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Exhibit 2
APPRAISAL
OF
THE 10,927.857 ACRE SEVEN J STOCK FARM, INC.
PROPERTY LOCATED NINETEEN MILES SOUTHWEST OF CROCKETT IN
HOUSTON COUNTY, TEXAS
JOB # 200204
PREPARED FOR
SEVEN J STOCK FARM INC.
16945 NORTHCHASE DRIVE, SUITE 1800
HOUSTON, TEXAS 77060-2151
PREPARED BY
JAMES CONNOR SMITH, MAI, ARA
State Certified - General Real
Estate Appraiser - TX-1321583-G
1101 UNIVERSITY DRIVE EAST, SUITE 108
COLLEGE STATION, TEXAS 77840
on
SEPTEMBER 18, 2002
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2
September 18, 2002
Mr. Randy Parten
Seven J Stock Farm Inc.
16945 Northchase, Suite 1800
Houston, Texas 77060-2151
Re: The 10,927.857 acre Seven J Stock Farm, Inc. property located nineteen
miles southwest of Crockett in Houston County, Texas
Dear Mr. Parten:
In accordance with your request, I have conducted the required investigation,
gathered the necessary data, and made certain analyses that have enabled me to
form an opinion of the above referenced property.
Based on an inspection of the property and the investigation and analyses
undertaken, I have formed the opinion that as of August 14, 2002 as if
unaffected by environmental issues and subject to the existing oil and gas
leases, and subject to the assumptions and limiting conditions set forth in this
report, the surface estate of the property had a reasonable value range of $750
to $775 per acre.
I have further concluded that the property had a market value of $775 per acre
or:
EIGHT MILLION FOUR HUNDREDSIXTY NINE THOSAND EIGHTY NINE DOLLARS
($8,469,089)
I estimate a reasonable marketing period for the property to be 18-24 months.
The summary appraisal report that follows sets forth the identification of the
property, the assumptions and limiting conditions, pertinent facts about the
area and the subject property, comparable data, the results of the investigation
and analyses leading to the conclusions.
I appreciate the opportunity to be of service and look forward to future
consultations at your request.
Sincerely,
James Connor Smith, MAI, ARA
State Certified - General Real
Estate Appraiser - TX-1321583-G
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TABLE OF CONTENTS
INTRODUCTION
Letter of Transmittal..................................................2
Table of Contents......................................................3
Salient Facts and Conclusions..........................................4
Area Map...............................................................5
DESCRIPTION AND ANALYSIS
Nature of the Assignment...............................................6
Scope of the Appraisal Assignment......................................7
Definitions............................................................8
Assumptions and Limiting Conditions....................................9
Property Analysis.....................................................12
Seven J Stock Farm Tract Map..........................................14
Seven J Stock Farm Flood Plain Map....................................16
Seven J Stock Farm Land Mix Map.......................................18
Seven J Stock Farm Aerial Map.........................................33
Area/Neighborhood Analysis............................................49
Highest and Best Use..................................................53
Standard Appraisal Techniques Briefly Explained.......................56
VALUATION OF THE PROPERTY
Cost Approach.........................................................57
Land Component Sales Map..............................................59
Sales Comparison Approach.............................................69
Direct Comparison Sales Map...........................................76
Reconciliation........................................................78
Marketing Time Estimate...............................................79
Certification.........................................................80
Appraiser Qualifications..............................................81
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<Table>
<Caption>
SALIENT FACTS AND CONCLUSIONS
PROPERTY DESCRIPTION
EFFECTIVE DATE OF THE APPRAISAL: August 14, 2002
DATE THE REPORT WAS PREPARED: August 14 through September 15, 2002
DATE OF TRANSMITTAL: September 18,2002
DATES OF INSPECTION: August 14, 2002
INSPECTED BY: James Connor Smith, MAI, ARA
OWNER: Seven J Stock Farm, Inc.
PROPERTY: The 10,927,857 acre Seven J Stock Farm,
Inc. property.
ADDRESS/LOCATION: Nineteen miles southwest of Crockett in
Houston County, Texas
LEGAL DESCRIPTION: 10,927,857 acres, more or less, and being
situated in the John Durst, A-29,
Ignacio Lopez, A-50, G. Gonzales,
A-462, and the Barton Clark, A23,
Surveys, Houston County, Texas
PROPERTY RIGHTS APPRAISED: Surface estate
CURRENT USE: Livestock Ranch/Crop Production
HIGHEST AND BEST USE: Livestock Ranch/Crop Production
MINERALS/ROYALTY RIGHTS: None Appraised (Surface Estate Only)
LAND
LAND SIZE: 10,297.857 acres, more or less
ZONING: None
FLOOD ZONE: 75%
LAND IMPROVEMENTS: Fencing, livestock pens, livestock
water distribution system, stock
tanks, pivot irrigation systems,
permanent pecan plantings and ranch
road system
BUILDING IMPROVEMENTS: Five single family residences, an office,
equipment and material storage
buildings, livestock buildings, and
hay storage barns
VALUATION
DATE OF VALUE: August 14, 2002
VALUE CONCLUSION
FINAL VALUE ESTIMATE:
$/Acre $775
$ TOTAL $8,469,089
</Table>
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[MAP]
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NATURE OF ASSIGNMENT
IDENTIFICATION OF THE PROPERTY
The Seven J Stock Farm, Inc. property consisting of the surface estate in
10,927,857 acres, more or less, of real property located nineteen miles
southwest of Crockett in Houston County, Texas
PURPOSE AND FUNCTION OF APPRAISAL
The purpose of this appraisal was to provide an estimate of the market value "as
is" of the SURFACE ESTATE INTEREST in the property owned by the Seven J Stock
Farm, Inc. I understand the function of the appraisal will be for financial
planning use.
PROPERTY RIGHTS APPRAISED
The subject property is appraised on the basis of the following ownership
interests in the surface estate only:
----------------------------------------------------------
TRACT # TOTAL ACRES
----------------------------------------------------------
1 - Murray Tract, J. Durst, A-29 10,249.0000
2 - Petty Tract, J. Durst, A-29 65.0000
3 - Keel Tract, G. Gonzales, A-462 21.1670
4 - McDougall Tract, G. Gonzales, A-462 259.1900
5 - Jackson Tract, I. Lopez, A-50 333.5000
-----------
Total 10,927.8569
DATE OF VALUE
The Market Value estimate is made based upon conditions prevailing as of August
14, 2002..
DATE OF INSPECTION
This property was inspected on August 14, 2002.
DATE OF REPORT
This report was prepared from August 15 through September 18, 2002.
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SCOPE OF THE APPRAISAL ASSIGNMENT
The following steps and procedures were completed to estimate the current market
value of the subject property.
1. Inspect subject property and surrounding neighborhood.
2. Gather appropriate site, neighborhood, and economic data.
3. Investigate, confirm, and inspect comparable unimproved land sales to
determine land component unimproved land sales to determine land component
contributory values.
a) Date range of search: January 1, 1999 to July 30, 2002
b) Geographical limits of search:, Houston County, Texas
c) Size limits of search: 500 to 15,000 acres
d) Use or zoning limits of search: Livestock Ranches with improved
pasture, native pasture/wooded pasture and cropland components
4. Estimate the reproduction cost new of building and land improvements and
deduct accrued depreciation from all causes to estimate their contributory value
for use in the cost and sales comparison approaches.
5. Investigate, confirm, and inspect comparable improved sales to estimate
the value of the subject property via the direct sales comparison approach.
a) Date range of search: January 1, 1999 to July 30, 2002
b) Geographical limits of search: Houston County, Texas
c) Size limits of search: 500 to 15,000 acres
d) Use or zoning limits of search: Livestock Ranches with
residential/agricultural improvements
6. Analyze the time on the market of the comparable sales to develop an
estimated marketing period for the subject property.
7. Reconcile the value indications from the two approaches to develop a
concluded value range and a final market value estimate of the subject
property.
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DEFINITIONS
MARKET VALUE
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 OWN BEST INTERESTS;
(3) A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN MARKET
(4) PAYMENT IS MADE IN TERMS OF CASH IN U.S. 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.11
- ----------------
1 Uniform Standard of Professional Appraisal Practice, 1992 Edition, Page 7.
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ASSUMPTIONS AND LIMITING CONDITIONS:
This appraisal report has been made with the following general assumptions:
This is a Summary Appraisal Report which is intended to comply with the
reporting requirements set forth under Standard Rule 2-2(b) of the Uniform
Standards of Professional Appraisal Practice for a Summary Appraisal
Report. As such it might not include full discussions of the data,
reasoning, and analyses that were used in the appraisal process to develop
the appraiser's opinion of value. Supporting documentation concerning the
data, reasoning, and analyses is retained in the appraiser's file. The
information contained in this report is specific to the needs of the
client for the intended use stated in this report. The appraiser is not
responsible for unauthorized use of this report.
This appraisal report has been prepared for the exclusive benefit of Seven
J Stock Farm Inc. and can not relied upon by any other party. Any party
who uses or relies upon any information in this report, without the
preparer's written consent, does so at his own risk.
o To the best of the appraiser's ability, the analysis, opinions, and
conclusions were developed and the report was prepared in accordance with
USPAP and with the standards and reporting requirements of the Appraisal
Institute and the American Society of Farm Managers and Rural Appraisers.
o No responsibility is assumed for the legal description or for matters
including legal or title considerations. Title to the property is assumed
to be good and marketable unless otherwise stated.
o The property is appraised free and clear of any or all liens or
encumbrances unless otherwise stated.
o Responsible ownership and competent property management are assumed.
o Information furnished by others is believed to be reliable. However,
no warranty is given for its accuracy.
o All engineering is assumed to be correct. There has not been an
engineering survey of the structural stability of the improvements
supplied to this firm or its employees regarding the subject property. It
is assumed that there are no significant problems associated with the
structure that will detract from the investment potential of the property.
The plot plans and illustrative material in this report are included only
to assist the reader in visualizing the property.
o It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that render it more or less valuable.
There has not been a soil or subsoil study supplied to this firm or its
employees regarding the subject property. It will be assumed that no
adverse soil or subsoil conditions exist that would affect the long term
investment potential of the property. No responsibility is assumed for
such conditions or for arranging for engineering studies that may be
required to discover them.
o It is assumed that there is full compliance with all applicable federal,
state, and local environmental regulations and laws unless noncompliance
is stated, defined, and considered in the appraisal report.
o 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
..
o 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.
o It is assumed that the utilization of the land and improvements is within
the boundaries or property lines of the property described and that there
is no encroachment or trespass unless noted in the report.
o The appraiser has no present or prospective interest in either the
property being appraised, or with the parties involved.
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o It is assumed that all mechanical fixtures including, but not limited to,
electrical, structural and plumbing items are in working order and not
subject to significant deferred maintenance unless otherwise stated in
this report.
o It is assumed that all plumbing and electrical work complies with all
applicable rules, regulations, codes and standards unless otherwise stated
in this report.
o Special assumptions have been made in some of the sections of the report
for the purpose of determining an estimate of value. These assumptions are
necessary in regard to such items as hidden construction details, the
amount or amounts of insurance coverage, maintenance expenditures, etc.
These assumptions are based upon the best knowledge and judgement of the
appraiser, and are believed to be typical of the actions of buyers,
sellers and investors in the market.
This appraisal report has been made with the following general limiting
conditions:
o The distribution, if any, of the total valuation in this report between
land and improvements applies only under the stated program of
utilization. The separate allocations for land and buildings must not be
used in conjunction with any other appraisal and are invalid if so used.
o 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 the proper written
qualification and only in its entirety.
o The appraiser, 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.
o Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser, or the firm with
which the appraiser is connected) shall be disseminated to the public
through advertising, public relations, news, sales, or other media without
the prior written consent and approval of the appraiser.
o Where property rights other than fee title are the subject of the
appraisal, the property rights appraised will be specifically outlined in
the report.
o All information, comments and conclusions appertaining to the subject and
other properties represent the personal opinion of the appraiser formed
after examination of the property or properties. While it is believed that
the information, estimates, analyses and conclusions drawn therefrom are
correct, the appraiser does not guarantee them and assumes no liability
for errors in facts, analysis or judgement.
o Unless otherwise stated in this report, the existence of hazardous
substances or other adverse environmental conditions were not brought to
the attention of the appraiser. This includes, without limitation, any
test being performed to identify such substances or environmental hazards
after the inspection of the subject property. The appraiser has no
knowledge of the existence of such materials on or in the property unless
otherwise stated. The appraiser is not qualified to test for such
materials, substances or conditions. The presence of such may affect the
value of the property. The value estimate in this report is based on the
assumption that no such condition exists, unless otherwise stated. No
responsibility is assumed for any such conditions, nor is it for any
expertise or engineering knowledge required to discover these conditions.
o The Americans with Disabilities Act ("ADA") became effective January 26,
1992. I have not made a specific compliance survey and analysis of this
property to determine whether or not it is in conformance with the various
detailed requirements of the ADA. It is possible that a compliance survey
of the property, together with a detailed analysis of the requirements of
the ADA, could reveal that the property is not in compliance with one or
more of the requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since I have no direct
evidence relating to this issue, I did not consider possible
non-compliance with the requirements of ADA in estimating the value of the
property.
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o I have not been supplied with an environmental assessment of the site.
Furthermore, as a real estate appraiser, I am not qualified to determine
if the location is in compliance with state or national regulations. These
hazardous material or conditions could include, but are not limited to,
the existence of toxic waste (within or around the subject site currently
or historically), UREA formaldehyde foam insulation, asbestos containing
materials, or communicable diseases from present or former occupants. The
existence of any such materials or conditions could adversely affect the
value of the property. If there are any questions concerning the above, I
recommend the appropriate environmental survey be performed.
o As of the inspection date, I did not notice the subject property
containing underground storage tanks (USTs) which may or may not pose
environmental hazards to the subject, the surrounding properties or the
water table in the subject area. As a real estate appraiser, I am not
qualified to judge such environmental hazards. I recommend that the proper
environmental tests be conducted in order to better assess the subject's
situation, if the need arises. If contamination is found on the subject,
any adverse condition present on the subject could affect the specified
value estimate(s) in this report. Without the appropriate environmental
test reports, I will assume that no adverse conditions exist and appraise
that subject as such so that the value estimates are not reflective of
such potential adverse conditions.
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PROPERTY ANALYSIS
A physical inspection of the appraised property was made. A study was also made
of the neighborhood and other areas which might be considered competitive with
it. From this study, it was determined that buyers in this market have given
consideration to the following features in arriving at a negotiated price for
similar properties. It is our opinion that equally well-informed buyers and
sellers would most likely consider the same features in agreeing upon the market
value of the subject property. They are reported as: 1) LAND, 2) MINERALS, 3)
LEGAL LIMITATIONS OF USE, 4) LAND IMPROVEMENTS, 5) BUILDING IMPROVEMENTS, 6)
ENVIRONMENTAL HAZARDS, 7) PROPERTY TAXES, AND 8) PROPERTY HISTORY.
LAND
Location: The Seven J Stock Farm property is located approximately nineteen
miles southwest of Crockett in Houston County, Texas. It fronts along both sides
of State Highway 21, FM 2498, and FM 3275. It also fronts on the Trinity River
along its west boundary line. (See Location Map)
Area: For purposes of this appraisal, the Seven J Stock Farm property consists
of 10,927.857 acres, more or less. This represents the total land within the
Seven J Stock Farm property according to the original deeds of conveyance into
this ownership.
Shape/Dimensions/Access: The property is very irregularly shaped and measures
approximately 4.5 miles long by 5.9 miles wide. The property has 22,200' of
frontage along the east and west lines of State Highway 21, 3600' of frontage
along the north and south lines of FM 2498, 9400' of frontage along the north
and south lines of FM 3275, 1800' of frontage along the north and south lines of
FM 2915, and 12,900' of frontage along county gravel roads. The ranch is
comprised of six tracts separated by the public roads on which they front and by
Big Creek. The shapes, dimensions, and access of each tract will be described
individually below. A map of the individual tracts is found on the following
page. The tracts are identified by their general geographic location.
West Tract - This part of the property contains approximately 3526.967
acres and consists of that portion of the property lying west of State
Highway 21 and south of FM 2498. This property fronts 15,700' on the
west side of State Highway 21 and 3600' on the south line of FM 2498.
It also has approximately 2.5 miles of frontage on the east bank of the
Trinity River on its most westerly boundary.
East Tract - This tract contains approximately 5080.831 acres and
consists of that portion of the property lying east of State Highway
21, south of FM 3275, and west of Big Creek. This tract contains
22,200' of frontage on the east line of State Highway 21 and 9400' of
frontage on the south line of FM 3275. It fronts along Big Creek for
its entire eastern property line and has approximately 3 miles of
frontage on the east bank of the Trinity River along its most southerly
boundary.
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Northwest Tract - This tract contains approximately 226.171 acres and
consists of that portion of the property lying on the west side of
State Highway 21 and north of FM 2498. This portion of the property is
triangular in shape and measures approximately 6500' of frontage along
the west line of State Highway 21 with 3600' of frontage on the north
line of FM 2498. It contains the South, West and North Bull pastures.
Northeast Tract - This tract contains approximately 903.641 acres and
consists of that portion of the property lying on the north side of FM
3275. As seen from the map, the property is very irregular in shape and
is shown to have 8500' of frontage along the north line of FM 3275. The
most southeasterly portion of this property also has access through an
adjoining owners property from a county gravel road. It contains the
Stumpville, McDougald, Petty and Jackson pastures.
Southeast Tract - This tract contains approximately 777.611 acres and
consists of that portion of the property lying to the east of Big Creek
and Lost Creek and to the west of the county road which connects with
FM 2915. The property fronts 1800' along the west line of FM 2915 and
has 12,900' of frontage along the county gravel road. A private road
runs through the tract providing access to properties under other
ownerships lying to the south. It contains the Pond pasture and the
North, Middle and South Mississippi Hill pastures.
East Southeast Tract - This tracts contains approximately 412.636 acres
and consists of that portion of the property lying to the east of the
county gravel road which connects with FM 2915. This property fronts
1800' on the east line of FM 2915 and approximately 9200' on the county
gravel road. A private road runs through a portion of the property
providing access to properties under other ownerships lying to the
north and east. It contains the East Mississippi Hill and Mississippi
Hill Meadow pastures.
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[MAP]
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15
Topography: The elevation of this ranch ranges from a low of approximately 150'
MSL along the high bank of the Trinity River to a high of 244' MSL at the top of
the hill in the North McDougal Pasture of the northeast tract. Approximately 75%
of the property is part of a broad flood plain of the Trinity River. The Trinity
is an old mature stream with many oxbow turns in its channel and has a
reputation of being subject to overflow several times during the winter periods
of heavy rainfall. Most of the bottomland portions of the Seven J property are
protected from Trinity overflows by a levee solely designed to protect this
ranch. All of the low-lying land except for approximately 1650 acres lying
between the levee and the river are protected by the levee. The levee system
consists of approximately 10.2 miles of elevated earthen berm forming a loop
around the low-lying portion of the Seven J Stock Farm property. Portions of the
Seven J Stock Farm are of higher elevations, namely the northwest tract, the
northerly one-third of the east tract, the northeast tract, the southeast tract,
and the east-southeast tract. The elevation of these tracts generally is above
175' MSL and as such would not be considered bottomland. Generally speaking, the
topography of this portion of the property would be described as having slopes
ranging from 2% to 10%.
Flood Plain: Approximately 75% of the subject property is located within the
100-year flood plain of the Trinity River and its tributaries.
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[MAP]
Drainage: The upland higher elevation portions of the Seven J property would be
considered fairly well drained by the intermittent creeks, which form up on them
and drain away from them. The bottomland portion is extremely flat but the
series of drainage ditches and canals which have been installed as a part of the
levee system provide it with better than typical drainage for a bottomland
property.
Soil Classification: The general soil map for Houston County as determined by
the USDA Soil Conservation Service shows the bottomland soils underlying the
Seven J Stock Farm property to be in the Kaufman-Kosse-Texark clay series and
the Freestone-Bienville-Konawa-Porter Springs fine sandy loam series. The clay
soils group consists of deep, somewhat poorly drained, very slowly permeable
soils of the flood plains of the Trinity River. The soils formed in recent
clayey alluvium. The surface layer is very dark gray to black ranging in depth
from 16" to 36". These soils are naturally fertile and are well suites for crop
production and pastureland. The growing of
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crops is somewhat hazardous on the soils however, due to the risk of flooding.
The soil capability classification of these soils is II to III. Class II and
Class III land capability classifications are land suitable for cultivation with
moderate to severe limitations or hazards. In this case the hazard is the
propensity of the land for frequent flooding; however, in the case of the Seven
J this is mitigated to a great degree by the levee system.
The sandy loam soil series is generally deep, moderately well drained, slowly
permeable soils that occupy nearly level to gently sloping old stream terraces.
Surfaces are generally brown, fine sandy loams ranging in thickness from 12" to
over 70". Slopes range from 0% to 5 %. These soils are mainly used for
pastureland although they are suited for cropland with the main limitation being
seasonal wetness and occasional flooding. The soil capability class of these
soils ranges from II to III. They have the capability of being used for
pastureland or for cropland with the main risk being frequent flooding and
seasonal wetness.
The soils underlying the upland portion of the Seven J are in the Derly,
Annona-Kurth-Moten-Falba soils association. These soils are moderately deep,
loamy, very slowly permeable somewhat poorly drained soils on uplands. The
surface horizons are generally fine sandy loams ranging in thickness from 3" to
12". Slopes range from 5% to 15%. These soils are mainly used for pastureland,
although they are suited for forage crop production. The soil capability class
rating of these soils ranges from III to IV. This gives them the capability of
being used for pastureland or for forage crops with the main risk being erosion
and seasonal wetness.
Land Capability Classification: The productive capability of the soils on the
subject can best be categorized by use of the U.S. Department of Agriculture
land capability classification system. This is the systematic arrangement of
land types according to properties that determine the land's ability to produce
on a virtually permanent basis. Classification is made for the purpose of
selection and application of land uses and treatments that will keep it
productive for prolonged use. Classification is made into eight land-capability
classes. Four are for land suited for cultivation and four are for land not
suited for cultivation. These land classes are separated according to the degree
of permanent limitations and hazards in the land's use and maintenance.
As described earlier, the capability class rating on the bottomland soils
underlying the Seven J Stock Farm is generally II and III that gives them the
capability of being utilized for cropland and/or pastureland. Since the property
is protected by the levee from the overflows, approximately 25% of the total
ranch is devoted to crop production. The balance of the land is devoted to
native and improved pasture.
Land Use/Vegetation: Analysis of farm/ranch sales in this section of the State
indicates that price differentiation is made on the basis of three classes of
cropland based on crop capability and quality while pastureland price
differentiation is based on improved pasture, native pasture, and wooded pasture
due to differences in carrying capacity and recreational use potential. In the
Trinity River area, many of the cropland capability Class II through IV and all
of the non-cropland Class V through VII are devoted to pasture use and there is
little distinction made in the market for differences in Soil Conservation
Service land capability ratings of pastureland. The Seven J Stock Farm property
consists of approximately 27% cropland/orchard, 36% improved pasture, 31%ative
pasture, and 6% wildlife/wasteland/woods along the creeks and banks of the
Trinity River. The following table summarizes the Seven J land mix by tract.
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<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
CROPLAND NATIVE
TRACT # ORCHARD IMPROVED PASTURE PASTURE WOODED PASTURE TOTALS
- ----------------------------------------------------------------------------------------------------------------------------
West 560.860 996.726 1669.392 299.990 3526.967
- ----------------------------------------------------------------------------------------------------------------------------
East 2369.053 1638.648 832.132 241.000 5080.833
- ----------------------------------------------------------------------------------------------------------------------------
Northwest 129.702 96.470 226.172
- ----------------------------------------------------------------------------------------------------------------------------
Northeast 505.201 339.439 59.000 903.640
- ----------------------------------------------------------------------------------------------------------------------------
Southeast 289.888 434.722 53.000 777.610
- ----------------------------------------------------------------------------------------------------------------------------
E Southeast 250.082 147.553 15.000 412.635
- ----------------------------------------------------------------------------------------------------------------------------
Totals 2929.913 3810.247 3519.708 667.990 10927.857
- ----------------------------------------------------------------------------------------------------------------------------
Percent 26.81% 34.87% 32.21% 6.11% 100%
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
[MAP]
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The primary improved grass vegetation found on the ranch is a warm season forage
species known as coastal Bermuda grass. This grass has been sprigged over
approximately 3893 acres or 36% of the ranch in those areas where it is
adaptable. It primarily favors the higher, better drained, lighter textured soil
areas. Approximately 3804 acres or 35% of the ranch is established in native
warm season species such as common Bermuda grass, common Dallisgrass, and
several paspalum species. Most of these species are found in the lower, heavier
soiled, more frequently flooded pasture areas. Many of the native pastures have
been over seeded in the past with hairy vetch, white clover, burr clover, and
other legumes. These cool season legumes reseed themselves and generally will
volunteer each year if weed spraying is delayed long enough to make them seed.
[PICTURE]
Typical Cropland Scene
[PICTURE]
Typical Improved Pasture Scene
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[PICTURE]
Typical Native Pasture Scene
Carrying Capacity: The livestock carrying capacity of the Seven J Stock farm
with the above described pasture land mix is estimated to be approximately 2200
mature beef animals. Under assumed low-moderate management to include annual
weed spraying and only minimal fertilization of hay fields the improved pasture
would support one cow per three acres. The native pasture would have a stocking
rate of one cow per four-five acres. The wooded pasture areas have very limited
carrying capacity estimated at one cow per ten-fifteen acres. Based on these
stocking rates I have projected the carrying capacity of the Seven J to be as
follows:
Land Class Acres Animal Units/Acre Animal Units
- --------------------------------------------------------------------------------
Improved pasture 3810.247 .33 1257
- --------------------------------------------------------------------------------
Native Pasture 3519.707 .25 880
- --------------------------------------------------------------------------------
Wooded pasture 667.990 .10 67
- --------------------------------------------------------------------------------
Totals 7997.944 .36 2204
- --------------------------------------------------------------------------------
Crop Allotments: The Class II cropland on the Seven J Stock Farm property has a
history of cotton and grain production for a number of years. The property has
been leased to two different parties for crop production on a share rental basis
since 1980. The U.S.D.A. Agricultural Conservation and Stabilization office
records in Crockett has the following crop allotment acres and yield base for
the property:
ASCS CROP YIELD AND ACREAGE - SEVEN J STOCK FARM, INC.
CROP COTTON CORN GRAIN
===============================================================
Yield 572 pounds 45 bushels
Acres 1221.8 1031.3
<Page>
21
As seen from the above table, there are 2253.1 acres of cotton and grain base
allocated to the 2930 acres of cropland on the Seven J Stock Farm. This
represents approximately 77% of the total acres having subsidized crop base that
is considered excellent. A large amount of crop base acreage and a high yield is
generally an asset for any cropland capability property. The yield base
multiplied by the allotted acres determines the amount of deficiency payment the
operator would receive for growing the crop. With this high percentage of crop
base and the recent addition of irrigation systems, the probability of continued
leasing of the cropland on Seven J Stock Farm is high.
Water Rights: The Seven J Stock Farm, Inc. was issued permit #1521 by the Texas
Water Rights Commission which controls the use of the waters from the Trinity
River. The permit provides for diverting water from the Trinity for agricultural
use on the Seven J property. This permit, which was revised on January 11, 1972,
provides for a maximum of 620 acres to be irrigated, a maximum of 1240 acre feet
of water to be used in any crop year. In recent years irrigation systems have
been installed which utilize the permitted water for irrigating a newly
established pecan orchard and for growing crops on the cropland.
Recreation: Due to the extremely limited wooded vegetation found on this ranch,
it would be considered a poor habitat for white tailed deer, the most important
game species for hunting recreation in the area. The only good wildlife habitat
is along the wooded portions of the Trinity, Big Creek, and Lost Creek. Several
of the adjacent properties are wooded and consequently, deer do move across the
area. However, the potential for leasing the property for hunting white tail
deer is considered negligible. Likewise, with the predominant grass vegetation
being coastal and common Bermuda grass, this land is a poor habitat for bob
white quail, the most important upland game species. Fishing recreation would be
available for the Trinity River, but the potential for developing this into a
source of material income is very limited. For these reasons, the recreational
attributes of this property are considered minimal overall.
Utilities: Electricity is available in the area and presently serving the
subject property. Water service is presently provided to the housing and
associated farm buildings from drilled wells and distribution systems. There is
no sanitary sewer service available in this rural area.
MINERALS
The status of the mineral estate underlying the subject property was not
investigated inasmuch as the appraisal assignment called for the valuation of
the surface estate only. Consequently, no mineral valuation is included in this
appraisal. It is presumed that the mineral owner has the right to use the
surface for exploration and production of oil, gas, and other minerals and there
was evidence of mineral production on the property in the form of several oil
well sites as of the date of the inspection. The subject property lies well
outside the boundaries of any coal or lignite producing areas. Therefore, there
would be no value to such minerals associated with the surface estate.
<Page>
22
LEGAL LIMITATIONS OF USE
Deed Restrictions: None
Zoning: None
Easements: The appraiser has not been furnished with a complete abstract of
title on this property and no specific research has been made regarding easement
encumbrances affecting the property. By observation, the only apparent easements
are local REA electric service lines serving the property and a number of
underground petroleum product pipeline easements. These appear to be part of a
gathering pipeline system associated with oil and gas production on this and
other adjacent properties.
LAND IMPROVEMENTS
The land improvements located on the Seven J Stock Farm property are fairly
extensive and adequate for the current operation. They consist of perimeter
fencing, cross fencing, livestock pens, stock water system, pivot irrigation
system, road system, and flood protection system.
PERIMETER FENCING
The primary perimeter fencing is of barbed wire on cedar posts in overall fair
to good condition. Most of the fencing on the original Seven J was installed
approximately 25 years ago but much of the fencing has been replaced or repaired
due to age or the damage caused by the 1990 flood. The area around the
headquarters along both sides of SH 21 has been fenced with steel pipe.
CROSS FENCING
There is extensive cross fencing found on the Seven J and it is of the same
quality and condition generally as the perimeter fencing. The property is
cross-fenced into 44 pastures ranging in size from 48 acres to 520 acres with
the typical size being approximately 150 acres. There are also seven traps
ranging in size from 12 to 40 acres. The fencing on some of these small traps is
of steel pipe construction as opposed to the typical five strands of barbed wire
on good quality cedar and pine posts on 6' to 8' centers.
LIVESTOCK PENS
The Seven J Stock Farm property contains four sets of well designed and
constructed livestock pens. The main set is located in the west headquarters
area and contains a covered working chute with hydraulic squeeze, and a covered
livestock scale with 10,000-pound capacity. The pens are made of welded steel
pipe and sucker rod and are in good condition. The pens are well designed and
have good functional utility.
<Page>
23
[PICTURE]
Another set of pens is located in the Patterson Lake trap of the west tract. The
construction of these pens is creosoted pole/cross ties with treated 2" x 6"
boards for the exterior with welded steel pipe interior fencing and gates. These
pens are in fair condition and their functional utility is good.
[PICTURE]
A third set of pens is located in the Petty Place part of the northeast tract.
These pens are constructed of a combination of treated pine poles and wood
planking for the exterior with interior welded steel pipe fencing and gates.
There is a cutting chute with squeeze and both truck, trailer, and farm trailer
loading chutes. These pens are in good condition and their utility is good.
<Page>
24
[PICTURE]
The fourth set of pens is located in the Pond trap of the southeast Mississippi
Hill tract. These pens are constructed of welded steel pipe and feature a
cutting chute, squeeze, and two loading chutes. The pens are in good condition
and have good functional utility.
[PICTURE]
STOCK WATER
Livestock watering facilities on the Seven J Stock Farm property are provided by
a piped water distribution system and a few natural water impoundments. Although
some of the pastures have frontage on the Trinity River, the riverbank is quite
steep in many areas and the river does not
<Page>
25
provide a reliable source of stock water. The water distribution system consists
of nine water wells, three of which are equipped with 5 horsepower submersible
pumps powered by electricity. The remaining six wells are artesian free-flowing
wells equipped with booster pumps and pressure systems. The wells are typically
800 to 1300 feet deep in depth and have 4" steel casings. A number of these
wells were made from oil well attempts plugged back to provide water wells. The
water system consists of oil field steel pipe piped from the wells to the
various pastures located in the vicinity of the wells. It is estimated that
there is approximately 50,000 linear feet of this water piping. Each of the 44
pastures and the 7 traps on the Seven J are provided with piped water with the
exception of a few of the pastures along Big Creek on the east tract and along
the creek serving the northeast tract. The water is piped to concrete water
troughs with 300 to 450 gallon water capacity. Since much of the water
distribution pipe has been installed in excess of 20 years, maintenance of the
water distribution system is a continuing problem.
IRRIGATION SYSTEM
The Seven J irrigation system is designed to utilize water from the Trinity
River supplemented by three drilled water wells of approximately 800 gallons per
minute capacity. River water is picked up by a barge mounted pumping unit and
transported by underground PVC pipeline to a dumping point on the eastside of
the levee from where it flows by gravity into Patterson Lake. . The 55 acre lake
serves as a surface reservoir for the pickup pump supplying water to the
underground sprinkler system in the nearby 138 acre pecan orchard and the
distribution lines to the Rice Field pivot and the Lower Bottom sump. There is
an alternate pipeline connecting directly from the river pump to the water
distribution system The portable Rice field pivot can irrigate approximately 160
acres of the East Rice Field in two settings. This hydraulic powered pivot can
also be towed to a location in the West Rice Field where it can irrigate 104
acres in a single setting. A booster pump and well provide water from the sump
to the electric powered Lower Bottom pivot irrigating approximately 400 acres. A
drilled well is the water source for the hydraulic powered Pin Oak Point
portable pivot irrigating approximately 200 acres per setting. The pecan orchard
sprinkler system is installed underground with laterals connected to the mains.
The cost of the pumps, motors and water mains was reported to be approximately
$330,000. This equates with approximately $330 per irrigated acre when allocated
to the 864 cropland acres and the 138 acre permanent planting acreage. The
pivots reportedly had an original cost of approximately $40,000-$55,000 each.
Another underground irrigation water main runs from Patterson Lake to a pivot
pad in the center of the B & Boss pasture. The lessee paid for this line and has
installed a pivot system to irrigate the coastal Bermuda hay in that pasture.
<Page>
26
[PICTURE]
Patterson Lake Reservoir
[PICTURE]
Patterson Lake Pump
<Page>
27
[PICTURE]
Rice Field Pivot
[PICTURE]
Lower Bottom Pivot
<Page>
28
[PICTURE]
Pin Oak Pivot
[PICTURE]
River Pump Pickup Site
<Page>
29
PECAN ORCHARD
There are approximately 138 acres of permanent pecan plantings located in the
Patterson Lake Pasture. Approximately 116 acres were planted in 1994 with an
additional 22 acres established in 1998 and 1999. There are approximately 3400
trees in the orchard. The varieties planted include Pawnee, Kiowa, Choctaw,
Cheyenne and Desirable. The orchard is sprinkler irrigated by laterals connected
to the underground distribution mains. The 1994 orchard was just coming into
production in 2001 with yields of approximately 100 pounds per acre. Production
in the current crop year is expected to be approximately 150 pounds per acre.
The development costs of the orchard and its associated irrigation system was
reported at approximately $300,000 or $2174 per orchard acre. However since the
orchard is just beginning to come into limited production the current
contributory value of these permanent plantings is estimated to be only about
50% of their cost or $1000 per acre. This is consistent with the values
indicated from sales of young and mature pecan orchards in the Mills, San Saba
and Comanche counties I have researched. The top prices paid for mature well
managed orchards appears to be around $2500 per acre.
There are also several areas containing native pecan trees managed and harvested
under a contract with Mike Grimes of Moody, Texas. Under this agreement the
contractor bears all costs of spraying and harvesting in return for 60% of the
pecans. In 2001 the yield to the owner was approximately 20,000 pounds of
pecans.
[PICTURE]
1994 Pecan Orchard Planting
<Page>
30
[PICTURE]
1998 Pecan Orchard Planting
[PICTURE]
Native Pecan Trees
<Page>
31
RANCH ROAD SYSTEM
A good quality gravel surfaced ranch road system serves the Seven J Stock Farm
property. A road runs through the center of the west tract connecting the west
headquarters with the nearby Rattlesnake Ranch and providing access to most of
the centrally located pastures. Another road system enters the East Rice Field
area and provides good vehicle access to those pastures located along the levee.
The east tract is served by two road systems running through the middle of the
cropland tracts and providing access to the River Pasture and the Pin Oak Point
Pasture. This road also connects with the two levee pump outs. The road
continues across Big Creek running through the southeast tract to connect with
FM 2915. Another good road enters the South Wolf Den pasture and serves the
northern portion of the east tract. The northeast tract and the east-southeast
tract have fairly adequate public road frontage and consequently there has been
no interior ranch road construction on these tracts.
FLOOD PROTECTION SYSTEM
A large percentage of the Seven J Stock Farm bottomland is protected by an
earthen levee which connects to the high ground on the nearby Rattlesnake Ranch
on the north, runs along and adjacent to the Trinity River on the west, and then
loops back around to the high ground of the east tract. This levee is
approximately 10.2 miles in length and averages approximately 10' to 15' in
height. The levee was reportedly constructed in the 1920's. It is wholly owned
by and its maintenance is the responsibility of Seven J Stock Farm, Inc. The
levee has generally been well maintained. A ranch road system runs along the top
of the levee. Drainage ditches are installed to collect rainfall within the
protected area of the levee and transfer it to two collection points on the
upstream side of the levee. Located at these two low points in the farm are two
floodwater pump outs. These pump out points are a combination of gravity flow
gates to discharge runoff when the river is below the floodgate elevation. When
the river is high, the gates can be closed to prevent flood waters flowing into
the Seven J protected area and the water is pumped out of the protected area via
two large turbine pumps powered by diesel engines. The pump-out floodgates and
pump systems are quite elaborate and reportedly have functioned adequately in
the past. The exception to this was the 1990 flood during which time the water
flowing into the Seven J property was greater than the capacity of the pump
outs. Although the levee generally protects the property from Trinity overflow,
the flood of 1990 was of such magnitude that properties upstream from Seven J
overflowed and those waters came around the upper end of the Seven J levee and
inundated the entire property to depths of several feet. In order to prevent a
breach, the levee was broken to allow the accumulated floodwaters to flow out of
the property into the Trinity streambed. Subsequently, the levee was repaired
and is now functioning. The 1990 flood has been variously estimated as being
equivalent to a 500-year to 1000-year flood. The levee was not designed to
protect against floods of this magnitude. The levee system would cost several
million dollars to replace and its contributory value is included in the
estimated value of the land it was designed to protect.
<Page>
32
[PICTURE]
River Pasture Pump Out
[PICTURE]
Pin Oak Pump Out
<Page>
33
[MAP]
<Page>
34
BUILDING IMPROVEMENTS
The Seven J Stock Farm property is improved with buildings designed for housing
for labor, storage for ranch equipment, supplies, and feed, and for sheltering
livestock. An inventory of these improvements was made and a description of the
most significant of these improvements follows. Following the narrative
description is a building improvement tabulation summary.
HOUSING AND OFFICE
Residence #1 - The 2734 square foot manager's dwelling is of average quality
frame construction consisting of a pier and beam foundation, wood siding,
composition shingle roof, and an attached two-car carport. The floor plan
contains a living room, dining room, den, kitchen, three bedrooms, two baths,
and a large utility room. There is a detached two-car carport. This structure
was given a major renovation 10 years ago to include new appliances, new heating
and air conditioning, termite damage repairs, new floor covering, interior
painting, and exterior painting. It has an effective age estimated at 45 years.
The functional utility of the building is fair since it appears to have been
added to at least twice.
[PICTURE]
Residence #2 - The 1152 square foot residence is a fair quality wood frame
structure with concrete slab foundation, asbestos shingle siding, composition
shingle roof, and has a detached one-car carport. The floor plan contains a
living room, kitchen, two bedrooms, and one bath. This structure appears to be
in fair condition due to recent painting and installation of new carpeting. It
has an effective age estimated at 40 years. The functional utility of the floor
plan is good.
<Page>
35
[PICTURE]
Residence #3 - The 2632 square foot dwelling is of average quality wood frame
construction with a concrete slab foundation, asbestos shingle siding, a
lightweight composition shingle roof, aluminum sash windows and an attached
two-car carport with storage shed. The floor plan features a living room, dining
room, kitchen, den, four bedrooms, two baths, and a utility room. This structure
appears to be in fair condition and has an effective age estimated at 45 years.
The functional utility of the building is good.
<Page>
36
[PICTURE]
Residence #4 - The 1540 square foot dwelling is of fair quality wood frame
construction with a concrete slab foundation, asbestos siding, lightweight
composition shingle roof, aluminum sash windows, and an attached one-car carport
with storage shed. The floor plan features a living room, dining room/kitchen,
four bedrooms, and two baths. This structure appears to be in fair condition and
has an effective age estimated at 50 years. The functional utility of the
building is good.
[PICTURE]
Residence #5 - The 1428 square foot residence is of low cost frame construction
with concrete block foundation, asbestos siding, composition roof, wood sash
windows, and a detached frame two-car garage with dirt floor. The floor plan
consists of a living room, dining room, kitchen, three bedrooms, and one bath.
The building is in poor condition and has an effective age estimated at 45
years. The functional utility of the building is fair.
<Page>
37
[PICTURE]
Office Building - The 3362 square foot office building is a combination wood
frame and low cost masonry structure with concrete slab foundation, frame and
concrete block walls, aluminum doors, aluminum sash windows, and composition
shingle and flat built-up tar and gravel roof. The interior finish consists of
commercial grade vinyl tile with interior painted walls. The floor plan consists
of an entry and large reception area, ten offices, two restroom areas, and a
storage room. The original 1656 square foot structure was built around 1977
while a 1716 square foot section was added at the front in 1998. The building is
generally in good condition and has an effective age estimated at 15 years. The
functional utility of the office building is fair inasmuch as it is probably
oversized for a typical ranch office.
[PICTURE]
Commissary - The 4664 square foot two-story storage/apartment building is of
wood frame construction consisting of a pier and block foundation, asbestos
siding and galvanized iron roof cover. The downstairs area consists of a 1364
square foot storage area previously used as a plantation store, and a 868 square
foot office/apartment located at the rear of the building. The upstairs consists
of two 1116 square foot two-bedroom, one-bath apartments. This structure is in
fair condition and has an effective age estimated at 35 years. The functional
utility of this building is fair since the store portion has not been functional
for a number of years. However there has been a history of utilizing one or two
of the apartments to house ranch labor at various times in the past.
<Page>
38
[PICTURE]
STORAGE BUILDINGS
Shop Building - The 6000 square foot ranch shop building is a rigid frame steel
structure with a concrete slab foundation, 12' eave height, galvanized sandwich
panel siding and roof. There is an enclosed 4800 square foot shop area with a
1200 square foot open shed on one end. The building is in fair condition with an
effective age of 30 years. Its utility is fair.
<Page>
39
[PICTURE]
Shop and Equipment Shed - The 7840 square foot rigid steel frame shop/storage
shed structure has an enclosed 960 square foot (20' x 48') shop building on one
end. There are two overhead doors on either end of the shop. The building has a
16' eave height. The equipment shed which is attached measures 48' x 160' and
has a dirt floor and open on three sides. The siding and roof on this structure
are galvanized steel sandwich panels. The building has an effective age of 30
years and its functional utility is fair.
[PICTURE]
Quonset/Shed - This structure is an 8496 square foot quonset type structure with
an attached pipe and steel beam support lean-to shed. Construction features of
the quonset include concrete slab foundation, steel frame supports, galvanized
iron roof, and sliding doors on either end. The structure is in fair condition
and has an effective age estimated at 45 years. The functional utility of this
structure is poor due to its design.
<Page>
40
[PICTURE]
Quonset Warehouse - This structure is a 4100 square foot quonset type structure.
Construction features include a concrete slab foundation, steel frame supports,
galvanized iron roof, and sliding doors on either end. The structure is in fair
condition and has an effective age estimated at 45 years. The functional utility
of this structure is poor due to its design.
[PICTURE]
Hay Warehouse - The 9200 square foot rigid steel frame structure has sandwich
panel exterior siding and roof cover. This structure consists of a large
warehouse area with a 16' eave height and a smaller area which has a 10' eave
height. This building is in fair condition and has an effective age of 30 years.
Its utility is poor.
<Page>
41
[PICTURE]
Hay Barn - (Horse Trap) The 5760 square foot wood frame hay storage structure
has a concrete slab foundation and galvanized corrugated iron sides and roof.
There is an attached 12' x 48' open shed on one end of the building to
facilitate forklift stacking of round hay bales in the building. This structure
was originally designed for square bale storage but by the addition of the shed
has been converted to round bale storage. The building is in fair condition and
has an effective age estimated at 25 years.
[PICTURE]
Hay Barn - (Creek Pasture) The 5760 square foot wood frame hay storage structure
has a concrete slab foundation and galvanized corrugated iron sides and roof.
There is an attached 12' x 48' open shed on one end of the building to
facilitate forklift stacking of round hay bales in the building. This structure
was originally designed for square bale storage but by the addition of the shed
has been converted to round bale storage. The building is in fair condition and
has an effective age estimated at 25 years.
<Page>
42
[PICTURE]
Hay Barn - (Seed Field) The 8640 square foot structure has steel pipe columns,
pipe roof trusses and R panel galvanized roofing. It has a graveled floor and
partially enclosed sides. The building has an effective age of ten years and is
in good condition.
[PICTURE]
Hay Barn - (Mississippi Hill) The 8640 square foot structure has steel pipe
columns, pipe roof trusses and R panel galvanized roofing. It has a graveled
floor and partially enclosed sides. The building has an effective age of ten
years and is in good condition.
<Page>
43
[PICTURE]
SHELTER
Stable - This is a 2304 square foot pole and wood frame structure with a dirt
floor. It consists of 14 horse stalls and 2 concrete slab feed storage areas on
either side of a center alley. This structure is in fair condition and it has an
effective age of 35 years. Its functional utility is fair.
Tack Room - The 280 square foot tack room is a wood frame structure with a
concrete slab foundation, galvanized iron sides and roof. It is located adjacent
to the stable. The structure is in fair condition and has an effective age
estimated at 35 years. Its functional utility is fair.
<Page>
44
[PICTURE]
OTHER BUILDINGS
There are several other farm buildings located on the property considered to
have little or no contributory value due to their age, condition, or functional
obsolescence. These include a building formerly used for auction sales, several
livestock sheds and a small hay barn in the Northeast tract. Another building
once known as the Bag Warehouse was leased to Trinity Valley Pecan Company and
remodeled into part of a pecan shelling plant built by the tenant. The lease
term is for fifty years beginning September 1, 1998 and no residual value is
attributable to these buildings in this valuation. Another residence is located
in the Creek Pasture on 5.966 acres leased for fifty years beginning September
1, 1997 to John R. Parten and Nancy K. Parten. This building was a leasehold
improvement by the tenant and the present worth of any reversionary interest at
the end of the lease would be minimal.
<Page>
45
[PICTURE]
Auction Building
[PICTURE]
Pecan Shelling Plant
<Page>
46
[PICTURE]
Parten Residence
ENVIRONMENTAL HAZARDS
The presence of environmental hazardous materials may affect the value of a
property either as a diminution and/or as a cost to cure. Examples of these
potential hazards include, but are not limited to the following: underground
storage tanks, evidence of waste disposal such as sludge, paints, chemicals, oil
spillage or asbestos content in the improvement's construction materials. Based
on my inspection of the subject property there is evidence of potential
environmental hazards in the form of burnt lubricating oil from farm equipment
in the headquarters area. There is also considerable oil production activity on
the ranch and there may be additional hazards from such operations. However I am
not qualified to perform environmental assessments. The client is urged to
obtain an assessment from a qualified expert before making an economic decision
regarding this property.
PROPERTY TAXES
The Houston County appraisal District has assessed the "Market" value and "Ag
Use" value of the subject property as shown in the following table. Section
23.41 of the Texas Property Tax Code provides that land designated for
agricultural use is to be appraised for tax purposes at it's value based on the
land's capacity to produce agricultural products. The subject land except for
the farmstead acreage qualifies for AG Use assessment. This results in a
substantial reduction in assessed value and tax levy.
<Page>
47
<Table>
<Caption>
MARKET AND AG USE LAND ASSESSED VALUES FOR 2002
- -----------------------------------------------------------------------------------------------------
Market Value Ag Use Value
- -----------------------------------------------------------------------------------------------------
No. Acres $/Unit $ Total $/Unit $ Total
- -----------------------------------------------------------------------------------------------------
696.87 $ 732.89 $ 510,730.00 $ 93.85 $ 65,400.00
- -----------------------------------------------------------------------------------------------------
8703.89 $ 729.16 $ 6,346,540.00 $ 97.91 $ 852,230.00
- -----------------------------------------------------------------------------------------------------
334.00 $ 730.00 $ 243,820.00 $ 83.95 $ 28,040.00
- -----------------------------------------------------------------------------------------------------
1125.94 $ 729.67 $ 821,570.00 $ 91.11 $ 102,580.00
- -----------------------------------------------------------------------------------------------------
216.00 $ 730.00 $ 157,680.00 $ 90.00 $ 20,280.00
- -----------------------------------------------------------------------------------------------------
43.90 $ 730.00 $ 32,050.00 $ 143.74 $ 6,310.00
- -----------------------------------------------------------------------------------------------------
21.33 $ 729.95 $ 15,570.00 $ 80.17 $ 1,710.00
- -----------------------------------------------------------------------------------------------------
11,141.93 $ 743.78 $ 8,127,960.00 $ 93.12 $ 1,017,690.00
- -----------------------------------------------------------------------------------------------------
REAL PROPERTY ASSESSMENT, TAX RATE AND TOTAL TAX-2001
- --------------------------------------------------------------------------------------------------------------------------------
Agency Land Improvements Total Tax Rate per $100 2001 Tax
- --------------------------------------------------------------------------------------------------------------------------------
Houston County $1,084,190.00 $ 763,270.00 $1,847,460.00 $ .3409 $ 6,297.99
- --------------------------------------------------------------------------------------------------------------------------------
Houston Co. Hospital $1,084,190.00 $ 763,270.00 $1,847,460.00 $ .0396 $ 731.59
- --------------------------------------------------------------------------------------------------------------------------------
Lovelady ISD $1,084,190.00 $ 763,270.00 $1,847,460.00 $ 1.3300 $ 24,571.22
- --------------------------------------------------------------------------------------------------------------------------------
Total $1,084,190.00 $ 763,270.00 $1,847,460.00 $ 1.7105 $ 31,600.80
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
As shown in the preceding tables, the assessed market value for the land in 2002
was $744 per acre. This appears to be the general level of assessment for
pastureland/cropland in Houston County. The Ag Use assessed value for the land
was $93.12 per acre. The total tax burden for land and improvements equates with
$2.84 per acre for 2001.
PROPERTY HISTORY
Acquisition Data: The following table provides a history of the acquisition of
the various tracts making up the Seven J Stock Farm Inc. property. It was
assembled over a period of years until a total of 10,927.856 acres had been
acquired. The most recent acquisition on August 13, 1991 was Tract 4 known as
the Keel Tract containing 21.16 acres purchased for $1000 per acre.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------
Date Recording Grantor Grantee Tract # # Acres % Interest
- ---------------------------------------------------------------------------------------------------------------
09/08/48 261/331 Murray Seven J 1 10,249.00 100
- ---------------------------------------------------------------------------------------------------------------
07/06/54 307/459 Petty Seven J 3 65.00 100
- ---------------------------------------------------------------------------------------------------------------
07/14/80 464/83 McDougal Seven J 5 259.19 100
- ---------------------------------------------------------------------------------------------------------------
11/08/88 Parten Seven J 6 333.50 100
- ---------------------------------------------------------------------------------------------------------------
08/13/91 963/180 Cox Seven J 4 21.16 100
- ---------------------------------------------------------------------------------------------------------------
</Table>
<Page>
48
Operation: Since 1998 the Seven J Stock Farm, Inc. property has been under lease
to four tenants for crop production and livestock grazing use. Approximately
2612 acres are leased for cotton and grain crops to Wayne Dyches (713 acres) and
Roy Dyches (1691 acres). The terms of the farming leases call for the owner to
receive 1/4th of the cotton and 1/4th of all government subsidies in connection
with the cotton crop. The owner is required to pay 1/4th the cost of fertilizer,
insect control chemicals and hauling and ginning. The owner is to receive 30% of
the grain crop and 30% of any government subsidy associated with the grain crop.
The owner's expenses in connection with the grain crop are 30% of the cost of
fertilizer, insect control chemicals and hauling and drying, but not any
harvesting costs. The tenants are responsible for general maintenance and upkeep
and a proportionate share of the drainage ditch, levee and the two pumping
stations. The owners have installed three center pivot irrigation systems
covering approximately xxx acres. The agreed total annual rental for this system
is $5,960 per year for each pivot allocated 25%-30% to the owner and 70%-75% to
the tenant (depending on crop grown). The current lease covers the 2000-2002
crop years but can be renewed at the option of both parties for an additional
two years under the same terms. In actuality, the same tenants have been farming
the Seven J cropland since 1980.
The bulk of the non-cropland Seven J Stock Farm property consisting of
approximately 8,500 acres was leased to J. R. Parten Ranch Trust for livestock
grazing. The lease was for a period of five years beginning November 1, 1999
through October 31, 2004. The ranch lease gave the tenant the use of most of the
farm buildings with the exception of those reserved for the use of the owner.
Likewise excepted from this lease was all of the land used by the farming
tenants. The lease provision calls for the payment of $16 per acre per year with
an adjustment based on increases in the consumer price index. The tenant is
required to mow or spray every acre of pastureland each year. He is also
required to spread one ton of lime over all of the pastureland one time during
the five-year lease term. Failure to accomplish weed spraying or liming would
require the additional payment of $6.50 per acre for non mowed or sprayed
acreage and $21 per acre for un limed acreage. The owner pays all ad valorem
taxes and maintenance expense on water well bores and downhole equipment. The
lessee is responsible for all other maintenance of land improvements and
building improvements. The owner is responsible for maintenance of the levee
pump out pumps, engines, and equipment. The lessee agrees to pay a pro rata
portion of the levee maintenance based on the number of acres protected by the
levee system.
There is an additional grazing lease covering 1183.71acres of pastureland to
Risinger Ranches. The lease extends from August 1, 1998 through July 31, 2003.
The terms and conditions of the Risinger lease are identical to the Parten
lease.
On an overall basis, the ranch would be considered a good cattle operation due
to the extensive pasture cross fencing and livestock water distribution system,
and its convenient access. The division of the property into the six tracts
detracts somewhat from efficient operation. The large amount of river bottom
pasture is a positive in regard to natural fertility and forage production;
however, the wetness and risk of flooding detracts from its appeal.
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49
AREA AND NEIGHBORHOOD ANALYSIS
LOCATION
The subject property is located in central Houston County in east central Texas.
It is located about mid-way between Dallas on the north and Houston on the
south. Interstate Highway 45 runs through the west of the area and connects
these two metropolitan centers. The entire county and the surrounding counties
comprise an area wherein are located properties of comparable physical
characteristics influenced by the same general locational and economic factors.
Consequently, the competitive market area is considered to comprise Houston
County and the surrounding counties.
TOPOGRAPHY AND SOILS
The subject area and neighborhood is comprised of rolling uplands to level
riverbottom ranging in elevation from 200' to 600' above sea level. The upland
areas slope generally toward the bottomlands of the Trinity River on the west
and the Neches River on the east. The surrounding area is in the western coastal
plain, Texas claypan area, Texas blackland prairie, and the east Texas
timberland major land resource areas. The soils formed under timber, post oak
savannah, and prairie vegetation. The soils of the post oak savannah are light
colored, fine sandy loam to fine sand and the soils formed under grasslands are
dark colored, fine sandy loam to clay.
CLIMATE
The climate is predominantly maritime with long summers and mild winters. The
average temperature for July is 95 degrees while the temperature during January
is approximately 35 degrees. The average rainfall is approximately 42 inches
with an annual growing season that averages 265 days. Typically, the first
freeze of fall occurs in mid-November and the last freeze of spring in
mid-March. This growing season is favorable for the development of improved
pasture for livestock and hay and crop production of cotton, milo, corn,
peanuts, and watermelon.
MINERALS AND NATURAL RESOURCES
Soil is the most important natural resource in these counties. Livestock, hay,
and forage crops are the main agricultural sources of income in the county.
Lignite coal mining for energy production has become increasingly important in
the area and is actively being conducted in Leon, Freestone, and Robertson
Counties. The main oil and gas fields are located in various sections in Brazos,
Robertson, Madison, Leon, and Houston Counties. Water is an important natural
resource. The Trinity River, Neches River, and numerous small streams, creeks,
and lakes provide abundant water supplies for the county. The agricultural land
is improved with farm ponds, many of which are spring fed and are stocked with
fish for individual recreation. Most of the county has ample supplies of good
quality underground water for industrial, agricultural, and
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50
domestic uses. Fish and wildlife are another important natural resource in the
area. Most areas are leased for deer hunting which provides additional income to
land owners. Timber production is substantial in the eastern half of the county.
Most of the soils in the area have a potential for growing pine or hardwood.
POPULATION
Major cities in this region include Crockett, the county seat of Houston County,
(2000 population, 7141), Madisonville, the county seat of Madison County (2000
population, 4159), Franklin, the county seat of Robertson County (2000
population, 1470), Centerville, the county seat of Leon County (2000 population,
903), Huntsville, the county seat of Walker County, (2000 population, 35079),
Anderson, the county seat of Grimes County, (2000 population, 257), and
Bryan-College Station, the county seat of Brazos County, (2000 population,
133,550). Other small cities in Houston County include Grapeland (1451), Kennard
(317), Latexo (272) and Lovelady (608).
LAND USAGE AND TRENDS
Land usage in the area and in the vicinity of the subject property range from
agricultural production on the larger tracts to rural residential and
recreational uses on the smaller heavily wooded properties. With the strong
growth in population during the past 25 years in this region and in the nearby
Houston and Dallas metropolitan areas, a number of unimproved wooded properties
were subdivided for rural recreational and residential purposes beginning in the
early 1980's. Demand for rural subdivision and recreational tracts declined in
the late 1980's-early 1990's but has regained momentum in recent years. This
strong demand has caused land values in general to increase with the highest
prices being paid for tracts near the 1-45 corridor because of the easy access
for urban residents to travel to their weekend ranches. These small tracts were
utilized for very limited agricultural production, if any, and are mostly used
for rural recreation such as hunting, fishing, and relaxing. The larger, more
open upland tracts are generally utilized for livestock pasturing. Row cropping
is generally confined to the rich alluvial lands along the Trinity River and on
the Blackland prairie areas of the region.
The use of land in the area as part of open pit lignite/coal mines has become an
important land use in the region. At the present time there are open pit mines
in Grimes, Freestone, Leon, and Limestone Counties with other mines located in
counties to the northeast and southwest. A band of lignite coal known as the
Wilcox formation runs through this section of the state in a northeast/southwest
band. This lignite, which is of good quality, typically has a BTU content of
5,500 to 7,000 BTU's per ton and is found at depths from 30' to 125'. With these
depths, it is proven to be economically feasible to strip mine to extract the
lignite/coal. The coal in all cases is utilized as a fuel for mine mouth located
electric generating plants. As the lands are included in the strip mine, they
are taken out of agricultural and other uses and utilized in the mine during the
mining period and in the following reclamation. Income from lignite leases and
royalty payments is an important factor in the local land market for those areas
containing these valuable lignite deposits.
MANAGEMENT PRACTICES
The major ranching enterprises in the area consist of cow/calf or stocker feeder
type operations. A description of these cattle operations follows.
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51
Beef Cattle Operation: The typical livestock ranching enterprise in this
neighborhood is a cow-calf operation. Practically all breeds are represented in
local herds with the English and Brahman types being predominant. Many operators
prefer British-Brahman cross breeds due to the good milk producing
characteristics of the mother cows. Herd cows typically weight 900 pounds and
bulls average 1200 pounds. Calves are normally born in the winter months so that
they are old enough to graze the lush spring pasture growth. The typical calf
crop is 85 to 95%. Calves are sold when they are six to seven months old with
the typical selling weight being between 400 and 550 pounds. Calves are normally
sold at the local livestock auction with steers usually purchased as feeders for
eventual placement in feed lots and heifers for replacement breeding stock.
Approximately 3 to 4 acres of common Bermuda grass pasture is necessary to
maintain a cow during an average season. They can graze this pasture growth for
8 to 9 months out of the year with supplemental feeding during the winter
months. Feeding programs usually include salt and minerals free choice at all
times and protein cubes and hay during the winter. The typical supplemental
feeding costs for a cow in this area ranges from $25 to $35 per year. Other
costs incurred in cattle production include vaccination for contagious diseases
and control of internal and external parasites.
Stocker Operation: The typical stocker operation found in the area consists of
purchasing stocker animals in October and November and grazing them on small
grain winter pasture through May at which time they are sold as feeders. These
animals are purchased at an average weight of approximately 450 pounds and they
are held for approximately six months. They will have gained an average of
approximately 250-300 pounds when sold in May. Typical pasturage for these
stocker operations consist of oats, wheat, and rye grasses. Oats are generally
planted in early September in order that good growth is available to be grazed
in November. The stocking rate on this type of pasture will run approximately
1.5 head per acre. The animals typically do not require supplemental feeding on
winter pastures except for salt and minerals. Other expenses involved with
operation include veterinarian expenses as well as labor and equipment charges.
In this area, a death loss of approximately 2% is considered typical.
DETRIMENTS AND HAZARDS
The major detriment or hazard involved with the livestock operations are summer
droughts which retard pasture growth. Generally, these droughts are not of such
duration or intensity as to cause pasture failure. Some portions of the land
along the creeks flowing into the Trinity and Navasota Rivers are subject to
overflow during periods of heavy rainfall. These floods are a hazard to
livestock which sometimes must be moved to higher ground. Much of the soil along
the creek bottoms and drainage areas is subject to gully erosion. The natural
fertility of many of the soils in this area make the area subject to severe
overgrowth of weeds which must be controlled through mowing or spraying. There
are no poisonous plants which cause death losses to livestock in the area.
RENTAL PRACTICES
The pastureland in this neighborhood is typically leased on a cash rent basis.
The term will vary from one year to ten years with the typical being for five
years. Rents usually reflect the carrying capacity of the individual pasture and
often times the maximum number of cows which the
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52
tenant may graze is stated in the lease. The tenant is responsible for
maintenance of fences and watering facilities. Fertilizer expense, if any, is
borne by the tenant and often he is required to mow the pastures for weed
control at least once a year. Grazing leases in the neighborhood range from
$2.00 per acre for wooded unimproved pastureland up to $20 per acre for highly
improved pastureland. The typical ranch lease runs about $10 per acre per year.
In relationship to the carrying capacity, most operators will pay from $80 to
$120 for the grazing rights for one cow for one year. This upper range is
generally only paid for improved pastureland providing grazing for nine months
out of a year. A set of livestock working pens is almost always included in the
lease arrangement. Farming leases are usually negotiated on a cash rent and/or a
crop share arrangement. Cash rents on typical farmland range from $25 to $50 per
acre. Crop share leases usually pay 1/3 of the grain and 1/4 of the cotton to
the landlord for use of the land. The landlord typically contributes his pro
rata share of the fertilizer, insecticide, and harvest costs.
MARKET ACTIVITY
The demand for land in the area generally was strengthened during the 1990's and
was strong in 2000-2002. The general low level of commodity prices and
profitability from farming enterprises has caused decline of farmland trading in
the bottomland sections of the area with only the most efficient operators
purchasing to expand operations. Large ranch properties have stabilized in
recent years but continue to find buyers when offered on the market. The major
influence in the land market is the strong demand for recreational hunting land
and tracts suitable for subdivision. In spite of the slowdown of the economy
there has been no slackening of market demand and activity to date. The present
outlook is for continued appreciation in prices for rural land in the area.
SUMMARY
The neighborhood consists of a ten county region. All community services and
markets are adequate to serve this area. The typical geographic and economic
influences, land usage, management practices, detriments and hazards, rental
practices and market activity were discussed. In analyzing all of these factors,
it appears that an investment in rural land in this area would be a relatively
sound one at this time with appreciation in value expected in the future. The
appreciation potential of ranch properties appears to be moderately good due to
their wide ownership appeal.
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53
HIGHEST AND BEST USE
HIGHEST AND BEST USE is defined as:
1. THE REASONABLE AND PROBABLE USE THAT SUPPORTS THE HIGHEST PRESENT VALUE OF
VACANT LAND OR IMPROVED PROPERTY, AS DEFINED, AS OF THE DATE OF THE APPRAISAL.
2. THE REASONABLY AND LEGAL USE OF LAND OR SITES AS THOUGH VACANT, FOUND TO BE
PHYSICALLY POSSIBLE, APPROPRIATELY SUPPORTED, FINANCIALLY FRASIBLE, AND THAT
RESULTS IN THE HIGHEST PRESENT LAND VALUE.
3. THE MOST PROFITABLE USE.2
CONCLUSION
Based on an analysis of features, factors and conditions creating, maintaining,
or destroying market value in the immediate neighborhood, the highest and best
use of the appraised property on the date of the appraisal is concluded to be:
Agricultural Usage for Crop Production and Livestock Pasturing
The highest and best use of land as though vacant and property as improved must
be determined utilizing four criteria - physically possible, legally
permissible, financially feasible, and maximally productive. My analysis of the
subject with respect to this criteria and the resulting Highest and Best Use
conclusions are as follows:
LAND AS VACANT
1) Physically Possible: The primary constraint imposed upon the possible use of
any property is dictated by the physical characteristics of that property. The
physical characteristics of a site such as 1/4 size, shape, topography,
improvements, and availability of utilities affect the uses to which it can be
put.
The subject property is a 10,297.857 acre tract located on State Highway 21,
nineteen miles southwest of Crockett in Houston County, Texas. The property
consists of six tracts located close to each other but separated by state
highways and county roads. This property has adequate size, access, topography,
soils, and vegetation to support the existing and concluded highest and best
uses.
Surrounding land uses in the immediate neighborhood include agricultural
livestock pasturing, hay production, cotton and grain production, recreation,
and rural homesite uses. The larger tracts in this area are typically utilized
for agricultural purposes with some recreational use for deer hunting and
fishing. Therefore, the surrounding land uses as well as the physical
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54
characteristics of the subject property support the existing and concluded
current and future highest and best uses. The physical qualities influencing
utility or appeal of this property are listed below:
a) Adequate frontage on State Highway 21, FM 2498, FM 3275, and county
roads
b) 75% level bottomland topography protected by an extensive levee
system and 25% rolling upland topography cut by small creeks
c) Land classification consisting of 2929.913 acres (26.81%)
cropland/orchard, 3810.247 acres (34.87%) improved pasture, 3519.708
acres (32.21 %) native pasture, and 667.990 acres (6.11%) wooded
pasture/wildlife land
d) The soils located on this property are fertile bottomland and
moderately fertile upland sandy soils adaptable to cropland and
improved pasture use
(e) The property is cross-fenced for efficient grazing management
with a good livestock water system
(f) The property is improved with adequate building improvements to house
necessary ranch labor and store necessary equipment, supplies, and
feed
2) Legally Permissible: The second consideration given to a property when
determining a highest and best use is its legally permissible uses. Legal
limitations of use, such as private restrictions, zoning, building codes,
historic district controls, and environmental regulations may preclude many
highest and best uses. The legal restrictions which apply to the subject
property include utility service easements. These site restrictions do not
preclude the aforementioned physically possible uses for the subject property.
3) Financially Feasible: The third step in analyzing a property's highest and
best use is to analyze the financial feasibility of the development. Those uses
meeting the first two criteria and are capable of generating a net revenue high
enough to satisfy the required rate of return on investment and provide a return
on the land would be considered financially feasible uses. To determine such
uses, surrounding property uses and development trends in the area as well as
supply and demand relationships for similar developments must be analyzed.
The subject tract has a long history of crop and livestock production. It's high
quality cropland and it's improved pastures and extensive cross fencing make it
efficient for these uses. However, it lacks the wooded vegetation to give it
additional use for recreation in the form of hunting. Typically, similar
properties in the neighborhood show a low return on their current land value
based on net to land from cash rent or from direct operations. Obviously, buyers
of these properties are motivated by potential land appreciation and other
speculative benefits that accrue through the ownership. Typically, the income
received from the rental of agricultural land rarely provides sufficient return
above operating and management expenses in comparison with other alternative
investments. However, based on the historic acceptance of these low rates of
return on land, coupled with future speculative benefits, the highest and best
use conclusion is considered to be financially feasible.
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55
4) Maximally Productive: For a site to be utilized to its highest and best use,
that use must produce the highest value consistent with the rate of return
warranted by the market for that use. As noted above, the concluded current and
future possible highest and best use for the property is physically possible,
legally permissible, financially feasible, and compatible with the surrounding
land uses. The highest and best use for the subject property meets the above
criteria and is considered to be maximally productive.
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56
STANDARD APPRAISAL TECHNIQUES BRIEFLY EXPLAINED
There are three distinctly separate approaches in appraising real property
which, when applied to market data, indicate a property's value in its own
market. These approaches or techniques are commonly distinguished from each
other by the nature of the data used--cost, sales, or income. A brief
explanation of these techniques and their application to this appraisal follows.
COST APPROACH TO VALUE
In the cost approach, the value of the component parts, as they contribute to
the whole of the property, are estimated and added to the depreciated cost of
the improvements. The component parts on the subject include minerals, land,
land improvements, and building improvements. The total represents the value
indicated by the cost approach.
SALES COMPARISON APPROACH TO VALUE
In the sales comparison approach, the subject property is compared to similar
properties that have sold recently or for which listing prices or offering
figures are known. Data for generally comparable properties are used, and
comparisons are made to demonstrate a probable price at which the subject
property would sell if offered on the market.
INCOME APPROACH TO VALUE
In the income capitalization approach, the current rental income is shown with
deductions for landlords operating expenses. A conclusion about the prospective
net operating income of the property is developed. In support of this net
operating income estimate, operating statements for previous years may be
reviewed together with available operating/cost estimates. An applicable
capitalization method and appropriate rates are developed for use in
computations that lead to an indication of value by the income capitalization
approach.
APPLICABLE APPROACHES TO THIS APPRAISAL
The cost approach was applicable because the land is comprised of three
components having different value and there are depreciable improvements on the
property. The sales comparison approach to value was applicable because sales of
land considered reasonably comparable to the subject have occurred and
information regarding these properties was available for analysis. The income
approach to value was not utilized even though the subject property has income
potential in the form of grazing leases, hunting leases, pecan production and
building rents. The typical capitalization rates for agricultural properties are
substantially below alternate investment properties. This indicates that the net
income is not a significant factor in determining prices for ranches in this
market. It was therefore concluded that the values developed from the cost and
sales comparison approaches would be more reliable as indicators of the
reactions of the market to this property and the income approach was omitted.
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57
COST APPROACH
Land and minerals are usually the major components of value in a rural property,
and the value of buildings and other improvements is relatively minor in
relation to the land value. The cost approach is applicable, however, in
estimating the market value of rural properties in order to estimate the value
contribution of the various property components including any improvements. The
application of the cost approach calls for identifying the various resources or
components which comprise a given ranch property and estimating the value of
each separately. This approach is based on the assumption that the summation of
the contributory value of the property's resources or components will
approximate the value of the property as a whole. Specifically, this approach
calls for inventorying the minerals, the various building and land improvements,
as well as the different types of land comprising the subject and estimating the
value of each. The cost approach consists of the following steps:
1. Estimate the value of the mineral interest
2. Estimate the value of the various land types or capability classes of the
subject.
3. Estimate the reproduction cost and depreciation for land and building
improvements to derive a depreciated cost basis.
4. Add the depreciated cost of the buildings, land improvements, land
components, and minerals to arrive at an indication of value from the cost
approach.
In the following pages of this report, the process as outlined above is applied
to the subject property.
MINERAL COMPONENT VALUATION
This valuation does not include an estimate of the contributory value of the
mineral/royalty ownership in the subject property. Therefore, this valuation
procedure is omitted.
LAND COMPONENT VALUATION
Valuation of the land consists of identifying the major types of land as
distinguished by their soil characteristics, vegetative cover, topography, or
other factors. Sales of tracts entirely or predominantly of each type of land
are analyzed. From the overall price per acre is extracted the contributory
value of minerals and land improvements to develop the surface value. Then the
value of minor classes of land, if any, is subtracted and the remainder of the
sales price is considered to be attributable to the principal land type. An
analysis of several sales provides a value range for each, type of land. Based
on the relative characteristics such as market conditions, location, access, and
physical characteristics of the subject and the sales within each category, an
indication of the value of each class of subject land is developed. A summary
description of these sales is presented on the following tabular analysis.
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58
<Table>
<Caption>
SEVEN J STOCK FARM
LAND COMPONENT SALES
200204LCS-JCS-9/16/02
1 2 3 4 5
========================================================================================================
Map Reference Austonio Austonio Grapeland Sand Ridge Chapel
Date 23-Nov-99 14-Jun-99 05-Jan-00 10-Aug-00 22-Sep-00
Recording 1139-238 1129-289 0000-57 00-2982 00-3580
Grantor Minter Vasquez Fox Davidson Richmond
Grantee 3L Cattle Parten Klein Hornbeck Pipes
County Houston Houston Houston Houston Houston
Location 4 mi W 4 mi S 2 mi W 4 mi W 2 mi NE
Austonio Austonio Grapeland Weldon Austonio
Area (Acres) 706.045 983.000 586.917 433.037 483.049
Primary Road CR 3200 SH 21 FM 227 CR 3495 SH 21
Secondary Road None CR 3200 None None None
Minerals/Royalties 33%/33% 12.5%/12.5% 25%/25% 0%/0% 25%/25%
Esmts/Encumbrances Electric Electric Electric Electric Pipeline
Bldg. Improvements None None None None None
Land Improvements Fair Poor Fair Poor Poor
Units of Comparsion:
Overall Price/Acre $630 $677 $683 $543 $630
CE Price/Acre $630 $677 $683 $543 $630
Bldg.Impr.Price/Ac $0 $0 $0 $0 $0
Land Price/Acre $630 $677 $683 $543 $630
Land Impr.Price/Acre $0 $25 $25 $0 $0
Timber Price/Acre $0 $0 $0 $0 $0
Minerals Price/Acre $30 $25 $25 $0 $25
Surface Price/Acre $600 $627 $633 $543 $605
Land Mix/Allocation ($/Ac):
Class II (cropland) 622/$595 530/$642
Class IV-VII (improved) 500/$706
Class IV-VII (native) 453/$642 56/$657
Class IV-VII (woods) 84/$475 87/$550 377/$526 483/$605
(continued)
6 7 8 9 10
=======================================================================================================
Map Reference Halls Bluff Austonio Austonio Austonio Crockett
Date 30-Oct-00 05-Oct-00 05-Oct-00 22-Jun-01 28-Jan-02
Recording 00-4046 00-3747 00-3744 02-0606
Grantor Alicante Maples-Rizzo Luenick-Rizzo Rizzo Shartle
Grantee Crockett Parten Parten Parten Lowery
County Houston Houston Houston Houston Houston
Location 11 mi W 6 mi SW 6 mi SW 6 mi SW 2 mi
Crockett Austonio Austonio Austonio Crockett
Area (Acres) 1628.892 474.549 1155.779 719.000 2121.698
Primary Road SH 7 FM 2498 FM 2498 CR 3200 SH 19
Secondary Road None CR 3200 CR 3200 None SH 21
Minerals/Royalties 0%/0% 25%/25% 8%/8% 25%/25% 12.5%/12.5%
Esmts/Encumbrances Powerline None Levee None Powerline
Bldg. Improvements None None None None None
Land Improvements Poor Poor Poor Poor Fair
Units of Comparsion:
Overall Price/Acre $625 $750 $750 $731 $765
CE Price/Acre $625 $750 $750 $731 $765
Bldg.Impr.Price/Ac $7 $0 $0 $0 $10
Land Price/Acre $618 $750 $750 $731 $755
Land Impr.Price/Acre $10 $10 $10 $10 $25
Timber Price/Acre $0 $0 $0 $0 $0
Minerals Price/Acre $0 $50 $25 $50 $25
Surface Price/Acre $608 $690 $715 $671 $705
Land Mix/Allocation ($/Ac):
Class II (cropland) 1628/$608 256/$690 1035/$740 172/$791
Class IV-VII (improved)
Class IV-VII (native) 219/$690 547/$633 2019/$722
Class IV-VII (woods) 121/$592 103/$578
</Table>
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59
[MAP]
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60
CONCLUDED VALUE OF LAND COMPONENTS
An analysis of the land sales data shows the current contributory values of the
typical surface estate classifications and the value ratios of these components
to each other.
- --------------------------------------------------------------------------------
LAND COMPONENT LOW $/ACRE HIGH $/ACRE MEAN $/ACRE RATIO
- --------------------------------------------------------------------------------
Cropland $595 $791 $678 100
- --------------------------------------------------------------------------------
Improved Pasture $706 $706 $706 100
- --------------------------------------------------------------------------------
Native Pasture $633 $722 $669 90
- --------------------------------------------------------------------------------
Wooded Pasture $475 $605 $554 80
- --------------------------------------------------------------------------------
In consideration of all differences between the sale properties and the subject
for factors such as date of sale, location, access, size and other physical
characteristics, I have concluded that the subject land components would
contribute the following values:
Cropland 2929.913 acres @ $ 700 per Acre = $ 2,043,939
Improved Pasture 3810.247 acres @ $ 700 per Acre = $ 2,667,173
Native Pasture 3519.707 acres @ $ 650 per Acre = $ 2,287,810
Wooded Pasture 667.990 acres @ $ 550 per Acre = $ 367,395
Total 10927.857 acres @ $ 675 per Acre = $ 7,366,317
Rounded $ 7,376,303
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61
ESTIMATE OF IMPROVEMENT REPRODUCTION OR REPLACEMENT COST
The theoretical base for the cost approach is reproduction cost, but replacement
cost may also be used in certain cases. There is an important distinction
between these terms.
REPRODUCTION COST: "THE COST OF CONSTRUCTION AT CURRENT PRICES OF AN EXACT
DUPLICATE OR REPLICA USING THE SAME MATERIALS, CONSTRUCTION STANDARDS, DESIGN,
LAYOUT, AND QUALITY OF WORKMANSHIP, EMBODYING ALL THE DEFICIENCIES,
SUPERADEQUACIES, AND OBSOLESCENCE."
REPLACEMENT COST: "THE COST OF CONSTRUCTION AT CURRENT PRICES OF AN IMPROVEMENT
HAVING UTILITY EQUIVALENT TO THE IMPROVEMENT BEING APPRAISED BUT BUILT WITH
MODERN MATERIALS AND ACCORDING TO CURRENT STANDARDS, DESIGN, AND LAYOUT."
The use of replacement cost eliminates the need to deduct some forms of
functional obsolescence but does not affect the necessity to measure physical
deterioration and external obsolescence.
TECHNIQUES FOR ESTIMATING COST
QUANTITY/SURVEY METHOD: This method involves calculation of all types of labor
and materials, subcontractor fees, and equipment required for reproduction of a
new improvement. Each item of cost is priced in terms of current local prices
and wages and is usually calculated on a per hour, per pound, or other unit of
measurement depending upon the materials being estimated. Overhead, profit, and
other indirect costs are usually added in as a lump sum or as an appropriate
percentage at the end. The quantity/survey method is the most accurate method of
cost estimating because essentially it is a repetition of the contractors
original process of developing a bid figure. It is the most detailed, complex,
costly, and time consuming and requires expert analysis. It is rarely used in
rural appraising because of the time and expense involved.
UNIT IN PLACE METHOD: This method involves estimating the unit cost of materials
or component sections of the installed improvement. In this method, the
structure is generally broken down into large units and to these large units are
then applied a unit cost which involves either an amount per square foot or
lineal foot as the unit would be installed in place. Other indirect costs and
overhead are added at the end either as lump sums or percentages. Accurate
measurement and description are essential for the successful use of this method.
COMPARATIVE UNIT METHOD: This method of cost estimating is generally utilized in
estimating the cost of improvements found on rural properties. It consists of
lumping together all components of the structure and then estimating cost based
on a cost per square foot, cubic foot, or linear foot. The costs used are
usually completed construction costs including all installation expenses and
usually all builders overhead and profit as well. Commercial cost estimating
services provide information on these unit costs. This method is the least
accurate of the three methods; however, it is easiest to apply and least time
consuming and costly.
SOURCE OF COST DATA
LOCAL BUILDERS: These are excellent sources of current costs of construction for
various improvements located on rural properties. The builder's detailed cost
estimate is the most reliable
<Page>
62
indicator of the cost new, but due to the time and cost involved, it is
typically not feasible to employ a builder to estimate every building which is
appraised.
MARKET ABSTRACTION: Sales can be found which include new improvements, and if
sufficient land sales can be found, the cost new of improvements can be
abstracted from the market. This method is generally not applicable to the
appraisal of farm improvements because the data is seldom available.
COST SERVICES: There are three recognized cost reporting services which can be
subscribed to by those persons or organizations requiring detail cost
information. These include Dodge Building Cost Calculator, Beck's Building
Valuation Manual, and Marshall and Swift Valuation Services. The purpose of each
of these services is to reduce the construction cost of various types of
improvements to average unit costs either on a square foot or cubic foot basis.
In addition, these services usually supply cost indexes and local cost
multipliers for various areas throughout the United States. These cost manuals
are widely utilized by appraisers in developing cost estimates utilizing the
unit in place and comparative unit methods.
In developing reproduction cost estimates for land and building improvements on
the subject property as well as the analysis of similar improvements on the
sales properties, the appraiser has utilized cost data from Marshall and Swift
Valuation Services. The unit costs for residential improvements was taken from
Section 12 and the cost of farm buildings from Section 17 of the calculator
section of the cost manual. Land improvement unit costs were taken from Sections
66 and 67 of the Supplemental Cost Section. All costs were modified with the
current cost multipliers and the local multipliers to arrive at the final
estimated unit cost.
ESTIMATE OF DEPRECIATION
Accrued depreciation is defined as "the difference between the cost new and the
present contributory value of the improvements." The major types of depreciation
are physical deterioration, functional obsolescence, or external obsolescence.
PHYSICAL DETERIORATION: This is the adverse effect on value caused by
deterioration or impairment or condition as a result of wear and tear and
disintegration and may be classified as curable and. incurable. Curable physical
deterioration is applicable to items whose physical deterioration is
economically feasible to cure and which are customarily repaired and replaced.
Incurable physical deterioration is applicable to items whose physical
deterioration either cannot be corrected or can be corrected only at a cost in
excess of their contribution to the value of the property.
FUNCTIONAL OBSOLESCENCE: This is the adverse effect on value resulting from
defects in design that impair utility or efficiency. It can also be caused by an
overcapacity or changes over the years that have made some aspect of the
structure, material, or design obsolete by current standards. The defect may be
curable or incurable, and either classification may be caused by deficiency or
excess.
<Page>
63
Curable functional obsolescence relates to items which are economically feasible
to alter or correct. Incurable functional obsolescence relates to items which
cannot be cured without excessive costs.
EXTERNAL OBSOLESCENCE: External obsolescence is that loss due to influences
outside the property. It results in some degree of market rejection in the
extent of this item of depreciation is the extent of the loss in market value to
the improvement. It is not considered to be curable because the source is not
inherent in the property. A loss in value suffered by a ranch improvement due to
changing land use patterns is an example of external obsolescence.
TECHNIQUES OF ESTIMATING ACCRUED DEPRECIATION
BREAKDOWN METHOD: This technique measures accrued depreciation by estimating
loss in value from curable physical deterioration, incurable physical
deterioration, curable functional obsolescence, incurable functional
obsolescence, and external obsolescence. Each type of depreciation is dealt with
and estimated separately and then totaled to arrive at the estimate of total
depreciation.
ECONOMIC AGE/LIFE METHOD: This is a method of estimating accrued depreciation in
which the ratio of effective age to total economic life is applied to the
current cost of the improvements to obtain a lump sum deduction.
MODIFIED ECONOMIC AGE/LIFE METHOD: This method recognizes the effect of curable
items of accrued depreciation. Curable items of physical deterioration and
functional obsolescence are first estimated and deducted from reproduction cost
and then the age/life method is applied to the balance.
MARKET ABSTRACTION METHOD: This method develops the overall rates of
depreciation for the subject improvements from an analysis of sales of similarly
improved properties. The underlying mineral and land value is estimated and
abstracted from the sales in order to abstract the depreciated value of the
improvements. Total depreciation can be estimated by subtracting the
contributory value or depreciated value of the improvements from their estimated
reproduction cost new on the date of the sale. By estimating the effective
age/economic life of the improvements, an annual rate of depreciation can be
arrived at. These rates can then be applied to the subject improvements to
estimate their accrued depreciation.
DEFINITIONS
ACTUAL AGE: The number of years which have elapsed since construction was
completed (also called chronological age).
EFFECTIVE AGE: The age indicated by the condition and utility of an improvement.
ECONOMIC LIFE: The period over which improvements to real property contribute to
property value.
REMAINING ECONOMIC LIFE: The estimated period during which improvements will
continue to contribute to property value.
<Page>
64
DEPRECIATION RATE ESTIMATES FOR SUBJECT BUILDINGS
The rates of depreciation for the subject buildings were developed by use of the
market abstraction method. Typical building improvements found on Central Texas
ranches are housing for man, storage for equipment, supplies, supplemental feed
and hay. Shelter for livestock is sometimes found but generally is not required
due to the mild winters. Based on analyses of many sales, I have arrived at the
following estimates of typical economic life and rates of depreciation for these
types of building improvements.
- --------------------------------------------------------------------------------
ITEM TYPICAL ECONOMIC LIFE ANNUAL DEPRECIATION
- --------------------------------------------------------------------------------
Residences-Good Quality 65 years 1.5%
- --------------------------------------------------------------------------------
Residences-Fair Quality 50 years 2.0%
- --------------------------------------------------------------------------------
Storage Buildings-Good Quality 50 years 2.0%
- --------------------------------------------------------------------------------
Storage Buildings-Fair Quality 40 years 2.5%
- --------------------------------------------------------------------------------
Hay Barn-Good Quality 40 years 2.5%
- --------------------------------------------------------------------------------
Hay Barn-Fair Quality 33 years 3.0%
- --------------------------------------------------------------------------------
Stables-Good Quality 33 years 3.0%
- --------------------------------------------------------------------------------
Livestock Shed-Good Quality 33 years 3.0%
- --------------------------------------------------------------------------------
Livestock Shed-Fair Quality 25 years 4.0%
- --------------------------------------------------------------------------------
DEPRECIATION RATE ESTIMATES FOR LAND IMPROVEMENTS
The rates of depreciation for the subject land improvements were arrived at by
use of the economic age/ life method. Typical land improvements found on central
Texas ranches include exterior fencing, cross fencing, livestock pens, earthen
stock tanks, stock water wells and distribution systems and irrigation wells and
distribution systems. Based on analysis of many sales, consultations with land
owners, fencing contractors, water well drilling companies and dirt moving
contractors I have arrived at the following estimates of the economic life and
rates of depreciation for these type improvements:
- --------------------------------------------------------------------------------
ITEM TYPICAL ECONOMIC LIFE ANNUAL DEPRECIATION
- --------------------------------------------------------------------------------
Livestock Fencing-Good Quality 40 years 2.5%
- --------------------------------------------------------------------------------
Livestock Fencing-Fair Quality 33 years 3.0%
- --------------------------------------------------------------------------------
Stock Pens-Good Quality 40 years 2.5%
- --------------------------------------------------------------------------------
Stock Pens-Fair Quality 33 years 3.0%
- --------------------------------------------------------------------------------
Water Wells/Distribution lines 25 years 4.0%
- --------------------------------------------------------------------------------
Pivot Irrigation Systems 20 years 5.0%
- --------------------------------------------------------------------------------
<Page>
65
<Table>
<Caption>
EVEN-J STOCK FARM
DEPRECIATED VALUE BUILDING IMPROVEMENTS
200204DVB-JCS-8/30/02
QUANTITY UNIT PHYSICAL DEPREC.
ITEM (SF) COST COST NEW % RCN $
===========================================================================================================
Housing
Residence #1 2734 $65.00 $177,710 75.00% $133,283
Residence #2 1152 $45.00 $51,840 75.00% $38,880
Residence #3 2632 $61.00 $160,552 70.00% $112,386
Residence #4 1540 $52.00 $80,080 75.00% $60,060
Residence #5 1428 $41.00 $58,548 95.00% $55,621
Office Building 3372 $55.00 $185,460 25.00% $46,365
Commissary 4464 $35.00 $156,240 80.00% $124,992
Total Housing 17322 $50.25 $870,430 $571,587
Storage Buildings
Shop/Shed 6000 $15.00 $90,000 70.00% $63,000
Shop/Shed 7840 $10.00 $78,400 80.00% $62,720
Quonset/Shed 8496 $9.00 $76,464 90.00% $68,818
Quonset/Grain 4100 $9.00 $36,900 90.00% $33,210
Hay Warehouse 9200 $15.00 $138,000 80.00% $110,400
Warehouse/Store 3312 $15.00 $49,680 65.00% $32,292
Hay Barn (Horse) 5760 $12.00 $69,120 65.00% $44,928
Hay Barn (Creek) 5760 $12.00 $69,120 65.00% $44,928
Seed Field Hay Barn 8640 $8.00 $69,120 25.00% $17,280
Miss. Hill Hay Barn 8640 $8.00 $69,120 25.00% $17,280
Total Storage 50468 $12.04 $607,684 $460,296
Livestock Shelter
Stable 2304 $13.00 $29,952 75.00% $22,464
Tack Room 280 $10.00 $2,800 75.00% $2,100
Total Shelter 2584 $12.67 $32,752
Total Buildings $1,510,866
Rounded
(continued)
PHYSICALLY DEPRECIATED
DEPRECIATED OBSOLESCENCE VALUE VALUE VALUE
ITEM VALUE % PDV $ TOTAL PER SF PER AC
====================================================================================================== ==========
Housing
Residence #1 $44,428 10.00% $4,443 $39,985 $14.63 $4
Residence #2 $12,960 $0 $12,960 $11.25 $1
Residence #3 $48,166 $0 $48,166 $18.30 $4
Residence #4 $20,020 $0 $20,020 $13.00 $2
Residence #5 $2,927 $0 $2,927 $2.05 $0
Office Building $139,095 10.00% $13,910 $125,186 $37.13 $11
Commissary $31,248 25.00% $7,812 $23,436 $5.25 $2
Total Housing $298,844 $272,679 $15.74 $25
Storage Buildings
Shop/Shed $27,000 10.00% $2,700 $24,300 $4.05 $2
Shop/Shed $15,680 10.00% $1,568 $14,112 $1.80 $1
Quonset/Shed $7,646 50.00% $3,823 $3,823 $0.45 $0
Quonset/Grain $3,690 50.00% $1,845 $1,845 $0.45 $0
Hay Warehouse $27,600 50.00% $13,800 $13,800 $1.50 $1
Warehouse/Store $17,388 25.00% $4,347 $13,041 $3.94 $1
Hay Barn (Horse) $24,192 $0 $24,192 $4.20 $2
Hay Barn (Creek) $24,192 $0 $24,192 $4.20 $2
Seed Field Hay Barn $51,840 $0 $51,840 $6.00 $5
Miss. Hill Hay Barn $51,840 $0 $51,840 $6.00 $5
Total Storage $147,388 $28,083 $119,305 $2.36 $11
Livestock Shelter
Stable $7,488 25.00% $1,872 $5,616 $2.44 $1
Tack Room $700 25.00% $175 $525 $1.88 $0
Total Shelter $6,141 $2.38 $1
Total Buildings $398,125 $36
Rounded $382,475 $35
</Table>
<Page>
66
<Table>
<Caption>
SEVEN-J STOCK FARM
DEPRECIATED VALUE LAND IMPROVEMENTS
200204DVLI -JCS-9/03/02
UNIT COST
ITEM QUANTITY COST COST NEW PER ACRE
=============================================================================================
Fencing
Perimeter-Typical 230000 $1.40 $322,000 $29
Cross-Typical 225000 $1.40 $315,000 $29
Pipe Fencing 15000 $3.00 $45,000 $4
Total Fencing 455000 $1.50 $682,000 $62
Livestock Pens
Headquarters/Auction 3436 $22.00 $75,592 $7
Patterson Lake 1022 $15.00 $15,330 $1
Petty Place 982 $15.00 $14,730 $1
Mississippi Hill 900 $15.00 $13,500 $1
Total Pens 6340 $18.79 $119,152 $11
Road System 92,400 $2.00 $184,800 $17
Livestock Water System 9 $30,000.00 $270,000 $0
Irrigation System
Wells/Pumps/Motors 6 $25,000.00 $150,000 $0
Main Lines 15000 $10.00 $150,000 $0
Pivots 3 $50,000.00 $150,000 $0
Total Irrigation $450,000
Permanent Plantings 138 $2,000.00 $276,000 $0
Total Land Improvements $1,981,952 $90
Rounded
(continued)
PHY DEPR PHYS OBSOLES
------------------------ DEPREC ------------------------ DEPREC VALUE
ITEM %/RCN Total $ VALUE % PDV Total $ VALUE /ACRE
================================================================================================================================
Fencing
Perimeter-Typical 70.00% $225,400 $96,600 $0 $96,600 $9
Cross-Typical 70.00% $220,500 $94,500 $0 $94,500 $9
Pipe Fencing 40.00% $18,000 $27,000 $0 $27,000 $2
Total Fencing $463,900 $218,100 $218,100 $20
Livestock Pens
Headquarters/Auction 60.00% $45,355 $30,237 25.00% $7,559 $22,678 $2
Patterson Lake 60.00% $9,198 $6,132 $0 $6,132 $1
Petty Place 60.00% $8,838 $5,892 $0 $5,892 $1
Mississippi Hill 35.00% $4,725 $8,775 $0 $8,775 $1
Total Pens $68,116 $51,036 $7,559 $43,477 $4
Road System 75.00% $138,600 $46,200 $0 $46,200 $4
Livestock Water System 80.00% $216,000 $54,000 $0 $54,000 $5
Irrigation System $0
Wells/Pumps/Motors 50.00% $75,000 $75,000 $0 $75,000 $7
Main Lines 50.00% $75,000 $75,000 $0 $75,000 $7
Pivots 50.00% $75,000 $75,000 $0 $75,000 $7
Total Irrigation $225,000 $225,000 $225,000 $21
Permanent Plantings 50.00% $138,000 $138,000 $0 $138,000 $13
Total Land Improvements $1,249,616 $732,336 $724,777 $66
Rounded $710,311 $65
</Table>
<Page>
68
SUMMARY OF THE COST APPROACH
The resulting contributory value of the building and land improvements as
described and analyzed in previous sections of this report are itemized in the
Cost approach Summary. The value of the land components is added to provide a
whole property value estimate.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
ITEM # Units $/Acre Contributory Value
$/Acre
- ---------------------------------------------------------------------------------------------
Buildings Improvements
- ---------------------------------------------------------------------------------------------
Housing 17,322 sf $25 $ 272,679
- ---------------------------------------------------------------------------------------------
Storage & Shelter 50,468 sf $10 $ 119,305
- ---------------------------------------------------------------------------------------------
Subtotal 10,927 ac $35 $ 382,475
- ---------------------------------------------------------------------------------------------
Land Improvements
- ---------------------------------------------------------------------------------------------
Fencing 460,000 lf $19 $ 216,178
- ---------------------------------------------------------------------------------------------
Pens 4 ea $ 4 $ 43,711
- ---------------------------------------------------------------------------------------------
Roads 92,400 lf $ 4 $ 43,711
- ---------------------------------------------------------------------------------------------
Stock Water System $ 4 $ 43,711
- ---------------------------------------------------------------------------------------------
Irrigation System $21 $ 225,000
- ---------------------------------------------------------------------------------------------
Permanent Plantings 138 $13 $ 138,000
- ---------------------------------------------------------------------------------------------
Subtotal $65 $ 710,311
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Land
- ---------------------------------------------------------------------------------------------
Cropland 2929.913 ac $700 $ 2,043,939
- ---------------------------------------------------------------------------------------------
Improved Pasture 3810.247 ac $700 $ 2,667,173
- ---------------------------------------------------------------------------------------------
Native Pasture 3519.707 ac $650 $ 2,287,810
- ---------------------------------------------------------------------------------------------
Wooded Pasture 667.990 ac $550 $ 367,395
- ---------------------------------------------------------------------------------------------
Subtotal 10927.857 ac $675 $ 7,366,317
- ---------------------------------------------------------------------------------------------
Total 10927.857 ac $775 $ 8,469,089
- ---------------------------------------------------------------------------------------------
</Table>
<Page>
69
SALES COMPARISON APPROACH
The sales comparison approach is a method of estimating market value whereby a
subject property is compared with comparable properties that have sold recently.
It has as it's premise that the market will determine a price for the property
being appraised in the same manner that it determines the prices of comparable
competifive properties. Further, it assumes that a buyer would pay no more for a
property than the cost or value of acquiring another property with the same
utility.
The application of the sales comparison approach generally follows this
procedure:
1. Research the market to obtain information about transactions, listings,
and other offering of properties similar to the subject property.
2. Verify property, income, and price data by consulting a knowledgeable
source, usually one of the participants in the transaction.
3. Determine relevant units of comparison and develop a comparative analysis
for each unit.
4. Compare the subject and comparable sales/offerings according to the
elements of comparison.
5. Develop appropriate units of value for the subject property and value
indications.
6. Reconcile the multiple value indications that result into a single value
indication.
Units of comparison are components into which a property may be divided for
comparison purposes. The primary function of a unit of comparison is to adjust
for differences among properties. The units of comparison typically used for
estimating the value of rural tracts are as follows:
1. OVERALL PRICE PER ACRE - This unit of comparison is derived by dividing the
sales price by the total acres. This unit of comparison can often be used when
properties are very similar and few adjustments are required for differences in
land, minerals, and improvement contribution.
2. MINERAL PRICE PER ACRE - This unit of comparison is derived by dividing the
value of the mineral and royalty rights conveyed in the transaction by the total
number of surface acres. It normally involves "deep" or oil and gas minerals but
in areas of lignite or other mineral deposits found near the surface, it
involves "shallow" minerals also.
Prices paid for "deep" minerals vary depending upon the percentage of mineral
and royalty rights conveyed. Typically, speculative deep mineral value is highly
volatile and subject to change. Nominal values can be common in areas with no
production or infrequent leasing. Speculative values of minerals are abstracted
and estimated by discussion with knowledgeable oil and gas land men. Often
times, it is estimated at a multiple of the current lease bonus being paid in
the area. In areas where oil and gas production is fully developed, many land
conveyances are of the
<Page>
70
surface only with the mineral rights totally severed and reserved. The value of
producing oil and gas reserves is generally estimated by geologists utilizing a
discounted cash flow analysis which takes into account the current and future
product prices, the estimated quantity of the reserve, and the anticipated
decline rate of the production.
Prices paid for speculative "surface" minerals such as lignite and coal not
subject to a mineral lease add an increment of value. The speculative value of
the lignite as a submarginal resource is estimated by the landman's "rule of
thumb" method which applies a multiple to the current obtainable lease bonus.
The value of surface minerals subject to a lignite or coal lease is dependent
upon the anticipated royalty payments to be received in accordance with the
provisions of the lease. If the property is located within the boundaries of a
scheduled mining plan, the certainty of receiving the earned royalty from
extraction of the mineral increases it's value contribution significantly.
3. LAND IMPROVEMENT PRICE PER ACRE - This unit of comparison is derived by
dividing the contributory value of the land improvements such as fencing,
working pens, drilled wells, and earthen stock tanks by the number of acres in
the tract. In many real estate transactions, the actions of buyers and sellers
indicate that a rounding or absorption process occurs with regard to the
contributory value of land improvements. It has been observed that many times
these improvements do not contribute their physically depreciated value in the
sale.
4. BUILDING IMPROVEMENT PRICE PER ACRE - This unit of comparison is derived by
dividing the contributory value of the building improvements such as homes,
barns, and sheds by the number of acres. The contributory value of building
improvements is estimated on a cost less physical/functional/external
depreciation basis. Emphasis is given to the appropriateness of the improvement
in relation to land use.
5. SURFACE PRICE PER ACRE - This unit of comparison is derived from the overall
price per acre minus the price per acre for minerals, building improvements, and
land improvements.
I researched the land market in this section of the state for recent sales of
ranches having the same characteristics as the subject property. From the sales
discovered, I have selected 15 sales as being useful for comparison purposes in
estimating the value of the subject property. A detailed description of the
first ten sales is found in the Cost Approach Section. A description of five
improved sales are found in the Sales Adjustment Grid.
<Page>
71
ELEMENTS OF COMPARISON
Elements of comparison are the characteristics of properties and transactions
that cause prices to vary. Certain elements should be considered and adjustments
for them should be made to the price of each comparable property, if
appropriate. The elements of comparison are:
1. FINANCING TERMS - The transaction price of one property may vary from that of
an identical property because financing arrangements vary. Financing
arrangements for each comparable property are considered and the necessary
adjustments made to reflect the financing terms under which the subject property
is expected to sell. Properties selling with liberal seller financing appear to
bring a premium when compared to similar properties sold under conventional
financing or all cash to the seller. All of the sales utilized in this analysis
sold for cash or terms considered equivalent to cash and required no adjustments
for financing.
2. CONDITIONS OF SALE - When the conditions under which a property sells are
atypical, the result may be a price that is higher or lower than that of a
normal market transaction. When non-market conditions of sale are detected in a
transaction, it is typical to exclude it from the valuation comparison analysis.
However, occasionally such a transaction may have to be used due to lack of
other comparables, but an adjustment is made after a careful interview process
and research into the non-market motivations involved. All sales utilized were
arms length transactions and no adjustments for conditions of sale were
appropriate.
3. MARKET CONDITIONS (TIME) - Market conditions may change between the time of
sale of a comparable property and the date of the appraisal of the subject
property. Under such circumstances, the price of the comparable property would
be different at the later time and an adjustment would have to be made to the
actual transaction price if the sale is used as a comparable. Changed market
conditions result from various causes such as inflation, deflation, changing
demand, and changing supply.
Trends in rural land prices in Texas by regional market areas are monitored by
the Real Estate Research Center at Texas A&M University. Land Market Region 27
(Brazos, Burleson, Grimes, Leon, Madison, Robertson and Washington Counties) and
Land Market Region 30 (Anderson, Cherokee, Gregg, Harrison, Houston,
Nacogdoches, Panola, Shelby and Smith Counties) make up the 16 county area
surrounding the subject property. The published data from the Center's research
show that the median price of rural land in the Region 30 market reached $800
per acre in 1992 and has since increased to $1224 per acre in 2001, a 53% gain.
Region 27 also experienced rapid increases in median price per acre from 1992
through 2001. The median price per acre has increased from the $1069 per acre to
1800 per acre, a 68.4% gain. In light of this data and other independent
research on land sales activity I have concluded that the market in the Madison,
Houston, and Leon County area has increased at a rate approximating 5% to 6% per
year over the past 10 years. For these reasons, in comparing the subject
property with the sales which took place since 1999, the sale prices were
adjusted on the basis of 0.5% per month to reflect changes in market conditions.
<Page>
72
4. LOCATION - An adjustment for location may be required if the locational
characteristics of the comparable property are significantly different from
those of the subject property. Proximity to urban areas and particularly the
major employment towns of the area has an effect on the prices paid for rural
land. The subject property is located approximately nineteen miles southwest of
Crockett. The sales utilized vary in distance from the county seat or urban
areas, but comparison analysis indicates no significant variations in price due
to location of large livestock ranches in this section of the state. Therefore,
no adjustments for location were made.
PHYSICAL CHARACTERISTICS - Characteristics may differ between a comparable
property and a subject property, and the differences might require a number of
comparisons and adjustments to the comparable.
1. ACCESS: Access often plays a major role in the price paid for small rural
tracts. Historically, tracts with paved road frontage tend to sell for 10% more
than tracts with graveled road frontage and 20% more than tracts with easement
access. Those tracts having secondary access appear to sell for a premium when
compared to those properties with primary road frontage only
2. SIZE: Adjustments are made in size if there is a large difference in size
between the size of the subject property and the comparable sales. It is
typically observed that smaller properties sell for higher unit prices than do
otherwise comparable larger properties. Paired sales analysis demonstrates that
the change in price per acre as size of tract increases varies from 0 to -8% for
each 100% increase in size. From this analysis, I have concluded that the
appropriate size adjustment is consistent with a positive or negative 2.5%
adjustment to the sales price for each 100% increase or decrease in size up to a
maximum adjustment of 40%.
OTHER PHYSICAL FACTORS: After analyzing the market transactions, there appears
to be some correlation between prices paid and such features as shape of tract
and topography. However, the sales properties in this report were sufficiently
comparable in these features so that no quantitative adjustment for them was
necessary.
ENCUMBRANCES: Adjustments for encumbrances may be necessary if a property has
legal encumbrances that limit it's use such as pipelines, power lines and access
easements. Pipelines, service lines, and low voltage transmission lines appear
to have a very nominal affect on the overall property value. However, it has
been noted in the market that large high voltage transmission lines do have
negative impact on prices paid. One of the sales had encumbrances which would
impact value and was adjusted accordingly.
<Page>
73
BUILDING IMPROVEMENTS: Building improvements such as houses and barns tend to
have contributory value provided they are appropriate farm and ranch
improvements capable of utilization in the operation of the property. A head to
head comparison of the subject improvements with those found on the sales
properties develops the amount of adjustment for building contributions.
LAND IMPROVEMENTS: Land improvements such as fencing, working pens, drilled
wells, and earthen livestock tanks are given consideration because they have a
direct bearing on how the property can be utilized. Adjustments were made to
each comparable based upon the allocated per acre land improvement contribution
versus the subject's estimated land improvement contribution.
MINERALS: Adjustments are made to reflect the differences in the mineral/royalty
contribution between the sale properties and the subject. Deep mineral leasing
activity in the neighborhood was relatively slow until late 1989. Since that
time, there has been leasing for oil and gas exploratory rights in the subject
neighborhood. Historically, the rule of thumb for outright purchase of mineral
interest has been to multiply the paid or obtainable bonus by two or three. I
have investigated oil and gas lease bonuses paid throughout the area and have
found that bonuses range from $50 to $100 per acre. The variation in the lease
bonuses apparently depends on the location, the amount of acreage involved, and
the prospects of production based on other exploration. Utilizing the land man's
"rule of thumb" method, I have concluded that deep minerals are contributing
approximately $50 to $150 per net mineral acre in land sales prices. This
recognizes the mineral consciousness on the part of participants in the land
market. As previously stated in the MINERAL INTEREST section of this report, the
value of the subject's mineral interest, if any, is not included in the
valuation of the surface estate only. Accordingly, I have adjusted the mineral
contribution in the sale properties in comparison to the $0 per acre mineral
value of the subject property.
A tabular analysis of the comparable sales is found on the following page with a
following page map showing their locations. Adjustments were made to the
comparable sales on a per acre basis for differences between the sales and the
subject property to provide indications of value.
<Page>
74
<Table>
<Caption>
SEVEN J STOCK FARM
10,927.857 ACRES, HOUSTON CO.
Sales Adjustment Grid
2002043SAG-JCS-9/16/02 11 12 13 14 15
============================== =====================================================================================
Map Reference Weldon Pearson Ch Stanmire Lake Percilla Berea
Date 26-Feb-99 13-Jun-00 31-May-00 15-Aug-01 02-May-02
Volume/Page 1121-886 00-2230 00-1988 13175 22138
Grantor LaRue Bromberg Torres Lowery Gilmore
Grantee Hornbeck Mosely Chilcoat Henicke Shell
County Houston Houston Houston Houston Houston
Location 11 mi SW 2 mi NE 11 mi W 2 mi E 5 mi NE
Lovelady Austonio Grapeland Grapeland Crockett
Area (Acres) 1038.598 972.413 772.363 609.256 734.561
Primary Road FM 2915 SH 21 FM 227 CR 1880 SH 21
Secondary Road CR 3455 None None None None
Minerals/Royalties 0%/0% 33%/33% 25%/25% 50%/50% 0%/0%
Esmts/Encumbrances pipelines pipe/powerlines pipeline pipeline powerlines
Bldg. Improvements good good good good good
Land Improvements fair fair good good good
Units of Comparsion:
Overall Price/Acre $711 $668 $807 $1,165 $858
CE Price/Acre $711 $668 $807 $1,165 $858
Bldg.Impr.Price/Ac $86 $57 $97 $246 $82
Land Price/Acre $625 $611 $710 $919 $776
Land Impr.Price/Acre $50 $25 $50 $50 $75
Timber Price/Acre $0 $0 $0 $0 $0
Minerals Price/Acre $0 $35 $25 $50 $0
Surface Price/Acre $575 $551 $635 $819 $701
Land Mix/Allocation($/AC):
Class II-III (cropland)
Class IV-VII (improved) 580/$682 477/$856 734/$701
Class IV-VII (native) 678/$575 683/$
Class IV-VII (woods) 361/$575 289/$ 192/$546 132/$685
Class VIII (wasteland)
Compared to Subject
and Adjusted For:
Financing $0 $0 $0 $0 $0
Conditions of Sale $0 $0 $0 $0 $0
Market Conditions $107 $87 $113 $55 $17
Location $0 $0 $0 $0 $0
Phy. Characteristics
Access $63 $122 $142 $184 $155
Size ($156) ($153) ($249) ($368) ($272)
Shape $0 $0 $0 $0 $0
Land Mix/Quality $44 $55 $64 $0 ($31)
Encumbrances $0 $0 $0 $0 $77
Building Imp. ($51) ($22) ($62) ($211) ($47)
Land Improvements $15 $40 $15 $15 ($10)
Minerals $0 ($35) ($50) ($50) $0
Total Adjustments $22 $94 ($27) ($375) ($111)
Overall Price/Acre $711 $668 $807 $1,165 $858
Adjusted Price/Acre $733 $762 $780 $790 $747
</Table>
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[MAP]
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CONCLUDED VALUE FOR SUBJECT BY SALES COMPARISON APPROACH
The subject property was rated and compared to five improved sales ranging in
size from 609 acres to 1038 acres. These sales occurred during the period 1999
to 2002, are located in Houston County and were considered to have similar
characteristics to that of the subject property. The sale properties sold within
the range of $668 per acre to $1165 per acre while the mean sales price per acre
was $842. After making adjustments for differences between the subject and the
sale properties for the various value influencing factors isolated from my
market research, the value of the subject property was indicated to be within
the range of $733 to $790 per acre. Because all of the sales properties are
substantially smaller than the subject and lack comparability in other factors
such as land mix/quality, I believe that the best use of this approach is to
yield a bracket of value in support of the component (cost) approach. Therefore,
based on the foregoing analysis, the value of the subject property via the sales
comparison approach was indicated at $750-$775 per acre or
$8,195,893-$8,469,089.
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RECONCILIATION AND FINAL ESTIMATE OF VALUE
The value of the subject property was arrived at by an analysis of the subject's
specific attributes in comparison with the prices paid for comparable tracts.
The subject is a 10,927.857 acre tract located nineteen miles southwest of
Crockett in southwest Houston County, Texas. Those physical qualities
influencing the utility and appeal of this property are as follows:
1) The property is comprised of six tracts separated by the public roads in
which they front and by Big Creek. From an operational standpoint, this is less
desirable than if the tracts were contiguous. However the ability to breakup the
property into smaller units is an advantage from a marketing standpoint.
2) The soils of the property are highly fertile Trinity River bottom clays and
sandy loams which are inherently fertile and suitable for pastureland or
cropland. However, due to frequent flooding from the Trinity River and poor
drainage due to it's nearly level topography, the property is primarily suitable
for pastureland use. The flood hazard increases the risk of operation and
represents a negative influence on the property's desirability.
3) The land mix on the property consists of 26.81% or 2929.913 acres of
cropland, 34.87% or 3810.247 acres of improved pastureland, 32.21 % or 3519.707
acres of native open pastureland and 6.11 % or 667.990 acres of wooded
pastureland. The carrying capacity of the 7997.944 acres of pastureland is
estimated at 2200 animal units or 3.63 acres per animal unit. The cropland is
level, fertile, well laid out with adequate drainage ditches and has a history
of good yields. The irrigation system adds to the productivity of the cropland
and provides a capability for further expansion of the pecan orchards.
4) Land improvements on the property consist of good quality perimeter fencing,
cross fencing, livestock pens, water distribution systems, and a good quality
gravel road system. These improvements are of good quality, have been fairly
well maintained, and function well in the property's current use as a
livestock/cropland ranch.
5) The building improvements on the property consist of five fair to average
quality frame residences, a concrete block office building, and a two-story
frame commissary/apartment building. This housing has been fairly well
maintained and is functional. Storage buildings on the property consist of
adequate storage for machinery, equipment, and livestock feed necessary to
operate the property. Livestock shelter buildings include a stable-tack room and
various livestock sheds which have fair utility and are in fair condition.
6) This valuation is of the surface estate only and gives no consideration to
the mineral/royalty ownership or value contribution.
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MARKET VALUE
The market value of the subject property was estimated utilizing the cost and
sales comparison approaches to value. These techniques indicated similar values
as shown below:
Cost Approach 10,927.857 Acres @ $775 per Acre= $8,469,089
Sales Comparison Approach 10,927.857 Acres @ $750 per Acre= $8,195,893
10,927.857 Acres @ $775 per Acre= $8,469,089
Based on the preceding analyses, it was my opinion that the Market Value of the
subject property as of August 14, 2002 was $775 per acre or:
EIGHT MILLION FOUR HUNDRED SIXTY NINE THOUSAND EIGHTY NINE DOLLARS
$8,469,089
Allocated as:
Land (Surface Estate) 10,927.857 Acres @ $675 per Acre= $ 7,376,303
Building Improvements 10,927.857 Acres @ $ 35 per Acre= $ 382,475
Land Improvements 10,927.857 Acres @ $ 65 PER Acre= $ 710,311
---------------------------
Total 10,927.857 Acres @ $775 per Acre= $ 8,469,089
MARKETING TIME ESTIMATE
The reasonable marketing time is an estimate of the amount of time it might take
to sell a property interest in real estate at the estimated market value level
during the period immediately after the effective date of an appraisal.
The comparable ranch sales used in this analysis were marketed for periods
ranging from 12 to 36 months. However, all sold within 12 months of their final
listed asking price indicating there is a reasonable demand for such properties
when priced correctly. The extremely large size of the subject property would
tend to require a longer than typical time on the market. Therefore, for
purposes of this appraisal, I concluded a reasonable marketing period for the
subject to be 18 to 24 months.
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CERTIFICATION
I certify that, to the best of my knowledge and belief:
o the statements of fact contained in this report are true and
correct.
o the reported analyses, opinion, and conclusions are limited only by
the reported assumptions and limiting conditions, and are my
personal, unbiased professional analyses, opinions, and conclusions.
o I have no present or prospective interest in the property that is
the subject of this report, and I have no personal interest or bias
with respect to the parties involved.
o my compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of
the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
o the appraisal assignment was NOT based on a requested minimum
valuation, a specific valuation, range of valuation, or the approval
of a loan.
o my analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the Uniform Standards of
Professional Appraisal Practice as promulgated by the Appraisal
Foundation and the requirements of Code of Professional Ethics and
the Standards of Professional Appraisal Practice of the Appraisal
Institute and the American Society of Farm Managers and Rural
Appraisers.
o the use of this report is subject to the requirements of the above
organizations relating to review by its duly authorized
representatives.
o I have made a personal inspection of the property that is the
subject of this report.
o no one provided significant professional assistance to the person
signing this report. James Connor Smith is currently certified under
the voluntary continuing education programs of the above referenced
organizations.
The market value of the subject property as of August 14, 2002 as estimated
herein, was:
EIGHT MILLION FOUR HUNDRED SIXTY NINE THOUSAND EIGHTY NINE DOLLARS
$8,469,089
at a reasonable marketing period estimated to be 18-24 months
Respectfully submitted,
James Connor Smith, MAI, ARA
State Certified - General
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Real Estate Appraiser TX-1321583-G
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JAMES CONNOR SMITH, MAI, ARA
REALTOR-APPRAISER-CONSULTANT
BIOGRAPHICAL DATA
AFFILIATIONS/PROFESSIONAL DESIGNATIONS
Appraisal Institute-Member-MAI Certificate No. 4822 (1972)
American Society of Farm Manager/Rural Appraisers-Accredited Rural Appraiser-ARA
Certificate No. 462 (1973)
State Certified General Real Estate Appraiser-Texas No. TX-13211583-G (1991)
Texas Real Estate Broker License No. 101308-34 (1961)
National Association of Realtors (1961)
Realtors Land Institute (1995)
EDUCATION
Texas A & M University/ B. S. Agriculture (1952)
Advanced real estate appraisal, development and marketing education in numerous
courses and seminars sponsored by the Appraisal Institute, American Society of
Farm Managers/Rural Appraisers, National and Texas Association of Realtors,
Realtors Land Institute and the American Right of Way Association.
PROFESSIONAL EXPERIENCE
James Connor Smith has been engaged in real estate activity since 1961 and is
experienced in the sale, leasing, management, development and valuation of real
property. Since 1965 he has been active as an independent appraiser/consultant
specializing in valuation and counseling for rural and commercial property.
Located in Bryan, Texas he has valued rural property throughout the state but
has primarily served the south central Texas market. Rural properties appraised
have included irrigated farmland, livestock ranches, pecan orchards, timberlands
and recreational subdivisions. His particular specialty is partitioning
undivided interests in rural properties for estate settlement. He is also
experienced in mineral valuation to include lignite, gravel and non-producing
oil and gas. He has over thirty years experience in appraising for rights-of-way
which includes valuations for highways, pipelines, power lines and large scale
plant/lake site acquisitions. As part of his litigation appraisal work he has
become known for providing effective expert witness testimony in eminent domain
and bankruptcy proceedings in state and federal jurisdictions. He has also been
involved in appraisal education as a certified instructor with the ASFMRA
specializing in advanced rural appraisal and eminent domain courses.
In 1974 he formed a real estate brokerage company known as Brazosland Realty,
Inc. This twenty person organization is active in residential, commercial and
rural real estate marketing in Brazos and surrounding counties of south central
Texas. A complementary company known as Brazosland Properties, Inc. was
organized in 1979. It's personnel are involved in property management and
leasing. Mr. Smith serves as Chairman of these companies.
BACKGROUND
Mr. Smith was born at Eagle Pass and attended public schools at Uvalde, Texas.
He attended Texas A & M University from 1948 to 1952 and received a Bachelor of
Science in Agriculture. He served as a photo-intelligence officer in the U S Air
Force from 1952 to 1956 during which time he was involved in photo mapping
operations in Europe and Africa. He moved to Brazos County, Texas in 1957 and
was engaged in a family farming operation until 1960.
Mr. Smith's civic activities have included serving as a director for the
Bryan-College Station Board of Realtors, United Fund, Chamber of Commerce and
Brazos County Industrial Foundation. He is a member of Grace Bible Church of
College Station. He is married to the former Dorothy Holt of Center, Texas and
they have two children-a son and a daughter-and five grandchildren. His hobbies
include skeet and trap shooting, hunting and expedition canoeing.
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83
REAL ESTATE MARKETING, APPRAISAL AND COUNSELING SERVICES
Sale Brokerage Buyer Representation
Current Value Appraisals Partial Interest Valuations/Partitions
Gift and Estate Valuations Basis Allocations
Expert Witness Litigation Support
Rights-of-Way Negotiation Dispute Arbitration
BANK REFERENCES
Mr. George Nelson
President
Wells Fargo Bank
P O Drawer 913
Bryan, Texas 77805-0913
979/776-5402