\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<\/p>\n
-4-<\/p>\n
16<\/p>\n
troubling unemployment rate”. Value Line’s Quarterly Economic Review
\nidentified the following estimates for selected economic statistics from 1993
\nto 1995.<\/p>\n
1993 1994 <\/p>\n
Real GDP 2.7% 3.2%
\nPersonal Consumption Expenditures 2.8% 2.7%
\nFederal Government Purchases (5.2%) (3.0%)
\n30-Year Treasury Bond Yields 7.1% 7.2%
\nPrime Rate 6.0% 6.3%
\nConsumer Price Index 3.5% 3.5% <\/p>\n
-5-<\/p>\n
17
\n DESCRIPTIVE DATA<\/p>\n
REGIONAL ANALYSIS<\/p>\n
The subject property is in the Richmond-Petersburg Metropolitan Statistical
\nArea (MSA), which consists of the cities of Richmond, Petersburg, Colonial
\nHeights and Hopewell; and the surrounding counties of Chesterfield, Henrico,
\nHanover, Goochland, Powhatan, New Kent, Charles City, Dinwiddie and Prince
\nGeorge.<\/p>\n
The MSA occupies the center of eastern Virginia. It contains more localities
\nthan any other of the state’s eight MSAs as well as more area (nearly 3,000
\nsquare miles). It is the third largest in population after the Northern
\nVirginia and the Norfolk-Virginia Beach-Newport News MSAs.<\/p>\n
Population<\/p>\n
The following is a summary of population changes for the MSAs of the state of
\nVirginia:<\/p>\n
\n\n=============================================================================================================<\/p>\n COMPARISON OF POPULATION CHANGE 1980-87
\n MSAs IN VIRGINIA<\/p>\n
=============================================================================================================
\n Annual
\n Percent Total
\n Area 1980 1987 Change Change
\n ——————– —— —— —— ——
\n
\n Bristol 90,597 90,600 0.0% 3
\n Charlottesville 113,568 123,300 1.2% 9,732
\n Danville 111,789 109,100 -0.1% -2,689
\n Lynchburg 142,000 142,700 0.2% 700
\n Norfolk 1,160,311 1,346,100 1.5% 185,789
\n Northern 1,146,184 1,374,400 1.7% 228,216
\n Richmond 761,311 825,300 0.7% 63,989
\n Roanoke 220,393 224,200 0.2% 3,807
\n===========================================================================================================
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nSource: Center For Public Service<\/p>\n
-6-<\/p>\n
18<\/p>\n
The Richmond-Petersburg MSA is the third largest of the state’s eight MSAs. It
\nhas grown steadily but at a rate significantly less than that of Northern
\nVirginia and Norfolk. These areas have enjoyed tremendous growth due to the
\nstrong presence of the federal government. Growth has moderated significantly
\nin recent years due to sluggish economic conditions discussed previously.<\/p>\n
As of 1988, the most populous locality in the MSA was the city of Richmond at
\n214,500 persons followed by the adjacent counties of henrico and Chesterfield
\nwith 205,200 and 187,100 persons, respectively. Chesterfield County is the
\nfastest growing locality having registered a 32.3 percent population gain since
\n1980 and an average growth rate of 3.3 percent per year. Projections by local
\nplanning agencies and the Virginia Employment Commission project that the
\nChesterfield and Henrico populations will surpass Richmond by the year 2000.<\/p>\n
Both population and population growth are concentrated in the northern section
\nof the MSA. The population is centered in Richmond but growth is highest in
\nthe counties around Richmond.<\/p>\n
Transportation Network<\/p>\n
The Richmond-Petersburg MSA is well positioned at the center of the “Golden
\nCrescent” enabling it to be a crossroads of transportation. Interstate 95
\n(I-95) connects Richmond with Northern Virginia and the major east coast cities
\n– — Washington 100 miles to the north and New York 370 miles to the north.
\nInterstate 64, the principal east-west highway in the state intersects I-95 in
\nthe MSA and heads east to the Norfolk area and west to Charlottesville.
\nAnother interstate, I-85, slants northeast from central North Carolina to meet
\nI-95 in Petersburg. Several other arterial and primary highways also converge
\non the capital city.<\/p>\n
Income<\/p>\n
Total personal income (TPI) in the Richmond-Petersburg MSA reached $14.4
\nbillion, or approximately 15 percent of the state total in 1987. TPI is
\nreported by place of residence, rather than by place of employment, and it has
\nthree components: 1) net<\/p>\n
-7-<\/p>\n
19<\/p>\n
earnings; 2) dividends, interest, and rent by place of residence; and 3)
\ntransfer payments by place of residence. <\/p>\n
The Richmond-Petersburg MSA ranked third in the state in TPI behind the
\nNorfolk-Newport News-Virginia Beach MSA and the Northern Virginia MSA. These
\nthree MSAs accounted for more than two-thirds of the state TPI. Between 1980
\nand 1987, TPI in the Richmond- Petersburg MSA increased by $6.6 billion, which
\ntranslates into an average annual growth rate of 9.2 percent. This is slightly
\nfaster than the 9.0 percent growth rate for the state, but slightly under that
\nof the Charlottesville MSA, which was the second fastest growing area and
\nNorthern Virginia which, at 10.7 percent, was the fastest growing area. A
\nlarge part of the reason for the high TPI in the Richmond-Petersburg MSA is the
\nsize of its population; areas with a high population naturally have high TPI.
\nThe Richmond-Petersburg MSA ranked second in per capita personal income with
\n$17,448 in 1987. The highest was Northern Virginia with $23,760.<\/p>\n
Employment<\/p>\n
Employment for the Richmond-Petersburg MSA has expanded by 100,500 jobs, from
\n373,900 in January of 1980 to 474,400 in May of 1990. This represents an
\nannual increase of approximately 2.4 percent. Between May 1989 and May 1990,
\nemployment grew 5,900, or 1.3 percent showing the slowdown.<\/p>\n
According to the data from the Virginia Employment Commission, the greatest
\nemployment gains for the Richmond-Petersburg MSA have been in the service
\nindustry sector, which increased its share of total employment from 17 percent
\nin 1980 to 22 percent in 1990. A relative decline in manufacturing employment
\nis shown from 18 percent in 1980 to 14 percent in 1990. The other sectors
\nincreased at a rate similar with the overall average. There is an apparent
\ntrend of less semi-skilled and blue-collar workers to more white- collar and
\ngovernment employee workers.<\/p>\n
The area economy has good diversity with 81 percent of the employment split
\nalmost evenly among manufacturing (14%), trade (24%), services (22%), and
\ngovernment (20%). This diversity creates a very healthy economic climate.<\/p>\n
-8-
\n 20<\/p>\n
Richmond is the home of fourteen Fortune 500 companies and besides being the
\nState Capitol, the city holds several federal offices such as the Fifth
\nDistrict Federal Reserve Bank and the Fourth U.S. Circuit Court of Appeals.<\/p>\n
The unemployment rate over the last 15 years has averaged 3.9 percent. The
\nlowest rate was 2.4 percent in the national economic expansion year of 1972 and
\nthe highest rate was 5.8 percent during the recession year of 1982. The rate
\nhas consistently been 2.0 percent to 3.0 percent below the national rate and
\nslightly below the state rate. Recent rates were as follows:<\/p>\n
May 1980 May 1989<\/p>\n
Richmond-Petersburg MSA 3.9% 3.9%
\n Virginia 4.4% 4.5%
\n United States 5.8% 5.6%<\/p>\n
As with population, Richmond places third behind Northern Virginia and Norfolk
\nin total employment growth with 84,700 new employees between 1980 and 1988.
\nNorthern Virginia had nearly four times this amount with a growth of 294,200
\nand Norfolk ranked second with 134,400. Northern Virginia experienced a 6.6
\npercent annual growth versus 3.5 percent for Norfolk and 2.7 percent for
\nRichmond. Overall, the state had a 4.0 percent increase annually which was
\nobviously skewed due to the strong performance of Northern Virginia.<\/p>\n
Employment changes between October 1988 and October 1989 displayed a slowing of
\ngrowth in Norfolk, while Richmond increased at a slightly higher rate than the
\nprevious eight years. Northern Virginia continued to grow with 47,700 new
\nemployees versus 15,200 for Richmond and 5,000 for Norfolk. The decline in
\nemployment growth in Norfolk was likely due to federal cut-backs in defense
\nspending.<\/p>\n
Healthcare<\/p>\n
Healthcare facilities abound in the Richmond area. The following is a list of
\nlocal hospitals.<\/p>\n
-9-<\/p>\n
21<\/p>\n
\n\n Facility Number of Beds
\n <\/p>\n Charter Westbrook 175
\n Children’s 36
\n Chippenham 470
\n Henrico Doctors’ 312
\n Humana – St. Luke’s 160
\n Hunter Holmes McGuire – Virginia Medical Center 1,508
\n Johnston – Willis 232
\n Medical College of Virginia 881
\n Metropolitan 180
\n Retreat 230
\n Richmond Community 102
\n Richmond Eye and Ear 60
\n Richmond Memorial 351
\n St. John’s 70
\n St. Mary’s Hospital 401
\n Stuart Circle 153
\n<\/c><\/s><\/caption>\n<\/table>\n
Nursing homes in the Richmond area include the following:<\/p>\n
\n
\n Beth Sholom Home Central, Virginia Beth Sholom Woods
\n Cambridge Manor Convalescent Center Camelot Hall
\n Chippenham Manor Catshaw Nursing Manor
\n Eastern Star Home Forest Hill Convalescent Center
\n Imperial Health Center Lakewood Manor Retirement Community
\n Libbie Convalescent Center Marywood Apartments
\n Little Sisters of the Poor Richmond Home for Ladies
\n Masonic Home of Virginia Snyder Memorial Home
\n Richmond Nursing Home Summerhill at Stony Point
\n Stratford Hall Nursing Home The Virginia Home
\n The Hermitage University Park Nursing Home
\n The Windsor Westport Convalescent Center
\n Westminster Canterbury
\n<\/c><\/s><\/table>\nConclusion<\/p>\n
The Richmond-Petersburg MSA has experienced steady growth during the 1980s. In
\nrelation to the other MSAs in the state of Virginia, it ranks generally third
\nin most categories behind Northern Virginia and the Norfolk-Newport News MSA.
\nNorthern Virginia, being part of the Washington, D.C. MSA, has been one of the
\nmost active markets in the United States. The large expansion of the federal
\ngovernment over the<\/p>\n
-10-
\n 22<\/p>\n
last several decades has stimulated tremendous growth in this area. This area
\nof the state will likely continue to exceed other Virginia localities in
\npopulation, employment and income growth.<\/p>\n
The Norfolk-Newport News-Virginia Beach area will obviously be impacted by the
\nimpending cut-back in defense spending. Due to this, the Richmond-Petersburg
\nMSA will likely out-perform that MSA in growth during the 1990s. It is,
\nhowever, unlikely that the Richmond-Petersburg MSA will experience the
\nexplosive growth that Northern Virginia experienced during the 1980s.
\nDevelopment over the next decade is expected to be at a pace slightly above
\nthat of the state average, but below that of Northern Virginia. The next
\nseveral years will likely be very sluggish until the economy recovers from its
\ndoldrums.<\/p>\n
NEIGHBORHOOD ANALYSIS<\/p>\n
The neighborhood’s area boundaries are Broad Street (Highway 250) to the west,
\nStaples Road to the east, Parham Road to the south and Hungary Road to the
\nnorth.<\/p>\n
The area is generally residential with modest single-family homes and
\nmulti-family developments to the north and east of the subject. Development
\nalong Parham Road mainly is office-institutional in nature, such as office
\nbuildings, banks, and county offices. West of the subject, toward Broad
\nStreet, are more commercial or retail developments such as automobile
\ndealerships, fast food restaurants, and shopping centers.<\/p>\n
The area has convenient access to Interstate 64, providing access to downtown
\nRichmond west of the subject.<\/p>\n
The immediate surrounding area is supportive and complementary to the continued
\ngrowth potential of the subject facility. The development has also contributed
\nto a continued growth of the neighborhood.<\/p>\n
-11-
\n 23<\/p>\n
MARKET DATA – Metropolitan Richmond\/Henrico County<\/p>\n
Based upon the 1993 Richmond Commercial Real Estate Market Review prepared by
\nHarrison and Bates the suburban office market out performed the downtown market
\nduring the 1992 fiscal year. Internal market growth particularly in the
\nnorthwest quadrant (subject location) was substantial during the 1992 fiscal
\nyear.<\/p>\n
Office building sales in 1992 ranged from $30.00 per square to $108.00 per
\nsquare foot. Generally, suburban office buildings were selling for $40.00 to
\n$60.00 per square foot, which in some instances is less than one-half their
\nreplacement (construction) cost. Rental rates appear to be stabilizing in all
\nmarkets and even increasing slightly in pockets of the suburban market. Deep
\ndiscounts through free rent and other concessions are somewhat passe’ since
\nmany tenants are more interested in the lowest possible rate over the term
\nrather than increasing the overall rate to cover the often extravagant
\nconcessions and extras.<\/p>\n
The Hanover Medical Park was completed in 1992 and contains a total of 110,000
\nsquare feet. This property was partially pre-leased with the remaining being
\navailable. Because of the anticipated increase in absorption in the suburban
\nmarket, the suburban market is expected to improve faster than the downtown
\nmarket. Office building sales will continue to be quite sporadic and will not
\ntruly stabilize until lenders are no longer owners, the RTC is out of the
\nbusiness and the Banks are willing and \/or able to make realistic loans on
\nspeculative office properties.<\/p>\n
During the first six months of 1993 the northwest quadrant office market
\ncontinued to absorb space and attract leasing and sales activity. Absorption
\nof the quadrant has been steady with 200,000 square feet of net absorption.
\nAdditionally, the quadrant’s appeal to tenants and prospective buyers remains
\nhigh. The overall vacancy for the northwest quadrant has been reduced to
\nalmost 13 percent, down considerable from end of year 1992s vacancy rate of
\n16.5 percent. Class A office space vacancy rate in the northwest quadrant is
\napproximately 7.5 percent.<\/p>\n
-12-
\n 24<\/p>\n
ZONING<\/p>\n
The subject property is zoned “O-3” by the Henrico County Zoning District. The
\npurpose of this district is to provide for office buildings in attractive
\nsurroundings with types of uses and signs so controlled as to be generally
\ncompatible with high-density residential surroundings.<\/p>\n
The subject improvement is considered a legal conforming use. Principle uses
\nincluded in this zoning district are as follows:<\/p>\n
Office Buildings
\n General Hospitals
\n Hotels or Motels
\n Retail and Service Facilities
\n Schools
\n Banks<\/p>\n
Maximum Stories: 8
\nMaximum Height: 110 feet
\nMinimum Lot Area: 25,000 feet
\nMinimum Lot Width: 100 feet
\nMinimum Front Yard Depth: 35 feet
\nMinimum Side Yard: 15 feet
\nMinimum Rear Yard: 40 feet<\/p>\n
REAL ESTATE TAXES AND ASSESSMENTS<\/p>\n
The subject property was assessed in 1993 by the Henrico County Assessment
\nOffice. The property is taxes based upon 100 percent of the assessed value.
\nThe property is identified by real estate account number HE 0110701. The
\nsubject’s parcel number is 60-0A-000-0025. The assessments for the parcel is
\npresented below:<\/p>\n
Parcel Identification Number 60-0A-000-0025<\/p>\n
Land $1,074,000
\n Improvements 6,339,000
\n ———-
\n $7,413,000 <\/p>\n
-13-
\n 25<\/p>\n
This assessment does include Professional Office Building I and Professional
\nOffice Building II.<\/p>\n
The millage rate applicable to the subject property for the 1993 tax years was
\n$.98 per $100. This would indicate a total tax amount payable for the 1993 tax
\nyear of $72,647.40.<\/p>\n
SITE ANALYSIS<\/p>\n
The subject site is located on the north side of Parham Road in the northwest
\nsection of Richmond, Virginia. The street address is 7760 Parham Road,
\nRichmond, Virginia. As indicate by the plat map included in the Exhibit
\nSection of this report, the site is irregular in shape and contains a total of
\n12.33 acres, of which 6.145 acres has been allocated to the subject. Access to
\nthe site is via Broad Street to the west or Staple Road to the east to Parham
\nRoad. Parham Road is a paved four-lane highway.<\/p>\n
The subject land is approximately level with grade on Parham Road. The
\ntopography is generally flat with the rear portion approximately ten feet above
\ngrade on Parham Road. Utilities to the site include water, sewer, electricity,
\ncable, telephone and gas.<\/p>\n
The subject property appears to have adequate drainage and soil load-bearing
\ncapabilities to support most development alternatives. A soil report, however,
\nwas not made available to the appraiser and it is assumed, based on existing
\nimprovement, that soil load-bearing capabilities are adequate.<\/p>\n
According to the County Planning Office, the subject property is not located in
\na flood plain zone.<\/p>\n
A legal description of the property and a land configuration plat are include
\nin the Exhibit Section of this report.<\/p>\n
-14-
\n 26<\/p>\n
BUILDING AND SITE IMPROVEMENTS<\/p>\n
BUILDING<\/p>\n
The HealthSouth Professional Office Building II is a three-story Class B
\nbuilding with an underground parking garage. The building was constructed and
\nopened in November of 1992. The building has a total gross square footage of
\n118,000 and net leasable area of 62,369 square feet.<\/p>\n
The building is a steel and concrete framed structure with a concrete slab
\nfloor. The first, second and third floors are elevated concrete slab with
\nsteel joist supports. The exterior wall finishes include brick veneer and
\nconcrete panels. The roof is concrete slab with built up composition in
\nportion with metal framed skylights in some portions. Interior wall finishes
\ninclude wood finishes with vinyl wall coverings in others. Built in wood
\ncounters and shelving are located in the first floor area.<\/p>\n
Heating and cooling is provided by central forced air system. Elevators are in
\nplace for service to all parking garage and doctors offices. Plumbing includes
\na full sprinkler located throughout the building including the parking garage.<\/p>\n
Overall the building is in excellent condition.<\/p>\n
SITE<\/p>\n
Land improvements to the site include site preparation and concrete paving for
\nparking, drives, curbs and sidewalks. In addition, site improvements include
\nlighting, signage and asphalt paving for driveways.<\/p>\n
More detail descriptions of the buildings and site improvements are included in
\nthe Exhibit Section of this report.<\/p>\n
-15-
\n 27<\/p>\n
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE<\/p>\n
The building is in excellent overall condition. It appears to have been
\nadequately maintained. No significant deferred maintenance was indicated from
\nthe appraiser’s inspection of the property. There does not appear to be any
\nfunctional or economic obsolescence.<\/p>\n
-16-
\n 28<\/p>\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, p. 45, 10th Ed. published by The
\n Appraisal Institute].<\/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
-17-
\n 29<\/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
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-3”, 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. Hospital
\nrelated development (POB I) located just west of the subject improvement
\nindicate that development is financially feasible.<\/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,<\/p>\n
-18-
\n 30<\/p>\n
and new development is financially feasible. Based on this analysis, the
\ncurrent highest and best use of the land, if vacant, would be for
\noffice\/institutional development.<\/p>\n
As Improved<\/p>\n
The subject site is currently improved with a 62,369 rentable square foot
\noffice 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 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 Henrico
\nCounty zoning guidelines. Under the zoning, the property could remain as it
\nis, 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
-19-
\n 31<\/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 only financially
\nfeasible use is to correct any deferred maintenance that currently exist. This
\nwill enable to the property to remain competitive in the leasing market. The
\nhighest 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
-20-
\n 32<\/p>\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
-21-
\n 33<\/p>\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 arm’s length transactions that conveyed a fee simple interest, and
\nonly real property was included in the transactions.<\/p>\n
-22-
\n 34
\nLand Comparable Number 1<\/p>\n
\n <\/p>\nLocation: 48-OA-0000-0023B; Broad Street<\/p>\n
Deed Book\/Page: 2330\/356<\/p>\n
Grantor: Fred and Lavinia Williams, Jr.<\/p>\n
Grantee: Broad Street Investment, a Delaware Corporation<\/p>\n
Date of Sale: January 1992<\/p>\n
Size: 4.644 acres, or 202,293 square feet<\/p>\n
Sale Price: $800,000<\/p>\n
Unit Price: $3.95 per square foot<\/p>\n
Zoning: BU-2<\/p>\n
Comments: Improved with shopping center<\/p>\n
Land Comparable Number 2<\/p>\n
Location: East Broad Street, 38-3-C (78-A2-9)<\/p>\n
Deed Book\/Page: 2279\/1889<\/p>\n
Grantor: Rowe Development Company<\/p>\n
Grantee: Innsbrook Land Holding Corporation<\/p>\n
Date of Sale: February 1991<\/p>\n
Size: 14.78 acres, or 643,643 square feet<\/p>\n
Sale Price: $2,886,200<\/p>\n
Unit Price: $4.48 per square foot<\/p>\n
Zoning: Commercial<\/p>\n
Comments: Improved with office building
\n<\/c><\/s><\/table>\n
-23-
\n 35<\/p>\n
Land Comparable Number 3<\/p>\n
\n <\/p>\nLocation: West End Drive, (59-A-6G)<\/p>\n
Deed Book\/Page: 2252\/1843<\/p>\n
Grantor: W. Randolph and Elizabeth Cosby<\/p>\n
Grantee: Eagles Self Storage Corp.<\/p>\n
Date of Sale: July 1990<\/p>\n
Size: 2.987 acres, or 130,114 square feet<\/p>\n
Sale Price: $552,595<\/p>\n
Unit Price: $4.25 per square foot<\/p>\n
Zoning: Business<\/p>\n
Comments: Improved with mini-storage facility<\/p>\n
Land Comparable Number 4<\/p>\n
Location: 8250 West Broad Street, 60-A-2 (92-B1-8)<\/p>\n
Deed Book\/Page: 2186\/247<\/p>\n
Grantor: Max and Wilma Pearson<\/p>\n
Grantee: Holly Brook, Inc. a Virginia Corporation<\/p>\n
Date of Sale: April 1989<\/p>\n
Size: 7.01 acres, or 305,356 square feet acres<\/p>\n
Sale Price: $1,100,000<\/p>\n
Unit Price: $3.60 per square foot<\/p>\n
Zoning: Commercial<\/p>\n
Comments: Improved with a Capitol Lincoln Mercury dealership
\n<\/c><\/s><\/table>\n
-24-
\n 36
\nLand Comparable Number 5 – (Listing)<\/p>\n
\n
\nLocation: Parham Road, north side, west of Hungary Spring; Map 60-A-25<\/p>\nAgent: Ted Austin, Prudential Realty Co., Richmond, Virginia<\/p>\n
Size: 6.69 acres, or 291,416 square feet<\/p>\n
Asking Price: $1,170,750<\/p>\n
Unit Price: $4.02 per square foot<\/p>\n
Zoning: Retirement Center
\n<\/c><\/s><\/table>\n
SUMMARY OF LAND COMPARABLES<\/p>\n
\n\n Sale Date of Size Unit Price
\n Number Location Sale (acres) (sq. ft.) Zoning
\n
\n 1 Broad Street, north side January 4.644 $3.95 BU-2
\n 1992
\n 2 East Broad Street February 14.780 $4.48 C-2
\n 1991
\n 3 West End Drive July 2.987 $4.25 BU-2
\n 1990
\n 4 West Broad Street April 7.010 $3.60 C-2
\n 1989
\n 5 Parham Road, north side Current 6.690 $4.02 RC
\n Listing <\/p>\nSUBJECT PARHAM ROAD 6.165 O-3
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-25-
\n 37<\/p>\n
Discussion of Land Comparables<\/p>\n
LAND SALE NUMBER 1 is a 4.644-acre tract which is now improved with a shopping
\ncenter. The comparable’s location is superior to the subject’s along Parham
\nRoad. Parham Road is developed with more institutional or office improvements
\nwhile this section of Broad Street is more commercially improved. We have made
\nan downward adjustment for this factor to the comparable. An additional
\ndownward adjustment was indicated because of the parcel’s smaller size in
\ncomparison to the subject’s 6.165 acres. Typically, smaller parcels sell at a
\nhigher unit price than larger tracts. A downward adjustment has been made for
\nzoning. The adjustments are shown on a Land Sale Adjustment Grid at the end of
\nthis discussion. The adjusted price per square foot of this comparable is
\n$3.36 per square foot.<\/p>\n
LAND SALE NUMBER 2 is a parcel containing a total of 14.78 acres. This
\ntransaction is approximately two years old indicating an upward adjustment for
\ntime. An adjustment for location was deemed not necessary. The property was
\nlevel throughout indicating a downward adjustment in comparison to the subject
\nwhich has a rolling topographical layout. An upward adjustment has been
\nindicated for the comparable’s larger size in comparison to the subject.
\nTypically, larger tract sell at a lower unit price than smaller tracts. A
\ndownward adjustment was indicated for zoning in comparison to the subject’s
\nOffice-Institutional zoning. The adjusted price per square foot of this
\ncomparable is $4.47.<\/p>\n
LAND SALE NUMBER 3 is a 2.987-acre tract located northwest of the subject
\nimproved with a mini-storage facility. Because this transaction is
\napproximately three years old we have made an upward adjustment for time. An
\nupward adjustment was indicated for this transaction based location along a
\nless visible thoroughfare with limited access. Downward adjustments were
\nindicated for the level topography and the smaller size. An additional
\ndownward adjustment has been made for zoning. The adjusted price for this
\ncomparable is $4.02 per square foot.<\/p>\n
LAND SALE NUMBER 4 is a 7.01-acre parcel that was improved with a car
\ndealership. It is located northwest of the subject property along Broad
\nStreet. A upward adjustment was indicated for time. An addition upward
\nadjustment was made for location. The adjusted price per square foot of this
\ncomparable is $3.97.<\/p>\n
-26-
\n 38
\nLAND SALE NUMBER 5 is a current listing of a site just east of the subject
\nalong Parham Road. This site is zoned for retirement facility. A downward
\nadjustment is indicated because this is a listing rather than an actual sale.
\nAn upward adjustment is also indicated due to the limited zoning. The adjusted
\nprice per square foot of this comparable is $4.19 per square foot.<\/p>\n
The adjusted land prices range from $3.36 per square foot to $4.19 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 $4.00 per square is representative of the
\nsubject site. The subject land value is estimated as follows:<\/p>\n
268,547 SF x $4.00\/SF = $1,074,188<\/p>\n
Rounded to: $1,074,000
\n ==========<\/p>\n
-27-
\n 39<\/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 HealthSouth Professional Building
\n Richmond, Virginia<\/p>\n
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
\n Element #1 #2 #3 #4 #5
\n
\nSale Price\/SF $3.95 $4.48 $4.25 $3.60 $4.01 <\/p>\nProperty Rights Fee Simple Same Same Same Same Same
\n Adjustment
\n ———————————————————–
\nAdjusted Price\/SF $3.95 $4.48 $4.25 $3.60 $4.01 <\/p>\n
Financing Cash Cash Cash Cash Cash Cash
\n Adjustment
\n ———————————————————–
\nAdjusted Price\/SF $3.95 $4.48 $4.25 $3.60 $4.01 <\/p>\n
Conditions of Sale None None None None Listing
\n Adjustment -5%
\n ———————————————————–
\nAdjusted Price\/SF $3.95 $4.48 $4.25 $3.60 $3.81 <\/p>\n
Market\/Time
\n Adjustment 0% 5% 5% 5% 0%
\n ———————————————————–
\nAdjusted Price\/SF $3.95 $4.70 $4.46 $3.78 $3.81 <\/p>\n
Other Adjustments
\n Location Adjustment -5% 0% 5% 5% 0%
\n Topography Adjustment 0% -5% -5% 0% 0%
\n Size Adjustment -5% 5% -5% 0% 0%
\n Zoning Adjustment -5% -5% -5% 0% 10%
\n Net Other Adjustments -15% -5% -10% 5% 10%<\/p>\n
FINAL ADJUSTED PRICE PER SF $3.36 $4.47 $4.02 $3.97 $4.19
\n =========================================================== <\/p>\n
<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-28-
\n 40<\/p>\n
Building 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 $7,598,450.<\/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
-29-
\n 41<\/p>\n
Marshall Valuation Service, 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 1992, and it is in excellent condition.
\nAfter taking into consideration all significant physical factors affecting the
\nsubject property, it is judged that the subject has no discernible depreciation
\nat present.<\/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 20 years.<\/p>\n
Cost Approach Conclusion<\/p>\n
The schedule that followings is a summary of the estimated replacement cost by
\ncategory for the subject building plus estimates of all forms of depreciation.<\/p>\n
-30-
\n 42
\n SUMMARY OF REPLACEMENT COSTS NEW
\n HEALTHSOUTH PROFESSIONAL BUILDING II
\n RICHMOND, VIRGINIA<\/p>\n
\n Replacement
\n Cost
\n
\nSite Preparation $ 24,295
\nFoundation 180,214
\nFrame 883,188
\nExterior Walls 540,255
\nFloors 596,837
\nRoof 513,465
\nRoof Cover 64,634
\nPartitioning and Built-in 1,502,568
\nCeilings 122,344
\nFloor Coverings 283,199
\nPlumbing 378,023
\nHVAC 395,605
\nElectrical 720,859
\nOther Features 202,382
\n ———–
\nTOTAL REPLACEMENT COST $ 6,407,868<\/p>\nArchitect’s Fees Plans and Specs 4.4% 281,946
\nArchitect’s Fees, Supervision 3.4% 217,686
\nEntrepreneural Overhead, Profit, and Other
\n Miscellaneous Fees 10.0% 690,768
\n ———–
\nTotal Other Costs $ 1,190,582<\/p>\n
TOTAL PROJECT REPLACEMENT COST $ 7,598,450<\/p>\n
ACCRUED DEPRECIATION:
\nBuilding Costs 0% Straight Line 0\/45ths 0 <\/p>\n
Depreciated Value Building $ 7,598,450 <\/p>\n
SITE IMPROVEMENTS
\n Replacement Cost $ 164,000
\n Depreciated Cost 0% Straight Line 0\/20ths 0 <\/p>\n
Depreciated Value $ 164,000<\/p>\n
Plus Land Value $ 1,740,000
\n ———– <\/p>\n
DEPRECIATED COST APPROACH VALUE $ 8,836,450 <\/p>\n
<\/c><\/c><\/s><\/caption>\n<\/table>\n
-31-
\n 43<\/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
$8,836,000
\n ==========<\/p>\n
-32-
\n 44<\/p>\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
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
-33-
\n 45
\nIMPROVED SALE NUMBER 1 <\/p>\n
\n
\nGENERAL SALE DATA <\/p>\nLocation: 1016 Independence Boulevard,
\n Virginia Beach, Virginia
\nDate of Sale: May 12, 1992
\nDeed Book\/Page: 3086\/1410
\nGrantor: Diagnostic Center Associates
\nGrantee: Diagnostic Center of Virginia Beach
\nSale Price: $1,586,500
\nTerms of Sale: Assumption of original note, $568,494
\n cash
\nPROPERTY DATA <\/p>\n
Land Size: .93 acres
\nBuilding Size: 15,000 square feet
\nYear Built: 1986<\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——- ——
\nEstimated Gross Income: $225,000 $15.00
\nVacancy Allowance @ 5%: ($ 11,250) ($ 0.75)
\n ——— ——-
\nEffective Gross Income: $213,750 $14.25
\nEstimated Expenses @ $3.50\/SF ($ 52,500) $ 3.50
\n ——— ——
\nNet Operating Income: $161,250 $10.75<\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $105.77
\nStabilized Overall Rate: 10.16%
\nEGIM: 7.42
\n<\/c><\/s><\/table>\n
COMMENTS<\/p>\n
Structure is a one-story, Class C, medical office designed for a single tenant
\nuser. The building is located adjacent to a hospital.<\/p>\n
-34-
\n 46<\/p>\n
IMPROVED SALE NUMBER 2 <\/p>\n
\n
\nGENERAL SALE DATA <\/p>\nLocation: West side of 20th Street South at the
\n 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 percent to 45 percent of the total purchase price.<\/p>\n
-35-
\n 47<\/p>\n
IMPROVED SALE NUMBER 3<\/p>\n
GENERAL SALE DATA<\/p>\n
Location: 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>\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<\/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.<\/p>\n
-36-
\n 48<\/p>\n
IMPROVED SALE NUMBER 4<\/p>\n
GENERAL SALE DATA<\/p>\n
Location: 816 Independence Boulevard,
\n Virginia Beach, Virginia
\nDate of Sale: August 1991
\nDeed Book\/Page: 3006\/1566
\nGrantor: Humana of Virginia, Inc.
\nGrantee: MPB, Inc.
\nSale Price: $5,011,700
\nTerms of Sale: Cash to Seller<\/p>\n
PROPERTY DATA <\/p>\n
Land Size: 3.507 acres (approximate)
\nBuilding Size: 35,000 square feet
\nYear Built: 1977
\nOccupancy at Sale: 75.0%<\/p>\n
STABILIZED OPERATING DATA
\n Dollars Per SF
\n ——– ——
\nEstimated Gross Income*: $630,000 $18.00
\nVacancy Allowance @ 5%: $ 31,500 ($ 0.90)
\n ——– ——
\nEffective Gross Income: $598,500 $17.10
\nEstimated Expenses @ $5.00\/SF $175,000 ($ 5.00)
\n ——– ——
\nNet Operating Income: $423,500 $12.10 <\/p>\n
MARKET VALUE INDICATORS <\/p>\n
Sale Price Per Square Foot: $143.19
\nStabilized Overall Rate: 8.45%
\nEGIM: 8.37<\/p>\n
COMMENTS<\/p>\n
Built as a four-story, Class A, building located next to hospital. The
\nconstruction is steel frame with brick veneer. It is located north side of
\nIndependence Avenue<\/p>\n
-37-
\n 49<\/p>\n
These four sales are summarized as follows:<\/p>\n
SUMMARY OF IMPROVED SALES<\/p>\n
\n\nSALE RENTABLE PRICE PER
\n NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT<\/p>\n
\n 1 1016 Independence Blvd. 15,000 $1,586,500 $105.77
\n Virginia Beach, Virginia
\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 4 816 Independence Blvd. 35,000 $5,011,700 $143.19
\n Virginia Beach, Virginia
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\nThe unadjusted prices of these comparables range from $84.13 per square foot
\nto $143.33 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 NUMBER 1 is a Class C professional office building that is located
\nadjacent to a hospital. The facility was acquired by a physician’s group to
\nprovide outpatient service in conjunction with the hospital. This transaction
\nwas reportedly at a market value price. However, a downward adjustment is
\nstill indicated because the building never was marketed as a vacant building
\ndue to this relationship. The building has a substantial setback from
\nIndependence Boulevard and has poor visibility. An upward adjustment is
\nindicated due to this inferior location compared to the subject. A downward
\nadjustment to the price per square foot is indicated because of the smaller
\nsize of this comparable. An upward adjustment to this comparable is indicated
\nbecause of the subject’s superior construction quality. The adjusted price per
\nsquare foot of this comparable is $114.23.<\/p>\n
SALE NUMBER 2 is the sale of a building purchased by the University of Alabama
\nto use as a Medical Genetics Center. An upward adjustment was indicated
\nbecause of the time of sale. Upward adjustments were indicated because of the
\ninferior location as compared to the subject. An additional upward adjustment
\nwas made for size and construction quality. The adjusted price for this
\ncomparable is $114.84 per square foot.<\/p>\n
-38-
\n 50<\/p>\n
SALE NUMBER 3 was the sale of a three-building professional office facility
\nthat is located approximately one-quarter-mile from the North Fulton Medical
\nCenter in Roswell, Georgia. An upward adjustment was made for time of sale.
\nNo adjustments to the price per square foot of this comparable are indicated
\nbecause of size. Upward adjustments are indicated due to the comparable’s
\nsuperior location and construction quality. The adjusted price per square foot
\nof this comparable is $151.31.<\/p>\n
SALE NUMBER 4 was the August 1992 sale of an office building in Virginia Beach,
\nVirginia. Upward adjustment was indicated for the time of sale. An upward
\nadjustment to the price per foot of this comparable is indicated because of the
\ncomparable’s location and quality. A downward adjustment is indicated for
\nsize. The adjusted price for this comparable is $172.90 per square foot.<\/p>\n
The adjusted prices per square foot range from $114.23 to $172.90. An adjusted
\nprice of $160.00 per square foot is representative of the subject property.
\nBased on this analysis, the market value of the subject hospital by the Direct
\nSales Comparison Approach, as of September 29, 1993, the effective date of this
\nreport, is calculated as follows:<\/p>\n
62,369 SF x $160.00\/SF = $9,979,040<\/p>\n
Rounded to: $9,980,000
\n ==========<\/p>\n
-39-
\n 51<\/p>\n
I M P R O V E D S A L E S A D J U S T M E N T G R I D
\n HealthSouth Professional Building II
\n Richmond, Virginia<\/p>\n
\n\n Subject Land Comp Land Comp Land Comp Land Comp
\n
\n Element #1 #2 #3 #4 <\/p>\nSale Price\/SF $105.77 $ 84.13 $139.23 $143.19 <\/p>\n
Property Rights Fee Simple Same Same Same Same
\n Adjustment
\n ———————————————–
\nAdjusted Price\/SF $105.77 $ 84.13 $139.23 $143.19 <\/p>\n
Financing Cash Cash Cash Cash Cash
\n Adjustment
\n ———————————————–
\nAdjusted Price\/SF $105.77 $ 84.13 $139.23 $143.19 <\/p>\n
Conditions of Sale None None None
\n Adjustment -10% -10%
\n ———————————————–
\nAdjusted Price\/SF $ 95.19 $ 84.13 $125.31 $143.19<\/p>\n
Market\/Time
\n Adjustment 0% 5% 5% 5%
\n ———————————————–
\nAdjusted Price\/SF $ 95.19 $ 88.34 $131.57 $150.35<\/p>\n
Other Adjustments:
\n Location Adjustment 15% 15% 10% 10%
\n Topography Adjustment 0% 0% 0% 0%
\n Size Adjustment -5% 5% 0% -5%
\n Zoning Adjustment 0% 0% 0% 0%
\n Construction Adjustment 10% 10% 5% 10%
\n Net Other Adjustments 20% 30% 15% 15%<\/p>\n
FINAL ADJUSTED PRICE PER SF $114.23 $114.84 $151.31 $172.90
\n ===============================================
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
-40-
\n 52<\/p>\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
\ndoctor\/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 doctors at different rates and terms, or they can use the office space
\nfor hospital purposes. This master lease also guarantees payment regardless of
\noccupancy levels<\/p>\n
The appraisers received a draft of the form of master lease agreement, but the
\nactual 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
62,369 SF x $18.00\/SF = $1,122,642<\/p>\n
Because of the guarantee of payment related to the master lease regardless of
\noccupancy levels, we have not utilized a vacancy allowance for the property.<\/p>\n
-41-
\n 53<\/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$56,132, based on the management experience of other properties. The net
\noperating income for the property is $1,122,642 less $56,132, or $1,066,510.<\/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
Sale No. Property Location Sale Date OAR (%)<\/p>\n
1 Independence Boulevard May 1992 7.42%
\n Virginia Beach, Virginia
\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 Independence Boulevard August 1991 8.45%
\n Virginia Beach, Virginia<\/p>\n
The direct capitalization, or overall rates, for these comparables ranged from
\n7.4 percent to 10.1 percent.<\/p>\n
A capitalization rate slightly above the upper end of this range, at 10.5
\npercent, is considered appropriate because of the current physical condition of
\nthe building as compared to the comparable and the guaranteed rents involved.<\/p>\n
Therefore, 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
$1,066,510\/.105 = $10,157,238<\/p>\n
Rounded to: $10,150,000
\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 HealthSouth Professional Building II. The three approaches are summarized
\nas follows:<\/p>\n
Cost Approach . . . . . . . . . . . . . . . . . . . . $ 8,836,000
\n Direct Sales Comparison Approach . . . . . . . . . . . $ 9,980,000
\n Income Approach . . . . . . . . . . . . . . . . . . . $10,150,000<\/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 sixteen 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 quality and quality of data available in this approach was
\nconsidered good, but two of the four sales were not properties located in the
\nVirginia 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 buyer 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
\nHealthSouth Professional Building II, as of September 29, 1993, and based on
\nthe assumptions and limiting conditions in this report, is:<\/p>\n
$10,150,000
\n ===========<\/p>\n
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