An Appraisal Report of
Proposed Independent/Assisted Living Center
East of SE 15th Street & Westminister Road
Midwest City, Oklahoma
86-Unit Facility
(Phase 1)
PREPARED FOR
MMR Investment Bankers
Mr. Jerry Martin, CEO/President
550 North 159th, East, Suite 300
Wichita, Kansas 67230
PREPARED BY
Patrick 0. Glenn and Associates
P.O. Box 13603
Oklahoma City, Oklahoma 73113
DATE OF REPORT
August 13, 2001
EFFECTIVE DATE
"As Is" August 10, 2001
'As Completed" March 1, 2002
Patrick 0. Glenn & Associates, Inc.
R E A L E S T A T E A N A L Y S T S
2723 Northwest 50th St - Oldahoma City, OK 73112. 942-3393. Fax: 942-1711
Patrick O. Glenn & Associates, Inc.
R E A L E S T A T E A N A L Y S T S
August 13, 2001
Mr. Jerry Martin, CEO/President
MMR Investment Bankers
550 N. 159th Street, East Suite 300
Wichita, Kansas 67230
Re: Proposed Village at Oakwood Phase I
Mr. Martin:
At your request, our firm has prepared a self-contained narrative appraisal
report of the above captioned property located at:
East of SE 15th & Westminister Road
Midwest City, Oklahoma
The accompanying report is predicated on a site inspection and an
investigation of the neighborhood and market for such properties. The
analysis is based on prevailing economic conditions and has been processed
in accordance with Title XI of FIRREA (Financial Institutions Reform,
Recovery And Enforcement Act) as well as the Uniform Standards of
Professional Appraisal Practice (USPAP) of the Appraisal Foundation.
Having considered all the facts relating to the valuation assignment,
we have concluded that the 86 unit Independent/Assisted Living Center
had the following estimated market value:
Patrick O. Glenn, MAI
2723 Northwest 50th St Oklahoma City, OK 73112. 942-3393. Fax: 942-1711
www.pog.com
"as completed
SEVEN MILLION SIX HUNDRED THOUSAND DOLLARS
($7,600,000)
as of March 1, 2002
"as is
THREE HUNDRED THOUSAND DOLLARS
($300,000)
as of August 10, 2001
contingent upon limiting conditions and "as is" condition and without
an environmental audit. The property was not known to have any significant
natural, cultural, recreational or scientific value and is not subject
to any wetlands protection that we were made aware of in the course of
our appraisal.
Respectfully,
/s/ Patrick O. Glenn
________________________________
Patrick O. Glenn, MAI
Certified General Appraiser #10419
TABLE OF CONTENTS
APPRAISAL REPORT PAGE
Letter of Transmittal i
Table of Contents ii
Summary of Important Facts and Conclusions iii
INTRODUCTION
Identification of Property 1
Property Rights Appraised 1
Purpose of Appraisal 1
Definition of Market Value 2
Function of Report 3
Date of Report 3
Effective Date of Appraisal 3
Statement of Ownership & Sales History 3
Scope of the Appraisal 4
GEO-ECONOMIC PROFFLE
City Data 6
Neighborhood Data 13
Market Study 15
PROPERTY PROFRLE
Site Data 20
Building Data 23
HIGHEST AND BEST USE
Highest and Best Use 27
VALUATION
Valuation Process 29
Rates, Risk & Reasonableness 29
Income Capitalization Approach 36
Cost Approach 46
Sales Comparison Approach 53
CONCLUSION
Reconciliation 59
Marketing Period 60
Certificate of Appraiser 61
Contingent and Limiting Conditions 62
Resume of Appraiser 64
ADDENDA
SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS
Type of Property: Proposed independent/assisted living facility
of about 72,000sf containing 86 units.
Location of Subject: East of SE 15th Street & Westminister Road
Midwest City, Oklahoma
Effective Date of Appraisal: August 10, 2001 "as is"
March 1, 2002 "as completed"
Purpose of Appraisal: To estimate the value of the subject property
in fee simple estate, unencumbered by
mortgage or lien but subject to all easements
of record. Respective of surface rights, only
but inclusive of the contributory value of
personal property (FF & E) required for going
concern operation as an assisted living
center.
Outline Description: 86-unit (phase I) proposed
independent/assisted living center. The
two-story structure is to be of contemporary
design with gable roof and brick veneer.
Situated on a 261,360 s.f. site.
Highest and Best Use: As to be improved.
Value Indications:
Income Capitalization Approach: $7,490,000
Cost Approach: $7,590,000
Sales Comparison Approach: $8,000,000
Allocation of Value:
Land Value: $300,000
Personal Property (FF&E): $365,500
Building & Site Improvements: $6,934,500
Concluded Market Value: $7,600,000; "as completed., and
$300,000; "as is" inclusive of personal
property, contingent upon limiting
conditions and without environmental
audit. The property is not known to have
any significant natural cultural,
recreational or scientific value and is
not subject to any wetlands protection that
we were made aware of in the course of
our appraisal.
INTRODUCTION
IDENTIFICATION OF PROPERTY
The appraised property is the first phase of an independent and assisted
living center to be constructed in 2001/2002. The property will consist
of a two-story frame and block building with brick veneer. The planned
improvements will be of modern design and construction.
The phase I construction will consist of an assisted living area of 70
1 bedroom assisted living units, 8 studio units and 8 dementia rooms.
The phase I portion of the facility will contain about 72,000sf of area
with a total of 86 units. The units will be located along each side of
a primary corridor. There will be a full service kitchen, dining room,
reception room, day room and laundry as well as administrative offices
and nursing facilities. There is no physical address but the site is
in the 13000 Block of Southeast 15th Street about 1/2 mile east of the
intersection of SE 15th Street and Westminister in Midwest City.
PROPERTY RIGHTS APPRAISED
The subject is appraised in fee simple estate as if unencumbered but
subject to easements of record and respective of surface rights only.
Fee simple estate is defined as:
... absolute ownership unencumbered by any other interest or estate
subject only to the four powers of government. (source: American
Institute of Real Estate Appraisers, The Dictionary of Real Estate
Appraisal Second Edition, Page 120, Copyright 1989, The American
Institute of Real Estate Appraisers; Chicago).
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the Market Value of the
identified real estate in terms of the real property rights defined above.
Included with the real estate are appurtenances attached thereto, however,
non-realty items are excluded, other than those normally required for
the operation of the property.
1
INTRODUCTION
DEFINITION OF MARKET VALUE
"Market Value" is defined as the most probable price which a property
should bring in a competitive and open market under all conditions requisite
to a fair sale, the buyer and seller each acting prudently, knowledgeable
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 each acting
in what he considers his own best interest;
(3) a reasonable time is allowed for exposure in the open market;
(4) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto;
(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.
as set forth in 12 CFR Part 34 of Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989
This definition of "market valiie" implies that for market value to be
identifiable a sale must have actually or theoretically taken place on
the effective date of the appraisal, and assumes that the property has
actually or theoretically been exposed for sale for a reasonable marketing
time.
The net value to the seller can be substantially less due to the costs
associated with holding the property during the marketing period as well
as marketing costs to sell the property.
"Market Value 'as is' on appraisal date", is defined as an estimate of
market value of a property in the condition observed upon inspection and
as it physically, legally exists without hypothetical conditions, assumptions,
or qualifications, as of the effective date of the appraisal.
2
INTRODUCTION
FUNCTION OF REPORT
The appraisal report has been prepared at the client's request for management,
accounting, legal, loan underwriting or marketing purposes. If this report
is intended for use in loan underwriting or collateral asset valuation,
the 7-eadei, should carefully consider the definition of iliarket value.
Restrictions on use of the report and dissemination of information to
the public are outlined within contingent and limiting conditions contained
in the Conclusion Section of this report and made an integral part of
this analysis.
DATE OF REPORT
August 13, 2001
EFFECTIVE DATE OF APPRAISAL
"As Is"
August 10, 2001
"As Completed"
March 1, 2002
STATEMENT OF OWNERSHIP AND SALES HISTORY
The current owner of record is Village at Oakwood, LLC according to the
Oklahoma County records. The subject was purchased for construction of
the subject senior living facility in March 2001 as recorded at book 8031,
page 482. The subject was purchased for a reported sales price of $306,000.
No other transaction occurred in the 3-year period prior to the date
of appraisal.
3
INTRODUCTION
SCOPE OF THE APPRAISAL
The Appraisal Problem
The appraisal assignment requires the i-narket valuation of the fee simple
estate as including the furniture, fixtures and equipment associated with
the going concern operation of the independent/assisted living center.
The primary task was to identify the probable gross income which is
attributable to the real estate and equipment and arrive at a market value
for the property through the process of capitalization.
Special Assumptions and Limiting Conditions
No special assumptions or limiting conditions govern this appraisal
assignment. All applicable assumptions and limiting conditions can be
found in the Conclusion Section of this report.
Collecting and Confirming Data
The property was inspected and the market for nursing home properties
was investigated. Data utilized in the report was obtained from public
and private data sources including city and county records, property managers
and information contained in the appraiser's files as well as other
appraisers. Unless otherwise noted in the appraisal, sale prices were
confirmed with either the buyer or seller or the broker handling the
transaction.
Appraisal Process
The estimation of Market Value for a commercial property is the result
of a multi-step analytical process which begins with the Geo-Economic
Profile. This section studies the area economic climate, the real estate
market and the neighborhood influences which impact the property.
The next step in the process is the Property Profile which presents
all relevant data pertinent to the site and any improvements.
Most Probable Use (highest and best use) provides direction for the
development of the three valuation approaches, the Income Capitalization,
Cost and Sales Comparison Approaches. These separate techniques are
interrelated by the market derived yield requirement as identified in the
Rates, Risk and Reasonableness discussion.
4
INTRODUCTION
SCOPE ... continued
The Income Capitalization Approach nieasi-ires value of the subject's
ability or capacity to generate revenue as determined by market rents
and occupancy trends. Net income after deduction of estimated operating
expenses may then be capitalized by various methods to arrive at a present
worth of anticipated future benefits.
The Cost Approach is an estimate of the replacement cost new of the subject
improvements, less the allowance for accrued depreciation and plus the
estimate of land value. This approach is most accurate when the improvements
are new or of recent construction and modern technique.
The Sales Comparison Approach is based upon the principle of substitution
which states that a prudent purchaser would pay no more for real property
than the cost of an equally desirable substitute available on the open
market. After proper analysis of comparable sales, a conclusion may be
drawn as to the indicated value of the subject, given adjustments for
market recognized differences.
The appraisal process concludes with the Reconciliation of the value
indications in terms of the highest and best use, weighted by the indication
which provides the best quality and quantity of data, and which best reflects
the attitudes of the typical buyers.
The Marketability of the property considers the length of time required
for exposure on the open market for the property to sell at the value
concluded in this appraisal.
5
[OKLAHOMA CITY STREET MAP INDICATING SUBJECT PROPERTY]
GEO-ECONOMIC PROFILE
CITY DATA
LOCATION
Distance in miles from Dallas: 200
Distance in miles from Tulsa: 95
POPULATION
1980 1990 1995
City 404,014 444,719 466,510
County 568,933 599,611 625,300
30-Mile Radius 979,600
CLIMATE
Average Annual Temperature: January 36 July 80
Average Flying Days Per Year: 350
Average Annual Rainfall: 32"
Average Annual Snowfall: 9"
MUNTCIPAL SERVICES
Form of Local Government: Manager/Council
Fire Department Personnel: Fulltime 950 Stations 33
Fire Insurance Classification: City 3 Adjacent 7
Police Department Personnel: 1,031 Support 295
Garbage Service Provided: Yes --municipal
Comprehensive City plan: Complete
Zoning: Yes--City
Public Library: 15
UTILITIES
Electric: Oklahoma Gas & Electric Company
Natural Gas: Oklahoma Natural Gas Company
Telephone: Southwestern Bell
Source of City Water: 5 Reservoirs
LABOR MARKET
COUNTY NAME: Oklahoma
Male Female Total
Civilian Labor Force 179,521 142,904 322,425
Employed 168,849 133,451 302,300
Labor Avail. 30 miles 9,570 8,120 17,690
6
GEO-ECONOMIC PROFILE
CITY DATA...continued
MAJOR EMPLOYERS IN THE CITY
Company Name Product/Service Number Employed
State of Oklahoma Government 37,400
Tinker Air Force Base Military 24,080
Oklahoma Health Center Medical Services 8,674
Oklahoma City Public Schools Education Services 5,300
Lucent Technologies Communications 4,700
City of Oklahoma City Government 4,297
General Motors Corporation Auto Assembly 4,200
Baptist Medical Center Medical Services 3,896
FAA Aeronautical Center Aerospace Training 3,500
US Postal Service Mail Delivery 2,095
Southwestern Bell Telephone Telecommunications 2,033
Seagate Technology Computer Disk Drives 2,000
St. Anthony Hospital Medical Services 1,858
Mercy Health Center Medical Services 1,750
Oklahoma County Government 1,640
Southwest Medical Center Medical Services 1,600
Dayton Tire Company Tire Manufacturer 1,500
Oklahoma Gas & Electric Co. Electric Utility 1,500
TRANSPORTATION
Major Highways: U.S. 62, 77, 270; S.H. 1, 3, 66, 152
Nearest Interstate Highway I-35, I-40 & I-44 Distance of
Interchange: local
Rail: Burlington Northern, Santa Fe,
Union Pacific
MOTOR FREIGHT CARRIERS
More than 35 motor freight companies serve Oklahoma City with terminals.
More than 10 motor freight companies have terminals in the city.
EXPRESS SERVICES
Name Terminal
United Parcel Service y
Federal Express y
Airborne Express y
Purolater Courier y
7
GEO-ECONOMIC PROFILE
CITY DATA...continued
AIR
Nearest Commercial Airport: local
City: Oklahoma City
Airlines: American, Continental, Delta, Exec. Express,
Northwest, Southwest, TWA, United
Air Freight: Yes--more than 20 companies
EDUCATIONAL FACILITIES
Type Number Grades Enrollment Teachers Ratio
<s>
Public 84 PK-12 37,235 2,261 16.5-1
Private Schools 37 PK-12 9,264 N/A N/A
College or University Distance
Oklahoma City Community College local
Oklahoma City University: local
University of Central Oklahoma: 12 miles
Oklahoma University: 22 miles
Oklahoma State University: 64 miles
Vocational Schools Miles
9 in the metro area: local
MEDICAL FACILITIES
Number of Hospitals: 20 Total beds: 5,004
Number of Nursing Homes: 26 Total beds: 3,200
8
GEO-ECONOMIC PROFILE
CITY DATA...continued
Market Definition
The Oklahoma City Metropolitan Statistical Area (MSA) as defined by the
Census Bureau, consists of 6 counties surrounding and including Oklahoma
City. Situated in the center of the state, the MSA occupies 4,251 square
miles. The population density of Oklahoma County, the heart of the MSA,
is 850 people per square mile.
Metropolitan Statistical Area (MSA)
Total Population: 983,800
Total Adults (18+) 718,900
Projected 2000 Population 1,042,400
(Source: Market Statistics,Producers of The Survey of Buying Power)
Designated Market Area (DMA)
Total Population: 1,501,900
Total Adults (18+) 1,100,700
Projected 2000 Population 1,557,000
(Source: Market Statistics,Producers of The Survey of Buying Power)
DEMOGRAPHIC PROFILE
OKC Metro Market
- ---------------------------------------------------------
Total Adults % of Adults
- ---------------------------------------------------------
Income
$50,000+ 24
$30,000 - $49,999 25
$20,000 - $29,999 21
Less than $20,000 30
Education
College Graduate 31
Some College 28
Trade School 4
High School Graduate 28
Not High School Graduate 9
Occupation
Manager/Professional 20
Sales/Admin Support 21
Production/Craft/Service 25
Retired/Homemaker 24
Other/Not Employed 10
- ----------------------------------------------------------
9
GEO-ECONOMIC PROFILE
CITY DATA ... continued
Culture
From the Festival of the Arts and Shakespeare in the Park to Broadway
plays and the Oklahoma City Philharmonic Orchestra, cultural activities
are found everywhere in the Metro area. The unique Festival of the Horse
each fall reflects the Western heritage of this dynamic metropolitan area.
Ballet and theater companies, the Oklahoma City Art Museum, the Kirkpatrick
Center Museum Complex and a host of other opportunities await the visitor
and resident alike.
Recreation
The sports enthusiast, whether participant or fan, will find an opportunity
for many activities in the Metro area. Triple A baseball, CBA basketball,
minor league hockey, Big Twelve college athletics and professional soccer
keep Oklahoman's cheering throughout the year. Golf courses, amusement
parks, the Oklahoma City Zoo and other attractions offer countless
opportunities for leisure time activities.
Tourism
With a 16,000 seat convention center and an active Chamber of Commerce,
Oklahoma City hosts over 480,000 convention delegates a year. Special
attractions, such as the National Cowboy Hall of Fame, the State Fair
and the renowned Remington Park race track, provided added incentives
for visiting. The MAPS project will add a new baseball park, convention
center, fine arts center and will enhance the CBD as a tourist attraction.
Oklahoma's central location in the U.S. and affordable accommodations
also make it an attractive site for conventions.
Travel
Oklahoman's love to travel, driving and flying to destinations throughout
the United States and beyond. In 1996, over 70% of Metro households
vacationed outside the Oklahoma City area, and 40% made a business trip
outside the Metro area. Served by 7 major airlines, Will Rogers airport
enplaned more than one and a half million travelers.
Corporate Headquarters
Because of its centralized location, favorable climate, growth, aesthetic
developments and affordable cost of living, Oklahoma City has become a
"central office city." Major companies based in Oklahoma City include
Kerr-McGee, Macklanburg-Duncan, Scrivner, C.R. Anthony, Dolese Brothers,
American Fidelity Assurance Company, Oklahoma Publishing Company, Braum's
Ice Cream, LSB Industries, CMI Corporation, Fleming Companies, Sonic Drive-In
and Taco Mayo.
10
GEO-ECONOMIC PROFILE
CITY DATA...continued
MARKET SUMMARY
---------------------------------------------------------------------
MSA DMA State Totals
Category (6 counties) (34 counties) (77 counties)
---------------------------------------------------------------------
Population 983,800 1,501,900 3,206,500
Households 377,400 577,300 1,229,600
Income ($000) $13,238,274 $18,876,918 $38,870,990
Apparel/Access. ($000) $422,670 $540,822 $1,041,857
Automotive ($000) $2,021,125 $2,526,195 $4,067,590
Building Materials ($000) $280,334 $373,154 $872,385
Clubs/Restaurants ($000) $742,592 $955,139 $1,870,622
Department Stores ($000) $694,728 $977,721 $2,267,832
Drug Stores ($000) $211,162 $309,866 $601,773
Food Sales ($000) $1,202,441 $1,853,645 $4,142,064
Furniture/Appl. ($000) $415,029 $495,937 $969,884
General Merch. ($000) $917,119 $1,271,718 $2,792,788
Supermarkets ($000) $1,162,419 $1,770,200 $3,947,594
Total Retail Sales ($000) $7,244,003 $9,797,535 $19,878,686
---------------------------------------------------------------------
Source: Sales & Marketing Survey of Buying Power
----------------------------------------------------------
DMA NATIONAL RANKINGS
----------------------------------------------------------
Population 46
Households 44
Effective Buying Income 50
Total Retail Sales 52
Ranking by Dollar Sales
Food Stores 56
Eating & Drinking Establishments 51
General Merchandise Stores 49
Apparel/Accessories 45
Furniture/Appliances 51
Automotive Dealers 41
Building Materials/Hardware 76
Drug Stores 63
----------------------------------------------------------
Source: Sales & Marketing Survey of Buying Power
11
GEO-ECONOMIC PROFILE
CITY DATA ... continued
Summary
The measure of the Oklahoma City metropolitan area indicates a stable
economic situation with continued steady growth. Additional data from
Southwestern Bell and the Oklahoma University Center for Economic and
Management Research underscores this conclusion. The Gross State Product
(GSP) as measured in real 1982 dollars has been steadily increasing since
1987. According to the General Business Index (GBI), which is a composite
of 25 key economic variables, the local economy has not recorded a negative
quarterly change since the 4tl-L quarter 1991.
Residential building permits have risen each year since 1992 indicating
population growth. With a cost-of-living index running about 9% below
the national average and the cost of a home running about 23% below the
national average, continued growth is expected. Office and industrial
vacancy continues to decline and rental rates are also below national
averages.
A statistic of particular importance to the sales tax revenue is indicated
in the DMA national rankings by dollar sales. The Oklahoma City population
is listed as 46th in the nation with most of the dollar sales of products
ranked between 45th and 55th in the nation. However, auto dealership
sales in Oklahoma City ranks 41st in the nation which is the highest ranking
in any category for the metro area.
In summation, the Oklahoma City metro area is expected to continue the
steady growth trend of recent years. The combination of central location,
low cost-of-living and low real estate costs as compared to national averages
is an advantage that ensures growth. Therefore, the future economic picture
appears to be bright for the Oklahoma City metro area.
12
[Neighborhood Map Indicating Subject Property]
GEO-ECONOMIC PROFILE
NEIGHBORHOOD DATA
A study of the neighborhood is important to the appraisal process. The
neighborhood is defined as:
"... a group of complementary land uses." (The Appraisal of Real Estate
- Ninth Edition)
"Neighborhood analysis provides a bridge between the analysis of general
influences on all property values and the study of a particular subject
property." (The Appraisal of Real Estate - Eight Edition)
The proposed assisted living center is to be located in the far southeast
part of the Oklahoma City metropolitan area in Midwest City, and about
ten miles from the Oklahoma City Central Business District.
Boundaries
North: Reno Avenue
South: Interstate 40
East: Anderson Road
West: Douglas Boulevard
Access
The neighborhood is accessed by I-40, a primary thoroughfare through
Midwest City. East-West streets include SE 29th, SE 15th and Reno.
North-South streets include Douglas, Post, Westminister and Anderson.
Douglas and Anderson both have I-40 interchanges south of the subject
property providing easy access to all areas of Oklahoma City.
Infrastructure
All city utilities and services are available to the neighborhood in
the vicinity of the site.
Zoning and Use Restrictions
Predominant zoning for the immediate neighborhood is commercial at the
SE 15th & Westminister intersection with residential zoning in most areas
without major corner intersections.
13
GEO-ECONOMIC PROFILE
NEIGHBORHOOD DATA...continued
Environmental Issues
No environmental conditions were observed in the neighborhood which
would negatively impact the property.
Development Trends
The neighborhood has not been fully developed with many undeveloped tracts
available. Growth trends are toward this area of Midwest City.
Summary
The neighborhood near the subject has been an undeveloped area with both
single family and acreage residential. The area around the intersection
of SE 15th and Westminister is developing commercially.
14
GEO-ECONOMIC PROFILE
MARKETSTUDY
Oklahoma City SMSA
The purpose of this market study is to analyze the elderly housing market
and determine the existing supply of units available and the demand for
such units in the Oklahoma City area. The assisted living centers, nursing
centers and dementia rooms that are serving this need within the elderly
housing market are studied. The study will also attempt to identify the
potential future demand for such facilities.
The Oklahoma City planning department has prepared a document to assist
in future planning. This document, the Comprehensive Housing Affordability
Strategy Data Book (CHAS), presents an overview of the housing market
within the city.
Affordable Housing for the Elderly - Oklahoma City
The following is an excerpt from the current CHAS five-year plan for
Oklahoma City, page 103:
Census data shows there are over 60,000 elderly residents in Oklahoma
City. A high number of the elderly would be females who are surviving
homemakers on very limited incomes. Many are renters who are cost
burdened due to the inadequacy of survivor benefits to meet all of their
living costs; many are in an ownership situation and are burdened due to
maintenance and operation Of inefficient properties. For many owners,
subsidized rental properties are a better living alternative.
Census data shows that 17,086 households are persons who live alone
and are over 65 (see page 13)
15
GEO-ECONOMIC PROFILE
MARKETSTUDY ... continued
Demographics
The U.S. Census Bureau provides population projections by age through
2025 in five year increments. Following are the Statewide projections
by age and for the year indicated:
Persons by Age
Ages Year
2000 2005 2010 2015 2020 2025
50-54 214,374 241,535 265,525 255,932 224,296 219,728
55-59 175,640 216,519 246,208 271,443 262,373 229,823
60-64 147,035 174,992 218,476 249,057 275,053 266,702
65-69 133,571 141,573 170,397 214,018 244,435 270,424
70-74 115,823 120,439 129,068 156,512 197,562 226,097
75-79 96,272 99,536 104,179 112,672 137,583 175,007
80-84 63,654 72,499 75,677 79,552 86,922 107,163
85+ 62,625 70,356 81,685 90,658 98,404 108,782
The July 1998 U.S. Census Bureau indicated a Statewide population of
3,346,700 with 201,110 persons or 6.01% in Cleveland County. Oklahoma
County had 632,990 persons or 18.91% of the Statewide total. Together,
24.92% of the Oklahoma population reside in Cleveland and Oklahoma Counties.
The following tables indicate the percentages by age that reside in these
two counties.
Persons by Age (Oklahoma & Cleveland County)
Ages Year
2000 2005 2010 2015 2020 2025
50-54 53,422 60,191 66,169 63,778 55,895 54,756
55-59 43,769 53,957 61,355 67,644 65,383 57,272
60-64 36,641 43,608 54,444 62,065 68,543 66,462
65-69 33,286 35,280 42,463 53,333 60,913 67,390
70-74 28,863 30,013 32,164 39,003 49,232 56,343
75-79 23,991 24,804 25,961 28,078 34,286 43,612
80-84 15,863 18,067 18,859 19,824 21,661 26,705
85+ 15,606 17,533 20,356 22,592 24,522 27,108
16
GEO-ECONOMIC PROFILE
MARKET STUDY... continued
Summary
The previous two tables indicate a growing elderly population. This
is reported to be primarily through increases in medical technology and
the growing health conscienceness of the population in general. The second
table indicates a large local (Cleveland and Oklahoma Counties) elderly
population. Even with the CHAS and Areawide Aging Agency (AAA) projections
of up to 24% of the elderly population below the poverty line, there appear
to be sufficient numbers in the over 50 age groups to support elderly
housing.
One trend as reported by Senior Housing Net is that as the "baby boomers"
grow older, there has been more thought to retirement. This age group
will begin requiring elderly housing by 2005 and in large numbers by 2020.
Many report retirement funds that would appear to indicate a decline
in the percentage of elderly under the poverty line. However, these are
projections and only time will tell.
The local trends would indicate that the existing 40-units within the
subject are feasible and in line for future demands. There are currently
about 2,600 rooms in retirement centers, residential care centers and
assisted living centers in the Oklahoma City SMSA. There is an 80-room
center scheduled for construction in far NW Oklahoma City, a 124-unit
multiple care facility in Midwest City, along with recent openings of
several other centers in the immediate vicinity of the subject property.
Payment Options
The following data is provided by Senior Housing Net:
There are various ways of paying for senior housing and long-term care;
some of the most frequently accessed sources are summarized here.
Private Funds
Medicaid
Medicare
Long-Term Care Insurance
Supplemental Security Income (SSI)
17
GEO-ECONOMIC PROFILE
MARKET STUDY... continued
Private Funds
Most people pay for independent living, assisted living and CCRC's out
of their own pockets with private funds. There are some states which
accept Medicaid for assisted living, but there is currently no program
on the federal level, and private funds still account for approximately
90% of assisted living payments. About one-third of long-term care at
nursing facilities is paid with private funds.
Medicaid
As defined in Title XIX of the Social Security Act, Medicaid is a joint
Federal-State program which pays for medical services to eligible needy
and vulnerable families and individuals. The State must offer basic services
in order to receive matching Federal funds and the Medicaid program varies
from State to State. Common services include but are not limited to:
outpatient hospital services
inpatient hospital services
nursing facility
services for persons aged 21 or older prenatal care
physician services
medical and surgical dental services
home health and community-based care for persons eligible for nursing
facility services
laboratory and x-ray services
nurse-midwife services
pediatric and family nurse practitioner services
family planning services and supplies
Medicaid is a vendor payment program, and States may pay for Medicaid
services through HMOs or directly to providers. The Medicaid payment
rates must be accepted as payment in full. States may elect to impose
deductibles, co-insurance or co-payments on Medicaid recipients for some
services.
As the U.S. population ages, Medicaid is being increasingly utilized
for funding of long-term care. Currently, approximately 45% of nursing
facility and home health services are paid for with Medicaid funds. An
even larger percentage of these services are covered by Medicaid for persons
utilizing more than four months of long-term care.
Medicaid pays for only about 10% of assisted living services, the majority
being paid for with private funds. Several States have adopted Medicaid
waiver programs to earmark funds toward assisted living, and this trend
is expected to continue as cost remains a critical issue for both State
and Federal governments.
18
GEO-ECONOMIC PROFILE
MARKET STUDY... continued
Medicare
As defined in Title XVIII of the Social Security Act, Medicare (Health
Insurance for the Aged and Disabled) is a Federal health insurance program
for aged (65+) and certain disabled individuals (e.g. persons with end-stage
renal disease (ESRD) who require dialysis or a kidney transplant), regardless
of income.
Medicare is defined as two parts, defined as follows:
Part A (Hospital Insurance): Provided automatically to individuals 65
and over who are entitled to Social Security, and to disabled persons
who have received such benefits for at least 24 months. The health services
covered under Part A are:
Skilled Nursing Facility (SNF) Care
Home Health Agency Care
Inpatient Hospital Care
Part B (Supplementary Medical Insurance): Provided to almost all U.S.
residents 65 or older, certain aliens 65 or over, and disabled individuals
entitled to Part A. Part B coverage requires payment of a monthly premium,
and primarily covers physician services. Also covered by Part B are
non-physician services, including diagnostic tests, ambulance services,
clinical laboratory tests, flu vaccinations and some therapy services.
Long Term Care Insurance: Long-term care insurance covers the cost of
long-term care in certain types of care facilities, depending upon the
policy. Some policies may cover stay in licensed nursing facilities,
while others will only pay for home health care. Often, persons with
a sizable asset base may wish to purchase a policy to protect these assets.
Supplemental Security Income (SSI): SSI is a state-regulated
federally-financed financial assistance program for seniors in some
assisted living residences (or their equivalent). SSI benefits are paid
directly to the individual, who then pays for the services provided by the
facility. Only some communities accept SSI, and are not required to admit
residents who will use the program.
In summary, there are a number of elderly care housing options with a
corresponding number of payment options. An individual has flexibility
in choosing the level of care and payment options.
19
[Plat Map Indicating the subject property]
PROPERTY PROFILE
SITE DATA
Location
The Village at Oakwood is to be located east of the intersection of SE
15th Street and Westminister Road in the eastern portion of Midwest City,
Oklahoma.
Legal Description
The subject is legally described as:
Tract "E" in Oakwood Park to Midwest City, Oklahoma, a part of the NW14
of Section 8, Township 11 North, Range 1 West, more particularly described
as:
Beginning 1,910 feet East of the Northwest corner of said NW14; thence
East a distance of 415.00 feet; thence South a distance of 670.00 feet;
thence West a distance of 415.00 feet; thence North a distance of 670.00
feet to the point of beginning, containing 5.91 acres or 257,300sf more
or less.
Size/Shape/Frontage
The tract is rectangular in shape with 415 feet of frontage of along
SE 15th and 670 feet of depth. As provided and described, the site contains
6.00 acres or about 261,360 net square feet.
Topography
The site is above street grade and is moderately sloped from west to
east and relatively level from north to south with an eastward slope.
The slope is sufficient for surface drainage.
Flood Hazard
The site does not lie in a flood hazard zone according to the Federal
Emergency Management Agency Map No. 400405 0015 D revised March 8, 1983.
Soil Type
No soil engineering report was furnished for this appraisal. It is
recommended that a soil engineer be consulted to determine suitability of
soil base for specific development. No adverse conditions were observed
which would limit the proposed use of the property.
20
PROPERTY PROFILE
SITE DATA...continued
Nuisances and Hazards
No environmental soil survey was provided for this appraisal. While
no environmental hazards were observed, the appraisers are not trained
in the detection of such problems. It is recommended that an environmental
study be made to ensure that no hazardous materials are present in or
near the site.
Access
The site is accessed via SE 15th Street, a section line street that is
asphaltic paved with two lanes.
Ingress/Egress
The site is to be entered from SE 15th street.
Visibility
The site has good visibility from SE 15th street being above grade.
Utilities
All utilities are available to the site. Electric power is supplied
by 0 G & E, natural gas by ONG and water/sewer by the City of Midwest
City.
Improvements
See Building Data Section.
Zoning
The subject is zoned under a Planned Unit Development (PUD) that has
been recently rezoned to a multi-family district. The planned improvements
are allowed under the multi-family zoning.
Surrounding Land Uses
As stated, the subject is located 1,910 feet east of Westminister Road
along the south side of SE 15th Street. To the north of the subject across
SE 15th is vacant land. To the south and west is vacant land and residential
subdivisions that are part of the Oakwood development. To the east is
a platted single-family subdivision.
21
PROPERTY PROFILE
SITE DATA ... continued
Functional Adequacy of Site
The site appears to be will suited to its intended use as an independent
and assisted living facility. The location makes it readily accessible
to a middle to upper middle income residential neighborhoods in the
growth corridor of Midwest City.
Easements
A complete survey was not furnished for this appraisal. It is our
recommendation that a survey be conducted to identify possible encroachments
as well as legal boundaries. No obvious encroachments were observed during
the site inspection.
Covenants and Restrictions
No special covenants and restrictions beyond normal zoning codes were
known to exist. A title search by a qualified firm is recommended to
identify any encumbrances to ownership which might exist.
Ad Valorem Tax Account # 15-600-7021
The subject taxes are based upon a market value of $306,000 and an assessed
value-of $33,660. The 2000 taxes were 3,464,62 and 2001 taxes are expected
to be similar.
Tax Analysis
The property will be assessed after completion of the facility. We have
estimated that the taxes at that time will be about $50,000 based on the
value concluded in the report as compared to other independent and assisted
living centers in the area.
22
[SITE PLAN]
PROPERTY PROFILE
BUILDING DATA
The facility is to be developed with 86 units in phase 1. Construction
is scheduled to be completed in early-2002. As indicated in the preliminary
plans, the building will contain about 72,000sf in phase I.
ARCHITECTURAL DESIGN
The building is to be two-story and constructed in a contemporary "H"
shape which allows a nursing station, kitchen, dining room and offices
to be centrally located. The units (86) are located along a primary hallway.
The building is to be constructed sonietime in late 2001 and early 2002
and the construction is described briefly as follows:
CONSTRUCTION
Substructure: Poured, reinforced concrete
slab-on-grade.
Superstructure: Wood frame with brick veneer exterior
facade.
Roof: Gable with heavy weight asphalt composition
shingles.
Windows: Aluminum frame.
Doors: Aluminum/glass entry doors with steel
doors at emergency exits. Interior
doors solid core wood with wood frames.
All doors are extra wide allowing
handicap access.
Restrooms: Bathrooms with fiberglass tub enclosures
in each resident room. Separate common
restrooms in the main corridor which
include handrails and handicap access.
HVAC: Central multiple units for the offices,
kitchen and common areas. Individual
through the wall heat pump units for the
resident rooms. Cottages to be central
HVAC.
23
PROPERTY PROFILE
BUILDING DATA ... continued
Plumbing: Commercial grade conforming to city code.
Electrical: Conforming to code requirements for
present use.
Interior Finish: Painted sheetrock with some coverings
and wainscoting in hallways.
Parking: Parking to be on east (front) of the
building.
Landscaping: Trees and shrubbery around perimeter of
the building with grass lawn.
Furniture, Fixtures & Equipment: Kitchen equipment included all necessary
kitchen equipment, tables, stoves,
refrigerators, freezers and dishwashing
system.
24
PROPERTY PROFILE
BUILDING DATA ... continued
CONDITION OF IMPROVEMENTS
The subject independent and assisted living center is to be an attractive,
well designed facility of good quality construction and good utility.
As a new structure there will be no deferred maintenance. The condition
of the building is discussed in terms of effective age, functional utility
and external forces which impact the property value.
Deferred Maintenance
This discussion includes those items of maintenance which need to be
corrected or cured as of the appraisal date and which exceed normal routine
maintenance. As a new building, there will be no deferred maintenance.
Effective Age/Physical Life
The effective age of a property considers the actual age and any gain
or loss due to care and maintenance or lack of it.
Physical life is the number of years a structure or component is expected
to remain serviceable without regard to functional utility. The shell
structure of a building may have a potential physical life which far exceeds
the practical life cycle of the property. The practical life cycle is
dictated by the number of times the short-lived items can be replaced
or renovated before the property is replaced or abandoned.
A discussion of effective age and estimated physical life provide the
foundation for estimating physical deterioration of a property using the
age-life method and also provides a basis for estimating remaining economic
life which is important when forecasting future income potential.
The property should be in service by spring 2002 and will have no effective
age at the time of completion. The physical life, new for the long-lived
building structure is estimated to be 45 to 50 years according to Marshall
& Swift guidelines. The physical life, new for the short-lived components
is treated separately in the Cost Approach section under accrued depreciation.
Remaining Economic Life
The remaining life of a property is estimated based on the experience
of similar structures in the neighborhood or surrounding neighborhoods
which are subject to similar economic forces. This estimated time is
related to physical life remaining but can be shorter if the neighborhood
economic cycle is deteriorating causing functional or external obsolescence.
25
PROPERTY PROFILE
BUILDING DATA ... continued
The neighborhood for the subject is stable and is expected to remain
viable for the remaining physical life of the building of 45 to 50 years,
the remaining economic life for the property.
Functional Utility
Functional utility is the ability of a property to compete with similar
properties in the neighborhood. Diminished utility can result from
deficiencies or superadequacies.
The subject is planned to be of modern design and construction and no
functional obsolescence was observed.
External Obsolescence
External obsolescence is any loss in value due to forces outside the
property and includes locational and economic factors.
No locational or environmental factors were observed in the neighborhood
which would negatively impact this property.
The economic factors which impact a property arise from an imbalance
in supply and demand as related to the subject. Economic obsolescence
is measured by the rent loss due to low rents or occupancy in the
neighborhood as compared to the rent required for feasibility. Economic
obsolescence is analyzed in the Cost Approach Section under Accrued
Depreciation.
FF&E
Furniture, fixtures and equipment required for the normal operation as
an assisted living center has been included in this appraisal. This includes
beds, bedding, case goods, kitchen and laundry equipment, recreational
equipment and some nursing support equipment. According to Marshall Valuation
Service, the cost new of this equipment will typically be about $4,250/unit
($365,500). No detailed equipment list with replacement cost was available
as of the date of the appraisal. The FF&E costs from Marshall's will
be used in this analysis.
26
HIGHEST AND BEST USE
MOST PROBABLE USE
Fundamental to the appraisal concept is the theory of highest, best or
most probable use of the land "as vacant" and "as improved". Highest
and best use may be defined as:
The reasonably probable and legal use of vacant land or art improved
property, which is physically possible, appropriately supported, financially
feasible, and that results in the highest value. (Source: The Appraisal
of Real Estate Ninth Edition, Page 269; Chicago: The American Institute
of Real Estate Appraisers; 1987)
The concept derives from the definition which states that market value
is "the most probable price which a property should bring in a competitive
and open market".
The term "most probable use" is used interchangeably with "highest and
best use" but is preferred in this discussion because it implies a reasonable
and practical use for property and not necessarily those uses which are
speculative, even though they indicate a higher value.
The most probable use for the site is considered both "as vacant" and
"as improved". There are four essential stages of analysis used in
estimating highest and best use.
1. Permitted Use: What are the legal and permitted uses, in
reference to zoning and restrictions?
2. Possible Use: What physical application of the site is possible?
3. Feasible (Probable) Use: What potential and legal uses will
produce a net return to the land? Or, what permitted and
physically possible uses are in demand in the market.
4. Highest and Best (Most Probable) Use: Among the feasible or
marketable uses, which use produces the highest return or
present worth to the land?
27
HIGHEST AND BEST USE
HIGHEST AND BEST USE ... continued
Permitted Use
Uses permitted by the Midwest City planning department include most
residential uses with no commercial or industrial uses allowed. As stated,
re-zoning was required for the proposed use and the developer obtained the
required zoning.
Possible Use
The site is of sufficient size to permit a small to medium commercial
use or light industrial use as well as most residential applications.
Feasible (Probable) Use
The discussion of feasible or probable use is a market-driven concept
and the market usually limits the number of property uses to a few logical
choices.
The feasible uses for this site, that is, those uses which would provide
a return to the land, are best indicated by the development trends which
are apparent in the immediate neighborhood. This follows from the reasonable
assumption that developers have carefully considered the market and have
employed those uses which would maximize the return to their property.
There is little likelihood that, if vacant, the site would be developed
for any specific use at this time due to the large number of competitive
sites available in the immediate vicinity. One exception would be the
intended use as an independent and assisted living center which is a viable
and feasible use.
Highest and Best Use - As Vacant
The highest and best use analysis selects from among the feasible uses,
that reasonably probable use which will produce the highest return to the
land. Since none of the likely uses are considered feasible at this time,
the highest and best use would be to hold as speculative land for future
development until the market demand dictates construction. Considering the
possible future uses, there are no alternative uses that would likely produce
a higher return than the intended use. Therefore, the speculative buyer
would likely purchase the land for a similar or the same use as the intended
use as an independent/assisted living center.
28
VALUATION
VALUATION PROCESS
As previously outlined, the valuation process recognizes fundamental
geo-economic factors as well as physical characteristics that are influential
and impactive on the property. More specifically, the appraisal problem
addresses the economic viability of the property relative to market trends,
anticipated revenues and the effects of change within the neighborhood.
Building on the economic and physical data developed in the preceding
studies and considering the highest and best or most probable use for
the property, the valuation process will employ all three appraisal
techniques, the Income Capitalization, Cost, and Sales Comparison Approaches
to develop various indications of value. These are considered the
probable range of value for the property.
Definition and Description of Assisted Living Centers
Assisted Living Centers are a relatively new concept in the elderly care
industry. As such, appraisal methodology is evolving to meet the demands
of a new industry that in some ways is very unique. Rarely are these
type properties sold or rented to an operator, so workable databases do
not exist within the market. This presents a problem with the definition
of Market Value, which presumes an active market of buyers and sellers.
However, most centers trade as a going concern with no allocation available
between business operation and real estate. Arriving at a realistic
conclusion is not an easy task.
RATE ANALYSIS & SELECTION
Minimum Acceptable Yield
The underlying basis for valuing income producing real estate is the
minimum Acceptable required to attract investors to a property considering
alternative investment opportunities and the risks associated with ownership.
The concept of valuing commercial real estate based on a minimum acceptable
yield is a logical extension of the definition of market value which states
that "the buyer and seller, (are) each acting prudently, knowledgeably
and assuming price is not affected by undue stimulus".
29
VALUATION
RATE ANALYSIS & SELECTION - continued
Minimum acceptable yield can be defined as that anticipated reward
which is sufficiently high to attract a buyer and sufficiently low to
justify selling. Further explained, the buyer desires the highest reward
(yield) possible but if the yield potential is too high, the seller will
not sell but will hold the property and enjoy the benefit for himself.
It is our belief that most market value sales of real estate are transacted
at a price that reflects a prospective yield which falls within a narrowly
defined range of minimum acceptable yield rates. If this premise can
be supported, the minimum acceptable yield becomes the point of equilibrium
in the field of variables which influence real estate valuation.
Unless this concept is accepted and applied, the valuation of real estate
continues to be a practice of subjective art with one too many variables
present, in most instances, to permit true economic modeling.
If a minimum acceptable yield, or narrow yield range does exist and can
be identified, and we believe it can, then the classic approaches to value,
the Income, Cost and Sales Approaches become dependable economic models
as viewed from three perspectives but with a common reference point,
or point of equilibrium, being the minimum acceptable yield.
Identifying A Minimum Acceptable Yield
We have explored several avenues to identify what might be considered
a minimum acceptable yield for real estate. The first of these was the
use of nationally published investor surveys as well as surveys of local
investors. The second was a study of historical yield performance achieved
by real estate over time.
A third avenue explored the comparative rates available in the market
and constructed a yield rate model by adding to a safe rate various premiums
for management, illiquidity and risk. A yield rate is then selected based
on these studies which provides a reasonable incentive to attract a buyer
to the property.
National Investor Surveys
The nationally published survey by Peter F. Korpacz and Associates identifies
equity yield rate ranges for various type of real estate as well as equity
cap rates, residual cap rates and an average yield range for high and
low grade investments in real estate.
30
VALUATION
RATE ANALYSIS & SELECTION - continued
KORPACZ SURVEY - SUMMARIZED
3rd Quarter 2000
Equity Equity Residual
Property Type IRR's Cip Rate Cap Rates
Regional Mall Market 11.24% 8.44% 8.68%
Power Center Market 11.27% 9.58% 9.75%
CBD Office Market 11.18% 8.91% 9.41%
Suburban Office Market 11.04% 9.22% 9.56%
Industrial Market 10.98% 9.08% 9.41%
Apartment Market 11.45% 8.63% 9.10%
Source: Korpacz Real Estate Investor Survey, 3rd Quarter 2000, Price
Waterhouse Coopers
Local Investor Survey
In addition to the national surveys shown above, we have discussed yield
requirements with several prominent local investors and real estate advisors.
While most buyers may not consciously calculate yield in the decision
process, the consensus was that the minimum yield of 12% would be required
to attract them to a property. This is not to say that a buyer does not
hope that he can do much better than the minimum yield. It merely says
that if he cannot see at least the minimum yield he will not complete
the deal.
National Market Indicators
2000 - 2001
Regional Mall Office Industrial Apartment
1st Qtr 4th Qtr 1st Qtr 4th Qtr 1st Qtr 4th Qtr 1st Qtr 4th Qtr
Discount 11.45% 11.41% 11.31% 11.04% 10.90% 10.88% 11.41% 11.41%
OAR 8.78% 8.70% 9.38% 8.92% 9.08% 8.96% 8.58% 8.57%
Residual 8.98% 8.95% 9.61% 9.46% 9.49% 9.41% 9.07% 9.04%
Source: Valuation Insights & Perspectves, The Appraisal Institute,
2nd Quarter 2001.
Comparative Rates
Another recognized method for identifying a minimum acceptable yield
rate considers alternative investments to real estate. At any given time
in the market, there is a limited amount of capital available and various
investments must
31
VALUATION
RATE ANALYSIS & SELECTION - continued
compete for these capital funds. This competition is measured in terms
of anticipated yield which is recognizably influenced by the relative
safety or risk as reflected by the following benchmark investment rates.
MONEY RATES
Mar 01 Jan 01 Mar 00 Jan 00
Prime Rate 8.32% 9.05% 8.83% 8.50%
Federal Discount Rate 4.81% 5.52% 5.34% 5.00%
3-mo. Treas. Bills 4.42% 5.15% 5.72% 5.43%
6-mo. Treas. Bills 4.28% 4.95% 5.85% 5.52%
5-Yr. Treas. Bonds 4.64% 4.86% 6.50% 6.58%
10-Yr. Treas. Bonds 4.89% 5.16% 6.26% 6.66%
Corporate Bonds (Aaa) 6.98% 7.15% 7.68% 7.78%
Corporate Bonds (A) 7.61% n/a 8.07% 8.15%
Corporate Bonds (Baa) 7.84% 7.93% 8.20% 8.33%
In reviewing alternative investments and their yield, we have considered
the four major components influencing the rate of return, i.e.; the safe
rate, a management premium, an illiquidity premium and risk premiums.
Risk Free Rate
The safe rate is the current market rate on risk-free investments. The
safe rate, or risk-free rate, moves up and down with changes in both supply
and demand in the money market. The treasury bond rate is often used
as an acceptable measure of the risk-free rate because in theory, there
is no chance that the government will default on interest or principal
payments.
Management-Premium
Management premium is a charge for the cost of administering an investment,
even though the investment vehicle may be passive in nature. Traditional
mortgage loans require a substantial amount of administrative time and
effort. Late payments must be collected, loans in default must be foreclosed,
and insurance and tax payments must be foreclosed, and insurance and tax
payments must be escrowed and subsequently disbursed. When compared to
a loan with the U.S. Treasury which involves virtually no lender
administration - typically lenders pay .25% - .50% (25-50 basis points) of
the gross yield to a servicing company to perform these duties.
32
VALUATION
RATE ANALYSIS & SELECTION - continued
Illiquidity Premium
Illiquidity exists when lenders or investors give up the right to withdraw
their money immediately. The higher interest yield nori-nally paid on
longterm government bonds as compared with short-term government securities
is an elementary example of illiquidity premium. Real estate is recognized
as a long-term investment and may require a discount to liquidate if the
need should arise. This premium is the amount added to the risk free
rate to provide sufficient discount to effect an immediate sale. The
formula is as follows:
Illiquidity Premium = Risk Free Rate/Discount Rate - Risk Free Rate
where the Discount Rate is the present value of one (1) at the risk free
rate for the number of years required for a normal marketing period.
Risk
Risk premiums are additional interest amounts added to compensate for
the perceived risk of the investment. The greater the perception of risk
the greater the return required. Risk premium is associated with the
principles of anticipation and change. Default risk is the risk that
either the principal/interest payments or yield will be less than that
contacted for or anticipated, or will be paid after the due date. The
default risk premium considers financial strength, integrity and quality
of the tenant. This premium is similar to the extra interest charged
by a lender for a second mortgage position and is usually about 200 basis
points above a first mortgage.
Another form of risk arises from uncertainty of the market in the future.
The longer term holding periods associated with real estate investment
require,, an additional premium for the risk of change which reflects
the perceived volatility of the market. Until the late 1970's, real estate
was considered a very stable investment, however during the past decade
values have rapidly inflated and deflated.
The premium for risk of change or reliability factor is applied to account
for a volatility in inflation rates beyond the long term average rate
which is incorporated in the risk-free rate above. This premium is calculated
as the difference between the current risk free rate and the previous
four-year average. The logic is that rates always tend to return to the
norm.
Allocations to the various elements which comprise the yield rate are
illustrated in the two models as follows:
33
VALUATION
RATE ANALYSIS & SELECTION - continued
CONSTRUCTED YIELD RATE MODEL
Risk-free Rate (10-Yr U.S. Bond): 4.89%
Management Premium: 2.00%
Illiquidity Premium: 2.00%
Default Risk: 1.00%
Reliability Factor 1.55%
Indicated Yield Rate: 11.44%
CONSTRUCTED YIELD RATE MODEL
Market Rate (Corporate Baa Bonds): 7.84%
Management Premium: 2.00%
Illiquidity & Risk Premium: 3.00%
Indicated Yield Rate: 12.84%
Summary
Both national and local data indicate that real estate investors are
willing to accept yields in the range of 10% to 13% with predominate yield
requirements around 11% to 12%. Considering the economic forces,
neighborhood and physical characteristics of the property and current
market conditions, a yield rate of 12% has been selected for this analysis.
This rate is believed to be a reasonable incentive to attract capital to the
property provided that net income prospects are accurately estimated.
In the Income Approach, this yield rate provides a means of capitalizing
anticipated net income to produce an indication of value. The yield rate
can be applied as a discount rate to periodic incomes in a discounted
cash flow analysis or, when modified by an anticipated annual rate of
change, provides an overall rate by which a single years income can be
directly capitalized into an indication of value.
The yield rate provides a basis for the developer's required rate of
return in the Cost Approach by which economic appreciation or depreciation
may be calculated, which, when applied to the depreciated cost of a property,
will convert a replacement or reproduction cost estimate to a market value
indication.
The yield rate also provides a point of equilibrium or continuum through
the Sales Approach as a test of reasonableness for abstracted overall
rates. The difference between the required (minimum) yield and the indicated
overall rate, based on a
34
VALUATION
RATE ANALYSIS & SELECTION - continued
reasonable income projection, is the annualized appreciation or depreciation
anticipated by the buyer at the time of reversion.
As supported, developed and illustrated the minimum yield requirement
for real estate is an integral and significant part of this analysis.
As discussed the yield requirement becomes a common factor in all three
approaches or indications and a significant element of the valuation process.
35
VALUATION
INCOME CAPITALIZATION APPROACH
The theory of the Income Capitalization Approach is that the value of
a property is the present worth of all the net income it will produce
over its useful life, or for a specified holding period, plus the anticipated
reversion value of the property at the end of the holding period.
The Income Approach measures the gross income potential of the property
as indicated by public and private rents and adjusts for vacancy which
are estimated from a study of current and recent vacancy rates for all
facilities and for the subject.
From the effective gross income are deducted operating expenses based
on actual costs and compared to typical costs incurred by similar properties.
The resulting net operating income is then converted to an indication
of value through one of several capitalization techniques.
The market study previously outlined in this report discussed the potential
demand as indicated from a demographic profile of the Oklahoma City area.
In addition to the general data in the market study, the following assisted
living centers operating in the Oklahoma City metroplex are outlined.
These centers are considered to be direct or indirect competition to
the proposed subject facility.
36
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Rent Comparable 1
Forest Glade Assisted Living 2500 N Glade Avenue
No. Units 106
Yr. Built: 1990
Occupancy: 99%
Unit Features: microwave - refrigerator - walk-in tub
enclosures
Utilities: all paid
Concessions: None - $100 deposit
Comments: This property was built as an independent
living apartment complex and was expanded to
include 38 assisted living units. It is in
excellent physical condition and the
independent living units are full with a
waiting list. The assisted living area has
one vacancy.
Services: Three meals per day; 24 hour staff; nurse on
staff; medical supervision; weekly
housekeeping; van service; personal
assistance
Type Unit Unit Size Rent $/SF
1 bed-independent living 530sf $1,189 $2.24
1 bed-assisted living 530sf $1,689 $3.19
extra persons $811
37
VALUATION
INCOME CAPITALIZATION APPROACH...continued
Rent Comparable 2
Emerald Sq. Assisted Living 701 N Council Road
No. Units 60
Yr. Built: 1995
Occupancy: 98%
Unit Features: microwave - refrigerator - walk-in tub
enclosures
Utilities: all paid
Concessions: None - $100 deposit
Comments: This property was built as an assisted living
center with 60 assisted living units. It is
in excellent physical condition and the units
are nearly full with one vacancy.
Services: Three meals per day; 24 hour staff; nurse on
staff; medical supervision; weekly
housekeeping; weekly laundry; van service;
personal assistance; secured premises
Type Unit Unit Size Rent $/SF
efficiency-assisted living 225sf $1,175 $5.22
1 bed-assisted living 290sf $1,300 $4.48
extra persons $950
38
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Rent Comparable 3
Rivermont Assisted Living 750 Canadian, Norman
No. Units 59
Yr. Built: 1995
Occupancy: 98%
Unit Features: full kitchens - walk-in tub enclosures
Utilities: all paid
Concessions: None - $100 deposit
Comments: This property was built as an assisted living
center with 59 assisted living units and 70
total beds. It is in excellent physical
condition and the units are nearly full with
one vacancy.
Services: Three meals per day; 24 hour staff; nurse on
staff; medical supervision; weekly
housekeeping; van service; personal assistance
Type Unit Unit Size Rent $/SF
private-assisted living 320sf $1,995 $6.23
semi-private-assisted living 420sf $1,495 $3.56
extra persons $100
premium location $100
39
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Rent Comparable 4
Alteria Sterling House 2435 NW 122nd
No. Units 37
Yr. Built: 1996
Occupancy: 100%
Comments: This property was built as an assisted living
center with 37 assisted living units. During
1999 the facility was converted to a dementia
care facility. Minor renovation, primarily
securing the property more fully, were
completed. The facility is 100% occupied
with a waiting list.
Services: Three meals per day and snacks; 24 hour staff;
nurse on staff; weekly housekeeping; weekly
laundry; secured premises
Type Unit Unit Size Rent $/SF
studio unit 220sf $1,650* $7.50
1 bedroom unit 284sf $1,845* $6.50
1 bedroom unit 312sf $1,950* $6.25
move-in fee $600
*additional levels of assisted care are available @Nitliin the same units
outlined above with fees based upon individual assessment
40
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Rent Comparible 5
The Mansion At Waterford 6110 N Penn
No. Units n/a
Yr. Built: 1999
Occupancy: unavailable (property is in the initial
leasing phase)
Comments: This property was built as a retirement
center with independent living, assisted
living, nursing and dementia care units.
It is in excellent physical condition having
opened in the last few months.
Services: Three meals per day; 24 hour staff; nurse on
staff; medical supervision; weekly
housekeeping; daily bed making & trash;
weekly laundry; van service; personal
assistance; secured premises
Type Unit Unit Size Rent S/SF
ind. living efficiency 360sf $1,895 $5.26
ind. living 1 bedroom 380sf $2,095 $5.51
ind. living 1 bedroom 455sf $2,295 $5.04
ind. living 1 bedroom 585sf $2,595 $4.44
ind. living 1 bedroom 825sf $3,095 $3.75
ind. living I bedroom 950sf $3,195 $3.36
ind. living 1 bedroom 99osf $3,395 $3.43
extra persons $500
assisted living* $400; $800; $1,200
*three levels of assisted care are available within the sai-ne units
outlined above with fees of $400, $800 and $1,200 per month above the
independent living rates
41
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Market Rents
The five previously outlined assisted living and alzlieimer's centers
indicate a consistent range of rental rates in the Oklahoma City market.
The variances in rates are minimal and are primarily due to room size,
amenities and services offered. Phase I of the proposed subject facility
will offer 1 bedroom assisted living units, studio assisted living units
and alzheimer's units. The projected rates are to be as follows:
(70) 1 bed units @ $1,850 per month: $22,200 annual per unit
(8) studio units @ $1,400 per month: $16,800 annual per unit
(8) alzheimer units @ $2,750 per month: $33,000 annual per unit
These rates are for level one care. Higher levels of care will increase
as follows; level 2 $200/month; level 3 $400/month; level 4 $600/month.
A second person charge is $700 per month. The projected rates for both
the assisted living and the dementia (alzheimer) units appear to be near
those indicated in the market and the subject rates are projected for
spring 2002. It should also be noted that each center has latitude to
define which services are included at each level of care. This also can
reflect a difference in rates per room from one center to another in the
same market.
Potential Gross income
The rents for the subject appear to be sufficiently in line with the
local market to have confidence in the projections. The subject rents
produce the following:
(70) 1 bed units @ $1,850 per month x 12: $1,554,000
(8) studio units @ $1,400 per month x 12: $134,400
(8) dementia units @ $2,750 per month x 12: $264,000
---------
Total: $1,952,400
*Additional income of about $200,000 is projected for additional care
levels and 2nd persons
42
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
Vacancy
The five comparable retirement centers were indicating full occupancy
with the exception of one center. Some of the centers have waiting lists
in addition to being 100% occupied. As new rooms are added to the supply
in the local market, the occupancy levels will tend to decline. However,
at present there is more demand than rooms available and occupancy should
remain strong. A stabilized occupancy level of 95% for the subject is
considered reasonable given possible pre-leasing and high demand.
Expenses
The following proforma indicates projected operating costs for phase
I of the proposed center. The expenses are estimated from data provided
and as compared to operating expenses for competitive facilities in the
Oklahoma City market.
The expense categories as outlined are estimated both from the projected
data for the subject and from known expenses for competitive centers.
In addition to the expenses as estimated, an additional item known as
"replacement reserves" is added to account for the replacement of short
lived components of the real estate improvements. The maintenance expense
usually covers most upgrades of short lived items, however roof replacement
and HVAC are not covered under the maintenance costs. The "replacement
reserves" accounts for these items.
43
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
INCOME - EXPENSE PROFORMA
Revenue
(70) 1 bed units @ $1,850 per month x 12: $1,554,000
(8) studio units @ $1,400 per month x 12: $134,400
(8) dementia units @ $2,750 per month x 12: $264,000
---------
Potential Gross Income: $1,952,400
Less Vacancy: 10% PGI -195,240
Add Miscellaneous Income*: +200,000
Effective Gross Income: $1,957,160
Expenses
Salaries & Wages: 26.0% EGI $5,917/ unit $508,862
Employee Benefits: 4.5% EGI $1,024/ unit 88,072
Taxes (non-payroll): 2.5% EGI $569/ unit 48,929
Utilities: 4.0% EGI $910/ unit 78,286
Insurance: 1.3% EGI $296/ unit 25,443
Marketing: 1.5% EGI $341/ unit 29,357
Maintenance: 1.0% EGI $228/ unit 19,572
Laundry & Linen: 1.4% EGI $319/ unit 27,400
Housekeeping Supplies: 0.5% EGI $114/ unit 9,786
Food & Kitchen Supplies: 8.5% EGI $1,934/ unit 166,359
Social Services Supplies 0.3% EGI $68/ unit 5,871
Administration: 1.7% EGI $387/ unit 33,272
Property Taxes: 2.7% EGI $614/ unit 52:843
Reserves for Replacement: 2.0% EGI $445/ unit 391,143
------ ---------
TOTAL EXPENSES: 57.2% E/R $13,177/ unit 1,133,195
---------
Net Operating Income: $823,965
CAPITALIZATION
Capitalization is the process of converting anticipated future benefits
to present worth. In selecting the appropriate techniques for converting
the net operating income into an estimate of value, several methods were
considered; Mortgage-Equity Capitalization, Discounted Cash Flow Analysis
and Direct Capitalization. Both the Mortgage-Equity and Direct Capitalization
methods produce an indication of value based on a single year's net income.
When the net income stream is predictable a stabilized year can be selected
and the resulting value indication is meaningful.
44
VALUATION
INCOME CAPITALIZATION APPROACH ... continued
DIRECT CAPITALIZATION METHOD
The use of Direct Capitalization in assisted living facilities is a valid
method because of the consistency of the incoi-iie stream caused by the
partial governmental controls of the income. This consistency throughout
the state allows the appraiser to apply direct capitalization because
of the stabilized income that is predictable year to year.
The sales of existing assisted living cei-iters outlined in the Sales
Comparison Approach provides some support for the overall rates as derived
from these sales. This '-market derived" data, when the income is accurate
and stable is accorded great weight in the analysis.
The two sales produced overall rates of 10.97% and 11.00%. The subject
is representative of the norm and an overall rate near the mean is appropriate.
Data provided by a survey of lenders and investors in National Investment
Conference for Senior Housing and Long Term Care Industries (NIC)
publications indicates rates of between 10.3% and 12.8% for assisted living
facilities with an average of 11.2%. The survey included 64 assisted living
properties nationally. The subject is representative of the norm and an
overall rate near the mean is appropriate. However, the survey was from
1999 and early 2000 data when interest rates were higher. Therefore, the
subject NOI will be capitalized at a rate of 11.0%, indicating the following
value.
$823,965 (NOI) / 11.00% = $7,490,591
Summary
The capitalization of the net operating income to an investor produced
an indicated value of $7,490,591 which is inclusive of furniture, fixtures
and equipment (personal property) necessary for the operation of the assisted
living center business.
This value is based on the 86 units for which phase I of the center is
to be constructed. The indicated value is for "as completed" condition
and is contingent upon timely completion of construction in accordance
with the preliminary drawings included in the addenda of this report.
VALUE INDICATION By The INCOME CAPITALIZATION APPROACH (rnd): $7,490,000
45
VALUATION
COST APPROACH
The Cost Approach to value is based upon the principle that a prudent
purchaser would not pay more for a property than the cost to reproduce
or replace it, without costly delay. The approach involves estimating
the value of the subject site as if it were vacant and available to be
put to its highest and best use, to which is added the value of the present
worth of the improvements. The value of the improvements is based on
the current cost of reproducing or replacing them, inclusive of
entrepreneurial profit, less any accrued depreciation.
The square foot method of estimating costs is used more than any other
method in this area, and this is the method adopted in estimating the
cost of the subject improvements. The rates per square foot for each
of the various types of improvements have been obtained by checking the
costs of erecting similar type newly built properties in the area, contrasted
with estimates provided by Marshall Valuation Service, a national cost
estimating firm.
Site Valuation
The Cost Approach commences with a valuation of the subject site. In
the discussion of highest and best use, it was concluded that the reasonably
probable-highest and best use of the subject site was the proposed use
as an independent/assisted living center. The following land sales are
presented for comparison to the subject site of 261,360sf (6.00 acres).
46
[COMPARABLE LAND SALES INDICATING SUBJECT PROPERTIES]
VALUATION
COST APPROACH ... continued
LAND SALE NO. 1
Location: NW/C of Westminister Road & SE 15th
Date: August 1999
Grantor: 1st Oklahoma Mortgage Investment Co.
Grantee: Land Improvements, LLC
Consideration: $220,000
Conveyance: WD; Book 7662, Page 1270
Terms: Cash sale
Comments: This property contains 109,771sf (2.52 acres)
and was purchased for development of a retail
center. The site is rectangular with corner
exposure and frontage on both Westminister
Road and SE 15th. The property is within the
Midwest City limits with commercial zoning and
city utilities are reported to be available.
Analysis: $220,000/109,771sf = $2.00 per sf
LAND SALE NO. 2
Location: NE/C of Westminister Road & SE 15th
Date: August 1999
Grantor: Diverse Properties, LLC
Grantee: Land Improvements, LLC
Consideration: $750,000
Conveyance: WD; Book 7654, Page 399
Terms: Cash sale
Comments: This property contains 380,714sf (8.74 acres)
and was purchased for development of
condominium offices. The site is rectangular
with corner exposure and frontage on both
Westminister Road and SE 15th. The property
is within the Midwest City limits with
commercial zoning and city utilities are
reported to be available.
Analysis: $750,000/380,714sf = $1.97 per sf
47
VALUATION
COST APPROACH ... continued
LAND SALE NO. 3
Location: East of Westminister Road & SE 15th
Date: March 2001
Grantor: Oakwood East Development Co., LLC
Grantee: Village at Oakwood, LLC
Consideration: $306,000
Conveyance: WD; Book 8031, Page 482
Terms: Cash sale
Comments: This property contains 261,360sf (6.00 acres)
and is the purchase of the subject site. The
site is rectangular with frontage on SE 15th
east of Westminister Road. The property is
within the Midwest City limits with office
zoning and city utilities are available.
Analysis: $306,000/261,360sf = $1.17 per sf
ANALYSIS
The three previously described sales represent the best data available
for estimating the value of the subject tract. All three of these sales
were purchased for a specific use and are located along SE 15th within
1/2 mile of the subject. There is moderate sales activity in the subject
area with a few of sales occurring each year. The sales are summarized
as follows:
Sale Sales Price/
No. Date Size Use Price SF
1 8/99 109,77lsf retail center $220,000 $2.00
2 8/99 380,714sf offices $750,000 $1.97
3 3/01 261,360sf living center $306,000 $1.17
Subject 8/01 261,360sf living center
48
VALUATION
COST APPROACH... continued
MARKET ADJUSTMENTS
Property Rights Conveyed
All properties were transferred in fee simple estate. No adjustment
was required.
Financing Terms
Sales were cash to the sellers and/or third party mortgage financing
at market terms requiring no cash equivalency adjustment.
Conditions of Sale
All sales were arms length. No conditions were known which would have
influenced the price paid for these properties. All of the sales were
purchased for a specific use. No adjustment were made for unusual conditions
of sale or items of personal property.
Market Conditions
These sales occurred between August 1999 and March 2001. The market
has been relatively stable or increasing slightly for this type property
during this period and no adjustment was supported by the data.
Location
All of the sales were located in the immediate vicinity of the subject.
The sales each have SE 15th exposure like the subject and are considered
similar to the subject in location. Sales 1 and 2 have corner exposure
and the sales prices are $0.85 and $0.82 per sf higher than sale 3. With
a negative adjustment of $0.85 per sf, these two sales indicate values
of $1.15 and $1.12 per sf.
Physical Characteristics
The physical characteristics of the sales varied somewhat. All of the
properties were of vacant land along SE 15th Street. Size varied but
all of the sites were suitable for the intended use with no difficulty
in development. Topography, utility availability and zoning were similar
with no market supported adjustments.
Summary
The three sales depicted a range of value from $1.15 per sf up to $2.00
per sf prior to adjustments. When sales 1 and 2 are adjusted for corner
exposure a value of $1.13/sf is indicated. All three sales exhibit a
mean of $1.14 per square foot.
49
VALUATION
COST APPROACH... continued
With emphasis on sale 3 because it is the subject site, the following
is considered to best represent the subject's place in the market:
261,360 sf x $1.15 psf = $300,564
Estimated Land Value (Rounded) $300,000
50
VALUATION
COST APPROACH ... continued
Replacement Cost
In developing the subject improvement's current replacement cost, new,
information obtained from the construction cost estimate provided was
consulted. The cost new from Marshall & Swift is outlined below as it
is in line with the estimated cost provided. The overall cost is a blend
of costs for the cottages and the primary building because the cost per
sf is within $0.20 for each type of unit.
Indicated Unit Cost: $82.68/sf
Perimeter Area Multiplier 1.000
Story Height Multiplier 1.000
Local Multiplier 0.910
Current Multiplier 1.100
x1.001
---------
$82.76
Add Entrepreneurial Profit @ 12% 9.93
Total $92.69
Building Replacement Cost, New:
Gross Building Area: 72,000sf
Unit Cost: x $92.69
--------
TOTAL BUILDING REPLACEMENT COST, NEW: $6,673,680
Depreciation
Physical/Incurable Building:
Age/Life Depreciation: (0%) -0
Depreciated Value of Building: $6,673,680
FF&E Cost
86 Units ($4,250/unit) $365,500
Site Value:
Site Improvements Replacement Cost: $250,000
Age/Life Depreciation: (0%)
-------
Depreciation: -0
Depreciated Value of Site Improvements: $250,000
Land Value Estimate: $300,000
51
VALUATION
COST APPROACH... continued
Replacement Cost Analysis
Building Replacement Cost, New: $6,673,680
FF&E Cost, New: 365,500
Add Site Improvements: 250,000
-------
Total Improvement Costs, New: $7,289,180
Add Land Value: 300,000
-------
Total Cost, New Improvements and Land: $7,589,180
Replacement Cost Summary
Building Replacement Cost, New: $6,673,680
Physical Depreciation: -0
Depreciated FF&E Cost: 365,500
Add Site Improvements, Depreciated: 250,000
-------
Total Improvement Costs, Depreciated: $7,289,180
Add Land Value: 300,000
-------
Total Depreciated Property Value: $7,589,180
Less Economic Obsolescence: -0
Value Indication: $7,589,180
VALUE INDICATED by COST APPROACH (rnd): $7,590,000
52
VALUATION
SALES COMPARISON APPROACH
The Sales Comparison Approach is a method of estimating market value
by comparing the subject to similar properties which have sold recently.
This approach is based on the principle of substitution which states:
". . . the value of a property that is replaceable in the market tends
to be set by the cost of acquiring an equally desirable substitute
property." (Source: The Appraisal of Real Estate, Eighth Edition,
Pages 310-311. Chicago: The American Institute of Real Estate
Appraisers; 1983).
This approach is recognized as an objective analysis when recent sales
are available which are considered to have a similar highest and best
use and the terms and conditions affecting the sale are known and are
adjusted for recognized market dif ferences.
Market sales activity for assisted living centers has been very limited
in the Oklahoma City area. Most of the competitive assisted living centers
have been constructed since 1994 and are still operated by the original
developer. There are two facilities that have sold in the Oklahoma City
market. These two sales represent the only local indication of value
for existing assisted living centers. Four additional sales located
throughout the U.S. are referred to but will not be relied upon in this
analysis.
53
VALUATION
Sale No. 1
GARDENS AT RIVERMONT
800 Canadian Trails Drive
Norman, Oklahoma
This facility is a one-story, Cape Cod style built in 1995. The building
features asphalt, hipped, shingled roof with brick exterior facade, wood
frame portico with brick posts and concrete parking area and through the
wall heat pumps. The independent living units have full kitchens but
the assisted living units do not. The rooms feature plush carpeting,
call buttons and have a sprinkler system. The bathrooms feature ceramic
tile on the floor and a formed seat in the shower. Meals are served in
a central dining area for the occupants.
Rent Schedule
NO. TYPE SIZE BASE RENT
48 Assisted Living/l bed private 320sf $2,000
11 Assisted Living/l bed shared 420sf $1,500
Extra person (shared room only) $1,500
Deposit (refundable) $750
Services
Three meals per day, 24 hour staff, nurse on staff, medial supervision,
weekly housekeeping, some laundry service, van service, personal assistance.
Sale Data
Date: 8/7/95
Buyer: Arizona Baptist Retirement Center
Seller: SMG
Conveyance: WD; Book 2656, Page 1034
Consideration: $3,500,000
Terms: Cash to Seller
Actual Occupancy at Sale: 57%
Appraiser's Proforma Based on Seller's Income Expense Data:
PGI: $1,677,780; VACANCY: 10%; EGI: $1,510,000; EXPENSES: $1,125,000;
NOI: $385,000
Units of Comparison:
UNIT PRICE:$59,322;EGIM,2.31;NOI/Unit:$6,525;OAR: 11.00%
54
VALUATION
Sale No. 2
ALTERRA STERLING HOUSE
4101 N. Council Road
Bethany, Oklahoma
This facility was built in 1994 as a 26-unit assisted living center.
The building features a quadrangle design with covered porches and lawn
furniture characteristic of the floor plan for this franchised center.
The building has frame construction with brick veneer and vinyl siding
with some Ashlor cut limestone on the front. The roof is gable with asphalt
shingles. There is a hardwood entry floor and plush carpeting in the
main parlor. The dining area has tight looped carpet. The walls are
painted sheetrock and wallpaper with stippled ceiling. The building has
smoke alarms and a sprinkler system. There is a stone-faced fireplace
in the common area which also features oak trim. There is a library for
the residents use. Each room features cabinetry inside the front door,
under the counter 3 cu. ft. refrigerator and microwave oven. The bathroom
features a fiberglass bath enclosure which is fully walk-in and handicapped
accessible and special chairs for the shower.
Rent Schedule
NO. TYPE SIZE BASE RENT
6 Assisted Studio 294 sf $1,842.50
10 Assisted Living/l bed 319 sf $2,035
10 Assisted Living/l bed deluxe 360 sf $2,178
Extra person $600
Move in fee $600
Services
Three meals per day, 24 hour staff, nurse on staff, medial supervision,
weekly housekeeping and laundry service, van service, personal assistance,
secured premises.
Sale Data
Date: 3/22/96
Buyer: Meditrust of Kansas, Inc.
Seller: Sterling House Corp.
Conveyance: WD; Book 6873, Page 2202
Consideration: $1,502,000
Terms: Cash to Seller
Appraiser's Proforma Based on Seller's Income Expense Data:
PGI: $610,255; VACANCY: 10%; EGI: $549,230; EXPENSES: $384,461;
NOI: $164,769
Units of Comparison:
UNIT PRICE: $51,793; EGIM, 2.73; NOI/Unit: $6,337; OAR: 10-97%
55
[OKLAHOMA CITY MAP INDICATING THE COMPARABLE BUILDING SITES]
VALUATION
MARKET ADJUSTMENTS
Property Rights Conveyed
All properties were transferred in fee simple estate. No adjustment
required.
Financing Terms
None of the sales involved seller financing, therefore, no adjustments
were required for cash equivalency due to favorable financing.
Conditions of Sale
All sales were arms length. No conditions were known which would have
influenced the price paid for these properties. All of these sales included
the personal property (FF&E) required for operation as an assisted living
center.
Market Conditions
These sales occurred August 1995 and in March 1996. The market has improved
since this period of time due to the general economic climate and the
lower interest rates for mortgage financing. However, the assisted living
center market is currently developing and there is not sufficient data
available to support an adjustment. Therefore, no adjustment was made
for this condition.
Physical Characteristics/Location
New facilities or facilities which receive above average management and
maintenance tend to attract a higher occupancy. Because most of the assisted
living centers in this market are of recent construction there is no support
for adjustments. Therefore, we have made no adjustments for these
differences.
Unit Price/Unit
The two sales depict prices per room of $59,322 and $51,793 with a mean
of $55,557 per room. There is not sufficient data for a pattern but the
two sales appear to be consistent with a difference of about $7,500 per
room.
The price per unit or per bed does not appear to be a valid method for
estimating value for the subject property. Assisted living centers vary
considerably in interior features and in ancillary space like offices,
exercise areas, common areas, laundry space and space usage other than
for the actual living units. The amount of space within a particular
property that is not included in unit size is a factor that can vary from
as low as 50% to as high as 80%. The subject property has a ratio of
living space to total building size of approximately 57.2%.
56
VALUATION
The net rentable are (NRA) within the two sales is about 74% and 70%.
If adjusted for this difference, the two sales would be adjusted upward
by 17% and 13%. When these adjustments are applied, the two sales indicate
unit prices of $67,034 and $60,598. Using the upper end of the range
still does not place the subject near the values indicated by the Income
and Cost approaches
"'As Is"
86 Units x $65,000/unit = $5,590,000
Price Per Square Foot
A price per sf was also abstracted from the two local sales. In terms
of per sf of net rentable area (rooms or units), the sales produced very
consistent values of $175.18 and $175.59. These indications are considered
accurate because the square footage of rooms is the income producing portion
of any retirement center or assisted living center. The age of these
two centers is also a factor that requires some adjustment in comparison
to the proposed or "new" subject physical condition. Using a life of
45 years with an age of 5 and 6 years respectively, the two sales would
be adjusted upward by 11% and 13%. This adjustment would produce a price
per square foot of NRA of between $194.45 and $198.42.
Applying $195.00 per sf of net rentable are produces the following for
the subject:
41,200sf (NRA) @ $195/sf = $8,034,000
VALUE INDICATION SUMMARY
Price/Unit or Room: $5,590,000
Price/SF (NRA): $8,034,000
Summary
The indications produced by the two methods produced varying values.
The value indication produced by the price per sf of net rentable area
is very consistent. In addition, this method relies upon the income
producing portion of a property and is considered a significant market
indicator. The price per unit or room produces varied values and is less
accurate because of the required adjustment to account for the differences
in percentage of net rentable area from center to center. However, the
adjustment to the price per sf of NRA for building age is some what
subjective.
57
VALUATION
For these reasons, the price per square foot of net rentable area will
be given more weight and is considered to be an accurate indication given
the limited market data available. Therefore, the two methods produce
the following value.
VALUE INDICATION By The SALES COMPARISON APPROACH (rnd): $8,000,000
58
CONCLUSION
RECONCILIATION
The process of valuation encompasses the entire body of data as outlined
within the appraisal report. The purpose of this appraisal was to estimate
market value of the fee estate as if unencumbered and respective of surface
rights only. The City and Neighborhood Data provide a foundation from
which market data was abstracted, analyzed and employed in the subsequent
appraisal process. The Market Study depicted the current market conditions
and available data for independent/assisted living properties in the state
of Oklahoma.
As outlined by the appraisal process, the approaches employed have produced
the following indications of value for the subject property.
INCOME CAPITALIZATION APPROACH: $7,490,000
COST APPROACH: $7,590,000
SALES COMPARISON APPROACH: $8,000,000
FF&E VALUE: $365,500
LAND VALUE: $300,000
The indications of value have been based on direct and indirect
interpretation of available market data and current activity. A reasonable
and supportable range is illustrated by these interdependent approaches
respective of prevailing economic and market conditions and reflective of
"Highest and Best Use" of the site.
The Income Capitalization Approach developed an indication of value based
on forecasted income for the property and capitalized using an underwriting
model which allowed us to structure a typical mortgage-equity relationship
which would maximize the property value and provide adequate security
to the investor. Reflecting available income and occupancy, the Income
Approach parallels the thinking of investors and therefore, provides a
realistic value indication for the subject to an investor/buyer.
The Cost Approach provides an indication of value for a subject property,
"as is" or "as depreciated" based on replacement cost. The approach also
provides an indication of site value and illustrates accrued depreciation,
based on age/life. The Cost Approach is particularly valid for new or
proposed properties like the subject and provides a reasonable value
indication for the subject.
59
CONCLUSION
RECONCILIATION ... continued
The Sales Comparison Approach is recognized as objective in assemblage
of data, however, interpretation of market activity may be subjective
given limitations of the data base or sample. The properties outlined
and analyzed exhibited the only data available and indicate the limited
sales activity for this type property.
Based on analysis of data as outlined and supported in this appraisal
report and giving weight to the indication produced by the Income and
Cost Approaches, it is the opinion of the appraiser that the stabilized
"market value" of the proposed property "as completed" was:
"AS COMPLETED" VALUE
SEVEN MILLION SIX HUNDRED THOUSAND DOLLARS
($7,600,000)
as of March 1, 2002;
inclusive of personal property (FF&E) of $365,500 required for operation as
an assisted living center;
"AS IS" VALUE
(Land Only)
THREE HUNDRED THOUSAND DOLLARS
($300,000)
as of August 10, 2001
contingent upon limiting conditions and "as completed" physical condition
and without environmental audit.
Marketability
The discussion of marketability considers the length of time required
for exposure on the open market for the property to sell. Knowledge
of a reasonable marketing period can be important when the appraisal is
used for loan underwriting or collateral asset valuation, since a long
marketing period can result in a substantial reduction in net value to
a seller due to holding costs over the marketing period and costs associated
with the sale of the property. With strong demand and limited sales,
a marketing period of 6 months to a year is considered appropriate with
an aggressive marketing effort.
60
CONCLUSION
APPRAISER'S CERTIFICATION
The undersigned does hereby certify that, except as otherwise noted in
this appraisal report:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only
by the reported assumptions and limiting conditions, and are my
personal, unbiased professional analyses, opinions, 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 ,vith the Uniform Standards of
Professional Appraisal Practice.
6. I have made a personal inspection of the property that is the subject
of this report.
7. No one provided significant professional assistance to the person
signing this report.
8. This appraisal assignment was not based on a requested minimum
valuation, a specific valuation, or the approval of a loan.
9. I am currently certified under the Appraisal Institute's continuing
education program. The use of this report is subject to the
requirements of the Appraisal Institute relating to review by its duly
authorized representatives.
10. This appraisal report has been made in conformity with and is subject
to the requirements of the Code of Professional Ethics and Standards
of Professional Conduct of the Appraisal Institute.
11. The real estate, which is the subject of this appraisal report was
valued as of March 1, 2002; at $7,600,000; "as completed" and as of
August 10, 2001; at $300,000; " as is" without environmental audit, and
contingent upon limiting conditions contained herein.
/s/Patrick O. Glenn
________________________
Patrick O. Glenn MAI
Certified General Appraiser #10419
61
CONCLUSION
CONTINGENT AND LIMITING CONDITIONS
The effect of any appraisal is predicated by the terms of the assignment
and logical assumption, which together form the basis of the analysis.
The following conditions and assumptions, together with lesser assumptions
embodied in the report, constitute the framework of the analysis and the
conclusions.
1. This report expressed the opinion of the appraiser, relative to the
defined value of the subject property, as of the date of the appraisal.
The value conclusions are in no way contingent upon reporting of a
specific value, nor is the compensation paid to the appraiser
predicated on reporting a predetermined value. The subject property
was appraised in fee simple, as a whole, and unencumbered by mortgage
or liens. The appraisal applies to surface rights only. Subsurface
value, such as minerals and oil, if any, are not included in this
report.
2. No responsibility is assumed for legal matters, nor is this report
to be construed as rendering any opinion as to the quality of title,
which is assumed to be good and merchantable. The value is reported
without regard to questions of title, boundaries, encroachments,
environmental regulations, licenses, or other matter of legal nature
unless non-compliance has been stated, defined, and considered in the
appraisal report.
3. The legal description furnished by the client to this appraiser is
assumed correct, but it has not been verified by legal counsel or a
licensed surveyor. It is included for the purpose of identification
only and should not be used in conveyance or other legal documents.
4. The various sketches and exhibits included in this appraisal are placed
herein to assist the reader in visualizing the property under appraisal.
These drawings are not based on actual surveys, and no responsibility
is assumed for their cartographic accuracy.
5. Possession of this report does not carry the right of publication,
duplication, or reproduction of it, or any part of it, nor may it be
used by anyone other than the party for whom it is made without prior
consent of the appraiser. The appraisal report can only be considered
true and valid with the original signature of the appraiser.
6. The appraiser assumes that there are no hidden or unapparent conditions
of the property, subsoil, or structures which would render it more or
less valuable. No responsibility is assumed for such conditions or
for engineering which may be required to discover them.
7. This appraisal is based upon present conditions of the national and
local economics, the present purchasing power of the dollar, and
present financing, rates and terms as of the date of this appraisal.
This appraisal assumes that the property will be competently managed,
leased, and maintained by financially sound owners over the projected
period of ownership.
8. The information, documentation and market data reported in this
appraisal is believed to be reliable, but no responsibility is assumed
for accuracy as much of it was furnished by others and assembled by
the appraiser. Wherever possible, the information was checked,
verified, or confirmed by the appropriate available means.
62
CONCLUSION
CONTINGENT AND LIMITING CONDITIONS ... continued
9. This appraisal must be used in whole and not in part. The distribution
of values to land and improvements and the totals apply only under the
present program of utilization. No part of this appraisal shall be
used in conjunction with any other appraisal, and all opinions
expressed herein are invalid if so used.
10. The appraiser will not be required to give testimony or attendance
in court or before other legal authority by reason of this appraisal
without prior agreement and arrangement between the employer and the
appraiser.
11. Disclosure of the contents of this appraisal report is governed by
the By-Laws and Regulations of the Appraisal Institute .
12. Neither all nor part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser or the firm with
which he is connected, or any reference to the Appraisal Institute or
the M.A.I. designation) shall be disseminated to the public through
advertising media, public relations media, news media, sales media,
prospectus for securities, or any other public means of communication
without the prior written consent and approval of the undersigned.
13. Unless otherwise stated in this report, the existence of hazardous
material, which may or may not be present on the property, was not
observed by the appraiser. The appraiser has no knowledge of the
existence of such materials on or in the property. The appraiser,
however, is not qualified to detect such substances. The presence of
substances such as asbestos, ureaformaldehyde foam insulation, or
other potentially hazardous materials may affect the value of the
property. The value estimate is predicated on the assumption that
there is no such material on or in the property that would cause a
loss in value. No responsibility is assumed for any such conditions,
or for any expertise or engineering knowledge required to discover
them. The client is urged to retain an expert in this field, if
desired.
14. The value estimate contained herein is contingent upon completion
of the proposed improvements in accordance with the preliminary plans
and in a timely manner.
15. The Americans with Disabilities Act ("ADA") became effective January
26, 1992. We have not made a specific compliance survey and analysis
of this property to determine whether or not it is in conformity with
the various detailed requirements of the ADA. It is possible that a
compliance survey of the property, together with a detailed analysis
of the requirements of the ADA, could reveal that the property is not
in compliance with one or more of the requirements of the Act. If so,
this fact could have a negative effect upon the value of the property.
Since we have no direct evidence relating to this issue, we did not
consider possible non-compliance with the requirements of ADA in
estimating the value of the property.
63
RESUME OF APPRAISER
PATRICK 0. GLENN, MAI
Certified Appraiser #10419
ANTECEDENT INFORMATION
Born August 1947, resident of Oklahoma City since early childhood. Attended
public schools, graduated from college and pursued a banking career.
Since 1973, 1 have been involved in mortgage lending and real estate
appraising of all types of income producing properties. In May 1981, I
established an office as an independent fee appraiser. I was awarded
membership in the American Institute and designation of MAI, in October 1982.
The Appraisal Institute conducts a voluntary program of continuing education
for its designated members. MAIs and RMs who meet the minimum standards
of this program are awarded periodic Educational Certification. I am
not currently certified under this voluntary program. Attendance at
educational courses and seminars in subsequently outlined.
PROFESSIONAL EDUCATION
Appraisal Institute Course I-A: Basic Valuation
Procedures
Course I-B: Capitalization
Theories & Technique
Course VI: Investment Analysis
and Evaluation
Course III: Industrial Valuation
SEMINARS: Standards of Professional Practice
Basic Valuation
Sales Comparison
Cash Equivalency
Rates-Ratios
Market Analysis
Mortgage Bankers
Association: Income Property Case Study I and II
PUD Finance Seminar
Joint Venture Finance Seminar
64
AFFILIATIONS Oklahoma City Metropolitan Board of Realtors
Discipline Committee, Oklahoma Real Estate
Appraisal Board
Great Plains Chapter, Appraisal Institute
Market Data Research (member)
FORMAL EDUCATION
1970: Attended School of Law at Oklahoma
City University (no degree)
1969: Graduate; University of Denver with B.S. in
Economics
EMPLOYMENT EXPERIENCE
1980 - 1981: Vice-President Real Estate Division, First
National Bank and Trust Co., of Oklahoma City.
1977 - 1980: Executive Vice-President, Harper Groups, Inc.,
real estate investment corporation.
1969 - 1977: Assistant Vice-President, Real Estate Division,
Liberty National Bank and Trust Co.
APPRAISAL EXPERIENCE
Office: Urban & suburban office buildings, multi- and
single-tenant.
Banks: Headquarter and branch facilities with F.F. & E.
as going concerns.
Retail: Community mall, power centers, neighborhood
and strip shopping, factory outlet mall and
free-standing outlets.
Residential: Multi-family apartments, condominiums and
sub-division analysis. Nursing homes and
retirement centers; mobile home parks; hotels
and motels.
Special Use: Auto dealerships, parking garage, restaurants,
churches, marina, truck stops and amusement park.
Industrial: Bulk warehouses, multi-tenant distribution,
manufacturing and showroom-office facilities.
A list of clients and references is available upon request.
65
ADDENDA
Review of the Assisted Living Industry
[A PHOTOCOPY OF AN ARTICLE OF SENIOR HOUSING PROJECTED GROWTH AND
CAPTITIALIZATON RATES FOR SECOND QUARTER OF 2000]