning: M-1 Light Industrial, but permitted for the construction of an 11-story, 220,000 square
\n foot office building.<\/p>\n
Utilities: All utilities are available.<\/p>\n
Comments: This vacant parcel is across from UAB and a high rise apartment building that is
\n currently under construction. The owner has been offered approximately $35 per foot.
\n<\/c><\/s><\/table>\n
-24-
\n 36
\nA summary of the land sales and listing is shown as follows:<\/p>\n
SUMMARY OF LAND COMPARABLES<\/p>\n
\n\n LAND SALE SIZE PRICE
\n COMP LOCATION DATE (SF) PER SF <\/p>\n
\n 1 13th Street South 04\/93 7,000 $19.29
\n 2 12th Street South 04\/93 8,160 $ 8.09
\n 3 12th Street South 11\/90 45,600 $32.89
\n 4 17th Street 01\/90 16,000 $15.00
\n 5 19th Street Listing 56,000 $55.00
\n SUBJECT 13TH AVENUE SOUTH $44,616
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nDiscussion of Land Comparables<\/p>\n
LAND COMPARABLE 1 was one parcel of 15 that were assembled by the hospital
\naround what is now the American Sports Medicine Institute. Downward
\nadjustments are indicated because of the more level topography of this
\ncomparable parcel and because of its smaller size. The adjustments are shown
\non a Land Sale Adjustment Grid at the end of this discussion. The adjusted
\nprice per square foot of this comparable is $16.40 per square foot.<\/p>\n
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
\nby the hospital for future parking needs of the hospital. The improvements
\nwere not considered to have any significant value. A large upward adjustment
\nis indicated because of the inferior location of this parcel compared to the
\nsubject that is adjacent to the hospital. Downward adjustments are indicated
\nbecause of the comparable’s level topography and its smaller size. The
\nadjusted price per square foot of this comparable is $9.30.<\/p>\n
-25-
\n 37
\nLAND COMPARABLE 3 was a 45,600 square foot parcel north of the hospital that
\ncontained a Methodist Church. The church has relocated and the land is being
\nused for hospital overflow parking. The remaining building is reportedly
\nscheduled to be removed in the near future. Downward adjustments are indicated
\nbecause of the declining economy since this purchase and because of the level
\ntopography of this site. The adjusted price for this comparable is $28.12 per
\nsquare foot.<\/p>\n
LAND COMPARABLE 4 is a parcel that UAB purchased for future parking or
\ndevelopment. It is located one-quarter-mile south of the UAB campus. An
\nupward adjustment is indicated due to the inferior location of this comparable.
\nA downward adjustment is indicated for size. The adjusted price per square
\nfoot of this comparable is $14.85.<\/p>\n
LAND COMPARABLE 5 is the current listing of a site just north of UAB Medical
\nCenter. This site is zoned for high rise development. A significant downward
\nadjustment is indicated because this is a listing rather than an actual sale.
\nDownward adjustments are also indicated for location, topography and due to the
\nsuperior zoning density of this site. The adjusted price per square foot of
\nthis comparable is $32.73 per square foot. The adjusted land prices range from
\n$9.30 per square foot to $32.73 per square foot, with the prices of the most
\ncomparable sites being in the middle of this range. Based on our analysis of
\nthe subject versus these comparables, it is our opinion that a land price of
\n$18.25 per square is representative of the subject site. The average price per
\nsquare foot for the land assembled around what is now the American Sports
\nMedicine Institute was $18.16 per square foot. The subject land value is
\nestimated as follows:<\/p>\n
44,616 SF x $18.25\/SF = $814,242<\/p>\n
Rounded to: $815,000
\n ========<\/p>\n
-26-
\n 38<\/p>\n
\n\n L A N D S A L E A D J U S T M E N T G R I D
\n American Sports Medicine Institute
\n Birmingham, Alabama<\/p>\n
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
\n
\nElement #1 #2 #3 #4 #5 <\/p>\nSale Price\/SF $19.29 $8.09 $32.89 $15.00 $55.00 <\/p>\n
Propery Rights Fee Simple Same Same Same Same Same
\n Adjustment
\n ————————————————————————-
\nAdjusted Price\/SF $19.29 $8.09 $32.89 $15.00 $55.00 <\/p>\n
Financing Cash Cash Cash Cash Cash Cash
\n Adjustment
\n ————————————————————————-
\nAdjusted Price\/SF $19.29 $8.09 $32.89 $15.00 $55.00 <\/p>\n
Conditions of Sale None None None None Listing
\n Adjustment -15%
\n ————————————————————————-
\nAdjusted Price\/SF $19.29 $8.09 $32.89 $15.00 $46.75 <\/p>\n
Market\/Time Effective
\n Adjustment Sep-93 0% 0% -10% -10% 0%
\n ————————————————————————-
\nAdjusted Price\/SF $19.29 $8.09 $29.60 $13.50 $46.75 <\/p>\n
Other Adjustments:
\n Location Adjustment 0% 30% 0% 20% -15%
\n Topography Adjustment -5% -5% -5% 0% -5%
\n Size Adjustment 44,616 -10% -10% 0% -10% 0%
\n Zoning Adjustment 0% 0% 0% 0% -10%
\n Net Other Adjustments -15% 15% -5% 10% -30% <\/p>\n
FINAL ADJUSTED PRICE PER SF $16.40 $9.30 $28.12 $14.85 $32.73
\n =========================================================================<\/p>\n
<\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-27-<\/p>\n
39
\nBuilding and Site Improvements<\/p>\n
The building and site improvements have been valued on the basis of replacement
\ncost less accumulated depreciation. The cost new was estimated via the
\nsegregated cost method, with cost factors obtained from Marshall Valuation
\nServices, Inc., a national cost manual. The unit cost includes both direct and
\nindirect costs, with adjustments made for special building features,
\nconstruction quality, time and location. The composite unit cost has then been
\napplied to the gross square footage of the building to derive the replacement
\ncost new. The total project replacement costs for the subject building are
\nestimated to be $3,176,887 using Marshall Valuation Services. A schedule at
\nthe end of this section shows the estimated replacement cost by category for
\nthe subject building plus estimates of all forms of depreciation.<\/p>\n
The total accumulated depreciation of a structure represents the loss in value
\ndue to physical deterioration, functional obsolescence, or external (or
\neconomic) obsolescence. Economic life of a structure or improvement is the
\nperiod over which they contribute to the value of the property. These terms
\nare defined as follows:<\/p>\n
Physical Deterioration: The loss in value due to deterioration or
\n ordinary wear and tear, i.e., natural forces taking their toll of the
\n improvements. This begins at the time the building is completed and
\n continues throughout its physical life.<\/p>\n
Functional Obsolescence: The loss in value due to poor plan,
\n functional inadequacy, or super-adequacy due to size, style, design, or
\n other items. This form of depreciation occurs in both curable or
\n incurable forms.<\/p>\n
External (or Economic) Obsolescence: The loss in value caused by
\n forces outside the property itself. It can take many forms such as
\n excessive noise levels, traffic congestion, abnormally high crime
\n rates, or any other factors which affect a property’s ability to
\n produce an economic income, thereby causing a decline in desirability.
\n Other forms of economic obsolescence may include governmental
\n restrictions, excessive taxes, or economic trends.<\/p>\n
Economic Life: The economic life of a good quality medical office
\n buildings is typically 40 to 50 years. For the subject Class B
\n building, we have assumed an economic life of 45 years.<\/p>\n
Remaining Economic Life: Remaining economic life can be defined as the
\n number of years remaining in the economic life of the structure or
\n structural components as of the date of the appraisal.<\/p>\n
-28-
\n 40
\nMarshall Valuation Services, Inc., and the actual experience of other buildings
\nin the market, were use to estimate the overall economic life of the
\nimprovements. The assignment of economic lives assumed that, except for the
\nbuilding shell and foundation, building components would be replaced
\nperiodically over the life of the building.<\/p>\n
Physical Depreciation<\/p>\n
The amount of physical depreciation and obsolescence in the subject building is
\njudged normal for a building of this age. Observation of the subject property
\nindicated that the structure and related component parts have been adequately
\nmaintained through a continuous maintenance service program.<\/p>\n
The subject property was constructed in early 1992, and it is in excellent to
\ngood condition. After taking into consideration all significant physical
\nfactors affecting the subject property, it is judged that the subject has an
\neffective age equal to its actual age of one and one-half years. The remaining
\nuseful life is estimated to be 43.5 years. This translates into a physical
\ndepreciation estimate of 3.3 percent (1.5 years divided by 45 years). The
\namount of depreciation attributable to the property has been estimated on a
\nstraight-line basis, which is founded on the assumption that depreciation of a
\nproperty occurs equally throughout its economic life.<\/p>\n
The elements which make up site improvements have shorter economic lives than
\nthe building. We have estimated the aggregate useful lives of these items to
\nbe 15 years with an effective age of one and one-half years and a remaining
\nuseful life of 13.5 years. Therefore, the depreciation rate attributable to
\nthe site improvements on a straight-line basis is estimated to be approximately
\n10.0 percent. Entrepreneurial profit and miscellaneous replacement costs are
\ndepreciated at a blended depreciate rate.<\/p>\n
We also requested the actual construction costs for the property, since it was
\ncompleted in early 1992. The total costs of the improvements was reported by
\nHealthSouth to be $2,973,780, including architectural and engineering expenses
\nbut excluding any profit. The detailed cost information was not audited by the
\nappraisers, but is assumed to be correct. The total replacements costs via the
\nMarshall Valuation Service, excluding the entrepreneurial profit, was
\napproximately $200,000 higher than the HealthSouth costs.<\/p>\n
-29-
\n 41
\nThe actual development costs of $2,973,780 for the subject property is
\nconsidered more reliable than the Marshall numbers because of the
\nspecial-purpose nature of the subject building. We, however, believe that an
\nentrepreneurial profit of 10.0 percent is normal and customary in the market to
\nencourage new development. Including the entrepreneurial profit of 10.0
\npercent, or $297,378, the total building replacement costs are $3,271,158.<\/p>\n
Total depreciation is estimated at $109,509, based on 3.3 percent depreciation
\nof building replacement costs and 10.0 percent depreciation of site
\nimprovements. The total depreciated value of the subject replacement costs is
\n$3,271,158 less $109,509, or $3,161,649. The $815,000 land value is added to
\nthe depreciated replacement costs, for a final Cost Approach value of
\n$3,976,649.<\/p>\n
Cost Approach Conclusion<\/p>\n
Based on the investigation as previously defined, the market value of the
\nsubject property by the Cost Approach, as of September 29, 1993, is rounded to:<\/p>\n
$3,975,000
\n ==========<\/p>\n
-30-
\n 42
\n SUMMARY OF REPLACEMENT COSTS NEW
\n 1313 13th STREET SOUTH<\/p>\n
\n\n MARSHALL
\n SERVICE<\/p>\n
\nSite Preparation $ 36,440
\nFoundation $ 66,618
\nFrame $ 282,449
\nExterior Walls $ 201,710
\nFloors $ 166,297
\nRoof $ 104,300
\nRoof Cover $ 36,654
\nPart. & Bit. in $ 609,512
\nCeilings $ 170,916
\nFloor Coverings $ 98,420
\nPlumbing $ 189,605
\nHVAC $ 378,910
\nElectrical $ 203,773
\nOther Features Owner’s Costs $ 538,433
\n ————-
\nTotal Building Replacement Costs $2,973,780 $3,084,037
\nSite Improvement Replacement Costs $ 92,850
\n ———————–
\nTotal Replacement Cost $2,973,780 $3,176,887<\/p>\nArchitect’s Fees Plans and Specs (Of Building Costs) 4.00% $ 123,361
\nArchitect’s Fees, Supervision (Of Building Costs) 1.50% $ 46,261
\nEntrepreneurial Overhead, Profit 10.00%
\n and other Miscellaneous Fees (Of Total Replacement Costs) $ 297,378 $ 317,689
\n ———————–
\nTotal Other Costs $ 487,311<\/p>\n
Total Project Replacement Cost $3,271,158 $3,664,198<\/p>\n
Accrued Depreciation:
\n Building Replacement Costs 3.3% Straight Line 1.5\/45th $ 99,027<\/p>\n
Site Improvement Costs 10.0% 1.5 Years\/15 Years $ 0<\/p>\n
Other Costs 3.5% Blended Rate $ 10,482
\n ——–
\n Total Physical Depreciation $109,509<\/p>\n
Less Total Depreciation (All Forms) ($ 109,509)
\n ———–<\/p>\n
Depreciated Value of Replacement Costs (Based on Actual Costs) $3,161,649<\/p>\n
Plus Land Value $ 815,000
\n ———–<\/p>\n
DEPRECIATED COST APPROACH VALUE $3,975,000<\/p>\n
ROUNDED: $3,975,000
\n ===========<\/p>\n
<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-31-<\/p>\n
43
\n DIRECT SALES COMPARISON APPROACH<\/p>\n
The Direct Sales Comparison Approach is based upon the principle of
\nsubstitution; that is, when a property is replaceable in the market, its value
\ntends to be set at the cost of acquiring an equally desirable substitute
\nproperty, assuming there is no costly delay in making the substitution. Since
\ntwo properties are rarely identical, the necessary adjustments for differences
\nin quality, location, size, services and market appeal are a function of
\nappraisal experience and judgment.<\/p>\n
The Direct Sales Comparison Approach gives consideration to actual sales of
\nother similar properties with adjustments as previously stated. The sales
\nprices are analyzed in common denominators and applied to the subject property
\nin respective categories to be indicative of market value.<\/p>\n
The unit of comparison used in this analysis is the price per square foot,
\nwhich is the gross purchase price of the building divided by the net leasable
\narea in the building. The following sales are considered to be representative
\nof market activity and conditions as of the valuation date. Unless otherwise
\nindicated, the sales involved arm’s length transactions that conveyed a fee
\nsimple interest, and only real property was included in the transactions.
\nAlso, all purchase prices quoted in this report represent all cash sales unless
\nseller financing is noted and the sale prices adjusted for cash equivalency.<\/p>\n
In our analysis, we obtained details on four professional office building sales
\nwhich have occurred over the past two years. The terms of the sale and
\nsignificant data was verified to the extent possible by county deed records and
\nwith parties to the transaction. Information on these sales is shown on the
\nfollowing pages:<\/p>\n
-32-
\n 44
\nIMPROVED SALE NUMBER 1<\/p>\n
\n
\nGENERAL SALE DATA<\/p>\nLocation: 1770 Independence Court, Homewood, Jefferson County, Alabama
\nDate of Sale: March 9, 1993
\nDeed Book\/Page: 4223\/115
\nGrantor: Brookwood Medical & Dental Group
\nGrantee: Proxy Land Development Corporation
\nSale Price: $850,000
\nTerms of Sale: All Cash <\/p>\n
PROPERTY DATA <\/p>\n
Land Size: 92,200 square feet
\nBuilding Size: 7,808 square feet – gross
\n 6,928 square feet – leasable
\nYear Built: 1984
\nOccupancy at Sale: 100% <\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——– ——
\nEstimated Gross Income: $100,456 $14.50
\nVacancy Allowance @ 5%: $ 5,023 $ 0.73
\n ——– ——
\nEffective Gross Income: $ 95,433 $13.77
\nEstimated Expenses @ $4.00: $ 27,712 $ 4.00
\n ——– ——
\nNet Operating Income: $ 67,721 $ 9.77 <\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $ 122.69
\nStabilized Overall Rate: 8.0%
\nEGIM: 8.91
\n<\/c><\/s><\/table>\n
COMMENTS<\/p>\n
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
\nmore than market value for the building, so the Grantee\/physician would move
\nhis surgical practice to the HealthSouth Medical Center. The location and
\nbuilding quality for this comparable are very inferior to the subject property.<\/p>\n
-33-
\n 45
\nIMPROVED SALE NUMBER 2<\/p>\n
\n
\nGENERAL SALE DATA<\/p>\nLocation: West side of 20th Street South at the address 908 20th Street South in
\n Birmingham, Alabama
\nDate of Sale: December 20, 1991
\nDeed Book\/Page: 4166\/170
\nGrantor: The Byrd Company, Inc.
\nGrantee: Board of Trustees of the University of Alabama
\nSale Price: $3,750,000
\nTerms of Sale: All Cash <\/p>\n
PROPERTY DATA <\/p>\n
Land Size: 82,460 square feet
\nBuilding Size: 52,440 square feet – gross
\n 44,574 square feet – leasable
\nYear Built: 1964 <\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——– ——
\nEstimated Gross Income: $624,036 $14.00
\nVacancy Allowance @ 10%: $ 62,404 $ 1.40
\n ——
\nEffective Gross Income: $561,632 $12.60
\nEstimated Expenses @ $6.00\/SF $222,870 $ 5.00
\n ——– ——
\nNet Operating Income: $338,762 $ 7.60 <\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $ 84.13
\nStabilized Overall Rate: 9.0%
\nEGIM: 6.68
\n<\/c><\/s><\/table>\n
COMMENTS<\/p>\n
This three-story building was purchased by the UAB Medical Center. A Medical
\nGenetics Center now occupies the facility. The current land value near the UAB
\ncampus is estimated at 40% to 45% of the total purchase price.<\/p>\n
-34-
\n 46
\nIMPROVED SALE NUMBER 3<\/p>\n
\n
\nGENERAL SALE DATA<\/p>\nLocation: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
\nDate of Sale: November 20, 1991
\nDeed Book\/Page: 14752\/1-8
\nGrantor: Upper Hembree Associates II, Ltd.
\nGrantee: Medical Plaza, Inc.
\nSale Price: $4,525,000
\nTerms of Sale: All Cash <\/p>\n
PROPERTY DATA <\/p>\n
Land Size: 1.65 acres (approximate)
\nBuilding Size: 32,500 square feet
\nYear Built: 1991
\nOccupancy at Sale: 100% <\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——– ——
\nEstimated Gross Income*: $671,125 $20.65
\nVacancy Allowance @ 5%: $ 33,556 $ 1.03
\n ——– ——
\nEffective Gross Income: $637,569 $19.62
\nEstimated Expenses @ $6.00\/SF $178,750 $ 5.50
\n ——– ——
\nNet Operating Income: $458,819 $14.12 <\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $ 139.23
\nStabilized Overall Rate: 10.1%
\nEGIM: 7.10
\n<\/c><\/s><\/table>\n
COMMENTS<\/p>\n
This property included three buildings containing 12,400 SF, 12,000 SF and
\n8,100 SF. The first two buildings were leased to North Fulton Hospital for
\nseven years. The first 12,400 SF was leased for $16.00\/SF net, and the other
\n12,000 SF was leased for $16.25\/SF net. The tenants were responsible for all
\ncosts but structural maintenance and management.<\/p>\n
* The rents were adjusted upward $4.50\/SF for gross comparison.<\/p>\n
-35-
\n 47
\nIMPROVED SALE NUMBER 4<\/p>\n
\n
\nGENERAL SALE DATA<\/p>\nLocation: 38A Lenox Pointe, Atlanta, Fulton County, Georgia
\nDate of Sale: August 26, 1992
\nDeed Book\/Page: 15703\/336
\nGrantor: Cates Construction Company
\nGrantee: Dr. Laura J. Mills
\nSale Price: $184,000
\nTerms of Sale: Third-party financing had no impact on the purchase price <\/p>\n
PROPERTY DATA <\/p>\n
Parcel Number: 17-6-4-38A
\nBuilding Size: 1,200 square feet
\nYear Built: 1992
\nOccupancy at Sale: Vacant\/New <\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——- ——
\nEstimated Gross Income: $21,600 $18.00
\nVacancy Allowance: $ 1,080 $ 0.90
\n ——- ——
\nEffective Gross Income: $20,520 $17.10
\nEstimated Expenses @ $4.50\/SF: $ 5,400 $ 4.50
\n ——– ——
\nNet Operating Income: $15,120 $12.60 <\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $153.33
\nStabilized Overall Rate: 8.2%
\nEGIM: 8.97
\n<\/c><\/s><\/table>\n
COMMENTS<\/p>\n
This is a two-story office building that was constructed specifically for a
\ndental practice. The construction is wood frame with brick veneer siding. It
\nis situated among the Lenox Pointe Office buildings at the intersection of
\nLenox Road and Buford Highway.<\/p>\n
-36-
\n 48
\nThese four sales are summarized as follows:<\/p>\n
SUMMARY OF IMPROVED SALES<\/p>\n
\n\n SALE RENTABLE PRICE PER
\n NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT <\/p>\n
\n 1 Independence Court 6,928 $ 850,000 $122.69
\n Birmingham, Alabama
\n 2 20th Street South 44,574 $3,750,000 $ 84.13
\n Birmingham, Alabama
\n 3 1260 Upper Hembree 32,500 $4,525,000 $139.23
\n Roswell, Georgia
\n 4 38A Lenox Pointe 1,200 $ 184,000 $153.33
\n Atlanta, Georgia
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nThe unadjusted prices of these comparables range from $84.13 per square foot to
\n$153.33 per square foot. Each of the comparables will be discussed and
\nadjusted for comparisons with the subject property. An Improved Sales
\nAdjustment Matrix is shown at the end of this section.<\/p>\n
SALE 1 is a Class C professional office building that is located near the
\nBrookwood Medical Center. An affiliate of HealthSouth Medical Center purchased
\nthis building to entice its physician\/owner to move his practice to their
\nfacility. This transaction was reportedly at a market value price. However, a
\ndownward adjustment is still indicated because the building was not marketed as
\na vacant building due to this relationship. A downward adjustment to the price
\nper square foot is indicated because of the smaller size of this comparable.
\nThe building is located at the end of a steep winding road, and has poor
\nvisibility. An upward adjustment is indicated due to this inferior location
\ncompared to the subject. Upward adjustments to this comparable are also
\nindicated because of the subject’s superior construction quality and because
\nthe building is new. The adjusted price per square foot of this comparable is
\n$130.36.<\/p>\n
SALE 2 is the sale of a building purchased by UAB to use as a Medical Genetics
\nCenter. Upward adjustments are indicated because of the subject’s superior
\nlocation, and because of the older age of this comparable. An upward
\nadjustment to the price per<\/p>\n
-37-
\n 49
\nsquare foot of this comparable is also indicated because it is larger than the
\nsubject building. The adjusted price for this comparable is $121.99 per square
\nfoot.<\/p>\n
SALE 3 was the sale of a three-building professional office facility that is
\nlocated approximately one-quarter-mile from the North Fulton Medical Center in
\nRoswell, Georgia. A downward adjustment is indicated because 80 percent of
\nthis facility was net leased to the hospital. An upward adjustment is
\nindicated because of the subject’s slightly superior location. The adjusted
\nprice per square foot of this comparable is $125.31.<\/p>\n
SALE 4 was the August 1992 sale of a small dental office building in Atlanta,
\nGeorgia. A large downward adjustment to the price per foot of this comparable
\nis indicated because of the comparable’s small size. Upward adjustments are
\nindicated for location and for quality of improvements. The adjusted price for
\nthis comparable is $145.66 per square foot.<\/p>\n
The adjusted prices per square foot range from $121.99 to $145.66, with most of
\nthe adjusted sales prices in the lower end of this range. An adjusted price of
\n$125.00 per square foot is representative of the subject property. Based on
\nthis analysis, the market value of the subject property by the Direct Sales
\nComparison Approach, as of September 29, 1993, the effective date of this
\nreport, is calculated as follows:<\/p>\n
27,800 SF x $125.00\/SF = $3,475,000<\/p>\n
-38-
\n 50<\/p>\n
I M P R O V E D S A L E A D J U S T M E N T G R I D
\n American Sports Medicine Institute
\n Birmingham, Alabama<\/p>\n
\n\n Subject Improved Sale Improved Sale Improved Sale Improved Sale
\n Element #1 #2 #3 #4
\n
\nSale Price\/SF $122.69 $84.13 $139.23 $153.33 <\/p>\nProperty Rights Fee Simple Same Same Same Same
\n Adjustment
\n ——————————————————–
\nAdjusted Price\/SF $122.69 $84.13 $139.23 $153.33 <\/p>\n
Financing Cash Cash Cash Cash Cash
\n Adjustment
\n ——————————————————–
\nAdjusted Price\/SF $122.69 $84.13 $139.23 $153.33 <\/p>\n
Conditions of Sale Relationship None None None
\n Adjustment -15.0%
\n ——————————————————–
\nAdjusted Price\/SF $104.29 $84.13 $139.23 $153.33<\/p>\n
Market\/Time Effective
\n Adjustment Sep – 93 0% 0% 0% 0%
\n ——————————————————–
\nAdjusted Price\/SF $104.29 $84.13 $139.23 $153.33<\/p>\n
Other Adjustments
\n Location Adjustment 20% 20% 5% 10%
\n Age\/Condition Adjustment 10% 15% 0% 0%
\n Size Adjustment -15% 10% 0% -25%
\n Quality Adjustment 10% 0% 0% 10%
\n Leasing
\n Other Adjustment 0% 0% -15% 0%<\/p>\n
Net Other Adjustments 25% 45% -10% -5%<\/p>\n
FINAL ADJUSTED PRICE PER SF $130.36 $121.99 $125.31 $145.66
\n ========================================================
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-39-
\n 51
\n INCOME APPROACH<\/p>\n
The Income Approach is based on the principle of anticipation, and has as its
\npremise that value is represented by the present worth of expected future
\nbenefits. The price that an investor will pay for an income property usually
\ndepends on the anticipated income stream. The Income Approach represents an
\nattempt to simulate the future cash flows for the property, and to quantify the
\nfuture benefits in present dollars.<\/p>\n
The subject property is one of nine professional office buildings that
\nHealthSouth is selling for the purpose of establishing a real estate investment
\ntrust (REIT). HealthSouth Corporation, the seller, will provide a net rental
\nguarantee, in the form of a master lease. The REIT, as the new property owner,
\nwill receive the net rental master lease rate per square foot of rentable
\noffice area, regardless of the rental rates charged or received from the actual
\nphysician\/tenants.<\/p>\n
This master lease is a credit enhancement vehicle that will enable the REIT
\nissuer to sell the REIT shares. It will also allow HealthSouth leasing
\nflexibility for the office space. HealthSouth can lease office space to
\nvarious physicians at different rates and terms, or they can use the office
\nspace for hospital purposes.<\/p>\n
The appraisers received a draft of the form of master lease agreement, but the
\nactual master lease agreement for each property are not yet available. For the
\npurpose of our Income Approach, the gross income will be the master lease rate
\nfor each property times the rentable building area. We reserve the right to
\nmodify the Income Approach valuation if the actual master lease for each
\nproperty differs significantly from the draft lease presented to us.<\/p>\n
As discussed earlier, this report assumes that the tenant finish work on the
\ntop floor of this building will be completed prior to the prospective sale to
\nthe REIT.<\/p>\n
-40-
\n 52
\nThe master lease rate for the subject property will be $12.00 per square foot
\nof net rentable area. The gross income for the subject property is calculated
\nas follows:<\/p>\n
27,800 SF x $12.00\/SF = $333,600<\/p>\n
The subject appraisal assumes 100 percent of the income is guaranteed through
\nthe master lease agreement. Since the leased fee interest is being appraised,
\nthere is no deduction for vacancy or credit loss.<\/p>\n
Since the master lease provides for an income level to the REIT net of all
\noperating expenses, the only out-of-pocket expenses to the REIT will be
\naccounting, legal and internal administration or management expenses. These
\nmanagement expenses are estimated at 5.0 percent of effective gross income, or
\n$16,680, based on the management experience of other properties. The net
\noperating income for the property is $333,600 less $16,680, or $316,920.<\/p>\n
The estimated direct capitalization rates, or overall rates (OARs), for the
\nfour improved sale comparables presented in the Direct Sales Comparison
\nApproach Section of this report are summarized as follows:<\/p>\n
\n\n Sale No. Property Location Sale Date OAR (%) <\/p>\n
\n 1 Independence Court March 1993 8.0%
\n Birmingham, Alabama
\n 2 20th Street South December 1992 9.0%
\n Birmingham, Alabama
\n 3 Upper Hembree November 1991 10.1%
\n Roswell, Georgia
\n 4 Lenox Pointe August 1992 8.2%
\n Atlanta, Georgia
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nThe direct capitalization, or overall rates, for these comparables ranged from
\n8.0 percent to 10.1 percent.<\/p>\n
-41-
\n 53
\nSince the market net income per square foot for the subject property is
\nestimated to be the master lease rate of $12.00, a capitalization rate in the
\nmiddle of this range, or 9.0 percent, is considered appropriate for the
\nproperty.<\/p>\n
It is, therefore, our opinion that the market value of the subject property by
\nthe Income Approach is calculated and rounded as follows:<\/p>\n
Net Operating Income\\OAR = Estimated Value<\/p>\n
$316,920\\.090 = $3,521,333<\/p>\n
Rounded to: $3,520,000
\n ==========<\/p>\n
-42-
\n 54
\n CORRELATION AND CONCLUSION<\/p>\n
We have considered three approaches to value in order to estimate the value of
\nthe 1313 13th Street South Office Building. The three approaches are
\nsummarized as follows:<\/p>\n
Cost Approach . . . . . . . . . . . . . . . . . . . . . $3,975,000
\n Direct Sales Comparison Approach . . . . . . . . . . . . $3,475,000
\n Income Approach . . . . . . . . . . . . . . . . . . . . $3,520,000<\/p>\n
The Cost Approach involved a detailed analysis of the individual components of
\nthe property. These costs were estimated using reliable sources, including an
\nestimator service and the actual costs provided by the building owners. The
\nCost Approach is usually considered a good indicator of value for a new special
\npurpose property such as the subject. Some actual costs, however, may not
\ntranslate into a higher value in the eyes of some prospective investors or
\nproperty buyers. Overall, this approach is considered a good indicator of
\nvalue.<\/p>\n
The Direct Sales Comparison Approach is based on the price that investors and
\nowner-occupants have recently paid for comparable professional office
\nbuildings. The quality and quality of data available in this approach was
\nconsidered good, but two of the four sales were not properties located in the
\nBirmingham market. The appraisers only consider this approach to be a fair
\nindicator of value for the subject property.<\/p>\n
The Income Approach normally provides the most reliable value estimate for
\nmulti-tenant professional office buildings. The subject property is a special
\npurpose facility that would likely be occupied by one or a very few number of
\ntenants. For this reason, the Income Approach is only considered a fair
\nindicator of value for the subject.<\/p>\n
Based on this analysis, it is our opinion that the market value of the 1313
\n13th Street South Office Building, as of September 29, 1993, and based on the
\nassumptions and limiting conditions in this report, is:<\/p>\n
$3,500,000
\n ==========<\/p>\n
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