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Cummings Appraisals SAMPLE OFFICE APPRAISAL COMPLETE APPRAISAL SUMMARY APPRAISAL REPORT OF An Existing Office Building Located At Subject Address City, State ZIP Client Job Number DATE OF VALUE Date of Value DATE OF REPORT Date of Report PREPARED FOR Client Name Client Title Client Title 2 CLIENT COMPANY Client Address City, State ZIP Client Phone Number PREPARED BY Calvin Cummings, MAI Certified General Real Estate Appraiser CUMMINGS APPRAISALS 99 South Lake Avenue, Suite 021 Pasadena, CA 91101 Phone 626-744-0428 Fax 626-744-0922 Cummings Appraisals Subject Address, City, State ZIP Date of Report Client Name Client Title Client Title 2 CLIENT COMPANY Client Address City, State ZIP RE: Complete Appraisal, Summary Appraisal Report of Subject Address, City, State ZIP Client Job Number Dear Client Name: In accordance with your request, we have prepared a complete appraisal of the market value as is of the leased fee interest in the above referenced real property, presented in a summary appraisal report. The following appraisal report summarizes the most pertinent data gathered, the techniques employed, and the reasoning leading to the opinion of value. The analyses, opinions and conclusions were developed based on, and this report has been prepared in conformance with our interpretation of the requirements of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA); the Interagency Appraisal and Evaluation Guidelines; the Uniform Standards of Professional Appraisal Practice (USPAP); the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute; and Client Company appraisal requirements. Based upon the results of the investigation and analyses contained in the following report, it is our opinion that the market value as is of the leased fee interest in the subject property, as of Date of Value, the date of inspection, is: SEVEN MILLION NINE HUNDRED THOUSAND DOLLARS ($7,900,000) The value conclusion reported above is based on estimated marketing and exposure times of 2 to 4 months and is contingent upon the certification and limiting conditions attached. Respectfully submitted, CUMMINGS APPRAISALS Calvin Cummings, MAI Certified General Real Estate Appraiser California License # AG005293 Expiration: October 9, 2006 Cummings Appraisals 2 Subject Address, City, State ZIP TABLE OF CONTENTS SUMMARY OF SALIENT FACTS............................................................................................................. 4 CERTIFICATION ........................................................................................................................................ 5 PURPOSE/FUNCTION................................................................................................................................ 6 SCOPE, APPRAISAL DEVELOPMENT AND REPORTING PROCESS................................................. 6 INTENDED USE/USERS OF APPRAISAL ............................................................................................... 7 LEGAL DESCRIPTION .............................................................................................................................. 7 OWNERSHIP ............................................................................................................................................... 7 EXPOSURE TIME AND MARKETING TIME.......................................................................................... 7 LOCATION ANALYSIS ............................................................................................................................. 8 MARKET ANALYSIS ............................................................................................................................... 10 SITE DESCRIPTION ................................................................................................................................. 12 IMPROVEMENTS DESCRIPTION ......................................................................................................... 14 PROPERTY HISTORY.............................................................................................................................. 16 ASSESSORS INFORMATION.................................................................................................................. 16 OCCUPANCY AND USE OF SUBJECT.................................................................................................. 16 HIGHEST AND BEST USE ...................................................................................................................... 16 VALUATION ............................................................................................................................................. 17 SALES COMPARISON APPROACH....................................................................................................... 17 INCOME CAPITALIZATION APPROACH ............................................................................................ 26 RECONCILIATION................................................................................................................................... 39 INSURABLE VALUE ESTIMATE........................................................................................................... 40 ADDENDA................................................................................................................................................. 41 Cummings Appraisals 3 Subject Address, City, State ZIP SUMMARY OF SALIENT FACTS General Information: Client: Client Company Client Appraisal File No.: 2004-5552 Internal Job No.: 0105 Prospective Purchaser/Borrower: Borrower Name Appraisal/Report Type: Complete Appraisal, Summary Appraisal Report Date of Value: Date of Value Date of Report: Date of Report Interest Appraised: LeasedFee Valuation Premises: Market Value As Is and Insurable Value Property Information: Property Type: Existing Office Building Property Address: Subject Address, City, State ZIP Owner of Record: See Ownership section Map Reference: TG 671-E2 Assessor Parcel No.: APN Site Area: xx,xxx square feet (SF), or approximately 0.34 acres (Ac.) Zoning: C3, Downtown Commercial Flood Zone Code: X Flood Zone Panel: 0601590000 Census Tract / Block: 7019.00 / 1 Gross Building Area (GBA): xx,xxx SF Rentable Area: xx,xxx SF Usable Area: 21,974 SF Year Built / Renovated: 1983 / 1999 Effective Age: 15 years Remaining Economic Life: 40 years Stories: 4 Current Occupancy: 100% Parking Spaces: 78, or 3.09/1,000 SF Personal Property: None Valuation Parameters: Cost Approach: N/A Sales Comparison Approach: $8,070,000 Income Capitalization Approach: Overall Capitalization Rate: $7,860,000 Gross Income Multiplier: $7,920,000 Market Value Conclusion: $7,900,000 Estimated Exposure Time: 2 to 4 months Estiamted Marketing Time: 2 to 4 months Estimated Potential Gross Income: $754,477 Estimated Net Operating Income: $471,432 Insurable Value Estimate: $4,930,000 Cummings Appraisals 4 Subject Address, City, State ZIP CERTIFICATION I certify that, to the best of my knowledge and belief: • The statements of fact contained in this report are true and correct. • The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial and unbiased professional analyses, opinions, and conclusions. • I 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. • I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. • My engagement in this assignment was not contingent upon developing or reporting predetermined results. • My 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. • This appraisal assignment was not based upon a requested minimum valuation, a specific valuation, or the approval of a loan. • My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. • The reported analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Appraisal Institute's Code of Professional Ethics and Standards of Professional Appraisal Practice, which include the Uniform Standards of Professional Appraisal Practice. • The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. • As of the date of this report, I have completed the continuing education program of the Appraisal Institute. • I have made a personal inspection of the property that is the subject of this report. • No one provided significant real property appraisal assistance to the person signing this certification. Calvin Cummings, MAI Certified General Real Estate Appraiser California License #AG005293 Expiration: October 9, 2006 Cummings Appraisals 5 Subject Address, City, State ZIP PURPOSE/FUNCTION The purpose of the appraisal is to estimate market value as defined by the Board of Governors of the Federal Reserve System, in accordance with Title XI of FIRREA (1989). “Market Value means 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 knowledgeable, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and 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 compatible 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 associates with the sale.” (Source: Title 12, Banks and Banking; Chapter II, Federal Reserve System; Subchapter A, Board of Governors of the Federal Reserve System; Part 225, Bank Holding Company and Change in Bank Control (Regulation Y), Subpart G, Appraisals; 225.62 Definitions (g).) The appraisal will be utilized by Client Company as an aid in proper underwriting for a potential real estate loan / refinance involving the asset. SCOPE, APPRAISAL DEVELOPMENT AND REPORTING PROCESS The scope of this appraisal included the following: • reading of the request for appraisal services and related attachments; • physical inspection of the subject, neighborhood, and submarket; • research public records, or other sources deemed reliable, relative to the subject; • research public records, or other sources deemed reliable, for comparable properties; • present the results in this Summary Appraisal Report. In developing an opinion of market value for the subject property, both the sales comparison and income capitalization approaches are applicable, and the appraiser has performed the analysis necessary under each of these two approaches to indicate a value conclusion. The subject property is improved with a smaller four-story office building which was originally built in 1983 and was renovated in 1999. It is currently 100% leased and occupied by four tenants. The sales comparison and income capitalization approaches are both utilized by purchasers of smaller office building properties such as the subject. However, in the final analysis, the sales comparison approach is of secondary importance as most purchasers of multi-tenant leased investments such as the subject rely more heavily on the income capitalization approach to value. Due to the older age of the subject improvements and the fact that buyers, sellers and brokers do not typically utilize this approach in their pricing decisions for a property such as the subject, the cost approach is not considered applicable or necessary to develop a reliable value indication and, therefore, has not been performed. This is a Complete Appraisal, Summary Appraisal Report which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(b) of the Uniform Standards of Professional Appraisal Practice (USPAP) for a Summary Appraisal Report. As such, it presents only summary discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser’s opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the Cummings Appraisals 6 Subject Address, City, State ZIP appraiser’s file. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated above. INTENDED USE/USERS OF APPRAISAL The intended use of this appraisal is to assist Client Company, the client, in proper underwriting for a potential real estate loan / refinance involving the asset. The intended users of this appraisal are Client Company and/or its designated representatives. The appraiser is not responsible for unauthorized use of this report. LEGAL DESCRIPTION According to the Preliminary Report (Fidelity National Title Company, 601 S. Figueroa St. #2130, Los Angeles, CA 90017; Order No. xxxxxxx; Dated xxxxxxxx xx, 20xx) provided and reviewed, the subject's Legal Description and Assessor Parcel Number are as follows: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx., of Miscellaneous Records, in the office of the County Recorder of said County. Assessor's Parcel No.: APN OWNERSHIP According to the Preliminary Report, title is vested in: Borrower Name, a California Limited Liability Company, as to an undivided 73.84% interest and xxxxx xxxxxx, Successor Trustee of the xxxxx Family Trust "x" dtd x/xx/xx as to an undivided 25.8984% interest and xxxxx xxxxxx, a married woman as her sole and separate property as to an undivided .2616% interest. EXPOSURE TIME AND MARKETING TIME Exposure time is the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of appraisal, and is always presumed to precede the effective date of the appraisal. Exposure times for seven sales of similar office properties located in the subject's market area were analyzed, with exposure times of 25, 30, 45, 90, 100, 126 and 210 days (average of 89 days). Based on our findings, an exposure time of 2 to 4 months for the subject property is considered reasonable and appropriate. The reasonable marketing time is an opinion of the amount of time it might take to sell a real property interest at the concluded market value level during the period immediately after the effective date of an appraisal. According to brokers interviewed with brokerage firms active in the subject's market area (Charles Dunn Company, Coldwell Banker Commercial, Equis Corporation, Grubb & Ellis, and Lee & Associates) market conditions for office properties remain strong – especially for good-quality, well- located properties such as the subject – and reasonable marketing times for office properties like the Cummings Appraisals 7 Subject Address, City, State ZIP subject would be approximately 2 to 4 months, if properly priced and marketed. Based on our analysis, a marketing time of 2 to 4 months would also be reasonable for the subject. LOCATION ANALYSIS City of Santa Monica The subject property is located in city of Santa Monica's downtown area, xxxxx blocks northwest of the Santa Monica (I-10) Freeway and xxxx blocks northeast of the Third Street Promenade. Santa Monica is situated on the west side of Los Angeles County, 16 miles west of downtown Los Angeles, where Pacific Coast Highway and the Santa Monica (I-10) Freeway meet. The city encompasses 8.3 square miles and is bordered by the City of Los Angeles on three sides and the Pacific Ocean on the west. Santa Monica offers convenient access to major freeways, bus lines and airports. It is served by two freeways, the Santa Monica (I-10) and San Diego (I-405); and by four major east-west thoroughfares – Santa Monica (Route 66), Wilshire, Olympic and Pico Boulevards. It is located approximately six miles from Los Angeles International Airport. The city also has its own state-of-the-art aviation operations at Santa Monica Airport, offering a wide variety of business charters and general aviation services. Climate Santa Monica's coastal Mediterranean climate provides an ideal atmosphere for taking advantage of the famous California lifestyle. Centered on three miles of wide, sandy beaches, the city enjoys a mild climate averaging 68 degrees Farenheit year-round. Air quality is consistently good in the coastal district that surrounds Santa Monica. Population According to the 2000 Census, Santa Monica's population is 84,084, or about 10,100 persons per square mile. Based on the net addition of 1,202 housing units to the City's housing supply, it is estimated that as of June 30, 2003, the City's population had increased to 85,991. Although it is home to a signficant number of older people, Santa Monica is a city whose age distribution shows a significant concentration in the 22-44 age group, and has fewer youth under 19 years of age (16%) than the county average. The average age for residents in the city is 39 years of age. The city also has an educated population: 91% had twelve years or more of schooling; and 54% have a BA Degree or higher. Households, Housing & Employment Santa Monica has an average of 2.8 persons per family, and 1.8 persons per household. The 49,065 housing units in the City as of 2003 are primarily (70%) occupied by renters as opposed to homeowners. The median household income in Santa Monica is $50,714 as of the 2000 Census. The number of households earning over $150,000 doubled between 1990 and 2000 when it reached 12% of total households. Management, professional and related occupations represent 60% of the City's employed population. The most popular employment industries for City residents were educational, health & social service (18.8%), followed closely by professional, scientific & management industries (18.6%). Information services provided employment for 14.6% of residents. Cummings Appraisals 8 Subject Address, City, State ZIP Real Estate The total assessed value of property in Santa Monica in Fiscal Year 2001/2002 was approximately $13.5 billion. There are over 4,000 acres of developed land in the City, not including streets and roadways. There are almost 10 million square feet of space in the City devoted to commercial use, including retail, office, hotels, and restaurants. The median price of a home is $631,000. Industry, Employment & Labor Force Santa Monica is an economically successful city with about 16,000 businesses which collectively generate almost $8.4 billion in gross annual income. About $2.3 billion of these sales are in the retail sector. There are an estimated 71,000 jobs in Santa Monica, generating a combined payroll of around $3 billion. The Westside, including Santa Monica, also has a large resident workforce of skilled "knowledge workers." Over 60% of the 47,059 employed Santa Monica residents work in managerial, professional, and related occupations. Tourism Tourism is a key component of the economy and lifestyle of this beachfront community. Over 3.8 million people visit the city each year from outside Los Angeles County for pleasure, vacation, or business. These visitors spend $788 million annually, and bring in hotel tax revenues of $20 million to the city. Approximately 11,500 jobs are supported by the tourist industry. Even with the recent slowdown in the tourism industry, the City's hotel occupancy rate in its 3,500 room remains good, at 73%. The city is an international destination, as well as the destination for millions of day-trippers, particularly on weekends, as they throng to the city's clean beaches, the Santa Monica Pier, and special retail destinations such as the Third Street Promenade, Main Street, Montana Avenue, and Santa Monica Place. Shopping Districts There are five shopping areas in Santa Monica – Downtown, Ocean Avenue & Pier, Main Street, Montana Avenue, and Sunset Pico – each each with its own style and pace. The subject property is located in the Downtown area, home of the popular Third Street Promenade, an open-air pedestrian promenade with cafés, bookstores, kiosks, cinemas, fashion boutiques and novelty shops; Santa Monica Place, an ocean-view shopping mall, designed by world-renowned architect Frank O. Gehry, with 140 unique shops; and a myriad of galleries, shops and restaurants along the surrounding streets. The Third Street Promenade and its six parking structures are bounded by Wilshire Boulevard, Broadway, Second and Fourth Streets and located three blocks southwest of the subject property, as is Santa Monica Place. Santa Monica Place is a 570,000-square-foot regional mall with 120 shops, services and eateries plus Robinsons-May and Macy's department stores. Originally designed by renowned architect, Frank Gehry, Santa Monica Place was built in 1980 and renovated in 1990. This tri-level skylit galleria is the site of many Hollywood shoots including scenes from the blockbuster film Terminator II and hit TV series Beverly Hills 90210. Santa Monica Place is located at the intersection of Fourth and Broadway in downtown Santa Monica at the south end of the popular Third Street Promenade and just two blocks from the historic Santa Monica Pier and beach. There are 2,000 parking spaces in the lots adjacent to the mall and over 3,000 additional spaces available within three blocks of the shopping center. Cummings Appraisals 9 Subject Address, City, State ZIP The Ocean Avenue and Pier district is located seven blocks west of the subject and includes Ocean Front Walk and the Santa Monica Pier, a year-round shore-side carnival with ocean side and ocean view eateries, souvenir shops, bike and surfboard rentals, an historic carousel and a brand-new by-the-sea amusement park. High-Tech, Post-Production & Dot-Commers No discussion of the Westside would be complete without mentioning the tremendous influx in recent years from the entertainment, high-tech and software industries. The overall business base, with 71,000 jobs, remains strong. The diversity of the economy, and desirable quality of life in Santa Monica, with its clean air, excellent retail, restaurant and entertainment venues, and plentiful amenities, continue to make Santa Monica a highly-desired business location. Santa Monica College The city is home to Santa Monica College, with 31,000 full-time and part-time students on several campuses. The college consistently leads the state's 107 community college in placements of transfer students at the University of California. Its Academy of Entertainment & Technology provides training in key technical entertainment industry fields. It has an extensive Workforce Development Center which provides specialized training for important business sectors. Conclusion The subject property is well located in the established downtown commercial district of Santa Monica, with quick, convenient access to nearby freeways and surface arterial routes. The subject office tenants benefit from several nearby amenities including the Third Street Promenade, Santa Monica Place, Santa Monica Pier, Ocean Avenue, Main Street, Santa Monica College, Santa Monica Airport, the Pacific Ocean and Santa Monica State Beach. Office rents and property values in the downtown district are some of the highest in the city. MARKET ANALYSIS Los Angeles Office Market Mid-Year 2004 According to NAI Capital Commercial's Mid-Year 2004 Southern California Market Report, the Los Angeles Basin Office Market, with approximately 320 million SF of multi-tenant space, is the nation's fourth largest office market. The market bottomed in 2002, and began to recover in 2003. The pace of recovery escalated in the first half of 2004. Net absorption in the first half of 2004 totaled 3.2 million SF, slightly exceeding the total figure for 2003 (+3.1 million SF) and matching the long-term average for the Los Angeles Basis (+3.2 million SF per six months, 1985 to present). Construction completions finally slowed significantly, and only 717,700 SF came on line in the first half of 2004. The combination of strong net absorption and minimal completions enabled the vacancy rate to drop to 15.2%. This is still a moderately high rate, but is down signficantly from 16.7% as of year-end 2003 and from 16.8% as of mid-year 2003. Asking rental rates, which had been dropping, stabilized in most areas. Cummings Appraisals 10 Subject Address, City, State ZIP Vacancy rates today are highest in high-rise buildings (17%), followed by mid-rise buildings (15.4%) and low-rise buildings (12.7%). They also are highest in Class A buildings (16.4%), followed by Class B buildings (13.3%) and Class C buildings (7%). Construction activity has picked up, and 2.9 million SF is underway (up from 1.8 million SF as of year- end 2003). However, when complete, this new space will expand the base by only 0.9%, or 4.5 months worth of demand under normal economic conditions. Market conditions are projected to continue to tighten into 2005. From a tenant's perspective, the window of opportunity to expand or to lock in low rental rates will soon be closing. These are also excellent times for firms to take advantage of low mortgage rates to purchase office buildings that meet their long-term needs. However, prices are now quite high. Within the Los Angeles Basin, demand has been strongest in West Los Angeles, the San Fernando Valley and South Orange County. These are high-rent areas, where cutting-edge firms were generally hit the hardest during the recent downturn. These firms now are leading the way in recovery. Vacancy rates are now lowest in the San Fernando Valley (10.7%), Ventury County (11.3%) and North Orange County (11.5%), and highest in the South Bay (20.7%). 2005 Forecast According to the Grubb & Ellis 2005 Real Esatate Forecast for the Los Angeles Office market, the much inproved Los Angeles County office leasing market in 2004 is anticipated to carry forward through 2005. Through each quarter during the year, the leasing market got stronger, posting lower vacancies across all submarkets and enough absorption for landlords to consider asking rent increases. These rent increases should become more evident and pronounced across the LA Metro region in 2005. Rents in the county saw very little change throughout 2004, floating at an average of a little over $2.40 per SF per month on a full service gross basis. Although rents in the most expensive submarket of West Los Angeles dropped over the last 12 months, other markets like Tri-Cities and Downtown Los Angeles have had increased rents from one year ago. Most submarkets experienced a flattening of rents suggesting that the bottom was hit. The market should not experience any flucuations through the first half of 2005. Investment activity in Los Angeles County remains strong. Two signficant transactions in 2004 put an exclamation point on the multitude of deals and the soaring prices. One deal involved TIAA-CREF in a joint venture with Equity Office Properties purchasing the Colorado Center in Santa Monica from Tishman Speyer Properties for $445 million. The partnership outbid 15 other competitors for the property. The other major deal in 2004 was in Downtown Los Angeles where Trizec Properties purchased the Bank of America Plaza at 333 South Hope Street from Beacon Capital for $435 million. West Los Angeles Office Market West Los Angeles commands the highest rental rates in the Los Angeles Basin. It has a large concentration of high-profile firms (including those in entertainment, computer programming and finance), and is in the midst of some of the most exclusive residential neighborhoods in the nation. It has a large office base, with 48.7 million SF of space. It is a moderately mature market, with 62% of its space built before 1985. It also is moderately dense, with 61% of its space in mid-rise or high-rise buildings. Net absorption was a very strong one million SF in the first half of 2004. This was up sharply from a total of 350,800 SF in 2003. It also was more than double the average of 440,000 SF per six months 1985 Cummings Appraisals 11 Subject Address, City, State ZIP to present. There was strong growth in demand from the entertainment industry (reversing a three-year downturn), as well as from professional services. No new space came on line due to construction in the first half of 2004. This enabled the vacancy rate to drop very sharply to 15.5%, down from 17.7% as of year-end 2003. Asking rental rates remained firm at an average of $2.72 per SF per month, full service gross (FSG) for Class A space. Construction activity has picked up, and 899,200 SF is currently underway. However, 790,000 SF of this space is in one building, 2000 Avenue of the Stars in Century City, and this project is not projected to come on line until late 2006. The market is projected to continue to tighten in the remainder of 2004 and in 2005. Santa Monica Office Market According to a July 26, 2004 article in the Los Angeles Business Journal entitled "Los Angeles County Office Market, Second Quarter 2004," for the second quater of 2004 the Santa Monica submarket had 7,882,943 SF of office space, including 1,288,718 SF of vacant space. The Santa Monica submarket vacancy rate increased from 15.0% for 2nd Qtr. 2003 to 17.3% for 1st Qtr. 2004, and then declined to 16.3% for 2nd Qtr. 2004. There was only 42,500 SF of office space under construction in Santa Monica for 2nd Qtr. 2004 with 71,555 SF of net absorption. According to a knowledgable broker in the market, Yahoo! is reportedly days away from signing a lease for 270,000 SF at Colorado Center and WPP is, likewise, about ready to sign a lease for 100,000 SF at the Water Garden project. These prospective lease deals are very signficant in that, if they are ultimately consumated, they could be responsible for lowering the vacancy in this submarket by 4.5% to 5.0% to around 12% sometime in the first part of 2005. Conclusion The subject is located in Los Angeles, the nation's fourth largest office market. The local office market has continued its recovery since bottoming out in 2002 and prospects look good for 2005. Strong net absorption coupled with minimal construction completions has resulted in declining vacancy rates and expectations are for continued firming of rental rates. With positive market trends and historically low interest rates, the investment market continues to be strong with relatively low yield expectations as investors continue to vie for available for-sale product. SITE DESCRIPTION Location: Subject Address, Santa Monica, Los Angeles County, CA 90401 Assessor Parcel Number: APN Census Tract/Block: 7019.00 / 1 Site Area: xx,xxx SF (per Assessor Map), or approximately 0.34 Ac. Shape: Rectangular, interior parcel; 100 feet wide by 150 feet deep Topography: Flat and level Streets: The subject is located on the xxxx side of xxx Street, between xxxxxxxx to the south and xxxxxxxxxxxx Boulevard to the Cummings Appraisals 12 Subject Address, City, State ZIP north. xxx Street is improved with asphalt paving, concrete curbs, gutters, storm drains and street lighting. xxx Street is a minor, two-way, commercial arterial that runs southeast to northwest through the western portion of Santa Monica. Santa Monica Boulevard, the Historic Route 66, is located xxx block to the north. There is a 20-foot-wide alley running from xxxxxxxx to xxxxxxxxxxxx Boulevard serving the subject property. Street Access/Exposure: Vehicular access is good via one commercial-width curb cut/driveway off of xxx Street accessing the 1st Floor parking garage and a commercial-width driveway off of the rear alley with ramp down to the Basement Level parking garage. Street exposure to xxx Street is good with partial southern exposure to xxxxxxxx due to a neighboring open parking lot on the south side of the sujbect builidng. Existing Use: A four-story, Class-C office building. Zoning: C3, Downtown Commercial zoning district. Permitted uses include general offices (subject use). Development standards include: 1) Maximum Building Height of 4 stories, not to exceed 50 feet; 2) Maximum Floor Area Ratio (FAR) of 1.5; 3) Minimum Lot Size of 7,500 SF, with minimum width of 50 feet and minimum depth of 150 feet; 4) Development Review required for any development of more than 30,000 SF of floor area. Flood Zone: Located in Flood Zone X; Flood Panel 0601590000; City of Santa Monica Community; Panel Date not listed; located outside Special Flood Hazard Area (SFHA); not located within 250 feet of multiple flood zones. Zones B, C, and X are the flood insurance rate zones that correspond to areas outside the 1- percent annual chance floodplain, areas of 1-percent annual chance sheet flow flooding where average depths are less than 1 foot, areas of 1-percent annual chance stream flooding where the contributing drainage area is less than 1 square mile, or areas protected from the 1-percent annual chance flood by levees. No Base Flood Elevations or depths are shown within this zone. Insurance purchase is not required in these zones. Alquist-Priolo Earthquake Fault Zone: According to the most recent maps listed on the State of California / Department of Conservation / California Geological Survey / Alquist-Priolo Earthquake Fault Zones website (http://www.consrv.ca.gov/CGS/rghm/ap/index.htm), the subject does not appear to be located in an Alquist-Priolo Earthquake Fault Zone. Although the subject does not appear to be located within a designated Alquist-Priolo Special Study Zone, the entire Los Angeles area has been described as an area of potential high risk earthquake damage. This earthquake damage risk became apparent during the January 17, 1994 Northridge earthquake. Property owners in Southern California are strongly advised to Cummings Appraisals 13 Subject Address, City, State ZIP evaluate obtaining Earthquake insurance for their properties, if available. Soils/Subsurface Conditions: We have not reviewed a soil report in connection with this assignment. In the absence of a soil report, we assume soil conditions to be free of toxins and to be adequate to support the existing improvements into the future. We observed no evidence of any soil problems during our physical inspection of the site. Easements/Encroachments: Typical street, utility and right-of-way easements assumed. No apparent adverse easements or encroachments were observed during our inspection of the site. However, a premise of this appraisal is that no adverse title conditions exist that would affect the marketability of the property. Conclusion: The subject site reflects appropriate zoning, size, shape, topography, access and utilties for the subject office property. IMPROVEMENTS DESCRIPTION The subject improvements description is based on our physical inspection of the site and improvements on Date of Value; Assessor information; partial floor plan drawings; building area summaries; and other information provided for this assignment by the ownership and their agents. Property Type: Low-rise office building Use: Multi-tenant, professional office Year Built / Renovated: 1983 / 1999 No. of Buildings: 1 No. of Stories: 4 above grade, including one grade-level parking level, plus one basement level parking level Effective Age: 15 years Remaining Economic Life: 40 years Building Area: According to Assessor information obtained from First Amercian Real Estate Solution's RealQuest Property Detail Report, the building area for the subject improvements is listed as xx,xxx SF, which corresponds closely to the xx,xxx SF of rentable area shown on the current rent roll. The building areas summarized below are based on our review and analysis of RealQuest property data, the rent roll and architect's building area calculations provided (see Addendum attached), and assume multi-tenant occupancy of the second floor and single- tenant occupancy of the third and fourth floors as presently leased. Since rental rates and building prices for office buildings Cummings Appraisals 14 Subject Address, City, State ZIP are typically calculated and analyzed on a rentable area basis, we have utilized the subject's rentable area as the main unit of comparison in this appraisal. We have reviewed architectural plans for the subject, and we have spot-checked various dimensions to verify they are the same as the plans. Gross Building Area (GBA): xx,xxx SF Rentable Area (RSF): xx,xxx SF Usable Area: 21,974 SF General Construction: We were not provided with detailed architectural drawings or a detailed improvement description. Based on our on-site inspection, the subject improvements are assumed to be a Class- C, Type-III, four-story, low-rise office building. Electrical Service: Assumed to be heavy-amp, 3-phase, 4-wire, 120/208-volt and adequate for current use. Fire Sprinklers: Yes; fire panel in lobby and monitored alarm. HVAC: Three package units on roof. Parking: 78 spaces, or 3.09/1,000 SF of rentable area, on two levels Office Interior: Carpet, tile and wood floors; paint, vinyl, wood and tile covered walls; open and suspended exposed-spline acoustic ceilings; recessed fluorescent and spot lighting. Restrooms: One men's and one women's restroom on each office floor. Amenities: Creative build-out with private balconies and outdoor patios, nice landscaping, floor-to-ceiling glass, and upper-floor views. Deferred Maintenance: Nominal. The improvements were remodelled / renovated in 1999 and are in good condition for their age. Construction Quality: Good Overall Condition: Good Conclusion: The subject improvements reflect good-quality, Class-C construction, are in good condition for their age, and reflect very good building identity. Overall, the improvements represent a very functional multi-tenant, low-rise office building with very good tenant and investor appeal. The subject is fire sprinklered and benefits from its favorable downtown Santa Monica location, creative buildout, convenient security-gated parking garage, and very good building identity. Cummings Appraisals 15 Subject Address, City, State ZIP PROPERTY HISTORY To the best of our knowledge, the subject property has not been offered for sale or transferred in the past three years, nor is it currently listed or under contract for sale. According to the RealQuest Property Detail Report, the last sale appears to have occurred in xxxx 19xx (Document # xxxxxx, recorded xxxx xx, 19xx) between xxxxxxx xxxxx xxxxx, as seller, and the current ownership, as buyer, for a sale price of $x,xxx,xxx, or $xxx.xx/SF based on xx,xxx RSF. ASSESSORS INFORMATION The subject property is located in Tax Rate Area xxxx with 2004 assessed values and taxes as follows: SUMMARY OF ASSESSED VALUES AND PROPERTY TAXES Assessor Parcel No. Land Improvements Total Taxes APN $2,205,282 $3,307,923 $5,513,205 $60,957.30 The total taxes above is based on a total tax rate for the general tax levy and voted indebtedness of 1.076508% and $1,607.21 in direct assessments. OCCUPANCY AND USE OF SUBJECT The property is currently 100% leased and occupied as a multi-tenant professional office building. HIGHEST AND BEST USE The term "highest and best use" is defined as "That reasonably probable use and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value."1 As Though Vacant The appraised property is currently zoned C3 (Downtown Commercial District). The C3 District is intended to maintain and enhance the downtown area and to provide a concentration and variety of commercial, residential, cultural, and recreational opportunities including comparison and general retail, office, cultural uses, and complementary uses such as hotels, housing, and visitor serving uses. Permitted uses include art galleries, artist studios above the first floor, auditoriums, bakeries, banks and savings and loan institutions, barber or beauty shops, business colleges, cleaners, child day care centers, congregate housing, dance studios, domestic violence shelters, electrical distribution substations, exercise facilities, general offices, general retail and specialized retail uses, homeless shelters with less than 55 beds, hotels 1 The Appraisal of Real Estate, 12th edition, The Appraisal Institute, Chicago, Illinois, (U.S. 2001), page 305. Cummings Appraisals 16 Subject Address, City, State ZIP and motels, laundromats, medical, dental and optometrist clinics and laboratories, medical equipment rentals, multifamily dwelling units, museums, outdoor newsstands, party equipment rentals, photocopy shops, places of worship, restaurants, senior group housing, senior housing, single-family dwelling units, single-room occupancy housing, tailors, theaters, trade schools, transitional housing, variety stores, and approved accessory uses. A full highest and best use and feasibility analysis for the subject property as though vacant is beyond the scope of this assignment. However, based on recent and nearby downtown developments in the subject's immediate neighborhood, it would appear that the highest and best use of the subject, if vacant and available for development, would likely be achieved with the construction of a modern professional office building or a mixed-use development with ground-floor retail and office and/or residential uses on upper floors, built to the maximum allowable density. As Improved Several options are available regarding existing improvements: renovation, addition, a change in use, and demolition are among the most obvious. The subject office building was recently remodelled (1999), has been well maintained and does not require renovation at this time. Although the existing use is "grandfathered" under current zoning, signficant addition to the existing improvements would most likely not be allowed due to density and parking requirements. A change in use from the current office use is not considered likely given the surrounding development and neighborhood trends. Demolition of the existing improvements is not financially prudent at this time. Therefore, the highest and best use as improved is continued use as a multi-tenant, professional office building property. VALUATION The subject property involves a 1983-built/1999-remodelled, xx,xxx-rentable-square-foot, low-rise professional office building – a type and size of property purchased by both investors and owner-users. The sales comparison and income capitalization approaches are both utilized by purchasers of smaller office building properties such as the subject. However, the most typical purchasers for buildings like this are investors who typical place the most weight on the income capitalization approach. Due to the older age of the subject improvements and the fact that buyers, sellers and brokers do not typically utilize this approach in their pricing decisions for a property such as the subject, the cost approach is not considered applicable or necessary to develop a reliable value indication and, therefore, has not been performed. SALES COMPARISON APPROACH Methodology The Sales Comparison Approach to value consists of an analysis of sales of similar properties, utilizing a unit method of comparison. A typical unit method of comparison for office properties is sales price per square foot of rentable area. The sales are analyzed to refect differences in location, date of sale, physical characteristics, and economic factors. The unit value is adjusted based on these characteristics and then applied to the subject property. The steps involved include 1) research the market to obtain information on sales transactions, listing and offerings to purchase properties similar to the subject property; 2) verify the information by confirming that the data obtained are factually accurate and that the transactions reflect arm's-length market consideration; 3) select relevant units of comparison, and develop a comparative analysis for each unit; 4) compare the subject and comparable sale properties using the elements of comparison and adjust the sale price of each comparable appropriately or eliminate the property as a comparable; 5) reconcile the various Cummings Appraisals 17 Subject Address, City, State ZIP value indications produced from the analysis of comparables into a single value indication or a range of values. Units of comparison The units of comparison selected depend on the appraisal problem. Smaller, low-rise office properties such as the subject are often analyzed on the basis of price per square foot, with adjustments made for appropriate elements of comparison. Where applicable, comparable sales were analyzed to extract overall capitalization rates and gross income multipliers which are then used for purposes of direct capitalization in the income capitalization approach. Comparable Sales Data A field survey, search of public records, and interviews with knowledgable real estate brokers, appraisers and principals were conducted to obtain and verify sales of Santa Monica office properties comparable to the subject property which yielded five comparable sale properties. Presented below and on the following pages are a comparable sales map, a comparable sales summary, comparable sale photographs, a description and comparative analysis of the comparable sales, and a reconciliation of the adjusted units of comparison into an indicated value for the subject property via the sales comparison approach. Cummings Appraisals 18 Subject Address, City, State ZIP COMPARABLE SALES MAP Subject Cummings Appraisals 19 Subject Address, City, State ZIP COMPARABLE SALES SUMMARY Comparable No. SUBJECT Sale #1 Sale #2 Sale #3 Sale #4 Sale #5 1437 7th 1101-1111 2210 Main 1901 Main 1221 2nd Address Street Broadway Street 520 Broadway Street Street City Santa Monica Santa Monica Santa Monica Santa Monica Santa Monica Santa Monica Sale Date n.a. 9/23/2004 8/17/2004 5/21/2004 7/1/2003 5/13/2003 Sale Price n.a. $ 4,250,000 $ 3,000,000 $ 31,600,000 $ 6,100,000 $ 9,500,000 Rentable Area (SF) 25,212 13,639 9,600 108,093 16,925 24,000 Land Area (SF) 15,000 15,000 5,200 30,000 10,440 7,500 Land-to-Building Ratio 59% 110% 54% 28% 62% 31% Year Built 1983 1980 1977 1981 1990 2003 Stories 4 3 3 6 3 4 Parking Spaces 78 86 15 359 60 72 Parking Ratio/1,000 SF 3.09 6.31 1.56 3.32 3.55 3.00 Sale Price/SF n.a. $ 311.61 $ 312.50 $ 292.34 $ 360.41 $ 395.83 Cap Rate n.a. n.a. 5.95% 5.61% 6.34% n.a. GIM n.a. n.a. 12.23 11.60 10.89 n.a. Cummings Appraisals 20 Subject Address, City, State ZIP COMPARABLE SALE PHOTOGRAPHS Sale #1: 1101 Broadway, Santa Monica Sale #2: 2210 Main Street, Santa Monica Sale #3: 520 Broadway, Santa Monica Sale #4: 1901 Main Street, Santa Monica Sale #5: 1221 2nd Street, Santa Monica Cummings Appraisals 21 Subject Address, City, State ZIP Comparable Sales Discussion Comparable Sale #1 Sale #1 (APN 4282-024-016, 017 & 029) is located at 1101 Broadway in Santa Monica (Map 671-F1), approximately 0.3 miles northeast of the subject. The improvements reflect a three-story, 1980-built, average-quality, structural-brick office building in good condition. The property contains 13,639 SF of rentable area and xx,xxx SF of land area, for a 1.10:1 land-to-building ratio. There are 86 parking spaces, for a 6.31:1 parking ratio. The property was on the market for 210 days, and sold on September 10, 2004 for $4,250,000 (Document #2447972, recorded September 23, 2004), or $311.613SF. The buyer was an owner-user who preferred to keep financing and operating data confidential. Comparable Sale #2 Sale #2 (APN 4289-022-018) is located at 2210 Main Street in Santa Monica (Map 671-F4), approximately 0.9 miles south of the subject near the intersection of Main Street and Pacific Street. The improvements reflect a slightly older, 1977-built, three-story, good-quality, mixed-use office building of frame-and-stucco construction in good condition. There is one retail space and covered parking on the ground floor, several office suites on the second floor plus one studio unit, and three additional apartments on the third floor. The property contains 9,600 SF of rentable area and 5,200 SF of land area, for a 0.54:1 land-to-building ratio. The property was on the market for 100 days, and sold on August 13, 2004 for $3,000,000 (Document #2111930, recorded August 17, 2004), or $312.50/SF. Terms of the transaction included a $1,350,000 (45%) down payment and a first mortgage of $1,650,000 with Preferred Bank for the balance. Unit 206 and the penthouse were vacant at time of sale and income for those units was projected based on rental rates obtained from the listing broker. Based on gross scheduled income of $245,219, a 5% vacancy and credit loss allowance, $54,574 of expenses, and a net operating income of $178,384, the sale indicated a gross income multiplier (GIM) of 12.23 and an overall capitalization rate (Cap Rate) of 5.95%. Comparable Sale #3 Sale #3 (APN 4291-024-001, 002, 003, 026) is located at 520 Broadway in Santa Monica (Map 671-E2), two blocks south of the subject. The improvements reflect a six-story, 1981-built, average-quality office building of steel-frame-and-glass construction in average-to-good condition. The property contains 108,093 SF of rentable area and 30,000 SF of land area, for a 0.28:1 land-to-building ratio. There are 359 parking spaces, for a 3.32:1 parking ratio. The property sold on May 18, 2004 for $31,600,000 (Document #1297217, recorded May 21, 2004), or $292.34/SF. Terms of the transaction included a $7,000,000 (22%) down payment and a first mortgage of $24,600,000 with Merrill Lynch Mortgage Investors for the balance. Based on gross scheduled income of $2,724,000, a 5% vacancy and credit loss allowance, $813,800 of expenses, and a net operating income of $1,774,000, the sale indicated a GIM of 11.60 and a Cap Rate of 5.61%. Comparable Sale #4 Sale #4 (APN 4289-019-024) is located at 1901 Main Street in Santa Monica (Map 671-E3), approximately 0.7 miles south of the subject. The improvements reflect a multi-tenant, three-story, 1990- built, good-quality, concrete-and-steel office building in good condition. The property contains 16,925 SF of rentable area and 10,440 SF of land area, for a 0.62:1 land-to-building ratio. There are 60 parking spaces, for a 3.55:1 parking ratio. The property sold on April 28, 2003 for $6,100,000 (Document #1888703, recorded July 1, 2003), or $360.41/SF. Terms of the transaction included a $2,135,000 (35%) Cummings Appraisals 22 Subject Address, City, State ZIP down payment and a first mortgage of $3,965,500 with First Bank of Beverly Hills for the balance. Based on gross scheduled income of $560,000, a 5% vacancy and credit loss allowance, $145,000 of expenses, and a net operating income of $387,000, the sale indicated a GIM of 10.89 and a Cap Rate of 6.34%. Comparable Sale #5 Sale #5 (APN 4291-002-018) is located at 1221 2nd Street in Santa Monica (Map 671-D2), approximately 0.5 miles west of the subject. The improvements reflect a multi-tenant, four-story, 2003- built, good-quality, steel-frame office building in good condition. The property contains 24,000 SF of rentable area and 7,500 SF of land area, for a 0.31:1 land-to-building ratio. There are 72 parking spaces, for a 3.00:1 parking ratio. The property sold on May 8, 2003 for $9,500,000 (Document #1352096), or $395.83/SF. Terms of the transaction included $4,840,000 down (51%), with an all-inclusive trust deed carried back by the seller for $4,660,000 which wraps an existing loan dated January 24, 2003 for $4,390,000 with Marchants Bank of Long Beach. The property is a multi-tenant office building and was purchased by an investor who preferred to keep the operating data confidential. Sales Comparison Analysis Elements of comparison are the characteristics of properties and transactions that cause the prices to vary. The appraiser has considered and compared all of the relevant differences between the comparable properties and the subject property that could affect their values. Adjustments for them have been made to the price of each comparable property, as detailed in the comparable sale adjustment grid. The common elements of comparison considered in this sales comparison analysis are summarized below. Property Rights Conveyed The initial step in the valuation process is to determine the real property interest to be appraised. Once this is established, the appraiser can relate the market data to the subject property. In the case of the subject property, the leased fee interest is being appraised. Sales 2, 3, 4, 5, and 6 all reflected transfers of similar interests; therefore, no adjustments were required. Sale 1 involved a fee simple transfer, which has been reflected in our economic characteristics adjustments. Financing Terms The transaction price of one property may differ from that of an identical property due to different financial arrangements. In some cases buyers pay higher prices for properties to obtain below-market financing. Conversely, interest rates at above-market levels often result in lower sales prices. All of the sales involved typical market terms by which the sellers received cash or its equivalent and the buyers paid all cash or tendered typical down payments and obtained conventional financing at market terms for the balance; therefore, no adjustments were required. Conditions of Sale When the conditions of sale are atypical, the result may be a price that is higher or lower than that of a normal transaction. Adjustments for conditions of sale usually reflect the motivations of the buyer and seller. When nonmarket conditions of sale are detected in a transaction, the sale should be be thoroughly researched and related to the subject property only with great care. If possible, the sale should not be used in an appraisal. None of the sales involved atypical conditions of sale and, therefore, no adjustments were required. Cummings Appraisals 23 Subject Address, City, State ZIP Market Conditions Market conditions may change between the time of sale of a comparable property and the date of the appraisal of the subject property. Changes in market conditions may be caused by inflation, deflation, fluctuations in supply and demand, or other factors. Although the adjustment for market conditions is often referred to as a "time adjustment," time is not the cause of the adjustment. Market conditions may shift over time, but the cause of the adjustment is not time. If market conditions have not changed, no adjustment is required even though considerable time may have elapsed. Our analysis of the subject office sales market indicated no demonstrable change in market conditions during the 12 to 18 months, therefore, no adjustments for price appreciation have been made. Locational Characteristics Location adjustments may be required when the locational characteristics of a comparable property are different from those of the subject property. Location adjustments are usually expressed as percentages that reflect the increase or decrease in value attributable to the property's location or neighborhood. Sales 1, 2, 3 and 4 all reflect relatively similar locational characteristics and require no adjustments for comparison. Sale 5 reflects a slightly superior location on 2nd Street, one block east of Ocean Avenue, and requires a small downward adjustment for comparison. Physical Characteristics If the physical characteristics of a comparable property and the subject property differ in many ways, each of these differences may require comparison and adjustment to the comparable. Physical differences for office properties may include building size, age, quality of construction, condition, architectural appeal, identity, and amenities. Sale #1 is slightly older than the subject, having been built in 1980. However, it has not been remodelled to the degree that the subject has and, therefore lacks the architectural appeal and identity enjoyed by the subject. This is offset, somewhat, by its superior land-to-building and parking ratios. Overall, it is considered slightly inferior to the subject and would require a small upward adjustment for comparison. Sale #2 is slightly older than the subject and has an inferior parking ratio, but reflects similar architectrual appeal, identity and land-to-building ratio. It is the smallest of the five sales and is also a mixed-use project, with ground-floor retail and upper-floor apartments. Overall, it is considered slightly inferior to the subject and would require a slight upward adjustment for physical characteristics. Sale #3 is similar in age to the subject, having been built in 1981. Its six-story glass-veneer design and corner location reflects superior building identity to the subject's, but this early-1980's black-box design is also becoming somewhat dated and lacks the architectural appeal of more modern, contemporary designs. However, this property is substantially larger than the subject, at over 100,000 SF of rentable area, and would require a moderate upward size adjustment for comparison. Sale #4 is newer than the subject and was remodelled by the same architect design team that renovated the subject. It reflects a superior corner location and superior architectural appeal and identity. Overall, it is felt to be somewhat superior to the subject and would a small to moderate downward adjustment for comparison. Sale #5 is much newer than the subject, built in 2003, and reflects superior amenities including 15-foot exposed ceilings, polished concrete, operable windows, and fiber-optic readiness. Overall, it is felt to be superior and would require a small to moderate downward adjustment for comparison with the subject. Cummings Appraisals 24 Subject Address, City, State ZIP Economic Characteristics When appraisers analyze income-producing properties by the sales comparison approach, they make comparisons and adjustments on the basis of the property's income characteristics, which can affect desirability and sales prices. Characteristics that can affect the income a property can produce include management, tenant composition, rent concessions, lease terms and expiration dates, renewal options, and other lease provisions. Sale 1 involved a sale to an owner-user which would require a slight downward adjustment for economic characteristics. Sales 2, 3, and 4 are all relatively similar in age to the subject and were purchased as leased fee investments. Due to their ages, they are all assumed to have somewhat similar leasing profiles and, therefore, no adjustment is indicated. Sale 5 is a new building with at-market leases and, therefore, a small downward adjustment in indicated. Please refer to the following adjustment grid for specific adjustments to the comparables. COMPARABLE SALES ADJUSTMENT GRID Sale #1 Sale #2 Sale #3 Sale #4 Sale #5 Sale Date 9/23/2004 8/17/2004 5/21/2004 7/1/2003 5/13/2003 Transaction Price/SF $ 311.61 $ 312.50 $ 292.34 $ 360.41 $ 395.83 Property Rights 0.0% 0.0% 0.0% 0.0% 0.0% Financing Terms 0.0% 0.0% 0.0% 0.0% 0.0% Conditions of Sale 0.0% 0.0% 0.0% 0.0% 0.0% Subtotal 0.0% 0.0% 0.0% 0.0% 0.0% Normal Sale Price/SF $ 311.61 $ 312.50 $ 292.34 $ 360.41 $ 395.83 Market Conditions 0.0% 0.0% 0.0% 0.0% 0.0% Time-Adjusted Normal Price/SF $ 311.61 $ 312.50 $ 292.34 $ 360.41 $ 395.83 Location Characteristics 0.0% 0.0% 0.0% 0.0% -5.0% Physical Characteristics 5.0% 2.5% 10.0% -10.0% -10.0% Economic Characteristics -2.5% 0.0% 0.0% 0.0% -5.0% Subtotal 2.5% 2.5% 10.0% -10.0% -20.0% Adjusted Sale Price/SF $ 319.40 $ 320.31 $ 321.57 $ 324.37 $ 316.66 Reconciliation From the market data available, five office properties were selected as most comparable to the subject. The unadjusted sale prices for the comparable sales ranged from $292.34 to $395.83 per square foot, with an average unadjusted sales price of $334.54 per square foot. We have adjusted the five comparable sales based on pertinent elements of comparison as discussed and summarized in the preceding adjustment grid. The final adjusted sale prices ranged from $316.66 to $324.37 per square foot, and averaged $320.46 per square foot. Based on this analysis, we have concluded a final per-unit value indicator for the subject Cummings Appraisals 25 Subject Address, City, State ZIP of $320.00 per square foot. Based on the subject's xx,xxx square feet of rentable area, this yields a final value indication for the subject via the sale comparison approach of $8,067,840, rounded to $8,070,000. This equates to $320.09/SF of rentable area. INCOME CAPITALIZATION APPROACH Methodology The income capitalization approach is widely applied in appraising income-producing properties such as the subject. Anticipated future income is converted to a value estimate through the capitalization process. The steps involved are as follows: • Estimate the potential gross income. • Estimate and deduct a vacancy and collection loss to derive effective gross income. • Estimate and deduct expenses of operation to derive net operating income. • Estimate economic life or the duration and pattern of the income stream. • Select an appropriate capitalization method and technique. • Complete the necessary computations to derive an economic valuation. • Reconcile a value indication via the income capitalization approach. The generally accepted techniques used in this approach are direct capitalization and discounted cash flow (yield) analyses. Direct capitalization is used to convert an estimate of a single year's income expectancy into an indication of value in one step. Yield capitalization uses the discounting procedure to convert future benefits to present value on the premised of a required level of profit or rate of return on invested capital. In this analysis, we have used direct capitalization, based on the limited number of tenants (four) and the fact that most investors for smaller office properties like the subject rely upon the direct capitalization in their pricing decisions. Potential Gross Income Potential gross income is the total income attributable to the real property at 100% occupancy before deducting vacancy and collection loss and operating expenses. In the case of a multi-tenant property such as the subject, potential gross income is comprised of market rent for vacant space or leases expiring within 6 to 12 months, contract rent for leased space, expense reimbursement income, and parking income. Unless stated otherwise, all rental rates are quoted on a monthly, per-square-foot basis. The four tenant spaces are all leased with the earliest lease expirations being September 30, 2007 for Suites 300 and 400, two years and nine months from the date of value. Therefore, for purposes of this analysis, we have estimated potential gross income based on current contract rents. However, in order to analyze the subject's upside income potential or downside risk in terms of its income stream, we have conducted a rental survey and analysis in order to determine market rent for the subject lease spaces. Market Rent In order to estimate the market rent applicable for the subject lease spaces, if vacant, a field survey and interviews with leasing agents, landlords and tenants were conducted to obtain and verify asking and achieved rental rates for similar-size office space in the subject market. Presented below and on the following pages are a comparable rentals map, comparable rental summary, comparable rental photographs, a discussion of the comparable rentals, and a reconciliation of the rental data into indicated Cummings Appraisals 26 Subject Address, City, State ZIP fair market rental rates for the subject property's location, suite sizes, expense provisions, and overall comparability to the comparable rentals. All rental rates are quoted on a monthly, per-square-foot basis. COMPARABLE RENTALS MAP Subject Cummings Appraisals 27 Subject Address, City, State ZIP COMPARABLE RENTALS SUMMARY No. Address Yr. Blt. Stories Bldg SF Suite SF Parking Rent Basis Notes R-1 1221 2nd Street 2003 4 24,000 5,701 3.00:1 $2.15 MG (1) R-2 520 Broadway 1981 6 108,093 5,765 3.00:1 $2.20 FSG (1) R-3 1321 7th Street 1980 3 8,500 1,450 4.00:1 $2.45 MG (1) R-4 501 Colorado Ave. 1983 3 22,100 1,862 2.85:1 $2.50 FSG (1) R-5 1447 2nd Street 2001 4 24,400 3,400 3.00:1 $2.50 MG (1) R-6 429 Santa Monica 1982 7 83,000 1,952-3,333 3.00:1 $2.60 FSG (1) R-7 1250 6th Street 1986 4 28,300 1,928 3.00:1 $2.65 FSG (1) R-8 1546 7th Street 1990 3 14,000 8,000 3.00:1 $2.70 MG (2) R-9 325 Wilshire Blvd. 1970 2 23,400 4,500 3.00:1 $2.85 MG (3) R-10 1453 3rd Street 1981 4 92,300 745-7,054 2.50:1 $2.50-$3.00 FSG (1) Notes: (1) Asking rates (2) Ascent Media, 8,000 SF, 60 mos., 3% annual increases, no TI's (3) Avenue Editing, 4,500 SF, 60 mos., 3% annual increases, no TI's Cummings Appraisals 28 Subject Address, City, State ZIP COMPARABLE RENTAL PHOTOGRAPHS Rental #1: 1221 2nd Street, Santa Monica Rental #2: 520 Broadway, Santa Monica Rental #3: 1321 7th Street, Santa Monica Rental #4: 501 Colorado Avenue, Santa Monica Rental #5: 1447 2nd Street, Santa Monica Rental #6: 429 Santa Monica Blvd., Santa Monica Cummings Appraisals 29 Subject Address, City, State ZIP COMPARABLE RENTAL PHOTOGRAPHS, CONT'D. Rental #7: 1250 6th Street, Santa Monica Rental #8: 1546 7th Street, Santa Monica Rental #9: 325 Wilshire Blvd., Santa Monica Rental #10: 1453 3rd Street, Santa Monica Comparable Rentals Discussion and Analysis Comparable Rental #1 Rental #1 is a 2003-built, 4-story, 24,000 SF office building located six blocks west of the subject at 1221 2nd Street. The building currently has Suite 400 (5,701 SF) available for lease for $2.15, modified gross (MG). This high-tech space one block west of the Third Street Promenade has partial ocean views and one exterior sign available. Comparable Rental #2 Rental #2 is a 1981-built, 6-story, 108,093 SF office building located two blocks southwest of the subject at 520 Broadway. There is a 5,765 SF space available on a sublease basis through February 28, 2007 for $2.20, full-service gross (FSG). The landlord is about to complete a major renovation of the common areas. Cummings Appraisals 30 Subject Address, City, State ZIP Comparable Rental #3 Rental #3 is a 1980-built, 3-story, 8,500 SF office building located one block northwest of the subject at 1321 7th Street. The building currently has Suite 205 (1,450 SF) available for lease for $2.45, MG. This Tudor-style building has a central garden patio, operable windows and doors, and a 4.00:1 parking ratio. Comparable Rental #4 Rental #4 is a 1983-built, 3-story, 22,100 SF office building located two blocks south of the subject at 501 Colorado Avenue. The building has Suite 170 (1,862 SF) available for lease for $2.50, FSG. This building has been remodeled and has a black-tinted window facade and hardwood floors. Comparable Rental #5 Rental #5 is a 2001-built, 4-story, 24,400 SF office building located five blocks southwest of the subject at 1447 2nd Street. The building has a 3,400 SF suite on the 3rd floor available for lease for $2.50, MG. This recently constructed building has high ceilings, exposed steel beams, tubular metal railings and is complete with balconies, patios and large floor-to-ceiling, operable windows. This unique and contemporary property is located between Ocean Avenue and the Third Street Promenade. Comparable Rental #6 Rental #6 is a 1982-built, 7-story, 83,000 SF office building located three blocks west of the subject at 429 Santa Monica Boulevard. This building has two suites (#230 with 3,333 SF and #270 with 1,952 SF) available for lease for $2.60, FSG, subject to 3% annual increases (typical in this market) and a five-year term. Comparable Rental #7 Rental #7 is a 1986-built, 4-story, 28,300 SF office building located two blocks northwest of the subject at 1250 6th Street. This building had Suite 305 (1,928 SF) available on a sublease basis for 11 months at $2.65, FSG. This is a very well maintained building with operable windows and French doors and outdoor patio areas. This suite includes four large office, a large conference room, and a kitchen. Comparable Rental #8 Rental #8 is a 1990-built, 3-story, 14,000 SF office building located one block southeast of the subject at 1546 7th Street. Ascent Media recently leased 8,000 SF for 60 months at $2.70, MG, with 3% annual increases and no tenant improvement (TI) allowance. Comparable Rental #9 Rental #9 is a 1970-built, 2-story, 23,400 SF building with ground-floor retail and second-floor office located four blocks northwest of the subject at 325 Wilshire Boulevard. Avenue Editing recently leased approximately 4,500 SF for 60 months at $2.85, MG, with 3% annual increases and no TI allowance. Comparable Rental #10 Rental #10 is a 1981-built, 4-story, 92,300 SF building located four blocks southwest of the subject on the Third Street Promenade at 1453 3rd Street. This property has Third Street Promenade exposure, large Cummings Appraisals 31 Subject Address, City, State ZIP exterior patios, on-site parking and valet, multiple city parking structures directly adjacent to the building, and Broadway Deli as the ground-floor tenant. This recently renovated building has several suites available for lease as office or medical use on a full-service gross basis: 2,000 SF #250 at $2.50, 3,443 SF #319 at $2.75, 2,166 SF #350 at $2.50, 1,497 SF #370 at $2.75, 2,500 SF #430 at $2.25, 7,054 SF #400 at $3.00, and 745 SF #490 at $3.00. Recent Subject Leasing The subject recently leased the 8,533 SF third floor (Suite 300) on October 1, 2004 for 3 years with one 3- year option at market, an initial rate of $2.20, MG (net of electric), and a rent increase to $2.27 at the beginning of year 2. The space became available on May 16, 2004 and the asking rate had been $2.35, MG (net of electric) for a 3- to 10-year term. Please refer to the "Contract Rent" section below for a detailed summary of the four subject leases. Fair Market Rent Conclusion Based on our analysis of the ten comparable rentals surveyed, recent leasing activity in the subject property, and discussions with knowledgable Santa Monica office leasing agents, we have concluded with market rent estimates for the subject lease spaces of $2.20, MG, for the 2nd and 3rd floor suites, and $2.35, MG, for the 4th floor suite. Contract Rent We have reviewed a current rent roll (see Addendum attached) which has been corroborated by our review of the leases (see discussion below) for the subject property. Subject Leases xxxxxxx xxxx xxxxxxxxxxx, Inc. Original Lease/Addendum Date: 08/26/xx Premises: Suite 202 Rentable Area: 2,459 SF Term: 5 years, 11/15/xx-11/14/xx Base Rent: 11/15/xx - $4,549.15, or $1.85/SF Base Rent Increase: 11/15/xx - $4,672.10, or $1.90/SF 11/15/xx - $4,795.05, or $1.95/SF 11/15/xx - $4,918.00, or $2.00/SF 11/15/xx - $5,040.95, or $2.05/SF Share of Operating Expense Increase: 10.8% Operating & Tax Expense Base Year: 1998, FSG TI Allowance: $5,000, or $2.03/SF for paint & carpet 1st Lease Extension Date: 9/20/xx Term: 5-year extension, 11/15/xx-11/14/xx Base Rent: 11/15/xx - $5,164.00, or $2.10/SF Base Rent Increases: 11/15/xx - $5,287.00, or $2.15/SF 11/15/xx - $5,410.00, or $2.20/SF 11/15/xx - $5,533.00, or $2.25/SF 11/15/xx - $5,656.00, or $2.30/SF Cummings Appraisals 32 Subject Address, City, State ZIP 1st Lease Amendment Date: 1/21/xx Premises: Suite 200 added, 01/17/xx-11/14/xx Rentable Area: Increased to 3,359 SF Base Rent: 02/01/xx - $6,664.00, or $1.98/SF Base Rent Increases: 11/15/xx - $6,862.00, or $2.04/SF 11/15/xx - $7,064.00, or $2.10/SF 11/15/xx - $7,269.00, or $2.16/SF 11/15/xx - $7,479.00, or $2.23/SF xxxxxx xxx, xxxx Original Lease/Addendum Date: 02/08/xx Premises: Suite 203 Rentable Area: 2,823 SF Term: 4 years, commences 60 days from date Lessor and Lessee mutually sign the Lease (02/18/xx) and shall expire 48 months thereafter Option to Extend: One period of four years; base rent to be greater of base rent for last month of term or prevailing market rent Base Rent: Mos. 01-12 - $2.75/SF Base Rent Increase: Mos. 13-24 - $2.83/SF Mos. 25-36 - $2.92/SF Mos. 37-48 - $3.00/SF Share of Operating Expense Increase: Proportionate share Operating & Tax Expense Base Year: 2000, FSG TI Allowance: $25,000, or $8.86/SF 1st Amendment Date: 10/06/xx Premises: Suite 205 added (2,488 RSF) Rentable Area: Increased to 5,311 SF Base Rent: Additional monthly base rent for Suite 205 of $8,210.40. Initial combined rent for both suites shall be $15,973.65, commencing 10/30/xx Base Rent Increases: Base rent for Suite 205 shall be increased by 4% effective April 17th each year. Share of Operating Expense Increase: An additional 10%; total combined share for both suites shall be 22% 1st Lease Extension Date: 11/10/xx Term: 4-year extension ending 03/01/xx Base Rent: $10,356.00, or $1.95/SF, effective 03/01/xx Base Rent Increases: 3% effective 03/01/xx and each year thereafter Share of Operating Expense Increase: Effective 03/01/xx, Lessee no longer required to pay its share of Operating Expense Increases (i.e. 0% share) xxxxxx xx, xxx. Original Lease/Addendum Date: 06/23/xx Premises: Suite 300 Rentable Area: 8,553 SF Term: 3 years, 10/01/xx-09,31/xx Cummings Appraisals 33 Subject Address, City, State ZIP Option to Extend: One period of three years; base rent adjusted to 100% of prevailing market rent Base Rent: Mos. 01-12 - $18,816.60, or $2.20/SF Base Rent Increases: Mos. 13-24 - $19,381.10, or $2.27/SF Mos. 25-36 - $19,962.53, or $2.33/SF Share of Operating Expense Increase: 34% Operating & Tax Expense Base Year: 20xx, MG (net of electric) TI Allowance: $53,459, or $6.25/SF, plus $0.12 per usable square foot for preliminary space plan xxxxxxxxxxx xxxxxxxx, xxxx Original Lease/Addendum Date: 07/09/xx Premises: Suite 400 Rentable Area: 7,989 SF Term: 5 years, 10/01/xx-09/30/xx Option to Extend: One period of five years; base rent adjusted to greater of base rent for last month of term or prevailing market rent Base Rent: 10/01/xx - $18,000, or $2.25/SF Base Rent Increases: Cost of Living Adjustments (COLA) Oct. 1st each year Share of Operating Expense Increase: 32% Operating & Tax Expense Base Year: 20xx, FSG TI Allowance: $50,000, or $6.26/SF Based on the rent roll provided, current contract office rent for the four tenants totals $55,220.60 per month, or $662,647 annually. This equates to an average current monthly rent of $2.19/SF which is approximately 2.6% below the estimated average market rent for the building of $2.25/SF. Expense Reimbursement Income Based on the rent roll provided, 2004 monthly estimated operating and tax expense reimbursements are $680 for xxxxxxx xxxx and $84 for xxxxxxxxxxx, for a total of $764.00 per month, or $9,168 annually. However, based on our review of the Common Area Maintenance Costs worksheets provided, it appears that the actual monthly operating and tax expense reimbursements are $733 for xxxxxxx xxxx and $200 for xxxxxxxxxxx, for a total of $933 per month, or $11,196 annually. xxxxxx xxx no longer pays their prorata share of operating and tax expense increases, and xxxxxx xx pays their prorata share over a 20xx base year amount. For purposes of this analysis, we have recalculated expense reimbursements based on our forecasted expenses, as shown on the following page. Cummings Appraisals 34 Subject Address, City, State ZIP FORECAST EXPENSE REIMBURSEMENT CALCULCATION Cent. West Renaissance 14.4% 32.0% Total Estimated Taxes 86,651 Less 1998 BY Taxes 27,673 Difference 58,978 25% of Increase 14,744 14.4% Share 2,123 Total Reimb Exps 158,670 245,321 1998 Base Year 116,335 221,188 Difference 42,335 24,133 Prorate Share 6,096 7,722 Total Reimbursement 8,219 7,722 15,942 Parking Income In addition to the four office lease tenants, there are two month-to-month parking rental agreements with parties not leasing office premises in the building. According to the rent roll provided, current contract parking rent for the four office tenants and two outside parking agreements is $6,324 per month, or $75,888 annually. Total Potential Gross Income Based on contract office rent of $662,647, expense reimbursement income of $15,942, and parking income of $75,888, total potential gross income (PGI) for the subject is estimated at $754,477. Vacancy and Collection Loss Based on our Market Analysis presented earlier, vacancy rates in Santa Monica are currently hovering around 15% to 16%, but could drop as low as 12% if two large and significant leases are executed early in 2005 as planned. Prospects for 2005 are for a continued tightening in the market. Most investors apply vacancy and collection loss allowances of 5% to 10% in their proformas for smaller office properties such as the subject. Based on favorable demand trends and noting the subject's current 100% occupancy and lease exipirations 33 to 38 months in the future, we have estimated a stabilized vacancy and collection loss factor of 5.0%. Based on a total PGI of $754,477, the forecast vacancy and collection loss allowance is $37,724. Effective Gross Income Deducting the estimated vacancy and collection loss allowance from estimated total PGI yields an estimated effective gross income (EGI) of $716,753. Operating Expenses Our expense estimates are based on our analysis of subject property income and expense data for 2002, 2003 and Jan.-Nov. 2004 YTD (see Addendum attached); comparative expense data and statistics Cummings Appraisals 35 Subject Address, City, State ZIP obtained from the Building Owners and Managers Association (BOMA); and comparable expense data on other office properties of this size and age retained in our files. Property Tax Property Tax expense has been estimated based on our concluded value times the total tax rate of 1.0765% plus $1,607 for direct assessments. The total estimated property tax expense is $86,651, or $3.44/SF. Insurance Insurance expense includes fire, casualty and liability insurance and has been estimated at $4,500, or $0.18/SF. Cleaning Cleaning expense includes janitorial & supplies, and trash service. Cleaning expense has been estimated at $28,000, or $1.11/SF. Utilities Utilities expense includes gas, electricity, water and sewer, and has been estimated at $68,000, or $2.70/SF. Roads/Grounds Roads/Grounds expense includes gardening and parking maintenance. Roads/Grounds expense has been estimated at $4,000, or $0.16/SF. Security Security expense includes alarm, intercom services, intercom repair, remotes, security gate, and security system. Security expense has been estimated at $3,000, or $0.12/SF. Management Fees Property management expense has been estimated at 4.0% of EGI, or $28,670 ($1.14/SF). Other Aministrative Other administrative expenses include accounting, office expense, legal/lease review, and tax & licenses. Other Administrative expense has been estimated at $2,500, or $0.10/SF. Repairs/Maintenance Repairs/Maintenance expense includes elevator service, pest control, electrical repair, elevator repair, fire systems, HVAC service & repair, locksmith (locks & keys), maintenance labor & materials, painting, plumbing, roof repair, repairs & maintenance, tenant expense, and carpets & floors. Repairs/Maintenance expense has been estimated at $20,000, or $0.79/SF Cummings Appraisals 36 Subject Address, City, State ZIP Total Operating Expenses Total operating expenses have been estimated at $245,321. This equates to $9.73/SF or 34.2% of EGI. Net Operating Income After deducting estimated operating expenses of $245,321 from estimated EGI of $716,752, the stabilized net operating income (NOI) estimate for the subject property is $471,432, or $18.70/SF. Please refer to the following Income and Expense Summary. INCOME AND EXPENSE SUMMARY Item Annual PSF Rental Income $662,647 $26.28 Expense Reimbursements $15,942 $0.63 Parking Income $75,888 $3.01 Potential Gross Income (PGI) $754,477 $29.93 Vacancy & Collection Loss (5%) ($37,724) ($1.50) Effective Gross Income (EGI) $716,752 $28.43 Operating Expenses: Property Tax $86,651 $3.44 Insurance $4,500 $0.18 Cleaning $28,000 $1.11 Utilities $68,000 $2.70 Roads/Grounds $4,000 $0.16 Security $3,000 $0.12 Management Fees (4% of EGI) $28,670 $1.14 Other Administrative $2,500 $0.10 Repairs/Maintenance $20,000 $0.79 Total Operating Expenses $245,321 $9.73 Net Operating Income $471,432 $18.70 Cummings Appraisals 37 Subject Address, City, State ZIP Direct Capitalization The overall capitalization rate selected for capitalizing the net operating income of the subject property was derived from an economic analysis of three of the five comparable office building sales analyzed in the sales comparison approach, summarized in the following table. GROSS INCOME MULTIPLIER & CAPITALIZATION RATE SUMMARY Sale Sale Sale Price PGI NOI Address GIM Cap Rate No. Date PSF PSF PSF 2210 Main Street S-2 08/17/04 $312.50 $25.54 12.23 $18.58 5.95% Santa Monica 520 Broadway S-3 05/21/04 $292.34 $25.20 11.60 $16.41 5.61% Santa Monica 1901 Main Street S-4 07/01/03 $360.41 $33.09 10.89 $22.87 6.34% Santa Monica Subject Address Subj $29.92 $18.71 Santa Monica Overall Capitalization Rate Technique The three improved sales analyzed reflect a relatively narrow range of Cap Rates from 5.61% to 6.34%. In addition to the three cap rate sales, opinions as to applicable cap rates werer obtained from office investment brokers interviewed during the course of this appraisal. The office brokers we spoke to at Charles Dunn Company, Coldwell Banker Commercial, Equis Corporation, Grubb & Ellis, and Lee & Associates indicated a limited availability of well-located, good-quality, smaller office buildings in Santa Monica such as the subject. This has reportedly kept upward pressure on prices per square foot and downward pressure on capitalization rates. The brokers we spoke to indicated that applicable capitalization rates for a smaller, well-located, high-identity building in the downtown core such as the subject, if available, would be in the 5.5% to 6.5% range – depending on the credit worthiness of the tenants and lease terms. Based on our broker interviews and our analysis of the comparable cap rate sales, including their upside rental income potentials and overall comparability to the subject, we have selected a 6.00% overall capitalization rate by which to capitalize the forecasted net operating income into a value indication for the subject property via the overall capitalization rate technique. Based on an estimated net operating income of $471,432 and an overall capitalization rate of 6.00%, the indicated value for the subject property via the income capitalization appraoch is $7,857,200, rounded to $7,860,000. This equates to $311.76/SF of rentable area. Gross Income Multiplier Technique The three improved sales analyzed also reflected a relatively narrow range of GIMs, from 10.89 to 12.23. In addition to Cap Rate opinions, we also interviewed investment brokers for their opinions of an appropriate GIM for the subject property. The brokers we spoke to indicated that applicable GIMs for Cummings Appraisals 38 Subject Address, City, State ZIP similar buildings in the downtown core would be in the 10.00 to 11.00 range, which is somewhat lower than the GIMs indicated from the sales analyzed. Based on our broker interviews and our analysis of the GIMs from the sales, including their upside rental income potentials, expense ratios, and overall comparability to the subject, we have selected a 10.50 GIM by which to capitalize the potential gross income into a value indication for the subject property via the gross income multiplier technique. Based on the forecasted potential gross income of $754,477 and a GIM of 10.50, the indicated value for the subject property via the gross income multiplier technique is $7,922,009, rounded to $7,920,000. This equates to $314.14/SF of rentable area. RECONCILIATION The value indications from the approaches to value are summarized as follows: SUMMARY OF VALUE CONCLUSIONS Cost Approach N/A N/A Sales Comparison Approach $8,070,000 $320/SF Income Capitalization Approach: Overall Capitalization Rate $7,860,000 $312/SF Gross Income Multiplier $7,920,000 $314/SF Final Concluded Value $7,900,000 $313/SF In the final analysis, the sale comparison approach is of secondary importance in estimating market value as most purchasers of multi-tenant leased investments such as the subject rely more heavily on the income capitalization approach to value. The income capitalization approach is most pertinent of the two approaches employed and should be weighted most heavily in the final reconciliation. In the income capitalization approach, we utilized two widely recognized techniques, the overall capitalization rate and the gross income multiplier, which yielded value indications with one percent of each other. In the final analysis, and placing the most weight on the values indicated via the income capitalization approach, we have concluded with a market value as is of the leased fee interest in the subject property, as of Date of Value of $7,900,000. MARKET VALUE AS IS, AS OF DATE OF VALUE SEVEN MILLION NINE HUNDRED THOUSAND DOLLARS ($7,900,000) Cummings Appraisals 39 Subject Address, City, State ZIP INSURABLE VALUE ESTIMATE Insurable Value The definition of insurable value may vary from state to state and from insurance to insurance company; therefore, we have attempted to use a very basic approach to this estimate. We have first estimated the replacement cost of the improvements and then subtracted non-insurable items such as architect's fees and indestructible items such as excavation costs, foundations, site work, site improvements, and underground piping. These items are generally referred to as insurance exclusions. This approach excludes depreciation, since most parties requesting insurable value want to know the cost of replacing the improvements. Replacement Cost and Insurance Exclusions The replacement cost for the improvements has been estimated using the Marshall Valuation Service. We have developed the replacement cost estimate on a per-square-foot basis, which includes "soft costs" such as architect's fees, contractor's overhead and profit, construction loan interest and fees. Section 15, Pages 17 and 19 of Marshall Valuation Service, adjusted by current and local cost multipliers from Section 99 Pages 3 and 6, and insurance exclusions from Section 96, Page 1, estimated to be approximately 4% of replacement costs new, provided the weighted average adjusted base cost per square foot of gross building area of approximately $78.93 for the subject office building and parking levels. Based on this analysis, we have estimated insurable value to be $4,930,349, rounded to $4,930,000. INSURABLE VALUE AS OF DATE OF VALUE FOUR MILLION NINE HUNDRED THIRTY THOUSAND DOLLARS ($4,930,000) Cummings Appraisals 40 Subject Address, City, State ZIP ADDENDA Cummings Appraisals 41 Subject Address, City, State ZIP CONTINGENT AND LIMITING CONDITIONS The market value set forth in this appraisal report is subject to the following contingent and limiting conditions. 1. The Appraiser assumes no responsibility for matters of a legal nature affecting the property appraised or the title hereto, nor does the Appraiser render any opinion as to the title, which is assumed to be good and marketable unless otherwise stated. 2. The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. 3. Responsible ownership and competent property management are assumed. 4. The various sketches, maps, plats, and exhibits in this report are included for illustration purposes only, to assist the reader in visualizing the property and are not necessarily drawn to scale. The Appraiser has made no survey of the property. 5. The Appraiser, by reason of this report, is not required to give further consultation or testimony or attendance in court, with reference to the property in question, unless arrangements have been previously made a reasonable time in advance. 6. Any distribution of the valuation in the report between land and improvements applies only under the existing program of utilization. The separate valuations for land and building must not be used in conjunction with any other appraisal and are invalid if so used. 7. The Appraiser assumes that there are no hidden or un-apparent conditions of the property, subsoil, or structure, which would render it more or less valuable. The Appraisers assume no responsibility for such conditions, or for obtaining engineering studies that may be required to discover such factors. 8. Information, estimates, and opinions furnished to the Appraiser, and contained in the report, were obtained from sources considered reliable and believed to be true and correct. However, the Appraiser gives no responsibility for accuracy or warranty of such items. 9. Possession of this report, or a copy thereof, does not carry with it the right of publication. 10. Neither all, nor any part of the content of the report, or copy thereof (including conclusions as to the property value, the identity of the Appraiser, professional designations, reference to any professional appraisal organizations, or the firm with which the Appraiser are connected), shall be disseminated to the public through advertising, public relations, news, sales, or other media without the prior written consent and approval of the appraiser. 11. That the date of value to which the opinions expressed in this report apply is set forth in this report. The Appraiser assumes no responsibility for economic or physical factors occurring at some later date, which may affect the opinions herein stated. The forecast, projections, or operating estimates contained herein are based on current market conditions, anticipated short- term supply and demand factors, and a continued stable economy. These forecasts are, therefore, subject to changes with future conditions. 12. That no claim is intended to be expressed for matters of expertise, which would require specialized investigation or knowledge beyond that ordinarily employed by real estate appraisers. The Appraiser claims no expertise in areas such as, (but not limited to), legal, structural, pest control, mechanical, etc. 13. That the Appraiser has personally inspected the subject property, and finds no obvious evidence of structural deficiencies except as stated in this report; however, no responsibility for hidden defects or conformity to specific governmental requirements, such as fire, building and safety, Cummings Appraisals 42 Subject Address, City, State ZIP earthquake or occupancy codes, can be assumed without provision of specific professional or governmental inspections. 14. Unless otherwise stated in the report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. The appraiser has no knowledge of the existence of such materials on or in the property. The appraiser, however, is not qualified to detect such substances such as asbestos, urea-formaldehyde foam insulation, and other potentially hazardous materials may affect the value of the property. The value estimated is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The intended user of this report is urged to retain an expert in this field, if desired. 15. The Americans with Disabilities Act (ADA) became effective January 26, 1992. The appraiser has not made a specific compliance survey or analysis of the property to determine whether or not it is in conformity with the various detailed requirements of ADA. It is possible that a conformity survey of the property and a detailed a detailed analysis of the requirements the ADA would 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 impact upon the value of the property. Since the appraiser has no direct evidence relating to this issue, possible noncompliance with the requirements of ADA was not considered in estimating the value of the property. Acceptance of and/or use of this appraisal report constitute acceptance of the foregoing general assumptions and limiting conditions. Cummings Appraisals 43 Subject Address, City, State ZIP ENGAGEMENT LETTER (1 OF 6) Cummings Appraisals 44 Subject Address, City, State ZIP ENGAGEMENT LETTER (2 OF 6) Cummings Appraisals 45 Subject Address, City, State ZIP ENGAGEMENT LETTER (3 OF 6) Cummings Appraisals 46 Subject Address, City, State ZIP ENGAGEMENT LETTER (4 OF 6) Cummings Appraisals 47 Subject Address, City, State ZIP ENGAGEMENT LETTER (5 OF 6) Cummings Appraisals 48 Subject Address, City, State ZIP ENGAGEMENT LETTER (6 OF 6) Cummings Appraisals 49 Subject Address, City, State ZIP REGIONAL MAP Subject Cummings Appraisals 50 Subject Address, City, State ZIP CITY MAP Subject Cummings Appraisals 51 Subject Address, City, State ZIP NEIGHBORHOOD MAP Subject Cummings Appraisals 52 Subject Address, City, State ZIP PLAT MAP Cummings Appraisals 53 Subject Address, City, State ZIP PROPERTY DETAIL REPORT Cummings Appraisals 54 Subject Address, City, State ZIP BUILDING AREA CALCULATIONS Cummings Appraisals 55 Subject Address, City, State ZIP BASEMENT LEVEL PARKING PLAN Cummings Appraisals 56 Subject Address, City, State ZIP 1ST FLOOR PARKING PLAN Cummings Appraisals 57 Subject Address, City, State ZIP 2ND FLOOR OFFICE PLAN Cummings Appraisals 58 Subject Address, City, State ZIP 3RD FLOOR OFFICE PLAN Cummings Appraisals 59 Subject Address, City, State ZIP 4TH FLOOR OFFICE PLAN Cummings Appraisals 60 Subject Address, City, State ZIP DUE DILIGENCE CHECKLIST Cummings Appraisals 61 Subject Address, City, State ZIP Subject Photographs Front, West Elevation Front, West Elevation Front and South Side Elevations Side, South Elevation Side, South Elevation Cantilevered Office Floors / Architectural Detail Cummings Appraisals 62 Subject Address, City, State ZIP Subject Photographs South Side Elevation Rear Elevation Enlosed Trash Receptacle Area off Rear Alley Ramp Down to Basement Parking off Alley Rear Elevation Rear and North Side Elevations Cummings Appraisals 63 Subject Address, City, State ZIP Subject Photographs North View of xxx Street, Subject at Right South View of xxx Street, Subject at Left North View of Rear Alley, Subject at Left South View of Rear Alley, Subject at Right Main Building Entrance 1st Floor Parking Entrance Cummings Appraisals 64 Subject Address, City, State ZIP Subject Photographs Main Building Lobby Main Building Lobby Elevator Cab 1st Floor Parking Level 1st Floor Parking Level Basement Level Parking Cummings Appraisals 65 Subject Address, City, State ZIP Subject Photographs 2nd Level Courtyard and Elevator Landings xxxxxxx xxxx Office Photos Lobby Exterior Office Interior Office Area Interior Office Area Cummings Appraisals 66 Subject Address, City, State ZIP Subject Photographs xxxxxx xxx Office Photos Interior Office Conference Room Interior Office Open Area with Billiard Table Dining Area Cummings Appraisals 67 Subject Address, City, State ZIP Subject Photographs xxxxxx xx Office Photos Lobby Area Open Office Area Conference Room Interior Office Kitchen Area Cummings Appraisals 68 Subject Address, City, State ZIP Subject Photographs xxxxxxxxxxx Office Photos Open Office Area Conference Room Open Office Area Exterior Office Filing Area Cummings Appraisals 69 Subject Address, City, State ZIP Subject Photographs 4th Level Patio/Walkway 2nd Level Courtyard Typical Elevator Landing Rooftop HVAC Equipment Rooftop HVAC Equipment Rooftop HVAC Equipment Cummings Appraisals 70 Subject Address, City, State ZIP Subject Photographs Property One Lot North of Subject Property Adjacent North of Subject Property Adjacent South of Subject Property Diagonal Southwest of Subject Fire Station Across from Subject Property Diagonal Northwest of Subject Cummings Appraisals 71 Subject Address, City, State ZIP RENT ROLL Cummings Appraisals 72 Subject Address, City, State ZIP OWNER'S CAM COSTS AND INCOME STATEMENT SUMMARY CAM Costs Income Statement 2002 2003 2003 1/04-11/04 Annualized INCOME Scheduled Rent 678,818 589,297 642,869 Vacancy/Delinquency (57,653) (79,298) (86,507) Rental Income - Collected 621,165 509,999 556,363 Parking Income 60,677 61,963 67,596 CAM Reimb. 6,694 13,634 14,873 Interest Income 2,390 1,752 1,911 Rent Concessions (702) - - TOTAL INCOME 690,224 587,348 640,743 - OPERATING EXPENSES - GENERAL - Accounting - - 1,543 2,600 2,836 Alarm 873 1,067 1,067 763 832 Office Expense - - 17 29 32 Elevator Service 2,306 2,496 2,496 2,222 2,424 Gardening 4,600 6,308 4,304 3,390 3,698 Insurance / Ins-Fire/Liability 5,932 5,213 3,175 4,901 5,347 Intercom Services 510 566 566 433 472 Janitorial & Supplies 26,498 25,607 25,607 29,588 32,278 Legal/Lease Review - - - 1,885 2,056 Management Fees 32,975 33,424 33,424 28,598 31,198 Pest Control 75 517 517 330 360 Property Tax 56,889 59,143 59,143 55,065 60,071 Tax & Licenses - - 813 899 981 Trash Service 2,383 1,823 1,823 1,612 1,759 TOTAL GENERAL EXPENSES 134,495 132,315 144,344 - REPAIRS - Electrical Repair 2,016 2,238 2,238 1,733 1,891 Elevator Repair - 1,172 1,172 117 128 Fire Systems 711 231 231 365 398 HVAC Service & Repair 6,186 5,231 2,891 4,908 5,354 Intercom Repair - 275 275 785 856 Locksmith / Locks and Keys 60 805 805 993 1,083 Maint-Labor & Materials 756 3,802 3,902 2,188 2,387 Painting 875 226 226 1,923 2,098 Parking Maintenance 2,688 - - - - Plumbing 3,194 2,706 2,706 9,957 10,862 Roof Repair - 424 424 1,347 1,469 Repairs & Maintenance 261 - - - - Security Gate 592 5,181 1,249 582 635 Security System 270 274 274 80 87 Tenant Expense - - 554 (191) (208) Carpets & Floors - 2,142 - - - Remotes 125 - - - - TOTAL REPAIRS 16,947 24,787 27,040 - UTILITIES - Gas 2,625 3,743 3,743 2,893 3,156 Electrical/Water/Sewer 67,786 64,087 64,087 62,040 67,680 TOTAL UTILITIES 70,411 67,830 67,830 64,933 70,836 - TOTAL EXPENSES - - 219,272 222,035 242,220 - NET OPERATING INCOME - - 470,952 365,313 398,523 - CAPITAL IMPROV & OTHER - Impr - Carpet - - 2,042 - - Impr - Roof &/or Gutters - - - 3,328 3,631 Impr - Security Fencing/Gates - - 3,932 5,500 6,000 Impr - HVAC - - 3,902 2,936 3,203 Impr - Landscaping - - 2,004 - - Impr - Signs - - 923 - - TOTAL CAP IMPROVEMENTS - - 12,803 11,764 12,833 - TOTAL EXPENSES & CAP IMPR 232,075 233,799 255,053 Total Reimbursable C.A. Exps. 221,188 228,698 Cummings Appraisals 73 Subject Address, City, State ZIP APPRAISER'S EXPENSE ANALYSIS AND FORECAST CAM Costs Income Statement Forecast 2002 2003 2003 1/04-11/04 2004 Annlzd $ PSF Rental Income 662,647 26.28 Expense Reimbursements 15,942 0.63 Parking Income 75,888 3.01 Potential Gross Income (PGI) 754,477 29.93 Less: V&CL (5%) 37,724 1.50 Effective Gross Income (EGI) 716,753 28.43 Operating Expenses: Property Tax 56,889 59,143 59,143 55,065 60,071 86,651 3.44 Insurance / Ins-Fire/Liability 5,932 5,213 3,175 4,901 5,347 4,500 0.18 Janitorial & Supplies 26,498 25,607 25,607 29,588 32,278 Trash Service 2,383 1,823 1,823 1,612 1,759 Cleaning 28,881 27,430 27,430 31,200 34,036 28,000 1.11 Gas 2,625 3,743 3,743 2,893 3,156 Electrical/Water/Sewer 67,786 64,087 64,087 62,040 67,680 Utilities: 70,411 67,830 67,830 64,933 70,836 68,000 2.70 Gardening 4,600 6,308 4,304 3,390 3,698 Parking Maintenance 2,688 - - - - Roads/Grounds: 7,288 6,308 4,304 3,390 3,698 4,000 0.16 Alarm 873 1,067 1,067 763 832 Intercom Services 510 566 566 433 472 Intercom Repair - 275 275 785 856 Remotes 125 - - - - Security Gate 592 5,181 1,249 582 635 Security System 270 274 274 80 87 Security: 2,370 7,363 3,431 2,643 2,883 3,000 0.12 Management Fees 32,975 33,424 33,424 28,598 31,198 28,670 1.14 Accounting - - 1,543 2,600 2,836 Office Expense - - 17 29 32 Legal/Lease Review - - - 1,885 2,056 Tax & Licenses - - 813 899 981 Other Administrative: - - 2,373 5,413 5,905 2,500 0.10 Elevator Service 2,306 2,496 2,496 2,222 2,424 Pest Control 75 517 517 330 360 Electrical Repair 2,016 2,238 2,238 1,733 1,891 Elevator Repair - 1,172 1,172 117 128 Fire Systems 711 231 231 365 398 HVAC Service & Repair 6,186 5,231 2,891 4,908 5,354 Locksmith / Locks and Keys 60 805 805 993 1,083 Maint-Labor & Materials 756 3,802 3,902 2,188 2,387 Painting 875 226 226 1,923 2,098 Plumbing 3,194 2,706 2,706 9,957 10,862 Roof Repair - 424 424 1,347 1,469 Repairs & Maintenance 261 - - - - Tenant Expense - - 554 (191) (208) Carpets & Floors - 2,142 - - - Repairs/Maintenance: 16,441 21,987 18,162 25,892 28,246 20,000 0.79 Total Expenses 221,188 228,698 219,272 222,035 242,220 245,321 9.73 Net Operating Income 471,432 18.70 Cummings Appraisals 74 Subject Address, City, State ZIP QUALIFICATIONS Cummings Appraisals 75 Subject Address, City, State ZIP CERTIFIED GENERAL REAL ESTATE LICENSE Cummings Appraisals 76
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