EX-99 6 sir2_sctoi042005exh5.txt EXH 5 OAK TERRACE RETIREMENT APT APPRAISAL COMPLETE APPRAISAL OF THE GOING CONCERN Oak Terrace Retirement Apartments 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 IN A RESTRICTED APPRAISAL REPORT As of 4/16/04 Prepared For: SPECS, Inc. 4200 Blue Ridge Boulevard, Suite'LH-06 Kansas City, Missouri 64133 Prepared By: Cushman & Wakefield of Illinois, Inc. Senior Housing/Healthcare Industry Group Valuation Services, Advisory Group 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 C&W File ID: 04-248-01 Cushman & Wakefield Cushman & Wakefield of Illinois, Inc. 455 North Cityfront Plaza, Suite 2800 Chicago, IL 60611 312.470.1817 Tel 312.470.2317 Fax randal_dawson@cushwake.com April 30, 2004 Jim Hoyt General Partner SPECS, Inc. 4200 Blue Ridge Boulevard, Suite LH-06 Kansas City, Missouri 64133 Re: Complete Appraisal of Real Property In a Restricted Report Oak Terrace Retirement Apartments 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 C&W File ID: 04-248-01 Dear Mr. Hoyt: In fulfillment of our agreement as outlined in the Letter of Engagement, we are pleased to transmit our complete appraisal report on the property referenced above. The value opinion reported in this appraisal report is qualified by certain assumptions, limiting conditions, certifications, and definitions, which are set forth in the report. We particularly call your attention to the following extraordinary assumptions and hypothetical conditions: Extraordinary Assumptions: This appraisal employs no other extraordinary assumptions. Hypothetical Conditions: This appraisal employs no hypothetical conditions. This report was prepared for SPECS, Inc. and is intended only for their specified use. It may not be distributed to or relied upon by any other persons or entities without the written permission of Cushman & Wakefield of Illinois, Inc. This appraisal report has been prepared in accordance with our interpretation of your institutions guidelines, Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the Uniform Standards of Professional Appraisal Practice (USPAP), including the Competency Provision. Jim Hoyt SPECS, Inc. April 30, 2004 Page 2 The property consists of an existing 129 unit, independent living facility known as Oak Terrace Retirement Apartments. The facility has an effective capacity of 137 units and/or residents. The facility contains 117,250:t square feet of gross floor area and is situated on a 1.80 acre parcel of land. The facility occupancy was 88 percent at the time of inspection. The property has been appraised as a going concern and assumes a fair sale, which includes the transfer of a valid operating license, adequate working capital, an assembled workforce, and the transfer of all business assets necessary for the operation of a licensed health care facility. Randal D. Dawson, MAI inspected the property and prepared the report. This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the market value of the fee simple estate of the referenced property, subject to the assumptions and limiting conditions, certifications, extraordinary and hypothetical conditions, if any, and definitions, "as-is" on April 16, 2004 was: TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS $12,500,000 The above value estimate is inclusive of $310,000 in personal property and $4,100,000 in business value as an integral part of the going-concern. Based on recent market transactions, as well as discussions with market participants, a sale of the subject property at our stated opinion of market value would have required an exposure time of approximately twelve (12) months. Furthermore, a marketing period of approximately twelve (12) months is currently warranted for the subject property. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we have developed an opinion that the market value based on the bond financing of the fee simple estate of the referenced property, subject to the assumptions and limiting conditions, certifications, extraordinary and hypothetical conditions, if any, and definitions, "as-is" on April 16, 2004 was: SIXTEEN MILLION ONE HUNRED THOUSAND DOLLARS $16,100,000 Jim Hoyt SPECS, Inc. April 30, 2004 Page 3 This letter is invalid as an opinion of value if detached from the report, which contains the text, exhibits, and Addenda. Respectfully submitted, CUSHMAN & WAKEFIELD OF ILLINOIS, INC. /S/ RANDAL D. DAWSON -------------------------------- Randal D. Dawson, MAI Associate Director Senior Housing/Healthcare Industry Group Illinois Certified General Appraiser License No. 153-001098 randal-dawson@cushwake.com 312.4 70.1817 Office Direct 312.470.2317 Fax SUMMARY OF SALIENT FACTS Common Property Name: Oak Terrace Retirement Apartments Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Property Description: The property consists of a 1-building, 6- story independent living facility containing 129 units and 137 beds situated on a 1.80- acre parcel of land. Assessor's Parcel Number: 14-32-127-005, 14-32-127-006 and 14-32-127- 007 Interest Appraised: Fee Simple Estate Date of Value: April 16, 2004 Date of Inspection: April 16, 2004 Ownership: Secured Investment Resources Occupancy: Current physical occupancy is 88 percent based on a stabilized effective capacity of 129 units. Current Property Taxes Total Assessment: $5,088,330 2004 Property Taxes: $129,210 Hiqhest and Best Use If Vacant: Multi-family residential property developed to the highest density possible As Improved: As it is currently utilized as an independent living facility: Site & Improvements Zoning: R-5b Land Area: 1.80 acres or 78,408:t square feet Number of Units: 129 Number of Beds: 137 Number of Stories: 6 Number of Buildings: 1 Year Built: 1987 Type of Construction: Brick Gross Building Area: 117,250:t square feet Parking: 161 spaces (1.25 Unit). VALUE INDICATORS Income Capitalization Approach Direct Capitalization Net Operating Income: $1,123,860 Capitalization Rate: 9.00% Indicated Value: $12,500,000 Reconciled Value: $12,500,000 FINAL VALUE CONCLUSION Market Value As-Is Fee Simple: $12,500,000 Exposure Time: Under 12 months Marketing Time: Under 12 months INSURABLE VALUE Conclusion: $7,400,000 Market Value Based on Bond $16,000,000 Financing Extraordinary Assumptions and Hypothetical Conditions Extraordinary Assumptions An extraordinary assumption is defined by the Uniform Standards of Professional Appraisal Practice (2004 Edition, The Appraisal Foundation, page 2) as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis." This appraisal employs no other extraordinary assumptions. Hvpothetical Conditions A hypothetical condition is defined by the Uniform Standards of Professional Appraisal Practice (2004 Edition, The Appraisal Foundation, page 3) as "that which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis." This appraisal employs no hypothetical conditions. SUBJECT PHOTOGRAPHS [GRAPHIC OMITTED] Exterior view of property [GRAPHIC OMITTED] Exterior view of property [GRAPHIC OMITTED] Interior view of property [GRAPHIC OMITTED] Interior view of property [GRAPHIC OMITTED] Street Scene along Washington Street Facing East [GRAPHIC OMITTED] Street Scene along Washington Street Facing West TABLE OF CONTENTS INTRODUCTION 1 REGIONAL ANALYSIS 5 LOCAL AREA ANALYSIS 12 SENIOR LIVING INDUSTRY OVERVIEW 16 COMPETITIVE MARKET ANALYSIS 21 SITE DESCRIPTION 32 IMPROVEMENTS DESCRIPTI0N 33 REAL PROPERTY TAXES AND ASSESSMENTS 37 ZONING 38 HIGHEST AND BEST USE 39 VALUATION PROCESS 41 INCOME CAPITALIZATION APPROACH 43 RECONCILIATION AND FINAL VALUE OPINION 57 INSURABLE VALUE 59 SUPPLEMENTAL VALUATION - SCENARIO II 60 ASSUMPTIONS AND LIMITING CONDITIONS 62 CERTIFICATION OF APPRAISAL 65 ADDENDA 66 INTRODUCTION Identification of Property Common Property Name: Oak Terrace Retirement Apartments Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Property Description: The property consists of a 1-building, 6-story independent living facility containing 129 units and an effective capacity of 137 units situated on a 1.80 acre site. Assessor's Parcel Number: 14-32-127-005, 14-32-127-006 and 14-32-127-007 Property Ownership and Recent History Current Ownership: Secured Investment Resources Sale History: The property has not transferred within the past three years to the best of our knowledge. Current Disposition: To the best of our knowledge, the property is not under contract of sale nor is it being marketed for sale. Reginald Intended Use and Users of the Appraisal This appraisal is intended to provide an opinion of the market value of the fee simple interest in the property for the exclusive use of SPECS, Inc. for internal review. All other uses and users are unintended, unless specifically stated in the letter of transmittal. Dates of Inspection and Valuation The value conclusion reported herein is as of April 16, 2004. The property was inspected on April 16, 2004 by Randal D. Dawson, MAI Property Rights Appraised fee simple interest of the property as a going-concern. Scope of the Appraisal This is a complete appraisal presented in a Restricted report, intended to comply with the reporting requirements set forth under the Uniform Standards of Professional Appraisal Practice (USPAP) for a Restricted Appraisal Report. In addition, the report was also prepared to conform to the requirements of the Code of Professional Ethics of the Appraisal Institute and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Title XI Regulations. In preparation of this appraisal, we investigated a sampling of improved sales from a local, regional or national basis. We also analyzed rental data, and considered the input of buyers, sellers, brokers, property developers and public officials. Additionally, we investigated the general regional economy as well as the specifics of the local area. The scope of this appraisal required collecting primary and secondary data relative to the subject property. The depth of the analysis is intended to be appropriate in relation to the significance of the appraisal issues as presented herein. The data have been analyzed and confirmed with sources believed to be reliable, whenever possible, leading to the value conclusions set forth in this report. In the context of completing this report, we have made a physical inspection of the subject property. The valuation process involved utilizing generally accepted market-derived methods and procedures considered appropriate to the assignment. The scope of this research, and the analysis contained herein, is reflective of "the amount and type of information researched and the analysis applied in an assignment" (2004 US PAP, page 5). This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. Definitions of Value, Interest Appraised and Other Terms The following definitions of pertinent terms are taken from the Dictionary of Real Estate Appraisal, Fourth Edition (2002), published by the Appraisal Institute, as well as other sources. Market Value Market value is one of the central concepts of the appraisal practice. Market value is differentiated from other types of value in that it is created by the collective patterns of the market. A current economic definition agreed upon by agencies that regulate federal financial institutions in the United States of America follows, taken from the glossary of the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and acting in what they consider their own best interests; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto; and . 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Fee Simple Estate Absolute ownership unencumbered by any other interest or estate, subject to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. Leased Fee Estate An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease. Leasehold Estate The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions. Goinq-Concern Value The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment. Common going-concern appraisals are conducted for assisted living facilities, nursing homes, hotels and motels, restaurants, bowling alleys, industrial enterprises, retail stores, and similar property uses. For these property types, the physical real estate assets are integral parts of an ongoing business such that the market values from the land and building are difficult, if not impossible, to segregate from the total value of the ongoing business. Market Rent The rental income that a property would most probably command on the open market, indicated by the current rents paid and asked for comparable space as of the date of appraisal. Cash Equivalent A price expressed in terms of cash, as distinguished from a price expressed totally or partly in terms of the face amounts of notes or other securities that cannot be sold at their face amounts. Market Value As Is on Appraisal Date The value of specific ownership rights to an identified parcel of real estate as of the effective date of the appraisal; related to what physically exists and is legally permissible and excludes all assumptions concerning hypothetical market conditions or possible rezoning. Prospective Value Upon Completion of Construction The value of a property on the date that construction is completed based on market conditions projected to exist as of that completion date. This value is not the market value as of a specified future date, but rather is a projected value based on assumptions that mayor may not occur. Prospective Value Upon Reaching Stabilized Occupancy The value of a property as of a point in time when all improvements have been physically constructed and the property has been leased to its optimum level of long term occupancy. At such point, all capital outlays for tenant improvements, leasing commissions, marketing costs, and other carrying charges are assumed to have been incurred. Exposure Time and Marketing Time Exposure Time Under Paragraph 3 of the Definition of Market Value, the value opinion presumes that "A reasonable time is allowed for exposure in the open market". Exposure time is defined as the length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at the market value on the effective date of the appraisal. Exposure time is presumed to precede the effective date of the appraisal. The reasonable exposure period is a function of price, time and use. It is not an isolated opinion of time alone. Exposure time is different for various types of real estate and under various market conditions. As noted above, exposure time is always presumed to precede the effective date of appraisal. It is the length of time the property would have been offered prior to a hypothetical market value sale on the effective date of appraisal. It is a retrospective opinion based on an analysis of recent past events, assuming a competitive and open market. It assumes not only adequate, sufficient and reasonable time but adequate, sufficient and a reasonable marketing effort. Exposure time and conclusion of value are therefore interrelated. Based on discussions with market participants and information gathered during the sales verification process, a reasonable exposure time for the subject property at the value concluded within this report would have been approximately twelve (12) months. This assumes the current owner employed an active and professional marketing plan. Marketing Time Marketing time is an opinion of the time that might be required to sell a real property interest at the appraised value. Marketing time is presumed to start on the effective date of the appraisal. (Marketing time is subsequent to the effective date of the appraisal and exposure time is presumed to precede the effective date of the appraisal). The opinion of marketing time uses some of the same data analyzed in the process of estimating reasonable exposure time and it is not intended to be a prediction of a date of sale. We consider, based on the assumptions employed in our analysis, as well as our selection of investment parameters for the subject, that our value conclusion represents a price achievable within twelve (12) months. Legal Description The Sangamon County assessor identifies the subject site as Assessor's Parcel Number 14-32-127-005, 14-32-127-006 and 14-32-127-007. A legal description is located in the Addenda section of this report. REGIONAL ANALYSIS [GRAPHIC OMITTED] REGIONAL MAP Introduction A variety of factors and forces that interact within a given region influence the short- and long-term value of real estate. Regional analysis serves to identify those forces that affect property value, and the role they play within the region. The four primary forces that influence real property value include environmental characteristics, governmental forces, social factors, and economic trends. These forces determine the supply and demand for real property, which, in turn, affect market value. The subject property is located in Springfield, within the central portion of Sangamon County, which is in the central portion of Illinois. Economic & Demographic Profile The following profile of the Springfield MSA was provided by Economy.com, a leading provider of economic, financial, and industry information. Economy.com's core assets of proprietary editorial and research content as well as economic and financial databases are a source of information on national and regional economies, industries, financial markets, and demographics. The company staffs economists, data specialists, programmers, and online producers who create a proprietary database. Economy.com's approach to the analysis of the U.S. economy consists of building a large-scale, simultaneous-equation econometric model, which they simulate and adjust with local market information, creating a model of the U.S. macro economy that is both top-down and bottom-up. As a result, those variables that are national in nature are modeled nationally while those that are regional in nature are modeled regionally. Thus, interest rates, prices, and business investment are modeled as national variables; key sectors such as labor markets (employment, labor force), demographics (population, households, and migration), and construction activity (housing starts and sales) are modeled regionally and then aggregated to national totals. This approach allows local information to influence the macroeconomic outlook. Therefore, changes in fiscal policy at the national level (changes in tax rates, for example) translate into their corresponding effects on state economies. At the same time, the growth patterns of large states, such as California, New York, and Texas, playa major role in shaping the national' outlook. In addition, on a regional basis, the modeling system is explicitly linked to other states through migration flows and unemployment rates. Economy.com's model structure also takes into account migration between states. Springfield, IL Employemnt Growth Rank Best=1 Worst=325 2002-04: 309: 5th quintile 2002-07: 266: 5th quintile MSA LIFE CYCLE PHASE:Growth/Mature Vitality (Best-1 Worst=325): 71(2nd quintile) Cost of Doing Business (US=100%):98% Cost of Living (US=100%):85% Relative Employment Performance [Graphic Omitted-Line Graph (1990-2007)] 1996 1997 1998 1999 2000 2001 2002 Indicators 6.6 6.7 6.8 6.9 7.1 7.1 7.1 Gross Metro Product, C$B 3.7 2.4 1.5 1.2 2.4 -0.3 0.7 % Change 112.0 112.1 114.1 113.6 115.3 115.5 115.3 Total Employment (000) 1.0 0.1 1.8 -0.4 1.5 0.2 -0.2 % Change 4.5 4.3 3.9 3.6 3.5 3.9 4.6 Unemployment Rate 6.1 3.8 5.7 2.3 6.5 4.1 2.1 Personal Income Growth 202.1 201.9 201.7 201.3 201.6 202.3 203.2 Population (000) 922 812 848 843 759 806 674 Single-Family Permits 209 121 105 303 170 113 256 Multifamily Permits 81.9 83.2 85.9 86.1 84.5 86.9 90.5 Existing Home Price($Ths) 575 695 1,273 782 589 1,525 1,900 Mortgage Originations($Mil) -0.2 -1.0 -0.9 -1.1 -0.6 0.0 0.2 Net Migration (000) 799 1,139 1,126 1,022 955 1,258 1,490 Personal Bankruptcies
Indicators 2003 2004 2005 2006 2007 Gross Metro Product, C$B 7.2 7.4 7.6 7.8 8.0 % Change 0.6 2.7 3.0 3.1 2.8 Total Employment (000) 111.9 113.0 115.3 117.7 119.3 % Change -2.9 0.9 2.1 2.0 1.4 Unemployment Rate 5.2 5.3 5.2 5.0 4.8 Personal Income Growth 2.7 3.4 3.8 4.0 4.0 Population (000) 204.1 205.2 206.5 207.8 208.9 Single-Family Permits 734 892 783 764 748 Multifamily Permits 423 125 116 137 153 Existing Home Price($Ths) 93.6 94.7 100.0 101.4 105.6 Mortgage Originations($Mil) 2,455 1,053 627 649 684 Net Migration (000) 0.2 0.3 0.5 0.5 0.3 Personal Bankruptcies 1,625 1,576 1,454 1,436 1 ,450
------------------------------------------- STRENGTHS AND WEAKNESSES STRENGTHS . Below average business and living costs. . High level of housing affordability. . Low exposure to downsizing manufacturing industries. . Concentration of stable employers in healthcare and education. WEAKNESSES . Lack of a significant economic driver. . Disproportionate impact from state fiscal crisis. . Middling population ---------------------------------------- [GRAPHIC OMITTED-Bar Graph] Current Employment Trends December 2003 Employmnet Growth % Change Year Ago Total -2.6 Construction 3.7 Manufacturing -7.5 Trade 0.7 Trans/Utilities 4.9 Information -5.5 Financial Activities -3.6 Prof & Business Svcs 0.8 Edu & Heatlth Svcs -1.52 Leisure & Hospitality -1.0 Other Services -6.8 ------------------------------------------ FORECAST RISKS Short Term [Down Arrow] Long Term [Up Arrow] Risk-adjusted Return, '02-07: -0.16% UPSIDE . The tourism industry recovers and expands more quickly than anticipated. . Plans to increase state revenue come to fruition, solving budget crisis. DOWNSIDE . Further restructuring in healthcare industry would have a large effect on SPR. . Slow recovery of slate economy will necessitate further government cutbacks. ------------------------------------ ANALYSIS Recent Performance. The Springfield economy has yet to show signs of significant growth. Weakness in government payrolls has been largely responsible for the plight of the local economy, which depends on the government sector for growth. However, the private sector, which also depends on the public sector in a number of ways, is not performing much better, and has continued to suffer from severe losses. As a result, the unemployment rate, while lower than state and national aver-ages, is historically high for the area, at 5.4%. The general malaise settling in on the SPR la-bor market has hurt consumer credit conditions, with the bankruptcy filing rate climbing to well above state and national averages. New budget. Governor Rod Blagojevich recently submitted a $43.5 billion operations budget \\ith the hope of reducing the estimated $1.7 billion deficit looming over the state of Illinois. The budget's solution will involve cutting costs by $840 million and generating $945 million in new revenue on top of $280 million in estimated base revenue growth, without raising the sales or income taxes. While the absence of any increases in sales or income taxes will limit the direct effects of the new budget on consumer spending, other parts of the proposal will have significant ramifications for the SPR economy if approved. Several state agencies will face budget cuts, and as most are located in SPR, the state capital, pay-roll cuts from these agencies will mean more job losses in SPR. Furthermore, because the budget plan does not address the escalating costs of the State Employees Retirement Fund, government employees who have retired in the SPR area may find themselves \\ith reduced pensions from the state government. Government weight. Because of the high proportion of government employees in SPR, losses in that sector will have a more severe effect on the SPR economy than similar losses would have on a metro area more dependent on other industries. A decline in government payrolls means a drop in overall consumer demand, which means that retail and other service sectors will suffer. Moreover, if the State Employees Retirement Fund remains underfunded, retired government employees may be unable to pay for healthcare, lowering demand and muting the growth of the healthcare industry in the area. National Guard. The SPR economy is sup-ported a great deal by the presence of the Illinois National Guard. Aside from being one of the largest employers in the area with 2,700 employees, the Guard is able to attract federal and state funding for projects that help encourage growth in the SPR area. One recent example is a new joint-use armory and field house that should be completed in August 2004. The project received $2.9 million in federal funding and $2 million in state funding, and will provide a home to Company C, 1st Battalion, 178th Infantry, and the East High School Naval Junior Reserve Officer Training Corps program. While the new facility will have a minimal impact on employment growth, it should attract larger numbers of trainees, which "ill support further growth in retail services through greater demand. Net job loss should end in the Springfield economy this year. Concerns over the state budget, however, continue to threaten this outlook. Budget troubles could result in more public sector job cuts and reduced retirement benefits, which would undoubtedly hamper any economic recovery. Longer term, the SPR metro area lacks significant growth drivers to propel itself forward. Furthermore, weak demographic trends and population growth will restrict housing development, labor force growth, and demand for local goods and services. SPR will therefore be a below average performer. Collin Peng-Sue February 2004 ------------------------------------------ TOP EMPLOYERS Memorial Health System 3,400 St. John's Hospital 2,839 Illinois National Guard 1,700 Roman Catholic Diocese 1,600 Horace Mann Insurance Company 1,280 Blue Cross and Blue Shield Association 1,200 SIU School of Medicine 1,200 SBC Communications, Inc. 900 Springfield Clinic, LLP 900 Cingular Wireless 706 University of Illinois 655 Express Personnel Services 650 McGraw Enterprises, Inc. 650 American General Financial Group 600 Hardees of Springfield 600 Levi Ray & Shoup, Inc. 500 Meijer, Inc. 500 Freeman United Coal Company 470 Lincoln Land Community College 405 Cub Foods of Springfield 400 Source: Springfield Chamber of Commerce, May 2003 Public Federal 2,201 State 19,957 Local 10,627 2002 -------------------------------------------
COMPARATIVE EMPLOYMENT AND INCOME % of Total Employment Average Annual Earnings Sector SPR IL US SPR IL US Construction 4.8% 4.7% 5.2% $35.292 $48,420 $39,845 Manufacturing 3.4% 12.8% 12.0% $38.464 $49.710 $48.756 Durable 65.9% 60.7% 62.0% nd $50,119 $50,404 Nondurable 34.1% 39.3% 38.0% nd $49,043 $45,969 Transport Utilities 1.8% 4.4% 3.6% nd $45.020 $44,972 Wholesale Trade 3.1% 5.2% 4.4% $45.106 $58,203 $51,842 Retail Trade 10.4% 10.7% 11.7% $19.221 $22,743 $22,635 Information 3.0% 2.5% 2.6% $38.980 $63.325 $69,569 Financial Activities 7.2% 6.8% 6.0% $30.502 $45,883 $41,740 Prof. and Bus. Services 8.9% 13.4% 12.4% $33,149 $51,215 $43,053 Educ.and Health Services 14.5% 12.1% 12.5% $39,281 $34,012 $34.032 Leisure and Hosp. Services 8.9% 8.4% 9.0% $12,721 $19,091 $19,135 Other Services 5.6% 4.3% 3.9% $22,620 $22,568 $19.842 Government 28.4% 14.6% 16.2% $48,121 $44,927 $42,939 Source: Percent of total employment - Economy.com & BLS, 2002; Average annual earnings - BEA, 2001
--------------------------------------- HOUSE PRICES [Graphic Omitted-Line Graph 1987-2003] CREDIT QUALITY Fitch: N/A Moody's: N/A
LEADING INDUSTRIES NAICS Industry Employees (000) GVSL Sale & Local Government 30.6 6221 General Medical and Surgical Hospitals 5.3 5241 Insurance Carriers 3.7 5617 Services to Buildings and Dwellings 3.1 6211 Offices 01 Physicians 2.6 4521 Department Stores 2.0 8139 Bus. Prof. Labor. Political. & Similar Org. 1.8 2360 Construction of Buildings 1.7 6231 Nursing Care Facilities 1.6 5413 Architectural, Engineering, & Related Services 1.4 5412 Accting., Tax Prep., Bookkeeping & Payroll 1.3 8134 Civic and Social Organizations 1.2 4529 Other General Merchandise Stores 1.1 6111 Elementary and Secondary Schools 1.1 3344 Semi. & Other Electronic Component Manuf. 0.9 High-tech employment 4.3 As % of total employment 3.7 Source: BLS, Economy com, 2002
---------------------------------- INSUSTRIAL DIVERSITY SPR=0.52 (1.00= Most Diverse (U.S.), 0.00= Least Diverse) EMPLOYEE VOLATILITY Due to U.S. Fluctuations: 60% Not due to U.S. 40% Due to U.S. Relative to U.S. US = 100 SPR = 74
MIGRATION FLOWS Into Springfield Number Median of Migrants Income Chicago 570 23,773 St. Louis 376 22,336 Decatur 301 20,237 Champaign 183 21,874 Peoria 170 22,106 Bloomington 137 27,499 San Diego 46 21,874 Phoenix 43 16,249 Rockford 35 19,499 Indianapolis 34 20,832 Total Inmigration 6,816 20,832 From Springfield Chicago 517 26,739 St. Louis 491 25,328 Decatur 204 22,499 Peoria 177 25,858 Bloomington 161 23,181 Champaign 157 19,999 Phoenix 92 20,555 Indianapolis 46 21,666 Tampa 42 14,622 Houston 36 54,999 Total Outmigration 6,626 21,562 Net Migration 190 -731
------------------------------------ Net Migration, SPR [GRAPHIC OMITTED-Bar Graph] Domestic Foreign Total 1998 -1,198 263 .935 1999 -1,428 325 .1.103 2000 .769 210 .559 2001 -159 131 .28 2002 86 129 215 Source: IRS (top), 2002; Census Bureau & Economy. com, 2002
---------------------------------------------- PER CAPITA INCOME [GRAPHIC OMITTED] SPR 31,037 IL 32,990 US 30,413 Source: Bureau of Economic Analysis, 2001 ----------------------------------------------- Springfield, IL [GRAPHIC OMITTED-Line Graph] Low Cost Housing in Springfield One of the reasons behind SPR's low cost of living is the abundance of affordable homes in the area. According to Economy.com's housing affordability index, homes in SPR have been consistently much more affordable than in the u.s. as a whole. This is due in large part to the inability of the SPR economy to create a significant number of jobs. The lack of job growth has depressed demand for housing, limiting the rate of price appreciation. [GRAPHIC OMITTED-Line Graph] Government Protects Springfield During Recessions. While significant job growth has been lacking in the SPR metro area of late, the area has still managed to outperform the nation. One of the main reasons behind the area's apparent immunity to national recessions is its status as the Illinois state capital, which ensures an above average number of government jobs in proportion to total employment in the area. This helped the area keep payrolls relatively steady as lllinois lost jobs more quickly than the nation as a whole. [GRAPHIC OMITTED-Line Graph] But Leaves It Vulnerable to Budget Shortfalls The problem with above average dependence on anyone sector, of course, is that dependence can hurt an economy further down the road. Indeed, even as the national economy pulled itself out of recession, the Illinois state government found itself awash in debt, and was forced to cut payrolls. Thus, the large government presence in SPR has become a hurdle in the way of recovery. With the government facing a budget shortfall of $1.5 to $2 billion for. the fiscal year 2005, it is unlikely that government payroll growth will accelerate any time soon. . [GRAPHIC OMITTED-Line Graph] Migration Turnaround One positive facet of the SPR economy is its positive migration outlook. While it experienced persistent out-migration over the latter part of the 1990s, the negative trends have subsided, and migration is positive once more. Further improvement in SPR's migration trends would help to bolster labor force growth, and thereby help attract new businesses into the area. In addition, stemming the flow of out-migrants will provide support for SPR's housing market, which has faced weak demand in recent years. Critical Observations The following bullet points summarize some of our general observations relating to the subject's region. Social Influences . Springfield's current population is 205,200 people. . The population increased 1.94 percent from 1999-2004. Forecasts indicate 1.80 percent total population growth between 2004 and 2007. . Migration trends have been poor throughout the latter part of the 1990's, although recent trends indicate steady in-migration that could potentially lead to a favorable population growth rate. Those leaving Springfield are going to Chicago, St. Louis and Decatur. . As of 2003, the average per capita income in the Springfield MSA was $31,037, which is slightly above the National average of $30,413, but lower than the State average of $32,990. Personal income growth is expected to increase by 3.4 percent in 2004. Economic Influences . The largest employment sectors are Services (32.3%), Government (28.4%) and Retail Trade (10.4%). . The top three employers are Memorial Health Insurance, St. John's Hospital and Illinois National Guard. . Springfield's housing affordability has been consistently below the national average for years. Depressed labor force conditions can partially account for the low demand in housing, thus limiting the rate of appreciation. . As of February 2004, the unemployment rate for Springfield was 5.9 percent, which is above the national average of 5.6 percent, but below the state average of 6.8 percent. . The only industries experiencing growth between December 2002 and December 2003 were Construction (3.7%) and Trans/Utilities (4.9%). Manufacturing experienced the largest decline in employment of 7.5%. . Out of a total of 325 metropolitan statistical areas in the United States, Springfield ranks 266th in terms of expected employment growth between 2002-2007. Government Influences . The government is supportive of business and is considered pro-growth. Government incentives for growth include an enterprise zone; tax increment financing and business incentives are available for qualifying commercial interests. . The present economic weakness in the economy has had a negative effect on State and local treasuries, resulting in cuts in services and an increased risk of higher taxes. However, it is noted that this circumstance is common among most MSA's. Environmental Influences . The Springfield MSA is located in Sangamon County in central Illinois. The region is served by several interstates including I-55 and 1-72, which provide access to several major markets including St. Louis, Chicago and Indianapolis. 35 Intrastate and 74 Interstate trucking companies serve the region, while the community supports 41 truck terminals. Capital airport provides daily commercial flights and five railroads serve Sangamon County. . Springfield is approximately 98 miles from St. Louis, 204 miles from Chicago, 207 miles from Indianapolis, 337 miles from Kansas City, 457 miles from Detroit and 635 miles from Atlanta. Conclusion In light of the social and economic attributes of the greater Springfield area, it is clear that the region benefits by the following: . Below average business and living costs . High level of housing affordability . Low exposure to downsizing manufacturing industries . Concentration of stable employers in healthcare and education Concurrently, there are inherent risks to the economic health of the metropolitan area, including the following: . Lack of significant economic driver . Disproportionate impact from state fiscal crisis. . Middling population trends The Precis report indicates that the Springfield economy is stagnant. The state's fiscal budget crisis is having a disproportionate effect on Springfield due to the large amount of government jobs associated with the state capital. The Governor of Illinois recently submitted a $43.5 billion operations budget with the hope of decreasing the estimated $1.7 billion state deficit. One of the solutions in this plan is to cut spending by $840 million that will undoubtedly cut jobs in Springfield. Since government jobs account for nearly 28 percent of the workforce, the repercussions of a mass layoff would affect numerous industries in Springfield. The presence of the National Guard in Springfield bodes well for the area not only because it is one of the largest employers, but also because projects developed through state and federal funding attracts trainees to the area that support retail services. However, The Base Realignment and Closure (BRAG) Commission is coordinating the Defense Department's effort to assess current military facilities and make recommendations for base closings for 2005. Springfield houses one of three Air National Guard Bases in Illinois that BRAC is assessing with the expectation that at least one will be closed. The economic impact of the Springfield base closing would be highly detrimental to the local economy. Overall, the Springfield region lacks favorable population trends and significant growth drivers that would enable possible long-term growth. The additional threat of severe government cutbacks and the possible closure of the National Guard base dampen an optimistic outlook over the forecast horizon. [GRAPHIC OMITTED-Map] LOCAL AREA ANALYSIS Location . The property is located in Sangamon County, within the greater Springfield area, which is in central Sangamon County. Springfield is the county seat of Sangamon County and the State Capital of Illinois. Eleventh Street borders the neighborhood to the east, Walnut Street to the west, Carpenter Street to the north, and South Grand Avenue to the south. . The subject is located in the central portion of Sangamon County. This area is a middle income urban area of average desirability. Access . The area is accessed by Interstate 55, which runs north and south along the east side of the city. And Interstate 72, which runs east and west intersecting with I-55 south of town cascading around the city on the southeast side of the city. The subject is located at the along West Adams Street between Pasfield Street and College Street, both secondary north/south transportation artery which provides access to the area, and Jefferson and Washington Streets, which are primary east/west thoroughfares. . The subject property has good exposure from West Adams Street, Pasfield Street, and College Street. Driveways on Pasfield Street and College Street provide vehicle access to the subject site. The subject property also has good access to the area's freeway network with an interchange approximately two miles east of the subject, at Clearlake Avenue and I-55. Neighborhood Characteristics . A mix of single- and multi-tenant office buildings characterizes the immediate area of the subject property. In general, the properties in the subject's district are generally compatible in nature and were constructed from the early 1960's to late-1980's. The majority of the commercial properties near the subject are average-to-good facilities typical of a secondary street in an urban area. Development in this area includes a mix of commercial and very limited residential uses. The immediate area of the subject property generally compromises commercial land uses. . Properties adjacent to, or in the immediate vicinity of, the subject includes a few single family homes followed of office development to the south along West Adams Street; office development to the north; to the east is a office development; and to the west is a commercial parking lot. . Several arterial roads intersect West Adams Street. The roads all lead to well established residential neighborhoods. The subject's immediate area can be described as being in the mature stage of its life cycle. Demographics . At demographic chart is located at the end of this section. Special Hazards or Adverse Influences . No special hazards or adverse influences within the subject's immediate neighborhood were noted. Conclusion . The subject's neighborhood is considered to be a desirable and viable area suitable for office development over the long run, due to its location, relative ease of access and its proximity to a significant population base. It appears that the market in the Springfield area is very strong, due primarily to the recent economic improvement and limited amount of speculative development. . The trends for the local area appear stable but healthy. The local population is growing slowly because the area is nearly fully developed. Employment is steady with a short-term slowdown in 2003. Housing values are predicted to grow over the next five years. . The near-term health of the local area is good with stable real estate values. The senior housing developments in the local area should experience a positive influence.
DEMOGRAPHIC PROFILE 1700 WEST WASHINGTON SPRINGFIELD, ILLINOIS 3.0 MILES 6.0 MILES 6.0 MILES Population 2000 Population 76,159 126,730 126,730 2003 Population 75,190 126,060 126,060 2006 Population 73,771 127,237 127,237 % Change 2000 to 2003 -0.43% -0.17% -0.17% % Change 2003 to 2006 -0.36% -0.13% -0.13% Per Capita Personal Income 2000 Per Capita Personal Income $24,162 $22,699 $22,699 2003 Per Capita Personal Income $26,632 $25,773 $25,773 2006 Per Capita Personal Income $31,392 $30,424 $30,424 % Change 2000 to 2003 3.53% 4.02% 4.02% % Change 2003 to 2006 3.19% 3.37% 3.37% Households 2000 No. Households 34,666 56,236 56,236 2003 No. Households 34,521 56,503 56,503 2006 No, Households 34,366 57,069 57,069 % Change 2000 to 2003 -0.14% 0.16% 0.16% % Change 2003 to 2006 -0.09% 0.20% 0.20% Persons Per Household 2000 Persons Per Household 2.14 2.24 2.24 2003 Persons Per Household 2.12 2.22 2.22 2006 Persons Per Household 2.09 2.16 2.16 % Change 2000 to 2003 -0.30% -0.33% -0.33% % Change 2003 to 2006 -0.30% -0.34% -0.34% Average Household Income 2000 Avg Household Income $52,516 $51,642 $51,642 2003 Avg Household Income $56,030 $56,042 $56,042 2006 Avg Household Income $66,975 $67,454 $67,454 % Change 2000 to 2003 3.36% 3.64% 3.64% % Change 2003 to 2006 2.91% 3.05% 3.05% Income Ranges Median Income $42,066 $43,753 $43,753 $150,000 or more 4.95% 4.42% 4.42% $100,000 to $149,000 6.52% 6.55% 6.55% $75,000 to $99,999 9.70% 10.39% 10.39% $50,000 to $74,999 17.43% 19.13% 19.13% $35,000 to $49,999 17.63% 16.01% 16.01% $25,000 to $34,999 13.56% 12.69% 12.69% $15,00010 $24,999 13.43% 13.14% 13.14% Under $15,000 14.57% 13.47% 13.47% 2000 Median Income $37,575 $39,196 $39,196 2006 Median Income $47,707 $49,677 $49,677 Occupancy 2000 Occupied Housing Units 36,556 61,660 61,660 Owner Occupied 52.36% 56.71% 56.71% Renter Occupied 37.52% 32.20% 32.20% Education 2000 Population 25+ by Education level 52,013 67,172 67,172 Bachelors Degree Only 19.47% 17.63% 17.63% Graduate Degree 13.36% 10.90% 10.90% Retail Trade Potential 2002 Total Retail Sales $1,224,020,156 $2,004,250,630 $2,004,250,630 Apparel Accessory $27,132,676 $44,535,079 $44,535,079 Automotive Dealers $259,029,463 $424,529,691 $424,529,691 Automotive & Home Supply Stores $7,674,591 $12,655,772 $12,655,772 Drug & Proprietary Stores $57,093,699 $93,612,066 $93,612,066 Eating & Drinking Places $127,062,757 $206,240,790 $206,240,790 Food Stores $134,167,644 $219,662,610 $219,662,610 Furniture Home Furnishing Stores $26,753,419 $43,940,645 $43,940,645 Home Appliance, Radio, & TV. Stores $35,117,464 $57,516,274 $57,516,274 Gasoline Service Stations $66,242,115 $111,591,977 $111,591,977 General Merchandise $123,566,714 $201,907,916 $201,907,916 Department Store $104,536,339 $170,612,604 $170,612,604 Hardware, lumber & Garden Stores $54,632.204 $69,362,645 $69,362,645 SPRINGFIELD SANGAMON COUNTY, IL Population 2000 Population 111,454 166,951 2003 Population 111,230 169,922 2006 Population 111,003 191,921 % Change 2000 to 2003 -0.07% 0.17% % Change 2003 to 2006 -0.04% 0.21% Per Capita Personal Income 2000 Per Capita Personal Income $23,460 $23,173 2003 Per Capita Personal Income $26,453 $26,359 2006 Per Capita Personal Income $31,373 $31,097 % Change 2000 to 2003 4.05% 4.39% % Change 2003 to 2006 3.47% 3.36% Households 2000 No. Households 46,621 76,722 2003 No. Households 46,999 79,900 2006 No, Households 49,717 62,061 % Change 2000 to 2003 0.26% 0.50% % Change 2003 to 2006 0.29% 0.54% Persons Per Household 2000 Persons Per Household 2.24 2.36 2003 Persons Per Household 2.22 2.34 2006 Persons Per Household 2.16 2.3 % Change 2000 to 2003 -0.33% -0.32% % Change 2003 to 2006 -0.33% -0.33% Average Household Income 2000 Avg Household Income $53,223 $55,094 2003 Avg Household Income $59,641 $62,295 2006 Avg Household Income $69,643 $72,361 % Change 2000 to 2003 3.67% 4.16% % Change 2003 to 2006 3.15% 3.04% Income Ranges Median Income $44,443 $46,413 $150,000 or more 4.62% 4.77% $100,000 to $149,000 9.11% 10.23% $75,000 to $99,999 10.62% 12.34% $50,000 to $74,999 16.65% 20.62% $35,000 to $49,999 17.60% 17.40% $25,000 to $34,999 12.70% 11.60% $15,00010 $24,999 12.55% 11.36% Under $15,000 13.55% 11.26% 2000 Median Income $39,676 $43,606 2006 Median Income $51,030 $56,465 Occupancy 2000 Occupied Housing Units 53,733 65,459 Owner Occupied 56.61% 64.45% Renter Occupied 33.66% 27.66% Education 2000 Population 25+ by Education level 75,366 126,620 Bachelors Degree Only 16.96% 16.26% Graduate Degree 11.62% 10.30% Retail Trade Potential 2002 Total Retail Sales $1,741,970,762 $2,653,331,173 Apparel Accessory $36,604,961 $63,954,523 Automotive Dealers $366,766,624 $604,704,020 Automotive & Home Supply Stores $11,150,360 $16,059,665 Drug & Proprietary Stores $61,469,964 $134,075,764 Eating & Drinking Places $161,199,363 $297,049,674 Food Stores $190,756,663 $311,729,775 Furniture Home Furnishing Stores $36,233,051 $63,044,691 Home Appliance, Radio, & TV. Stores $50,054,607 $62,117 ,324 Gasoline Service Stations $96,666,454 $157,704,662 General Merchandise $175,392,663 $285,647,075 Department Store $146,361,256 $241,655,601 Hardware, lumber & Garden Stores $77 ,600,571 $126,676,002
SENIOR LIVING INDUSTRY OVERVIEW Independent Living Congregate care or independent living units are designed for seniors who pay for some congregate services (Le. housekeeping, transportation, meals, etc.) as part of the monthly fee or rental rate, and who require little, if any, assistance with activities of daily living. Residents of congregate/independent living units may also receive some health care services provided by in-house staff or an outside agency. Congregate units may be part of an "age in place" residence, a property that provides assisted living services, or a continuing care retirement community. The retirement housing industry has matured considerably over the past two decades as the elderly population increased and more senior housing alternatives are sought. Retirement housing expanded beyond the early dominance of life care and continuing care retirement communities (CCRCs). These communities, which typically included independent living and nursing care on a single campus, typically charge residents a high entrance fee and a moderate monthly service fee. Rental retirement communities represented a major area of growth in the 1980s, fueled in part by the Department of Housing and Urban Development's 221 (d)(4) Retirement Service Center mortgage insurance program. Although the program no longer exists, the rental model is still a popular option for newly developed retirement communities. In addition, a small but distinct increase in the number of cooperatives and condominiums occurred, particularly in communities targeting a more affluent segment of the elderly population. Today's retirement community is generally a smaller complex consisting of 100 to 200 independent living units as compared to the 200 to 300 independent living units that characterized the early CCRCs. In some cases, communities are developed in stages to avoid some of the up front risk associated with initial lease-up, and to allow the facility to be more responsive to market needs and preferences. The rental retirement communities of the early 1980s typically offered no nursing care or assistance with daily living. Rather, these facilities were designed to provide hospitality services such as meals, housekeeping, transportation, and recreational activities. These facilities met with slow lease-up rates and exceedingly high turnover due to their inability to meet changing needs of residents. Independent living communities, particularly rental communities, are the least heavily monitored and the least governed by state regulations of all senior housing communities. In some states, this has resulted in a fair degree of flexibility in providing additional services. Over the past ten years, retirement communities have been attracting an older and somewhat frail population than originally anticipated. The average age of entrance into an independent living facility is between the late 70's and early 80's, rather than the late 60's and early 70's as originally anticipated. As a result of the change in resident profile, as well as the experience gained in the 1980s, it is clear that some form of health care or supportive services for the frail elderly is a necessary component of a retirement community. Assisted Living The emergence of assisted living in the 1990s as an option in the long-term care continuum for elders represented the convergence of social, political, economic and treatment trends. Prior to this time, most dependent seniors had only two long-term care options: be cared for by a family member or enter an institutionalized nursing home. Today, these limited options are inadequate to serve the diverse needs of the elderly population. For many elderly, individual nursing homes are overly intensive, expensive and institutional. In response, assisted living is a favored form of long-term care for those seniors with moderate to intermediate care needs. The Assisted Living Facilities Association of America (ALFAA) defines assisted living as a special combination of housing, personalized supportive services and health care designed to respond to the individual needs of those who require help in activities of daily living, but do not need the skilled medical care provided in a nursing home. Assisted living care promotes the maximum independence of dignity for each resident and encourages the involvement of a resident's family, neighbors and friends. Although the general characteristics and philosophy behind assisted living are consistent throughout the country, there is no consensus on a legal definition of this term. Some states enacted laws using the term assisted living; however, in most jurisdictions, licensure statutes contain a variety of programs and services. In referring to residential housing and services, most state licensing laws use terms such as: rest homes, homes for the aged, supportive living facilities, residential care facilities, board and care homes, elderly group homes, congregate care housing and senior housing. Assisted living programs are located in a variety of environments. They may be housed in newly constructed freestanding facilities, retrofitted buildings such as former hotels, units attached to nursing homes, senior apartments with services, units within CCRC developments and congregate care units. Whatever the environment, facilities must provide private units, or at a minimum, companion suite residential living space. Typically, a resident will have a compact studio or efficiency apartment with a private bathroom. The living space mayor may not include a kitchenette (sink and small refrigerator), a living room or storage space. Economics generally dictate the size of the private living space, which can range from a small one-room efficiency of less than 300 square feet to a large two-bedroom apartment of 750:t square feet or larger. Assisted living residences also provide for a considerable amount of common space for the residents. Newer assisted living facilities generally allocate from 30 percent to 40 percent of the total gross square footage of the building to common areas. Such space includes dining rooms, libraries, lounges, activity centers, kitchens and laundry rooms. The size of an assisted living facility depends on many variables, including market forces and site constraints. Most new freestanding facilities typically provide 40 to 100+ units. The level of service in assisted living facilities varies substantially. However, there are certain basic services generally offered including: . 24-hour a day on-site supervision or access to an emergency call system; . Two or three meals and regular snacks are available; . Light housekeeping and laundry services are available; . Some level of daily personal care from the facility staff; . A personalized health care plan delineating how a resident's health care needs may be addressed; and . Recreational activities, social services and transportation resources. An objective of assisted living is to enable residents to age in-place. Thus, the level of personal care, congregate services or health care services may be adjusted upwards as needed. However, this may prove difficult if residents increasing amounts of nursing care since state law may limit or prohibit skilled nursing care in assisted living facilities. Despite this issue, there is a growing trend by states to extend the scope of assisted living services far into the long-term care continuum. The typical resident of assisted living is 83 years old, a woman and single or widowed. Today's assisted living residents have care needs and characteristics previously associated with patients in intermediate care nursing homes in the 1970s and 1980s. Senior care needs are gauged by the extent to which an individual requires regular assistance with ongoing activities of daily living (ADLs) such as bathing, eating, walking, toileting and dressing. In order to determine that there is an ADL dependency, a clinician must determine that an individual cannot safely or routinely perform a specific activity without assistance and that individual. Unless such help is provided, the individual is at risk of not meeting an essential daily need. While the number of ADLs with which a person needs assistance is used clinically as a measure of dependency, such dependency does not necessarily mean that medical care is required. In assisted living facilities, residents generally have at least one ADL dependency, and it is not uncommon that they have as many as three or four. Assisted living fees typically include a fixed monthly amount that covers both housing and services. The monthly amount generally includes a base level of personal care with additional personal care charged separately. There also may be entrance fees, typically equivalent to the first and last month's rent. Assisted living facilities do not require the large endowment type entrance fees demanded in some CCRCs. Occupancy Patterns Occupancy data compiled by the American Seniors Housing Association (ASHA) for the various senior housing community types (congregate, assisted and CCRCs) has been summarized in the following table.
Median Occupancy Rates (National) For Profit Senior Housing Facilities Property Type 1996 1997 1998 1999 2000 2001 2002 2003 Independent 98.0% 96.0% 98.0% 95.0% 95.0% 94.5% 93.1% 91.5% Assisted Living 95.0% 95.0% 92.0% 94.0% 90.0% 93.8% 94.2% 91.0% CCRCs 95.0% 94.0% 95.0% 93.2% 93.2% 93.1% 92.4% 92.0% All Communities 96.0% 95.0% 95.0% 93.7% 93.7% 94.0% 93.5% 92.0% Source: American Seniors Housing Association
Independent living facilities in 2003 exhibited one of the lowest occupancy rate of any of the facility types. This represented a moderate decline over the average rate in 2002. Overall, all of the facility types saw average occupancies decline over that reported in 2002. The average length of stay in a senior housing facility also varies with the facility type. Following is a table that sets forth the average length of stay, based on data compiled by ASHA. Average Resident Length of Stay (Stated In Months) Property Type 1999 2000 2001 2002 2003 Independent 43.4 38.1 43.1 33.4 37.8 Assisted Living 18.5 20.5 28.0 17.7 20.7 All CCRCs Independent 45.4 59.8 37.3 37.0 48.5 Assisted Living 18.2 16.8 12.8 12.0 18.8 Nursing 23.2 18.6 9.0 9.0 15.5 Source: American Seniors Housing Association
The average length of stay in an independent living facility nationally in 2003 was 37.8 months, reflecting an increase over the average length of stay for 2002. In 2003, all facility types showed an upward trend in occupancy in contrast to the rather significant decline for independent and assisted living facilities in 2002, the decline of which was the result of increased lateral movement of residents between existing facilities caused by such factors as facility operational problems (e.g., management, staffing), as well as foreclosures and closings of poorly operated facilities. Absorption Trends Net absorption data compiled by ASHA for senior housing facilities is summarized in the following table. We note that this is the most recent information that has been published.
2001 National Average Net Absorption Rates Senior Housing Facilities 1st Months Months 2nd 3rd Property Type Month 2-6 7 -12 Year Year Independent 25.5 6.7 3.7 2.8 2.9 Assisted Living 11.7 5.2 2.9 2.2 5.3 CCRCs 37.4 18.9 9.0 5.5 4.1 All Communities 28.4 10.3 5.2 3.5 4.1 Figures based on number of residents Source: American Seniors Housing Association
As seen, initial absorption of new residents for all facility types is strong in the first month, but then tapers off during the following months. COMPETITIVE MARKET ANALYSIS Primary Market Area The first step in analyzing the competitive market for the subject is delineating its primary market area (PMA). The PMA is typically described as either a defined radius around the subject, zip codes, or it can be the county or township in which the property is located. In order to delineate the subject's PMA, our analysis evaluated industry trends, an interview with the subject's General Manager as well as representatives at the competitive properties we used in our analysis. Industry Trends National surveys conducted by two senior housing associations regarding relocation trends for senior housing is presented below. These figures denote the percentage and distances involved of residents who have relocated to a senior housing project.
Relocation Trends - Senior Living Facilities AAHSA ALFA Independent Assisted Independent Assisted Living Living Living Living Under 5 Miles 25% 55% 22% 29% 5 -10 Miles 21% 15% 18% 24% 10 - 15 Miles 11% 8% 16% 17% 15 - 25 Miles 10% 8% 20% 14% Over 25 Miles 35% 14% 24% 16% Sources: AAHSA - American Association of Homes and Services for the Aging (1998) ALFA - Assisted Living Federation of America (2000)
Both studies show a relatively similar percentage of relocation trends for independent living residents, however, the percentages for assisted living differed greatly on the percentages of residents relocating from under five miles. Local Trends Our discussion with the marketing directors at the subject and the competing facilities indicated that approximately 75 percent of the subject's residents come from Sangamon County. This encompasses a radius of approximately 6 miles. The remaining percentage emanate from the greater Springfield MSA. Residents relocate to Springfield to either retire or be near their adult children that work in the area. Based on the data, we have determined the PMA of the subject to encompass an area of approximately 6 miles with 75 percent of the residents emanating from the PMA. Although a property like the subject may also attract residents from outside of the area, the geographic market area within a radius of 6 miles of the subject is considered to represent the primary draw for the subject. As indicated on the chart, the subject's PMA of 6 miles is similar to the comparables. Most of the marketing directors we interviewed also indicated that adult children in this local market are the driving forces in the decision making process for their parents. Supply/New Construction No new projects are currently under construction; therefore, the market is not expected to have any additional supply Existing Facilities Because of the subject's levels of personal care services, and type of amenities, the personal care homes in the market with less than 20 beds do not generally compete directly with the subject. However, the following charts detail the number of independent living units in the subject's market area that pose direct and indirect competition to the subject. We note that the table includes facilities located in both the subject's primary and secondary market area in Springfield.
MARKET AREA SUPPLY Name Total Units PMA/SMA* Brenden Gardens 112 PMA Montvale Estates 121 PMA SUBJECT 129 ----- Totals 362 . PMA - Primary Market Area; SMA - Secondary Market Area
Proposed Units Regarding planned or pending projects in the subject's PMA, discussions with local providers and municipal planning departments indicated that there are no facilities planned at this time. However, because of the large retirement draw of the market area, it would be reasonable to assume that the PMA could possibly see some new development through the mid-term. Occupancy Patterns Industry Statistics Independent living facilities generally exhibit the highest occupancy patterns of any of the senior housing community types (congregate, assisted and CCRCs). As was noted earlier, independent living facilities had an average occupancy rate of 91.5 percent in 2003 (which represented a decline from 93.1 percent in 2002), and was only slightly higher than assisted living facilities at 91.0 percent. Competitive Market Area The senior living facilities we surveyed for our analysis totaled approximately 233 units and the current reported occupancy of those properties, which were not in lease-up ranged from 84 to 99 percent. Oak Terrace Retirement Apartments was at 88 percent occupancy at the time of inspection. The subject appears to have a good reputation in the market. The following table summarizes the competitive properties and their reported occupancy levels. Please note that not all of these properties may fall within the defined market area of the subject; however, in the Senior Demographics section we defined the total competitive supply in the subject's primary market area.
DEFINED COMPETITIVE FACILITIES Name Total Units Occupancy Level Brenden Gardens * 112 84% Montvale Estates * 121 90% SUBJECT 129 88% * Denotes facilities located in subject's primary market area.
Rental Rates Current rental rates for independent living units in the Springfield area begin at approximately $1,200 per month for a studio unit and increase to approximately $2,500 per month for a two-bedroom unit. In general, independent living facilities provide one two three meals per day, weekly to bi-weekly housekeeping, weekly laundry, all utilities except telephone and cable TV, recreation activities and scheduled transportation. Rent Increases Most independent living facilities in the Springfield market area instigated annual rent increases over the last several years. Although no specific data was available, discussions with several providers indicated that they routinely increase rents between three and five percent per year. Discussions with the subject's Executive Director indicated that the facility also increased rents annually over the last several years. Concessions Rent concessions, or incentives, provide a good indication of the condition, or strength of current local market conditions. Rent concessions are generally found in markets exhibiting high vacancy and diminished absorption levels, as well as being used by new projects as a part of their overall marketing program. At the time of our investigation of the Springfield market area, specific concessions were noted, generally $300 off the 2nd months rent. Similar to the market, Oak Terrace Retirement Apartments reported that they are offering concessions for leasing vacant units. Concessions will likely be part of the market. The use of concessions typically stimulates occupancy in response to unforeseen vacancies. They should, however, not be of any major significance to a property like the subject. Absorption Trends An independent living facility generally exhibits a moderate initial absorption pattern during the first operating year of any of the senior housing community types (independent, assisted and CCRCs). Occupancy data compiled by ASHA was summarized previously. The industry data indicated that initial absorption of new residents for all facility types is strong in the first month, then it tapers off dramatically during the following months. Specifically, net monthly absorption averaged 25.5 residents for the Month 1, 6.7 residents for Months 2 - 6, 3.7 residents for Months 7 - 12, and 2.8 residents during Year 2. Oak Terrace Retirement Apartments opened in 1987 and has shown good success from an occupancy basis. The facility was 88.00 percent occupied at the time of our inspection. Management reported that the facility has been operating at positive occupancy levels for several years. Senior Demographics We evaluated the current and future market potential by analyzing demographic trends and the supply of senior housing in the facility's market area. Most market areas for assisted living comprise up to five miles for the PMA and up to 10 to 20 miles for the SMA. As discussed earlier, the PMA for the subject encompasses an area of approximately [XXX] miles and a SMA of approximately [XXX] miles. This assumption was based on our review of the demographics of the area, trends on where most of the competition is being constructed, as well as from discussions with other similar and competing facilities in the area. Claritas, Inc. compiled the demographic data used in our analysis. The data includes figures for the most recent census year in 2000, 2003 estimates and projections for the year 2008. For purposes of this analysis, we relied upon the 2003 estimates for current demographic information. Additional state and national information was obtained from A Profile of Older Americans: 2001, prepared by the American Association of Retired Persons, the Administration on Aging based on data from the U.S. Bureau of the Census. Through a review of senior demographics, industry surveys and local market characteristics; we utilized the following criteria to determine the subject's market area characteristics.
MARKET CLASSIFICATIONS Market Wide Market Penetration Rent Type of Market Occupancy Rate Concessions Good 90%+ Up to 3.9% None Equilibrium 80 - 89% 4.0% - 6.9% Nominal Saturation 70 - 79% 7.0% - 9.9% Moderate Saturated (Over Built) 69% and Below 10% and Above Substantial
Nationally, it is generally anticipated that 60 to 70 percent of residents will come from the PMA and an additional 15 to 20 percent will be from the secondary market area. The remainder of the residents will generally be from other areas and have relocated to be closer to family members. Primary market residents lost to other market areas generally offset residents coming from the secondary market. The demand for elderly housing is determined by analyzing the relationship between the supply of senior housing units and the number of qualified residents with adequate income to afford the units. In general, a higher ratio of qualified residents, coupled with a high overall occupancy in the area indicates a strong demand for senior housing. At the same time, a low ratio of units to available households coupled with a high occupancy also indicates a high demand. A low occupancy for the area always indicates a low demand. In other words, the ratio of qualified residents is only one component. We calculated the market wide occupancy as of the date of inspection for the subject's PMA. The primary competing facilities in the PMA, including the subject, are shown in the following table. We acknowledge that the following summary of properties may not represent all of the facilities in the market area, but are what we believe to be the most competitive with the subject.
MARKET OCCUPANCY CHARACTERISTICS Primary Market Area Name No. Units Occupancy Occupied Units Brenden Gardens 112 84% 94 Montvale Estates 121 90% 109 SUBJECT 129 88% 114 Totals 362 87% 317
These, along with the previous factors shown will be used in our age and income qualified penetration analysis that follows. Age and Income Qualified Penetration Analysis In our analysis we assumed that 75 percent of the residents will come from the PMA. The population in the area is adequate in size, the general population is increasing and the elderly population is on the rise. This suggests that the subject facility will not have to place greater weight on attracting residents to relocate in order to be closer to family members. Areas where the younger population is expanding would be more apt to attract residents from outside the community to move to be closer to their children. Based on the market classification, penetration rates of up to 3.9 percent were classified for good markets, 4.0 to 6.9 percent signifies the market is at equilibrium, 7.0 to 9.9 percent indicates a market is nearing saturation and rates above 10 percent signify the market is saturated. The subject's indicated penetration rate for 2003 signifies that there is adequate demand in the PMA. Even assuming a 25 percent increase in supply over the next five years indicates good demand in the PMA. Although the average age of an assisted living resident is above 75 years, this analysis is based on a 65+ income qualified population. This was due to maintaining consistency with the penetration study and resultant indices that were based on a 65+ population study. Nonetheless, if only to the 75+ income qualified households are evaluated and the same criteria as shown in the previous table is used, this indicates the following penetration figures: Conclusion Overall, these findings suggest that there appears to be adequate demand for the subject facility in the PMA from both the general population base and the project specific targeting. Based on the current inventory, the subject's PMA is not close to reaching a saturation point. Further, current statistics appear to be leaning towards a greater spend down of assets by the elderly and that traditional income levels may be conservative. With this in mind, there appears to be a adequate marketplace for the subject facility. Market Rate Comparisons On the following pages are data sheets of the facilities we compared with the subject. A map showing their location follows these pages. All of the facilities are noted as being located in the subject's PMA. Senior Housing Rent No. SUBJECT Oak Terrace Retirement Apartments 1700 West Washington Street Springfield Illinois Property Type: ILF Verification: Administrator 217-793-0431 30-Apr-04 No. Units Unit Types Occupancy 129 Independent Living Unit 88% 0 Assisted Living Units 0% 129 Total Units/Beds 88% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio $1,218 to $1,486 380 to 414 -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,914 to $2,447 483 to 810 -- to -- -- to -- Two-Bedroom $2,466 to $2,466 810 to 810 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent -- to -- -- to -- -- to -- -- to -- Additional Personal Care -- to -- -- to -- -- to -- -- to -- Community Fee -- to -- -- to -- -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges [Points] [Ala Carte] [Levels] /Sewer X Electricity X Cable TV X Telephone Incontinence Care: Housekeeping: Weekly Dressing Assistance: Activities: Daily Bathing Assistance Transportallon: Bus Van limo Medication Assistance: Security (Hrs): 24 Alzheimer Dementia Area: Nursing Staff: Improvement Description -------------------------------------------------------------------------------- Year Opened 1987 Common Construction Areas: Lobby X Dining Room X Type Masonry Wood Frame Activity X Salon X Floors 123 Library X Laundry X Site Suitability Good Unit Amenities: Construction Call System X Fire Detectors X Quality Good Pvt Bath X Shared Bath Exterior Kitchenettes Yes Siding Masonry Roofing Shingles HVAC System: Through-Wall Units Building Area Covered Parking Yes (Sq.Ft.) 117.250 Condition Average Effective Age (Yrs): 15 Site Area (AC) 1.80 Remarks: Senior Housing Rent No. 1 Brenden Gardens 90 Southwind Drive Springfield, IL Property Type: ILF Verification: Administrator 217-529-4586 30-Apr-04 No. Units Unit Types Occupancy 112 Independent Living Unit 84% 0 Assisted Living Units 0% 112 Total Units/Beds 84% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio -- to -- -- to -- -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,350 to $1,475 525 to 525 -- to -- -- to -- Two-Bedroom $1,650 to $1,700 775 to 775 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent $300 to $300 -- to -- Additional Personal Care -- to -- -- to -- Community Fee -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges /Sewer X Electricity X Cable TV X Telephone Incontinence Care:No Housekeeping: Weekly Dressing Assistance:No Activities: Daily Bathing Assistance:No Transportallon: Van Medication Assistance:No Security (Hrs): No Alzheimer Dementia Area:No Nursing Staff: Improvement Description -------------------------------------------------------------------------------- Year Opened 1994 Common Construction Areas: Lobby X Dining Room Type Masonry Wood Frame Activity X Salon Floors Library X Laundry Site Suitability Average Unit Amenities: Construction Call System X Fire Detectors X Quality Average Pvt Bath X Shared Bath Exterior Kitchenettes Yes No Siding Wood Masonry Roofing Rubber HVAC System: Central Building Area Covered Parking Yes (Sq.Ft.) Condition Average Effective Age (Yrs): 10 Remarks: This property is located 10 miles away from the subject. Senior Housing Rent No. 2 Montvale Estates 2601 Montvale Drive Springfield, IL Property Type: ILF Verification: Administrator 217-546-5577 30-Apr-04 No. Units Unit Types Occupancy 121 Independent Living Unit 90% 0 Assisted Living Units 0% 121 Total Units/Beds 90% Rent Schedule Unit Independent Living Unit Size Assisted Living Unit Description Monthly Rent Range Range Monthly Rent Range Range Unit Semi-Private -- to -- -- to -- -- to -- -- to -- Studio -- to -- -- to -- -- to -- -- to -- Studio Alcove -- to -- -- to -- -- to -- -- to -- One-Bedroom $1,650 to $1,925 525 to 530 -- to -- -- to -- Two-Bedroom $2,275 to $2,450 775 to 775 -- to -- -- to -- Cottage/Vila -- to -- -- to -- -- to -- -- to -- 2nd Occupant Rent $350 to $350 -- to -- Additional Personal Care -- to -- -- to -- Community Fee -- to -- -- to -- Basic Service Care Package: Additional Care: Meals: 123 Care Hours Included In Base Rate: Utilities: Water Additional Personal Care Charges /Sewer X Electricity X Cable TV X Telephone Incontinence Care:No Housekeeping: Weekly Dressing Assistance:No Activities: Daily Bathing Assistance:No Transportallon: Van Medication Assistance:No Security (Hrs): 24 Alzheimer Dementia Area:No Nursing Staff: Improvement Description -------------------------------------------------------------------------------- Year Opened 1192 Common Construction Areas: Lobby X Dining Room Type Masonry Wood Frame Activity X Salon Floors Library X Laundry Site Suitability Average Unit Amenities: Construction Call System Fire Detectors X Quality Average Pvt Bath X Shared Bath Exterior Kitchenettes Yes Siding Masonry Roofing Rubber HVAC System: Central Building Area Covered Parking No (Sq.Ft.) Condition Average Effective Age (Yrs): 12 Remarks: This property is located 2 miles away from the subject. [GRAPHIC OMITTED] RENTAL MAP Direct Comparisons As a basis for comparing the subject's asking rental rates to the comparables shown in the previous summary, we classified each comparable in relation to the subject as either similar, inferior, or superior. The overall classification was based on the five primary factors (aside from pricing) used by potential residents in choosing an assisted living facility. We based these factors on our discussions with hundreds of marketing directors and administrators across the nation. The five main factors in order of importance are as follows: reputation for quality care or social status of the facility; age and condition of the building; unit sizes; amenities and planned activities; and location. Rental Rate Analysis The independent living rates at Oak Terrace Retirement Apartments include three meals per day, weekly housekeeping/laundry, utilities (except for telephone and cable TV), activities and scheduled transportation. A summary of the asking or street rents for the subject, as well as the rates for the competitive properties are shown in the following discussions. Companion (Shared) Units -Independent Livinq The following chart indicates the asking rates for independent living companion or shared units at the subject, as well as the comparables: Studio Units -Independent Living The following chart indicates the asking rates for independent living studio units at the subject, as well as the comparables:
Studio Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens -- - -- -- - -- Montvale Estates -- - -- -- - -- SUBJECT 380 - 414 $1,218 - $1,486 Range (Excluding Subject) 0 - 0 $0 - $0 Median (Excluding Subject) #NUM! - #NUM! #NUM! - #NUM!
One-Bedroom Units - Independent Living The following chart indicates the asking rates for independent living one-bedroom units at the subject, as well as the com parables:
One-Bedroom Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens 525 - 525 $1,350 - $1,475 Montvale Estates 525 - 530 $1,650 - $1,925 SUBJECT 483 - 810 $1,914 - $2,447 Range (Excluding Subject) 525 - 530 $1,350 - $1,925 Median (Excluding Subject) 525 - 528 $1,500 - $1,700
Two-Bedroom Units - Independent Living The following chart indicates the asking rates for independent living two-bedroom units at the subject, as well as the comparables:
Two-Bedroom Units - IL Facility Name Unit Size (SF) Rental Range Brenden Gardens 775 - 775 $1,650 - $1,700 Montvale Estates 825 - 825 $2,275 - $2,450 SUBJECT 810 - 810 $2,466 - $2,466 Range (Excluding Subject) 775 - 825 $1,650 - $2,450 Median (Excluding Subject) 800 - 800 $1,963 - $2,075
Summary/Conclusion The subject is one of several competing facilities in the marketplace and offers independent living units. The subject maintained favorable occupancy levels over the last several years. The subject rates are generally at the middle end of the competition and appear to be reflective of market rates. Concessions are not prevalent in the marketplace. The subject's ability to continue to attract, as well as retain residents suggests that there is a good marketplace for this type of facility, which should continue into the foreseeable future. SITE DESCRIPTION Location: 1700 West Washington Street Springfield, Sangamon County, Illinois 62702 The subject is located at approximately mid-block along the north side of West Washington Street between Chatham Road and Lincoln Avenue. Shape: Rectangular Topography: Level Land Area: 1.8000 gross acres (1.8000 net acres) 78,408 gross square feet (78,408 net square feet) Frontage, Access, Visibility: The site has adequate frontage, access and visibility. Soil Conditions: We did not receive nor review a soil report. However, we assume that the soil's load- bearing capacity is sufficient to support existing and/or proposed structure(s). We did not observe any evidence to the contrary during our physical inspection of the property. Drainage appears to be adequate. Utilities All public utilities are available to the site Site Improvements: The site improvements include asphalt paved parking areas, curbing, signage, landscaping, yard lighting and drainage. Land Use Restrictions: We were not given a title report to review. We do not know of any easements, encroachments, or restrictions that would adversely affect the site's use. However, we recommend a title search to determine whether any adverse conditions exist. Flood Map: National Flood Insurance Rate Map Community Panel. Number 170912-0140-C (January 6,1983) Flood Zone: FEMA Zone C: Areas outside of a 100-year flood hazard. Wetlands: We were not given a Wetlands survey. If subsequent engineering data reveal the presence of regulated wetlands, it could materially affect property value. We did not note the presence of wetlands during our inspection We recommend a wetlands survey by a competent engineering firm. Hazardous Substances: We observed no evidence of toxic or hazardous substances during our inspection of the site. However, we are not trained to perform technical environmental inspections and recommend the services of a professional engineer for this purpose. Overall Functionality: The subject site is functional for the current intended use. IMPROVEMENTS DESCRIPTION The following description of improvements is based upon our physical inspection of the improvements along with our discussions with the Administrator. Please refer to the development plan and floor plans in the Addenda. The facility was constructed in 17 and contains 117,250:t square feet of gross building area within 1, 6-story building. The facility has 129 units and an effective capacity of 137 beds and/or residents. The unit mix for the development is as follows.
Oak Terrace Retirement Apartments No. No. Unit Total Description Units Beds Sq.Ft. Sq.Ft. Independent Living Small Studio 5 5 410 2,050 Square Studio 5 5 380 1,900 West Studio 15 15 414 6,210 Regular Studio 10 10 414 4,140 1BR West-Patios 10 10 483 4,830 1 BR -Patios 62 62 483 29,946 1 BR Intermediate-Patio 5 5 782 3,910 1 BR Deluxe - Patio 9 9 810 7,290 2BR - Patio 8 10 810 6,480 Subtotals 129 137 66,756 Totals 129 137 66,756
General Description Year Built: 17 Number of Buildings: 1 Number of Stories: 6 Gross Building Area: 117,25O + square feet Number of Units: 129 Number of Beds: 137 Design and Functionality: The building is an independent living property of brick construction. The improvements have good appeal to prospective independent living residents. Construction Detail Basic Construction: Brick Foundation: Poured concrete slab Framing: Steel. Floors: Reinforced concrete poured over gravel. Each upper floor is bridged by wood stud floor beams. Exterior Walls: The exterior facade of the building consists of brick veneer. Roof Cover: Flat roofing system consisting of built-up assemblies with a sealed membrane cover. Roof Cover: Wood truss roofing system covered with a composition shingle cover. Windows: Units have thermal windows in aluminum frames. The windows are double paned with sliders. Mechanical Detail Heating: The heating system is assumed to be adequate for existing use and in compliance with local law and building codes. Cooling: The cooling system is assumed to be adequate for existing use and in compliance with local law and building codes. Plumbing: The plumbing system is assumed to be adequate for existing use and in compliance with local law and building codes. Electrical Service: The electrical service system is assumed to be adequate for existing use and in compliance with local law and building codes. Elevator Service: The building contains elevators. Fire Protection: The building is fire sprinklered. Each apartment has electric smoke detectors in compliance with local code. Interior Detail Layout: The building is designed in a "L" shape. The resident living units have small kitchenettes with microwaves, a sink and refrigerators. All units have baths with a sink, toilet and prefabricated shower stall. Floor Covering: Carpet in the living, dining and bedroom areas with sheet vinyl tile in the entry, kitchenettes and bathrooms. Walls: Painted and textured gypsum board. Ceilings: Painted and textured gypsum board. Bathrooms: Depending on unit type, each resident unit is equipped with a shared or full bathroom. All bathrooms consist of a walk-in shower with wall-mounted showerhead, toilet and sink and sheet vinyl floor covering, and a combination wall papered gypsum board walls. Kitchen Facilities: All meals for the residents are prepared in a central kitchen. Equipment includes a gas/ range, steel hood with fire suppression system, dishwashers, stainless steel preparation tables, walk-in coolers and walk-in freezers. Site Improvements Parking: 161 spaces (1.25:Unit). Parking is adequate Onsite Landscaping: A variety of trees, shrubbery and grass. Other: Other site improvements include signage, trash enclosures, paved asphalt drives, concrete sidewalks and walking paths, as well as fencing. Summary Condition: The improvements are in average condition given its competitive position in the marketplace. The improvements have been well maintained and provide a good appearance relative to competing buildings within its market. We did not inspect the roof of the building or make a detailed inspection of the mechanical systems. The appraisers, however, are not qualified to render an opinion as to the adequacy or condition of these components. The client is urged to retain an expert in this field if detailed information is needed about the adequacy and condition of mechanical systems. Quality: The overall quality of the improvements is rated as average and is consistent with the competition in the market area. Layout & Functional Plan: Average. The facility is considered to be functional for its intended use. There are adequate common areas and units are considered to be comparable to most competing projects within the area. The furnishings and fixtures appear to be of good quality. Capital Improvements: Other than normal routine property maintenance, there are no major capital improvement expenditures planned in the immediate future. Year Built: 17 Effective Age: 15 years Expected Economic Life: 50 years Remaining Economic Life: 35 years Americans With Disabilities Act The Americans With Disabilities Act (ADA) became effective January 26, 1992. We have not made, nor are we qualified by training to make, a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey and a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since we were not provided with the results of a compliance survey, we did not analyze the results of possible non-compliance. Hazardous Substances We are not aware of any potentially hazardous materials (such as formaldehyde foam insulation, asbestos insulation, radon gas emitting materials, or other potentially hazardous materials), which may have been used in the construction of the improvements. However, we are not qualified to detect such materials and urge the client to employ an expert in the field to determine if such hazardous materials are thought to exist. REAL PROPERTY TAXES AND ASSESSMENTS Taxes are levied against all real property in this locale for the purpose of providing funding for the various municipalities. The amount of ad valorem taxes is determined by the current assessed value for the property in conjunction with the total combined tax rate for the municipalities. The property is subject to the taxing jurisdiction of Sangamon County. The assessors' parcel identification number is 14-32-127-005, 14-32-127-006 and 14-32-127-007. The 2004 calendar fiscal tax year is the most recent year for both assessed value and tax information for the subject. This data is shown in the following chart.
PROPERTY ASSESSMENT/TAX DATA 2004 Assessor's Market Value: Assessor's Market Value: $5,088,330 Equalization/Assessment Ratio 32.15% Assessed Value $1,635,898 Tax Rate ($/$1,000 AV) 78.9839 Total Property Taxes $129,209.65 Building Area 117,250 Property Taxes per Square Foot $1.10 No. of Units 129 Property Taxes per Unit $1,001.63
Total taxes for the property are $129,209.65, or $1,001.63 per unit. We did not do a direct comparison with other senior housing facilities in the market area. Assessed values are usually poor indicators of market value and in the case of the subject and its higher level of quality, any direct comparison to the existing product in the Springfield market area would not provide any substantial of support towards an assessment estimate. The definition of market value used in this report assumes a sale of the property. If the property were sold, it would be' reassessed according to the county assessor's opinion of its market value, which is typically the sale price. The current assessment of the property of $1,635,898 is considered reasonable based on our market value estimates determined herein. For the purposes of our Year 1 proforma, we have increased the current taxes for the property. A forecast tax liability $150,000. The increased taxes will be reflected in our proforma model in the Income Capitalization Approach. Based on property tax comparisons, it is our opinion that the subject's real estate taxes are reasonable. ZONING The property is zoned R-5b by the City of Springfield [or Sangamon County]. Permitted uses within this district include commercial and multifamily development. Industrial development is prohibited in this zoning district. Zoning regulations imposed within this district are as follows: We are not experts in the interpretation of complex zoning ordinances but the property appears to be a conforming use based on our review of public information. The determination of compliance is beyond the scope of a real estate appraisal. We know of no deed restrictions, private or public, that further limit the subject property's use. The research required to determine whether or not such restrictions exist, however, is beyond the scope of this appraisal assignment. Deed restrictions are a legal matter and only a title examination by an attorney or title company can usually uncover such restrictive covenants. Thus, we recommend a title search to determine if any such restrictions do exist. HIGHEST AND BEST USE Definition Of Highest And Best Use According to The Dictionary of Real Estate Appraisal, Fourth Edition (2002), a publication of the Appraisal Institute, the highest and best use is defined as: "The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability." Highest And Best Use Criteria We evaluated the site's highest and best use both as currently improved and as if vacant. In both cases, the property's highest and best use must meet four criteria described above. Legally Permissible The first test concerns permitted uses. According to our understanding of the zoning ordinance, noted earlier in this report, the site may legally be improved with structures that accommodate commercial and residential uses. Aside from the site's zoning and regulations, we are not aware of any legal restrictions that limit the potential uses of the subject. Physically Possible The second test is what is physically possible. As discussed in the "Property Description," the site's size, soil, topography, etc. do not physically limit its use. The subject site is of adequate shape and size to accommodate almost all urban land uses. Financial Feasibility and Maximal Productivity The third and fourth tests are, respectively, what is feasible and what will produce the highest net return. After analyzing the physically possible and legally permissible uses of the property, .the highest and best use must be considered in light of financial feasibility and maximum productivity. For a potential use to be seriously considered, it must have the potential to provide a sufficient return to attract investment capital over alternative forms of investment. A positive net income or acceptable rate of return would indicate that a use is financially feasible. As stated in the Competitive Market Analysis section, population, income and age statistics would indicate that demand for senior living options in the subject area is considered moderate This relates to the economic feasibility of developing a property similar to the subject. The stabilized facilities in the subject's market area are exhibiting occupancies above 85 percent. As such, market conditions for senior living in the subject's primary market area are considered adequate. Highest and Best Use of Site As Though Vacant Considering the subject site's size, configuration and topography, location among other independent living properties and state of the local independent living market, it is our opinion that the Highest and Best Use of the subject site as though vacant is multi-family residential property developed to the highest density possible. Highest and Best Use of Property As Improved According to the Dictionary of Real Estate Appraisal, highest and best use of the property as improved is defined as: "The use that should be made of a property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one." As discussed, an independent living facility exists on the site. The design, layout, as well as average unit size of the facility are good and there is no functional obsolescence in the improvements. As will be demonstrated in the Sales Comparison Approach and the Income Capitalization Approach, the operating characteristics of an assisted living facility represent a viable facility from a revenue-producing standpoint. Alternative uses for the existing improvements, however, would be limited due to the overall design (smaller rooms and limited individual cooking facilities). As a result, any conversion to an alternative use would be costly. It is our opinion that the existing complex adds value to the site as if vacant, and rent levels of existing leases encumbering the subject property would dictate a continuation of the current use. Therefore, it is our opinion that the Highest and Best Use of the subject property as improved is as it is currently utilized as an independent living facility. VALUATION PROCESS Methodology There are three generally accepted approaches available in developing an opinion of value: the Cost, Sales Comparison and Income Capitalization approaches. We considered and analyzed each in this appraisal to develop an opinion of the market value of the subject. In appraisal practice, an approach to value is included or eliminated based on its applicability to the property type being valued and the quality of information available. Each approach is discussed below, and applicability to the subject property is briefly addressed in the following summary. Land Value Developing an opinion of land value is typically accomplished via the Sales Comparison Approach by analyzing sites of comparable utility adjusted for differences, to indicate a value for the subject parcel. Valuation is typically accomplished using a unit of comparison such as price per square foot or acre. Adjustments are applied to the units of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a total value. The reliability of this approach is dependent upon (a) the availability of comparable sales data; (b) the verification of the sales data; (c) the degree of comparability; (d) the absence of non-typical conditions affecting the sales price. Cost Approach The Cost Approach is based upon the premise that an informed purchaser would pay no more for the subject than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable when the property being appraised involves relatively new improvements, which represent the highest and best use of the land; or when relatively unique or specialized improvements are located on the site, for which there exist few sales or leases of comparable properties. In the Cost Approach, the appraiser forms an opinion of the cost of all improvements, depreciating them to reflect value loss from physical, functional and external causes. Land value, entrepreneurial profit .qnd depreciated improvement costs are then added for a total value. Sales Comparison Approach The Sales Comparison Approach utilizes sales of comparable properties, adjusted for differences, to indicate a value for the subject property. Valuation is typically accomplished using a unit of comparison such as price per square foot, effective gross income multiplier or net income multiplier. Adjustments are applied to the units of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a total value. The reliability of this approach is dependent upon (a) the availability of comparable sales data; (b) the verification of the sales data; (c) the degree of comparability; (d) the absence of non-typical conditions affecting the sales price. Income Capitalization Approach This approach first determines the income-producing capacity of a property by utilizing contract rents on leases in place and by estimating market rent from rental activity at competing properties. Deductions are made for vacancy and collection loss and operating expenses. The resulting net operating income is capitalized at an overall capitalization rate to derive an opinion of value. The capitalization rate represents the relationship between net operating income and value. Related to the Direct Capitalization Method is the Discounted Cash Flow Method. In the Discounted Cash Flow Method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a selected yield rate (internal rate of return.) The reliability of the Income Capitalization Approach depends upon whether investors actively purchase the subject property type for income potential, as well as the quality and quantity of available income and expense data from comparable investments. Summary This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. We conclude the valuation process by analyzing each approach to value used in the appraisal. When more than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or is a correlation of all the approaches used in the appraisal. INCOME CAPITALIZATION APPROACH Methodology The Income Capitalization Approach is a method of converting the anticipated economic benefits of owning property into a value through the capitalization process. The principle of "anticipation" underlies this approach in that investors recognize the relationship between an asset's income and its value. In order to value the anticipated economic benefits of a particular property, potential income and expenses must be projected, and the most appropriate capitalization method must be selected. The two most common methods of converting net income into value are Direct Capitalization and Discounted Cash Flow. In direct capitalization, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the discounted cash flow method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). In our opinion, the direct capitalization analysis method is most appropriate to value the subject property. Historical Financial Performance of the Subject Property The subject is an existing independent living facility. Management provided financial statements for 2001 2002 2003 and a budget projection. The financial statements are summarized on the following chart. Potential Gross Income There is only one type of payment source at the subject for independent living services; private pay residents. This type of payor is generally considered the most desirable since private pay rates allow for greater profitability than any fixed government rate plans. The subject generates revenue from monthly rentals of the living units, as well as from other sources such as second person (double occupancy) fees, move-in or processing fees, as well as other miscellaneous revenue.
OAK TERRACE RETIREMENT APARTMENTS INCOME AND OPERATING EXPENSE SUMMARY -------------------------------------------------------------------------------- 2001 2002 (January-December) (January-December) Amount $/Unit % of EGI Total $/Unit % of EGI REVENUES Rental Income $2,549,404 $19,763 95.48% $2,636,197 $20,436 95.91% Other Income $ 120,704 $ 936 4.52% $ 112,407 871 4.09% GROSS POTENTIAL REV. $2,670,108 $ 20,699 100.00% $2,748,604 21,307 100.00% Vacancy/ Collection Loss Inc. Above Inc. Above TOTAL NET REVENUE $2,670,108 $20,699 100.00% $2,748,604 $21,307 100.00% OPERATING EXPENSES Departmental Repair/Maint/ Supply $38,997 $302 1.46% $ 44,418 $ 344 1.62% Services $ 561,679 $4,354 21.04% $ 589,826 $ 4,572 21.46% Administrative $ 26,732 $ 207 1.00% $ 27,365 $ 212 1.00% Advertising $ 43,224 $ 335 1.62% $ 41,109 $ 319 1.50% Payroll $ 455,227 $3,529 17.05% $ 483,937 $ 3,781 17.61% Utilities $ 85,031 $ 659 3.18% $ 77,136 $ 600 2.82% Non-Departmental Real Estate Taxes $ 116,745 $ 905 4.37% $ 149,555 $ 1,159 5.44% Insurance $ 40,946 $ 317 15.53% $ 65,546 $ 508 2.38% Management Fees (5% of EGI) $ 133,505 $1,035 5.00% $ 137,430 $ 1,065 5.00% Replacement Reserves $ 38,700 $ 300 1.45% $ 38,700 $ 300 1.41% TOTAL ALL EXPENSES $ 1,540,786 $11,944 57.71% $1,655,322 $12,832 60.22% EXPENSE RATIO 57.7% 60.2% NET OPERATING INCOME $ 1,129,322 $ 8,754 42.29% $1,093,282 $ 8,475 39.78% OCCUPANCY 94.2% 94.2% 2003 2004 (January-December) (January-December) Amount $/Unit % of EGI Total $/Unit % of EGI REVENUES Rental Income $2,569,806 $20,130 96.63% $2,723,203 $21,110 96.13% Other Income $ 90,525 $ 702 3.37% $ 109,680 850 3.87% GROSS POTENTIAL REV. $2,687,331 $20,832 100.00% $2,832,883 21,960 100.00% Vacancy/ Collection Loss Inc. Above Inc. Above TOTAL NET REVENUE $2,687,331 $20,832 100.00% $2,832,883 $21,960 100.00% OPERATING EXPENSES Departmental Repair/Maint/ Supply $30,025 $233 1.12% $ 35,035 $ 272 1.24% Services $ 609,090 $4,722 22.67% $ 657,574 $ 4,722 22.67% Administrative $ 49,914 $ 387 1.86% $ 28,426 $ 220 1.00% Advertising $ 35,624 $ 276 1.33% $ 34,810 $ 270 1.23% Payroll $ 460,270 $3,568 17.13% $ 457,075 $ 3,543 16.13% Utilities $ 86,146 $ 668 3.21% $ 86,940 $ 674 3.07% Non-Departmental Real Estate Taxes $ 141,384 $1,096 5.26% $ 145,620 $ 1,129 5.14% Insurance $ 49,598 $ 384 1.85% $ 86,298 $ 669 3.05% Management Fees (5% of EGI) $ 134,367 $1,042 5.00% $ 141,644 $ 1,098 5.00% Replacement Reserves $ 38,700 $ 300 1.44% $ 38,700 $ 300 1.37% TOTAL ALL EXPENSES $ 1,635,118 $12,675 60.85% $1,712,122 $13,272 60.44% EXPENSE RATIO 60.8% 60.4% NET OPERATING INCOME $ 1,052,213 $ 8,157 39.15% $1,120,761 $ 8,688 39.56% OCCUPANCY 94.2% 94.2% C&W Forecast Stabilized Year Amount $/Unit % of EGI REVENUES Rental Income $3,171,984 $23,153 Other Income $ 110,000 $ 803 GROSS POTENTIAL REV. $3,281,984 $23,956 Vacancy/ Collection Loss ($426,658) TOTAL NET REVENUE $2,855,626 $22,134 OPERATING EXPENSES Departmental Repair/Maint/ Supply $ 335,000 $ 271 1.23% Services $ 660,000 $ 5,116 23.11% Administrative $ 30,000 $ 233 1.05% Advertising $ 35,000 $ 271 1.23% Payroll $ 460,000 $ 3,566 16.11% Utilities $ 90,000 $ 698 3.15% Non-Departmental Real Estate Taxes $ 150,000 $ 1,163 5.25% Insurance $ 90,000 $ 698 3.15% Management Fees (5% of EGI) $ 142,766 $ 1,107 5.00% Replacement Reserves $ 38,700 $ 300 1.36% TOTAL ALL EXPENSES $1,731,466 $13,422 60.64% EXPENSE RATIO 60.6% NET OPERATING INCOME $1,123,860 $ 8,712 39.36% OCCUPANCY 94.2%
Independent Living Rate Analysis The subject has an effective capacity of 137 residents and/or beds. The facility is of average quality construction with a modern layout and design. The following is a description of the types of accommodations that are available at the subject. Independent living residents at the subject have the choice of studio, one-bedroom, and two-bedroom apartment units. All units reflect good design/layout and feature private bathrooms, kitchenettes and adequate closet space. All residents are provided with three daily meals, weekly housekeeping, activities, and scheduled transportation included in their monthly rent. The subject's actual rental rates (rent roll) were tested for reasonableness against similar facilities in the subject's market area. In the Competitive Market Analysis section, we identified several existing facilities considered to provide competition for the subject. Data sheets were provided in the Competitive Market Analysis section presented previously. The complexes we surveyed are all considered comparable given that they all provide independent living units. We note that the facilities are all adequately maintained and they all have a similar amenity package. All of the competing facilities were discussed in detail in the Competitive Market Analysis section of the report. The following table summarizes the subject's unit types and the actual and asking monthly rents.
Oak Terrace Retirement Apartments In House Rents Asking Rents No. Occ. Monthly $/Unit Monthly $/Unit Unit Units Units Revenue Per Mo. Revenue Per Mo. Independent Living Small Studio 5 5 $ 5,985 $ 1,197 $ 6,090 $1,218 Square Studio 5 5 $ 6,562 $ 1,312 $ 6,640 $1,328 West Studio 15 13 $18,374 $ 1,413 $21,540 $1,436 Regular Studio 10 9 $13,202 $ 1,467 $14,860 $1,486 Total- Studio 35 32 $44,123 $ 1,379 $49,130 $1,404 1BR West-Patios 10 10 $18,636 $ 1,864 $19,140 $1,914 1BR -Patios 62 50 $97,072 $ 1,941 $123,318 $1,989 1 BR Intermediate -Patio 5 5 $11,067 $ 2,213 $ 11,265 $2,253 1 BR Deluxe - Patio 9 8 $19,002 $2,375 $ 22,023 $2,447 Total - One- Bedroom 86 73 $145,777 $1,997 $175,746 $2,044 2BR - Patio 8 8 $ 19,152 $2,394 $ 19,728 $2,466 Total- 2 BR 8 8 $ 19,152 $2,394 $ 19,728 $2,466 Independent Totals 129 113 $209,052 $1,850 $ 244,604 $1,896 Totals 129 113 $209,052 $1,850 $ 244,604 $1,896
The subject's current in-house average rates generally fall similar most of the asking rates at the subject. This is reportedly due to recent rent increases. Overall, the average monthly rate is $1,850 per month, which is 2.49 percent below the average asking rate of $1,896. We consider an increase for the in-house rates of approximately 2.00 percent to be reasonable, noting that an additional rate increase will be instigated in the first part of 2004. This increase will not adversely affect the stabilized occupancy level at the subject. Base Rental Rates The following chart details our reconciled base rental rates for all unit types at the subject. These rates were concluded to in the Competitive Market Analysis section of the report.
Oak Terrace Retirement Apartments Reconciled Market Rental Rates Resident No. No. Market Unit Type Type Units Beds Rent Small Studio IL 5 5 $1,218 Square Studio IL 5 5 $1,328 West Studio IL 15 15 $1,436 Regular Studio IL 10 10 $1 ,486 1BR West-Patios IL 10 10 $1,914 1 BR -Patios IL 62 62 $1,989 1 BR Intermediate-Patio IL 5 5 $2,253 1 BR Deluxe - Patio IL 9 9 $2,447 2BR - Patio IL 8 16 $2,466 Totals 129 137
Other Revenues In addition to room revenue, the subject receives additional income from additional personal care, new resident fees (entrance fees), second person fees, as well as miscellaneous revenue from such items as barber/beauty income, laundry services, cable TV revenue, meal and guest fees, food catering, health supplies, parking, etc. Other Income This category includes revenue received from the subject's barber/beauty income, laundry services, cable TV revenue, meal and guest fees, food catering, health supplies, parking, etc. The historic revenue for this category are shown in the following table. Year Total $/Unit 2001 $120,704 $936 2002 $112,407 $871 2003 $90,525 $702 BUDGET 2004 $109,680 $850 C&W Forecast $110,000 $803
Based on the data, we forecast Year 1 revenue from this source at $110,000. Vacancy and Collection Loss Both the investor and the appraiser are primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100 percent occupied and all tenants were paying their rent in full and on time. A normally prudent practice is to expect some income loss as tenants vacate, fail to pay rent, or pay their rent late. Model units or other rent loss, if necessary, is addressed separately. The subject, as of the most current rent roll provided, was 88.00 percent occupied. This is about equal to current average occupancy levels for the market area overall. In consideration of the above, we forecast a stabilized vacancy and collection loss of 13.00 percent for the subject. Effective Gross Income The following table summarizes the projected estimate of stabilized income based on the above findings. The stabilized revenues are based on current market rents and trends and reflect what we consider a typical purchaser would anticipate.
Oak Terrace Retirement Apartments STABILIZED OPERATING INCOME RESIDENT NO. NO. MONTHLY PER UNIT TYPE TYPE UNITS BEDS RATE INCOME RESIDENT Small Studio IL 5 5 $ 1,218 $ 73,080 Square Studio IL 5 5 $ 1,328 $ 79,680 West Studio IL 15 15 $ 1,436 $258,480 Regular Studio IL 10 10 $ 1 ,486 $178,320 1BR West-Patios IL 10 10 $ 1,914 $229,680 1 BR -Patios IL 62 62 $ 1,989 $1,479,816 1 BR Intermediate- Patio IL 5 5 $ 2,253 $135,180 1 BR Deluxe - Patio IL 9 9 $ 2,447 $264,276 2BR - Patio IL 8 16 $ 2,466 $473,472 Total 129 137 $3,171,984 $ 23,153 Other $ 110,000 $ 803 TOTAL POTENTIAL GROSS INCOME $3,281,984 $ 23,956 LESS: VACANCY @ 13.0% $ (426,658) EFFECTIVE GROSS INCOME $ 2,855,326 $ 23,956
Opinion of Expenses We developed an opinion of the property's annual operating expenses after reviewing its historical performance and reviewing the operating statements of similar senior living properties. Management provided operating statements for 2001 2002 2003 and a budget projection. This information was summarized previously. Furthermore, we supported our estimate of projected expenses with other senior living facilities in the region, as well as from overall industry statistics. We also note that the reader is cautioned when reviewing the comparable expenses for individual facilities, in that the reporting of expenses varies by property and that different congregate living facilities offer different services. All comparisons will be made on an actual resident basis. Expense Comparables The expense comparables are summarized in the following chart.
SUMMARY OF COMPARABLE OPERATING EXPENSES INDEPENDENT LIVING FACILITIES Facility Confidential Confidential Confidential Reporting Period 2003 2003 2002 Year Bum 2001 2001 1990 No. of IL Units 42 60 176 No. of AL Unils 72 84 11 No. of AL2 Units 0 0 0 Total Unils 114 144 187 Occupancy 93% 92% 98% Resident Days 38,822 48,198 66,890 Per %of Per %of Per %of Resident EGI Resident EGI Resident EGI TOTAL NET REVENUES $26,055 $23,495 $34,768 EXPENSES General & Administrative $1,518 5.83% $968 4.12% $3,052 8.78% Payroll Taxes & Benefits $1,446 5.55% $895 3.81% $3,882 11.17% Resident Care $3,168 12.16% $2,587 11.01% $1,133 3.26% Food Services $2,264 8.69% $2,107 8.97% $4,949 14.23% Activities $455 1.75% $269 1.15% $461 1.33% Housekeeping $482 1.85% $370 1.57% $1,291 3.71% Plant Operations $745 2.86% $657 2.80% $2,046 5.89% Utities $1,087 4.17% $1,274 5.42% $1,805 5.19% Marketing/Promotions $536 2.06% $290 1.23% $546 1.57% Real Estate Taxes $904 3.47% $839 3.57% $1,257 3.62% Insurance $585 2.24% $882 3.76% $1,154 3.32% ADJUSTED OPERATING EXPENSES $13,188 50.62% $11,138 47.41% $21,576 62.06% Management Fee $1,303 5.00% $1,175 5.00% $1,738 5.00% Expense Ratio Before Reserves 56% 52% 67% Reserves - - - - - - ASHA ASHA ASHA Lower Upper Facility Quartile Median Quartile Reporting Period 2003 2003 2003 Year Bum N/A N/A N/A No. of IL Units N/A N/A N/A No. of AL Unils N/A N/A N/A No. of AL2 Units N/A N/A N/A Total Unils N/A N/A N/A Occupancy N/A N/A N/A Resident Days TOTAL NET REVENUES $19,389 $26,972 $32,078 EXPENSES General & Administrative $885 $1,703 $2,372 Payroll Taxes & Benefits $847 $1,665 $2,143 Resident Care $532 $1,961 $2,924 Food Services $2,717 $3,875 $4,531 Activities N/A N/A N/A Housekeeping $491 $789 $1,085 Plant Operations $511 $1,138 $1,593 Utities $875 $1,352 $1,753 Marketing/Promotions $522 $1,045 $1,431 Real Estate Taxes $489 $1,064 $1,533 Insurance $289 $647 $1,178 ADJUSTED OPERATING EXPENSES $12,424 $18,300 $22,613 Management Fee $673 $1,411 $1,748 Expense Ratio Before Reserves 68% 73% 76% Reserves $193 $580 $977 Source: The State of Seniors Housing, 2003. ASHA. (Data is for Independent Living Facilities) Note: Each line expense for ASHA derived from seperately sorted data columns and may not add up under totals. * All comparable categories based on Actual Unit (Per Resident)
Repair/ Maintenance/ Supply The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $38,997 $302 1.46% 2002 $44,418 $344 1.62% 2003 $30,025 $233 1.12% BUDGET 2004 $35,035 $272 1.24% C&W Forecast $35,000 $271 1.23%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $35,000 or $ 271 per unit. Services The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $561,679 $4,354 21.04% 2002 $589,826 $4,572 21.46% 2003 $609,090 $4,722 22.67% BUDGET 2004 $657,574 $5,097 23.21 % C&W Forecast $660,000 $5,116 23.11 %
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $660,000 or $5,116 per unit. Administrative The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $26,732 $207 1.00% 2002 $27,365 $212 1.00% 2003 $49,914 $387 1.86% BUDGET 2004 $28,426 $220 1.00% C&W Forecast $30,000 $233 1.05%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $30,000 or $ 233 per unit. Advertising The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $43,224 $335 1.62% 2002 $41,109 $319 1.50% 2003 $35,624 $276 1.33% BUDGET 2004 $34,810 $270 1.23% C&W Forecast $35,000 $271 1.23%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $35,000 or $ 271 per unit. Payroll The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $455,227 $3,529 17.05% 2002 $483,937 $3,751 17.61% 2003 $460,270 $668 3.21% BUDGET 2004 $457,075 $3,543 16.13% C&W Forecast $460,000 $3,566 16.11 %
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 activities costs at $460,000 or $3,566 per unit. Utilities The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $85,031 $659 3.18% 2002 $77,436 $600 2.82% 2003 $86,146 $668 3.21% BUDGET 2004 $86,940 $674 3.07% C&W Forecast $90,000 $698 3.15%
The subject's actual expenses are supported by the comparable properties. We forecast Year 1 costs at $90,000 or $ 698 per unit. Real Estate Taxes This cost is for the annual real and personal property tax liability for the subject. The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $116,745 $905 4.37% 2002 $149,555 $1,159 5.44% 2003 $141,384 $1,096 5.26% BUDGET 2004 $145,620 $1,129 5.14% C&W Forecast $150,000 $1,163 5.25%
Please refer to the Real Estate Taxes and Assessments section of the report for a discussion on how the Year 1 taxes were estimated. We forecast the Year 1 real estate tax expense at $150,000 or $1,163 per unit. Insurance This cost is for the annual liability insurance for the property. The historical costs, as well as our forecast for this category are shown in the following chart. Year Total $/Unit % of EGI 2001 $40,946 $317 1.53% 2002 $65,546 $508 2.38% 2003 $49,598 $384 1.85% BUDGET 2004 $86,298 $669 3.05% C&W Forecast $90,000 $698 3.15%
The expense comparables showed expenses for this category from $ 585 to $1,154 per resident (average of $ 874 per resident), while the industry data showed a range from $ 289 to $1,178 per resident (median of $ 647 per resident): Insurance costs for senior living properties increased strongly over the last one to two years. The subject's actual expenses are supported by the comparable properties. We forecast Year 1 insurance costs at $90,000 or $ 698 per unit. Management Fee The subject is managed by an operating entity of the ownership at a rate equal to 5.0 percent of effective gross income. According to data by The 2003 State of Senior Housing Report, the median management fee for independent living facilities is 5.1 percent, with a general range from 4.9 to 6.3 percent. We concluded to a 5.0 percent management fee, which equates to a Year 1 expense of $142,766 or $1,107 per resident. Replacement Reserves Replacement reserves are necessary for replacement of roof covering, mechanical systems, furnishings, appliances, etc. For a facility such as the subject, it is reasonable to deduct one to two percent of net resident revenues for replacement reserves. The ASHA industry data shows a range of reserve unit allowances from $ 193 to $ 977 per unit with a median of $ 580 per unit. In the case of the subject and its date of construction, we deducted an amount equal to $300 per unit which equates to a total cost of $38,700 or $ 300 per resident, which is well supported by the industry data. Expense Summary Overall, we project the first year expenses for the subject (including management fees and reserves) at $1,731,466 ($13,422 per resident) and 60.64 percent of effective gross income. Additionally, the subject operated historically at expense ratios ranging from 58 to 61 percent. According to The Senior Care Acquisition Report 2004, the average expense ratio for independent living facilities was 79.0 percent in 2003, which represented a 4.2 percent increase from 75.8 percent in 2002. The survey noted; however, that many of the properties used in the transaction samplings were either troubled or no stabilized, which resulted in a higher reported operating expense basis. Furthermore, operating margins for independent living facilities were reported at 28.3 percent for the median, 18.8 percent for the lower quartile and 34.3 percent for the upper quartile according to the State of Senior Housing Report 2003. Our net operating income estimate is similar than the historical amounts and equates to $8,712 per resident, which is abovethe most recent operating year of $8,688 per resident. The expenses and resultant net operating income estimate are considered reasonable in light of the historical data. A summary of our Year 1 proforma is presented as follows:
Oak Terrace Retirement Apartments STABILIZED OPERATING STATEMENT Total PR % of EGI EFFECTIVE GROSS INCOME $ 2,855,326 $23,956 EXPENSES Repair/Main/Supply $ 35,000 $ 271 1.23% Services $ 660,000 $ 5,116 23.11% Administrative $ 30,000 $ 233 1.05% Advertising $ 35,000 $ 271 1.23% Payroll $ 460,000 $ 3,566 16.11% Utilities $ 90,000 $ 698 3.15% Real Estate Taxes $ 150,000 $ 1,163 5.25% Insurance $ 90,000 $ 698 3.15% TOTAL OPERATING EXPENSES 54.3% $ 1,550,000 $ 12,016 54.28% Management Fees 5.0% $ 142,766 $ 1,107 5.00% Replacement Reserves $ 300 $ 38,700 $ 300 1.36% TOTAL EXPENSES $ 1,731,466 $ 13,422 60.64% NET OPERATING INCOME $ 1,123,860 $ 8,712 39.36% (*) Per Actual Resident
Direct Capitalization Rate Analysis In determining an appropriate capitalization rate, we utilized several different methods: market extraction from the sales comparables; findings reported in The Senior Care Acquisition Report, 2004, published by Irving Levin Associates, Inc.; and findings from the Senior Care Participants Survey completed by Cushman & Wakefield, Inc.; and from the Band-of-Investment Analysis. We analyzed investment rates of return acceptable to buyers in order to determine the capitalization rate. The overall rate on an investment is determined by analyzing several aspects of that investment and then assigning a risk associated with those aspects. Elements usually considered are: . Reliability of the gross income prediction. How certain is it that the income will be forthcoming? Income is more dependable when the property is leased on a long-term basis to financially responsible tenants than when rented on a month-to-month basis to less reliable tenants. . Reliability of the expense prediction. Is there great danger of having expenses increase materially, or is there a fair chance that they will remain about the same or even decrease? . Expense ratio. If the expenses are low in relation to gross income, the quality of the net income may be better, because a moderate reduction in gross income or a moderate increase in expenses does not affect the net income substantially. . Burden of management. Even when real estate management is employed, a property that requires constant attention, because of either maintenance or rent collection problems, is less desirable than one that needs minimal management. A long-term lease that requires a tenant to take care of all repairs and to pay taxes and insurance presents a situation that is relatively free from this burden of management. . Marketability of the property. An investment that has marketability and liquidity appeals to a wider group of investors than one lacking those attributes. . Stability of value. The value or market price of a piece of real property tends to remain within a narrower range for longer periods of time than do most other commodities. As described previously, the gross income projected for the property is subject to such uncertainties as competition from other facilities and fluctuations in demand for the subject's services. Moreover, the subject property has limited marketability and liquidity because a purchaser must have the appropriate operating license from the applicable state regulatory agencies, which limits the number of potential investors and would, in any potential sale of the property, create impediments and delays. Going-In Capitalization Rate Industry Findings To further test the capitalization rates, we consulted data on independent living acquisition trends in The Senior Care Acquisition Report, Eighth Edition, 2004. The report indicated that after seeing two years of declining capitalization rates for independent living properties between 2000 and 2001, 2002 saw an increase in rates to a reported average of 12.20 percent. For 2003, however, the average capitalization rate declined to 11.1 percent. This information is summarized in the graph below. Independent Living Facility Capitalization Rates [GRAPHIC OMITTED] 1995: 10.3% 1996: 10.2% 1997: 9.2% 1998: 10.3% 1999: 10.9% 2000: 10.5% 2001: 9.9% 2002: 10.8% 2003: 9.9% In addition, Cushman & Wakefield, Inc. surveyed senior care participants regarding their investment parameters for senior housing properties. This recent information is summarized in the following table. 2003 Participants Survey Change From Change From Survey 2002 2001 Property Type Survey Range Average Basis % Basis % Point Point Capitalization Rates 55+ Senior Apartments 7.00% - 10.25% 8.15% -7 0.9% -68 -7.6% Independent Living 9.00% - 10.50% 9.55% -5 0.5% -30 -3.0% Assisted Living 10.00% - 12.25% 10.85% -17 1.6% -8 -7.2% Skilled Nursing 11.50% - 18.00% 14.15% 16 -1.1% -61 -4.2% Continuing Care Retirement Community 9.00% - 11.50% 10.40% -35 3.4% -15 -1.4% Internal Rates of Return 55+ Senior Apartments 9.50% - 15.00% 10.60% -15 1.4% -20 -1.8% Independent Living 10.00% - 15.00% 11.90% -25 2.1% -65 -5.7% Assisted Living 12.00% - 17.00% 15.30% 42 -2.7% -22 -1.5% Skilled Nursing 13.00% - 20.00% 16.30% -25 1.5% -165 -9.1% Continuing Care Retirement Community 9.00% - 17.00% 13.00% -25 1.9% -135 -9.2% Source: Senior Care Participants Survey, 2003 by Cushman & Wakefield, Inc.
In reviewing the 2003 survey, capitalization rates for independent living facilities ranged from 9.00 to 10.50 percent with an average indication of 9.55 percent. This data is only 25 basis points below that reported previously in The Senior Care Acquisition Report, Eighth Edition, 2004. The 2003 C&W survey also shows that capitalization rates declined slightly over those reported in 2002 and 2001. In choosing the appropriate capitalization rate for the subject, we considered its location, occupancy, as well as the overall condition and utility of the property. The subject is a mid-sized independent living facility located in a favorable demographic area in Illinois. The market area is considered to be at a equilibrium basis with no under- or over- supply at this time. Based on the data and characteristics of the subject and marketplace, we consider a capitalization rate of between 8.75 to 9.25 percent to be appropriate for the property. Band of Investment The Band of Investment technique accounts for the combination of equity and prevailing financing which are banded together to finance this type of real estate. The rate developed is a weighted average, the weights being percentages of the total value, allocated to the mortgage and equity positions. After surveying several commercial mortgage lenders and consulting the most recent Senior Care Participants Survey, published by Cushman & Wakefield, Inc. and the Senior Care Acquisition Report, published by Irving Levin Associates, it is our opinion that a typical creditworthy owner could obtain financing from a lending source in an amount equal to 75 percent of value at an annual interest rate of 6.0 percent. A typical loan period for this type of real estate ranges from 20 to 30 years. Utilizing a 25-year amortization period at a 6.0 percent interest rate (payable monthly) yields a mortgage constant of 0.0773162. For a review of investor rates of return, we reference the previous table, which showed investment parameters for independent living properties. As shown in the table, internal rates of return or equity dividend rates for senior housing properties ranged from 9.50 to 20.00 percent. Independent living facilities fall within the lower to middle portion of the range from 10.00 to 15.0 percent with an average indicated rate of 11.90 percent. Assisted living facilities fall within the middle portion at 12.00 to 17.0 percent with an average indicated rate of 15.30 percent. Based on the data, we consider a prudent investor in a senior housing property like the subject would accept an initial annual return of between 10 percent and 15 percent of an equity investment in anticipation of a stable income flow and property appreciation over time. From this, and based on the subject's physical, locational and competitive structure, a rate from within the middle portion of the latter range, or 13.0 percent would be reasonable. It should be emphasized that the equity dividend rate is not necessarily the same as an equity yield rate or true rate of return on equity capital. The equity dividend rate is an equity capitalization that reflects all benefits that can be recognized by the equity investor as of the date of purchase. The overall capitalization rate is developed as follows: Band of Investment Technique 75.0% MORTGAGE X 0.0773162 Mortgage Constant = 0.0579 25.0% Equity X 0.1300 Equity Dividend = 0.0325 100.0% Total 0.9.04 OAR = 9.00% Direct Capitalization Method Conclusion We estimated a capitalization rate ranging between 8.75 to 9.25 percent through our direct comparison analysis, while the band-of-investment technique correlated to 9.00 percent. Utilizing both methods to develop a capitalization rate, tempered with investor criteria and the specific attributes of the subject, we consider a rate of 9.00 percent warranted for the property. We note that this rate is applied after reserves. Our conclusion via the Direct Capitalization Method is as follows: DIRECT CAPITALIZATION METHOD Net 0perating Income $1,123,860 Sensitivity Analysis (0.25% OAR Spread) Value $/Unit Based on Low-Range of 8.75% $12,844,112 $99,567 Based on Most Probable Range of 9.00% $12,487,331 $96,801 Based on High-Range of 9.25% $12,149,835 $94,185 Reconciled Value $12,487,331 $96,801 Rounded to nearest $100,000 $12,500,000 $96,899 Value Conclusion: $12,500,000
RECONCILIATION AND FINAL VALUE OPINION Valuation Methodology Review and Reconciliation This appraisal employs only the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be considered necessary and applicable for market participants. The client has requested that we perform a restricted appraisal report. Therefore, we have not employed the Cost Approach or the Sales Comparison Approach to develop an opinion of market value. The approaches indicated the following values: Income Capitalization Approach: $12,500,000 Due to the fact that the subject is an income producing property, investors are primarily concerned with their return on equity. Therefore, we placed most weight on the Income Capitalization Approach in our final value conclusion. Given that investors typically purchase these types of properties based on their income producing capabilities, this approach was useful in providing support for our findings in the Income Capitalization Approach. The Income Capitalization Approach is typically considered the most appropriate approach to utilize when valuing going-concerns such as nursing homes, independent living and independent living facilities. This approach considers the income potential of the property. In our Income Capitalization Approach to value, the anticipated monetary benefits of ownership were converted into a value estimate. Within the Income Capitalization Approach, direct capitalization was used, as it is the most common method used by investors and purchasers in acquiring existing and stabilized properties of this nature. Based on our Complete Appraisal as defined by the Uniform Standards of Professional Appraisal Practice, we developed an opinion that the "as-is" market value of the fee simple estate of the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, on April 16, 2004 was: TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS $12,500,000 Personal Property Allocation Included in the above estimate of market value is the contributing value of the personal property at the subject property, or the furnishings, fixtures and equipment (FF&E). FF&E is generally considered to be part of the independent living facility and is typically sold with the building. It is therefore considered to be a part of the property's total value. FF&E includes the individual unit and public area furnishings, kitchen equipment, service/maintenance equipment and other machinery. Based on previous analysis of the subject, we estimated the value of the FF&E as new to be $519,225, including a 15 percent factor for entrepreneurial profit. Physical deterioration (depreciation) must be deducted for the FF&E. The subject opened in 1987. Based on our physical inspection of the property, we are of the opinion that the property is currently in average physical condition. We estimated that the subject's FF&E has a useful life of 10 years and we estimated the current effective age at 4 years. This equates to a 40 . percent depreciation factor, as summarized in the following table. .
Furniture, Fixtures and Equipment Total Value of FF&E As New $519,225 Physical Life (Yrs) 10 Effective Age (Yrs) 4 Percent Depreciated (%) 40 Percent Value Remaining (%) 60 Depreciated Value $311,535 Rounded $310,000
The contributing value of the FF&E is considered to be the cost of the FF&E less its accrued depreciation. This equates to a value of $310,000 rounded. INSURABLE VALUE Insurable Value is directly related to the portion of the real estate which is covered under the asset's insurance policy. We based this opinion on the building's replacement cost new (RCN), which has no direct correlation with its actual market value. The replacement cost new is the total construction cost of a new building built using modern technology, materials, standards and design, but built to the same specifications and with the same utility as the building being appraised. For insurance purposes, replacement cost new includes all direct costs necessary to construct the building improvements. Items which are not considered include land value, site improvements, indirect costs, accrued depreciation and entrepreneurial profit. To develop an opinion of insurable value, exclusions for below-grade foundations and architectural fees must be deducted from replacement cost new. We developed an opinion of replacement cost new by using the Calculator Cost Method developed by Marshall Valuation Service, a nationally recognized cost estimating company which estimates construction costs for all types of improvements. Marshall Valuation Service revises its cost factors monthly and adjusts them to reflect regional and local cost variations.
Oak Terrace Retirement Apartments INSURABLE VALUE Gross Building Area Square Footage (GBA) 117,250 Total Replacement Cost New Of Improvements $7,805,448 Less-Insurance Exclusions Per S.F. Percent Foundations Below Grade $1.66 2.50% $195,136 Piping Below Grade (Negligible) $0.00 0.00% $0 Architect Fees $1.66 2.50% $195,136 Total Insurance Exclusions $390,272 INSURABLE VALUE SUMMARY Total Replacement Cost New $7,805,448 Less: Total Insurance Exclusions ($390,272) Insurable Value $7,415,176 Rounded to nearest $50,000 $7,400,000 Source: Marshall Valuation Service See Cost Approach for calculator details
Therefore, the insurable value for the improvements is estimated to be $7,400,000. SUPPLEMENTAL VALUATION - SCENARIO II VALUATION BY THE DIRECT CAPITALIZATION METHOD AS ENCUMBERED In the previous section, the subject property's Market Value unencumbered, or "free and clear" was estimated. However, as previously stated the purpose of this report is to estimate the Market Value of the subject property, as encumbered with long-term bond financing. The terms of the bond and Letter of Credit are summarized as follows. TERMS OF BOND FINANCING Long-term bond financing issued by the City of Springfield, Illinois encumbers the subject property. The Community Improvement Adjustable Demand Revenue Bonds (Oak Tree Joint Venture, LP) Series 1999. A synopsis of the bond terms is included in the addenda section of this report. Derivation Of Overall Capitalization Rate: Capitalization rates express relationships between net income and total value. The rate employed must be consistent with and reflective of those rates currently employed by investors active in the market place. Therefore, in order to determine the affect favorable bond financing has on the capitalization rates we interviewed a number of active investors and participants so that we may get an understanding as to the methodology applied in the purchasing of such properties. In conducting our research, we interviewed representative from such institutions as Lend Lease, Heitman Capital, and Equity Residential Group. Each of those interviewed were relatively consistent in that their respective companies discounted "unleveraged market-rate overall rates" between 50 and 150 basis points to reflect the benefits of the leverage and favorable financing. Therefore, for properties such as the subject, a "leveraged" capitalization rate of between 6.5 percent and 7.5 percent (8.0 percent less 50 to 200 basis points) is implied. For the purposes of our analysis, we have concluded to 7.0 percent, which is applied to the estimated NOI and results in a value as follows: SUPPLEMENTAL VALUATION - SCENARIO II $1,123,860 + 7.0% = $16,055,143 or $16,100,000 (as rounded) SIXTEEN MILLION ONE HUNDRED THOUSAND DOLLARS ($16,100,000) This value considers the effect of positive leverage and terms attributable to bond financing that encumbers the subject property. The difference between the unencumbered and the estimated Market Value, as encumbered, is $3,600,000, is the implied benefit of the long-term bond financing. This value represents a 28.8 percent increase from our market value conclusion under Scenario I ASSUMPTIONS AND LIMITING CONDITIONS "Report" means the appraisal or consulting report and conclusions stated therein, or a letter opinion, to which these Assumptions and Limiting Conditions are annexed. "Property" means the subject of the Report "C&W" means Cushman & Wakefield, Inc. or its subsidiary that issued the Report. "Appraiser(s)" means the employee(s) of C&W who prepared and signed the Report. The Report has been made subject to the following assumptions and limiting conditions: 1. No opinion is intended to be expressed and no responsibility is assumed for the legaldescription or for any matters that are legal in nature or require legal expertise or specialized knowledge beyond that of a real estate appraiser. Title to the Property is assumed to be good and marketable and the Property is assumed to be free and clear of all liens unless otherwise stated. No survey of the Property was undertaken. 2. The information contained in the Report or upon which the Report is based has been gathered from sources the Appraiser assumes to be reliable and accurate. The owner of the Property may have provided some of such information. Neither the Appraiser nor C&W shall be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, sketches, exhibits and factual matters. Any authorized user of the Report is obligated to bring to the attention of C&W any inaccuracies or errors that it believes are contained in the Report. 3. The opinions are only as of the date stated in the Report. Changes since that date in external and market factors or in the Property itself can significantly affect the conclusions. 4. The Report is to be used in whole and not in part. No part of the Report shall be used in conjunction with any other analyses. Publication of the Report or any portion thereof without the prior written consent of C&W is prohibited. Reference to the Appraisal Institute or to the MAI designation is prohibited. Except as may be otherwise stated in the letter of engagement, the Report may not be used by any person other than the party to whom it is addressed or for purposes other than that for which it was prepared. No part of the Report shall be conveyed to the public through advertising, or used in any sales or promotional or offering or SEC material without C&W's prior written consent. Any authorized user of this Report who provides a copy to, or permits reliance thereon by, any person or entity not authorized by C&W in writing to use or rely thereon, hereby agrees to indemnify and hold C&W, its affiliates and their respective shareholders, directors, officers and employees, harmless from and against all damages, expenses, claims and costs, including attorneys' fees, incurred in investigating and defending any claim arising from or in any way connected to the use of, or reliance upon, the Report by any such unauthorized person or entity. 5. Except as may be otherwise stated in the letter of engagement, the Appraiser shall not be required to give testimony in any court or administrative proceeding relating to the Property or the Appraisal. 6. The Report assumes (a) responsible ownership and competent management of the Property; (b) there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning and environmental regulations and laws, unless noncompliance is stated, defined and considered in the Report; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimate contained in the Report is based. 7. The physical condition of the improvements considered by the Report is based on visual inspection by the Appraiser or other person identified in the Report. C&W assumes no responsibility for the soundness of structural members nor for the condition of mechanical equipment, plumbing or electrical components. 8. The forecasted potential gross income referred to in the Report may be based on lease summaries provided by the owner or third parties. The Report assumes no responsibility for the authenticity or completeness of lease information provided by others. C&W recommends that legal advice be obtained regarding the interpretation of lease provisions and the contractual rights of parties. 9. The forecasts of income and expenses are not predictions of the future. Rather, they are the Appraiser's best estimates of current market thinking on future income and expenses. The Appraiser and C&W make no warranty or representation that these forecasts will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the Report, envisages for the future in terms of rental rates, expenses, and supply and demand. 10. Unless otherwise stated in the Report, the existence of potentially hazardous or toxic materials that may have been used in the construction or maintenance of the improvements or may be located at or about the Property was not considered in arriving at the opinion of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the Property. The Appraisers are not qualified to detect such substances. C&W recommends that an environmental expert be employed to determine the impact of these matters on the opinion of value. 11. Unless otherwise stated in the Report, compliance with the requirements of the Americans with Disabilities Act of 1990 (ADA) has not been considered in arriving at the opinion of value. Failure to comply with the requirements of the ADA may adversely affect the value of the Property. C&W recommends that an expert in this field be employed. 12. If the Report is submitted to a lender or investor with the prior approval of C&W, such party should consider this Report as only one factor together with its independent investment considerations and underwriting criteria, in its overall investment decision. Such lender or investor is specifically cautioned to understand all Extraordinary Assumptions and Hypothetical Conditions and the Assumptions and Limiting Conditions incorporated in this Report. 13. In the event of a claim against C&W or its affiliates or their respective officers or employees or the Appraisers in connection with or in any way relating to this Report or this engagement, the maximum damages recoverable shall be the amount of the monies actually collected by C&W or its affiliates for this Report and under no circumstances shall any claim for consequential damages be made. 14. If the Report is referred to or included in any offering material or prospectus, the Report shall be deemed referred to or included for informational purposes only and C&W, its employees and the Appraiser have no liability to such recipients. C&W disclaims any and all liability to any party other than the party which retained C&W to prepare the Report. 15. By use of this Report each party that uses this Report agrees to be bound by all of the Assumptions and Limiting Conditions stated herein. Extraordinary Assumptions An extraordinary assumption is defined as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis." (USPAP 2001 Edition, ASS of The Appraisal Foundation, 1/1/2001, page 2). This appraisal employs no other extraordinary assumptions. Hypothetical Conditions An extraordinary assumption is defined as "an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property or about conditions external to the property, such as market conditions or trends, or the integrity of data used in an analysis." (USPAP 2004 Edition, ASS of The Appraisal Foundation, 1/1/2004, page 3). This appraisal employs no hypothetical conditions. CERTIFICATION OF APPRAISAL We certify that, to the best of our knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported 3. assumptions and limiting conditions, and is our personal, impartial, and unbiased professional analyses, opinions, and conclusions. 3. We have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. 4. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. 5. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. 6. Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. 7. Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. 8. Randal D. Dawson, MAI made a personal inspection of the property that is the subject of this report. 9. No one provided significant real property appraisal assistance to the persons signing this report. 10. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 11. As of the date of this report, Appraisal Institute continuing education for Randal D. Dawson, MAI is current. /S/ RANDAL D. DAWSON --------------------- Randal D. Dawson, MAI Associate Director Senior Housing/Healthcare Industry Group Illinois Certified General Appraiser License No. 153-001098