EXHIBIT C
================================================================================
COMPLETE APPRAISAL
OF REAL PROPERTY
THE WALDEN POND APARTMENTS
12850 Whittington
Houston, Harris County, Texas 77077
================================================================================
IN A SELF-CONTAINED REPORT
As of July 20, 2001
Westbridge Partners, LTD
c/o The Berkshire Group
One Beacon Street, Suite 1550
Boston, MA 02108
Prepared by:
CUSHMAN & WAKEFIELD OF TEXAS, INC.
Valuation Advisory Services
2929 Allen Parkway, Suite 2100
Houston, Texas 77019
C&W ID NO. 01-9166
[GRAPHIC OMITTED]
[LOGO-CUSHMAN & WAKEFIELD]
Cushman & Wakefield of
Texas, Inc.
Licensed Real Estate Brokers
2929 Allen Parkway, Suite 2100
Houston, Texas 77019
(713) 961-3700 Tel
(713) 961-4226 Fax
July 20, 2001
Mr. David Quade
Westbridge Partners, LTD
C/o The Berkshire Group
One Beacon Street, Suite 1550
Boston, MA 02108
Re: Complete Appraisal of Real Property
The Walden Pond Apartments
12850 Whittington
Houston, Harris County, Texas 77077
Dear Mr. Quade:
In fulfillment of our agreement as outlined in the Letter of Engagement, Cushman
& Wakefield of Texas, Inc. is pleased to transmit our self-contained appraisal
report estimating the market value of the leased fee estate in the Walden Pond
Apartments subject to the existing short-term leases without regard to existing
financing.
The value opinions reported herein are qualified by certain assumptions,
limiting conditions, certifications, and definitions, which are set forth in the
report. We particularly call your attention to the following special
assumptions:
o Based on information provided by property ownership, there is a fault
hazard band traversing the subject. The current improved property uses this
area for surface parking and landscaped area. We assume that this fault
condition has no adverse effect on the subject, as improved. We are not
qualified to render an opinion relative to this condition and strongly
suggest that an expert be engaged.
This report was prepared for Westbridge Partners, Ltd. and is intended for their
specified use in connection with a solicitation of the unit holders of the
client's parent, Krupp Realty Limited Partnership IV. It may not be distributed
to or relied upon by any other person or entity without the written permission
of Cushman & Wakefield, Inc.
This report was prepared in compliance with the Uniform Standards of
Professional Appraisal Practice (USPAP) as set forth by the Appraisal Foundation
and in accordance with the Code of Professional Ethics and Standards of
Professional Practice of the Appraisal Institute and the Interagency Appraisal
and Evaluation Guidelines as regulated by Title XI of FIRREA.
MR. DAVID QUADE
WESTBRIDGE PARTNERS, LTD
JULY 20, 2001
PAGE 2
The property was inspected by and the report prepared by. Scott Rando, MAI and
Operating Manager of Cushman and Wakefield of Texas, Incorporated with
assistance from Heidi Luo.
Based on our complete appraisal, as defined by the UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE, we have formed an opinion that the as-is market
value of the fee simple estate in the referenced real property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of July
20, 2001, was as follows:
TWELVE MILLION FOUR HUNDRED THOUSAND DOLLARS
$12,400,000
Based upon the available data, i.e., the transactions that have occurred in the
marketplace, coupled with our discussions with knowledgeable participants in the
Greater Houston area apartment market, a marketing period of not more than
twelve (12) months is believed to be reasonable in today's market for
multi-family properties such as the subject.
This letter is invalid as an opinion of value if detached from the report, which
contains the text, exhibits, and Addenda.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF TEXAS, INC.
/s/ Scott Rando
- ----------------------------------
Scott Rando, MAI
Operating Manager
State Certified General Appraiser
License No.
01-9166
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
Property Name: The Walden Pond Apartments
Location: The subject is located along the north line
of Whittington Drive between Dairy Ashford
and Eldridge. The street address is 12850
Whittington, Houston, Texas 77077.
General Overview: This is a pitched roof 416-unit garden style
apartment complex that was built in 1982.
The subject includes 308 one bedroom units
and 108 two bedroom units. Occupancy at
inspection was 95 percent.
Assessor's Parcel Number: 115-085-000-0004; 115-085-000-0005;
115-085-000-0006
Preliminary 2001 Real
Estate Assessment: $10,909,900
Projected 2001 Real Estate Taxes: $316,862
Interest Appraised: Leased Fee Estate, subject to existing short
term leases.
Date of Value: July 20, 2001 (As-is)
Date of Inspection: July 20, 2001
Ownership: Westbridge Partners, Ltd. (Berkshire Realty
Company, Inc., a publicly traded real estate
investment trust.)
Land Area: 12 acres or 357,745 square feet
Zoning: None
Highest and Best Use
If Vacant: Future development of a multi-family complex
consisting of a garden style apartment
project typical of the surrounding
development.
As Improved: Continued use as a 416 unit garden apartment
complex.
Improvements
Type: A 416 unit two and three story garden
apartment complex totaling 296,712 net
rentable square feet.
Year Built: 1982
Type of Construction: Construction includes stucco and wood veneer
and pitched roofs.
Net Rentable Area: 296,712 square feet
Deferred Maintenance: None
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
=============================================================================================================
UNIT TYPE TOTAL # SF TOT SF VACANT OCCUPIED % OCC.
- -------------------------------------------------------------------------------------------------------------
BLU1 1BR/1BA 48 687 32,976 1 47 98%
BLU2 1BR/1BA 48 687 32,976 1 47 98%
BLU3F 1BR/1BA FP 48 687 32,976 1 47 98%
BMF2 1BR/1BA FP 14 661 9,254 2 12 86%
BMI1 1BR/1BA 30 661 19,830 1 29 97%
BMI2 1BR/1BA 16 661 10,576 1 15 94%
BMXFG3 1BR/1BA W/SUNROOM 16 700 11,200 0 16 100%
BS1 1BR/1BA 32 539 17,248 1 31 97%
BS2 1BR/1BA 16 539 8,624 3 13 81%
BS2D 1BR/1BA W/WINDOW 16 539 8,624 0 16 100%
BS3 1BR/1BA 16 539 8,624 0 16 100%
BTFUX TH 1BR/1BA 8 818 6,544 1 7 88%
DU1 2BR/1BA 19 853 16,207 2 17 89%
DU1W 2BR/1BA 1 853 17,060 0 1 100%
DU2 2BR/1BA 20 853 17,060 1 19 95%
DU3F 2BR/1BA W/FP 20 853 17,060 0 20 100%
FU1 2BR/2BA 24 960 23,040 2 22 92%
FU2 2BR/2BA 24 960 23,040 2 22 92%
- -------------------------------------------------------------------------------------------------------------
TOTAL 416 296,712 19 397 95%
=============================================================================================================
CURRENT QUOTED RENTAL RATES:
================================================================================
NUMBER UNIT QUOTED QUOTED
UNIT TYPE OF SIZE MONTHLY MONTHLY
UNITS (SF) RENT/UNIT RENT/SF
================================================================================
1BR/1BA 48 687 $565 $0.822
1BR/1BA 48 687 $565 $0.822
1BR/1BA FP 48 687 $555 $0.808
1BR/1BA FP 14 661 $545 $0.825
1BR/1BA 30 661 $525 $0.794
1BR/1BA 16 661 $525 $0.794
1BR/1BA W/SUNROOM 16 700 $555 $0.793
1BR/1BA 32 539 $485 $0.900
1BR/1BA 16 539 $485 $0.900
1BR/1BA W/WINDOW 16 539 $495 $0.918
1BR/1BA 16 539 $465 $0.863
TH 1BR/1BA 8 818 $635 $0.776
2BR/1BA 19 853 $675 $0.791
2BR/2BA 1 853 $675 $0.791
2BR/2BA 20 853 $640 $0.750
2BR/2BA W/FP 20 853 $630 $0.739
2BR/2BA 24 960 $730 $0.760
2BR/2BA 24 960 $730 $0.760
- --------------------------------------------------------------------------------
TOTAL/AVG. 416 296,712 $575 $0.806
================================================================================
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
SUMMARY OF INCOME AND EXPENSE INFORMATION:
======================================================================================================================
TOTAL PER UNIT PER SF
======================================================================================================================
INCOME
1999 Actual $2,450,431 $5,890 $8.26
2000 Actual $2,470,283 $5,938 $8.33
2001 Budget $2,534,049 $6,091 $8.54
C&W Forecast 2001-2002 $2,568,673 $6,175 $8.66
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
1999 Actual $1,196,099 $2,875 $4.03
2000 Actual $1,226,065 $2,947 $4.13
2001 Budget $1,248,875 $3,002 $4.21
C&W Forecast 2001-2002 $1,396,904 $3,358 $4.71
======================================================================================================================
Value Indicators
Sales Comparison Approach:
Value Per Unit $30,288
Effective Gross Income Multiplier: 4.90
Indicated Value: $12,600,000
Income Capitalization Approach-Direct Capitalization
Current Physical Occupancy: 95% (YTD Economic is 86.4%)
Stabilized Vacancy and Collection 9% Economic
Loss Rate:
Effective Gross Income: $2,568,673
Net Operating Income: $1,171,770
Overall Capitalization Rate: 9.5%
Indicated Value: $12,300,000
Income Capitalization Approach -
Discounted Cash Flow Analysis
Market Rental Growth Rate
(Year 2-11) 3.0%
Expense Growth Rate: 3.0%
Forecasted Year 1-10 Vacancy and 9.0%
Collection Loss Rate:
Reversion Year Capitalization Rate: 10.5%
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
================================================================================
Transaction Costs in Reversion Sale: 4.0%
Discount Rate: 12.0%
Implicit First Year Capitalization Rate: 9.45%
Indicated Value: $12,400,000
Income Approach Value Conclusion: $12,400,000
Value Per Unit: $29,808
Value Per Square Foot $41.79 (NRA)
Implicit Capitalization Rate: 9.45%
Exposure Time Implicit in Market Value Estimate:
12 months
As-is Value Conclusion: $12,400,000
Value Per Unit: $30,288
Implicit Capitalization Rate: 9.51%
Exposure Time Estimate: 12 months
Special Assumptions:
o Based on information provided by property ownership, there is a fault
hazard band traversing the subject. The current improved property uses this
area for surface parking and landscaped area. We assume that this fault
condition has no adverse effect on the subject, as improved. We are not
qualified to render an opinion relative to this condition and strongly
suggest that an expert be engaged.
TABLE OF CONTENTS
================================================================================
PAGE
INTRODUCTION...................................................................1
Identification of Property..................................................1
Property Ownership and Recent History.......................................1
Purpose and Intended Use of the Appraisal...................................1
Extent of the Appraisal Process.............................................1
Date of Value and Property Inspection.......................................2
Property Rights Appraised...................................................2
Definitions of Value, Interest Appraised, and Other Pertinent Terms.........2
Exposure Time...............................................................2
Fee Simple Estate...........................................................3
Market Rent.................................................................3
Cash Equivalent.............................................................3
Market Value As Is on Appraisal Date........................................3
Legal Description...........................................................3
REGIONAL ANALYSIS..............................................................5
LOCAL MARKET AREA ANALYSIS....................................................13
APARTMENT MARKET ANALYSIS.....................................................15
PROPERTY DESCRIPTION..........................................................27
REAL PROPERTY TAXES AND ASSESSMENTS...........................................33
ZONING........................................................................35
HIGHEST AND BEST USE..........................................................36
VALUATION PROCESS.............................................................38
SALES COMPARISON APPROACH.....................................................39
INCOME CAPITALIZATION APPROACH................................................47
RECONCILIATION AND FINAL VALUE ESTIMATE.......................................64
ASSUMPTIONS AND LIMITING CONDITIONS...........................................66
CERTIFICATION OF APPRAISAL....................................................69
ADDENDA.......................................................................70
QUALIFICATIONS................................................................78
Improved Property Sales
Rent Comparables Detailed Sheets and Photos
Subject Data
Flood Map
Insurable value Estimate
Qualifications
PHOTOGRAPHS OF SUBJECT PROPERTY
================================================================================
INTRODUCTION
================================================================================
IDENTIFICATION OF PROPERTY
The subject property is a 416-unit garden apartment complex called the Walden
Pond Apartments located in far west Houston. The subject was built in 1982. The
subject is located along the north line of Whittington Drive between Dairy
Ashford and Eldridge. The street address is 12850 Whittington, Houston, Texas
77077.
The improvements consist of 416 rental units in 22 buildings. There are 308 one
bedroom units and 108 two bedroom units. The site contains 12 acres. The tax
assessor's parcel identification number is 115-085-000-0004, 0005 and 0006.
PROPERTY OWNERSHIP AND RECENT HISTORY
The property was originally constructed in 1982, by Dinnenstien. There have been
no known sales over the past 5 years.
PURPOSE AND INTENDED USE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of a fee simple
estate in the subject property, subject to short-term leases. The report is for
the internal use of the Client.
EXTENT OF THE APPRAISAL PROCESS
In the process of preparing this appraisal, we:
o Inspected the exterior of all buildings and site improvements
and a representative sample of units with Felicia Cox, the
resident manager.
o Reviewed leasing policy, concessions, and history of recent
occupancy with the resident manager.
o Reviewed a detailed history of income and expense and a budget
forecast for 2001 including the budget for planned capital
expenditures.
o Conducted market research of occupancies, asking rents,
concessions and operating expenses at competing complexes
which involved interviews with on-site managers and a review
of our own data base from previous appraisal files.
o Prepared an estimate of stabilized income and expense (for
capitalization purposes).
o Conducted market inquiries into recent sales of similar
complexes to ascertain sales price per unit, effective gross
income multipliers and capitalization rates. This process
involved telephone interviews with sellers, buyers, and/or
participating brokers. (See detailed sales write-ups in
ADDENDA for more complete information on the verification
process.)
o Prepared Sales Comparison and Income Capitalization Approaches
to value.
-1-
INTRODUCTION
================================================================================
DATE OF VALUE AND PROPERTY INSPECTION
The effective date of as-is value was July 20, 2001. Scott Rando inspected the
property on July 20, 2001.
PROPERTY RIGHTS APPRAISED
We have appraised the leased fee estate subject to short-term leases.
DEFINITIONS OF VALUE, INTEREST APPRAISED, AND OTHER PERTINENT TERMS
The definition of market value taken from the UNIFORM STANDARDS OF PROFESSIONAL
APPRAISAL PRACTICE of the Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller, each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in
what they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in US dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
EXPOSURE TIME
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open
market". Exposure time is defined as the estimated length of time the
property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
Based on our research of recent sales of apartment complexes considered
to be reasonably comparable to the subject, as well as our discussions
with local brokers and buyers/sellers of multi-family projects, we have
concluded that the probable exposure time for the subject property
would have been approximately twelve months. In fact, the majority of
the apartment sales included within this report, were exposed on the
market for a period of approximately six to twelve months prior to
closing. Thus, the aforementioned exposure time appears reasonable.
-2-
INTRODUCTION
================================================================================
The following definitions of pertinent terms are taken from the DICTIONARY OF
REAL ESTATE APPRAISAL, THIRD EDITION (1993), published by the APPRAISAL
INSTITUTE.
FEE SIMPLE ESTATE
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.
MARKET RENT
The rental income that a property would most probably command on the
open market, indicated by the current rents paid and asked for
comparable space as of the date of appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or
other securities that cannot be sold at their face amounts.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all
assumptions concerning hypothetical market conditions or possible
rezoning.
LEGAL DESCRIPTION
The subject property is legally described as that certain 12 acre tract of land,
or Reserve A1 and Reserve A2 in Ashford Crossing Section One, Harris County,
Texas (see addenda for complete metes and bounds description).
-3-
REGIONAL ANALYSIS
================================================================================
Insert Regional Map
-4-
REGIONAL ANALYSIS
================================================================================
The short- and long-term value of real estate is influenced by a variety of
factors that interact within a given region. Regional analysis serves to
identify those forces that affect property value and the role they play within
the region. The four primary forces that influence real property value include
environmental characteristics, governmental forces, social factors, and economic
trends. These forces influence real estate supply and demand, which, in turn,
affect market value.
OVERVIEW OF THE HOUSTON MSA
Houston is the fourth largest city in the U.S. and the economic hub of the Gulf
Coast region. Houston is a natural seaport, which in conjunction with the
Houston Ship Channel, results in this ocean access being a major factor in the
economic vitality of the region. Houston's port is the second largest in the
country and seventh in the world based on annual tonnage. Extending 52 miles
from Galveston Bay to within four miles of the Houston Central Business District
(CBD), the Houston Ship Channel provides deep water access to the world markets
and a direct link to 14,000 miles of U.S. waterways. Houston recently ranked
first in foreign tonnage among U.S. ports with 86.5 million tons valued at $34.1
billion dollars. The port handled an estimated 169.1 million tons of cargo in
1998, exceeding the 1990 amount of 125.3 million tons. Mexico is Houston's top
trading partner in terms of tonnage followed by Venezuela, Algeria, Saudi
Arabia, and Kuwait. Petroleum and petroleum products rank as Houston's top
import commodity by tonnage followed by crude fertilizers and minerals, iron and
steel, organic chemicals and sugars. Petroleum and petroleum products were the
number one export, followed by organic chemicals, cereals and cereal products,
plastics and inorganic chemicals. The Port of Houston generates 75,457 direct
and 129,033 indirect jobs.
The Houston economy is more diverse than in the mid 1980's, however, it is still
approximately 50 to 55 percent energy related. Houston is the global center for
energy operations, providing financial research and technological support for
the international energy industry. The Houston area contains 22 percent of U. S.
refinery capacity and 45 percent of U. S. chemical manufacturing capacity. Over
29 percent of U. S. jobs in oil and gas extraction are located in Houston. The
economic health of the oil and gas segment of the economy to a large extent
provides an excellent economic barometer for this city. Houston is headquarters
to 29 of the nation's 100 largest publicly traded energy firms.
Employment statistics in Houston have reflected reasonably consistent growth
since 1988. The economic expansion/recovery produced 108,800 new jobs in 1997
reflecting job growth of 5.91 percent and 77,100 jobs were produced in 1998,
presenting a growth rate of 3.96 percent. Employment growth averaged 3.78
percent over the 4 years ending in December 1999 according to the most recent
data provided by the Texas Employment Commission. As of December 2000, total
employment was approximately 2,134,368. Job growth in 2000 slowed slightly to
2.54 percent.
Following is a breakdown of the non-agricultural employment picture since 1988:
-5-
REGIONAL ANALYSIS
================================================================================
HOUSTON MSA HISTORICAL EMPLOYMENT BY SECTOR
=======================================================================================================================
MANUFACT., MINING,
YEAR F.I.R.E SERVICES CONSTRUCTION TRADE GOVT. UTILITIES TOTAL
=======================================================================================================================
1988 101,000 487,900 87,900 370,700 194,500 324,900 1,453,100
- -----------------------------------------------------------------------------------------------------------------------
1989 101,300 522,000 98,500 379,600 199,800 336,700 1,520,500
- -----------------------------------------------------------------------------------------------------------------------
1990 102,200 532,900 100,300 372,100 204,200 340,400 1,611,200
- -----------------------------------------------------------------------------------------------------------------------
1991 98,600 464,200 113,500 389,400 218,500 362,900 1,635,200
- -----------------------------------------------------------------------------------------------------------------------
1992 97,100 464,000 107,400 388,800 225,100 353,300 1,665,100
- -----------------------------------------------------------------------------------------------------------------------
1993 97,900 467,200 103,700 393,400 234,400 352,000 1,704,500
- -----------------------------------------------------------------------------------------------------------------------
1994 99,600 493,800 113,700 420,100 242,300 366,500 1,759,500
- -----------------------------------------------------------------------------------------------------------------------
1995 94,700 525,100 121,600 426,000 246,800 379,900 1,794,100
- -----------------------------------------------------------------------------------------------------------------------
1996 96,200 537,700 127,900 437,100 247,000 393,500 1,839,400
- -----------------------------------------------------------------------------------------------------------------------
1997 102,300 584,300 132,100 454,100 253,500 421,900 1,948,200
- -----------------------------------------------------------------------------------------------------------------------
1998 108,900 618,000 140,400 468,500 258,500 431,000 2,025,300
- -----------------------------------------------------------------------------------------------------------------------
1999 112,700 639,900 148,100 488,500 267,500 424,700 2,081,400
- -----------------------------------------------------------------------------------------------------------------------
2000 120,800 645,300 157,200 500,900 281,300 425,700 2,134,368
- -----------------------------------------------------------------------------------------------------------------------
SOURCE: TEXAS EMPLOYMENT COMMISSION
=======================================================================================================================
The price per barrel of oil has fluctuated from approximately $18.40 per barrel
in December 1997 to $25.23 per barrel as of December, 1999. As of December 2000,
the price of oil was $26.83 per barrel according to Wall Street Journal. Most
companies in the past year shifted their focus which entailed cutting expenses,
abandoning projects, and in some cases laying off workers and consolidating.
According to Bill Gilmer, senior economist with the Houston branch of the
Federal Reserve Bank of Dallas, when oil prices were around $22 a barrel,
companies established budgets at $16 to $17 per barrel. The economic health of
the oil and gas industry can be tracked by two energy stock indexes published
weekly in the Houston Chronicle. The Standard and Poor energy stock index for
domestic exploration and production companies is $82.50 as of February 2001. The
stock index was approximately $70 in December 1997 and approximately $53 in
December 1999. The Standard and Poor energy stock index for oil well and
equipment service companies was $4374.1 as of February 2001, compared to an
approximate $4,410 in December 1997, $2,600 in December 1998, $3,007 in December
1999 and $4,504 in November 2000.
The active number of drilling rigs in Texas has increased to 421 as of Year End
2000, compared to 301 one year ago. The offshore rig utilization rate in the
Gulf of Mexico was 85.5 percent as of Year End 2000, up from 77.6 percent a year
ago. The U. S. total number of drilling rigs as of Year End 2000 is 1,114,
compared to 815 one year ago.
The higher current level of both indexes and the drilling rig count have meant
increased levels of profitability in the short term for energy companies
compared to the low levels achieved in the past several years. Indications for
the foreseeable future are for a period of
-6-
REGIONAL ANALYSIS
================================================================================
slow to moderate growth following a period of strong economic growth which
occurred in 1996, 1997, and 1998.
According to a recent survey, after a year of laying off workers and paring back
spending because of low oil prices, energy companies plan to start hiring and to
increase their drilling budgets. 64 percent of the executives surveyed at 89
energy companies planned to increase spending for oil and gas exploration in
2000. The Chairman of Conoco disclosed that the Houston oil company planned to
increase its capital expenditures budget in 2000 by about 30 percent from $1.8
billion to as high as $2.4 billion. However, major oil companies are being more
cautious when it comes to ramping up spending in the United States. While 77
percent of the large independent companies are planning to spend more on
exploration in the United States, only 29 percent of the majors are planning
higher U.S. spending.
A ten year historical perspective of the economic indicators discussed are
outlined as follows:
========================================================================================================
OIL AND GAS (2) ACTIVE DRILLING RIGS (3)
========================================================================================================
YEAR END OIL PRICE EXPLORATION & OIL WELL AND U.S. TEXAS(4)
EQUIPMENT
PER BARREL PRODUCTION COMPANIES SERVICE CO.
(1) STOCK INDEX STOCK INDEX
========================================================================================================
1990 $27.34 N/A 1813.2 1136 348
- --------------------------------------------------------------------------------------------------------
1991 $19.51 N/A 1672.2 796 315
- --------------------------------------------------------------------------------------------------------
1992 $19.47 67.13 1654.1 926 251
- --------------------------------------------------------------------------------------------------------
1993 $14.57 64.80 1711.1 857 264
- --------------------------------------------------------------------------------------------------------
1994 $17.73 51.08 1591.3 816 274
- --------------------------------------------------------------------------------------------------------
1995 $18.95 59.98 2066.6 763 251
- --------------------------------------------------------------------------------------------------------
1996 $25.49 77.79 3001.1 852 283
- --------------------------------------------------------------------------------------------------------
1997 $18.40 70.04 4412.9 1013 358
- --------------------------------------------------------------------------------------------------------
1998 $11.30 46.41 2503.6 621 302
- --------------------------------------------------------------------------------------------------------
1999 $25.23 52.64 3006.8 815 301
- --------------------------------------------------------------------------------------------------------
2000 $26.83 71.99 4503.9 1,114 421
- --------------------------------------------------------------------------------------------------------
FEB-2001 $28.83 82.50 4374.1 1,151 460
- --------------------------------------------------------------------------------------------------------
Sources: (1) Wall Street Journal, (2) Standard & Poor, (3) Baker Hughes (4) Average number of rigs
active annually
========================================================================================================
Two passenger airports serve the region. These airports include George Bush
Intercontinental Airport (IAH) and William P. Hobby Airport (HOU). George Bush
Intercontinental Airport is situated on roughly 8,000 acres about 21 miles north
of Houston's CBD. Houston has the fourth largest airport system in the United
States and the sixth largest in the world. IAH is served by 33 passenger and
cargo airlines offering nonstop or direct service throughout the nation, with
international service to 150 cities and 18 countries through the world. Total
passenger service for Houston Airport System (George Bush IAH, William P. Hobby,
Ellington Field) in 2000 was nearly 39 million, including more than 5.0
-7-
REGIONAL ANALYSIS
================================================================================
million international passengers. In 2000, total passenger service for IAH was
approximately 31 million including 5.0 million international passengers. Air
freight numbers in 1997 for the Houston Airport System were estimated at 607
million pounds of air freight. As of December 2000, the total air freight had
increased 14.7 percent to 696 million pounds. William P. Hobby (HOU) is located
about seven miles southeast of the CBD and was Houston's first commercial
passenger airport. This airport is operated by the City of Houston and is the
35th busiest airport in the nation for total passengers. At present, this
facility is dominated by intrastate carriers, specifically Southwest Airlines,
and services more than 8 million passengers per year through thirteen airlines.
Encompassing over 675 acres and over 100 permanent buildings with nearly 20
million gross square feet in physical plant space, the Texas Medical Center is
the largest medical complex in the world. The Texas Medical Center (TMC) is a
world-renowned center for health care, medical research, and education. With
over 53,000 employees, TMC is considered Houston's largest single employer. The
Texas Medical Center today has 42 member institutions. All 42 of the TMC member
institutions are not-for-profit, and are dedicated to the highest standards of
patient and preventive care, research, education, and local, national, and
international community well being. Approximately 20,165 students attend the
medical center and approximately 4,500,000 patients are scheduled annually. Two
major medical schools, Baylor College of Medicine and the University of Texas
Health Science Center, offer a variety of health care professions. Over $2
billion has been received as grants for research during the past five years.
Moreover, about $385 million in sponsored research is conducted annually by the
Texas Medical Center. The Greater Houston Partnership estimates that TMC has a
$10.0 billion annual indirect impact on the Houston economy. Facilities include
14 hospitals (with 6,321 licensed beds), two medical schools, four schools of
nursing, and additional facilities for medical and health education, research
and support services including security, parking, childcare and utilities. There
are over 37,000 parking places and 12 miles of private and public streets and
roadways within the TMC area. Since 1985, approximately $2.7 billion has been
spent in adding to or renovating the facilities of the member institutions and
the infrastructure of the Texas Medical Center.
The aerospace industry also provides a major economic stimulus to the Houston
economy. Named the host center for space station re-design operations in 1994,
The Johnson Space Center (JSC) is the main center for the manned segments of the
National Aeronautics and Space Administration's U.S. space program. National
Aeronautics & Space Administration (NASA) is unique among Federal agencies,
since 80 percent of its funding goes to outside contractors compared to 11
percent government-wide. Virtually all major U.S. aerospace companies are now
located in the Clear Lake area in Houston, and are participating in the billions
of dollars of federal aerospace contracts involving the space station and space
shuttle projects. The total NASA 1997 fiscal budget request was $14 billion,
which provided for the development, manufacturing, testing, assembly and
qualification of flight hardware; development of facilities for integrated
operations and docking systems for the Space Shuttle and Space Station;
activities related to utilization of the Russian Mir space station; flight
technology demonstrations; advances in a number of technologies, including the
concept for the first new crewed spacecraft in more than 20 years and advanced
life support systems. In 1993, JSC was reported to have a $1.1 billion impact on
the Houston economy and employed 15,000 people. There is a combined work force
of federal and contract employees, who are responsible for the day-to-day
activities associated with the Orbiter subsystem engineering, space station
development, life sciences, astronaut crew training,
-8-
REGIONAL ANALYSIS
================================================================================
mission operations, and shuttle project integration. As of 1998, the JSC
employed about 15,500 persons and continues to be a virtual link in the
metropolitan area economy.
DEMOGRAPHICS
The following table outlines the population growth of both the City of Houston
and the Houston MSA.
========================================================================================================
Year City of Houston Houston MSA
========================================================================================================
1980 CENSUS 1,615,745 2,754,304
- -------------------------------------------------- ------------------------- ---------------------------
1990 CENSUS 1,630,553 3,322,025
- -------------------------------------------------- ------------------------- ---------------------------
COMPOUND ANNUAL GROWTH 1980 - 1990 +0.92% +20.61%
- -------------------------------------------------- ------------------------- ---------------------------
2000 ESTIMATE 1,778,420 4,067,762
- -------------------------------------------------- ------------------------- ---------------------------
2005 (PROJECTION) 1,868,438 4,454,923
- --------------------------------------------------------------------------------------------------------
Source: EQUIFAX NATIONAL DECISIONS SYSTEMS
========================================================================================================
The preceding table indicates the region has had a positive growth rate since
1980. The 2000 population in the Houston CMSA was an estimated 4.1 million
people, representing an increase of 22.45 percent from 1990.
CONCLUSION
Dr. Barton Smith, director of the Institute for Regional Forecasting at the
University of Houston, predicted that Houston would add 51,500 jobs in 2000. The
Greater Houston Partnership expected the area's economy to add 61,000 jobs in
2000. In reality, the economy gained 50,000 to 60,000 jobs, which is consistent
with the estimates. Job growth for the first quarter of 2001 was 1.6 percent
compared to the 2.9 percent growth experience in 2000. Houston's employment base
benefited from the consolidation within the oil and gas industry in 1999 and
2000 as regional offices closed and most employees at those offices were
relocated to Houston. As a result, Houston's overall share of the national oil
and gas mining market continues to grow. The positive effect to Houston
resulting from increased oil prices should continue in 2001 as oil and gas
companies reinvest profits resulting from the increased price of oil.
In summary the following chart outlines some of the economic and real estate
indices in recent years.
-9-
REGIONAL ANALYSIS
================================================================================
SUMMARY OF HOUSTON
ECONOMIC AND REAL ESTATE INDICATORS
====================================================================================================================================
CITYWIDE ECONOMIC INDICATORS
- ------------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Employment Growth (no. 29,900 39,400 55,000 6,900 40,100 108,800 77,100 56,100 62,000
of jobs) (a)
- ------------------------------------------------------------------------------------------------------------------------------------
1.8% 2.4% 3.2% 0.4% 2.2% 5.9% 4.0% 2.77% 2.54%
- ------------------------------------------------------------------------------------------------------------------------------------
Population (b) 3,366,000 3,401,000 3,452,100 3,526,900 3,637,700 3,710,261 3,852,500 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Y.E. Unemployment
Rate (a) 7.3% 6.2% 5.6% 5.7% 5.2% 4.6% 3.6% 4.1% 4.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Airport Passenger
Traffic (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic 25,310,000 26,182,000 27,989,080 29,989,218 31,573,900 33,226,070 32,326,145 N/A 34,554,708
- ------------------------------------------------------------------------------------------------------------------------------------
International 2,269,000 2,578,000 2,755,880 2,910,500 3,368,000 3,847,556 4,191,183 N/A 4,992,990
- ------------------------------------------------------------------------------------------------------------------------------------
Port of Houston Cargo (d)
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign 47,684,000 36,434,000 58,100,000 42,329,000 47,819,000 100,772,900 107,758,500 104,725,122 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic 48,623,000 43,671,000 83,900,000 30,112,000 28,674,000 62,609,724 60,520,000 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Retail Sales (CSMA) (e)
in millions $32,000 $30,297 $31,282 $36,426 $43,514 $46,855 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
US Rig Count (f) 926 857 816 763 852 1,013 621 815 1,078
- ------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE MARKET INDICATORS
- ------------------------------------------------------------------------------------------------------------------------------------
Median Home Price (MLS) $80,349 $80,900 $78,200 $80,000 $83,000 $95,000 $95,250 $105,950 $119,500
(g)
- ------------------------------------------------------------------------------------------------------------------------------------
S-F Housing Permits 15,530 16,880 16,910 17,150 20,500 N/A N/A N/A N/A
(CMSA) (h)
- ------------------------------------------------------------------------------------------------------------------------------------
Single-Family Starts (i) 12,800 13,000 13,800 14,060 16,445 18,958 23,000 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Hotel Occupancy Rate (j) 62.8% 63.2% 64.3% 64.5% 63.8% 67.5% 74.3% 66.1% N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Direct Office Occupancy 77.7% 77.8% 78.9% 78.6% 79.2% 86.3% 88.3% 87.0% 88.0%
Rate (k)
- ------------------------------------------------------------------------------------------------------------------------------------
Direct Industrial 85.9% 85.1% 86.5% 86.8% 88.7% 91.1% 92.9% 92.6% 93.1%
Occupancy Rate (k)
- ------------------------------------------------------------------------------------------------------------------------------------
Retail Occupancy Rate (m) 82.0% 86.0% 84.6% 85.2% 84.6% 87.0% 89.5% 91.1% 91.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Y.E. Apartment Occupancy 87.5% 88.1% 88.5% 89.4% 90.0% 91.1% 90.5% 90.7% 90.5%
Rate (l)
====================================================================================================================================
Sources:
(a) Texas Employment Commission, TEXAS LABOR MARKET (g) Houston Association of Realtors
(b) University of Houston Center for Public Policy (h) CDS Research
(c) City of Houston Aviation (i) American Metro/Study Corporation
(d) Port of Houston Authority (j) Hospital Advisory Service/PKF Consulting
(e) Texas State Comptroller (k) Cushman & Wakefield of Texas, Inc. (4Q 2000)
(f) Baker Hughes Inc.(YTD Nov. 3, 2000) (l) APARTMENT MARKET TRAC (YTD JANUARY 2001)
(m) Revac's Market Survey (Jan. 2000)
Dr. Barton Smith, director of the Institute for Regional Forecasting at the
University of Houston, predicted recently that Houston would have an employment
increase of 3.67 percent in 2001, declining slightly from 2002 to 2005, to range
from 2.25 to 2.87 percent. Thereafter, employment growth of 1.8 percent is
anticipated. Employment in the Houston MSA is growing and becoming more
diversified. This is causing the economy to be more stable during economic
cycles. The Gulf Coast location, growing market, excellent
-10-
REGIONAL ANALYSIS
================================================================================
transportation facilities, mild climate and other features, result in a growing
office/warehouse market.
Further, population projections of 3.14 percent in 2001 is anticipated. This
rate of increase is also anticipated to slow in 2002 to 2005, to range from 2.25
to 2.73 percent. Thereafter, this segment is also anticipated to grow 1.8
percent annually.
The city has experienced good economic growth in recent years and has economic
benefits resulting from the current high price of oil. Projections are that the
local economy and population will grow steadily for the foreseeable future.
-11-
LOCAL MARKET AREA
================================================================================
Insert Local Market Map
-12-
LOCAL MARKET AREA ANALYSIS
================================================================================
The neighborhood boundaries for the subject as delineated on the facing page are
IH-10 on the north, Dairy Ashford Road to the east, Westheimer on the south and
SH-6 to the west. Situated about 16 miles west of Houston's CBD, the
neighborhood is within the territorial jurisdiction of Houston, Harris County,
Texas.
Primary access to the neighborhood is provided by IH-10, the Sam Houston Tollway
and to a lesser degree, SH-6. IH-10, extending from Beaumont, Texas to El Paso,
Texas is Houston's major east/west freeway. Within the neighborhood, IH-10 is a
six-lane, limited access freeway with three-lane feeder roads. In addition to
recent expansion and interchange upgrades, a contra flow lane has been
constructed in the center of the main lanes to serve Metro busses and vehicles
with over two passengers. This enables suburban commuters to decrease traveling
time while alleviating traffic congestion on the main lanes of the freeway.
IH-10, also referred to as the Katy Freeway, will eventually be expanded to
eight lanes.
Because segments of IH-10 have reached or exceed current design capacity, the
State Department of Public Transportation commissioned a study to determine the
appropriate design for IH-10 for the year 2010. The results of this study
indicate five main lanes, three express lanes and three frontage lanes will be
needed in each direction.
The Sam Houston Tollway, located outside, but, proximate to the subject's
neighborhood also provides primary access to the area. This arterial is an 8 to
10-lane controlled access toll road which will ultimately encircle Houston's CBD
at a radius of 12 to 16 miles. The completed sections of this road extend from
the North Freeway (IH-45) and loop west around Houston and again connecting to
Gulf Freeway (IH-45).
SH-6 is a six-lane, bi-directional road circumscribing the Houston CMSA at a
radius of 20 to 30 miles. Secondary access to the area is provided by Dairy
Ashford Road, Eldridge Parkway, Briar Forest Drive, Westheimer and Memorial
Drive. Both Dairy Ashford Road and Eldridge Parkway are four-lane, boulevard
roads traversing the neighborhood in a north/south direction. Briar Forest
Drive, Westheimer and Memorial Drive extend in a east/west direction generally
terminating west of SH-6. Although secondary arterials, these roads are heavily
congested especially during peak traffic hours.
In addition to the aforementioned thoroughfares located in or proximate to the
neighborhood, the State Department and private sector are working together to
create an outer loop to be known as the Grand Parkway. The Grand Parkway
Association was created as a "transportation corporation" to assist the State
Department of Public Transportation plan, design, and acquire right-of-way for
the Grand Parkway. The Grand Parkway Association has worked closely with the
state in securing right-of-way and financial contributions for preliminary
engineering for the 157-mile outer loop. Segments of the parkway will be
constructed on receipt of right-of-way and approval of engineering plans and
environmental assessments. The first section of the Grand Parkway, the area
extending from U.S. Highway 90 to IH-10 has been completed, however because of
environmental problems other sectors have not been let.
Currently, over 70 percent of the subject's immediate neighborhood is developed
while areas to the north and west are only 50 percent to 60 percent developed.
-13-
LOCAL MARKET AREA ANALYSIS
================================================================================
Portions of the exclusive Memorial Drive area are within the neighborhood. The
Memorial area is located between the West Loop 610 and SH-6 between the Katy
Freeway and Buffalo Bayou. The westerly most portion of the Memorial area is
within close proximity of the subject just north of Buffalo Bayou. The Memorial
area has become known as a prestigious residential section of the city of
Houston with expensive homes catering to middle- to upper-income families. As
the supply of developable acreage in this area has dwindled, middle- to
upper-income households are now moving westward as evidenced by the sales
activity in the custom built neighborhoods.
According to the West Houston Association's Development Survey, the subject's
neighborhood is within an area known as West Houston which is defined as the
area west of Gessner Road, north of Westheimer and south of US-290. This area
has over 40 companies employing over 250 people each. Selected companies include
Browning-Ferris Industries, Cameron Ironworks, Exxon Chemical, Conoco, and
Amoco.
Commercial development is primarily concentrated along IH-10, Westheimer, SH-6,
and Memorial Drive. Commercial uses vary, but, consist primarily of office,
retail and freestanding commercial buildings. The subject's market area is
dominated by high rise corporate headquarters facilities of major national oil
companies. Most of the projects are within a few miles of the subject with
properties proximate to the headquarters benefiting because of increased demand
for most property types. The location of these major has contributed to
increased demand for single-family development which in turn significantly
impacted retail and ancillary developments.
Future trends for the neighborhood are for continued residential and commercial
development. The existing transportation system provides excellent linkage to
all areas of Houston and, accordingly, the area remains a popular suburban real
estate market.
-14-
APARTMENT MARKET ANALYSIS
================================================================================
According to the July 2001 issue of Apartment Market TRAC, published by
Apartment Data Services, Inc., during 1983 developers built 36,617 apartment
units in the Houston market. This construction marked the climax of a remarkable
period of growth for the Houston apartment market. During the seven-year period
from 1977 through 1983, 173,776 apartment units or an average of 24,825
apartment units per year were added. However, the building boom of the late
1970s and early 1980s was followed by a sharp local recession. The economic
decline and unprecedented supply growth resulted in a major downturn in the
apartment market during the mid-1980s. An improving economy combined with
virtually no new construction through the latter half of the 1980s and into the
early 1990s allowed gradual recovery of the market. Table AMA-1 (located on the
following page) shows a summary of the recent performance of the Houston
apartment market and key indicators from 1987 through 2000.
HOUSTON AREA EMPLOYMENT
The change in overall employment is presented in Table AMA-1 as the number of
new jobs added to the Houston economy and the percentage annual change in job
growth. Job creation is often used as an indicator of potential demand for
apartment units. These statistics are presented in order to review the overall
strength of the local economy and as a leading indicator of demand for apartment
units.
Similar to the national economy, these statistics reveal strong job creation
during the late 1980s through 1990. After a recession in the early 1990s, steady
job creation has resumed particularly in 1997 and 1998. A total of 185,900 jobs
were created during this two-year period, followed by 54,800 jobs in 1999 and
roughly 50,000 jobs in 2000. Public and private economists predict job growth at
approximately 2.5 to 3.0 percent in 2001, which should create another 50,000 to
75,000 jobs for the year. In fact, Dr. Barton Smith had predicted net job growth
of nearly 75,000 jobs in 2001. However, at the end of the first quarter of 2001,
Ted Kerr adjusted his job growth expectation to slightly under 50,000 in 2001.
By the end of the second quarter, Dr. Smith will release his revised estimates
and many anticipate a slight downward revision to a level consistent with the
last two years.
UNITS BUILT/UNITS RENOVATED/OPERATING UNITS
The number of units built and renovated each year and the supply of operating
units are presented in Table MA-1 as measures of the supply of apartment units.
It should be noted that although the supply of operating units at year end 2000
at 439,244 units is at the highest level over the period surveyed, the annual
supply of operating units has increased only 0.92 percent annually over the last
14 years. Stated differently, annual new construction has averaged 3,786 new
units since 1987. Further, over the past 5 years, 7,552 units were built
annually. However, when considering all of the factors effecting the supply of
units in Houston, namely new construction, demolitions, renovations, etc., we
see that over the past 10 years, a net annual average change in supply of 6,062
units has occurred. Further, as of year to date June 2001, inventory increased
by 774 units while absorption was 8,165 units indicating a 1.5 percent increase
in overall occupancy since year-end 2000.
-15-
APARTMENT MARKET ANALYSIS
================================================================================
The sub-markets experiencing the greatest amount of new construction since 1995,
expressed as a percentage of the market, are: Lake Houston/Kingwood (58.4
percent), FM 1960 West/Steeplechase (41.1 percent), Fort Bend (39.5 percent),
Katy/Far West (37.6 percent), Tomball/Far Northwest (34.6 percent),
Montrose/Museum District (30.9 percent) and Woodlands/Far North (35.6 percent).
-16-
APARTMENT MARKET ANALYSIS
================================================================================
Insert AMA-1
-17-
APARTMENT MARKET ANALYSIS
================================================================================
Along with a change in the number of operating units comes a change in the
quality of the supply. During the 6 months ending April 2001, 1,919 Class A
units have been added to the market. Considerable renovation of Class B product
has also occurred in the market. The supply of Class B increased by 2,685
whereas Class C units decreased by 3,825 and Class D units increased by 1,234.
In addition, on the following pages we have detailed the recently completed
properties that are now undergoing leaseup as well as the new construction list
for properties that are currently under construction and those that are
proposed. To this end we see that roughly 5,696 of the new units that have
recently been constructed were delivered over the past 12 - 13 months. It is
interesting to note that this construction is occurring throughout the
metropolitan area, but with a concentration in the Montrose/Museum and FM
1960W/Champions markets. In fact, six of the 21 properties under construction or
1,730 of the 5,202 units (33%) are located in the Montrose submarket. Further,
there are 31 properties with 8,582 units proposed for construction throughout
the area, with concentrations in the Montrose, FM 1960 East and FM 1960 West
submarkets. The Montrose/Museum/Midtown market has seen tremendous development
over the past 24 months as the CBD continues to thrive and housing is sought by
young professionals as well as "empty nesters" seeking to re-urbanize.
-18-
APARTMENT MARKET ANALYSIS
================================================================================
Insert now leasing July 2001
-19-
APARTMENT MARKET ANALYSIS
================================================================================
Insert under construction July 2001
-20-
APARTMENT MARKET ANALYSIS
================================================================================
Insert proposed construction July 2001
-21-
APARTMENT MARKET ANALYSIS
================================================================================
ABSORPTION
The demand for apartment units is directly reflected in the statistics for
absorption. Absorption is defined as the net change in the total number of
occupied units over a given time. Absorption, in general, shows if renters are
moving into or out of a market area.
The apartment industry's economic demand cycle is composed of two different
cycles, a long-term "business" cycle and a short term "seasonal" cycle. The
long-term cycle occurs over many years and is the result of local, state, and
national economics. The short-term "seasonal" cycle is an annual cycle beginning
in April and ending in March. The six-month period, April through September, is
the "fast" season where absorption is relatively strong. October through March
is the slow season and absorption is significantly reduced. The most recent
seven year absorption citywide is summarized below:
====================================================
HOUSTON APARTMENT MARKET ABSORPTION
====================================================
YEAR UNITS ABSORBED
---- --------------
1994 6,566
1995 7,434
1996 6,766
1997 6,632
1998 8,339
1999 8,323
2000 13,638
------
Total 57,758
Annual Average 8,251
====================================================
The multi-family market competes with the single-family residential market. Due
to the excess of single-family residences in Houston during the late 1980s,
pricing was reduced for some sectors and single-family homes became a reasonable
alternative for apartment dwellers. This was perhaps the biggest factor slowing
absorption and holding down the rate of increases in rental rates and occupancy.
The Houston Association of Realtors Multiple Listing Service indicated sales of
51,214 existing homes during 1999 that represents a new record high. Further,
the January 2001 closings totaled 2,909 homes which is 3.6 percent above January
2000 levels. Over the same period, the median price for a single family home
increased 5 percent to $115,000.
As can be seen from the recent absorption statistics, 2000 absorption was almost
double the average year level. If job growth continues through the end of the
year at the current pace, absorption may reach 15,000 units in 2001. First
quarter and Second quarter 2001 absorption were 4,203 units and 3,962 units that
if annualized, would surpass the 16,000 absorption mark.
-22-
APARTMENT MARKET ANALYSIS
================================================================================
OCCUPANCY
During the period from November 1987 through April 1991 the supply of operating
units was steadily decreasing. During this same period Houston was experiencing
an overall positive absorption. These two actions caused the occupancy rates to
steadily improve from 76.3 percent in November 1987 to 87.4 percent in April
1991. Overall occupancy remained above 90 percent from November 1996 to December
1998, but declined in 1999 to 89.3 percent by year-end. Occupancy as of December
2000 was 90.6 percent and as of June 2001, occupancy has risen further to 92.0
percent. This marks a 1.5 percent increase over the past year and a 0.8 percent
increase over the past three months. The current performance of the citywide
apartment market segmented by classification is summarized below:
HOUSTON APARTMENT MARKET PERFORMANCE
BY PRODUCT CLASSIFICATION
JULY 2001
============================================================================================================
CLASS A B C D TOTAL
============================================================================================================
Average Rent Rate PSF $0.928 $0.679 $0.589 $0.443 $0.703
Occupancy 92.5% 93.1% 91.6% 85.2% 92.0%
Number of Units 101,336 212,426 93,140 33,116 440,018
Percent of Market 23.0% 48.3% 21.2% 7.5% 100%
============================================================================================================
RENTAL RATES AND CONCESSIONS
Since 1987 rental rates have increased from $0.364 to $0.689 per square foot or
approximately 4.6 percent compounded annually. It should be noted that the
higher rate growth reflects a period of market recovery and the fact the
majority of units added to the supply consist of both Class A and B units. This
has continued into 2001 as the average rate is $0.703 per square foot at the end
of the second quarter. This equates to a 3.7 percent rise over the past year. As
seen above, 2001 Class A rents are $0.928 per unit monthly while Class B rents
are $0.679 per unit monthly.
Concessions were prevalent in 2000 with 35 percent of the operating complexes
offering some sort of concession. Concessions are still prevalent in the market
as of July 2001 although they are declining, with only 623 properties or 27
percent offering concessions. The average concession is roughly 5 percent which
has a roughly 2 percent net impact on the entire inventory of units. Note that
newer properties generally offer concessions in an effort to lease up more
rapidly. Therefore, concessions are involved with roughly 38 percent of all
Class A units and only 22 percent of all class D units.
SUBMARKET REVIEW
As seen in the following summary, the Inner Loop West/Greenway, Galleria,
Westchase, and FM 1960 East/IAH Airport submarkets are ranked as having the
highest occupancy rates while the Inner Loop/Greenway, Montrose/Museum, Medical
Center/Bellaire and
-23-
APARTMENT MARKET ANALYSIS
================================================================================
Galleria submarkets have the highest rental rates. As might be expected, this
high rental rate has attracted development. In fact, as mentioned earlier, the
Montrose/Museum district has seen a 30.9 percent increase in inventory over the
past 5-6 years, with 1,674 units now under construction and an additional 1,102
units proposed.
Further, based on annualized growth rate and percent of market absorbed, the
Katy Far West and Bearcreek/Copperfield submarkets are currently the "hottest"
markets.
====================================================================================================================================
TABLE AMA-2
HOUSTON APARTMENT SUBMARKET SUMMARY AS OF JUNE 2001
====================================================================================================================================
AVERAGE
MONTHLY RANKING
TOTAL SUBMARKET RANKING RANKING RENTAL BY
INVENTORY PRO RATA BY OCCUPANCY BY RATE MONTHLY
SUBMARKET (# UNITS) SHARE INVENTORY (%) OCCUPANCY ($/SF/MO) RENTAL
====================================================================================================================================
C1 Montrose/Museum District 8,934 2.03% 19 93.2% 15 $0.947 2
C2 Inner Loop West/Greenway 11,669 2.65% 15 95.7% 1 $0.989 1
C3 Medical Center/Bellaire 15,916 3.62% 13 93.0% 18 $0.875 3
C4 Heights 2,228 0.51% 37 93.1% 17 $0.741 16
C5 Inner Loop East 7,508 1.71% 23 86.2% 32 $0.525 38
- ------------------------------------------------------------------------------------------------------------------------------------
SW1 Galleria 18,475 4.20% 10 95.4% 2 $0.870 4
SW2 Woodlake/Westheimer 11,055 2.51% 16 94.6% 7 $0.785 13
SW3 West Memorial/Briar Forest 20,523 4.66% 7 94.7% 5 $0.742 15
SW4 Westchase 12,472 2.83% 14 94.9% 3 $0.822 7
SW5 Alief 22,980 5.22% 3 92.2% 24 $0.663 21
SW6 Sharpstown/Westwood 25,608 5.82% 2 93.7% 11 $0.585 32
SW7 Gulfton/Bissonnet 17,897 4.07% 11 91.5% 26 $0.599 28
SW8 Braeswood/Fondren SW 20,586 4.68% 6 94.5% 8 $0.609 27
SW9 Almeda/South Main 4,757 1.08% 33 87.4% 30 $0.563 36
SW10 Fort Bend 6,993 1.59% 25 93.4% 13 $0.855 5
SW11 Richmond/Rosenberg 2,426 0.55% 36 91.7% 25 $0.673 20
- ------------------------------------------------------------------------------------------------------------------------------------
NW1 Brookhollow 18,479 4.20% 9 92.4% 21 $0.629 26
NW2 Spring Branch 17,537 3.99% 12 94.1% 10 $0.576 33
NW3 Inwood/Northwest 5,695 1.29% 29 93.3% 14 $0.644 24
NW4 FM 1960 West/Champions 29,397 6.68% 1 92.9% 19 $0.724 17
NW5 FM 1960 West/Steeplechase 10,814 2.46% 17 92.3% 22 $0.814 8
NW6 Bear Creek/Copperfield 8,053 1.83% 22 94.7% 5 $0.780 14
NW7 Katy/Far West 5,286 1.20% 31 89.8% 28 $0.795 10
NW8 Tomball/Far Northwest 1,619 0.37% 38 93.7% 11 $0.692 18
NW9 Woodlands/Far North 5,720 1.30% 28 92.3% 22 $0.826 6
- ------------------------------------------------------------------------------------------------------------------------------------
NE1 Northshore/Wood Forest 8,650 1.97% 20 88.6% 29 $0.662 22
NE2 Eastex Freeway/Near Northeast 5,021 1.14% 32 87.3% 31 $0.572 34
NE3 Northline/Aldine 9,792 2.23% 18 84.3% 35 $0.556 37
NE4 Greenspoint 8,469 1.92% 21 81.9% 37 $0.646 23
NE5 FM 1960 East/AH Airport 6,534 1.48% 26 94.9% 3 $0.675 19
NE6 Lake Houston/Kingwood 5,536 1.26% 30 81.7% 38 $0.792 11
NE7 Far East 2,739 0.62% 35 85.9% 33 $0.564 35
- ------------------------------------------------------------------------------------------------------------------------------------
SE1 US-288/South 6,386 1.45% 27 85.7% 34 $0.590 31
SE2 Gulfgate/Almeda Mall 20,852 4.74% 5 92.5% 20 $0.631 25
SE3 Galena Park/Jacinto City 695 0.16% 39 80.0% 39 $0.466 39
SE4 Pasadena/Deer Park 22,206 5.05% 4 90.9% 27 $0.594 29
SE5 Friendswood/Pearland 4,271 0.97% 34 94.3% 9 $0.810 9
SE6 Clear Lake 18,808 4.27% 8 93.2% 15 $0.786 12
SE7 Baytown 7,307 1.66% 24 83.1% 36 $0.591 30
- ------------------------------------------------------------------------------------------------------------------------------------
* Totals/Averages 440,018 100.00% 92.0% $0.703
====================================================================================================================================
* There are some apartment projects in Dickinson that are part of the Greater Houston Area yet are not part of an individual
submarket. SOURCE: APARTMENT DATA SERVICES INC. AND CUSHMAN & WAKEFIELD OF TEXAS, INC.
====================================================================================================================================
THE WEST MEMORIAL/BRIAR FOREST SUBMARKET
The subject property is located in the WEST MEMORIAL/BRIAR FOREST submarket as
defined by the Apartment Data Services Inc. The boundaries are Interstate 10 to
the north, Westheimer to the south, S. Gessner to the east and Barker Clodine to
the west.
-24-
APARTMENT MARKET ANALYSIS
================================================================================
The subject market contains 74 operating complexes and 20,523 operating units,
plus another 215 non-operating units. Since 1995, 963 units (4.7%) have been
renovated and there have been 3,229 units (15.7%) constructed. No complexes are
under construction and one complex containing 149 units is proposed in the
submarket at this time. In 1999, 731 new units were added and in 2000, no new
units were added to the market.
Table AMA-2 presents the relative characteristics of the various submarkets
within the city of Houston. The subject submarket ranks 7th in size of the 39
submarkets in the city making up 4.66 percent of the citywide apartment units.
The submarket has an occupancy of 94.7 percent and ranks 5th in occupancy among
the 39 submarkets. Occupancy level in the submarket peaked at 96.1 percent in
September of 1997 but have since fallen. The submarket appears to be on the
rebound as is evident by the rising occupancy level since December 1999 when
occupancy bottomed out at 87.9 percent. Occupancy levels have increased 3.3
percent in the past 12 months and 5.4 percent in the past 6 months. The
submarket has absorbed 945 units over the past year.
The submarket has an average rental rate of $0.742 per square foot per month and
is ranked 15th among the submarkets analyzed. Rental rates on average have risen
6.3 percent in the past twelve months and 8.5 percent in the past six months.
The average age of construction in the submarket is 1981. The majority of the
projects built in the submarket were built between 1978 and 1983.
- --------------------------------------------------------------------------------
NO-BILLS PAID UNITS - WEST MEMORIAL/BRIAR FOREST SUBMARKET
AS OF JUNE 2001
- --------------------------------------------------------------------------------
NO. OF UNITS PRICE SIZE RENTAL RATE
REPORTING
UNIT SIZE/SF ($/MO) (SF) ($PSF/MO)
================================================================================
Efficiency 910 $443 498 $0.890
- --------------------------------------------------------------------------------
1 BR 9,290 $608 746 $0.815
- --------------------------------------------------------------------------------
2 BR 8,156 $775 1,075 $0.721
- --------------------------------------------------------------------------------
3 BR 1,881 $873 1,402 $0.623
- --------------------------------------------------------------------------------
ABSORPTION ANALYSIS
Based on historic information it appears that the West Memorial/Briar Forest
submarket's current occupancy at 94.7 percent is near stabilized occupancy level
for this market. Additions to supply have averaged 807 new units annually over
the past four years whereas absorption has averaged 681 units over that same
time frame. The market occupancy tends to fluctuate between 88 and 95 percent
due to relatively constant additions to unit supply. Based on population growth
estimates, continued unit demand is projected in the near future at 250 to 300
new units annually. A reduction in supply growth is necessary for occupancy
levels to surpass 94 percent on a significant basis.
SUBJECT PERFORMANCE
The subject was 95 percent occupied at inspection, with an average rental rate
of $0.758 per square foot per month. The subject's occupancy performance is
slightly above the
-25-
APARTMENT MARKET ANALYSIS
================================================================================
submarket occupancy of 94.7 percent. The average occupancy rate among the
comparable rental properties is 95 percent, which supports our stabilized
occupancy conclusion. Based on the fact that the subject occupancy level tends
to peak in the summer months, an overall occupancy level of in the 95 percent
range during the summer months and a stabilized annual occupancy of 94 percent
is reasonable. (Note: This is physical occupancy only, economic occupancy is
expected to be lower).
CONCLUSION
Based on our review of the actual and historical occupancy at the subject, and
the rental rate trends in the citywide market and the submarket, we conclude
that the subject will achieve physical occupancy level in the 94 to 95 percent
range by the middle of the summer season. It is our opinion that the property
will perform well within the submarket because of its location, amenities and
renovated condition.
-26-
PROPERTY DESCRIPTION
================================================================================
SITE DESCRIPTION
Location: The subject is located along the north line
of Whittington Drive between Dairy Ashford
and Eldridge, in far west Houston. The
common address is 12850 Whittington Drive,
Houston, Harris County, Texas.
Shape: Rectangular
Land Area: 12 acres or 357,745 square feet
Frontage: The site contains significant frontage along
the north side of Whittington Drive.
Street Improvements: Whittington Drive is a concrete paved,
two-lane, bi-directional secondary roadway.
Soil Conditions: We did not review a soil report and we
assume that the soil's load-bearing capacity
is sufficient to support the existing
structures. We did not observe any evidence
to the contrary during our physical
inspection of the property. The tract's
drainage appears to be adequate. Based on
information provided by property ownership,
there is a fault hazard band traversing the
subject. The current improved property uses
this area for surface parking and landscaped
area. We assume that this fault condition
has no adverse effect on the subject, as
improved. We are not qualified to render an
opinion relative to this condition and
strongly suggest that an expert be engaged.
Utilities: All utilities, including electricity, water,
sewer, natural gas, and telephone are
currently available to the site.
Access: The site is primarily accessed curb cuts
along Whittington Drive and then through
security gates.
Land Use Restrictions: We were not given a title report to review.
We do not know of any easements,
encroachments, or restrictions that would
adversely affect the site's use. However, we
recommend a title search to determine
whether any adverse conditions exist.
Flood Hazard: According to Community Panel No.
48201C0830-J, National Flood Insurance Rate
Map, effective November 6, 1996, the subject
property partially is in Flood Hazard Zone
X, which is not within the 500 year flood
plain.
-27-
PROPERTY DESCRIPTION
================================================================================
Insert Site Plan
-28-
PROPERTY DESCRIPTION
================================================================================
Wetlands: We were not given a Wetlands survey. If
subsequent engineering data reveal the
presence of regulated wetlands, it could
materially affect property value. We
recommend a wetlands survey by a competent
engineering firm.
Seismic Hazard: The site is not located in a Special Study
Zone.
Site Improvements: The subject is improved with 4, 3-story
apartment buildings containing a total of
416 units. Other site improvements include a
swimming pool, jacuzzi, pavement, covered
parking areas and common area landscaping.
Hazardous Substances: We were not provided with a Phase I
Environmental Site Assessment. We observed
no evidence of toxic or hazardous substances
during our inspection of the site. However,
we are not trained to perform technical
environmental inspections and recommend the
services of a professional engineer for this
purpose.
We are not qualified to detect hazardous
materials and we have not considered any
cost deductions associated with these items.
Comments: Currently, the site is typical of other
multi-family sites in the area. The
topography is suitable for multi-family type
uses.
IMPROVEMENT DESCRIPTION
The following physical description of improvements was developed from our recent
discussions with on-site management, our physical inspection of the property,
and the provided building and property information. The subject is improved with
a 416 unit apartment complex that was completed in 1982. The total net rentable
area is 296,712 square feet, which results in an average unit size of 713 square
feet. Construction characteristics include wood framing with stucco and wood
veneer exterior with a pitched roof.
It should be noted that we inspected a representative sample of units and found
them to be in average to good condition. All of the units are assumed to be in
similar condition.
The subject contains numerous floor plans. The unit mix is shown as follows:
-29-
PROPERTY DESCRIPTION
================================================================================
UNIT MIX AND OCCUPANCY LEVELS
=============================================================================================================
UNIT TYPE TOTAL # SF TOT SF VACANT OCCUPIED % OCC.
- -------------------------------------------------------------------------------------------------------------
BLU1 1BR/1BA 48 687 32,976 1 47 98%
BLU2 1BR/1BA 48 687 32,976 1 47 98%
BLU3F 1BR/1BA F 48 687 32,976 1 47 98%
BMF2 1BR/1BA F 14 661 9,254 2 12 86%
BMI1 1BR/1BA 30 661 19,830 1 29 97%
BMI2 1BR/1BA 16 661 10,576 1 15 94%
BMXFG3 1BR/1BA W/SUN 16 700 11,200 0 16 100%
BS1 1BR/1BA 32 539 17,248 1 31 97%
BS2 1BR/1BA 16 539 8,624 3 13 81%
BS2D 1BR/1BA W/WIN 16 539 8,624 0 16 100%
BS3 1BR/1BA 16 539 8,624 0 16 100%
BTFUX TH 1BR/1BA 8 818 6,544 1 7 88%
DU1 2BR/1BA 19 853 16,207 2 17 89%
DU1W 2BR/1BA 1 853 853 0 1 100%
DU2 2BR/1BA 20 853 17,060 1 19 95%
DU3F 2BR/1BA W/FP 20 853 17,060 0 20 100%
FU1 2BR/2BA 24 960 23,040 2 22 92%
FU2 2BR/2BA 24 960 23,040 2 22 92%
- -------------------------------------------------------------------------------------------------------------
TOTAL 416 296,712 19 397 95%
=============================================================================================================
The subject's common area amenities include two swimming pools, jacuzzi,
clubhouse, and landscaped and lighted grounds. Unit amenities include kitchens
with oven/ranges with a range hood, dishwashers and sinks with disposals. The
bathrooms have package tub/showers, porcelain toilets and sinks.
General Description
Year Built: 1982
Average Unit Size: 713
Number of Stories: 2 & 3
Construction Detail
Foundation: Reinforced concrete slab.
Framing: Wood stud wall construction.
Exterior Walls: Stucco and wood veneer.
Roof Structure/Cover: Pitched with plywood decking.
Windows: Aluminum frame and single-paned glass
windows with screens.
Exterior Doors: Front entry doors are solid wood with raised
panel designs and are equipped with
reinforced dead bolts and peep holes. All
interior doors are painted hollow core with
-30-
PROPERTY DESCRIPTION
================================================================================
standard grade hardware.
Mechanical Detail
Heating and Cooling: Each unit is equipped with a ground or roof
mounted electric single-unit HVAC system.
Plumbing: Assumed to be per city code. Hot water for
the units is provided by central boiler
systems.
Electric Service: Each unit is equipped with separate
electrical meters. Electric service is
assumed to meet city code.
Fire Protection: Smoke Detectors.
Interior Detail
Floor Covering: Carpet over pad in living, dining, and
bedroom areas and sheet vinyl tile in
kitchen and bathroom.
Walls: Painted and textured gypsum board.
Ceilings: Painted and textured gypsum board.
Lighting: Fluorescent and/or incandescent with
standard apartment fixtures. Some units have
ceiling fans with light fixtures.
Bathrooms: Depending upon the unit type, each apartment
is equipped with one or two full baths. Full
baths consists of a shower/tub kit with wall
mounted shower head, toilet and sink, sheet
vinyl floor covering, and painted gypsum
board walls.
Site Improvements
On-Site Parking: Open-surface, striped parking lot, concrete
paved with an adequate number of parking
spaces.
Landscaping: The grounds are attractively landscaped with
trees, bushes, shrubs, and sod; there is no
sprinkler system.
Other Amenities: The property has controlled access gates,
two swimming pools, a playground, a heated
Jacuzzi, three laundry facilities, a
clubhouse/leasing center, and landscaped and
lighted grounds.
-31-
PROPERTY DESCRIPTION
================================================================================
Condition: The improvements are in average condition
for their age.
Americans With Disabilities Act: The Americans with Disabilities Act (ADA)
became effective January 26, 1992. We have
not made, nor are we qualified by training
to make, 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 and a
detailed analysis of the requirements of the
ADA could reveal that the property is not in
compliance with one or more of the
requirements of the Act. If so, this fact
could have a negative effect upon the value
of the property. Since we have not been
provided with the results of a survey, we
did not consider possible non-compliance
with the requirements of ADA in estimating
the value of the property.
Design Features
and Functionality: The building and site improvements are
attractive, functionally efficient and
appear to be well adapted to the site. The
unit interiors are considered to be of
average to good quality. As a result, the
apartment complex should continue to be
competitive with other nearby complexes. The
subject improvements are estimated to have
an overall economic life expectancy of
approximately 45 years. The effective age of
the improvements is considered to be the
same as the actual or chronological age,
which is 18 years. Therefore, the remaining
economic life of the improvements is about
27 years.
Personal Property Included in
Value Estimate: None
Deferred Maintenance: None
-32-
REAL PROPERTY TAXES AND ASSESSMENTS
================================================================================
The subject property is under four taxing jurisdictions: Harris County, Houston
Independent School District, Houston Community College and the City of Houston.
Taxes are levied against all real property in this locale for the purpose of
providing funding for the various municipalities. The amount of ad valorem taxes
is determined by the current assessed value for the property in conjunction with
the total combined tax rate for the municipalities. The assessors' parcel
identification number is 115-085-000-0004, 115-085-000-0005 and
115-085-000-0006.
TAX RATES
Following is a chart presenting the tax rates levied by the above noted taxing
jurisdictions.
=============================================================
TAXING AUTHORITY 2000 TAX RATE
=============================================================
Harris County $0.64802
City of Houston $0.65500
Houston Community College $0.08233
Houston ISD $1.51900
-------------------------------------------------------------
TOTAL $2.90435
=============================================================
TAX ASSESSMENT
The Harris County Appraisal District establishes the assessed value on real
property for all of the previously noted taxing jurisdictions. By state law, the
appraisal district is required to re-evaluate all real property every three
years. Tax rates for 2001 have not been established at this time. Following are
the historical assessments for the subject property.
========================================================================================================
SUBJECT'S ASSESSED VALUE
========================================================================================================
2001
1998 1999 2000 (PRELIMINARY)
========================================================================================================
Acct#115-085-000-0004
Land $522,720 $522,720 $522,720 $609,840
Building $1,665,980 $1,943,280 $1,943,280 $2,450,060
Acct#115-085-000-0005
Land $522,720 $522,720 $522,720 $609,840
Building $2,933,880 $3,422,880 $3,422,880 $3,379,360
Acct#115-085-000-0006
Land $522,720 $522,720 $522,720 $609,840
Building $2,665,280 $3,324,240 $3,324,240 $3,250,960
- --------------------------------------------------------------------------------------------------------
Total $8,833,300 $10,258,560 $10,258,560 $10,909,900
========================================================================================================
-33-
REAL PROPERTY TAXES AND ASSESSMENTS
================================================================================
The subject property's 2001 preliminary assessment of $26,226 per unit results
in a tax liability of $762 per unit or $316,862 annually, applying 2000 combined
tax rates.
TAX COMPARABLES
The following chart illustrates three comparable property assessments.
- ------------------------------------------------------------------------------------------------------------------
COMPARABLE NO. OF UNIT YEAR BUILT 2001 PRELIMINARY VALUE PER UNIT
VALUE
- ------------------------------------------------------------------------------------------------------------------
The Myriad 288 1983 $8,627,000 $29,955
1520 Enclave Pkwy
- ------------------------------------------------------------------------------------------------------------------
Silverado
1335 Silverado 344 1978 $10,181,300 $29,597
- ------------------------------------------------------------------------------------------------------------------
The Gables 140 1983 $5,290,600 $37,790
12730 Whittington
- ------------------------------------------------------------------------------------------------------------------
The subject's current assessment is well below the range shown by the
comparables. We project an assessment of $30,210 per unit would be reasonable
which result in a tax liability of $877 per unit or approximately $365,000
applying 2000 combined tax rates.
-34-
ZONING
================================================================================
There is no zoning in Harris County. Each parcel is developed based upon its
highest and best use as determined by its location, balance of the area
development, utilities, and deed restrictions.
We know of no deed restrictions, private or public, that further limits the
subject property's use. The research required to determine whether or not such
restrictions exist, however, is beyond the scope of this appraisal assignment.
Deed restrictions are a legal matter and only a title examination by an attorney
or Title Company can usually uncover such restrictive covenants. Thus, we
recommend a title search to determine if any such restrictions do exist.
-35-
HIGHEST AND BEST USE
================================================================================
HIGHEST AND BEST USE OF SITE AS THOUGH VACANT
According to the DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION (1993), a
publication of the APPRAISAL INSTITUTE, the highest and best use of the site as
though vacant is defined as:
Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the
parcel of land is vacant or can be made vacant by demolishing any
improvements.
We evaluated the site's highest and best use as if vacant and as currently
improved. In both cases, the highest and best use must meet the aforementioned
criteria. The use must be 1) physically possible; 2) legally permissible; 3)
financially feasible; and 4) maximally productive.
The first test is what is physically possible. As discussed in the Property
Description section of this report, the site's size and soil conditions do not
significantly limit its use. With 12 acres, the subject, as vacant, is large
enough to accommodate most suburban land uses, with such exceptions as a major
commercial or industrial development or a regional shopping center. The critical
city utilities are available and should not impede the timing of the site's
development.
The second test concerns permitted uses. The site is not zoned. Additionally, we
are not aware of any deed restrictions that would preclude specific types of
development. Various easements encumber the site but have been dedicated for the
normal development of the existing improvements. It is our understanding that
these easements could likely be modified if necessary to accommodate other
development.
The third and fourth tests are, respectively, what is feasible and what will
produce the highest net return to the land. These items will be address in
tandem. Of primary significance to financially feasible uses of the property is
its specific location, which influences the possible alternative uses for future
development. The subject tract is located along the north line of Whittington
Drive between Dairy Ashford and Eldridge. Whittington Drive is an interior
roadway. Dairy Ashford and Eldridge provide good access and good visibility,
which tends to suggest the site's potential for some type of commercial
development including multi-family or development such as a restaurant.
As discussed in the preceding Apartment Market Analysis section of this report,
there has been substantial improvement in the multi-family residential market
over the last five years throughout the metropolitan area and nationally.
Presently, the subject's market area is performing well with stabilized rental
rates and occupancy rates generally above 90 percent. Restaurant development is
possible, however, it is not the most feasible use of the site given its large
size at 12 acres.
Therefore, it is our opinion that the highest and best use of the subject, as if
vacant, is for multi-family residential development, likely consisting of a
garden style type apartment complex.
-36-
HIGHEST AND BEST USE
================================================================================
HIGHEST AND BEST USE OF PROPERTY AS IMPROVED
According to the DICTIONARY OF REAL ESTATE APPRAISAL, highest and best use of
the property as improved is defined as:
THE USE THAT SHOULD BE MADE OF A PROPERTY AS IT EXISTS. AN EXISTING
PROPERTY SHOULD BE RENOVATED OR RETAINED AS IS SO LONG AS IT CONTINUES
TO CONTRIBUTE TO THE TOTAL MARKET VALUE OF THE PROPERTY, OR UNTIL THE
RETURN FROM A NEW IMPROVEMENT WOULD MORE THAN OFFSET THE COST OF
DEMOLISHING THE EXISTING BUILDING AND CONSTRUCTING A NEW ONE.
As noted in the Property Description section of this report, the subject site is
improved with a 416-unit garden apartment complex and related site improvement
that were built in 1982. The improvements are functional in design and are
average condition.
The subject is 95 percent occupied and achieving an average achieved rental rate
of approximately $0.758 per square foot. Since occupancy rates tend to reach the
highest in June or July, We project that the subject's physical occupancy will
stabilize in the 93 to 94 percent range.
The data within the Apartment Market Analysis revealed that the market is
stabilized and the rental rate and occupancy levels achieved by the subject
property should become competitive with other nearby apartment complexes. This
conclusion is supported by the data and analysis presented in the balance of
this report. It is our opinion that the existing improvements are capable of
providing a satisfactory return to the land over both the near and long term.
For these reasons, it is our opinion that the highest and best use of the site,
as improved, is for its continued use as developed with a garden type apartment
complex.
-37-
VALUATION PROCESS
================================================================================
In this appraisal, we have used the Sales Comparison Approach and the Income
Capitalization Approach to develop a market value estimate.
The Cost Approach was not performed for the following reasons:
o This approach is more relevant for new construction or where
sufficient information is available to reasonably estimate the
replacement cost new of the improvements and land.
o The investment marketplace does not typically trade apartment
complexes such as the subject on a cost/value basis,
particularly in markets where it is generally perceived that
cost may exceed value, and particularly for complexes like the
subject, which are in excess of ten years old.
o The subjectivity of accurately estimating accrued depreciation
of the existing improvements significantly limits the
reliability of this approach.
In the Sales Comparison Approach, we:
o Searched the market for recent sales.
o Analyzed those sales on the basis of the sales price per unit
and the Effective Gross Income Multiplier (EGIM).
o Correlated the various value indications into a point value
estimate from within the range.
In developing the Income Capitalization Approach we:
o Studied rents in effect in this and competing complexes to
estimate potential rental income at market levels.
o Estimated income from sources other than apartment rentals.
o Studied the recent history of operating expenses at this and
competing properties to estimate an appropriate level of
stabilized expenses and reserves for replacement.
o Estimated net operating income by subtracting stabilized
expenses from potential gross income.
o Capitalized stabilized net operating income into an indication
of capital value.
o Performed the Direct Capitalization Method and Discounted Cash
Flow analysis in order to estimate the subject's value on an
as-is and prospective basis.
In estimating the final value, we performed the following:
o Reviewed and re-examined each of the approaches to value which
were employed.
o Considered the type and reliability of the data used and
applicability of each approach.
o Reconciled the approaches to a final value conclusion.
-38-
SALES COMPARISON APPROACH
================================================================================
METHODOLOGY
In the Sales Comparison Approach, the appraiser estimates the value of a
property by comparing it with similar, recently sold properties in the
surrounding or competing area. Inherent in this approach is the principle of
substitution which holds that when a property is replaceable in the market, its
value tends to be set at the cost of acquiring an equally desirable substitute
property, assuming that no costly delay is encountered in making the
substitution. By analyzing sales that qualify as arms-length transactions
between willing and knowledgeable buyers and sellers, we can identify market
value and price trends. The properties must be reasonably comparable to the
subject in physical, locational, and economical characteristics. The basic steps
of this approach are:
1. Research recent, relevant property sales and current offerings
throughout the competitive area;
2. Select and analyze properties that are similar to the subject,
giving consideration to the date of sale, any change in
economic conditions that may have occurred between the sale
date and the date of value, and other physical, functional, or
locational factors;
3. Identify sales that include favorable financing and calculate
the cash equivalent price;
4. Reduce the sale prices to a common unit of comparison such as
price per square foot of net rentable area, the price per unit
and the effective gross income multiplier;
5. Make appropriate adjustments to the prices of the comparable
properties; and
6. Interpret the adjusted sales data and draw a logical value
conclusion.
In this instance, the sale prices of the comparables were reduced to those
common units of comparison used by purchasers, sellers, brokers and appraisers
to analyze improved properties that are similar to the subject. Of the available
units of comparison, the sales price per unit (used by buyers, sellers, and
brokers), as well as the effective gross income multiplier method (EGIM),
employed predominantly by appraisers, are most commonly used in the market.
Generally, the EGIM is considered the most reliable indicator of value because
it considers the income characteristics of the property. However, the price per
unit provides an alternative value indication and a check for reasonableness.
The chart and map on the following pages summarize recent market data considered
to be most indicative of the subject's current market value. Detail sheets with
photographs relating to each of the sales can be found in the ADDENDA of this
report.
-39-
WALDEN POND APARTMENT
12850 WHITTINGTON DRIVE
HOUSTON, TEXAS
COMPARABLE APARTMENT SALES SUMMARY
===============================================================================================================================
CASH NET PERCENT MONTHLY
NAME/ADDRESS/ SALE EQUIVALENT YEAR RENTABLE NO. OF AVG. UNIT OCCUPIED @ RENT PER
NO. SUBMARKET DATE SALES PRICE BUILT AREA UNITS SIZE (S) SALE SF
===============================================================================================================================
1 Edge Lake Nov-00 $6,600,000 1984 160,320 216 742 92% $0.80
3010 Nasa Road One
Clear Lake
2 Madison Park Jan-01 $23,500,000 1977 516,528 576 897 93% $0.74
9801 Meadow Glen
Westchase
3 Chateaux Dijon Mar-01 $10,650,000 1968 267,803 313 856 92% $0.71
16201 El Camino Real
Clear Lake
4 Pirate's Landing Mar-01 $12,500,000 1990 196,434 230 854 94% $0.85
2727 Nas Road One
Clear Lake
5 Boca Springs Mar-01 $9,662,500 1977 225,352 296 761 93% $0.76
3777 S. Gessner
Westchase
6 Arbor at West Oaks Jun-01 $8,100,000 1981 207,175 222 933 85% $0.68
12707 Bellaire
Alief
===============================================================================================================================
WALDEN POND
12850 WHITTINGTON DRIVE 1982 296,712 416 713 95% $0.76
HOUSTON, TEXAS
===============================================================================================================================
Low 1968 160,320 216 742 85% $0.68
Data Range: High 1990 516,528 576 933 94% $0.85
Median 1979 216,264 263 855 93% $0.75
===============================================================================================================================
============================================================================================
SALE GOING-IN
NAME/ADDRESS/ PRICE EXPENSE CAPITALIZATION
NO. SUBMARKET PER UNIT EGIM RATIO (EGI) RATE
============================================================================================
1 Edge Lake $30,556 4.66 54.92% 9.67%
3010 Nasa Road One
Clear Lake
2 Madison Park $0,799 5.53 48.80% 9.26%
9801 Meadow Glen
Westchase
3 Chateaux Dijon $34,026 5.07 59.59% 7.97%
16201 El Camino Real
Clear Lake
4 Pirate's Landing $54,348 6.62 43.84% 8.49%
2727 Nas Road One
Clear Lake
5 Boca Springs $32,644 5.03 55.44% 8.86%
3777 S. Gessner
Westchase
6 Arbor at West Oaks $36,486 5.02 52.38% 9.49%
12707 Bellaire
Alief
============================================================================================
Low $30,556 4.66 43.8% 7.97%
Data Range: High $54,348 6.62 59.6% 9.67%
Median $35,256 5.05 53.7% 9.06%
============================================================================================
-40-
SALES COMPARISON APPROACH
================================================================================
Insert Sales Map
-41-
SALES COMPARISON APPROACH
================================================================================
Comparability of physical, local market and economic characteristics are some of
the more important criteria in analyzing these sales in relation to the subject
property. The comparable properties were constructed from 1968 to 1990 with the
subject being built in 1982. All of the sales are relatively similar in
construction quality and type as the subject and offer similar amenity packages.
The properties were reportedly in fair to average condition at the time of sale.
Also, the occupancy rates of these properties were stabilized or near stabilized
at 85 to 94 percent at the time of sale.
The comparables shown previously indicate a variance in sales prices ranging
from $30,556 to $54,348 per unit on a cash equivalent basis. With respect to the
overall analysis, it appears that the variance in sale prices is primarily
associated with the quality or age of the complex, as well as locational
differences, average unit size, and the condition of improvements at the time of
sale. However, it is important to address each property in terms of the
conventional sequence of adjustments relative to the subject as follows. The
analysis primarily concentrates on differences meriting adjustment with the
specific aspects of the most comparable sales noted in the summary chart.
PROPERTY RIGHTS CONVEYED
As shown in the summary chart, all of the comparables are substantially occupied
and encumbered by short-term leases; therefore, the leased fee estate was
conveyed in each case. Consequently, no adjustments are warranted for
differences in property rights conveyed.
SELLER FINANCING/CASH EQUIVALENCY
None of the comparables included below market seller financing based on our
conversations with the sources involved in the transactions. Therefore a cash
equivalency adjustment has not been made to these sales.
CONDITIONS OF SALE
We identified no special motivational conditions concerning the comparable
sales. Therefore, in our opinion, no adjustments are warranted for special
motivational conditions. Therefore, we have not made any adjustments to the
sales for special conditions or motivational influence.
SALES PRICE PER UNIT ANALYSIS
MARKET CONDITIONS
As shown in the summary table, the most comparative transactions occurred
between November 2000 and June 2001. All of the sales occurred under similar
market conditions and no adjustment was warranted.
Other Adjustments
The additional adjustments warranted by the comparables are described for each
property below with most of these adjustments involving location, condition,
age-quality issues, or economic characteristics.
-42-
SALES COMPARISON APPROACH
================================================================================
Comparable I-1 represents the sale of Edge Lake, which is located in the Clear
Lake submarket. The Clear Lake submarket is superior to the subject West
Memorial/Briar Forest submarket in economic characteristics. The Edge Lake
Apartments are situated along the north line of Nasa Road One, but they do not
front Clear Lake. From a condition standpoint, this facility is slightly
inferior to the subject. The buyer's representative stated that the property is
likely to be repositioned to a Class A/B product type through renovation and
that cost would likely exceed $10,000 per unit. Additionally, Edge Lake has a
similar average unit size of 742 square feet. This project was 92 percent
occupied at the time of sale. In the final analysis, with a sales price of
$30,556 per unit, a downward adjustment is warranted for location.
Comparable I-2, Madison Park, is located in the Westchase submarket, which is
superior to the subject West Memorial/Briar Forest market area. Considering the
construction date in 1977 and recent renovation, this complex is similar to the
subject in effective age, quality and age. This complex has a substantially
larger average unit size as compared to the subject. The project offers 576
units with an average unit size of 897 square feet. The project was 93 percent
occupied at the time of sale. At $40,799 per unit, this sale warrants downward
adjustment for superior location and larger average sized units.
Comparable I-3, Chateaux Dijon, is located in the Clear Lake submarket along El
Camino Real. This property is superior to the subject in terms of location,
inferior in effective age (1968) and condition, and larger in average unit size
at 856 square feet. The sale has 313 units and occupancy at sale of 92 percent.
In summary, with a sales price of $34,026 per unit, this sale warrants downward
adjustment for location, upward adjustment for condition and downward adjustment
for unit size.
Comparable I-4, Pirate's Landing, is located in the Clear lake submarket along
Clear Lake, which is a superior characteristic with lake frontage and lake view
units. This sale is newer having been constructed in 1990. It has an average
unit size of 854 square feet and an occupancy level of 94 percent. At a sales
price of $54,348 per unit, this sale is considered superior to the subject
warranting a downward adjustment for lake frontage, superior unit size and
age/condition.
Comparable I-5 reflects the sale of Boca Springs, which is located in the
Westchase submarket along Gessner. This sale is superior in location as compared
to the subject. The quality of construction, condition and overall appeal of
this complex is similar to the subject. This complex contains 296 units with a
similar average unit size of 761 square feet. Overall, with a sales price of
$32,644 per unit, this warrants a downward adjustment for location but is
otherwise a reasonable indication of value for the subject.
Comparable I-6 is located in the Alief submarket which is inferior to the
subject market area. This sale includes similar physical characteristics as
compared to the subject including effective age, recent renovation, construction
quality and amenities. Significant differences include the substantially larger
average unit size of 933 square feet versus the subject at 713 square feet.
Overall, this sale warrants a downward adjustment for unit size.
The chart following summarizes the applicable adjustments.
-43-
SALES COMPARISON APPROACH
================================================================================
Insert Summary of Sales Analysis Per Unite Methodology
-44-
SALES COMPARISON APPROACH
================================================================================
Based on the available data, we have concluded to a value range of $29,000 to
$31,000 per unit for the subject. The average adjusted price among the
comparables is $30,242 per unit. The subject's estimated value via the sales
price per unit analysis is calculated as follows:
416 Units X $30,000 Per Unit = $12,480,000
Less: Deferred Maintenance - $0
-----------
$12,480,000
Rounded to, $12,500,000
EFFECTIVE GROSS INCOME MULTIPLIER ANALYSIS
The Effective Gross Income Multiplier (EGIM) is a ratio, which measures the
relationship between the sales price of a property and its effective gross
income. Effective gross income is the total annual income that a property would
produce after an allowance for vacancy and credit loss. Generally speaking, an
effective gross income multiplier is inversely related to the expense ratio and
overall rate (i.e., a higher multiplier reflects a lower expense ratio and
overall vacancy and vice versa) when stable conditions are present. It can be a
reliable method of comparison when extracted from market data that exhibits a
high degree of uniformity, particularly with respect to location, risk, age,
financing, anticipated vacancy and expense ratio.
Where possible, the expense ratios of the comparable properties have been
calculated by dividing the estimated expenses by the indicated effective gross
annual income. In this analysis, sufficient data was available on all of the
comparables and the expense ratios and EGIMs calculated for this analysis are
based on actual occupancy levels at the time of sale rather than pro forma
occupancy levels. The effective gross income multipliers exhibited by the
comparable sales range from 4.66 to 6.62. Following is a summary of the expense
ratios and EGIM's for each of the comparable sales.
-------------------------------------------------
COMPARABLE SALE RATE AND RATIO ANALYSIS
-------------------------------------------------
PERCENT EXPENSE
SALE SALE OCCUPIED EGIM RATIO
NO. DATE @ SALE (EGI)
=================================================
1 Nov-00 92% 4.66 54.92%
2 Jan-01 93% 5.53 48.80%
3 Mar-01 92% 5.07 59.59%
4 Mar-01 94% 6.62 43.84%
5 Mar-01 93% 5.03 55.44%
6 Jun-01 85% 5.02 52.38%
=================================================
HIGH 4.66 0.4384
LOW 6.62 0.5959
AVERAGE 5.05 0.5365
-------------------------------------------------
All of the sales had achieved a stabilized or near occupancy level of the time
of sale. The expense ratios of the comparables fall within a range of 43.84
percent to 59.59 percent and average 53.65 percent. The subject's projected
expense ratio equates to 54.4 percent of the
-45-
SALES COMPARISON APPROACH
================================================================================
effective gross income. This expense ratio, which is based on our projected
effective rental rates for the subject, is near the average of the cited range
of the expense ratios exhibited by the comparable sales. The subject is most
similar to I-1, I-5 and I-6 with expense ratios that average 54.25 percent and
EGIMs that average 4.90.
An inverse relationship generally exists between the expense ratio and the EGIM,
i.e., the higher the expense ratio, the lower the EGIM. Conversely, the lower
the expense ratio, the higher the EGIM. Hence, since the occupancy rates for the
sales are relatively consistent ranging from 85 to 95 percent, as the expense
ratios increase, it would be expected that the EGIMs would decrease, all other
things being equal. As evidenced by the chart, the sales included generally
follow this trend. All of the comparables have a relatively narrow range of
expense ratios of 43.84 to 59.59 percent. Although not an absolute trend, these
sales do exhibit a narrow range of EGIMs between 4.66 to 6.62. The sales do in
fact show an inverse relationship trend between expense ratios and EGIMs.
The subject's pro forma occupancy and the expense ratio are within the range. It
is our opinion that the EGIM applicable to the subject should be within the
range indicated by sales I-1, I-5 and I-6 which have expense ratios of 52.38 to
55.44 percent and EGIMs between 4.66 to 5.03. Therefore, an EGIM of 4.90 is
considered appropriate for the subject. This multiplier is applied to the
stabilized effective gross income estimated for the subject of $2,568,673 (see
Income Approach section of this report) resulting in a value conclusion as
follows:
Effective Gross Income X EGIM = Indicated Value
$2,568,673 X 4.90 = $12,586,000
Less: Deferred Maintenance $0
-----------
$12,586,000
Rounded to, $12,600,000
We concluded that the value by the price per unit analysis was $12,500,000,
while the EGIM analysis produced a value indication of $12,600,000. Both
analyses reflect reasonable indications of value. After considering all factors,
it is our opinion that a reconciled value for the subject property by the Sales
Comparison Approach is $12,600,000.
-46-
INCOME CAPITALIZATION APPROACH
================================================================================
METHODOLOGY
The Income Capitalization Approach is a method of converting the anticipated
economic benefits of owning property into a value estimate through
capitalization. The principle of anticipation underlies this approach in that
investors recognize the relationship between an asset's income and its value. In
order to value the anticipated economic benefits of a particular property,
potential income and expenses must be estimated, and the most appropriate
capitalization method must be selected.
The two most common methods of converting net income into value are direct
capitalization and discounted cash flow analysis. In direct capitalization, net
operating income is divided by an overall rate extracted from market sales to
indicate a value. In the discounted cash flow method, anticipated future net
income streams and a reversionary value are discounted to an estimate of net
present value at a chosen yield rate (internal rate of return).
Direct capitalization is particularly appropriate in the instance of an
apartment complex where occupancy is stabile and both market rental rates and
occupancy levels are easily supportable. In this instance, the subject occupancy
is below the projected stabilized level. Occupancy levels throughout the
submarket recently declined as a result of unit supply outpacing demand, but
over the past few months have shown significant improvement. We utilized the
direct capitalization method to value the subject on a prospective basis.
Anticipated changes in rental rate and occupancy levels are difficult to
quantify using the direct capitalization method. The discounted cash flow
technique allows for anticipated change, and we have analyzed the subject
property on an as-is and prospective basis utilizing the discounted cash flow
technique as a result. The following is an analysis of the current market rental
rates, existing leases in place, other revenue, vacancy/collection loss
projections, and operating expenses for the subject property. Historical expense
and income information pertaining to the subject was utilized along with
operating information from comparable property.
UNIT RENTAL RATE ANALYSIS
In an effort to estimate the market rent for the subject's basic unit types, we
surveyed competitive apartment complexes in the local market area. Eight of the
most comparable are emphasized in this analysis. The number of units within the
projects ranges from 140 to 760 units and they total 3,548 units. These projects
range in year of construction from 1979 to 1983.
-47-
INCOME CAPITALIZATION APPROACH
================================================================================
===============================================================================================================================
QUOTED RENTAL RATE COMPARISON
===============================================================================================================================
MONTHLY
COMP. NUMBER YEAR OF AVERAGE UNIT QUOTED OCCUPANCY
NUMBER PROJECT OF UNITS CONSTRUCTION SIZE (SF) BASE RENT PSF RATE
===============================================================================================================================
R-1 Chelsea Court 760 1982 804 $0.704 95%
R-2 The Myriad 288 1982 797 $0.773 98%
R-3 Roseland Place 671 1982 726 $0.793 95%
R-4 Ashton Park 720 1982 813 $0.773 95%
R-5 The Gables 140 1983 894 $0.775 98%
R-6 Silverado 344 1979 724 $0.838 93%
R-7 Mansions of Shadowbriar 259 1983 1,004 $0.745 94%
R-8 The Crossing 366 1981 764 $0.780 95%
----- ---
3,548
SUBJECT WALDEN POND 416 1982 713 $0.781 95%
===============================================================================================================================
-48-
INCOME CAPITALIZATION APPROACH
================================================================================
Insert rental map
-49-
INCOME CAPITALIZATION APPROACH
================================================================================
As indicated by the previous chart, occupancy levels among the comparable vary
from 93 to 98 percent with an average of 95 percent. The following chart
illustrates a comparison of the current quoted rents for each type of subject
unit relative to similar quoted rents for comparable apartment units contained
within the competing complexes surveyed. All of the comparables are leased on a
PLUS ELECTRIC basis, wherein the tenants are responsible for the cost of
electricity to their own apartment units. The subject complex is individually
metered and tenants pay their own electricity bills.
-50-
INCOME CAPITALIZATION APPROACH
================================================================================
===============================================================================================================================
RENTAL COMPARISONS
===============================================================================================================================
ONE BEDROOM, ONE BATH 539 SQUARE FEET
COMP YEAR UNIT RENT PER RENT PER
NO. NAME COMPLETED TYPE AMENITIES SIZE (SF) UNIT SF
===============================================================================================================================
1 Chelsea Court 1982 1-1 CF,WDC 576 $477 $0,828
2 The Myriad 1982 1-1 CF,WDC 576 $510 $0.885
6 Silverado 1979 1-1 CF-WDC 536 $509 $0.950
8 The Crossing 1981 1-1 CF-WDC 606 $510 $0,842
---------------------------------------------------------------------
Range Low 536 $477 $0.828
High 606 $510 $0.950
Average 574 $502 $0.876
---------------------------------------------------------------------
SUBJECT 1/1 UNITS 539 $483 $0.896
CURRENT QUOTED RENT
ESTIMATED MARKET RENT 539 $477 $0.885
---------------------------------------------------------------------
===============================================================================================================================
===============================================================================================================================
ONE BEDROOM, ONE BATH 661, 687, 700 SQUARE FEET
COMP YEAR UNIT RENT PER RENT PER
NO. NAME COMPLETED TYPE AMENITIES SIZE (SF) UNIT SF
===============================================================================================================================
1 Chelsea Court 1982 1/1 CF,WDC 668 $449 $0.672
2 The Myriad 1982 1/1 CF,WDC 668 $548 $0.820
3 Roseland Place 1982 1/1 CF,WDC 689 $540 $0.784
3 Roseland Place 1982 1/1 CF,WDC 733 $570 $0,778
3 Roseland Place 1982 1/1 CF,WDC 742 $595 $0.802
4 Ashton Park 1982 1/1 CF,WDC 668 $535 $0.801
5 The Gables 1983 1/1 CF,WDC 715 $595 $0.832
5 The Gables 1983 1/1 CF,WDC 737 $615 $0.834
6 Silverado 1979 1/1 CF,WDC 632 $559 $0.884
6 Silverado 1979 1/1 CF,WDC 685 $577 $0.842
6 Silverado 1979 1/1 CF,WDC 723 $595 $0.823
8 The Crossing 1981 1/1 CF,WDC 721 $560 $0.777
8 The Crossing 1981 1/1 CF,WDC 741 $570 $0.769
---------------------------------------------------------------------
Range Low 632 $449 $0.672
High 742 $615 $0.884
Average 702 $562 $0.801
---------------------------------------------------------------------
SUBJECT 1/1 UNITS 661 $530 $0.802
CURRENT QUOTED RENT
ESTIMATED MARKET RENT 661 $506 $0.766
---------------------------------------------------------------------
SUBJECT 1/1 UNITS 687 $562 $0.818
CURRENT QUOTED RENT
ESTIMATED MARKET RENT 687 $532 $0.774
---------------------------------------------------------------------
SUBJECT 1/1 UNITS 700 $555 $0.793
CURRENT QUOTED RENT
ESTIMATED MARKET RENT 700 $540 $0.771
---------------------------------------------------------------------
===============================================================================================================================
===============================================================================================================================
ONE BEDROOM, ONE BATH, TOWNHOUSE, 818 SQUARE FEET
COMP YEAR UNIT RENT PER RENT PER
NO. NAME COMPLETED TYPE AMENITIES SIZE (SF) UNIT SF
===============================================================================================================================
1 Chelsea Court 1982 1/1.5 TH CF, WDC 816 $559 $0.685
1 Chelsea Court 1982 1/1.5 TH CF, WDC 883 $614 $0.695
2 The Myriad 1982 1/1.5 TH CF, WDC 816 $625 $0.766
4 Ashton Park 1982 1/1.5 TH CF, WDC 815 $635 $0.779
4 Ashton Park 1982 1/1.5 TH CF, WDC 886 $645 $0.728
5 The Gables 1983 1-1 TH CF, WDC 816 $650 $0.797
5 The Gables 1983 1-1 TH CF, WDC 870 $680 $0.782
6 Silverado 1979 1-1 TH CF, WDC 818 $659 $0.806
---------------------------------------------------------------------
Range Low 815 $559 $0.685
High 886 $680 $0.806
Average 840 $633 $0.755
---------------------------------------------------------------------
THE SUBJECT 1/1 TH 818 $635 $0.776
QUOTED RATE
ESTIMATED MARKET RENT 818 $620 $0.758
---------------------------------------------------------------------
===============================================================================================================================
-51-
INCOME CAPITALIZATION APPROACH
================================================================================
===============================================================================================================================
RENTAL COMPARISONS CONTINUED
===============================================================================================================================
ONE BEDROOM, ONE BATH, 853 SQUARE FEET
COMP YEAR UNIT RENT PER RENT PER
NO. NAME COMPLETED TYPE AMENITIES SIZE (SF) UNIT SF
===============================================================================================================================
1 Chelsea Court 1982 2/1 CF, WDC 916 $627 $0.684
1 Chelsea Court 1982 2/1 CF, WDC 933 $637 $0.683
2 The Myriad 1982 2/1 CF, WDC 916 $665 $0.726
2 The Myriad 1982 2/1 CF, WDC 933 $685 $0.734
3 Roseland Place 1982 2/1 CF, WDC 899 $675 $0.751
4 Ashton Park 1982 2/1 CF, WDC 916 $650 $0.710
---------------------------------------------------------------------
Range Low 899 $627 $0.683
High 933 $685 $0.751
Average 919 $657 $0.715
---------------------------------------------------------------------
THE SUBJECT 2/1 QUOTED 853 $648 $0.760
RATE
ESTIMATED MARKET RENT 853 $640 $0.750
---------------------------------------------------------------------
===============================================================================================================================
TWO BEDROOMS, TWO BATHS, 960 SQUARE FEET
COMP YEAR UNIT RENT PER RENT PER
NO. NAME COMPLETED TYPE AMENITIES SIZE (SF) UNIT SF
===============================================================================================================================
1 Chelsea Court 1982 2/2 CF, WDC 979 $681 $0.696
2 The Myriad 1982 2/2 CF, WDC 979 $735 $0.751
3 Roseland Place 1982 2/2 CF, WDC 1,000 $730 $0.730
4 Ashton Park 1982 2/2 CF, WDC 920 $730 $0.793
5 The Gables 1983 2/2 CF, WDC 1,000 $745 $0.745
6 Silverado 1979 2/2 CF, WDC 965 $747 $0.774
8 The Crossing 1981 2/2 CF, WDC 941 $660 $0.701
8 The Crossing 1981 2/2 CF, WDC 1,042 $850 $0.816
---------------------------------------------------------------------
Range Low 920 $660 $0.696
High 1,042 $850 $0.816
Average 978 $735 $0.751
---------------------------------------------------------------------
THE SUBJECT 2/2 QUOTED 960 $730 $0.760
RATE
ESTIMATED MARKET RENT 960 $723 $0.753
---------------------------------------------------------------------
===============================================================================================================================
-52-
INCOME CAPITALIZATION APPROACH
================================================================================
Each of the unit types offered by the subject property were compared and
analyzed separately to the competition.
Rental One, which was built in 1982, is superior to the subject in general
location because of Briar Forest frontage and visibility. It is comparable to
the subject in overall condition and actual age. The property is 95 percent
leased and offers a similar amenity package as compared to the subject. Rental
One provides a higher indication of market rent for the subject due to larger
average unit size and larger number of units.
Rental Two is superior in general location because of Enclave Parkway frontage
and visibility. It has larger average unit size and smaller number of units as
compared to the subject. Rental Two, which is currently 98 percent leased,
provides a slightly lower indication of market rent for the subject property.
Rental Three was built in 1982 and is comparable to the subject in terms of
general location. Rental Three is currently 95 percent leased with similar
construction quality and unit amenities as compared to the subject and a similar
average size unit of 726 square feet. The property is larger than the subject in
terms of total number of units. Rental Three provides a slightly higher
indication of market rent for the subject property.
Rental Four was constructed in 1982 and is located just north of the subject,
which is similar in location. The physical features are generally similar to the
subject. The average size of the units at 813 square feet is larger than the
subject at 713 square feet. Rental Four currently has an occupancy level of 95
percent and provides a slightly lower indication of market rent due to its
larger number of units.
Rental Five was built in 1983 and is similar in general location having frontage
along Whittington Drive. It is similar overall except for its larger average
sized unit at 894 square feet. Rental Five currently has an occupancy level of
98 percent and provides a similar indication of market rent for the subject.
Rental Six was built in 1979 and is comparable to the subject in terms of
general location. It is currently 93 percent leased with superior construction
quality and unit amenities as compared to the subject and a similar average size
unit of 724 square feet. The property is smaller than the subject in terms of
total number of units. Rental Three provides a higher indication of market rent
for the subject property.
Rental Seven is similar in general location. It has larger average unit size and
smaller number of units as compared to the subject. The property does not have
two bedroom units and therefore lacks variety. Rental Seven, which is currently
94 percent leased, provides a lower indication of market rent for the subject
property.
Rental Eight was built in 1981 and is similar in general location, construction
quality and overall condition. It is similar overall in terms of average unit
size at 764 square feet and total number of units at 366 units. It currently has
an occupancy level of 95 percent and provides a similar indication of market
rent for the subject.
The following chart demonstrates the current quoted street rates for the
subject's various unit types and our market rental rate forecast.
-53-
INCOME CAPITALIZATION APPROACH
================================================================================
[GRAPHIC OMITTED]
In general, emphasis was placed on the quoted rents of Comparable Eight.
Consideration was given to the average rate on a per unit and per square foot
basis, and adjustments were made for differences such as size, age and
condition, as well as location. We concluded that the current quoted subject
rents are slightly higher than the indicated market rent.
ESTIMATE OF POTENTIAL UNIT RENTAL INCOME
The GROSS POTENTIAL rental income for the subject property at projected market
rent for all unit types is $231,750 monthly ($0.781/psf) or $2,781,000
($9.37/psf) on an annualized basis. These figures reflect the subject as if
fully occupied and collecting market rent for every unit. For comparative
purpose, the actual annualized contract rental income for all occupied units is
$0.758 per square foot per month. This 2.94 percent loss to lease factor
reflects lease dates of up to a year ago. As noted, market rent in the submarket
has risen 6.3 percent over the past year and 8.5 percent over the past six
months.
Two of the comparables are offering rental concessions on individual unit types
subject to change. Overall, those apartment facilities that have stabilized
occupancy levels no longer offer concessions. The subject is currently 95
percent occupied and we forecast stabilization on August 1, 2001.
OTHER INCOME
In addition to rental income, we have combined several miscellaneous sources of
income into a category called Other Income. This is a non-rental income
category, which typically includes security deposit forfeitures, termination
fees, miscellaneous and vending machine
-54-
INCOME CAPITALIZATION APPROACH
================================================================================
revenue, bad check charges, and late charges. The subject had an actual other
income expense in 1999 of $165 per unit and $182 per unit in 2000. We have
projected Other Income at $180 per unit based on the 2001 budget.
VACANCY AND COLLECTION LOSS
Investors are primarily interested in the cash revenues that an income property
is likely to produce annually over a specified period of time rather than what
it could produce if it were always 100 percent occupied and all the tenants were
actually paying their rent in full and on time. It is normally prudent to expect
some income loss either in the form of actual vacancy or in the form of
turnover, non-payment, or slow payment of rent by tenants. As of the date of
inspection, the property had 397 occupied units including 7 employee units, and
19 vacant units. The rent roll reflects a physical occupancy of 95 percent.
According to our review of the 2nd Quarter 2001 KORPACZ REAL ESTATE INVESTOR
SURVEY, national apartment investors forecast a total vacancy level of 3 to 10
percent with an average of approximately 6.0 percent. We forecast a stabilized
physical vacancy level 6 percent based on the comparable occupancy range of 93
to 98 percent with an average of 95 percent, less 2 percent considering that
occupancy rates normally reach the highest during June and July, with an
additional 3.0 percent economic loss factor for collection models, employee
units, etc. These assumptions are reasonable based on our review of the
available budgetary data from similar quality complexes in the Houston area and
based on long-term average occupancy levels among the comparables.
ABSORPTION ANALYSIS
The subject property is currently 95 percent occupied with 397 leased units. A
total of 383 occupied units are required for the subject to reach the market
supported 92 percent stabilized physical occupancy level. The peak occupancy
period is in the summer months as is evident by the subject's 95 percent current
occupancy.
RENT CONCESSIONS
As noted previously, concessions are less prevalent in the current market, with
only two of the rent comparables offering concessions. Most complexes are
phasing out concessions as they reach stabilized occupancy. We forecast no
concession in our estimate.
EFFECTIVE GROSS INCOME
This is the level of income generated after considering all sources of revenue,
model unit and employee unit costs, as well as vacancy and collection loss. The
STABILIZED effective income is estimated at $2,568,679.
OPERATING AND FIXED EXPENSES
We have forecast the subject property's annual operating and fixed expenses
after reviewing the operating expenses of similar Class B complexes with which
we are familiar. Recent, actual operating information from the subject was also
considered. We analyzed each item of expense and attempted to forecast the
amount a typical informed investor would consider reasonable.
-55-
INCOME CAPITALIZATION APPROACH
================================================================================
Insert operating income and expense chart
-56-
INCOME CAPITALIZATION APPROACH
================================================================================
DISCUSSION AND CONCLUSIONS
As illustrated in the preceding chart, comparable property expenses were
presented on according to the following individual expense categories.
MANAGEMENT
The actual management fee among comparable apartment properties in the Greater
Houston area typically ranges from 3 to 4 percent, indicating a median of 3.5
percent of the effective gross income. The actual 2000 expense was 3.8 percent
of effective income. Thus, we concluded to a management fee of 3.5 percent of
effective gross income based on market average.
GENERAL & ADMINISTRATIVE
This expense category typically includes telephone service, legal services,
accounting services, general office expenses, licensing fees, city fees, outside
apartment locator fees, and professional services. The expenses comparable
indicate general and administrative expenses ranging from $0.27 to $0.49 per
square foot. The subject's actual expense in 2000 was $0.25 per square foot and
the year to date 2001 expense is annualized at $0.30 per square foot. Giving
emphasis to the actual 2000 and annualized 2001 expense levels, we estimated a
stabilized figure of $95,000 or $0.32 per square foot.
PAYROLL AND BENEFITS
This expense includes payroll and benefits for all on-site personnel. The
expenses comparable range from $0.82 to $1.16 per square foot. The actual 2000
subject expense was $1.21 per square foot and the 2001 expense is annualized at
$1.25 per square foot. Emphasizing the actual expenses, we concluded that $1.35
per square foot is a reasonable expense expectation.
REPAIRS AND MAINTENANCE
This category includes those expenses normally incurred for routine maintenance,
repair and services of the entire project. The expense comparable range from
$0.70 to $1.04 per square foot. The subject's actual 2000 expense was lower at
$0.36 per square foot. The annualized 2001 expense of $0.37 per square foot. On
a long term basis, the subject should have an average expense level. Based on
the range of the comparable and the annualized 2001 level, we estimated this
expense at $0.39 per square foot including contract services.
UTILITIES
This expense category typically includes common area electricity, gas,
water/sewer services, and trash collection. The subject is individually metered
for electricity. The property owner is responsible for the trash, water and
sewer service only. The expense comparable ranged from $0.63 to $1.12 per square
foot in 2000. The subject had a 2000 expense of $0.59 per square foot. The 2001
annualized expense is $0.61 per square foot and indicative of the recent
increase in utility costs. We estimated a stabilized figure of $0.61 per square
foot based on actual 2001 expenses.
-57-
INCOME CAPITALIZATION APPROACH
================================================================================
ADVERTISING/PROMOTION
This expense category typically includes such items as signs, newspaper
advertising and other media costs. The expenses comparable indicate
advertising/promotion expenses ranging from $0.14 to $0.25 per square foot. The
actual 2000 expense for the subject was $0.09 and the 2001 annualized expense is
$0.05 per square foot. The subject expense should stabilize near market average
as occupancy stabilizes. Based on the recent actual expenses, we estimated a
stabilized figure of $0.08 per square foot.
REPLACEMENTS
The typical investor makes an allowance for future capital reserves such as
exterior painting, roof replacement, parking lot resurfacing and renovation of
amenities such as clubhouse and pool. The capital reserves allowance is usually
above the net operating income line in the statement of income and expenses
It has become customary for most apartment investors in today's market to
include a reserve for unit replacements in their operating expense forecast.
Based on our conversations with buyers, sellers, and brokers of this product
type, reserves usually range from $150 to $400 per unit. The comparable indicate
a range between $176 and $252 per unit. The subject's actual 2000 amount was $71
per unit and the annualized 2001 expense is $100 per unit. Considering the
subject's age, condition, amenity package and its unit size, we have estimated
this expense at $250 per unit.
REAL ESTATE TAXES
As was discussed within the REAL PROPERTY TAXES AND ASSESSMENTS, our estimate of
stabilized (2001) tax liability is $365,000 or $1.23 per square foot. This
estimate is based on our analysis as discussed in detail in the Tax Section. The
comparables range from $0.50 to $0.95 per square foot. The subject's actual
expense in 2000 was reported at $1.15 per square foot.
INSURANCE
The expense comparable range from $0.07 to $0.11 per square foot in actual
insurance expense. The subject's actual expense in 2000 was at $0.07 per square
foot. The annualized 2001 amount is $0.08 per square foot. We concluded to an
insurance expense of $0.08 as a result.
EXPENSE SUMMARY
Our estimate of total expenses including capital reserves for the subject
property totals $3,358 per unit, $4.71 per square foot of rentable area, and 54
percent of effective gross income. The expense comparable in our analysis
indicate a range of total expenses per square foot of $4.22 to $5.06 per square
foot or $3,321 to $4,681 per unit. The subject's actual expense in 2000 was
$4.13 per square foot or $2,945 per unit. The annualized 2001 expenses total
$4.12 per square foot or $2,938 per unit. Note that our projections include
complete reserves while historical levels are not fully inclusive of this. Our
total expense ratio projection of 54 percent is with in the range indicated by
the sales comparable, which range from 43.8 to 59.6 percent of effective income.
Given the data suggested by the
-58-
INCOME CAPITALIZATION APPROACH
================================================================================
expense comparable, our knowledge of operating data of master metered Class B
apartment projects, as well as current trends in the property tax expense area,
our expense projections are reasonable.
DIRECT CAPITALIZATION
In the direct capitalization method, we estimated the market value by dividing
the stabilized net operating income by an overall capitalization rate derived
from our analysis of the market sales. This rate is computed by dividing the net
operating income from a sold property by its sale price. The overall
capitalization rates derived from the improved property sales are summarized as
follows.
==========================================================
SUMMARY OF OVERALL CAPITALIZATION RATES
==========================================================
SALE NO. CAPITALIZATION RATE
==========================================================
1 9.67%
2 9.26%
3 7.97%
4 8.49%
5 8.86%
6 9.49%
==========================================================
All of the comparable sales included unit replacements as a part of the annual
operating and fixed expenses. As is the case with these sales, more and more
investors include unit replacements in their estimate of net operating income
which results in a capitalization rate that is a TRUER rate of return.
Additional variations in capitalization rates are a function of property
specifics, including variances in the age, condition, and quality of each
comparable.
The overall capitalization rates of the comparable sales range from 7.97 to 9.67
percent with the mean of 9.06 percent. Sale Six, which is the most recent sale
and the most similar sale in terms of location, indicated an actual overall rate
of 9.49 percent.
In addition, Cushman & Wakefield Valuation Advisory Services surveyed national
real estate investors to determine their investment objectives. Following is a
brief review of internal rates of return, overall capitalization rates, and
income and expense growth rates considered acceptable by the respondents for
Class B leased asset apartments.
-59-
INCOME CAPITALIZATION APPROACH
================================================================================
======================================================================================================================
CUSHMAN & WAKEFIELD VALUATION ADVISORY SERVICES
WINTER/SPRING 2001 NATIONAL INVESTOR SURVEY FOR CLASS B APARTMENTS
(LEASED ASSET)
======================================================================================================================
INCOME EXPENSE GROWTH PROJECTION
GOING IN TERMINAL IRR GROWTH GROWTH PERIOD
---------------- ---------------- --------------- ---------------- ---------------- ---------------
LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH
======================================================================================================================
Mean 8.8% 9.2% 9.3% 9.3% 11.3% 11.9% 3.0% 3.1% 2.9% 3.0% 7.8% 8.5%
- ----------------------------------------------------------------------------------------------------------------------
Range 8.0% 10.5% 8.5% 11.0% 10.2% 14.0% 2.5% 4.0% 2.0% 4.0% 4.0% 10.0%
======================================================================================================================
NO. OF RESPONSES: 12
======================================================================================================================
The preceding table summarizes the investment parameters of some of the most
prominent investors currently acquiring similar grade apartment properties in
the United States. The investors' going-in overall rates range from 8.0 to 10.5
percent with the average being 8.8 to 9.2 percent. Overall, given that the
subject is a Class B project in the West Memorial/Briar Forest submarket and by
emphasizing the overall rate of Sale Six, we have concluded to a 9.5 percent
overall rate. In summary, the value via the direct capitalization method is
calculated as follows:
==============================================
DIRECT CAPITALIZATION
==============================================
Net Operating Income $1,171,770
Overall Capitalization Rate divided by 9.5%
---------------
Less: Deferred Maintenance -$0
Indicated Value $12,334,421
Rounded to: $12,300,000
==============================================
The prospective (stabilized) value via the direct capitalization approach is
$12,300,000, rounded.
CASH FLOW ANALYSIS
An electronic spreadsheet program was used to model future income and expenses.
Our discounted cash flow analysis is presented in the ADDENDA. In formulating
this model, the following assumptions were used:
o The pro forma is based on an eleven year analysis, with a
ten-year holding period. The as-is analysis begins August 2001
on a fiscal year basis.
o All revenue and expense items have been entered based on our
current estimates.
-60-
INCOME CAPITALIZATION APPROACH
================================================================================
o Based on our future assessment of the rental market, as
discussed previously in this report, we have increased rental
rates 3.0 percent in Year Two and over the remaining period of
analysis. This growth forecast does not attempt to reflect
growth rates in any specific year, but rather the long term
trend over the analysis period.
o Other income is estimated to increase at 3.0 percent per year.
o Based on the previous discussion, we have projected the
subject's economic occupancy to be 91 percent.
o All of the general operating expenses have been grown at 3.0
percent throughout the holding period.
o The reversion estimate was based on a resale in the tenth year
of the analysis period. It was formulated by applying a 10.5
percent terminal capitalization rate to the eleventh year net
operating income and subtracting a 4.0 percent selling cost.
TERMINAL CAPITALIZATION RATE SELECTION
A terminal capitalization rate was used to estimate the market value of the
property at the end of the assumed investment holding period. The rate is
applied to the eleventh year estimate of net operating income after subtracting
unit replacements, but before making deductions for capital reserves. We
estimated an appropriate terminal rate based on the indicated capitalization
rates of the improved property sales in the market today. As previously depicted
in the Sales Comparison Approach, these trailing rates ranged from 7.97 to 9.67
percent, with the mean being 9.06 percent. A premium was added to the current
rate to allow for the risk of unforeseen events or trends which might affect our
estimate of net operating income during the holding period, including a possible
deterioration in market conditions for the property. Investors typically add
none or up to 50 to 100 basis points to the GOING-IN rate to arrive at a
terminal capitalization rate, according to Cushman & Wakefield's periodic
investor surveys.
We have projected a terminal rate of 10.5 percent, which is 100 basis points
higher rate than the concluded initial rate. This rate selection falls
comfortably within the range of terminal capitalization rates from our Investor
Survey results and the sales.
DISCOUNT RATE ANALYSIS
In our valuation, we endeavored to reflect the most likely actions of typical
buyers and sellers in this market. We forecasted cash flows and discounted them
and the future property value at the time of reversion to a present value at an
internal rate of return (yield rate) currently required by investors for real
property of a similar quality. The yield rate (internal rate of return or IRR)
is the single rate that discounts all future equity benefits (cash flows and
equity reversion) to an estimate of net present value.
Cushman & Wakefield Valuation Advisory Services surveyed national real estate
investors to determine their investment objectives. The table presented earlier
in the Income Capitalization Approach summarizes the investment parameters of
some of the most
-61-
INCOME CAPITALIZATION APPROACH
================================================================================
prominent investors currently acquiring high-grade apartment properties in the
United States. The entire survey is included in the ADDENDA to this report.
The investors' internal rates of return cited in the survey range from 10.0 to
14.0 percent with the average being 11.3 to 11.9 percent. It is our opinion that
a discount rate of 12 percent would be required to attract available capital in
the subject's case. This discount rate is consistent with current institutional
purchasing parameters for this type of product, considering the subject's
overall quality and the concessions that are lingering in the market.
DISCOUNTED CASH FLOW ANALYSIS
Using this 12 percent discount rate, our discounted cash flow models located in
the ADDENDA, indicate an as-is value for the subject of $12,400,000, rounded.
With regard to the composition of the YIELD OR INTERNAL RATE OF RETURN, as
analyzed in the prospective Discounted Cash Flow chart, 61 percent of the
subject's ultimate yield is from the cash flows, compared to 39 percent being
attributable to the reversion. We are of the opinion that these relationships
are generally acceptable in today's investment environment for apartments.
RECONCILIATION OF THE INCOME CAPITALIZATION APPROACH
On an as-is (stabilized) basis, the discounted cash flow method and the direct
capitalization method indicate the same value of $12,400,000 for the subject.
Both methods are credible for analyzing income producing properties such as the
subject. The former technique more accurately reflects the cash flow changes
scheduled to transpire. However, most investors in stabilized apartment
complexes prefer the direct capitalization technique. Therefore, giving equal
emphasis, the value of the subject via the Income Capitalization Approach is
estimated at $12,400,000 on an as-is basis.
-62-
INCOME CAPITALIZATION APPROACH
================================================================================
Insert DCF Analysis
-63-
RECONCILIATION AND FINAL VALUE ESTIMATE
================================================================================
The approaches indicated the following AS-IS values:
INCOME CAPITALIZATION APPROACH: $12,400,000
SALES COMPARISON APPROACH: $12,600,000
The Cost Approach has not been utilized in this report. The Cost Approach
requires an estimation of the cost to reproduce or replace the existing
improvements of the property. From this cost new of improvements accrued
depreciation from physical, functional and economic sources is deducted to
arrive at a cost less depreciation. The estimated land value is then added to
arrive at total value. The subjectivity of estimating accrued depreciation of
aged existing improvements limits the reliability of this approach. In addition,
we know of few investors who utilize replacement cost as the basis for their
investment decisions when dealing with similar aged properties such as the
subject.
The Sales Comparison Approach consists of the collection and analysis of data
relevant to actual sales of properties deemed comparable to the subject
property. Properties, which have been sold, are compared to the property under
appraisal and adjustments to the sale prices are made based on differences
between the subject property and the comparable sales. Adjustments are typically
made for location, date of sale, building size, quality of construction and
other relevant characteristics.
The Income Capitalization Approach converts anticipated future cash flows into a
present value estimate. This method is based on the premise that the motivation
for a property purchase is a function of the anticipation of future benefits to
be gained from the investment. The potential purchaser, in essence, will trade
the purchase price of the property for a projected income stream to be received
in the future. Conversion of the anticipated cash flow into a value indication
commonly occurs in the form of discounted cash flow analysis or application of a
single capitalization rate to a stabilized income estimate. We have applied the
direct capitalization and discounted cash flow methods in this appraisal.
These three traditional methods of estimating the market value of commercial
real estate are not mutually exclusive approaches to deriving an estimate of
most probable selling price, but are inter-dependent methodologies, each relying
on components from at least one of the other approaches. Hence, the Cost
Approach requires extensive market data to derive estimates of depreciation and
to determine the value of land as if vacant. This approach may also require
income data in order to make adjustments for functional and economic
obsolescence. The Sales Comparison Approach requires application of methods from
the Income Capitalization Approach in order to make adjustments for differences
in income that have influenced the sale price. Consideration of market data is
also required for the Income Capitalization Approach in the selection and
application of equity, capitalization and discount rates, and estimation of
income and expenses. Consequently, it is our opinion that the purchasers and
sellers, at least intuitively, consider components of all three approaches in
the process of negotiating an acceptable price for a particular property.
It is the Income Capitalization Approach, however, that is logically considered
the most appropriate technique for estimating the value of income-producing
property. Not only does this approach represent the most direct and accurate
simulation of market behavior, it is the method explicitly employed by buyers
and sellers in acquisition and disposition decisions.
-64-
RECONCILIATION AND FINAL VALUE ESTIMATE
================================================================================
Therefore, following the implied dictum of the market, we have used an approach
based primarily on projected income as the foundation for our valuation of the
subject property.
Based on our complete appraisal, as defined by the UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE, we have formed an opinion that the as-is market
value of the leased fee estate in the referenced real property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of July
20, 2001, was as follows:
TWELVE MILLION FOUR HUNDRED THOUSAND DOLLARS
$12,400,000
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell a real
property interest at the appraised value. Marketing time is presumed to start on
the effective date of the appraisal. (Marketing time is subsequent to the
effective date of the appraisal and exposure time is presumed to precede the
effective date of the appraisal.) The estimate of marketing time uses some of
the same data analyzed in the process of estimating reasonable exposure time and
it is not intended to be a prediction of a date of sale.
Our estimate of an appropriate marketing time for the subject relates to a sale
of the property. Based on our investigations with several real estate
professionals, with special consideration given to the strengthening of the
apartment market throughout the area, we conclude that a marketing period of
approximately 12 months would be required in order to sell the property.
It is our opinion that the marketing time for properties like the subject is no
more than 12 months. This is based on our conversations with brokers as well as
investor/buyers of multi-family development within the area, whom are familiar
with this property type. The value is based on the current market conditions. It
should not be interpreted that this value estimate represents the final price at
which the property might sell throughout the entire marketing period due to
uncertain market conditions.
-65-
ASSUMPTIONS AND LIMITING CONDITIONS
================================================================================
"Appraisal" means the appraisal report and opinion of value stated therein, or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and limiting
conditions:
1. No opinion is intended to be expressed and no responsibility is assumed for
the legal description or for any matters which are legal in nature or
require legal expertise or specialized knowledge beyond that of a real
estate appraiser. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual matters.
Any authorized user of the Appraisal is obligated to bring to the attention
of C&W any inaccuracies or errors that it believes are contained in the
Appraisal.
3. The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the Property
itself can significantly affect property value.
4. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Reference to the Appraisal Institute
or to the MAI designation is prohibited. Except as may be otherwise stated
in the letter of engagement, the Appraisal may not be used by any person
other than the party to whom it is addressed or for purposes other than
that for which it was prepared. No part of the Appraisal shall be conveyed
to the public through advertising, or used in any sales or promotional or
offering or SEC material without C&W's prior written consent.
Any authorized user of this Appraisal who provides a copy of this Appraisal
to, or permits reliance thereon by, any person or entity not authorized by
C&W in writing to use or rely thereon, hereby agrees to indemnify and hold
C&W, its affiliates and their respective shareholders, directors, officers
and employees, harmless from and against all damages, expenses, claims and
costs, including attorneys' fees, incurred in investigating and defending
any claim arising from or in any way connected to the use of, or reliance
upon, the Appraisal by any such unauthorized person or entity.
-66-
ASSUMPTIONS AND LIMITING CONDITIONS
================================================================================
5. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
6. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have been or can
be obtained and renewed for any use on which the value estimate contained
in the Appraisal is based.
7. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
8. The forecasted potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser assumes no responsibility for the authenticity or completeness of
lease information provided by others. C&W recommends that legal advice be
obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these forecasts will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisages for the future in
terms of rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance of the improvements or may be located at or about the
Property was not considered in arriving at the opinion of value. These
materials (such as formaldehyde foam insulation, asbestos insulation and
other potentially hazardous materials) may adversely affect the value of
the Property. The Appraisers are not qualified to detect such substances.
C&W recommends that an environmental expert be employed to determine the
impact of these matters on the opinion of value.
11. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been
considered in arriving at
-67-
ASSUMPTIONS AND LIMITING CONDITIONS
================================================================================
the opinion of value. Failure to comply with the requirements of the ADA
may adversely affect the value of the Property. C&W recommends that an
expert in this field be employed.
12. If the Appraisal is submitted to a lender or investor with the prior
approval of C&W, such party should consider this Appraisal as only one
factor together with its independent investment considerations and
underwriting criteria, in its overall investment decision. Such lender or
investor is specifically cautioned to understand all Extraordinary
Assumptions and Hypothetical Conditions and the Assumptions and Limiting
Conditions incorporated in this Appraisal.
13. In the event of a claim against C&W or its affiliates or their respective
officers or employees or the Appraisers in connection with or in any way
relating to relative to the Appraisal or this engagement, the maximum
damages recoverable shall be the amount of the monies actually collected by
C&W or its affiliates for this Appraisal and under no circumstances shall
any claim for consequential damages be made.
14. By use of this Appraisal each party which uses this Appraisal agrees to be
bound by all of the Assumptions and Limiting Conditions stated herein.
SPECIAL ASSUMPTIONS
1. We were not provided building plans for the subject improvements. As a
result, the number of units and the net rentable area are based on the rent
roll as well as the current floor plans and unit sizes furnished by the
property management company. Any significant deviation that result in a
different unit count or net rentable area could impact the value estimate
contained herein.
-68-
CERTIFICATION OF APPRAISAL
================================================================================
We certify that, to the best of our knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and is our personal,
impartial, and unbiased professional analyses, opinions, and conclusions.
3. We have no present or prospective interest in the property that is the
subject of this report, and no personal interest with respect to the
parties involved.
4. We have no bias with respect to the property that is the subject of this
report or to the parties involved with this assignment.
5. Our engagement in this assignment was not contingent upon developing or
reporting predetermined results.
6. Our compensation for completing this assignment is not contingent upon the
development or reporting of a predetermined value or direction in value
that favors the cause of the client, the amount of the value opinion, the
attainment of a stipulated result, or the occurrence of a subsequent event
directly related to the intended use of this appraisal.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the
Appraisal Institute.
8. made a personal inspection of the property that is the subject of this
report. Scott M. Rando, MAI, Operating Manager, Valuation Advisory
Services, reviewed and approved the report and inspected but did not
inspect the property.
9. Heidi Luo provided significant professional assistance to the persons
signing this report.
10. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
11. As of the date of this report, Appraisal Institute continuing education for
Scott M. Rando is current.
/s/ Scott M. Rando, MAI
- ------------------------------------
Scott M. Rando, MAI
Operating Manager
State Certified General Appraiser
License No.
-69-
ADDENDA
================================================================================
Improved Property Sales
Rent Comparables Detailed Sheets and Photos
Subject Data
Flood Map
Insurable value Estimate
Qualifications
-70-
IMPROVED PROPERTY SALES
================================================================================
RENT COMPARABLES
================================================================================
SUBJECT DATA
================================================================================
FLOOD MAP
================================================================================
INSURABLE VALUE ESTIMATE
================================================================================
INSURABLE VALUE ESTIMATE
================================================================================
Insurable Replacement Cost is the current replacement cost of structures, either
as proposed in plans and specifications or as existing when physically
inspected. NO PERSONAL PROPERTY is included.
Insurable Replacement Cost Includes:
Repair engineering and design fees; permit fees; and contractor's overhead and
profit. It excludes costs associated with land acquisition and development;
professional fees not directly related to repairs; taxes, financing costs,
owner's overhead and profit; loss of income during repairs, chattels not
included above; and all other costs not relevant to the repair of insured
damages.
NOTE: The Insurable Replacement Cost calculations were based on information
taken from the Calculator Cost section of the Marshall Valuation Service,
published by Marshall & Swift.
Insurable Replacement Cost Excludes:
Although insurable exclusions are typically a matter of underwriting, the
Marshall valuation Service indicates the typical exclusion includes excavation
and foundations (3.0 percent of cost), architect's fees (1.90 percent of cost),
and below ground piping and mechanical (1.00 percent of cost) for a total
deduction of 5.90 percent. This exclusion amount will be considered in the total
costs to be shown next.
INSURANCE REPLACEMENT COST CALCULATIONS:
The Walden Pond Apartments
Estimated GBA of 296,712 Sq. Ft. @ $48.38 PSF $14,354,927
Site Improvements $1,100,000
Indirect Costs @ 12% $1,856,591
-----------
Subtotal $17,309,518
Less Exclusions @ 5.90 percent -$1,021,262
-----------
TOTAL $16,288,257
ROUNDED $16,300,000
QUALIFICATIONS
================================================================================
QUALIFICATIONS
================================================================================
SCOTT M. RANDO, MAI
PROFESSIONAL AFFILIATIONS:
MAI - Member of the Appraisal Institute, 1997 and serves on various
local committees State Certified General Real Estate Appraiser in Texas
(TX-1322037-G)
National Council of Real Estate Investment Fiduciaries (NCREIF)-Active
Member
CCIM - Active Member
National Association of Corporate Owned Real Estate (NACORE) - Active
Member
INDUSTRY HISTORY:
Operating Manager, and Retail Industry Group member Cushman & Wakefield
of Texas, Inc., Valuation Advisory Services, Houston, Texas, May 2000
to present
Senior Manager, Arthur Andersen, LLP, Houston, Texas, January 1998 to
May 2000
Manager, Trahan & Partners, Houston, Texas, 1985 to 1998
APPRAISAL EXPERIENCE:
General experience includes valuation assignments of the following
property types:
Regional Malls Super-regional Malls
Redevelopment Retail Assets Specialty Retail
Power Centers Resort and Recreational
Properties
Discount Centers Residential Subdivisions
Community and Neighborhood Centers Mixed Use Developments
Office Buildings Apartments
Major Hotels Residential Condominiums
Commercial Land Leasehold/Leased Fee Interests
Auto Dealerships Joint Venture
Limited Partnership Interests Other Undivided Interests
Industrial Facilities Special Purpose
EDUCATION:
Bachelor of Science in Business Administration - Finance, University of
Houston, Houston, Texas, 1983
Appraisal Courses:
All courses completed for Appraisal Institute MAI designation including
Capitalization Theory & Techniques, Appraisal Principals, Case Studies,
Appraisal Principles, Report Writing, and Standards of Professional
Practice.