<Page>
EXHIBIT 99.1
================================================================================
MR. ROBERT J. EDSTROM
U.S. Bank National Association
Complete Appraisal, Self-Contained Report
Leasehold Going Concern Market Value Analysis
Proposed 40 Million Gallon Ethanol Fuel Plant
"NORTHERN LIGHTS ETHANOL"
48416 144th Street, Big Stone City, South Dakota 57216
Owner/Borrower: Northern Lights Ethanol, LLC
RETECHS Project #CCV-01-06 ROC
[Photograph]
(Aerial photo, dated September 14, 2001, provided by Northern Lights' website.)
Appraisal Inspection Date:
September 17, 2001
Prepared By
JOSEPH J. IBACH, MAI
ND Certified General Appraiser ID#1009
South Dakota #324CG-2001R
================================================================================
DAKOTA APPRAISAL & CONSULTING, LTD.
304 EAST ROSSER AVENUE
P.O. BOX 1235
BISMARCK, NORTH DAKOTA 58502-1235
(701) 255-3181
<Page>
[Dakota Appraisal and Consulting, Ltd. Letterhead]
November 9, 2001
Mr. Robert J. Edstrom
U.S. Bank National Association
c/o U.S. Bank Real Estate Technical Services
155 First Avenue SW
Rochester, MN 55902
RE: Complete Appraisal, Self-Contained Report
Leasehold Going Concern Market Value Analysis
Proposed 40 Million Gallon Ethanol Fuel Plant to be known as "Northern
Lights Ethanol"
48416 144th Street, Big Stone City, SD 57216
Owner/Borrowers: Northern Lights Ethanol, LLC
RETECHS Project #CCV-01-06 ROC
Dear Mr. Edstrom:
This COMPLETE APPRAISAL presented in a SELF-CONTAINED REPORT was made in
accordance with your request to develop an opinion of the above captioned
property's leasehold market value in its (1) as-is condition and (2) upon
completion of construction. Typically, the market value of real estate assumes
FEE SIMPLE estate or ownership, often referred to as absolute ownership. It
implies that a property is free of encumbrances or restrictions that would
affect ownership or title. In this particular property, the owner/borrower or
Northern Lights Ethanol, LLC will have ownership in only the completed subject
improvements as the improvements will be located on a site leased from Big
Stone-Grant Industrial Development & Transportation, L.L.C. This land or site
lease is relatively long term (total term of 99 years) and, as the following
report will detail, the specified lease terms have not created a marketable
interest by Northern Lights Ethanol, LLC. Therefore, the owner/borrower will
have only a leasehold interest in the completed subject improvements.
The property's valuation analysis also considered its "going concern" value
concept. This concept, normally created by a proven on-premise business
operation, is a value enhancement resulting from items of intangible personal
property such as marketing and management skills, an assembled work force,
working capital, etc. A profitable ethanol plant, a characteristic that should
be anticipated in the completed property's operation, is or would be purchased
with this going concern value concept incorporated within the transaction. Based
on the preceding, the primary appraisal objective is then to provide an opinion
of the completed subject improvement's LEASEHOLD GOING CONCERN MARKET VALUE. The
appraisal's intended use is to assist you and/or your assigns in loan
underwriting purposes. The appraisal report is NOT intended for any other use or
user.
The description of the subject property, the data and detailed analyses of all
factors pertinent to the development of the appropriate value(s), and ALL
definitions, assumptions, and limiting conditions are detailed in the enclosed
report. In particular, your attention is directed to the following important
limiting conditions:
1. This letter of transmittal does NOT represent the fully documented
appraisal of the subject real estate. Sole reliance by the reader on the
contents of this letter without considering the entire contents of the
appraisal report (starts with this letter of transmittal and concludes with
page 128) could lead the reader to erroneous conclusions concerning the
appraisal of the subject property. Therefore, this letter must not be
utilized in place of nor represented as the complete appraisal report.
<Page>
Mr. Robert J. Edstrom -2- November 9, 2001
2. The completed appraisal was made to conform to the Appraisal Institute's
Code of Professional Ethics and Standards of Professional Appraisal
Practice and the most recent edition of the UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE (USPAP) adopted by the Appraisal Standards
Board of the Appraisal Foundation and should meet the minimum requirements
for all federally related transactions. Additionally, the appraisal was
made in conformance with OCC-12CFR 34, Subpart C; FDIC-12 CFR 323; Title XI
of FIRREA; and "U.S. Bank Commercial Reporting Guidelines", dated February
1, 2000.
3. It will be assumed that the proposed ethanol plant will be completed per
plans and specifications provided by the owner/borrower, as detailed in
this report. Any significant deviation from the plans and specifications
could render the appraisal and its results void. Likewise, the as-complete
value is based on a prospective or future date or the date the proposed
improvements are scheduled for completion. This assumption is deemed an
"EXTRAORDINARY ASSUMPTION", or by USPAP definition: "AN ASSUMPTION,
DIRECTLY RELATED TO A SPECIFIC ASSIGNMENT WHICH, IF FOUND TO BE FALSE,
COULD ALTER THE APPRAISER'S OPINIONS OR CONCLUSIONS." For the purpose of
this analysis, it will be assumed that market conditions relating to this
particular property type or that of an ethanol plant would remain unchanged
through the prospective completion date. This extraordinary assumption is
clearly required for purposes of reasonable analysis within the appraisal's
objective(s) and intended use. Use of this extraordinary assumption still
results in a credible analysis.
4. A "Phase I Environmental Property Evaluation" was completed on the subject
site by American Technical Services, Inc (ATS). of Sioux Falls, South
Dakota, dated May 2, 2001. The report's cover letter, states that "BASED ON
THE DESCRIBED ENVIRONMENTAL PROPERTY EVALUATION, ATS CONCLUDES THAT NO
FURTHER SITE ASSESSMENT ACTIVITIES ARE NECESSARY AT THIS TIME. Based on
this environmental evaluation, it will be assumed that no environmental
concerns exist within the subject site.
5. The Americans with Disabilities Act (ADA) became effective January 26,
1992, or before the proposed subject improvements are scheduled to be
completed. Therefore, it can only be assumed that the completed subject
improvements will meet all of the ADA requirements.
6. The appraisal assignment is based on an impartial or unbiased perspective;
it is not made for the purpose of favoring a specific cause or any
particular party. The undersigned has no present or contemplated future
interest in the real estate that is the subject of this analysis and all
opinions were developed through the course of accepted analytical
procedures. Therefore, neither the employment to make the analysis nor the
compensation is contingent on the outcome of the analysis directly related
to the appraisal's intended use.
7. It is assumed that ALL information provided by the owner/borrower, their
representatives, and various market participant verification sources is
accurate and that no misrepresentations have been made. This assumption is
especially pertinent as considerable information was owner/borrower
provided pertaining to the subject property's projected plant production
and income and expenses.
8. The subject property's developed leasehold market value opinion is based on
a reasonable exposure time (the time needed to market the subject property
PRECEDING the appraisal's effective date) of one-two years. A reasonable
marketing period (assumes a sale AFTER the appraisal's effective date) was
also estimated at one-two years. The market value opinion is a nominal or
gross value; no adjustment has been made for carrying costs or the time
value of money which may be incurred over time if the real estate is
marketed.
<Page>
Mr. Robert J. Edstrom -3- November 9, 2001
Careful consideration has been made to the valuation methods employed and to an
accurate analysis of the subject property and its related market. Based on the
results of the appraisal investigation and analysis, it is my opinion that the
subject improvement's respective values are:
<Table>
Objective #1: Subject Improvement's PROSPECTIVE
AS-COMPLETE LEASEHOLD GOING CONCERN
MARKET VALUE, as of November 1, 2002, or
the date the improvements are scheduled
for completion: $50,000,000
Objective #2: Partially built improvement's AS-IS leasehold
market value as of September 17, 2001, or
the appraisal inspection date: $10,000,000
</Table>
The concluded going concern market value includes the contributory value of the
(1) improvements (site is excluded as it is subject to a long-term lease) AND
(2) the contributory value of the non-real property items or furniture,
fixtures, and equipment (FF&E), personal property, trade fixtures, and all other
intangible items used in the complete operation of an ethanol plant such as
marketing and management skill, assembled work force, working capital, etc.
Ethanol plants are unique real estate investments since their ability to
generate revenue depends on more than simply real estate. An ethanol plant
simply cannot operate without the inclusion of non-real property items and
reasonable and competent management must be assumed. The UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE (USPAP) dictates that the appraisal must
"IDENTIFY AND CONSIDER THE EFFECT ON VALUE OF ANY PERSONAL PROPERTY, TRADE
FIXTURES, OR INTANGIBLE ITEMS THAT ARE NOT REAL PROPERTY BUT ARE INCLUDED IN THE
APPRAISAL". Therefore, the following allocation of the leasehold going concern
market value has been made for the purpose of this appraisal:
<Table>
<Caption>
Leasehold Going Concern
Market Value Allocation
Components 11-1-2002
---------- ---------
a. Improvements Only $30,000,000
b. Non-Real Property Items to include
going-concern (FF&E, personal
property, etc.) $20,000,000
-----------
Total $50,000,000
</Table>
Again, these are value ALLOCATIONS. They do NOT represent individual values for
each component but, rather, it is their estimated contributory value to the
total going concern value conclusion.
It has been a privilege to be of service. If you have any questions or comments
after reading the appraisal report, please inquire. (The only computer software
used in this appraisal is Microsoft Word 97. No computer software was used in
the ANALYSIS of the property.)
Respectfully submitted,
/s/ Joseph J. Ibach
Joseph J. Ibach, MAI
NDCG ID#1009
SD#324CG-2001R
kjs
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4
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
I. Preface
Letter of Transmittal.......................................................................... 1
Table of Contents.............................................................................. 4
Summary of Salient Facts and Conclusions....................................................... 5
Certification and Statement of Limiting Conditions............................................. 8
Compliance with FIRREA Checklist............................................................... 10
II. Appraisal Process: As-Complete Going Concern Market Value Analysis
A. Introduction/Scope......................................................................... 11
B. Identification of the Subject Property..................................................... 14
C. Definition of the Appraisal Problem........................................................ 16
D. Statement of Competency.................................................................... 20
E. Market Area Analysis....................................................................... 21
F. Neighborhood Analysis...................................................................... 26
G. Site Description........................................................................... 28
H. Description of Improvements................................................................ 33
I. Real Estate Taxes and Special Assessment Data.............................................. 43
J. Highest and Best Use Analysis.............................................................. 44
K. Valuation Process.......................................................................... 55
L. Cost Approach.............................................................................. 57
M. Income Capitalization Approach............................................................. 70
N. Reconciliation............................................................................. 99
O. Leasehold Estate Analysis.................................................................. 105
III. As-Is Leasehold Market Value Analysis.......................................................... 108
IV. Marketing Time................................................................................. 110
V. Addenda
Client Engagement Letter....................................................................... 112
U.S. Bank's Commercial Appraisal Reporting Guidelines, February 1, 2000........................ 116
Section 1102 CI Commercial/Industrial District................................................. 123
Qualifications................................................................................. 125
State Certifications........................................................................... 127
Select Copies of Building and Millwright & Mechanical Package Plans............................ 129
</Table>
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5
SUMMARY OF SALIENT FACTS AND IMPORTANT CONCLUSIONS
I. Property Summary:
A. Property Type: Proposed 40 million gallon
ethanol fuel plant to be known
as "Northern Lights Ethanol".
B. Address: 48416 144th Street,
Big Stone City, SD, 57216.
C. Standard Metropolitan None
Statistical Area (SMSA):
D. Census Tract #: None
E. Legal Description: Parcel A in the SW 1/4 of Sec. 12
and Parcel B in the SE 1/4 of
Sec. 11, Township 121 North,
Range 47 West, Grant County, SD.
F. Parcel #: Not Yet Assigned
G. Site Data:
1. Net Leased Site Area:
a. Parcel A: 28.30 Acres
b. Parcel B: 8.29 Acres
Total 36.59 Acres
2. Zoning: C-I; Commercial /Industrial
3. Flood Plain: Not in a flood plain.
H. Improvement Size Summation:
1. Plant's Production Capability: 40,000,000 gallons/year
2. Building Components:
<Table>
<Caption>
Approximate Exterior
Component(1) Dimensions(2) Main Floor Size(3) Wall Height(4)
------------ ------------- ------------------ --------------
a. Process/Distillation
Buildings
- Process Bldg. 120' X 246' 29,540 s.f. 56' 6"
- Mechanical Bldg. 80' X 190' 17,120 s.f. 20'
- Distillation Bldgs. 72' X 76' 4,245 s.f. 58' 1" -71' 8"
- Process Office 35' X 90' 3,180 s.f. 13'
------
Total 54,085 s.f.
b. Grains Building
- Receiving/Holding
Bldg. 100' X 136' 13,804 s.f. 36'
- M.C.C. Bldg. 21' X 36' 756 s.f. 11'
------
Total 14,560 s.f.
c. Scale Building 19' X 50' 1,108 s.f. 10' 4 1/2"
d. Administration Bldg. 39' X 92' 3,645 s.f. 10' 4 1/2"
------
Total Floor Area 73,398 s.f.
</Table>
(1) Listed in order as to correspond to enclosed plans.
(2) Width x length. Dimensions not all inclusive.
(3) As detailed on individual component plans. "Site Plan with
Building Sizes" exhibit indicates slightly different sizes for
some buildings.
(4) Generally from finish floor to top of eave.
<Page>
6
3. Storage Capacity:
a. Corn Storage - 913,000 bushels
b. DDGS* Concrete Silo Storage - 4,000 tons
c. Ethanol Tank Farm - 2,000,000 gallons
d. Fermentors - 2,200,000 gallons
*Distillers dried grains with saluables (DDGS).
I. Improvement Age:
1. Year Built/Historical: Under construction-construction
started on April 18, 2001, with
completion scheduled for
November 1, 2002.
2. Est. Effective Age: New
3. Est. Remaining Economic Life:
a. Improvements - 40-50 years
b. Equipment - Varies from 10 yrs. to 50 yrs.
J. Ownership:
1. Site Owner/Lessor: Big Stone-Grant Industrial
Development & Transportation,
L.L.C.
2. Improvement Owner/Lessee: Northern Lights Ethanol, LLC
K. Client: U.S. Bank National Association
II. Site's Highest & Best Use Conclusions:
A. As Vacant: Agricultural or farmland.
B. As Proposed: Substantially its proposed use
or that of an ethanol fuel
plant.
III. Prospective As-Complete "Fee Simple*"
Going Concern Market Value Indicators:
<Table>
A. Cost Approach: $48,825,000
B. Income Capitalization Approach: $57,500,000
C. Sales Comparison Approach: Not Applicable
</Table>
*Disregards the Ground Lease Agreement.
IV. Reconciled As-Complete "Fee Simple"
Going Concern Market Value Opinion: $50,000,000 or
$1.25/gal. of production
capability
<Page>
7
V. Implied Income Analysis Using "Fee Simple"
Going Concern Market Value Conclusion:
<Table>
A. Estimated Net Income $11,500,000
B. Implied Overall Rate $11,500,000 (I)
DIVIDED BY $50,000,000 (V) = 23.0%(R)
C. Est. Annual Debt Service (mo.
pymts.) 65% l-t-v, 8.50% mtg.
interest, 10 yr. amort. = $ 4,835,442
D. Debt Service Ratio $11,500,000 (I)
DIVIDED BY $4,835,442 (debt ser.) = 2.38
E. Implied Equity Dividend Rate
($11,500,000 NOI less $4,835,442
debt ser.) DIVIDED BY $17,500,000
or 35% equity = 38.1%
</Table>
VI. Reconciled As-Complete Leasehold Going Concern Market Value Opinion:
<Table>
A. Fee Simple Prospective As-Complete
Going Concern Market Value
Conclusion: $50,000,000
B. Less Underlying Site's Market Value: Negligible
-----------
Subtotal $50,000,000
C. Less Market Discount for
Improvements Located on Leased Site: None
-----------
Leasehold Interest Going Concern Market
Value Conclusion: $50,000,000
VII. Reconciled As-Is Fee Simple Market Value
Opinion: $10,000,000
</Table>
VIII.Estimated Exposure and Marketing Times
as it applies to all value conclusions: Approximately One-Two Years
<Page>
8
CERTIFICATION AND STATEMENT OF ASSUMPTIONS AND LIMITATIONS OF THE APPRAISAL
A. CERTIFICATION
According to UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP)
Standards Rule 2-3 and the Supplemental Standard Rules, the undersigned
does hereby certify that, to the best of my knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are my personal,
impartial, and unbiased professional analyses, opinions, and conclusions.
3. I have no bias and no present or prospective interest in the property that
is the subject of this report AND no personal interest or bias with respect
to the parties involved with this assignment.
4. The appraisal assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
5. My compensation for completing this assignment was not contingent upon the
development or reporting of a predetermined value or direction in value
that favors the cause of the client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event
directly related to the appraisal's intended use.
6. The undersigned nor any employee of Dakota Appraisal and Consulting, Ltd.
have not been sued by a regulatory agency or financial institution for
fraud or negligence involving an appraisal request.
7. I have made a personal appraisal inspection of the property that is the
subject of this report.
8. No one provided significant real property appraisal assistance to the
person signing this certification.
9. To the best of my knowledge and belief, the reported analyses, opinions,
and conclusions were developed and this report has been prepared in
conformity with the requirements of the Code of Professional Ethics and the
Standards of Professional Appraisal Practice of the Appraisal Institute and
the UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP).
10. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
11. I am a Member of The Appraisal Institute (MAI). The Bylaws and Regulations
of The Appraisal Institute require each Member or Candidate to control the
use and distribution of each appraisal report signed by such Member or
Candidate. Therefore, except as hereinafter provided, the party for whom
this appraisal report was prepared may distribute copies of this appraisal
report, in its entirety, to such third parties as may be selected by the
party for whom this appraisal report was prepared; however, selected
portions of this appraisal report shall not be given to third parties
without the prior written consent of the signatories of this appraisal
report. Further, neither all nor any part of this appraisal report shall be
disseminated to the general public by the use of advertising media, public
relations media, news media, sales media, or other media for public
communication without the prior written consent of the signatories of this
appraisal report.
12. The Appraisal Institute conducts a voluntary program of continuing
education for its designated members. Designated members who meet the
minimum standards of this program are awarded periodic educational
certification. As of the date of this report, I have completed the
requirements of the continuing education program of The Appraisal
Institute.
13. The undersigned has achieved ample experience in the appraisal of
properties similar to the subject property. I am also board-certified
through the North Dakota Real Estate Appraiser Qualification and Ethics
Board or the applicable appraiser regulatory agency if other than North
Dakota and have successfully completed numerous educational courses offered
by the Appraisal Institute (see enclosed Qualifications). Additionally,
every effort has been made to secure the information, knowledge, and
applicable data needed to complete this assignment. It is the opinion of
the undersigned that all necessary steps have been taken to ensure proper
development of the appraisal.
14. The subject improvement's respective values are:
<Table>
Objective #1: Subject Improvement's PROSPECTIVE AS-COMPLETE
LEASEHOLD GOING CONCERN MARKET VALUE, as of November
1, 2002, or the date the improvements are scheduled
for completion: $50,000,000
Objective #2: Partially built improvement's AS-IS leasehold
market value as of September 17, 2001, or the
appraisal inspection date: $10,000,000
</Table>
SIGNED /s/Joseph J. Ibach November 9, 2001
---------------------------------------------------------------------
Joseph J. Ibach, MAI ND CG#1009 SD#324CG-2001R Date of Report
<Page>
9
B. ASSUMPTIONS AND LIMITATIONS OF THE APPRAISAL
This appraisal report is subject to the limiting conditions:
1. No responsibility is assumed for the legal description or for matters
including legal or title considerations. Title to the property is assumed
to be intact and marketable and free and clear of any or all liens or
encumbrances unless otherwise noted. Special assessments have been
addressed in the appraisal report.
2. Responsible ownership and competent property management are assumed.
3. The information furnished by others is believed to be reliable. However, no
warranty is given for its accuracy.
4. All engineering is assumed to be correct. The report's plat maps, plans,
and all other illustrative material are included only to assist the reader
in visualizing the property.
5. It is assumed that no hidden or unapparent conditions exist in the
property, subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required.
6. It is assumed that full compliance with all applicable federal, state, and
local environmental regulations and laws exists unless noncompliance is
stated, defined, and considered in the appraisal report.
7. It is assumed that all applicable zoning and use regulations and
restrictions have been complied with, unless a nonconformity has been
stated, defined, and considered in the appraisal report.
8. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state or national government or private entity or organization have been or
can be obtained or renewed for any use on which the value estimate
contained in this report is based.
9. It is assumed that the utilization of the site and improvements is within
the boundaries of the property described and that no encroachment or
trespass exists unless noted in the report.
10. While the Appraiser has inspected the subject property and has considered
the information developed in the course of such inspection together with
the information provided by the ownership and client, the Appraiser is not
qualified to verify or detect the presence of hazardous substances or
environmental liabilities by visual inspection or otherwise, nor qualified
to determine the effect, if any, of known or unknown substances or
liabilities present. Unless otherwise stated in the report, the final
conclusion of value is based on the assumption that the subject property is
free of hazardous substances, hazardous waste contamination, and all other
environmental liabilities, and it is specifically assumed that present and
subsequent ownerships will exercise due diligence to ensure that the
property does not become otherwise contaminated.
11. The appraisal and market value estimate is based on cash, its equivalent,
or on financing terms available for the property type in its locale as of
the effective appraisal date. No consideration has been given to the
assumption of favorable existing financing (if any) or favorable
seller-financing.
12. The distribution, if any, of the total valuation between site and
improvements applies only under the stated program of utilization. The
separate allocations for site and improvements and any other value
components must not be used in conjunction with any other appraisal and are
invalid if so used.
13. Possession of this report, or a copy thereof, does not carry with it the
right of publication. It may not be used for any purpose by any person
other than the party to whom it is addressed without the written consent of
the appraiser, and in any event only with proper written qualification and
only in its entirety.
14. The appraiser herein by reason of this appraisal is not required to give
further consultation, testimony, or be in attendance in court with
reference to the property in question unless arrangements have been
previously made.
15. The forecasts, projections, or operating estimates contained herein are
based on current market conditions, anticipated short-term supply and
demand factors, and a continued stable economy. These forecasts are,
therefore, subject to changes with future conditions.
16. Unless specifically cited in the appraisal report, no value has been
allocated to mineral rights or deposits.
17. Unless otherwise addressed within the appraisal report, no consideration
has been afforded to any potential Natural, Cultural, Recreational, or
Scientific value that may or may not be inherent to the subject property.
<Page>
10
COMPLIANCE WITH FIRREA CHECKLIST
<Table>
1. Conform to USPAP? Yes X No
--- ---
2. Be written and contain sufficient information? Yes X No
--- ---
3. Deductions/discounts to value "as is"? Yes X No
--- ---
4. Correct value definition? Yes X No
--- ---
5. Be performed by State-licensed or certified appraisers? Yes X No
--- ---
</Table>
COMPLIANCE WITH USPAP CHECKLIST
<Table>
<Caption>
No. Requirement Page #
--- ----------- ------
1. Conformance to the Uniform Standards of Professional Appraisal Practice
(USPAP), NOT including its "Departure Provision". 11-13
2. Disclosure of the manner in which the appraiser satisfies the "Competency
Provision" of USPAP. 20
3. The reports must be based upon "Market Value" as defined by USPAP. 16
4. The report must be written and in narrative format descriptive enough to
lead the client to a determination of estimated "Market Value" and an
understanding of the basis upon which such an estimate is made, and
detailed enough to reflect the complexity of the appraisal. 11-111
5. Analyze and report any prior sales of the property one (1) year prior for
1-4 family residential properties, or three (3) prior years for all other
properties. 14&15
6. For income producing properties, an analysis of current or expected
revenues, vacancies, and expenses even though the property may be
encumbered under a triple net lease. 72-92
7. The appraisal must include a reasonable marketing period for the
property. 110
8. The report must include mention of current conditions and trends that may
affect projected absorption and income as they, in turn, affect the 21-27,
market value of the subject property. 47-54
9. The report must discuss any appropriate deductions or discounts for any
proposed construction, partial leases, below economic leases, or tract
development with unsold units. 108-109
10. There must be a statement in the certification that the appraisal
assignment was not based upon a requested minimum valuation, a specific
valuation, or approval of any proposed financing. 8
11. There must be sufficient documentation to support the appraiser's logic,
reasoning, judgement, and analysis to enable the client to determine the
reasonableness of the final market value estimate. 11-111
12. The report must include a legal description of the property in addition
to the description required by USPAP. 14
13. Identify and separately value any personal property, fixtures, or
intangible items that are not real property but are included in the
appraisal, and discuss the impact of their inclusion or exclusion on 3 &
the estimate of market value. 102-104
14. Follow a reasonable valuation method that addresses the sales comparison,
income, and cost approaches to market value, reconciles those approaches,
and explains elimination of each approach not used. 55&56
</Table>
<Page>
11
II. APPRAISAL PROCESS
A. INTRODUCTION/SCOPE (rev. 8/1/01)
An appraisal of the subject property is presented in the following
report; an APPRAISAL is defined as:
1. AN ANALYSIS, OPINION, OR CONCLUSION RELATING TO THE NATURE,
QUALITY, VALUE, OR UTILITY OF SPECIFIED INTEREST IN, OR
ASPECTS OF, IDENTIFIED REAL ESTATE.
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE
APPRAISAL, THIRD EDITION: 16)
2. THE ACT OR PROCESS OF DEVELOPING AN OPINION OF VALUE; AN
OPINION OF VALUE.
(UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE,
2001 Edition)
An appraisal is based on an impartial or unbiased perspective; it is not
made for the purpose of favoring a specific cause of any particular
party. It is essential that the appraisal communicate accurate analyses
and opinions in such a manner that it will be meaningful to the client
and not be misleading in the marketplace.
The UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP)
was developed to reflect the current standards of the appraisal
profession. These standards deal with the procedures to be followed in
performing an appraisal; they are referenced throughout the following
appraisal report. The appraisal process reports the appraisal procedures
in an orderly manner in which the data used in developing the value(s) of
the subject property is assembled, classified, analyzed, and interpreted
into a final opinion or conclusion. The final conclusion of value(s) is
developed through a course of accepted analytical procedure reflecting
only the opinion(s) of the appraisers involved in the analysis.
Standard 1 of the UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL
PRACTICE (USPAP) states that "IN DEVELOPING A REAL PROPERTY APPRAISAL, AN
APPRAISER MUST IDENTIFY THE PROBLEM TO BE SOLVED AND THE SCOPE OF WORK
NECESSARY TO SOLVE THE PROBLEM, AND CORRECTLY COMPLETE RESEARCH AND
ANALYSIS NECESSARY TO PRODUCE A CREDIBLE APPRAISAL." Two categories are
allowed in DEVELOPING an appraisal or:
1. COMPLETE APPRAISAL: THE ACT OR PROCESS OF DEVELOPING AN
OPINION OF VALUE OR AN OPINION OF VALUE DEVELOPED WITHOUT
INVOKING THE DEPARTURE RULE.
2. LIMITED APPRAISAL: THE ACT OR PROCESS OF DEVELOPING AN
OPINION OF VALUE OR AN OPINION OF VALUED DEVELOPED UNDER
AND RESULTING FROM INVOKING THE DEPARTURE RULE.
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The Complete Appraisal incorporates all of Standard 1 but USPAP
allows certain departures from Standard 1. When departure is invoked, the
appraisal becomes a Limited Appraisal. In this particular appraisal, the
client specifically requested that a Complete Appraisal be prepared;
thus, departure was not invoked.
Standard 2 of USPAP allows three categories in REPORTING an
appraisal or:
1. Self-Contained Report
2. Summary Report
3. Restricted Use Report
Each appraisal option is dependent upon the level of detail required in
the report. A comprehensive level of detail is presented in the
Self-Contained Report; a less detailed, yet concise level of information
is presented in the Summary Report; and a minimal level of detail is
presented in the Restricted Use Report. USPAP contains specific
guidelines which determine what constitutes a Self-Contained, Summary,
and Restricted Use Report and when use of a particular option is
appropriate. In this particular assignment, the client requested that a
Self-Contained Report be prepared. Therefore, a COMPLETE APPRAISAL will
be developed and presented in a SELF-CONTAINED REPORT.
The first step in this process involves defining the appraisal
problem: that is, the identification and appropriate inspection of the
real estate and properly and accurately identifying the appraisal's
intended use AND user, purpose(s) or objective(s), effective date(s),
property rights to be appraised, and the type(s) of value sought.
Detailed market information pertaining specifically to the subject
property's value is then collected and analyzed. This information
includes an applicable market analysis, site and improvement description,
highest and best use analysis, and the application of the relevant
valuation techniques used in developing an opinion of the property's
value(s) including complete assemblage, verification, and analysis of all
appropriate market data. The final step in the appraisal process is the
reconciliation or correlation of the values as indicated by the relevant
valuation techniques.
The subject property's inspection was conducted only within the
context of the appraisal process to uncover valuation issues. This
"appraisal inspection" is NOT to be construed as a building inspection in
which the intent is to uncover defective building or structural
components.
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13
Therefore, this appraisal inspection, as it relates to the property (site
and improvements), will address only the observed conditions that would
likely impact the property's valuation issues and/or its overall appeal
and marketability. Any and all references to the property's inspection
only infers an "appraisal inspection".
In this particular appraisal, several of the following sources were
utilized in providing both general and detailed information pertaining to
the area real estate market, including sales, listings, rents, general
market statistics, etc.:
1. Office files.
2. Federal, state, and local agencies relating to general data and
trade associations and private business enterprises relating to
the specific property type.
3. Market participants including brokers/real estate agents,
buyers, sellers, lenders, property managers, landlords, and/or
tenants.
4. County Register of Deeds' records.
5. County and/or City Assessor records.
6. Multiple Listing Service records.
7. City and/or County Planning and/or Engineering Offices.
8. Building Inspector's Office.
9. Information provided by the property's owner, manager, and/or
any other individuals involved in the property.
Detailed discussions of each sale, listing, rent, or any other
appropriate section of the report will provide the informational source,
when the information was verified, and to whom the information was
verified. "Office files" is considered the initial (and most favored)
source of information since this type of information is usually provided
by individuals having first hand knowledge of a transaction. Often, this
information was obtained just before, immediately after, or even during
the progression of a particular transaction. The sources and data used in
this appraisal are considered reliable. When conflicting information was
provided, the source deemed most reliable was used. Data believed to be
unreliable was not included in the report nor used as a basis for the
value conclusion.
The following report details the entire appraisal process, starting
with a proper identification of the subject property and concluding with
the final market value opinion(s). For ease of use, a simple outline
format has been used in the following appraisal.
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14
B. IDENTIFICATION OF THE SUBJECT PROPERTY
1. Property Type:
The primary ownership interest in this particular property involves
only the subject improvements as they will be located on a leased
site. Specifically, the completed 40 million gallon ethanol fuel
plant to be known as "Northern Lights Ethanol" will be located on a
36.59 acre leased site.
2. Address/Location:
The property's street address of "48416 144th Street, Big Stone
City, South Dakota" places it about two miles northwest of the
community's city limits or in an area reflecting predominantly
agricultural uses.
3. Standard Metropolitan Statistical Area (SMSA): None
4. Census Tract #: None
5. Legal Description:
The following legal description was copied from the warranty deed
in which the current site owner acquired title on April 19, 2001:
"PARCEL A IN THE SOUTHWEST QUARTER (SW 1/4) OF SECTION TWELVE
(12), TOWNSHIP ONE HUNDRED TWENTY-ONE (121) NORTH, RANGE
FORTY-SEVEN (47) WEST OF THE FIFTH PRINCIPAL MERIDIAN, GRANT
COUNTY, SOUTH DAKOTA, ACCORDING TO THE RECORDED PLAT THEREOF.
PARCEL B IN THE SOUTHEAST QUARTER (SE 1/4) OF SECTION ELEVEN
(11), TOWNSHIP ONE HUNDRED TWENTY-ONE (121) NORTH, RANGE
FORTY-SEVEN (47) WEST OF THE FIFTH PRINCIPAL MERIDIAN, GRANT
COUNTY, SOUTH DAKOTA, ACCORDING TO THE RECORDED PLAT THEREOF."
6. Parcel #: Not Yet Assigned
7. Ownership History:
Detailing the subject property's ownership history is a mandatory
element of a fully documented appraisal that conforms to the
UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP).
Standards Rule 1-5 of USPAP requires that the appraisal "MUST
CONSIDER AND ANALYZE ANY PRIOR SALES OF THE PROPERTY BEING
APPRAISED THAT OCCURRED WITHIN ..." three years for all property
types except one to four family residential. The intent of this
requirement is to encourage the research and analysis of prior
sales of the subject; the time frames cited are minimums. A
complete title search of the subject property has not been made nor
is an opinion of title intended to be rendered in the following
discussion. The Grant County Register of Deeds and Director of Tax
Equalization offices were referenced to formulate recent ownership
of the subject property but only for the purposes of this
appraisal.
Ownership to the identified subject site was deeded to the current
owner or Big Stone-Grant Industrial Development and Transportation,
L.L.C. on April 19, 2001, from Ottertail Corporation,
Montana-Dakota Utilities Company, and Northwestern Public Service.
(Deed is filed in Book 108, page 161.) Big Stone-Grant Industrial
Development and Transportation, L.L.C. is a subsidiary of the
sellers who own the adjacent Big Stone power
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15
plant. A search of the Register of Deeds records indicate that the
related ownership dates back to at least 1986. Thus, the site has
been part of the Big Stone power plant ownership for well in excess
of three years preceding the appraisal's effective date. A separate
ownership group and the subsequent deeding of the identified
subject parcel to Big Stone-Grant Industrial Development and
Transportation, L.L.C. was required to establish the lease with the
owner/borrower. (The "Big Stone Plant Property Lease" will be
further detailed in the following report.) Based on the preceding,
the land or site is and will continue to be owned by Big
Stone-Grant Industrial Development and Transportation, L.L.C. with
the owner/borrower or Northern Lights Ethanol, LLC securing use of
the identified subject site through a 99 year lease.
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16
C. DEFINITION OF THE APPRAISAL PROBLEM
1. Appraisal's Intended Use and User:
This appraisal was made at the request of Mr. Robert J. Edstrom,
Real Estate Technical Services, representing the client or U.S.
Bank National Association. Per the engagement letter, the
"APPRAISAL WILL BE USED AS THE BASIS FOR LOAN UNDERWRITING". This
report is intended for use only by U.S. Bank National Association
and/or its assigns; use of this report by others is NOT intended.
2. Appraisal Objective(s), Property Rights Appraised, and Effective
Date(s):
The engagement letter indicates that "THE PURPOSE OF THE APPRAISAL
IS TO PROVIDE A SUPPORTED OPINION OF THE MARKET VALUE OF THE REAL
ESTATE AS OF THE DATE OF YOUR INSPECTION, IN ACCORDANCE WITH THE
APPRAISAL POLICIES AND PROCEDURES OF U.S. BANCORP, AND AS DEFINED
BY 12 C.F.R. 34. THE FOLLOWING VALUE(S) ARE REQUESTED:
LEASEHOLD MARKET VALUE AS IS
LEASEHOLD MARKET VALUE UPON COMPLETION OF CONSTRUCTION
The client specified appraisal objectives require that an opinion
of market value be provided. MARKET VALUE, is defined on pages 5
and 6 of the client's "Commercial Appraisal Reporting Guidelines"
as:
"THE MOST PROBABLE PRICE WHICH A PROPERTY SHOULD BRING IN A
COMPETITIVE AND OPEN MARKET UNDER ALL CONDITIONS REQUISITE TO
A FAIR SALE, THE BUYER AND SELLER EACH ACTING PRUDENTLY AND
KNOWLEDGEABLY, AND ASSUMING THE PRICE IS NOT AFFECTED BY UNDUE
STIMULUS. IMPLICIT IN THIS DEFINITION IS THE CONSUMMATION OF A
SALE AS OF A SPECIFIED DATE AND THE PASSING OF TITLE FROM
SELLER TO BUYER UNDER CONDITIONS WHEREBY:
(1) BUYER AND SELLER ARE TYPICALLY MOTIVATED;
(2) BOTH PARTIES ARE WELL INFORMED OR WELL ADVISED, AND
ACTING IN WHAT THEY CONSIDER THEIR BEST INTERESTS;
(3) A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN
MARKET;
(4) PAYMENT IS MADE IN TERMS OF CASH IN UNITED STATES DOLLARS
OR IN TERMS OF FINANCIAL ARRANGEMENTS COMPARABLE THERETO;
AND
(5) THE PRICE REPRESENTS THE NORMAL CONSIDERATION FOR THE
PROPERTY SOLD UNAFFECTED BY SPECIAL OR CREATIVE FINANCING
OR SALES CONCESSIONS GRANTED BY ANYONE ASSOCIATED WITH
THE SALE."
The client also specified that "leasehold" real property interests
be addressed. According to THE APPRAISAL OF REAL ESTATE, 12th
Edition, page 8, published by the Appraisal Institute, REAL
PROPERTY INTERESTS are described as follows:
"REAL PROPERTY INCLUDES ALL INTERESTS, BENEFITS, AND RIGHTS
INHERENT IN THE OWNERSHIP OF PHYSICAL REAL ESTATE. A RIGHT OR
INTEREST IN REAL ESTATE IS ALSO REFERRED TO AS AN ESTATE.
SPECIFICALLY, AN ESTATE IN LAND IS THE DEGREE, NATURE, OR
EXTENT OF INTEREST THAT A PERSON HAS IN IT.
THE TOTAL RANGE OF OWNERSHIP INTERESTS IN REAL PROPERTY
IS CALLED THE BUNDLE OF RIGHTS. IMAGINE A BUNDLE OF
STICKS WHERE EACH 'STICK' REPRESENTS A DISTINCT AND
SEPARATE RIGHT OR INTEREST. THE BUNDLE OF RIGHTS
CONTAINS ALL THE INTERESTS
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17
IN REAL PROPERTY, INCLUDING THE RIGHT TO USE THE REAL ESTATE,
SELL IT, LEASE IT, ENTER IT, AND GIVE IT AWAY, AND EACH
'STICK' CAN BE SEPARATED FROM THE BUNDLE AND TRADED IN THE
MARKET."
It is possible to own all or only some of the rights in a parcel of
real estate. The extent of ownership determines the kind of
interest, or estate, that is held. A person who owns all the
property rights is said to have "FEE SIMPLE TITLE" or estate
defined as:
"ABSOLUTE OWNERSHIP UNENCUMBERED BY ANY OTHER INTEREST
OR ESTATE, SUBJECT ONLY TO THE LIMITATIONS IMPOSED BY
THE GOVERNMENTAL POWERS OF TAXATION, EMINENT DOMAIN,
POLICE POWER, AND ESCHEAT."
(Appraisal Institute, DICTIONARY OF REAL ESTATE
APPRAISAL, 3RD EDITION; 140)
Fee simple ownership, often referred to as ABSOLUTE, implies that
the subject property would be free of encumbrances or restrictions
which could affect ownership or title. In this particular property,
"fee simple" ownership will not exist as the completed improvements
will be located on a site leased from the property owner or Big
Stone-Grant Industrial Development and Transportation, L.L.C.
Therefore, the tenant or improvement owner/borrower or Northern
Lights Ethanol, LLC cannot provide fee simple ownership in the
completed improvements. Only a "LEASEHOLD INTEREST" will exist; it
is defined as:
"THE INTEREST HELD BY THE LESSEE (THE TENANT OR RENTER)
THROUGH A LEASE CONVEYING THE RIGHTS OF USE AND
OCCUPANCY FOR A STATED TERM UNDER CERTAIN CONDITIONS."
(Appraisal Institute, DICTIONARY OF REAL ESTATE
APPRAISAL, 3RD EDITION; 204)
Leasehold interest ownership implies that, when a lease is
transmitted, a tenant (in this case, the tenant being the
owner/borrower or Northern Lights Ethanol, LLC) usually acquires
the rights to possess the property for the lease period, to
sublease the property if desired, and occasionally improve the
property under the restrictions specified in the lease. In return,
the tenant is obligated to pay rent, surrender possession of the
property at the termination of the lease, remove any improvements
the lessee has modified or constructed if specified, and abide by
the lease provisions. Thus, fee simple title to the as-complete
improved subject property (site and improvements) will not be
available. The valuation analysis of the subject improvements will,
therefore, consider the impact the site lease has on the fee simple
market value by estimating the individual leased fee and leasehold
interests.
The first specified appraisal objective alludes to developing an
opinion of the leasehold market value of the subject property based
on its "as-is" condition. VALUE AS-IS, as used in the following
report, is defined as:
"THE VALUE OF SPECIFIC OWNERSHIP RIGHTS TO AN IDENTIFIED
PARCEL OF REAL ESTATE AS OF THE EFFECTIVE DATE OF THE
APPRAISAL; RELATES TO WHAT PHYSICALLY EXISTS AND IS LEGALLY
PERMISSIBLE AND EXCLUDES ALL ASSUMPTIONS CONCERNING
HYPOTHETICAL MARKET CONDITIONS OR POSSIBLE REZONING."
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL,
3RD EDITION; p. 385)
As of the inspection date or September 17, 2001, the identified
leased site was partially improved; the construction manager or Mr.
Kurt Mahon estimated that the improvements were about 25% complete.
Again, this site is leased and, as the following analysis of the
leasehold interest will demonstrate, the lease terms and/or the
site's contributory value are insignificant when compared to the
property's overall value. For this reason, no marketable interest
in the lease has been created. Even so, the owner/borrower would
not have a marketable interest in the underlying site as of the
inspection date. The only marketable interest would be in the
partially complete improvements. Thus, one appraisal objective is
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to develop an opinion of the partially built improvements or as-is
leasehold market value as of September 17, 2001, or the appraisal
inspection date.
The other appraisal objective is to provide an opinion of the
completed subject improvement's leasehold market value as of a
future or prospective date as completion is not scheduled until
November 1, 2002, as indicated by the owner/borrower's
representative or Mr. Larry Ward. Therefore, this objective's
effective date of valuation would be November 1, 2002. It must also
be assumed that the proposed project is completed in a workmanlike
manner according to the plans and specifications provided by the
owner/borrower and detailed throughout the following appraisal
report. Any significant deviation from the plans and specifications
could render the appraisal and its results void.
Developing an opinion of the subject improvement's leasehold market
value based on this significant assumption or assuming that the
project is complete is deemed an "extraordinary assumption" or by
USPAP definition: "AN ASSUMPTION, DIRECTLY RELATED TO A SPECIFIC
ASSIGNMENT, WHICH, IF FOUND TO BE FALSE, COULD ALTER THE
APPRAISER'S OPINIONS OR CONCLUSIONS." For the purpose of this
analysis, it will be assumed that market conditions relating to
this particular property type or that of a retail facility would
remain unchanged through the prospective date. This extraordinary
assumption is clearly required for purposes of reasonable analysis
within the appraisal's objective and intended use. Use of this
extraordinary assumption still results in a credible analysis.
This particular property type or that of an operating ethanol
plant, which is anticipated to be a profitable business venture,
incorporates something more than simply real estate. Specifically,
a considerable amount of non-real property items are included such
as furniture, fixtures, and equipment but, more importantly, other
intangible items are integral components such as marketing and
management skills, an assembled work force, working capital, or all
other items needed to create a profitable ethanol plant. In
essence, the operation and/or purchase of an operating ethanol
plant would include the GOING-CONCERN VALUE, defined as:
"THE VALUE CREATED BY A PROVEN PROPERTY OPERATION;
CONSIDERED AS A SEPARATE ENTITY TO BE VALUED WITH A
SPECIFIC BUSINESS ESTABLISHMENT."
(Appraisal Institute, DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION; 160)
A profitable ethanol plant, a characteristic that is anticipated in
the completed subject property's operation, is normally purchased
with this going concern value concept incorporated within the
transaction. For this reason, the following appraisal report will
develop the subject property's "going concern" values. (All
references to value in the following appraisal report will include
the going concern concept.) Based on the preceding, the primary
appraisal objective needs to include the going concern value
concept.
Based on the preceding discussion, this appraisal has a twofold
objective or developing an opinion of the:
1. As-complete subject improvement's prospective leasehold going
concern market value as of November 1, 2002, or the date the
improvements are scheduled for completion.
2. Partially built improvement's as-is leasehold market value as
of September 17, 2001, or the appraisal inspection date.
It must be emphasized that the enclosed written appraisal report
was completed on November 9, 2001. No evidence exists to suggest
that market conditions will change measurably between the initial
appraisal inspection or September 17, 2001, the
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19
completion date of the written appraisal report or November 9,
2001, and the prospective valuation date of November 1, 2002.
The most appropriate appraisal process used in developing an
opinion of the improvement owner's leasehold market value is to (1)
first develop an opinion of the subject property's (site and
improvements) market value assuming fee simple ownership existed
and then (2) focus on the valuation of Northern Lights Ethanol,
LLC's or the site tenant's leasehold interest in the improvements.
This appraisal report will start with first developing an opinion
of the subject property's fee simple market value which, again,
would include both the site and improvements. The development of an
opinion of the subject improvement's as-complete and as-is
leasehold market values will then follow.
3. Special Instructions and Other Conditions:
The appraisal was made to conform to the Appraisal Institute's Code
of Professional Ethics and Standards of Professional Appraisal
Practice and the most recent edition of the UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE (USPAP), adopted by the Appraisal
Standards Board of the Appraisal Foundation, and should meet the
minimum requirements for all federally-related transactions.
Additionally, the appraisal was made in conformance with the Office
of the Comptroller of Currency (OCC)-12CFR 34, Subpart C and/or 12
CFR 7.3025; Federal Deposit Insurance Corporation (FDIC)-12 CFR
323; Title XI of Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA), and U.S. Bank "Commercial Appraisal
Reporting Guidelines", dated February 1, 2000.
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20
D. STATEMENT OF COMPETENCY
The competency provision of the UNIFORM STANDARDS OF PROFESSIONAL
APPRAISAL PRACTICE (USPAP) recognizes that the background and experience
of appraisers can vary widely, and that a lack of knowledge or experience
can lead to inaccurate or inappropriate appraisal practice. The
Competency Provision states:
PRIOR TO ACCEPTING AN ASSIGNMENT OR ENTERING INTO AN AGREEMENT TO
PERFORM ANY ASSIGNMENT, AN APPRAISER MUST PROPERLY IDENTIFY THE
PROBLEM TO BE ADDRESSED AND HAVE THE KNOWLEDGE AND EXPERIENCE TO
COMPLETE THE ASSIGNMENT COMPETENTLY; OR ALTERNATIVELY:
1. DISCLOSE THE LACK OF KNOWLEDGE AND/OR EXPERIENCE TO THE CLIENT
BEFORE ACCEPTING THE ASSIGNMENT; AND
2. TAKE ALL STEPS NECESSARY OR APPROPRIATE TO COMPLETE THE
ASSIGNMENT COMPETENTLY; AND
3. DESCRIBE THE LACK OF KNOWLEDGE AND/OR EXPERIENCE AND THE STEPS
TAKEN TO COMPLETE THE ASSIGNMENT COMPETENTLY IN THE REPORT."
This appraisal assignment was accepted by Dakota Appraisal &
Consulting, Ltd., from the client or U.S. Bank National Association, as
represented by Mr. Robert J. Edstrom, Real Estate Technical Services for
U.S. Bank National Association. Prior to receiving the assignment, the
client requested that an appraisal proposal be submitted. Evidently, the
client was of the opinion that the undersigned had the competency to
undertake the assignment as it was awarded. The undersigned has not
completed prior appraisals on an ethanol plant. However, appraisals on
other types of processing plants have been completed within the recent
past. More specific to this project, the undersigned met personally with
the owner/borrower's representative or Mr. Larry Ward of Broin &
Associates, Inc. Broin & Associates are deemed one of the country's
largest ethanol plant developers involved in plant design, engineering,
construction, and operation. Additionally, contacts were made to various
sources within the industry relative to present and future markets,
pricing, supply and demand factors, etc. Many major industry publications
and sources will be referenced in the following report.
Additionally, the knowledge and experience of the signatory of this
appraisal in the valuation of somewhat related properties is well
established, is confirmed through the successful completion of numerous
appraisals and educational courses offered by the Appraisal Institute,
and the signatory appraiser is board-certified through the North Dakota
Real Estate Appraiser Qualifications and Ethics Board (NDCG-1009) and the
South Dakota Department of Commerce and Regulation (Certificate
#324CG-2001R). Lastly, every effort has been made to secure the
information, knowledge, and applicable data needed to complete this
assignment. Based on the preceding, it is the opinion of the signatory of
this appraisal that all necessary and appropriate steps were taken to
insure that a properly developed appraisal has been made.
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21
E. MARKET AREA ANALYSIS
DEFINED --
Value of real property is dependent upon the recognition and
understanding of the area market economic trends. Particular trends may
vary with the appraisal problem and the type of real estate appraised,
but a probable direction, extent, and impact of economic change must be
reasonably identified and forecasted to measure their probable impact on
the property being appraised. Thus, the conditions and potential of the
local economy, and, possibly, national and regional economics, are
relevant to most appraisal assignments.
STATE ECONOMICS--
The subject property is located in the Grant County, South Dakota,
area market. South Dakota is still generally considered an agricultural
state in terms of percentage of land use. However, the percentage of all
income earned in the state that relates to agriculture has declined in
recent years since the State is attempting to gradually diversify its
economic base with increased emphasis generated from non-farm activity.
South Dakota has been successful in attracting comparatively more
businesses when compared to most other area states as it offers no
corporate income tax, no personal income tax, no business inventory tax,
no personal property tax, and competitive premiums for workers and
unemployment compensation insurance premiums. With the diversification of
the economic base, most indicators are revealing a mostly stable economy.
South Dakota's population increased from 690,768 in 1980 to 696,004
in 1990 and to 754,844 in 2000 or an increase of 64,087 people or 9.3% or
about .5% per year over the last 20 years. However, if the increase in
only Sioux Falls' (states largest city) population of 42,632 people were
deducted from the state's population increase, the state's overall
population statistics would show only a modest increase.
LOCATION AND TRANSPORTATION --
The completed subject property will be located about two miles
northwest of the Big Stone City, South Dakota, city limits. As such, it
will be located in the extreme northeast corner of Grant County; Grant
County is located in the northeast quadrant of South Dakota. The
"L-shaped"
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22
shaped" Grant County has the Minnesota-South Dakota state line as its
east boundary and its north boundary is located only about 42 miles south
of the South Dakota-North Dakota state line. The county's extreme
northwest corner extends about eight miles west of Interstate 29. By far,
the predominant land use within Grant County and the entire region or
extending throughout northeast South Dakota, southeast North Dakota, and
west central Minnesota is for agricultural or farming purposes.
The predominant mode of area transportation is via the highway
system. Interstate 29 is the major north-south traffic arterial serving
the extreme east end of North and South Dakota. The major east-west
traffic arterial through Grant County is U.S Highway 12. It enters the
county on the extreme northeast corner or at Big Stone City and exits
near the county's northwest corner at its intersection with Highway 81. A
series of state highways also transverse the county with the most
significant being north-south State Highway 15 through the county's
central part.
Other area county transportation facilities include the Burlington
Northern/Santa Fe (BNSF) Railroad that, for the most part, parallels U.S.
Highway 12 through the county and the Sisseton-Milbank (SM) Railroad. The
SM Railroad is simply a 38 mile track extending from Milbank on the south
to Sisseton, South Dakota, to the northwest. By far, the BNSF Railroad is
the predominant county rail transportation. (Availability of rail is a
significant characteristic in site selection for an ethanol plant.) Other
area transportation modes include a small airport at Milbank, South
Dakota, and area trucking firms. Collectively, comparatively good modes
of transportation exist within Grant County, especially as it relates to
the availability and proximity to rail and the interstate system.
COUNTY SUMMARY --
As earlier detailed, South Dakota is primarily an agricultural
state in terms of land use and Grant County is no exception. The county's
primary economic base is heavily dependent upon the agricultural
industry. About 70% of the county land is used as cropland with the
balance used as pasture or hayland. According to the latest or 1997 Ag
Census, Grant County had 359,043 acres in farmland with 534 farms;
average farm size was 672 acres. Crop production is the primary source of
income derived primarily from the production of corn, spring
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23
wheat, and soybeans. However, Grant County has been the state's leading
dairy producer over the last five years (see enclosed agricultural
ratings). According to the latest industry figures or those for 1998,
farm employment was the county's third largest employer at 681 employees
behind services at 1,247 employees and retail at 830 employees.
The one commodity that has significant importance in the subject's
plant is that of corn. The state's corn production has increased
significantly over the last three decades. Specifically, state-wide corn
production approximated about 100 to 150 million bushels in the mid 1970s
but has increased to approximately 400 million bushels in the last three
years with 1999 and 2000 having total production approximating 425
million bushels. The vast majority of the corn is grown in the eastern
one-third of the state or in the vicinity of Grant County. As the
enclosed statistics indicate, Grant County generates about 1.75% of the
total statewide corn production; Grant County's corn production has
averaged nearly 7.2 million bushels over the last five years.
The Grant County seat or Milbank had a 2000 population of 3,640
which represented 46.4% of the total county population of 7,847. Grant
County, Milbank, and the closest community or Big Stone City have all had
significant population declines over the last four decades. Specifically,
Grant County's population peaked in 1960 at 9,913 people but declined to
7,847 in 2000 or a total decline of nearly 21%. Milbank's population
peaked in 1980 at 4,120 but has since declined to 3,640 or a decline of
11.7%. Lastly, Big Stone City's population peaked at 718 in 1960 but
declined to 605 in 2000 or a decline of nearly 16%. These population
declines are consistent for most rural located statewide counties and are
almost directly attributable to the demise of the agricultural industry.
The economy of the closest community or Big Stone City relies
almost entirely on two industries or agriculture and utilities. The Big
Stone Power Plant, located only about two miles to the northwest of Big
Stone City is the area's largest non-farm employer; it employs about 76
people. The area is also known as one of the three leading granite mining
areas in the United States. Big Stone City offers only limited retail
services as most are provided in Milbank, located only eleven miles
southwest of Big Stone City. Only one single family permit per year has
been issued in Big Stone City since 1993. Milbank is the county's primary
service center as it offers
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the county's largest school district, a 35 bed hospital, considerable
long-term care/assisted living facilities, and a majority of the non-ag
employment. Single family residential building permits have averaged
6.6/year from 1993 through 1999. County-wide, a favorable unemployment
rate exists at about 4% or less.
AGRICULTURAL ECONOMY --
The area's agricultural economy is in a constant state of
uncertainty as comparatively low commodity prices have been received in
recent years, production costs seem to be ever-increasing, and the simple
reliance upon Mother Nature creates considerable uncertainty in probable
profitability. The adjacent exhibit details that the average price per
acre of statewide farmland has increased every year since the last major
drought or in the late 1980's. However, farming's profitability has
resulted from the creation of larger farms, increased yields, and
increased government subsidies. In turn, the number of farms has
decreased measurably over the last several decades. The outlook for
continued increases in farmland values is favorable but, if present, such
increases tend to reflect a gradual rate of growth perceptible only over
a long period measured in years. It should also be acknowledged that,
while the agricultural economy continues to improve, the memory of recent
depressed conditions would, in all likelihood, continue to shape the
actions of buyers to some extent in terms of cautious attitudes.
Most area community leaders and local county and city governments
have become more proactive in terms of attracting employment beyond the
agricultural industry. In recent years, value added agricultural
industries have received considerable interest. Ethanol plant development
has recently emerged as the most significant value added industry for
high corn crop production areas. More specific to this region, the 40
million gallon Dakota Ethanol plant opened on August 1, 2001, in
Wentworth, South Dakota (a community located about 100 miles south on
Interstate 29, just outside Madison, South Dakota), and groundbreaking
for a 40 million gallon ethanol plant, known as Glacial Lakes Corn
Processors, took place in Watertown, South Dakota (a community located
about 50 miles southwest), on August 7, 2001. Also, the $260 million
ProGold corn processing plant (designed to produce corn syrup sweetener)
opened in 1996 near Wahpeton,
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25
North Dakota. (Plant was originally member operated but it has been since
leased to Cargill.) Wahpeton, North Dakota, is located about 75 miles
north of the subject.
Generally, most agricultural value added processing facilities have
been generally profitable as adequate labor exists, financial incentives
are readily available, and the area is well known as a major producer of
raw agricultural products. Specifically, the eastern border of North and
South Dakota and the western border of Minnesota has some of the most
productive agricultural farmland in the entire region. As a result, the
region produces some of the country's highest yields.
SUMMARY --
The state's and Grant County's predominant economic base is still
that of agriculture or an economic base still being viewed as being quite
static. Any renewal of optimism in the area's overall agricultural real
estate market is tempered by the still comparatively low commodity prices
and increased costs of operation. Continued stability appears to be the
most reasonable anticipation for the area's agricultural real estate
market. Diversification through value added products within the
agricultural industry is now perceived by many as an avenue to increase
farming's profitability. The more local market definitely has the
potential to provide a continued supply of raw product which, in this
particular property type, would be corn.
<Page>
26
F. NEIGHBORHOOD ANALYSIS
DEFINED --
A NEIGHBORHOOD is defined as:
"A GROUP OF COMPLEMENTARY LAND USES; A CONGRUOUS GROUPING OF
INHABITANTS, BUILDINGS, OR BUSINESS ENTERPRISES."
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION: 242)
The Neighborhood Analysis provides information in reference to the
neighborhood's history, type of development, present land use, and
present and future potential. Relating the subject's location to the
neighborhood provides an understanding of how the subject will conform to
the neighborhood use and neighborhood market.
BOUNDARY DESCRIPTION --
The subject property's neighborhood boundaries are somewhat
nondescript as it is/will be located in a predominantly agricultural use
area in Grant County's extreme northeast corner. The east border of South
Dakota is a logical neighborhood boundary but, as would be the case in
all other perimeter boundaries, similar land use and similar economics
extend throughout the region. Therefore, no specified neighborhood
boundaries exist.
ACCESSIBILITY --
The same transportation arterials that serve the entire market
area, as previously defined, would also serve this specific location. The
two major highways serving Big Stone City are U.S. Highways 12 and 75;
they intersect just on the east side of the state boundary at Ortonville,
Minnesota. Also, the BNSF Railroad passes through Big Stone City. Even
the community's proximity to Interstate 29 or approximately 32 miles west
via Highway 12 is deemed a favorable access characteristic.
LAND DEVELOPMENT/USES--
Again, the completed subject property will be located about two
miles northwest of Big Stone City. The predominant land use outside the
city limits is that of agricultural farmland with the exception of
scattered rural residences and scattered commercial/industrial single
land users. The most significant commercial/industrial land user in the
area is the Big Stone Power Plant. This 450 megawatt power plant opened
in 1975 and currently employs 76. According to "Tom" at Big Stone Power,
the plant is currently undertaking a feasibility study to determine
whether the plant should
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27
expand by an additional 600 megawatts, due primarily to the recent energy
concerns. The only other noted commercial or industrial users in
proximity to Big Stone City or even Milbank include some scattered
warehouses, some commercial users along the area highways, gravel pits, a
concrete processing plant, and area granite mines. A good maintenance
level was observed in area improved properties with owner occupancy being
predominant.
TRENDS --
The current predominant land use or agricultural farmland will
continue as the predominant land use into the foreseeable future. Simply,
the rural nature of the area precludes any significant commercial or
industrial development beyond periodic single use projects. As in the
broader agricultural market, agricultural values within this more
immediate area will tend to remain stable or increase modestly unless
agricultural commodity prices increase significantly.
SUMMARY --
The overall appeal and marketability of the completed subject
property will not be significantly impacted by the defined neighborhood.
Rather, its overall appeal, marketability, and, ultimately, its
profitability is more impacted by the regional nature of the agricultural
economy. Even so, the local or more immediate area provides those
services needed to support the proposed use. Also, this proposed use is
consistent with the existing neighborhood land use.
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28
G. SITE DESCRIPTION
1. Introduction:
As paraphrased from page 189 of The Appraisal of Real Estate (12th
Edition, published by the Appraisal Institute), a land or site
description is a detailed listing of factual data and information
on pertinent physical characteristics. A land or site analysis is a
careful study of the site's factual data in relation to the
neighborhood characteristics that create, enhance, or detract from
the utility and marketability of the land or site as compared with
competing comparable land, sites, or alternate locations. Even
though a site is described as though vacant, most land parcels have
been improved to some extent so the term site is used in the
following description.
The primary appraisal objective is to develop an opinion of the
subject improvement's market value as they will be located on a
leased site. Thus, the site is not part of this ownership interest
other than a leasehold interest may exist if the contractual land
rent is far below market rent. (This discussion will be detailed in
the following report.) Even though a site is not part of the
ownership interest to be addressed, a description of the site upon
which the improvements will be located and function is both useful
and necessary as it provides for a more complete understanding of
the entire property.
The subject site involves two separate and distinct parcels or
Parcel A in the SW 1/4 of Section 12 and Parcel B in the SE 1/4 of
Section 11, both located in Township 121 North, Range 47 West,
Grant County, South Dakota. However, only Parcel A will be improved
with the proposed ethanol plant. Parcel B is located west of Parcel
A, west and adjacent to 484th Avenue or the north-south street
between Parcel A on the east and Parcel B on the west. Essentially,
Parcel B was included as some borrow or fill was needed from this
parcel to improve Parcel A. Parcel B's limited utility and the lack
of market precludes it having a separate and distinct use. For this
reason, it will be simply carried as surplus land or additional
land that allows for future expansion of the existing improvements.
2. Location and Adjacent Site Users:
Parcel A's street address of "48416 144th Street, Big Stone City,
South Dakota" places it about two miles northwest of the city
limits. Specifically, the site is located on the northeast corner
of 144th Street on the south and 484th Avenue on the west. Parcel B
is located west and adjacent but across the street (484th Avenue)
to the west. Adjacent land users include the Big Stone Power Plant
to the north and agricultural farmland in all other directions.
3. Physical Characteristics (Shape, Size, Topography, Etc.):
a. Parcel A: This triangular shaped site has 1,625.4 feet of
width along the south and its depth along the west boundary is
1,519 feet. The plat map details Parcel A's size at 29.56
acres but it includes 1.26 acres of right-of-way. This road
right-of-way cannot be used as part of the area to be
developed. Thus, Parcel A's net acreage is 28.30 acres (29.56
acres less 1.26 acres right-of-way). The size is significant
for an industrial or commercial user but it is measurably
smaller if compared to area farmland parcels. Prior to
development of its current use, the parcel was used as
farmland.
The site has a moderate slope from north to south but site
preparation for the existing use will provide for adequate
drainage. It can only be assumed that soil tests were
conducted for development of the site for the proposed use.
These soil tests were not provided. For this reason, it can
only be assumed that the soils are
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29
sufficient to support development. No obvious limiting
physical characteristics were apparent.
b. Parcel B: This triangular shaped parcel has 897.3 feet of
frontage along its east boundary or along 484th Avenue. It
then extends approximately 770 feet west at a point where the
triangle connects. The plat indicates a total site size of
8.29 acres. The site was used as agricultural farmland but a
portion has since been excavated for fill needed to improve
Parcel A. It has a rolling topography.
4. Access and Visibility:
Good access is provided to both parcels by the two adjacent
streets. Both roadways are asphalt surfaced but it became apparent
that both will need to be upgraded and/or resurfaced to accommodate
the heavy truck traffic that will service the sites. Parcel A will
also be accessed by a 100 foot wide railroad spur line that will
connect through the subject site's southeast corner to the spur
line off the BNSF main track. This spur line currently connects to
the Big Stone Power Plant. The availability of rail was a
significant factor in selecting this site by the current user. Good
site visibility also exists as the sites afford considerable street
frontage and the adjacent land users do not prohibit line of sight.
5. Flood Plain Status, Easements, Environmental Concerns, and Other
Encumbrances:
The enclosed flood map details that only those county areas
designated "Zone A" are located within a special flood hazard area.
The subject site is not located within a Zone A area and,
therefore, is NOT within an identified flood hazard area. Thus,
flood insurance should not be a required contingency to obtaining
lender financing. No evidence was provided to indicate that the
sites are adversely encumbered with easements. It can only be
assumed that all municipal and public services are provided off the
adjacent streets. No apparent adverse encumbrances or encroachments
were evident.
A "Phase I Environmental Property Evaluation" was completed on the
subject sites by American Technical Services , Inc. (ATS) of Sioux
Falls, South Dakota, dated May 2, 2001. Page 9 of the report states
that "THE ASSESSMENT HAS REVEALED NO EVIDENCE OF RECOGNIZED
ENVIRONMENTAL CONDITIONS IN CONNECTION WITH THE PROPERTY. BASED ON
THE EVALUATION OF COLLECTED SUBSURFACE DATA, ATS DOES NOT RECOMMEND
FURTHER SITE ASSESSMENT ACTIVITIES." Based on this report, it will
be assumed that no environmental concerns exist within the subject
site.
6. Off-site Improvements:
Both adjacent streets are standard two lane asphalt surfaced county
roads that will undoubtedly need to be reconstructed/resurfaced in
the near future. No other street improvements exist. The site
is/will be serviced by city water and sewer. The community of Big
Stone in conjunction with the county will be providing these
municipal services to the site. Electricity is being provided by
the adjacent Big Stone Power Plant. The availability of adequate
electrical power, water, and sewer are significant components in
development of this site.
7. Zoning:
The subject site is zoned "CI-Commercial/Industrial District".
According to Section 1102 of the Grant County Comprehensive Zoning
regulations, this district "IS INTENDED FOR COMMERCIAL AND
INDUSTRIAL USES WHICH DUE TO THEIR SIZE AND NATURE REQUIRE HIGHWAY
ACCESS." The only permitted uses are those allowed in the
agricultural zoning district with the exception of residential
dwellings. All other uses require a conditional use permit.
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30
However, a significant number of condition uses are allowed. The
required lot area is determined by "NEED, SETBACK, SIDE YARDS, ...
HOWEVER, IN NO CASE SHALL A LOT HAVE LESS THAN TWO (2) ACRES."
Other yard requirements exist. A copy of the CI zoning district
regulation is enclosed in the Addenda. (No zoning map was available
from the county officials.)
8. Summary:
Again, the "subject site" involves both Parcels A and B totaling
36.59 acres. The sites will be developed with or have availability
to all municipal services, will feature a corner location adjacent
to two asphalt surfaced roadways, and have railroad accessibility.
Thus, the site is deemed to have reasonably good characteristics as
it relates to a rural located industrial site.
9. Subject Site's Representative Photographs:
The following pictures depict primarily the partially improved
Parcel A. Parcel B can be viewed from various street scenes. These
pictures, taken on September 17, 2001, attempt to depict the site's
overall characteristics and vicinity/street scenes.
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31
[Photograph]
Property overview looking northwest from near Parcel A's corner.
[Photograph]
Property overlooking northeast from the corner of 144th Street and 484th Avenue.
[Photograph]
Property overview looking southeast from Parcel A's extreme northwest corner
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32
[Photograph]
Overall vicinity view looking west along the railroad spur that will
connect to the subject site in the background.
[Photograph]
Street scene, looking west on 144th Street from the Big Stone entrance.
[Photograph]
Street scene, looking north on 484th Ave. from the south side of the
railroad underpass. The road intersection seen in the background is
the intersection of 484th Ave. & 144th Street.
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33
H. DESCRIPTION OF IMPROVEMENTS:
1. Introduction:
The completed subject improvements or that of a 40 million gallon
ethanol fuel plant will involve extensive building components and
considerable specialized fixtures and equipment. Therefore, this
description is intended to familiarize the reader with the general
construction, finish, and utility of the improvements AND needed
equipment and fixtures assuming the plant were complete. An
operating ethanol plant will require the use of considerable
non-real property items to include all the furniture, fixtures, and
equipment (FF&E). (For ease of reference, the following appraisal
will simply reference all FF&E simply as "equipment".) Much of the
equipment is considered personal property in that it is not
permanently affixed to the buildings but other equipment such as
the conveyors, scales, boilers, etc. are normally fixtures or
equipment permanently affixed to the real estate; they normally
become part of the real estate.
The following briefly describes the proposed subject improvements
and equipment/fixtures based on the (a) owner/borrower provided
plans and specifications, (b) an on-site inspection by the
undersigned of a now operating, almost identical ethanol plant
known as Dakota Ethanol plant located in Wentworth, South Dakota,
on September 18, 2001, and (c) considerable input provided by the
developer or Mr. Larry Ward of Broin & Associates, Inc. The
undersigned personally met with Mr. Ward on September 18, 2001, and
had numerous phone conversations over the course of completing this
assignment. The building plans were drawn by Short, Elliot,
Hendrickson Inc. (SEH) of St. Cloud, MN, and are referenced as File
No. ABROIN0201.00, dated October 3, 2001. The millwright and
mechanical package plans were provided by Broin & Associates of
Sioux Falls, South Dakota, and are referenced as Project NLE, dated
July 16, 2001. Both firms have been actively involved in the design
and/or construction of similar ethanol plants throughout the
region, the most recent being the aforementioned Dakota Ethanol
plant located in Wentworth, South Dakota. (This plant opened on
August 1, 2001.) It will be assumed that the proposed improvements
will be completed per these plans and specifications. Any
significant deviation from this information could render the
appraisal and its results void. No attempt was made to detail all
improvement or equipment characteristics but it should be
sufficient as to provide a basic overview.
2. Environmental and the Americans with Disabilities Act (ADA)
Concerns:
The completed subject improvements will be new and, for this
reason, the building components and the furniture, fixtures, and
equipment (FF&E) should not contain hazardous materials. The
Americans with Disabilities Act (ADA) became effective January 26,
1992, or a date preceding the subject improvement's estimated
completion date of November 1, 2002. Therefore, it can only be
assumed that the proposed improvements will be constructed in
compliance with the ADA requirements.
3. History:
The building permit to construct the improvements was issued on
April 18, 2001. Site preparation started in mid-May with the first
concrete poured on June 7, 2001. As of the inspection date or
September 17, 2001, about 25% of the construction had been
complete. Completion is scheduled for November 1, 2002. This
completion date is deemed reasonable, assuming no undue delays
arising from inclement weather or other unknown factors.
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34
4. Site Utilization-Parcel A Only:
a. Site Access: Two driveways off 144th Street on the south will
be provided. The one located near the site's southeast corner
will provide the primary truck access as it leads to the scale
house, truck scale, and eventually to the grain receiving
area. The second access along 144th Street will be located
near the site's approximate center providing access to the
parking lot for the administrative office building. No access
points are detailed along 484th Avenue. Rail access will also
be provided along the site's northeast side from an existing
spur line serving the adjacent Big Stone Power Plant. Good
site access will be afforded.
b. Building Placement: Most areas of Parcel A will be improved
with various building or equipment components. Essentially,
the building and equipment components are placed as to
maximize truck and rail access. Generally, the main processing
plant will be located near the site's center with the corn
storage bins located to the north or near the railroad line
and the ethanol tank farm located on the site's northwest
corner. Reference to the enclosed site plan is essential in
understanding the improvement's placement.
c. Building-to-Site Ratio: This component is generally not
applicable to this particular property type as far more land
exists than even needed for the plant, especially if Parcel B
is added to the entire site size. However, the additional land
is not deemed excess or surplus land as the area market simply
does not have the economics as to justify value enhancement
for additional lands.
d. Parking Lot and Parking Requirements: Two lined parking lots
will be provided, one located at the scale house and one at
the administrative office building. The parking is sufficient
for both uses. Additionally, various areas throughout the site
can be used for parking. Likewise, the parking requirements
are not a significant factor in this particular property type.
e. Other Site Improvements: The majority of the site area will be
improved with compacted rock based material as to provide
sufficient support for the considerable on-site truck traffic.
Some landscaped areas will be installed around the site's
perimeter, especially along the east side as to enhance the
site's initial appearance. Other significant site improvements
will include the rail line and earthen bermed retaining walls
around the ethanol tank farm.
5. Plant Design and Utilization:
The completed ethanol plant is/will be designed, constructed, and
finished to accommodate a state-of-the-art ethanol fuel production
facility with an initial production capacity of 40 million gallons
per year. Liquid ethanol or ethyl alcohol can be used as a fuel
when blended with gasoline or even in its original state. Ethanol
is made by fermenting almost any material that contains starch such
as corn, sorghum, potatoes, sugar cane, etc. The subject ethanol
plant will be utilizing grain corn as its starch material. Some
understanding of the dry mill corn ethanol production process is
necessary in the valuation analysis. The following five step
production process was provided by the developer or Broin and
Associates, Inc.:
Step 1. Milling
- Objective: The physical breakdown of the corn kernel using
mechanical processes.
a. Dried, shelled corn as received is checked for moisture
content, bushel weight, and foreign matter. Corn is
cleaned in a scalper and then passed through
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35
hammermills, which grind it into fine powder called meal
to expose the starch to further downstream processing.
Step 2. Liquefaction and Saccharification
- Objective: Use of heat and enzymes to break down starches
into fermentable sugars.
a. The meal, mixed with water and alpha-amylase, passes
through cookers where the starch is liquefied.
b. Heat is applied to facilitate liquefaction.
c. Continuous cookers heat the mixture to 190 DEG.-195 DEG.
F, after which it is held At 190 DEG. F for three to five
hours. In a process that incorporates a jet cooker, steam
is injected in to the flow of mash to raise the
temperature and the pressure.
d. In the saccharification stage, the mash from the cookers
is cooled and glucoamylase is added to break the
multi-glucose chains into single glucose surgars.
Step 3. Fermentation
- Objective: Conversion of sugar to carbon dioxide and
ethanol through yeast metabolization.
a. Fermentation is carried out in the batch mode where
fermentation tanks are filled with mash, yeasted, and left
to ferment for a period of time. (There will be four
550,000 gallon fermentation tanks.) After fermentation is
complete, the batch is transferred to the next step of the
process, the tanks are cleaned, and a new batch is
started.
b. The process of fermentation will be programmed for
approximately 48 hours.
c. The 692,000 gallon beer well maximizes the conversion for
starch to ethanol by allowing additional time for
fermentation to be completed. The larger beer well also
acts as a buffer between fermentation and distillation.
Step 4. Distillation and Dehydration
- Objective: Use of heat and molecular sieve dehydrators to
separate ethanol from water.
a. The fermented mash (beer) contains about 14% to 16%
ethanol plus solids from unfermented corn solids and yeast
cells.
b. The beer is pumped into a distillation column (rectifier)
where the ethanol is boiled and separated from a watery
residue called stillage.
c. The ethanol vapor exits the top of the continuous process
distillation columns at approximately 190 proof.
d. The stillage is pumped out of the bottom of the columns,
separated and dried through a couple of other steps in the
process, and eventually becomes the Distillers Dried
Grains with Solubles (DDGS) product.
e. The 190 proof ethanol is run through molecular sieve
dehydrators for the final step of purification. This
system acts like a sponge to remove the remaining water to
yield a final ethanol product of at least 199.5 proof.
f. Anhydrous ethanol produced by the sieves is metered to a
tank farm for storage. Each tank of production is
segregated until lab tests have verified the quality.
After quality control, the fuel ethanol is denatured to
BATF formulations as trucks are loaded. Currently, the
fuel ethanol is blended with five gallons of denaturant
per one hundred gallons of ethanol.
Step 5. By-Product Recovery
- Objective: The use of heat and mechanical processes to
process non-fermentable corn components into saleable feed
products.
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36
a. The stillage leaves the bottom of a distillation column
and travels to the centrifuge where it is separated into
cake (wet solids) and thin stillage (liquid).
b. Evaporators boil away most of the moisture in the thin
stillage leaving a thick syrup containing all of the
dissolved solids from the mash.
c. The syrup is mixed with the centrifuge cake and the
mixture is dried to about 10% moisture for sale as
Distillers Dried Grains with Solubles (DDGS), a high value
animal feed.
Generally, one 56 pound bushel of No. 2 yellow corn yields about
(1) 2.6-2.8 gallons of 200 proof ethanol, (2) 17-18 pounds of DDGS,
and (3) 17 pounds of carbon dioxide. The plant's significant
components and capacities are detailed as follows:
Plant Components/Capacities:
a. Processing: 110,000 gallons/day or 40 million
gallons/year.
b. Building Components:
<Table>
<Caption>
Approximate Exterior
Component(1) Dimensions(2) Main Floor Size(3) Wall Height(4)
------------ ------------- ------------------ --------------
1. Process/Distillation
Buildings
- Process Bldg. 120' X 246' 29,540 s.f. 56' 6"
- Mechanical Bldg. 80' X 190' 17,120 s.f. 20'
- Distillation Bldgs. 72' X 76' 4,245 s.f. 58' 1" -71' 8"
- Process Office 35' X 90' 3,180 s.f. 13'
------
Total 54,085 s.f.
2. Grains Building
- Receiving/Holding
Bldg. 100' X 136' 13,804 s.f. 36'
- M.C.C. Bldg. 21' X 36' 756 s.f. 11'
------
Total 14,560 s.f.
3. Scale Building 19' X 50' 1,108 s.f. 10' 4 1/2"
4. Administration Bldg. 39' X 92' 3,645 s.f. 10' 4 1/2"
------
Total Floor Area 73,398 s.f.
</Table>
(1) Listed in order as to correspond to enclosed plans.
(2) Width X length. Dimensions not all inclusive.
(3) As detailed on individual component plans. "Site Plan
with Building Sizes" exhibit indicates slightly
different sizes for some buildings.
(4) Generally from finish floor to top of eave.
c. Needed Transportation: 90 tankers or 30 rail cars/week.
d. Corn Grind: 40,000 bushels/day or 14 million bushels/year.
e. Water Requirements: 650,000 gallons/day or 227,500,000
gallons/year.
f. Scale: 110' length with 60 ton capacity.
g. Rail: Two main lines - 2,600' track
h. Corn Receiving: 2-15,000 bushels/hr. systems, each with
800 bushel/23' 6" long pits to accommodate simultaneous
unloading of two hopper tailers.
i. Corn Storage: 2-90' diameter, 430,000 bushel bins and one
36' diameter, 53,000 bushel bin (off-speck corn) - total
storage capacity will be 913,000 bushels.
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j. Hammermill: 500 h.p. rated @ 130,000 lbs/hr. - normal rate
is 93,500 lbs/hr.
k. DDGS Storage: 4,000 tons, 112' high concrete silo with
bottom bulk weigher load-out rated at 240 tons/hr.
Conveyed to silo by 28" duct.
l. DDGS Production: 350 tons/day or 120,000 tons/year.
m. Ethanol Tank Farm: 2-1 million gallon denatured storage
tanks
2-190,000 gallon 190 proof storage
tanks
l-60,000 gallon unleaded gasoline tank
n. Cooling Tower Circulation Rate: 18,000 gallons/minute
(gpm).
o. Water Treatment: Mechanical building houses 3-2,000
horsepower fire-tube boilers (two in operation, one on
standby) 2 air compressors, and water treatment equipment.
Water treatment includes a dual R.O. system and green sand
filters. Green sand filter backwash water connects to a
settling basin before being discharged with the R.O.
concentrate water and cooling tower bleed-off water. R.O.
water is used primarily for cooling tower make-up and
boiler make-up. Process wastewater is filtered and run
through a separate R.O. in the mechanical building to be
purified into boiler make-up water. The concentrate from
this R.O. is sent through the methanator and then used as
part of the water needed to slurry the corn flower.
(Hence, zero discharge of process wastewater.)
p. Miscellaneous:
- Blender, hot slurry tank, CIP scanner, T-jet.
- Cook tube, flash tank, 3-stage liquefaction with 2
hours retention.
- Dual interchangers so one can be cleaned while other
is in service.
- 2-stage saccharification system.
- Post-sach dual interchangers and dual mash coolers.
- Clean-in place (CIP) system. Fermenters, coolers,
interchangers, all set up for automated CIP-ing.
- Four 550,000 gallon fermenters, each with circulation
pump and external cooler.
- Yeast Tank.
- Bulk enzyme storage tanks behind fermenters along
wall.
- Acid and Caustic Storage.
- Fermentation CO(2) scrubber with cooled recirculation
and fresh water sections.
- Four "Westfalia" CB505 horizontal decanter
centrifuges.
- Two I.C.M. direct fired rotary dryers, discharge to a
common stack 175' tall. Boiler stack gas is ducted
here to provide part (about 10%) of energy
requirements.
- Four-stage plate type evaporator. Excess steam is used
in distillation.
- Distillation and molecular sieve.
- Beer well, syrup, and thin stillage tanks.
The industry specifications for the furniture, fixtures, and
equipment (FF&E) were not provided. Rather, the equipment
description is best detailed by referencing the borrower/owner
provided "Contract Schedule of Values" (complete copy enclosed in
the following Cost Approach) and the previously referenced
"Millwright and Mechanical Package" plans. The plans accurately
depict the location of the equipment throughout the plant but,
again, specific details are not provided. Even so, the information
provided through the combination of these two sources is sufficient
for this analysis. It can only be assumed that the building
components and equipment will be properly sized for the plant's
planned capacity.
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38
Generally, the major building enclosures will be steel framed with
colored steel exterior wall and roof covering, poured concrete
ground level floors, considerable structural support steel for
mounting necessary equipment and fixtures, and generally unfinished
production areas with the exception of insulation and liners. The
only exceptions would be the finished office areas, employee areas,
control room and lab, scale building, etc. Lastly, it can only be
assumed that the collective design and utilization will result in
an efficiently operated ethanol fuel plant as the project developer
or Broin & Associates are industry leaders in this particular
market segment. (Further specifics relating to their background
will be detailed in the following Highest and Best Use Analysis.)
Again, reference to the enclosed exhibits more accurately depict
the plant's design, layout, and even the plant equipment's location
and use. The following details primarily the main building
component's structural and finish components. Their perceived
overall quality, physical condition, and functional utility will
also be addressed in this discussion.
6. Structural Description:
a. Basic Frame: A nationally known cost service or MARSHALL
VALUATION SERVICE (MVS) classifies the building's basic
construction as predominantly Class "S" with the exception of
the scale and administration buildings. Class S construction
is detailed by MVS as being primarily incombustible
construction featuring generally pre-engineered metal frame
buildings with metal exterior wall and roof cover. The scale
and administration buildings are classified as Class "D"
structures or buildings generally having wood frame or
combustible construction components. The majority of the
following description will apply to the process/distillation
and grains buildings as they comprise 93.5% of the total floor
area. The specific details for the scale and administration
buildings will follow.
b. Foundation Walls: Generally 18" wide poured concrete
foundation walls set on poured concrete spread footings below
the frost line.
c. Floor Structure: Six inch poured concrete slab over compacted
base.
d. Exterior Wall Construction and Finish: Rigid steel frame with
metal panel exterior wall cover. Generally, all interior walls
are then insulated with the bottom 10' covered with a panel
liner.
e. Roof Structure: Rigid steel frame.
f. Roof Insulation and Cover: Batt insulation sealed with vapor
barrier. Roof cover is metal panels. Complete gutter and
downspout systems also installed.
7. Interior Construction and Finish:
Generally, minimal interior finish exists in most of the
process/distillation and grains buildings other than the 10' high
panel liners. However, select areas to include needed office areas,
rest rooms, labs, control rooms, etc. are finished with standard
tile flooring, and painted drywall and/or metal wall cover and
drywall and/or suspended ceiling cover.
8. Mechanical Systems:
The ethanol process, in itself, generates most all needed heat
throughout these buildings with the exceptions of controlled
employee areas. These areas have forced air heat with central air
conditioning. Additionally, all plumbing, electrical, lighting, and
complete wet fire protection system installed to service the plant.
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9. Scale and Administration Buildings:
These two buildings will feature standard 2"x6" wood frame exterior
wall construction with insulated poured concrete foundation walls
and spread footings, four inch poured concrete floor over compacted
base, brick veneer exterior wall cover with the exception of metal
siding around the eave areas, and asphalt shingled roof cover.
Interior will feature carpet and vinyl floor covering, painted
drywall walls, and a suspended acoustical tile ceiling. HVAC will
be provided by gas forced air furnaces with central air
conditioning. Additionally, all other electrical, lighting, and
plumbing needs will be installed.
10. Quality of Construction, Physical Condition, and Functional
Utility:
a. Quality of Construction: The plans and specific construction
details, input provided by the project developer or Broin &
Associates, and even the inspection of the Dakota Ethanol
Plant located at Wentworth, South Dakota, suggest that "good"
quality will be apparent in this completed processing
facility. Specifically, the project developer or Broin &
Associates, Inc. have extensive knowledge in developing this
particular facility. Thus, this completed plant will have
quality equal to, if not exceeding most competitors within the
ethanol processing industry.
b. Physical Condition: New
c. Functional Utility: The last major building component that has
a significant impact on the property's overall appeal and
marketability is that of functional utility. Functional
utility is the ability of the improvements to be useful and to
perform the function for which they were intended according to
current market tastes and standards; the efficiency of a
building's use in terms of architectural style, design and
layout, traffic patterns, and the size and type of rooms.
(This definition was paraphrased from the Appraisal Institute,
THE DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION, page
155.)
Again, the project developer has incorporated a
state-of-the-art design which is undoubtedly consistent with
or, most likely, superior to the current market parameters for
this particular market segment. Reference to the enclosed site
plan will indicate that the plant even has the capability of
being expanded as allowances have been made for additional
corn and DDGS storage facilities. A virtual replica of this
facility was recently completed in Wentworth, South Dakota,
and, from all indications, the design or functional utility
has been exceptional. Thus, the market would also perceive
this completed plant as having exceptionally good functional
utility.
d. Summary: The completed plant will be new and offer quality and
functional appeal exceeding that normally found in this
particular market segment, especially if compared to older
ethanol plants. Considered collectively, the subject
property's overall appeal and marketability will be favorably
impacted by the completed improvements good characteristics.
11. Age:
a. Historical: New
b. Effective Age: New
c. Estimated Remaining Economic Life: A nationally recognized
cost manual or MARSHALL VALUATION SERVICE (MVS) reports on the
observed typical life expectancy of most types of
improvements. Ethanol processing plants are not specifically
detailed. However, it references manufacturing facilities with
most Class S
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manufacturing facilities having life expectancies of about
40-50 years. This estimation of life expectancy was based on
appraisers' opinions and studies of actual mortality,
condition of survivors, and ages at which major reconstruction
or change of occupancy have taken place. These life expectancy
studies do not include cases of mortality from economic
obsolescence or poor business management. As detailed in
Section 97, page 5 of MVS, "(SOME OCCUPANCIES, SUCH AS HOTELS,
FAST FOOD RESTAURANTS, SERVICE STATIONS, ETC. ARE COMPLETELY
REMODELED OR REBUILT LONG BEFORE THE END OF THEIR USEFUL LIFE
AS A MATTER OF MARKETING POLICY.)" ECONOMIC life should not be
confused with an estimate of remaining physical life. Economic
life refers to the period of time in which improvements are
anticipated to contribute value to the site, while PHYSICAL
life refers to the period of time that the improvements are
anticipated to physically exist. The subject improvement's
REMAINING ECONOMIC life should approximate 40-50 years as they
will be new. The estimate of remaining economic life is
important because lenders typically require a remaining
economic life equal to or exceeding the term of a loan.
12. Floor Plans:
The floor plans, the appropriate copies are located in the Addenda,
were provided by the developer or Broin & Associates, Inc. Again,
it must be emphasized that the appraisal will be based on the
assumption that the improvements and furniture, fixtures, and
equipment (FF&E) will be completed and/or installed per plans and
specifications. Any significant deviation from the plans and
specifications could render the appraisal and its results void.
These plans provide considerably more specifics as it relates to
the entire processing plant facility.
13. Representative Photographs of Similar Improvements:
The following pictures, taken on September 18, 2001, are
representative of the Dakota Ethanol Plant in Wentworth, South
Dakota. This facility opened on August 1, 2001. These photographs
provide a good visual representation of the subject improvement's
respective composition and finish when complete.
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[Photograph]
Dakota Ethanol plant overview looking south to southwest.
[Photograph]
Grains building, concrete DDGS storage silo, and corn storage
buildings to the rear.
[Photograph]
Close-up of grain storage buildings.
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[Photograph]
Close-up of DDGS concrete storage silo
[Photograph]
Ethanol tank farm
[Photograph]
Corn conveying system between grain storage tanks and grains building
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43
I. REAL ESTATE TAXES AND SPECIAL ASSESSMENTS DATA
According to South Dakota state law, a property's real estate taxes
are based on a formula originating from the County Director of Tax
Equalization's interpretation of the property's estimated "true and full
value". As of the inspection date, the property has been assessed only as
vacant land with Parcel A having a tentative 2002 taxable value of
$15,051 or $531.84/acre and Parcel B having a taxable value of $4,379 or
$528.23/acre. The exact assessment level for the completed plant has yet
to be determined. The owner/borrower has projected real estate taxes of
about $960,000. They are detailed in the Business Plan which will be
referenced in the following discussion. This expense computes to 2% of
the approximate project cost or $48,000,000. This projected expense is
deemed reasonable; it is probable that it will even be less once the
total assessment process is complete. As of the inspection date, no
unpaid special assessment existed.
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J. HIGHEST AND BEST USE ANALYSIS
The previous discussion detailed the area and neighborhood markets
and the subject property. Again, the premise for this valuation analysis
must be stressed. The first appraisal objective is to develop an opinion
of the completed subject property's market value assuming fee simple
ownership even though the site is leased. Within the fee simple ownership
interest concept, the "subject site" has been identified as two parcels
totaling 36.59 acres. Again, Parcel B comprising 8.29 acres has limited
utility and is carried simply as surplus land or additional land that
allows for future expansion of the existing improvements. For this
reason, the two parcels totaling 36.59 acres will be considered
collectively as the "subject site".
The highest and best use analysis attempts to identify the most
PROBABLE and PROFITABLE, COMPETITIVE use to which the market and property
can support; key determinants to the concept of value. Highest and best
use is a market driven concept based on evidence collected from general
data and analyzed to develop an opinion of a property's value. In
essence, the Highest and Best Use Analysis reconciles all the previously
assembled market information into the foundation on which market value
rests.
HIGHEST AND BEST USE of the subject real estate, as it will be
considered in this report, is defined as:
THE REASONABLY PROBABLE AND LEGAL USE OF VACANT LAND OR AN IMPROVED
PROPERTY WHICH IS PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED,
FINANCIALLY FEASIBLE, AND THAT RESULTS IN THE HIGHEST VALUE. THE
FOUR CRITERIA THE HIGHEST AND BEST USE MUST MEET ARE LEGAL
PERMISSIBILITY, PHYSICAL POSSIBILITY, FINANCIAL FEASIBILITY, AND
MAXIMUM PROFITABILITY.
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION: 171)
Conclusions of highest and best use for real estate are normally made
according to two premises. The first premise assumes that the site is
VACANT and AVAILABLE for development and the second premise addresses the
highest and best use of the site AS IMPROVED. In most cases, as long as
the value of the improved site is greater than the value of the
unimproved site, the highest and best use of the site is as improved.
The highest and best use of a specific property is shaped by the
competitive forces within the
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45
market location and, therefore, the analysis and interpretation of
highest and best use is an economic study of those market forces focused
on the subject property. Thus, the four criteria that formulate a
property's highest and best use, as specified in the definition, must be
detailed and are normally considered sequentially. The first two tests of
legal permissibility and physical possibility MUST be applied before the
remaining tests of financial feasibility and maximum productivity. Again,
the four criteria formulating a property's highest and best use are:
1. Legally permissible: What uses are permitted by zoning and
deed restrictions on the site in question?
2. Physically possible: What uses of the subject site are
physically possible as dictated by the physical aspects of the
site itself?
3. Financially feasible: Which possible and permissible uses will
produce a net return to the owner of the site?
4. Maximally productive: Among the feasible uses, which use will
produce the highest net return or highest present worth?
These four criteria are now detailed and applied to the subject site
according to the premise that it is vacant and available for development
and it is improved to its present or proposed state of improvement.
HIGHEST AND BEST USE AS VACANT:
Under this premise, the site's highest and best use AS THOUGH
VACANT is defined as:
AMONG ALL REASONABLE, ALTERNATIVE USES, THE USE THAT YIELDS THE
HIGHEST PRESENT LAND VALUE, AFTER PAYMENTS ARE MADE FOR LABOR,
CAPITAL, AND COORDINATION. THE USE OF A PROPERTY BASED ON THE
ASSUMPTION THAT THE PARCEL OF LAND IS VACANT OR CAN BE MADE VACANT
BY DEMOLISHING ANY IMPROVEMENTS.
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION: 171)
The four criteria formulating the site's highest and best use, assuming
it were vacant, are now applied:
1. Legally Permissible:
The first step in determining the subject site's highest and best
use, assuming it were vacant, is addressing legal considerations or
private restrictions, zoning, building codes, environmental
regulations, etc. Typically, the most obvious legal consideration
that affects development of a particular site is zoning. The
previous discussion detailed that the subject site is zoned "C-I or
Commercial/Industrial". This commercial zoning district allows a
significant number of commercial and/or industrial uses but all are
allowed only through a conditional use permit. The only permitted
uses are those allowed in the agricultural zoning district. No
other legal considerations were noted that would restrict site
development.
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2. Physically Possible:
The two most significant subject site characteristics that would
readily impact its probable use(s) would be that of site size and
site location. Most other physical site characteristics relating to
elevation, drainage, site preparation, and even the site
encumbrances would not have a measurable impact on probable uses.
The site size at 36.59 acres is sufficient so that single or
multiple uses would be possible. Regardless of the probable number
of uses that could exist, its location or two miles northwest of
the city limits of Big Stone City is still deemed a predominantly
agricultural use area.
3. Financially Feasible:
The predominant land use outside the city limits is that of
agricultural farmland with the exception of scattered rural
residences and scattered commercial/industrial single land users.
The subject site is located next to one of the area's largest
commercial land users or the Big Stone Power Plant, built in 1975.
Thus, 26 years was needed before another somewhat similar
commercial/industrial user located to this area. Essentially, the
majority of the area land has been and continues to be agricultural
in nature. Thus, the location still suggests continued agricultural
use as being probable.
4. Maximally Productive:
Selecting one particular use available within the broader
agricultural market that would be maximally productive is dictated
by the current balance of supply and demand. As previously noted,
the site's zoning allows for commercial and/or industrial users but
the likelihood of this type of development occurring is greatly
minimized by the limited demand. Thus, the site's rural location
suggests that continued agricultural use would be probable until
such time that, IF and WHEN demand so evolved, the site would be
commercially or industrially developed.
5. Site's Highest and Best Use Conclusion if Vacant:
Based on the preceding analysis, the subject site's highest and
best use, if vacant, is concluded to be agricultural related
development. This use is legally permitted, physically possible
within the site's constraints, financially feasible, and demand
would still be sufficient within the area market to represent
maximum economic productivity.
HIGHEST AND BEST USE AS IMPROVED:
The second premise addresses the site's highest and best use AS
IMPROVED, defined as:
THE USE THAT SHOULD BE MADE OF A PROPERTY AS IT EXISTS. AN
EXISTING PROPERTY SHOULD BE RENOVATED OR RETAINED AS IS SO
LONG AS IT CONTINUES TO CONTRIBUTE TO THE TOTAL MARKET VALUE
OF THE PROPERTY, OR UNTIL THE RETURN FROM A NEW IMPROVEMENT
WOULD MORE THAN OFFSET THE COST OF DEMOLISHING THE EXISTING
BUILDING AND CONSTRUCTING A NEW ONE. (Appraisal Institute, THE
DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION: 171)
The analysis of highest and best use as improved applies the same four
tests of legal permissibility, physical possibility, financial
feasibility, and economic profitability to the subject site as proposed
or presently being improved or that of an ethanol fuel plant.
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1. Legally Permissible:
The subject site is being improved with an owner occupied ethanol
fuel plant or a use that is allowed only through a conditional use
permit by zoning. The March 12, 2001, teleconference meeting of the
Grant County Planning Commission approved the use. No other known
unusual easements or other legal restrictions exist that would
prohibit the completed subject improvement's development and/or
continued use. Thus, legal permissibility is suggested.
2. Physically Possible:
The four previously detailed building components will total 73,398
square feet of main floor footprint area but it does not include
the grain storage buildings. Even so, the building components will
occupy only about 6% of Parcel A. More importantly, the completed
plant's physical design, site placement, and access are entirely
appropriate within the site's physical constraints. Thus, the
site's proposed use or that of an ethanol fuel plant is physically
possible.
3. Financially Feasible:
The anticipated market value of the improved site or that of a 40
million gallon ethanol fuel plant will far exceed the site's market
value, if it were vacant. The following analysis will detail that
the site's underlying market value is insignificant at about
$20,000-$30,000 as compared to a total project cost approximating
$45-$50 million. This ethanol plant will have the capability of
generating income (in this particular property it would be in the
form of business income generated by operation of the plant to
include both the improvements and non-real property items) in
excess of supporting the site's underlying market value, as will be
demonstrated in the following Income Analysis. The subject site's
improved state or that of an ethanol fuel plant will conform to the
neighborhood's already established site uses. Specifically, the
adjacent land user or the Big Stone Power Plant offers a similar
use and other, more localized commercial/industrial users are noted
throughout the broader market. Lastly, the owner/borrower/developer
is, evidently, of the opinion that the local market is sufficient
to support the proposed use as being financially feasible. Thus,
disregarding the site's proposed use or that of an ethanol fuel
plant is not realistic, implying that this proposed use is
financial feasible.
4. Maximally Productive:
The subject site's proposed use or that of a 40 million gallon
ethanol fuel plant is legally permissible, physically possible, and
all indications are that it should be financially feasible. Even
so, a sufficient overview of the overall ethanol market should be
presented to determine if, when complete, the use will be maximally
productive. This overview should include some insight as to the
national, regional, and local ethanol market using available
information. Much of the following information was paraphrased
and/or copied from various internet websites relating to the
ethanol fuel industry. These sources include the American Coalition
for Ethanol (ACE), Broin & Associates website and related links,
the Renewable Fuels Association (RFA), etc.
HISTORY - Ethanol has been around since ancient times when it was
used primarily as an intoxicating drink. During the late 1800's,
ethanol in the United States was used primarily for lamp fuel with
sale exceeding 25 million gallons per year. The first large scale
use of ethanol as a fuel occurred during the early 1900's when
petroleum supplies in Europe were short. In the U.S., Henry Ford's
Model T and other early 1920's automobiles were originally designed
to run on alcohol fuels. Hitler and the U.S. relied on ethanol to
power their armies during
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World War II. After World War II, oil prices decreased which caused
the use of ethanol to decrease. The limited use of ethanol
continued until the oil crisis developed in the 1970's.
Increased use of ethanol as a fuel has grown significantly since
the late 1970's. It was first used as a product extender because of
gasoline shortages. In 1973, the Organization of Petroleum
Exporting Countries (OPEC) caused gasoline shortages by increasing
prices and blocking shipments of crude oil to the United States.
The OPEC action called attention to the fact that the United States
was extremely dependent on foreign oil. The focus shifted once
again to alternative fuels such as ethanol. At that time, gasoline
containing ethanol was called gasohol. Later, when gasoline was
more plentiful, ethanol was introduced to increase the octane
rating and the name gasohol was dropped in favor of names
reflecting the increased octane. Unleaded plus or super unleaded
are two examples of names used today.
Ethanol, when used as a gasoline component, improves combustion and
reduces carbon monoxide emissions. Use of ethanol benefits the
areas of the U.S. that are considered to exceed Environmental
Protection Agency air quality standards during the winter months.
Some studies have indicated that, used in a correctly formulated
fuel, the use of ethanol can also reduce emissions which contribute
to the formation of smog.
More recently, ethanol supporters have focused attention on other
advantages. One of these advantages is ethanol's ability to provide
octane while replacing other environmentally harmful components in
gasoline. Other studies suggest that using ethanol can slow global
warming. Ethanol reduces imports by replacing imported gasoline and
crude oil. Reducing gasoline and crude oil imports reduces American
dependence on foreign oil. According to a recent poll conducted by
Research Strategy Management, 75% of American voters believe that
the country needs to do something to reduce its dependence on
foreign oil.
Today, ethanol is widely used and available in most areas of the
U.S. Ethanol is contained in over 11% of all gasoline sold in the
United States. It is or has been marketed by such companies as
Exxon, Sunoco, Texaco, Amoco, Mobile, ARCO, Super-America, Chevron,
Union, Shell, and Phillips, as well as numerous independent
marketers. Since ethanol was first sold in 1978, American consumers
have driven more than two trillion miles (80,000 trips around the
world) on ethanol blended gasoline.
The 1990's experienced the introduction and operation of flexible
fuel vehicles (FFV). FFV vehicles are capable of operating on E-85,
which is a blend of 85% ethanol and 15% unleaded gasoline. The Ford
Taurus FFV car was introduced to Iowa in 1996 and was used in the
state fleet and by some city governments. They became available
commercially shortly thereafter. FFV's, designed for versatility,
will operate on unleaded gasoline or any mixture of gasoline and
ethanol up to an 85% blend.
The key component in a flexible fuel vehicle is a sensor which
determines the percentage of ethanol in the fuel and, with the help
of a computer, makes adjustments automatically for best performance
and emissions. Beginning with the 1998 model year, Chrysler offered
FFV minivans. Ford continues to offer the Taurus and added Windstar
and Ranger in 1999. Explorer and Sport Trac were offered in 2001.
General Motors Chevrolet S10 and Sonoma, Isuzu Hombre, and Mazda
B3000 were offered in an FFV version beginning in 2000.
Two specific pieces of federal legislation, the Clean Air Act
Amendments of 1990 and the Energy Policy Act of 1992 mandated the
phased-in adoption of cleaner-burning vehicles. These federal laws
required that state, municipal, and private fleets must meet
stricter emission guidelines starting in 1998. One way this was
accomplished was by replacing existing vehicles with newer
technology like flexible fuel vehicles. One portion of the law
requires 70% of all new fleet vehicle purchases meet these new
standards in 2000.
Auto manufacturers were also required to meet the new standards.
Beginning in 1996, new model vehicles were equipped with on-board
diagnostic monitoring systems capable of
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monitoring tailpipe and evaporative emissions. New computer
technology made this possible.
WHY ETHANOL NOW? - Ethanol use and production has increased
considerably during the 1980's and 1990's. Growth in use of the
E-10 blend has taken place because the fuel performs well in
automotive engines and is competitively priced with "conventional"
gasoline.
Proponents of ethanol have identified additional reasons for
increased production and use, especially in the Midwest:
1. It is in the national interest to reduce dependence on oil
imports. Trade deficits are decreased and it allows for a
dependable source of fuel if supplies would be cut off by
unfriendly countries.
2. Farmers see an increased demand for corn which helps
stabilize prices.
3. The quality of the environment improves. Carbon monoxide
emissions are reduced and lead and other carcinogens
(cancer causing agents) have been removed from gasoline.
4. Car owners gain from increased octane in gasoline which
reduces engine knock. It also absorbs moisture and cleans
the fuel system.
Those who challenge the use of ethanol as a fuel and challenge the
incentives for ethanol argue that:
1. It is more important to use grain for food to reduce world
hunger than to use ethanol as a fuel.
2. The ethanol industry should not receive more favorable
incentives than manufacturers of other fuels.
3. It damages or plugs fuel system components on some
vehicles and causes vapor lock, especially in hot weather.
4. Foreign oil imports are reduced only slightly because of
ethanol use.
5. It does little to reduce emissions and improve the
environment.
6. It reduces motor fuel tax for ethanol blends.
WORLDWIDE - Other countries are either producing and using ethanol
in large quantities or are providing incentives to expand ethanol
use. Brazil and Sweden are using large quantities of ethanol as a
fuel. Some Canadian provinces promote ethanol use as a fuel by
offering subsidies of up to 45 cents per gallon of ethanol. India
is in the beginning stages of initiating the use of ethanol as an
automotive fuel. In France, ethanol is produced from grapes that
are of insufficient quality for wine production.
Prompted by the increase in oil prices in the 1970's, Brazil
introduced a program to produce ethanol for use in automobiles in
order to reduce oil imports. The production and use of ethanol, a
renewable fuel made from agricultural products, increases economic
activity, creates jobs, helps to stabilize commodity prices, and
boosts farm income. It can help us become independent from imported
oil and improve our balance of trade.
THE NATIONAL SCENE - The ethanol industry contributes positively to
the U.S. economy, particularly rural communities where ethanol
production is based. The economy is increased by providing direct
and indirect jobs and increasing corn prices and rural income. The
U.S. Department of Agriculture has concluded that a 100 million
gallon ethanol facility could create 2,250 local jobs for a single
community.
A report by the Renewable Fuel Association about the economic
outlook of the U.S. ethanol industry over a seven year period, 1996
to 2002, concluded:
- The ethanol industry will add more than $2 billion per year to
the entire U.S. economy. The goods and services purchased by
ethanol producers represent increased demand for other
industries. These include purchases of grain, natural gas,
electricity, water, telephone, and accounting and legal
services.
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- Net farm income for crop producers will be $2.2 billion, or
nearly 3% higher, each year because of ethanol production.
Increased demand for grain grown by American farmers provides
market support for prices and incomes.
- Ethanol supports 55,000 jobs. Ethanol production directly
accounts for over 5,800 jobs in the food/fuel processing
industry in 17 states. Additionally, the spending by ethanol
manufacturers on goods and services indirectly supports an
average of 48,900 jobs annually throughout all other
industries in the entire economy. Increases in ethanol
production offer enormous potential for overall economic
growth and additional employment in rural communities where
ethanol production is often based.
- Ethanol production will increase total household income by
$12.5 billion over the next seven years. The ethanol industry
directly pays $277 million in wages to employees. These
employees and their families spend this income, thereby
creating demand. The indirect impact of ethanol production
adds another $1.8 billion to household income annually.
- Ethanol generates $555 million of net tax revenue for the
Federal treasury annually through personal and business income
tax collections. Additional revenues, provided by taxes on
household and farm income that are generated and supported by
the ethanol industry, offset the cost of the partial ethanol
excise tax exemption for ethanol-blended gasoline.
- Ethanol contributes over $2 billion annually to the U.S. trade
balance. The U.S. currently imports 54% of its petroleum
demand. Use of ethanol reduces the trade deficit by about $1.3
billion annually by replacing imported MTBE. Another $800
million is gained annually due to export of the by-products of
ethanol, corn gluten feed and gluten meal.
According to the American Coalition for Ethanol, more than $3
billion has been invested in 60 ethanol production facilities
operating in 20 different states across the country. Additionally,
news reports have stated that: (1) The federal government has
devoted $300 million to reimbursing farmers for production costs if
they join cooperatives to produce renewable fuels. (2) President
Bush's agenda includes creating a national energy policy, a
positive sign for renewable fuels. Bush has a strong record of
support for ethanol. As governor of Texas, Bush joined the
Governor's Ethanol Coalition, which now has Nebraska Gov. Mike
Johanns as its chairman. (3) President Bush has endorsed a
continuation of the ethanol program that gives gasoline marketers
and blenders a 5.3-cent reduction in the 18.3-cent federal tax on
gasoline. Lastly, in a report unveiled by Johanns recently at a
national ethanol conference, economist John Urbanchuk of
Moorestown, NJ, estimated that quadrupling of ethanol production in
the next 15 years would save U.S. consumers $57.5 billion a year,
mostly by replacing imported oil.
AGRICULTURE - Ethanol is made from farm-produced raw products which
are usually in surplus. Corn is preferred in ethanol production and
supplies most of the raw material needed. Ethanol production
creates domestic markets for corn and, according to the USDA,
ethanol production adds about 25 to 30 cents to every bushel of
corn. Better prices mean less reliance on government subsidy
programs and more income and independence for farmers. Ethanol
production consumed about 600 million bushels of corn in 2000;
ethanol production is the third largest user of corn, behind feed
and export uses. Ethanol production uses about 7% of the nation's
corn crop.
As the domestic ethanol industry continues to grow, it is
witnessing a surge in the construction of farmer owned ethanol
production facilities. Farmers are realizing the added benefits to
the ethanol industry through ownership of manufacturing plants.
The production of ethanol does not mean less corn is available for
food. Instead, ethanol production produces many valuable high
protein food and feed co-products. An acre of corn (125 bushels)
produces 313 gallons of ethanol, 1,362 pounds of 21% distillers
grains, 325 pounds of 60% gluten meal, and 189 pounds of corn oil.
Distillers grain can be used for feed in most every type of animal
system and are used as a cost efficient, nutritional, digestible,
and palatable protein feed for cattle, swine, and sheep.
Approximately 1.4 billion tons of distillers grain is produced
annually.
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PRODUCTION AND PRICE - Advances in technology in ethanol production
process has substantially reduced costs. A shift to larger
production plants along with improved yeast strains and enzymes
have reduced cost by more than 50 percent. These innovations have
lowered production costs from $1.40 per gallon in 1980 to less than
$1.00 in 2001. Still newer plants and improved technologies have
further reduced costs to an approximate current average price of
$1.09 to produce one gallon of ethanol. This trend is expected to
continue. The cost of producing ethanol will also be affected by
corn yields, corn costs, and markets for co-products.
Consumer prices at the service station pump for E-10 ethanol blend
is usually the same price per gallon as unblended fuel. This is
also true for E-85 blends. The price at the retail gas pump
reflects federal and state tax exemptions, loan guarantees, and
other government subsidies.
Offsetting the cost of these tax incentives is a reduction in farm
subsidies and the increase of tax revenues. According to the U.S.
Department of Agriculture, if ethanol use does not continue to
grow, "deficiency payments for corn and other program crops will
increase by $580 million for crop year 1998 and $740 million by the
year 2000"-more than the cost of the tax incentives. The economic
activity attributable to the ethanol industry will generate $3.5
billion in additional income tax revenue over the next five years
-- $1 billion more than the cost of tax exemptions. The U.S.
ethanol industry will create a net gain to the taxpayers of almost
$4 billion over the next five years.
The oil industry began receiving federal subsidies as early as 1916
to promote development of an energy industry. As the oil industry
became more profitable, the subsidy payments continued. In 1984,
the oil industry received over $8.5 billion from the federal
government. During the same time period, renewable fuel industries
-- solar, wind, geothermal, hydropower, and alcohol fuels --
received only $1.7 billion.
The preceding suggests that sufficient demand should continue for
the ethanol industry into the near future. According to the
National Corn Growers Association, the market is ripe for expansion
opportunities with their goal to add an additional 600 million
bushels of ethanol production over the next ten years. A sufficient
supply of raw product or corn exists nationwide and, if the prices
can be enhanced by any measurable amount, production would even
increase. Since 1981, ethanol production has increased from 175
million gallons to record production of 1.63 billion gallons in
2000 with more than 1.8 billion gallons anticipated for 2001 from
more than 50 ethanol producing facilities operating in 20 different
states.. The majority of the this growth has been within the last
decade as ethanol production increased from 900 million gallons to
the 1.63 billion gallons or an increase of 81%. According to an
August 7, 2001, news release from the Renewable Fuels Association
(RFA), more than a dozen ethanol plant facilities have opened since
1999 and six major expansions to existing facilities were
completed. To date, 57 ethanol plants can produce over 2 billion
gallons of ethanol per year. Eleven additional ethanol plants are
under construction with a combined annual capacity of 245 million
gallons, 34 existing companies are undergoing expansion totaling
235 million gallons, and dozens of additional proposed production
facilities across the country are in various stages of development,
engineering, and financing. Annual ethanol production capacity is
expected to reach 3.5 billion gallons in 2003. Ethanol-blended fuel
sales now represents over 11% of all automotive fuels sold in the
United States. As stated by Ron Miller, Chairman of the Renewable
Fuels Association, "NEW PLANTS SCHEDULED TO BEGIN PRODUCTION IN
2001 WILL CONTRIBUTE TO THE INDUSTRY'S ABILITY TO RESPOND TO
GROWING MARKET DEMAND FOR CLEAN BURNING OCTANE AND OXYGENATES.
IMPORTANTLY, THESE NEW FACILITIES WILL PROVIDE MUCH-NEEDED ECONOMIC
STIMULUS TO RURAL COMMUNITIES FACED WITH RECORD LOW COMMODITY
PRICES AND SHRINKING EXPORT MARKETS."
ETHANOL IN SOUTH DAKOTA (paraphrased from the South Dakota Corn
Growers website) - Although the State of South Dakota does not
mandate gasoline outlets to sell ethanol, nearly all gasoline
outlets offer consumers the choice to purchase gasoline containing
10% ethanol.
<Page>
52
In addition, a number of stations across the state also offer
consumers the choice to purchase gasoline containing up to 85%
ethanol for specially designed flex fuel vehicles. Consumers should
feel secure knowing that ethanol blends of up to 10% are approved
under the warranties of all major auto manufacturers, domestic and
foreign, marketed in the U.S.
Beyond gasoline outlets selling ethanol, South Dakota has and is
achieving success with the planning and development of ethanol
plants in various parts of the state. Part of the reason ethanol
has achieved a large degree of success is attributable to the
creation of the ethanol producer incentive fund, which sustains
ethanol's development in the state and South Dakota's $.02 per
gallon fuel tax exemption for ethanol blends. (According to the
borrower's Business Plan, "THE STATE OF SOUTH DAKOTA PROVIDES A
PRODUCTION INCENTIVE OF TWENTY (20) CENTS PER GALLON UP TO A
MAXIMUM $1 MILLION PER YEAR. A PLANT IS ELIGIBLE TO RECEIVE A
MAXIMUM OF $10 MILLION." In 1999, South Dakota produced 16 million
gallons of ethanol. Beginning the twenty-first century, South
Dakota will produce 68 million gallons of ethanol. South Dakota's
annual ethanol production is projected to total 218 million gallons
by 2004.
South Dakota currently has four ethanol plants operational in the
communities of Aberdeen, Huron, Scotland, and Wentworth. These four
plants are capable of producing 68 million gallons of ethanol
annually. In addition to these plants, other ethanol plants are in
various stages of development; in the communities of Watertown,
Rosholt, and Milbank, plants are under construction; in Chancellor
they will be breaking ground in the spring of 2002; Pierre is just
ready to start selling shares; and Mitchell is in the research
stages of the project. If all these plants come to fruition, South
Dakota will have the capability of supplying over 258 million
gallons of ethanol annually to South Dakotans and their
counterparts across the U.S.
DEVELOPMENT OF SUBJECT PROPERTY OR NORTHERN LIGHTS ETHANOL PLANT
(Much of the following information was detailed in the borrower's
"Business Plan".) Northern Growers Cooperative, now known as
Northern Lights Ethanol, LLC (NLE), stemmed from a steering
committee that was formed by several area corn farmers and the
civic leaders in the Grant County area. This group focused on the
low prices paid to producers for agricultural products. The
steering committee began researching the possibility of
constructing and operating a dry mill ethanol plant in the Grant
County, South Dakota area. The committed elected a temporary Board
of Directors and established a non-profit corporation to study the
feasibility and profitability of a plant within the area. This
study included tours of various corn production facilities in the
area, availability of critical elements to a successful plant such
as rail service, water quality, low cost power, site drainage and
other factors.
The vision eventually evolved into the formation of a limited
liability corporation and membership stock was then sold with a
minimum purchase of 5,000 shares per member available. The equity
drive raised $18,520,000 with about 700 members. Northern Lights
Ethanol then selected Broin Enterprises, Inc. and its affiliates to
design and build the facility (through their affiliate Broin &
Associates, Inc.), to manage the business operations and facilities
(Broin Management, LLC), and market the ethanol (Ethanol Products,
LLC).
BROIN ENTERPRISES, INC. (BEI) owns and operates an 8.5 million
gallon per year fuel ethanol plant in Scotland, South Dakota. BEI
employs 32 individuals and has gross revenues in excess of
$10,000,000 annually. In addition to producing ethanol, the plant
generates 23,000 tons of Distillers Dried Grains and compresses
more than 16,000 tons of Liquid Carbon Dioxide annually. BEI
operates as a full scale production plant in addition to a research
and development facility for ethanol process improvement projects.
Owners of the company are Robert, Jeff, Todd, and Lowell Broin. The
company has grown from 1 million gallons per year capacity to 8.5
million gallons per year capacity since its inception.
BROIN AND ASSOCIATES, INC. (B&A) is an engineering and construction
firm specializing in the design, engineering, construction, DCS
system configuration, employee training, and plant start-up of new
ethanol production facilities in the Midwest. Broin and Associates
was
<Page>
53
formed in 1991 to fulfill a need for knowledgeable, experienced
individuals specializing in the design and construction of ethanol
plants. A Contract for Future Services has been signed with Broin
and Associates, Inc. Other projects completed to date by B&A
include:
1. The design, construction, and start-up of a 4 million gallon
per year capacity ethanol plant for HEARTLAND GRAIN FUELS,
L.P. in Aberdeen, South Dakota in April of 1993. The Aberdeen
plant has been very successful to date. The facility was
constructed $500,000 under budget, turned a profit in its
first full month of operation, and operated at 20% greater
than design capacity in its first year. The plant has since
completed an expansion and is presently operating at 8.5
million gallons of production.
2. In 1994, completed the expansion of the BROIN ENTERPRISES
ethanol plant in Scotland, South Dakota, from 3 to 6 million
gallons of annual capacity. It is currently operating at over
8.5 million gallons per year. The expansion has been very
successful, operating at 115% of design capacity within 90
days. The Scotland facility also turned a profit in its first
month of operation.
3. In 1995, completed the design, engineering, construction
oversight, DCS system configuration, employee training, and
plant start-up services for the HEARTLAND CORN PRODUCTS 10
million gallon ethanol plant in Winthrop, Minnesota. The plant
came on-line in April, reaching full capacity in just 8 days.
The 16 day performance guarantee was completed 32 days later
and the plant is currently operating at 60% over design
capacity.
4. In 1996, Broin and Associates completed the design,
engineering, construction oversight, DCA system configuration,
employee training, and plant start-up services for the AL-CORN
CLEAN FUEL 10 million gallon ethanol plant in Claremont,
Minnesota. The Al-Corn facility is the first in the country
that uses traditionally high-yielding technologies and is not
connected to a waste treatment facility. Operations have been
very successful and the Al-Corn plant is currently operating
in excess of 140% of design capacity.
5. In 1997, Broin and Associates completed turn-key design and
construction of an 11.5 million gallon per year ethanol plant
for ETHANOL2000, LLP in Bingham Lake, Minnesota. The plant
came on -line in late June and has been very successful. By
December 31st, the plant was able to declare a $900,000
dividend after only six months of operation. The plant
completed a $15,400,000 expansion in August 2000 increasing
the nameplate capacity to 27 million gallons per year.
Original $2.00 cooperative stock has recently been sold for
$4.98/bushel.
6. In 1998, Broin and Associates completed turn-key design,
engineering, and construction oversight for the PRO-CORN LLC
12 million gallon ethanol plant in Preston, Minnesota. The
plant reached nameplate capacity in only seven days, turning a
profit in its first month of operation. The plant was able to
declare a dividend after only four months of operation and is
presently running at 60% over design capacity.
7. Also in 1998, Broin and Associates completed turn-key design,
engineering, and construction oversight for the AGRI-ENERGY
LLC 12 million gallon ethanol plant in Luverne, Minnesota. The
plant reached nameplate capacity in only six days, also
turning a profit in its first month of operation. Operations
at Agri-Energy have been highly successful, with the plant
currently running in excess of 60% over design capacity.
8. In 1999, Broin and Associates completed the turn-key design,
engineering, and construction oversight for the EXOL 13
million gallon ethanol plant near Albert Lea, Minnesota. The
plant came on-line in late March and was operating at design
capacity in 5 1/2 days. The 10 day performance guarantee was
completed in the first
<Page>
54
10 days of distillation operations. Within three weeks, the
plant was operating in excess of 20% over design capacity. The
plant is currently running in excess of 50% over design
capacity.
9. In 2000, Broin and Associates completed the turn-key design,
engineering, and construction oversight for the NORTHEAST
MISSOURI RAIN PROCESSORS, LLC 15 million gallon per year
facility in Macon, MO. The plant came on-line on May 8, 2000.
It is running at 115% of design capacity after only 2 months
of operation and is improving weekly.
10. In 2001, Broin and Associates designed and built three
projects to include the GOLDEN TRIANGLE ENERGY, LLC (15
million gallon per year plant completed in February), DAKOTA
ETHANOL, LLC (40 million gallon per year plant completed in
August), and the EXOL plant expansion (13 to 36 million
gallons per year).
BROIN MANAGEMENT, LLC is a management firm with more than 17 years
of experience in the ethanol industry. Ethanol facility operations,
microbiological research, grain hedging, mass in-put purchasing,
and on-going professional support are specialties of the group,
along with expertise in the finance and income tax arenas. Current
plants managed by the firm include ETHANOL 2000, BINGHAM LAKE, MN,
PRO-CORN, PRESTON, MN, AGRI-ENERGY, LUVERNE, MN AND EXOL, ALBERT
LEA, MN, NORTHEAST MISSOURI GRAIN, MACON, MO, GOLDEN TRIANGLE
ENERGY, CRAIG, MO, AND DAKOTA ETHANOL, LLC, WENTWORTH, SD.
ETHANOL PRODUCTS, LLC is engaged in marketing, supply,
distribution, fuel blending, trading, risk management, and market
development of fuel ethanol for use in motor gasoline throughout
the United States. Their primary focus is to develop new
value-added markets for ethanol and to improve the value of ethanol
in existing markets. Knowledge of customers, suppliers, substitute
products, and changing industry structure are important components
of developing a successful marketing strategy. Ethanol Products
advantages include concentrated experience and extensive market
coverage in an affordable manner, the reliability of multi-point
supply sourcing, and a diversified market base. It provides
marketing for numerous plants in the region, allowing ethanol
buyers to purchase ethanol from a single source. This "one call"
sourcing will result in increased convenience, versatility, and
security of supply for ethanol buyers and increased market
knowledge and coverage for ethanol producers.
The preceding discussion detailed that the subject site's proposed
use or that of a 40 million gallon ethanol fuel plant is legally
permissible, physically possible, financially feasible, and should
be a productive use. The combination of a perceived favorable
future ethanol market, knowledgeable ownership/management, a
state-of-the-art processing plant, and a location providing needed
product, transportation, labor force, etc. supports the observation
that the subject site's proposed use or that of an ethanol fuel
plant as being a definite probable use. This use definitely
represents a maximally productive use as it will generate income
far in excess of that needed to satisfy the return to the
underlying site. The following detailed analysis of the income and
expense projections also will conclude that the resulting net
income is sufficient to support the total development costs. Thus,
it is unlikely that any measurable functional or even external
obsolescence will exist. For these reasons, it is determined that
the subject site's proposed use or that of a completed ethanol fuel
plant represents the site's highest and best use. This conclusion
as to the site's highest and best use provides the basis for the
following valuation process.
<Page>
55
K. VALUATION PROCESS (rev. 8-27-01)
The previous discussion and analyses outlined the appraisal
problem, detailed the subject's area market, neighborhood, and the
specifics of the subject property, and concluded with a determination of
the property's highest and best use. Achieving the goal of providing a
reliable opinion of a property's going concern market value normally
involves the three traditional valuation techniques or: (1) the Cost
Approach, (2) the Sales Comparison Approach (also known as the Market
Approach), and (3) the Income Capitalization Approach. These valuation
techniques require the assemblage of market data pertaining to such
factors as sale prices and asking prices of similar properties and
unimproved tracts of land, cost data on similar construction, rental
prices of similar properties, and current rates of return on similar
investments.
Each valuation technique used in developing a market value
indication is not an independent system of valuation unrelated to the
other approaches. The valuation process considered as a whole is
comprised of integrated, interrelated, and inseparable techniques and
procedures that have the common objective of providing a convincing and
reliable market value indication. Each valuation technique normally
references conclusions from the other technique(s). For these reasons, no
predetermined sequence exists in the application of the three valuation
techniques used in developing a market value indication.
In this particular appraisal, only two valuation techniques used in
developing a market value opinion will be utilized. The Sales Comparison
Approach or a valuation technique that relies on the assemblage of
similar property sales could not be used as few "similar" operating
ethanol plants even exist and even within those that do exist, few, if
any, have sold. Most state-of-the-art facilities have evolved only within
the decade and, according to industry sources, none have sold. The
alternative would be to use sales of similar use processing plants.
However, the definite uniqueness of an ethanol fuel plant would create
few similarities to most other types of processing plants. For these
reasons, the Sales Comparison Approach could not be utilized.
<Page>
56
Not utilizing the Sales Comparison Approach does NOT constitute
departure from the UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE
(USPAP). Departure is invoked only when a valuation technique is
applicable and is TYPICALLY used in developing the value opinion. Most
market participants would not expect the application of the Sales
Comparison Approach and most appraisal peers would not apply the Sales
Comparison Approach.
In this particular appraisal, only two valuation techniques or the
Cost Approach and Income Capitalization Approach will be used in
developing a market value opinion. Each technique is presented beginning
with a brief explanation of the techniques and steps utilized. Data is
assembled and analyzed, resulting in an indication of market value by
each valuation technique. Finally, the market value indication by each
valuation technique is evaluated and reconciled into an opinion of the
subject property's going concern market value.
<Page>
57
L. COST APPROACH (Rev. 9-26-01)
The Cost Approach is based on the premise that a property's value
tends to reflect the site's market value plus the current cost to produce
all the improvements, less any existing depreciation. The basic
underlying principle in the Cost Approach is that of substitution. It
affirms that a prudent buyer will pay no more for a property than the
cost to acquire a similar site and construct improvements of equivalent
desirability and utility without undue delay. Simply, an improvement's
cost as of the appraisal's effective date plus the underlying site/land
value provides a measure against which prices for similar improved
properties may be judged.
The steps used in the Cost Approach are:
1. ESTIMATE THE VALUE OF THE LAND AS THOUGH VACANT AND AVAILABLE TO BE
DEVELOPED TO ITS HIGHEST AND BEST USE.
2. DETERMINE WHICH COST BASIS IS MOST APPLICABLE TO THE ASSIGNMENT:
REPRODUCTION COST OR REPLACEMENT COST.
3. ESTIMATE THE DIRECT (HARD) AND INDIRECT (SOFT) COSTS OF THE
IMPROVEMENTS AS OF THE EFFECTIVE APPRAISAL DATE.
4. ESTIMATE AN APPROPRIATE ENTREPRENEURIAL PROFIT OR INCENTIVE FROM
ANALYSIS OF THE MARKET.
5. ADD ESTIMATED DIRECT COSTS, INDIRECT COSTS, AND THE ENTREPRENEURIAL
PROFIT OR INCENTIVE, TO ARRIVE AT THE TOTAL COST OF THE
IMPROVEMENTS.
6. ESTIMATE THE AMOUNT OF ACCRUED DEPRECIATION IN THE STRUCTURE AND,
IF NECESSARY, ALLOCATE IT AMONG THE THREE MAJOR CATEGORIES:
PHYSICAL DETERIORATION, FUNCTIONAL OBSOLESCENCE, AND EXTERNAL
OBSOLESCENCE.
7. DEDUCT THE ESTIMATED DEPRECIATION FROM THE TOTAL COST OF THE
IMPROVEMENTS TO DERIVE AN ESTIMATE OF THEIR DEPRECIATED COST.
8. ESTIMATE THE CONTRIBUTORY VALUE OF ANY SITE IMPROVEMENTS THAT HAVE
NOT ALREADY BEEN CONSIDERED (SITE IMPROVEMENTS ARE OFTEN APPRAISED
AT THEIR CONTRIBUTORY VALUE, I.E., DIRECTLY ON A DEPRECIATED-COST
BASIS.)
9. ADD THE LAND VALUE TO THE TOTAL DEPRECIATED COST OF ALL THE
IMPROVEMENTS TO ARRIVE AT THE INDICATED VALUE OF THE PROPERTY.
10. ADJUST THE INDICATED VALUE OF THE PROPERTY FOR ANY PERSONAL
PROPERTY (E.G., FIXTURES, FURNITURE, AND EQUIPMENT) OR ANY
INTANGIBLE ASSET VALUE THAT MAY BE INCLUDED IN THE COST ESTIMATE.
IF NECESSARY, THIS VALUE, WHICH REFLECTS THE VALUE OF THE FEE
SIMPLE INTEREST, FOR THE PROPERTY INTEREST BEING APPRAISED TO
ARRIVE AT THE INDICATED VALUE OF THE SPECIFIED INTEREST IN THE
PROPERTY.
(Appraisal Institute, APPRAISAL OF REAL ESTATE, TWELFTH EDITION;
Pg. 356)
The first step in the Cost Approach is developing the site's MARKET
VALUE OPINION, as if vacant and available to be developed to its highest
and best use. The most common method in developing the site's market
value is known as the Direct Market Comparison technique. This valuation
<Page>
58
technique is based on the assumption that an informed purchaser will pay
no more for a site than the cost of acquiring a similar site with the
same utility (again, the principle of substitution).
The first indication of the subject site's probable market value
would be the price/value IMPLIED in the contractual "Ground Lease
Agreement". A synopsis of this lease includes:
1. Lessor: Big Stone-Grant Industrial Development &
Transportation, L.L.C.
2. Lessee: Northern Lights Ethanol, LLC
3. Lease Commencement Date: May 1, 2001
4. Initial Term: 99 years but with "lessee's option to terminate".
Specifically, "LESSEE SHALL HAVE
THE RIGHT, BY WRITTEN NOTICE TO LESSOR GIVEN AT
LEAST 365 DAYS PRIOR TO: (A) THE EXPIRATION OF THE
FIRST FIVE-YEAR PERIOD OF THE TERM OF THIS LEASE;
OR (B) THE EXPIRATION OF ANY FIVE-YEAR PERIOD OF
THE TERM OF THIS LEASE THEREAFTER, TO TERMINATE
THIS LEASE AND SURRENDER ITS LEASEHOLD INTEREST
UNDER THIS LEASE TO LESSOR, EFFECTIVE ON THE
EXPIRATION OF THE FIVE-YEAR TERM AS SPECIFIED IN
THE WRITTEN NOTICE..."
5. Options: None
6. Rent: Years 1-5: $2,400/year
Years 6-99: "THE
RENTAL TO BE PAID BY LESSEE UNDER THIS LEASE
AGREEMENT SHALL BE ADJUSTED ON JANUARY 1, 2006,
AND EVERY FIVE YEARS THEREAFTER BY INCREASING THE
RENTAL IN EFFECT DURING THE IMMEDIATELY PRECEDING
FIVE-YEAR PERIOD BY FIVE PERCENT."
7. Payment of Expenses: Tenant responsible for paying
all expenses.
Based on the preceding, the collected rent is "net" rent to the
landlord in that the tenant is responsible for paying all expenses. The
contractual rent can be "capitalized" into a market value indication
applicable to the collective subject site or, again, about 36.59 acres.
This capitalization process simply divides the net income by an
appropriate return rate or overall capitalization rate or a valuation
method commonly known as direct capitalization. (The direct
capitalization methodology will be detailed in the following Income
Approach.)
Only two components are needed in formulating the site's market
value indication through application of direct capitalization or (1) the
net income and (2) an appropriate capitalization rate. Again, the
contractual ground lease agreement is structured for a total of 99 years
with fixed rent of $2,400 annual in the first five year segment with the
rent increasing 5% per year for each additional
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59
five year segment. For the purpose of this analysis, the average annual
rent over the 99 years of the lease will be used or about $4,000. This
net income will then be capitalized using return rates or overall rates
of 6% and 9%. The 6% land capitalization rate is more applicable to
farmland, whereas, the 9% capitalization rate is more applicable to
commercial or industrial land. (Support for these capitalization rates
will be detailed in the following Income Approach.) The following details
the application of this direct capitalization method to the subject
site's net income, resulting in an indicated market value for the subject
site:
<Table>
1. Average Annual Rent $ 4,000
2. Capitalized into Market Value
a. Using 6% Rate:
$4,000 (I) DIVIDED BY .06 (R) = $ 66,667
b. Using 9% Rate:
$4,000 (I) DIVIDED BY .09 (R) = $ 44,444
3. Indicated Price Per Acre. of Site Area
a. $66,667 DIVIDED BY 36.59 acres = $ 1,822/acre
b. $44,444 DIVIDED BY 36.59 acres = $ 1,215/acre
</Table>
The next step or determining whether this indication of the subject
site's market value or $1,200 to $1,800/acre is market supported is made
by assembling and comparing recent sales of vacant sites that are
considered to be similar to the subject site in physical characteristics,
location, and, most importantly, use or potential use. The site's highest
and best use if vacant was previously concluded to be that of
agricultural farmland. Verification with the local Director of Tax
Equalization or Mr. Darwin Conrad and South Dakota Department of
Revenue's state representative or Mr. Kyle Helseth (605-367-5800)
verified that "good" area cropland sells for approximately
$600-$700/acre. Applying this value/price range to the subject site would
indicate an initial contributory value indication of:
36.59 acres X $600/acre = $21,954, say, $22,000
36.59 acres X $700/acre = $25,613, say, $26,000
Attempting to further quantify this price/value range with actual area
market land sales is not entirely relevant as the site's underlying
market value, especially as it relates to the total project cost of
around $45-$50 million, is relatively insignificant.
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60
The lease analysis suggests a probable underlying site market value
approximating $44,000 or about $1,200/acre to nearly $67,000 or about
$1,800/acre as opposed to area farmland sales supporting prices/values at
about $600-$700/acre. If vacant of the present improvements, it is
unlikely that the site would be purchased for something more than area
farmland. However, the site would have a comparatively smaller size and,
for this reason, may be able to generate value/price near the upper end
of the $600-$700/acre range. Based on this available market evidence, the
subject site's fee simple market value is concluded at $25,000 or
$683.25/acre. The site's fee simple market value conclusion is then
carried through to the end of the Cost Approach.
The next step in the Cost Approach is estimating the subject
improvement's replacement or reproduction cost, as of the appraisal's
effective date. In this particular appraisal, the REPLACEMENT COST is
appropriate since, by definition, it:
"THE ESTIMATED COST TO CONSTRUCT, AS OF THE EFFECTIVE APPRAISAL
DATE, A BUILDING WITH UTILITY EQUIVALENT TO THE BUILDING BEING
APPRAISED, USING CONTEMPORARY MATERIALS, CURRENT STANDARDS, DESIGN
AND LAYOUT. WHEN THIS COST BASIS IS USED SOME EXISTING OBSOLESCENCE
IN THE PROPERTY IS ASSUMED TO BE CURED." (Appraisal Institute, THE
APPRAISAL OF REAL ESTATE, TWELFTH EDITION, Pg. 357)
The replacement cost estimate is based on the use of current substitute
materials and building techniques since they are functional in today's
market and the structure's value and/or utility would not be diminished
by their use.
Several methods are available in which to estimate the replacement
cost of a particular improvement or (1) the actual cost of the subject
improvements could be utilized, if the costs were recent, (2) costs of
reasonably similar newly constructed buildings could be assembled and
compared, and/or (3) a national cost service could be referenced. In this
particular appraisal, two sources or the owner provided actual or bid
costs of the proposed improvements and indirect costs of reasonably
similar newly constructed ethanol plants will be used to formulate the
subject improvement's replacement cost estimate.
The following four pages detail the owner/borrower provided costs.
(Note: No page 65 exists.)
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61
MILLBANK, SD 40 MMGPY PLANT
CONTRACT SCHEDULE OF VALUES, PROJECT ESTIMATE
<Table>
100 SITE ***
130 SURVEYING, SOIL BORINGS, SITE ENGINEERING
131 Topographical survey
132 Other surveying and locating costs
133 Soil borings and geotech report
134 Soil testing services during constr.
140 SITE PREPARATION(ALLOWANCE)
Gravel roadways and parking lots
Building base excavation and backfill
Rail spur sub-grade
Excavation and backfill
150 SITE UTILITIES
151 WATER LINES, SYSTEMS
Water mains, branches, hydrants on site Water line from
Big Stone Fire system Demineralized water line from Big
Stone
152 SEWER
Sanitary sewer piping, septic system
Direct discharge piping
- Treated wastewater line to Big Stone Plant
160 RAILROAD SWITCHES AND TRACKAGE(ALLOWANCE)
170 SITE SECURITY FENCES, GATES, ETC.
190 OTHER SITE IMPROVEMENTS
Tank farm secondary containment
Miscellaneous site devel. costs
200 BUILDINGS, STRUCTURES, CONCRETE, AND MILLWRIGHT ***
210 CONCRETE CONTRACT
220 BUILDINGS (INCL. MAS., CARPENTRY, DOORS, ETC.)
240 TRUCK SCALE AND CORE SAMPLER
250 STRUCTURAL STEEL
Incl. structural steel framing of Distillation and Evap Bldg.
260 MILLWRIGHT CONTRACT
300 MECHANICAL ***
310 MECHANICAL EQUIPMENT
311 BOILERS AND RELATED EQUIPMENT
312 REBOILER AND PRESS REDUCING (ALLOWANCE)
313 COOLING TOWER
315 COMPRESSED AIR EQUIPMENT & YEAST AIR BLOWER
317 WATER TREATMENT AND SUPPLY EQUIPMENT
320 PIPING, MANUAL VALVES, OTHER MATERIALS
321 Victaulic, Pressfit fittings and pipe
322 Pre-fabricated pipe
323 Random Pipe, fittings, Bolts, and Gaskets
324 Manual valves
325 Unit heaters
326 Ventilators
327 Steam traps, strainers, flex. connectors, misc.
329 Steam and condensate lines, complete with structure,
concrete, installation, heat trace
330 HVAC, PLUMBING, AND UNDERGROUND CONTRACT
340 PIPE AND VESSEL INSULATION CONTRACT
350 MECHANICAL PIPING CONTRACT
360 PRE-FABRICATED PIPING SKIDS
370 FIRE SPRINKLER, FIRE PUMP, ETC.
</Table>
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62
<Table>
400 PROCESS SYSTEMS ***
PROCESS EQUIPMENT
401 Tanks and towers (Process & Storage)
402 Mixers/Agitators
403 Heat Exchangers
404 Pumps & Seals
405 Blowers
406 Filters
407 Conveyors
408 Other Equipment and Specialties
409 Byproduct Dryer and Related Equipment
410 Airlocks 411 Control Valves
412 XV Valves
413 Safety Valves and Discs
414 Wastewater pre-treatment/treatment
415 Ethanol Loadout Skid, Etc.
417 Hammermill
418 Centrifuges
500 ELECTRICAL ***
600 INSTRUMENTATION ***
601 Field instrumentation (sensors)
602 Controllers and control system
603 Local Indicators
700 GRAIN SYSTEMS ***
710 GRAIN RECEIVING, HANDLING, LOAD-OUT EQUIP.
DDG load-out pit and elevator
Corn receiving pit and elevator: 2 X 15,000 b.p.h.
Corn scalper
Dust control equipment
Conveyors
Concrete and erection
720 GRAIN STORAGE
(1) 60,000 bu. damaged corn bin
(2) 400,000 bushel storage bins
Aeration equipment
Concrete and erection
730 CORN FLOUR AND DDG SYSTEMS
740 DDG STORAGE SILO - 4,000 TONS
800 OTHER DESIGN BUILD COSTS ***
820 PAINTING, ETC.
840 FREIGHT ON EQUIPMENT
850 SUBCONTRACTED ENGINEERING
860 SALES TAX
870 MISCELLANEOUS CONSTRUCTION EXPENSE
1001 CONTINGENCIES
1002 ENGINEERING, MANAGEMENT, ACQUISITION, OVERHEAD
</Table>
<Page>
63
<Table>
900 OTHER PROJECT EQUIPMENT, COSTS (ALLOWANCES) ***
910 TRUCK AND POWER EQUIPMENT
Skid loader
Fork lift
Fork lift
Pick-up truck
Rail Car Mover
Trailer
920 MAINTENANCE EQUIPMENT
Welders
Benches
Parts shelves
Tools, etc.
930 SPARE PARTS
940 LAB EQUIPMENT
945 SAFETY EQUIPMENT
950 OFFICE EQUIPMENT AND FURNISHINGS
Phone system
Desks, chairs
Computers
Copy machine, fax machine
Other
TOTAL CONTRACT COST $43,857,792
EXCISE TAX $ 877,156
1000 OWNER'S PROJECT COSTS $ 4,065,052
1010 LAND $ 0
1020 LOAN ORIGINATIONS AND INTEREST $ 1,100,000
1030 OPERATING COST PRIOR TO START-UP $ 300,000
1040 MISCELLANEOUS ADDITIONAL DEVELOPMENT $ 300,000
1045 OWNER'S CONTINGENCY $ 411,792
1050 START UP AND OPERATING CAPITAL $ 3,800,000
1090 REFUND OF SALES AND EXCISE TAX $(1,846,740)
TOTAL PROJECT COST $48,800,000
</Table>
<Page>
64
SCHEDULE OF CONTRACT VALUES AND PROJECT ESTIMATE
<Table>
<Caption>
CONTRACT VALUES AT BIG STONE SITE
------------------------
100 SITE WORK $ ***
200 BUILDINGS $ ***
300 MECHANICAL $ ***
400 PROCESS SYSTEMS $ ***
500 ELECTRICAL $ ***
600 INSTRUMENTATION $ ***
700 GRAIN SYSTEMS $ ***
800 OTHER CONSTRUCTION COSTS $ ***
900 OTHER PROJECT EQUIPMENT, COSTS $ ***
TOTAL CONTRACT COST $43,857,792
EXCISE TAX $ 877,156
<Caption>
OWNER'S PROJECT COSTS
1010 LAND $ 0
1020 LOAN ORIGINATIONS AND INTEREST $ 1,100,000
1030 OPERATING COST PRIOR TO START-UP $ 300,000
1040 MISCELLANEOUS ADDITIONAL DEVELOPMENT $ 300,000
1045 OWNER'S CONTINGENCY $ 411,792
1050 START UP AND OPERATING CAPITAL $ 3,800,000
1090 REFUND OF SALES AND EXCISE TAX $(1,846,740)
1000 OWNER'S PROJECT COSTS $ 4,065,052
TOTAL PROJECT COST: $48,800,000
</Table>
<Page>
65
<Page>
66
The total cost estimate of $48.8 million computes to $1.22/gallon
of anticipated processing capacity or, as referenced in the industry,
simply $1.22/gallon. The representative of Broin & Associates or Mr.
Larry Ward verified that the estimated project cost for the 40 million
gallon Dakota Ethanol Plant located at Wentworth, South Dakota, which
opened on August 1, 2001, was $44,400,000 or $1.11/gallon. Actual
expenditures at the Dakota Ethanol plant were somewhat higher than the
projected cost but, yet, the initial projection of $1.11/gallon provides
for an initial cost estimate indication. Broin Enterprises, Inc. was also
involved in the development, construction, and operation of the
Ethanol2000, LLP plant at Bingham Lake, MN, in July of 1997. This
11,500,000 gallon facility was initially constructed at a cost of $19
million or $1.65/gallon. In 2000, a 18,500,000 gallon/year expansion at a
cost of $15.4 million was completed. Thus, this 30 million gallon plant
was constructed at a cost of $34,400,000 or $1.15/gallon. Lastly, the
Glacial Lakes Corn Processors ethanol plant broke ground on August 7,
2001, in Watertown, South Dakota. According to the local newspaper
article, this 40 million gallon facility is being built at a cost of $54
million or $1.35/gallon. In summary, these three recently built or
to-be-built ethanol plants indicate costs of $1.11/gallon, $1.15/gallon,
and $1.35/gallon as compared to the subject's reported cost of
$1.22/gallon.
In summary, the owner/borrower is projecting total project costs at
$48,800,000 or $1.22/gallon. This cost is supported by the available
market evidence. Also, the anticipated subject plant's costs are deemed
reliable in that the plant will be state-of-the-art, the costs are based
on mostly known bids or projections, and the facility is being
constructed by one of the industry experts. For the purpose of this
analysis, the anticipated project cost of $48,800,000 will be used.
The estimated replacement cost of $48,800,000 is all inclusive
except for ENTREPRENEURIAL PROFIT or effort, sometimes referred to as
DEVELOPER PROFIT, defined as:
A MARKET-DERIVED FIGURE THAT REPRESENTS THE AMOUNT AN ENTREPRENEUR
EXPECTS TO RECEIVE FOR HIS OR HER CONTRIBUTION TO A PROJECT; THE
DIFFERENCE BETWEEN THE TOTAL COST OF A PROPERTY (COST OF
DEVELOPMENT) AND ITS MARKET VALUE (PROPERTY VALUE AFTER
COMPLETION), WHICH REPRESENTS THE ENTREPRENEUR'S COMPENSATION FOR
THE RISK AND EXPERTISE ASSOCIATED WITH DEVELOPMENT. IN THE COST
APPROACH, EXPECTED PROFIT IS REFLECTED AS ENTREPRENEURIAL PROFIT.
(Appraisal Institute, DICTIONARY OF REAL ESTATE APPRAISAL, 3RD
EDITION; 118)
<Page>
67
Entrepreneurial profit -- sometimes referred to as developer profit
-- represents the level of risk and expertise associated with the
development of a project. Entrepreneurial profit can take the form of
profit on a sale of the property, an additional return on an investment
in an operating property, or use value to the entrepreneur. Ideally,
measurements of entrepreneurial profit should be extracted directly from
the market. In reality, this type of information is rarely available. It
has been noted within this particular market segment that these plants
are generally developed by owner/occupants/operators with many in recent
years developed as farmer owned co-ops. Presently, farmer owned
cooperatives account for about one-third of all U.S. fuel ethanol
production. These cooperatives help to insure farmer members a
value-added market for their crops and offer profit sharing dividends as
the industry prospers. For these primary reasons, entrepreneurial profit
is not normally included as part of the plant's cost. This observation
was confirmed by Mr. Larry Ward of Broin & Associates. Mr. Ward indicated
that entrepreneurial profit is anticipated in the plant's production or
business. For these reasons, entrepreneurial profit will not be included.
The next step in the Cost Approach is estimating depreciation
accrued to the subject improvements. The concept of DEPRECIATION, as it
relates to this appraisal, is defined as:
"...A LOSS IN PROPERTY VALUE FROM ANY CAUSE; THE DIFFERENCE BETWEEN
THE REPRODUCTION OR REPLACEMENT COST OF AN IMPROVEMENT ON THE
EFFECTIVE DATE OF THE APPRAISAL AND THE MARKET VALUE OF THE
IMPROVEMENT ON THE SAME DATE. IN REGARD TO IMPROVEMENTS,
DEPRECIATION ENCOMPASSES BOTH DETERIORATION AND OBSOLESCENCE."
(Appraisal Institute, DICTIONARY OF REAL ESTATE APPRAISAL, THIRD
EDITION; pg. 96)
Depreciation in an improvement can result from three major causes
operating individually or in combination that include physical
deterioration, functional obsolescence, and external obsolescence. The
market recognizes the occurrence of depreciation but an accurate
interpretation of how the market perceives the affect of the depreciation
must be made.
Physical deterioration occurs as a result of the natural aging
process of a structure and may also result from the deferring of
maintenance. Physical deterioration is a continual, on-going process--no
matter how slow--that is the result of climatic exposure, use, and/or
neglect. No physical deterioration would exist as the improvements would
be new.
<Page>
68
Functional obsolescence refers to loss resulting from any reduction
in an improvement's ability to be useful and to perform its intended
function, ACCORDING TO CURRENT MARKET TASTES AND STANDARDS. Any reduction
in the efficiency of a building's utility associated with, or derived or
influenced from architectural style, design and layout, traffic patterns,
the size and type of rooms, and/or outdated building techniques and
materials are examples of functional obsolescence. The subject
improvements or the ethanol fuel plant will be state-of-the-art as it
relates to this particular industry. Additionally, the developer or Broin
& Associates is well versed in plant design, construction, and operation
as they are a leading expert in this particular improvement type. For
these reasons, the completed plant will be state-of-the-art with no
measurable functional obsolescence apparent.
The third form of depreciation is termed EXTERNAL OBSOLESCENCE or:
"...AN ELEMENT OF ACCRUED DEPRECIATION; A DEFECT, USUALLY
INCURABLE, CAUSED BY NEGATIVE INFLUENCES OUTSIDE A SITE AND
GENERALLY INCURABLE ON THE PART OF THE OWNER, LANDLORD, OR TENANT."
(Appraisal Institute, THE DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION; pg. 128)
External obsolescence can be either temporary as in an over-supplied
market or permanent as in having proximity to an environmental disaster.
Normally, external obsolescence is market-wide when its cause is economic
such as having insufficient demand for a certain type or use of product
that the subject property was designed to provide, increased costs
associated with governmental regulations (good example is ADA
requirements), changing technology, negative conditions such as high
interest rates, unaffordable financing, or economic recessions. The
preceding detailed that the site's proposed use or the 40 million gallon
ethanol plant substantially represents its highest and best use. The use
was deemed to be financially feasible and, if operated and managed at its
capacity, should be maximally productive. For these reasons, no
measurable external obsolescence will be noted.
As no depreciation is observed, the subject site's previously
concluded market value is added to the subject improvement's replacement
cost resulting in an indication of the subject
<Page>
69
property's as-complete fee simple going concern market value by the Cost
Approach. These results are summarized as follows:
<Table>
1. Estimated Cost New $48,800,000
2. Less Accrued Depreciation - None 0
3. Plus Site's Market Value Estimate
by Previous Comparison + 25,000
----------
As-Complete Fee Simple Going Concern
Market Value Indication by Cost Approach $48,825,000
</Table>
<Page>
70
M. INCOME CAPITALIZATION APPROACH
The market value developed by the Income Capitalization Approach is
the estimated present worth of future benefits of property ownership,
commonly referred to as NET INCOME, defined as:
...INCOME REMAINING AFTER ALL OPERATING EXPENSES ARE DEDUCTED FROM
EFFECTIVE GROSS INCOME, BUT BEFORE MORTGAGE DEBT SERVICE AND BOOK
DEPRECIATION ARE DEDUCTED; MAY BE CALCULATED BEFORE OR AFTER
DEDUCTING REPLACEMENT RESERVES.
(Appraisal Institute, The Dictionary of Real Estate Appraisal,
Third Edition; 243)
Net income or NET OPERATING INCOME is generated by a property, normally
in the form of rent but, in some instances, in the form of income
generated by a business operation (motels, truck stops, restaurants,
nursing homes, grain elevators, etc.) Though not specifically stated in
the definition, the term net operating income or net income is also
presumed to be income before personal or corporate income taxes. Market
participants engaged in the purchase or sale of income-producing
properties anticipate a property's ability to generate net income which,
in turn, can be converted into an indication of a property's value.
The steps normally used in the Income Capitalization Approach are:
1. ESTIMATE THE GROSS POTENTIAL INCOME OF THE SUBJECT PROPERTY BASED
ON MARKET RENT AND/OR BASED ON THE PROPERTY'S ABILITY TO GENERATE
NET INCOME FROM ITS BUSINESS OPERATION. (ACTUAL CONTRACTUAL RENT
MAY OR MAY NOT BE MARKET RENT.)
2. ESTIMATE AND DEDUCT A VACANCY/COLLECTION LOSS ALLOWANCE TO DERIVE
EFFECTIVE GROSS INCOME.
3. ESTIMATE AND DEDUCT EXPENSES OF OPERATION TO DERIVE NET OPERATING
INCOME (NOI) PRIOR TO SATISFYING DEBT SERVICE, PERSONAL INCOME
TAXES, OR DEPRECIATION.
4. SELECT AN APPROPRIATE CAPITALIZATION METHOD OR TECHNIQUE TO CONVERT
THE NET OPERATING INCOME INTO AN ESTIMATE OF VALUE.
The first step in the Income Capitalization Approach is estimating
the subject's net operating income derived from (1) actual contractual
rent if a property is leased at or near market, (2) the business
operation within a property, if applicable, and/or (3) an estimation of
market rent if owner occupied. The completed subject property will be
entirely owner occupied/operated. Thus, no actual or contractual rent is
available. Rather, its net operating income will be generated from the
plant's business operation. (The terms "net income" and "net operating
income" are interchangeable and will be used as such throughout the
following appraisal report.)
<Page>
71
Developing an indication of the subject property's going concern
market value on the basis of its on-premise BUSINESS OPERATION requires,
at a minimum, REASONABLE management skills. As such, a processing plant
involves not only the real estate (buildings and site improvements) but
also many business elements generally not part of income producing
properties. These elements include furniture, fixtures, and equipment
(FF&E), specialized and highly trained labor and management, and possibly
inventories, working capital, and other intangible business assets.
Additionally, this particular property type will require certain
expenditures be made to insure continuation of the business such as
marketing and sales expense, replacement allowances, and even pre-opening
operating expenses. Therefore, a processing plant's market value extends
beyond simply the real estate to include the "going concern" value
concept, again, defined as:
"THE VALUE CREATED BY A PROVEN PROPERTY OPERATION; CONSIDERED AS A
SEPARATE ENTITY TO BE VALUED WITH A SPECIFIC BUSINESS
ESTABLISHMENT." (Appraisal Institute, DICTIONARY OF REAL ESTATE
APPRAISAL, THIRD EDITION; 160)
This particular ethanol fuel plant's net income will be derived
through sales of refined ethanol fuel and distillers dried grains with
solubles (DDGS) less operating expenses before recognition of
depreciation, mortgage interest, amortization expenses, and income taxes.
Normally, a processing plant's historical operating statements would be
analyzed to determine if they are reflective of the market. In this
particular assignment, the subject property involves a proposed ethanol
fuel plant facility and, therefore, no historical operating information
is available. The Income Approach must then be based on an analysis of
the owner/borrower projections and, if possible, correlated to direct or
even indirect market evidence.
A complete "Business Plan" was developed by Broin & Associates,
Inc. As has been detailed, Broin & Associates is a well known and
respected expert in the ethanol industry. Their income and expense
projections are based on seventeen years of experience in the ethanol
industry to include the actual design, construction, and operation of
comparable ethanol plants located throughout this region. For this
reason, considerable emphasis will be placed on the business plan as
developed by Broin & Associates. A complete copy of the Business Plan has
not been included in
<Page>
72
this report as the most significant parts have been copied and
incorporated by direct or indirect reference. A complete copy has been
retained on file.
The following sixteen pages were taken from the "Northern Growers
Cooperative Ethanol Plant Business Plan" prepared in September of 2000.
The first several pages detail the market background for ethanol, DDGS,
and corn. Income and expense projections or "profitability projections"
are then presented in three scenarios or (1) average case, (2) best case,
(3) worst case. Following these projections, these three scenarios have
been combined on one page by the undersigned as to provide for ease of
comparison. The combined/comparative profitability projections have been
corrected in that an error was made in the computation of the income
generated by DDGS. In the worst case scenario, a price of ***/ton was
used, whereas, it should have been ***/ton. Conversely, ***/ton for
DDGS was used in the best case scenario when it should have been
***/ton. Therefore, the changes in the appropriate areas were "penciled
in" on the combined or comparative statement. The last four pages are the
owner/borrower's five year projections using the "average case" scenario
for the first year and projecting income and expense changes over the
next four years. Further detailed discussion concerning these entire
projections will follow. These projections are preceded by significant
assumptions and followed by supplementary information.
<Page>
73
V. MARKET EXPLANATION
A. ETHANOL
The target truck marketing area for the ethanol produced at the
proposed facility would include all the state of South Dakota, as well as
markets in Minnesota and Northwest Iowa. Markets in Sioux Falls,
Mitchell, Watertown and Wolsey would be primary targets for the facility,
along with markets in Milford, LeMars, Rock Rapids and Sioux City, Iowa,
and markets in Marshall, Alexandria, Mankato, Minneapolis and St. Paul,
Minnesota. An ethanol facility located in Eastern South Dakota will have
a definite freight advantage over several out-of-state companies
currently shipping ethanol into the Twin Cities, Northwestern Minnesota
and Canada.
Due to the size of the facility, approximately 2/3 of the ethanol
would be marketed by rail. The target rail markets for the facility would
include the West, the Pacific Northwest, the Southern and Southwest
markets, as well as potential new markets on the East Coast due to MTBE
phase outs. The phase out of MTBE in California could create a market
capable of consuming a large percentage of the rail traffic from the
Northern Growers Cooperative facility.
Should there be a price advantage shipping to other cities or
states, the ethanol plant will have the ability to truck or rail product
to any location that is deemed feasible. Ethanol Products, LLC has been
marketing fuel ethanol in South Dakota, Nebraska, Minnesota, Illinois,
Wisconsin, South Dakota, and several Western and Southern states for over
eleven years. Ethanol Products, LLC personnel have the contacts to market
ethanol in almost any area of the U.S.
Selling prices for ethanol (F.O.B. the plant) have been estimated
by Broin & Associates. In order to estimate future ethanol prices, the
average price attained by Broin Enterprises fuel ethanol plant in
Midwestern markets for the years 1992-1998 have been averaged. The
average price received during this period was ***/gallon, therefore a
slightly conservative estimate of ***/gallon has been utilized in the 5
year financial projections.
The effect of changes in the price of ethanol on net income of the
project are illustrated in the average, best and worst case profitability
scenarios of the financial forecasts. The comparison forecasts include
first year interest and depreciation.
B. DISTILLERS DRIED GRAINS
The main co-product of the ethanol production process is Distillers
Dried Grains with Solubles (DDGS). DDGS is a high protein, high energy
feed supplement primarily marketed to the dairy and beef industry. Recent
research shows new potential in the swine industry. Many poultry rations
include DDGS. DDGS is a very popular feed supplement, and a very saleable
product.
Selling prices (F.O.B. the plant) for financial forecast purposes
have been estimated by Broin & Associates. In order to estimate future
DDGS prices, the average
<Page>
74
price attained by Broin Enterprises fuel ethanol plant in nationwide
markets for the years 1992-1999 have been averaged. The average price
received during this period was ***/ton. For financial forecast
purposes, a slightly conservative estimate of ***/ton has been utilized.
The effect of changes in the price of DDGS on the net income of the
project are illustrated in the average, best and worst case profitability
scenarios of the financial forecasts.
C. CORN PURCHASING
The location of the ethanol plant facility, in Grant County, South
Dakota, allows availability of corn at acceptable basis levels. Northern
Growers Cooperative members will deliver up to 12 million bushels of corn
required by the plant. Northern Growers Cooperative will be paid an
average of market prices at surrounding elevators plus freight from the
point of origin. Delivery periods will be established, and delivery of
corn by members will be rotated in each delivery period. The price paid
to members at the time of delivery will be determined by management
representatives at the beginning of each marketing period. At the end of
each delivery period, an additional payment will be made correcting the
price to equal the actual average of surrounding elevators during the
delivery period plus freight from the members point of origin.
The additional bushels required to operate the facility will be
purchased on the open market at competitive prices. It is anticipated
that 20-40% of this corn may be purchased from elevators during the first
1-2 years of operation, or until a substantial customer base is
established.
Grant County, South Dakota produces and exports a tremendous
quantity of corn. The basis between the Chicago Board of Trade and local
corn prices is one of the most desirable in the country, averaging as
wide as $.60/bushel at harvest. The accompanying statistics show the
amount of corn grown in the Northeastern area of South Dakota (see
Exhibit J).
Purchase price for corn (F.O.B. the plant) has been estimated by
Broin & Associates. In order to estimate this price, 10 year historical
cash prices from the local elevators in the area were analyzed. The
average on-farm corn price from 1988-1999 was $2.26/bushel. Based on this
average, a slightly conservative estimate of $2.30/bushel has been used
in the average case profitability scenario and the 5 year projected
financials.
<Page>
75
The effect of changes in the price of corn on the net income of the
project are illustrated in the average, best and worst case profitability
scenarios of the financial forecasts.
<Page>
76
PROPOSED FREIGHT TABLE
Northern Growers Cooperative
<Table>
<Caption>
Miles to Plant Cents/Bushel*
------------------------------------------------------------------------
0-4.9 4.5
5-9.9 5.0
10-14.9 5.5
15-19.9 6.0
20-24.9 7.0
25-29.9 7.5
30-34.9 8.0
35-39.9 8.5
40-44.9 9.0
45-49.9 9.5
50-54.9 10.5
55-59.9 11.0
60-64.9 11.5
65-69.9 12.0
70-74.9 12.5
75-79.9 13.0
80-84.9 13.5
85-89.9 14.0
90-94.9 14.5
95-99.9 15.0
100+ Miles 15.5
</Table>
*Freight will be paid from point of origin to the plant.
<Page>
77
Northern Growers Cooperative
VI. PROJECTED FINANCIAL DATA
Summary of Significant Financial Forecast Assumptions
Profitability Projection - Average Case
Profitability Projection - Best Case
Profitability Projection - Worst Case
Determining Assumptions
Projected Income Statement
Cash Flow Projection
Projected Balance Sheets
<Page>
78
Northern Growers Cooperative
SUMMARY OF SIGNIFICANT FINANCIAL FORECAST
ASSUMPTIONS
This financial forecast is Broin Management, LLC's estimate of the
most probable results of operations, cash flow, and allocations of income
(loss) for the forecast period. Accordingly, the forecast reflects
management's judgment based on historical and present circumstances of
the most likely set of conditions and its most likely course of action.
The assumptions disclosed herein are those which management
believes are significant to the financial forecast or otherwise related
to key factors upon which the financial results of the Company depend.
For the purpose of formulating the Financial Statements for this
Financial Plan, several assumptions have been made, including but not
limited to the following:
1) It is assumed that debt repayment will be the equivalent
often equal principal payments, with interest on remaining principal paid
annually.
2) Although no one can predict the future of commodity and
fuel prices, the Financial Statements begin with an Average Case Scenario
based on conservative estimates relating to historical pricing and
operational data. The Five Year Proforma Financials are based on the
Average Case Annual Cash Flow Statements.
3) Again, although no one can predict the future of commodity
and fuel prices, the Best Case and Worst Case Annual Cash Flow Statements
attempt to simulate how changes in the prices of corn and ethanol can
impact plant profitability.
<Page>
79
NORTHERN GROWERS COOPERATIVE
Ethanol Plant Project
40 Million Gallon Per Year Capacity
FINANCIAL PROJECTIONS
September 25, 2000
Prepared By:
Broin and Associates, Inc.
Plant Design, Engineering, Construction
2209 E. 57th Street N.
Sioux Falls, South Dakota 57104
<Page>
80
NORTHERN GROWERS COOPERATIVE
Financial Forecast Assumptions
For the purpose of formulating the Financial Statements for this
Financial Plan, several assumptions have been made, including but not
limited to the following:
(1) It is assumed that debt principal repayment will be as follows:
<Table>
<Caption>
Primary Debt Term Rate Amount
------------ ---- ---- ------
Primary Lender 10 yrs 9.50% $29,280,000
</Table>
(2) Although no one can predict the future of commodity and fuel prices,
the Financial Statements begin with an Average Case Scenario based on
historical pricing and operational data. The Five Year Proforma
financials arc based on the Average Case Annual Cash Flow Statements.
(3) Again, although no one can predict the future of commodity and fuel
prices, the Best Case and Worst Case Annual Cash Flow Statements attempt
to simulate how changes in the prices of corn and ethanol can impact
plant profitability.
<Page>
81
NORTHERN GROWERS ETHANOL PROJECT
PROFITABILITY PROJECTION - WORST CASE
<Table>
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/BUSHEL CORN (W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER YEAR 14,286,629
ETHANOL PRICE/GALLON $ * vs. $ *
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ * vs. $ *
CORN PRICE PER BUSHEL $ * vs. $ *
DEBT SERVICING AMOUNT $ 29,280,000
DEPRECIABLE ASSETS $ 45,000,000
TOTAL INVESTMENT $ 48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
----------- ------------ ------------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT price/gal: $ *** $ *** $ *** $ ***
CORN price/bu.: $ *** $ *** $ *** $ ***
BOILER FUEL price/mbtu: $ *** $ *** $ *** $ ***
ELECTRICITY price/KWH: $ *** $ *** $ *** $ ***
WATER & SEWER COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS, SOFTENING $ *** $ *** $ ***
MISCELLANEOUS SUPPLIES $ *** $ *** $ ***
MAINTENANCE, REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL *** $ *** $ *** $ ***
OTHER PAYROLL COSTS *** $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE, TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: *** $ *** $ *** $ ***
INTEREST yrs: *** $ *** $ *** $ ***
TOTAL EXPENSE: $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP
RETURN/BUSHEL: $ *
</Table>
<Page>
82
NORTHERN GROWERS ETHANOL PROJECT
PROFITABILITY PROJECTION - AVERAGE CASE
<Table>
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/BUSHEL CORN (W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER YEAR 14,286,629
ETHANOL PRICE/GALLON $ ***
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ *
CORN PRICE PER BUSHEL $ *
DEBT SERVICING AMOUNT $ 29,280,000
DEPRECIABLE ASSETS $ 45,000,000
TOTAL INVESTMENT $ 48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
----------- ------------ ------------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT price/gal: $ *** $ *** $ *** $ ***
CORN price/bu.: $ *** $ *** $ *** $ ***
BOILER FUEL price/mbtu: $ *** $ *** $ *** $ ***
ELECTRICITY price/KWH: $ *** $ *** $ *** $ ***
WATER & SEWER COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS, SOFTENING $ *** $ *** $ ***
MISCELLANEOUS SUPPLIES $ *** $ *** $ ***
MAINTENANCE, REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL *** $ *** $ *** $ ***
OTHER PAYROLL COSTS *** $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE, TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: *** $ *** $ *** $ ***
INTEREST yrs: *** $ *** $ *** $ ***
TOTAL EXPENSE: $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP
RETURN/BUSHEL: $ *
</Table>
<Page>
83
NORTHERN GROWERS ETHANOL PROJECT
PROFITABILITY PROJECTION - BEST CASE
<Table>
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/BUSHEL CORN (W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER YEAR 14,286,629
ETHANOL PRICE/GALLON $ * vs. $ *
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ * vs. $ *
CORN PRICE PER BUSHEL $ * vs. $ *
DEBT SERVICING AMOUNT $ 29,280,000
DEPRECIABLE ASSETS $ 45,000,000
TOTAL INVESTMENT $ 48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
----------- ------------ ------------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT price/gal: $ * $ *** $ *** $ ***
CORN price/bu.: $ * $ *** $ *** $ ***
BOILER FUEL price/mbtu: $ * $ *** $ *** $ ***
ELECTRICITY price/KWH: $ * $ *** $ *** $ ***
WATER & SEWER COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS, SOFTENING $ *** $ *** $ ***
MISCELLANEOUS SUPPLIES $ *** $ *** $ ***
MAINTENANCE, REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL 33 $ *** $ *** $ ***
OTHER PAYROLL COSTS 23% $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE, TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: 15 $ *** $ *** $ ***
INTEREST yrs: 9.5% $ *** $ *** $ ***
TOTAL EXPENSE: $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP
RETURN/BUSHEL: $ *
</Table>
<Page>
84
<Table>
<Caption>
PROFITABILITY PROJECT - WORST CASE
----------------------------------------
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/
BUSHEL CORN (W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER YEAR 14,286,629
ETHANOL PRICE/GALLON $ * vs. $ *
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ * vs. $ *
CORN PRICE PER BUSHEL $ * vs. $ *
DEBT SERVICING AMOUNT $29,280,000
DEPRECIABLE ASSETS $45,000,000
TOTAL INVESTMENT $48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
-------- ----------- ----------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE
PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED
GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT
price/gal: $ * $ *** $ *** $ ***
CORN price/bu.: $ * $ *** $ *** $ ***
BOILER FUEL
price/mbtu: $ * $ *** $ *** $ ***
ELECTRICITY
price/KWH: $ * $ *** $ *** $ ***
WATER & SEWER
COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS,
SOFTENING $ *** $ *** $ ***
MISCELLANEOUS
SUPPLIES $ *** $ *** $ ***
MAINTENANCE,
REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL * $ *** $ *** $ ***
OTHER PAYROLL
COSTS * $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE,
TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: * $ *** $ *** $ ***
INTEREST yrs: * $ *** $ *** $ ***
TOTAL EXPENSE $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP RETURN/BUSHEL: *
<Caption>
PROFITABILITY PROJECTION - AVERAGE CASE
-------------------------------------------
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/
BUSHEL CORN(W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER YEAR 14,286,629
ETHANOL PRICE/GALLON $ *
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ *
CORN PRICE PER BUSHEL $ *
DEBT SERVICING AMOUNT $29,280,000
DEPRECIABLE ASSETS $45,000,000
TOTAL INVESTMENT $48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
-------- ----------- -----------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE
PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED
GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT
price/gal: $ * $ *** $ *** $ ***
CORN price/bu.: $ * $ *** $ *** $ ***
BOILER FUEL
price/mbtu: $ * $ *** $ *** $ ***
ELECTRICITY
price/KWH: $ * $ *** $ *** $ ***
WATER & SEWER
COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS,
SOFTENING $ *** $ *** $ ***
MISCELLANEOUS
SUPPLIES $ *** $ *** $ ***
MAINTENANCE,
REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL * $ *** $ *** $ ***
OTHER PAYROLL
COSTS * $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE,
TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: * $ *** $ *** $ ***
INTEREST yrs: * $ *** $ *** $ ***
TOTAL EXPENSE $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP RETURN/BUSHEL: $ *
<Caption>
PROFITABILITY PROJECTION - BEST
----------------------------------------
SPECIFICATIONS GALLONS ETHANOL/HOUR 4808
HOURS/WEEK 160
GALLONS ETHANOL/
BUSHEL CORN(W/DEN.) 2.80
GALLONS ETHANOL/YEAR 40,002,560
BUSHELS CORN PER
YEAR 14,286,629
ETHANOL PRICE/GALLON $ * vs. $ *
STATE INCENTIVE/GALLON $ *
DDGS PRICE PER TON $ * vs. $ *
CORN PRICE PER BUSHEL $ * vs. $ *
DEBT SERVICING AMOUNT $29,280,000
DEPRECIABLE ASSETS $45,000,000
TOTAL INVESTMENT $48,800,000
<Caption>
$/GAL.
ETHANOL $/MONTH $/YEAR
-------- ----------- -----------
REVENUE ETHANOL FUEL $ *** $ *** $ ***
STATE INCENTIVE
PAYMENT $ *** $ *** $ ***
DISTILLERS DRIED
GRAIN W/SOL. $ *** $ *** $ ***
TOTAL INCOME: $ *** $ *** $ ***
EXPENSES DENATURANT
price/gal: $ * $ *** $ *** $ ***
CORN price/bu.: $ * $ *** $ *** $ ***
BOILER FUEL
price/mbtu: $ * $ *** $ *** $ ***
ELECTRICITY
price/KWH: $ * $ *** $ *** $ ***
WATER & SEWER
COSTS $ *** $ *** $ ***
ENZYMES $ *** $ *** $ ***
YEAST, CHEMICALS,
SOFTENING $ *** $ *** $ ***
MISCELLANEOUS
SUPPLIES $ *** $ *** $ ***
MAINTENANCE,
REPAIRS $ *** $ *** $ ***
EMPLOYEE PAYROLL * $ *** $ *** $ ***
OTHER PAYROLL
COSTS * $ *** $ *** $ ***
INSURANCE, BOND $ *** $ *** $ ***
GENERAL EXPENSE,
TAXES $ *** $ *** $ ***
MANAGEMENT EXPENSE $ *** $ *** $ ***
MARKETING EXPENSE $ *** $ *** $ ***
DEPRECIATION yrs: * $ *** $ *** $ ***
INTEREST yrs: * $ *** $ *** $ ***
TOTAL EXPENSE $ *** $ *** $ ***
NET INCOME: $ *** $ *** $ ***
RETURN TO EQUITY: *
COOP RETURN/BUSHEL: *
</Table>
<Page>
85
DETERMINING FACTORS FOR FIVE YEAR PROJECTIONS
<Table>
<Caption>
FISCAL YEAR: 2002 2003 2004 2005 2006
--------------------------------------------------------------------------------------
ANNUAL PRODUCTION *** *** *** *** ***
Gallons/bushel 2.80 2.80 2.80 2.80 2.80
Gallons/hour *** *** *** *** ***
Hours/week 160 160 160 160 160
- ------------------------------------------------------------------------------------------------------------------
Corn Price: $ * Int. Rate: 9.50%
Ethanol Price: $ * Beg Loan: $ 29,280,000
DDGS value/ton $ * Beg Cash $ 3,800,000
</Table>
FULL OPERATION INVENTORY, ACCOUNTS RECEIVABLE AND PAYABLE
<Table>
<Caption>
ITEM INVENTORY ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE
IN DAYS IN $ IN DAYS IN $ IN DAYS IN $
- --------------------------------------------------------------------------------------------------------------
ETHANOL FUEL *** $ *** *** ***
STATE INCENTIVE PMT. *** *** ***
DDGS *** *** *** ***
DENATURANT *** *** *** ***
CORN *** *** *** ***
NATURAL GAS *** *** ***
ELECTRICITY, WATER *** *** ***
CHEMICALS & SUPPLIES *** *** *** ***
MAINTENANCE PARTS *** *** ***
PAYROLL *** *** ***
==============================================================================================================
TOTALS *** *** ***
==============================================================================================================
STARTUP OPERATING CAPITAL REQ. *** + *** ***
= *** ***
- --------------------------------------------------------------------------------------------------------------
</Table>
<Page>
86
PROJECTED PROFIT AND LOSS STATEMENT
<Table>
<Caption>
FISCAL YEAR: 2002 2003 2004 2005 2006
- -------------------------------------------------------------------------------------------------------
INCOME
Ethanol Sales *** *** *** *** ***
State incent. pmt. *** *** *** *** ***
DDGS sales *** *** *** *** ***
=======================================================================================================
TOTAL INCOME: *** *** *** *** ***
- -------------------------------------------------------------------------------------------------------
COST OF GOODS SOLD
Denaturant *** *** *** *** ***
Corn *** *** *** *** ***
Boiler fuel *** *** *** *** ***
Electricity, water *** *** *** *** ***
Enzymes & chemicals *** *** *** *** ***
Misc. supplies *** *** *** *** ***
Maintenance, repair *** *** *** *** ***
Payroll *** *** *** *** ***
Other payroll costs *** *** *** *** ***
- -------------------------------------------------------------------------------------------------------
TOTAL COST OF GOODS: *** *** *** *** ***
=======================================================================================================
GROSS INCOME: *** *** *** *** ***
- -------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Mgmnt & Marketing Expense *** *** *** *** ***
Administ. payroll *** *** *** *** ***
Other payroll costs *** *** *** *** ***
Insurance, bond *** *** *** *** ***
General Expense, Taxes *** *** *** *** ***
Interest (Incl. Const. Interest) *** *** *** *** ***
Depreciation *** *** *** *** ***
- -------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXP: *** *** *** *** ***
=======================================================================================================
NET PROFIT/LOSS *** *** *** *** ***
=======================================================================================================
VALUE ADDED PMT./BU. *** *** *** *** ***
TOTAL RETURN/BU. *** *** *** *** ***
=======================================================================================================
</Table>
<Page>
87
CASH FLOW PROJECTION
<Table>
<Caption>
FISCAL YEAR: 2002 2003 2004 2005 2006
- --------------------------------------------------------------------------------------------------------
SOURCES OF CASH
BEG CASH ON HAND *** *** *** *** ***
INCOME *** *** *** *** ***
BEG ACCTS RECEIVABLE *** *** *** *** ***
END ACCTS RECEIVABLE *** *** *** *** ***
DEPRECIATION *** *** *** *** ***
========================================================================================================
TOTAL SOURCES: *** *** *** *** ***
USES OF CASH
COST OF GOODS &
OPERATING EXPENSE: *** *** *** *** ***
BEG ACCTS PAYABLE *** *** *** *** ***
ENDING ACCTS PAYABLE *** *** *** *** ***
PARTNER DISTRIBUTION *** *** *** *** ***
CAPITAL INVESTMENTS *** *** *** *** ***
PRINCIPAL PAYMENTS *** *** *** *** ***
INCREASED INVENTORY *** *** *** *** ***
========================================================================================================
TOTAL USES: *** *** *** *** ***
========================================================================================================
ENDING CASH ON HAND: *** *** *** *** ***
</Table>
<Page>
88
PROJECTED BALANCE SHEET
<Table>
<Caption>
JUNE 1 JUNE 1 JUNE 1 JUNE 1 JUNE 1 JUNE 1
2002 2003 2004 2005 2006 2007
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH *** *** *** *** *** ***
ACCOUNTS RECEIVABLE *** *** *** *** *** ***
INVENTORY *** *** *** *** *** ***
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT *** *** *** *** *** ***
FIXED ASSETS
R.E. & IMPROVEMENTS *** *** *** *** *** ***
EQUIPMENT *** *** *** *** *** ***
PREPROD. EXPENSE *** *** *** *** *** ***
LESS-ACCUM DEPR *** *** *** *** *** ***
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED *** *** *** *** *** ***
======================================================================================================================
TOTAL ASSETS: *** *** *** *** *** ***
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURR PORTION L.T. DEBT *** *** *** *** *** ***
ACCOUNTS PAYABLE *** *** *** *** *** ***
TOTAL CURRENT *** *** *** *** *** ***
TOTAL LONG TERM *** *** *** *** *** ***
======================================================================================================================
TOTAL LIABILITY *** *** *** *** *** ***
- ----------------------------------------------------------------------------------------------------------------------
EQUITY
BEG. PARTNER CAPITAL *** *** *** *** *** ***
CASH CONTRIBUTION *** *** *** *** *** ***
(including TIF)
CASH CONTRIBUTION *** *** *** *** *** ***
NET INCOME *** *** *** *** *** ***
======================================================================================================================
TOTAL EQUITY *** *** *** *** *** ***
======================================================================================================================
TOTAL EQUITY & LIAB. *** *** *** *** *** ***
======================================================================================================================
</Table>
<Page>
89
The completed ethanol plant will generate revenues from two primary
sources plus a cash incentive provided by the state of South Dakota. The basis
for projecting these revenue sources is summarized as follows:
1. Ethanol Fuel: The plant is being designed as a 40 million gallon
facility. The projections were based on the assumption that the
plant would generate 4,808 gallons per hour with an average of 160
hours per week, assuming 52 weeks per year. Thus, total ethanol
capacity is computed as: 4,808 gal./hr. X 160 hrs./week X 52 weeks
= 40,002,560 gallons. The processed ethanol would then be sold in
the open market. The previous highest and best use discussion has
concluded that a definite market has existed for ethanol fuel and,
from all indications, this market will continue. According to Broin
Enterprises, the average price received for processed ethanol from
1992 through 1998 was */gallon. The worst case scenario used a
market price of */gallon, the average case used */gallon,
and the best case used */gallon. As an example, the average
case scenario indicates total ethanol fuel sales computed as:
40,002,560 gallons X */gallon = *. In all three scenarios, it was
assumed that a market would exist for all 40 million gallons of
processed ethanol fuel. Evidently, a sufficient market will exist
to sell the entire capacity as no evidence was provided to indicate
an over supply. Also, many of the plants that were designed,
constructed, and managed by Broin and Associates have achieved
production capacities exceeding those originally planned.
2. Distillers Dried Grains with Solubles (DDGS): The second largest
revenue source will be through the sales of DDGS. DDGS is a high
protein, high energy feed supplement marketed primarily to the
cattle industry. A definite market also exists for this by-product.
The worst case scenario used a price of */ton, the average case
scenario used a price of */ton, and the best case scenario used
a price of */ton. The average price received for this product
from 1992 through 1999 has approximated */ton. As earlier
detailed, about 17-18 pounds of DDGS are generated from one bushel
of corn. Thus, the DDGS sales in the average case scenario was
computed as follows: (14,286,629 bushels of corn/year X 17
lb./bushel) / 2,000/ton X */ton = *.
3. State Incentive Payment: Page 7 of the Business Plan states that
"THE STATE OF SOUTH DAKOTA PROVIDES A PRODUCTION INCENTIVE OF
TWENTY (20) CENTS PER GALLON UP TO A MAXIMUM OF $1 MILLION PER
YEAR. A PLANT IS ELIGIBLE TO RECEIVE A MAXIMUM OF $10 MILLION."
This basic incentive plan was confirmed by Ms. Joan Serfling of the
South Dakota Department of Revenue (605-773-5124). However, the
incentive is not guaranteed as the funds available from the Capital
Construction Fund for ethanol development are generated by
statewide tank inspection fees of $.02/gallon of gasoline sold plus
year end sources from interest on the fund and even from some
on-line lottery capital. The amount available for ethanol
development will undoubtedly become somewhat diluted as more plants
are developed and/or monies from the Capital Construction Fund will
not meet prior year balances, especially since the tank inspection
fees are showing a downward trend in recent months. Thus, it is
somewhat speculative to anticipate receiving the maximum of $1
million per year through the state incentive payment program. Based
on the preceding, the income from the state incentive plant will be
reduced from $1 million annually to $500,000 annually for ten
years. At the end of ten years, the annual income will be reduced
by $500,000 but this loss of revenue should be offset by revenue
increases resulting from increased plant production and/or
increased revenues from the sale of ethanol fuel and DDGS.
The revenue forecasts with the exception of the state cash
incentive are reasonable in light of the current market for processed
ethanol fuel and DDGS. Most market participants would
<Page>
90
undoubtedly utilize revenues generated from the average case scenario as
it tends to be more representative of the overall ethanol market knowing
that fluctuations can and will occur. For the purpose of this analysis,
the first year stabilized revenues, as detailed in the average case
scenario but reducing the state cash incentive to $500,000, will be
utilized.
The next step in the Income Approach is estimating operating
expenses that are deducted from the estimated potential revenue,
resulting in net operating income. The total operating expenses are
typically based on one or a combination of several sources to include:
1. The subject property's actual historical and/or operating
expenses;
2. Estimations based on alternate market sources;
3. Overall expense ratios extracted from other similar property
types.
In this particular appraisal, only the owner/borrower provided
projections and some indirect market evidence is available in which to
analyze projected expenses.
Reference to the previous "Combined/Comparative Profitability
Projections" chart details all expenses. Most listed expenses are
appropriate to the plant's operation, were based on observations noted
within other plants currently owned and/or managed by Broin & Associates,
and, as was the case in the total revenue projections, the average case
scenario expenses tend to be more appropriate. However, several expenses
require some further detail or:
1. Corn Expense: The largest single expenditure is the purchase of the
raw product or corn. Specifically, this expense amounts to about
40%-71% of total revenue, depending on which scenario is selected.
It amounts to 53% of the total revenue in the average case
scenario. Page 9 of the Business Plan details the rationale behind
the corn expense. First and foremost, a sufficient amount of corn
is grown within the region to supply the plant. As earlier
detailed, Grant County has produced an average of about 7.2 million
bushels of corn over the last five years (1996-2000). Thus, Grant
County alone produces about half the corn needed to operate this
plant. Combining the corn production in nearby counties, an
adequate corn supply will exist. The Business Plan then details
that "THE AVERAGE ON-FARM CORN PRICE FROM 1988-1999 WAS
$2.26/BUSHEL." The adjacent USDA-South Dakota Agricultural
Statistics Service details that the average prices received by
farmers for corn for the same time frame was $2.15/bushel. Thus,
using a corn expense of $2.30/bushel in an average case scenario is
deemed reasonable.
2. Utilities: Combined, the utility costs will be the second largest
plant expenditure at slightly more than $5.9 million in the average
case scenario or 9.6% of total projected revenues. It can only be
assumed that these collective expenditures have been reasonably
projected, again based on past operating histories in other plants
owned and managed by Broin & Associates. However, it is significant
to note that the boiler fuel expense or the cost of natural gas has
been subject to substantial fluctuations over recent years.
<Page>
91
3. Maintenance and Repairs: This expenditure is attributable to
everyday maintenance and does not include capital expenditures or
possibly replacement allowances. The expense appears reasonable.
4. Replacement Allowance: No allowance has been made for periodic
replacement of furniture, fixtures, and equipment and major
building components as they are essential to maintain the quality,
image, and income of an ethanol fuel plant. Therefore, a possible
REPLACEMENT ALLOWANCE may have to be noted; it is defined as:
"AN ALLOWANCE THAT PROVIDES FOR THE PERIODIC REPLACEMENT OF
BUILDING COMPONENTS THAT WEAR OUT MORE RAPIDLY THAN THE
BUILDING ITSELF AND MUST BE REPLACED DURING THE BUILDING'S
ECONOMIC LIFE."
(Appraisal Institute, DICTIONARY OF REAL ESTATE APPRAISAL,
THIRD EDITION; 303)
Estimating or projecting an appropriate amount for a replacement
allowance is difficult as many of the building and equipment
components will deteriorate at substantially different rates and
precisely allocating costs to the separate building and equipment
components is difficult. Reference to the previous owner/borrower
provided cost summary indicates that the non-real property items or
the furniture, fixtures, and equipment will amount to about $19
million of the total cost ($48,800,000) if none of the indirect or
soft costs are allocated. (See adjacent page.) Assuming that the
non-real property items have an AVERAGE life of fifteen years,
about $1,267,000/year would be needed to replace the $19 million
($19 million / 15 years). If the replacement allowance funds were
invested and achieved a return of about 5%-6%, about $1 million
annually would still need to be placed into reserves to replace the
plant's equipment if a fifteen year life were appropriate. It is
entirely possible that the equipment will have a longer average
life but some of the building components will also need periodical
replacement. Thus, it is conceivable that a replacement allowance
of $1 million annually should be anticipated even though an annual
"maintenance/repairs" expenditure of $800,000 is noted.
5. Management and Marketing Expenses: These two components will be
contracted to affiliates of Broin Enterprises. Specifically, a
"Contract for Future Services" has already been executed between
Northern Growers Cooperative, now known as Northern Lights Ethanol,
LLC, and Broin & Associates. (A complete copy of the contract is
part of the previously referenced Business Plan.) Per the Business
Plan, "THE COST OF THE MANAGEMENT SERVICES WILL BE $250,000 PER
YEAR BASE FEE PLUS AN ANNUAL BONUS TOTALING 5% OF NET PROFITS. THE
INITIAL TERM IS THREE (3) YEARS." The worst case scenario shows a
minimum management expense of $250,000 as there are no net profits,
whereas, the other two scenarios have net profits added to the
$250,000 base. Evidently, this management fee is consistent with
the market as it has been secured by Broin & Associates in the
management of numerous other ethanol plants. The marketing expense
will be fees paid to market the distilled ethanol fuel and the
DDGS. Again, this marketing expense is consistent with those
charged in other operating ethanol plants.
6. The last two listed expenses or depreciation and interest are not
applicable to the valuation process. These two expenses need to be
deducted from the total.
With the exception of the last two expenditures or depreciation and
interest, all other listed expenses are appropriate to the plant, were
based on observations noted within other plants currently owned and
managed by Broin and Associates, and, again, the expenses listed in the
average case scenario would tend to be more appropriate. Ideally, these
expenditures should also be
<Page>
92
compared to direct or indirect market evidence as to ascertain their
appropriateness and/or reasonableness. However, this information was not
specifically provided, though Mr. Larry Ward of Broin & Associates made
the assurance that these expenditures are entirely appropriate.
Evidently, the stockholders of Northern Lights Ethanol, LLC had verified
the expenses as being appropriate in their due diligence in determining
the project's feasibility..
Again, the expenses reported in the average case scenario are
deemed to be most applicable. All expenses are appropriate with the
exception that the depreciation and interest expense need to be deducted
and a replacement allowance of $1 million needs to be added. Also, the
$500,000 state cash incentive has to be noted. Based on the preceding,
the average case scenario revenues and expenses are adjusted as follows:
PROFITABILITY PROJECTION - AVERAGE CASE
<Table>
A. Revenue Sources
1. Sales of Ethanol Fuel $ *
2. Sale of DDGS *
3. State Incentive Payment *
-----------
Total $ *
B. Expense Adjustments:
1. Total $ *
2. Expenses Not Applicable
a. Depreciation - *
b. Interest - *
3. Replacement Allowance + *
-----------
Adjusted Expense Total - * - *
------------ -----
C. Adjusted Net Income $ * - *
say, $ 11,500,000
</Table>
This stabilized net income of $11.5 million is based on the
"average case" scenario as it relates to projected income and expense. It
is important to reference page 13 of the Business Plan as it summarizes
the significant financial forecast assumptions. To paraphrase, the
projections were based on the most appropriate data available plus the
"MANAGEMENT'S JUDGEMENT BASED ON HISTORICAL AND PRESENT CIRCUMSTANCES OF
THE MOST LIKELY SET OF CONDITIONS AND ITS MOST LIKELY COURSE OF ACTION."
Simply, considerable confidence must be placed in the projections made by
Broin and Associates as they are known experts in the industry. Based on
the available information, the $11.5 million will be used as the first
year stabilized net income.
<Page>
93
A five year pro forma was also prepared or the last four pages of
the previously copied Business Plan excerpt. The five year projection was
based on the assumption that annual production would increase from about
40 million gallons in the first year to * gallons in the fifth year or an
increase of * over the total five years or about * annually. The
unadjusted net profit is projected to increase about * over the five
years or about * annually. The question now arises as to whether a single
year net income conclusion or a series of probable net income increases
should be utilized. The answer to this question then determines which of
the two most common methods of capitalizing net income into a going
concern market value would be utilized or
DIRECT CAPITALIZATION and YIELD CAPITALIZATION, defined as follows:
1. DIRECT CAPITALIZATION: A METHOD USED TO CONVERT AN ESTIMATE OF A
SINGLE YEAR'S INCOME EXPECTANCY INTO AN INDICATION OF VALUE IN ONE
DIRECT STEP--EITHER BY DIVIDING THE NET INCOME ESTIMATE BY AN
APPROPRIATE INCOME RATE OR BY MULTIPLYING THE INCOME ESTIMATE BY AN
APPROPRIATE FACTOR. (Appraisal Institute, DICTIONARY OF REAL ESTATE
APPRAISAL, THIRD EDITION; 100)
2. YIELD CAPITALIZATION: THE CAPITALIZATION METHOD USED TO CONVERT
FUTURE BENEFITS INTO PRESENT VALUE BY DISCOUNTING EACH FUTURE
BENEFIT AT AN APPROPRIATE YIELD RATE OR BY DEVELOPING AN OVERALL
RATE THAT EXPLICITLY REFLECTS THE INVESTMENT'S INCOME PATTERN,
VALUE CHANGE, AND YIELD RATE. (Appraisal Institute, DICTIONARY OF
REAL ESTATE APPRAISAL, Third Edition; 398)
Direct Capitalization is direct, easily understood, and is
frequently used by most area buyers in the purchase of most property
types. The net operating income (NOI) is simply divided by an overall
rate (R(O)) resulting in a value indication (V). The net operating income
(NOI) expectancy is frequently the anticipated income for the forthcoming
income period. The NOI is then divided by an overall rate (OAR or R)
which represents (1) the relationship between income and value observed
in the market and/or (2) the annual rate of return necessary to attract
investment capital. Direct Capitalization is normally applicable to
stable levels of net operating income and is used by many buyers
primarily concerned with value predicated on present income or income
projected into the very near future. The major disadvantage of direct
capitalization is that it does not recognize changing levels of income.
Income changes in an ethanol fuel plant are not scheduled but,
rather, they are subject to change in commodity prices, climatic
conditions, management, etc. If a strong market exists for the property's
products and good management is in place, all indications are that
revenues should
<Page>
94
increase and, subsequently, net operating income should also increase.
However, the reverse would be true if these same market conditions were
to reverse. Therefore, the utilization of Yield Capitalization requires
that ACCURATE estimations as to these changing market conditions
anticipated over the course of ownership be made, an almost impossible
task.
Typically, most buyers of this particular property type would base
their purchasing decision on actual income performance from present or
immediate past operation with only minimal consideration given to
forecasted income. Increased income beyond the date of sale generally
results from new ownership and the operation from the buyer's
perspective. Therefore, most weight would be afforded to the plant's
"present" income producing capability. For these reasons, Yield
Capitalization has the least reliability in this analysis. However, some
weight will be afforded to the observation that a potential does exist
for increased income when applying Direct Capitalization in developing an
opinion of the subject property's going concern market value opinion.
Again, the going concern market value (V) developed through
application of Direct Capitalization is computed by dividing the net
operating income (NOI) by an overall rate (OAR or R). An overall rate is
an income rate as it expresses the relationship between one year's income
and the corresponding capital value of a property. It may be more than,
less than, or equal to the expected yield on the capital invested
(normally the down payment when financing is involved), depending on
projected changes in income and future value. This rate of return
represents the annual rate of return necessary to attract investment
capital for a particular property type. As paraphrased from THE APPRAISAL
OF REAL ESTATE, Twelfth Edition as published by the Appraisal Institute
on page 491, the rate of return is influenced by many factors including
the degree of apparent risk, market expectations regarding future
inflation, the prospective rates of return for alternative investments,
the rates of return earned by comparable properties in the past, the
availability of debt financing, and the prevailing tax law. Generally,
higher overall rates are associated with less desirable properties and
more attractive properties are associated with lower overall rates.
Many accepted methods of deriving an overall rate are available but
the two that will be utilized in this report are: (1) derivation from
direct or indirect market evidence and (2) Band of Investment utilizing
mortgage and equity components. The first method or deriving overall
rates from
<Page>
95
direct market evidence results from locating "similar use" property sales
and dividing their respective net operating incomes by the purchase
price. Again, no similar property sales were available in this particular
assignment. An alternative source of direct market evidence is made by
referring to the adjacent REGIONAL MARKET INDICATORS SAMPLING chart. It
indicates overall rates ranging from about 11%-19% for these property
types located mostly in North and South Dakota. None of the property
types are similar to the subject but, yet, the motel and convenience
store categories reflect overall rates inclusive of the operation of an
on-premise business. These two property types indicate overall rates
ranging from about 12% to nearly 19%. The subject property's anticipated
overall rate would be at least comparable to, if not in excess of even
the highest overall rate of 19% as the perception of risk in operating an
ethanol fuel plant is much greater than that found in motels or
convenience stores.
The second technique that will be used in the derivation of an
overall capitalization rate is the "Band of Investment" analysis using
mortgage and equity components. In this method, an overall capitalization
rate (R(O)) is built up by mortgage and equity components. This method is
based on the premise that investments are financed with the equity
investor seeking to obtain the best available loan or mortgage terms in
order to maximize the potential benefits of leverage. The analysis of an
overall rate by the Band of Investment method develops a weighted average
between the return on investment that is required to cover the mortgage
portion and the return on the investment that is required to cover the
equity portion.
The Band of Investment method is comprised of mortgage and equity
components, specifically, the mortgage constant derived from an interest
rate, the equity dividend rate, and mortgage and equity positions. The
mortgage constant for the selected mortgage interest rate is the
component for the mortgage return; and the cash on cash return or
spendable income, more commonly referred to as the equity dividend rate,
is the latter component. The weights are percentages of the total
investment represented by the initial equity investment. Therefore, the
utilization of the Band of Investment method in developing a
capitalization or overall rate requires the proper selection of a
mortgage interest constant, loan-to-value ratio, and an equity dividend
rate.
The financial projections made in the borrower's aforementioned
Business Plan had assumed debt repayment based on an interest rate of
9.5%, an amortization period of ten years, and a loan-to-
<Page>
96
cost ratio of 60%. The client's account representative or Mr. Carl
Johnson, U.S. Bank Sioux Falls office, indicated that mortgage interest
rates would undoubtedly approximate 8.25%-8.75% but, yet, would still be
amortized only over ten years and a loan-to-value ratio not to exceed
75%. The comparatively shorter amortization period is required due to the
considerable amount of non-real property items and business component
within this particular property type. A representative of the local Wells
Fargo bank also verified that the approximate terms currently quoted by
the client would be consistent with their lending practices.
For the purpose of this analysis, a mortgage constant will be
computed using a loan-to-value ratio of 65%, amortized over 10 years, and
a stabilized mortgage interest rate of 8.5%. The mortgage interest rate
of 8.5% attempts to reflect a stabilized rate over the course of normal
ownership and includes some provision for loan fees. At these terms,
monthly payments are assumed. An annual mortgage constant of .1488
results utilizing these financing terms. (The actual computation of the
mortgage constant is made using a financial calculator but the same
results can be obtained through the use of financial tables.) The
mortgage constant represents the return to the mortgage component within
the Band of Investment Analysis.
The second component requiring analytical consideration in
development of the overall rate by the Band of Investment is the equity
dividend rate (EDR) or the equity capitalization rate. The EQUITY
DIVIDEND or EQUITY CAPITALIZATION RATE is defined as:
"AN INCOME RATE THAT REFLECTS THE RELATIONSHIP BETWEEN A
SINGLE YEAR'S PRE-TAX CASH FLOW EXPECTANCY AND THE EQUITY
INVESTMENT." (Source: THE APPRAISAL OF REAL ESTATE, Eleventh
Edition, published by the Appraisal Institute.)
This rate is many times referred to in the real estate market as the CASH
ON CASH RETURN or CASH FLOW RATE. Like the overall capitalization rate,
the equity dividend rate (EDR) depends on projected changes in income,
value, and amortization of a loan. A knowledgeable investor normally
attempts to seek a return on invested equity at least comparable to the
cost of the mortgage (mortgage interest rate). However, it was
historically common for investors to invest with equity dividend rates
below the cost of the mortgage or even have negative equity dividend
returns. The tax benefits of real estate ownership prior to 1986 and also
the continued inflationary trends of real estate more than offset the low
equity return rate. The present investor now realizes that the equity
dividend rate must provide an acceptable equity return.
<Page>
97
Ideally, equity dividend rates should also be extracted from direct
market evidence. Again, no direct market evidence was available in which
to extract an equity dividend rate. Alternatively, reference is again
made to the previously referenced REGIONAL MARKET INDICATORS SAMPLING
chart. With the exception of one EDR of 11.4%, the balance of the data
indicates EDRs approximating 15%-21%. An equity dividend rate even in
excess of this range would be anticipated because of the again perceived
greater risk inherent in the operation of an ethanol fuel plant.
Indications of more appropriate equity dividend rates were provided
by ConAgra's 2001 Annual Report. The adjacent page highlights ConAgra's
financial performance plus details some of their expectations. Over the
last six years or through fiscal 2001, ConAgra's annual average return on
common equity was 27.2% excluding "unusual items". The overall range was
24.3%-29.9%. The report also states that "ONE OF CONAGRA FOODS' KEY
FINANCIAL OBJECTIVES OVER THE LONG TERM IS TO AVERAGE MORE THAN A 20%
AFTER-TAX CASH EARNINGS RETURN ON YEAR-BEGINNING COMMON STOCKHOLDERS'
EQUITY, AND TO EARN MORE THAN A 15% RETURN IN ANY GIVEN YEAR."
Collectively, this agricultural industry leader is anticipating pre-tax
equity dividend rates approximating 20%-30%.
The anticipated equity return for a specialized ag-related industry
is comparatively greater than that noted in more standard real estate
investments. If ConAgra or an agricultural industry leader is
anticipating 20%-30% OVERALL equity return, it is entirely probable that
the subject property, as a single source specialty commodity, may have to
anticipate an equity return approximating the upper end of this range.
Thus, the available market data suggests that the subject property's
anticipated equity dividend rate would approximate a range of 25% to 30%,
especially if the property's probable value change over the course of
ownership is considered. Specifically, the last component in the mortgage
equity analysis to consider is the subject property's anticipated value
change, if any, throughout the anticipated length of ownership. It stands
to reason that, if a property is appreciating in value, the overall
return to an investor is partially recaptured in the property
appreciation. If a property is depreciating in value, added return is
necessary to keep a desired investment goal. In the absence of sufficient
market support to substantiate a probable change in this property's
value, equity dividend rates of 25% and 30% will be used as the return to
the equity funds within the Band of Investment Analysis.
<Page>
98
Based on the preceding, the Band of Investment development of an
overall rate will use a mortgage constant based on an interest rate of
8.5% amortized over 10 years, a loan-to-value ratio of 65%, and equity
dividend rates of 25% and 30%. The following computations apply these
conclusions to the Band of Investment analysis, resulting in an overall
rate range:
<Table>
<Caption>
Capital Equity
Component Portion X Rate = Weighted Rates
--------- ------- ---- --------------
1. Mortgage Loan .65 .1488 .0967 .0967
2. Equity Funds
a. Equity Div. Rate - 25% .35 X .2500 .0875
-----
b. Equity Div. Rate - 30% .35 X .3000 .1050
-----
Indicated Overall Rate .1842 .2017
say, 18.5% 20%
</Table>
The two sources used in deriving an applicable overall rate
resulted in the following conclusions:
1. Indirect Market Evidence - In excess of 12%-19%
2. Band of Investment - 18.5%-20%
Most consideration has to be afforded to the overall rate range
developed by the Band of Investment analysis. Specifically, the indirect
market evidence simply does not have true similarity. The Band of
Investment indicated an overall rate range of about 18.5% to 20%. An
overall rate at or near the upper end of this range would be anticipated
as to reflect that the net income is generated by a highly specialized
business operation, the comparatively higher non-liquidity in this type
of investment, the considerable dependence on management, the uncertainty
in the farm commodity prices, etc. For the purpose of this analysis, an
overall rate of 20.0% is selected and applied to the subject property's
estimated net income of $11,500,000 as follows:
1. Estimated Net Income $ 11,500,000
2. Capitalized at 20%: DIVIDED BY .20
--------------
As-Complete Going Concern Market Value
Indication by Income Capitalization Approach $ 57,500,000
(As a footnote, the previous conversion of the ground rent into a
market value indication used overall rates of 6% and 9%. The
overall rate applicable to ONLY the site would be far less than the
property's 20% overall rate as the 20% overall rate includes a
return to the site, the improvements, and the non-real property
components. For this reason, the selected land overall rates of 6%
and 9.0% were deemed applicable.)
<Page>
99
N. RECONCILIATION
The final step in the appraisal process is termed RECONCILIATION; it is
defined as:
"THE LAST PHASE OF ANY VALUATION ASSIGNMENT IN WHICH TWO OR MORE VALUE
INDICATIONS DERIVED FROM MARKET DATA ARE RESOLVED INTO A FINAL VALUE
ESTIMATE, WHICH MAY BE EITHER A FINAL RANGE OF VALUE OR A SINGLE POINT
ESTIMATE." (The Appraisal Institute, Dictionary of Real Estate Appraisal,
Third Edition; 296)
The primary appraisal objective was to formulate an opinion of the
subject property's PROSPECTIVE AS-COMPLETE LEASEHOLD GOING CONCERN MARKET
VALUE, as of November 1, 2002, or the date the proposed subject
improvements are scheduled to be completed. The most appropriate
appraisal process available to develop this value opinion is to first
develop an opinion of the subject property's as-complete going concern
market value assuming FEE SIMPLE ownership existed. The entire previous
valuation analysis addresses the subject property's fee simple ownership
interest or an ownership interest that first disregards the underlying
land lease. Application of the two applicable valuation techniques used
in addressing the subject property's going concern market value resulted
in the following:
<Table>
Cost Approach $ 48,825,000
Income Capitalization Approach $ 57,500,000
</Table>
Theoretically, these two valuation techniques used in developing
the going concern market value should result in identical value
conclusions. As a practical matter, the results are virtually never
identical since the marketplace does not operate in a perfect
environment. Reconciliation of the value indications is, therefore,
necessary in order to formulate the subject property's final going
concern market value conclusion.
In this particular assignment, considerable weight is afforded to
the market value indication developed through the Cost Approach. When
complete, the subject improvements will be new and the proposed use or
that of an ethanol fuel plant was found to substantially represent the
site's highest and best use. As such, sufficient market should exist to
substantiate the majority of the replacement cost due to the basic
underlying principal of substitution. To repeat, a prudent buyer would
pay no more for a property than the cost to acquire a similar site and
construct improvements of equivalent desirability and utility without
undue delay. As detailed, the completed
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100
improvements will be state-of-the-art and, if placed into the open market
when complete, the property would have exceptionally good
characteristics. The market value developed through application of the
Cost Approach has good reliability because of the underlying support as
it relates to the predominant component or that of the improvement's
replacement cost. Furthermore, the application of the Income
Capitalization Approach definitely supported the replacement cost.
The completed subject property's primary market appeal will be
created by its income characteristics; a factor given primary concern in
the marketability of a profitable ethanol fuel plant. If placed into the
open market, it is possible that most buyers would consider ONLY the
property's income producing characteristics. Thus, the subject property's
revenue and expense potential is a vital component in this valuation
analysis. For these reasons, considerable weight is also given to the
going concern market value as indicated by the Income Capitalization
Approach.
The two major components within this valuation technique or (1) the
net operating income estimate and (2) the selected overall capitalization
rate required a careful analysis of the subject property's anticipated
business operation and the resulting marketplace anticipations. The net
operating income was based entirely on projections made by the
owner/borrower through Broin & Associates. The net income resulted from
what was considered to be an "average case" scenario but most all
components had reasonably good market support. The resulting net
operating income was then capitalized into a going concern market value
using direct capitalization or through use of an overall rate. The
overall rate had to consider that the completed plant has the potential
for increased future revenues but, yet, the associated risk with
purchasing this property type also had to be incorporated. Collectively,
the resulting going concern market value indication developed by the
Income Capitalization Approach was deemed reliable though it exceeded the
indication through application of the Cost Approach.
The final element of consideration required for a properly
developed going concern market value relates to REASONABLE EXPOSURE TIME,
defined as:
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101
"THE ESTIMATED LENGTH OF TIME THE PROPERTY INTEREST BEING APPRAISED
WOULD HAVE BEEN OFFERED ON THE MARKET PRIOR TO THE HYPOTHETICAL
CONSUMMATION OF A SALE AT MARKET VALUE ON THE EFFECTIVE DATE OF THE
APPRAISAL; A RETROSPECTIVE OPINION BASED UPON AN ANALYSIS OF PAST
EVENTS ASSUMING A COMPETITIVE AND OPEN MARKET.
(Source: Statement 6 of the UNIFORM STANDARDS OF PROFESSIONAL
APPRAISAL PRACTICE (USPAP), adopted on September 16, 1992.)
The fact that exposure time is always presumed to occur PRIOR to
the appraisal's effective date is substantiated by related facts in the
appraisal process or supply and demand conditions, use of current cost
information, the analysis of historical sales (the sales sold AFTER
reasonable exposure and after completion of negotiations between the
seller and buyer), and/or the analysis of future income expectancy.
Exposure time is different for various property types and under various
market conditions. This concept of reasonable exposure time encompasses
not only adequate, sufficient, and reasonable TIME but also adequate,
sufficient, and reasonable EFFORT. Likewise, the reasonable exposure
period is a function of price, time, and use; it is not an isolated
opinion of time alone. (Much of the previous paragraph was paraphrased
from page 83 of the USPAP 2001 Edition relating to Statement 6.)
Therefore, several other elements to the concept of reasonable exposure
time are implied in the definition or:
1. THE PROPERTY IS ACTIVELY EXPOSED AND AGGRESSIVELY MARKETED TO
POTENTIAL PURCHASERS THROUGH MARKETING CHANNELS COMMONLY USED
BY BUYERS AND SELLERS OF SIMILAR TYPE PROPERTIES.
2. THE PROPERTY IS OFFERED AT A PRICE REFLECTING THE MOST
PROBABLE MARKUP OVER MARKET VALUE USED BY SELLER OF
SIMILAR TYPE PROPERTIES.
3. A SALE IS CONSUMMATED UNDER TERMS AND CONDITIONS OF THE
DEFINITION OF MARKET VALUE AS USED WITHIN THIS REPORT.
(Appraisal Institute, THE APPRAISAL JOURNAL; "User-Friendly
Appraisal Reports", October 1992)
The estimate of reasonable exposure time is normally based on one
or more of the following: (1) published statistical information, (2)
information gathered through sales verification, and (3) interviews of
market participants. In this particular assignment, only indirect market
evidence and input provided by market participants provided some
indication as to probable exposure time.
The previously referenced REGIONAL MARKET INDICATORS SAMPLING chart
indicated exposure times ranging from about two months to one year. Most
standard property types will market within
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102
one year if competitively priced. This particular property type or that
of an operating ethanol fuel plant is not a standard property type. Most
market participants interviewed in this assignment indicated that, if
even competitively priced, an exposure time exceeding one year would have
to anticipated because of the limited number of available or even
interested buyers. An exposure time of one to two years should be
sufficient to adequately expose the property to a regional or even
national level with every attempt made to achieve optimum value. Based on
these market observations, a reasonable exposure time or the time needed
to market the property preceding the appraisal's effective date is
estimated at one-two years.
In summary, the two valuation techniques used in developing the
subject property's as-complete fee simple going concern market value
resulted in a range of $48,825,000 (as developed by the Cost Approach) to
$57,500,000 (as developed by the Income Capitalization Approach). The
going concern market value as developed by the Income Capitalization
Approach or $57,500,000 needs to be somewhat tempered by the realization
that even small fluctuations in any of the commodity prices or
expenditures could have a major impact on the property's profitability.
In theory, the selection of an overall rate should have incorporated this
potential risk. In reality, measuring this risk perception is difficult
because of the simple lack of truly market supported overall rates. For
this primary reason, most consideration is afforded to the going concern
market value as developed by the Cost Approach. Based on this analysis
and considering the subject property's characteristics relative to its
particular market segment, its as-complete fee simple going concern
market value, as of November 1, 2002, is projected to be:
FIFTY MILLION DOLLARS
($50,000,000)
The as-complete going concern market value conclusion for the
"Northern Lights Ethanol Fuel Plant" includes the contributory value of
the (1) real property (site and improvements) AND (2) the contributory
value of the non-real property items or furniture, fixtures, and
equipment (FF&E), personal property, trade fixtures, and all other
intangible items required in the complete operation of an ethanol plant.
Again, this GOING-CONCERN VALUE, defined as "THE VALUE CREATED BY A
PROVEN PROPERTY OPERATION; CONSIDERED AS A SEPARATE ENTITY TO BE VALUED
WITH A SPECIFIC BUSINESS
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103
ESTABLISHMENT." (Appraisal Institute, DICTIONARY OF REAL ESTATE
APPRAISAL, THIRD Edition; 160). In this particular property, a
going-concern component will definitely exist as management will be an
integral part of the property's future profitability, and, in its
simplest form, the value of an ethanol fuel plant property exists only
after the assemblage of the site, improvements, labor, equipment, and
marketing. This assemblage creates an economically viable business that
is expected to continue.
Standards Rule 1-2 (e) of the UNIFORM STANDARDS OF PROFESSIONAL
APPRAISAL PRACTICE (USPAP) states that the appraisal must "IDENTIFY AND
CONSIDER THE EFFECT ON VALUE OF ANY PERSONAL PROPERTY, TRADE FIXTURES, OR
OTHER INTANGIBLE ITEMS THAT ARE NOT REAL PROPERTY BUT ARE INCLUDED IN THE
APPRAISAL". Therefore, an attempt should be made to identify the
contributory value of all non-real property items. Accurately allocating
the non-real property items from the concluded going concern market value
is a controversial topic as it is difficult to determine EXACTLY at which
point the income attributable to the business stops and the income
attributable to the real estate begins. Even so, this allocation process
will be addressed as to comply with USPAP.
Actual direct market support would provide the most reliable
indication of the contributory value of the non-real property items. The
amount of non-real property items to include the intangibles relating to
the completed subject property's going concern component would be
comparatively more than most standard property types as it includes a
significant amount of processing equipment. The adjacent page is the last
page of the previously referenced cost summary entitled "Contract
Schedule of Values, Project Estimate" in which the components deemed
primarily fixtures and equipment have been highlighted. The highlighted
items on the left column total nearly $19 million. Additionally, a large
percentage of at least three other cost components would have some costs
allocated to non-real property items or (1) other construction costs, (2)
excise tax, and (3) owner's project costs. These three line items have
simply been divided in half with the total being $5,880,396. Adding this
amount to the total for the itemized non-real property items of
$18,977,208 indicates a non-real property component cost estimate of
$24,877,640 or nearly 51% of the total cost.
<Page>
104
Understandably, some of the equipment may be deemed permanent
fixtures but yet the non-real property component would still be
significant. More importantly, the amount of the total going concern
market value attributable to an economically viable business is as
important as the processing equipment. In the absence of more definitive
market support, the contributory value of the completed subject
property's non-real property items/going concern component is estimated
at 40% of the total or $20,000,000 ($50,000,000 x 40%).
Based on this market analysis, the following allocation of the
subject property's concluded prospective as-complete and stabilized fee
simple going concern market value is made:
<Table>
1. Real Property (Site and Improvements) $30,000,000 - 60.0%
2. Non-Real Property Items to include Going-Concern
(FF&E, personal property, etc.) 20,000,000 - 40.0%
----------- ----
Total Concluded As-Complete
Going Concern Market Value $50,000,000 - 100.0%
</Table>
Again, these are value allocations. They do NOT represent individual
market value conclusions for each component but, rather, their estimated
contributory value to the total fee simple as-complete going concern
market value.
<Page>
105
O. LEASEHOLD ESTATE VALUATION
The previous analysis developed an opinion of the subject
property's FEE SIMPLE market value that assumed complete ownership in
both the site and improvements. However, the owner/ borrower or Northern
Lights Ethanol, LLC leases the underlying site. The right of use or
interest possessed by the tenant is commonly known as LEASEHOLD INTEREST,
defined as:
"THE INTEREST HELD BY THE LESSEE (THE TENANT OR RENTER) THROUGH A
LEASE CONVEYING THE RIGHTS OF USE AND OCCUPANCY FOR A STATED TERM
UNDER CERTAIN CONDITIONS." (Appraisal Institute, DICTIONARY OF REAL
ESTATE APPRAISAL, 3rd Edition; 204)
Leasehold estate interest implies that, when a lease is
transmitted, a tenant usually acquires the rights to possess the property
(in this case, the site only) for the lease period, to sublease the
property if desired, and/or improve the leased property under the
restrictions specified in the lease. In return, the tenant is obligated
to pay rent, surrender possession of the property at the termination of
the lease, remove any improvements the lessee has modified or constructed
if specified, and abide by the lease provisions. The property owner or
landlord (Big Stone-Grant Industrial Development and Transportation,
L.L.C., simply referenced as Big Stone-Grant Industrial) limited rights
in this site will eventually be restored to fee simple ownership in the
event that the existing land lease expires or is terminated. For the
interim, however, the site owner's or Big Stone-Grant Industrial
Development rights for use of the site are something less than "absolute"
due to the presence of the site lease. As such, their encumbered
ownership in the site is referred to as the LEASED FEE ESTATE or
ownership, defined as:
"AN OWNERSHIP INTEREST HELD BY A LANDLORD WITH THE RIGHT OF USE AND
OCCUPANCY CONVEYED BY LEASE TO OTHERS. THE RIGHTS OF THE LESSOR
(THE LEASED FEE OWNER) AND THE LEASED FEE ARE SPECIFIED BY CONTRACT
TERMS CONTAINED WITHIN THE LEASE." (Appraisal Institute, DICTIONARY
OF REAL ESTATE APPRAISAL, 3rd Edition; 204)
When considered separately, the interests of "leasehold estate" and
"leased fee estate" are each readily identified as separate property
interests that are something less than the absolute ownership known as
"fee simple estate". Leasehold estate and leased fee estate are
fractional interests of the property's fee simple estate. The sum of
these two fractional interests represents the property's complete fee
simple estate or ownership rights or:
A% Leased Fee Estate (Landlord's position)
+ B% LEASEHOLD ESTATE (Tenant's position)
<Page>
106
= 100% Fee Simple Estate (Absolute Interest)
Based on the previous discussion, the sum of (1) the leased fee
estate or Big Stone-Grant Industrial Development's ownership interest in
the underlying site plus (2) Northern Lights Ethanol's leasehold estate
or the ownership interest in the completed improvements equals the
property's 100% fee simple estate (previously concluded at $50,000,000).
The balance of this discussion then needs to address the matter of
formulating an opinion of the market value of one of the partial
interests, deducting this value from the property's previously concluded
fee simple market value estate or $50,000,000, and the result would be
the market value of the remaining partial interest. In this particular
appraisal, the previous valuation analysis has already addressed the
estimated market value of the underlying site; it was concluded to be
$25,000.
A leasehold estate or the tenant's interest (Northern Lights
Ethanol) in the underlying leased subject site is said to be marketable
when (1) contract rent is measurably LESS than market rent and/or (2) the
contract or lease term is of such duration that it would be economically
feasible to assume the lease. If contract rent is less than market rent,
a potential incentive exists for a prospective assignee to pay a sum to
acquire the right to occupy the leased space (right to continue to lease
the underlying site) at rent that is below prevailing market levels.
Logically, the market value of a leasehold interest would be represented
by the price of the contract (actual) rent plus a value enhancement
recognized by the market. The sum of the two components cannot exceed
market rent since a prudent tenant would not pay an amount in excess of
market rent to occupy space if comparable space could be obtained
elsewhere for less within a reasonable period of time (principle of
substitution).
Reference is made to pages 58 and 59 in which the current "Ground
Lease Agreement" is detailed. As noted, the average annual ground rent
throughout the 99-year lease term will approximate $4,000. At this rent,
the tenant would be responsible for paying all expenses relating to the
site.
The initial thought in developing the tenant's or Northern Lights
Ethanol's leasehold interest is simply to subtract the land lease payment
from the net operating income and capitalize the result into a market
value estimate. However, this methodology would apply only IF the land
<Page>
107
lease approximated market. The prior lease analysis had capitalized this
average annual net rent of $4,000 into a market value estimate using
overall rates of 6% and 9%. The resulting market value estimate of about
$44,000 to $67,000 or $1,200 to $1,800/acre far exceeds the concluded fee
simple market value of about $25,000 or about $683/acre. Thus, the
underlying site is rented above what is deemed to be market levels. Even
so, the tenant would have no marketable interest in the underlying land
lease as the rent exceeds market but, more significantly, the
contributory value of the site is negligible. Simply, a site having a
contributory value of $25,000 or, even say $67,000, is insignificant when
compared to the property's overall value conclusion of $50,000,000. For
these reasons, the initial opinion of the leasehold estate's market value
of the subject improvements is deemed to be comparable to the fee simple
market value.
The concern now relates to whether the market would discount the
PROPERTY'S fee simple market value estimate of $50,000,000 for the market
perception of purchasing improvements located on a leased site.
Specifically, market perception of purchasing most standard or
non-institutional improvements located on a leased site normally tends to
be something more than simply deducting the site's value. This market
observation has been confirmed numerous times over the years with
individuals involved in the ownership, property management, and/or sale
of income producing properties located in the upper midwest. However,
this particular improvement type or that of a large ethanol fuel
processing plant would appeal to more institutional type users or, in
other words, more sophisticated users and, ultimately, more sophisticated
or institutional buyers/investors. Land leases are not unusual in the
institutional market, especially if the land leases are relatively
straightforward, are long term, and the lease terms approximate market.
In this particular instance, all these conditions exist. For these
reasons, no measurable discount would result in attempting to market this
leasehold interest. Based on the results of this appraisal investigation
and analysis, the going concern market value of the as-complete subject
improvement's leasehold estate, as of November 1, 2002, is projected to
be:
FIFTY MILLION DOLLARS
($50,000,000)
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108
III. OBJECTIVE #2-"AS-IS" LEASEHOLD MARKET VALUE ANALYSIS
A. APPRAISAL OBJECTIVE:
The previous appraisal objectives were based on the assumption that
the subject improvements would be a completed 40 million gallon ethanol
fuel plant. The client also specified that one last appraisal objective
be provided or that of developing an opinion of the subject property's
"as-is" fee simple going concern market value as of the appraisal
inspection date or September 17, 2001. As previously detailed, a value
based on the property's as-is condition "RELATES TO WHAT PHYSICALLY
EXISTS AND IS LEGALLY PERMISSIBLE AND EXCLUDES ALL ASSUMPTIONS CONCERNING
HYPOTHETICAL MARKET CONDITIONS...". Therefore, this last appraisal
objective is to develop an opinion of the subject property's as-is fee
simple going concern market value as of the appraisal inspection date or
September 17, 2001, or that of a partially completed ethanol fuel plant.
B. SCOPE:
The majority of the preceding appraisal process relative to
definitions, assumptions, appraisal's intended use, ownership rights,
city/market and neighborhood descriptions, the site description, and
highest and best use analysis would still be applicable. The following
analysis will, therefore, begin with the improvement's description in
their AS-IS condition and conclude with the development of market value.
C. DESCRIPTION OF IMPROVEMENTS:
In its as-is condition, approximately 25% of the project was
complete. Briefly, the site had been graded, most underground utilities
installed, considerable amount of poured concrete installed, some of the
storage tanks erected, and other miscellaneous improvements completed.
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D. VALUATION PROCESS:
Ideally, an attempt should be made to assemble sales of ethanol
plants in a similar state of completion or that as found in the subject
property on September 17, 2001. Again, the improvements were
approximately 25% complete. In reality, such market data simply does not
exist. For this reason, development of the subject property's as-is
market value can only be based only on a simple logical interpretation.
The subject property's previously concluded market value assuming
completion of the subject improvements was $50,000,000 with the
underlying site having no measurable or contributory value. If the
improvements were 25% complete, the preliminary indication of the
improvements' contributory value in their as-is condition would
approximate $12,500,000 ($50,000,000 x 25%).
Another factor needs to be considered prior to concluding to the
subject property's final as-is market value. A degree of negative market
perception may be created if the subject property owner were unable to
complete the improvements and another developer/owner had to be secured.
Undoubtedly, the new buyer would incur additional expenditures to
complete the improvements and, therefore, the existing improvements would
be worth something less to a different developer or buyer. Additionally,
the buyer of the incomplete subject improvements would be entitled to
some entrepreneurial return for the effort and time expended to
coordinate completion of the improvements. Market support for this
entrepreneurial effort is virtually impossible to obtain. However, the
as-is market value would undoubtedly be something less than simply 25% of
the improvement's contributory value. Based on this analysis and assuming
an exposure time of about one year, the subject property's as-is fee
simple market value, as of September 17, 2001, is concluded at:
"TEN MILLION DOLLARS"
($10,000,000)
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110
IV. MARKETING TIME
The client has also requested that an estimate of MARKETING TIME be
provided, defined as:
"AN OPINION OF THE AMOUNT OF TIME IT WOULD TAKE TO SELL A REAL OR
PERSONAL PROPERTY INTEREST AT THE CONCLUDED MARKET VALUE LEVEL
DURING THE PERIOD IMMEDIATELY AFTER THE EFFECTIVE DATE OF AN
APPRAISAL."
(Source: Advisory Opinion-7, UNIFORM STANDARDS OF PROFESSIONAL
APPRAISAL PRACTICE (USPAP), adopted September 16, 1992, and last
revised on September 15, 1999).
A normal marketing time assumes a sale AFTER the appraisal's effective
date and is normally anticipated by most lenders. (The client is a lender
in this particular appraisal.) Lenders are concerned about their interest
in the identified real estate even after the loan is secured. The
development of a marketing time estimate uses much of the same
methodology and sources referenced in developing the previous reasonable
exposure time estimate. Likewise, it is a function of price, time, use,
and anticipated market conditions.
It is possible that a particular property's market value(s) could
change during a specified marketing time as any significant change in
economic conditions through the estimated marketing time could impact the
property's ultimate future value(s). It may be inappropriate to assume
that a particular property's market value(s) will simply remain stable
during the marketing period/time. Therefore, it is technically incorrect
for the appraisal's user to carry the current market value estimate(s)
forward to the end of a concluded marketing period and simply "discount"
the value(s) back to the present.
The assembled market sources used in previously estimating the
subject's one-two year exposure time indicate that an appropriate
marketing time would also approximate one-two years. No market evidence
exists to suggest that the subject property's market value would change
measurably as it relates to the local or even regional ethanol fuel plant
market within this one-two year time frame. Thus, this particular market
segment should sustain the subject property's previously concluded market
values through the one-two year estimated marketing time.
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A D D E N D A
<Page>
[U.S. Bank Assignment Letter and U.S. Bank Commercial Appraisal Reporting
Guidelines - Pages 112-122]
<Page>
[Section 1102. "CI" Commercial/Industrial District - Pages 123-124]
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QUALIFICATIONS
JOSEPH J. IBACH, MAI
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EDUCATION
APPRAISAL INSTITUTE - Successfully Completed Courses
1976-Present Course 410 & 420 STANDARDS OF PROFESSIONAL PRACTICE August 1996
Course 110, FACULTY TRAINING WORKSHOP, October 1994
Course 1B-A, CAPITALIZATION THEORY & TECHNIQUES, PART A, June 1988
Course 1B-B, CAPITALIZATION THEORY & TECHNIQUES, PART B, June 1988
Course 1A1, REAL ESTATE APPRAISAL PRINCIPALS, July 1987
Course 1A2, BASIC VALUATION PROCEDURES, July 1987
Course 2-1, CASE STUDIES IN REAL ESTATE VALUATION, January 1982
Course 2-2, VALUATION ANALYSIS & REPORT WRITING, January 1982
Course 3, RURAL VALUATION, September 1979 SREA
Course 201, PRINCIPALS OF INCOME PROPERTY APPRAISING, November 1976
1971-1975 Dickinson State College, Dickinson, North Dakota
B.A. Degree, Business Administration
B.S. Degree, Secondary Education
1967-1971 Linton Public High School, Linton, North Dakota
SEMINARS
UNDERWRITING RURAL PROPERTIES/RURAL APPRAISALS, July 2000, Sponsored by FannieMae (2 hrs.)
1996-Present REAL ESTATE TRENDS-2000, GENERAL & COMMERCIAL SESSIONS, June 2000,
Sponsored by Minnesota Chapter of the Appraisal Institute (8 hrs.)
APPRAISAL OF UNIQUE PROPERTIES AND SUPPORTING ADJUSTMENTS, May
2000, Sponsored by ND R.E. Appraisal Board (8 hrs.)
THE FHA & THE APPRAISAL PROCESS, September 1999, Sponsored by
ND R.E. Appraisal Board (8 hrs.)
STANDARDS OF PROFESSIONAL PRACTICE, June 1999, Sponsored by
Appraisal Institute (16 hrs.)
SUPPORTING SALES COMPARISON GRID ADJUSTMENTS, December 1998,
Sponsored by Appraisal Institute (7 hrs.)
TIPS & TECHNIQUES FOR PERFORMING APPRAISAL REVIEWS, July 1998,
Sponsored by ND R.E. Appraisal Board (7.5 hrs.)
Small Hotel/motel Valuation, May 1998, Sponsored by Appraisal
Institute (7.5 hrs.)
LITIGATION SKILLS FOR THE APPRAISER, January 1998, Sponsored by
Appraisal Institute (7 hrs.)
HIGHEST & BEST USE APPLICATION, November 1997, Sponsored by
Appraisal Institute (7 hrs.)
ROBO-APPRAISER '97, August 1997, Sponsored by Pro Source (7.5
hrs.)
USPAP STANDARDS & ETHICS UPDATE, AUGUST 1997, Sponsored by Pro
Source (7.5 hrs.)
STANDARDS OF PROFESSIONAL PRACTICE PARTS A & B, August 1996,
Sponsored by Appraisal Institute (27 hrs.)
HOTEL/MOTEL VALUATION, April 1996, Sponsored by Appraisal
Institute (7 hrs.)
BUSINESS/VALUATION SEMINAR - PARTS I & II, February 1996,
Sponsored by Appraisal Institute (14 hrs.)
WORK EXPERIENCE
1982-Present Dakota Appraisal & Consulting, Ltd., Bismarck, North Dakota; Owner/President.
1977-1982 Ray Reilly Appraisal Consultants, Inc., Grand Forks, North Dakota
Fee Appraiser on a wide variety of appraisal assignments
1975-1977 Gate City Savings and Loan Association, Bismarck, North Dakota
Staff Appraiser responsible for all residential and commercial appraising
and the supervision of construction loans.
TEACHING EXPERIENCE
1991 Education Program - State Licensed & Certified Courses
1. FOUNDATIONS OF REAL ESTATE APPRAISAL
2. APPRAISING THE SINGLE FAMILY RESIDENCE
1987 Institute of Financial Education, Instructor for "Residential Appraising" course
1985-Present Graduate Realtors Institute, Instructor for residential appraisal courses
1981-1982 University of North Dakota, Grand Forks, North Dakota; Instructor of Department of
Correspondence Study; Guest Lecturer for real estate related courses
University of Minnesota Technical College, Crookston, Minnesota; Instructor for a
three-part real estate course on Real Estate Appraising.
</Table>
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126
<Table>
STATE North Dakota CG#1009, South Dakota #324CG-2001R, Minnesota #4001062, Montana #241,
CERTIFICATIONS & Wyoming #420.
PROFESSIONAL *Member Appraisal Institute (MAI) as sponsored by the Appraisal Institute
MEMBERSHIPS *President of North Dakota Real Estate Appraiser Qualification and Ethics Board, 1996 to
present. (Board member since 1993)
*Federal Housing Administration (FHA) approved appraiser
*Realtor Member of the Bismarck-Mandan Board of Realtors
American Society of Farm Managers & Rural Appraisers
COURT Certified as expert witness in Walsh, Emmons, Burleigh and Mercer County District Courts and
TESTIMONY U. S. District Bankruptcy Court in Fargo, Bismarck, and Minot, ND
</Table>
PARTIAL LIST OF MAJOR CLIENTS SERVED
FINANCIAL INSTITUTIONS:
American National Bank, Bank America Mortgage, Bank Center One, Bank of North
Dakota, BNC National Bank, Bremer Bank, Dakota Community Bank, Farm Credit
Services, First American Bank West, First International Bank, First Southwest
Bank, First Western Bank & Trust, Gate City Federal Savings Bank, Imperial
Thrift & Loan Assoc. (Glendale, CA),), Ocwen Federal Bank (West Palm Beach, FL),
Ramsey National Bank & Trust Co., Security State Bank (Linton, ND), Stearns Bank
(St. Cloud, MN), State Bank of-Fargo, Superior Bank (Rosemont, IL), U.S. Bank
National Association, Wells Fargo Bank, Yellowstone Bank.
GOVERNMENT AGENCIES:
City of Bismarck, Emmons County, Federal Deposit Insurance Corporation
(FDIC), General Services Administration (GSA), M.D. Department of
Transportation, N.D. Public Service Commission, Oliver County, N.D. State
Land Department, N.D. State Water Commission, University of North Dakota,
U.S. Army Corps of Engineers, U.S. Bureau of Reclamation, U.S. Department
of Agriculture, U.S. National Park Service, Veterans Administration.
EMPLOYEE RELOCATION COMPANIES:
Americorp Relocation, Cendant Mobility Relocation, Coldwell Banker
Relocation Management Services Inc., Corporate Transfer Service,
Equitable Relocation Management Corp., Homequity, PHH Relocation,
Prudential Relocation, WHR Group, Inc.
APPRAISAL MANAGEMENT COMPANIES:
Appraisal Management Company, ATM Corporation, CLT Appraisal Services,
DiTech, General American Corporation, LandAmerica OneStop,.
BUSINESSES/CORPORATIONS:
Advanta Mortgage, Alliance Pipeline Co., Basin Electric Power
Cooperative, Brutger Equities, Burlington Northern/Santa Fe Railroad,
Cities Service Company, Cloverdale Foods Company, Diamond Shamrock,
Dougherty Funding, Falkirk Mining, FannieMae, FreddieMac, G.E. Assurance
Holdings, Inc., Glaser Financial, GreenTree Mortgage, Minnkota Power
Cooperative, North American Coal, North Central Food Systems, Inc., St.
Alexius Medical Center, Super Valu Stores, Inc., Tharaldson Enterprises,
The Nature Conservancy, United Power Cooperative, Venture Mortgage, and
numerous realty firms, law firms, and private clients.
TYPES OF ASSIGNMENTS
1. Residential: Single family & multi-family, condominium units &
projects, townhouse units & projects.
2. Commercial: Motels/hotels, resorts, medical clinics, office
buildings, retail/commercial buildings, automobile dealerships,
grain elevators, industrial buildings, restaurants, manufactured
housing parks, financial institution buildings, gas stations,
convenience stores, truck stops, warehouses, etc.
3. Land: Residential, commercial, industrial, farms, ranches.
4. Other Condemnation (representing property owners and condemning
agencies), rent analysis, informational studies, feasibility
studies.
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[North Dakota Real Estate Appraiser Permit]
<Page>
126
[South Dakota Real Estate Appraiser License]