\n TABLE OF CONTENTS<\/p>\n Page
\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 2
\n Property Rights Appraised 2
\n Definition of Value 2
\n History of the Property 3
\n History and Nature of the Business Environment 4
\n Market Data – Metropolitan Birmingham 6<\/p>\n
DESCRIPTIVE DATA 11
\n Neighborhood Analysis 11
\n Zoning 12
\n Real Estate Taxes and Assessments 12
\n Site Analysis 13
\n Building and Site Improvements 14<\/p>\n
HIGHEST AND BEST USE 16<\/p>\n
VALUATION SECTION 20
\n Valuation Methodology 20
\n Cost Approach 21
\n Direct Sales Comparison Approach 34
\n Income Approach 42<\/p>\n
CORRELATION AND CONCLUSION 45
\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 – Tax Plat Map
\nExhibit D2 – Tax Appraisal Summary Sheet
\nExhibit E – Land Sale Location Map
\nExhibit F1 – Building Floor Plans
\nExhibit F2 – Leasing Status Schedule
\nExhibit G – Building Description
\nExhibit H – Land Improvements Description
\nExhibit I – Rent Comparable Location Map
\nExhibit J – Rent Comparables Summary
\nExhibit K – Subject Photographs<\/p>\n
12
\n INTRODUCTION<\/p>\n
PROPERTY IDENTIFICATION<\/p>\n
The subject of this appraisal is HealthSouth Professional Office Building
\nlocated at 1222 14th Avenue South in Birmingham, Alabama. The building is a
\nfive-story building that includes a basement leased to the adjacent hospital, a
\ndoctor’s parking deck and three stories of office space. The facility also
\nincludes a six-level parking deck that is attached to the building.<\/p>\n
The property was converted to a condominium in 1983. The premises that is the
\nsubject of this report excludes the two office suites that have been owned by
\ntheir doctor\/occupants since 1983. The tax parcels are listed by individual
\noffice suites beginning with 29-01-3-009-07.302 through 29-01-3-009-07.335.
\nThe office building is situated on 40,150 square feet of land. However, since
\n6.46 percent of the leasable area in the building is privately owned, the
\nsubject parcel size must be reduced by 6.46 percent, or 2,594 square feet. The
\nnet subject land size is 37,556 square feet.<\/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,
\nexcluding the two suites owned by doctors, would be included in that sale.<\/p>\n
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\n 13
\nSCOPE 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
PROPERTY 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, page 123, 10th Edition, published by The
\nAppraisal 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
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\n 14
\n o Both parties are well informed or well advised, and acting in
\n 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 property
\n sold unaffected by special or creative financing or sales
\n concessions granted by anyone associated with the sale.”<\/p>\n
[The Appraisal of Real Estate, Page 21, 10th Edition, published by The
\nAppraisal Institute].<\/p>\n
HISTORY OF THE PROPERTY<\/p>\n
The subject professional building was reportedly constructed by the South
\nHighlands Hospital in 1981 and converted to a condominium office building in
\n1983. Two of the office suites, containing 6.464 percent of the leasable area
\nin the building were sold to two doctor practices in 1983. The hospital
\nprovided long-term financing for most of the purchase price at the time of
\nthose sales.<\/p>\n
HealthSouth Medical Center, Inc., acquired the assets of the subject property
\nand the South Highlands Hospital in November 1989 [Deed Book 3726\/Page 014].
\nSince this sale, HealthSouth has acquired a number of parcels around the
\nhospital. A new main hospital building and the Alabama Rehabilitation Center
\nwere constructed in 1991. The American Sports Medicine Institute (ASMI) was
\nadded in 1992.<\/p>\n
The subject professional office building has reportedly not been marketed for
\nsale and is not currently under an agreement of sale. No other deed transfers
\nwere noted in the last three years. A title search is recommended for official
\ndetermination.<\/p>\n
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\n 15
\nHISTORY 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 Fixed Investment advanced 2.2 percent and Residential
\nFixed Investment grew 1.7 percent. Federal Government Purchases declined
\n(0.6%) over the same period. Federal Government Purchases account for 7.2
\npercent of the total GDP, and this decline is limited to the rate of overall
\nGDP 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
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\n 16
\nThe 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
\n\n JUNE 30, 1993 JANUARY 2, 1992<\/p>\n
\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%
\n<\/c><\/c><\/s><\/caption>\n<\/table>\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<\/p>\n
\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 -5-
\n 17
\nMARKET 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
POPULATION<\/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 on the
\nnext page shows the county population totals by decade. Table 1 also shows the
\nannual percentage 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
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\n 18
\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
AVERAGE PERCENTAGE INCREASE<\/p>\n
\n\n COUNTY 1970s 1980s 1990s<\/p>\n
\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>\nSource: Birmingham Area Chamber of Commerce
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\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
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\n 19
\nHOUSING<\/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 multi-family 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
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 on the following page shows the diversity in employment in the
\nBirmingham MSA.<\/p>\n
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\n 20
\n TABLE 2
\n EMPLOYMENT BY SECTOR<\/p>\n
\n\n PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL
\n SECTOR LABOR DOLLARS ESTABLISHMENTS<\/p>\n
\n Health Services 11.7% 6.5%
\n Other Services 14.0% 26.5%
\n Manufacturing 15.7% 5.7%
\n Construction 12.0% 8.8%
\n Transp., Comm. & Utilities 13.8% 3.6%
\n Wholesale Trade 10.2% 9.5%
\n Retail Trade 9.8% 25.2%
\n Finance, Insurance, & Real Estate 9.1% 9.2%
\n Mining & Agricultural 3.5% 1.4%
\n Miscellaneous 0.2% 3.6%
\n REGION 100.0% 100.0%<\/p>\nSource: Birmingham Chamber of Commerce
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
In 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
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\n 21
\nINCOME<\/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
TABLE 3<\/p>\n
\n\n Average Per Percent Average Percent
\n Capita of U.S. Household of U.S.
\n County 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 lower
\nmanufacturing work forces and lower household sizes have also been the
\nexperience in Birmingham.<\/p>\n
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\n 22
\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.<\/p>\n
The property is situated at 1222 14th Street South. The block bounded by 11th
\nAvenue South, 14th Avenue South, 12th Street South and 13th Street South
\ncontains the subject building and the HealthSouth Medical Center. East, south
\nand west of the property are primarily older residential areas. Some homes
\nhave been converted to commercial uses around the hospital, and a few small
\nblocks have been redeveloped with small apartment buildings.<\/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’s Medical Center. Although medical service
\nis the focus of new<\/p>\n
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\n 23
\ndevelopment, new retail, restaurant and residential development is also active
\nin the area.<\/p>\n
ZONING<\/p>\n
The subject property is zoned “O & I, Office and Institutional District”, by
\nthe City of Birmingham. According to the City zoning requirements, this
\ndistrict provides “for the orderly arrangement of institutional, clerical and
\nadministrative space.” Permitted uses include public, semi-private or private
\noffice; public or semi-private, religious, educational or charitable
\ninstitutions; and, other similar uses consistent with this zoning code’s
\npurpose and surrounding uses. This zoning shall not include properties with
\nindustrial characteristics, communal living facilities or correctional
\ninstitutions.<\/p>\n
Other general conditions of the O & I zoning include a minimum lot width of 50
\nfeet, setbacks from fronting streets of 25 feet, and setbacks for side yards
\nand rear boundaries of 10 feet and 20 feet, respectively. A larger side buffer
\nof 25 feet is required when the lot joins a residential district. Off-street
\nparking for medical institutional facilities is three spaces per 1,000 square
\nfeet gross office area plus one space for each 400 square feet of office area
\nabove 10,000 square feet. There is approximately 180 parking spaces, or 4.17
\nper 1,000 square feet of gross office area.<\/p>\n
A letter of zoning compliance from the City of Birmingham is recommended for an
\nofficial determination regarding any zoning conformity 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 1993 millage rate is $69.50 per $1,000 of assessed value.<\/p>\n
The individual office suites are valued and taxed separately, since the
\nproperty is a condominium. The total tax-appraised value of the subject office
\ncondominiums owned by HealthSouth is $4,365,704. The total City and County
\nproperty taxes due in 1993 are $60,683.28. A summary of the taxes is shown in
\nthe Exhibit Section. <\/p>\n
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\n 24
\nSITE ANALYSIS<\/p>\n
The subject site is rectangularly-shaped and fronts 182.5 feet on the north
\nside of 14th Avenue South and 220 feet along the east side of 13th Street
\nSouth. The entire site contains 40,150 square feet, or 0.92172 acres. Since
\n6.46 percent of the building area is owned by two doctor practices, 6.46
\npercent of the site must be excluded for valuation purposes. The remaining
\nsubject acreage is 37,556 square feet, or 0.8622 acres. A legal description of
\nthe subject condominiums was provided to the appraisers and is included in the
\nExhibit Section. A survey of the property was not available to the appraisers.
\nThe parcel size was determined by the dimensions on a tax plat map that is also
\nin the Exhibit Section. We reserve the right to modify our report if the
\nactual acreage is found to vary significantly from the tax plat acreage.<\/p>\n
The topography of the site slopes slightly downward from 14th Avenue South to
\nthe front of the new HealthSouth hospital facing 11th Avenue South. The south
\nend of the site contains a parking deck. Just north of the parking deck is the
\nsubject medical office building. South of the subject medical office building
\nis the new Alabama Sports Medicine and Orthopaedic Center and the new
\nHealthSouth Hospital. The older HealthSouth Hospital buildings are situated
\nwest of the subject building. The subject building is at the crest of a hill
\nand 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. Seven staggered
\nlevels of parking deck provide parking for approximately 180 cars.<\/p>\n
We 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
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\n 25
\nBUILDING AND SITE IMPROVEMENTS<\/p>\n
BUILDING<\/p>\n
The 1222 14th Avenue South Office Building was reportedly constructed in 1981.
\nIt contains 56,244 gross square feet and 45,580 rentable square feet. The
\nsubject building contains 3,117 square feet in two suites that were sold to
\ndoctor\/owners when the building was converted to a condominium in 1983.
\nExcluding these two suites, the building contains 53,127 gross square feet and
\n42,463 rentable square feet. The rentable area excludes the common area rest
\nrooms, the common area hallways, mechanical rooms and vertical penetrations
\n(stairwells, elevator shafts). The building area by floor and suite is shown
\non a Leasing Status Schedule in the Exhibit Section of this report.<\/p>\n
The building is a five-story, reinforced concrete and steel structure building,
\nwith a brick veneer exterior. Only the storage areas in the basement of the
\nbuilding are sprinklered. The building has a metal deck roof structure, with a
\nwaterproof membrane roof and large-stone gravel covering. Ceiling finishes
\nconsist of acoustical ceiling tiles and recessed fluorescent lighting. The
\ninterior walls are gypsum board on metal framing. Most of the hallways have
\nvinyl flooring, and the suites are mostly carpeted. Windows and doors are
\nmetal framed, and interior doors are solid-core wood.<\/p>\n
Heating and air conditioning is supplied via a Carrier chiller and a Cleaver
\nBrooks boiler that are located in the basement. Additional air handlers are
\nlocated on the roof of the building. Two 91-gallon Rudd water heaters are also
\nin the basement.<\/p>\n
A parking floor is located above the basement of the five-story structure.
\nThis parking floor contains the physician’s parking. There are three floors of
\noffice space above this parking floor. The second floor parking area connects
\nwith a staggered, six-level parking deck on the south side of the building.
\nThe top floor of this parking decks connects with the third floor of the
\nprofessional building, or to the first floor of office space.<\/p>\n
More detail descriptions of the buildings and site improvements are included in
\nthe Exhibit Section of this report.<\/p>\n
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\n 26
\nCondition of Improvements and Obsolescence<\/p>\n
The building is in good overall condition. It appears to have been adequately
\nmaintained. No significant deferred maintenance was indicated from the
\nappraiser’s inspection of the property. There does not appear to be any
\nfunctional or economic obsolescence.<\/p>\n
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\n 27
\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
-16-
\n 28
\nAs 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
PHYSICALLY 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 “O-I, Office-Institutional”. Permitted uses in this general
\nzoning category vary widely. Potential legal uses would include some retail
\nand restaurants, office\/institutional, hotels, hospitals and other
\nmedical-oriented uses.<\/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 north and east sides of the building indicate that
\nnew development is financially feasible. HealthSouth Medical Center, UAB
\nMedical Center and St. Vincent Medical Center have all recently built new
\nmedical office facilities.<\/p>\n
-17-
\n 29
\nMAXIMALLY 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.<\/p>\n
As Improved<\/p>\n
The subject site is currently improved with a 42,463 rentable square foot
\noffice building, with an adjacent parking deck and associated site
\nimprovements. The purpose of this discussion is to determine whether to leave
\nthe improvements as they are, to modify the improvements or to remove the
\nimprovements.<\/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 make minor repairs to the deferred maintenance items on the
\nproperty. The improvements are considered functional.<\/p>\n
LEGALLY PERMISSIBLE<\/p>\n
The improvements, as improved, are a legal conforming use according to the City
\nof Birmingham zoning guidelines. Under the zoning, the property could remain
\nas 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
\noffice\/institutional 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. It would, however,
\nbe financially feasible to correct any deferred maintenance.<\/p>\n
-18-
\n 30
\nMAXIMALLY PRODUCTIVE<\/p>\n
The maximally productive use for the existing property is the financially
\nfeasible use that produces the greatest property value. The only financially
\nfeasible use is to correct any deferred maintenance that currently exists.
\nThis will enable to the property to remain competitive in the leasing market.
\nThe highest and best use, as improved, is to not make any major changes to the
\ncurrent asset use. The improvements represent the current highest and best use
\nof the property.<\/p>\n
-19-
\n 31
\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
-20-
\n 32
\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
-21-
\n 33
\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
-22-
\n 34
\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: $8.07<\/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
-23-
\n 35
\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
-24-
\n 36
\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
-25-
\n 37
\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: Retectangular<\/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
-26-
\n 38
\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 $ 8.07
\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 14TH AVENUE SOUTH 37,556
\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 parcel
\nand because of its smaller size. The adjustments are shown on a Land Sale
\nAdjustment Grid at the end of this discussion. The adjusted price per square
\nfoot of this comparable is $17.98 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 $9.71.<\/p>\n
-27-
\n 39
\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 $15.53.<\/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. The adjusted price per square foot of this comparable is
\n$30.94 per square foot.<\/p>\n
The adjusted land prices range from $9.71 per square foot to $30.94 per square
\nfoot, with the prices of the most comparable sites being in the middle of this
\nrange. Based on our analysis of the subject versus these comparables, it is
\nour opinion that a land price of $18.50 per square is representative of the
\nsubject site. The average price per square foot for the land assembled around
\nwhat is now the American Sports Medicine Institute was $18.16 per square foot.
\nThe subject land value is estimated as follows:<\/p>\n
37,556 SF x $18.50\/SF = $694,786<\/p>\n
Rounded to: $695,000
\n ========<\/p>\n
-28-
\n 40
\n L A N D S A L E A D J U S T M E N T G R I D
\n HealthSouth Professional Building
\n Birmingham, Alabama<\/p>\n
\n\n Subject Land Comp Land Comp Land Comp Land Comp Land Comp
\n Element #1 #2 #3 #4 #5 <\/p>\n
\nSale Price\/SF $19.29 $8.09 $32.89 $15.00 $55.00 <\/p>\nProperty 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 -25%
\n ————————————————————
\nAdjusted Price\/SF $19.29 $8.09 $32.89 $15.00 $41.25 <\/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 $41.25 <\/p>\n
Other Adjustments
\n Location Adjustment 0% 30% 0% 20% -10%
\n Topography Adjustment -5% -5% -5% 0% -5%
\n Size Adjustment -5% -5% 0% -5% 0%
\n Zoning Adjustment 0% 0% 0% 0% -10%
\n Net Other Adjustments -10% 20% -5% 15% -25%<\/p>\n
FINAL ADJUSTED PRICE PER SF $17.36 $9.71 $28.12 $15.53 $30.94
\n ============================================================ <\/p>\n
<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-29-
\n 41
\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 $5,767,449.<\/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
-30-
\n 42<\/p>\n
Marshall 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 1981, and it is in average to good
\ncondition. After taking into consideration all significant physical factors
\naffecting the subject property, it is judged that the subject has an effective
\nage equal to its actual age of twelve years. The remaining useful life is
\nestimated to be 33 years. This translates into a physical depreciation
\nestimate of 26.7 percent (12 years divided by 45 years). The amount of
\ndepreciation attributable to the property has been estimated on a straight-line
\nbasis, which is founded on the assumption that depreciation of a property
\noccurs 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 seven years and a remaining useful life of
\n8 years. Therefore, the depreciation rate attributable to the site
\nimprovements on a straight-line basis is estimated to be approximately 46.7
\npercent. Entrepreneurial profit and miscellaneous replacement costs are
\ndepreciated at a blended depreciate rate.<\/p>\n
The total depreciation for the building is estimated to be $1,570,836, and the
\ndepreciated value of the building replacement costs to be $4,196,613.<\/p>\n
Approximately 4.64 percent of the subject building was sold to physician’s
\npractices and is not considered part of the subject premises. Subtracting 4.64
\npercent of the depreciated building replacement costs, or $194,723, leaves
\n$4,001,890 as the Depreciated Replacement Costs for the subject premises.<\/p>\n
-31-
\n 43
\nCost Approach Conclusion<\/p>\n
The schedule on the following page is a summary of the estimated replacement
\ncost by category for the subject building plus estimates of all forms of
\ndepreciation.<\/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:<\/p>\n
$4,700,000
\n ==========<\/p>\n
-32-
\n 44
\n SUMMARY OF REPLACEMENT COSTS NEW
\n 1222 14th AVENUE SOUTH<\/p>\n
\n\n DOLLARS
\n
\nSite Preparation $ 52,516
\nFoundation $ 117,411
\nFrame $ 513,738
\nExterior Walls $ 287,208
\nFloors $ 392,233
\nRoof $ 100,716
\nRoof Cover $ 35,394
\nPart. & Blt. in $ 1,074,228
\nCeilings $ 254,796
\nFloor Coverings $ 154,706
\nPlumbing $ 291,696
\nHVAC $ 568,459
\nElectrical $ 359,139
\nOther Features (Includes parking deck) $ 654,289
\n ———–
\nTotal Building Replacement Costs $ 4,856,529
\nSite Improvement Replacement Costs $ 143,780
\n ———–
\nTotal Replacemsnt Cost $ 5,000,309<\/p>\nArchitect’s Fees Plans and Specs. (Of Building Costs) 4.00% $ 194,261
\nArchitect’s Fees, Supervision (Of Building Costs) 1.50% $ 72,848
\nEntrepreneurial Overhead, Profit, 10.00%
\n and Other Miscellaneous Fees (Of Total Replacement Costs) $ 500,031
\n ———–
\nTotal Other Costs $ 767,140<\/p>\n
Total Project Replacement Cost $ 5,767,449<\/p>\n
Accrued Depreciation:
\n Building Replacement Costs 26.7% Straight Line 12\/45ths $1,294,751 <\/p>\n
Site Improvement Costs 46.7% 7 Years\/15 Years $ 67,145 <\/p>\n
Other Costs 27.2% Blended Rate $ 208,940
\n ———-
\n Total Physical Depreciation $1,570,836 <\/p>\n
Functional & Economic Depreciation $ 0
\n ———–
\nLess Total Depreciation (All Forms) $(1,570,836)
\n ———–
\nDepreciated Value of Replacement Costs – Entire Building $ 4,196,613<\/p>\n
Less: 4.64% of Total Costs due to Doctor\/owned Suites $ (195,133)
\n ———–
\nDepreciated Value of Replacement Costs – Subject Premises $ 4,001,480<\/p>\n
Plus Land Value $ 695,000
\n ———–
\nDEPRECIATED COST APPROACH VALUE $ 4,696,480<\/p>\n
ROUNDED TO: $ 4,700,000
\n ===========<\/p>\n
<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-33-
\n 45
\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 arms-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
A secondary unit of comparison used in this analysis is a effective gross
\nincome multiplier (EGIM). This gives an indication of market value as a
\nmultiple of stabilized property income. This method is less reliable than the
\nsales per square foot method, and will be given less emphasis for this reason.<\/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
-34-
\n 46
\nIMPROVED SALE NUMBER 1<\/p>\n
\n
\nGENERAL SALE DATA
\nLocation: 1770 Independence Court, Homewood,
\n 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>\nPROPERTY 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<\/p>\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.
\n<\/c><\/s><\/table>\n
-35-
\n 47
\nIMPROVED SALE NUMBER 2<\/p>\n
\n
\nGENERAL SALE DATA
\nLocation: West side of 20th Street South at the
\n address 908 20th Street South in 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
\n Alabama
\nSale Price: $3,750,000
\nTerms of Sale: All Cash<\/p>\nPROPERTY 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<\/p>\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.
\n<\/c><\/s><\/table>\n
-36-
\n 48
\nSITE PLAN EXHIBIT F<\/p>\n
(Map)<\/p>\n
HEALTHSOUTH REHABILITATION CENTER
\n OF LITTLE ROCK
\n LITTLE ROCK, ARKANSAS
\n 49
\nIMPROVED SALE NUMBER 3<\/p>\n
\n
\nGENERAL SALE DATA
\nLocation: 1260 Upper Hembree Road in
\n 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>\nPROPERTY 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<\/p>\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.
\n<\/c><\/s><\/table>\n
-37-
\n 50
\nIMPROVED SALE NUMBER 4<\/p>\n
\n
\nGENERAL SALE DATA
\nLocation: 38A Lenox Pointe, Atlanta, Fulton
\n 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
\n on the purchase price<\/p>\nPROPERTY DATA<\/p>\n
Parcel Number: 17-6-4-38A
\nBuilding Size: 86,206 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<\/p>\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.
\n<\/c><\/s><\/table>\n
-38-
\n 51
\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 86,205 $ 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 never was marketed
\nas a vacant building due to this relationship. The building is located at the
\nend of a steep winding road, and has poor visibility. An upward adjustment is
\nindicated due to this inferior location compared to the subject. An offsetting
\ndownward adjustment to the price per square foot is indicated because of the
\nsmaller size of this comparable. An upward adjustment to this comparable is
\nindicated because of the subject’s superior construction quality. A downward
\nadjustment is indicated because the subject building is a condominium causing
\nits marketability to be somewhat restricted. The adjusted price per square
\nfoot of this comparable is $109.50.<\/p>\n
-39-
\n 52
\nSALE 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. A downward
\nadjustment is indicated because the subject building is a condominium causing
\nits marketability to be restricted. The adjusted price for this comparable is
\n$105.16 per square foot.<\/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. Downward adjustments to the price per square foot of this
\ncomparable are indicated because it is new and smaller than the subject
\nfacility. A downward adjustment is also indicated because 80 percent of this
\nfacility was net leased to the hospital. A further downward adjustment is
\nindicated because the subject building is a condominium causing its
\nmarketability to be restricted. Upward adjustments are indicated due to the
\nsubject’s superior location and construction quality. The adjusted price per
\nsquare foot of this comparable is $111.38.<\/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. Downward adjustments are
\nalso indicated because this building is new and because the subject facility is
\na condominium. Upward adjustments are indicated for location and for quality.
\nThe adjusted price for this comparable is $107.33 per square foot.<\/p>\n
The adjusted prices per square foot range from $105.16 to $111.38. An adjusted
\nprice of $108.00 per square foot is representative of the subject property.
\nBased on this analysis, the market value of the subject property by the Direct
\nSales Comparison Approach, as of September 29, 1993, the effective date of this
\nreport, is calculated as follows:<\/p>\n
42,463 SF x $108.00\/SF = $4,586,004<\/p>\n
Rounded to: $4,585,000
\n ==========<\/p>\n
-40-
\n 53
\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 HealthSouth Professional Building
\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 -10.0%
\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 25% 20% 5% 10%
\n Age\/Condition Adjustment 0% 10% -10% -10%
\n Size Adjustment -25% 0% -10% -35%
\n Quality Adjustment 10% 0% 10% 10%
\n Condominium Adjustment -5% -5% -5% -5%
\n Leasing
\n Other Adjustment 0% 0% -10% 0%<\/p>\n
Net Other Adjustments 5% 25% -20% -30%<\/p>\n
FINAL ADJUSTED PRICE PER SF $109.50 $105.16 $111.38 $107.33
\n ============================================================
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-41-
\n 54
\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 office
\narea 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 various
\nphysicians at different rates and terms, or they can use the office space for
\nhospital purposes.<\/p>\n
The appraisers received a draft of the form of the master lease agreement, but
\nthe actual master lease agreements for each property are not yet available. For
\nthe purpose of our Income Approach, the gross income will be the master lease
\nrate for each property times the rentable building area. We reserve the right
\nto modify the Income Approach valuation if the actual master lease for each
\nproperty differs significantly from the draft lease presented to us.<\/p>\n
The gross income for the subject property is calculated as follows:<\/p>\n
42,463 SF x $12.50\/SF = $530,788<\/p>\n
The subject appraisal assumes that 100 percent of the income is guaranteed
\nthrough the master lease agreement. Since the leased fee interest is being
\nappraised, there is no deduction for vacancy or credit loss.<\/p>\n
-42-
\n 55
\nSince 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$26,539, based on the management experience of other properties. The net
\noperating income for the property is $530,788 less $26,539, or $504,249.<\/p>\n
The estimated direct capitalization rates, or overall rates (OARs), for the
\nfour improved sale comparables presented in the Direct Sales Comparison Section
\nof 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
A capitalization rate at 10.5 percent, is considered appropriate because
\neffective comparable market net lease rates are $1.00 to $1.50 per square foot
\nless than the master lease rate of $12.50 per square foot.<\/p>\n
-43-
\n 56
\nTherefore, it is 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
$504,249\\.105 = $4,802,371<\/p>\n
Rounded to: $4,800,000
\n ==========<\/p>\n
-44-
\n 57
\n CORRELATION AND CONCLUSION<\/p>\n
We have considered three approaches to value in order to estimate the value of
\nthe 1222 14th Avenue South Office Building. The three approaches are
\nsummarized as follows:<\/p>\n
Cost Approach . . . . . . . . . . . . . . . . $4,700,000
\n Direct Sales Comparison Approach . . . . . . . $4,585,000
\n Income Approach . . . . . . . . . . . . . . . $4,800,000<\/p>\n
The Cost Approach involved a detailed analysis of the individual components of
\nthe property. These costs were estimated using sources which were considered
\nto be reliable. However, estimating the replacement cost and all forms of
\ndepreciation for a twelve year old building is difficult. For this reasons,
\nthis approach is only considered a fair indicator of value for the subject
\nproperty.<\/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 quantity 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
\nprofessional office buildings such as the subject. Although many buyers of
\nprofessional office buildings are owner\/occupants, these buyers are generally
\naware of a property’s cash flow potential and its value from an investor’s
\nperspective. For this reason, the Income Approach is considered the best
\nindicator of value for the subject property.<\/p>\n
Based on this analysis, it is our opinion that the market value of the 1222
\n14th Avenue South Office Building, as of September 29, 1993, and based on the
\nassumptions and limiting conditions in this report, is:<\/p>\n
$4,750,000
\n ==========<\/p>\n
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