A Self-Contained Real Estate Appraisal Report of A Proposed 22 Unit Assisted Care Facility and 5 Efficiency Assisted Care Units all Located on the Louisiana Highway 1 Bypass Within the Corporate Limits of Natchitoches, Natchitoches Parish, Louisiana For MMR Investment Bank Post Office Box 781440 Witchita, Kansas 67278-1440 As Of January 10, 1999 Prepared by Robert M. McSherry, MAI Louisiana State Certified General Real Estate Appraiser No. G0891 3760 Chelsea Drive Baton Rouge, Louisiana 70809 ROBERT M. MC SHERRY, MAI 3760 Chelsea Drive Baton Rouge, Louisiana 70809 Phone (504)924-8093 January 11, 1999 MMR Investment Bank Post Office Box 781440 Witchita, Kansas 67278-1440 RE: A proposed 22 unit assisted care facility and 5 efficiency assisted care units all located on the Louisiana Highway 1 Bypass, within the corporate limits of Natchitoches, Natchitoches Parish, Louisiana. Dear Sir: In accordance with your request to provide an estimate of the Estimated Market Value of Fee Simple Interest of the Going Concern of the property identified as a proposed 22 unit Assisted Care Facility and 5 Efficiency Assisted Care Units all located within the corporate limits of Natchitoches, Natchitoches Parish, Louisiana, we have personally inspected the subject site and reviewed the submitted plans and specifications for the proposed improvements and conducted a thorough review and analysis of all matters pertinent for the Estimate of Market Value herein contained. Market Value as defined by the Department of the Treasury, Office of the Comptroller of the Currency, August 24, 1990, is, "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, 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: a. buyer and seller are typically motivated; b. both parties are well informed or well advised, and each acting in what he considers his own best interest; c. a reasonable time is allowed for exposure in the open market; Robert M. McSherry, MAI Page Two d. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and e. 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. Fee Simple Interest is defined by the Appraisal Institute as being, "a fee without limitations to any particular class of heirs or restrictions but subject to the limitations of eminent domain, escheat, police power and taxation. An inheritable estate". Going Concern Value is "the value created by a proven property operation." It includes the incremental value associated with the business concern, which is distinct from the value of the real estate only. Going concern value includes an intangible enhancement of the value of an operating business enterprise which is produced by the assemblage of the land, building, labor, equipment, and marketing operation. This process creates an economically viable business that is expected to continue. Going concern value refers to the total value of a property, including both real property and intangible personal property attributed to business value. Special purpose properties such as the subject are appropriate for only one use or for a very limited number of uses. The highest and best use of a special purpose property as improved, is probably the continuation of its current use, if that use remains viable. Therefore, in the case of special purpose properties a going concern value is considered appropriate. In this instance the subject property has an excellent location within a viable market. As long as quality management is maintained, it's Market Value would be the same as it's Going Concern Value. Included is our appraisal report which contains the various exhibits and data utilized in arriving at the herein contained estimate of Market Value for the subject property. It is our opinion that the property herein identified as the proposed 22 Unit Assisted Care Facility and 5 Efficiency Assisted Care Units all located on the Louisiana Highway 1 Bypass within the corporate limits of Natchitoches, Natchitoches Parish, Louisiana, was estimated to have a Market Value based on Stabilized Net Operating Income, as of January 10, 1999, of: Robert M. McSherry, MAI Page Three TWO MILLION TWO HUNDRED FIFTY-FIVE THOUSAND DOLLARS ($2,255,000.00) Allocated: LAND: $ 175,000.00 IMPROVEMENTS: $2,005,000.00 FURNITURE, FIXTURES & EQUIPMENT: $ 75,000.00 GOODWILL OF GOING CONCERN -0- The "As Is" Value of the property, derived by the utilization of the Discounted Cash Flow Methodology, is estimated to be, as of January 10, 1999, but subject to completion of the property in accordance with submitted plans and specifications within a reasonable period of time, of: TWO MILLION ONE HUNDRED SEVENTY THOUSAND DOLLARS ($2,170,000.00) The subject property is proposed at the present time and this appraiser has been provided plans and specifications for the property. The herein contained Estimate of Market Value is conditioned upon the completion of the improvements in accordance with the plans and specifications utilizing quality materials and workmanship within a reasonable period of time. A final inspection by this appraiser will be required to ascertain the assumptions utilized in preparing this appraisal report have been fulfilled. This appraisal report was prepared in accordance with and compliance of the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Foundation and the Guide Notes to the Standards of Professional Practice adopted by the Appraisal Institute. These standards contain binding requirements and specific guidelines that deal with the procedures to be followed in developing an appraisal, analysis, or opinion. These uniform Robert M. McSherry, MAI Page Four standards also set the requirements to communicate the appraiser's analysis, opinions, and conclusions in a manner that will be meaningful and not misleading in the marketplace, accordingly, the Departure Provision does not apply. If we may be of further service to you in regard to this property or in any other manner, please do not hesitate to contact us at your earliest convenience. Respectfully submitted, /S/ROBERT M MCSHERRY Robert M. McSherry, MAI Louisiana State certified General Real Estate Appraiser No. G0891 Robert M. McSherry, MAI EXECUTIVE SUMMARY Location: East side of LA Highway 1 Bypass within the Corporate Limits of Natchitoches, Natchitoches Parish, Louisiana Interest Appraised: Fee Simple Interest Site: 4.00 Acres or 174,240 Square Feet, more or less Building Description: The property will include twenty-two (22) assisted care living units and 5 efficiency assisted care units all located within a single, T-shaped building. The common area amenities including a full service kitchen, a dining area, activities area, office/reception area, adequate bathrooms which would be fully equipped to satisfy the needs of the residents of the assisted care facilities as well as storage areas and other required additions to render the subject property a functional assisted care facility catering to those requiring assisted care. Construction characteristics include a reinforced poured concrete foundation, wood framing, with a combination of brick veneer and vinyl siding exterior walls with the roof being of composition shingles. Although the property is proposed at the present time, this appraiser is aware of a similar property which has been constructed by the owners of the subject and our physical inspection of this existing complex has been utilized in conjunction with the submitted plans and specifications. The property is considered to be a most functional assisted living facility and is Robert M. McSherry, MAI considered a most attractive property and should be well accepted by the local market. Highest and Best Use: Assisted care facility including all required amenities. Cost Approach to Value $2,310,000.00 Market Approach to Value $2,240,000.00 Income Approach to Value: Stabilized Net Income: $2,255,000.00 Discounted Cash Flow Value: $2,170,000.00 Final Value Estimate: Stabilized Net Income: $2,255,000.00 "As Is" Value: $2,170,000.00 Allocated: Land $ 175,000.00 Improvements $2,005,000.00 Furniture, Fixtures and Equipment $ 75,000.00 Goodwill of Going Concern -0- Robert M. McSherry, MAI IDENTIFICATION OF THE PROPERTY The property being inspected, analyzed and for which the Market Value Estimate of the Fee Simple Interest of the Going Concern is applicable is a 4.0 acre tract of land which will be basically rectangular in shape with no direct frontage along the east side of LA Highway 1 Bypass within the corporate limits of Natchitoches, Louisiana. The subject site is a portion of a larger tract of land which is to be purchased from Farm Burear Insurance by Biltmore, LLC for a total consideration of $175,000.00. The property has not been purchased as of the date of this appraisal with the closing date set to be within two weeks of the date of the appraisal and, at that time, a complete legal description including metes and bounds survey of the property will be provided this appraiser to ascertain the assumptions utilized within this report have been fulfilled. This is a condition of this appraisal report. Robert M. McSherry, MAI PURPOSE OF THE APPRAISAL The purpose of this report is to communicate, in a narrative format, the data and reasoning that the appraisers have utilized to form the herein contained estimate of Market Value of the Fee Simple Interest of the Going Concern for the property identified as a proposed 22 assisted care facility and 5 efficiency assisted care units all located on the west side of LA Highway 1 Bypass, Natchitoches, Louisiana. OBJECTIVE OF THE APPRAISAL The objective and function of this appraisal report is to provide an estimate of the Market Value of the Fee Simple Interest of the Going Concern of the property for use by MMR Investment Bank in order to provide long term financing of the subject property for the Biltmore Group, L.L.C. The Subject property was personally inspected by this appraiser both before and after the date of this appraisal and the submitted plans and specifications reviewed. As the property is proposed construction, a final inspection of the property will be required by the appraiser to ascertain the assumptions utilized within this appraisal report have been fulfilled and this appraisal is also conditioned upon being completed in accordance with the plans and specifications utilizing quality materials and workmanship throughout. Other additional conditions are contained in an additional section of this report. Robert M. McSherry, MAI PURPOSE OF THE APPRAISAL The purpose of this report is to communicate, in a narrative format, the data and reasoning that the appraisers have utilized to form the herein contained estimate of Market Value of the Fee Simple Interest of the Going Concern for the property identified as a proposed 22 assisted care facility and 5 efficiency assisted care units all located on the west side of LA Highway 1 Bypass, Natchitoches, Louisiana. OBJECTIVE OF THE APPRAISAL The objective and function of this appraisal report is to provide an estimate of the Market Value of the Fee Simple Interest of the Going Concern of the property for use by Colonial Trust Company in order to provide long term financing of the subject property for the Biltmore Group, L.L.C. The Subject property was personally inspected by this appraiser both before and after the date of this appraisal and the submitted plans and specifications reviewed. As the property is proposed construction, a final inspection of the property will be required by the appraiser to ascertain the assumptions utilized within this appraisal report have been fulfilled and this appraisal is also conditioned upon being completed in accordance with the plans and specifications utilizing quality materials and workmanship throughout. Other additional conditions are contained in an additional section of this report. Robert M. McSherry, MAI PURPOSE OF THE APPRAISAL The purpose of this report is to communicate, in a narrative format, the data and reasoning that the appraisers have utilized to form the herein contained estimate of Market Value of the Fee Simple Interest of the Going Concern for the property identified as a proposed 22 assisted care facility and 5 efficiency assisted care units all located on the west side of LA Highway 1 Bypass, Natchitoches, Louisiana. OBJECTIVE OF THE APPRAISAL The objective and function of this appraisal report is to provide an estimate of the Market Value of the Fee Simple Interest of the Going Concern of the property for use by Church Loans and Investments in order to provide long term financing of the subject property for the Biltmore Group, L.L.C. The Subject property was personally inspected by this appraiser both before and after the date of this appraisal and the submitted plans and specifications reviewed. As the property is proposed construction, a final inspection of the property will be required by the appraiser to ascertain the assumptions utilized within this appraisal report have been fulfilled and this appraisal is also conditioned upon being completed in accordance with the plans and specifications utilizing quality materials and workmanship throughout. Other additional conditions are contained in an additional section of this report. Robert M. McSherry, MAI DATE OF THE APPRAISAL The effective date of this appraisal is January 10, 1999. The subject site was personally inspected by this appraiser both before and after this date and the submitted plans and specifications for the proposed improvements were also reviewed by the appraiser prior to the date of the appraisal. Robert M. McSherry, MAI DEFINITION OF SIGNIFICANT TERMS Market Value, as defined by the Department of the Treasury, Office of the Comptroller of the Currency, August 24, 1990, is, "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, 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 data and the passing of title from seller to buyer under conditions whereby: a. buyer and seller are typically motivated; b. both parties are well informed or well advised, and each acting in what he considers his own best interest; c. a reasonable time is allowed for exposure in the open market; d. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and e. 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. Fee Simple Interest is defined by the Appraisal Institute as being, "a fee without limitations to any particular class of heirs or restrictions but subject to the limitations of eminent domain, escheat, police power and taxation. An inheritable estate". Going Concern Value is "the value created by a proven property operation." It includes the incremental value associated with the business concern, which is Robert M. McSherry, MAI distinct from the value of the real estate only. Going concern value includes an intangible enhancement of the value of an operating business enterprise which is produced by the assemblage of the land, building, labor, equipment, and marketing operation. This process creates an economically viable business that is expected to continue. Going concern value refers to the total value of a property, including both real property and intangible personal property attributed to business value. Special purpose properties such as the subject are appropriate for only one use or for a very limited number of uses. The highest and best use of a special purpose property as improved, is probably the continuation of its current use, if that use remains viable. Therefore, in the case of special purpose properties a going concern value is considered appropriate. Robert M. McSherry, MAI PROPERTY RIGHTS APPRAISED This assignment concerns the appraisal of the Fee Simple Interest with Fee Simple Interest defined in Real Estate Appraisal Terminology as being, "a fee without limitations to any particular class of heirs or restrictions but subject to the limitations of eminent domain, escheat, police power and taxation. An inheritable estate". STATEMENT OF OWNERSHIP AND RECENT HISTORY The larger tract from which the subject property will be partitioned is under the ownership of Farm Bureau Insurance and has been under this ownership for a period in excess of three (3) years. The property will be purchased by Biltmore, LLC for a total consideration of $175,000.00 for the 4 acre tract which indicates a purchase price of $43,750.00 per acre. The property has been owned by the current owner, Farm Bureau Insurance, for a period in excess of three (3) years and there are no speculative transactions affecting the subject property according to the records found in the Natchitoches Parish Clerk of Court's Office other than those of normal business transactions. Robert M. McSherry, MAI ASSUMPTIONS AND LIMITING CONDITIONS This appraisal report has been made with the following assumptions and limiting conditions: 1. No responsibility is assumed for the legal description or for matters including legal or title consideration. Title to the property is assumed to be good and marketable unless otherwise stated. 2. The property is appraised free and clear of any and all liens or encumbrances unless otherwise stated. 3. Responsible ownership and competent property management are assumed. 4. The information furnished by others is believed to be reliable. No warranty, however, is given for its accuracy. 5. All engineering is assumed to be correct. The plot plans and illustrative material in this report are included only to assist the reader in visualizing the property. 6. It is assumed that there are no hidden or apparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them. 7. It is assumed that there is full compliance with all applicable federal, state, and local environmental regulations and laws unless noncompliance is stated, defined, and considered in the appraisal report. 8. It is assumed that all applicable zoning and use regulations and restrictions have been complied with, unless a nonconformity has been stated, defined, and considered in the appraisal report. 9. It is assumed that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority from any local, state or national government or private entity or organization have been, or can be obtained or renewed for any use on which the value estimate contained in this report is based. Robert M. McSherry, MAI 10. It is assumed that the utilization of the land and improvements is within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted in the report. 11. The distribution, if any, of the total valuation in this report between land and improvements applies only under the stated program of utilization. The separate allocations for land and buildings must not be used in conjunction with any other appraisal and are invalid if so used. 12. The appraisers herein, by reason of this appraisal, are not required to give further consultation, testimony, or be in attendance in court with reference to the property in question unless arrangements have been previously made. 13. Possession of this report, or a copy thereof, does not carry with it the right of publication. It may not be used for any purpose by any person other than the party to whom it is addressed without the written consent of the appraisers, and in any event only with proper written qualification and only in its entirety. 14. Neither all nor any part of the contents of this report (especially any conclusions as to value, the identity of the appraisers, or the firm with which the appraisers are connected) shall be disseminated to the public through advertising, public relations, new, sales, or other media without the prior written consent and approval of the appraisers. 15. The existence of hazardous materials, which may or may not be present on the subject property, was not observed by the appraisers. The appraisers have the knowledge of the existence of such materials on or in the subject property. However, the appraisers are not qualified to detect such substances and the presence of potential hazardous materials may affect the value of the property. This value estimate contained within this report is predicated on the assumption that no such hazardous materials are present on or in the property. No responsibility is assumed for any such conditions or for any expertise or any knowledge required to discover these items. This should be accomplished by an expert in the field and is a condition of this appraisal report. 16. That the appraiser has personally inspected the subject property and finds no obvious evidence of structural deficiencies, except as stated in this report, however, no responsibility for hidden defects or conformity to specific governmental requirements, such as the Americans with Disabilities (ADA) or fire, building and safety, earthquake, or occupancy Robert M. McSherry, MAI codes, etc., can be assumed without provision of specific professional or governmental inspections. 17. This property is proposed at the present time and the appraisal is conditioned upon the completion of the subject property in accordance with the submitted plans and specifications utilizing quality materials and workmanship throughout. A final inspection by the appraiser would be required in order to ascertain the assumptions utilized in arriving at the herein contained Estimate of Market Value have been fulfilled, 18. This appraisal is not based on a requested minimum valuation, a specific valuation or the approval of the loan. Robert M. McSherry, MAI NACHITOCHES AREA DATA Natchitoches was founded in 1714 by Louis de St. Denis when he traveled up the Mississippi River into the Red River and built Fort St. Jean Baptiste near a village of an Indian tribe of the Caddo family, the Natchitoches. The Red River began changing courses in 1825 leaving Natchitoches without transportation advantages. During the 20th century the river to Natchitoches was dammed creating the serene Cane River that meanders peacefully through the center of this historic city and into Plantation Country. Natchitoches is known as the "City of Lights" in honor of the world famous Christmas Festival of Lights, a fairyland of multi-colored lights created by 170,000 Christmas bulbs strung along city streets and along the Cane River Lake. The lights reflect in the waters below and stretch along the historic downtown area. This festival, always held the first Saturday in December, attracts over 150,000 people to the day long festivities. This festival has been consistently listed as "Top 100 Events in North America" by the American Bus Association and one of the "Top 20 Events in December by the Southeast Tourism Bureau. The City also gained fame when in 1988 the popular movie "Steel Magnolias" was filmed there. Robert M. McSherry, MAI Natchitoches continues to retain it's magic, charm and heritage while maintaining a perfect balance with progressive industries. Coupled with scenic beauty and friendly hospitality, the quality of life makes Natchitoches a retirement haven. In this old-world, modern city and parish, both visitor and citizen can seek their hearts desire. Most recently the City of Natchitoches has been named on of the top six U.S. communities to retire to as published by the Klinger's Personal Finance Adviser. Diverse recreation opportunities, cost of living, low taxes, weather and cultural offering attract retirees to the area. Thirty-three blocks in the downtown area are in the National Historic Landmark District, which overlooks the picturesque Cane River Lake. Points of interest include the first French Settlement, Fort St. Jean Baptiste State Commemorative Area, the American Cemetery, the Louisiana Sports Hall of Fame and the National Fish Hatchery and Aquarium. In the country side along the winding Cane River are some of the earliest plantations in the state including Bayou Folk Museum, Beau Fort, Magnolia, Oaklawn and Landmark Plantation which is the home of the St. Augustine Church and Cemetery. Kisatchie National Forest and freshwater lakes offer recreational opportunities to fishermen, hunters, campers and hikers. Natchitoches Parish is located in West Central Louisiana and is one of the larger political subdivisions of the state. The parish consists of 1,264 square miles on Robert M. McSherry, MAI 803,388 acres. Winn, Bienville, Vernon, Grant, Rapides, Sabine and DeSoto Parishes, as well as the Red River, create the parish boundaries. The Natchitoches Parish School System includes 5 preschool, 13 elementary and 3 high schools. There also exists two church affiliated private schools serving the community. The Louisiana School of Math, Science and the Arts provide high quality education for the state's most gifted high school students. Higher education is provided by Northwestern State University as well as vocational training provided by the Louisiana Technical College and Natchitoches Central Area Vocational Technical School. Within two hour's drive of Natchitoches are 12 colleges or universities in which 5 of these institutions offer doctoral degrees in the arts, sciences, engineering, medical and legal fields. Police protection is provided by the Natchitoches Police Department and the Natchitoches Parish Sheriff's Department which handles the entire criminal, civil and tax division operations for the parish. Fire protection, rescue and emergency services are provided by the Natchitoches Fire Department. Robert M. McSherry, MAI The Natchitoches Parish Hospital serving Natchitoches Parish is an integral part of the community. The Natchitoches Parish Hospital is an 84 bed hospital and 112 bed long term care unit providing medical and surgical acute care. Regional medical centers with the very latest medical technology are available in the Alexandria/Pineville area, 50 miles south. There are 8 voluntary health agencies and 1 parish health unit, the Natchitoches Parish Health Unit, in the parish. Natchitoches also has a kidney dialysis center and a rehabilitation center. The city is served by 25 physicians, 126 nurses, 9 dentists and 1 skilled nursing staff. There are 8 financial institutions serving the area and the 7 top providers of employment are as follows: Name Product/Service # Employees Natchitoches Parish School Board Public Education 1,025 Con Agra Frozen Foods Food Manufacturing 900 Northwestern State University Higher Education 634 Marco Plywood 520 Natchitoches Parish Hospital Health Care 425 Willamette Industries, Inc. Linerboard Paper 374 City of Natchitoches Municipal Government 250 Robert M. McSherry, MAI Area Location Map [MAP OF SURROUNDING AREA] Robert M. McSherry, MAI OVERVIEW OF ASSISTED LIVING INDUSTRY In anticipation that more elderly Americans will live in assisted living homes than nursing homes in the near future, consumer industry groups are saying it is time to put some minimum standards into law. One of the most important things for the industry is to try not to admit residents it cannot provide quality care for. Many assisted living homes charge additional fees for personal services residents may come to need as they grow older. Some will help residents if they get sick by permitting periodic visits from nurses, for example, or providing supervision for people with Alzheimer's Disease. In order to minimize residents need to move, the consumer or trade groups say assisted living facilities should be required to offer at least some help with the dozen daily activities including meals, using the bathroom, taking medication and shopping. Those facilities which accept people with Alzheimer's or other types of dementia would also be required to provide 24 hour awake staff and special training for those workers. Assisted living has become the hottest new housing option for older people by promising to provide a happy medium between their homes and a full nursing home facility. Industry estimates show that the number of elderly Americans living in settings that could be described as assisted living has probably doubled from 560,000 in 1990 to as many as 1,000,000 in 1997. By early next century, experts predict assisted living homes will care for more elderly Americans than nursing homes. Robert M. McSherry, MAI Although numbers are inexact, assisted living facilities ranging from luxury apartment buildings to modest group homes provide housing along with personal services and some health care. Residents may be too frail to live alone but too healthy to need the 24 hour medical attention of nursing homes. Assisted living can be less expensive than nursing homes. A 1997 survey by the National Center for Assisted Living found that 52% costs $1,001.00 to $2,000.00 per month and 24% cost less than $1,000.00 per month. In contrast, monthly nursing home fees average above $3,000.00. Assisted living's affordability has attracted the attention of law makers worried about how the nation will ensure elderly care for the huge baby boom generation now middle aged. Medicaid programs for the poor in 28 states have begun to cover some assisted living services and the Department of Health and Human Services is conducting a fact finding survey. Unlike nursing homes, assisted living homes are not regulated by the Federal Government. Fewer than half of the states require licensing before it opens. That allows for flexibility and partly explains assisted living's popularity. In summary, the assisted living facilities currently expanding throughout the United States are the most popular and desirable alternative living situation for those elderly which require some minimal level of care but not the extensive Robert M. McSherry, MAI level required by nursing home patients. As the population continues to grow older but maintain better health, the appeal thus desirability of assisted living facilities will continue to be enhanced. Robert M. McSherry, MAI SCOPE OF THE APPRAISAL The appraiser has personally inspected the subject site and conducted an in-depth inspection of the neighborhood in which the subject property is located observing it's trends of development and characteristics. Vacant land sales utilized in conjunction with the Cost Approach to Value and in determining the estimated Market Value of the subject site, as if vacant, and owned in Fee Simple have been inspected by this appraiser and a combination of data provided by the Marshall Valuation Service Cost Manual and other available in-file data has been utilized in the process of estimating the replacement cost new of the subject improvements. In the final analysis, the appraiser has utilized and relied upon the experience of judgment based on the opinion of the quality and quantity of the data in arriving at the final value estimate of the Fee Simple Interest in the subject property. The Income Approach to Value has been completed utilizing a stabilized net income capitalized into value and a discounted cash flow method. Economic rents were determined by rent comparables and current data utilized with respect to expense projections. Information provided by the publication "Trends in the Health Care Industry" as well as information provided by other actual ongoing facilities similar to the subject have been utilized in the process of estimating the projected expenses which were included in the Income Approach to Value. Although the subject property is proposed at the present time and has Robert M. McSherry, MAI no income or expense history, it is considered to be a functional facility and a facility which is demand with respect to providing long term assisted living care. Robert M. McSherry, MAI DESCRIPTION OF THE PROPERTY Site Data Size, Shape and Topography The subject site will be a 4.0 acre rectangular shaped parcel of land having direct frontage along the right-of-way of LA Highway 1 Bypass. The subject property is located on the east side of LA Highway 1 Bypass which is a dual-lane, asphalt, State maintained traffic artery serving local and Parish wide vehicular traffic. The topography is level to rolling and will require site preparation prior to construction. Utilities The subject property is located within the corporate limits of Natchitoches, Natchitoches Parish, Louisiana and will be provided with all city utilities and services available to properties within the corporate limits of Natchitoches including electrical service, police and fire protection, public water, sewerage disposal, and refuge disposal. Telephone service and natural gas service is provided by the local utility companies servicing the area and all services and utilities are considered adequate to provide the requirements of the subject property. Access Access to the subject development will be provided as the result of frontage along the east right-of-way of LA Highway 1 Bypass. This bypass provides a Robert M. McSherry, MAI connection to not only I-49 via LA Highway 6 but also to the downtown area of Natchitoches, major shopping areas as well as the other areas of the parish. Overall, access to the site is considered above average. Zoning Conversations with representatives on the Natchitoches City Hall indicated that the current zoning applicable to this area of the incorporated areas of Natchitoches, Louisiana is "B-3". Land uses are also controlled by deed restrictions or other restrictive covenants which run with the land and, although this appraiser has not conducted an in-depth review of the abstract to the subject site, no deed restrictions or other restrictive covenants are assumed to exist which would affect the utilization of the subject site as a site of an assisted living facility. This appraiser has not conducted an in-depth review with respect to the abstract to the subject site but no deed restrictions or other restrictive covenants are assumed to exist which would affect the development of the subject property to its highest and best use. However, this should be ascertained by competent legal authority and is a condition of this appraisal report. Drainage Review of Flood Hazard Maps found in the Natchitoches Community Office indicated the subject property to be located in a Flood Zone "X" according to Robert M. McSherry, MAI Flood Map No. 220131-0003-C having an effective date of September 18, 1987. This indicates no flood insurance is required for the subject property. However, the flood map indicates a flood zone "AE" to be in the area and the exact flood zone status must be determined by an engineer. Tax Data The subject property is proposed construction property and the taxes on the vacant land only are minimal. The subject property will be placed on the Natchitoches Parish tax rolls the year after it is completed and at that time will be assessed and the tax liability can be assigned. For the purposes of this appraisal report and for the utilization in the Income Approach, taxes have been projected but are subject to change once the property is completed and placed on the tax rolls. The 1998 millage rates applicable to the subject property are as follows: City 17.03 Parish 105.82 Total 122.85 Assisted living facilities such as the subject are assessed at 10% of Market Value and conversations with representatives of the Natchitoches Parish Tax Assessor's Office indicate an estimated Market Value for tax purposes will be approximately 30% less than actual Market Value. Thus: Robert M. McSherry, MAI Estimated Value of Subject $2,255,000.00 Estimated Assessed Value $1,578,500.00 10% - Assessed Value $ 157,850.00 $157,850.00 X 122.85 Mills = Estimated Tax Liability $19,391.87 Robert M. McSherry, MAI Subject Property Location Map [STREET MAP OF NATCHITOCHES INDICATING SUBJECT PROPERTY] Robert M. McSherry, MAI DESCRIPTION OF THE IMPROVEMENTS Assisted Living Facility The proposed facility containing the assisted living units will be constructed within a single T-shaped building but a building comprised of different component sections housing the assisted living units in two wings with the public areas located in the center or core of the building. The building is a modified T-shape and encompasses a total of 22.216 square feet of heated area. The assisted living units contained within this facility will contain approximately 485 square feet of living area and feature a bedroom, living room, kitchenette and full bath with shower while the efficiency units will contain approximately 200 square feet of area. The gross building area was calculated by Mr. Mike Wallace, the preparer of the plans and specifications for the property. Construction characteristics for this building include reinforced poured concrete foundation with adequate grade beams and both interior and perimeter footings with the exterior being wood framing utilizing a combination of brick veneer vinyl with the roof being a composition shingle roof over wood decking. Windows will be insulated, horizontal slide aluminum windows with each unit of the assisted care units having their own central HVAC unit with the common areas utilizing central, zoned units. Interior construction will include a combination of vinyl and carpet or ceramic tile flooring, painted or vinyl covered sheetrock walls with acoustical ceilings. Lighting will be both standard and fluorescent fixtures. Robert M. McSherry, MAI Amenities to be contained within the assisted care portion of the building include a full service kitchen, dining room, activities area, whirlpool area, staff laundry, TV rooms, offices and other required amenities as well as an apartment for the resident managing couple. As previously noted, the total gross area contained within this portion of the subject property is 22.216 square feet. Within this total, 22 assisted living units, 5 efficiency assisted units and remaining common areas will be contained. Parking will be poured concrete and located at strategic locations around the site and will be adequate to fulfill the requirements of both the tenants and staff. Landscaping will be extensive and utilized in conjunction with the natural topography of the area should be most pleasing. Each assisted living unit will include a toilet, lavatory and tub/shower unit, through wall air conditioning unit with heat strip, drop-in over/range unit with vent hood as well as adequate closet and cabinet space. A complete set of working drawings will be provided the appraiser as a condition of this appraisal to ascertain the assumptions utilized within this report have been fulfilled. A final inspection by the appraiser will be required. As noted, the subject is proposed construction and this appraisal is conditioned upon the completion utilizing quality materials and workmanship with a final Robert M. McSherry, MAI inspection by the appraiser required to ascertain the preliminary plans and specifications provided this appraiser were correct. Robert M. McSherry, MAI HIGHEST AND BEST USE Introduction The Appraisal Institute defined highest and best use as follows, "that legal use, at the time of the appraisal, which is the most profitable likely use to which a property can be put." There are several basic factors which must be considered in order to make a proper determination of Highest and Best Use: 1. The use must be legal, that is, legally adaptable regarding zoning and other restrictions; 2. The use must be probable, not conjectural or speculative; 3. The property must be physically adaptable to use contemplated; 4. There must be a demand for such use; 5. The use must be profitable, the highest return to the land over the longest period of time. Highest and best use of the land (or site) if vacant and available for use may be different from the highest and best use of the improved property. This is true if the improvement is not an appropriate use, but it makes a contribution to the total property value in excess of the value of the site. The above five tests have been applied to the subject property's vacant site. In arriving at the estimate of highest and best use, the subject site has been carefully analyzed. Robert M. McSherry, MAI HIGHEST AND BEST USE ASSUMING A VACANT SITE Permissible Use An investigation has been conducted in order to determine the zoning classification that encumbers the subject property. The results of this investigation has revealed that the subject site is not affected by City zoning with the subject site zoned "B-3". The zoning classification allows a large number of permissible uses to be considered for the subject property but it's location within a combination residential and commercial area, the access provided by a dual-laned traffic artery and other factors indicate the proposed utilization as an assisted care facility to be one of the better if not the best permissible uses of the site and would be a legal, conforming, permissible use. Possible Use Inspection of the subject property's neighborhood has been made to determine any physical limitations that might be present. The result of this inspection has revealed the neighborhood is developed with mix of property types. The zoning which is currently applicable to the subject property does allow for an assisted care facility to be constructed on the site as well as other types of multi-family construction. This zoning classification will allow the property to be developed as proposed within this appraisal report and this is considered the most likely probable use to which the subject property could be put. In the final analysis, the proposed utilization of the subject property is considered to constitute one of it's Highest and Best Uses. Robert M. McSherry, MAI THE APPRAISAL PROCESS The real estate appraisal profession typically utilizes three basic approaches in the process of estimating the value of a parcel of real property. These approaches include the Cost Approach, the Income Approach and the Market Data Approach. The Cost Approach utilizes an estimate of reproduction or replacement costs new of the building and other on-site improvements to be contained within the subject property less accrued depreciation from all sources including physical curable and incurable deterioration, functional obsolescence and economic obsolescence to arrive at an estimate of depreciated reproduction or replacement costs for the improvements. The estimated value of the site, as if vacant, and determined by the comparison of the subject site with other similar parcels in either the immediate proximity of the subject or in other comparable areas is added to the depreciated reproduction or replacement cost estimate of the improvements to provide an indication of value of the property being appraised from the Cost Approach. The Cost Approach is generally accorded the greatest credence in instances where the property being appraised is either a proposed property or a new property having little or no accrued depreciation or instances where the property being appraised represents a special purpose type property. In these instances, the Cost Approach is an accurate indication of value for the property and is accorded considerable credence in the reconciliation process. Robert M. McSherry, MAI The Income Approach to Value utilizes an estimate of gross annual income to be generated by the property being appraised as determined to be representative of economic rentals for this type property within the area less an allowance considered typical for vacancy and collection losses to arrive at an estimate of effective gross annual income which is to be generated by the property. Expenses typically associated with the operation of this type property in accordance with prevailing lease terms and conditions in the area as well as data provided by analysis of the operating history of other similar type properties are projected and deducted from the effective gross annual income to arrive at an estimate of net operating income before recapture attributable to the subject. This net operating income is then capitalized by the most appropriate method available with respect to the subject property in particular and the appraisal problem in general into an indication of value for the property being appraised from the Income Approach. Another method of utilizing the Income Approach is the Gross Income Multiplier technique. This technique identifies the relationship between the sales price (value) of a property and its gross annual income earning potential. The Gross Income Multiplier is derived by dividing the sales price of a property by its gross potential income and, thus, is an excellent indicator of buyer, seller and investor attitudes toward the property being analyzed. An effective gross income multiplier is also excellent as it utilizes the actual gross income after vacancy to derive the multiplier. use depends upon available data. The Market Data or Direct Sales Comparison Approach utilize sales of comparable improved properties in either the immediate proximity of the subject Robert M. McSherry, MAI or in other comparable areas to derive a unit of comparison. Each of the various comparable sales are carefully reviewed and analyzed by the appraiser, adjusted for any dissimilarities between the subject property and the comparable sale in such areas as date of sale, location, design, condition, and other physical characteristics to result in an adjusted unit of comparison to be utilized in the Market Data or Direct Sales Comparison Approach to provide an indication of value for the property being appraised. The reconciliation is the method whereby all data provided by the various approaches utilized in the appraisal report are carefully analyzed and accorded weight in varying degrees. The approach which is considered to be the most representative of current buyer, seller and investor attitudes towards the subject property is accorded the greatest credence in the final analysis but all the approaches are interrelated and all data gathered and utilized in the various approaches must be carefully analyzed in the reconciliation process and to ignore any available data would be improper. Robert M. McSherry, MAI COST APPROACH TO VALUE The Cost Approach to Value, like the Sales Comparison and Income Approaches, is based on comparison. in the Cost Approach, the cost to construct a building and the value of any existing building are compared. The Cost Approach to Value reflects market thinking in the recognition that market participants relate value to cost. Buyers tend to judge the value of an existing structure by comparing it to the value of a newly constructed building with optimal functional utility. Moreover, buyers adjust the prices they are willing to buy by estimating the cost to bring an existing structure to desired levels of functional utility. Thus, by applying the Cost Approach, an appraiser attempts to estimate the difference in worth to a buyer between the property being appraised and a newly constructed building with optimal utility. An appraiser makes a sound value estimate by estimating the cost to construct a reproduction of or a replacement of the existing structure and then deducts all evidence of accrued depreciation in the property being appraised from the cost of the reproduction or replacement structure and the resulting figure, plus the value of the land, plus any entrepreneurial profit provides a value indication through the application of the Cost Approach. The decision to utilize reproduction or replacement costs is most pertinent and the selection plays and important part in contributing to the validity of the Cost Approach. Replacement cost is defined in Real Estate Appraisal Terminology as Robert M. McSherry, MAI being, "the cost of construction at current prices of a building having utility equivalent to the building being appraised but built with modern materials and according to the current standards, design and layout. The use of the replacement cost concept presumably eliminates all functional obsolescence and the only depreciation to be measured is physical deterioration and economic obsolescence." The appraisers will utilize the replacement cost method supported by Marshall Valuation Service in conjunction with the construction cost estimate provided by knowledgeable contractors/engineers or architects. DEPRECIATION All types of accrued depreciation affecting the subject improvements were considered. Accrued depreciation is defined as, "the difference between reproduction cost new as of the date of the appraisal and the present contributory value of the improvements." Accrued depreciation is divided into three basic categories: physical deterioration (which includes curable and incurable), functional obsolescence (including curable and incurable), and economic obsolescence (which is always incurable). The following is a discussion of each type of depreciation and the observed depreciation applicable to the subject property. Physical Deterioration, Curable This type of depreciation is defined as, "the loss in value from cost new which can be recovered or offset through correction, repair, or replacement of the defective items causing the loss, providing the resultant value approximates the Robert M. McSherry, MAI cost of the work." The property is proposed thus no deferred maintenance is present. Physical Deterioration, Incurable This type of depreciation is defined as, "the loss from cost new which is impossible to offset or which would involve an expenditure substantially in excess of the value increase resulting therefrom." The property is proposed and has an effective are of 0 years and a total economic life of 30 years. Functional Obsolescence Functional obsolescence is defined as, "the loss from cost new as of the date of the appraisal which is caused by a superadequacy, inadequacy, unattractive style, poor or inefficient layout or design." Items causing functional obsolescence can be either curable or incurable, it is curable only when it is profitable to cure the item. Incurable, functional obsolescence involves items of initiate which would not be economical to correct because the value would not increase so much as the cost of correction. Based on my inspection of the subject improvements, it is my opinion that they are totally adequate and comparable to similar properties in the same general price range, therefore, no loss of value from functional obsolescence exists. Economic Obsolescence This type of depreciation is defined as, "the loss from cost new as of the date of the appraisal due to causes external to the property boundaries." To measure Robert M. McSherry, MAI this type of obsolescence the appraiser capitalizes the rent lost due to the external factor for the prorata share applicable to the building. As indicated in the site date, there are no undesirable external influences and, thus, there is no loss to the subject improvements due to economic obsolescence. Entrepreneurial Profit For the Cost Approach to provide a sound indication of value, a market derived entrepreneurial profit must be added to the direct and indirect costs. The profit figure is typically expressed as a percentage of total direct and indirect costs. Entrepreneurial profit is a necessary element in the motivation to construct the improvements. However, part or all of the profit may be lost as functional or external obsolescence if the market indicates that the improvements have a Market Value less than the current reproduction or replacement cost less physical deterioration. The results of the investigation and analysis of this market data will appear as follows: Robert M. McSherry, MAI COMPARABLE LAND SALE 1 Date of Sale: July 10, 1997 Recordation: Conveyance Book 522, Page 858, Nachitoches Parish, Louisiana Vendor: Nelkin, et al Vendee: J&K Properties, LLC Size: 4.02 Acres Consideration: $55,000.00 Indicated Price/Acre: $13,681.59 per Acre Brief Legal Description: Located in Section 83, T9N-R7W, Nachitoches Parish, Louisiana Financing: Typical Site Utilities: Public Terrain: Relatively Level Access: Two-lane Asphalt Zoning: "R-1" to be Changes to "R-3" Highest and Best Use: Commercial or Multi-Family Confirmation: Vendee Comments: Proposed site of Magnolia Place Apartments, 1 48 unit complex Robert M. McSherry, MAI COMPARABLE LAND SALE 2 Date of Sale: May 27, 1997 Recordation: Conveyance Book 521, Page 806, Nachitoches Parish, Louisiana Vendor: A.J. Brouillette Vendee: Kenneth Sparks Size: 1.2 Acres + Consideration: $40,000.00 Indicated Price/Acre: $33,333.00 per Acre Brief Legal Description: Lots 18 and 19 in Tract 2 of S. Nelkin Estate, Natchitoches, Louisiana Financing: Typical Site Utilities: Public Terrain: Relatively Level Access: Two-lane Concrete Zoning: "C-1" Commercial Highest and Best Use: Commercial Confirmation: Public Records Comments: Site of newly constructed USDA Complex Robert M. McSherry, MAI COMPARABLE LAND SALE 3 Date of Sale: May 21, 1998 Recordation: Conveyance Book 530, Page 442, Natchitoches Parish, Louisiana Vendor: Ferguson Realty, Inc. Vendee: Kenneth Starks Size: 2.065 Acres Consideration: $80,000.00 Indicated Price/Acre: $38,740.00 per Acre Brief Legal Description: Tract or Parcel located in Section 86, T9N-R7W, Natchitoches Parish, Louisiana Financing: Typical Site Utilities: Public Terrain: Relatively Level Access: Two-lane Asphalt Zoning: "C-1" Commercial Highest and Best Use: Commercial Confirmation: Public Records Robert M. McSherry, MAI COMPARABLE LAND SALE 4 Date of Sale: June 30, 1997 Recordation: Conveyance Book 522, Page 702, Natchitoches Parish, Louisiana Vendor: E.W. Robertson, et ux Vendee: First Church of Christ Size: 3.01 Acres Consideration: $50,000.00 Indicated Price/Acre: $16,611.00 per Acre Brief Legal Description: Tract or Parcel located in a portion of Section 83 and 86, T9N-R7W, Natchitoches Parish, Louisiana Financing: Typical Site Utilities: Public Terrain: Relatively Level Access: Two-lane Asphalt Zoning: "R-1" Residential Highest and Best Use: Commercial Confirmation: Public Records Robert M. McSherry, MAI COMPARABLE LAND SALES SUMMARY CHART Date Size/Usable Price/Acre Location Sale 1 7/97 4.02 Acres $13,681.00 Natchitoches Ph., LA Sale 2 5/97 1.20 Acres $33,338.00 Natchitoches Ph., LA Sale 3 5/98 2.065 Acres $38,740.00 Natchitoches Ph., LA Sale 4 6/97 3.01 Acres $16,611.00 Natchitoches Ph., LA Robert M. McSherry, MAI Land Sales Location Map [STREET MAP OF NATCHITOCHES INDICATING COMPARABLE LAND SALES 1,2,3 & 4] ANALYSIS OF COMPARABLE LAND SALES The four vacant comparable land sales contained within this appraisal report and utilized for analysis purposes are sales of sites located either in the immediate proximity of the Louisiana Highway 1 Bypass or in other very comparable areas of Natchitoches, Louisiana. All sites thus sales are considered current with respect to date and all sales have been sold within either 1997 or 1998 thus requiring only minimal adjustment for the time differential. The size of the sales is similar with respect to the subject property with the major adjustment criteria required for that of location with Sales 1 and 4 located some distance away from direct highway frontage with Sales 2 and 3 having highway frontage. However, the location of all sales are considered slightly inferior to that of the subject property requiring an upward adjustment for this locational dissimilarity between the subject property and the comparable sales and these sales have been adjusted accordingly. Adjustments for zoning differential between the comparable sales and the subject property is also required with respect to Sale 2. After this adjustment grid has been completed, it is our opinion that the subject site is estimated to have a Market Value, as if vacant and after site preparation, of $43,750.00 per acre. Robert M. McSherry, MAI Therefore, the estimated Market Value of the subject site, as if vacant, is thus derived: 4.0 Acres @ $43,750.00/ Acre $175,000.00 INDICATED VALUE OF THE SUBJECT SITE, AS IF VACANT (R/T) $175,000.00 Robert M. McSherry, MAI DISCUSSION OF COST APPROACH In the construction of any project, the total cost of development can be divided into basic categories: direct or hard cost, and indirect or soft costs. As defined in Real Estate Appraisal Terminology, the definition of Direct Costs is, "the cost of direct labor and materials devoted specifically to a unit of work. In construction, these costs are directly related to site acquisition and construction of the improvements..." Defined in this same text, Indirect Cost is, "that cost in the development of a property which would not be included in a general contract for construction or for land acquisition..." Direct costs include the cost of items such as land acquisition, construction of the buildings, equipment and fixtures, the builder's profit and overhead, any temporary buildings for on-the-job usage, power line installation, and the electrical power used in the construction. As indicated in the Cost Approach Schedule which follows, direct or hard costs have been broken down into categories of building area, elevators and other primary building costs. Indirect, or soft costs, generally include fees, financing costs, and overhead. As the Cost Approach Schedule indicates, the indirect costs fall into 8 categories. The permits and fees sections include the estimated costs of a building permit, an appraisal, a survey and accounting and inspection charges. Architectural engineering estimates have been based on typical market charges. The legal expenses includes work done on both interim and permanent loan packages. Robert M. McSherry, MAI The insurance costs indicated are limited to construction-period coverage including the builder's risk. The closing cost estimate includes costs of closing both the interim and permanent loans. The interest expense is based on typical current market conditions and covers the period of time required to complete the construction of the project. The loan commitment fees are also based on current typical market conditions. The appraiser's have relied upon the Marshall Valuation Service, a publication of Marshall & Swift, 1617 Beverly Boulevard, Post Office Box 26307, Los Angeles, California, in estimating the replacement costs new of the subject property improvements. The Cost Approach to Value, as it applies to the property being appraised, is as follows: Robert M. McSherry, MAI COST APPROACH TO VALUE Cost Source: Marshall-Swift Cost Manual and Contractor Cost Data Direct Costs: Residential Living Units 15,681 sq. ft. @ $61.70/sq. ft. $ 967,518.00 Common Area Core 6,535 sq. ft. @ $59.70/sq. ft. $ 390,140.00 Total Direct Costs: Improvements $1,357,658.00 Indirect Costs: Plans, Specifications, Inspection Included in Direct Costs Contractor's Overhead/Profit $176,900.00 Interim Interest $ 67,800.00 Legal, Audit, Appraisal $ 55,000.00 Financing Fees - Construction $ 27,100.00 Misc. Expenses $ 50,000.00 Financing Fees - Long Term $162,800.00 Total Indirect Costs $ 539,600.00 Total Replacement Costs New: Improvements $1,897,258.00 Less: Accrued Depreciation Physical Curable -0- Physical Incurable -0- Functional Obsolescence -0- Economic Obsolescence -0- Total Accrued Depreciation -0- Depreciated Replacement Costs: Improvements $1,897,258.00 Add: Land Value 4.0 acres @ $43,750.00/acre $ 175,000.00 Robert M. McSherry, MAI Add: Site Preparation $ 35,000.00 Add: Furniture, Fixtures and Equipment $ 80,000.00 Add: Parking, Walks, Landscaping, Porches $ 25,000.00 Add: Entrepreneurial Profit @ 5% $ 94,850.00 Total All Costs and Value Components $2,307,108.00 INDICATED VALUE OF SUBJECT FROM COST APPROACH (R/T) $2,310,000.00 Note: Cost of Furniture, Fixture and Equipment based on costs association with actual costs experienced by Southside Garden Assisted Care Facility and Arbor House of West Monroe, Louisiana. Robert M. McSherry, MAI MARKET DATA APPROACH TO VALUE Market data is discussed in all the approaches to value. Data analysis is needed in the Cost Approach to develop a land value indication and to support costs and depreciation indicators; in the Income Approach to establish rent levels, vacancy indications, expenses, and capitalization rates; and in the Direct Sales Comparison Approach to establish comparability. The appraiser has carefully perused the Louisiana market with respect to sales of properties considered similar to the subject property and none were found. However, available data from other appraisers has revealed the sale of three similar type properties in other areas of the United States and these are included merely for analysis purposes as follows: Robert M. McSherry, MAI IMPROVED PROPERTY SALE 1 VENDOR: American Retirement, Inc. VENDOR: Horizon Retirement, Inc. LOCATION: 2601 Chimney Rock Road, Hendersonville, North Carolina RECORDATION: N/A DATE: February, 1993 CONSIDERATION: $6,480,000.00 TERMS: $2,224,000.00 cash, assumption of a mortgage balance of $4,316,000.00. terms are considered to be cash equivalent. SITE SIZE: N/A IMPROVEMENTS: This is a 110 unit senior living community constructed in 1988. The units are housed in a three-story building of wood frame construction. Construction quality is considered to be average; condition at the time of sale was good. The gross building area is approximately 96,058 square feet with an average unit size of 873 square feet. ESTIMATED GROSS INCOME: $1,706,255.00 ESTIMATED EXPENSE RATIO: Approximately 56 percent NET OPERATING INCOME: Approximately $751,844.00 UNIT INDICATORS: SP/Unit = $58,909.00 SP/SF = $ 67.46 SP/GI = 3.80 GIM NOI/SP = 0.1160 OAR Robert M. McSherry, MAI IMPROVED PROPERTY SALE 2 VENDOR: American Retirement, Inc. VENDOR: Emeritus Corporation LOCATION: 2601 Chimney Rock Road, Hendersonville, North Carolina RECORDATION: N/A DATE: September, 1995 CONSIDERATION: $9,483,523.00 TERMS: Cash SITE SIZE: N/A IMPROVEMENTS: This is a 110 unit senior living community constructed in 1988. The units are housed in a three-story building of wood frame construction. Construction quality is considered to be average; condition at the time of sale was good. The gross building area is approximately 96,058 square feet with an average unit size of 873 square feet ESTIMATED GROSS INCOME: Approximately $2,175,000.00 ESTIMATED EXPENSE RATIO: Approximately 56 percent NET OPERATING INCOME: Approximately $957,000.00 UNIT INDICATORS: SP/Unit = $86,214.00 SP/SF = $ 98.73 SP/GI = 4.36 GIM NOI/SP = 0.1009 OAR Robert M. McSherry, MAI IMPROVED PROPERTY SALE 3 VENDOR: ABD Investments, Inc. VENDOR: Merrill Associates, LP LOCATION: 6725 Inglewood Avenue, Stockton, California RECORDATION: N/A DATE: July, 1994 CONSIDERATION: $4,200,000.00 TERMS: Cash SITE SIZE: N/A IMPROVEMENTS: This is a 74 unit senior living community constructed in 1989. The units are housed in two-story buildings of wood frame construction. Construction quality is considered to be average; condition at the time of sale was good. The gross building area is approximately 63,730 square feet with an average unit size of 861 square feet. ESTIMATED GROSS INCOME: Approximately $1,395,000.00 ESTIMATED EXPENSE RATIO: Approximately 70 percent NET OPERATING INCOME: Approximately $418,500.00 UNIT INDICATORS: SP/Unit = $56,757.00 SP/SF = $ 65.90 SP/GI = 3.01 GIM NOI/SP = 0.0996 OAR Robert M. McSherry, MAI SUMMARY Sale One Sale Two Sale Three Indicated OAR 11.6% 10.09% 9.96% Price/Unit $58,909.00 $86,214.00 $56,757.00 Gross Income Multiplier 3.80 4.36 3.01 Estimated Expense Ratio 56% 56% 70% The three Improved Property Sales included within this report have been provided this appraiser by knowledgeable sources and other appraisers and are deemed accurate as they were verified by knowledgeable and ethical persons. The appraiser has conducted an in-depth review of conveyances of similar type assisted living or congregate care facilities in the State of Louisiana and none were found which were considered to be reflective of true arms-length transactions between willing buyers and willing sellers with no undue duress being experienced. These three Improved Property Sales have been included for the purpose of deriving an indicated Overall Capitalization Rate, an indicated price per unit and an indicated Gross Income Multiplier for utilization in the analysis process with respect primarily to the Income Approach to Value. The level of services provided by these facilities are similar to those to be provided by the subject property which would include three (3) meals per day, utilities, maid service one (1) day a week, flat linen service one (1) day a week, various assistance with respect to bathing, exercise, and transportation to various off-site functions as well as on-site recreational functions, counseling, with other services provided on a more extensive basis for additional expense paid by the Robert M. McSherry, MAI guest or resident of the facility. It is acknowledged that a large number of the residents residing in the assisted care facilities are requiring increased levels of care and these additional expenses are being passed directly to the tenant as they upset the economies of an assisted care facility having to provide this extraordinary level of care without additional remuneration. The price per unit indicated by Improved Property Sale 2 is considered the best available and has been accorded the greatest credence. Accordingly: 27 Units @ $83,000.00/Unit $2,241,000.00 INDICATED VALUE OF SUBJECT FROM THE MARKET DATA OR DIRECT SALES COMPARISON APPROACH (R/T) $2,240,000.00 Robert M. McSherry, MAI INCOME APPROACH TO VALUE Introduction The Income Approach reflects the subject's income-producing capabilities and requires an analysis of the project's probable market rent. In the comparative analysis, we have considered factors that would probably influence market acceptance of properties in the area. The factors include proximity to major traffic arteries; location; design; amenities; and the quality of management. To develop a supportable estimate of value using the Income Capitalization Approach, realistic projections of income and expenses must be made. congregate care facilities are unique forms of real estate with many unusual characteristics, such as an intensive use of labor, costs of goods sold, expenses categories, and product identity. Therefore, special care in data gathering and analysis are required to create an estimate of the future income for the subject. The appraiser will utilize data provided by the publication, Trends in the Health Care Industry for supporting data. The subject property is proposed at the present time and, therefore, has no historical income and expense data associated with the property. The subject will contain 22 assisted care units and 5 efficiency assisted care units all located in a single T-shaped building which will also contain common areas for the operation of the facility. The services provided the assisted living units include all utilities, maid service, three meals a day, transportation, Robert M. McSherry, MAI activities with additional laundry and maid service available at additional expense. Normal day to day medical treatments are also available for the various tenants with any extraordinary medical expense passed directly to the tenant. This appraiser has had the opportunity to appraise a number of assisted care facilities in both Louisiana and Mississippi over the last several years and has relied on data provided by these facilities, various industry publications and data provided by various health care consulting groups and experts in arriving at the estimated monthly rental rates and expenses including fixed expenses, operating expenses, staffing, dietary, reserves and other appropriate expenses. This appraiser has conducted rental surveys of a number of assisted care, private pay facilities located in the Baton Rouge, Louisiana area as well as facilities located in West Monroe, Shreveport and Alexandria, Louisiana in order to arrive at an estimated economic rental rate for the subject property based on the level of services provided. The assisted care market is still a relatively new market and the majority of the facilities have been constructed in larger metropolitan areas such as Baton Rouge. The rental rates commanded in these larger areas are above those which can be commanded in smaller or more rural communities in North Louisiana and appropriate adjustments have been made. The most comparable property is the Arbor House of West Monroe, which was completed in December of 1997 and has experienced stabilized occupancy with respect to the assisted care units within a six (6) month period. These units lease for $1,850.00 per month for the basic rate with expenses including utilities, Robert M. McSherry, MAI three (3) meals a day, maid service once a week, laundry service once a week, assistance in bathing, transportation to shopping, church and other functions as well as in-house recreational activities. This appraiser has also recently completed an appraisal of a 33 unit assisted care facility located in Baton Rouge, Louisiana which is very typical with respect to the subject property. However, the monthly rate provided by this facility is slightly higher than those in rural areas with the base monthly rate being $1,850.00 per month. The same services are provided including utilities, three (3) meals per day, assistance with daily living activities including bathing, grooming, weekly bed linen and towel service, weekly house keeping, transportation to medical and dental appointments, worship service, planned activities as well as other assistance required. Both rent comparables require upward adjustment for time and location. Based on this appraiser's personal inspection of these two facilities and adjustment, it is our opinion that a $2,000.00 per month stabilized rent with services including electricity, three (3) meals per day, maid service, transportation, activities, assistance in the normal living activities as well as normal day to day medical treatment being provided is economic rent. The actual income and expense data of various facilities is closely held information and these individuals have requested confidentiality with respect to this actual data. Accordingly, this data has been retained in our various files. Robert M. McSherry, MAI income into an indication of value based upon stabilized income of 10.5% is reflective of current industry attitudes and is considered appropriate with respect to this particular appraisal assignment. Conclusion Based on the available information we have concluded that a 10.5% is the most appropriate capitalization rate which is derived from the actual band of investments method and supported by the Underwriter's Method and available market data. The location of the subject has also been considered. Thus: NET OPERATING INCOME ------------------------ = VALUE OVERALL CAPITALIZATION RATE $236,770.00 ----------------- = $2,254,952.00 .105 INDICATED VALUE OF SUBJECT FROM INCOME APPROACH (R/T) $2,255,000.00 Robert M. McSherry, MAI DISCOUNTED CASH FLOW ANALYSIS The subject property will require a period in excess of one year to achieve stabilized net income. In order to provide an estimate of the present value of the improvements upon completion but prior to achieving stabilized net operating income, the discounting process is utilized. The income stream generated by the subject until stabilized income is reached is discounted into an estimate of present value and the reversionary value of the improvements as estimated upon achieving a stabilized net income is also discounted to present worth. The market indicates a discount rate of 11% to be appropriate to be utilized in discounting the income and reversion and this is based on current rates of return on alternate investments and the risk associated with the subject. Robert M. McSherry, MAI Present Worth of Income Stream Year One: $164,970.00 x .900901 = $ 148,621.00 Year Two: $236,770.00 x .811622 = $ 192,167.00 Total Present Value of Income Stream $ 340,788.00 Present Worth of Reversion $2,255,000.00 x .811622 $1,830,207.00 Summation: Present Worth of Income Stream $ 340,788.00 Present Worth/Reversion $1,830,207.00 Total $2,170,995.00 INDICATED VALUE OF SUBJECT FROM INCOME APPROACH/DISCOUNTED CASH FLOW $2,170,000.00 Robert M. McSherry, MAI RECONCILIATION AND FINAL VALUE The three approaches to value have indicated the following value estimates of the property being appraised: COST APPROACH TO VALUE $2,310,000.00 MARKET APPROACH TO VALUE $2,240,000.00 INCOME APPROACH TO VALUE OVERALL CAPITALIZATION RATE $2,255,000.00 DISCOUNTED CASH FLOW ANALYSIS $2,170,000.00 The subject property is proposed construction and only preliminary plans and specifications have been provided this appraiser in order to complete the Cost Approach to Value. Costs are extremely difficult to estimate and no two competent contractors will ever agree on the actual cost to construct a property. However, this appraiser has utilized reliable sources including the Marshall Valuation Service Cost Manual as well as actual construction costs affecting a similar type property in order to complete the Cost Approach to Value and this approach is considered reflective of the cost new of the subject property. The subject property is considered an income producing and has been valued based on it being a Going Concern. The property is under competent ownership and will have excellent management in place and the utilization of the Going Concern concept is considered appropriate with respect to this particular appraisal problem. Accordingly, the Indicated Value of the Property based on stabilized net income being generated at the end of the second year is Robert M. McSherry, MAI 30 Year Treasury Bond Rate 5.21% Merrill-Lynch Ready Assets 30 Day 54.65 (Average Yield) As can be reflected by the above alternate investment vehicles. Current rates for both short and long term yields is between the high 4.00% to the low 5.00% range. The projected 9.00% equity yield or "cash-on-cash" return projected for the subject property provides an excellent return on the investor's cash, approximately 3.00% in excess of other alternate investment vehicles. Accordingly, the 9.00% equity dividend rate is considered appropriate when the overall risk and competitive rates are considered. Derivation of Capitalization Rate - The band of investment (or weighted average) formula for deriving an overall rate when the mortgage constant and equity dividend rates is known as: Mortgage Percent x Mortgage Constant Plus Equity Percent x Equity Dividend Rate Equals Overall Capitalization Rate .75 x .1079671 = .0809 .25 x .09 = .0225 Total = .10340 Rounded to .103 Underwriter's Method In making loan decisions, institutional lenders use a debt coverage ratio (DCR), which is the ratio of net operating income to annual debt service. This measure Robert M. McSherry, MAI of constraint is frequently used by institutional lenders, who are general fiduciaries. They manage and lend the money of others, including depositors and policy holders. Because of the fiduciary responsibility, institutional lenders are particularly sensitive to the safety and profit and are anxious to avoid default and possible foreclosure. Consequently, when they underwrite income property loans, institutional lenders try to provide a cushion so that the borrower will be able to meet the debt service obligations on the loan even if the building income declines. The debt coverage ratio may also be used to estimate the overall capitalization rate by multiplying the ratio by the mortgage loan constant (RM) and the loan-to-value ratio (M). The debt coverage ratio, mortgage loan constant, and loan-to-value ratio have already been determined to be 1.20, .1079671 and .75, respectfully. The formula for derivation of an overall capitalization rate from debt coverage ratio is as follows: RO = DCR x RM x M RO = 1.20 X .1079671 X .75 RO = .0971 R/T = .097 Review of the three (3) improved property sales contained within this report have indicated an Overall Capitalization Rate from a low of 9.96% to a high of 11.6%. These indicated Overall Capitalization Rates which have been derived from available market data indicates the rate chosen for the capitalization of the net Robert M. McSherry, MAI The results of our survey and analysis indicates an economic rental rate for the assisted care units, based on the herein listed services being provided, of $2,000.00 per month and $1,550.00 per month for the efficiency units with the rates remaining stable over the two year projection period. The projected rate includes the herein listed services being provided. Inflation will impact expense projections as well as increased occupancy and these anticipated increases have also been utilized in the Income Approach to Value. In order to accurately project appropriate expenses for the subject property, the appraiser has reviewed the current publication Trends in the Health Care Industry with respect to historical operating expenses for assisted care facilities. In addition, this appraiser has been provided itemized comparable expense data with respect to three separate properties located in the State of Louisiana but, due to confidentiality requirements, the names of these properties are retained in the appraiser's file at the request of the property owners. However, the following summary chart is included for the benefit of the reader of this appraisal report and it also provides support for the expense projections for the subject property. The Income Approach to Value as it applies to the property being appraised based on economic rental rates herein quoted and utilizing a two year period in order to achieve a stabilized net occupancy and thus a stabilized net operating income is reproduced as follows: Robert M. McSherry, MAI ITEMIZED COMPARABLE EXPENSE DATA Property 1 Property 2 Property 3 Administrative $249,610.00 $417,960.00 $461,530.00 Dietary $186,938.00 $251,184.00 $204,983.00 Maintenance $156,914.00 $275,424.00 $193,530.00 Housekeeping/Janitorial $ 51,340.00 $ 55,512.00 $ 52,322.00 Taxes/Insurance $ 82,000.00 $110,560.00 $ 66,738.00 Utilities $ 91,328.00 $ 24,360.00 $ 65,678.00 Nursing/Other -0- $ 9,458.00 $ 10,664.00 Per Unit Expenses $ 9,522.00 $ 9,458.00 $ 10,664.00 Robert M. McSherry, MAI INCOME APPROACH TO VALUE Year One Gross Annual Potential Income: 22 - Assisted Living Units @ $2,000.00/month $ 528,000.00 5 - Efficiency Units @ $1,550.00/month $ 93,000.00 Total Gross Annual Potential Income $ 621,000.00 Less: Vacancy and Collection Losses Assisted Living Units (35%) $ 184,800.00 Total Vacancy and Collection Loss $ 184,800.00 Effective Gross Annual Potential Income $ 436,200.00 Expenses: Administrative $80,430.00 Plant Operations $43,600.00 Dietary $56,700.00 Housekeeping $17,500.00 Aides $48,000.00 Activities $17,500.00 Reserves for Replacement $ 7,500.00 Total Expenses $ 271,230.00 Net Operating Income $ 164,970.00 Note: Management fee included in Administrative Expense. Robert M. McSherry, MAI INCOME APPROACH TO VALUE Year Two Gross Annual Potential Income: 22 -Assisted Living Units @ $2,000.00/month $ 528,100.00 5 - Efficiency Units @ $1,550.00/month $ 93,000.00 Total Gross Annual Potential Income $ 621,000.00 Less:Vacancy and Collection Losses Assisted Living Units (10%) $ 52,800.00 Total Vacancy and Collection Loss $ 52,800.00 Effective Gross Annual Potential Income $ 568,200.00 Expenses: Administrative $85,230.00 Plant Operations $56,800.00 Dietary $74,000.00 Housekeeping $22,700.00 Aides $62,500.00 Activities $22,700.00 Reserves for Replacement $ 7,500.00 Total Expenses $ 331,430.00 Net Operating Income $ 236,770.00 Note: Management Fee included in Administrative Expense. Robert M. McSherry, MAI JUSTIFICATION OF CAPITALIZATION RATE Direct Capitalization is a method used to convert a single year's income estimate into a value indication in the Income Capitalization Approach. The direct capitalization formula using an overall property capitalization rate is: Value / Net Operating Income = Overall Capitalization Rate In this appraisal, the appraisers will employ two different methods to obtain an overall capitalization rate: 1) Band of Investment - mortgage and equity components 2) Underwriter's Method (derivation from debt coverage ratio) Band of Investment The appraisers contacted local lenders regarding rates and terms of alternate investments as well as current market rates applicable for this market. Annual Constant - In developing the mortgage components for the Band of Investment Method, the appraisers reviewed the National Mortgage Commitment Survey conducted by the Appraisal Institute Research Department which surveyed sample lenders in various geographical regions throughout the United States. The data quoted is based on national averages and do not reflect conditions inherent in all markets. Therefore, the appraisers contacted local lenders regarding rates and terms applicable for this market area. Lenders in the local market are quoting rates at prime plus 1%, terms of 20 years. 75% and a loan-to-value ratio. The local market closely approximates the national averages for the subject property type. Robert M. McSherry, MAI The appraisers reviewed available data concerning current national and local quoted mortgage rates and talked to various lenders in the Louisiana area which confirm that market rates and terms for loans of the quality of the subject property are available at 9% interest rate with monthly payments amortized for a 20 year term, a 75% loan-to-value ratio. Therefore, the mortgage constant is derived to be .1079671. Equity Dividend - Current rates of return available from alternative investment vehicles are reviewed. These alternative investments are more liquid than an investment in real estate; therefore any potential investor would expect a higher rate of return. Based on this, we have been able to conclude that a 9% equity dividend rate is required to attract investment capital to the subject property's type which is considered to be slightly more risky than other types of real estate investments. In order to ascertain the appropriate equity dividend or "cash-on-cash" rate, the appraiser has reviewed money rates for other alternate investments as of January 10, 1999. The results of this analysis of comparable and alternative money rates are as follows: Certificates of Deposit 30 Day 4.29% 90 Day 4.51% 180 Day 4.67% Treasury Bill Rates 3 Months 4.39% 6 Months 4.40% 52 Weeks 4.33% Robert M. McSherry, MAI considered the best available indicator of it's current Market Value and has been accorded the greatest credence in the final analysis. Based on the data contained within this report, other in-file data, and this appraiser's review and analysis of said data, it is our opinion that the proposed property identified as the 22 Unit Assisted Care and 5 Unit Efficiency Assisted Care Facility all located on Louisiana Highway 1 Bypass within the corporate limits of Natchitoches, Natchitoches Parish, Louisiana was estimated to have a Market Value, as of January 10, 1999, but subject to completion according to plans and specifications utilizing quality materials and workmanship throughout and also subject to the other conditions contained within this report, and based upon Stabilized Net Operating Income, of: TWO MILLION TWO HUNDRED FIFTY-FIVE THOUSAND DOLLARS ($2,255,000.00) Allocated: Land $ 175,000.00 Improvements: $2,005,000.00 Furniture, Fixtures and Equipment $ 75,000.00 Goodwill of Going Concern -0- The estimated "as is" value is estimated to be, as of January 10, 1999 and subject to completion within a reasonable period of time, is: Robert M. McSherry, MAI TWO MILLION ONE HUNDRED SEVENTY THOUSAND DOLLARS ($2,170,000.00) Robert M. McSherry, MAI ADDENDA Robert M. McSherry, MAI APPRAISER'S CERTIFICATION I certify that, to the best of my knowledge and belief.... (1) The statements of fact contained in this report are true and correct. (2) The reported analyses, opinions, and conclusions are limited only by the report assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinion and conclusions. (3) I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest or bias with respect to the parties involved. (4) My compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. (5) My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. (6) I have made a personal inspection of the property that is the subject of this report and all rent comparables. (7) No one provided significant professional assistance to the person signing this report. (8) The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Practice of the American Institute of Real Estate Appraisers. (9) The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. (10) I am not currently certified under the voluntary continuing education program of the American Institute of Real Estate Appraisers. Robert M. McSherry, MAI (11) I certify that the use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. Estimated Market Value: /S/ROBERT M MCSHERRY $2,255,000.00 -------------------------- Robert M. McSherry, MAI LA State Certified General Real Estate Appraiser No. G0891 Allocated: Land $ 175,000.00 Improvements $2,005,000.00 Furniture, Fixtures and Equipment $ 75,000.00 Goodwill of Going Concern -0- As Of: January 10, 1999 Robert M. McSherry, MAI QUALIFICATIONS OF ROBERT M. MC SHERRY, MAI EDUCATIONAL BACKGROUND AND TRAINING: Graduate of Louisiana State University, Baton Rouge, Louisiana, Bachelor of Science Degree in Business Administration with a Major in Finance. Real Estate Appraisal Course 1-A, Basic Fundamentals, Methods and Techniques, 1974, AIREA Real Estate Appraisal Course 1-B, Capitalization, 1975, AIREA Real Estate Appraisal Course VIII, Single-Family Residential Appraisal, 1974, AIREA Real Estate Appraisal Course II, Techniques and Application, 1976 and 1980, AIREA Real Estate Appraisal Course III, Rural Properties, 1979 Real Estate Appraisal "Industrial Valuation" Course, 1984 Seminar: R-41C - New Orleans, Louisiana, AIREA, 1978 "Standards of Professional Practice" Course, AIREA, 1987 "Capitalization Theory and Techniques, Part A" Course, AIREA, 1987 "Standards of Professional Practice" Course, Appraisal Institute, 1992 "Advanced Level Finance I & II", 1997 "Risk Management/Ethics/Fair Housing", 1997 "How to Value Louisiana Timberland", 1997 "Uniform Standards of Professional Appraisal Practice" Seminar, 1997 PROFESSIONAL EXPERIENCE Real Estate Broker, State of Louisiana (1971) Robert M. McSherry, MAI Monroe Redevelopment Agency, Monroe, Louisiana (1971) Ford, Bacon & Drive Construction and Engineering Company, Monroe, Louisiana (1972) Mississippi power and Light Company, Jackson, Mississippi (1973-1976) Cameron-Brown South, Inc., Mortgage Bankers, Baton Rouge, Louisiana (1976-1977) Real Estate Appraiser, Monroe, Louisiana (1978-1985) Real Estate Appraiser, Baton Rouge, Louisiana and Jackson, Mississippi (1985-Present) PROFESSIONAL MEMBERSHIPS Residential Member, American Institute of Real Estate Appraisers, Certification Number 1040 Licensed Real Estate Broker, State of Louisiana Fee Inspector for the Louisiana Homeowners Warranty Corporation FNMA Approved Level III Appraiser, Number 1027135 Member, American Institute of Real Estate Appraisers - MAI Designation (1981), Number 6291 Certified Licensed General Appraiser, State of Louisiana, Number 0891 Robert M. McSherry, MAI PHOTOGRAPHS FLOOR PLAN [FLOOR PLAN OF ENTIRE FACILITY] [FLOOR PLAN OF DINING AND ADMINISTRATION] [ENLARGED FLOOR PLAN OF APT UNITS]