STERLING APARTMENT HOMES &
STERLING COMMERCE CENTER
1815 JOHN F. KENNEDY BOULEVARD
PHILADELPHIA, PENNSYLVANIA
MARKET VALUE -
FEE SIMPLE ESTATE
AS OF MAY 13, 2003
PREPARED FOR:
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
(AIMCO)
C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP
&
LIEFF CABRASER HEIMANN & BERNSTEIN
ON BEHALF OF NUANES, ET. AL.
[AMERICAN APPRAISAL ASSOCIATES(R) LOGO]
[AMERICAN APPRAISAL ASSOCIATES(R) LOGO]
[AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD]
JULY 21, 2003
Apartment Investment and Management
Company ("AIMCO") c/o
Mr. Steven A. Velkei, Esq.
Liner Yankelevitz Sunshine & Regenstreif LLP
1100 Glendon Avenue, 14th Floor
Los Angeles, California 90024-3503
Nuanes, et al.( "Plaintiffs ") c/o
Ms. Joy Kruse
Lieff Cabraser Heimann & Bernstein
Embarcadero Center West
275 Battery Street, 30th Floor
San Francisco, California 94111
RE: STERLING APARTMENT HOMES & STERLING COMMERCE CENTER
1815 JOHN F. KENNEDY BOULEVARD
PHILADELPHIA, PHILADELPHIA COUNTY, PENNSYLVANIA
In accordance with your authorization, we have completed the appraisal of the
above-referenced property. This complete appraisal is intended to report our
analysis and conclusions in a summary format.
The subject property consists of an apartment project having 536 units with a
total of 486,553 square feet of rentable area. The attached commerce center
contains 109,992 square feet of retail and office space. The improvements were
built in 1960. The improvements are situated on 0.89091 acres. Overall, the
improvements are in good condition. As of the date of this appraisal, the
subject property is 91% occupied and the commerce center is approximately 54%
occupied.
It is our understanding the appraisal will be used by the clients to assist the
San Mateo Superior Court in the settlement of litigation between the above
mentioned clients. The appraisal is intended to conform to the Uniform Standards
of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal
Standards Board of the Appraisal Foundation and the Code of Professional Ethics
and Standards of Professional Practice of the Appraisal Institute.
AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
The appraisal is presented in a summary report, and the Departure Provision of
USPAP has not been invoked in this appraisal. It is entirely inappropriate to
use this value conclusion or the report for any purpose other than the one
stated.
The opinions expressed in this appraisal cover letter can only be completely
understood by reading the narrative report, addenda, and other data, which is
attached. The appraisal is subject to the attached general assumptions and
limiting conditions and general service conditions.
As a result of our investigation, it is our opinion that the fee simple market
value of the subject, effective May 13, 2003 is:
($68,700,000)
This value is allocated between the two uses as follows:
Sterling Apartment Homes: $65,500,000
Sterling Commerce Center: $ 3,200,000
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
-s- Frank Fehribach
-------------------
July 21, 2003 Frank Fehribach, MAI
#053272 Managing Principal, Real Estate Group
State of Pennsylvania Certified General Appraiser
#GA003334
Report By:
Richard Mupo
AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
TABLE OF CONTENTS
Cover
Letter of Transmittal
Table of Contents
APPRAISAL DATA
Executive Summary ......................................................... 4
Introduction .............................................................. 11
Area Analysis ............................................................. 13
Market Analysis ........................................................... 16
Site Analysis ............................................................. 18
Improvement Analysis ...................................................... 18
Highest and Best Use ...................................................... 19
VALUATION
Valuation Procedure ....................................................... 20
Sales Comparison Approach ................................................. 22
Income Capitalization Approach ............................................ 28
Reconciliation and Conclusion ............................................. 48
ADDENDA
Exhibit A - Photographs of Subject Property
Exhibit B - Summary of Rent Comparables and Photograph of Comparables
Exhibit C - Assumptions and Limiting Conditions
Exhibit D - Certificate of Appraiser
Exhibit E - Qualifications
General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXECUTIVE SUMMARY
PART ONE - PROPERTY DESCRIPTION
PROPERTY NAME: Sterling Apartment Homes&Sterling Commerce Center
LOCATION: 1815 John F. Kennedy Boulevard
Philadelphia, Pennsylvania
INTENDED USE OF ASSIGNMENT: Court Settlement
PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate
INTEREST APPRAISED: Fee simple estate
DATE OF VALUE: May 13, 2003
DATE OF REPORT: July 21, 2003
PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS:
SITE:
Size: 0.89091 acres, or 38,808 square feet
Assessor Parcel No.: 881035000
Floodplain: Community Panel No. #420757-183F (August 2, 1996)
Flood Zone X, an area outside the floodplain.
Zoning: C5 (Multi-Story Office District)
BUILDING:
Apartments:
No. of Units: 536 Units
Total NRA: 486,553 Square Feet
Average Unit Size: 908 Square Feet
Apartment Density: 601.6 units per acre
Year Built: 1960
Commerce Center:
Office Area: 85,970 Square Feet
Retail Area: 24,022 Square Feet
Total Area: 109,992 Square Feet
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
UNIT MIX AND MARKET RENT:
GROSS RENTAL INCOME PROJECTION
Market Rent
Square ---------------- Monthly Annual
Unit Type Feet Per Unit Per SF Income Income
- --------- ------ -------- ------ -------- ----------
EA10 412 $ 899 $ 2.18 $ 28,768 $ 345,216
EB10 495 $ 949 $ 1.92 $130,013 $1,560,156
1A10 550 $ 1,149 $ 2.09 $ 55,152 $ 661,824
1B10 803 $ 1,379 $ 1.72 $140,658 $1,687,896
1C10 920 $ 1,509 $ 1.64 $ 31,689 $ 380,268
2A20 1,315 $ 1,759 $ 1.34 $218,116 $2,617,392
2B20 1,425 $ 2,109 $ 1.48 $ 67,488 $ 809,856
2C20 1,794 $ 2,449 $ 1.37 $ 12,245 $ 146,940
3A20 1,631 $ 2,229 $ 1.37 $ 53,496 $ 641,952
3B20 1,778 $ 2,359 $ 1.33 $ 18,872 $ 226,464
3C20 2,215 $ 2,499 $ 1.13 $ 4,998 $ 59,976
4A30 2,500 $ 2,459 $ 0.98 $ 2,459 $ 29,508
-------- ----------
Total $763,954 $9,167,448
OCCUPANCY:
APARTMENTS: 91%
COMMERCE CENTER: 69% (44.4% Office, 88.8% Retail)
ECONOMIC LIFE: 45 Years
EFFECTIVE AGE: 7 Years
REMAINING ECONOMIC LIFE: 38 Years
SUBJECT PHOTOGRAPHS AND LOCATION MAP:
SUBJECT PHOTOGRAPHS
[PICTURE] [PICTURE]
EXTERIOR - FRONT OF BUILDING EXTERIOR - REAR OF BUILDING
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
AREA MAP
[MAP]
NEIGHBORHOOD MAP
[MAP]
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
HIGHEST AND BEST USE:
As Vacant: Hold for future multi-family development
As Improved: Continuation as its current use
METHOD OF VALUATION: In this instance, the Sales Comparison and Income
Approaches to value were utilized.
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PART TWO - ECONOMIC INDICATORS
INCOME CAPITALIZATION APPROACH
Amount $/Unit
---------- ---------------
DIRECT CAPITALIZATION - APARTMENTS
Potential Rental Income $9,167,448 $ 17,103
Effective Gross Income $8,939,001 $ 16,677
Operating Expenses $3,617,390 $ 6,749 40.5% of EGI
Net Operating Income: $5,214,411 $ 9,728
Capitalization Rate 8.00%
DIRECT CAPITALIZATION VALUE $64,900,000 * $121,082 / UNIT
DISCOUNTED CASH FLOW ANALYSIS - APARTMENTS:
Holding Period 10 years
2002 Economic Vacancy 10%
Stabilized Vacancy & Collection Loss: 6%
Lease-up / Stabilization Period 24 months
Terminal Capitalization Rate 8.50%
Discount Rate 10.50%
Selling Costs 2.00%
Growth Rates:
Income: 3.00%
Expenses: 3.00%
DISCOUNTED CASH FLOW VALUE $63,900,000 * $119,216 / UNIT
RECONCILED INCOME CAPITALIZATION VALUE $64,500,000 $120,336 / UNIT
DISCOUNTED CASH FLOW ANALYSIS - COMMERCE CENTER:
Holding Period 10 years
2002 Economic Vacancy 31%
Stabilized Vacancy & Collection Loss: 12%
Lease-up / Stabilization Period 24 months
Terminal Capitalization Rate 9.00%
Discount Rate 11.50%
Selling Costs 2.00%
Growth Rates:
Income: 0% in Yr. 2, 3.00% thereafter
Expenses: 3.00%
DISCOUNTED CASH FLOW VALUE $3,200,000 * $29.09 / SF
RECONCILED INCOME APPROACH VALUE $3,200,000 $29.09 / SF
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 9
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SALES COMPARISON APPROACH
PRICE PER UNIT:
Range of Sales $/Unit (Unadjusted) $81,984 to $116,175
Range of Sales $/Unit (Adjusted) $116,175 to $125,071
VALUE INDICATION - PRICE PER UNIT $64,000,000 * $119,403 / UNIT
EGIM ANALYSIS
Range of EGIMs from Improved Sales 5.65 to 9.27
Selected EGIM for Subject 7.50
Subject's Projected EGI $8,939,001
EGIM ANALYSIS CONCLUSION $66,800,000 * $124,627 / UNIT
NOI PER UNIT ANALYSIS CONCLUSION $66,700,000 * $124,440 / UNIT
RECONCILED SALES COMPARISON VALUE $66,000,000 $123,134 / UNIT
- ----------------------------
* Value indications are after adjustments for concessions, deferred maintenance,
excess land and lease-up costs, if any.
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 10
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PART THREE - SUMMARY OF VALUE CONCLUSIONS
STERLING APARTMENT HOMES:
SALES COMPARISON APPROACH:
Price Per Unit $64,000,000
NOI Per Unit $66,700,000
EGIM Multiplier $66,800,000
INDICATED VALUE BY SALES COMPARISON $66,000,000 $123,134 / UNIT
INCOME APPROACH:
Direct Capitalization Method: $64,900,000
Discounted Cash Flow Method: $63,900,000
INDICATED VALUE BY INCOME APPROACH $64,500,000 $120,336 / UNIT
RECONCILED OVERALL VALUE CONCLUSION: $65,500,000 $122,201 / UNIT
STERLING COMMERCE CENTER:
INCOME APPROACH:
Discounted Cash Flow Method: $ 3,200,000
INDICATED VALUE BY INCOME APPROACH $ 3,200,000 $ 29.09 / SF
RECONCILED OVERALL VALUE CONCLUSION: $ 3,200,000 $ 29.09 / SF
COMBINED SUBJECT VALUE: $68,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 11
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
INTRODUCTION
IDENTIFICATION OF THE SUBJECT
The subject property is located at 1815 John F. Kennedy Boulevard, Philadelphia,
Philadelphia County, Pennsylvania. Philadelphia identifies it as 881035000.
SCOPE OF THE ASSIGNMENT
The property, neighborhood, and comparables were inspected by Richard Mupo on
May 13, 2003. Frank Fehribach, MAI has not made a personal inspection of the
subject property. Richard Mupo performed the research, valuation analysis and
wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the
value. Frank Fehribach, MAI and Richard Mupo have extensive experience in
appraising similar properties and meet the USPAP competency provision.
The scope of this investigation comprises the inspection of the property and the
collection, verification, and analysis of general and specific data pertinent to
the subject property. We have researched current improved sales and leases of
similar properties, analyzing them as to their comparability, and adjusting them
accordingly. We completed the Sales Comparison and Income Capitalization
Approaches to value. From these approaches to value, a concluded overall value
was made.
DATE OF VALUE AND REPORT
This appraisal was made to express the opinion of value as of May 13, 2003. The
date of the report is July 21, 2003.
PURPOSE AND USE OF APPRAISAL
The purpose of the appraisal is to estimate the market value of the fee simple
interest in the subject property. It is understood that the appraisal is
intended to assist the clients in litigation settlement proceedings. The
appraisal was not based on a requested minimum valuation, a specific valuation,
or the approval of a loan.
PROPERTY RIGHTS APPRAISED
We have appraised the Fee Simple Estate in the subject property (as applied in
the Sales & Income Approaches), subject to the existing short-term leases. A Fee
Simple Estate is
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 12
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal
Institute, 1993), as:
"Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat."
MARKETING/EXPOSURE PERIOD
MARKETING PERIOD: 6 to 12 months
EXPOSURE PERIOD: 6 to 12 months
HISTORY OF THE PROPERTY
Ownership in the subject property is currently vested in CCIP. To the best of
our knowledge, no transfers of ownership or offers to purchase the subject are
known to have occurred during the past three years.
AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
AREA / NEIGHBORHOOD ANALYSIS
NEIGHBORHOOD ANALYSIS
A neighborhood is a group of complementary land uses. The function of the
neighborhood analysis is to describe the immediate surrounding environs. The
subject is located in the city of Philadelphia, Pennsylvania. Overall, the
neighborhood is characterized as an urban setting with the predominant land use
being office. The subject's neighborhood is generally defined by the following
boundaries.
NEIGHBORHOOD BOUNDARIES
East - Juniper Street
West - Scuykill River
South - Walnut Street
North - I-676
MAJOR EMPLOYERS
Major employers in the subject's area include City of Philadelphia, University
of Pennsylvania, Mellon Financial to name a few. The overall economic outlook
for the area is considered favorable.
DEMOGRAPHICS
We have reviewed demographic data within the neighborhood. The following table
summarizes the key data points.
AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 14
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
NEIGHBORHOOD DEMOGRAPHICS
AREA
----------------------------------------
CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA
- --------------------------- ------------ ------------ ------------ ----------
POPULATION TRENDS
Current Population 62,254 443,430 902,902 5,117,235
5-Year Population 64,020 428,220 869,767 5,176,062
% Change CY-5Y 2.8% -3.4% -3.7% 1.1%
Annual Change CY-5Y 0.6% -0.7% -0.7% 0.2%
HOUSEHOLDS
Current Households 36,383 183,977 349,056 1,932,596
5-Year Projected Households 37,874 181,697 342,081 1,983,369
% Change CY - 5Y 4.1% -1.2% -2.0% 2.6%
Annual Change CY-5Y 0.8% -0.2% -0.4% 0.5%
INCOME TRENDS
Median Household Income $ 30,555 $ 23,464 $ 23,910 $ 52,124
Per Capita Income $ 32,346 $ 16,628 $ 14,731 $ 24,601
Average Household Income $ 55,407 $ 40,091 $ 38,085 $ 65,140
Source: Demographics Now
The subject neighborhood's population is expected to show increases above that
of the region. The immediate market offers inferior income levels as compared to
the broader market.
The following table illustrates the housing statistics in the subject's
immediate area, as well as the MSA region.
HOUSING TRENDS
AREA
----------------------------------------
CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA
- --------------------------- ------------ ------------ ------------ ----------
HOUSING TRENDS
% of Households Renting 60.85% 44.10% 40.08% 27.89%
5-Year Projected % Renting 59.92% 44.74% 41.19% 27.84%
% of Households Owning 23.06% 37.82% 44.08% 64.86%
5-Year Projected % Owning 24.76% 37.31% 43.04% 65.19%
Source: Demographics Now
AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 15
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SURROUNDING IMPROVEMENTS
The following uses surround the subject property:
North - Municipal Parking Lot
South - Office Building
East - Municipal Parking Lot
West - Residential Apartment Building
CONCLUSIONS
The subject is well located within the city of Philadelphia. The neighborhood is
characterized as being mostly urban in nature and is currently in the stable
stage of development. The economic outlook for the neighborhood is judged to be
favorable with a good economic base.
AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 16
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
MARKET ANALYSIS
The subject property is located in the city of Philadelphia in Philadelphia
County. The overall pace of development in the subject's market is more or less
decreasing. There are no new significant projects recently completed within
Center City. Over 790 units were delivered to the market in 2002. The greater
Philadelphia area delivered 280 units during the first quarter of 2003. This
figure is down significantly from the prior year. Overall, delivery of new units
has slowed over the past year. The following table illustrates historical
vacancy rates for the subject's apartment market.
HISTORICAL VACANCY RATE
Period Region Submarket
- ----------------------------------------
1Q03 3.8% 5.6%
4Q02 3.3% 5.8%
1-Year Annualized 2.9% 4.4%
3-Year annualized 2.5% 2.9%
Source: REIS
Occupancy trends in the subject's market are stable. Historically speaking, the
subject's submarket has underperformed the overall market. Occupancy has been on
a general decline since 2000 due to weakening economic conditions. As Downtown
Philadelphia's office market and economy improves, demand for local residential
units will likely increase. As noted above, Center City's occupancy rate
slightly underperforms as compared to the Greater Philadelphia market.
Market rents in the subject's market have been following a stable trend. The
following table illustrates historical rental rates for the subject's market.
HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change
- --------------------------------------------------------
3Q02 N/A - $1,308 -
4Q02 N/A N/A $1,317 0.7%
1Q03 N/A N/A $1,325 0.6%
Source: Reis
The following table illustrates a summary of the subject's competitive set.
AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 17
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject
- ------------------------------------------------------------------------------------
R-1 The Lofts at 1835 Arch 192 98% 2001 1 Block to the North
R-2 Park Towne Place 980 95% 1959 3/4 Mile to the NE
R-3 1500 Locust 610 92% Appr. 1990 1/4 Mile to the SE
R-4 Locust on The Park 152 95% Appr. 1990 1/2 Mile to the SW
Subject Sterling Apartment Homes 536 91% 1960
Effective rents have remained relatively stable since mid-2002 and are projected
to remain stagnant for the foreseeable future. According to Reis, rent growth
over the next five years will be light, estimated at roughly 2.8% growth per
annum.
Concerning the downtown office and retail market, NAI Geis Realty Group, Inc.
reports that the Class A occupancy rate within the Philadelphia central business
district is 87%, while the occupancy rate for Class B space is 85%. The average
Class A rental rate is $27.00 per square foot and the average Class B rental
rate is $19.00 per square foot. The downtown retail market reports an occupancy
rate of 93% with an average rental rate of $25.00 per square foot. Growth rates
over the next five years should be similar to those of the apartment market, or
generally in the 2.0% to 4.0% range.
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 18
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PROPERTY DESCRIPTION
SITE ANALYSIS
Site Area 0.89091 acres, or 38,808 square feet
Shape Rectangular
Topography Level
Utilities All necessary utilities are available to the site.
Soil Conditions Stable
Easements Affecting Site None other than typical utility easements
Overall Site Appeal Good
Flood Zone:
Community Panel #420757-183F, dated August 2, 1996
Flood Zone Zone X
Zoning C5, the subject improvements represent a legal
conforming use of the site.
REAL ESTATE TAXES
ASSESSED VALUE - 2002
---------------------------------- TAX RATE/ PROPERTY
PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES
- ----------------------------------------------------------------------
881035000 $2,500,000 $5,894,304 $8,394,304 0.08264 $693,705
IMPROVEMENT ANALYSIS
Year Built 1960
Number of Units 536
Net Rentable Area 486,553 Square Feet - Apartment Space
109,992 Square Feet - Office & Retail Space
596,545 Square feet - Total
Construction:
Foundation Steel or concrete piles
Frame Composite concrete or brick and steel
Exterior Walls Brick or masonry
Roof Built-up asphalt with or without gravel over a steel
beams structure
Project Amenities Amenities at the subject include a swimming pool, gym
room, business office, security, and parking area.
Unit Amenities Individual unit amenities include a cable TV connection,
and washer dryer connection. Appliances available in each
AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 19
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
unit include a refrigerator, stove, microwave dishwasher,
garbage disposal, washer/dryer, and oven.
Unit Mix:
Unit Area
Unit Type Number of Units (Sq. Ft.)
- -------------------------------------
EA10 32 412
EB10 137 495
1A10 48 550
1B10 102 803
1C10 21 920
2A20 124 1,315
2B20 32 1,425
2C20 5 1,794
3A20 24 1,631
3B20 8 1,778
3C20 2 2,215
4A30 1 2,500
Overall Condition Good
Effective Age 7 years
Economic Life 45 years
Remaining Economic Life 38 years
Deferred Maintenance None
HIGHEST AND BEST USE ANALYSIS
In accordance with the definition of highest and best use, an analysis of the
site relating to its legal uses, physical possibilities, and financial
feasibility is appropriate. The highest and best use as vacant is to hold for
future multi-family development. The subject improvements were constructed in
1960 and consist of a 536-unit multifamily with office and retail project. The
highest and best use as improved is for a continued multifamily with office and
retail use. Overall, the highest and best use of the subject property is the
continued use of the existing apartment project.
AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 20
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
THE VALUATION PROCEDURE
There are three traditional approaches, which can be employed in establishing
the market value of the subject property. These approaches and their
applicability to the valuation of the subject are summarized as follows:
THE COST APPROACH
The application of the Cost Approach is based on the principle of substitution.
This principle may be stated as follows: no one is justified in paying more for
a property than that amount by which he or she can obtain, by purchase of a site
and construction of a building, without undue delay, a property of equal
desirability and utility. In the case of a new building, no deficiencies in the
building should exist.
In the case of income-producing real estate, the cost of construction plays a
minor and relatively insignificant role in determining market value. The Cost
Approach is typically only a reliable indicator of value for: (a) new
properties; (b) special use properties; and (c) where the cost of reproducing
the improvements is easily and accurately quantified and there is no economic
obsolescence. In all instances, the issue of an appropriate entrepreneurial
profit - the reward for undertaking the risk of construction, remains a highly
subjective factor especially in a market lacking significant speculative
development.
THE SALES COMPARISON APPROACH
The Sales Comparison Approach is an estimate of value based upon a process of
comparing recent sales of similar properties in the surrounding or competing
areas to the subject property. Inherent in this approach is the principle of
substitution.
The application of this approach consists of comparing the subject property with
similar properties of the same general type, which have been sold recently or
currently are available for sale in competing areas. This comparative process
involves judgment as to the similarity of the subject property and the
comparable sale with respect to many value factors such as location, contract
rent levels, quality of construction, reputation and prestige, age and
condition, among others. The estimated value through this approach represents
the probable price at which a willing seller would sell the subject property to
a willing and knowledgeable buyer as of the date of value.
AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 21
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
THE INCOME CAPITALIZATION APPROACH
The theory of the Income Capitalization Approach is based on the premise that
present value is the value of the cash flow and reversionary value the property
will produce over a reasonable holding (ownership) period.
The Discounted Cash Flow Analysis will convert equity cash flows (including cash
flows and equity reversion) into a present value utilizing an internal rate of
return (or discount rate). The Internal Rate of Return (IRR) will be derived
from a comparison of alternate investments, a comparative analysis of IRR's used
by recent buyers of similar properties, and a review of published industry
surveys.
The Direct Capitalization Analysis converts one year of income into an overall
value using overall capitalization rates from similar sales. The overall rates
take into consideration buyers assumptions of the market over the long-term.
The results of the Income Capitalization Analysis are usually the primary value
indicator for income producing properties. Investors expect a reasonable rate of
return on their equity investment based on the ownership risks involved; this
approach closely parallels the investment decision process.
RECONCILIATION
In this instance, we have completed the Sales Comparison and Income
Capitalization Approaches to value. As an income producing property, the income
approach is a primary approach to value. The Sales Comparison Approach is also
considered reliable as investors are buying similar buildings in the market.
Our research indicates that market participants are generally not buying,
selling, investing, or lending with reliance placed on the methodology of the
Cost Approach to establish the value. Therefore, we have decided that the Cost
Approach is not a reliable indicator of value for the subject, and this approach
has not been utilized.
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SALES COMPARISON APPROACH
Use of market or comparable sales requires the collection and analysis of
comparable sales data. Similar properties recently sold are compared to the
subject and adjusted based on any perceived differences. This method is based on
the premise that the costs of acquiring a substitute property would tend to
establish a value for the subject property. The premise suggests that if a
substitute is unavailable in the market, the reliability of the approach may be
subordinate to the other approaches.
The reliance on substitute properties produces shortcomings in the validity of
this approach. Geographic and demographic characteristics from each submarket
restrict which sales may be selected. Recent sales with a similar physical
characteristics, income levels, and location are usually limited. The sales we
have identified, however, do establish general valuation parameters as well as
provide support to our conclusion derived through the income approach method.
The standard unit of comparison among similar properties is the sales price per
unit and price per square foot of net rentable area. To accurately adjust prices
to satisfy the requirements of the sales comparison approach, numerous
calculations and highly subjective judgments would be required including
consideration of numerous income and expense details for which information may
be unreliable or unknown. The sales price per unit and square foot are
considered relevant to the investment decision, but primarily as a parameter
against which value estimates derived through the income approach can be judged
and compared.
In examining the comparable sales, we have applied a subjective adjustment
analysis, which includes specific adjustments derived from our experience and
consulting with the market participants.
SALES COMPARISON ANALYSIS
Detailed on the following pages are sales transactions involving properties
located in the subject's competitive investment market.
Photographs of the sale transactions are located in the Addenda. Following the
summary of sales is an adjustment grid that is used to arrive at a value.
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE
DESCRIPTION SUBJECT I - 1 I - 2
- ------------------------------ -------------------------- ------------------------------ ---------------------------------
Property Name Sterling Apartment Homes Presidential City Apts Cedarbrook Hill
LOCATION:
Address 1815 John F. Kennedy 3900 City Line Avenue 8460 Limekiln Pike
Boulevard
City, State Philadelphia, Pennsylvania Philadelphia, Pennsylvania Wyncote, Pennsylvania
County Philadelphia Philadelphia Montgomery
PHYSICAL CHARACTERISTICS:
Net Rentable Area (SF) 486,553 1,044,824 1,187,200
Year Built 1960 1951 1963
Number of Units 536 988 896
Unit Mix: Type Total Type Total Type Total
EA10 32 Studio 200 1Br/1Ba 323
EB10 137 1Br/1Ba 300 2Br/2Ba 527
1A10 48 2Br/2Ba 300 3Br/2Ba 46
1B10 102 3Br/2Ba 188
1C10 21
2A20 124
2B20 32
2C20 5
3A20 24
3B20 8
3C20 2
4A30 1
Average Unit Size (SF) 908 1,058 1,325
Land Area (Acre) 0.8909 2.6500 41.0000
Density (Units/Acre) 601.6 372.8 21.9
Parking Ratio (Spaces/Unit) 0.37 1.0+ 1.0+
Parking Type (Gr., Cov., etc.) Garage Open, Covered Open, Covered
CONDITION: Good Average Average
APPEAL: Good Average Good
AMENITIES:
Pool/Spa Yes/No Yes/No Yes/No
Gym Room Yes Yes Yes
Laundry Room No No Yes
Secured Parking No No Yes
Sport Courts No No Yes
Washer/Dryer Connection Yes Yes No
Gated Security Yes
Business Center
OCCUPANCY: 91% 95% 88%
TRANSACTION DATA:
Sale Date May, 2002 May, 2001
Sale Price ($) $81,000,000 $88,100,000
Grantor Ira Lubert & Dean Adler Cedarbrook Holdings LLC
Grantee L.A.D. Presidential LP Ceebraid-Signal Corp /
Transwestern
Sale Documentation N/A N/A
Verification Buyer Buyer
Telephone Number
ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF
Potential Gross Income $0 $0 $0.00 $17,711,500 $19,767 $14.92
Vacancy/Credit Loss $0 $0 $0.00 $ 2,125,380 $ 2,372 $ 1.79
------------------------------------------------------------------
Effective Gross Income $0 $0 $0.00 $15,586,120 $17,395 $13.13
Operating Expenses $0 $0 $0.00 $ 8,394,000 $ 9,368 $ 7.07
------------------------------------------------------------------
Net Operating Income $0 $0 $0.00 $ 7,192,120 $ 8,027 $ 6.06
------------------------------------------------------------------
NOTES: No financial data was made The buyer intends to rehab
available for this sale. portions of the property for
a cost of $16 million.
PRICE PER UNIT $81,984 $98,326
PRICE PER SQUARE FOOT $ 77.53 $ 74.21
EXPENSE RATIO N/A 53.9%
EGIM N/A 5.65
OVERALL CAP RATE N/A 8.16%
Cap Rate based on Pro Forma or Actual Income? PRO FORMA
COMPARABLE
DESCRIPTION I - 3
- ------------------------------ ------------------------------
Property Name Berkshire Towers
LOCATION:
Address 11215 Oak Leaf Drive
City, State Silver Spring, Maryland
County Montgomery
PHYSICAL CHARACTERISTICS:
Net Rentable Area (SF) 1,375,638
Year Built 1965
Number of Units 1,119
Unit Mix: Type Total
1Br/1Ba 495
2Br/2Ba 396
3Br/2Ba 228
Average Unit Size (SF) 1,229
Land Area (Acre) 17.1900
Density (Units/Acre) 65.1
Parking Ratio (Spaces/Unit) 1.0+
Parking Type (Gr., Cov., etc.) Open, Covered
CONDITION: Good
APPEAL: Good
AMENITIES:
Pool/Spa Yes/Yes
Gym Room Yes
Laundry Room Yes
Secured Parking No
Sport Courts Yes
Washer/Dryer Connection No
Gated Security Clubhouse
Business Center Yes
OCCUPANCY: 95%
TRANSACTION DATA:
Sale Date May, 2003
Sale Price ($) $130,000,000
Grantor Berkshire Realty Holdings
Grantee Stellar Management
Sale Documentation MGA-47781
Verification Buyer
Telephone Number
ESTIMATED PRO-FORMA: Total $ $/Unit $/SF
Potential Gross Income $14,761,620 $13,192 $10.73
Vacancy/Credit Loss $ 738,081 $ 660 $ 0.54
------------------------------
Effective Gross Income $14,023,539 $12,532 $10.19
Operating Expenses $ 4,908,239 $ 4,386 $ 3.57
------------------------------
Net Operating Income $ 9,115,300 $ 8,146 $ 6.63
------------------------------
NOTES: Property was completely
remodeled in 1997.
PRICE PER UNIT $116,175
PRICE PER SQUARE FOOT $ 94.50
EXPENSE RATIO 35.0%
EGIM 9.27
OVERALL CAP RATE 7.01%
Cap Rate based on Pro Forma or Actual Income? PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
IMPROVED SALES MAP
[MAP]
IMPROVED SALES ANALYSIS
The improved sales indicate a sales price range from $81,984 to $116,175 per
unit. Adjustments have been made to the sales to reflect differences in
location, age/condition and quality/appeal. Generally speaking, larger
properties typically have a lower price per unit when compared to smaller
properties, all else being equal. Similarly, those projects with a higher
average unit size will generally have a higher price per unit. After appropriate
adjustments are made, the improved sales demonstrate an adjusted range for the
subject from $116,175 to $125,071 per unit with a mean or average adjusted price
of $121,230 per unit. The median adjusted price is $122,443 per unit. Based on
the following analysis, we have concluded to a value of $120,000 per unit, which
results in an "as is" value of $64,000,000 (rounded after necessary adjustment,
if any).
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SALES ADJUSTMENT GRID
COMPARABLE
DESCRIPTION SUBJECT I - 1
- ----------------------------------- -------------------------- --------------------------
Property Name Sterling Apartment Homes Presidential City Apts
Address 1815 John F. Kennedy 3900 City Line Avenue
Boulevard
City Philadelphia, Pennsylvania Philadelphia, Pennsylvania
Sale Date May, 2002
Sale Price ($) $81,000,000
Net Rentable Area (SF) 486,553 1,044,824
Number of Units 536 988
Price Per Unit $81,984
Year Built 1960 1951
Land Area (Acre) 0.8909 2.6500
VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ.
Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0%
Financing Cash To Seller 0%
Conditions of Sale Arm's Length 0%
Date of Sale (Time) 05-2002 3%
VALUE AFTER TRANS. ADJUST. ($/UNIT) $ 84,443
Location Inferior 10%
Number of Units 536 988 5%
Quality / Appeal Good Inferior 10%
Age / Condition 1960 1951 / Average 20%
Occupancy at Sale 91% 95% -5%
Amenities Good Inferior 5%
Average Unit Size (SF) 908 1,058 0%
Commercial Units Yes Comparable 0%
PHYSICAL ADJUSTMENT 45%
FINAL ADJUSTED VALUE ($/UNIT) $ 122,443
COMPARABLE COMPARABLE
DESCRIPTION I - 2 I - 3
- ----------------------------------- ------------------------------ --------------------------
Property Name Cedarbrook Hill Berkshire Towers
Address 8460 Limekiln Pike 11215 Oak Leaf Drive
City Wyncote, Pennsylvania Silver Spring, Maryland
Sale Date May, 2001 May, 2003
Sale Price ($) $88,100,000 $130,000,000
Net Rentable Area (SF) 1,187,200 1,375,638
Number of Units 896 1,119
Price Per Unit $98,326 $116,175
Year Built 1963 1965
Land Area (Acre) 41.0000 17.1900
VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ.
Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0%
Financing Cash To Seller 0% Cash To Seller 0%
Conditions of Sale Arm's Length 0% Arm's Length 0%
Date of Sale (Time) 05-2001 6% 05-2003 0%
VALUE AFTER TRANS. ADJUST. ($/UNIT) $ 104,225 $ 116,175
Location Comparable 0% Comparable 0%
Number of Units 896 5% 1,119 5%
Quality / Appeal Comparable 0% Comparable 0%
Age / Condition 1963 / Average 20% 1965 / Good 0%
Occupancy at Sale 88% 0% 95% -5%
Amenities Comparable 0% Superior -5%
Average Unit Size (SF) 1,325 -5% 1,229 -5%
Commercial Units Comparable 0% Inferior 10%
PHYSICAL ADJUSTMENT 20% 0%
FINAL ADJUSTED VALUE ($/UNIT) $ 125,071 $ 116,175
SUMMARY
VALUE RANGE (PER UNIT) $116,175 TO $125,071
MEAN (PER UNIT) $121,230
MEDIAN (PER UNIT) $122,443
VALUE CONCLUSION (PER UNIT) $120,000
VALUE OF IMPROVEMENT & MAIN SITE $64,320,000
LESS: LEASE-UP COST -$ 291,000
VALUE INDICATED BY SALES COMPARISON APPROACH $64,029,000
ROUNDED $64,000,000
NET OPERATING INCOME (NOI) ANALYSIS
We have also conducted a net operating income (NOI) comparison analysis. The NOI
effectively takes into account the various physical, location, and operating
aspects of the sale. When the subject's NOI is compared to the sale NOI, a
percent adjustment can be arrived at. The following table illustrates this
analysis.
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 26
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SALES COMPARISON APPROACH (NOI PER UNIT ANALYSIS)
NOI PER UNIT COMPARISON
SALE PRICE NOI/ SUBJECT NOI
COMPARABLE NO. OF ------------ -------------- -------------- ADJUSTMENT INDICATED
NO. UNITS PRICE/UNIT OAR NOI/UNIT SUBJ. NOI/UNIT FACTOR VALUE/UNIT
- ---------- ----- ------------ -------- -------------- -------------- ---------- ----------
I-1 988 $ 81,000,000 N/A N/A $ 5,214,411
$ 81,984 $ 9,728
I-2 896 $ 88,100,000 8.16% $ 7,192,120 $ 5,214,411 1.212 $ 119,168
$ 98,326 $ 8,027 $ 9,728
I-3 1119 $130,000,000 7.01% $ 9,115,300 $ 5,214,411 1.194 $ 138,744
$ 116,175 $ 8,146 $ 9,728
PRICE/UNIT
Low High Average Median
- -------- -------- -------- --------
$119,168 $138,744 $128,956 $128,956
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT
Estimated Price Per Unit $ 125,000
Number of Units 536
Value $67,000,000
Less: Lease-Up Cost -$ 291,000
------------
Value Based on NOI Analysis $66,709,000
Rounded $66,700,000
The adjusted sales indicate a range of value between $119,168 and $138,744 per
unit, with an average of $128,956 per unit. Based on the subject's competitive
position within the improved sales, a value of $125,000 per unit is estimated.
This indicates an "as is" market value of $66,700,000 (rounded after necessary
adjustment, if any) for the NOI Per Unit Analysis.
EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS
The effective gross income multiplier (EGIM) is derived by dividing the sales
price by the total effective gross income. The following table illustrates the
EGIMs for the comparable improved sales.
EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON
SALE PRICE
COMPARABLE NO. OF ------------ EFFECTIVE OPERATING SUBJECT
NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM
- ---------- ------ ------------ ------------ ------------ ----- ------------- ----
I-1 988 $ 81,000,000 N/A N/A
$ 81,984
I-2 896 $ 88,100,000 $ 15,586,120 $ 8,394,000 53.86% 40.47% 5.65
$ 98,326
I-3 1119 $130,000,000 $ 14,023,539 $ 4,908,239 35.00% 9.27
$ 116,175
EGIM
Low High Average Median
- ---- ---- ------- ------
5.65 9.27 7.46 7.46
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES
Estimate EGIM 7.50
Subject EGI $ 8,939,001
Value $67,042,508
Less: Lease-Up Cost -$ 291,000
------------
Value Based on EGIM Analysis $66,751,508
Rounded $66,800,000
Value Per Unit $ 124,627
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 27
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
There is an inverse relationship, which generally holds among EGIMs and
operating expenses. Properties, which have higher expense ratios, typically sell
for relatively less and therefore produce a lower EGIM. As will be illustrated
in the Income Capitalization Approach of this report, the subject's operating
expense ratio (OER) is estimated at 40.47% before reserves. The comparable sales
indicate a range of expense ratios from 35.00% to 53.86%, while their EGIMs
range from 5.65 to 9.27. Overall, we conclude to an EGIM of 7.50, which results
in an "as is" value estimate in the EGIM Analysis of $66,800,000.
SALES COMPARISON CONCLUSION
The three valuation methods in the Sales Comparison Approach are shown below.
The overall value via the Sales Comparison Approach is estimated at $66,000,000.
Price Per Unit $64,000,000
NOI Per Unit $66,700,000
EGIM Analysis $66,800,000
Sales Comparison Conclusion $66,000,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
INCOME CAPITALIZATION APPROACH
The income capitalization approach is based on the premise that value is created
by the expectation of future benefits. We estimated the present value of those
benefits to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the right to receive them as of the date of
value.
This approach requires an estimate of the NOI of a property. The estimated NOI
is then converted to a value indication by use of either the direct
capitalization or the discounted cash flow analysis (yield capitalization).
Direct capitalization uses a single year's stabilized NOI as a basis for a value
indication by dividing the income by a capitalization rate. The rate chosen
accounts for a recapture of the investment by the investor and should reflect
all factors that influence the value of the property, such as tenant quality,
property condition, neighborhood change, market trends, interest rates, and
inflation. The rate may be extracted from local market transactions or, when
transaction evidence is lacking, obtained from trade sources.
A discounted cash flow analysis focuses on the operating cash flows expected
from the property and the proceeds of a hypothetical sale at the end of a
holding period (the reversion). The cash flows and reversion are discounted to
their present values using a market-derived discount rate and are added together
to obtain a value indication. Because benefits to be received in the future are
worth less than the same benefits received in the present, this method weights
income in the early years more heavily than the income and the sale proceeds to
be received later. The strength of the discounted cash flow method is its
ability to recognize variations in projected net income, such as those caused by
inflation, stepped leases, neighborhood change, or tenant turnover. Its weakness
is that it requires many judgments regarding the actions of likely buyers and
sellers of the property in the future.
In some situations, both methods yield a similar result. The discounted cash
flow method is typically more appropriate for the analysis of investment
properties with multiple or long-term leases, particularly leases with
cancellation clauses or renewal options. It is especially useful for
multi-tenant properties in volatile markets. The direct capitalization
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
method is normally more appropriate for properties with relatively stable
operating histories and expectations.
A pro forma analysis for the first year of the investment is made to estimate a
reasonable potential net operating income for the Subject Property. Such an
analysis entails an estimate of the gross income the property should command in
the marketplace. From this total gross income must be deducted an allowance for
vacancy/collection loss and operating expenses as dictated by general market
conditions and the overall character of the subject's tenancy and leased income
to arrive at a projected estimate of net operating income. Conversion of the net
operating income to an indication of value is accomplished by the process of
capitalization, as derived primarily from market data.
MARKET RENT ANALYSIS
In order to determine a market rental rate for the subject, a survey of
competing apartment communities was performed. This survey was displayed
previously in the market analysis section of the report. Detailed information
pertaining to each of the comparable rental communities, along with photographs,
is presented in the Addenda of this report.
The following charts display the subject's current asking and actual rent rates
as well as a comparison with the previous referenced comparable rental
properties.
SUMMARY OF ACTUAL AVERAGE RENTS
Average
Unit Area -----------------------
Unit Type (Sq. Ft.) Per Unit Per SF %Occupied
- --------------------------------------------------------------------
EA10 412 $ 896 $ 2.17 81.3%
EB10 495 $ 941 $ 1.90 89.1%
1A10 550 $1,184 $ 2.15 95.6%
1B10 803 $1,302 $ 1.62 92.4%
1C10 920 $1,509 $ 1.64 100.0%
2A20 1315 $1,772 $ 1.35 90.9%
2B20 1425 $2,189 $ 1.54 96.8%
2C20 1794 $2,569 $ 1.43 100.0%
3A20 1631 $2,251 $ 1.38 90.9%
3B20 1778 $2,509 $ 1.41 100.0%
3C20 2215 $2,794 $ 1.26 100.0%
4A30 2500 $2,459 $ 0.98 0.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
RENT ANALYSIS
COMPARABLE RENTS
------------------------------------------------
R-1 R-2 R-3 R-4
------------------------------------------------
The Lofts at Park Towne 1500 Locust on
1835 Arch Place Locust The Park
------------------------------------------------
SUBJECT SUBJECT COMPARISON TO SUBJECT
SUBJECT UNIT ACTUAL ASKING ------------------------------------------------
DESCRIPTION TYPE RENT RENT Similar Inferior Superior Similar
- --------------------------------------------------------------------------------------------------------------
Monthly Rent EA10 $ 896 $ 909 $ 819
Unit Area (SF) 412 412 460
Monthly Rent Per Sq. Ft. $ 2.17 $ 2.21 $ 1.78
Monthly Rent EB10 $ 941 $ 949 $1,100 $1,125
Unit Area (SF) 495 495 497 528
Monthly Rent Per Sq. Ft. $ 1.90 $ 1.92 $ 2.21 $ 2.13
Monthly Rent 1A10 $1,184 $1,199
Unit Area (SF) 550 550
Monthly Rent Per Sq. Ft. $ 2.15 $ 2.18
Monthly Rent 1B10 $1,302 $1,399 $1,400 $1,024 $1,505 $1,395
Unit Area (SF) 803 803 815 715 795 809
Monthly Rent Per Sq. Ft. $ 1.62 $ 1.74 $ 1.72 $ 1.43 $ 1.89 $ 1.72
Monthly Rent 1C10 $1,509 $1,489 $1,750 $1,700
Unit Area (SF) 920 920 950 898
Monthly Rent Per Sq. Ft. $ 1.64 $ 1.62 $ 1.84 $ 1.89
Monthly Rent 2A20 $1,772 $1,749 $2,200 $1,629 $2,183 $1,950
Unit Area (SF) 1,315 1,315 1,275 1,043 1,113 1,211
Monthly Rent Per Sq. Ft. $ 1.35 $ 1.33 $ 1.73 $ 1.56 $ 1.96 $ 1.61
Monthly Rent 2B20 $2,189 $1,899 $2,335
Unit Area (SF) 1,425 1,425 1,264
Monthly Rent Per Sq. Ft. $ 1.54 $ 1.33 $ 1.85
Monthly Rent 2C20 $2,569 $2,339
Unit Area (SF) 1,794 1,794
Monthly Rent Per Sq. Ft. $ 1.43 $ 1.30
Monthly Rent 3A20 $2,251 $2,209 $1,839
Unit Area (SF) 1,631 1,631 1,223
Monthly Rent Per Sq. Ft. $ 1.38 $ 1.35 $ 1.50
Monthly Rent 3B20 $2,509 $2,299
Unit Area (SF) 1,778 1,778
Monthly Rent Per Sq. Ft. $ 1.41 $ 1.29
Monthly Rent 3C20 $2,794 $2,509
Unit Area (SF) 2,215 2,215
Monthly Rent Per Sq. Ft. $ 1.26 $ 1.13
Monthly Rent 4A30 $2,459 $2,459 $2,074
Unit Area (SF) 2,500 2,500 1,465
Monthly Rent Per Sq. Ft. $ 0.98 $ 0.98 $ 1.42
SUBJECT UNIT
DESCRIPTION TYPE MIN MAX MEDIAN AVERAGE
- -------------------------------------------------------------------------------
Monthly Rent EA10 $ 819 $ 819 $ 819 $ 819
Unit Area (SF) 460 460 460 460
Monthly Rent Per Sq. Ft. $ 1.78 $ 1.78 $ 1.78 $ 1.78
Monthly Rent EB10 $1,100 $1,125 $1,113 $1,113
Unit Area (SF) 497 528 513 513
Monthly Rent Per Sq. Ft. $ 2.13 $ 2.21 $ 2.17 $ 2.17
Monthly Rent 1A10
Unit Area (SF)
Monthly Rent Per Sq. Ft.
Monthly Rent 1B10 $1,024 $1,505 $1,398 $1,331
Unit Area (SF) 715 815 802 784
Monthly Rent Per Sq. Ft. $ 1.43 $ 1.89 $ 1.72 $ 1.69
Monthly Rent 1C10 $1,700 $1,750 $1,725 $1,725
Unit Area (SF) 898 950 924 924
Monthly Rent Per Sq. Ft. $ 1.84 $ 1.89 $ 1.87 $ 1.87
Monthly Rent 2A20 $1,629 $2,200 $2,067 $1,991
Unit Area (SF) 1,043 1,275 1,162 1,161
Monthly Rent Per Sq. Ft. $ 1.56 $ 1.96 $ 1.67 $ 1.71
Monthly Rent 2B20 $2,335 $2,335 $2,335 $2,335
Unit Area (SF) 1,264 1,264 1,264 1,264
Monthly Rent Per Sq. Ft. $ 1.85 $ 1.85 $ 1.85 $ 1.85
Monthly Rent 2C20
Unit Area (SF)
Monthly Rent Per Sq. Ft.
Monthly Rent 3A20 $1,839 $1,839 $1,839 $1,839
Unit Area (SF) 1,223 1,223 1,223 1,223
Monthly Rent Per Sq. Ft. $ 1.50 $ 1.50 $ 1.50 $ 1.50
Monthly Rent 3B20
Unit Area (SF)
Monthly Rent Per Sq. Ft.
Monthly Rent 3C20
Unit Area (SF)
Monthly Rent Per Sq. Ft.
Monthly Rent 4A30 $2,074 $2,074 $2,074 $2,074
Unit Area (SF) 1,465 1,465 1,465 1,465
Monthly Rent Per Sq. Ft. $ 1.42 $ 1.42 $ 1.42 $ 1.42
CONCLUDED MARKET RENTAL RATES AND TERMS
Based on this analysis above, the subject's concluded market rental rates and
gross rental income is calculated as follows:
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
GROSS RENTAL INCOME PROJECTION
Market Rent
Unit Area ------------------- Monthly Annual
Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income
- ----------------------------------------------------------------------------------------
EA10 32 412 $ 899 $2.18 $ 28,768 $ 345,216
EB10 137 495 $ 949 $1.92 $ 130,013 $1,560,156
1A10 48 550 $ 1,149 $2.09 $ 55,152 $ 661,824
1B10 102 803 $ 1,379 $1.72 $ 140,658 $1,687,896
1C10 21 920 $ 1,509 $1.64 $ 31,689 $ 380,268
2A20 124 1,315 $ 1,759 $1.34 $ 218,116 $2,617,392
2B20 32 1,425 $ 2,109 $1.48 $ 67,488 $ 809,856
2C20 5 1,794 $ 2,449 $1.37 $ 12,245 $ 146,940
3A20 24 1,631 $ 2,229 $1.37 $ 53,496 $ 641,952
3B20 8 1,778 $ 2,359 $1.33 $ 18,872 $ 226,464
3C20 2 2,215 $ 2,499 $1.13 $ 4,998 $ 59,976
4A30 1 2,500 $ 2,459 $0.98 $ 2,459 $ 29,508
---------------------------------
Total $ 763,954 $9,167,448
PRO FORMA ANALYSIS
For purposes of this appraisal, we were provided with income and expense data
for the subject property. A summary of this data is presented on the following
page.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002
--------------------------------------------------------------------------------
ACTUAL ACTUAL ACTUAL
--------------------------------------------------------------------------------
DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT
- -------------------------------------------------------------------------------------------------------------
Revenues
Rental Income $8,342,210 $ 15,564 $8,855,683 $ 16,522 $9,139,066 $ 17,050
Vacancy $ 502,931 $ 938 $ 478,155 $ 892 $ 844,922 $ 1,576
Credit Loss/Concessions $ 18,839 $ 35 $ 28,274 $ 53 $ 79,026 $ 147
--------------------------------------------------------------------------------
Subtotal $ 521,770 $ 973 $ 506,429 $ 945 $ 923,948 $ 1,724
Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other Misc. Revenue $ 358,833 $ 669 $ 366,006 $ 683 $ 458,161 $ 855
--------------------------------------------------------------------------------
Subtotal Other Income $ 358,833 $ 669 $ 366,006 $ 683 $ 458,161 $ 855
--------------------------------------------------------------------------------
Effective Gross Income $8,179,273 $ 15,260 $8,715,260 $ 16,260 $8,673,279 $ 16,181
Operating Expenses
Taxes $ 454,883 $ 849 $ 639,413 $ 1,193 $ 641,270 $ 1,196
Insurance $ 62,262 $ 116 $ 128,240 $ 239 $ 122,284 $ 228
Utilities $1,052,106 $ 1,963 $1,142,411 $ 2,131 $1,016,569 $ 1,897
Repair & Maintenance $ 64,655 $ 121 $ 55,249 $ 103 $ 45,412 $ 85
Cleaning $ 522,451 $ 975 $ 506,709 $ 945 $ 496,132 $ 926
Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Marketing & Leasing $ 38,977 $ 73 $ 38,468 $ 72 $ 37,528 $ 70
General Administrative $ 61,275 $ 114 $ 91,888 $ 171 $ 91,216 $ 170
Management $ 412,405 $ 769 $ 457,317 $ 853 $ 432,824 $ 808
Miscellaneous $ 587,943 $ 1,097 $ 667,060 $ 1,245 $ 545,058 $ 1,017
--------------------------------------------------------------------------------
Total Operating Expenses $3,256,957 $ 6,076 $3,726,755 $ 6,953 $3,428,293 $ 6,396
Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------
Net Income $4,922,316 $ 9,183 $4,988,505 $ 9,307 $5,244,986 $ 9,785
FISCAL YEAR 2003 ANNUALIZED 2003
------------------------------------------------------
MANAGEMENT BUDGET PROJECTION AAA PROJECTION
------------------------------------------------------------------------------------------
DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT %
- -----------------------------------------------------------------------------------------------------------------------
Revenues
Rental Income $9,343,212 $ 17,431 $9,117,800 $ 17,011 $9,167,448 $ 17,103 100.0%
Vacancy $ 615,000 $ 1,147 $ 822,888 $ 1,535 $ 458,372 $ 855 5.0%
Credit Loss/Concessions $ 12,000 $ 22 $ 215,400 $ 402 $ 91,674 $ 171 1.0%
------------------------------------------------------------------------------------------
Subtotal $ 627,000 $ 1,170 $1,038,288 $ 1,937 $ 550,047 $ 1,026 6.0%
Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0%
Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0%
Other Misc. Revenue $ 296,831 $ 554 $ 342,992 $ 640 $ 321,600 $ 600 3.5%
------------------------------------------------------------------------------------------
Subtotal Other Income $ 296,831 $ 554 $ 342,992 $ 640 $ 321,600 $ 600 3.5%
------------------------------------------------------------------------------------------
Effective Gross Income $9,013,043 $ 16,815 $8,422,504 $ 15,714 $8,939,001 $ 16,677 100.0%
Operating Expenses
Taxes $ 781,506 $ 1,458 $ 684,124 $ 1,276 $ 696,800 $ 1,300 7.8%
Insurance $ 147,716 $ 276 $ 131,764 $ 246 $ 147,400 $ 275 1.6%
Utilities $1,103,000 $ 2,058 $1,713,536 $ 3,197 $1,072,000 $ 2,000 12.0%
Repair & Maintenance $ 64,100 $ 120 $ 21,764 $ 41 $ 64,320 $ 120 0.7%
Cleaning $ 514,800 $ 960 $ 573,604 $ 1,070 $ 522,600 $ 975 5.8%
Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0%
Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0%
Marketing & Leasing $ 36,000 $ 67 $ 77,884 $ 145 $ 37,520 $ 70 0.4%
General Administrative $ 100,500 $ 188 $ 128,980 $ 241 $ 93,800 $ 175 1.0%
Management $ 456,547 $ 852 $ 431,128 $ 804 $ 446,950 $ 834 5.0%
Miscellaneous $ 522,538 $ 975 $ 468,612 $ 874 $ 536,000 $ 1,000 6.0%
------------------------------------------------------------------------------------------
Total Operating Expenses $3,726,707 $ 6,953 $4,231,396 $ 7,894 $3,617,390 $ 6,749 40.5%
Reserves $ 0 $ 0 $ 0 $ 0 $ 107,200 $ 200 3.0%
------------------------------------------------------------------------------------------
Net Income $5,286,336 $ 9,863 $4,191,108 $ 7,819 $5,214,411 $ 9,728 58.3%
REVENUES AND EXPENSES
The subject's revenue and expense projections are displayed on the previous
chart. Rental income is based on the market analysis previously discussed. Other
income consists of forfeited deposits, laundry income, late rent payments, month
to month fees, pet fees, vending machine revenue, etc.
We forecasted the property's annual operating expenses after reviewing its
historical performance at the subject property. We analyzed each item of expense
and attempted to forecast amounts a typical informed investor would consider
reasonable.
VACANCY AND COLLECTION LOSS
An investor is primarily interested in the annual revenue an income property is
likely to produce over a specified period of time, rather than the income it
could produce if it were always 100% occupied and all tenants were paying their
rent in full and on time. An investor normally expects some income loss as
tenants vacate, fail to pay rent, or pay their rent late.
We have projected a stabilized vacancy and collection loss rate of 6% based on
the subject's historical performance, as well as the anticipated future market
conditions.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
RESERVES FOR REPLACEMENT
"Reserves for replacements" is a contingency account allocated to the expenses
of the property to provide for replacement of short-lived items and for
unforeseen necessary capital expenditures. We have utilized the Korpacz Real
Estate Investor Survey of the national apartment market, which reports a range
of replacement reserves between $150 and $400 per unit. For purposes of this
analysis, we have included an allowance of $200 per unit for reserves for
replacement.
CAPITAL EXPENDITURES
Capital expenditures represent expenses for immediate repair or replacement of
items that have average to long lives. Based on our inspection of the property
as well as discussions with property management personnel, there are no major
items remaining in need of repair or replacement that would require an expense
beyond our reserves for replacement. Therefore an allowance of $200 per unit
should be satisfactory in our reserves for replacement to cover future capital
expenditures.
DISCOUNTED CASH FLOW ANALYSIS
As the subject is a multi-tenant income property, the Discounted Cash Flow
Method is considered appropriate. This method is especially meaningful in that
it isolates the timing of the annual cash flows and discounts them, along with
the expected equity reversion, to a present value. The present value of the cash
flow is added to the present value of the reversion, resulting in a total
property value.
INVESTMENT CRITERIA
Appropriate investment criteria will be derived for the subject based upon
analysis of comparable sales and a survey of real estate investors. The
following table summarizes the findings of Korpacz National Investor Survey for
the most recent period.
KORPACZ NATIONAL INVESTOR SURVEY
1ST QUARTER 2003
NATIONAL APARTMENT MARKET
CAPITALIZATION RATES
---------------------------------------------
GOING-IN TERMINAL
---------------------------------------------
LOW HIGH LOW HIGH
- ----------------------------------------------------------
RANGE 6.00% 10.00% 7.00% 10.00%
AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUMMARY OF OVERALL
CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR
- ------------------------------------------------------
I-1 May-02 95% $ 81,984 N/A
I-2 May-01 88% $ 98,326 8.16%
I-3 May-03 95% $116,175 7.01%
I-4 N/A N/A N/A
I-5 N/A N/A N/A
High 8.16%
Low 7.01%
Average 7.59%
Based on this information, we have concluded the subject's overall
capitalization rate should be 8.00%. The terminal capitalization rate is applied
to the net operating income estimated for the year following the end of the
holding period. Based on the concluded overall capitalization rate, the age of
the property and the surveyed information, we have concluded the subject's
terminal capitalization rate to be 8.50%. Finally, the subject's discount rate
or yield rate is estimated based on the previous investor survey and an
examination of returns available on alternative investments in the market. Based
on this analysis, the subject's discount rate is estimated to be 10.50%.
HOLDING PERIOD
The survey of investors indicates that most investors are completing either
10-year cash flows or extending the analysis to the end of the lease if it is
more than 10-years. A 10-year period has been used in the analysis of the
subject with the eleventh year stabilized NOI used to determine the reversion.
SELLING COSTS
Sales of similar size properties are typically accomplished with the aid of a
broker and will also incur legal and other transaction related cost. Based on
our survey of brokers and a review of institutional investor projections, an
allowance of 2.00% of the sale amount is applied.
DISCOUNTED CASH FLOW CONCLUSION
Discounting the annual cash flows and the equity reversion at the selected rate
of 10.50% indicates a value of $63,900,000. In this instance, the reversion
figure contributes
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
approximately 44% of the total value. Investors surveyed for this assignment
indicated they would prefer to have the cash flow contribute anywhere from 50%
to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix
are located on the following pages.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
STERLING APARTMENT HOMES
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009
FISCAL YEAR 1 2 3 4 5 6
- -----------------------------------------------------------------------------------------------------------------------------
REVENUE
Base Rent $ 9,167,448 $ 9,167,448 $ 9,442,471 $ 9,725,746 $10,017,518 $10,318,043
Vacancy $ 715,103 $ 548,575 $ 472,124 $ 486,287 $ 500,876 $ 515,902
Credit Loss $ 91,674 $ 91,674 $ 94,425 $ 97,257 $ 100,175 $ 103,180
Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------------
Subtotal $ 806,777 $ 640,249 $ 566,548 $ 583,545 $ 601,051 $ 619,083
Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other Misc. Revenue $ 321,600 $ 321,600 $ 331,248 $ 341,185 $ 351,421 $ 361,964
--------------------------------------------------------------------------------------
Subtotal Other Income $ 321,600 $ 321,600 $ 331,248 $ 341,185 $ 351,421 $ 361,964
--------------------------------------------------------------------------------------
EFFECTIVE GROSS INCOME $ 8,682,271 $ 8,848,799 $ 9,207,171 $ 9,483,386 $ 9,767,888 $10,060,925
OPERATING EXPENSES:
Taxes $ 696,800 $ 717,704 $ 739,235 $ 761,412 $ 784,255 $ 807,782
Insurance $ 147,400 $ 151,822 $ 156,377 $ 161,068 $ 165,900 $ 170,877
Utilities $ 1,072,000 $ 1,104,160 $ 1,137,285 $ 1,171,403 $ 1,206,545 $ 1,242,742
Repair & Maintenance $ 64,320 $ 66,250 $ 68,237 $ 70,284 $ 72,393 $ 74,565
Cleaning $ 522,600 $ 538,278 $ 554,426 $ 571,059 $ 588,191 $ 605,837
Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Marketing & Leasing $ 37,520 $ 38,646 $ 39,805 $ 40,999 $ 42,229 $ 43,496
General Administrative $ 93,800 $ 96,614 $ 99,512 $ 102,498 $ 105,573 $ 108,740
Management $ 434,114 $ 442,440 $ 460,359 $ 474,169 $ 488,394 $ 503,046
Miscellaneous $ 536,000 $ 552,080 $ 568,642 $ 585,702 $ 603,273 $ 621,371
--------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $ 3,604,554 $ 3,707,993 $ 3,823,878 $ 3,938,595 $ 4,056,753 $ 4,178,455
Reserves $ 107,200 $ 110,416 $ 113,728 $ 117,140 $ 120,655 $ 124,274
--------------------------------------------------------------------------------------
NET OPERATING INCOME $ 4,970,517 $ 5,030,389 $ 5,269,564 $ 5,427,651 $ 5,590,481 $ 5,758,195
=============================================================================================================================
Operating Expense Ratio (% of EGI) 41.5% 41.9% 41.5% 41.5% 41.5% 41.5%
Operating Expense Per Unit $ 6,725 $ 6,918 $ 7,134 $ 7,348 $ 7,569 $ 7,796
YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014
FISCAL YEAR 7 8 9 10 11
- --------------------------------------------------------------------------------------------------------------
REVENUE
Base Rent $10,627,585 $10,946,412 $11,274,805 $11,613,049 $11,961,440
Vacancy $ 531,379 $ 547,321 $ 563,740 $ 580,652 $ 598,072
Credit Loss $ 106,276 $ 109,464 $ 112,748 $ 116,130 $ 119,614
Concessions $ 0 $ 0 $ 0 $ 0 $ 0
-----------------------------------------------------------------------
Subtotal $ 637,655 $ 656,785 $ 676,488 $ 696,783 $ 717,686
Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0
Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0
Other Misc. Revenue $ 372,823 $ 384,007 $ 395,527 $ 407,393 $ 419,615
-----------------------------------------------------------------------
Subtotal Other Income $ 372,823 $ 384,007 $ 395,527 $ 407,393 $ 419,615
-----------------------------------------------------------------------
EFFECTIVE GROSS INCOME $10,362,752 $10,673,635 $10,993,844 $11,323,659 $11,663,369
OPERATING EXPENSES:
Taxes $ 832,016 $ 856,976 $ 882,685 $ 909,166 $ 936,441
Insurance $ 176,003 $ 181,283 $ 186,722 $ 192,324 $ 198,093
Utilities $ 1,280,024 $ 1,318,425 $ 1,357,978 $ 1,398,717 $ 1,440,678
Repair & Maintenance $ 76,801 $ 79,105 $ 81,479 $ 83,923 $ 86,441
Cleaning $ 624,012 $ 642,732 $ 662,014 $ 681,874 $ 702,331
Landscaping $ 0 $ 0 $ 0 $ 0 $ 0
Security $ 0 $ 0 $ 0 $ 0 $ 0
Marketing & Leasing $ 44,801 $ 46,145 $ 47,529 $ 48,955 $ 50,424
General Administrative $ 112,002 $ 115,362 $ 118,823 $ 122,388 $ 126,059
Management $ 518,138 $ 533,682 $ 549,692 $ 566,183 $ 583,168
Miscellaneous $ 640,012 $ 659,212 $ 678,989 $ 699,358 $ 720,339
-----------------------------------------------------------------------
TOTAL OPERATING EXPENSES $ 4,303,809 $ 4,432,923 $ 4,565,911 $ 4,702,888 $ 4,843,975
Reserves $ 128,002 $ 131,842 $ 135,798 $ 139,872 $ 144,068
-----------------------------------------------------------------------
NET OPERATING INCOME $ 5,930,941 $ 6,108,869 $ 6,292,135 $ 6,480,899 $ 6,675,326
==============================================================================================================
Operating Expense Ratio (% of EGI) 41.5% 41.5% 41.5% 41.5% 41.5%
Operating Expense Per Unit $ 8,029 $ 8,270 $ 8,518 $ 8,774 $ 9,037
Estimated Stabilized NOI $ 5,214,411 Sales Expense Rate 2.00%
Months to Stabilized 24 Discount Rate 10.50%
Stabilized Occupancy 95.0% Terminal Cap Rate 8.50%
"DCF" VALUE ANALYSIS
Gross Residual Sale Price $78,533,252 Deferred Maintenance $ 0
Less: Sales Expense $ 1,570,665 Add: Excess Land $ 0
-----------
Net Residual Sale Price $76,962,587 Other Adjustments $ 0
PV of Reversion $28,356,778 -----------
Add: NPV of NOI $35,592,791 Value Indicated By "DCF" $63,949,568
----------- Rounded $63,900,000
PV Total $63,949,568
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE
------------------------------------------------------------------
TOTAL VALUE 10.00% 10.25% 10.50% 10.75% 11.00%
- -----------------------------------------------------------------------------------------------
8.00% $67,990,945 $66,843,662 $65,721,867 $64,624,911 $63,552,161
8.25% $67,035,583 $65,909,744 $64,808,865 $63,732,310 $62,679,462
TERMINAL CAP RATE 8.50% $66,136,419 $65,030,762 $63,949,568 $62,892,215 $61,858,097
8.75% $65,288,636 $64,202,008 $63,139,375 $62,100,125 $61,083,668
9.00% $64,487,952 $63,419,296 $62,374,192 $61,352,041 $60,352,262
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
INCOME LOSS DURING LEASE-UP
The subject is currently 91% occupied, below our stabilized occupancy
projection. We have estimated a 24-month lease-up period. An adjustment must be
made to bring the subject to a stabilized operating level. To account for this
income loss during lease-up, we have compared the current DCF analysis to an "as
stabilized" DCF analysis assuming the subject's occupancy were stabilized. The
difference in net operating income during the lease-up period is discounted to a
present value figure of $291,000 as shown in the following table.
INCOME LOSS DURING LEASE-UP
DESCRIPTION YEAR 1 YEAR 2
- ----------------------------------------------------------------
"As Is" Net Operating Income $4,970,517 $5,030,389
Stabilized Net Operating Income $5,214,411 $5,116,082
---------- ----------
Difference $ 243,894 $ 85,692
PV of Income Loss During Lease-Up $ 290,899
----------
Rounded $ 291,000
----------
CONCESSIONS
Concessions have historically not been utilized at the subject property or in
the subject's market. Therefore, no adjustment was included for concessions.
DIRECT CAPITALIZATION METHOD
After having projected the income and expenses for the property, the next step
in the valuation process is to capitalize the net income into an estimate of
value. The selected overall capitalization rate ("OAR") covers both return on
and return of capital. It is the overall rate of return an investor expects.
After considering the market transactions and the investor surveys, we
previously conclude that an overall rate of 8.00% percent is applicable to the
subject. The results of our direct capitalization analysis are as follows:
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 38
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
STERLING APARTMENT HOMES
TOTAL PER SQ. FT. PER UNIT %OF EGI
- -----------------------------------------------------------------------------------------------------------
REVENUE
Base Rent $ 9,167,448 $ 18.84 $ 17,103
Less: Vacancy & Collection Loss 6.00% $ 550,047 $ 1.13 $ 1,026
Plus: Other Income
Laundry Income $ 0 $ 0.00 $ 0 0.00%
Garage Revenue $ 0 $ 0.00 $ 0 0.00%
Other Misc. Revenue $ 321,600 $ 0.66 $ 600 3.60%
-------------------------------------------------------
Subtotal Other Income $ 321,600 $ 0.66 $ 600 3.60%
EFFECTIVE GROSS INCOME $ 8,939,001 $ 18.37 $ 16,677
OPERATING EXPENSES:
Taxes $ 696,800 $ 1.43 $ 1,300 7.80%
Insurance $ 147,400 $ 0.30 $ 275 1.65%
Utilities $ 1,072,000 $ 2.20 $ 2,000 11.99%
Repair & Maintenance $ 64,320 $ 0.13 $ 120 0.72%
Cleaning $ 522,600 $ 1.07 $ 975 5.85%
Landscaping $ 0 $ 0.00 $ 0 0.00%
Security $ 0 $ 0.00 $ 0 0.00%
Marketing & Leasing $ 37,520 $ 0.08 $ 70 0.42%
General Administrative $ 93,800 $ 0.19 $ 175 1.05%
Management 5.00% $ 446,950 $ 0.92 $ 834 5.00%
Miscellaneous $ 536,000 $ 1.10 $ 1,000 6.00%
TOTAL OPERATING EXPENSES $ 3,617,390 $ 7.43 $ 6,749 40.47%
Reserves $ 107,200 $ 0.22 $ 200 1.20%
-------------------------------------------------------
NET OPERATING INCOME $ 5,214,411 $ 10.72 $ 9,728 58.33%
=======================================================
"GOING IN" CAPITALIZATION RATE 8.00%
VALUE INDICATION $ 65,180,138 $ 133.96 $ 121,605
LESS: LEASE-UP COST ($ 291,000)
"AS IS" VALUE INDICATION
(DIRECT CAPITALIZATION APPROACH) $ 64,889,138
ROUNDED $ 64,900,000 $ 133.39 $ 121,082
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 39
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF
- ---------------------------------------------------------
7.25% $ 71,631,911 $71,600,000 $133,582 $147.16
7.50% $ 69,234,481 $69,200,000 $129,104 $142.22
7.75% $ 66,991,723 $67,000,000 $125,000 $137.70
8.00% $ 64,889,138 $64,900,000 $121,082 $133.39
8.25% $ 62,913,983 $62,900,000 $117,351 $129.28
8.50% $ 61,055,013 $61,100,000 $113,993 $125.58
8.75% $ 59,302,269 $59,300,000 $110,634 $121.88
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD
Applying the capitalization rate to our estimated NOI results in an estimated
value of $64,900,000.
CORRELATION AND CONCLUSION BY THE INCOME APPROACH
The two methods used to estimate the market value of the subject property by the
income approach resulted in the following indications of value:
Discounted Cash Flow Analysis $63,900,000
Direct Capitalization Method $64,900,000
Giving consideration to the indicated values provided by both techniques, we
have concluded the estimated value by the income capitalization approach to be
$64,500,000.
DISCOUNTED CASH FLOW ANALYSIS - STERLING COMMERCE CENTER
Following is a summary of the subject's discounted cash flow analysis. Because
the commercial space is only 54.1% occupied and is not projected to reach a
stabilized level of occupancy until the third year, only a discounted cash flow
analysis was performed. A direct capitalization analysis is not considered
applicable.
MARKET RENT ANALYSIS
In order to determine a market rental rate for the subject, a review of current
office and retail leases was performed. A summary of actual leases signed over
the last 12 months is shown on the following table.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 40
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUMMARY OF ACTUAL RECENT OFFICE LEASES
LEASE LEASE RENTAL COMPOUNDED
SUITE SIZE START TERM RATE/SF ANNUAL RENT
TENANT NO. (SF) DATE (MONTHS) ($) GROWTH RATE EXPENSES
- ------------------------------------------------------------------------------------------------------------------
Dr. Parrish 465 1,418 7-02 12 15.75 - Full Service
Eagles for Leukaemia 452 1,340 10-02 36 16.00 3.1% $8.18 Stop
Michael Kleeman 350 2,904 1-03 24 15.50 6.5% $8.20 Stop
United Equity 301 1,800 3-03 12 15.00 - $8.18 Stop
Windows Corp. 303 2,002 4-03 84 8.55 2.5% Full Service
Contemporary Staffing 307 2,424 4-03 48 11.14 2.4% $8.18 Stop
Equitrac 340 2,943 5-03 12 17.88 - $1.00 *
McCann & Gerschke 309 6,093 6-03 36 14.00 3.5% BY Stop
Wainstein et al 400 3,190 6-03 36 15.50 3.2% $0.84 *
Averages - 2,679 - 33 14.37 2.4% -
All office tenants - 2,386 - - 15.16 - -
* Tenant's specific expense pass through amount
As shown above, recent office leases range from $8.55 to $17.88 per square foot
with an average of $14.37 per square foot. The average rental rate for all of
the office tenants is $15.16 per square foot. Also, this average amount is the
weighted amount for the entire tenants and takes into account the sizes of the
various spaces and is not the simple average of each tenant's rental rate.
Concerning the retail tenants, there have only been two recent leases signed
within the last 12 months. They are Suite 1823 - City Nails, a 1,097 square foot
space with a beginning lease rate of $18.00 per square foot. The lease term is
84 months (7 years) and there are annual rent increases of $1.00 per square
foot. The compounded annual rental growth rate is 4.9%. The expenses are full
service with the tenant paying no expense pass through amounts. This lease was
signed in April 2003. The second lease was Suite 1833 - Southland, a 3,420
square foot space with a rental rate of $15.30 per square foot. The lease term
is 42 months (3.5 years) and the rental rate is fixed throughout the term. This
is also a full service lease with the tenant paying no expense pass through
amount. There was no improvement allowance given by the landlord and both spaces
were taken in an "as-is" condition. The average rental rate from the existing 10
retail tenants is $23.14 per square foot.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 41
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
CONCLUDED MARKET RENTAL RATES AND TERMS
Based on this analysis above as well as interviews with the subject's property
management, rental rates and terms are shown as follows:
OFFICE TENANTS
Large tenants (Suite 200): $14.00 per square foot market rent
All other tenants: $16.00 per square foot market rent
Rent Abatement: Currently 4 months of free rent for all
leases signed in the 1st year, changing to 3
months for all leases signed in the 2nd
year, and 2 months for all leases signed in
the 3rd through 11th year
Average lease term: 60 months (5 years)
Rent increases: None, flat
Expenses: Gross lease with no expense recovery
Tenant improvement allowance: $15.00 / SF for new tenants, $0 for renewals
Leasing commissions: Sliding scale based on 6% of the 1st year's
rent, 5% of the 2nd year's rent, 4% of the
3rd year's rent, 3.5% of the 4th year's
rent, 3% of the 5th year's rent, and 2.5%
of any remaining year's rent if needed; no
commission upon renewal.
RETAIL TENANTS
Market rent: $20.00 per square foot
Average lease term: 84 months (7 years)
Rent Abatement: Currently 4 months of free rent for all
leases signed in the 1st year, changing to 3
months for all leases signed in the 2nd
year, and 2 months for all leases signed in
the 3rd through 11th year
Rent increases: None, flat rate
Expenses: Gross lease with no expense recovery
Tenant improvement allowance: None
Leasing commissions: Sliding scale based on 6% of the 1st year's
rent, 5% of the 2nd year's rent, 4% of the
3rd year's rent, 3.5% of the 4th year's
rent, 3% of the 5th year's rent, and 2.5%
of any remaining year's rent if needed; no
commission upon renewal.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 42
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PRO FORMA ANALYSIS
For purposes of this appraisal, we were provided with income and expense data
for the subject property. A summary of this data is presented on the following
page.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 43
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
OPERATING EXPENSES - HISTORICAL & PROJECTED
STERLING COMMERCE CENTER
2000 ACTUAL 2001 ACTUAL 2002 ACTUAL
- -------------------------------------------------------------------------------------------------------
Base Rental Revenue $ 1,678,969 $ 15.26 $ 1,743,488 $ 15.85 $ 1,913,014 $ 17.39
Reimbursement Income 0 0.00 0 0.00 0 0.00
Misc Income 109,058 0.99 138,950 1.26 31,481 0.29
---------------------- ----------------------- -----------------------
GROSS POTENTIAL INCOME $ 1,788,027 $ 16.26 $ 1,882,438 $ 17.11 $ 1,944,495 $ 17.68
Less General Vacancy -$ 87,268 ($ 0.79) -$ 154,562 ($ 1.41) -$ 794,364 ($ 7.22)
Less Credit Loss -120,614 (1.10) -3,738 (0.03) -7,609 (0.07)
---------------------- ----------------------- -----------------------
EFFECTIVE GROSS INCOME $ 1,580,145 $ 14.37 $ 1,724,138 $ 15.68 $ 1,142,522 $ 10.39
Real Estate Taxes $ 76,409 $ 0.69 $ 111,160 $ 1.01 $ 111,046 $ 1.01
Insurance 8,584 0.08 21,066 0.19 21,580 0.20
Utilities 306,167 2.78 388,437 3.53 355,503 3.23
Repairs & Maintenance 16,598 0.15 16,408 0.15 13,894 0.13
Cleaning 285,066 2.59 275,389 2.50 355,367 3.23
Marketing/Leasing 6,943 0.06 7,668 0.07 6,654 0.06
Gen. & Admin. 22,789 0.21 28,207 0.26 26,118 0.24
Management Fee 88,812 0.81 101,147 0.92 59,868 0.54
Miscellaneous 50,406 0.46 84,597 0.77 82,090 0.75
---------------------- ----------------------- -----------------------
TOTAL EXPENSES $ 861,774 $ 7.83 $ 1,034,079 $ 9.40 $ 1,032,120 $ 9.38
NET OPERATING INCOME $ 718,371 6.53 $ 690,059 6.27 $ 110,402 1.00
Leasing & Capital Costs
Tenant Improvements $ 0 0.00 $ 0 0.00 $ 0 0.00
Leasing Commissions 0 0.00 0 0.00 0 0.00
Structural Reserve 0 0.00 0 0.00 0 0.00
---------------------- ----------------------- -----------------------
NET CASH FLOW $ 718,371 $ 14.37 $ 690,059 $ 15.68 $ 110,402 $ 10.39
AAA
2003 BUDGET 2003/2004 PROJECTED
- -----------------------------------------------------------------------------
Base Rental Revenue $ 1,727,952 $ 15.71 $ 1,124,357 $ 10.22
Reimbursement Income 0 0.00 94,945 0.86
Misc Income -34,260 (0.31) 5,000 0.05
----------------------- -----------------------
GROSS POTENTIAL INCOME $ 1,693,692 $ 15.40 $ 1,224,302 $ 11.13
Less General Vacancy -$ 555,000 ($ 5.05) -$ 112,436 ($ 1.02)
Less Credit Loss 0 0.00 -24,115 (0.22)
----------------------- -----------------------
EFFECTIVE GROSS INCOME $ 1,138,692 $ 10.35 $ 1,087,751 $ 9.89
Real Estate Taxes $ 111,048 $ 1.01 $ 111,000 $ 1.01
Insurance 21,648 0.20 22,000 0.20
Utilities 320,600 2.91 281,143 2.56
Repairs & Maintenance 37,150 0.34 15,328 0.14
Cleaning 354,060 3.22 315,572 2.87
Marketing/Leasing 6,600 0.06 6,600 0.06
Gen. & Admin. 21,800 0.20 22,000 0.20
Management Fee 64,135 0.58 60,000 0.55
Miscellaneous 66,580 0.61 75,000 0.68
----------------------- -----------------------
TOTAL EXPENSES $ 1,003,621 $ 9.12 $ 908,643 $ 8.26
NET OPERATING INCOME $ 135,071 1.23 $ 179,108 1.63
Leasing & Capital Costs
Tenant Improvements $ 0 0.00 $ 51,121 0.46
Leasing Commissions 0 0.00 5,770 0.05
Structural Reserve 0 0.00 21,998 0.20
----------------------- -----------------------
NET CASH FLOW $ 135,071 $ 10.35 $ 100,219 $ 10.61
Net Rentable Area (SF): 109,992
REVENUES AND EXPENSES
The subject's revenue and expense projections are displayed on the previous
chart. Rental income is based on both actual lease rates and terms and market
rates previously discussed. Miscellaneous income consists of late rent fees,
vending machine revenue, etc.
We forecasted the property's annual operating expenses after reviewing its
historical performance at the subject property. We analyzed each item of expense
and attempted to forecast amounts a typical informed investor would consider
reasonable.
VACANCY AND COLLECTION LOSS
An investor is primarily interested in the annual revenue an income property is
likely to produce over a specified period of time, rather than the income it
could produce if it were
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 44
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
always 100% occupied and all tenants were paying their rent in full and on time.
An investor normally expects some income loss as tenants vacate, fail to pay
rent, or pay their rent late.
We have projected a stabilized vacancy rate of 10% plus a collection loss rate
of 2% for a total of 12%, based on the subject's historical performance, as well
as the anticipated future market conditions.
RESERVES FOR REPLACEMENT
"Reserves for replacements" is a contingency account allocated to the expenses
of the property to provide for replacement of short-lived items and for
unforeseen necessary capital expenditures. We have utilized the Korpacz Real
Estate Investor Survey of the national CBD office market, which reports a range
of replacement reserves of from $0.10 to $0.50 per square foot. For purposes of
this analysis, we have included an allowance of $0.20 per square foot for
reserves for replacement.
CAPITAL EXPENDITURES
Capital expenditures represent expenses for immediate repair or replacement of
items that have average to long lives. Based on our inspection of the property
as well as discussions with property management personnel, there are no major
items remaining in need of repair or replacement that would require an expense
beyond our reserves for replacement. Therefore an allowance of $0.20 per square
foot should be satisfactory in our reserves for replacement to cover future
capital expenditures.
DISCOUNTED CASH FLOW ANALYSIS
As the subject is a multi-tenant income property, the Discounted Cash Flow
Method is considered appropriate. This method is especially meaningful in that
it isolates the timing of the annual cash flows and discounts them, along with
the expected equity reversion, to a present value. The present value of the cash
flow is added to the present value of the reversion, resulting in a total
property value.
VACANT SPACE ABSORPTION ANALYSIS
The subject's office space is 44.4% occupied and has 47,802 square feet of
vacant space. The property has signed 21,356 square feet of new or renewing
leases in the first six months of 2003. Based on this data, the subject's vacant
office space was leased up over a two-year period. The subject's retail portion
is 88.8% occupied and has only one vacant space
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 45
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
available. This space was leased up in January 2004 or the ninth month of the
first year of operations.
TENANT RENEWAL PROBABILITY
Because the majority of the subject's tenants are small size companies, with
most leasing between 2,000 to 4,000 square feet per suite, a 50% renewal
probability was applied.
INFLATION RATES
Market rent was held flat for the first two years and then grown at a rate of 3%
per year thereafter. Operating expenses were inflated at a rate of 3% per year
throughout the holding period.
HOLDING PERIOD
The survey of investors indicates that most investors are completing either
10-year cash flows or extending the analysis to the end of the lease if it is
more than 10-years. A 10-year period has been used in the analysis of the
subject with the eleventh year stabilized NOI used to determine the reversion.
INVESTMENT CRITERIA
Appropriate investment criteria will be derived for the subject based upon
analysis of comparable sales and a survey of real estate investors. The
following table summarizes the findings of the Korpacz National Investor Survey
for the most recent period.
KORPACZ NATIONAL INVESTOR SURVEY
NATIONAL CBD OFFICE MARKET - DISCOUNT RATE (IRR)
RANGE AVERAGE
- ---------------------------------------------------------
1st Quarter 2003 9.00% to 12.50% 10.92%
Because of the subject's age and small size of commercial space, the discount
rate should be above the average for the market. Based on this analysis, the
subject's discount rate is estimated to be 11.50%.
TERMINAL CAPITALIZATION RATE
A terminal capitalization rate of 9.0% is concluded for the subject and applied
to the
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 46
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
subject's 11th year cash flow projection.
SELLING COSTS
Sales of similar size properties are typically accomplished with the aid of a
broker and will also incur legal and other transaction related cost. Based on
our survey of brokers and a review of institutional investor projections, an
allowance of 2.00% of the sale amount is applied.
DISCOUNTED CASH FLOW CONCLUSION
Discounting the annual cash flows and the equity reversion at the selected rate
of 11.50% indicates a value of $3,200,000. Overall, the blend seems reasonable.
The cash flow and pricing matrix are located on the following pages.
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 47
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
AIMCO
STERLING COMMERCE CENTER
PRESENT VALUE TABLE
AS OF MAY 1, 2003
Discount PV of
Yr FYE Cash Flow Factor @ 11.50% Cash Flow
- -----------------------------------------------------------------
1 2004 $100,219 0.89686 $ 89,883
2 2005 $193,756 0.80436 $ 155,850
3 2006 $417,818 0.72140 $ 301,413
4 2007 $272,500 0.64699 $ 176,306
5 2008 $431,070 0.58026 $ 250,134
6 2009 $350,126 0.52042 $ 182,211
7 2010 $210,480 0.46674 $ 98,240
8 2011 $180,088 0.41860 $ 75,385
9 2012 ($ 24,917) 0.37543 -$ 9,355
10 2013 $356,903 0.33671 $ 120,172
Present Value of Cash Flow $1,440,239
Year 11 Net Income $ 491,671
Residual Value Capped @ 9% $5,463,011
Cost of Sales @ 2% ($ 109,260)
----------
Net Proceeds $5,353,751
Present Value of Residual $1,802,642
Total Present Value of Cash Flows $1,440,239
----------
Indicated Value $3,242,881
Rounded $3,200,000
AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 48
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
RECONCILIATION AND CONCLUSION
This appraisal was made to express an opinion as of the Market Value of the fee
simple estate in the property.
AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE
Sterling Apartment Homes:
Cost Approach Not Utilized
Sales Comparison Approach $ 66,000,000
Income Approach $ 64,500,000
Reconciled Value $ 65,500,000
Sterling Commerce Center:
Cost Approach Not Utilized
Sales Comparison Approach Not Utilized
Income Approach $ 3,200,000
Reconciled Value $ 3,200,000
Combined Value: $ 68,700,000
The Income Capitalization Method is considered a reliable indicator of value.
Income and expenses were estimated and projected based on historical operating
statements and market oriented expenses. This method is primarily used by
investors in their underwriting analysis. Furthermore, there was good support
for an overall rate in the Direct Capitalization Method.
The Sales Comparison Approach to value supported the value conclusion by the
Income Approach and was given secondary consideration. Investment-grade,
income-producing properties such as the subject are not typically traded based
on cost. Therefore, the Cost Approach has not been considered in our valuation.
FINAL VALUE - FEE SIMPLE ESTATE
Based on the investigation and premise outlined, it is our opinion that as of
May 13, 2003 the market value of the fee simple estate in the property is:
$68,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
ADDENDA
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXHIBIT A
SUBJECT PHOTOGRAPHS
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUBJECT PHOTOGRAPHS
[PICTURE] [PICTURE]
EXTERIOR - FRONT OF BUILDING EXTERIOR - REAR OF BUILDING
[PICTURE] [PICTURE]
J.F.K. BOULEVARD WESTBOUND INTERIOR - LOBBY LEVEL
[PICTURE] [PICTURE]
INTERIOR - TYPICAL RESIDENTIAL CORRIDOR INTERIOR - TYPICAL KITCHEN
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUBJECT PHOTOGRAPHS
[PICTURE] [PICTURE]
INTERIOR - TYPICAL BATH INTERIOR - TYPICAL LIVING ROOM
[PICTURE] [PICTURE]
ROOFTOP POOL INTERIOR - 2ND FLOOR OFFICE SPACE (VACANT)
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXHIBIT B
SUMMARY OF RENT COMPARABLES
AND PHOTOGRAPH OF COMPARABLES
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES
COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3
PRESIDENTIAL CITY APTS CEDARBROOK HILL BERKSHIRE TOWERS
3900 City Line Avenue 8460 Limekiln Pike 11215 Oak Leaf Drive
Philadelphia, Pennsylvania Wyncote, Pennsylvania Silver Spring, Maryland
[PICTURE] N/A [PICTURE]
N/A N/A
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE
DESCRIPTION SUBJECT R - 1
- ------------------------------- ---------------------------------------------- --------------------------------------------------
Property Name Sterling Apartment Homes The Lofts at 1835 Arch
Management Company Aimco Forest City Residential
LOCATION:
Address 1815 John F. Kennedy Boulevard 1835 Arch Street
City, State Philadelphia, Pennsylvania Philadelphia, PA
County Philadelphia Philadelphia
Proximity to Subject 1 Block to the North
PHYSICAL CHARACTERISTICS:
Net Rentable Area (SF) 486,553 197,170
Year Built 1960 2001
Effective Age 7 2
Building Structure Type Brick/Granite Hi-Rise Building Brick Hi-Rise Building
Parking Type (Gr., Cov., etc.) Limited Garage Space Limited Spaces
Number of Units 536 192
Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo.
1 EA10 412 32 $ 896 4 1Br/1Ba 815 104 $1,400
2 EB10 495 137 $ 941 5 1Br/1Ba w/Den 950 28 $1,750
3 1A10 550 48 $1,184 6 2Br/2Ba 1,275 46 $2,200
4 1B10 803 102 $1,302 Penthouse Units 1,940 13 $3,000
5 1C10 920 21 $1,509
6 2A20 1,315 124 $1,772
7 2B20 1,425 32 $2,189
8 2C20 1,794 5 $2,569
9 3A20 1,631 24 $2,251
10 3B20 1,778 8 $2,509
11 3C20 2,215 2 $2,794
12 4A30 2,500 1 $2,459
Average Unit Size (SF) 908 1,022
Unit Breakdown: Efficiency 32% 2-Bedroom 30% Efficiency 0% 2-Bedroom 28%
1-Bedroom 32% 3-Bedroom 6% 1-Bedroom 72% 3-Bedroom 0%
CONDITION: Good Very Good
APPEAL: Good Good
AMENITIES:
Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling
Balcony X W/D Connect. Balcony X W/D Connect.
Fireplace Fireplace
X Cable TV Ready X Cable TV Ready
Project Amenities X Swimming Pool Swimming Pool
Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash
Basketball Court BBQ Equipment Basketball Court BBQ Equipment
Volleyball Court Theater Room Volleyball Court Theater Room
Sand Volley Ball Meeting Hall Sand Volley Ball X Meeting Hall
Tennis Court Secured Parking Tennis Court Secured Parking
Racquet Ball Laundry Room Racquet Ball Laundry Room
Jogging Track X Business Office Jogging Track X Business Office
X Gym Room X Security X Gym Room X Security
OCCUPANCY: 91% 98%
LEASING DATA:
Available Leasing Terms 6 to 15 Months 6 to 15 Months
Concessions None None
Pet Deposit $200 - $300 $150
Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas
X Water X Trash X Water X Trash
Confirmation May 13, 2002, John Ditko May 13, 2003, Forest City
Telephone Number (215) 563-3401 (215) 568-1835
NOTES: The building is loft conversion
COMPARISON TO SUBJECT: Similar
COMPARABLE COMPARABLE
DESCRIPTION R - 2 R - 3
- ------------------------------- ------------------------------------------------- ------------------------------------------------
Property Name Park Towne Place 1500 Locust
Management Company Aimco Scully Company
LOCATION:
Address 2200 Ben Franklin Parkway 1500 Locust Street
City, State Philadelphia, PA Philadelphia, PA
County Philadelphia Philadelphia
Proximity to Subject 3/4 Mile to the NE 1/4 Mile to the SE
PHYSICAL CHARACTERISTICS:
Net Rentable Area (SF) 964,040 563,420
Year Built 1959 Appr. 1990
Effective Age 15 5
Building Structure Type Four Brick Mid-Rise Buildings Masonry Hi-Rise Building
Parking Type (Gr., Cov., etc.) Open, Garage Limited Garage Space
Number of Units 980 610
Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo.
1 Studio 460 160 $ 819 2 Studio 497 110 $1,100
4 1Br/1Ba 715 165 $1,024 4 1Br/1Ba 795 125 $1,505
2Br/1Ba 995 165 $1,429 5 1Br/1Ba 898 125 $1,700
6 2Br/2Ba 1,043 165 $1,629 6 2Br/2Ba 1,113 125 $2,183
9 3Br/2Ba 1,223 165 $1,839 7 2Br/2Ba 1,264 125 $2,335
12 4Br/2Ba 1,465 160 $2,074
Average Unit Size (SF) 984 924
Unit Breakdown: Efficiency 16% 2-Bedroom 35% Efficiency 18% 2-Bedroom 41%
1-Bedroom 17% 3-Bedroom 17% 1-Bedroom 41% 3-Bedroom
CONDITION: Good Good
APPEAL: Average Very Good
AMENITIES:
Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling
Balcony W/D Connect. Balcony X W/D Connect.
Fireplace Fireplace
X Cable TV Ready X Cable TV Ready
Project Amenities X Swimming Pool X Swimming Pool
Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash
Basketball Court BBQ Equipment Basketball Court BBQ Equipment
Volleyball Court Theater Room Volleyball Court Theater Room
Sand Volley Ball X Meeting Hall Sand Volley Ball X Meeting Hall
X Tennis Court Secured Parking Tennis Court Secured Parking
Racquet Ball X Laundry Room Racquet Ball Laundry Room
Jogging Track X Business Office Jogging Track X Business Office
X Gym Room X Security X Gym Room X Security
OCCUPANCY: 95% 92%
LEASING DATA:
Available Leasing Terms 6 to 15 Months 6 to 15 Months
Concessions None None
Pet Deposit $200 - $300 $200 - $300
Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas
X Water X Trash X Water X Trash
Confirmation May 13, 2003, Leasing Office May 13, 2003, Leasing Office
Telephone Number (215) 568-2200 (215) 893-0800
NOTES: Additional amenities include a free shuttle to Amenities include a year-round indoor pool,
Center City (Downtown). sundeck, concierge and banquet facilities.
COMPARISON TO SUBJECT: Inferior Superior
COMPARABLE
DESCRIPTION R - 4
- ------------------------------- ---------------------------------------------------
Property Name Locust on The Park
Management Company Dranoff Properties
LOCATION:
Address 201 South 25th Street
City, State Philadelphia, PA
County Philadelphia
Proximity to Subject 1/2 Mile to the SW
PHYSICAL CHARACTERISTICS:
Net Rentable Area (SF) 143,599
Year Built Appr. 1990
Effective Age
Building Structure Type Renovated Mid-Rise Loft Building
Parking Type (Gr., Cov., etc.) Open
Number of Units 152
Unit Mix: Type Unit Qty. Mo.
2 Studio 528 21 $1,125
4 1Br/1Ba 809 65 $1,395
6 2Br/2Ba 1,211 66 $1,950
Average Unit Size (SF) 945
Unit Breakdown: Efficiency 14% 2-Bedroom 43%
1-Bedroom 43% 3-Bedroom
CONDITION: Slightly Superior
APPEAL: Good
AMENITIES:
Unit Amenities Attach. Garage Vaulted Ceiling
Balcony X W/D Connect.
Fireplace
X Cable TV Ready
Project Amenities Swimming Pool
Spa/Jacuzzi Car Wash
Basketball Court BBQ Equipment
Volleyball Court Theater Room
Sand Volley Ball X Meeting Hall
Tennis Court Secured Parking
Racquet Ball Laundry Room
Jogging Track X Business Office
X Gym Room X Security
OCCUPANCY: 95%
LEASING DATA:
Available Leasing Terms 6 to 15 Months
Concessions None
Pet Deposit $300
Utilities Paid by Tenant: X Electric X Natural Gas
X Water X Trash
Confirmation May 13, 2003, Leasing Office
Telephone Number (215) 735-1810
NOTES: Amenities include concierge, storage, internet
services and drycleaning deliveries.
The building is a loft conversion
COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES
COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3
THE LOFTS AT 1835 ARCH PARK TOWNE PLACE 1500 LOCUST
1835 Arch Street 2200 Ben Franklin Parkway 1500 Locust Street
Philadelphia, PA Philadelphia, PA Philadelphia, PA
[PICTURE] [PICTURE] [PICTURE]
COMPARABLE R-4
LOCUST ON THE PARK
201 South 25th Street
Philadelphia, PA
[PICTURE]
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXHIBIT C
ASSUMPTIONS AND LIMITING CONDITIONS
(3 PAGES)
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property appraised. In
this appraisal, it is presumed that, unless otherwise noted, the owner's claim
is valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
Land areas and descriptions used in this appraisal were obtained from public
records and have not been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
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. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act ("ADA") became effective January 26, 1992.
We have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity 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 on the value of the
property. Since we have no direct evidence relating to this issue, we did not
consider the possible noncompliance with the requirements of ADA in estimating
the value of the property.
We have made a physical inspection of the property and noted visible physical
defects, if any, in our report. This inspection was made by individuals
generally familiar with real estate and building construction. However, these
individuals are not architectural or structural engineers who would have
detailed knowledge of building design and structural integrity. Accordingly, we
do not opine on, nor are we responsible for, the structural integrity of the
property including its conformity to specific governmental code requirements,
such as fire, building and safety, earthquake, and occupancy, or any physical
defects which were not readily apparent to the appraiser during the inspection.
The value or values presented in this report are based upon the premises
outlined herein and are valid only for the purpose or purposes stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this appraisal unless arrangements are previously made within a
reasonable time in advance for
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
such testimony, and then such testimony shall be at American Appraisal
Associates, Inc.'s, prevailing per diem for the individuals involved.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use, the
identity of the appraiser or the firm with which the appraiser is connected, or
any reference to the Appraisal Institute or the designations awarded by this
organization) shall be disseminated to the public through prospectus,
advertising, public relations, news, or any other means of communication without
the written consent and approval of American Appraisal Associates, Inc.
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXHIBIT D
CERTIFICATES OF APPRAISERS
(1 PAGE)
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D
CERTIFICATE OF APPRAISER
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and represent the
unbiased professional analyses, opinions, and conclusions of American
Appraisal Associates, Inc.
American Appraisal Associates, Inc. and I personally, have no present
or prospective interest in the property that is the subject of this
report and have no personal interest or bias with respect to the
parties involved.
Compensation for American Appraisal Associates, Inc. is not contingent
on an action or event resulting from the analyses, opinions, or
conclusions in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the requirements of the Uniform
Standards of Professional Appraisal Practice and the Code of
Professional Ethics and the Standards of Professional Practice of the
Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I personally did not inspect the subject property. Richard Mupo
provided significant real property appraisal assistance in the
preparation of this report.
I am currently in compliance with the Appraisal Institute's continuing education
requirements.
-s- Frank Fehribach
---------------------------------------
Frank Fehribach, MAI
Managing Principal, Real Estate Group
State of Pennsylvania Certified General
Appraiser #GA003334
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
EXHIBIT E
QUALIFICATIONS OF APPRAISERS
(2 PAGES)
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
FRANK A. FEHRIBACH, MAI
MANAGING PRINCIPAL, REAL ESTATE GROUP
POSITION Frank A. Fehribach is a Managing Principal for the Dallas Real
Estate Group of American Appraisal Associates, Inc. ("AAA").
EXPERIENCE
Valuation Mr. Fehribach has experience in valuations for resort hotels;
Class A office buildings; Class A multifamily complexes;
industrial buildings and distribution warehousing; multitract
mixed-use vacant land; regional malls; residential subdivision
development; and special-purpose properties such as athletic
clubs, golf courses, manufacturing facilities, nursing homes,
and medical buildings. Consulting assignments include
development and feasibility studies, economic model creation
and maintenance, and market studies.
Mr. Fehribach also has been involved in overseeing appraisal
and consulting assignments in Mexico and South America.
Business Mr. Fehribach joined AAA as an engagement director in 1998.
He was promoted to his current position in 1999. Prior to
that, he was a manager at Arthur Andersen LLP. Mr. Fehribach
has been in the business of real estate appraisal for over ten
years.
EDUCATION University of Texas - Arlington
Master of Science - Real Estate
University of Dallas
Master of Business Administration - Industrial Management
Bachelor of Arts - Economics
STATE State of Arizona
CERTIFICATIONS Certified General Real Estate Appraiser, #30828
State of Arkansas
State Certified General Appraiser, #CG1387N
State of Colorado
Certified General Appraiser, #CG40000445
State of Georgia
Certified General Real Property Appraiser, #218487
State of Michigan
Certified General Appraiser, #1201008081
State of Texas
Real Estate Salesman License, #407158 (Inactive)
State of Texas
State Certified General Real Estate Appraiser, #TX-1323954-G
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
PROFESSIONAL Appraisal Institute, MAI Designated Member
AFFILIATIONS Candidate Member of the CCIM Institute pursuing Certified
Commercial Investment Member (CCIM) designation
PUBLICATIONS "An Analysis of the Determinants of Industrial Property
-authored with Dr. Ronald C. Rutherford and Dr.
Mark Eakin, The Journal of Real Estate Research, Vol. 8, No.
3, Summer 1993, p. 365.
AMERICAN APPRAISAL ASSOCIATES, INC.
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
GENERAL SERVICE CONDITIONS
AMERICAN APPRAISAL ASSOCIATES, INC.
STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA
GENERAL SERVICE CONDITIONS
The services(s) provided by AAA will be performed in accordance with
professional appraisal standards. Our compensation is not contingent in any way
upon our conclusions of value. We assume, without independent verification, the
accuracy of all data provided to us. We will act as an independent contractor
and reserve the right to use subcontractors. All files, workpapers or documents
developed by us during the course of the engagement will be our property. We
will retain this data for at least five years.
Our report is to be used only for the specific purpose stated herein; and any
other use is invalid. No reliance may be made by any third party without our
prior written consent. You may show our report in its entirety to those third
parties who need to review the information contained herein. No one should rely
on our report as a substitute for their own due diligence. We understand that
our reports will be described in public tender offer documents distributed to
limited partners. We reserve the right to review the public tender offer
documents prior to their issuance to confirm that disclosures of facts from the
current appraisals are accurate. No reference to our name or our report, in
whole or in part, in any other SEC filing or private placement memorandum you
prepare and/or distribute to third parties may be made without our prior written
consent.
The Tender Offer Partnerships, as that term is defined in the Settlement
Agreement, agree to indemnify and hold us harmless against and from any and all
losses, claims, actions, damages, expenses or liabilities, including reasonable
attorneys' fees, to which we may become subject in connection with this
engagement except where such losses, claims, actions, damages, expenses or
liabilities, including reasonable attorney's fees, arise or result from AAA's
misconduct, bad faith or negligence. Co-Clients will not be liable for any of
our acts or omissions.
AAA is an equal opportunity employer.