\n TABLE OF CONTENTS<\/p>\n
Page
\n Number
\n ——-
\n
\nStatement of Basic Assumptions and Limiting Conditions
\nSummary of Salient Facts and Conclusions
\nSubject Photographs<\/p>\nIntroduction 1
\n Property Identification 1
\n Purpose of the Appraisal 1
\n Function of the Appraisal 1
\n Scope of the Appraisal 1
\n Asset Rights Appraised 2
\n Effective Date of the Appraisal 2
\n Definition of Value 2
\n Compliance 3
\n Competency 3
\n Sale History 4
\n Reasonable Exposure Time 4
\nHistory and Nature of the Business Environment 6
\nState Nursing Home Environment 14
\nRegional and Market Analysis 18
\nNeighborhood and Site Description 23
\n Real Estate Tax and Assessment Analysis 26
\nHighest and Best Use 29
\nValuation Methodology 32
\nIncome Approach 33
\nCost Approach 41
\nCorrelation of Value 66
\nCertification 67<\/p>\n
ADDENDUM<\/p>\n
Supporting Schedules A-1<\/p>\n
EXHIBIT SECTION<\/p>\n
Exhibit A – Legal Description E- 1
\nExhibit B – Building Description E- 2
\nExhibit C – Land Improvements Description E- 6
\nExhibit D – Professional Qualifications E- 7
\n<\/c><\/s><\/caption>\n<\/table>\n
7
\n STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS<\/p>\n
The appraisers assume:<\/p>\n
1. That the subject property is marketable and that the property is free
\n and clear of all liens, encumbrances, easements and restrictions
\n unless otherwise noted.<\/p>\n
2. No liability for matters legal in nature.<\/p>\n
3. That ownership and management will be in competent and responsible
\n hands. We have not been engaged to evaluate the effectiveness of
\n Management and we are not responsible for future marketing efforts and
\n other Management actions upon which actual results will depend.<\/p>\n
4. That the property will not operate in violation of any applicable
\n government regulations, codes, ordinances or statutes. It is assumed
\n that all required licenses, certificates of occupancy, consents or
\n other legislative or administrative authorization from all local,
\n state or national governmental or private entities or organizations
\n have been or can be obtained or renewed.<\/p>\n
5. Unless otherwise noted, that there will be no changes in reimbursement
\n or tax regulations.<\/p>\n
6. That there are no concealed or dubious conditions of the subsoil or
\n subsurface waters including water table and floodplain. We further
\n assume that there are no regulations of any government entity to
\n control or restrict the use of the property unless specifically
\n referred to in the report.<\/p>\n
7. That there are no significant changes in the supply and demand
\n patterns as indicated in this report. It is emphasized that this is
\n not a study of market feasibility, rather an appraisal of the property
\n under market conditions as observed as of the date of our market
\n research. These market conditions have been researched and are
\n believed to be correct; however, the appraisers assume no liability
\n should market conditions materially change because of unusual or
\n unforeseen circumstances.<\/p>\n
The following limiting conditions are submitted with this report:<\/p>\n
1. All of the facts, conclusions and observations contained herein are
\n consistent with information available as of the date of valuation.
\n Value is affected by economic conditions, local and national. We,
\n therefore, assume no liability for any unforeseen precipitous change
\n in the economy.
\n 8
\n STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS<\/p>\n
2. The valuation applies only to the property described herein and was
\n prepared for the function stated in this report and should not be used
\n for any other purpose.<\/p>\n
3. The appraisers have made no survey of the property. Any and all maps,
\n sketches and site plans are assumed to be correct, but no guarantee is
\n made as to their accuracy.<\/p>\n
4. Information furnished by others is presumed to be reliable, and where
\n so specified in the report, has been verified; but no responsibility,
\n whether legal or otherwise, is assumed for its accuracy, and it cannot
\n be guaranteed as being certain.<\/p>\n
5. The signatories herein shall not be required to give testimony or
\n attend court or be at any governmental hearing with reference to the
\n subject property unless prior arrangements have been made with
\n Valuation Counselors Group, Inc.<\/p>\n
6. Disclosure of the contents of this report is governed by the bylaws
\n and regulations of professional appraisal organizations. Neither this
\n report nor any portions thereof shall be disseminated to the public
\n through public relations media, news media, advertising media, sales
\n media or any other public means of communication without the prior
\n written consent and approval of the appraisers and Valuation
\n Counselors Group, Inc.<\/p>\n
7. No responsibility is taken for changes in market conditions after the
\n date of valuation, or for the inability of the property owner to find
\n a purchaser at the appraised value.<\/p>\n
8. The legal description shown herein has been included for the sole
\n purpose of identifying the subject property. The figures have not
\n been verified by a licensed surveyor or legal counsel and should not
\n be used in any conveyance or any other legal document.<\/p>\n
9. We were not aware of and the report does not take into consideration
\n the possibility of the existence of asbestos, PCB transformers, or
\n other toxic, hazardous, or contaminated substances and\/or underground
\n storage tanks containing hazardous material. The report does not
\n consider the cost of encapsulation treatment or removal of such
\n material. If the client\/property owner has a concern over the
\n existence of such conditions in the subject property, the appraisers
\n consider it imperative to retain the services of a qualified engineer
\n or contractor to determine the existence and extent of such hazardous
\n conditions. Such consultation should include the estimated cost
\n associated with any required treatment or removal of hazardous
\n material.
\n 9
\n STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS<\/p>\n
10. The report, the final estimate of value and the prospective financial
\n analyses included herein are intended for your information. Neither
\n this report nor its contents nor any reference to Valuation Counselors
\n Group, Inc. may be included or quoted in any offering circular,
\n registration statement, prospectus, sales brochure, appraisal, loan
\n document or other document without Valuation Counselors Group, Inc.’s
\n prior written permission.<\/p>\n
11. The estimate of the market value stated herein is the value of the
\n subject property as a single entity. No consideration was given to a
\n bulk sale or group purchase of properties. In the event that this
\n appraisal is used as a basis to set a market price, no responsibility
\n is assumed for the seller’s inability to obtain a tenant or purchaser
\n at the value reported herein.<\/p>\n
12. It is assumed that there are no outstanding issues related to fraud
\n and abuse statutes under the Medicare\/Medicaid program which would
\n impact value.<\/p>\n
13. It is assumed that the business has an adequate insurance plan.<\/p>\n
14. A copy of this report and the working papers from which it was
\n prepared will be kept in our office files for eight years.
\n 10
\n SUMMARY OF SALIENT FACTS AND CONCLUSIONS<\/p>\n
\n
\nGENERAL DATA<\/p>\nEffective Date of Value March 1, 1994<\/p>\n
Date of Inspection March 17, 1994<\/p>\n
Property Identification Mountain View Nursing Center<\/p>\n
Property Location Sand Hill Road, Greensburg, Westmoreland County, Pennsylvania<\/p>\n
Assets Appraised Tangible and Intangible Assets<\/p>\n
Interest Appraised Leased Fee Estate<\/p>\n
Number of Licensed Beds 137<\/p>\n
Land Size 8.238 Acres<\/p>\n
Improvement Description One story plus partial basement, Class C, masonry and wood framed nursing home consisting
\n of 52,727 gross square feet, built in 1971 with an addition in 1981.<\/p>\n
INDICATIONS OF MARKET VALUE<\/p>\n
Income Approach $9,800,000<\/p>\n
Market Approach N\/A<\/p>\n
Cost Approach $4,800,000<\/p>\n
Final Estimate of Market Value $9,800,000<\/p>\n
REASONABLE EXPOSURE TIME Twelve Months
\n<\/c><\/s><\/table>\n
11
\n SUBJECT PHOTOGRAPHS<\/p>\n
(Photo)<\/p>\n
EAST VIEW LOOKING WEST<\/p>\n
(Photo)<\/p>\n
REAR VIEW, WEST LOOKING EAST
\n 12
\n SUBJECT PHOTOGRAPHS<\/p>\n
(Photo)<\/p>\n
INTERIOR – HALLWAY<\/p>\n
(Photo)<\/p>\n
INTERIOR – PATIENT ROOM
\n 13
\n INTRODUCTION<\/p>\n
PROPERTY IDENTIFICATION<\/p>\n
The subject property, known as Mountain View Nursing Center and doing business
\nas Integrated Health Services at Mountain View, consists of a 137 licensed bed
\nnursing home located at Sand Hill Road, in Greensburg, Westmoreland County,
\nPennsylvania. For title reference and legal description, see the Exhibit
\nSection. The improvement consists of a 52,727 square foot building located on
\nan 8.238 acre site.<\/p>\n
PURPOSE OF THE APPRAISAL<\/p>\n
The purpose of the appraisal is to estimate the market value of the leased fee
\nestate as of the date specified within this report.<\/p>\n
FUNCTION OF THE APPRAISAL<\/p>\n
This report is to be used in connection with financing.<\/p>\n
SCOPE OF THE APPRAISAL<\/p>\n
This appraisal engagement has been conducted using applicable standard
\nappraisal techniques and in conformity with the Uniform Standards of
\nProfessional Appraisal Practice (USPAP) as set forth by the Appraisal
\nFoundation. This appraisal entails the collection, analysis and description of
\ndata pertaining to physical, legal and economic conditions that affect the use
\nand value of the subject property and any other relevant data that would
\npertain to the appraisal of a healthcare facility. In our valuation of the
\nsubject property, we have conducted the Income and Cost Approaches to value.
\nThe Income Approach entailed a present value analysis of lease income. The
\nCost Approach involved the estimation of the depreciated replacement cost of
\nthe improvements based upon national cost publications, which was added to the
\nvalue of the land as if vacant. The Market Approach has not been utilized due
\nto the lack of transfers involving similar leased fee estate interests in
\nnursing facilities. We believe the lease payments include a return on assets
\nbeyond the real<\/p>\n
1
\n 14
\n INTRODUCTION<\/p>\n
property. In accordance with Uniform Standards of Professional Appraisal
\nPractice (USPAP), an attempt must be made to estimate the value of the real
\nproperty from the value of other assets which may exist. However, an attempt
\nto ascertain the contribution of the various assets to income is nearly
\nimpossible since the value of the tangible property is highly interrelated to
\nthe business enterprise. Accordingly, as allowed by the departure provision of
\nUSPAP, we have not provided an allocation of value between the real property
\nand other assets which may exist.<\/p>\n
ASSET RIGHTS APPRAISED<\/p>\n
The property rights appraised herein is the leased fee interest in the
\nproperty.<\/p>\n
The interest is defined by the Appraisal Institute as follows:<\/p>\n
LEASED FEE ESTATE: The ownership interest held by a landlord with
\n the right of use and occupancy conveyed by lease to others; usually
\n consists of the right to receive rent and the right to repossession
\n at the termination of the lease.<\/p>\n
EFFECTIVE DATE OF THE APPRAISAL<\/p>\n
The date of this appraisal is March 1, 1994.<\/p>\n
DEFINITION OF VALUE<\/p>\n
For the purpose of this report, 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, knowledgeably
\n and assuming the price is not affected by undue stimulus. Implicit
\n in this definition is the consummation of a sale as of a specified
\n date and the passing of title from seller to buyer under conditions
\n whereby:<\/p>\n
a) buyer and seller are typically motivated;<\/p>\n
2
\n 15
\n INTRODUCTION<\/p>\n
b) both parties are well informed or well advised and each
\n acting in what he considers his own best interest;<\/p>\n
c) a reasonable time is allowed for exposure in the open market;<\/p>\n
d) payment is made in terms of cash in U.S. dollars or in terms
\n of financial arrangements comparable thereto; and<\/p>\n
e) the price represents the normal consideration for the
\n property sold unaffected by special or creative financing
\n or sales concessions granted by anyone associated with the
\n sale.<\/p>\n
COMPLIANCE<\/p>\n
To the best of our knowledge, the analyses, opinions and conclusions that were
\ndeveloped in this report, have been prepared in conformity with the Uniform
\nStandards of Professional Appraisal Practice (USPAP) of the Appraisal
\nFoundation and the Appraisal Institute.<\/p>\n
COMPETENCY<\/p>\n
From our understanding of the assignment to be performed, which we have
\naddressed in the Scope of this Appraisal, it is our opinion that we are fully
\ncompetent to perform this appraisal, due to the fact that:<\/p>\n
a. The appraiser has full knowledge and experience in the
\n nature of this assignment.<\/p>\n
b. All necessary and appropriate steps have been taken in order
\n to complete the assignment competently.<\/p>\n
c. There is no lack of knowledge or experience that would
\n prohibit this assignment from being completed in a
\n professional competent manner or where an unbiased or
\n misleading opinion of value would be rendered.<\/p>\n
3
\n 16
\n INTRODUCTION<\/p>\n
SALE HISTORY<\/p>\n
The real estate currently has as its fee titled owner a corporation by the name
\nof Mountain View Nursing Center, Inc. The operating company is called
\nIntegrated Health Services, Inc., who has operated the facility since 1986.
\nIntegrated Health Services, Inc. has advised us that the facility will be sold
\nin the immediate future to Crescent Capital for $9,775,000 and subsequently
\nleased to Integrated Health Services, Inc. pursuant to a ten year lease with
\ntwo optional ten year renewal periods. We have also been advised us that the
\nlease will be based on an initial rent of $1,061,000 with additional rent
\nprovisions based upon general factors including the consumer price index and
\nnet operating income levels of the facility.<\/p>\n
According to public records, the subject property has not transferred ownership
\nin the past five years.<\/p>\n
REASONABLE EXPOSURE TIME<\/p>\n
Reasonable Exposure Time, for the purpose of this report, is defined as: “The
\nestimated length of time the property interest being appraised would have been
\noffered on the market prior to the hypothetical consummation of a sale at
\nmarket value on the effective date of the appraisal; a retrospective estimate
\nbased upon an analysis of past events assuming a competitive and open
\nmarket.”(1)<\/p>\n
————————- <\/p>\n
(1) Uniform Standards of Professional Appraisal Practice, 1993 Edition,
\n Washington, DC: The Appraisal Foundation, 1991, page 63 (SMT-6).<\/p>\n
4
\n 17
\n INTRODUCTION<\/p>\n
The concept of reasonable exposure encompasses not only adequate, sufficient
\nand reasonable time, but also adequate, sufficient and reasonable effort. This
\nconcept also takes into consideration the type of property being appraised,
\nsupply\/demand conditions as of the effective date of the appraisal and the
\nanalysis of historical sales information (sold after exposure and after
\ncompletion of negotiations between the seller and buyer). The reasonable
\nexposure period is, therefore, a function of price, time and use, not an
\nisolated estimate of time alone.<\/p>\n
Reasonable exposure time is always presumed to precede the effective date of
\nthe appraisal and differs for various types of real estate and under various
\nmarket conditions. Our estimate of exposure time is, therefore, based on the
\nsubject property’s determined Highest and Best Use as a healthcare facility in
\na market where there is evidence of demand for such services.<\/p>\n
The estimate of reasonable exposure time is not a predication, but rather, is
\nonly a judgment made by the appraiser based on market conditions preceding the
\neffective date of the appraisal.<\/p>\n
Based upon the determination of the subject’s Highest and Best Use, with
\nconsideration given to the overall condition and physical characteristics of
\nthe subject, it is estimated that a reasonable exposure time preceding the
\nactual sale of the property and thus implicit in our value estimate is twelve
\nmonths.<\/p>\n
5
\n 18
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
INDUSTRY OUTLOOK<\/p>\n
The elderly care segment of the healthcare industry includes such providers as
\nnursing homes, personal care facilities and retirement centers. Demand for
\nelderly care services continues to increase with the growth of the elderly aged
\nsegment of the United States population.<\/p>\n
The sixty-five and over aged portion of the population is forecasted to grow an
\nadditional 11% between 1990 and 1995. During 1990, the elderly aged sixty-five
\nyears and over comprised 13.3% of the total United States population, as
\ncompared to 11.3% as of the 1980 census report. Furthermore, the sixty-five
\nand over aged portion of the population is forecasted to increase to 14.1% of
\ntotal population by 1995.<\/p>\n
United States population statistics and forecasts are provided on the following
\ntable.<\/p>\n
\n\n FORECASTED UNITED STATES POPULATION
\n (THOUSANDS)<\/p>\n
PERCENT CHANGE
\n 1980 1990 1995 1980 TO 1990 1990 TO 1995<\/p>\n
\n Total U.S. 226,546 249,958 260,788 10.3% 4.3%<\/p>\n 65 Years + 25,549 33,184 36,828 29.9% 11.0%<\/p>\n
Percent of 11.3% 13.3% 14.1%
\n Total U.S.<\/p>\n
75 Years + 9,969 14,257 16,935 43.0% 18.8%<\/p>\n
Percent of 4.4% 5.7% 6.5%
\n Total U.S.<\/p>\n
Source: Donnelley Demographics
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
6
\n 19
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
Another factor which has contributed to growth in demand for elderly care is
\nthe increased life expectancy of the United States population.<\/p>\n
As the average life expectancy for both men and women continues to increase, as
\nillustrated on the following table, the probability of an elderly person
\nrequiring some form of healthcare service also increases.<\/p>\n
\n\n UNITED STATES LIFE EXPECTANCY<\/p>\n MEN WOMEN
\n AT BIRTH AT AGE 65 AT BIRTH AT AGE 65<\/p>\n
\n 1900 45.6 11.4 49.1 12.0
\n 1910 50.2 11.4 53.7 12.1
\n 1920 54.6 11.8 56.3 12.3
\n 1930 58.0 11.4 61.4 12.9
\n 1940 60.9 11.9 65.3 13.4
\n 1950 65.3 12.8 70.9 15.1
\n 1960 66.6 12.9 73.2 15.9
\n 1970 67.1 13.1 74.8 17.1
\n 1980 69.9 14.0 77.5 18.4
\n 1990 72.3 15.1 79.9 19.9
\n 2000E 73.4 15.7 81.1 20.8<\/p>\n Source: United States Bureau of the Census
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
7
\n 20
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
While most major healthcare providers will benefit from the graying of America,
\nthe nursing home industry will be the chief beneficiary. According to the
\nUnited States Commerce Department, long-term care spending for nursing home and
\nhome care services during the 1988 to 2003 period is expected to increase twice
\nas quickly as the rate of growth of those receiving the services. Demand for
\nretirement centers and personal care facilities has also increased due to the
\naforementioned demographic factors coupled with the fact that the majority of
\nyoung couples are employed full-time and unable to care for elderly parents at
\nhome.<\/p>\n
During the late 1980s, the growth of total facilities or number of units per
\nfacility in the retirement industry increased significantly. In a survey
\nconducted by Contemporary Long-Term Care (CLTC), 72% of the fifty largest
\nretirement operators reported an increase in their total number of facilities
\nin 1988. The growth had slowed in 1989 with 55.6% of fifty-four operators
\nsurveyed reporting increases in total facilities and number of units per
\nfacility. The average number of units per facility increased from 84 to 122
\nunits in the same survey.(2)<\/p>\n
Growth in the retirement industry is forecasted to continue, but at a much
\nslower rate in regards to the growth exhibited during the 1980s.<\/p>\n
United States healthcare costs have increased dramatically over the past few
\nyears. From 1950 to 1990 healthcare expenditures have grown from 4.4% of gross
\nnational product to 12.2% and are forecasted to grow to 16.4% by the year 2000.
\nTotal federal government outlays for healthcare have increased from $24 per
\ncapita in 1965 to $753 in 1990, with forecasts to increase to $1,810 by the
\nyear 2000. Furthermore, health insurance premiums had increased 1,195% between
\n1970 and 1990.<\/p>\n
– ————————- <\/p>\n
(2) “Growth Slows But Continues”, CLTC, June, 1990. <\/p>\n
8
\n 21
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
The current fiscal policy of the United States Government has left many states
\nresponsible for providing services the federal government previously provided.
\nThis has led to a fiscal crisis in many states. The direct impact of these
\nchanges is seen in reduced Medicaid budgets. The problem is compounded by the
\nfact that Medicaid has grown faster than any other major state expenditure.
\nCurrently, Medicaid covers slightly less than 50% of total patient days in
\nnursing homes. In 1989 Medicaid accounted for an average of 14% of the state
\nbudget, compared to 9% a decade ago. A recent survey by the National
\nAssociation of State Budget Office indicates that a total of twenty-eight
\nstates face budget deficits and thirty-two states expect Medicaid spending to
\nexceed current forecasts.(3)<\/p>\n
Escalating costs and the faltering reimbursement system has forced many states
\nto consider decertification and withdrawal from the program. In addition,
\nlong-term care providers in several states have turned to the courts in an
\neffort to receive fair reimbursement from the Medicaid system. Consequently,
\nwidespread healthcare cost containment may exhibit downward pressure on the
\nvalue of long-term care facilities with a high reliance on Medicaid patients.<\/p>\n
Long-term care by source of funds from 1960 to 2000 is presented on the
\nfollowing table.<\/p>\n
– ————————- <\/p>\n
(3) Pallarito, Karen, “Budget Deficit Threats to Shut
\n Out Medicaid Benefits”, Modern Healthcare, April 22,
\n 1991. <\/p>\n
9
\n 22<\/p>\n
COST APPROACH<\/p>\n
Land Sale Number 2 Photograph<\/p>\n
(Photo)<\/p>\n
23<\/p>\n
\n\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
Long-Term Care Expenditures Aggregate, Per Capita and Percent Distribution,
\n By Source of Funds: Selected Calendar Years 1960-2000<\/p>\n
THIRD PARTIES
\n GOVERNMENT<\/p>\n
DIRECT ALL PRIVATE OTHER STATE
\n PATIENT THIRD HEALTH PRIVATE AND
\nYEAR TOTAL PAYMENTS PARTIES INSURANCE FUNDS TOTAL FEDERAL LOCAL MEDICARE MEDICAID<\/p>\n
\n1960 100.0% 80.0% 20.0% — 1.0% 1.0% 1.0% 1.0% — —
\n1970 100.0% 46.9% 51.0% 0.0% 4.1% 46.9% 28.6% 18.4% 4.1% 28.6%
\n1980 100.0% 43.5% 56.5% 1.0% 3.0% 52.5% 30.5% 22.0% 2.0% 48.5%
\n1985 100.0% 49.5% 51.6% 1.2% 2.1% 48.4% 28.4% 20.0% 1.8% 44.6%
\n1990 100.0% 45.0% 55.0% 1.1% 1.9% 52.2% 32.4% 19.8% 4.7% 45.4%
\n1995 100.0% 42.9% 57.0% 1.3% 1.9% 53.8% 33.1% 20.7% 3.7% 48.1%
\n2000 100.0% 45.0% 55.0% 1.7% 2.0% 51.4% 31.7% 19.6% 3.4% 45.8%<\/p>\nNote: 0.0 denotes values less than $50 million. <\/p>\n
Source: Health Care Financing Administration. Office of the Actuary.
\n Office of National Health Statistics. Baltimore, Maryland: December, 1991.<\/p>\n
Forecasts: Sonnefeld, Sally; Waldo, Daniel; Lemieux, Jeffrey; McKusick, David,
\nProjections of National Health Expenditures Through the Year 2000. Health Care
\nFinancing Review, Fall 1991, Vol. 13, No.1. Health Care Financing
\nAdministration. Baltimore, Maryland: October, 1991.<\/p>\n
<\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
10
\n 24
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
As indicated, healthcare facilities currently derive most of their revenue from
\ngovernment sources such as Medicaid, Medicare and the Veterans Administration
\nand from private sources such as personal funds and insurance programs. The
\nMedicaid program, which accounts for over 45% of the United States nursing home
\nrevenues, typically pays rates significantly lower than Medicare or private
\nrates.<\/p>\n
Medicaid covers the skilled or intermediate nursing home costs of qualified low
\nincome residents for an unlimited period. Medicare only pays part of the
\nskilled nursing home costs incurred by qualified residents during a limited
\nperiod. In addition, nursing homes must meet strict federal guidelines in
\norder to qualify as Medicare certified for reimbursement. Therefore, only a
\nlow percentage of nursing home patients qualify for Medicare coverage relative
\nto Medicaid. However, nursing homes that attract a higher percentage of
\nMedicare or private pay patients typically have higher operating margins than
\nsimilar facilities with a higher Medicaid census.<\/p>\n
Competition is increasing among nursing homes for the more lucrative Medicare
\nand private pay patients. For example, many nursing homes have been developing
\nnew services such as multiple levels of care, retirement facilities,
\nAlzheimer’s and ventilator programs and other specialized services for niche
\nmarkets.<\/p>\n
In addition, as acute care hospitals have experienced lower reimbursement
\nlevels and declining occupancy rates, many have expanded into skilled nursing
\nservices to boost revenues. According to a 1986 survey conducted by the
\nAmerican Hospital Association, Chicago, approximately 19% of hospitals own or
\noperate skilled nursing facilities, 14% operate swing bed programs (use empty
\nacute care beds for long-term care) and 12% own or operate intermediate care
\nfacilities. Competition from swing bed programs is likely to intensify as more
\nhospitals qualify for Medicare reimbursement under this program.<\/p>\n
11
\n 25
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
Although nursing facilities benefit from increasing demand and changes in
\nMedicare reimbursement, widespread healthcare inflation concerns will keep
\ndownward pressure on nursing home revenues. Federal, state and local
\ngovernments, along with insurance companies and other third party payers, are
\ncontinually seeking ways to contain healthcare expenditures. The focus on
\nacute care cost containment is spreading to all types of healthcare facilities.<\/p>\n
CONCLUSION<\/p>\n
Although the healthcare industry, as a whole, has experienced good growth over
\nthe past several years, the news is not all good. An estimated thirty-eight
\nmillion Americans have no health insurance coverage at all with children
\naccounting for 36% of this total. Currently, as many as another fifty million
\nAmericans are believed to have inadequate coverage. The percentage of total
\nhealthcare costs of the United States gross national product (GNP) continually
\nincreases every year and it is estimated that it will consume 28% of the GNP by
\nthe year 2010.<\/p>\n
There are currently a number of proposals before the Senate and House of
\nRepresentatives’ committees to change the current structure of the healthcare
\nindustry. Some of these proposals call for a form of national healthcare with
\nothers leaning towards a heavily regulated form of a free-enterprise system.
\nAll the proposals currently being debated have a great number of controversial
\nissues, which makes the passage of a new healthcare system very unlikely in the
\nforeseeable future. This plan and the speculation around it suggests the
\npossible merging of the Medicare and Medicaid programs, putting spending
\ncapitalizations at an 8% level, making greater utilization of managed care and
\nmanaged competition and the creation of a National Health Care Board to oversee
\nthe creation of Healthcare Insurance Purchasing Cooperatives (HIPCs). It is
\ngenerally felt by the lawmakers like Congressman Stark, that there will be no
\ninterference or cutbacks on long-term care. It is believed that the current
\nproblems will reach a severe crisis level before some action by Congress will
\noccur.<\/p>\n
12
\n 26
\n HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT<\/p>\n
Escalating costly regulation and inadequate reimbursement from Medicaid and a
\nshortage of qualified nurses have squeezed industry profits. In an effort to
\nremain profitable, many providers have diversified into medical specialty
\nunits, which tend to be more profitable than typical nursing care. In any
\ncase, the elderly care segment of the healthcare industry continues to evolve
\nin response to profound social and economic influences.<\/p>\n
13
\n 27
\n STATE NURSING HOME ENVIRONMENT<\/p>\n
Operating currently in the state of Pennsylvania are over 98,800 licensed and
\napproved nursing home beds in more than 950 nursing homes. The overall
\noccupancy in the state is estimated to be almost 95%. This percentage can be
\ncompared with the national average of approximately 94%. In addition, Medicaid
\npatients represent at least 58% of the overall occupancy in Pennsylvania and at
\nleast 70% of the national average.<\/p>\n
CERTIFICATE OF NEED OVERVIEW<\/p>\n
The Certificate of Need (CON) program was created by the national Health
\nResource Planning Act of 1974, which mandated a system of state and local
\nagencies for the purpose of conducting CON reviews and other duties intended to
\ncontrol the costs and accessibility of healthcare services. In 1980, the
\nReagan Administration took the position that the program was ineffective with
\nrespect to controlling healthcare costs and felt that the state should run the
\nprograms. Although Congress re-authorized the program in 1981, federal funding
\nwas reduced and states were given more control over the planning process. In
\n1986, Congress voted to end federal involvement in state planning activities.
\nThe Federal Government repealed the CON system, effective January 1, 1987.<\/p>\n
By the start of the third year without federal mandates or the assistance of
\nthe CON program, a total of thirty-three states and the District of Columbia
\nstill enforced these regulations. During the past three years, several trends
\nhave developed according to the Healthcare Financing Administration’s Office of
\nIntergovernmental Affairs. States have:<\/p>\n
1) Liberalized their requirements by increasing expenditures
\n thresholds;<\/p>\n
2) Streamlined review processes and expedited procedures for
\n selected projects;<\/p>\n
3) Exempted certain types of projects from the review process; and<\/p>\n
14
\n 28
\n STATE NURSING HOME ENVIRONMENT<\/p>\n
4) Expanded CON regulations to include specialized nursing
\n services to include substance abuse treatment, inpatient
\n psychiatric services and trauma care.<\/p>\n
Supporters of this deregulation contend that eliminating market barriers would
\nexpand the number of available nursing beds, improve access in under-served
\ncommunities and hold down costs as providers compete with others to attract
\npatients. Opponents of decontrolled healthcare contend that bed supply would
\nincrease, but in a haphazard manner that favored urban areas. Also, a rapid
\nincrease in capacity would bankrupt the Medicaid program, as excess capacity
\nwould drive up the cost of care.<\/p>\n
Although the deregulation of the CON program greatly affected the nursing
\nindustry, the most significant factor which is critical to the survival of
\nthese facilities is the need for innovation. Such factors include
\nmodernization of facilities, marketing to the community, specialization,
\npersonal care of assisted units and contracting with hospitals.<\/p>\n
Currently, the state of Pennsylvania still enforces a CON program. Under this
\nsystem, state and local planning agencies conduct CON reviews of capital
\nexpenditures and develop state health plans which perform other functions to
\nensure access to healthcare services and control rising costs.<\/p>\n
For Pennsylvania, a CON is currently required for any new facility and for
\nexpenditures above $2,000,000. Existing nursing homes are permitted every two
\nyears to add up to the lesser of ten beds, or 10% of its certified bed
\ncapacity. In this regard, a CON is a valuable nursing home asset since it is a
\nprerequisite to opening and operating a facility.<\/p>\n
15
\n 29
\n STATE NURSING HOME ENVIRONMENT<\/p>\n
BED NEED METHODOLOGY<\/p>\n
In May 1991, Pennsylvania adopted a new bed methodology which estimates need by
\ncounty. Bed need estimates are based on the number of dependent elderly, their
\nforecasted population (starting with 1995 planning target year) and the
\npercentage of the dependents needing institutional care.<\/p>\n
PENNSYLVANIA’S NEW CASE-MIX PAYMENT SYSTEM<\/p>\n
In order to improve the state’s payment system, Pennsylvania plans to change,
\neffective January 1, 1994, from the current methodology to a classification
\nmethodology. So that this classification methodology is consistent with the
\ngoals of the Omnibus Budget Reconciliation Act of 1987 (OBRA ’87), the
\nPennsylvania Medical Assistance Program has developed a prospective case-mix
\npayment system for nursing facilities.<\/p>\n
The basis of this proposed case-mix payment system is the Research Utilization
\nGroups, Version III (RUG III), which will be used to classify residents into
\ncase-mix indices from which rates will be based. Residents will be classified
\nas to their functions in critical areas of daily living. Activities of daily
\nliving include bathing, eating and transfer. For those residents requiring
\nhigher degrees of care, the facility will receive a greater reimbursement under
\nthe new system. Classifications range from heavy rehabilitation to reduced
\nphysical functioning. Each nursing facility will receive an overall case-mix
\nbased upon the complexity of care offered. This new system is designed to
\nencourage facilities to take on patients requiring higher levels of care
\nthrough rewards for quality resident services and resident rehabilitation.<\/p>\n
16
\n 30
\n STATE NURSING HOME ENVIRONMENT<\/p>\n
Capital costs will be reimbursed under a new fair rental payment system. Each
\nfacility in Pennsylvania has been appraised by December 1992 and a depreciated
\nreplacement cost will have been determined. This value is added to a current
\nland value plus an equipment value to come up with an overall value of the
\nfacility. A yield factor is then applied to impute a fair rental payment
\namount. This payment will replace reimbursement for depreciation, interest,
\nreal estate taxes and return on equity.<\/p>\n
The new case-mix payment system, as implemented by the Pennsylvania Department
\nof Public Welfare, has been designed to be budget neutral, however, individual
\nproviders may fair better or worse when the system takes effect. It is unclear
\nhow the subject property will be affected by the change in the Medicaid system,
\nand our valuation is based upon existing reimbursement methodology.<\/p>\n
17
\n 31
\n REGIONAL AND MARKET ANALYSIS<\/p>\n
The subject is located in Unity Township, Greensburg, Westmoreland County,
\nwhich is situated in the western\/central portion of Pennsylvania. The closest
\nmajor city is Pittsburgh, which is thirty-one miles west of Greensburg, the
\ncounty seat. Major north\/south highways serving the area include U.S. 22 and
\nU.S. Highways 66, 819 and 119, and Routes 30, 136 and 130 which run east\/west.<\/p>\n
The major occupations within the county include clerical and sales at 13% of
\nthe total work force. Professional, technical and officials\/business
\nowners\/administrators each account for 10% of the work force, or 22,000
\nemployees each.<\/p>\n
The top seven major employers in the county are Westmoreland Hospital, West
\nPenn Power Company, Bell of Pennsylvania, Super Value Retail Support Center,
\nPPG Industries, Stuarts Drug and Surgical Supply and Westinghouse ABB Power T
\nand D Circuit Breaker Division.<\/p>\n
Healthcare facilities in the county include the Westmoreland Hospital, which
\ncontains 294 beds. The county also contains seventeen nursing homes with an
\nexcess of 220 beds. The largest facility is Westmoreland Manor with 540 beds.
\nA total of thirteen of these facilities have 100 beds or more.<\/p>\n
According to Donnelley Demographics, the county’s 1991 population is estimated
\nat 368,762 residents, a slight decrease from the 1980 level of 392,294
\nresidents. In 1991, the elderly population comprised 16.5% of total the
\npopulation, or 60,839 residents. This represents a 25% increase from the
\nnumber of elderly residents in 1980 which was 48,711 residents, or 12.4% of the
\ntotal population.<\/p>\n
18
\n 32
\n REGIONAL AND MARKET ANALYSIS<\/p>\n
The county’s 1996 total population is forecasted to decrease by approximately
\n3% to 357,757 residents. However, the county’s elderly population (age
\nsixty-five and over) is expected to exhibit an increase of approximately 1.9%
\nover the 1991 level to 61,997 residents. This upward shift in elderly
\nresidents from 16.5% to 17.3% of the population suggests increased demand for
\nlong-term care services within the county.<\/p>\n
Westmoreland County exhibited an average household income of $34,576 in 1991 as
\ncompared with $19,973 in 1980. Average household income is expected to
\nincrease to $41,139 in 1996, representing a growth of 18.9% over a five year
\nperiod. The average household income of residents sixty-five and over was
\n$39,769 in 1991 and was expected to increase to $40,886 in 1996.<\/p>\n
19
\n 33
\n REGIONAL AND MARKET ANALYSIS<\/p>\n
The following tables present selected demographic data for Westmoreland County.
\nAn area map follows.<\/p>\n
\n\n TOTALS AND MEDIANS<\/p>\n
1980 1991 % CHANGE 1996
\n CENSUS ESTIMATE 1980 TO 1991 FORECAST
\n
\n Total Population 392,294 368,762 -6.0% 357,757
\n Total Households 139,233 139,642 0.3% 139,825
\n Household Population 387,739 364,207 -6.1% 353,202
\n Average Household Size 2.8 2.6 -6.3% 2.5
\n Average Household Income $19,973 $34,576 73.1% 41,139
\n Median Household Income $17,955 $28,114 56.6% $32,800<\/p>\n Source: Donnelley Demographics
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
20
\n 34
\n REGIONAL AND MARKET ANALYSIS<\/p>\n
\n\n POPULATION BY AGE<\/p>\n 1980 CENSUS 1991 ESTIMATE 1996 FORECAST
\n NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
\n AGE
\n
\n Total 392,294 100% 368,762 100% 357,757 100%
\n 0 – 4 24,007 6.1% 23,050 6.3% 21,373 6.0%
\n 5 – 9 27,062 6.9% 22,851 6.2% 22,105 6.2%
\n 10 – 14 32,085 8.2% 21,784 5.9% 22,006 6.2%
\n 15 – 19 33,605 8.6% 24,639 6.7% 21,618 6.0%
\n 20 – 24 31,009 7.9% 29,064 7.9% 23,901 6.7%
\n 25 – 29 30,133 7.7% 29,486 8.0% 27,121 7.6%
\n 30 – 34 28,990 7.4% 27,322 7.4% 28,201 7.9%
\n 35 – 39 23,504 6.0% 26,737 7.3% 26,080 7.3%
\n 40 – 44 20,425 5.2% 25,838 7.0% 25,435 7.1%
\n 45 – 49 20,810 5.3% 21,486 5.8% 24,551 6.9%
\n 50 – 54 24,558 6.3% 18,257 5.0% 20,255 5.7%
\n 55 – 59 25,295 6.4% 17,703 4.8% 16,979 4.7%
\n 60 – 64 22,100 5.6% 19,706 5.3% 16,135 4.5%
\n 65 – 69 18,178 4.6% 19,590 5.3% 17,390 4.9%
\n 70 – 74 12,827 3.3% 16,166 4.4% 16,470 4.6%
\n 75 – 79 8,486 2.2% 11,895 3.2% 12,705 3.6%
\n 80 – 84 5,291 1.3% 7,312 2.0% 8,480 2.4%
\n 85 + 3,929 1.0% 5,876 1.6% 6,952 1.9%
\n less than 15 83,154 21.2% 67,685 18.4% 65,484 18.3%
\n 65 + 48,711 12.4% 60,839 16.5% 61,997 17.3%
\n 75 + 17,706 4.5% 25,083 6.8% 28,137 7.9%
\n Median Age 33.1 36.2 37.4
\n Median Age Adult 44.3 44.0 45.1
\n Population<\/p>\n Source: Donnelley Demographics
\n<\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
21
\n 35
\n REGIONAL AND MARKET ANALYSIS<\/p>\n
AREA MAP<\/p>\n
(MAP)<\/p>\n
22
\n 36
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
NEIGHBORHOOD ANALYSIS<\/p>\n
The subject property is situated on the west side of Sand Hill Road,
\napproximately six miles from Greensburg, the main business area. Access to the
\nproperty is very good via Route 30 to Sand Hill Road. Major arteries serving
\nthe area include Route 30 and U.S. Highway 119, which lead to Pittsburgh to the
\nwest and Harrisburg to the east.<\/p>\n
The area consists mainly of farmland, single family residences, small local
\nbusinesses and the Westmoreland Mall.<\/p>\n
SITE DESCRIPTION<\/p>\n
The subject land consists of an 8.238 acre (358,847 square foot) tract located
\non Sand Hill Road in Greensburg, Pennsylvania. The parcel is irregularly
\nshaped with an average depth of 500 feet and frontage on Sand Hill Road of 672
\nfeet. The tract is generally very rolling with adequate drainage.<\/p>\n
The site is not located in a floodplain area. Access to the site is good via
\ntwo entrance\/exits along Sand Hill Road, which are asphalt paved with no curbs
\nor sidewalks. Adjoining the property to the north is vacant land and a mobile
\nhome property, to the south is a very steep vacant ravine, to the east is Sand
\nHill Road then several mobile homes and single family residences and to the
\nwest is vacant land and a steep ravine. The only possible detriment to the
\nsubject site is the large ravine which is a portion of the property. All
\nutilities are available to the subject site.<\/p>\n
Overall, the site is functional, marketable and well suited for the current use
\nof the property as a skilled nursing home.<\/p>\n
A location map and plot plan are provided on the following pages.<\/p>\n
23
\n 37
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
LOCATION MAP<\/p>\n
(Map)<\/p>\n
24
\n 38
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
PLOT PLAN
\n (Map)<\/p>\n
25
\n 39
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
ZONING<\/p>\n
The city of Unity in the past year has enacted zoning restrictions for the
\ndevelopment of land use. According to zoning officials, the subject property
\nis located in an R-1 (Residential) zoning classification. Permitted uses in
\nthis classification include single family residences, farms, parks and
\nrecreation facilities, cemeteries, schools and churches. Minimum lot sizes are
\n40,000 square feet and minimum lot widths are 125 square feet. Since the
\nsubject property was constructed prior to the enactment of the current zoning
\nregulations, the current use of the subject is a permitted use due to it being
\ngrandfathered.<\/p>\n
REAL ESTATE TAX AND ASSESSMENT ANALYSIS<\/p>\n
The subject property is referred to on the Greensburg tax map of Westmoreland
\nCounty as parcel number 61-18-00-0-256. The property has been assessed at
\n$36,100 for the land and $524,280 for the building for a total of $560,380.
\nThe county tax assessor has assessed the property at market value in 1994 by
\napplying a multiplier of 3 to the assessed value. A total millage rate of
\n54.69 per $1,000 of assessed value is applicable to the subject property. This
\ncan be broken out as follows:<\/p>\n
14.99 for County Taxes
\n 2.20 for Township Taxes
\n 37.50 for School Taxes<\/p>\n
Therefore, total real estate taxes due in 1994 are calculated as follows:<\/p>\n
$560,380 x 54.69 \/ $1,000 = $30,647<\/p>\n
26
\n 40
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
IMPROVEMENTS DESCRIPTION<\/p>\n
The subject site is improved with a one story plus partial basement nursing
\nhome containing 44,064 square feet above grade and 8,663 square feet of
\nbasement area for a total of 52,727 square feet. The structure is a Class C,
\nwood frame and load bearing masonry wall building in good condition and
\nconstructed in 1971 with an addition in 1981. During 1993 and 1994 certain
\nareas of the facility were renovated. These renovations consisted of the
\nreplacement of carpeting and vinyl tile in various areas and repainting and
\nwallpapering throughout hallways and patient rooms. A laundry lift was added
\nto a rear exterior walkway which was enclosed. The building is constructed of
\nperimeter concrete footings and piers with the basement wall being concrete
\nblock. The exterior walls are primarily face brick over concrete block with
\naluminum frame windows. The floor structure consists of concrete slab for
\nground floor areas and wood beam with wood sheathing in the elevated areas
\nabove the partial basement. The roofing system is wood joists with wood
\nsheathing and composition shingle roof covering.<\/p>\n
Partitioning in the building is primarily drywall on wood studs with some areas
\ncontaining concrete block partitioning. Wall finishes are primarily painted
\nblock, wallpaper or painted drywall with ceramic tile in the shower\/tub rooms.
\nThe building contains seventy patient rooms, three shower\/tub rooms, dining
\nareas, lounges, main lobby, kitchen, administrative offices, nurses’ stations,
\netc. The ceilings are primarily suspended acoustical panels or painted
\ndrywall. The floor coverings are primarily carpeting in the hallways, offices
\nand dining areas with vinyl asbestos tile in the patient rooms, quarry tile in
\nthe kitchen and ceramic tile in the shower\/tub rooms. Some areas have exposed
\nconcrete.<\/p>\n
27
\n 41
\n NEIGHBORHOOD AND SITE DESCRIPTION<\/p>\n
Plumbing fixtures are standard including seventy-six water closets, seventy-six
\nlavatories, six tubs and three showers. The building contains a central
\nelectric heating system which is further serviced by central roof top and
\nthrough-wall air conditioning units. Lighting is primarily fluorescent
\nfixtures. Other features include an emergency generator, a walk-in freezer, a
\nstone fireplace, entrance canopies and a dry and wet fire sprinkler system.<\/p>\n
LAND IMPROVEMENTS<\/p>\n
Land improvements consist primarily of asphalt paving, gravel, concrete
\nsidewalks and general landscaping.<\/p>\n
A detailed description and component pricing of the cost to replace the
\nbuilding and land improvements is included in the Exhibit Section.<\/p>\n
EQUIPMENT DESCRIPTION<\/p>\n
Typical patient rooms contain triple crank beds, wood high back chairs with
\nvinyl covering, wood dressers and nightstands and cubicle curtains. Most of
\nthese items are original fixtures, however, approximately one-third of the beds
\nwere purchased within the past year. The overall condition of the equipment
\nfound at the subject is average when compared with other similar facilities
\ninspected by Valuation Counselors Group, Inc.<\/p>\n
28
\n 42
\n HIGHEST AND BEST USE<\/p>\n
The Appraisal Institute defines highest and best use as follows:<\/p>\n
The most profitable, likely use to which a property can be put. The
\n opinion of such use may be based on the highest and most profitable
\n continuous use to which the property is adapted and needed, or likely
\n to be in demand in the reasonably near future. However, elements
\n affecting value which depend upon events or a combination of
\n occurrences, which, while within the realm of possibility, are not
\n fairly shown to be reasonably probable, should be excluded from
\n consideration. Also, if the intended use is dependent upon an
\n uncertain act of another person, the intention cannot be considered.<\/p>\n
The use of the land which may reasonably be expected to produce the
\n greatest net return to land over a given period of time. That legal
\n use which will yield to land the highest present value, sometimes
\n called optimum use.<\/p>\n
In estimating the highest and best use, there are essentially four states of
\nanalysis:<\/p>\n
1. POSSIBLE USE – Uses which are physically possible for the site
\n in question.<\/p>\n
2. PERMISSIBLE USE (LEGAL) – Uses permitted by zoning and deed
\n restrictions on the site in questions.<\/p>\n
3. FEASIBLE USE – Possible and permissible uses which will produce
\n a net return to the owner of the site.<\/p>\n
4. MAXIMALLY PRODUCTIVE USE – Among the feasible uses, that use
\n which will produce the highest net return of highest present
\n worth.<\/p>\n
The highest and best use of the land (site) as if vacant and available for use
\nmay be different from the highest and best use of the property as improved.
\nThis will be true when the improvement is not an appropriate use and yet makes
\na contribution to total property value in excess of the site.<\/p>\n
29
\n 43
\n HIGHEST AND BEST USE<\/p>\n
The following conditions must be met in determining the highest and best use:<\/p>\n
The use must be legal.<\/p>\n
The use must be probable, not speculative or conjectural.<\/p>\n
There must be a profitable demand for such use and it must return to
\n land the highest net return for the longest period of time.<\/p>\n
In order for the subject site to fulfill its highest and best use, that use
\nmust meet four criteria. It must be (1) physically possible, (2) legally
\npermissible, (3) financially feasible, and (4) maximally productive. These
\ncriteria are further explained as follows.<\/p>\n
PHYSICALLY POSSIBLE<\/p>\n
The size, shape, location, utility availability and terrain impose
\n physical restraints upon the type of uses possible for the subject.
\n Any use incompatible with the utility capacity or constraints imposed
\n by the size, shape or terrain would not be considered physically
\n possible. As mentioned in the land description section of this
\n report, the subject is irregularly shaped and contains a gross land
\n area of 8.238 acres. All utilities are available at the site and all
\n required site improvements are in place. The physical characteristics
\n of the site in terms of size, shape and topography are favorable for
\n flexible development. Overall, the physical aspects of the site are
\n such that they do not impose any constraints which would prevent the
\n site from being developed to its highest and best use.<\/p>\n
LEGALLY PERMISSIBLE<\/p>\n
Uses of the land must be permitted by zoning and deed restrictions and
\n other legal considerations. The subject site is currently zoned R-1
\n (Residential) by Unity Township. Nursing home use is a legally
\n permitted use in this zoning designation. Thus, the present use of
\n the site for a nursing home is a legal use.<\/p>\n
30
\n 44
\n HIGHEST AND BEST USE<\/p>\n
FINANCIALLY FEASIBLE<\/p>\n
Any use of the subject which provides a financial return to the land
\n in excess of that required to satisfy operating expenses, financial
\n expenses and capital amortizations is considered financially feasible.
\n It is our opinion that the subject’s current use as a nursing home is
\n financially feasible based upon the historic financial performance of
\n the facility.<\/p>\n
MAXIMALLY PRODUCTIVE<\/p>\n
Among the feasible uses, that use which will produce the highest net
\n return at the highest present worth. The subject site is improved
\n with a licensed 137 bed nursing home. The improvements are in good
\n condition with a significant remaining economic life. Functional
\n utility of the structure meets the market standards expected of a
\n nursing home and demand for this type of development is evident in the
\n marketplace. Based upon the supply and demand characteristics of the
\n nursing home industry in Pennsylvania, it is our opinion that the
\n highest and best use of the property, as improved, is its current use
\n as the site of a nursing home.<\/p>\n
On reviewing the conditions and criteria for establishing the highest and best
\nuse of the subject, we have examined the market for the subject services and
\nthe regional and local economy as well as the existing physical and zoning
\ncharacteristics of the site. Additionally, we have considered the quality and
\ncondition of the subject improvements amendable for use as a nursing home.<\/p>\n
Based upon our review and analysis of the subject market, it is our opinion
\nthat the highest and best use of the site as vacant would be for healthcare
\ndevelopment such as the subject and as improved would be for the continuation
\nof its current use as that of a nursing home.<\/p>\n
31
\n 45
\n VALUATION METHODOLOGY<\/p>\n
There are three generally accepted approaches to estimate the value of an
\nasset, which are summarized as follows:<\/p>\n
INCOME APPROACH: This approach translates earnings, or expected cash
\n flows, into an estimate of value. It is based upon the premise that
\n value is determined by the present value of all future expected
\n income. Thus, forecasted earnings are converted to value through the
\n application of discount or capitalization rates derived from the
\n investment market.<\/p>\n
MARKET APPROACH: This valuation approach is based upon the comparison
\n of the subject to the sales of similar assets in the marketplace. Two
\n methods of estimating value via this approach are the Primary Sales
\n Comparison Approach and the Secondary Market Approach. The Primary
\n Sales Comparison Approach entails the analysis of direct asset
\n transfers, while the Secondary Market Approach involves the analysis
\n of multiples derived from equity transfers in public secondary markets
\n or exchanges.<\/p>\n
COST APPROACH: This procedure provides an indication of the value of
\n an asset by reducing an estimate of the current cost to reproduce or
\n replace an asset by an estimate of accrued depreciation. Depreciation
\n includes physical deterioration, functional and external (or economic)
\n obsolescence.<\/p>\n
In general, the Income Approach is the most reliable approach to value an
\nincome producing property. It best considers the income potential and risk
\ncharacteristics specific to the subject property. The Market Approach has not
\nbeen applied due to the lack of transfers of leased facilities. Nursing homes
\ntypically transfer in fee simple estate, with the assets of the operating
\ncompany included. The interest considered in this appraisal is that of a
\nleased fee estate, and we were unable to locate meaningful sales of similar
\ninterests to compare to the subject. The Cost Approach has limitations due to
\nthe difficulty in quantifying the depreciation and obsolescence in the assets.<\/p>\n
The Income and Cost Approaches are presented on the following pages.<\/p>\n
32<\/p>\n
46
\n INCOME APPROACH<\/p>\n
The Income Approach gives consideration to the net income expectancy from
\nrental of the property, and to the capitalization of this income in accordance
\nwith prevailing returns on properties or investments of similar risks to
\ndetermine the amount at which ownership would be justified by a prudent
\ninvestor. Since it is the purpose of this appraisal to estimate the market
\nvalue of the leased fee estate, the Income Approach is considered to be the
\nmost reliable method of valuation. The first step involves the estimating of
\nthe subject’s potential gross income. For this, we deduct reasonable
\nallowances for expenses to arrive at the indicate net income which is
\ncapitalized into the value estimate.<\/p>\n
ESTIMATE OF GROSS INCOME<\/p>\n
Integrated Health Services, Inc. has represented that this facility will be
\nsold to Crescent Capital and leased back to Integrated Health Services, Inc.
\nThe facility, including land, buildings, equipment and furnishings, will be
\nleased to Integrated Health Services, Inc. for a ten year period, with two, ten
\nyear renewal options. Although we have not been provided with a copy of the
\nfinal lease, Integrated Health Services, Inc. has provided us with a lease
\nsynopsis which indicates that the base rent in the first year will be
\n$1,061,000. In the second and third forecast years, contract rent is adjusted
\n1% annually. In subsequent years, additional rent has been based upon the
\nterms of the lease contract which stipulates the subsequent annual increases
\nwill be increased by the greater of 1) 1% of the then-current minimum rent, or
\n2) the lesser of either 3.75%, or the greater of either 5% of the incremental
\nnet operating income (before corporate allocations), or 67% the consumer price
\nindex from the preceding period.<\/p>\n
33
\n 47
\n INCOME APPROACH<\/p>\n
In our Discounted Cash Flow forecast, we have assumed an initial ten year
\nholding period, and have assumed that Integrated Health Services, Inc. will
\nexercise the two, ten year renewal options. Revenue has been estimated based
\nupon contract rent comprised of base rent plus additional rent, which we have
\nassumed to be at market. Because of the scarcity of arm’s length leases on
\nnursing facilities and the multitude of adjustments which would be required to
\nequate a lease comparable to the subject, revenue has been forecasted based
\nupon contract rent.<\/p>\n
The incremental net operating income factor is calculated based upon the
\nincremental performance of the most recently ended fiscal year as compared with
\nthe preceding year. The increment is then multiplied by a factor of 0.05.<\/p>\n
The lease is a net lease with the lessee responsible for operating expenses.
\nManagement costs have been estimated at 4% of revenue. This charge considers
\nthe cost of collection and accounting for rents. We have also estimated
\nnominal reserves for replacement at $100 per bed, increasing with inflation.
\nTotal expenses in the first forecasted year are estimated at $57,240, or 5.4%
\nof revenue. Net income is estimated at $1,003,760 in the first forecasted
\nyear, increasing to $1,229,281 by the tenth year. Schedules A-1 through A-5 in
\nthe Addendum to this report present the subject’s historic and prospective
\noccupancy, payor mix and operating performance of the operating business. The
\nsubject’s prospective performance has been estimated based upon information
\nfrom Management in conjunction with historic performance. The operating
\nperformance of the business has been analyzed to gauge the potential of the
\nCompany to cover its rent obligations and is a factor in estimating additional
\nrent. Forecasted net operating income of the business enterprise amounts to
\n1.6 times lease payments in the first forecasted year, which appears to provide
\nadequate coverage.<\/p>\n
34
\n 48
\n INCOME APPROACH<\/p>\n
DISCOUNT RATE CALCULATION<\/p>\n
CAPITALIZATION PROCESS AND DISCOUNT RATE<\/p>\n
As the annual cash flow and reversionary values are estimated ten years into
\nthe future, it is necessary to discount these values into a present value
\nestimate. Present value is today’s cash lump sum which represents the current
\nvalue of the right to collect the future payments and reversion. It is the
\naggregate value of the discounted future payments and reversion.<\/p>\n
The discount rate used must reflect a sufficient rate of return for a developer
\nor owner of property over the holding period. The rate must take into
\nconsideration the time value of money and charges for holding costs. The rate
\nmust also reflect an adequate rate of return for the risk involved when
\ncompared to other types of investments.<\/p>\n
When analyzing discount rates, it is important to realize that all investments
\nare in competition with each other for the investment dollar. The investor has
\na choice of: (1) bank rate securities such as government bonds, industrial or
\nmunicipal bonds and debentures, (2) stocks and other securities, or (3)
\nselected enterprises or other real estate investments at varying rates of
\nreturn. The acceptable rate of return to the investor is affected by
\nconsiderations of risk, burden of management, degree of liquidity and other
\nfactors (including personal preference). The analysis quite often follows the
\nhistorical summation of these factors, known as a “built-up” rate.<\/p>\n
As an example, an adjustment for risk is added to a safe or minimum risk rate
\nas an increment to compensate for the extent of risk believed to be involved in
\nthe use of the capital sum. Another adjustment is usually made of nonliquidity
\ndue to the time required to realize cash from the resale of the property. The
\nresale period may vary with the general marketability of the type of property
\nand the amount of the cash investment required.<\/p>\n
35
\n 49
\n INCOME APPROACH<\/p>\n
The principle of discounting money to be received in the future is based upon
\nthe fact that today’s dollar can be invested to earn a return, while the
\nexpected future dollar not yet generated, cannot. The discount rate must
\nreflect what is called the opportunity cost of capital. Thus, the investor is
\ncompensated by the discount rate for the current lost opportunity in investing
\nin alternative assets.<\/p>\n
In order to determine the appropriate rate, we have reviewed current monetary
\nrates as of March 1994.<\/p>\n
The following table presents yield rates associated with various types of
\ngovernment and corporate securities as indicated by the March 1, 1994 Wall
\nStreet Journal.<\/p>\n
YIELD RATES AS INDICATED BY THE MARCH 1, 1994
\n WALL STREET JOURNAL<\/p>\n
SECURITY YIELD
\n Prime Rate 6.00%
\n Ten Year U.S. Treasury Bonds 6.14%
\n Corporate Bonds
\n Aaa, Aa 6.20% to 7.42%
\n A, Baa 6.52% to 7.58%
\n Ba, C 9.44%<\/p>\n
36
\n 50
\n INCOME APPROACH<\/p>\n
As indicated by the following survey conducted by Real Estate Research
\nCorporation, required rates of return for commercial grade real estate were
\napproximately 5.6% to 5.9% above year treasury bonds in the first two quarters
\nof 1993.<\/p>\n
Real Estate vis-a-vis Capital Market Returns*<\/p>\n
Fourth Third
\n Quarter Quarter
\n 1993 1993<\/p>\n
Real Estate Yield (%) 11.7% 12.0%
\n Moody’s Aa Utilities (%) 7.0% 7.4%
\n Moody’s Aaa Corporate (%) 7.0% 7.2%
\n 10 Year Treasuries (%) 5.3% 5.7%<\/p>\n
*This survey was conducted in October, 1993 and reflects desired
\n returns for fourth quarter 1993 investments.<\/p>\n
Source: Real Estate Research Corporation<\/p>\n
As the subject property would have less liquidity and more risk than commercial
\ngrade real estate, it is reasonable to expect that the discount rate would be
\nhigher than the real estate yields presented. Several factors which influence
\nthe selection of a discount rate include the following:<\/p>\n
o Currently, there are restraints on supply through
\n licensure requirements which alter normal economics;
\n and<\/p>\n
o The value of the facility is highly related to the
\n operation of the business which is involved in the
\n provision of services such as healthcare, dietary and
\n housekeeping operations which entail a higher level
\n of Management expertise.<\/p>\n
37
\n 51
\n INCOME APPROACH<\/p>\n
Therefore, given the alternative investments available and taking into
\nconsideration the risks associated with real estate development and the
\nrealization of the additional rent revenue, we believe a 12.5% discount rate
\nfor the subject is appropriate. This return is considered equivalent to
\ninvestments with comparable risks available today for the same time period.<\/p>\n
FINAL CASH FLOW<\/p>\n
The earnings and cash flow forecasts in this analysis only cover a ten year
\nperiod. In reality, the property will generate earnings and cash flow well
\nbeyond the five year forecast period. Therefore, the value of this distant
\ncash flow stream, called a “reversion” value, must be estimated.<\/p>\n
We have assumed that Integrated Health Services, Inc. will exercise the renewal
\noptions after the initial ten year lease period. Therefore, the reversion
\nvalue has been estimated based upon the capitalization of net cash flow in
\nforecast year eleven. We have used a terminal capitalization rate of 10% in
\ncalculating the reversion value. According to Real Estate Research
\nCorporation’s Fourth Quarter 1993 Investor Survey, terminal capitalization
\nrates for multifamily housing averaged 9.4%. Since the risk associated with
\nthe subject is believed to be similar but slightly above that on multifamily
\nhousing, we have added a risk premium to the average terminal capitalization
\nrate exhibited by multifamily housing. The reversion value has been discounted
\nto present value at the discount rate of 12.5%.<\/p>\n
38
\n 52
\n INCOME APPROACH<\/p>\n
INCOME APPROACH CONCLUSION<\/p>\n
The sum of the annuity and reversion values estimated within the Discounted
\nCash Flow Analysis represent the total value of the property. Based upon our
\nanalysis, this value can be represented in the rounded amount of:<\/p>\n
$9,800,000
\n =========<\/p>\n
The following schedule presents the earnings forecast and Discounted Cash Flow
\nAnalysis and indicated value.<\/p>\n
39
\n 53<\/p>\n
\n\n INCOME APPROACH<\/p>\n SCHEDULE A
\n MOUNTAIN VIEW NURSING CENTER
\n DISCOUNTED CASH FLOW FORECAST<\/p>\n
Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
\n Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
\n
\nREVENUE:
\n Minimum Rent $1,061,000 $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116
\n Additional Rent 10,610 10,716 29,006 29,784 30,582
\n ————————————————————————————–
\n TOTAL REVENUE $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116 $1,171,698
\n ————————————————————————————–<\/p>\nEXPENSES: <\/p>\n
Management Fee: 42,440 42,864 43,293 44,453 45,645 46,868
\n Replacement Items 14,800 15,392 16,008 16,648 17,314 18,006
\n ————————————————————————————–
\n TOTAL EXPENSES 57,240 58,256 59,301 61,101 62,959 64,874
\n ————————————————————————————–
\nNET INCOME 1,003,760 1,013,354 1,023,025 1,050,231 1,078,158 1,106,824<\/p>\n
DISCOUNT FACTOR 0.8889 0.7901 0.7023 0.6243 0.5549 0.4933
\n PRESENT VALUE 892,231 800,674 718,503 655,654 598,301 545,963<\/p>\n
DISCOUNT RATE 12.5%
\nTERMINAL CAPITALIZATION RATE 10.0%<\/p>\n
CONCLUSION OF VALUE
\n ANNUITY 5,957,547
\n REVERSION 3,886,121
\n ==========
\n FIXED ASSET VALUE $9,843,668 <\/p>\n
\n Forecasted Forecasted Forecasted Forecasted Forecasted
\n Year 7 Year 8 Year 9 Year 10 Year 11
\n
\nREVENUE:
\n Minimum Rent $1,171,698 $1,203,100 $1,235,343 $1,268,450 $1,302,444
\n Additional Rent 31,402 32,243 33,107 33,994 34,906
\n —————————————————————————————
\n TOTAL REVENUE $1,203,100 $1,235,343 $1,268,450 $1,302,444 $1,337,350
\n —————————————————————————————<\/p>\nEXPENSES:<\/p>\n
Management Fee: 48,124 49,414 50,738 52,098 53,494
\n Replacement Items 18,727 19,476 20,255 21,065 21,908
\n —————————————————————————————
\n TOTAL EXPENSES 66,851 68,889 70,993 73,163 75,402
\n —————————————————————————————
\nNET INCOME 1,136,249 1,166,453 1,197,457 1,229,281 NET INCOME 1,261,948<\/p>\n
CAP. RATE 10%<\/p>\n
TERMINAL VALUE 12,619,482<\/p>\n
DISCOUNT FACTOR 0.4385 0.3897 0.3464 0.3079 0.3079
\n PRESENT VALUE 498,202 454,619 414,846 378,552 REVERSION 3,886,121<\/p>\n
DISCOUNT RATE
\nTERMINAL CAPITALIZATION RATE <\/p>\n
CONCLUSION OF VALUE
\n ANNUITY
\n REVERSION <\/p>\n
FIXED ASSET VALUE
\n<\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n
<\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
40
\n 54
\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 the depreciated replacement cost of
\nthe improvements and equipment is added. The replacement cost of the
\nimprovements and equipment is adjusted for accrued depreciation resulting from
\nphysical deterioration, functional obsolescence and external (or economic)
\nobsolescence.<\/p>\n
The cost analysis involves three basic steps:<\/p>\n
o Land value estimate.<\/p>\n
o Estimation of the replacement cost of the
\n improvements and equipment.<\/p>\n
o Estimation of the accrued depreciation from all
\n 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
The appraised property consists of approximately 8.238 acres of land situated
\nalong Sand Hill Road in Greensburg, Pennsylvania.<\/p>\n
41
\n 55
\n COST APPROACH<\/p>\n
Land valuation, as reported herein, assuming the site vacant is based upon the
\nfollowing steps:<\/p>\n
o A comparison with recent sales and\/or asking prices
\n for similar land.<\/p>\n
o Interviews with reliable real estate brokers and
\n other informed sources who are familiar with local
\n real estate activity.<\/p>\n
o Our experience in estimating land values; and when
\n necessary, due to a lack of other available data,
\n segregation of purchase price of improved properties.<\/p>\n
The following six sales are located within the general market area of the
\nsubject property and are considered to be representative of market activity and
\nconditions as of the valuation date. To the best of our knowledge, all
\nproperty rights transferred were fee simple. The following sales, which were
\nverified by local brokers and members of the Appraisal Institute and by a
\nsearch of the land records of Westmoreland County, were considered arm’s length
\ntransactions and did not include any special or creative financing, except
\nwhere noted.<\/p>\n
42
\n 56
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 1<\/p>\n
\n
\nLocation: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania<\/p>\nParcel Number: 50-16-00-0-094<\/p>\n
Grantor: Walter Z. and Ann M. Dillon<\/p>\n
Grantee: Keystone Coca-Cola Bottling Corporation<\/p>\n
Date of Transaction: August 5, 1993<\/p>\n
Deed Book\/Page: 3189\/247<\/p>\n
Consideration: $240,000<\/p>\n
Land Size: 9.7034 Acres<\/p>\n
Zoning: R-1B (Residential – Single Family)<\/p>\n
Price Per Acre: $24,730<\/p>\n
Verified By: County Records<\/p>\n
Comments: The site is currently improved with Coca-Cola Bottling Corporation. The parcel has approximately 426
\n feet of frontage on Georges Station Road and 466 feet of frontage on Donohoe Road. The topography is
\n level and sloping at the rear.
\n<\/c><\/s><\/table>\n
43
\n 57
\n COST APPROACH<\/p>\n
Land Sale Number 1 (Plat Map)<\/p>\n
(Map)<\/p>\n
44
\n 58
\n COST APPROACH<\/p>\n
Land Sale Number 1 Photograph<\/p>\n
(Photo)
\n 59
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 2<\/p>\n
\n
\nLocation: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania<\/p>\nParcel Number: 50-16-00-0-196<\/p>\n
Grantor: Westmoreland County Industrial Development Corporation<\/p>\n
Grantee: C.C. Incorporated Development Company<\/p>\n
Date of Transaction: December 20, 1993<\/p>\n
Deed Book\/Page: 3221\/349<\/p>\n
Consideration: $200,000<\/p>\n
Land Size: 5.565 Acres<\/p>\n
Zoning: IND (Industrial)<\/p>\n
Price Per Acre: $35,939<\/p>\n
Verified By: County Records<\/p>\n
Comments: The site is currently being cleared for development of a structure. This parcel is located
\n approximately one-half mile off of U.S. Highway 30.
\n<\/c><\/s><\/table>\n
45
\n 60
\n COST APPROACH<\/p>\n
Land Sale Number 2 (Plat Map)<\/p>\n
(Map)<\/p>\n
46
\n 61
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 3<\/p>\n
Location: Unity Township, Westmoreland County,
\nPennsylvania<\/p>\n
Parcel Number: 61-19-00-0-164<\/p>\n
Grantor: Keystone Waterproofing Company, Inc.<\/p>\n
Grantee: Clyde W. Hood, John A. Onega and David C.
\n Hunter, Trustees of the Latrube Congregation of
\n Jehovah’s Witness<\/p>\n
Date of Transaction: September 10, 1991<\/p>\n
Deed Book\/Page: 3045\/584<\/p>\n
Consideration: $40,000<\/p>\n
Land Size: 2 Acres<\/p>\n
Zoning: R-4 (Apartment-Residential Use)<\/p>\n
Price Per Acre: $20,000<\/p>\n
Verified By: County Records<\/p>\n
Comments: This parcel is currently improved with a
\n Jehovah’s Witness Congregation.<\/p>\n
47
\n 62
\n COST APPROACH<\/p>\n
Land Sale Number 3 (Plat Map)<\/p>\n
(Map)<\/p>\n
48
\n 63
\n COST APPROACH<\/p>\n
Land Sale Number 3 Photograph<\/p>\n
(Photo)<\/p>\n
64
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 4<\/p>\n
\n
\nLocation: U.S. Highway 30, Hempfield Township, Westmoreland County, Pennsylvania<\/p>\nParcel Number: 50-16-00-0-189<\/p>\n
Grantor: Westmoreland Company (Formerly Westmoreland Hardware Company)<\/p>\n
Grantee: Revest Properties<\/p>\n
Date of Transaction: August 1, 1990<\/p>\n
Deed Book\/Page: 2963\/84<\/p>\n
Consideration: $275,000<\/p>\n
Land Size: 7.1469 Acres<\/p>\n
Zoning: B-3 (Highway Business)<\/p>\n
Price Per Acre: $38,478<\/p>\n
Verified By: County Records<\/p>\n
Comments: This sale is currently improved with a Comfort Inn hotel. The topography is level and steep in
\n places.
\n<\/c><\/s><\/table>\n
49
\n 65
\n COST APPROACH<\/p>\n
Land Sale Number 4 (Plat Map)<\/p>\n
(Map)<\/p>\n
50
\n 66
\n COST APPROACH<\/p>\n
Land Sale Number 4 Photograph<\/p>\n
(Photo)<\/p>\n
67
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 5<\/p>\n
\n
\nLocation: Integrated Drive, Hempfield Township, Westmoreland County, Pennsylvania<\/p>\nParcel Number: 50-21-12-0-048<\/p>\n
Grantor: William Buildings, Inc.<\/p>\n
Grantee: I.H. of Locust Valley Road, Inc.<\/p>\n
Date of Transaction: May 30, 1990<\/p>\n
Deed Book\/Page: 2947\/296<\/p>\n
Consideration: $175,000<\/p>\n
Land Size: 5.208 Acres<\/p>\n
Zoning: R-5 (Residential)<\/p>\n
Price Per Acre: $33,602<\/p>\n
Verified By: County Records<\/p>\n
Comments: This parcel is improved with an Integrated Health Services at Laurel View.
\n<\/c><\/s><\/table>\n
51
\n 68
\n COST APPROACH<\/p>\n
Land Sale Number 5 (Plat Map)<\/p>\n
(Map)<\/p>\n
52
\n 69
\n COST APPROACH<\/p>\n
Land Sale Number 5 Photograph<\/p>\n
(Photo)<\/p>\n
70
\n COST APPROACH<\/p>\n
LAND SALE NUMBER 6<\/p>\n
\n
\nLocation: Ligonier Street, Derry Township, Westmoreland County, Pennsylvania<\/p>\nParcel Number: 45-34-00-0-119<\/p>\n
Grantor: Bruce and Sheryl Hershock, Rodger and Elizabeth Ann Searfuss and Arnold Roger and Theresa Wigle<\/p>\n
Grantee: Loyalhanna Health Care Associates<\/p>\n
Date of Transaction: September 13, 1990<\/p>\n
Deed Book\/Page: 2973\/219<\/p>\n
Consideration: $130,000<\/p>\n
Land Size: 6.59 Acres<\/p>\n
Zoning: N\/A<\/p>\n
Price Per Acre: $19,727<\/p>\n
Verified By: County Records<\/p>\n
Comments: This parcel is improved with Loyalhanna Health Care, which is a competitor of the subject property.
\n<\/c><\/s><\/table>\n
53
\n 71
\n COST APPROACH<\/p>\n
Land Sale Number 6 (Plat Map)<\/p>\n
(Map)<\/p>\n
54
\n 72
\n COST APPROACH<\/p>\n
Land Sale Number 6 Photograph<\/p>\n
(Photo)<\/p>\n
73
\n COST APPROACH<\/p>\n
Summary of Sales<\/p>\n
SALE SIZE PRICE PER
\n NUMBER DATE (ACRES) ZONING ACRE<\/p>\n
1 08\/93 9.7034 R-1B $24,730
\n 2 12\/93 5.5650 IN $35,939
\n 3 09\/91 2.0000 R-4 $20,000
\n 4 08\/90 7.1469 B-3 $38,478
\n 5 05\/90 5.2080 R-5 $33,602
\n 6 09\/90 6.5900 N\/A $19,727<\/p>\n
ANALYSIS<\/p>\n
In analyzing the land sales, certain elements should be considered when making
\nadjustments to the price of each comparable property. The elements of
\ncomparison are: 1) market conditions (time); 2) location; and 3) physical
\ncharacteristics.<\/p>\n
MARKET CONDITIONS (TIME)<\/p>\n
The condition of the market may change between the
\n time of sale and the date of the appraisal and
\n adjustments would have to be made to reflect the
\n market. Changed market conditions result from
\n various causes such as inflation, deflation, changing
\n demand, changing supply and changing land use
\n patterns. The tendency over time is for land values
\n to appreciate. Based on analysis of the recent
\n economic conditions of the region, there is evidence
\n that values have trended upward slightly. The supply
\n of vacant land is somewhat plentiful and demand was
\n considered average to good.<\/p>\n
60
\n 74
\n COST APPROACH<\/p>\n
LOCATION<\/p>\n
An adjustment for location may be required if the
\n locational characteristics of the comparable
\n properties are significantly different from those of
\n the subject. A property’s location is analyzed in
\n terms of the relative time\/distance relationship
\n between it and all likely destinations and origins.
\n The relationship is relative because the location of
\n a property can only be judged in relation to that of
\n others.<\/p>\n
PHYSICAL CHARACTERISTICS<\/p>\n
Physical characteristics differ between properties.
\n These differences may require a number of comparisons
\n and adjustments to the subject. An appraiser may be
\n required to judge the value that is added or lost by
\n the size and shape, corner influence, utilities, etc.
\n Size and shape can affect functional utility in
\n relation to optimum size and frontage to depth ratio.
\n The appraiser must also recognize that smaller tracts
\n of land typically sell for a higher unit price.
\n Typically, corner influence creates a higher unit of
\n value due to the frontage on two or more streets.
\n Also, the availability of utilities influences value.<\/p>\n
No sale required an adjustment for property rights conveyed, financing, or
\nconditions of sale, as all were arm’s length conveyances of the fee simple
\nestate with cash or conventional financing.<\/p>\n
Land Sale Number 1 is located on Donohoe Road, Hempfield Township, and was
\ntransferred on August 5, 1993. No adjustment was applied for market
\nconditions. This land sale contains 9.7034 acres and due to the similarity in
\nsize to the subject property, an adjustment for size was not required. The
\nsouthern portion of the parcel is considered to be clear and level and has been
\nimproved with the Coca-Cola Bottling Corporation manufacturing plant. Shape
\nand access features are considered to be comparable to the subject property,
\ntherefore, adjustments for these physical attributes were not applied. Since
\nall utilities were available to the comparable, no adjustment was applied for
\nthe factor of utilities.<\/p>\n
56
\n 75
\n COST APPROACH<\/p>\n
Land Sale Number 2 was transferred on December 20, 1993 and did not require an
\nadjustment for market conditions. Land Sale Number 2, like Land Sale Number 1,
\nis located on Donohoe Road, approximately two and one-half miles northwest of
\nthe subject property, requiring no adjustment for location. Typically, parcels
\nwith smaller land areas sell for a higher unit price than a larger parcel of
\nland. Land Sale Number 2 contains 5.565 acres and a downward adjustment was
\napplied for its smaller size. The topography is level and is gently sloping at
\nthe northerly portion of the parcel. Currently, the lot has been cleared and
\nis being developed with a one story structure. Shape and access features are
\nconsidered to be comparable to the subject property, therefore, an adjustment
\nfor these attributes was not required. Since all utilities were available to
\nthe comparable, no adjustment was applied for the factor of utilities.<\/p>\n
Land Sale Number 3 was transferred on September 10, 1991 and, according to
\nlocal appraisers and real estate brokers, land values have increased due to the
\nmigration of development easterly from Pittsburgh. A slight adjustment was
\napplied to the comparable for market conditions. Land Sale Number 3 is
\nsituated approximately five miles southeast of the subject in Derry Township
\nand required an upward adjustment for its inferior location. The comparable
\nsale, which has been improved with a Jehovah’s Witness Congregation, is
\nsituated on a two acre parcel. A downward adjustment was applied for the
\nfactor of size. Since the comparable contains only a two acre parcel, its
\npermissible uses are lessened. Therefore, an upward adjustment was applied for
\nthe factor of utility.<\/p>\n
Land Sale Number 4 was transferred on August 1, 1990 and required an upward
\nadjustment for market conditions for the increase in land values since the sale
\ndate. This comparable, which is located on U.S. Highway 30, is in a highly
\ncommercialized area and warrants a greater land value than a property located
\noff this major highway. Therefore, a significant downward adjustment was
\napplied for its superior location. This comparable land sale has been improved
\nwith a Comfort Inn hotel. The improvements have been developed on level
\nterrain with the remaining excess having a relatively steep topography. An
\nupward<\/p>\n
57
\n 76
\n COST APPROACH<\/p>\n
adjustment was applied for its inferior topography. This land sale contains
\n7.1469 acres and was considered to be comparable to the subject property,
\ntherefore, an adjustment for land size was not applied.<\/p>\n
Land Sale Number 5 was transferred on May 30, 1990 and required an upward
\nadjustment for market conditions. The comparable sale, located immediately off
\nU.S. Highway 30, is considered to be in a superior location to the subject
\nproperty, therefore, a downward adjustment was applied for location. The
\ncomparable is considered to be level and gently sloping and is improved with an
\nIntegrated Health Services at Mountain View facility. This comparable contains
\n5.208 acres and a downward adjustment was applied for its smaller land size.<\/p>\n
Land Sale Number 6 was transferred on September 13, 1990 and an upward
\nadjustment was applied for market conditions. This comparable sale, located
\napproximately six miles northeast of the subject property in Derry Township, is
\nconsidered to be in an inferior location. An upward adjustment was applied for
\nlocation. The comparable has a similar level and gently sloping topography as
\nthe subject property, therefore, no adjustment for topography was required.<\/p>\n
Based upon the above analysis and conversations with local brokers and
\nauthorities familiar with the subject real estate market, it is our opinion
\nthat the subject 8.238 acres of land have a value equivalent to $25,000 per
\nacre, or the rounded amount of:<\/p>\n
$206,000
\n =======<\/p>\n
A land sales adjustment grid and comparable land sales map are provided as
\nfollows:<\/p>\n
58
\n 77<\/p>\n
COST APPROACH<\/p>\n
Land Sales Adjustment Grid<\/p>\n
\n\n CHARACTERISTICS SUBJECT SALE #1 SALE #2 SALE #3 SALE #4 SALE #5 SALE #6
\n ———————————————————————————————————————————-
\n
\n SALE PRICE\/ACRE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727<\/p>\n PROPERTY RIGHTS FEE SIMPLE SAME SAME SAME SAME SAME SAME
\n ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727<\/p>\n
FINANCING NORMAL SAME SAME SAME SAME SAME SAME
\n ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727<\/p>\n
CONDITION OF SALE NORMAL SAME SAME SAME SAME SAME SAME
\n ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727<\/p>\n
MARKET CONDITIONS 0% 0% 5% 10% 10% 10%
\n ADJUSTED SALES PRICE $24,730 $35,939 $21,000 $42,326 $36,962 $21,700<\/p>\n
LOCATION 0% 0% 20% -30% -10% 15%<\/p>\n
PHYSICAL CHARACTERISTICS
\n TOPOGRAPHY 0% 0% 0% 10% 0% 0%
\n SIZE 0% -10% -10% 0% -5% 0%
\n ACCESS 0% 0% 0% 0% 0% 0%
\n UTILITY 0% 0% 10% 0% 0% 0%<\/p>\n
NET ADJUSTMENTS 0% -10% 20% -20% -15% 15%
\n ———————————————————————————————————————————-
\n ADJUSTED SALES PRICE $24,730 $32,345 $25,200 $33,861 $31,418 $24,955<\/p>\n
<\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
59
\n 78
\n COST APPROACH<\/p>\n
Land Sales Map<\/p>\n
(Map)<\/p>\n
60
\n 79
\n COST APPROACH<\/p>\n
BUILDING AND LAND IMPROVEMENTS VALUATION<\/p>\n
The building and land improvements have been valued on the basis of replacement
\ncost less accrued depreciation. The cost new was estimated using cost factors
\nobtained from the calculation section of Marshall Valuation Service (MVS), a
\nnationally recognized cost manual. The unit cost includes both direct and
\nindirect costs, with adjustments made for special building features,
\nconstruction quality, time and location. The soft costs reflect such items as
\nlegal and accounting fees, feasibility studies, architect’s fees and plans,
\ntest borings, appraisal fees, superintending, carrying costs and other
\ncontingency costs. To these we have added an amount representing
\nentrepreneurial profit.<\/p>\n
Entrepreneurial profit is a necessary element in the motivation to construct
\nthe improvements and represents an additional amount a developer would expect
\nto receive for construction of a similar project. The amount of
\nentrepreneurial profit varies according to the economic conditions and type of
\ndevelopment, but typically ranges from 10% to 20% of total project costs. We
\nhave contacted several developers, contractors and other familiar with real
\nestate construction. Although each project will vary and each developer
\nexpects a different rate of return, most anticipate a return that falls in the
\nabove stated range. Based on these conversations, we have estimated
\nentrepreneurial profit to comprise 20% of our estimate of the replacement cost
\nof the building.<\/p>\n
A description and pricing of the cost to replace the building and land
\nimprovements is included in the Exhibit Section of this report.<\/p>\n
The overall cost for the subject building was estimated at $5,536,963 inclusive
\nof all soft costs and entrepreneurial profit. This figure is equivalent to
\n$105.01 per square foot of gross building area. The land improvements have
\nbeen estimated at $74,881.<\/p>\n
61
\n 80
\n COST APPROACH<\/p>\n
Depreciation of a structure is its loss in value due to physical deterioration,
\nfunctional obsolescence and external (or economic) obsolescence. Economic life
\nis the period over which the improvements to the real estate contribute to the
\nvalue of the property. These terms are defined as follows:<\/p>\n
PHYSICAL DETERIORATION: The loss in value due to
\n deterioration or ordinary wear and tear, i.e.,
\n natural forces taking their toll of the improvements.
\n This begins at the time the building is completed and
\n continues throughout its physical life.<\/p>\n
FUNCTIONAL OBSOLESCENCE: The loss in value within
\n the property due to poor plan, functional inadequacy,
\n or super adequacy due to size, style, design or other
\n items. This form of depreciation occurs in both
\n curable and incurable forms.<\/p>\n
EXTERNAL (OR ECONOMIC) OBSOLESCENCE: The loss in
\n value caused by forces outside the property itself.
\n It can take many forms such as excessive noise
\n levels, traffic congestion, abnormally high crime
\n rates or other factors which affect a property’s
\n ability to produce an economic income thereby causing
\n a decline in desirability. Other forms of economic
\n obsolescence may include governmental restrictions,
\n excessive taxes or economic trends.<\/p>\n
ECONOMIC LIFE: Economic life is the period over
\n which improvements to real estate contribute to
\n property value. The economic life of a good quality
\n healthcare facility is typically forty-five to fifty
\n years.<\/p>\n
REMAINING ECONOMIC LIFE: Remaining economic life can
\n be defined as the number of years remaining in the
\n economic life of the structure or structural
\n components as of the date of the appraisal.<\/p>\n
In estimating the overall economic life of the improvements, data on economic
\nlives, published by Marshall Valuation Service and the American Hospital
\nAssociation were considered. The assignment of economic lives assumed that,
\nexcept for the building shell and foundation, building components would be
\nreplaced periodically over the life of the building.<\/p>\n
62
\n 81
\n COST APPROACH<\/p>\n
In accordance with the guidelines of the MVS manual, it is estimated that the
\nbuilding will have a total economic life of forty-five years. As stated
\nearlier, the subject property was constructed during 1971 with an addition in
\n1981 and renovations in 1993 and 1994. The subject, which has been well
\nmaintained, was considered to be in good overall physical condition. We
\nestimate that the building has an effective age of twelve years, which equates
\nto a remaining useful life of approximately thirty-three years. The amount of
\nphysical deterioration attributable to the building is calculated on an
\neconomic age\/life method, which is the ratio of the building’s effective age to
\nits total economic life. Based on this premise, total physical deterioration
\nof 26.7% is imputed to the building.<\/p>\n
As stated previously, the improvements have been well maintained, are in good
\noverall condition and are considered modern and functional in all respects. A
\nthorough inspection of the subject property revealed that, while typical wear
\nand tear for a building of this age has occurred, no significant items of
\ndeferred maintenance were noted. Based on this knowledge, it is our opinion
\nthat the subject does not suffer from functional obsolescence. Furthermore, it
\nis our opinion that the subject property does not suffer from any undue
\neconomic obsolescence.<\/p>\n
Based upon the previous analysis, total accrued depreciation from all causes of
\n26.7% is imputed to the subject building.<\/p>\n
The elements that make up the land improvements have shorter economic lives
\nthan that of the building. We have estimated the aggregate economic life of
\nthese items to be twenty years with an effective age of twelve years, which
\nequates to an average remaining useful life of eight years. The amount of
\naccrued depreciation attributable to the land improvements has also been
\ncalculated on an economic age\/life basis, resulting in a 60% depreciation
\nestimate.<\/p>\n
63
\n 82
\n COST APPROACH<\/p>\n
The estimate of the depreciated replacement costs of the building and land
\nimprovements is presented as follows:<\/p>\n
DEPRECIATED
\n REPLACEMENT REPLACEMENT
\n ASSET COST DEPRECIATION COST<\/p>\n
Building $5,536,963 $1,478,369 $4,058,594
\n Land Improvements 74,881 44,929 29,952
\n TOTAL $5,611,844 $1,523,298 $4,088,546<\/p>\n
EQUIPMENT VALUATION<\/p>\n
Nursing home equipment includes, but is not limited to, items such as: all
\npatient room furniture; kitchen utensils, appliances, dinnerware and
\naccessories; office machines, desks, chairs and files; maintenance and
\nhousekeeping machines and tools; laundry appliances; lounge furniture;
\naudio\/visual equipment and chapel furnishings; nursing items including
\nmonitoring devices, chart racks, medication carts; and items for physical
\ntherapy including parallel bars, training steps, pulleys and hydrocollators.<\/p>\n
Depreciated equipment values in nursing homes typically range from $2,000 to
\n$4,000 per bed. Generally the low end of this range represents equipment in
\nfacilities which is either highly depreciated, low in quality or low in volume
\ndue to smaller common areas and office space. A newer facility, or a facility
\nwhich has a high percentage of private patients and a location in an affluent
\narea, will generally have an equipment value at the high end of the range.<\/p>\n
64
\n 83
\n COST APPROACH<\/p>\n
The patient rooms are equipped with triple crank beds, metal and laminated wood
\noverbed tables, wood bedside cabinets and bureaus and vinyl covered wood high
\nback side chairs. The quality of the equipment found at the subject is good.<\/p>\n
Based on our experience, it is estimated that the value of the equipment in use
\ncan be reasonably represented at $3,500 per bed, which when multiplied by 131
\noperating beds, indicates a market value for all equipment of:<\/p>\n
$458,500
\n =======<\/p>\n
CONCLUSION<\/p>\n
Based upon the investigation, as previously defined, the results of the Cost
\nApproach, as of November 1, 1993 are reasonably represented as follows:<\/p>\n
Land $ 206,000
\n Building 4,058,594
\n Land Improvements 29,952
\n Equipment 458,500
\n ———-<\/p>\n
TOTAL $4,753,046<\/p>\n
ROUNDED $4,800,000
\n ==========<\/p>\n
65
\n 84
\n CORRELATION OF VALUE<\/p>\n
Each of the three traditional approaches to value have been considered, and we
\nhave applied the Income and Cost Approaches. The Market Approach has not been
\napplied due to the lack of sales of similar leased fee estate interests as the
\nsubject. While the approaches are independently developed, the same
\nfundamental principles of valuation and economics form the logical basis for
\neach approach. The indications of value by the two approaches are as follows:<\/p>\n
Income Approach . . . . . . . . . . . . . . . . . . $9,800,000
\n Market Approach . . . . . . . . . . . . . . . . . . N\/A
\n Cost Approach . . . . . . . . . . . . . . . . . . . $4,800,000<\/p>\n
The Income Approach involved a detailed analysis of the earnings potential of
\nthe property. The Income Approach best considers the physical characteristics,
\nearnings potential and risk specific to the subject entity. Because of the
\nlimitations inherent in the Cost and Market Approaches, the value estimated by
\nthe Income Approach was considered the best representation of value for the
\nsubject.<\/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, in light of the complexity of estimating the
\nreplacement cost and depreciation of the various components in this approach,
\nit is not necessarily the most reliable of the value estimates.<\/p>\n
Based upon the analysis as presented in this report, it is estimated that the
\nmarket value of the leased fee interest in Mountain View Nursing Center, as of
\nMarch 1, 1994, can be represented in the rounded amount of:<\/p>\n
$9,800,000
\n =========<\/p>\n
66
\n 85
\n CORRELATION OF VALUE<\/p>\n
We certify that, to the best of our knowledge and belief…<\/p>\n
o The statements of fact contained in this
\n report are true and correct, and that this
\n report has been prepared in conformity with
\n the Uniform Standards of Professional
\n Appraisal Practice of The Appraisal
\n Foundation and the Principles of Appraisal
\n Practice and Code of Ethics of the American
\n Society of Appraisers.<\/p>\n
o The reported analyses, opinions and
\n conclusions are limited only by the reported
\n assumptions and limiting conditions, and are
\n our personal, unbiased professional analyses,
\n opinions and conclusions.<\/p>\n
o We have no present or prospective interest in
\n the property that is the subject of this
\n report; we have no personal interest or bias
\n with respect to the parties involved.<\/p>\n
o The appraisal assignment was not based upon a
\n requested minimum valuation, a specific
\n valuation, or the approval of a loan.<\/p>\n
o Our compensation is not contingent on an
\n action or event resulting from the analyses,
\n opinions or conclusions in, or the use of,
\n this report.<\/p>\n
o John A. Van Havere has personally inspected
\n the property and Wade A. Collins and
\n Catherine M. Bernard have provided
\n professional assistance.<\/p>\n
\/s\/ Wade A. Collins
\n– ——————————————-
\nWade A. Collins, Vice President, Healthcare
\nValuation Counselors Group, Inc.<\/p>\n
\/s\/ Catherine M. Bernard
\n– ——————————————-
\nCatherine M. Bernard, Manager, Healthcare
\nValuation Counselors Group, Inc. <\/p>\n
\/s\/ John A. Van Havere
\n– ——————————————-
\nJohn A. Van Havere, Staff Appraiser
\nValuation Counselors Group, Inc.<\/p>\n
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