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Exhibit 10.10
August 31, 2000
High Equity Partners L.P. - Series 88
100 Jericho Quadrangle, Suite 214
Jericho, NY 11753-2727
Attn: Mr. Peter Braverman
RE: Valuation Analysis for High Equity Partners L.P. - Series 88 ("the
Partnership")
Gentlemen:
By letter dated June 14, 2000, the Partnership retained Insignia/ESG, Inc.
("Insignia") to undertake four separate valuation analyses with respect to the
Partnership on behalf of the Partnership. The engagement letter states that the
Partnership proposes to be converted (the "Transaction") into a real estate
investment trust (the "REIT") as described by the Partnership's management in
Amendment No.2 to the Registration Statement on Form S-4 of the REIT. We have
assumed that in the Transaction, each Partnership Unit would be exchanged for
three REIT shares. In each of the analyses, the value arrived at is expressed as
an amount per proposed REIT share. The following summarizes the specific
analyses that the Partnership asked us to perform.
1. An examination of the secondary market trading history ("Secondary Market
Trading History Analysis") of the existing units of limited partnership interest
in the Partnership (the "Partnership Units") on the limited secondary markets;
2. An analysis of the value of the net assets of the Partnership, and the amount
of cash available for distribution to partners, were the Partnership to
liquidate all of its real estate (the "Properties") and other assets
("Liquidation Analysis");
3. An analysis of the value of the Partnership Units, on a going concern basis,
based upon the future cash flow to be received by partners ("Going Concern
Analysis");
4. On the assumption that the Partnership was converted to the REIT, an analysis
of the expected range in which the REIT shares would trade based upon an
examination of comparable publicly traded real estate investment trusts
("Conversion and Comparable Company Analysis").
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In performing these analyses, we reviewed the documents provided to us by the
Partnership which are identified on Schedule A to this letter and we have relied
upon and assumed, without independent verification or investigation, the
accuracy and completeness of all financial and other information provided to or
discussed with us by the Partnership, its general partner and their respective
employees, representatives and affiliates. With respect to forecasts of the
future financial condition and operating results of the Partnership and the
proposed REIT provided to or discussed with us, we assumed, at the direction of
the management of the Partnership, without independent verification or
investigation, that such forecasts were reasonably prepared on bases reflecting
the best currently available information, estimates and good faith judgments of
the management of the Partnership. We have also relied upon assurances of the
management of the Partnership that they are unaware of any facts that would make
the historical information or forecasts incomplete or misleading. Except for the
appraisals provided to us by the Partnership referred to below, we have neither
made nor obtained any independent evaluations or appraisals of the assets or the
liabilities (contingent or otherwise) of the Partnership. The analyses do not
address the tax consequences of any aspect of the proposed Transaction (other
than transfer taxes assumed with the disposition of real estate upon
liquidation). We are not expressing any opinion as to the underlying evaluation,
future performance or long-term viability of the Partnership or the proposed
REIT, or the price at which Partnership Units or proposed REIT shares will
trade, whether or not the Transaction occurs. Our analyses are necessarily based
on the information available to us and general economic, financial and
securities market conditions and circumstances as they exist and can be
evaluated by us on the date hereof. It should be understood that, although
subsequent developments may affect our analyses, we do not have any obligation
to update, revise or reaffirm the analyses.
OVERVIEW OF CUSHMAN AND WAKEFIELD APPRAISAL METHODS
Insignia was provided with Cushman & Wakefield's ("Cushman") appraised values as
of June 30, 2000 for the Properties ("Appraised Values"). The valuation approach
selected by Cushman for the Properties varies based on each Property's
particular demise, encumbrances and the market conditions affecting it. With the
exception of the Properties identified as Tri-Columbus, Melrose Crossing II and
three Super Valu properties, Cushman employed a discounted cash flow approach
with, in most cases, support from the sales comparison approach.
Under the discounted cash flow approaches, the cash flows for the Properties for
the next 10 years were projected. At the end of the 10th year a terminal value
("Terminal Value") was added to the cash flow by capitalizing the projected 11th
year net operating income at a rate ("Appraised Cap Rate") selected by Cushman
and then deducting the anticipated costs associated with selling the Properties
("Selling Costs"). The cash flows were then discounted to present utilizing a
discount rate ("Appraised Discount Rate") selected by Cushman.
The values for Melrose Crossing II were determined based on the replacement cost
approach.
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The values for Tri-Columbus and three Super Valu properties were based on a
direct capitalization of income approach through which Cushman capitalized
estimated stabilized net operating income at the Appraised Cap Rate selected by
Cushman.
For the properties held through joint venture interests, Cushman provided a
second set of values ("Discounted J.V. Values") which contemplate a 25% to 35%
discount ("Joint Venture Discounts") to the Appraised Values in consideration of
the illiquidity associated with the ownership structure. The Discounted J.V.
Values together with the Appraised Values for the non-joint venture Properties
together constitute the Adjusted Appraisals ("Adjusted Appraisals").
1. SECONDARY MARKET TRADING HISTORY ANALYSIS
The Secondary Market Trading History Analysis is intended to value the
Partnerships based on the recent trading prices of Partnership Units. These
secondary markets cannot be characterized as either efficient or liquid markets,
and Partnership Units are expected to trade at a discount to liquidation value
or value based upon a going-concern analysis of the Partnership. The information
provided to us by the Partnership included the high sale price and low sale
price per Partnership Unit during each two months of trading from April 1, 1996
to May 31, 2000, together with a weighted average price per Partnership Unit for
the same period. The ranges of values indicated by this analysis are based upon
that secondary market trading data, with particular consideration given to the
weighted average trading prices in May, 2000, the most recent month for which
data was provided. Also considered are the trends in prices over the period for
which data was provided. The resulting range of values per REIT share from the
Secondary Market Trading History Analysis is indicated to be $31.52 to $35.55
per share.
2. LIQUIDATION ANALYSIS
The Liquidation Analysis is intended to value the Partnership's net assets
assuming a complete liquidation of the Partnership on a current basis. For
purposes of this analysis, we assumed that the non-joint venture Properties
would sell at their Appraised Values and that the interests in joint ventures
would sell at the values indicated in the Adjusted Appraisal.
The Liquidation Analysis assumes an adjustment for the anticipated property
disposition costs consisting of estimated transfer taxes, brokerage commissions
and closing costs ("Disposition Costs"). To the extent Properties were appraised
based on a discounted cash flow methodology, Disposition Costs were assumed to
be equal to Selling Costs utilized by Cushman in determining Terminal Value. For
Properties valued based on either a direct capitalization method or replacement
cost method, Disposition Costs were assumed to be 5% of Adjusted Appraisals.
Consideration was also given for the non-real estate assets of the Partnership.
The net assets considered were the Assets and Liabilities reported on the
Balance Sheet at June
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30, 2000 included in the Form 10-Q of the Partnership for the period ended
June 30, 2000 and were included at the value set forth on the Balance Sheet with
the exception of the assets classified as Other Assets on the Balance Sheets.
The only Other Assets included were those that were deemed to have value upon
liquidation, i.e. furniture, fixtures & equipment and receivables.
The fee giveback obligation was also considered to be realized by the limited
partners of the Partnership at full value as of June 30, 2000.
Finally, consideration was given for the partnership dissolution costs that were
estimated at $500,000 for the Partnership.
No general partner liquidation fees or priority distributions were considered,
as the partnership liquidation values would not provide for same under the terms
of the Partnership Agreement.
The resulting range of values per proposed REIT share based on the Liquidation
Analysis is indicated to be $43.83 to $49.42 per share.
3. GOING-CONCERN ANALYSIS
Insignia was provided with the distribution history of the Partnership. In
addition, pro forma financial statements showing forecasts of Partnership cash
flows, expenses and potential distributions were also provided to us by the
Partnership for the period ending December 31, 2001.
The Going-Concern Analysis is intended to value the Partnership as a going-
concern assuming its current asset base. The most significant component of the
value of the Partnership as a going-concern is the distributions to the
partners, which are assumed to be equal to the cash flow from the Partnership's
real estate assets. For purposes of this analysis, the Properties' cash flows
were attributed values based on the Appraised Values.
An adjustment was made to give effect for the joint venture illiquidity that
would impact the Terminal Values of the joint venture Properties. This
adjustment was made for the joint venture Properties that were valued by Cushman
pursuant to the discounted cash flow methodology, by applying to the Terminal
Value the same Joint Venture Discount utilized by Cushman in determining the
appraised liquidation value and discounting it to the present utilizing the
Appraised Discount Rate. For joint venture Properties appraised under the direct
capitalization approach, an adjustment was made to give effect to the joint
venture illiquidity that would affect the implied Terminal Values of these
Properties. This value was then discounted to the present at 12%.
Consideration was also given for the non-real estate assets of the Partnership.
The net assets considered were the Assets and Liabilities cited on the Balance
Sheet as of June 30, 2000 included in the Form 10-Q of the Partnership for the
period ended June 30,
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2000, and were included at the value set forth in the Balance Sheet with the
exception of the assets classified as Other Assets on the Balance Sheet of the
Partnership at June 30, 2000. The only Other Assets included were those that
were deemed to have value upon liquidation, i.e. furniture fixtures & equipment
and receivables.
An adjustment was also made to reflect the going-concern reserve requirements. A
general reserve of $1,000,000 was to be maintained by the Partnership and then
liquidated in 8 years. An adjustment was thus made equal to the cost of
maintaining this reserve. The net cost was assumed to be 12% of the reserve per
annum. A further adjustment was made for anticipated capital expenditures at
properties that were valued under either the replacement cost or direct
capitalization approaches, as no capital reserves were considered in the
appraisals for these properties. The reserves were based on actual anticipated
capital requirements over the next five years as estimated by the management of
the Partnership, and were discounted to present from the anticipated date of
expenditure utilizing a discount rate of 5%. A 5% discount rate was selected as
it is the approximate rate at which the reserved funds are expected to earn
interest.
Finally, an adjustment was made for the cost of asset management fees and
administrative costs. The values of these costs were derived by capitalizing the
anticipated annual cost of these expenses for the year ending December 31, 2001.
The capitalization rates employed were equal to the weighted average Appraised
Discount Rate/Appraised Cap Rate for the Properties.
The resulting range of values per proposed REIT share based on the Going-Concern
Analysis is indicated to be $31.44 to $35.46 per share.
4. CONVERSION AND COMPARABLE COMPANY ANALYSIS
The Conversion and Comparable Company Analysis endeavors to determine the range
of value for the proposed REIT's shares.
The methodology employed in determining the REIT's value consisted of applying
to the Projected Funds from Operations ("Projected FFO") of the REIT a range of
multiples (the "FFO Multiples") which are consistent with the FFO Multiples at
which comparable real estate investment trusts are currently trading in the
marketplace. Funds from Operations were calculated in accordance with the
guidelines set out by the National Association of Real Estate Investment Trusts
("NAREIT"). While no directly comparable companies were identified, by adjusting
and applying the median Projected FFO multiple for small-capitalization real
estate investment trusts, those with an implied market capitalization less than
$250 million, a range of reasonable FFO Multiples was established. The range of
FFO Multiples determined to be 5.4 to 6.7.
The Projected FFO of the REIT is comprised of two components: (1) Pro-forma FFO
("Pro-Forma FFO") for the assets currently owned ("Current Assets") by the
Partnership and (2) Anticipated FFO ("Anticipated FFO") for assets projected to
be acquired by the REIT in the future ("New Assets").
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The Pro-Forma FFO is based on the actual operating results of the Current Assets
for the 12 month period ending June 30, 2000, as adjusted for the anticipated
increase in Asset Management Fees resulting from the higher Adjusted Appraisals
as compared to the 1998 appraised values.
Anticipated FFO is based on the projected operating results of the New Assets,
as decreased by the rise in the asset management fees resulting from the
acquisition of the New Assets. The New Assets are assumed to be acquired in two
ways: (1) by utilizing all available cash less a reserve equal to 3% of the
Adjusted Appraisals to buy New Assets and (2) by leveraging the Current Assets
and the New Assets to a level of 75% with debt which carries an interest rate of
8%. The New Assets are assumed to generate net operating income equal to 10.5%
of their gross purchase price.
The resulting range of values per proposed REIT share based on the Conversion
and Comparable Company Analysis are indicated to be $32.06 to $39.78 per share.
Estimates of value of the proposed REIT shares are not intended and should not
be construed as a prediction of estimates as to the trading price of the
proposed REIT shares upon or after consummation of the Transaction.
The information set forth in this letter does not constitute and should not be
construed as a recommendation to any holder of Partnership Units with respect to
the proposed Transaction. The analyses do not address the merits of the proposed
Transaction or consider any alternatives to the proposed Transaction. This
letter has been prepared for the Partnership, and should not be reproduced,
summarized, described or referred to without the prior written consent of
Insignia; provided, however, that this letter may be summarized and reproduced
in full in the Registration Statement on Form S-4 to be filed by the
Partnership.
Insignia/ESG, Inc.
By:_________________
Title:________________
Name:_______________
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SCHEDULE A
LIST OF PARTNERSHIP-PROVIDED INFORMATION AND MATERIALS
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ITEM DESCRIPTION
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Appraisals Narrative appraisals of each of
the Partnership's properties
prepared by Cushman & Wakefield as
of June 30, 2000
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Forms 10-K Form 10-K for the Partnership
for the year ended December 31,
1999
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Forms 10-Q Form 10-Q for the Partnership
for the quarter ended June 30,
2000
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Capital Plans Descriptions of the
anticipated capital improvements
requirements at of the
Partnership's properties for the
next 5 years
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Asset Management Fees The Partnership's
and the proposed REIT's
anticipated asset management fees
based on the Appraised Values
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Administrative Expenses The Partnership's and the
proposed REIT's anticipated
Administrative Costs based on
historical costs and management's
estimation of future costs
assuming a 3% inflationary factor
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Pro-Forma FFO A projection of the
Partnership's and the REIT's funds
from operations based on the
assets currently owned by the
Partnership.
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Anticipated FFO A projection of the increase
in the REIT's funds from
operations based on the
acquisition of New Assets assuming
75% leverage of the Partnership's
Current Assets and New Assets, and
use of approximately 80% of the
Partnership's current cash
reserves for the acquisition of
New Assets. Leverage was assumed
to be 75% and bear interest at an
average rate of 8%, and New Assets
were assumed to generate net
operating income of 10.5% of their
gross cost. Asset Management Fees
were assumed to be based upon
1.25% of
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the prospective value of the New
Assets.
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Projected FFO The total FFO assumed to be
generated by the proposed REIT in
the future. Calculated by adding
the Pro-Forma FFO and Anticipated
FFO.
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Going-Concern Reserve Requirements An estimate
of the cost of the maintenance and
use of the cash reserves projected
for the Partnership assuming the
proposed REIT conversion does not
occur.
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Form S-4 Amendment No. 2 to the
Registration Statement on Form S-4
filed by the REIT in April 2000
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Pro-Forma Partnership Income Statements Pro-forma stabilized income
statements for the Partnership
assuming the proposed REIT
conversion does not occur. These
statements reflect operations for
the twelve month period ended June
30, 2000 as adjusted for major
known changes in property
operations, changes in the Asset
Management Fees based on the
increased Appraised Going- Concern
Values, and increased
administrative costs assuming an
inflationary factor of 3%.
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Secondary Market Trading History Chart of number and prices of
Partnership Units sold from April
1, 1996 through May 31, 2000 as
reported by Partnership Spectrum.
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Fee Giveback Obligations The General Partner's current fee
giveback obligations stipulated in
The Class Action Settlements, as
defined in the Form S-4.
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Going Concern Distributions Estimates of the distributions by
the Partnership if the Partnership
were to be a going concern.
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Partnership Dissolution Costs Estimates of the Partnership-level
costs associated with the
dissolution and winding up of the
affairs of the Partnership.
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