<PAGE>
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 13e-3
(SS. 240.13e-3) THEREUNDER)
---------------------------
KRUPP REALTY LIMITED PARTNERSHIP - V
(Name of Issuer)
---------------------------
KR5 ACQUISITION, L.L.C.
KRF COMPANY, L.L.C.
THE KRUPP FAMILY LIMITED PARTNERSHIP - 94
(Name of Person(s) Filing Statement)
---------------------------
LIMITED PARTNERSHIP UNITS
(Title of Class of Securities)
---------------------------
501128 30 0
(CUSIP Number of Class of Securities)
---------------------------
SCOTT D. SPELFOGEL, ESQ.
THE BERKSHIRE GROUP
ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108
(617) 574-8385
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
--------------------------
WITH COPIES TO:
JAMES M. DUBIN, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
(212) 373-3000
This statement is filed in connection with (check appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. /_/ The filing of a registration statement under the Securities Act of
1933.
c. /_/ A tender offer.
d. /_/ None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
---------------------------
CALCULATION OF FILING FEE
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Transaction Valuation: $37,457,400 Amount of filing fee: $7,491.48
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- -- Transaction valuation assumes the purchase of 31,214.5 units Krupp Realty
Limited Partnership - V at $1,200 in cash per Unit. The amount of the
filing fee, calculated in accordance with Regulation 240.0-11 of the
Securities Exchange Act of 1934, equals one fiftieth of one percentum of
such transaction value.
/_/ CHECK BOX IF ANY PART OF THE FEE IS OFFSET BY RULE 0-11(A)(2) AND
IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID.
IDENTIFY THE PREVIOUS FILING BY EITHER A REGISTRATION STATEMENT NUMBER, OR
THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
Amount Previously Paid: ---
Form or Registration No.:
Filing Parties:
Date Filed:
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<PAGE>
This Rule 13E-3 Transaction Statement (the "Statement") is being
filed by KR5 Acquisition, L.L.C., a Delaware limited liability company ("KR5"
or the "Purchaser"), KRF Company, L.L.C., a Delaware limited liability
company and KR5's sole member (the "Parent"), The Krupp Family Limited
Partnership - 94, a Massachusetts limited partnership and the Parent's sole
member (the "Family Partnership") with respect to the investor limited
partnership interests ("Units") of Krupp Realty Limited Partnership - V, a
Massachusetts limited partnership (the "Partnership"), that is subject to a
Rule 13e-3 transaction. The general partners of the Partnership are
submitting to Unit holders a proposal to approve (a) a merger agreement under
which (1) KR5 will merge with and into the Partnership and (2) each Unit
holder other than certain Unit holders who have agreed to reinvest their
Units in KR5 will receive $1,200 in cash for each outstanding Unit that the
Unit holder owns immediately before the effective time of the merger and (b)
an amendment to the Partnership's partnership agreement allowing the
Partnership to enter into the merger agreement and complete the merger with
KR5 (items (a) and (b) will be considered one proposal and referred to herein
as the "Merger Proposal"). The Merger Proposal is upon the terms and subject
to the conditions set forth in the Partnership's Preliminary Proxy Statement
for the Partnership's special meeting scheduled to be held on , 2000.
The following cross-reference sheet is supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Preliminary Proxy
Statement filed by the general partners of the Partnership with the Securities
and Exchange Commission on January 21, 2000 (including all annexes and exhibits
thereto, the "Proxy Statement") of the information required to be included in
response to the items of this Statement. The information in the Proxy Statement,
a copy of which is attached hereto as Exhibit D, is hereby expressly
incorporated by reference in its entirety and the responses to each item are
qualified in their entirety by the provisions of the Proxy Statement.
2
<PAGE>
<TABLE>
<CAPTION>
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Item No. Location in Proxy Statement
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<S> <C> <C>
1. Issuer and Class of Security "Special Factors--
Subject to the Transaction Determination of Merger
Price--Recent Unit Sales;
Tender Offer"; "Information
Concerning The Purchaser And
Its Affiliates"
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2. Identity and Background "Information Concerning The
Purchaser And Its Affiliates"
- --------------------------------------------------------------------------------------------------------------------------------
3. Past Contacts, Transactions or "Information About the
Negotiations Partnership, Its General
Partner and Their
Affiliates--Related Party
Transactions"; "The Merger
Agreement," "Special Factors--
Background of the Merger;
Purpose of the Transaction";
"Related Agreements"
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4. Terms of the Transaction "The Merger Agreement";
"Special Factors--Effects of
the Transaction"; "Related
Agreements"
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5. Plans or Proposals of the "Summary"; "Special
Issuer or Affiliate Factors-- Effects of the
Transaction";
"--Financing of
the Merger--Source of Funds";
"--Plans or Proposals by
Partnership or Affiliates
Following the Merger";"The
Merger Agreement--The
Surviving Entity"
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6. Source and Amounts of Funds "Special Factors--Financing of
or Other the Merger--Source of Funds"
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C> <C>
7. Purpose(s), Alternatives, "Summary"; "Special
Reasons and Effects Factors--Background of the
Merger;Purpose of the
Transaction"; --Alternatives
to the Merger";
"--Disadvantages and Risks
Associated with the Merger";
"--Conflicts of Interest";
"--Determination of Merger
Price--Book Value";
"--Fairness of the Merger";
"--Effects of the
Transaction";"--Plans or
Proposals by Partnership of
Affiliates Following the
Merger"; "--Material Federal
Income Tax Consequences"
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8. Fairness of the Transaction "Special Factors--Fairness of
the Merger"; "--Conflicts of
Interest"; "--Determination of
Merger Price"; "--Recent Unit
Sales; Tender Offer"; "The
Special Meeting--Votes
Required"; "Information about
the Partnership, Its General
Partners and Their Affiliates"
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9. Reports, Opinions, Appraisals "Special Factors--Independent
and Certain Negotiations Appraisal"; "--Experience of
Cushman & Wakefield";
"--Appraisal";"--Factors
Considered";"--Summary of
Cushman & Wakefield's
Methodology and Approaches
to Value";"--Assumptions,
Limitations and Qualifications
of Cushman & Wakefield's
Valuation"; "--Compensation";
"--Availability of Report"
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10. Interest in Securities of the "Information About The
Issuer Partnership, Its General
Partners And Their Affiliates
--The General Partners";
"--Ownership of Units";
"Information Concerning The
Purchaser And Its Affiliates--
Affiliates of the Purchaser"
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<S> <C> <C>
11. Contracts, Arrangements or "Related Agreements"
Understands with Respect to
the Issuer's Securities
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12. Present Intention and "The Special Meeting--Votes
Recommendation of Certain Required"; "Special Factors--
Persons with Regard to the Background of the Merger;
Transaction Purpose of the Transaction";
"--Fairness of the Merger"
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13. Other Provisions of the "The Special Meeting--
Transaction Appraisal Rights"
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14. Financial Information "Selected Financial Data";
"Index To Consolidated
Financial Statements"
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15. Persons and Assets Employed, "Special Factors--Financing of
Retained or Utilized the Merger--Costs Borne by
the Partnership"; "The Special
Meeting--Solicitation
Procedures"
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16. Additional Information Proxy Statement
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17. Material to be Filed as Proxy Statement
Exhibits
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</TABLE>
<PAGE>
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The name of the issuer of the Units subject to the Rule 13e-3
transaction is Krupp Realty Limited Partnership - V, a limited partnership
organized under the laws of Massachusetts, and the principal executive offices
of the Partnership are located at One Beacon Street, Suite 1500, Boston,
Massachusetts 02108.
(b) According to the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1998, as of such date, there were 35,200 Units of the
Partnership outstanding held by approximately 1,870 holders.
(c) The Units are not listed or traded on any exchange or quoted on the
National Association of Securities Dealers Automated Quotation System. However,
information regarding certain private transactions is set forth in under the
caption "Special Factors--Determination of Merger Price--Recent Unit Sales;
Tender Offer" in the Proxy Statement and is incorporated herein by reference.
(d) The information set forth under the caption "Information About the
Partnership, Its General Partners and Their Affiliates--Distributions" of the
Proxy Statement is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in under the caption "Information
Concerning the Purchaser and Its Affiliates" of the Proxy Statement is
incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a) - (d) The information set forth under the caption "Information
Concerning the Purchaser and its Affiliates" of the Proxy Statement is
incorporated herein by reference.
(e) and (f) During the last five years, neither the Purchaser, nor to
the best of the knowledge of the Purchaser, any affiliate of the Purchaser (i)
has been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
(g) Messrs. Douglas and George Krupp are both United States citizens.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) The information set forth under the caption "Information About
the Partnership, Its General Partners and Their Affiliates--Related Party
Transactions" of the Proxy Statement is incorporated herein by reference.
(a)(2) The information set forth under the caption "The Merger
Agreement" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth under the captions "Special
Factors--Background of the Merger; Purpose of the Transaction" and "Related
Agreements" is incorporated herein by reference.
<PAGE>
ITEM 4. TERMS OF THE TRANSACTIONS.
(a) The information set forth under the captions and "Special
Factors--Effects of the Transaction" and "The Merger Agreement" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth under the caption "Related Agreements" of
the Proxy Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) - (g) The information set forth under the captions "Summary,"
"Special Factors--Effects of the Transaction," "--Financing of the
Merger--Source of Funds" and "--Plans or Proposals by Partnership or Affiliates
Following the Merger" and "The Merger Agreement--The Surviving Entity" in the
Proxy Statement is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) and (b) The information set forth under the caption "Special
Factors--Financing of the Merger--Source of Funds" of the Proxy Statement is
incorporated herein by reference.
(c) and (d) No loan agreement has yet been entered into.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) - (c) The information set forth under the captions "Summary,"
"Special Factors--Background of the Merger; Purpose of the Transaction,"
"--Alternatives to the Merger," "--Fairness of the Merger," "--Disadvantage and
Risks Associated with the Merger" and "--Conflicts of Interest" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth under the captions "Special Factors
- --Background of the Merger; Purpose of the Transaction," "--Determination of
Merger Price--Book Value," "--Effects of the Transaction," "--Plans or Proposals
by Partnership or Affiliates Following the Merger" and "--Material Federal
Income Tax Consequences" of the Proxy Statement is incorporated herein by
reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) and (b) The information set forth under the caption "Special
Factors--Fairness of the Merger" and "--Determination of Merger Price" of the
Proxy Statement is incorporated herein by reference.
(c) The information set forth under the caption "The Special
Meeting--Votes Required" of the Proxy Statement is incorporated herein by
reference.
(d) No unaffiliated representative has been retained to act solely on
behalf of unaffiliated holders of Units for the purpose of negotiating the terms
of the Merger Proposal and/or preparing a report concerning the fairness of the
Merger Proposal.
(e) The general partners of the Partnership approved the Merger
Proposal. The information set forth under the captions "Special
Factors--Conflicts of Interest" and "Information
<PAGE>
about the Partnership, Its General Partners and Their Affiliates--Related Party
Transactions" of the Proxy Statement is incorporated herein by reference.
(f) The information set forth under the captions "Special
Factors--Determination of Merger Price--Recent Unit Sales; Tender Offer" of the
Proxy Statement is incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) and (b) The information set forth under the captions "Special
Factors--Independent Appraisals," "--Experience of Cushman & Wakefield,"
"--Appraisal," "--Factors Considered," "--Summary of Cushman & Wakefield's
Methodology and Approaches to Value," "--Assumptions, Limitations and
Qualifications of Cushman & Wakefield's Valuation" and "--Compensation" of the
Proxy Statement is incorporated herein by reference.
(c) The information set forth under the caption "Special
Factors--Independent Appraisals--Availability of Report" of the Proxy Statement
is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) and (b) The information set forth under the captions "Information
About the Partnership, Its General Partners and Their Affiliates--The General
Partners," "--Ownership of the Units" and "Information Concerning the Purchaser
and Its Affiliates--Affiliates of the Purchaser" of the Proxy Statement is
incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS
WITH RESPECT TO THE ISSUER'S SECURITIES.
The information set forth under the caption "Related Agreements" of the
Proxy Statement is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF
CERTAIN PERSONS WITH REGARD TO THE TRANSACTION.
(a) The information set forth under the caption, "The Special
Meeting--Votes Required" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth under the captions "Special
Factors--Background of the Merger; Purpose of the Transaction" and "--Fairness
of the Merger" of the Proxy Statement is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth under the caption "The Special
Meeting--Appraisal Rights" of the Proxy Statement is incorporated herein by
reference.
(b) None.
(c) Not applicable.
<PAGE>
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth under the captions "Selected Financial
Data" and "Index to Consolidated Financial Statements" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Not applicable.
(b) The information set forth under the captions "Special
Factors--Financing of the Merger--Costs Borne by the Purchaser" and "The Special
Meeting--Solicitation Procedures" of the Proxy Statement is incorporated herein
by reference.
ITEM 16. ADDITIONAL INFORMATION.
All of the information set forth in the Proxy Statement is incorporated herein
by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a) Not applicable.
(b)(1) Complete Appraisal of Real Property, dated as of August 2,
1999, prepared by Cushman & Wakefield, Inc. and relating to
the Park Place Tower Apartment Complex (Exhibit B-1).
(b)(2) Complete Appraisal of Real Property, dated as of August 13,
1999, prepared by Cushman & Wakefield, Inc. and relating the
Century Apartments (Exhibit B-2).
(c)(1) Voting Agreement, dated December 2, 1999 (Exhibit C-1).
(c)(2) Investment Agreement, dated December 2, 1999 (Exhibit C-2).
(d) Preliminary Proxy Statement (Exhibit D).
(e) Not applicable.
(f) Not applicable.
<PAGE>
SIGNATURE
After due inquiry and to the best of the undersigned's knowledge and
belief, the undersigned certifies that the information set forth in this
Statement is true, complete and correct.
Dated as of: January 21, 2000
KR5 Acquisition, L.L.C.
By: KRF Company, L.L.C.,
its sole member
By: The Krupp Family Limited
Partnership - 94,
its sole member
By: /s/ Douglas Krupp
-------------------------
Name: Douglas Krupp
Title: General Partner
KRF Company, L.L.C.
By: The Krupp Family Limited
Partnership - 94,
its sole member
By: /s/ Douglas Krupp
-------------------------
Name: Douglas Krupp
Title: General Partner
The Krupp Family Limited Partnership - 94
By: /s/ Douglas Krupp
-------------------------
Name: Douglas Krupp
Title: General Partner
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(a) Not applicable.
(b)(1) Complete Appraisal of Real Property, dated as of August 2,
1999, prepared by Cushman & Wakefield, Inc. and relating to
the Park Place Tower Apartment Complex (Exhibit B-1).
(b)(2) Complete Appraisal of Real Property, dated as of August 13,
1999, prepared by Cushman & Wakefield, Inc. and relating the
Century Apartments (Exhibit B-2).
(c)(1) Voting Agreement, dated December 2, 1999 (Exhibit C-1).
(c)(2) Investment Agreement, dated December 2, 1999 (Exhibit C-2).
(d) Preliminary Proxy Statement (Exhibit D).
(e) Not applicable.
(f) Not applicable.
<PAGE>
Exhibit (B)(1)
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COMPLETE APPRAISAL
OF REAL PROPERTY
PARK PLACE TOWER APARTMENT COMPLEX
655 West Irving Park Road
Chicago, Cook County, Illinois
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IN A SELF-CONTAINED REPORT
As of August 2, 1999
PREPARED FOR:
KRUPP REALTY LIMITED PARTNERSHIP - V
One Beacon Street, Suite 1550
Boston, Massachusetts 02108
PREPARED BY:
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Valuation Advisory Services
455 North Cityfront Plaza Drive, Suite 2800
Chicago, Illinois 60611-5555
<PAGE>
August 16, 1999
Mr. James Hynes
Vice-President
KRUPP REALTY LIMITED PARTNERSHIP - V
One Beacon Street, Suite 1550
Boston, Massachusetts 02108
RE: COMPLETE APPRAISAL OF REAL PROPERTY
Park Place Tower Apartment Complex
655 West Irving Park Road
Chicago, Cook County, Illinois
Dear Mr. Hynes:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Illinois, Inc. is pleased to transmit our self-contained
appraisal report estimating the as is market value of the leased fee estate,
disregarding existing financing secured by the above referenced property and any
associated prepayment penalty required to satisfy the prepayment of existing
mortgages in place.
The value opinion reported below is qualified by certain assumptions,
limiting conditions, certifications, and definitions, which are set forth in the
report.
This report was prepared for the Client, KRUPP REALTY LIMITED
PARTNERSHIP - V and its partners, and it is intended only for the specified use
of the Client. Unless otherwise stated, the report may not be distributed to or
relied upon by other persons or entities without written permission of the
Appraiser.
This appraisal report has been prepared in accordance with the Uniform
Standards of Professional Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and the Code of Ethics and Standards of Professional
Practice (USPAP), as well as Title XI of the Financial Institution Reform,
Recovery and Enforcement Act of 1989 (FIRREA).
The property was inspected by and the report was prepared by Craig A.
Schumacher, under the supervision of Michael J. Schaeffer and Stephen B. Kay,
MAI.
<PAGE>
Mr. Hynes
August 16, 1999
Page 2
Based on our complete appraisal as defined by the Uniform Standards of
Professional Appraisal Practice, we have formed an opinion that the AS IS market
value of the leased fee estate in the referenced property, disregarding existing
financing and subject to the assumptions, limiting conditions, certifications,
and definitions, as of August 2, 1999, is:
FORTY-EIGHT MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
$48,250,000
This letter is invalid as an opinion of value if detached from the
report, which contains the text, exhibits, and an ADDENDA.
Respectfully submitted,
CUSHMAN & WAKEFIELD OF ILLINOIS, INC.
Craig A. Schumacher
Senior Appraiser
Stephen B. Kay, MAI
Senior Appraiser
Illinois Certified Appraiser License No. 153-001054
Michael J. Schaeffer
Director, Manager
Illinois Certified Appraiser License No. 153-000885
CAS:sjb
File No. 99-347
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
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Property Name: The Park Place Tower High-Rise Apartment Complex
Location: 655 West Irving Park Road
Chicago, Cook County, Illinois
General Overview: The subject property is a 56-story, high-rise
apartment building constructed in 1973.
Located approximately five miles north of
downtown Chicago, this property offers
quality views of Chicago's lakefront and
skyline. The building contains a total of 901
apartment units, with 190 studio/convertible
unit styles; 552 one-bedroom/one-bath unit
styles and 159 two-bedroom/two-bath unit
styles. In addition to the residential units,
the property includes 11,175 square feet of
rentable commercial space currently leased to
approximately 16 tenants. Included in the
commercial space are a grocery store, a video
rental store and a dry cleaners. Common area
amenities include: garage parking; an
outdoor swimming pool; two tennis courts; a
volleyball court; a fitness center; a common
laundry facility; a community room; a bike
storage room; and individual storage lockers.
Assessor's Parcel Numbers: 14-21-101-031 and 14-21-101-032
Interest Appraised: Leased Fee Estate
Date of Value: August 2, 1999
Date of Inspection: August 2, 1999
Ownership: According to public record, the subject property
is currently owned by the Krupp Realty Limited
Partnership Fund - V.
Land Area: 2.84247 acres, or 123,818 square feet
<PAGE>
Current Assessment: $9,277,640
Current Property Taxes (1998): $1,763,005
Zoning: R-7, General Residence District
Highest and Best Use
If Vacant: Multi-family residential development
As Improved: Multi-family high-rise with supporting retail,
as currently improved.
Improvements
Type: A 56-story residential high-rise apartment
building with 11,175 net leasable square feet
of retail space and a two- and three-story,
593-space parking garage.
Year Built: 1973
Type of Construction: Concrete and Steel
Unit Mix: The subject's unit mix, current occupancy status
and average actual rental collections for
each unit type are presented in the following
chart:
<TABLE>
<CAPTION>
============================================================================================================================
UNIT MIX/CURRENT OCCUPANCY/AVERAGE ACTUAL RENTAL RATES
NET NO. AVERAGE
NO. SIZE RENTABLE UNITS ACTUAL RENT
UNIT TYPE UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Studio-A5 53 533 28,249 51 96% $ 793 $1.49
Studio-A9 53 533 28,249 48 91% $ 799 $1.50
Studio-A11 31 533 16,523 31 100% $ 754 $1.41
Convertible-A7 53 600 31,800 51 96% $ 858 $1.43
1BD/1BA-B3 53 762 40,386 52 98% $ 987 $1.30
1BD/1BA-B11 22 762 16,764 21 95% $ 926 $1.22
1BD/1BA-B13 53 762 40,386 52 98% $ 981 $1.29
1BD/1BA-B15 53 762 40,386 52 98% $ 995 $1.31
1BD/1BA-B16 53 834 44,202 53 100% $ 1,001 $1.20
1BD/1BA-B4 53 835 44,255 53 100% $ 1,006 $1.20
1BD/1BA-B6 53 835 44,255 51 96% $ 984 $1.18
1BD/1BA-B8 53 835 44,255 51 96% $ 956 $1.14
1BD/1BA-B12 53 835 44,255 50 94% $ 1,001 $1.20
1BD/1BA-B14 53 835 44,255 52 98% $ 990 $1.19
1BD/1BA-B17 53 841 44,573 51 96% $ 1,005 $1.20
2BD/2BA-F1 53 1,150 60,950 51 96% $ 1,508 $1.31
2BD/2BA-F2 53 1,150 60,950 50 94% $ 1,456 $1.27
2BD/2BA-F10 53 1,150 60,950 52 98% $ 1,456 $1.27
============================================================================================================================
TOTAL/WEIGHTED AV. 901 816 735,643 872 97% $ 1,025 $1.26
============================================================================================================================
</TABLE>
<PAGE>
Occupancy Data
Total Units: 901
Total Units Neither Leased or Occupied: 29
Physical Vacancy: 96.78%
VALUE INDICATORS
Cost Approach: Not Applicable
Sales Comparison Approach: $48,650,000
Implied Value Per Unit: $53,996
Implied Value Per Square Foot: $66.13
Income Approach-Direct Capitalization
Current Occupancy: 96.78%
Stabilized Vacancy & Collection Loss: 5.0 %
Forecast Date of
Stabilized Occupancy: Current
Potential Gross Income: $12,139,488
Effective Gross Income: $11,312,927
Net Operating Income(1): $4,461,524
Overall Capitalization Rate: 9.25 %
Indicated Value: $48,250,000
(1) After Replacement Reserves
Overall Value Conclusion: $48,250,000
SPECIAL ASSUMPTIONS: 1. We were not provided with building
plans for the subject improvements.
Therefore, the building sizes
relating to gross and net rentable
area have been compiled from
documentation furnished by property
ownership. Any significant deviations
that may result in a different unit
count or overall size could influence
the value estimates contained herein.
2. Please refer to the complete list
of assumptions and limiting
conditions included at the conclusion
of this report.
<PAGE>
TABLE OF CONTENTS
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PAGE
PHOTOGRAPHS OF SUBJECT PROPERTY..............................................1
INTRODUCTION................................................................19
REGIONAL ANALYSIS...........................................................25
NEIGHBORHOOD ANALYSIS.......................................................35
APARTMENT MARKET ANALYSIS...................................................40
PROPERTY DESCRIPTION........................................................67
REAL PROPERTY TAXES AND ASSESSMENTS.........................................77
ZONING......................................................................79
HIGHEST AND BEST USE........................................................80
VALUATION PROCESS...........................................................82
COST APPROACH...............................................................84
SALES COMPARISON APPROACH...................................................85
INCOME APPROACH.............................................................99
RECONCILIATION AND FINAL VALUE ESTIMATE....................................119
ASSUMPTIONS AND LIMITING CONDITIONS........................................121
CERTIFICATION OF APPRAISAL.................................................123
ADDENDA....................................................................124
Letter of Engagement
Legal Description
Rent Roll
Floor Plans
Investor Surveys
Qualifications of Appraisers
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
View of Southern Elevation
1
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
View of Eastern Elevation
2
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
View of Northern and Eastern Elevations
3
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
View of Northern and Western Elevations
Looking West on Irving Park Road
4
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Looking East on Irving Park Road
Main Entrance
5
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Entrance Along North Pine Grove Road
Garage Entrance Along Sheridan Road
6
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Garage Entrance Along Frontier Street
Shipping And Receiving
7
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Lobby
8
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Elevator Bank
9
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Retail Space
Community/Conference Room
10
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Sun Deck and Swimming Pool
Fitness Center
11
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Aerial View of Swimming Pool, Sun Deck and Tennis Courts
12
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Laundry Facility
Parking Garage
13
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Common Area Hallway
Living Area
14
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Typical Bedroom
15
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Typical Kitchen
16
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Typical Kitchen
17
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
Typical Bathroom
18
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
Park Place Tower represents a 56-story residential high-rise building
with 11,175 net rentable square feet of supporting retail space and a 593-space,
two- and three-story parking garage. The residential tower consists of studio,
convertible, one- and two-bedroom apartments (901 total units) from the third
floor to the 55th floor. Floor 56 represents a mechanical floor, while the first
floor contains the lobby, the property leasing office, three retail units and an
elevator bank. The second floor houses the property management office along with
a number of small professional office units. Additionally, the subject facility
is situated over a basement, where some mechanical equipment, a common area
laundry and tenant storage facilities are found. The subject's street address is
655 West Irving Park Road, Chicago, Cook County, Illinois. The subject's
improvements are situated on a 2.84247 acre, or 123,818 square foot, parcel.
This parcel is found at the southeastern corner of North Pine Grove Avenue and
West Irving Park Road.
PROPERTY OWNERSHIP AND RECENT HISTORY
According to public record, the Krupp Realty Limited Partnership Fund V
currently owns the subject property under appraisal. The subject has not
transferred ownership in the past three years; it is not encumbered with any
purchase options; it is not under any current agreement of sale; and is not
currently listed for sale. Berkshire Property Management currently manages the
property.
PURPOSE AND INTENDED USE OF THE APPRAISAL
The purpose of this appraisal is to estimate the as is market value of
the leased fee estate in the subject property, disregarding existing financing.
This report was prepared for the KRUPP REALTY LIMITED PARTNERSHIP FUND V and its
partners and is intended for their use only. We are advised that the appraisal
will be used for internal evaluation purposes and may be incorporated in filings
made by the Krupp Realty Limited Partnership Fund V and its affiliates under
current Securities Laws.
EXTENT OF THE APPRAISAL PROCESS
In the process of preparing this appraisal, we:
-- Inspected the exterior of all buildings and site improvements and
a representative sample of units with Berkshire Property
Management (the property management company).
-- Interviewed Berkshire representatives, concerning operational
characteristics of the subject property.
19
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
-- Reviewed leasing policy, concessions, and history of recent
occupancy with Berkshire Property Management.
-- Reviewed a detailed history of income and expense and a budget
forecast for 1999 including an engineering report regarding
planned capital expenditures.
-- Conducted market research of occupancies, asking rents,
concessions and operating expenses at competing complexes which
involved interviews with on-site managers and a review of our own
data base from previous appraisal files.
-- Prepared an estimate of stabilized income and expenses (for
capitalization purposes).
-- Conducted market inquiries into recent sales of similar complexes
to ascertain sales price per unit, effective gross income
multipliers and capitalization rates. This process involved
telephone interviews with sellers, buyers and/or participating
brokers.
-- Prepared the Sales Comparison and Income Approaches to value.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is August 2, 1999, which is also the date of our last
inspection.
PROPERTY RIGHTS APPRAISED
We have appraised the leased fee estate of the subject property.
DEFINITIONS OF VALUE, INTEREST APPRAISED, AND OTHER PERTINENT TERMS
The definition of market value taken from the UNIFORM STANDARDS OF
PROFESSIONAL APPRAISAL PRACTICE of the Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer
and seller, each acting prudently and knowledgeably, and assuming the
price is not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in
what they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
20
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale.
All of the above conditions are assumed in the valuation analysis.
EXPOSURE TIME
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open
market". Exposure time is defined as 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 the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
Based on our interviews with apartment investors and our investigation
of recently closed sale transactions, we concluded that marketing time
would have been 9 months before the effective date of valuation.
The following definitions of pertinent terms are taken from the
DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION (1993), published by the
APPRAISAL INSTITUTE.
LEASED FEE ESTATE
An ownership interest held by a landlord with the rights of use and
occupancy conveyed by lease to others. The rights of the lessor (the
leased fee owner) and the leased fee are specified by contract terms
contained within the lease.
MARKET RENT
The rental income that a property would most probably command on the
open market, indicated by the current rents paid and asked for at
comparable space as of the date of appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or
other securities that cannot be sold at their face amounts.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally
21
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
permissible and excludes all assumptions concerning hypothetical market
conditions or possible rezoning.
22
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
LEGAL DESCRIPTION
A complete legal description of the subject property is provided in the
ADDENDA section of this analysis. The subject property is identified by the Cook
County Assessor's Office as parcel numbers : 14-21-101-031 and 14-21-101-032.
This legal description appears to be current and most likely reflects the owned
inventory of the subject property in its "as is" condition. It is noted that we
have NOT verified said legal description with legal counsel and suggest that
such verification be obtained prior to utilizing said legal description in any
legal document of conveyance. Cushman & Wakefield assumes no responsibility for
the accuracy or legality of said legal description.
23
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
Insert Regional Map
24
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
CHICAGO METROPOLITAN AREA
This section evaluates general demographic and economic trends in the
property's regional location to determine the outlook for the overall market
based upon comparison of projected population, employment and other trends with
actual historical data. The Chicago Consolidated Metropolitan Statistical Area
(CMSA), located at the southwestern tip of Lake Michigan, is the Midwest's
financial, commercial, transportation, and industrial center. As defined by the
United States Census Bureau, the Chicago CMSA includes a total of thirteen
counties: ten in Illinois, two in Indiana, and one in Wisconsin. As a whole, the
Chicago CMSA covers a territory of 5,660 square miles.
POPULATION
The population of the Chicago Metropolitan Area is the third largest in
the nation, behind New York and greater Los Angeles. The historical and
projected population growth trends for the thirteen county Chicago CMSA are
summarized in the table below.
<TABLE>
<CAPTION>
===========================================================================================================
CHICAGO CONSOLIDATED METROPOLITAN STATISTICAL AREA
POPULATION CHARACTERISTICS 1980-2002
-----------------------------------------------------------------------------------------------------------
ANNUAL % ANNUAL % ANNUAL %
COUNTY 1980 1990 CHANGE 1997 CHANGE 2002 CHANGE
1980-1990 1990-1997 1997-2002
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ILLINOIS
-----------------------------------------------------------------------------------------------------------
Cook 5,253,685 5,105,067 -0.29% 5,135,667 0.09% 5,147,000 0.04%
-----------------------------------------------------------------------------------------------------------
Chicago 3,003,961 2,783,726 -0.76% 2,709,148 -0.39% 2,677,000 -0.24%
-----------------------------------------------------------------------------------------------------------
DeKalb 74,624 77,932 0.44% 84,996 1.25% 88,000 0.70%
-----------------------------------------------------------------------------------------------------------
DUPAGE 658,835 781,666 1.72% 870,407 1.55% 903,000 0.74%
-----------------------------------------------------------------------------------------------------------
Grundy 30,582 32,337 0.56% 35,724 1.44% 37,000 0.71%
-----------------------------------------------------------------------------------------------------------
KANE 278,405 317,471 1.32% 372,670 2.32% 397,000 1.27%
-----------------------------------------------------------------------------------------------------------
Kankakee 102,926 96,255 -0.67% 103,229 1.01% 106,000 0.53%
-----------------------------------------------------------------------------------------------------------
Kendall 37,202 39,413 0.58% 47,534 2.71% 51,000 1.42%
-----------------------------------------------------------------------------------------------------------
Lake 440,372 516,418 1.61% 587,226 1.85% 617,000 0.99%
-----------------------------------------------------------------------------------------------------------
McHenry 147,897 183,241 2.17% 236,033 3.68% 257,000 1.72%
-----------------------------------------------------------------------------------------------------------
Will 324,460 357,313 0.97% 432,538 2.77% 466,000 1.50%
-----------------------------------------------------------------------------------------------------------
INDIANA
-----------------------------------------------------------------------------------------------------------
Lake 522,965 475,594 -0.94% 481,139 0.17% 481,000 -0.01%
-----------------------------------------------------------------------------------------------------------
Porter 119,816 128,932 0.74% 143,048 1.50% 148,000 0.68%
-----------------------------------------------------------------------------------------------------------
WISCONSIN
-----------------------------------------------------------------------------------------------------------
Kenosha 123,137 128,181 0.40% 141,346 1.41% 147,000 0.79%
-----------------------------------------------------------------------------------------------------------
TOTAL 8,114,906 8,239,820 0.15% 8,671,557 0.73% 8,845,000 0.40%
-----------------------------------------------------------------------------------------------------------
Source: Equifax National Decision Systems
===========================================================================================================
</TABLE>
As indicated in the previous table, the total estimated population of the
Chicago CMSA in 1997 was 8,671,557. The population of the Chicago CMSA increased
0.15 percent annually between 1980 and 1990, and increased 0.73 percent annually
between 1990 and 1997. The Chicago CMSA population is expected to increase 0.40
percent annually between 1997 and 2002.
25
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
While the Chicago CMSA population has increased since 1980, the
population in the City of Chicago has consistently decreased. The Chicago
suburban population has grown significantly at the expense of population
decreases in the City of Chicago. Between 1980 and 1990, the City of Chicago
population decreased 0.76 percent annually. The Chicago population decreased
0.39 percent annually between 1990 and 1997, and is expected to decrease 0.24
percent annually between 1997 and 2002. The population shift from the city to
suburban areas is common among most major cities located throughout the Great
Lakes and Northeastern regions, and is expected to continue in the foreseeable
future.
TRANSPORTATION
AIR TRANSPORTATION
Chicago is one of the primary transportation hubs in the United States.
O'Hare International Airport is one of the busiest in the world, handling
approximately 70.4 million total passenger arrival and departures in 1997,
according to the Chicago Department of Aviation. Increased traffic at O'Hare
International Airport can be attributed to several factors: the deregulation of
the airline industry in the past decade, the development of "regional" hubs' by
major airlines, and the continued economic expansion of local and national
companies into global markets. O'Hare International Airport serves as a hub for
United Airlines. United Airlines is the busiest airline in the city, according
to the Chicago Department of Aviation, serving approximately 30 million
passengers in 1996.
According to CRAIN'S CHICAGO BUSINESS, the City of Chicago launched a
$1-billion dollar, five-year upgrade of O'Hare International Airport's aging
infrastructure in 1998. Terminals 2 and 3 at the airport will be modernized, and
renovations include the expansion of ticketing areas and the addition of
elevators and escalators. In order to relieve rush-hour traffic congestion by
the airport there are plans to widen exits and the roadway leading to O'Hare,
and add more exits to remote parking lots and Mannheim Road. Upgrade plans also
include replacing an aged heating and cooling system, improving access to
skyrail transportation, and creating a new bus transportation center.
Midway Airport, located in the southwest portion of the city, serves as
a secondary airport in the Chicago metropolitan area and has become an
increasingly popular alternative to O'Hare International Airport. Major
commercial airlines serving Midway Airport include America West, American Trans
Air, Continental, Northwest, and Southwest. Southwest Airlines serves the
largest number of passengers at Midway Airport. According to the Chicago
Department of Aviation, Southwest Airlines served 5.1 million passengers at
Midway Airport in 1997.
26
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Plans are under way to expand Midway Airport, which include adding a
terminal with 38 gates. Expansion plans will reportedly cost $722.0 million and
will be completed in 2003. The CHICAGO SUN TIMES in February 1998, reported
American Trans Air (ATA), the second largest carrier at Midway Airport, plans to
expand its business at Midway Airport. American Trans Air Airlines plans to add
500 people to its Chicago area workforce, and will occupy 12 of the 38 gates in
the new terminal to be completed in 2003. Three hundred of the new ATA employees
will be in reservations or customer service jobs. Two hundred of the new
employees will be hired for pilot or flight attendant jobs. Also in 1998,
American Trans Air added a number of non-stop service flights to ten additional
markets.
GROUND TRANSPORTATION
Several major expressways and interstate highways pass through the
Chicago area. Interstate 88 and 290 are the main routes to the cities along the
East-West Corridor. Interstate 55 provides access to the southwestern cities.
Cities to the north and northwest are accessed via Interstates 90 and 94; and
finally, north-south travel between the western suburbs is facilitated by
Interstates 294 and 355. In total, the Chicago area has over 630 miles of
expressways. Within the metropolitan area, rail lines, rapid transit systems,
bus lines and expressway systems facilitate commuter transportation.
EMPLOYMENT AND INCOME
The Chicago economy, like most major metropolitan areas, began as a
manufacturing center. Today, Chicago economic growth is no longer primarily
based in the manufacturing sector, but is distributed among the retail, FIRE
(finance, insurance, and real estate), and service industries. The table on the
following page summarizes the diversity of employment for the thirteen-county
Consolidated Metropolitan Statistical Area.
<TABLE>
<CAPTION>
===============================================================================================================
CHICAGO METROPOLITAN AREA (13-COUNTY CMSA)
NON-FARM EMPLOYMENT STATISTICS 1997-2010
---------------------------------------------------------------------------------------------------------------
INDUSTRY 1980 PERCENT OF 1997 PERCENT OF 2010 PERCENT OF
GROUP EMPLOYMENT TOTAL EMPLOYMENT TOTAL EMPLOYMENT TOTAL
(000'S) (000'S) (000'S)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Construction 169.4 4.1% 234.8 4.7% 260.5 4.7%
---------------------------------------------------------------------------------------------------------------
Manufacturing 952.1 23.2% 719.3 14.3% 666.5 12.0%
---------------------------------------------------------------------------------------------------------------
TCPU(1) 224.7 5.5% 291.8 5.8% 319.3 5.7%
---------------------------------------------------------------------------------------------------------------
Wholesale Trade 281.3 6.9% 310.0 6.2% 325.5 5.8%
---------------------------------------------------------------------------------------------------------------
Retail Trade 648.0 15.8% 814.7 16.2% 873.8 15.7%
---------------------------------------------------------------------------------------------------------------
FIRE(2) 357.7 8.7% 476.8 9.5% 590.5 10.6%
---------------------------------------------------------------------------------------------------------------
Services 931.1 22.7% 1,616.8 32.2% 1,938.6 34.8%
---------------------------------------------------------------------------------------------------------------
Government 540.2 13.2% 557.7 11.1% 595.8 10.7%
---------------------------------------------------------------------------------------------------------------
TOTAL NON-FARM 4,104.5 100.0% 5,021.9 100.0% 5,570.5 100.0%
EMPLOYMENT
---------------------------------------------------------------------------------------------------------------
(1) Transportation and Utilities
(2) Finance, Insurance and Real Estate
===============================================================================================================
Source: Woods and Poole
===============================================================================================================
</TABLE>
27
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
In 1980, the majority of the labor force of the Chicago CMSA was employed
within the manufacturing and service industries. The manufacturing and service
industries accounted for 23.2 and 22.7 percent of total employment in 1980,
respectively. However, in 1997, manufacturing employment was only 14.3 percent
of total employment in the Chicago CMSA. The portion of the labor force in
manufacturing employment is expected to continue to decrease, and is expected to
be approximately 12 percent of the total employment in the year 2010. The
services industry, however, was 22.7 percent of the labor force in 1980, but
increased to 32.2 percent of the labor force in 1997. Employment in the service
industry is expected to increase to 34.8 percent by the year 2010.
The majority of the labor force in the Chicago CMSA in 1997 was employed
within Cook County, followed by DuPage County. Approximately 62.4 percent of the
labor force was employed in Cook County, while 12.8 percent of the labor force
was employed in DuPage County. In the year 2010, the percentage of the labor
force employed in Cook County is expected to decrease slightly to 58.6 percent.
The table on the following page presents total non-farm employment per
thousand in each of the thirteen counties of the Chicago CMSA. The estimated
total non-farm employment in 1997 was 5,021,900 and the 2010 total estimated
non-farm employment is projected at 5,570,500.
28
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================
CHICAGO CONSOLIDATED METROPOLITAN STATISTICAL AREA
DISTRIBUTION OF TOTAL NON-FARM EMPLOYMENT
1997 AND 2010
- --------------------------------------------------------------------------------------------
COUNTY 1997 PERCENT OF 2010 PERCENT OF
(000'S) TOTAL (000'S) TOTAL
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS
- --------------------------------------------------------------------------------------------
Cook 3,131.3 62.4% 3,265.9 58.6%
- --------------------------------------------------------------------------------------------
DeKalb 41.8 0.8% 47.3 0.8%
- --------------------------------------------------------------------------------------------
DuPage 643.9 12.8% 785.2 14.1%
- --------------------------------------------------------------------------------------------
Grundy 17.3 0.3% 20.4 0.4%
- --------------------------------------------------------------------------------------------
Kane 188.9 3.8% 212.6 3.8%
- --------------------------------------------------------------------------------------------
Kankakee 51.0 1.0% 59.2 1.1%
- --------------------------------------------------------------------------------------------
Kendall 16.2 0.3% 18.1 0.3%
- --------------------------------------------------------------------------------------------
Lake 311.4 6.2% 422.0 7.6%
- --------------------------------------------------------------------------------------------
McHenry 100.9 2.0% 127.8 2.3%
- --------------------------------------------------------------------------------------------
Will 153.4 3.1% 194.4 3.5%
- --------------------------------------------------------------------------------------------
INDIANA
- --------------------------------------------------------------------------------------------
Lake 237.5 4.7% 266.3 4.8%
- --------------------------------------------------------------------------------------------
Porter 69.1 1.4% 85.6 1.5%
- --------------------------------------------------------------------------------------------
WISCONSIN
- --------------------------------------------------------------------------------------------
Kenosha 59.2 1.2% 65.7 1.2%
- --------------------------------------------------------------------------------------------
TOTAL EMPLOYMENT 5,021.9 100.0% 5,570.5 100.0%
- --------------------------------------------------------------------------------------------
Source: Woods and Poole
============================================================================================
</TABLE>
As indicated in the table above, the 2010 employment distribution in
counties outside of Illinois, is expected to be similar to the 1997 employment
distribution.
Chicago is a leading corporate headquarters location. A number of Fortune
500 firms are headquartered in the Chicago area. Many other firms also have
regional headquarters in the Chicago area. Sears, Roebuck and Company, Amoco,
Motorola, and Allstate Corporation are among the largest publicly held companies
in the Chicago area. The presence of a large number of corporate headquarters in
the area is indicative of the strength of the local support network and general
business climate. The tables on the following facing page present the largest
public and private companies in Chicago ranked by revenues.
29
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================
METROPOLITAN CHICAGO'S LARGEST PUBLIC COMPANIES
RANKED BY 1998 REVENUES
- ------------ --------------------- ---------------------------- -------------------------- ------------------
RANK NAME CITY 1998 NET REVENUES (IN NUMBER OF
MILLIONS) EMPLOYEES
- ------------ --------------------- ---------------------------- -------------------------- ------------------
<S> <C> <C> <C> <C>
1 Sears, Roebuck & Co. Hoffman Estates $41,300.0 300,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
2 Amoco Corp. Chicago $36,287.0 43,451
- ------------ --------------------- ---------------------------- -------------------------- ------------------
3 Motorola, Inc. Schaumburg $29,800.0 150,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
4 Allstate Corp. Northbrook $25,500.0 51,400
- ------------ --------------------- ---------------------------- -------------------------- ------------------
5(1) Sara Lee Corp. Chicago $18,624.0 135,300
- ------------ --------------------- ---------------------------- -------------------------- ------------------
6(1) CAN Financial Corp. Chicago $16,987.8 24,300
- ------------ --------------------- ---------------------------- -------------------------- ------------------
7(1) Caterpillar Inc. Peoria $16,522.0 57,026
- ------------ --------------------- ---------------------------- -------------------------- ------------------
8 UAL Corp. Elk Grove Township $16,362.0 87,628
- ------------ --------------------- ---------------------------- -------------------------- ------------------
9 Ameritech Corp. Chicago $16,000.0 72,000
- ------------ --------------------- ---------------------------- -------------------------- ------------------
10(1) Archer Daniels Decatur $13,314.0 14,811
Midland Co.
=============================================================================================================
Source: CRAIN'S CHICAGO BUSINESS, Top Business Lists 1998 Edition
(1) Represents 1997 figures
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================
METROPOLITAN CHICAGO'S LARGEST PRIVATE COMPANIES
RANKED BY 1997 REVENUES
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
RANK NAME CITY 1997 NET REVENUES NUMBER OF EMPLOYEES
(IN MILLIONS)
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
1 Montgomery Ward & Co. Chicago $6,618.0 62,579
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
2 Marmon Group Chicago $6,000.0 30,000
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
3 Alliant Foodservice Inc. Deerfield $4,500.0 9,400
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
4 Kemper Insurance Cos. Long Grove $3,913.0 10,068
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
5 Topco Associates Skokie $3,900.0 375
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
6 Hyatt Hotels Corp. Chicago $2,875.0 40,000
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
7 Ace Hardware Corp. Oak Brook $2,742.0 4,397
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
8 Cotter & Co. Chicago $2,441.7 3,470
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
9 Budget Rent A Car Corp. Lisle $2,400.0 24,000
- ------------ ---------------------------- ---------------------- ---------------------- ---------------------
10 Specialty Foods Corp. Rosemont $2,020.0 14,000
=============================================================================================================
Source: CRAIN'S CHICAGO BUSINESS, Top Business Lists 1997 Edition
=============================================================================================================
</TABLE>
30
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
The average annual unemployment rates for the nation, state, and Chicago
Primary Metropolitan Statistical Area (PMSA), since 1994 are presented in the
table below.
<TABLE>
<CAPTION>
=============================================================================================================
ANNUAL AVERAGE UNEMPLOYMENT RATES (NOT SEASONALLY ADJUSTED)
=============================================================================================================
AREA 1994 1995 1996 1997 1998(1)
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Illinois 5.7% 5.2% 5.3% 4.6% 4.1%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
U.S. 6.1% 5.6% 5.4% 4.7% 4.4%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
CHICAGO PMSA 5.6% 5.1% 5.0% 4.5% 4.0%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
=============================================================================================================
NINE-COUNTY CHICAGO PMSA DETAIL
=============================================================================================================
Cook,IL 6.1% 5.5% 5.5% 5.0% 4.5%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
DeKalb, IL 4.2% 3.8% 4.3% 3.6% 3.5%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
DuPage, IL 3.9% 3.4% 3.4% 2.9% 2.5%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Grundy, IL 7.9% 7.6% 6.7% 6.7% 6.4%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Kane, IL 5.6% 5.0% 4.9% 4.2% 3.5%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Kendall, IL 4.5% 4.0% 4.1% 3.2% 2.5%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Lake, IL 4.9% 4.0% 4.0% 3.2% 3.1%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
McHenry, IL 4.6% 4.1% 4.0% 3.0% 3.0%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Will, IL 5.7% 5.3% 5.2% 3.7% 4.0%
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
=============================================================================================================
Source: Northeastern Illinois Planning Commission; Illinois Department of Employment Security
(1) As of November, 1998
=============================================================================================================
</TABLE>
According to Woods and Poole, the 1997 average per capita income in the
Chicago CMSA was $23,038. The 1997 mean household income was $64,392. The 1997
per capita income in the 13-county Chicago CMSA ranged $18,650 to $32,747 and
the 1997 means household income ranged from $49,239 to $90,867. DuPage and Lake
County lead the Chicago CMSA in per capita income and mean household income. The
1997 per capita income in DuPage was $32,747, while the Lake County per capita
income was $30,260. Mean household income in DuPage and Lake Counties were
$90,867 and $87,092, respectively. Per capita and mean household income
statistics for the 13-county Chicago CMSA, are presented in the table on the
following page.
31
<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================
1997 CHICAGO CMSA PER CAPITA INCOME STATISTICS
- --------------------------------------------------------------------------------------------
COUNTY PER CAPITA INCOME MEAN HOUSEHOLD INCOME
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ILLINOIS
- --------------------------------------------------------------------------------------------
Cook $25,287 $67,588
- --------------------------------------------------------------------------------------------
DeKalb $18,650 $49,239
- --------------------------------------------------------------------------------------------
DuPage $32,747 $90,867
- --------------------------------------------------------------------------------------------
Grundy $22,463 $60,236
- --------------------------------------------------------------------------------------------
Kane $22,920 $67,054
- --------------------------------------------------------------------------------------------
Kankakee $18,912 $50,991
- --------------------------------------------------------------------------------------------
Kendall $22,141 $65,234
- --------------------------------------------------------------------------------------------
Lake $30,260 $87,092
- --------------------------------------------------------------------------------------------
McHenry $23,913 $69,634
- --------------------------------------------------------------------------------------------
Will $21,105 $63,333
- --------------------------------------------------------------------------------------------
INDIANA
- --------------------------------------------------------------------------------------------
Lake $19,492 $53,010
- --------------------------------------------------------------------------------------------
Porter $22,024 $60,504
- --------------------------------------------------------------------------------------------
WISCONSIN
- --------------------------------------------------------------------------------------------
Kenosha $19,584 $52,310
- --------------------------------------------------------------------------------------------
AVERAGE $23,038 $64,392
============================================================================================
</TABLE>
METROPOLITAN CHICAGO ECONOMY
As the home of four major financial exchanges, Chicago is the Midwest's
financial center. The financial exchanges located in the city include the
Chicago Board of Trade, Chicago Board Options Exchange, Chicago Mercantile
Exchange, and Midwest Stock Exchange. Eighty percent of the world's commodities
are traded through three of Chicago's exchanges.
According to data compiled by the Regional Economics Applications
Laboratory (REAL) at the University of Illinois at Urbana-Champaign for CRAIN'S
CHICAGO BUSINESS, the economic growth rate in 1997 was approximately 3.7
percent. Although the 1998 economic growth rate was somewhat lower at
approximately 2.8 percent, every sector of the local economy performed well.
The economic growth witnessed in 1998 was hampered by concerns of local
firms of domestic fallout from the troubled Asian economies and markets and
concerns about costs to retool computers for the year 2000, which are already
draining revenues of mid-sized companies. There were also theories that low
unemployment levels acted to curtail growth. The continuing tight labor market
is acting to maintain inflation fears as companies hike wages to attract new
employees. Despite the above concerns, economists observe that
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<PAGE>
REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
consumer confidence in the economy remains relatively positive while the Federal
Reserve continues to closely monitor various economic indicators tied to
inflation.
SUMMARY
In summary, Chicago's status as a world class city is due to a variety of
inherent strengths, including: its excellent transportation system, central
geographic location, well educated work force, commodities and futures
exchanges, and its numerous cultural, educational, and recreational amenities.
In addition, the municipality of the City of Chicago is generally healthy
financially, and the administration under Mayor Richard M. Daley, Jr. is
considered helpful toward business and development. Because of these factors,
the area ranked 11th among all metropolitan areas in terms of business climate,
according to a recent survey of chief executives across the nation.
Although the Chicago area will continue to be subject to national
economic trends and conditions, the diversity of the local economy will insulate
the area from volatile economic swings. Overall, the Chicago area is expected to
continue its trend of economic growth. The continuation of Chicago's healthy
business climate, as well as its economic stability, should ensure a favorable
environment for real estate development and investment over the long-term. The
continuation of the Chicago Metropolitan Area economic growth should ensure a
favorable environment for real estate development and investment over the
long-term.
33
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REGIONAL ANALYSIS
- --------------------------------------------------------------------------------
Neighborhood map
34
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
LOCATION
- - The subject property is located in the northeast portion of Chicago, Cook
County, Illinois. More specifically, the subject property is situated
along the south side of Irving Park Road, approximately two blocks west of
Lake Shore Drive. Downtown Chicago is situated approximately five miles
south of the subject property.
- - The subject's neighborhood is generally bounded by Montrose Avenue to the
north, Addison Street to the south, Lake Shore Drive (U.S. Highway 41) to
the east, and Halsted Street to the west.
TRANSPORTATION/ACCESS
- - Transportation to and from the subject's neighborhood is good. Lake Shore
Drive (U.S. Highway 41) provides primary north-south directed access from
areas to the north and south. Secondary north-south access is provided by
Halsted Street. Lake Shore Drive is an eight-lane asphalt-paved expressway
that has a full interchange at Irving Park Road. This roadway is further
improved with concrete curbs and gutters, as well as overhead street
lights. Montrose Avenue, Irving Park Road, and Addison Street are the
primary arteries providing roadway access to the subject's neighborhood
from the west. All of the major street arteries in the subject's
neighborhood, including Halsted Street, are two-lane asphalt-paved
roadways that are wide enough to allow parallel parking. There are no
major arterial improvements planned for the subject's neighborhood in the
immediate future.
- - While Lake Shore Drive provides convenient expressway access to downtown
Chicago, as well as all lakeshore neighborhoods, the nearest Interstate
highway access is approximately four miles southwest and west of the
subject. Public commuter rail access is available approximately
four-blocks west of the subject, while Chicago Transportation Authority
(CTA) bus access is available at the subject property, along Irving Park
Road.
NEIGHBORHOOD CHARACTERISTICS
- - The subject's neighborhood is generally divided into two sections; the
east portion and the west portion.
- - The east portion, which runs the length of the neighborhood in a
north-south direction, extends west from Lake Shore Drive approximately
one- to two-blocks, and is generally comprised of high-rise apartment and
condominium buildings. The western portion of
35
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
the subject's neighborhood extends west to Halsted Street, and is
generally comprised of low-to mid-rise apartment and condominium
structures, although single-family residences are also present.
- - The subject's neighborhood is 100 percent improved with either building
structures or recreational areas. The building improvements were generally
constructed between 1930 and 1975, although a few newer buildings are also
present in the neighborhood.
- - Commercial development in the subject's neighborhood is limited to
storefronts and strip-shopping centers along the Broadway and Halsted
Streets, although additional commercial spaces are also located on the
first floors of many high-rise residential structures, along major street
arteries. Other development in the subject's neighborhood includes
medical, educational, governmental and recreational facilities. There are
no known industrial facilities in the neighborhood. Nor was there any
evidence of new construction in the subject's neighborhood at the time of
inspection.
- - Major influences in the subject's neighborhood include its relatively
close proximity and ease of access to the employment, cultural, and retail
centers provided by downtown Chicago, as well as nearby proximity to the
recreational opportunities provided by the public parkland east of Lake
Shore Drive.
- - As the subject's neighborhood is 100 percent improved, and most buildings
appear to be well occupied and well maintained, we believe the subject's
neighborhood is in the stable stage of its life cycle.
NEARBY AND ADJACENT LAND USES
- - Land uses adjacent to the subject property include high-rise condominium
developments to the east and west, a variety of single-family and low-rise
multi-family structures to the south, and the American Islamic College to
the north.
POPULATION CHARACTERISTICS AND TRENDS
- - The population within one-mile of the subject property has declined
modestly in recent years, from 95,477 persons in 1980 to 86,139 persons in
1999.
- - The population within one mile of the subject property is anticipated to
decrease further between 1999 and 2004 to approximately 83,637 residents.
36
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
- - The population within one mile of the subject property is relatively
young, with over 50 percent of the residents between the ages of 25 and
49.
- - Approximately 40 percent of the residents older than 16 years of age are
employed in executive, professional, or managerial occupations.
HOUSEHOLD CHARACTERISTICS
- - Along with the population, the number of housing units in the neighborhood
also witnessed a slight decrease from 43,788 units in 1980 to 43,070 units
in 1999.
- - The number of households is anticipated to decrease even further between
1999 and 2004, from 43,070 units to 41,849 units.
- - The estimated number of people per household has remained relatively
stable since 1980, from 1.91 persons in 1980 to 1.95 persons in 1999.
- - Approximately 77 percent of the households within one mile of the subject
are renter-occupied, while the percentage of owner-occupied units
currently stands at approximately 23 percent.
- - There are reportedly 34,148 rental units within one mile of the subject,
and the median rent is estimated at $452 per month.
- - Approximately 20.5 percent of the housing units within one mile of the
subject were constructed prior between 1960 and 1980; 19.5 percent were
constructed between 1940 and 1960, and 55.7 percent were constructed prior
to 1940. Significantly, only 4.3 percent of the housing units within one
mile of the subject have been constructed since 1980.
SPECIAL HAZARDS
- - No special hazards or adverse influences were noted in the subject's
neighborhood at the time of inspection.
NEIGHBORHOOD COMPETITION
- - As indicated previously, the majority of housing units within one mile of
the subject property are renter-occupied. Competition for the subject
property includes: The New York, Pensacola Place, Park Sheridan and
Hawthorne House. The subject property
37
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
competes favorably with its competition. Please see the APARTMENT MARKET
ANALYSIS section of this report for a discussion of the subject's
competition.
38
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
CONCLUSION
- - The presence of a relatively strong and stable economy in Chicago, as
discussed in the previous REGIONAL DESCRIPTION section of this report, is
likely to provide a steady demand for housing units within the City.
- - Contributing factors leading to a positive forecast for the subject's
neighborhood is it's relatively close proximity to downtown Chicago, which
is the employment, cultural, and retail center of the region, as well as
its relatively close proximity to the recreational opportunities available
along the lakeshore.
- - Due to the relatively high occupancy levels that are currently being
achieved in the area, we do not believe there is any external obsolescence
affecting the subject property.
39
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
NATIONAL APARTMENT MARKET OVERVIEW
After a period of two to three years, in which real estate investment
trusts (REITs) steadily pushed up apartment values and decreased overall
capitalization rates with aggressive acquisition programs, signs during 1998
indicated that activity within the apartment market had begun to stabilize. The
slowdown in apartment acquisition during 1998 was directly tied to the REIT's
poor performance in the stock market. With stock prices deflated, REIT's were
unable to issue shares, their primary source of acquisition capital. Adding to
the problem was a slight rise in interest rates during 1998, limiting the
ability of most REIT's to borrow from traditional capital sources. With REIT's
no longer driving the market, many analysts believed that a surge in new
development coupled with artificially high prices were leading to a downswing in
the cycle. Early indications in 1999, however, point to an apartment market
which "just keeps on going" according to KORPACZ'S FIRST QUARTER 1999 REAL
ESTATE INVESTOR SURVEY. These indications include strong absorption levels and
the reintroduction of traditional investors to the apartment market who had been
displaced by aggressive pricing by the REIT's. Overall, analysts look to an
apartment market in equilibrium throughout 1999.
Ownership of large apartment properties (50 or more units) by
institutions has increased considerably since 1991. Both real estate
corporations and REITs have increased their share of the market while ownership
by limited partnerships has declined significantly. It must be noted that
individuals and partnerships still account for over half of all large apartment
properties, with individual owners picking up a substantial share of the market
between 1991 and 1998.
According to our most recent HEITMAN RESEARCH'S MARKET COMMENT,
apartment investments offering attractive risk-adjusted returns are available,
but harder to find. KORPACZ'S FIRST QUARTER 1999 REAL ESTATE INVESTOR SURVEY
states that while most analysts in 1998 agreed that the apartment market had
it's run as the hot property type, current thinking reflects a more optimistic
attitude toward this asset class. New construction fears have been eased by
stronger than expected absorption during the first six months of 1999, while
overall rental rates have remained stable, or in many cases have moved upward.
Additionally, overall occupancy rates, as reported by the U.S. Census Bureau and
several national research firms, continue to hover in the mid-90's.
According to KORPACZ'S FIRST QUARTER 1999 REAL ESTATE INVESTOR SURVEY,
the purchasing power of potential apartment investors made the market extremely
competitive in the past several years. REITs, pension funds, and other
institutional investors continue to
40
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
dominate the transaction market. Of the three, REITs emerged in 1996 and 1997 as
the most influential participant within the national apartment market. Their
aggressive approach towards multi-property purchases placed a significant
premium on portfolios, if and when available. Competition between REITs and
pension funds created a two-tiered apartment market. First, there are a number
of buyers seeking 1980s vintage product, due to lower per-unit costs when
compared to high-end, 1990s product. The availability, however, of 200-unit plus
complexes within this segment is limited within attractive markets because a
high percentage of ownership associated with this product type is pursuing a
long-hold investment strategy. The second tier is represented by high-end
product possessing a unique locational or physical characteristic. These
properties are trading at substantially lower capitalization rates when compared
to other 1990s product. Included in this group are luxury styled, high-rise
apartment buildings with urban locations. According to KORPACZ'S FIRST QUARTER
1999 REAL ESTATE INVESTOR SURVEY, " investors are particularly interested in
acquiring urban apartments; they believe they offer outstanding investment
potential". Nationwide, there has been a surge in residential population within
downtown areas. Young urban professionals, coupled with baby boomers entering
their retirement, have driven the demand for residential dwellings with an urban
location.
Further enhancing the apartment market are its positive fundamental
characteristics. Most importantly, the demand for apartment units is anticipated
to remain strong into the next millennium. Although the rate of new household
formation has been low in recent years, the percent of those that are renters is
consistently around 36.0 percent. According to KORPACZ'S FIRST QUARTER'S 1999
REAL ESTATE INVESTOR SURVEY, most apartment markets are stabilized and occupancy
levels are expected to increase in markets where economic expansion, new job
growth is occurring, and strong in-migration patterns are emerging.
Acting as a constraint to the development of new apartment units is the
increasing equity requirements on the part of commercial banks, which continue
to provide the majority of construction financing for new apartment projects.
Such a constraint on the part of lenders is anticipated to decrease the risk of
over overbuilding.
While institutional investors still seek alternative real estate
investment opportunities, the multi-family segment continues to be a preferred
property type among institutional investors. According to CB COMMERCIAL, the
most active cities for apartment investment are San Francisco, Chicago, Orange
County CA, San Diego, and Minneapolis. Apartments have had continued success in
the investment market due to the underlying strength of the real estate as well
as marginal performances in other property types. The apartment market
41
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
was the first to experience recovery and is still viewed in a positive light by
the investment community, even as some major markets approach equilibrium.
According to KORPACZ'S SECOND QUARTER 1999 REAL ESTATE INVESTOR SURVEY,
this quarter's investor cash flow assumptions reflected a stable apartment
market nationwide. The Second Quarter 1999 average free and clear equity IRR
increased by three basis points over the average IRR in First Quarter 1999 to
11.51 percent. The average free and clear equity cap rate of 8.86 percent in the
Second Quarter of 1999 represents a slight increase of three basis points over
the average cap rate in First Quarter 1999.
As stated previously, investors in the investment-grade apartment market
today include pension funds, insurance companies, real estate investment trusts
(REITs), and private partnerships, among others. Such investors typically
purchase stabilized apartment properties on a direct capitalization basis, while
the discounted cash flow analysis is utilized when a property is not stabilized.
The price per unit is the most common unit of comparison; however, this unit of
comparison is generally given secondary emphasis, due to the significant
physical differences between various apartment complexes.
In conclusion, apartment investors have a direct influence over their
own futures. By giving market fundamentals (supply/demand) their due respect,
investors can avoid serious damage during the current apartment cycle. Apartment
investors can also benefit from the informational advantages the apartment
sector holds over other property types. With accurate, timely and consistent
supply data available in most major markets and a high percentage of annual
turnover, whereby rental rate trends can be monitored, much of the guesswork
involved in pricing an apartment investment is eliminated. In the coming year,
trends to watch for are limited buying opportunities in weakening markets,
overbuilding of high-end product and consolidation within the REIT sector.
CHICAGO METROPOLITAN APARTMENT MARKET OVERVIEW
The Chicago metropolitan apartment market is surveyed by the Grubb &
Ellis Company. As of July 1, 1998, the most recent study available, Grubb &
Ellis tracked more than 107,835 apartment units in the Chicago metropolitan
area. Grubb & Ellis defines and analyzes four separate apartment markets in the
Chicagoland area, including: the City of Chicago, Northwest Cook County, DuPage
County, and Lake County. The subject property is located in the City of Chicago
submarket.
As of July 1998, apartment occupancy rates throughout the Chicago area
were relatively high, ranging from an average occupancy rate of 96.50 percent in
Lake County to
42
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
97.4 percent in Northwest Cook. The City of Chicago submarket placed a close
second reporting an average occupancy rate of 97.4 percent. All of the
submarkets experienced slight increase in their overall occupancy rates from
January 1998 to July 1998. The Lake County apartment submarket displayed the
largest increase in its overall occupancy level, increasing 1.6 percent to 96.5
percent. Occupancy levels in the City of Chicago increased by ten basis points
during the same time period.
Accompanying the stable high occupancy levels during this period
throughout the Chicago metropolitan area, have been correspondingly high
increases in monthly rental rates, ranging from an average of 1.73 percent in
the DuPage County submarket to an average of 3.54 percent in the City of Chicago
apartment submarket. According to Grubb & Ellis, Class A apartment buildings are
defined as properties generally less than eight years old, which offer full
amenities. While the subject property's age would normally place the property in
a lower property classification, as defined by Grubb & Ellis, two
characteristics applicable to the subject allow for the subject's classification
as a Class A property. First, the subject's status as a high-rise complex with
an excellent location near Lake Shore Drive allows for extensive views of Lake
Michigan and Chicago's skyline. Second, the subject property offers a full
amenity package to residents including an on-site dry-cleaners, a grocery store,
an up-scale lobby with 24-hour doorman, valet parking and many other project
amenities typically associated with Class A properties. For these reasons, we
believe the subject property effectively competes within the Class A apartment
asset strata. As such, a discussion regarding Class A apartment real estate
fundamentals is warranted.
The average monthly rental rate for the Chicago Class A apartment market
increased by 4.83 percent, or from $1,221 to $1,280 per month, between January
1998 and July 1998. The average monthly rental rates by unit type for the City
of Chicago are displayed in the tables on the following facing page.
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<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
===============================================================================
AVERAGE MONTHLY RENT PER UNIT TYPE
CLASS A
CHICAGO, ILLINOIS
<TABLE>
<CAPTION>
- --------------------------------- --------------------- -------------------- ---------------------------------
UNIT TYPE JANUARY 1998 JULY 1998 PERCENT INCREASE
- --------------------------------- --------------------- -------------------- ---------------------------------
<S> <C> <C> <C>
STUDIO, 1 BA $ 845.00 $ 873.00 3.31%
ONE-BEDROOM, 1 BA $1,186.00 $1,230.00 3.71%
TWO-BEDROOM, 1 BA $1,743.00 $1,631.00 -6.43%
TWO-BEDROOM, 2 BA $1,743.00 $1,788.00 2.58%
THREE-BEDROOM, 2 BA $2,171.00 $2,818.00 29.8%
- --------------------------------- --------------------- -------------------- ---------------------------------
AVERAGE $1,221.00 $1,280.00 4.83%
- --------------------------------- --------------------- -------------------- ---------------------------------
</TABLE>
================================================================================
SOURCE: GRUBB & ELLIS CHICAGO/METRO APARTMENT STUDY, JULY 1998.
================================================================================
================================================================================
AVERAGE MONTHLY RENT PER UNIT TYPE
CLASS A, B, C
CHICAGO, ILLINOIS
<TABLE>
<CAPTION>
- --------------------------------- --------------------- -------------------- ---------------------------------
UNIT TYPE JANUARY 1998 JULY 1998 PERCENT INCREASE
- --------------------------------- --------------------- -------------------- ---------------------------------
<S> <C> <C> <C>
STUDIO, 1 BA $ 755.00 $ 773.00 2.38%
ONE-BEDROOM, 1 BA $1,122.00 $1,153.00 2.76%
TWO-BEDROOM, 1 BA $1,363.00 $1,257.00 -7.78%
TWO-BEDROOM, 2 BA $1,694.00 $1,742.00 2.83%
THREE-BEDROOM, 2 BA $2,066.00 $2,542.00 23.04%
- --------------------------------- --------------------- -------------------- ---------------------------------
OVERALL AVERAGE $1,101.00 $1,140.00 3.54%
- --------------------------------- --------------------- -------------------- ---------------------------------
</TABLE>
================================================================================
SOURCE: GRUBB & ELLIS CHICAGO/METRO APARTMENT STUDY, JULY 1998.
================================================================================
44
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
A breakdown of the current average market rents per square foot for the
four submarkets in the Chicago MSA, as prepared by Grubb & Ellis, is presented
in the following table.
================================================================================
AVERAGE APARTMENT RENT PER SQUARE FOOT
CLASS A, B, C
CHICAGO METROPOLITAN AREA, JANUARY 1998 VS. JULY 1998
<TABLE>
<CAPTION>
- ------------------------------------ ----------------------- ------------------------ -------------------------
SUBMARKET JANUARY 1998 JULY 1998 PERCENT CHANGE
- ------------------------------------ ----------------------- ------------------------ -------------------------
<S> <C> <C> <C>
CITY OF CHICAGO $1.46 $1.54 +5.48%
Northwest Cook County $0.96 $0.98 +2.08%
DuPage County $0.96 $0.97 +1.04%
Lake County $0.87 $0.86 -1.15%
- ------------------------------------ ----------------------- ------------------------ -------------------------
</TABLE>
================================================================================
Source: Grubb & Ellis Chicago/Metro Apartment Study; July 1998.
================================================================================
As shown in the table above, three of the four apartment submarkets
experienced an increase in the average rent per square foot from January 1998 to
July 1998. The rent per square foot increases ranged from a low of 1.04 percent
in the DuPage County apartment submarket to a high of 5.48 percent in the City
of Chicago submarket. The Lake County submarket was the only sector to witness a
decline in the average rent per square foot during this time period.
According to Grubb & Ellis, the average occupancy rate in the Chicago
Class A apartment submarket, as of July 1998, increased from the January 1998
figure to 97.40 percent. The average Class A occupancy rate is identical to the
overall average occupancy rate for the City of Chicago, which was also reported
to be 97.40 percent, as of July 1998.
CITY OF CHICAGO APARTMENT MARKET OVERVIEW
The subject property is located in the city of Chicago, Cook County,
Illinois. The city of Chicago apartment market is comprised of six submarkets,
including the South Loop, the Loop, Gold Coast, River North, Near North and
North. The subject is located in the North submarket. The total supply is
estimated at 70,000 units, of which nearly 24,000 units have been constructed
since 1980. Over the past 20 years, the planners for the City of Chicago have
maintained a policy that encourages residential development. This policy views a
stable downtown population as the nucleus that binds its office, hotel, and
retail functions.
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<PAGE>
APARTMENT MARKET ANALYSIS
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Traditionally, residential development has been focused on Chicago's
near north side; however, this trend has changed dramatically over the past ten
years with the introduction of several thousand residential units to the
downtown area. Development in this area first proceeded with luxury units along
Lake Shore Drive and low-rise units in River North. As the downtown area
continued to grow, the residential development spread to the south, through
Streeterville, into the East Loop, and west into the heart of River North.
INVENTORY
According to the July 1998 apartment market survey prepared by Grubb &
Ellis, the subject property is located in the North submarket. The North
submarket is defined by Fullerton Avenue to the south, Ashland Avenue to the
west, Irving Park Road to the north and Lake Shore Drive to the east. Of the six
downtown submarkets, comprising approximately 27,031 apartment units tracked by
the Grubb & Ellis survey, the North submarket is the third largest, representing
19.72 percent of the total inventory or approximately 5,330 units.
After a record number of apartment units were delivered to the downtown
market during 1991, the construction of downtown high-rise apartment complexes
halted. The absence of high-rise apartment construction over the past several
years has been primarily due to downward pressures on effective rents caused by
the general recession, overbuilding in the downtown high-rise apartment market,
increased home ownership and lack of available financing. These factors, which
virtually suspended new high-rise apartment construction in Chicago, promoted
the biggest wave of condominium conversions in more than a decade.
CONDOMINIUM CONVERSION ACTIVITY
Condominium conversions have rebounded sharply since the early-1980's,
when high interest rates caused the market to slump. The primary factors fueling
the conversion market were continued low interest rates and the tax advantage of
home ownership on the demand side; and increasing operating expenses and
existing heavy debt obligations, which threatened the economic feasibility of
many stabilized apartment buildings, on the supply side. Reportedly, between
1991 and 1999, there have been 17 conversion of rental apartment buildings to
condo in downtown Chicago. These total more than 4,000 units, of which,
approximately 75.0 percent have sold. Rental developments with larger unit sizes
and higher bedroom counts are the most likely conversion candidates. Examples of
conversion activity in downtown Chicago are presented in the following
discussion.
46
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
Three new condominium conversion have been announced (officially) in the
last nine months, the Gold Coast Galleria, the Grand Ohio and the 401 East
Ontario.
- The Gold Coast Galleria, located at 111 West Maple, represents a
34-story, 331-unit complex which recently began sales. Local
investor, Nicholas Gouletas, is leading this project.
- Draper and Kramer, which recently purchased the property, began
marketing 593 units at the Grand Ohio. The Grand Ohio represents a
27-story building and is located at 211 East Ohio Street.
- Draper and Kramer, which also recently purchased this property,
began marketing 394 units at 401 East Ontario in July 1998. The
project is reportedly 50.0 percent sold out, with strong sales
expected in the latter half of 1999.
In addition to these recently announced conversions, we were able to
obtain more extensive details of the following properties which represent more
established condo conversion projects.
- According to the Sales Manager at River View (previously Cityfront
Center), the south half of the property's Mid-Rise tower was
converted in 1997 (about 220 units), while the north half was
converted in 1998. The tower, which is considered in direct
competition with the subject property, remains a rental property.
The tenant program began in late June/ early July 1997, while
sales to the public occurred shortly thereafter. Sources report
that the tenant program was strong with 25-30 percent of the
tenants buying a unit. However, we have heard from another source,
that the tenant program was slower than this reported pace.
Reports from one of the tenants at the North McClurg Building
indicate that MCL is telling tenants that they had until October
1997 to buy or move out. In addition, this resident stated that
MCL will not discuss upgrades until a contract is signed. It
should be noted that this information came from a third party
source that spoke to a resident in this building. Based on
information that we have gathered to date, the average price is
between $200 and $205 per square foot before the 10 percent tenant
discount is applied.
- Draper and Kramer's luxury 140-unit building in the Lake Meadows
complex completed their conversion program in mid-1998. The
average price per square foot ranged between $100 and $115 PSF.
47
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
- An affiliate of Golub & Company purchased 40 East Delaware Place
in 1997 and converted the 17-story, 75-unit apartment complex to
condominiums. The building was operated as the Maryland Hotel
until 1983, when it was fully renovated and converted for
apartment use. The building is located at the northwest corner of
Delaware Place and Rush Street, one block west of North Michigan
Avenue.
- Markwell Properties has completed the conversion of the Chicago
Motor Club office building to residential condominiums. Despite a
90 percent occupancy rate, the 15-story office building located at
68 East Wacker was not a financial success. The plans included 14
condominium units measuring 4,400 square feet, which would sell
for an average of $1.3 million. Markwell Properties purchased the
property from TA Realty and completed the project in 1997.
According to a recent article in the CHICAGO TRIBUNE, the City of
Chicago is considering a plan to induce developers to convert more older office
buildings for residential use, as a way to shore up the downtown tax base,
preserve historic structures, and maintain the vitality of the central business
district. The plan includes a progressive attitude about building and zoning,
and subsidies for infrastructure improvements. The money would come from the
$300.0 million in revenues generated by the Loop TIF district. The city has
identified more than 100 Loop buildings built before 1940.
Several other rumors about conversions have been surfacing; including
River City totaling 446 units and two projects in Printers Row/ Dearborn Station
totaling over 400 units which are being analyzed for conversion potential.
Finally, many of the other buildings that had HUD mortgages have
condominium potential. These include Doral Plaza, Burnham Plaza, 2 East 8th,
1212 South Michigan, Clark Elm, and the Old Franklin and Terminal Building. The
Oakwood has been discussed as a conversion candidate as has Doral Plaza. Habitat
has 711 Gordon Terrace under contract, a 96-unit duplex-style complex on the
north side. Apparently, 50 percent of the serious bidders were condominium
converters. Listed at $6.5 million, the bidding reportedly went above $7.5
million.
NEW APARTMENT DEVELOPMENT
As a result of the significant amount of conversion activity, residents
that desire to maintain their rental lifestyle in luxury oriented buildings have
increasingly fewer options.
48
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
After many difficult years, the conversion market has enhanced the outlook for
the downtown apartment market by decreasing the supply of available apartment
units.
As noted within this analysis, the downtown rental market has
experienced strong rental growth throughout the past several years, and is
currently experiencing high single-digit rental growth. Additionally, as of July
1998, apartment occupancies in the six downtown submarkets ranged from 96.6 to
98.7 percent, with an overall average of 97.4 percent. Strong rental growth and
increasing occupancies, combined with significant conversion activity, has
initiated a renewed interest in several downtown residential developments.
However, with an 18 to 24 month delivery period, the majority of
planned/proposed rental units are two years away. A detailed analysis regarding
expected and potential new rental development follows.
The first groundbreaking ceremony in six years regarding rental
development within the downtown Chicago market occurred in early December 1997.
This project, known as Cathedral Place (1W. Superior) is located on the block
bounded by Dearborn, Superior, Huron and State Street. The development is
comprised of an 810-unit apartment component, with an average unit size of 650
square feet, 52,000 square feet of retail/office space and 750 parking spaces.
Cathedral Place is expected to begin delivering units in late 1999 or in early
2000.
In addition to Cathedral Place, the next new development in the near term
will be located on a site east of Michigan Avenue. The site, proposed for
development by Draper and Kramer, is located on the block bounded by Fairbanks
Court, Ohio Street and Grand Avenue. Draper and Kramer, an active developer in
downtown Chicago, is proposing a 295-unit apartment development, including
13,000 square feet of retail space and 300 parking spaces. Reportedly, the
development could break ground in the next two months. This is one of two rental
developments expected east of Michigan Avenue.
The second new development broke ground in May 1999 with a location east
of Michigan Avenue and will be known as the River East Complex. MCL is the
developer and when completed the project will be located at the Northwest and
Northeast corners of Illinois Street and McClurg Court. According to
representatives of MCL, the River East Complex will represent a mixed-use
project consisting of hospitality, retail and residential type uses. With regard
to the residential portion of the plan, approximately 400 new luxury rental
units will be constructed within a high-rise setting. This figure, however, is
currently under consideration due to voices of concern from City Hall and local
neighborhood organizations.
49
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
River Front Park is a proposed 40-story, 600-unit apartment complex
located at the northwest corner of Kinzie and Dearborn Streets in the River
North submarket of downtown Chicago. The luxury apartment complex will have an
average unit size of 775 square feet, 20,000 square feet of retail space, and
350 parking spaces in a five-story parking garage. This project was reported to
be on hold due to an incomplete financing package.
The Sterling is a 387-unit luxury apartment tower to be located at the
southeast corner of LaSalle and Kinzie Street in downtown Chicago. The Sterling
is situated two blocks west of River Front Park. The proposed 48-story building
will house 387 apartment units with an average size of 1,019 square feet, a
535-stall, nine-level parking garage, 17,000 square feet of retail space and a
16,400 square foot health club and pool.
Additional planned projects include a 36-story, 230-unit complex at 121
W. Chestnut, currently proposed by the Barton Investments/Jannes Building joint
venture and a 45-story, 450-unit complex located in the Illinois Center Complex
(200 North Columbus), currently proposed by a joint venture including the
Charles E. Smith Corporation.
In addition, there are a number of vacant land parcels in downtown
Chicago which have been considered for apartment development for many years;
however, no significant progress has been made. Several projects had been
expected to break ground by now but have been delayed because of financing and
unrelated issues. Hard costs have tended to remain constant while the land
carry/costs continues to increase as developments are delayed. In addition, we
are finding significant dollars being budgeted for financing and equity
placement fees. While the equity money is available, it is also expensive.
While developers have been attempting to begin rental high-rise
construction for the past two years, increasing labor and land costs have made
new construction difficult to justify. The market is currently experiencing
strong demand, increasing rent levels and a depletion of existing supply due to
conversions and the lack of new construction. The market continues to tighten,
with rents rapidly approaching levels to justify new construction. The downtown
rental market will not likely see any new rental competition delivered before
the year 2000, but may witness a surge of new product thereafter.
OCCUPANCY AND RENTAL RATES
As of July 1998, the overall average apartment occupancy in the North
submarket was 97.9 percent, a 0.30 percent increase from January 1998, according
to the Grubb & Ellis
50
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
study. The survey further delineates the North submarket by property type ( as
discussed previously, we believe the subject is representative of Class A
product). Class A apartment buildings exhibited an average occupancy rate
consistent with that of the overall market, or 97.3, as of July 1998. Average
occupancy rates for Class A apartment complexes in downtown Chicago over the
past year are summarized in the table on the following page.
51
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
===============================================================================
AVERAGE OCCUPANCY RATES IN CLASS A APARTMENT COMPLEX
DOWNTOWN CHICAGO - JULY 1998 VS. JULY 1997
<TABLE>
<CAPTION>
- ----------------------------- -------------------------- --------------------------- --------------------------
SUBMARKET JULY 1998 JULY 1997 % CHANGE
- ----------------------------- -------------------------- --------------------------- --------------------------
<S> <C> <C> <C>
South Loop 98.60% 97.30% +1.34%
Loop 96.50% 97.70% -1.23%
Gold Coast 96.90% 97.00% -0.10%
River North 98.20% 96.80% +1.45%
Near North 98.70% 99.20% -0.50%
North 97.30% 98.50% -1.22%
- ----------------------------- -------------------------- --------------------------- --------------------------
Average 97.40% 97.40% 0%
- ----------------------------- -------------------------- --------------------------- --------------------------
</TABLE>
================================================================================
Source: Grubb & Ellis Chicago/Metro Apartment Study, July 1998 and July 1997.
================================================================================
Furthermore, Grubb & Ellis has reported the average rent for Class A
apartment buildings in the North submarket at $1.58 per square foot in July
1998, as compared to $1.55 per square foot in January 1998. Average rental rates
for Class A Apartment complexes located in downtown Chicago are summarized in
the following table.
================================================================================
AVERAGE RENTAL RATES IN CLASS A APARTMENT COMPLEX
DOWNTOWN CHICAGO - JULY 1998 VS. JULY 1997
<TABLE>
<CAPTION>
- ----------------------------- -------------------------- --------------------------- -------------------------
SUBMARKET JULY 1998 JULY 1997 % CHANGE
- ----------------------------- -------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
South Loop $1.19 $1.13 + 5.31%
Loop $1.54 $1.45 + 6.21%
Gold Coast $1.70 $1.58 + 7.60%
River North $1.58 $1.46 + 8.22%
Near North $1.58 $1.42 +11.27%
North $1.58 $1.57 + 0.64%
- ----------------------------- -------------------------- --------------------------- -------------------------
Average $1.56 $1.47 + 6.12%
- ----------------------------- -------------------------- --------------------------- -------------------------
</TABLE>
================================================================================
Source: Grubb & Ellis Chicago/Metro Apartment Study, July 1998 and July 1997.
================================================================================
COMPETITIVE MARKET
The subject property contains 901 apartment units in a 56-story
residential building. Park Place Tower represents a high-rise apartment complex
situated near Lake Shore Drive, along the western shore of Lake Michigan.
Competitive high-rise apartment complexes in the area share similar lake and
skyline views and offer a large number of amenities such as a health club,
swimming pool, parking garage, laundry room, 24-hour doorman, dry cleaners, and
convenience store. While some buildings may lack some of the above amenities in
their building, these services may be located nearby. The typical tenants are
white-collar workers who are employed in Chicago's Central Business District.
Tenants are often attracted to these buildings by their prestigious image,
project amenities, convenient location to employment centers and other
locational amenities and security. In our survey of the Chicago apartment
52
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
market, we uncovered four apartment projects in, or around the North Submarket,
which are considered to be competitive, to varying degrees, with the subject.
We conducted a market analysis, which concentrated on four high-rise
apartment projects, located near, or along Lake Shore Drive, in northeastern
Chicago, representing a total of 1,566 units. These apartment projects revealed
occupancy levels ranging from 96.0 to 100.0 percent, with an average occupancy
rate of 97.75 percent, which is generally consistent with the overall average
occupancy rate of 97.40 for the City of Chicago, as surveyed by Grubb & Ellis,
July 1998. It is noted that the subject property includes the tenant's heating
and cooling expenses in its quoted rental rates. Two of the projects selected
include tenant heating and cooling expenses in their quoted rates while two do
not. In determining the market orientation of subject's quoted rental rates we
have given this factor consideration and adjusted accordingly. The following
pages provide an apartment rental survey chart, a location map, and a detailed
description of each property.
53
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
===============================================================================
APARTMENT RENTAL SURVEY
<TABLE>
<CAPTION>
- -------------------------------- ------- -------- ------------- ------------- ------------- ----------- --------
AVERAGE
NAME/ YEAR NO. REPORTED APT. TYPE MONTHLY SIZE RENTAL RATE
LOCATION BUILT UNITS OCCUPANCY BR/BA RENT(1) PER SF RANGE/SF
- --------------------------- ------- -------- ------------- ------------- ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
R-1 1988 593 98% Studio $760-$1,050 540 $1.41-$1.94
The New York Convertible $957-$1,250 675 $1.42-$1.85
3660 North Lake Shore Drive 1 BR/1BA $935-$1,450 750 $1.25-$1.93
Chicago, IL 2 BR/2BA $1,590-$2,200 1,170 $1.36-$1.88
- --------------------------- ------- -------- ------------- ------------- ------------------------- ------------
R-2 1985 253 100% Studio/
The Park Sheridan Convertible $755-$905 595 $1.27-$1.52
5320 North Sheridan Road 1 BR/1 BA $920-$1,100 766 $1.20-$1.44
Chicago, IL 2 BR/2BA $1,205-$1,450 1,025 $1.18-$1.41
3 BR/2BA $1,515-$1,675 1,205 $1.26-$1.39
- --------------------------- ------- -------- ------------- ------------- ------------------------- ------------
R-3 1980 264 97% Studio/
Pensacola Place Convertible $710-$765 540 $1.31-$1.42
4334 North Hazel Street 1 BR/1BA $890-$945 810 $1.10-$1.17
Chicago, Illinois 2 BR/1BA $1,085-$1,140 1,038 $1.04-$1.10
2BR/1.5BA $1,165 1,025 $1.14
- --------------------------- ------- -------- ------------- ------------- ------------------------- ------------
R-4 1966 456 96% Studio/
Hawthorne House Convertible $750-$850 600 $1.25-$1.42
3450 North Lake Shore Drive 1 BR/1BA $1,050-$1,150 850 $1.23-$1.35
Chicago, Illinois 2 BR/2BA $1,450-$1,750 1,100 $1.32-$1.59
- --------------------------- ------- -------- ------------- ------------- ------------------------- ------------
</TABLE>
======================================================================
<TABLE>
<CAPTION>
- --------------------------- ------------------- --------------------
AVERAGE RENTAL
NAME/ RATE/SF OVERALL WEIGHTED
LOCATION OVERALL AVERAGE RENTAL RATE
- --------------------------- ------------------- -------------------------
<S> <C> <C>
R-1 $1.68
The New York $1.63
3660 North Lake Shore Drive $1.59 $1.62/SF
Chicago, IL $1.62
- --------------------------- --------------- -------------------------
R-2
The Park Sheridan $1.40
5320 North Sheridan Road $1.30 $1.32/SF
Chicago, IL $1.30
$1.32
- --------------------------- --------------- -------------------------
R-3
Pensacola Place $1.37
4334 North Hazel Street $1.13 $1.17/SF
Chicago, Illinois $1.07
$1.14
- --------------------------- --------------- -------------------------
R-4
Hawthorne House $1.33
3450 North Lake Shore Drive $1.29 $1.33/SF
Chicago, Illinois $1.46
- --------------------------- --------------- -------------------------
</TABLE>
================================================================================
(1) The quoted rental rates regarding comparable rentals R-2 and R-3 DO NOT
include heating expenses, where as the quoted rental rates for comparable
rentals R-1 and R-4 DO include heating expenses.
================================================================================
54
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
Insert rental map
55
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
R-1
------------------------------------------------------------------
------------------------------------------------------------------
View: The New York
APARTMENT COMPLEX R-1, The New York is located at 3660 North Lake Shore
Drive in the Lakeview/Wrigleyville neighborhood. The New York was built
in 1988. The 47-story building includes 593 rentable units, which are
currently 98.0 percent occupied. The overall weighted average unit size
is 764 square feet. The average rental rates, which include heat and
air-conditioning, currently range from $1.52 to $1.68 per square foot,
per month. The overall weighted average monthly rent is $1.60 per square
foot, inclusive of heat and air-conditioning. According to management,
current rents represent an increase of 3.0 to 6.0 percent from 1998 rent
levels. At present, general rent concessions are not being offered.
The building features a community/party room, 24-hour doorman, central
storage, a fitness center, an outdoor swimming pool, a sun deck, and a
covered parking garage. Commercial space includes a dry-cleaner and a
small grocery store.
56
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
Monthly parking is $135 per space per month. Apartment amenities
include: cable television hook-ups, wall-to-wall carpeting, blinds,
dishwashers, balcony/patio and microwave oven. This complex enjoys lake
views, and is located just west of Lake Michigan, relatively proximate
to Chicago's Central Business District. The chart below represents the
unit mix, square footage and current monthly rental range for the New
York:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
GROSS
MONTHLY RENT GROSS MONTHLY
AVERAGE SIZE PER SF RENTAL RATE
UNIT TYPE NUMBER OF % OF TOTAL AVERAGE RANGE/SF
UNITS UNITS AVERAGE/SF
--------------- ------------ ------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Studio 128 21.6% $760-$1,050 540 $1.41-$1.94
----------- --- -----------
$907 540 $1.68/SF
--------------- ------------ ------------- --------------- ------------- -----------------
Convertible 136 22.9% $957-$1,250 650-700 $1.42-$1.85
----------- ------- -----------
$1,100 675 $1.63/SF
--------------- ------------ ------------- --------------- ------------- -----------------
1BR/1BA 221 37.3% $935-$1,450 700-800 $1.25-$1.93
----------- ------- -----------
$1,193 750 $1.59/SF
--------------- ------------ ------------- --------------- ------------- -----------------
2BR/2BA 108 18.2% $1,590-$2,200 1,100-1,240 $1.36-$1.88
------------- ----------- -----------
$1,895 1,170 $1.62/SF
--------------- ------------ ------------- --------------- ------------- -----------------
TOTAL 593 100.00% 764 SF $1.62/SF
(Weighted (Weighted
Average) Average)
==========================================================================================
(1) Inclusive of heat and A/C.
==========================================================================================
</TABLE>
57
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
R-2
------------------------------------------------------------------
------------------------------------------------------------------
View: The Park Sheridan
APARTMENT COMPLEX R-2, The Park Sheridan Apartment Complex, is located at
5320 North Sheridan Road, in Chicago's Lakeview/Edgewater neighborhood.
The Park Sheridan was built in 1985. The Park Sheridan Tower consists of
253 units, contained in one 25-story apartment tower, and is currently
100.0 percent occupied. The overall weighted average unit size is 822
square feet. The average rental rates, which EXCLUDE heat and
air-conditioning, currently range from $1.30 to $1.40 per square foot per
month. The overall weighted average monthly rent is $1.32 per square foot,
EXCLUSIVE of heat and air-conditioning. According to management, these
rents represent an increase of 2.0 to 5.0 percent from the 1998 rent
levels. At present, rent concessions are not currently being offered.
The building features a 24-hour doorman and concierge, an indoor swimming
pool, a sun deck, tennis courts, community room, common laundry
facilities, a fitness
58
<PAGE>
center and a covered parking garage. Parking is $135 per month.
Apartment amenities include: cable television hook-up, wall-to-wall
carpeting, blinds and a balcony in each apartment unit. This 25-story
apartment complex offers panoramic city and lake views and is located
within close proximity to Lake Michigan. The following chart represents
the unit mix, square footage and current monthly rental range for The
Park Sheridan:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL GROSS GROSS MONTHLY
UNITS UNITS MONTHLY RENT(1) SIZE PER SF RENTAL RATE
AVERAGE AVERAGE RANGE/SF
UNIT TYPE AVERAGE/SF
---------------- ------------ ------------ ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Studio/
Convertible 46 18.2% $755-$905 595 $1.27-$1.52
--------- --- -----------
$833 595 $1.40/SF
---------------- ------------ ------------ ----------------- --------------- ----------------
1BR/1BA 138 54.5% $920-$1,100 702-830 $1.20-$1.44
----------- ------- -----------
$996 766 $1.30/SF
---------------- ------------ ------------ ----------------- --------------- ----------------
2BR/2BA 46 18.2% $1,205-$1,450 1,015-1,035 $1.18-$1.41
------------- ----------- -----------
$1,332 1,025 $1.30/SF
---------------- ------------ ------------ ----------------- --------------- ----------------
3BR/2BA 23 9.1% $1,515-$1,675 1,205 $1.26-$1.39
------------- ----- -----------
$1,591 1,205 $1.32/SF
---------------- ------------ ------------ ----------------- --------------- ----------------
TOTAL 253 100.00% 822 SF $1.32/SF
(Wgted Ave) (Wgted Ave)
==============================================================================================
(1) Exclusive of heat and A/C.
==============================================================================================
</TABLE>
59
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
R-3
------------------------------------------------------------------
------------------------------------------------------------------
View: Pensacola Place
APARTMENT COMPLEX R-3, the Pensacola Place high-rise is located at 4334
North Hazel Street, in Chicago's Lakeview neighborhood. Pensacola Place
was built in 1980, consists of 264 units contained in one 18-story
apartment tower, and is currently 97.0 percent occupied. The overall
weighted average unit size is 823 square feet. The average rental rates,
which EXCLUDE heat and air-conditioning, currently range from $1.07 to
$1.37 per square foot per month. The overall weighted average monthly rent
is $1.17 per square foot, EXCLUSIVE of heat and air-conditioning.
According to management, these rents represent an increase of 2.0 to 5.0
percent from the 1998 rent levels. At present, rent concessions are not
currently being offered.
60
<PAGE>
The building features a 24-hour doorman and concierge, an outdoor swimming
pool, a sun deck, tennis courts, community room, common laundry facilities
and a covered parking garage. Additionally, the property includes an
on-site Jewel/Osco grocery store and World's Gym. Parking is $125 per
month. Apartment amenities include: cable television hook-up, wall-to-wall
carpeting, blinds and a balcony in each apartment unit. This 18-story
apartment complex offers panoramic city and lake views and is located
within close proximity to Lake Michigan. The following chart represents
the unit mix, square footage and current monthly rental range for
Pensacola Place:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
GROSS MONTHLY
GROSS RENTAL RATE
NUMBER OF % OF TOTAL MONTHLY SIZE PER SF RANGE/SF
UNIT TYPE UNITS UNITS RENT(1) AVERAGE AVERAGE/SF
AVERAGE
--------------- ------------ ------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Studio/
Convertible 53 20.0% $710-$765 540 $1.31-$1.42
--------- --- -----------
$740 540 $1.37/SF
--------------- ------------ ------------- --------------- ------------ --------------
1BR/1BA 132 50.0% $890-$945 810 $1.10-$1.17
--------- --- -----------
$915 810 $1.13/SF
--------------- ------------ ------------- --------------- ------------ --------------
2BR/1BA 53 20.0% $1,085-$1,140 1,000-1,075 $1.04-$1.10
------------- ----------- -----------
$1,111 1,038 $1.07/SF
--------------- ------------ ------------- --------------- ------------ --------------
2BR/1.5BA 26 10.0% $1,165 1,025 $1.14
------ ----- -----
$1,165 1,025 $1.14/SF
--------------- ------------ ------------- --------------- ------------ --------------
TOTAL 264 100.0% 823 SF $1.17/SF
(Weighted (Weighted
Average) Average)
=======================================================================================
(1) Exclusive of heat and A/C.
=======================================================================================
</TABLE>
61
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
R-4
------------------------------------------------------------------
------------------------------------------------------------------
View: Hawthorne House
APARTMENT COMPLEX R-4, Hawthorne House is located at 3450 North Lake Shore
Drive in Chicago's Wrigleyville/Lakeview neighborhood. Hawthorne House was
built in 1966, consists of 456 units contained in one 40-story apartment
tower, and is currently 96.0 percent occupied. The overall weighted
average unit size is 850 square feet. The average rental rates, which
INCLUDE heat and air-conditioning, currently range from $1.29 to $1.46 per
square foot per month. The overall weighted average monthly rent is $1.33
per square foot, INCLUSIVE of heat and air-conditioning. According to
management, these rents represent an increase of 3.0 to 6.0 percent from
the 1998 rent levels.
At present, rent concessions are not currently being offered.
62
<PAGE>
The building features a 24-hour doorman and concierge, an outdoor swimming
pool, a sun deck, a fitness center, a community room, common laundry
facilities and a covered parking garage. Parking is $135 per month.
Apartment amenities include: cable television hook-up, wall-to-wall
carpeting, and blinds in each apartment unit. This 40-story apartment
complex offers panoramic city and lake views and is located within close
proximity to Lake Michigan. The following chart represents the unit mix,
square footage and current monthly rental range for Hawthorne House:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
GROSS MONTHLY
GROSS RENTAL RATE
NUMBER OF % OF TOTAL MONTHLY SIZE PER SF RANGE/SF
UNIT TYPE UNITS UNITS RENT(1) AVERAGE AVERAGE/SF
AVERAGE
--------------- ------------ ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Studio/
Convertible 91 20.0% $750-$850 600 $1.25-$1.42
--------- --- -----------
$798 600 $1.33/SF
--------------- ------------ ------------- --------------- ------------ ---------------
1BR/1BA 274 60.0% $1,050-$1,150 800-900 $1.23-$1.35
------------- ------- -----------
$1,097 850 $1.29/SF
--------------- ------------ ------------- --------------- ------------ ---------------
2BR/1BA 91 20.0% $1,450-$1,750 1,100 $1.32-$1.59
------------- ----- -----------
$1,606 1,100 $1.46/SF
--------------- ------------ ------------- --------------- ------------ ---------------
TOTAL 456 100.0% 850 SF $1.33/SF
(Weighted (Weighted
Average) Average)
=======================================================================================
(1) Inclusive of heat and A/C.
=======================================================================================
</TABLE>
63
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
The following chart summarizes our survey of the four competitive
apartment complexes, by unit type:
<TABLE>
<CAPTION>
===============================================================================================================
SUMMARY OF COMPETITIVE APARTMENT SURVEY
===============================================================================================================
TOTAL RANGE OF AVERAGE AVERAGE GROSS MONTHLY
UNIT TYPE NUMBER OF UNITS AVERAGE UNIT SIZE MONTHLY RENTAL RENTAL RATE/SF
SURVEYED PER SF RATES/SF
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Studio/Convertible 454 569 $1.25 - $1.94/SF $1.48/SF
---------------------------------------------------------------------------------------------------------------
1BR/1BA 765 794 $1.10 - $1.93/SF $1.33/SF
---------------------------------------------------------------------------------------------------------------
2BR/2BA 324 1,072 $1.04 - $1.88/SF $1.32/SF
---------------------------------------------------------------------------------------------------------------
3BR/2BA 23 1,205 $1.26 - $1.39/SF $1.32/SF
---------------------------------------------------------------------------------------------------------------
TOTAL 1,566 791 $1.13 - $1.92/SF $1.37/SF
(Weighted Average) (Weighted Average)
(Weighted Average)
===============================================================================================================
</TABLE>
VACANCY RATES
The Class A apartment market comprising the City of Chicago, Northwest
Cook County, DuPage County, and Lake County, as surveyed by Grubb & Ellis,
reports occupancy levels ranging from 97.0 percent to 98.10 percent, as of July
1998. Our survey of four northeastern Chicago luxury high-rise apartment
complexes revealed occupancy levels ranging from a low of 96.0 percent to a high
of 100.0 percent, with an average occupancy rate of 97.75 percent. This
information is presented in the table below.
<TABLE>
<CAPTION>
========================================================================
OCCUPANCY RATES
DOWNTOWN CHICAGO HIGH-RISE APARTMENT COMPLEXES
========================================================================
<S> <C>
R-1, The New York 98.0%
R-2, The Park Sheridan 100.0%
R-3, Pensacola Place 97.0%
R-4, Hawthorne House 96.0%
-------------------------------------------------------------------
AVERAGE 97.75%
========================================================================
</TABLE>
For the purposes of stabilization, we have applied a 4.0 percent vacancy
rate for the subject property. Our vacancy assumption is supported by the
previously presented market data, as well as historical occupancy levels
achieved at the subject property. Please refer to the INCOME APPROACH section
for a more detailed discussion regarding vacancy rates.
64
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
CONCLUSION
Occupancy levels of luxury high-rise apartment complexes located within
the downtown area of Chicago have increased over the last four years, coupled
with healthy increases in monthly rental rates. Based on the high occupancy and
per square foot rental rates of the four Chicago luxury high-rise apartment
complexes we surveyed, it is evident that the local apartment market has
recovered from the last wave of downtown apartment construction, which ended in
1991, and resulted in an oversupply of units. While the overall downtown
apartment market is fundamentally strong, new construction deliveries in the
near- to mid-term future could serve to upset the current equilibrium. Overall,
it is our opinion that the subject's rent structure is supported by market-based
evidence, primarily by the historically achieved rent rate levels witnessed at
the property and the rent levels displayed by the comparable data. As such, we
believe the subject property will remain a viable project into the foreseeable
future.
65
<PAGE>
APARTMENT MARKET ANALYSIS
- --------------------------------------------------------------------------------
Insert site plan
66
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
SITE DESCRIPTION
Location: 655 West Irving Park Road Chicago,
Illinois
Shape: Irregular
Area: 123,818 square feet, or 2.84247 acres
Frontage: 336' along the south side of West
Irving Park Road 95' along the east
side of North Pine Grove, and 100'
along the north side of Sheridan
Road. The subject property includes a
private roadway, named Frontier
Avenue, that is shared with the
condominium property to the east.
This roadway extends southward from
Irving Park Road, approximately 284',
and forms the eastern boundary of the
north portion of the subject site
(see Site Plan on the facing page).
Topography/Terrain: Level and at street grade
Street Improvements: All the streets along
the perimeter of the subject property
are two-lane asphalt-paved roadways
with room for parallel parking on
both sides. The streets are further
improved with concrete curbs and
gutters, sidewalks, and street
lights.
Soil Conditions: We did not receive nor
review a soil report. However, we
assume that the soil's load-bearing
capacity is sufficient to support the
existing structure. We did not
observe any evidence to the contrary
during our physical inspection of the
property. The parcel's drainage
appears to be adequate.
Utilities
Water: City of Chicago
Sewer: City of Chicago
67
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Electricity: Commonwealth Edison
Gas: People's Gas
Telephone: Ameritech
Access: Access to the subject property can be
gained by curb cuts along Irving Park
Road, Pine Grove Avenue, Frontier
Avenue, and Sheridan Road. The main
entrance to the subject is along the
south side of Irving Park Road.
Land Use Restrictions: We reviewed a title
report prepared by First American
Title Insurance Company of the
Mid-West on April 28, 1989. Based
upon our review of the title report,
we do not believe that there are any
easements, encroachments, or
restrictions that would adversely
affect the site's use. However, we
recommend an attorney's opinion in
the final analysis regarding the
status of title, and whether any
adverse conditions exist.
Flood Hazard: According to the Northeastern
Illinois Planning Commission, the
subject property is not located in a
flood hazard area. Map # H-01-75 of
the National Flood Insurance Program
was referenced.
Wetlands: We were not given a Wetlands survey.
If subsequent engineering data reveal
the presence of regulated wetlands,
it could materially affect property
value. We recommend a wetlands survey
by a competent engineering firm.
Seismic Hazard: The site is not located in a Special
Study Zone.
Hazardous Substances: We observed no evidence of toxic or
hazardous substances during our
inspection of the site. However, we
are not trained to perform technical
environmental inspections and
recommend the services of a
professional engineer for this
purpose.
68
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Comments: The site appeared to be well-kept at
the time of inspection. Additionally,
the site appeared to be functional
for the existing high-rise apartment
and parking use.
IMPROVEMENTS DESCRIPTION
General Description
Year Built: 1973
Unit Size and Mix:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
UNIT MIX
- --------------------------------------------------------------------
- --------------------------------------------------------------------
NET
NO. SIZE RENTABLE
UNIT TYPE UNITS (SF) AREA (SF)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<S> <C> <C> <C>
Studio-A5 53 533 28,249
- --------------------------------------------------------------------
Studio-A9 53 533 28,249
- --------------------------------------------------------------------
Studio-A11 31 533 16,523
- --------------------------------------------------------------------
Convertible-A7 53 600 31,800
- --------------------------------------------------------------------
1BD/1BA-B3 53 762 40,386
- --------------------------------------------------------------------
1BD/1BA-B11 22 762 16,764
- --------------------------------------------------------------------
1BD/1BA-B13 53 762 40,386
- --------------------------------------------------------------------
1BD/1BA-B15 53 762 40,386
- --------------------------------------------------------------------
1BD/1BA-B16 53 834 44,202
- --------------------------------------------------------------------
1BD/1BA-B4 53 835 44,255
- --------------------------------------------------------------------
1BD/1BA-B6 53 835 44,255
- --------------------------------------------------------------------
1BD/1BA-B8 53 835 44,255
- --------------------------------------------------------------------
1BD/1BA-B12 53 835 44,255
- --------------------------------------------------------------------
1BD/1BA-B14 53 835 44,255
- --------------------------------------------------------------------
1BD/1BA-B17 53 841 44,573
- --------------------------------------------------------------------
2BD/2BA-F1 53 1,150 60,950
- --------------------------------------------------------------------
2BD/2BA-F2 53 1,150 60,950
- --------------------------------------------------------------------
2BD/2BA-F10 53 1,150 60,950
====================================================================
TOTAL/WEIGHTED AV. 901 816 735,643
- --------------------------------------------------------------------
</TABLE>
Average Unit Size: 816 square feet
Density: 317 units per acre
69
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Construction Detail
Foundation: Reinforced concrete
Framing: Steel and concrete
Floors: Concrete
Number of Stories: 56
Exterior Walls: Concrete and glass (set in
aluminum frames)
Roof Structure: Flat
Roof Cover: Rubber membrane
Windows: Single-pane set in aluminum frames
Exterior Doors: There are four entrances to
the subject property. The main
entrance, located along Irving Park
Road, as well as the secondary
entrance, along Pine Grove, each have
a revolving door flanked by two side
doors. There is one steel door
leading to the garage, and there is a
loading area with steel doors.
Mechanical Detail
Heating and Cooling: Baseboard radiator heat
throughout, and coldwater circulation
for cooling.
Plumbing: Standard fixtures
Electrical Service: 120 Volt throughout
Elevator Service: There are six passenger and
two freight elevators
70
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Fire Protection: Only the garbage "shute
rooms" have sprinklers. Each floor
has three fire exits, three water
hoses, and a centrally monitored heat
and smoke sensor. Additionally, each
apartment unit is equipped with a
battery-operated smoke detector.
Security: There is a 24-hour doorman and a
private security patrol between 6:00
p.m. and 12:00 a.m. on Monday through
Thursday, and throughout the
weekends, beginning at 6:00 p.m. on
Fridays and extending until 12:00
a.m., on Monday.
Interior Detail
Floor Covering: The common-area hallways
have commercial grade carpeting,
while the main lobby has a
combination of Terrazzo and carpet.
The apartment units have carpeting,
except in the kitchen and bathroom
areas, which have vinyl- and
ceramic-tile floors, respectively.
Walls: Painted drywall throughout
Ceilings: Painted concrete
Lighting: Primarily incandescent
Kitchen Appliances: Include a stove, a dishwasher and a
refrigerator. A complete renovation
of the subject's kitchens was
performed in 1995-96. Such renovation
included new vinyl-tile flooring, new
lighting, new frost-free
refrigerators, and newly painted
cabinets.
Bathrooms: Standard residential fixtures with
vanity sink, a medicine cabinet, and
ceramic-tile floors.
Site Improvements
On-Site Parking: A two- and three-story parking garage
provides parking for approximately
593 cars.
71
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Landscaping: Site improvements include concrete
driveways and walkways, and
landscaping along the perimeter of
the building. Such landscaping
includes small bushes, ground
covering, plants and grass.
Other Amenities: Site and building amenities include a
swimming pool, two tennis courts, a
volleyball court, an exercise room, a
laundry room, a community room, a
bike room, and storage facilities.
Condition: At the time of inspection, the
property was in average condition.
Recently completed improvements
include a newly remodeled lobby, new
exterior landscaping near the
pedestrian entryways, a renovated
exercise room, newly painted and
carpeted hallways, a renovated
leasing office, and a new children's
playground on the recreation deck,
above the parking structure.
Additionally, the building's cooling
system has been rebuilt, as have the
mechanical systems for the swimming
pool and the ventilation systems of
the parking structure. Finally, the
concrete exterior of the building
recently underwent structural and
cosmetic repairs. Planned
improvements for the property's
future include a renovation of the
building's heating system; continued
repair to the building's exterior
walls and windows; sealing of the
parking garage deck; the replacement
of all electrical fuse panels; and
the installation of a storm water
flood valve. The economic impact of
these programs on the subject's
estimated market value is discussed
in detail in the INCOME APPROACH
section of this analysis.
Americans With Disabilities Act: The Americans With Disabilities Act
(ADA) became effective January 26,
1992. We have not made, nor are we
qualified by training to make, a
specific compliance survey and
analysis of this property to
determine
72
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
whether or not it is in conformity
with the various detailed
requirements of the ADA. It is
possible that a
73
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Stacking plan
74
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
compliance survey and a detailed
analysis of the requirements of the
ADA could reveal that the property is
not in compliance with one or more of
the requirements of the Act. If so,
this fact could have a negative
effect upon the value of the
property. Since we have not been
provided with the results of a
survey, we did not consider possible
non-compliance with the requirements
of ADA in estimating the value of the
property.
Hazardous Substances: We are not aware of any
potentially hazardous materials (such
as formaldehyde foam insulation,
asbestos insulation, radon gas
emitting materials, or other
potentially hazardous materials)
which may be used in the construction
of the improvements. However, we are
not qualified to detect such
materials and urge the client to
employ an expert in the field to
determine if such hazardous materials
are thought to exist.
Design Features
and Functionality: The subject property appears to be of
a functional design, in terms of both
the unit floor plans and the overall
building layout. A building stacking
plan is presented on the facing page
while individual floor plans are
presented in the ADDENDA section of
this report. At the time of
inspection, the building appeared to
be in average condition. However, the
number, quality, and condition of the
amenities continues to make the
subject highly competitive with
similar apartment building in the
market.
Physical Condition: As stated previously, the subject
property generally appeared to be in
average condition at the time of
inspection.
75
<PAGE>
PROPERTY DESCRIPTION
- --------------------------------------------------------------------------------
Personal Property Included
In Value Estimate: While by definition these items are
considered personal property (stoves,
ranges, refrigerators, ovens,
dishwashers, etc.), the market
perceives them to be necessary
fixtures required in order to
maintain the functional adequacy of a
multi-family complex. As such, these
particular items typically are not
allocated a separate value, but
included within a property's overall
sale price or estimated value. Based
on current market practice's, we have
not assigned a separate estimate of
value for these items, but rather
have included their contributory
value within our reconciled market
value estimate of the subject
property.
76
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
Apartment buildings (over six units) in Cook County are assessed at
33.33 percent of the assessor's opinion of market value. Properties are
reassessed every three years in Cook County. Assessments are subject to a
state-equalizing factor to make assessments uniform throughout the state. The
1997, payable in 1998 equalization factor for Cook County is 2.1489. Real estate
taxes are paid in arrears; taxes are payable in two installments on March 1st
and September 1st of the respective year. In accordance with Chapter 120,
Section 705, of the Illinois Revised Statutes, the first installment tax bill of
the respective year is based on 50.0 percent of the prior year's taxes. The
second installment reflects the increase in real estate taxes. The subject
improvements are identified by two tax parcel numbers. The tax parcel numbers,
equalized value, and real estate tax liability for 1998 are summarized in the
following table. The 1998 real estate tax rate equates to $8.843 per $100 of
equalized value.
<TABLE>
<CAPTION>
===============================================================================================================
REAL ESTATE TAXES & ASSESSMENT
PARK PLACE TOWER
- ---------------------------------------------------------------------------------------------------------------
ASSESSOR'S OPINION STATE EQUALIZATION 1997 TAX LIABILITY
PARCEL NUMBERS OF MARKET VALUE VALUATION PAYABLE IN 1998
ASSESSMENT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14-21-101-031 $ 816,542 $ 269,459 $ 579,040 $ 51,205
14-21-1-1-032 $ 27,297,518 $ 9,008,181 $ 19,357,680 $ 1,711,800
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 28,114,060 $ 9,277,640 $ 19,936,720 $ 1,763,005
===============================================================================================================
</TABLE>
The subject property's 1997 real estate taxes, payable in 1998, were
$1,763,005, or $1,957 per apartment unit. Based on our experience and extensive
interviews with several prominent Chicago property management companies, real
estate taxes for downtown high-rise apartment buildings typically range from
$2,500 to $3,500 per apartment unit. With a 1998 real estate tax liability of
$1,957 per unit, we believe that, while consistent with historical amounts
actually incurred at Park Place, the subject's real estate tax liability and
corresponding assessment are somewhat less than what is typically associated
with buildings similar to the subject in the local market. As a direct result,
we believe that, were the subject property to transfer ownership, there would be
a high degree of certainty regarding an upward reassessment by the Cook County
Assessor's Office. As such, we have attempted to mirror the likely actions of
the assessor's office by assigning the subject property a more market oriented
per unit real estate tax liability. Based on the subject's age, condition,
current achieved rent levels and overall market position, we believe the
subject's "market derived" real estate tax liability should fall somewhere near
the mid-aspect of the above-cited range, or at approximately $3,000 per
apartment unit. This equates to $2,700,000, as rounded. We have utilized this
figure when stabilizing the subject's real estate tax liability for the purposes
of capitalization.
77
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- --------------------------------------------------------------------------------
In order to test the reasonableness of our real estate tax liability for
the subject property, we have presented the real estate tax liabilities at
several similar apartment complexes within the subject's market. Our findings
are presented in the following table:
TAX COMPARISONS
<TABLE>
<CAPTION>
- ----------------------------------------------
NAME OF COMPLEX PER UNIT
- ----------------------------------------------
<S> <C>
City Front Center $2,937
1120 N. LaSalle $2,130
401 East Ontario $3,230
Plaza 440 $2,964
- ----------------------------------------------
</TABLE>
Based on the age and overall condition of the subject property relative
to the comparables, our estimated real estate tax liability of $3,000 per
apartment unit for the subject property appears reasonable and market oriented.
78
<PAGE>
ZONING
- --------------------------------------------------------------------------------
The subject property is zoned "R-7", General Residence District, under
the City of Chicago's zoning ordinance (as amended through January 11, 1995).
This zoning designation, which covers the majority of the subject's
neighborhood, is intended to maintain the residential character of the area.
Permitted uses in this area include a variety of residential structures, as well
as numerous complementary uses including schools, restaurants, medical
facilities, and small professional offices and retail facilities in multi-story
multi-family housing structures designed principally for the convenience and use
of residents of such buildings.
We are not experts in the interpretation of complex zoning ordinances,
but the property appears to be a legal conforming use based on our review of
public information. The determination of compliance is beyond the scope of a
real estate appraisal. We know of no deed restrictions, private or public, that
further limit the subject property's use. The research required to determine
whether such restrictions exist, however, is beyond the scope of this appraisal
assignment. Deed restrictions are a legal matter, and only a title examination
by an attorney or title company can usually uncover such restrictive covenants.
Thus, we recommend a title search to determine if any such restrictions do
exist.
79
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
HIGHEST AND BEST USE OF SITE AS THOUGH VACANT
According to the DICTIONARY OF REAL ESTATE APPRAISAL, THIRD EDITION
(1993), a publication of the APPRAISAL INSTITUTE, the highest and best use of
the site as though vacant is defined as:
"Among all reasonable, alternative uses, the use that yields the highest
present land value, after payments are made for labor, capital, and
coordination. The use of a property based on the assumption that the
parcel of land is vacant or can be made vacant by demolishing any
improvements."
In evaluating the site's highest and best use, as if vacant, the use
must be (1) legally permissible, (2) physically possible, (3) financially
feasible and (4) maximally productive.
- - The first test concerns permitted uses. The subject site is zoned R-7 by
the City of Chicago. According to representatives of the Chicago Building
and Zoning Department, the area surrounding the site has been slated for
residential developments, including attached dwelling units and accessory
structures.
- - The second test is what is physically possible. As discussed in the
PROPERTY DESCRIPTION section of this report, the site's topography, and
soil conditions generally limit its use. With 2.84247 acres or 123,818
square feet, the subject site is large enough to accommodate most URBAN
land uses.
- - The third and fourth tests are, respectively, what is feasible and what
will produce the highest net return to the land. These items will be
addressed in tandem. Of primary significance to the financially feasible
uses of the property are its specific location, which influences the
possible alternatives for future development. The subject parcel has
frontage along Irving Park Road, North Sheridan Road Street and North Pine
Grove Avenue. In addition, the immediate area contains primarily
residential developments. Given the zoning limitations and the size of the
subject site, multi-family/retail development is considered feasible for
the subject site.
- - The specific location of the subject property is influenced by its
surrounding development and land use patterns. As discussed in the
NEIGHBORHOOD ANALYSIS section of this report, the surrounding land uses are
comprised primarily of residential type developments. There have been no
recent land sales or developments in the neighborhood that would have a
negative impact on the subject property. As discussed in the APARTMENT
MARKET ANALYSIS section of this report, the apartment market is at stable
levels of occupancy and overall, market rental rates have been increasing
moderately over the past year. Given the issue of maximal productivity,
multi-family residential development appears to be the most appropriate
development alternative.
80
<PAGE>
HIGHEST AND BEST USE
- --------------------------------------------------------------------------------
- - Therefore, it is our opinion that the highest and best use of the subject
site, as vacant, is for multi-family residential development, likely
consisting of a high-rise apartment complex with complementary retail
development.
HIGHEST AND BEST USE OF PROPERTY, AS IMPROVED
According to the DICTIONARY OF REAL ESTATE APPRAISAL, highest and best
use of the property as improved is defined as:
"The use that should be made of a property as it exists. An existing
property should be renovated or retained as is so long as it continues
to contribute to the total market value of the property, or until the
return from a new improvement would more than offset the cost of
demolishing the existing building and constructing a new one."
The highest and best use "as vacant" and "as improved" must be
compatible. If the site value as though vacant is greater than the property as
improved (less demolition cost), then existing improvements have no value.
Sometimes existing improvements have interim use value. If the highest and best
use of the site is holding for future development, then the improvements might
make a short-term contribution to property value.
- - As noted in the PROPERTY DESCRIPTION section of this report, the subject
site is improved with a 901-unit high-rise apartment complex containing
735,643 square feet of net rentable area, plus related site
improvements. In addition, the subject has a retail/office portion with
11,175 square feet of net rentable area. The improvements were built in
1973, have been adequately maintained, and are functional in design.
Overall, the improvements appear to be in average.
- - As of July 31, 1999, the subject complex was 96.78 percent occupied and
was commanding an average rental rate of approximately $1.26 per square
foot. The data within the APARTMENT MARKET ANALYSIS reveals that the
Chicago apartment market is operating at stabilized levels. Further, the
subject property is competitive with other apartment complexes. The
retail/office component has historically operated at approximately 95.0
percent occupancy. As a result, it is our opinion that the existing
improvements are capable of providing a satisfactory return to the land
over both the near and long term. This conclusion is supported by the
data, analysis, and value conclusions presented in the balance of this
report.
- - Consequently, it is our opinion that the highest and best use of the
site, as improved, is for its continued use as an apartment complex
with complimentary retail space.
81
<PAGE>
VALUATION PROCESS
- --------------------------------------------------------------------------------
Appraisers typically use three approaches in valuing real property the
Cost Approach, the Sales Comparison Approach and the Income Approach. The type
and age of the property and the quantity of data affect the applicability of
each approach in a specific appraisal situation.
IN THE COST APPROACH, THE FOLLOWING STEPS ARE UTILIZED IN ESTIMATING
MARKET VALUE:
- Estimated land value, as vacant;
- Estimated replacement cost new (including developer's overhead and
profit);
- Subtracted depreciation due to age and condition (as well as
functional and external obsolescence);
- Add site value to depreciated replacement cost new.
The Cost Approach is most relevant where sufficient information is
available to reasonably estimate the replacement cost new of the improvements as
well as the land value. Properties similar to the subject are typically
purchased based upon the quality and quantity of the income stream that they are
able to generate to the investor. The ability of a property to generate
sufficient income levels in order to fulfill investor expectations is rarely
tied to the cost to replace the property and, therefore, the Cost Approach is
generally not considered to be a reliable indicator of value for properties such
as the subject property. Further, the subject property was built in 1973, making
the estimate of physical depreciation conjectural in nature. Additionally, we
were not provided with detailed building plans to assist in developing a
reliable replacement cost analysis. Finally, the lack of applicable multi-family
vacant land sales along, or near Lake Shore Drive, make estimating an accurate
land value difficult. Due to these factors, we have not the developed the Cost
Approach in our analysis.
In this appraisal, we have used the Sales Comparison Approach and the
Income Approach to develop a market value estimate for the subject property.
82
<PAGE>
VALUATION PROCESS
- --------------------------------------------------------------------------------
IN THE SALES COMPARISON APPROACH, WE PERFORMED THE FOLLOWING STEPS:
- Searched the market for recent sales.
- Analyzed those sales based on the sale prices per unit.
- Correlated the various value indications into a point value
estimate from within the range.
IN DEVELOPING THE INCOME APPROACH, WE:
- Studied rents in effect in this and competing complexes to
estimate potential rental income at market levels.
- Estimated income from sources other than apartment rentals.
- Studied the recent history of operating expenses at this and
competing properties to estimate an appropriate level of
stabilized expenses and reserves for replacement.
- Estimated net operating income by subtracting stabilized expenses
from potential gross income.
- Capitalized stabilized net operating income into an indication of
capital value, disregarding any existing financing.
The valuation process is completed by a reconciliation of the approaches
used.
83
<PAGE>
COST APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
This approach consists of an analysis of the property's physical value.
The principle of substitution, the underlying rationale of this approach, holds
that no prudent person will pay more for a property than the price of a site and
the cost of constructing, without undue delay, an equally desirable and useful
property.
In the Cost Approach, these steps are followed in order to reach an
estimate of value:
1. estimate land value as if vacant and available to be developed to
its highest and best use;
2. estimate the replacement cost new of all improvements, including
both direct and indirect costs;
3. estimate the necessary developer's administrative overhead and
profit;
4. estimate accrued depreciation, if any, from physical, functional,
and/or external causes;
5. deduct accrued depreciation from the total cost new of all
improvements;
6. add land value and depreciated replacement cost to estimate the
market value of the property by this approach.
The Cost Approach is most relevant where sufficient information is
available to reasonably estimate the replacement cost new of the improvements as
well as the land value. Properties similar to the subject are typically
purchased based upon the quality and quantity of the income stream that they are
able to generate to the investor. The ability of a property to generate
sufficient income levels in order to fulfill investor expectations is rarely
tied to the cost to replace the property and, therefore, the Cost Approach is
generally not considered to be a reliable indicator of value for properties such
as the subject property. Further, the subject property was built in 1973, making
the estimate of physical depreciation conjectural in nature. Additionally, we
were not provided with detailed building plans to assist in developing a
reliable replacement cost analysis. Finally, the lack of applicable multi-family
vacant land sales along, or near Lake Shore Drive, make estimating an accurate
land value difficult. Due to these factors, we have not the developed the Cost
Approach in our analysis.
84
<PAGE>
SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
In the Sales Comparison Approach, we estimated value by comparing this
property with similar, recently sold properties in the surrounding or competing
area. Inherent in this approach is the principle of substitution, which holds
that when a property is replaceable in the market, its value tends to be set at
the cost of acquiring an equally desirable substitute property, assuming that no
costly delay is encountered in making the substitution.
By analyzing sales that qualify as arms-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The basic steps of this approach are:
1. Research recent, relevant property sales and current offerings
throughout the competitive area;
2. Select and analyze properties that are similar to the property
appraised, considering changes in economic conditions that may
have occurred between the sale date and the date of value, and
other physical, functional, or locational factors;
3. Identify sales that include favorable financing and calculate the
cash equivalent price;
4. Reduce the sale prices to a common unit of comparison such as
price per unit, effective gross income multiplier, and overall
capitalization rate;
5. Make appropriate comparative adjustments to the prices of the
comparable properties to relate them to the property being
appraised; and
6. Interpret the adjusted sales data and draw a logical value
conclusion.
The most widely used and market-oriented unit of comparison for
properties such as the subject is the sales price per unit. All comparable sales
were analyzed on this basis. Provided on the following facing page is a summary
of the improved properties that we compared with the subject property. A map
displaying the location of the comparable sales relative to the subject property
is found on the following page.
85
<PAGE>
Insert sales summary
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
Insert sales map
87
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
The sales prices exhibited by the comparable data range from $43,554 to
$77,640 per unit, with an average unit sales price of $65,280 per unit. The wide
range of unadjusted sale prices per unit reflect a variety of factors including
unit size, unit mix, age, condition, amenities, and more importantly, the style
of the units and the rents achieved by these units.
Since this approach relies on physical units of comparison, it requires
an adequate sample of recently sold properties that possess physical, economic,
and financial comparability to the subject property. Implicit in this definition
of comparability is the concept of utility, in that the motivation and needs of
a particular segment of market demand are comparably met, or served.
What constitutes an adequate market sample is dependent on the type of
property and the market context. With respect to apartment complexes, there
generally exists a relatively high degree of economic and financial
comparability, as well as reasonable physical comparability, together with a
level of sales activity sufficient to give credence to the Sales Comparison
Approach. The preceding improved property sales represent the sales of apartment
complexes that are considered comparable to the subject property.
Comparability of the physical, neighborhood, and economic
characteristics are the most important criteria in analyzing the comparable
improved property sales in relation to the subject property. The comparables
were constructed between 1957 and 1984, while the subject was built in 1973.
Reportedly, the comparable improved property sales were in average to good
condition at the time of sale. In addition, the occupancy rates of these
properties were at a stabilized level at the time of purchase.
It is noted that comparability does not imply an identical or exact
duplicate, but rather the possession of a similar utility and affected by
similar supply and demand forces. As such, differences exist between the subject
property and the comparables that must be considered in order to estimate an
accurate value for the subject property by this approach. Following is a
qualitative discussion regarding noted differences between the subject property
and the comparable data.
88
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
QUALITATIVE ANALYSIS
PROPERTY RIGHTS CONVEYED
As shown on the previous facing page, all of the comparables are
substantially occupied and encumbered by short-term leases; therefore, the
leased fee estate was conveyed in each case.
SELLER FINANCING/CASH EQUIVALENCY
All of the improved sales were either financed at market terms at the
time of sale or were all cash transactions. Therefore, no adjustments regarding
financing were required.
CONDITIONS OF SALE
The buyer's motivation in comparable sale I-3 was condominium conversion.
As previously discussed in the APARTMENT MARKET ANALYSIS section of this report,
condominium converters will pay a premium for an apartment building. Therefore,
this sale required a downward adjustment for condition of sale. We identified no
special motivational conditions concerning the other three comparable improved
sales and, as such, they required no adjustments for this factor.
MARKET CONDITIONS
The four sales occurred between February 1996 and April 1998. While
conditions regarding high-rise residential investments have improved over the
past several years, they have not changed significantly enough to warrant an
adjustment for this factor. As such, we have not applied a market condition
adjustment to the four sales presented.
OTHER
The additional considerations, mostly involving location, condition and
age-quality issues, are described in the following property data sheets.
89
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
View: McClurg Court Center
IMPROVED PROPERTY SALE I-1 is located at 600 North McClurg Court in
Chicago, Illinois and is commonly referred to as McClurg Court Center. The
1,075-unit apartment building is located in Chicago's Gold Coast
submarket. Smith Property Holdings purchased the high-rise building from
McClurg Court Associates (Jupiter Industries) in April 1998. The sale
transacted for $70,100,000 or $65,209 per unit. The transfer was
reportedly all cash to the seller; therefore, no cash equivalent
adjustment was required. The apartment building was approximately 95.0
percent occupied at the time of sale. The buyer reportedly plans to
maintain the property as a rental building and intends to invest
$4,000,000 in capital improvements in an attempt to raise achievable rent
levels. In addition to the residential units, McClurg Court Center is
serviced by a 52,000 square foot health club and 58,000 square feet of
ground floor
90
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
retail, which includes as it's largest tenant, a Cineplex Odeon Movie
Theater, whose lease runs through 2007. Physically, McClurg Court Center
consists of two, 45-story steel frame, common-corridor, high-rise
apartment buildings constructed in 1972. The property contains a total of
1,075 residential units, with a net rentable building area of 740,000
square feet, which is inclusive of the aforementioned retail space. Due to
its age and style, this property is considered to be similar to the
subject property in terms of overall style, condition and tenant appeal.
This property, however, enjoys a superior location when compared to the
subject's location.
McClurg Court Center offers 344 convertible units 464 square feet in size,
172 efficiency units of 464 square feet in size, 473 one-bedroom units 653
square feet in size, and 86 two-bedroom units 1,207 square feet in size.
Project amenities include: the health club mentioned earlier; a sundeck;
an indoor swimming pool; a sauna/steamroom; a whirlpool; a
conference/community room; a 24-hour doorman; tennis courts, racquetball
courts. Amenities are considered to be similar to the project amenities
offered at the subject property.
According to the selling broker, the net operating income at the time of
sale equated to $5,958,500 after a deduction for replacement reserves. As
such, the implied going-in capitalization rate equates to 8.5 percent.
This represents a blended rate, with the residential portion of the
property priced utilizing an 8.25 going-in capitalization rate.
Reportedly, this transfer included only 12.67 percent of the land area.
The remaining portion is on a ground lease.
91
<PAGE>
IMPROVED PROPERTY SALE I-2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
View: 1120 North LaSalle Street
IMPROVED PROPERTY SALE I-2 is located at 1120 North LaSalle in Chicago,
Illinois. The apartment building is located on the border defining the
Near North and the Gold Coast submarket. Clark/Diversey Properties Limited
Partnership purchased the high-rise building in November 1996 from CAMCO.
The sale transacted for $19,650,000 or $74,715 per unit. The transfer was
reportedly all cash to the seller; therefore, no cash equivalent
adjustment was required. The apartment building was approximately 99.0
percent occupied at the time of sale. The comparable consists of a
20-story masonry, common corridor high-rise apartment building. The
property contains a total of 263 residential units and 3 retail units
located on the first floor. The gross building area is 200,319 square feet
plus a partial basement area. The residential net rentable area equals
195,409 square feet. The ground floor retail space consists of
92
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
approximately 5,215 net rentable square feet. This property was
constructed in 1981. The studio units range from 505 to 598 square feet,
the one-bedroom units range from 733 to 846 square feet, and the
two-bedroom units range in size from 933 to 953 square feet. According to
the buyer, the effective gross income was $3,580,706 and the net operating
income was $1,691,342, after replacement reserves. Based on the projected
stabilized income, the going-in capitalization rate equates to 8.61
percent and the effective gross income multiplier was 5.49. This property
is superior to the subject property in terms of location and condition,
but offers an inferior amenity package when compared to the subject
property.
93
<PAGE>
SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
View: 70 West Huron
IMPROVED PROPERTY SALE I-3, 70 West Huron, is a 239-unit apartment complex
located on the west half of the block bounded by Superior Street to the
north, Clark Street to the west and Huron Street to the south. 70 West
Huron is in the River North submarket of downtown Chicago. The building
was purchased by Invesco from Clark Huron Associates in April 1996. The
intended use is to convert the apartment building to condominiums. The
sale transacted for $18,556,000, or $77,640 per apartment unit. The
transfer was reportedly cash to the seller; therefore, no cash equivalent
adjustment was required. The 26-story apartment building was 97 percent
occupied at the time of sale. The gross building area is 257,086 square
feet, the net rentable area is 215,979 square feet, and the land area is
0.55 acres. The density equates to 435 units per acre. The basic
construction is steel frame and masonry
94
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
exterior walls. It was constructed in 1984 and the building was in good
overall condition at the time of sale.
The property has 239 apartment units, allocated as 48 studios, 143
one-bedroom and 48 two-bedroom units. In addition, there is a five-story
parking garage with 149 covered parking spaces and 3,800 square feet of
commercial space on the first floor. At the time of sale, the commercial
tenants included a dry cleaner, Cooperfield's Market and a vacant space.
Building amenities include a fitness center, community/party room,
balconies, secured parking, patio, 24-hour security, and laundry rooms.
The buyer will reportedly invest $2.3 million to refurbish the building
for condominium use. The studio units were initially listed at $61,500 to
$81,000; the one- bedroom units at $91,900 to $144,500 and the two-bedroom
units were listed between $150,000 to $198,500. The effective gross income
was reportedly $2,915,000 and the net operating income was $1,360,000,
after replacement reserves. The indicated expense ratio is 53.3 percent.
Based on the projected stabilized income, the going-in capitalization rate
equates to 7.33 percent and the effective gross income multiplier was
6.37. Overall, this property is superior to the subject in terms of
condition and location, but relatively similar in regard to amenities.
95
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
IMPROVED PROPERTY SALE I-4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
View: 3130 N. Lake Shore Drive
IMPROVED PROPERTY SALE I-4 is located at 3130 North Lakeshore Drive in
Chicago, Illinois. The apartment building is situated in the North
submarket. This property transacted in February of 1996. The purchase
price equated to for $12,500,000 or $43,554 per unit. This building was
constructed as a condominium building in 1972, but abandoned its sales
program at the time of construction due to a soft condominium market. The
transfer was reportedly all cash to the seller; therefore, no cash
equivalent adjustment was required. The apartment building was
approximately 96.0 percent occupied at the time of sale. The apartment net
rentable area is 200,508 square feet and the commercial rentable area is
2,700 square feet.
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
The 287-unit apartment building has an average apartment size of 699
square feet. The property has 144 indoor parking spaces. According to the
buyer, the effective gross income was $2,600,000 and the net operating
income was $1,348,000, after replacement reserves. Based on the stabilized
net operating income, the going-in capitalization rate equates to 10.78
percent and the effective gross income multiplier was 4.81. Overall, this
property is relatively similar to the subject in terms of location, but
offers inferior amenities and displays an inferior condition when compared
to the subject property.
The following chart summarizes our qualitative analysis between the
subject property and the comparable sales:
<TABLE>
<CAPTION>
==============================================================================================================
IMPROVED SALES COMPARISON-PHYSICAL ASPECTS
COMP. PROPERTY PRICE OVERALL RATING
NO. IDENTIFICATION PER UNIT RELATIVE TO THE SUBJECT
<S> <C> <C> <C>
I-1 McClurg Court Center $65,209 Superior
I-2 1120 N. LaSalle $74,715 Superior
I-3 70 West Huron $77,640 Superior
I-4 3130 N. Lake Shore Drive $43,554 Inferior
==============================================================================================================
</TABLE>
QUANTITATIVE ANALYSIS
In addition to the consideration and adjustments necessary for location
and physical property characteristics, the most important factor regarding the
subject property is the net operating income per unit, relative to the
comparable sales. The net operating income per unit is a significant variable
and indicator. Rent levels reflect such factors as unit mix, unit sizes, unit
and project amenities, age, condition, quality, location, etc., and the net
operating income per unit measures the relative productivity of the complex.
Based on the above analysis, we compared the net operating incomes
($NOIs) per unit between the enclosed sales and the subject property. With this
technique, each of the respective comparable sale prices per unit is multiplied
by the $NOI per unit of the subject property and then divided by the comparables
corresponding $NOI per unit, which produces an adjusted value indication for the
subject property. A relationship exists between the sales price per unit and the
amount of income a complex is expected to achieve.
As noted previously, the comparable sales reflect a broad range of price
per unit indices from $43,554 to $77,640 per unit. As displayed, the price per
unit indications vary due to variations in location, exposure, unit type, unit
mix, unit sizes, project and unit amenities, age, condition, quality, and most
importantly, the level and quality of rental
97
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
income which is determined collectively through the market perception of the
above noted factors.
We have found price per unit indications to be primarily affected by the
earning capacity of productivity of a given complex, i.e., the ability of an
apartment complex to achieve a particular level of net operating income per
unit. In this regard, the rental market is considered to accurately define
overall property quality and condition as the typical apartment tenant is highly
discerning about rental rates and strives to obtain the best possible location
and space for their rental dollars. Therefore, we believe that apartment
complexes can be effectively analyzed by their net operating income per unit, as
this reflects a property's income producing capabilities and operating
efficiencies.
The sales price per unit generally increases as the productivity ($NOI
per unit) of a particular complex increases. On occasion, some of the
comparables may display comparatively lower $NOI's per unit, but higher prices
paid on a per unit basis. This circumstance can be produced by the perceived
upside potential found in the comparable, the structure of existing leases, or
by changing rate of return requirements. Other variations in the general
relationship can occur when properties are in a non-stabilized, or otherwise
distressed condition when purchased.
Provided in the following chart is a summary of adjustment grid which
accounts for the disparity of the net operating incomes ($NOI's) per unit
between the comparables and the subject property. Again, with this technique,
each of the respective comparable sale prices per unit are multiplied by the
$NOI per unit of the subject and then divided by the comparables corresponding
$NOI per unit, which produces an adjusted value indication for the subject
property. The adjusted value indications for the subject property are
subsequently presented:
<TABLE>
<CAPTION>
===============================================================================================================
PRICE PER SQUARE UNIT ADJUSTMENT SUMMARY
(BASED ON $NOI/UNIT)
- ---------------------------------------------------------------------------------------------------------------
Sale Number Sale Subject Sale Adjusted
$/Unit X $NOI/Unit (1) / $NOI/Unit = Price/Unit
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I-1 $65,209/Unit X $4,952/Unit / $5,543/Unit = $58,256/Unit
I-2 $74,715/Unit X $4,952/Unit / $6,433/Unit = $57,514/Unit
I-3 $77,640/Unit X $4,952/Unit / $5,691/Unit = $67,558/Unit
I-4 $43,554/Unit X $4,952/Unit / $4,695/Unit = $45,938/Unit
===============================================================================================================
(1) Subject's NOI/Unit established in the Income Approach section.
===============================================================================================================
</TABLE>
The adjusted sale prices per unit range from $45,938 to $67,558 with an
average adjusted sale price of approximately $57,317 per unit. Based on our
analysis of the subject's physical and locational characteristics in relation to
each of the comparable properties, we believe the value of the subject property
would lie within the range of the
98
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SALES COMPARISON APPROACH
- ------------------------------------------------------------------------------
adjusted sale prices indicated by the comparable sales, or from $53,000 to
$55,000 per unit. Centering on the mid-aspect of this range, or at $54,000 per
unit, and using the subject total unit count of 901, an overall value conclusion
for the subject property by the SALES COMPARISON APPROACH of $48,650,000, as
rounded, is indicated.
INCOME APPROACH
- --------------------------------------------------------------------------------
METHODOLOGY
The Income Approach based upon the economic principle that the value of a
property capable of producing income is the present worth of anticipated future
net benefits. The net income projected for the property is translated into a
present value indication using the capitalization process. There are various
methods of capitalization that are based on inherent assumptions concerning the
quality, durability and pattern of the income projection.
The two most common methods of converting net income into value are
direct capitalization and discounted cash flow analysis. In direct
capitalization, the net operating income is divided by an overall rate extracted
from market sales to indicate a value. In the discounted cash flow method,
anticipated future net income streams and a reversionary value are discounted at
an appropriate rate of return to arrive at an estimate of present value. Where
the pattern of income is irregular due to existing leases that will terminate at
staggered future dates or due to the stabilization requirement on a newer
development, the discounted cash flow analysis is the most accurate.
In our opinion the direct capitalization method is most appropriate
here. The property is operating at a stabilized level and this is the analytical
method most likely to be used by potential investors. Again, with this technique
the estimated net operating income for the subject property is divided by an
overall rate extracted from market sales to indicate a value estimate for the
subject property.
POTENTIAL GROSS INCOME
APARTMENT INCOME
The potential gross revenue generated from the subject property
comprises a number of distinct elements: the monthly rental income generated
from the building's residents, the income generated by the building's commercial
tenants, parking related income, and miscellaneous income incurred in the
ownership and operation of the real estate. Deductions from these income
categories include a vacancy/credit loss and operating expenses.
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INCOME APPROACH
- --------------------------------------------------------------------------------
Insert rental chart
100
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
The subject property has 901 apartment units, of which, 896 are available
for lease. The remaining five units are provided rent-free to employees (2
units) or are utilized as model units (3 units). In order to estimate the market
rent for the actively leased apartment unit types at the subject property, we
surveyed the competitive apartment market. The results of our survey were
previously presented in the APARTMENT MARKET ANALYSIS section of the report and
reference is made thereto. The pertinent information for the four competitive
high-rise apartment complexes is presented on the facing page and has been
summarized in the following table. The apartment buildings are generally located
in the Wrigleyville/Lakeview/Rogers Park neighborhoods, generally within three
blocks of Lake Shore Drive. Additionally, all of the properties are located
within a one-mile radius of the subject property.
The following chart summarizes our survey of the four competitive
apartment complexes, by unit type:
<TABLE>
<CAPTION>
===============================================================================================================
SUMMARY OF COMPETITIVE APARTMENT SURVEY
===============================================================================================================
TOTAL RANGE OF AVERAGE AVERAGE GROSS
UNIT TYPE NUMBER OF UNITS AVERAGE UNIT SIZE MONTHLY RENTAL MONTHLY RENTAL
SURVEYED PER SF RATES/SF RATE/SF
----------------------- ------------------ ------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Studio/Convertible 454 569 $1.25 - $1.94/SF $1.48/SF
----------------------- ------------------ ------------------- ----------------------- -----------------------
1BR/1BA 765 794 $1.10 - $1.93/SF $1.33/SF
----------------------- ------------------ ------------------- ----------------------- -----------------------
2BR/2BA 324 1,072 $1.04 - $1.88/SF $1.32/SF
----------------------- ------------------ ------------------- ----------------------- -----------------------
3BR/2BA 23 1,205 $1.26 - $1.39/SF $1.32/SF
----------------------- ------------------ ------------------- ----------------------- -----------------------
TOTAL 1,566 791 $1.13 - $1.92/SF $1.37/SF
(Weighted Average) (Weighted Average)
(Weighted Average)
==============================================================================================================
</TABLE>
Although the preceding four competitive apartment buildings were
considered in our analysis, we have placed equal weight on current
leases-in-place recently negotiated at the subject property. Presented on the
following facing page is the unit mix with the average ACTUAL rents currently
in-place for each of the subject's unit types. Presented in the subsequent
chart, we show the range and average of ASKING market rents for each of the
subject's units types.
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INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
==========================================================================================================================
UNIT MIX/CURRENT OCCUPANCY/AVERAGE ACTUAL RENTAL RATES
NET NO. AVERAGE
NO. SIZE RENTABLE UNITS ACTUAL RENT
UNIT TYPE UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Studio-A5 53 533 28,249 51 96% $ 793 $ 1.49
Studio-A9 53 533 28,249 48 91% $ 799 $ 1.50
Studio-A11 31 533 16,523 31 100% $ 754 $ 1.41
Convertible-A7 53 600 31,800 51 96% $ 858 $ 1.43
1BD/1BA-B3 53 762 40,386 52 98% $ 987 $ 1.30
1BD/1BA-B11 22 762 16,764 21 95% $ 926 $ 1.22
1BD/1BA-B13 53 762 40,386 52 98% $ 981 $ 1.29
1BD/1BA-B15 53 762 40,386 52 98% $ 995 $ 1.31
1BD/1BA-B16 53 834 44,202 53 100% $ 1,001 $ 1.20
1BD/1BA-B4 53 835 44,255 53 100% $ 1,006 $ 1.20
1BD/1BA-B6 53 835 44,255 51 96% $ 984 $ 1.18
1BD/1BA-B8 53 835 44,255 51 96% $ 956 $ 1.14
1BD/1BA-B12 53 835 44,255 50 94% $ 1,001 $ 1.20
1BD/1BA-B14 53 835 44,255 52 98% $ 990 $ 1.19
1BD/1BA-B17 53 841 44,573 51 96% $ 1,005 $ 1.20
2BD/2BA-F1 53 1,150 60,950 51 96% $ 1,508 $ 1.31
2BD/2BA-F2 53 1,150 60,950 50 94% $ 1,456 $ 1.27
2BD/2BA-F10 53 1,150 60,950 52 98% $ 1,456 $ 1.27
==========================================================================================================================
TOTAL/WEIGHTED AV. 901 816 735,643 872 97% $ 1,025 $ 1.26
==========================================================================================================================
</TABLE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
===================================================================================================================
SUMMARY OF MARKET RENTAL RATES FOR PARK PLACE TOWER
===================================================================================================================
ASKING MARKET AVERAGE ASKING ASKING MARKET RENTAL AVERAGE ASKING
UNIT TYPE UNIT SIZE RENTAL RANGE PER MONTHLY RENTAL RANGE RENTAL RATE PER
MONTH RATE RATE PER SF, PER MONTH SF, PER MONTH
- ---------------- ----------- --------------------- ------------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C>
Studio 533 $ 728 - $ 960 $ 779 $1.37-$1.80 $ 1.46
Convertible 600 $ 836 - $ 933 $ 859 $1.39-$1.56 $ 1.43
1BD/1BA 762 $ 910 - $1,092 $ 971 $1.19-$1.43 $ 1.27
1BD/1BA 834 $ 910 - $1,092 $1,000 $1.09-$1.31 $ 1.20
1BD/1BA 835 $ 910 - $1,092 $ 991 $1.09-$1.31 $ 1.19
1BD/1BA 841 $ 910 - $1,092 $1,003 $1.08-$1.30 $ 1.19
2BD/2BA 1,150 $1,333 - $1,782 $1,493 $1.16-$1.55 $ 1.30
===================================================================================================================
</TABLE>
The average asking rents for each of the subject's unit types fall within
the ranges displayed by the direct competition and are consistent with average
achieved rent levels at the subject property. As such, we believe the quoted
rental rates at the subject property are consistent with its competition, are
market oriented and are supported by actual leasing activity at the subject
property.
In establishing the subject's potential apartment gross income in a
12-month period, we calculated the average ACTUAL rental collection for each of
the subject's unit types. We then applied these averages to their respective
unit types for each month of the 12-month period. Based on this formula, the
subject's estimated potential apartment gross income in the next 12 months from
the effective date of this appraisal equates to $11,194,488.
COMMERCIAL INCOME
The subject property has 11,175 square feet of commercial/office space on
the street and second floor levels. Retail tenants include Park Place Foods,
Critic's Choice Video Rental, a Beauty Salon and Foremost Dry Cleaners. These
establishments, all retail in nature, are located on the first floor of the
complex. Additionally, there is approximately 6,409 square feet of office space
divided into approximately 13 suites, of which 300 square feet is currently
vacant and available for lease. All office suites are located on the second
floor of the complex. Historically, the subject property collected net
commercial income of approximately $206,582 in 1996, $109,661 in 1997, $125,523
in 1998 while management budgeted net commercial income in 1999 at approximately
$97,431. We have estimated potential gross income for the subject's commercial
space in the first 12 months at $100,000. To this figure we have applied our
general vacancy/collection loss factor of 5.0 percent.
PARKING GARAGE INCOME
The two- and three-story parking garage at Park Place Tower offers
roughly 593 parking spaces. Rates range from $115 to $160 per space per month.
Historically, the subject property collected parking income of $615,733 in 1996,
$595,548 in 1997 and $656,561 in
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INCOME APPROACH
- --------------------------------------------------------------------------------
1998. Additionally, property management budgeted parking income at $618,000 in
1999. We have estimated potential gross income for the subject's parking garage
in the first 12 months at $620,000. To this figure we have applied our general
vacancy/collection loss factor of 5.0 percent.
OTHER INCOME
Other income for the subject property is generated from forfeited
security deposits, additional pet charges, pool side cabana rentals, credit
report fees, late payment penalties, termination fees, storage income, laundry
income and other various sources. Historically, the subject property collected
other income of $216,533 in 1996, $192,054 in 1997 and $242,821 in 1998.
Additionally, property management budgeted other income at $250,841 in 1999.
Based on historical collections and property management's projected figures, we
have stabilized this component of income for the subject property at $225,000.
CONCLUSION-POTENTIAL GROSS INCOME (PGI)
The various factors comprising the subject's potential gross income
include: Apartment rental collections; Retail/commercial rental collections;
Parking revenue; and Other income. Combining the expected revenues generated by
these various components results in an annual estimated gross potential income
of $12,139,488 for the subject property. Historically, the subject generated a
PGI of $10,996,240 in 1996, $11,180,834 in 1997 and $11,780,643 in 1998. Between
1996 and 1997, the subject's PGI displayed an increase of 1.68 percent, while
between 1997 and 1998, the subject property's PGI grew by 5.36 percent. Our
estimate represents a 3.05 percent increase over the subject's 1998 achieved
potential gross income, a figure near, but slightly below the mid-aspect of the
demonstrated growth rates. In addition, ownership reflects a budgeted PGI in
1999 of $12,099,168. Based on historical collections, the indicated annual
growth rates and ownership's projected figure, we believe our PGI estimate of
$12,139,488 is reasonable and supported by operations at the subject property.
In order to arrive at the subject property's effective gross income
(EGI), we must address three factors: a vacancy and collection loss factor,
income lost to non-revenue units and any concessions which may, or may not be
relevant. Once the subject's EGI is established, operating expenses will be
stabilized and deducted from the EGI in order to arrive at a net operating
income (NOI) for the subject property.
VACANCY AND CREDIT LOSS
Investors are primarily interested in the effective income a property is
likely to produce during the holding period (12 months), rather than the gross
potential income at 100 percent
104
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
occupancy with all tenants paying rent in full and on time. It is normally a
prudent practice to expect some income loss as tenants vacate, fail to pay rent
or pay rent late.
In determining the appropriate vacancy and collection loss, we considered
vacancy levels in the subject's North submarket, at the competitive properties
and the subject property's historical experience. As discussed in the APARTMENT
MARKET ANALYSIS section of the report, the vacancy rate for Class A apartment
buildings in the subject's North submarket was 97.30 percent as of July 1998.
Further, our survey of the four competitive apartment complexes indicated a
range of 96.0 to 100.0 percent, with an average of 97.75 percent. In our
analysis, the historical and current occupancy levels at the subject property
were also given consideration. As of the July 31, 1999 rent roll provided, the
subject property displayed an occupancy rate of 96.78 percent. Historically,
property management at the subject indicates that occupancy levels have been
maintained within the upper-aspect of the 90 percentile for the better part of
the past three calendar years. A historical occupancy report, however, was not
provided to the appraiser.
Upon review of occupancy levels in the North submarket of Chicago, the
occupancy levels at directly competitive properties and historical/current
occupancy levels at the subject property, we have estimated a 4.0 percent
vacancy rate for the subject property. We have also included a 1.0 percent
deduction of potential gross income to reflect potential credit loss.
NON-REVENUE UNITS
According to property management, Park Place Tower maintains three model
units and two employee occupied units. In order to account for these non-revenue
units, we have deducted the possible income generated by these units from the
subject's overall gross potential income. Historically, the subject has lost
$65,688 in 1996 to non-revenue units, $59,900 in 1997, $75,719 in 1998 and
expects to lose $74,592 in 1999 to non-revenue units. We have based our estimate
by applying the appropriate average actual rental collection for each of these
unit types in order to gauge the amount of income lost to non-revenue units at
the subject property. Based on this formula, we have deducted $61,692 in the 12
months following the effective date of this analysis to account for the
subject's non-revenue units. Our estimated amount is consistent with historical
losses to non-revenue units at the subject property.
RENTAL CONCESSIONS
Conversations with property managers at competing complexes, revealed
that rental concessions to prospective tenants are minimal to non-existent
within the subject's market.
105
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
This is primarily due to strong occupancy rates, and an overall healthy
apartment submarket (see Apartment Market Analysis section for further details).
Concessions, however, have historically been reflected in the operating
statements provided by ownership. In 1996, the
106
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Insert historical operating
107
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
subject property reported concession losses of $78,943; in 1997, $60,619; in
1998, $52,123; and are budgeted in 1999 at $21,000. Based on historical
operations at the subject property, we believe it is necessary to reflect this
charge against the subject's potential gross income. As such, we have estimated
a concession loss of $50,000 at the subject property in the first 12 months of
operations at the subject property.
CONCLUSION-EFFECTIVE GROSS INCOME (EGI)
By deducting our estimated vacancy and collection loss estimations of
$595,724 and $119,145, respectively, and our estimated concession charge of
$50,000 plus the lost income associated with non-revenue units of $61,692 from
the previously established PGI of $12,139,488, we arrive at an estimated EGI of
$11,312,927 for the subject property. Historically, the subject generated an EGI
of $10,098,572 in 1996, $10,736,277 in 1997 and $11,220,590 in 1998.
Additionally, ownership reflects a budgeted EGI in 1999 of $11,549,032. Based on
historical collections and ownership's projected figure, we believe our EGI
estimate of $11,312,927 is reasonable and supported by operations at the subject
property.
OPERATING EXPENSES
Our estimates of operating and fixed expenses are based upon a review of
known operating statements of other apartment projects, as well as historical
information provided by the client. The subject property represents a high-rise
apartment complex located in downtown Chicago, and therefore has more amenities,
higher maintenance costs and significantly higher real estate taxes when
compared to traditional, suburban garden-style apartment complexes. We have
analyzed each item of expense individually and attempted to project what the
typical investor would consider reasonable. The historical operating statements
for the subject property are summarized on the facing page. A summary of
operating expenses at comparable properties is included on the following facing
page.
ADMINISTRATIVE - This expense category includes office supplies and
equipment, legal and professional fees, office telephone expenses, dues
and subscriptions and a variety of other office operation related
expenses. Historically, the subject has incurred administrative expenses
of $164,932 in 1996, $165,081 in 1997 and $160,309 in 1998. Additionally,
ownership reflects a budgeted administrative expense in 1999 of $165,945.
Mindful of the fact that the management fee covers many similar expenses,
and based on historical collections and ownership's projected figure, we
believe $165,000 for administrative expenses is reasonable and supported
by operations at the subject property.
ADVERTISING/MARKETING - Marketing expenses include the costs of
advertising in local directories; tenant retention promotions, referral
and broker commissions and credit report expenses. Historically, the
subject has incurred marketing/advertising expenses of $370,764 in 1996,
$315,581 in 1997 and $292,412 in 1998.
108
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Insert comparable expenses
109
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Additionally, ownership reflects a budgeted advertising expense in 1999
of $304,539. Based on historical and projected amounts, we believe
$300,000 for advertising/marketing related expenses is reasonable and
supported by operations at the subject property.
PAYROLL - Payroll expenses are directly connected to the administration
of the complex, including the property manager's salary, payroll
associated with office personnel, leasing agents, the doorman's salary
and maintenance salaries. This category also accounts for workmen's
compensation, payroll taxes and any benefits associated with salaried
personnel. Historically, the subject has incurred payroll expenses of
$1,128,970 in 1996, $1,163,549 in 1997 and $1,172,900 in 1998.
Additionally, ownership reflects a budgeted salary expense in 1999 of
$1,187,262. Based on historical collections and ownership's projected
figure, we believe $1,200,000 for payroll related expenses is reasonable
and supported by operations at the subject property.
UTILITIES - Utility expenses include trash removal, electricity in the
common areas and vacated units, natural gas and water/sewer.
Historically, the subject has incurred utility expenses of $810,322 in
1996, $902,212 in 1997 and $760,546 in 1998. Additionally, ownership
reflects a budgeted utility expense in 1999 of $964,916. Based on
historical collections and ownership's projected figure, we believe
$950,000 for utility related expenses is reasonable and supported by
operations at the subject property.
REPAIRS AND MAINTENANCE - This expense category covers HVAC maintenance,
elevator maintenance, grounds maintenance, exterior and interior building
maintenance, interior decorating, unit carpet replacement, extermination
fees, janitorial supplies, uniforms, miscellaneous supplies and
licenses/inspection fees and a variety of other maintenance related
costs. Historically, the subject has incurred repairs and maintenance
expenses of $588,695 in 1996, $738,827 in 1997 and $628,346 in 1998.
Additionally, ownership reflects a budgeted repairs and maintenance
expense in 1999 of $615,254. Based on historical collections and
ownership's projected figure, we believe $625,000 for repairs and
maintenance related expenses is reasonable and supported by operations at
the subject property.
MANAGEMENT FEE - Management expenses in the downtown apartment market
typically range from 2.0 to 4.0 percent of effective gross income. The
management fee at the subject property has historically equated to
roughly 3.0 to 3.5 percent of effective gross income. We have projected
the management fee at 3.5 percent of effective gross income, or $395,952.
REAL ESTATE TAXES - Real estate taxes for the subject are discussed in
greater detail within the REAL ESTATE TAXES AND ASSESSMENTS section of
this report. Please refer to this section for a complete discussion, as
our estimated real estate tax liability of $2,700,000 for the subject
property varies significantly from historical real estate tax liabilities
incurred at the subject property.
110
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
INSURANCE - Historically, the subject has incurred an insurance expense
of $147,615 in 1996 and is budgeted at $118,668 in 1999. Figures for 1997
and 1998 were skewed by insurance related claims and payouts, and as
such, were considered unreliable examples. Due to this accounting
practice, we have placed little credence on the 1996 and budget 1999
figures as well. Instead, we have primarily relied on our experience with
the insurance expense at similar buildings in the subject's submarket, as
well as the insurance related expenses demonstrated by the comparables on
the facing page. Based on historical collections and ownership's
projected figure, we believe $0.15 per square foot, or approximately
$110,000 for insurance related expenses at the subject property is
reasonable and supported by market data.
DISCUSSION AND CONCLUSION
The total combined stabilized operating expenses for the subject property
during the initial fiscal year, which begins August 2, 1999, are forecasted at
$6,445,952. This reflects corresponding expense levels of $7,154 on a per unit
basis, and 57.0 percent (before reserves) of the annual effective gross income.
The subject's expense ratio falls within the range of ratios indicated by
comparable data, and is also generally consistent with the per unit expense
range displayed by the comparables.
The more market sensitive comparisons for expenses at apartment complexes
relates to expenses per square foot and per unit, with the percentage
correlation between expenses and effective gross income being a less sensitive
method due to the variables associated with apartment revenue. Expenses for
apartments are generally consistent with respect to most categories and, as
such, comparisons on an expense-per-square foot and expense-per-unit are more
market sensitive.
The subject's expense levels generally fall within or near the ranges
indicated by those items for which specific detail was obtainable. The subject's
overall expense amount is within the range of expenses indicated by the
comparables. As the subject represents a Class A, high-rise apartment building
in average condition, our forecasted amounts are considered to be a reasonable
estimation for the subject property for the 12 months following the date of
valuation, consistent with the need to show a stabilized expense level for
capitalization purposes.
RESERVES FOR REPLACEMENTS
In regard to older, high-rise apartment complexes such as the subject
property, investors typically make an allowance of $250 to $500 per unit for
future replacement reserves such as exterior painting, roof replacement, parking
lot resurfacing and renovation
111
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
of common area amenities. Recent market trends indicate that while the
replacement reserve allowance was traditionally treated as a below-the-line
expense item, it has become commonplace to include an allocation for this
expense above the net operating income line. Based on the subject's age and
condition, and mindful of the fact that we have allocated some unit turnover
costs within the repairs and maintenance expense category, we have estimated
capital reserves at $450 per unit.
CAPITAL EXPENDITURES
According to documentation provided by ownership, the subject property is
projected to incur a number of one-time capital expenditures which may, or may
not be required over the near- to mid-term future. The economic impact of
several of these potential costs have already been included in our replacement
reserve fund discussed earlier and reference is made thereto. In order to
reflect the potential impact of the remaining capital expenditure items on the
market value of the subject property, the appraiser must either make a
"lump-sum" deduction from their final value estimate for any future costs
expected to be incurred or the appraiser may categorize these items as potential
risk factors and address them through the selection of an appropriate going-in
capitalization rate. The capitalization rate is generally perceived as a
barometer which investors utilize in an attempt to reflect known and unknown
risk factors associated with a real estate investment. The capitalization rate
is then applied to a property's stabilized net operating income (NOI) in order
to convert the property's NOI into a market value estimate. We believe that, due
to the somewhat nebulous nature regarding the timing of these expenditures
coupled with the conjectural nature associated with the process of present
valuing future potential expenses into a "lump-sum" estimate, the economic
impact of future capital expenditures at the subject property is best reflected
as a risk related factor. As such, we have added an additional 50 basis points
to our going-in capitalization rate for the subject property to reflect any
unforeseen capital expenditures which may, or may not be incurred over the near-
to mid-term future.
DIRECT CAPITALIZATION
LOCAL SALES
In the Direct Capitalization method, we estimated market value by
dividing stabilized net operating income, after reserves, by an overall rate
derived from our analyses of market sales and computed by dividing the net
operating income from a sold property by its sale price. Presented in the table
below are overall rates of return from our market sale comparisons.
<TABLE>
<CAPTION>
SUMMARY OF APARTMENT OVERALL RATES (OARS)
=========================================================
SALE SALE DATE CAPITALIZATION RATE
=========================================================
<S> <C> <C>
I-1 4/98 8.50%
=========================================================
</TABLE>
112
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
I-2 11/96 8.61%
=========================================================
I-3 4/96 7.33%
=========================================================
I-4 2/96 10.78%
=========================================================
</TABLE>
The indicated range of market capitalization rates is from 7.33 to 10.78
percent, with an average capitalization rate of 8.81 percent. All of the
transactions are noted as consisting of apartment complexes with property and
operational differences to the subject that have been considered.
The capitalization rate for sale I-3 is considered too aggressive for the
subject property, as this property was purchased with the intent of converting
to condominium ownership. Generally, buyers will pay a premium when purchasing
an apartment complex for condominium conversion. According to the buyer of this
property, INVESCO, was willing to pay a premium of roughly 75 to 100 basis
points over the remaining pool of buyers for 70 West Huron. The capitalization
rate for sale I-4 is considered to high for the subject property, as this
property represents older product which offers inferior amenities, inferior
views and subsequently a lower NOI per unit indication when compared to the
subject property. Comparable sale I-2's capitalization rate is somewhat
applicable to the subject property, however, this sale is found in a stronger
submarket and displays a higher NOI per unit when compared to the subject
property. Finally, the overall capitalization rate implied for sale I-1 is
thought to be relatively applicable to the subject property due to the
motivation behind the sale, as well the physical similarities this property
shares with the subject. These factors are somewhat off-set by this property's
location in a stronger submarket and subsequent higher NOI per unit indication.
Of equal importance to capitalization rates displayed by local high-rise
apartment sales, is an investor's perception of the subject property's ability
to generate future income. This perception is two-tiered. The first component is
comprised of macro-economic issues such as asset class and overall market
conditions pertaining to a particular product type. The second factor addresses
whether potential economic "upside" exists at a specific property. Combined,
these components allow for the reasonable estimation of a real estate investor's
most likely actions.
Macro-economic issues affecting the subject property were addressed in
the REGIONAL and APARTMENT MARKET ANALYSES sections of this report, and
reference is made thereto. Overall, Chicago enjoys a healthy and diversified
economy with strong job growth resulting in low unemployment, increasing
salaries, and a sense of long-term security. In short, Chicago provides a stable
economic base which is poised for future growth. As a direct
113
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
result, real estate classes, including multi-family product, have benefited. As
stated in our APARTMENT MARKET ANALYSIS, "Investors are particularly interested
in acquiring apartments within urban location due to the resurgence of
residential living in downtown areas". Based on these and a variety of other
positive factors, we believe a potential investor would have an optimistic
outlook regarding the macro-economic issues affecting the subject property.
More localized, or specific factors determining the subject potential
economic upside were discussed in the NEIGHBORHOOD and APARTMENT MARKET
ANALYSES, sections of this report, and reference is made thereto. In summary, we
believe the subject's direct proximity to Lake Michigan and Chicago's CBD
coupled with its strategic position in the desirable Wrigelyville/Lakeview
neighborhood greatly enhances its ability to grow rental, parking, and
commercial revenues beyond the revenue increases witnessed at its direct
competition. As such, it is our opinion that a potential investor would perceive
a moderate amount of "upside" when pricing the subject property.
Based on our analysis of the subject property, relative to the comparable
improved sales, and perceived investor interest, we have concluded an
appropriate going-in capitalization rate near the mid-aspect of the market
range, or at 8.75 percent. This rate is further supported by conversations with
Brian Nagle of Cushman & Wakefield and Brian McCauliffe of CB Richard Ellis,
both of whom are active in the selling of downtown, investment grade properties.
NATIONAL INVESTOR SURVEYS
In a further attempt to support our estimated going-in capitalization
rate for the subject property, we turn to two nationally recognized investor
surveys. A review of the most recent KORPACZ REAL ESTATE INVESTOR SURVEY (Second
Quarter 1999) and the CUSHMAN & WAKEFIELD NATIONAL INVESTOR SURVEY
(Spring/Summer 1999) indicates going-in capitalization rates for institutional
grade, Class A, apartment complexes ranging from 7.5 to 11.0 percent, before
allocations of reserves. The following chart summarizes the surveys:
<TABLE>
<CAPTION>
================================================================================================================
(2ND QUARTER FREE AND CLEAR EQUITY FREE AND CLEAR FREE AND CLEAR EQUITY FREE AND CLEAR
1999 & CAP RATE (KORPACZ) OR EQUITY CAP RATE IRR (KORPACZ) OR EQUITY IRR
SPRING/ GOING-IN CAP RATE (KORPACZ) OR IRR (C&W) (KORPACZ)
SUMMER 1999) (C&W) GOING-IN CAP RATE RANGE OR
RANGE (C&W) IRR (C&W)
AVERAGE AVERAGE
================================================================================================================
<S> <C> <C> <C> <C>
Korpacz 7.5% to 11.0% 8.83% 10.0% to 15.0% 11.48%
- ----------------------------------------------------------------------------------------------------------------
Cushman & 7.5% to 9.20% 8.45% 9.80%-15.0% 11.85%
Wakefield
================================================================================================================
</TABLE>
114
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
Insert pro-forma
115
<PAGE>
INCOME APPROACH
- --------------------------------------------------------------------------------
CONCLUSION
With regional and national investors using capitalization rates between
7.5 and 9.0 percent; high levels of occupancy in the subject submarket, and
local apartment sales ranging between 7.5 and 10.5 percent, we have selected an
overall capitalization rate, applicable to capitalizing the market derived net
operating income for the subject property of 8.75 percent. As discussed
previously under the Capital Expenditure heading within this section of the
analysis, we believe that an additional 50 basis points to the subject's
capitalization rate is appropriate in order to reflect the unforeseen risk of
potential capital expenditures at the subject property in the near- to mid-term
future. As such, our concluded going-in capitalization rate for the subject
property equates to 9.25 percent. We believe this rate appropriately reflects
the relative risk associated with the subject property.
Our 12-month pro forma for the subject property is displayed on the
facing page. The subject's net operating income was capitalized as follows:
<TABLE>
Capitalization Rate Selected: 9.25 Percent
=====================================================================================================
DIRECT CAPITALIZATION - PARK PLACE TOWER
=====================================================================================================
<S> <C>
Net Operating Income, After Replacement Reserves $4,461,524
Divided by Overall Capitalization Rate 9.25%
Estimated Market Value $48,232,695
=====================================================================================================
Rounded Value Estimate By Direct Capitalization: $48,250,000
=====================================================================================================
</TABLE>
Therefore, based on the above, we have estimated the market value of the
subject property, by the INCOME APPROACH, at $48,250,000, as rounded.
116
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
The relevant approaches indicate the following values for the subject
property:
<TABLE>
<S> <C>
Cost Approach N/A
Sales Comparison Approach $48,650,000
Income Approach $48,250,000
</TABLE>
The purpose of the reconciliation and final value estimate is to
emphasize the approach or approaches we believe would be most greatly utilized
by a potential purchaser in determining the value of the subject property.
We considered both the Sales Comparison and Income Approaches of primary
relevance. The Sales Comparison approach is critical in determining per unit
prices around which participants are trading, and in determining factors that
add and detract from value - including expense ratios, occupancy levels, and
location factors. This approach is very relevant in the subject's valuation, and
we have emphasized it moderately in our determination of final value. It does
not, however, completely reflect the value from differing income streams. As a
result, we do not place primary emphasis on the value resulting from Sales
Comparison.
Because all operating income is derived from various rental revenue
sources, the Income Approach is a critical approach to value. Buyers are
concerned with current revenue as it relates to future revenue, and current
expenses as they relate to expected future expenses. The Income Approach
benefits from a strong reporting history for the subject, and plentiful
comparable information, including market survey data, rental comparison data,
and OAR information. The Income Approach has received strong emphasis in our
determination of final value. The direct capitalization method is the primary
method upon which investors in the market determine value for stabilized
properties like the subject, and is the primary valuation methodology emphasized
in this report.
Giving primary weight to the indication of value via the INCOME
CAPITALIZATION APPROACH, as supported by the SALES COMPARISON APPROACH, it is
our opinion that the leased fee market value of subject property, disregarding
existing financing and considering the assumptions, limiting conditions,
certification and definitions, as of August 2, 1999, the AS IS valuation date,
is:
FORTY EIGHT MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS
$48,250,000
117
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- --------------------------------------------------------------------------------
MARKETING TIME
Marketing time is an estimate of the time that might be required to sell
a real property interest at the appraised value. Marketing time is presumed to
start on the effective date of the appraisal. (Marketing time is subsequent to
the effective date of the appraisal and exposure time is presumed to precede the
effective date of the appraisal.) The estimate of marketing time uses some of
the same data analyzed in the process of estimating reasonable exposure time and
it is not intended to be a prediction of a date of sale.
Based on our discussions with local real estate professionals, we have
concluded that a marketing period of approximately 9 months would be required in
order to sell the subject property. This estimate is based on our conversations
with brokers familiar with the local high-rise apartment market, as well as
actual marketing time of similar apartment complexes located in the downtown
Chicago area. The value conclusions expressed in this report are based on
current market conditions. These value estimates should not be interpreted as
being representative of the final price at which the property might sell
throughout the entire marketing period, due to uncertain market conditions.
118
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
This appraisal is made subject to the following assumptions and limiting
conditions:
1. No opinion is intended to be expressed and no responsibility is assumed for
the legal description or for any matters which are legal in nature or
require legal expertise or specialized knowledge beyond that of a real
estate appraiser. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken. We
relied on documentation provided by the owner as to the current principal
amount of the tax exempt loan and as to the annual principal, interest and
fee payments related to serving that debt.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual matters.
3. The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the Property
itself can significantly affect property value.
4. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Except as may be otherwise stated in
the letter of engagement, the Appraisal may not be used by any person other
than the party to whom it is addressed or for purposes other than that for
which it was prepared. No part of the Appraisal shall be conveyed to the
public through advertising, or used in any sales or promotional material
without C&W's prior written consent. Reference to the Appraisal Institute
or to the MAI designation is prohibited.
5. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
6. The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or
119
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------
structures that render the Property more or less valuable (no
responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have been or can
be obtained and renewed for any use on which the value estimate contained
in the Appraisal is based.
7. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
8. In preparing this appraisal, we have relied on the rent roll and the
history of income and expenses furnished by the owner or the management
company representing the owner. We have not reviewed actual tenant leases.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these forecasts will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisages for the future in
terms of rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance of the improvements or may be located at or about the
Property was not considered in arriving at the opinion of value. These
materials (such as formaldehyde foam insulation, asbestos insulation and
other potentially hazardous materials) may adversely affect the value of
the Property. The Appraisers are not qualified to detect such substances.
C&W recommends that an environmental expert be employed to determine the
impact of these matters on the opinion of value.
11. Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been
considered in arriving at the opinion of value. Failure to comply with the
requirements of the ADA may adversely affect the value of the property. C&W
recommends that an expert in this field be employed.
120
<PAGE>
CERTIFICATION OF APPRAISAL
- --------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
1. Craig A. Schumacher inspected the property, and Michael J. Schaeffer and
Stephen B. Kay, MAI have reviewed and approved the report, but did not
inspect the interior of the property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment was not based on
a requested minimum valuation, a specific valuation or the approval of a
loan.
6. No one provided significant professional assistance to the persons signing
this report.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the
Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Stephen B. Kay, MAI has completed the
requirements of the continuing education program of the Appraisal
Institute.
<TABLE>
<S> <C> <C>
Craig A. Schumacher Stephen B. Kay, MAI Michael J. Schaeffer
Senior Appraiser Senior Appraiser Director, Manager
Illinois Certification Illinois Certification
#153-001054 #153-000885
</TABLE>
121
<PAGE>
ADDENDA
- --------------------------------------------------------------------------------
LETTER OF ENGAGEMENT
LEGAL DESCRIPTION
RENT ROLL
FLOOR PLANS
INVESTOR SURVEYS
QUALIFICATIONS OF APPRAISERS
122
<PAGE>
PHOTOGRAPHS OF SUBJECT PROPERTY
- --------------------------------------------------------------------------------
123
<PAGE>
<TABLE>
<CAPTION>
UNIT MIX & OCCUPANCY (2)
==================================================================================================
UNIT MIX/CURRENCY OCCUPANCY/AVERAGE ACTUAL RENTAL RATES
NET No. AVERAGE
NO. SIZE RENTABLE UNITS ACTUAL RENT
UNIT TYPE UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
==================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Studio-A5 53 533 28,249 51 96% $ 793 $1.49
Studio-A9 53 533 28,249 48 91% $ 799 $1.50
Studio-A11 31 533 16,523 31 100% $ 754 $1.41
Convertible-A7 53 600 31,800 51 96% $ 858 $1.43
1BD/1BA-B3 53 762 40,386 52 98% $ 987 $1.30
1BD/1BA-B11 22 762 16,764 21 95% $ 926 $1.22
1BD/1BA-B13 53 762 40,386 52 98% $ 981 $1.29
1BD/1BA-B15 53 762 40,386 52 98% $ 995 $1.31
1BD/1BA-B16 53 834 44,202 53 100% $ 1,001 $1.20
1BD/1BA-B4 53 835 44,255 53 100% $ 1,006 $1.20
1BD/1BA-B6 53 835 44,255 51 96% $ 984 $1.18
1BD/1BA-B8 53 835 44,255 51 96% $ 956 $1.14
1BD/1BA-B12 53 835 44,255 50 94% $ 1,001 $1.20
1BD/1BA-B14 53 835 44,255 52 98% $ 990 $1.19
1BD/1BA-B17 53 841 44,573 51 96% $ 1,005 $1.20
2BD/2BA-F1 53 1,150 60,950 51 96% $ 1,508 $1.31
2BD/2BA-F2 53 1,150 60,950 50 94% $ 1,456 $1.27
2BD/2BA-F10 53 1,150 60,950 52 98% $ 1,456 $1.27
=============================================================================================
TOTAL/WEIGHTED AV 901 816 735,643 872 97% $ 1,025 $1.26
=============================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
=================================================
UNIT MIX
NET
NO. SIZE RENTABLE
UNIT TYPE UNITS (SF) AREA (SF)
=================================================
<S> <C> <C> <C>
Studio-A5 53 533 28,249
Studio-A9 53 533 28,249
Studio-A11 31 533 16,523
Convertible-A7 53 600 31,800
1BD/1BA-B3 53 762 40,386
1BD/1BA-B11 22 762 16,764
1BD/1BA-B13 53 762 40,386
1BD/1BA-B15 53 762 40,386
1BD/1BA-B16 53 834 44,202
1BD/1BA-B4 53 835 44,255
1BD/1BA-B6 53 835 44,255
1BD/1BA-B8 53 835 44,255
1BD/1BA-B12 53 835 44,255
1BD/1BA-B14 53 835 44,255
1BD/1BA-B17 53 841 44,573
2BD/2BA-F1 53 1,150 60,950
2BD/2BA-F2 53 1,150 60,950
2BD/2BA-F10 53 1,150 60,950
=================================================
TOTAL/WEIGHTED AV 901 816 735,643
=================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tax Assessment
=====================================================================
<S> <C>
Assessors' Market Value
Land $0
Improvements $0
-----------------
Total Market Value $0
Assessment Ratio 0%
-----------------
Total Assessment $0
Combined City and County Tax Rate $0.00
-----------------
Total Tax (1994) $0
=====================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
APARTMENT LAND SALES SUMMARY
====================================================================================================================================
PRICE PER
SALE SIZE UNITS PRICE PERMITTED
NO. LOCATION DATE SALES PRICE (ACRES) PERMITTED PER ACRE UNIT
====================================================================================================================================
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Replacement Cost New
=================================================================================================================
ESTIMATING REPLACEMENT COST NEW
<S> <C> <C> <C>
DIRECT CONSTRUCTION COSTS
Buildings 250,000 Square Feet
Replacement Cost $30.00 Per Square Foot $7,500,000
Site Development Costs $500,000
Recreational Amenities and Site
Improvements $500,000
---------------
Total Direct Costs $8,500,000
(Per Square Foot) $34.00
INDIRECT CONSTRUCTION COSTS
Architectural and Engineering
2.00% of Direct Costs $170,000
Interim and Permanent Loan Fees
1.50% of 90% of Direct Costs, Architectural and Site Value $130,545
Construction Loan
Interest
0.71% Per Month
18 Months
60.00% Average Outstanding Balance
of 90% of Direct Costs, Architectural and Site Value $665,780
Legal Fees and Closing Costs
2.50% of 90% of Direct Costs, Architectural and Site Value $217,575
Developer's General and Administrative Overhead
3.00% of 90% of Direct Costs, Architectural and Site Value $261,090
Developer's Entrepreneurial Profit
12.00% Direct Costs and Architectural $1,160,400
--------------
Total Indirect Costs $2,605,390
Total Replacement Cost New $11,105,390
Add: Estimated Site Value
$1,000,000
---------------
Total $12,105,390
ESTIMATED REPLACEMENT COST NEW $12,000,000
=================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
APARTMENT SALES SUMMARY
==================================================================================================================================
YEAR NET
BUILT RENTABLE SF
CASH ----- ----------- OVERALL
SALE SALE EQUIVALENT NO. AVERAGE OCCUPANCY CAPITALIZATION
NO. NAME/LOCATION DATE SALES PRICE UNITS UNIT SIZE AT SALE RATE EGIM
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1 Woods of Earhart 3/1/95 $11,262,397 1977-79 173,472 SF 98% 8.70% 6.4
------- ----------
Ann Arbor, MI 216 803 SF
2 Oak Village Feb-95 $7,140,000 1953 378,000 SF 92% 12.68% 4.1
---- ----------
Westland, MI 315 1,200 SF
3 Woodcrest Villa Aug-94 $17,000,000 1970 425,200 SF 95% N/A N/A
---- ----------
Westland, MI 458 928 SF
4 Glenwood Orchard Jul-94 $3,450,000 1970 151,160 SF 93% 9.87% N/A
---- ----------
Westland, MI 160 945 SF
5 Cranbrook Dec-93 $9,850,000 1981-86 179,000 SF N/A 9.5% N/A
------- ----------
Southfield, MI 204 877 SF
6 Gateway Sep-93 $16,800,000 1973 380,328 SF 96% 9.13% 5.2
---- ----------
Farmington Hills, MI 424 897 SF
7 Meadow Tree Dec-92 $7,200,000 1974 313,000 SF N/A 11.07% N/A
---- ----------
Pittsfield Twp.,MI 336 931 SF
8 Woodhaven Square Jan-92 $3,060,000 1972 124,288 SF N/A 9.41% N/A
---- ----------
Woodhaven, MI 158 787 SF
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================
SALES SALES
OPERATING PRICE PRICE
SALE EXPENSE PER PER
NO. RATIO SF UNIT
=========================================
<S> <C> <C> <C>
1 44% $64.92 $52,141
2 48% $18.89 $22,667
3 N/A $39.98 $37,118
4 N/A $22.82 $21,563
5 N/A $55.03 $48,204
6 50% $44.17 $39,623
7 N/A $23.00 $21,429
8 N/A $24.62 $19,368
=========================================
</TABLE>
<PAGE>
Rental Comparisons
================================================================================
UNIT TYPE:ONE BEDROOM, ONE BATH
================================================================================
<TABLE>
<CAPTION>
NO. UNITS AMENITY RENT PER RENT PER
COMP NO. NAME THIS TYPE FEATURES SIZE (SF) UNIT SF
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
3 Bayou Bend 12 Fireplace 500 $500 $1.00
Balcony
5 The Corners 15 Mountain 650 $700 $1.08
View
7 The Angles 10 Washer 700 $800 $1.14
Balcony
------------------------------------------------------------------------
Range 500 $500 $1.00
700 $800 $1.14
Subject 750 $825 $1.10
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================================
UNIT TYPE: TWO BEDROOM, TWO BATH
===========================================================================================================
NO. UNITS AMENITY RENT PER RENT PER
COMP NO. NAME THIS TYPE FEATURES SIZE (SF) UNIT SF
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1 Vista View 10 Mountain 750 $600 $0.80
View
2 Mona Lisa 12 Fireplace 800 $720 $0.90
4 L'Apex 9 Balcony 900 $765 $0.85
------------------------------------------------------------------------
Range 750 $600 $0.80
900 $765 $0.85
Subject 900 $800 $0.89
</TABLE>
<TABLE>
<CAPTION>
===========================================================================================================
UNIT TYPE: THREE BEDROOM, TWO BATH
===========================================================================================================
NO. UNITS AMENITY RENT PER RENT PER
COMP NO. NAME THIS TYPE FEATURES SIZE (SF) UNIT SF
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
Range
Subject
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
1993 1994 Owner's Budget C&W Forecast
==================================================================================================
Per Per Per Per Per Per Per Per
Total Unit SF Total Unit SF Total Unit SF Total Unit SF
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Rental $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Other $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
--------------------------------------------------------------------------------------------------
Effective Gross Income $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
OPERATING EXPENSES
Management $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
General & Administrative $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Payroll/Benefits $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Utilities $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Advertising/Promotion $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Repairs & Maintenance $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Unit Reserves $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Other $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
FIXED EXPENSES
Real Estate Taxes $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
Insurance $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
TOTAL EXPENSES $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
--------------------------------------------------------------------------------------------------
NET OPERATING INCOME $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00
RESERVES FOR REPLACEMENT $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $74 $0.00
CASH FLOW $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 $0 $0.00 $0.00 ($74) $0.00
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================
EXPENSE SUMMARY TOTAL PER UNIT PER SF
===============================================================
<S> <C> <C> <C>
INCOME
1993 $0.00 $0 $0.00
1994 $0.00 $0 $0.00
1995 Budget $0.00 $0 $0.00
Annualized 1995 YTD
Forecast 1995 (1) $0.00 $0 $0.00
- ---------------------------------------------------------------
OPERATING EXPENSES
1993 $0.00 $0 $0.00
1994 $0.00 $0 $0.00
1995 Budget $0.00 $0 $0.00
Annualized 1995 YTD
Forecast 1995 (1) $0.00 $0 $0.00
- ---------------------------------------------------------------
(1) Annualized
===============================================================
</TABLE>
<PAGE>
Inc & Exp Summary
================================================================================
NAME OF COMPLEX
================================================================================
Potential Rental Income:
Less: Allowance for
Vacancy/Collection Loss
Less: Employee Units/Model Units
Effective Rental Income:
Plus: Miscellaneous Income:
Effective Gross Income (EGI): __________
Less: Operating Expenses:
Management Fee
Administrative & General
Payroll/Salaries
Utilities
Advertising/Promotion
Repairs/Maintenance
Unit Reserves
Less: Fixed Expenses:
Real Estate Taxes
Insurance
NET OPERATING INCOME __________
================================================================================
<PAGE>
================================================================================
DISCOUNTED CASH FLOW ANALYSIS
BEGINNING MM/DD/YY
================================================================================
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL RENTAL INCOME AT MARKET $2,181,600 $2,225,232 $2,314,241 $2,406,811 $2,503,083
Less: Vacancy, Model Units
& Collection Loss $152,712 $155,766 $161,997 $168,477 $175,216
-----------------------------------------------------------------
Effective Rental Income $2,028,888 $2,069,466 $2,152,244 $2,238,334 $2,327,868
Add: Other Miscellaneous Income $50,722 $51,737 $53,806 $55,958 $58,197
-----------------------------------------------------------------
EFFECTIVE GROSS INCOME $2,079,610 $2,121,202 $2,206,051 $2,294,293 $2,386,064
OPERATING EXPENSES:
Management Fee $103,981 $106,060 $110,303 $114,715 $119,303
Administrative and General $250,000 $260,000 $270,400 $281,216 $292,465
Payroll/Salaries $200,000 $208,000 $216,320 $224,973 $233,972
Utilities $75,000 $78,000 $81,120 $84,365 $87,739
Advertising/Promotion $15,000 $15,600 $16,224 $16,873 $17,548
Repairs and Maintenance $125,000 $130,000 $135,200 $140,608 $146,232
Reserves for Unit Replacement $75,000 $78,000 $81,120 $84,365 $87,739
FIXED EXPENSES
Real Estate Taxes $125,000 $130,000 $135,200 $140,608 $146,232
Insurance $50,000 $52,000 $54,080 $56,243 $58,493
-----------------------------------------------------------------
TOTAL OPERATING EXPENSES $1,018,981 $1,057,660 $1,099,967 $1,143,965 $1,189,724
NET OPERATING INCOME $1,060,630 $1,063,542 $1,106,084 $1,150,327 $1,196,340
CAPITAL RESERVES $0.15 Per SF $40,500 $42,120 $43,805 $45,557 $47,379
Total (x NRA)
-----------------------------------------------------------------
CASH FLOW AFTER CAPITAL RESERVES $1,020,130 $1,021,422 $1,062,279 $1,104,770 $1,148,961
Annual Cash on Cash Return 8.50% 8.51% 8.85% 9.21% 9.57%
</TABLE>
<TABLE>
<CAPTION>
YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 YEAR 11
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL RENTAL INCOME AT MARKET $2,603,207 $2,707,335 $2,815,628 $2,928,254 $3,045,384 $3,167,199
Less: Vacancy, Model Units
& Collection Loss $182,224 $189,513 $197,094 $204,978 $213,177 $221,704
-------------------------------------------------------------------------
Effective Rental Income $2,420,982 $2,517,822 $2,618,534 $2,723,276 $2,832,207 $2,945,495
Add: Other Miscellaneous Income $60,525 $62,946 $65,463 $68,082 $70,805 $73,637
-------------------------------------------------------------------------
EFFECTIVE GROSS INCOME $2,481,507 $2,580,767 $2,683,998 $2,791,358 $2,903,012 $3,019,132
OPERATING EXPENSES:
Management Fee $124,075 $129,038 $134,200 $139,568 $145,151 $150,957
Administrative and General $304,163 $316,330 $328,983 $342,142 $355,828 $370,061
Payroll/Salaries $243,331 $253,064 $263,186 $273,714 $284,662 $296,049
Utilities $91,249 $94,899 $98,695 $102,643 $106,748 $111,018
Advertising/Promotion $18,250 $18,980 $19,739 $20,529 $21,350 $22,204
Repairs and Maintenance $152,082 $158,165 $164,491 $171,071 $177,914 $185,031
Reserves for Unit Replacement $91,249 $94,899 $98,695 $102,643 $106,748 $111,018
FIXED EXPENSES
Real Estate Taxes $152,082 $158,165 $164,491 $171,071 $177,914 $185,031
Insurance $60,833 $63,266 $65,797 $68,428 $71,166 $74,012
-------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $1,237,313 $1,286,805 $1,338,277 $1,391,809 $1,447,481 $1,505,380
NET OPERATING INCOME $1,244,194 $1,293,962 $1,345,720 $1,399,549 $1,455,531 $1,513,752
CAPITAL RESERVES $0.15 Per SF $49,274 $51,245 $53,295 $55,427 $57,644 $59,950
Total (x NRA)
-------------------------------------------------------------------------
CASH FLOW AFTER CAPITAL RESERVES $1,194,920 $1,242,716 $1,292,425 $1,344,122 $1,397,887 $1,453,802
$14,420,307
(Reversion)
Annual Cash on Cash Return 9.96% 10.36% 10.77% 11.20% 11.65%
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------- -------------------------------------------------------------------
CASH FLOW ASSUMPTIONS VALUATION
----------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Units 300
NRA (sf) 270,000 Discount Rate 11.50%
1994 Average Unit Rent/Month $600 Terminal Capitalization Rate 9.50%
Rental Growth Rate
Year 1 (Blended for Lag) 1.0% Cost of Sale at Reversion 2.00%
Year 2 2.0%
Thereafter 4.0% Value of Cash Flow $6,873,365
Vacancy & Collection Loss 7.0% Value of the Reversion $4,855,409
----------------
Miscellaneous Income (% of Gross) 2.5% Total Value $11,728,774
Expense Growth Rate 4.0%
Real Estate Tax Growth Rate 4.0%
Management Fee (% of Gross) 5.0% ESTIMATED MARKET VALUE $12,000,000
Reserves for Unit Replacement $250 Per Unit $40,000
Overall Capitalization Rate (on NOI) 8.84%
================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
LAND SALES ADJUSTMENT TABLE
====================================================================================================================================
PERCENTAGE ADJUSTMENTS PERCENTAGE ADJUSTMENTS
----------------------------------- ----------------------------------------
CASH
EQUIVALENT UTILITY/ INDICATED
SALE SALES PRICE PROPERTY CONDITIONS MARKET ADJUSTED PERMITTED NET VALUE PER
NO. PER SF RIGHTS OF SALE CONDITIONS PRICE LOCATION DENSITY ADJUSTMENT ACRE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
===============================================================================
COST APPROACH SUMMARY
===============================================================================
Total Replacement Cost Including Developer's Overhead and Profit
LESS
Curable Physical Deterioration
Curable Functional Obsolescence
Incurable Functional Obsolescence
Subtotal
LESS
Physical Incurable Depreciation (Age-Life)
External Obsolescence
Total Depreciation
Depreciated Replacement Cost New
ADD
Estimated Site Value
Total (Rounded to)
VALUE INDICATED BY COST APPROACH
===============================================================================
<PAGE>
Exhibit (b)(2)
- -------------------------------------------------------------------------------
COMPLETE APPRAISAL
IN A SELF CONTAINED REPORT
CENTURY APARTMENTS
E/s Greenside Drive
Cockeysville, Baltimore County, Maryland
- -------------------------------------------------------------------------------
As of August 13, 1999
Prepared For:
KRUPP REALTY LIMITED PARTNERSHIP V
One Beacon Street, Suite 1550
Boston, MA 02108
Prepared By:
CUSHMAN & WAKEFIELD, INC.
Valuation Advisory Services
51 W. 52nd Street, 9th Floor
New York, New York 10019
<PAGE>
August 13, 1999
Mr. James Hynes
Vice President
Krupp Realty Limited Partnership V
One Beacon Street, Suite 1550
Boston, MA 02108
Re: Complete Appraisal of Real Property
CENTURY APARTMENTS
E/s Greenside Drive
Cockeysville, Baltimore County, Maryland
Dear Mr. Hynes:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield, Inc. is pleased to transmit our self-contained appraisal
report estimating the as is market value of the fee simple estate, disregarding
existing financing secured by the above referenced property and any associated
prepayment penalty required to satisfy the prepayment of existing mortgages in
place.
As specified in the Letter of Engagement, the value opinion reported
below is qualified by certain assumptions, limiting conditions, certifications,
and definitions, which are set forth in the report.
This report was prepared for Krupp Realty Limited Partnership V and is
intended only for their specified use. Unless otherwise stated, the report may
not be distributed to or relied upon by other persons or entities without
written permission of Cushman & Wakefield, Inc.
This appraisal report has been prepared in accordance with our
interpretation of the appraisal requirements of the Federal Home Loan Bank Board
(Freddie Mac), Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) and the Uniform Standards of Professional
Appraisal Practice, including the Competency Provision.
The property was inspected and the report prepared by Kelly J. Small
under the supervision of John D. Busi, MAI, who did not inspect the property.
<PAGE>
Mr. James Hynes Page 2 August 13, 1999
Based on our complete appraisal as defined by the Uniform Standards of
Professional Appraisal Practice, we have formed an opinion that the market value
of fee simple estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of August 13, 1999,
was:
TWENTY TWO MILLION THREE HUNDRED THOUSAND DOLLARS
$22,300,000
This letter is invalid as an opinion of value if detached from the
report, which contains the text, exhibits, and an ADDENDA.
Respectfully submitted,
CUSHMAN & WAKEFIELD, INC.
Kelly J. Small
Associate Director
Valuation Advisory Services
Maryland Certified General Appraiser License 20143
John D. Busi, MAI
Managing Director
Valuation Advisory Services
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Property Name: Century Apartments
Location: The subject property is located on the east side
of Greenside Drive, the south side of Sorley
Road, and the north side of Galloway Avenue in
Cockeysville, Baltimore County, Maryland.
General Overview: The improvements consists of 39 three--story apartment
buildings containing 468 units that were constructed in
1969. There are 136 one-bedroom, one-bath units, 260 two-bedroom,
1.5 bath units, and 72 three-bedroom, two-bath units. Project
amenities include a swimming pool, clubhouse, fitness center, and
two playgrounds. As of the date of appraisal, the property was
94 percent occupied.
Tax Account Number: 1600004952
Interest Appraised: Fee simple estate
Date of Value: August 13, 1999
Date of Inspection: August 13, 1999
Ownership: Century III Associates
Land Area: 28.744 acres
FY 2000 Property Assessment (FCV) $17,306,700
1998 Real Estate Taxes: $317,788
Zoning: DR 16, High Density Residential
Highest and Best Use:
As Vacant: Development of a multi-family complex
As Improved: Continued use as multi-family apartments.
Improvement Description
Type: Garden apartments
Year Built: 1969
Type of Construction: Brick and aluminum siding
Net Rentable Area: 435,458
</TABLE>
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- -------------------------------------------------------------------------------
UNIT MIX/CURRENT OCCUPANCY/RENTAL RATES:
<TABLE>
<CAPTION>
========================================================================================================
UNIT MIX/OCCUPANCY/RENTAL RATES
========================================================================================================
NET NO. QUOTED
UNIT TYPE NO. SIZE RENTABLE UNITS MONTHLY RENT
UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1-BR/1-BA 97 691 67,027 95 98% $675 $0.98
1-BR/1-BA/Den 39 801 31,239 36 92% $710 $0.89
2-BR/1.5-BA 260 974 253,240 244 94% $785 $0.81
3-BR/2-BA 72 1,166 83,952 67 93% $940 $0.81
- --------------------------------------------------------------------------------------------------------
Total 468 930 435,458 442 94% $780 $0.84
========================================================================================================
</TABLE>
<TABLE>
<S> <C>
Income and Expense Data:
Income (Per Unit):
1997 $7,957
1998 $8,204
Year-to-Date Annualized: $8,283
1999 budget $8,623
C&W Forecast $8,408
Operating Expenses (Per Unit):
1997 $3,244
1998 $2,969
Year-to-Date Annualized: $3,237
1999 budget $3,168
C&W Forecast $3,286
Value Indicators
Cost Approach: Not Applicable
Sales Comparison Approach: $22,700,000
Value Per Unit: $48,504
Income Approach- Direct Capitalization
Current Vacancy Rate: 6.0%
Stabilized Vacancy Rate: 7.0%
Effective Gross Income: $3,934,966
Total Expenses: $1,666,362
Net Operating Income: $2,268,604
Overall Capitalization Rate: 9.75%
Indicated Value (Less Deferred Maintenance) $22,300,000
Value Per Unit: $47,650
Income Approach- Discounted Cash Flow Analysis
Market Rent Growth Rate: 3.0%
Expense Growth Rate: 3.0%
</TABLE>
<PAGE>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Vacancy and Credit Loss: 7.0%
Terminal Capitalization Rate 10.0%
Cost of Sale at Reversion: 3.0%
Discount Rate: 12.0
Indicated Value $22,300,000
Value Per Unit: $47,650
Implied Overall Rate: 10.17 %
Value Conclusion $22,300,000
Value Per Unit: $47,650
Exposure Time Implicit
in Market Value Conclusion: 12 +/- months
Marketing Time: 12 +/- months
Special Assumptions Affecting Valuation: Please refer to our complete list of Assumptions and
Limiting Conditions at the end of this report.
</TABLE>
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROPERTY PHOTOGRAPHS..............................................................................................
INTRODUCTION......................................................................................................6
Identification of Property...................................................................................6
Property Ownership and Recent History........................................................................6
Purpose and Function of Appraisal............................................................................8
Extent of the Appraisal Process..............................................................................8
Date of Value and Property Inspection........................................................................8
Property Rights Appraised....................................................................................9
Exposure Time / Marketing Time...............................................................................9
Definitions of Value, Interest Appraised, and Other Pertinent Terms..........................................8
Legal Description............................................................................................9
REGIONAL ANALYSIS................................................................................................10
NEIGHBORHOOD ANALYSIS............................................................................................21
APARTMENT MARKET ANALYSIS........................................................................................23
PROPERTY DESCRIPTION.............................................................................................26
TAXES AND ASSESSMENTS............................................................................................31
ZONING...........................................................................................................33
HIGHEST AND BEST USE.............................................................................................34
VALUATION PROCESS................................................................................................36
SALES COMPARISON APPROACH........................................................................................38
INCOME CAPITALIZATION APPROACH...................................................................................46
RECONCILIATION AND FINAL VALUE ESTIMATE..........................................................................60
ASSUMPTIONS AND LIMITING CONDITIONS..............................................................................62
CERTIFICATION OF APPRAISAL.......................................................................................64
ADDENDA......................................................................................................... 65
</TABLE>
<PAGE>
PHOTOGRAPHS OF THE SUBJECT PROPERTY
- -------------------------------------------------------------------------------
Front View of Typical Apartment Building
Rear View of Typical Apartment Building
-1-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
View of Apartment Interior
View of Apartment Interior
-2-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
View of Apartment Interior
View of Apartment Interior
-3-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
Interior View of Clubhouse/Leasing Office
Interior View of Clubhouse/Leasing Office
-4-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
Interior View of Fitness Center
View of Swimming Pool
-5-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
Exterior View of Leasing Office
View of Playground
-6-
<PAGE>
SUBJECT PROPERTY PHOTOGRAPHS
- -------------------------------------------------------------------------------
Looking North Along Greenside Drive
Looking South Along Greenside Drive
-7-
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
IDENTIFICATION OF PROPERTY
The subject property, known as Century Apartments, consists of a 468
unit apartment complex containing approximately 435,458 square feet of net
rentable area. The improvements are situated on 28.744 acres of land fronting
the east side of Greenside Drive, the south side of Sorley Road, and the north
side of Galloway Avenue in Cockeysville, Baltimore County, Maryland. There are
136 one-bedroom, one-bath units, 260 two-bedroom, 1.5 bath units, and 72
three-bedroom, two-bath units. Project amenities include a swimming pool,
clubhouse, fitness center, and two playgrounds. As of the date of appraisal, the
property was 94 percent occupied.
PROPERTY OWNERSHIP AND RECENT HISTORY
Ownership of the subject property is vested in the name of Century III
Associates, which acquired the property in December 1971 from Ervin Company for
$1,293,823. There have been no other transfers in recent years and, to the best
of our knowledge, the property is not currently listed for sale.
PURPOSE AND FUNCTION OF APPRAISAL
The purpose of this appraisal is to estimate the market value of a fee
simple estate in the subject property, subject to short term leases,
disregarding existing financing and any associated prepayment penalty required
to satisfy the prepayment of existing mortgages in place. The function of this
report is to assist the client with internal evaluation purposes and may be
incorporated in filings made by the Krupp Realty Limited Parnership Fund V and
its affiliates under current Securities Laws.
EXTENT OF THE APPRAISAL PROCESS
In the process of preparing this appraisal, we:
- Inspected the building and site improvements.
- Reviewed leasing policy, concessions, and history of recent
occupancy with the resident manager.
- Conducted market research of occupancy rates, asking rents,
concessions and operating expenses at competing properties.
- Conducted market inquiries into recent sales of similar improved
properties to ascertain sales price per apartment unit and
capitalization rates.
- Researched market parameters regarding absorption, operating
expenses and growth in rents and expenses.
- Reviewed a history of income and expense for 1997 through
year-to-date 1999 and a budget forecast for 1999.
- Estimated market rental rates through an analysis of comparable
rents.
- Developed a value estimate of the property through direct sales
comparison using the price per apartment unit, effective gross
income multiplier, etc.
-8-
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
- Prepared an estimate of stabilized income and expenses (for
capitalization purposes).
- Developed a value estimate of the property via the Sales
Comparison and Income Capitalization Approaches.
- Reconciled the value indications and concluded a final value
estimate.
DATE OF VALUE AND PROPERTY INSPECTION
The date of value is August 13, 1999, with our date of inspection being
the same.
PROPERTY RIGHTS APPRAISED
Fee simple estate, subject to the existing short term leases
EXPOSURE TIME / MARKETING TIME
Exposure time is described as follows:
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open
market." Exposure time is defined as 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 the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
Based upon the recent transactions that have occurred in the marketplace
(as documented in this report), coupled with our discussions with knowledgeable
participants in the region's apartment market, the exposure time for an
apartment complex like the subject would have been about twelve months, as of
the appraisal date.
Marketing time is defined as follows:
Marketing time is an estimate of the time that might be required to sell
a real property interest at the appraised value. Marketing time is
presumed to start on the effective date of the appraisal. Marketing time
is subsequent to the effective date of the appraisal and exposure time
is presumed to precede the effective date of the appraisal. The estimate
of marketing time uses some of the same data analyzed in the process of
estimating reasonable exposure time and it is not intended to be a
prediction of a date of sale.
Our estimate of an appropriate marketing time for the subject relates to
a sale of the property in its as-is condition. Based on our discussions with
local brokers and buyer/sellers of multi-family properties like the subject, as
well as our assessment of the local real estate market and economic forces in
general, we conclude that the probable marketing period for the subject property
in today's environment would be about twelve months.
-9-
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
DEFINITIONS OF VALUE, INTEREST APPRAISED, AND OTHER PERTINENT TERMS
The definition of market value taken from the Uniform Standards of
Professional APPRAISAL PRACTICE of the Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer
and seller, each acting prudently and knowledgeably, and assuming the
price is not affected by undue stimulus. Implicit in this definition is
the consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting
in what they consider their own best interests;
3. A reasonable time is allowed for exposure in the open
market;
4. Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
5. The price represents the normal consideration for the
property sold unaffected by special or creative financing or
sales concessions granted by anyone associated with the
sale.
The following definitions of pertinent terms are taken from the
Dictionary of Real Estate Appraisal, Third Edition (1993), published by the
Appraisal Institute.
FEE SIMPLE ESTATE
Absolute ownership unencumbered by any other interest or estate, subject
to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat.
MARKET RENT
The rental income that a property would most probably command on the
open market; indicated by the current rents paid and asked for
comparable space as of the date of the appraisal.
CASH EQUIVALENT
A price expressed in terms of cash, as distinguished from a price
expressed totally or partly in terms of the face amounts of notes or
other securities that cannot be sold at their face amounts.
DIRECT CAPITALIZATION METHOD
Direct Capitalization Method is the method used to convert an estimate
of a single year's income expectancy into an indication of value in one
direct step, either by dividing the income estimate by an appropriate
rate or by multiplying the income estimate by an appropriate factor.
-10-
<PAGE>
INTRODUCTION
- -------------------------------------------------------------------------------
DISCOUNTED CASH FLOW ANALYSIS
The procedure in which a discount rate is applied to a set of projected
income streams and a reversion. The analyst specifies the quantity,
variability, timing, and duration of the income streams as well as the
quantity and timing of the reversion and discounts each to its present
value at a specified yield rate. Discounted Cash Flow Analysis can be
applied with any yield capitalization technique and may be performed on
either a lease-by-lease or aggregate basis.
MARKET VALUE AS IS ON APPRAISAL DATE
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all
assumptions concerning hypothetical market conditions or possible
rezoning.
LEGAL DESCRIPTION
The subject property is legally described as Tax Map 51, Grid 17, Parcel
537, within the land records of Baltimore County, Maryland. A copy of the legal
description is included in the Addenda.
-11-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
INTRODUCTION
The subject is located in Baltimore County, Maryland, which is one of the
component jurisdictions of the Baltimore Metropolitan Statistical Area (MSA).
The Baltimore MSA is defined by the U.S. Department of Commerce, Bureau of the
Census, to include Baltimore City and the counties of Baltimore, Howard, Anne
Arundel, Harford, Carroll, and Queen Anne's. Queen Anne's County is located
across the Chesapeake Bay Bridge and was added to the Baltimore MSA in 1983. The
Baltimore MSA encompasses 2,618 square miles. This analysis includes a
discussion of the Baltimore area.
Baltimore County is at the center of the metropolitan counties and
surrounds Baltimore City on three sides. The boundaries of the county are as
follows: the Maryland-Pennsylvania line to the north, Howard and Carroll
Counties to the west, the Chesapeake Bay and Harford County to the east, and
Anne Arundel County to the south.
GENERAL BACKGROUND
Historically, Baltimore has been an important port and rail center in the
mid-Atlantic region, while its surrounding counties were generally agricultural
in character. The port of Baltimore, formed by the Patapsco River estuary, was
the distribution center by which the area's produce and manufactured goods were
shipped around the world. World Wars I and II brought significant new
development to Baltimore as the city became a center for war-related industry,
with steel mills, oil and gas refineries and shipyards built along the harbor
and surrounding waterways.
In the decades following World War II, the city of Baltimore suffered the
same fate as many other older eastern U.S. cities. With the construction of new
highways, the population began to move out to the surrounding counties.
Businesses and industries soon followed the workforce to the burgeoning suburbs.
Baltimore's historic manufacturing base went into decline, and the old downtown
core suffered from a lack of investment.
In the past two decades, however, both the private and public sector have
redirected investment into the city's center. As a result of these efforts,
downtown Baltimore has enjoyed a revitalization. The Inner Harbor redevelopment,
which includes a festival market on the waterfront, has received national
attention. Further, Baltimore has retained its status as an important port,
educational and cultural center. Although it faces increasing competition from
the Maryland counties that surround Washington, D.C., Baltimore remains the
financial, legal, corporate and political center for Maryland. The Baltimore
area lies within 40 miles of the nation's capital and has benefited from the
growth of the Washington metropolitan area.
ECONOMIC FORCES
A discussion of economic forces includes such factors as employment, the
region's economic base, living costs, income, wage levels, utility costs and the
availability of mortgage credit. All of these factors impact the value of real
estate.
-12-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
INSERT REGIONAL MAP
-13-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
EMPLOYMENT AND THE ECONOMY
The Baltimore area has undergone a difficult transition over the past 30
years, from a manufacturing base to a service economy. The following table
illustrates the shift in employment that has occurred from the manufacturing
sector to the service sector during the past three decades. The table also shows
the change in employment composition, from one weighted towards manufacturing to
a more balanced employment mix today.
<TABLE>
<CAPTION>
===============================================================================================
EMPLOYMENT TRENDS
BALTIMORE MSA (000'S)
===============================================================================================
1960 1990 1998
<S> <C> <C> <C>
- ----------------------------------------- ---------------- ----------------- -----------------
Construction 6% 6.3% 5.5%
- ----------------------------------------- ---------------- ----------------- -----------------
Manufacturing 32% 11.8% 9.0%
- ----------------------------------------- ---------------- ----------------- -----------------
Util./Transp./Post. 9% 4.7% 4.9%
- ----------------------------------------- ---------------- ----------------- -----------------
Retail/Wholesale Trade 20% 23.7% 23.5%
- ----------------------------------------- ---------------- ----------------- -----------------
Finance/Insurance 5% 6.7% 6.3%
- ----------------------------------------- ---------------- ----------------- -----------------
Services 13% 27.9% 31.7%
- ----------------------------------------- ---------------- ----------------- -----------------
Government 15% 18.0% 18.1%
- ----------------------------------------- ---------------- ----------------- -----------------
Total Non-Agricultural Employment 629.0 1,103.0 1,200.0
===============================================================================================
SOURCE: U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS, 1998
===============================================================================================
</TABLE>
As illustrated above, manufacturing dominated the local economy in 1960,
representing 32 percent of all employment. Centered around the port of
Baltimore, shipping and steel manufacturing were among the major economic
activities in the region. With the redirection of the national economy, many
industrial firms such as Bethlehem Steel, General Motors and Maryland Dry Dock
began to contract, and thousand of jobs disappeared. As of 1998, manufacturing
jobs plummeted to 9 percent of the local workforce. Conversely, the services
sector jumped from 13 percent of employment in 1960 to 32 percent in 1998. The
decline in manufacturing jobs is likely to continue as the economy moves
increasingly toward services, trade and technology-based employment.
Today, the private sector economy is broad-based, with services,
manufacturing and technology-related businesses represented. This economic
diversity manifests itself in the type of industries based in the region. A list
of the largest private sector employers follows. The manufacturing industry
still maintains a presence, along with high-tech contractors, educational
institutions, public utilities, retailers and financial institutions. The
Baltimore region is home to four of FORTUNE'S top 500 industrial firms. The
firms are listed below in order of their sales rank in the FORTUNE Industrial
500.
Government employment is also a major factor in the local economy, with 18
percent of total jobs. Baltimore is only 40 miles from Washington, D.C. and
benefits from its proximity to the nation's capital and its enormous federal
government presence.
-14-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=========================================================================
MAJOR AREA EMPLOYERS
BALTIMORE MSA
=========================================================================
EMPLOYERS EMPLOYEES
<S> <C>
- -------------------------------------------------- ----------------------
Johns Hopkins University 15,516
- -------------------------------------------------- ----------------------
Helix Health Systems 11,227
- -------------------------------------------------- ----------------------
Johns Hopkins Health Systems 10,302
- -------------------------------------------------- ----------------------
Baltimore Gas & Electric Company 8,095
- -------------------------------------------------- ----------------------
Northrop Grumman 7,300
- -------------------------------------------------- ----------------------
Giant Food, Inc. 6,312
- -------------------------------------------------- ----------------------
Bethlehem Steel Corporation 6,250
- -------------------------------------------------- ----------------------
NationsBank Corporation 5,500
- -------------------------------------------------- ----------------------
Blue Cross and Blue Shield of Maryland 4,100
- -------------------------------------------------- ----------------------
GMAC Truck Group 3,402
================================================== ======================
SOURCE: BALTIMORE BUSINESS JOURNAL 1998
=========================================================================
</TABLE>
Baltimore's unemployment rate has traditionally been higher than the State
of Maryland as a whole. As of year-end 1998, the unemployment rate for the
Baltimore region was 3.9 percent, compared to 3.5 percent for the State of
Maryland. The unemployment rate decreased 0.8 percentage points over the same
period last year when unemployment was 4.7 percent. Baltimore City had the
highest unemployment rate of 6.6 percent followed by Baltimore County at 3.7
percent. The remaining counties had significantly lower rates of 2.0 to 3.0
percent.
INCOME
The ability of the population within an area to satisfy its material
desires for goods and services directly affects the price levels of real estate
and can be measured indirectly through retail sales. One measure of the relative
wealth of an area is average household disposable income which is available for
the purchase of food, shelter and durable goods. In order to present a
comparison of the relative wealth of the component jurisdictions in the
Baltimore MSA, we have examined the effective buying income of the region as
reported by Sales & Marketing Management Magazine's SURVEY OF BUYING POWER.
Effective buying income is essentially income after all taxes, or disposable
personal income.
According to the SURVEY OF BUYING POWER-1998, the Baltimore MSA had a
median household Effective Buying Income (EBI) of $37,249. Among components, the
median household EBI varied from a low of $25,529 in the City of Baltimore to a
high of $56,179 in Howard County. The suburbs had a higher effective buying
income than did the inner city. The following table depicts the 1998 effective
buying income for the Baltimore MSA and the individual counties comprising the
MSA.
-15-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
========================================================================================
EFFECTIVE BUYING INCOME
BALTIMORE METROPOLITAN AREA
========================================================================================
(000'S) BUYING POWER MEDIAN
TOTAL EBI INDEX* HOUSEHOLD EBI
<S> <C> <C> <C>
- -------------------------- -------------------- ------------------ ---------------------
BALTIMORE MSA $43,561,309 .9470 $37,249
- -------------------------- -------------------- ------------------ ---------------------
Anne Arundel $8,785,205 .1924 $45,748
- -------------------------- -------------------- ------------------ ---------------------
Baltimore County $14,142,246 .3197 $41,763
- -------------------------- -------------------- ------------------ ---------------------
Baltimore City $8,518,668 .1836 $25,529
- -------------------------- -------------------- ------------------ ---------------------
Carroll $2,473,784 .0568 $43,826
- -------------------------- -------------------- ------------------ ---------------------
Harford $3,599,423 .0774 $42,993
- -------------------------- -------------------- ------------------ ---------------------
Howard $5,359,489 .1023 $56,179
- -------------------------- -------------------- ------------------ ---------------------
Queen Anne's $682,494 .0148 $40,462
========================================================================================
SOURCE: THE SURVEY OF BUYING POWER DATA SERVICE 1998
========================================================================================
</TABLE>
A region's effective buying income is a significant statistic because it
conveys the effective wealth of the consumer. The consumer drives the economy
and creates demand for goods and services. This demand generates the need for
new housing, office buildings, retail centers and warehouse space. Nationally,
the Baltimore MSA ranks 17th in retail sales, 18th in effective buying income
and 17th in buying power. These statistics pair it closely with Seattle,
Washington; Tampa-St. Petersburg; and Riverside, California -- placing the
Baltimore MSA in the top five percent of the country. Equally significant as
these rankings is the region's growth and development during the past decade, as
follows:
<TABLE>
<CAPTION>
==================================================================================================
INCOME GROWTH IN THE BALTIMORE .M.S.A.
==================================================================================================
Effective Buying Income Retail Sales BPI
<S> <C> <C> <C>
- ------------------------- ---------------------------- ------------------------ ------------------
1988 $28,921,343 $14,264,185 1.2902
- ------------------------- ---------------------------- ------------------------ ------------------
1989 $31,205,367 $15,959,646 0.9923
- ------------------------- ---------------------------- ------------------------ ------------------
1990 $34,505,342 $16,905,854 1.0102
- ------------------------- ---------------------------- ------------------------ ------------------
1991 $36,179,630 $17,489,333 0.9991
- ------------------------- ---------------------------- ------------------------ ------------------
1992 $38,349,432 $17,484,100 0.9941
- ------------------------- ---------------------------- ------------------------ ------------------
1993 $39,799,720 $18,446,721 0.9800
- ------------------------- ---------------------------- ------------------------ ------------------
1994 $42,079,910 $19,610,884 0.9771
- ------------------------- ---------------------------- ------------------------ ------------------
1995 $44,323,057 $20,720,749 0.9645
- ------------------------- ---------------------------- ------------------------ ------------------
1996 $39,957,865 $21,744,811 0.9682
- ------------------------- ---------------------------- ------------------------ ------------------
1997 $41,391,150 $22,324,728 0.9541
- ------------------------- ---------------------------- ------------------------ ------------------
1998 $43,561,309 $22,742,582 0.9470
- ------------------------- ---------------------------- ------------------------ ------------------
2003 (proj) $51,056,294 $26,662,942 0.9144
Compound Annual % Change
1988-1998 5.1% 5.9% N/A
- ------------------------- ---------------------------- ------------------------ ------------------
Compound Annual % Change
1998-2003 3.4% 3.4% N/A
==================================================================================================
SOURCE: THE SURVEY OF BUYING POWER, DATA SERVICE: 1988-1998
==================================================================================================
</TABLE>
This data shows the growth in consumer wealth in the Baltimore MSA during
the past decade. The population of the Baltimore MSA not only has enjoyed an
increase in buying power but
-16-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
spending (as measured by retail sales) in the market has kept pace with this
growth. This growth is expected to continue in the coming years, albeit at a
lower pace.
UTILITY COSTS
The costs of utilities also are a key consideration for commercial and
industrial users. The Baltimore region has an extensive public utility system.
Baltimore Gas & Electric Company provides natural gas and electricity service to
the region. Its monthly bill for a 5,000 kilowatt industrial user averages
$70,000 versus $81,000 in Washington, $108,000 in Pittsburgh and $129,000 in
Philadelphia. Consequently, electricity costs are more affordable than
neighboring regions. The region has an abundance of water resources with a
system of reservoirs providing the majority of the area's water. Public water
and sewer services are provided by each jurisdiction. Bell Atlantic provides
local telephone and telecommunication services. All utility companies have
sufficient capacity to meet anticipated growth.
SOCIAL TRENDS
Population characteristics are the major indicator of social trends.
Trends in population have a significant influence on real estate values.
Specifically, the rate of growth or decline in an area's population base is an
important indicator of change within a regional economy. This has a direct
effect on real estate values. Since the supply of land is fixed, the demand for
real property will be affected by an increase or decrease in the population
base. An increase in population drives demand for new housing, highways,
services and products, which in turn, drives up real estate values. A decrease
in population may result in a decline in real estate values.
From 1980 to 1998, the region had a 12.8 percent increase in population.
However, the population increase was not uniform throughout the Baltimore
region. As the following table indicates, Howard County led the region with a
robust 95.5 percent population gain, or 113,300 persons. The city of Baltimore
saw its population decline by 16.9 percent or 132,600 persons. This trend of
population draining from the city to the suburbs began in the 1950s and is
expected to continue as residents opt for lower taxes, better schools and less
congestion. The counties located to the west and south of Baltimore, in what is
known as the Baltimore/Washington corridor, have led population growth with Anne
Arundel, Howard and Carroll counties all increasing by 25+/- percent or more
since 1980. Businesses tend to follow the population, opting for the lower land
costs and easier highway access in the suburban counties.
-17-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
==================================================================================================
POPULATION CHANGES
1980 - 1998
==================================================================================================
POPULATION CHANGE
------------------------------------------ -----------------------
1998 1980 AMOUNT PERCENT
<S> <C> <C> <C> <C>
Baltimore MSA 2,483,900 2,201,500 282,400 12.8%
==================================================================================================
Anne Arundel County 472,300 370,900 101,400 27.3%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Baltimore County 722,700 655,700 67,000 10.2%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Baltimore City 654,200 786,800 -132,600 -16.9%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Carroll County 149,100 96,300 52,800 54.8%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Harford County 215,400 146,000 69,400 47.5%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Howard County 231,900 118,600 113,300 95.5%
- ------------------------------- ------------------ ----------------------- ------------ ----------
Queen Anne's County 38,300 27,200 11,100 40.8%
==================================================================================================
SOURCE: BUREAU OF THE CENSUS; DEMOGRAPHICS USA 1998
==================================================================================================
</TABLE>
In addition to the relationship between changes in population and property
values, there are other social factors which should be examined. For example,
the average household size within an area, when considered along with population
trends, gives an indication of potential demand for housing and other goods and
services.
The average household size can also have a significant influence on
property values. An increase in household size may signal a young, growing
community with a likely demand for more schools, child care facilities, medical
facilities, etc. Conversely, a decline in household size may indicate an aging
population thus the average household size should be examined in conjunction
with population trends. The following table shows the changes in the number of
households in the Baltimore MSA from 1980 to 1998. While there was an 12.8
percent increase in metropolitan area population since 1980, there was a 16.8
percent increase in the number of households region-wide.
However, during the same period, the average household size decreased from
2.79 to 2.69 persons per household. In short, the trend is toward smaller
households, but an increase in the number of total households. This change is
due to a number of factors including more single persons, later parenthood,
smaller family size and a growing elderly population. There are more persons
living in smaller households than ever before. The trend will likely increase
the demand for goods and services, which will likely strengthen the demand for
warehouse space as well as other property types.
-18-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=================================================================================================================
HOUSEHOLD (HH) TRENDS
1980 - 1998
==================================================================================================================
NO. OF HH CHANGE SIZE OF HH
------------------------------- ------------------------------- ----------------------
1998 1980 NUMBER PERCENT 1998 1980
<S> <C> <C> <C> <C> <C> <C>
==================================================================================================================
Baltimore MSA 922,200 789,800 132,400 16.8% 2.69 2.79
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Anne Arundel 166,000 128,900 37,100 28.8% 2.85 2.99
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Baltimore County 283,800 247,000 36,800 14.9% 2.55 2.68
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Baltimore City 245,300 277,700 -32,400 -11.7% 2.67 2.74
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Carroll County 51,700 32,900 18,800 57.1% 2.88 3.02
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Harford County 75,500 49,300 26,200 53.1% 2.85 3.06
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Howard County 85,600 45,100 40,500 89.8% 2.71 2.94
--------------------------- ---------------- -------------- ---------------- -------------- ----------- ----------
Queen Anne's County 14,300 8,900 5,400 60.7% 2.68 2.84
==================================================================================================================
SOURCE: BUREAU OF THE CENSUS; DEMOGRAPHICS USA, 1998.
==================================================================================================================
</TABLE>
In conclusion, the population of the region is increasing at an average
rate (i.e., close to the national average). Household size is decreasing, but
the total number of households is increasing. This trend is expected to
continue, which will increase the demand for goods and services and have a
positive impact on real estate values in the long-term.
GOVERNMENTAL FORCES
The government forces that impact real estate values include tax
structure, zoning authority, public services and fiscal and regulatory policies
that impact development. The Corporation for Enterprise Development rated the
state of Maryland "A" for overall business climate. The state of Maryland levies
a seven percent corporate income tax on net income attributable to business
transacted within the state. The state sales and use tax is five percent on
tangible personal property sold at retail. This tax does not apply to a
manufacturer's purchase of raw materials, or to the purchases of machinery and
equipment.
Real property in Maryland is assessed at 40 percent of market value. The
state tax rate for real and personal property for fiscal year 1999 is $0.21 per
$100 of assessed valuation. Local tax rates vary among the taxing jurisdictions.
Maryland does not impose a state personal property tax on business. All
local jurisdictions offer complete or partial exemptions on machinery and
equipment and inventories. All jurisdictions exempt inventory at warehouse
facilities.
The state levies a graduated personal income tax of two percent to five
percent on federal adjusted gross income. Local jurisdictions levy personal
income taxes of 20 percent to 60 percent of the state tax liability. There are
no separate school taxes; such funds are derived from local property taxation.
Overall, Maryland is considered to have a healthy environment for business.
For over 30 years, the state of Maryland has actively discouraged the
creation of new municipalities, preferring to concentrate power in the county as
the basic form of local government. Zoning authority in Maryland is vested in
the local jurisdictions which regulate land use and the density of development.
Many counties have become increasingly concerned about the costs of growth and
development and have taken steps to manage growth through the planning and
zoning process. This trend will likely increase the costs of development over
the long term.
-19-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
TRANSPORTATION
Baltimore is centrally located in the mid-Atlantic region and has good
access to major markets along the East Coast and in the Midwest. The area is
served by an extensive transportation network which consists of highways,
rail-lines, an airport, seaport and public transportation.
The Baltimore MSA is traversed by a series of multi-lane highways.
Interstate 95 runs north-south connecting the Mid-Atlantic corridor to other
coastal regions. Along with the Baltimore/Washington Parkway, I-95 provides a
link between the Baltimore and Washington beltways. The proximity to I-95 has
encouraged the development of many industrial parks, particularly in Howard
County. Interstate 83 provides access to New York and Canadian markets.
Interstate 70 connects the Port of Baltimore with Pittsburgh and the Midwest.
Finally, all major arterials are accessible from Interstate 695, Baltimore's
five-lane circumferential beltway. Access to major interstate highways is a
major consideration for industrial users. The following chart illustrates
Baltimore's proximity to the East Coast and Midwest markets.
<TABLE>
<CAPTION>
=====================================================================
HIGHWAY DISTANCES FROM BALTIMORE
=====================================================================
City Miles
<S> <C>
=====================================================================
Washington, D.C. 40
------------------------------------ --------------------------------
Philadelphia 96
------------------------------------ --------------------------------
Richmond 143
------------------------------------ --------------------------------
New York 196
------------------------------------ --------------------------------
Pittsburgh 218
------------------------------------ --------------------------------
Boston 392
------------------------------------ --------------------------------
Chicago. 668
=====================================================================
SOURCE: DEPARTMENT OF ECONOMIC AND COMMUNITY DEVELOPMENT
=====================================================================
</TABLE>
The Baltimore region is served by five major and three short-line
railroads including AMTRAK, CSX, CONRAIL and Norfolk Southern Railroad. Nearly
610 railroad route miles traverse the region. CSX, CONRAIL and Norfolk Southern
carry freight throughout the region to points north, south and west. AMTRAK
passenger service, originating out of Baltimore's Pennsylvania Station, provides
access to the Northeast corridor including Washington, Philadelphia, New York
and Boston. Two commuter lines operated by MARC/CSX, connect Baltimore's Camden
and Pennsylvania Stations to Washington's Union Station.
Baltimore's buses connect nearly 80 miles of the city and provide access
to Annapolis, Maryland's state capitol. A recently completed subway system links
Baltimore's downtown region with the northwesterly suburbs, traveling 14 miles,
originating at Johns Hopkins Hospital and terminating at Owings Mill. A new,
27-mile long light-rail system was also recently constructed which connects Hunt
Valley in Baltimore County to the north with Glen Burnie in Anne Arundel County
to the south, with a spur to BWI Airport.
The Baltimore/Washington International Airport (BWI) is located in the
southerly portion of the Baltimore MSA in Anne Arundel County, ten miles from
downtown Baltimore. This modern airport hosts 18 passenger airlines that provide
direct air service to 135 cities in the United States and Canada. BWI also
provides service to air-freight carriers with its 110,000 square foot air cargo
complex. BWI services about 30 percent of commercial passengers, 38 percent of
-20-
<PAGE>
REGIONAL ANALYSIS
- -------------------------------------------------------------------------------
commercial operations and 57 percent of freight customers originating in the
Baltimore/Washington area. BWI has spawned the development of 15 new business
parks and has created nearly 10,000 jobs. A $140 million expansion is in
progress for a new international pier which will add 365,000 square feet of
space to the airport, doubling BWI's current capacity. At present, six aircraft
gates are planned with room for an additional 9 gates as needed.
Baltimore's water port stretches over 45 miles of developed waterfront and
reaches a depth of 42 feet. With its six million square feet of warehouse and
five million square feet of cold storage, the port serves 4,000 vessels yearly.
These extensive facilities can accommodate general, container, bulk and
break-bulk cargoes, making it the second busiest containerized cargo port in the
Mid-Atlantic and Gulf coast regions.
CONCLUSION
The Baltimore region has a diverse economic base. Historically a
manufacturing center, its industrial base has shrunk over the past 30 years. The
service sector has grown and has a major share of the local employment mix.
Government is also a significant employer, and provides a measure of stability
to the region's economy. The population of the region is growing moderately.
However, the suburban counties grew dramatically in the 1980s, as residents move
to the less-congested suburbs. The region has an extensive transportation system
with major interstate highways, a port, and international airport. It is
well-located along the mid-Atlantic coast, enabling it to serve major markets.
The long-term outlook for metropolitan Baltimore is generally positive.
The economic trends of the past thirty years have profoundly changed the economy
of the Baltimore MSA. The service sector has begun to fill the gap left by the
decline of heavy industries. The manufacturing industries, after a long period
of contraction, have begun to stabilize, and will continue to play a important
role in the region's economy.
-21-
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
AREA DEFINITION
The subject property is located on the east side of Greenside Drive, the
south side of Sorley Road, and the north side of Galloway Avenue in
Cockeysville, Baltimore County, Maryland. Neighborhood boundaries are considered
to be Shawan and Paper Mill Roads to the north, Interstate 83 to the west, the
Loch Raven Reservoir to the east, and Padonia Road to the south. The general
area is situated in the central portion of Baltimore County, north of Baltimore
City.
NEIGHBORHOOD CHARACTERISTICS
The subject is located along the York Road corridor, which extends from
Baltimore City north through Baltimore County continuing into the State of
Pennsylvania. York Road is the primary commercial thoroughfare through the area
that is developed with neighborhood and community shopping centers, restaurants,
automotive retailed uses, low and mid-rise office buildings, and other
free-standing commercial buildings.
Major established employers in the area are located north of the subject
in the Hunt Valley Business Community, Metropolitan Industrial Park, and
Cockeysville Road Industrial Park, as well as south within the Timonium and
Kilmarnock Industrial Parks. Other established employers are located about ten
miles south in the Central Business District (CBD) of Baltimore City.
Residential uses in the neighborhood comprise a mixture of older
garden-style apartments, condominiums, and single-family detached dwellings.
According to Equifax National Decision Systems, there are 19,009 housing units
within a three mile radius of the subject. About 43 percent of total inventory
comprises single family detached dwellings, with the remainder distributed
between single-family attached and multi-family units. Most of the housing stock
(73 percent) is 20+ years old. The median house value is $188,391 and the median
rent is $531. The occupancy rate is high with 95 percent of all housing units
occupied. There are a large proportion of renters, with 42 percent of all
housing units renter-occupied and the remaining 58 percent owner-occupied.
There are various schools in the immediate vicinity which serve the
community's educational needs, as well as adequate fire and police protection
and recreational amenities.
ACCESS
The neighborhood is considered to have good access via the combination
of interstate routes, state highways and local roads. Direct access to the
subject is via Greenside Drive, a secondary north/south artery which is
accessible from York Road via Padonia Road to the south and Cranbrook and Warren
Roads to the north. As previously discussed, York Road is a densely developed
primary commercial artery through the neighborhood. This thoroughfare
essentially parallels Interstate 83 (The Jones Falls Expressway) in a
north/south direction from Baltimore City northward through the State of
Pennsylvania. The subject has access to Interstate 83 immediately south via
Padonia Road. Both Interstate 83 and York Road connect with the Baltimore
Beltway about three miles south of the subject.
-22-
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
The Baltimore Beltway, a four to six lane circumferential highway
surrounding the City of Baltimore, traverses the northern and western boundary
of the neighborhood and provides convenient access to the surrounding
metropolitan area.
Public transportation is available to the neighborhood. Buses travel
along York Road, providing connections to local as well as regional employment
centers in the area. In addition, the area is served by Baltimore's Light Rail
System, an above ground trolley that extends from Glen Burnie in Anne Arundel
County through Baltimore City (along Howard Street) and northward to Hunt
Valley. An extension from Glen Burnie to BWI Airport is currently underway.
SURROUNDING LAND USES
Surrounding land uses are mixed and include a combination of
residential, retail, and office development. The subject is surrounded primarily
by residential uses including the Hunt Club and Deer Tree Apartments. Commercial
uses are concentrated primarily along York, Cranbrook, and Padonia Roads and
include neighborhood and community shopping centers, restaurants, automotive
retailed uses, low and mid-rise office buildings, and other free-standing
commercial buildings. The largest retailer in the area is Hunt Valley Mall, a
920,000 square foot regional mall constructed in 1981. Anchors include Wal-mart,
Sears, Hoyts Cinema, and Dick's Sporting Goods. This center is located about two
miles north of the subject at the northwest quadrant of Shawan and York Roads.
POPULATION
Demographic date for the subject micro market is provided by Equifax
National Decision Systems (ENDS). We have segregated our survey into three and
five-mile concentric circles. A detailed demographic profile of the neighborhood
is included in the ADDENDA. The population data for the three and five mile area
surrounding the subject is highlighted in the following table.
<TABLE>
<CAPTION>
============================================================================
POPULATION
============================================================================
YEAR 3 MILE 5 MILE
<S> <C> <C>
============================================================================
1980 37,366 72,510
1990 42,353 82,700
1999 42,740 86,179
2004 (Proj) 42,712 87,261
============================================================================
% Change 1980-1990 1.33% 1.41%
% Change 1990-1999 0.10% 0.47%
% Change 1998-2004 -0.01% 0.25%
============================================================================
</TABLE>
As can be seen, population in the subject area has remained relatively
stable since 1980, increasing at a nominal annual compound rate of 0.10 to 1.41
percent. Future projections are that the area will remain stable.
HOUSEHOLD INCOME
The 1999 estimated median household income for the immediate area ranges
from $56,461 to $63,056, which is above the MSA as a whole at $43,567. As the
radius from the subject expands, income increases. Household income data for the
three and five mile area surrounding the subject is highlighted in the following
table.
-23-
<PAGE>
NEIGHBORHOOD ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
===========================================================================
MEDIAN HOUSEHOLD INCOME
===========================================================================
YEAR 3 MILE 5 MILE
<S> <C> <C>
===========================================================================
1990 $45,690 $48,528
1999 $56,461 $63,056
2004 (Proj) $62,891 $70,492
===========================================================================
% Change 1990-1999 2.62% 3.33%
% Change 1998-2004 2.28% 2.36%
===========================================================================
</TABLE>
Between 1999 and 2004, the area is expected to experience annual
compound income growth of 2.28 to 2.36 percent, which is slightly lower than the
pace experienced over the past nine years of 2.62 to 3.33 percent.
SPECIAL HAZARDS OR ADVERSE INFLUENCES
The area contains several existing industrial parks, most of which are
light industry, producing no pollution. We observed no detrimental influences in
the neighborhood, such as land fills, noisy or air polluting industrial plants,
or chemical factories.
AVAILABILITY OF UTILITIES
All necessary utilities, including water and sewer, are available to the
subject neighborhood. Water and sewer are provided by Baltimore County.
Electrical power, natural gas, and telephone are provided by privately owned
public utility companies. All of these services are provided at a quality and
cost which is considered consistent with nearby competing communities.
CONCLUSION
The subject's immediate area is characterized as a mature residential
community which is well located with respect to transportation arteries and
employment centers. The demographic profile indicates a stable population base
with a median household income level above the MSA as a whole. Overall, we
expect that property values will remain stable for the near term and continued
investment in stabilized properties is warranted.
-24-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
To present an accurate picture of current and forecasted conditions of the
apartment market within the Baltimore metropolitan area, we compiled data
regarding the overall market, various delineated submarkets, and the subject's
specific micro market. To the best of our knowledge, there are no published
statistics on vacancy rates and rental trends for apartment properties in the
subject's immediate neighborhood. The data utilized in this analysis was
obtained from various sources including the YEAR END 1998 REPORT:
WASHINGTON/BALTIMORE REGION CLASS A RENTAL APARTMENT MARKET published by Delta
Associates, Inc., First Quarter 1999 REAL ESTATE INVESTOR SURVEY published by
Korpacz, data provided by REIS Reports, discussions with J. Michael Curtis, an
apartment broker with Cushman & Wakefield of Washington, D.C., Inc., and data
contained in our files specific to apartment projects in suburban Baltimore.
Supplemental information regarding specific competitive apartment projects that
have an impact on the subject (i.e., micro market) was provided by interviews
with property managers and knowledgeable market participants.
INVESTMENT CLIMATE
Investors in the investment-grade apartment market today include pension
funds, insurance companies, private partnerships, and to a lesser extent, some
real estate investment trusts (REITs). Such investors typically purchase
stabilized apartment properties on a direct capitalization basis. However, the
discounted cash flow analysis is also utilized as a check on the reasonableness
of the direct capitalization method, as well as in cases where the property is
not stabilized. The effective gross income multiplier (EGIM) and the "price per
unit" are also common units of comparison; however, such units of comparison are
generally given secondary emphasis due to the significant physical differences
between various apartment complexes, as well as differences between the
components of effective gross income.
According to the Korpacz survey, the apartment continues to exhibit
remarkable endurance. Despite the large number of new units added to inventory
in recent years, absorption has generally been good and the apartment market is
close to equilibrium. There are pockets of concern, but overall demand is
expected to exceed supply slightly over the next 18 months. Construction has
slowed in recent months due to the REIT withdrawal from development activity.
The squeeze on their capital and higher costs have limited their participation.
Investors are currently interested in acquiring urban properties; they believe
they offer outstanding investment potential due to the surge in residential
population in the downtown areas that were formerly deserted after business
hours.
The recent interest rate environment has provided opportunities for
renters to become home owners in many markets. This impacts the upscale projects
most directly as they rents that may equal the monthly cost of homeownership.
This is not as evident for middle income renters who may not have the financial
means to purchase a home. The recent recession and lack of confidence in future
income has greatly impacted the multi-family residential market. Many residents
chose to rent rather than buy during this uncertain time. This is evidenced by
the high rental demand in the county and the nationally growing apartment
market. Emerging Trends notes that most new apartment construction is geared to
the luxury apartment market with little attention given to the class B market.
As a result, the middle market has not softened as much and remains a
recommended investment.
-25-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
The one overriding factor that favors apartments is demographics. By the
year 2000 approximately 63 million people will be between the ages of 45 and 64.
This segment of the population will be empty nesters or retired and potential
renters as they move from large homes that no longer suit their needs. The prime
demographic group for renters is people age 35 to 65 who live alone. This group
is expected to expand nationally by five percent by 2010. The Baltimore MSA
experienced a 15.64 percent in this age group between 1990 and 1997 and is
projected to increase 7.13 percent by 2002. This shift in the age of the
population exceeds the national average.
The Korpacz study states that apartment prices range from 75 to 120
percent of replacement cost. The average price is 96.6 percent of replacement
cost, although little change is forecast over the next 12 months. Investors
believe the national market is in equilibrium. The average free and clear equity
IRR for the First Quarter 1999 increased 12 basis points from 11.36 percent last
quarter to 11.48 percent. The average free and clear overall capitalization rate
of 8.83 percent indicated an increase of six basis points from the previous
quarter of 8.77 percent. The residual capitalization rate has also increased to
9.22 percent from 9.20 percent last quarter.
In our discussions with brokers active in the apartment market, and our
review of recent sales, Class A projects have been trading at overall
capitalization rates in the 8.0 to 9.0 percent range (after reserves). Depending
upon the construction quality and amenities offered, coupled with the location,
these capitalization rates translated into prices of $60,000 to $90,000 per
unit. Class A- and B+ properties, generally constructed during the 1980s, have
been selling on slightly higher overall capitalization rates of 9.0 to 9.5
percent. This translated into sales prices of $45,000 to $60,000 per unit. Class
B- and C properties have been commanding capitalization rates in the 10.0 to
11.0+ percent range, with corresponding unit prices in the range of $35,000 and
under.
Capital for new and existing projects stems from traditional
sources--commercial banks--but with high equity requirements. These banks
include NationsBank, Citicorp, First Maryland National Bank, and First Union as
well as U.S. affiliates of foreign banks. For class A apartments, mortgage rates
are currently 120 to 140 basis points over U.S. Treasuries, depending on
loan-to-value ratio, which presently ranges from 60 to 80 percent. The typical
debt service coverage ratio is 1.25 percent after recognition of the unit
replacements. Other apartments, class B or less, require spreads between 150 and
225 basis points over U.S. Treasuries, with similar debt service ratio. In
general, loans are structured based on a seven to ten year maturity or right to
call, and a 30 year amortization period, except the pre-1980s complexes which
have a 20 year amortization period.
BALTIMORE APARTMENT MARKET
According to the year-end 1998 REIS Reports, vacancy for the Baltimore MSA
increased to 4.6 percent from 4.4 percent in 1997. The average vacancy over the
past decade has been about 5.7 percent. The following table exhibits the total
number of apartment units permitted, completed and absorbed in the past ten
years.
-26-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
======================================================================
BALTIMORE MSA APARTMENT ACTIVITY
======================================================================
PERMITS (UNITS) COMPLETIONS ABSORPTION
YEAR (UNITS) (UNITS)
<S> <C> <C> <C>
- ---------------- ----------------- ----------------- -----------------
1988 N/A 2,887 2,918
1989 N/A 3,482 2,948
1990 4,031 3,430 4,890
1991 1,759 2,080 387
1992 2,146 1,781 2,249
1993 2,357 1,031 389
1994 1,820 568 1,470
1995 1,547 723 1,509
1996 1,419 1,136 1,473
1997 1,819 880 1,017
======================================================================
</TABLE>
Delta Associates, Inc. also publishes a quarterly apartment survey for
the Washington/ Baltimore region for Class A rental properties in selected
submarkets. The Baltimore market is divided into three submarkets: THE
SOUTHERN SUBURBS, which includes Anne Arundel County and Columbia (Howard
County), THE NORTHERN SUBURBS, which includes West and Northwest Baltimore
County, North and Northeast Baltimore County, and Harford County, AND
BALTIMORE CITY. The subject is considered part of the North and Northeast
Baltimore County submarket.
According to Delta's year-end 1998 WASHINGTON/BALTIMORE REGION RENTAL
APARTMENT MARKET REPORT, the overall vacancy rate for Suburban Baltimore Class A
apartments was 3.6 percent, which is down from 4.6 percent in 1997 and 10.4
percent in 1996. The stabilized vacancy rate was substantially lower at 2.1
percent, which is down from 4.6 percent in 1997 and 5.4 percent in 1996. This
figure is relatively consistent with the vacancy indicated by the REIS Report
mentioned above. The North and Northeast Baltimore County submarket has an
overall vacancy significantly lower than the Suburban Baltimore market as a
whole at 0.8 percent. The following table depicts the average occupancy rates,
asking and effective rents, and growth rates for the suburban market as a whole
and the subject's submarket.
-27-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
===============================================================================
SUBURBAN BALTIMORE
CLASS A GARDEN APARTMENTS
AS OF YEAR-END 1998
===============================================================================
NORTH AND NORTHEAST BALTIMORE
SUBMARKET BALTIMORE MSA
--------- ------------------- ----------
<S> <C> <C>
- -------------------------------------------------------------------------------
Units Surveyed 1,041 11,939
Overall Vacancy 0.8% 3.6%
Stabilized Vacancy 0.8% 2.1%
Face Rent $751 $860
Effective Rent $749 $855
Concessions as a % Face Rent 0.3% 0.5%
Rent Growth over past 12 Months 4.3% 4.7%
Average Absorption (Units per Month) 20 N/A
Planned Units Expected to be delivered
within the next 36 months 524 2,873
===============================================================================
</TABLE>
As depicted, face rents in the subject's North and Northeast Baltimore
submarket are significantly lower than the Suburban Baltimore market as a whole.
Concessions in this submarket are virtually non-existent at 0.3 percent compared
to 0.5 percent for the market as a whole. The average absorption for new
market-rate projects in the subject submarket is 20 units per month. Over the
next 36 months, there are 524 units expected to be delivered in this submarket
compared to 2,873 for Suburban Baltimore. The bulk of new construction activity
in the MSA is planned for the Northern Suburban market (North and West Baltimore
County) with 1,447 units either under construction or likely to be started over
the next 36 months. This represents 50 percent of all new units within the
entire market. With 524 planned units, the subject's West and Northwest
Baltimore submarket accounts for about nine percent of all new units.
PROPOSED CONSTRUCTION
Based on our discussions with local market participants and a review of
Delta's year-end 1998 WASHINGTON/BALTIMORE REGION RENTAL APARTMENT MARKET
REPORT, there are various proposed projects slated for Baltimore County. There
are two projects proposed in the Owings Mills area: the Gates @ Owings Mills and
Briarwood @ Owings Mills. The Gates @ Owings Mills is proposed for 159 units.
Preleasing began in October 1998 and is anticipated for completion in late 1999.
Briarwood @ Owings Mills is slated for 348 units. Preleasing is anticipated for
July 1999, with completion of construction in June 2000. Lastly, there is a 312
unit complex known as Cambridge Court proposed in White Marsh. Preleasing is
anticipated for July 1999, with completion in June 2000.
MICRO MARKET ANALYSIS
The subject's competition is comprised of class B apartment projects of
similar age, condition, construction quality and amenities characteristics as
the subject. The following table highlights the most competitive apartment
complexes in the micro market. Each of the comparable rental properties is
described in detail in the Addenda.
-28-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
INSERT RENT CHART
-29-
<PAGE>
APARTMENT MARKET ANALYSIS
- -------------------------------------------------------------------------------
All of the comparables surveyed represent Class B apartment projects
constructed between 1966 and 1978. The total number of units for each complex
ranges from 192 to 609 units, while the individual unit sizes range from 700 to
1,175 square feet. For comparison purposes, the subject was constructed in 1969,
contains 468 units, and has individual unit sizes of 691 to 1,166 square feet.
The five complexes revealed occupancy levels ranging from 97 to 99
percent, with a weighted average occupancy of 98.2 percent. Current quoted
average monthly rental rates range from $575 to $875 per month or $0.66 to $1.01
per square foot. The subject's proforma rents of $675 to $940 per month or $0.81
to $0.98 per square foot falls within the range on a per square foot basis;
however, as will be discussed in the INCOME CAPITALIZATION APPROACH, the
subject's three-bedroom units are currently above market.
Concessions such as free rent or discounted rent are currently not
offered in the market; however, most of the complexes have move-in specials in
the form of reduced security deposits. Typical project amenities include a
swimming pool, clubhouse, laundry facilities, and/or playgrounds. Unit amenities
include a range/oven, frost free refrigerator, dishwasher, disposal, vertical or
mini blinds, and patio/balcony. Some complexes offer a fitness center and
washer/dryers.
-30-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
SITE DESCRIPTION
Location: East side of Greenside Drive, south side of
Sorley Road, and the north side of Galloway
Avenue, in Cockeysville, Baltimore County,
Maryland
Shape: Irregular
Land Area: 28.744 acres
Frontage: The site has frontage along the east side of
Greenside Drive, the south side of Sorley Road
and the north side of Galloway Avenue.
Terrain: Gently rolling topography
Street Improvements: Greenside Drive, Sorley Road and Galloway Avenue
are secondary streets that are improved with
curbs, gutters and street lights.
Soil Conditions: We did not receive nor review a soil report.
However, we assume that the soil's load-bearing
capacity is sufficient to support the existing
structures. We did not observe any evidence to
the contrary during our physical inspection of
the property. The tract's drainage appears to
be adequate.
Utilities All essential utilities including electricity,
gas, water, sewer, and telephone are currently
serving the site.
Access: The site's primary access is from Greenside Drive.
Land Use Restrictions: Based on a review of the title policy,there do
not appear to be any easements, encroachments, or
restrictions that would adversely affect the
site's use. However, we recommend a title search
to determine whether any adverse conditions exist.
Flood Hazard: Based on a review of the survey plat prepared by
GWS & Associates, Inc., dated December 9, 1997,
the subject property is not located in a flood
hazard zone.
Wetlands: We were not given a wetlands survey. If subsequent
engineering data reveal the presence of regulated
wetlands, it could materially affect property value.
We recommend a wetlands survey by a competent
engineering firm if additional concern exists.
</TABLE>
-31-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Seismic Hazard The site is not located in a Special Study Zone.
Site Improvements: The subject improvements consist of 39 three-story
apartment buildings, a swimming pool, clubhouse/
leasing office, macadam paved parking, and
landscaping.
Hazardous Substances: We observed no evidence of toxic or hazardous
substances during our inspection of the site.
However, we are not trained to perform technical
environmental inspections and recommend the
services of a professional engineer for this
purpose.
Comments: The subject site has good frontage along a
secondary, but connecting residential roadway.
The property is of adequate size for development
with a multi-family residential project. It is
situated in a mature residential area of Baltimore
County. Overall, the property is ideally suited for
a multi-family apartment community.
</TABLE>
IMPROVEMENTS DESCRIPTION
The following physical description of improvements was developed from
our discussions with on-site management and our physical inspection of the site.
We were not provided with building plans. The subject is improved with a 468
unit apartment complex including one model unit. The total net rentable area is
435,458 square feet, which results in an average unit size of 930 square feet.
Construction consists of wood framing with the exterior being comprised of brick
veneer and aluminum siding. The primary roof structure is a wood truss system
(pitched roof) with composition shingle covering. There is adequate on-site
parking.
According to property management, the property has been continually
maintained over the past several years. The parking lot was reportedly sealed
and stripped in sections, appliances were replaced in phases over the past three
years, and the roof was repaired in sections six to seven years ago.
Nonetheless, the property suffers from deferred maintenance including sprinkler,
catwalk, life safety, HVAC, piping, and lighting repairs. Based on a review of
the capital budget and discussions with management, deferred maintenance totals
about $920,000.
The subject's common area amenities include a swimming pool, clubhouse,
fitness center, and two playgrounds. According to property management, there is
an easement agreement with the adjacent Hunt Club Apartments for use of their
tennis courts and vice versa. Unit amenities include kitchens with frost free
refrigerators, oven/ranges, dishwashers, and disposals. The one bedroom units
have stackable washer/dryers, while the two and three bedroom units have full
washer/dryers. The bathrooms have package tub/showers, porcelain toilets and
sinks, and exhaust fans. Window treatments including mini blinds for the windows
and vertical blinds for patio doors.
We inspected a representative sample of units in the complex and found
them to be in good condition. According to the property manager, the uninspected
units were in similar condition and there were no unleasable units.
-32-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
GENERAL DESCRIPTION
Year Built: 1969
Type: Two and three-story apartment
buildings
Unit Mix:
<TABLE>
<CAPTION>
========================================================================================================
UNIT MIX/OCCUPANCY/RENTAL RATES
========================================================================================================
NET NO. QUOTED
UNIT TYPE NO. SIZE RENTABLE UNITS MONTHLY RENT
UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
1-BR/1-BA 97 98% $675 $0.98
691 67,027 95
1-BR/1-BA/Den 39 92% $710 $0.89
801 31,239 36
2-BR/1.5-BA 260 94% $785 $0.81
974 253,240 244
3-BR/2-BA 72 1,166 83,952 67 93% $940 $0.81
Total 468 930 435,458 442 94% $780 $0.84
========================================================================================================
</TABLE>
Net Rentable Area: 435,458 Square Feet
Average Unit Size: 930 Square Feet
CONSTRUCTION DETAIL
Foundation: Concrete block
Exterior Walls: Brick veneer and aluminum siding
Roof Structure/Cover: Gable roof with composition shingle. Gutter
Gutter and downspouts are aluminum.
Windows: Aluminum-framed double hung casement windows
Doors: Steel doors.
MECHANICAL DETAIL
Heating and Cooling: Individual heat pumps.
Plumbing Service: The units have one to two full baths with
standard plumbing fixtures.
Electrical Service: Assumed to meet code
Fire Protection: The buildings are not sprinklered. There are
smoke detectors in the individual apartments.
-33-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
INTERIOR DETAIL
Floor Covering: Carpet in the living areas, vinyl flooring in
the kitchen and ceramic tile in the baths.
Walls: Painted sheetrock
Ceiling: Painted sheetrock
Lighting: Fluorescent and/or incandescent with standard
apartment fixtures.
Unit Appliances: Standard appliances include a frost-free
refrigerator, gas range/oven, dishwasher,
disposal, and washer/dryers.
Project Amenities: Project amenities include a swimming pool,
clubhouse, fitness center, and two playgrounds.
On-Site Parking: There is adequate on-site macadam paved parking.
We were not provided with the actual number of
parking spaces.
Landscaping: The grounds are landscaped with mature trees,
bushes, shrubs and grass.
Americans With
Disabilities Act: The Americans With Disabilities Act (ADA)
became effective January 26, 1992. We have
not made, nor are we qualified by training
to make, a specific compliance survey and
analysis of this property to determine whether
or not it is in conformity with the various
detailed requirements of the ADA. It is
possible that a compliance survey and a
detailed analysis of the requirements of the
ADA could reveal that the property is not in
compliance with the Act. If so, the value of
the property could be negatively impacted.
Since we have not been provided with the
results of a survey, we did not consider
possible non-compliance with the requirements
of ADA in estimating the value of the property.
Hazardous Substances: We are not aware of any potentially hazardous
materials (such as formaldehyde foam insulation,
radon gas emitting materials, or other
potentially hazardous materials) which may have
been used in the construction or maintenance of
the improvements. We are not qualified to detect
such materials and urge the client to employ an
expert in the field to determine if such hazardous
materials were thought to exist.
-34-
<PAGE>
PROPERTY DESCRIPTION
- -------------------------------------------------------------------------------
Physical Condition: Based on our inspection, the subject property
is judged to be in good physical condition.
Personal Property Included
in Value Estimate: The subject property has the typical personal
property associated with an apartment complex,
including refrigerators and ovens. While we
recognize that there are various items of
personal property associated with the
operations of an apartment complex, buyers in
the market do not typically allocate a separate
value for standard appliances in their purchase
decisions. Therefore, we have not allocated a
separate value for these items, but do
recognize that they are an integral part of the
apartment operation.
Design Features
and Functionality: Based on our inspection of the subject of the
subject property, coupled with inspections of
several competitive complexes in the area, the
subject appears to have competitive functional
and design characteristics typical of apartment
complexes. Overall, the property appears to be a
positive competitor within the market.
Comments: Although the property has been continually
maintained over the past several years, it
currently suffers from deferred maintenance
including sprinkler, catwalk, life safety,
HVAC, piping, and lighting repairs. Based on a
review of the capital budget and discussions
with management, deferred maintenance totals
about $920,000.
The subject property was constructed in 1969
and is 30 years old. Based on our physical
inspection of the site, we conclude that the
structure's effective age is equivalent to
about 25 years.
Information published by the Marshall Valuation
Service indicates that the typical economic
life expectancy for retail improvements is
about 45 years. The difference between the
normal economic life and the effective age
results in an estimate of remaining economic
life of 20 years.
-35-
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- -------------------------------------------------------------------------------
The subject property is located in Baltimore County and is assessed by
the Maryland Department of Assessment and Taxation. This department is an
independent state agency responsible for real and personal property assessment
as well as the mapping of all real estate. The applicable tax rate is set by the
local jurisdiction and is a combination of state, county and city rates.
Maryland's assessment system is based on a three-year cycle in which
one-third of all taxable real estate is physically inspected and reassessed each
year. Assessments are based upon an estimate of ad valorem value known as full
cash value. The state assessors utilize the three traditional approaches to
value: Cost, Sales Comparison, and Income Capitalization Approach. To lessen the
impact of any increase in full cash value, a three year phase-in period is
implemented. This provides for one-third of the increase in full cash value
added to the first year of the assessment cycle with the balance being added in
equal installments over the next two years.
Assessments are a percentage of the full cash value of the property.
Once the full cash value and associated phase-in value is determined, a
percentage known as an equalization ratio is applied to ascertain the
assessment. The equalization ratio is 40 percent. The current assessing
procedure has been in effect since 1979.
Property owners receive an assessment notice once every three years.
These notices are generally issued in December of the year in which the property
was reviewed by the assessor. The notice shows the proposed full cash value as
of January 1, which is known as the date of finality. The proposed full cash
value is the basis upon which assessments for the following three taxable years
will be based. The state operates on a fiscal year basis from July 1 through
June 30th. The subject was recently reassessed as of January 1, 1999 and is in
the first year of the three year phase-in cycle.
TAX RATES
The current fiscal year 1999/2000 tax rate for Baltimore County is
$2.855 per $100 of assessed value. Added to this figure is the State of Maryland
rate of $0.21 per $100 of assessed value. Thus, the total tax liability is
equivalent to $3.065 per $100 of assessed value.
The tax rate has remained constant since fiscal year 1994/95. This,
however, may not continue with the commercial real estate market strengthening
from the recession of the early 1990s. Nonetheless, it is difficult, at best, to
judge the likelihood of future tax rate increases when viewing only a three year
history. Tax rates tend to increase or decrease based upon increasing government
budgets and the total tax base. Over the long term, tax rates tend to track
inflationary trends, except in fast growing areas where new services are
required.
In this analysis, we have assumed no significant future increases in the
tax rates given the improving real estate climate which should reverse the
recent trend of decreasing or flat real property assessments. In fact, there is
the possibility of increasing assessments over time. This scenario, however, is
difficult to accurately model.
-36-
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- -------------------------------------------------------------------------------
TAX ASSESSMENT
The subject property is identified for real estate assessment and
taxation purposes as account number 08-1600004952. The subject's fiscal year
1999/200 assessment and real estate tax burden are outlined in the following
table.
<TABLE>
<CAPTION>
=================================================
ASSESSMENT AND TAXES
<S> <C>
=================================================
Land $3,652,000
Improvements $13,654,700
-----------
Total $17,306,700
Phase-in $16,322,713
Assessment $6,529,080
Tax Rate $3.065
-----------
Estimated Taxes $200,116
=================================================
</TABLE>
In addition to these taxes, the subject is liable for metropolitan
charges equivalent to $117,787 including water and sewer benefits, and sewer
service. Thus, the total tax liability associated with the subject property is
$317,903 or $679 per unit for the tax year July 1, 1999 through June 30, 2000.
The subject property was recently assessed in January 1999 and
experienced an increase of $1,475,980 over the prior base year. The increase was
attributable to the improvements only. Land value remained constant at
$3,652,080. As previously discussed, increases in full cash value are phased-in
over a three year period. Thus, the subject's annual phase-in is $491,993 as
depicted in the following chart:
<TABLE>
<CAPTION>
=================================================================
ESTIMATED PHASE - IN
FISCAL YEARS 1999-2001
<S> <C>
=================================================================
Current Full Cash Value $17,306,700
Base Value (Prior FCV) $15,830,720
-----------
Value Increase $1,475,980
Annual Phase-In (3 year cycle) $491,993
=================================================================
</TABLE>
By adding the annual phase-in to the subject's base value, the subject's
full cash value and assessment can be estimated for the ensuing two years as
follows:
-37-
<PAGE>
REAL PROPERTY TAXES AND ASSESSMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
ESTIMATED FULL CASH VALUE AND ASSESSMENT
FISCAL YEARS 1999-2001
================================================================================
PHASE-IN ASSESSMENT
FULL CASH VALUE (40%)
<S> <C> <C>
================================================================================
Base Value $15,830,720
Annual Phase-In $491,993
-----------
Fiscal Year 1999/00 $16,322,713 $6,529,080
Annual Phase-In $491,993
-----------
Fiscal Year 2000/01 $16,814,706 $6,725,880
Annual Phase-In $491,993
-----------
Fiscal Year 2001/02 $17,306,700 $6,922,680
================================================================================
</TABLE>
Assuming the tax rate will approximately the past five years history and
remain stable, and that metropolitan charges will increase at an annual rate of
3.0 percent, real estate taxes are equivalent to $327,469 for fiscal year 2000
and $337,140 for fiscal year 2001, as depicted in the following chart.
<TABLE>
<CAPTION>
===============================================================================================================
ESTIMATED R.E. TAXES
FISCAL YEARS 1999-2001
===============================================================================================================
TAX RATE PER $100 OF METROPOLITAN ESTIMATED
FISCAL YEAR ASSESSMENT ASSESSED VALUE CHARGES R.E. TAXES
<S> <C> <C> <C> <C>
===============================================================================================================
FY 1999 $6,529,080 $3.065/$100 $117,787 $317,903
FY 2000 $6,725,880 $3.065/$100 $121,321 $327,469
FY 2001 $6,922,680 $3.065/$100 $124,960 $337,140
===============================================================================================================
</TABLE>
In the discounted cash flow analysis, we used our derived taxes
presented above for fiscal years one through three. Thereafter, real estate
taxes have been increased at 3.0 percent per year.
-38-
<PAGE>
ZONING
- -------------------------------------------------------------------------------
The subject property is zoned DR 16, Density Residential, under Baltimore
County Zoning Ordinance. The primary intent of this zone is for the development
of multifamily complexes. In addition, this designation permits a number of
public and non-profit institutions, government buildings, and various accessory
uses. In general, office, retail and industrial are not permitted.
This classification stipulates the area and density requirements depending
on the type of residential usage considered. For purposes of this appraisal, we
will outline the specific requirements applicable to the multifamily use. These
are as follows:
Density: 16 units per acre
Minimum Lot Width: 20 feet
Minimum Setbacks:
Front Yard: 10 feet
Side Yard: 25
Rear Yard: 30 feet
Minimum Off-Street
Parking Requirements: 1.25 spaces per efficiency;
1.5 spaces per one or two bedroom
units, 2.0 spaces per three
bedroom unit
Based on the above information and our review of the survey plat prepared
by GWS, Inc., the existing improvements appear to comply with the constraints
imposed by zoning in terms of density and parking. The determination of
compliance, however, is beyond the scope of this appraisal. We were not provided
with the actual number of parking spaces, therefore, we were unable to determine
if the property is in compliance with parking requirements.
We are not aware of any restrictive covenants or deed restrictions
(private or public) which would further limit the use of the subject property.
However, this statement should not be taken as a guarantee or warranty that no
such restrictions exist. Deed restrictions are a legal matter and only a title
examination by an attorney or title company would normally uncover such
restrictive covenants. Thus, an updated title search of the subject property is
recommended to determine if any such restrictions do exist.
-39-
<PAGE>
HIGHEST AND BEST USE ANALYSIS
- -------------------------------------------------------------------------------
HIGHEST AND BEST USE
According to the DICTIONARY OF REAL ESTATE APPRAISAL, Third Edition
(1993), a publication of the Appraisal Institute , the highest and best use of
real property is defined as:
The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum profitability.
We evaluated the sites' highest and best use as if vacant. In this case,
the highest and best use must meet the aforementioned criteria. The use must be
(1) legally permissible, (2) physically possible, (3) financially feasible, and
(4) maximally productive.
HIGHEST AND BEST USE, AS IF VACANT
The first criteria concerns the permitted uses. The property is zoned
DR-16, a residential district that allows multifamily uses. According to the
current zoning designation, residential uses are permitted, but commercial and
industrial are not. Therefore, based solely on its legally permissible uses, it
appears that multi-family residential development is the most likely use for the
site.
The second criteria is what is physically possible. As discussed in the
PROPERTY DESCRIPTION section of this report, the site's size, shape, topography,
frontage, availability of utilities, etc. should not limit its use from a
multi-family perspective.
The third and fourth tests are, respectively, what is feasible and what
will produce the highest net return. After determining those uses which are
physically possible and legally permissible, the remaining uses must be analyzed
in light of their financial feasibility. That is, for a potential use to be
seriously considered, it must have the potential to provide a sufficient return
to attract investment capital from alternative forms of investments.
Most of the uses surrounding the subject consist of residential
development. There are no surrounding uses or neighborhood trends which suggest
that the zoning of the site should be changed to accommodate another use. Based
on the surrounding development, a medium density multi-family residential use
would be most suitable for the subject site.
As discussed in the APARTMENT MARKET ANALYSIS section, there has been
improvement in the multi-family rental market over the past several years.
Overall, the apartment market is experiencing strong occupancy levels and
increasing rental rates. Strong market conditions have brought about the
construction of several new apartment projects, suggesting that new construction
is feasible.
Based on the foregoing, it is our opinion that the highest and best use of
the subject, as though vacant, is for development of a multi-family rental
complex.
-40-
<PAGE>
HIGHEST AND BEST USE ANALYSIS
- -------------------------------------------------------------------------------
HIGHEST AND BEST USE, AS IMPROVED
The subject site is improved with a multi-family apartment project that
is 94 percent occupied. This is consistent with our concluded highest and best
use, as if vacant. As will be discussed later in this report, the improvements
are capable of providing a satisfactory return to the land over both the near
and long term. This conclusion is obviously contingent upon management pursuing
a course of action in managing and maintaining the property that will maximize
its occupancy and rent levels. For these reasons, it is our opinion that the
highest and best use, as improved, is for continued use as an apartment complex.
-41-
<PAGE>
VALUATION PROCESS
- -------------------------------------------------------------------------------
Appraisers typically use three approaches in valuing improved
properties. These include the COST APPROACH, the SALES COMPARISON APPROACH and
the INCOME APPROACH. The type and age of the property and the quantity and
quality of data affect the applicability of each approach in a specific
appraisal situation. The strengths and weaknesses of each approach utilized are
weighed in the final analysis with the approach or approaches offering the
greatest quantity and quality of supporting data is given the most consideration
in the final analysis.
In this appraisal, we used the SALES COMPARISON APPROACH and the INCOME
CAPITALIZATION APPROACH to develop a market value estimate.
THE COST APPROACH WAS NOT PERFORMED FOR THE FOLLOWING REASONS:
- This approach is more relevant for new construction or where
sufficient information is available to reasonably estimate
the replacement cost new of the improvements and land.
- The investment marketplace does not typically trade
apartment complexes such as the subject on a cost/value
basis, particularly in markets where it is generally
perceived that cost may exceed value, particularly for
complexes like the subject, which are in excess of 30 years
old.
- The subjectivity of accurately estimating accrued
depreciation of the existing improvements significantly
limits the reliability of this approach.
IN THE SALES COMPARISON APPROACH, WE:
- Searched the market for recent apartment sales;
- Analyzed those sales on the basis of the sales price per
unit, overall capitalization rates, and net income
multipliers, and
- Correlated the various value indications into a point value
estimate from within the range.
IN DEVELOPING THE INCOME CAPITALIZATION APPROACH, WE:
- Studied the rents in effect at competing complexes to
estimate the potential rental income at market levels;
- Estimated the income from sources other than apartment
rentals;
- Reviewed the current occupancy and vacancy statistics for
the purpose of developing a vacancy and collection loss
forecast;
- Studied the recent history of operating expenses at this and
competing properties to estimate an appropriate level of
expenses and reserves for replacement;
- Estimated the net operating income and cash flow by
subtracting the operating, fixed and other expenses from the
effective gross income;
-42-
<PAGE>
VALUATION PROCESS
- -------------------------------------------------------------------------------
- Capitalized the net operating income into an indication of
value using the direct capitalization method;
- Prepared a discounted cash flow analysis in which the
estimated income and expenses over a 10 year forecast, and
the estimated property value at the time of reversion, are
discounted at an appropriate rate to estimate present market
value.
The appraisal process is concluded by a review and re-examination of
each of the approaches to value that has been employed. Consideration is given
to the type and reliability of data used and the applicability of each approach.
Finally, the approaches are reconciled and a final value conclusion is
estimated.
-43-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
METHODOLOGY
In the SALES COMPARISON APPROACH, we estimated value by comparing the
subject property with similar, recently sold properties in surrounding or
competing areas. Inherent in this approach is the principle of substitution,
which holds that when a property is replaceable in the market, its value tends
to be set at the cost of acquiring an equally desirable substitute property,
assuming that no costly delay is encountered in making the substitution.
By analyzing sales that qualify as arm's-length transactions between
willing and knowledgeable buyers and sellers, we can identify value and price
trends. The basic steps of this approach are:
1. research recent, relevant property sales and current
offerings throughout the competitive area;
2. select and analyze properties that are similar to the
property being appraised, considering changes in economic
conditions that may have occurred between the sale date and
the date of value, and other physical, functional, or
locational factors;
3. identify sales that include favorable financing and
calculate the cash equivalent price;
4. reduce the sale prices to a common unit of comparison such
as price per unit and overall capitalization rate;
5. make appropriate comparative adjustments to the prices of
the comparable properties to relate them to the property
being appraised; and
6. interpret the adjusted sales data and draw a logical value
conclusion.
The most widely-used and market-oriented units of comparison for
multi-family residential projects like the subject are the sales price per unit
(used by buyers, sellers, and brokers). In addition to this method, we employed
the net income multiplier analysis, which considers the income characteristics
of the property.
The net income multiplier method is considered a reliable indicator of
value because it considers the income characteristics of the property, however,
the price per unit provides an alternative value indication and a check for
reasonableness. The chart and map on the following pages summarize recent market
data considered to be most indicative of the subject's current market value.
Detail sheets with photographs relating to each of the sales can be found in the
ADDENDA of this report.
-44-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
INSERT SALES SUMMARY
-45-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
ANALYSIS OF SALES PRICE PER UNIT
Comparability of the physical, neighborhood, and economic
characteristics are the most important criteria in analyzing these sales in
relation to the subject property. The sales on the following page represent
recent Class B apartment sales in the Baltimore metropolitan area. The sales
exhibited a wide range of unit prices, ranging from $36,445 to $52,874 per unit.
With respect to the overall analysis, it appears that the variance in sales
prices are associated with locational and economic issues. However, it is
important to address each property in terms of the conventional sequence of
adjustments relative to the subject. The analysis primarily concentrates on
differences meriting adjustment with the specific aspects of each comparable
noted in the summary chart.
The first four elements that must be considered in advance of applying
any other compensating factors to derive a value conclusion via the sales price
per unit are property rights, financing, and conditions of sale, and market
conditions. We concentrated our analysis on the differences which merit
adjustment, with the specific aspects of each comparable noted in the
descriptions of each property included in the ADDENDA.
PROPERTY RIGHTS CONVEYED
As shown in the summary chart, all of the comparables are substantially
occupied and encumbered by short term leases; therefore, the fee simple estate,
subject to short term leases, was conveyed in each case. Consequently, no
adjustments are warranted for differences in property rights conveyed.
SELLER FINANCING / CASH EQUIVALENCY
All of the comparable sales were either financed at market terms at the
time of sale or were cash transactions. Thus, no adjustment for financing is
required.
CONDITIONS OF SALE
We identified no special motivational conditions concerning any of the
comparable sales. Therefore, in our opinion, no adjustment is warranted for this
factor.
MARKET CONDITIONS
As shown in the summary table, the transactions occurred between January
1998 and March 1999. All of the sales occurred within the past 12 to 18 months
and do not require adjustment.
OTHER
Other adjustments considered are for location, condition, age-quality,
amenities, and economic characteristics. These factors are considered for each
property and are discussed below.
-46-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
LOCATION
In order to determine a locational adjustment, we compared the gross
potential rent of the sales to that of the subject. We recognize that gross
rents are a function of both location and age/condition, and have taken this
into consideration in our overall adjustments to the sales. For comparison
purposes, the subject has an annual gross rent potential of $9,358 per unit. We
were unable to obtain the gross rents for Sale I-1. Silver Spring is generally
considered a superior locale relative to the subject given its location within
the Washington metropolitan area and its proximity to the District of Columbia.
We adjusted this sale slightly downward for location. The following chart
depicts the gross rent potential of the comparables and our raking of location.
<TABLE>
<CAPTION>
======================================================
LOCATIONAL ADJUSTMENTS
======================================================
SALE GROSS RENT RANKING
<S> <C> <C>
======================================================
Sale I-1 N/A N/A
Sale I-2 $8,784 Slightly Inferior
Sale I-3 $9,031 Slightly Inferior
Sale I-4 $6,977 Inferior
======================================================
</TABLE>
PHYSICAL
We considered whether age or condition of the comparables may have a
bearing on their pricing. Typically, older properties carry a more negative
connotation because of the lesser remaining useful lives of many of the building
components. An adjustment for age and condition also takes into account the
quality of the construction of the property, the maintenance and condition of
the property, as well as aesthetics, utility of the design, and amenities
offered.
The subject was constructed in 1969. All of the comparables were
constructed in the 1970s Sales I-1, I-3 and I-4 were also constructed in the
late 1960s/early 1970s and represent similar construction as the subject, while
Sale I-2 represent slightly newer construction. As discussed above,
age/condition has already been taken into consideration in our locational
adjustment. Thus, no adjustments are required.
Size is also a physical factor. Typically, smaller complexes sell for a
higher price per unit, all other factors being equal. In addition, purchasers
usually pay less (on a per unit basis) for complexes with larger unit sizes
because the income per square foot is lower. However, when only larger,
investment grade complexes are considered, the impact of complex size on sale
price is minor. The sales range in size from 156 to 435 per unit. After a review
of the sales, we felt that no major adjustments were necessary for size.
Considering amenities, the subject property offers a swimming pool,
clubhouse, fitness center, and two playgrounds. All of the sales offer a similar
level of amenities and do not require adjustment.
-47-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
ECONOMIC
Because a property's ability to produce income is a major factor in a
purchase decision, we considered the economics of the various properties
including occupancy and other income related factors. The subject property is
currently 97 percent occupied. All of the sales have lower occupancies and
require upward adjustments.
The following chart summarizes how each sale compares to the subject
property from a locational, physical and economic standpoint.
<TABLE>
<CAPTION>
======================================================================================================
IMPROVED SALES COMPARISON
======================================================================================================
SALES OVERALL RATING ADJUSTED
COMP. PRICE RELATIVE TO UNIT PRICE
NO. PROPERTY PER UNIT
<S> <C> <C> <C> <C>
- ------------- ------------------------------- ------------------ ------------------- -----------------
I-1 The Manor House $52,874 Superior $50,230
-5%
- ------------- ------------------------------- ------------------ ------------------- -----------------
I-2 Millpond $45,958 Slightly Inferior $48,256
+5%
- ------------- ------------------------------- ------------------ ------------------- -----------------
I-3 Cedar Valley $43,910 Slightly Inferior $46,106
+5%
- ------------- ------------------------------- ------------------ ------------------- -----------------
I-4 Park Place I & II $36,445 Inferior $49,201
+35%
======================================================================================================
1 The rating evaluation considers the net effect of all adjustments.
======================================================================================================
</TABLE>
As depicted above, the adjusted unit prices indicate a range of $46,106
to $50,230 per unit, with most at $48,256 to $50,230 per unit. Based on the
foregoing, we conclude a value range for the subject property of $48,000 to
$50,000 per unit.
Applying this unit range to the subject's total number of units depicts
a value for the subject property as follows:
<TABLE>
<CAPTION>
===================================================================================
SALE PRICE PER UNIT ANALYSIS
<S> <C> <C> <C> <C>
===================================================================================
468 units @ $48,000/Unit = $22,464,000
468 units @ $50,000/Unit = $23,400,000
===================================================================================
Concluded: $22,900,000
===================================================================================
</TABLE>
From this figure, we must deduct deferred maintenance charges of $920,000.
Hence, the as is value estimate via the sale price per unit analysis is
equivalent to $22,000,000 rounded.
NET INCOME MULTIPLIER
While price levels on a per unit basis implicitly contain both the
physical and economic factors affecting the real estate, these statistics do not
explicitly convey many of the details surrounding a specific property. Thus,
this single index to the valuation of the subject property has somewhat limited
direct application in this case. Comparability of both physical and economic
characteristics is the most important criteria in analyzing these sales in
relation to the subject property. However, it is also extremely important to
recognize that apartments are
-48-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
distinct entities by virtue of age and design, location and accessibility, and
particularly tenancy. Therefore, any analysis based upon the traditional
physical, locational, design and layout differences is not inclusive of all
potentially significant variables.
Given the preceding considerations, we extracted a significant unit of
comparison from the improved sales after analyzing each comparable property and
then applied the appropriate unit of comparison to the subject property. In this
case, we have identified a relationship between the net operating income and the
sales price of the property. As illustrated in the following table, a higher net
operating income per unit generally corresponds to a higher sales price per
unit. A summary of this relationship is presented as follows:
<TABLE>
<CAPTION>
======================================================
NOI $/UNIT
======================================================
COMP SALE SALES PRICE
SALE NO. NOI/UNIT PER UNIT OAR
<S> <C> <C> <C>
======================================================
I-1 $5,230 $52,874 9.89%
I-2 $4,297 $45,958 9.35%
I-3 N/A $43,910 N/A
I-4 $3,189 $36,445 8.75%
--- --------- ---------- -----
AVERAGES $4,239 $44,797 9.33%
======================================================
</TABLE>
Valuation of the subject property utilizing the net income multipliers
(NIM) from the comparable properties accounts for the disparity of the net
operating incomes ($NOI's) per unit between the comparables and the subject.
Within this technique, each of the adjusted NIM's are multiplied by the $NOI per
unit of the subject, which produces an adjusted value indication for the
subject. The net operating income per unit for the subject property is typically
calculated as of a stabilized year. The subject's stabilized $NOI is $4,847 per
unit. Details of this analysis can be found in the INCOME CAPITALIZATION
APPROACH.
Our goal is to determine what each property would have sold for (on a
per unit basis) if it had the same NOI per unit and income/growth potential as
the subject property. The NOI per unit figure takes into account differences in
time of sale, age, location, and other characteristics by accounting for
differences in income and expenses. The main concerns in using NOI comparisons
are:
1. Verification of data; and
2. Reliability of subject income and expense projections.
Value is composed of a return "on" and "of" invested funds. Two
properties may have identical NOIs per unit (in a given projection year), but if
the future of one is perceived superior to another (in terms of location,
quality, increasing future income stream, or competition), a buyer may pay more
via a lower overall rate. This is usually reflected in the "going in" overall
-49-
<PAGE>
SALES COMPARISON APPROACH
- -------------------------------------------------------------------------------
rate. We must rely on those adjusted value indications from properties having
the most similar risk, return rate, and future outlook as applicable to the
subject.
The tables below provide a process for adjusting the sales price per
unit figures, by the percent differential between each sale's NOI per unit, as
compared to the subject's NOI per unit. The resulting adjusted sales price per
unit provides a much more meaningful and consistent indicator of the subject's
value.
<TABLE>
<CAPTION>
==========================================================================================================
NET INCOME MULTIPLIER ANALYSIS
==========================================================================================================
COMP SALE SUBJECT SALES PRICE ADJUSTED
SALE NO. NOI/UNIT NOI/UNIT PER UNIT % DIFFERENCE PRICE/UNIT OAR
<S> <C> <C> <C> <C> <C> <C>
==========================================================================================================
I-1 $5,230 $4,847 $52,874 -7.31% $49,007 9.89%
I-2 $4,297 $4,847 $45,958 12.81% $51,846 9.35%
I-3 N/A $4,847 $43,910 N/A N/A N/A
I-4 $3,189 $4,847 $36,445 52.01% $55,399 8.75%
--- --------- --------- ---------- ------ ---------- -----
AVERAGES $4,239 $4,847 $44,797 19.17% $52,084 9.33%
INDICATED VALUE 468 @ $52,000 = $24,336,000
UNITS VALUE PER UNIT
ROUNDED $24,300,000
==========================================================================================================
</TABLE>
The indicated adjusted market range for the subject property ranges from
$49,007 to $55,399 per unit, with the mid-aspect of the market range at $52,084
per unit. We estimate a unit price of $52,000 per unit for the subject property.
Applying this unit rate to the subject's total units indicates a value estimate
for the subject property via the net income multiplier method of $24,300,000
(rounded).
From this figure, we must deduct deferred maintenance charges of $920,000.
Hence, the as is value estimate via the net income multiplier analysis is
equivalent to $23,400,000 rounded.
SALES COMPARISON APPROACH CONCLUSION
In this instance, the sale price per unit and net income multiplier
method produced a difference in values of 6.4 percent. Given the nominal
adjustments required via the sale price per unit analysis, we relied on this
method. In addition, we also relied on the net income multiplier method because
it considers the income characteristics of the property. Consequently, the value
via the SALES COMPARISON APPROACH is estimated at $22,700,000.
-50-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
METHODOLOGY
The INCOME CAPITALIZATION APPROACH is a method of converting the
anticipated economic benefits of property ownership into a value estimate
through capitalization. The principle of ANTICIPATION underlies this approach,
in that investors recognize the relationship between an asset's income and its
value. In order to value the anticipated economic benefits of a particular
property, potential income and expenses must be estimated, and the most
appropriate capitalization method must be selected.
The two most common methods of converting net income into value are
direct capitalization and a discounted cash flow analysis. In direct
capitalization, net operating income is divided by an overall capitalization
rate extracted directly from market sales to indicate a value. In the discounted
cash flow method, anticipated future cash flow and a reversionary value are
discounted to an estimate of net present value at a chosen yield rate (internal
rate of return).
Direct capitalization seems particularly appropriate, since the subject is
an apartment complex where short term leases exist (generally less than a year)
and both market rental rates and occupancy levels are easily supportable. On the
other hand, many investors employ the discounted cash flow analysis which can
offer a meaningful contrast in reflecting investor expectations of the current
period, as well as any anticipated future changes.
UNIT RENTAL RATE ANALYSIS
In an effort to estimate the current market rent for the subject units,
we surveyed five competitive Class B apartment complexes in the general vicinity
of the subject property. The apartments profiled are considered similar to the
subject project in overall quality and condition. As a result, they provide a
strong indication of rent levels the subject should be able to attain. A summary
of the comparable rentals is shown on the following page. These rentals present
a comparison of the current asking rents at the comparable projects for each of
the subject's unit types. There are no concessions such as free rent being
offered and as such, the asking rents are equivalent to effective rents.
We examined rents on both a per month and per square foot basis. Both of
these indicators need to be considered. The rent per square foot adjusts for
size differences between the apartment units in different projects. The absolute
total rent is taken into consideration because tenants are more conscious of
rent on a monthly rather than per square foot basis. The market rent for each
unit type is estimated and discussed in the following paragraphs.
-51-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
INSERT SUMMARY OF COMPARABLE RENTALS
-52-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
DERIVATION OF MARKET RENTS
The following pages illustrate a comparison of the current quoted rents
for the subject units relative to similar quoted rents for comparable two and
three bedroom units contained within the competing complexes surveyed. All of
the comparables are leased on a PLUS ELECTRIC basis, wherein the tenants are
responsible for the cost of electricity to their own separately metered
apartment units. If applicable, gas is also passed through to the tenant. Water,
sewer, and trash are paid by the landlord. Detail sheets for each comparable are
included in the ADDENDA section of this report.
LOCATION
All of the comparables are located within the subject's immediate
vicinity and are considered similar in terms of location. Hence, no adjustments
are deemed necessary for location.
PHYSICAL CHARACTERISTICS
These differences are considered to include the age, quality, and
condition of the individual complexes. The subject was constructed in 1969. The
comparables were constructed between 1966 and 1978. The rentals that are older
than the subject require upward adjustments for age/condition, while the newer
rentals require downward adjustments.
UNIT SIZE
The projects reflect varying unit sizes in comparison to the subject.
Complexes with the most similarly-sized units were given most consideration in
the comparison analysis. The individual units that were larger than the subject
units require downward adjustments, while those reflecting smaller sizes warrant
upward adjustments.
AMENITIES
This category includes individual unit and project amenities. Most of
the projects offer a similar level of unit and project amenities as the subject.
Those projects with inferior amenities require upward adjustments and vice
versa.
ANALYSIS BY UNIT TYPE
ONE BEDROOM UNITS
The subject property features 97 one-bedroom, one-bath apartments
containing 691 square feet and 39 one-bedroom, one-bath units with a den
containing 801 square feet. The current monthly rent for these unit types are
$675 and $710, or $0.98 and $0.89 per square foot, respectively. All of the
competitive apartments in the subject's market area offer similar models. The
table below summarizes the rental rates for this unit type.
-53-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================================
ONE-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 1 BR/1 BA 717 $575 $0.80
R-1 Deertree 1 BR/1 BA/Den 849 $595 $0.70
R-2 Hunt Club 1 BR/1 BA 701 $705 $1.01
R-3 Mays Chapel Village 1 BR/1 BA 700 $610 $0.87
R-3 Mays Chapel Village 1 BR/1 BA/DEN 820 $665 $0.81
R-4 Briarcliff East 1 BR/1 BA 937 $665 $0.71
R-5 Town & Country 1 BR/1 BA 805 $649 $0.81
Comparable Range Min 700 $575 $0.70
Max 937 $705 $1.01
============================================================================================================
Subject 1-BR/1-BA 691 $675 $0.98
1-BR/1-BA/Den 801 $710 $0.89
============================================================================================================
</TABLE>
The comparable one-bedroom units range in size from 700 to 937 square
feet and depict rents of $575 to $705 per month or $0.70 to $1.01 per square
foot. As shown, the rentals with unit sizes most similar to the subject of 700
to 820 square feet depict rents of $0.80 to $1.01 per square foot, while the
larger units containing 849 to 937 square feet depict lower rents of $0.70 to
$0.71 per square foot. Deertree, which depicts the lowest rent, is an older
project that has not undergone recent renovation. The subject's current rent of
$0.89 to $0.98 per square foot falls within the range indicated by the
comparables with similar unit sizes and is considered market oriented.
TWO-BEDROOM UNITS
The subject property features 260 two-bedroom, 1.5 bath apartments
containing 974 square feet. The current monthly rent for this unit type is $785
or $0.81 per square foot. All of the competitive apartments in the subject's
market area offer similar two-bedroom models; however, the number of baths vary.
The table below summarizes the rental rates for this unit type.
-54-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================================
TWO-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 2 BR/1 BA 972 $640 $0.66
R-1 Deertree 2 BR/1.5 BA 972 $655 $0.67
R-2 Hunt Club 2 BR/1.5 BA 1,003 $795 $0.79
R-3 Mays Chapel Village 2 BR/1.5 BA 880 $720 $0.82
R-4 Briarcliff East 2 BR/1 BA 974 $750 $0.77
R-5 Town & Country 2 BR/1 BA 1,057 $739 $0.70
Comparable Range Min 880 $640 $0.66
Max 1,057 $795 $0.82
============================================================================================================
Subject 2-BR/1.5-BA 974 $785 $0.81
============================================================================================================
</TABLE>
The comparable two-bedroom units range in size from 880 to 1,057 square
feet and depict rents of $640 to $795 per month or $0.66 to $0.82 per square
foot. Again, Deertree (the oldest project) depicts the lowest rent of $0.66 to
$0.67 per square foot. Town & Country, which has the largest unit size of 1,057
square feet, also has a low rent relative to the other comparables at $0.70 per
square foot. Excluding these rentals, the range narrows to $0.77 to $0.82 per
square foot for units ranging in size from 880 to 1,003 square feet. The
subject's current rent of $0.81 per square foot falls within this range, albeit
at the high end, and is considered market oriented.
THREE-BEDROOM UNITS
The subject property features 72 three-bedroom, two-bath apartments
containing 908 square feet. The monthly rent for this unit type is $940, or
$0.81 per square foot. Most of the competitive apartments in the subject's
market area offer similar models. The table below summarizes the rental rates
for this unit type.
-55-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================================
THREE-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 3 BR/1.5 BA 1,137 $785 $0.69
R-2 Hunt Club 3 BR/2 BA 1,175 $875 $0.74
R-3 Mays Chapel Village 3 BR/2 BA 1,100 $790 $0.72
R-4 Briarcliff East 3 BR/2 BA 1,166 $860 $0.74
Comparable Range Min 1,100 $785 $0.69
Max 1,175 $875 $0.74
============================================================================================================
Subject 3-BR/2-BA 1,166 $940 $0.81
============================================================================================================
</TABLE>
The comparable three-bedroom units range in size from 1,100 to 1,175
square feet and depict rents of $785 to $875 per month or $0.69 to $0.74 per
square foot. Excluding Deertree, which has the lowest rent of $0.69 per square
foot, the range narrows to $0.72 to $0.74 per square foot. Based on the
foregoing, the subject's three-bedroom rents appear to be about 10 to 12 percent
above market at $0.81 per square foot. Our analysis considers the existing
leases in place, which is about 5.0 percent below market rents. Thus, the
current market rent (potential gross income) was not relied upon in our income
analysis. We accounted for the above market rent for the three-bedroom units in
our selection of an overall rate.
ESTIMATE OF POTENTIAL UNIT RENTAL INCOME
The total potential gross rental income (both monthly and annually) for
the subject property, as if fully occupied and collecting rent at the market
rental rates previously referenced, is depicted below.
<TABLE>
<CAPTION>
====================================================================================
GROSS POTENTIAL RENTAL INCOME
====================================================================================
AVG PROJECTED TOTAL TOTAL
UNIT TYPE NUMBER UNIT MONTHLY MONTHLY ANNUAL
OF UNITS SIZE RENT/UNIT RENT RENT
<S> <C> <C> <C> <C> <C>
====================================================================================
1-BR/1-BA 97 691 $675 $65,475 $785,700
1-BR/1-BA/Den 39 801 $710 $27,690 $332,280
2-BR/1.5-BA 260 974 $785 $204,100 $2,449,200
3-BR/2-BA 72 1,166 $940 $67,680 $812,160
====================================================================================
Total 468 930 $780 $364,945 $4,379,340
====================================================================================
</TABLE>
-56-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
As shown, the potential gross rental income for the subject property at
our projected market rent (or STREET rent) for all unit types is $364,945
monthly or $4,379,340 on an annualized basis.
SUMMARY OF EXISTING LEASES
The actual monthly base rental income as of the August 1999 rent roll
was $346,757 per month or $4,161,084 per year INCLUDING contract rent on the
vacant, model and employee units. The following chart is a summary of the
occupancy status as of the date of appraisal.
<TABLE>
<CAPTION>
========================================================================================================
UNIT MIX/OCCUPANCY/RENTAL RATES
========================================================================================================
NET NO. QUOTED
UNIT TYPE NO. SIZE RENTABLE UNITS MONTHLY RENT
UNITS (SF) AREA (SF) LEASED OCCUPANCY RENT PER SF
<S> <C> <C> <C> <C> <C> <C> <C>
========================================================================================================
1-BR/1-BA 97 691 67,027 95 98% $675 $0.98
1-BR/1-BA/Den 39 801 31,239 36 92% $710 $0.89
2-BR/1.5-BA 260 974 253,240 244 94% $785 $0.81
3-BR/2-BA 72 1,166 83,952 67 93% $940 $0.81
========================================================================================================
Total 468 930 435,458 442 94% $780 $0.84
========================================================================================================
</TABLE>
In comparing the current rent roll to our market rent estimate, there is
a 5.3 percent difference between the potential gross income and the contractual
income. Generally, in a strengthening market, the collected rents will fall
short of the quoted street rates due to the lag time associated with the
renewing of existing leases. Obviously, the reverse may be true in a declining
market. Depending upon the volatility of the market, the lag typically ranges
from two to five percent.
It is our opinion that the CONTRACTUAL rental income for the subject
property should lag the GROSS potential income over the next 12 months. As the
existing leases expire, tenants will be asked to renew at MARKET RATES. The
likelihood is that this increase will be fairly evenly spread out over the next
12 to 18 month period.
MODEL/EMPLOYEE UNITS
According to property management, there is a one model and five employee
units that are either rent free or rent reduced. The income loss from these
units is presented as follows:
-57-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
===================================================================================
MODEL/EMPLOYEE UNITS
===================================================================================
QUOTED ANNUAL
NO. MONTHLY RENT RENT
UNI TYPE UNITS RENT/UNIT REDUCTION LOSS
<S> <C> <C> <C> <C>
===================================================================================
2 BR/1.5 BA Model 1 $785 $785 $9,420
2 BR/1.5 BA Employee 2 $785 $785 $18,840
2 BR/1.5 BA Employee 1 $785 $196 $2,355
3 BR/2 BA Employee 2 $940 $940 $22,560
===================================================================================
Total/Avg 6 $837 $739 $53,175
===================================================================================
</TABLE>
VACANCY AND COLLECTION LOSS
Both the investor and the appraiser are primarily interested in the
annual revenue an income property is likely to produce over a specified period
of time, rather than the income it could produce if it were always 100 percent
occupied and all tenants were paying their rent in full and on time. A normally
prudent practice is to expect some income loss as tenants vacate, fail to pay
rent, or pay their rent late.
As illustrated in the APARTMENT MARKET ANALYSIS, the Baltimore
Metropolitan Area has a current occupancy rate of about 95.6 percent, while
properties in the subject's micro market are sustaining occupancy levels of 95
percent or better. The subject is currently 94 percent occupied. Management
indicated that the subject's historical occupancy over the past three years has
been about 95 percent. Considering the subject's history, as well as the vacancy
rate for the Baltimore market as a whole of 5.0+/- percent, we estimated a
vacancy rate for the subject property of 5.0 percent.
Coupled with a vacancy rate deduction, we also considered bad debt or
collection loss. We estimated a collection/bad debt loss of 2.0 percent in our
analysis. Hence, total vacancy and collection loss is estimated at 7.0 percent.
OTHER INCOME
In addition to rental income, we combined several miscellaneous sources
of income into a category called Other Income. This revenue source at the
subject project results from receipt of tenant late charges, bad check charges,
lease breakage fees, application and credit fees, tenant charges for damages,
tenant service charges, etc.
A review of expense statements for similar apartment properties
indicated other income of 2.0 to 4.0 percent of effective rental income. The
subject's historical other income ranges from 2.9 to 3.1 percent of effective
rental income. We estimated other income at 3.0 percent of effective rental
income, which is consistent with the subject's history and expense comparables.
-58-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
OPERATING EXPENSES
To estimate the operating expenses for the subject property, we examined
the 1997 through year-to-date 1999 expenses and the 1999 budget. On the
following page is the Operating Income and Expense Analysis summarizing the
subject's historical operating performance. We also compared the operating
performance to other apartment complexes for which we have operating data. The
expense comparables considered in this analysis are summarized in table on the
second following page. On a line-by-line basis, we have considered each expense
category and estimated the appropriate level an informed investor would consider
reasonable.
VARIABLE EXPENSES
Variable expenses are operating expenditures that generally fluctuate
with the level of occupancy and/or intensity of property operation. These
expenses are described on the following pages.
MANAGEMENT -In the Baltimore market, management fees for market rent
projects are based on a percentage of effective gross income.
Conversations with area management companies indicated that a range
between 3.0 to 5.0 percent is the standard compensation for this
service, with most management companies trying to achieve at least $300
per unit. The subject's historical management fee ranges from 3.6 to 4.4
percent of effective gross income, with a 1999 budgeted expense of 4.2
percent. The expense comparables range from 4.0 to 6.0 percent of EGI or
$147 to $341 per unit, with an average of $258 per unit. Based on these
indicators, we estimated a market management fee of 4.0 percent for the
subject property, which is equivalent to $336 per unit for a stabilized
year.
UTILITIES - The utilities that the property owner is responsible for
includes gas, water, and sewer. The tenant pays for electric charges for
the individual apartments. The subject's historical expenses range from
$491 to $583 per unit. The year-to-date annualized 1999 expense is $676
per unit, while the 1999 budgeted amount is $538 per unit. According to
property management, utilities at the subject property were
extraordinarily low in 1998 and have averaged $550+/- per unit over the
past five years. The expense comparables indicate a range of $336 to
$643 per unit. We estimated utilities at $540 per unit, which is
consistent with the budget and expense comparables.
REPAIRS & MAINTENANCE - This category includes allocations for general
maintenance of the interior and exterior of the buildings, apartment
make-ready expenses, as well as minor maintenance to the HVAC equipment,
plumbing, kitchen appliances, roofs, maintenance supplies, and any
typical outside contractual labor costs. The subject's historical
expenses range from $744 to $784 per unit. The year-to-date annualized
1999 expense is $671 per unit, while the 1999 budgeted amount is $750
per unit. The expense comparables indicate a range of $382 to $1,163 per
unit, with most at $517 to $849 per unit. We estimated this expense at
$750 per unit, which is consistent with the subject's history and budget
and falls within the range of the expense comparables.
-59-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
Insert History
-60-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
Insert Expense Comparables
-61-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
PAYROLL - This expense includes all salary, hourly, and commissioned
employees, plus benefits such as insurance, payroll taxes, and workers
compensation. The subject's historical expenses range from $668 to $764
per unit. The year-to-date annualized 1999 expense is $661 per unit,
while the 1999 budgeted amount is $622 per unit. The expense comparables
indicate a range of $385 to $738 per unit, with most at $515 to $738 per
unit. As depicted, the lowest expense of $383 per unit had higher
general and administrative expenses, indicating that some payroll
expenses may be included in this category. We estimated this expense at
$680 per unit, which represents a 3.0+/- percent increase over 1998.
GENERAL AND ADMINISTRATIVE - This expense includes the costs of
professional services such as legal and accounting, advertising, as well
as office expenses such as postage, telephones, etc. The subject's
historical expenses range from $178 to $184 per unit. The year-to-date
annualized 1999 expense is $186 per unit, while the 1999 budgeted amount
is $204 per unit. The expense comparables indicate a range of $239 to
$453 per unit, with most at $239 to $300 per unit. As discussed above,
the comparable at the higher end of the range had lower payroll
expenses. We estimated this expense at $200 per unit, which is
consistent with subject's most recent history and budget.
FIXED EXPENSES
Fixed expenses are those which generally do not vary with occupancy and
have to be paid whether the property is occupied or vacant. The two major
expenses in this category are real estate taxes and insurance. In addition, we
include reserves for replacements as a fixed expense.
REAL ESTATE TAXES - This expense was discussed in the REAL PROPERTY
TAXES AND ASSESSMENTS section. We estimated the subject's tax liability
to be $679 per unit.
INSURANCE - The insurance expense at the subject project includes
liability, property damage, vehicle and umbrella insurance. The
subject's historical and year-to-date expenses range from $31 to $56 per
unit, while the 1999 budgeted amount is $56 per unit. The expense
comparables indicate a range of $41 to $123 per unit. Landlords (like
the subject owner) that own various complexes within a given
metropolitan area can generally achieve a bulk rate on insurance. In
this analysis, we estimated insurance charges based on an individual
buyer for the property. Thus, we did not consider a bulk (discounted)
rate. Accordingly, we estimated this expense at $100 per unit, which is
consistent with insurance charges at other properties.
RESERVES FOR REPLACEMENT - The typical informed investor makes an
allowance for reserves for replacements which includes appliance, carpet
and blinds replacement. This is an especially prudent charge as an
apartment complex ages and generally ranges from $150 to $300 per unit.
Based on the subject's older age, we estimate reserve for replacement at
the high end of the range, or $275 per unit. This estimate also takes
into account our lump sum deduction for deferred maintenance.
-62-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
Reserves for replacement has historically been taken below the net
operating income line in the statement of income and expenses. However,
over the past several years there has been a movement to place unit
replacements before the net operating income line because this is a
legitimate expense which, in most case, occurs annually. Therefore,
following market practices, we include unit replacements before net
operating income.
CAPITAL EXPENSES
In addition to the aforementioned unit replacement allowance (which has
been included as an operating expense above the net operating income
line), it is standard practice to consider capital reserves for roof
replacement, paving, stairwell replacement, water heater and HVAC
replacements, etc. This category of expense represents a charge to the
property below the net operating income line and, therefore, is
applicable to the cash flow analysis only. The typical informed investor
makes an allowance of $0.10 to $0.25 per net rentable square foot. The
low end of the range is generally for new construction. Given the
subject's older age, we estimated a capital reserve of $0.25 per square
foot.
As discussed in the PROPERTY DESCRIPTION section, the property suffers
from deferred maintenance including sprinkler, catwalk, life safety,
HVAC, piping, and lighting repairs. Based on a review of the capital
budget and discussions with management, deferred maintenance totals
about $920,000. We deducted this figure from our cash flow.
TOTAL EXPENSES
Our estimate of total expenses for the subject property for a stabilized
year is $3,561 per unit. The operating expense ratio is 42.3 percent. The
expense comparables range from $2,213 to $3,224 per unit, with operating expense
ratios of 40.2 to 58.4 percent. Overall, our estimate appears to be consistent
with the expense comparables and is considered reasonable.
PRO FORMA INCOME AND EXPENSE SUMMARY
A summary of our pro forma income and expense statement for the subject
property is as follows.
-63-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
============================================================================================================
DIRECT CAPITALIZATION
============================================================================================================
<S> <C> <C> <C>
INCOME:
Potential Rental Income: $4,161,084
LESS: Employee/Model ($53,175)
Units LESS: Vacancy & Collection Loss 7.0% ($287,554)
----------
Effective Gross Rental Income $3,820,355
Other Income 3.0% $114,611
--------
Effective Gross Income (EGI) $3,934,966
EXPENSES:
Variable
Expenses:
Management 4.0% $336 /Unit $157,399
Utilities $540 /Unit $252,720
Repairs/Maintenance $750 /Unit $351,000
Payroll $680 /Unit $318,240
General/Administrative $200 /Unit $93,600
------ ----------
Subtotal $2,506 /Unit $1,172,959
Fixed Expenses:
Real Estate Taxes $679 /Unit $317,903
Insurance $100 /Unit $ 46,800
------ --------
Subtotal $779 /Unit $364,703
Replacement Reserves $275 /Unit $128,700
Total Operating Expenses: $3,561 /Unit ($1,666,362)
------------
NET OPERATING INCOME $4,847 /Unit $2,268,604
Operating Expense Ratio 42.3%
Number of Units 468
============================================================================================================
</TABLE>
DIRECT CAPITALIZATION
In the direct capitalization method, we estimated the market value by
dividing the proforma net operating income by an overall capitalization rate
derived from our analysis of the market sales. This rate is computed by dividing
the net operating income (absent consideration of the capital reserves, which is
commonplace in the market) from a sold property by its sale price. The overall
capitalization rates derived from the improved property sales are shown below.
-64-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
========================================================
SUMMARY OF OVERALL RATES
========================================================
SALE NO. CAPITALIZATION RATE
<S> <C>
========================================================
I-1 9.89%
I-2 9.35%
I-3 N/A
I-4 8.75%
========================================================
</TABLE>
An analysis of the comparable sales indicates a range of capitalization
rates from 8.75 to 9.89 percent. It should be noted that all of the comparable
sales include unit replacements as a part of the annual operating expenses. As
is the case with these sales, more and more investors are including unit
replacements in their estimate of net operating income that results in a
capitalization rate that is a TRUER rate of return. The selection of the
appropriate rate applicable to the subject from the defined range depends upon
the comparability of each sale to the subject property.
Given the difficulty in obtaining reliable income data from buyers and
sellers, and the wide variation in overall capitalization rates found, we sought
indications provided by other data. Conversations with brokers in the market who
deal primarily with apartment projects indicated overall capitalization rates
between 9.0 and 10.0 percent for Class B apartments in good locations.
Cushman & Wakefield Valuation Advisory Services surveys national real
estate investors to determine their investment objectives. Following is a brief
review of overall capitalization rates, internal rates of return, and income and
expense growth rates considered acceptable by the respondents for Class B leased
asset apartments.
<TABLE>
<CAPTION>
==========================================================================================================
CUSHMAN & WAKEFIELD
FALL 1998 NATIONAL INVESTOR SURVEY
CLASS B LEASED ASSET APARTMENTS
==========================================================================================================
INCOME EXPENSE
GOING IN TERMINAL IRR GROWTH GROWTH
------------ ------------ ------------- ----------- ----------- PROJECTION
LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH PERIOD
- ------------------ ------------ ------------ ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Range 8.5% - 10.0% 9.0% - 10.0% 10.5% - 14.0% 2.5% 4.0% 2.5% 4.0% 3.0 - 10.0
Low - High 9.2% - 9.4% 9.5% - 9.7% 11.8% - 12.1% 3.2% - 3.5% 3.3% - 3.5% 8.1 - 8.8
Average
- ------------------ ------------ ------------ ------------- ----------- ----------- ----------
No. of Responses: 27
==========================================================================================================
</TABLE>
The preceding table summarizes the investment parameters of some of the
most prominent investors currently acquiring high-grade investment properties in
the United States. Generally speaking, our survey reveals going-in
capitalization rates of 8.5 to 10.0 percent, with the average low and high
responses of 9.2 and 9.4 percent, for Class B leased asset apartments. Average
terminal rates are about 30 basis points higher or 9.5 to 9.7 percent.
-65-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
In the final analysis, we selected a going-in capitalization rate that
reflects the subject's tenancy, quality and location. The subject is located a
moderate income area of Baltimore County, Maryland that has a high percentage of
renters (42%). The property is currently 94 percent leased, which is consistent
with the occupancy achieved over the past three years. The competitive market is
strong, with occupancies in the high 90 percent range. The subject's
three-bedroom units, which comprise 15.4 percent of the total inventory, have
above market rents. Based on the foregoing, and considering the stable
population base in the subject vicinity, we conclude an overall rate for the
subject of 9.5 to 10.0 percent, say 9.75 percent, which is supported by the
comparable sales.
Applying our selected capitalization rate to our projected net operating
income for the subject property results in the following value indication:
<TABLE>
<CAPTION>
===========================================================================================
DIRECT CAPITALIZATION
===========================================================================================
NET OVERALL VALUE
INCOME / RATE INDICATED VALUE PER UNIT
<S> <C> <C> <C> <C>
===========================================================================================
$2,268,604 / 9.75% $23,267,737 $49,717
===========================================================================================
</TABLE>
From this figure, we must deduct deferred maintenance charges of $920,000.
Hence, the as is value estimate via direct capitalization is equivalent to
$22,300,000 rounded.
DISCOUNTED CASH FLOW ANALYSIS
An Excel spreadsheet program was used to model future income and expenses.
In formulating this model, the following assumptions were used:
1. The pro forma is based on a ten year analysis, with an
eleven-year holding period. The analysis begins August 1999
on a fiscal year basis.
2. The Year One revenue and expense items are based on the
previously discussed estimates.
3. Based on our future assessment of the rental market, we are
forecasting a 3.0 percent increase in income.
4. Other income is estimated at 3.0 percent of effective rental
income.
5. Based on the occupancy/vacancy data from the submarket and
the direct competition, we have projected the subject's
vacancy and collection loss to be 7.0 percent.
6. Most of the general operating expenses (including
replacement reserves) have been grown at 3.0 percent
throughout the holding period, with the exception of
management which is a function of effective gross income.
7. The reversion estimate was based on a resale in the tenth
year of the analysis period. It was formulated by applying a
terminal capitalization rate to the
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<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
eleventh year net operating income and subtracting
3.0 percent in selling costs.
TERMINAL CAPITALIZATION RATE SELECTION
A terminal capitalization rate was used to estimate the market value of
the property at the end of the assumed investment holding period. The rate is
applied to the eleventh year estimate of net operating income after subtracting
unit replacements, but before making deductions for capital reserves. We
estimated an appropriate terminal rate based on the indicated rates in the
market today. A premium is typically added to the current rate to allow for the
risk of unforeseen events or trends which might affect our estimate of net
operating income during the holding period, including a possible deterioration
in market conditions for the property. Investors typically add 50 to 100 basis
points to the GOING-IN rate to arrive at a terminal capitalization rate,
according to Cushman & Wakefield's periodic investor surveys and KORPACZ REAL
ESTATE INVESTOR SURVEY.
We estimate that an appropriate terminal rate for the subject property
would be 10.0 percent, which is 25 basis points higher than our overall rate and
is supported by our investor survey.
DISCOUNT RATE ANALYSIS
In our valuation, we endeavored to reflect the most likely actions of
typical buyers and sellers in this market. We forecasted cash flows and
discounted them and the future property value at the time of reversion to a
present value at an internal rate of return (yield rate) currently required by
investors for real property of a similar quality. The yield rate (internal rate
of return or IRR) is the single rate that discounts all future equity benefits
(cash flows and equity reversion) to an estimate of net present value.
Our preceding investor survey summarized the investment parameters of some
of the most prominent investors currently acquiring high-grade apartment
properties in the United States. The cited internal rates of return range from
10.5 to 14.0 percent, with most at 11.0 to 12.5 percent. The low and high
averages are 11.8 and 12.1 percent, respectively. In our analysis of the subject
property, we discounted the subject's cash flows at 12.0 percent.
Using a 12 percent discount rate, our discounted cash flow model on the
following page indicates a value for the subject of $22,300,000 rounded.
This value produces an actual going-in capitalization or overall
capitalization rate of 10.17 percent, based upon the first year's projection of
net operating income, before the deduction for replacement reserves. This rate
essentially mirrors the range indicated by the comparable sales and our survey
of market participants and is considered reasonable.
With regard to the composition of the yield or internal rate of return, 57
percent of the subject's ultimate yield is from the cash flows, with the
remainder attributable to the reversion. Furthermore, the average cash on cash
return over the holding period equals 10.7 percent on an annualized basis. We
are of the opinion that all of these relationships are generally acceptable in
today's investment environment for apartment communities.
-67-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
INSERT DCF
-68-
<PAGE>
INCOME CAPITALIZATION APPROACH
- -------------------------------------------------------------------------------
INCOME CAPITALIZATION APPROACH CONCLUSION
In this instance, direct capitalization and the discounted cash flow
analysis produced similar values. Based on our recent conversations with brokers
and investors who deal directly in multi-family projects, it appears that the
majority of stabilized properties are bought and sold via the direct
capitalization approach. The discounted cash flow analysis is very appropriate
for the investor/purchaser buying properties where the potential for change may
exist over the near term. The subject represents a stabilized property with no
significant changes anticipated for the future; hence the assumptions are
minimized. Consequently, we relied more heavily on direct capitalization and
reconciled the value via the INCOME CAPITALIZATION APPROACH at $22,300,000.
-69-
<PAGE>
RECONCILIATION AND FINAL VALUE ESTIMATE
- -------------------------------------------------------------------------------
Two approaches to value were considered in our analysis. The indicated
values are shown below:
<TABLE>
<S> <C>
Cost Approach Not Applicable
Sales Comparison Approach $22,700,000
Income Capitalization Approach $22,300,000
</TABLE>
In the reconciliation, each approach to value is reviewed in order to
determine the reliability of the data employed and to determine which approach
best represents the actions of typical users and investors in the market.
The COST APPROACH is typically a good indication of value when the
subject is new (there is recent historical cost data available) and a minimal
amount of depreciation is present. Further, the interest being sought is the
leased fee estate which is difficult to estimate via this approach. The COST
APPROACH is fraught with deficiencies when attempting to apply this technique to
older properties. Given the subject's older age, this approach becomes less
reliable due to the subjective element of depreciation. Hence, we did not
utilize the COST APPROACH in our analysis of the property.
The SALES COMPARISON APPROACH is based on the principle of substitution
which implies that a prudent person will not pay more to buy a property than it
would cost to buy a comparable substitute property. The subject property, as
improved, was compared with the most recent sales data we could obtain on
relatively similar apartment complexes. Units of comparison were developed so
that a meaningful conclusion could be drawn. These units of comparison included
the sales prices per unit and net income multiplier. Because of the inherent
differences between the comparables and the subject, the broad range of value
indications provided an imprecise indication of the price that a buyer would pay
for the subject under normal circumstances. Nevertheless, the value indications
generally supports the value conclusion by the INCOME CAPITALIZATION APPROACH.
The INCOME CAPITALIZATION APPROACH is predicated upon the principle of
anticipation which assumes that value is determined by the future income one can
expect to receive from the real estate. In this approach, both the direct
capitalization and discount cash flow techniques were used to develop
indications of value. Investment properties are generally bought and sold based
upon their ability to produce income. All sources of data relative to the INCOME
CAPITALIZATION APPROACH were carefully researched and documented. Therefore,
greatest weight has been given to the value indication derived via the INCOME
CAPITALIZATION APPROACH.
Based on our complete appraisal as defined by the Uniform Standards of
Professional Appraisal Practice, we have formed an opinion that the market value
of fee simple estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of August 13, 1999,
was:
TWENTY TWO MILLION THREE HUNDRED THOUSAND DOLLARS
$22,300,000
-70-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- -------------------------------------------------------------------------------
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
This appraisal is made subject to the following assumptions and limiting
conditions:
1. No opinion is intended to be expressed and no responsibility is assumed
for the legal description or for any matters which are legal in nature
or require legal expertise or specialized knowledge beyond that of a
real estate appraiser. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the
owner of the Property. Neither the Appraiser nor C&W shall be responsible
for the accuracy or completeness of such information, including the
correctness of estimates, opinions, dimensions, sketches, exhibits and
factual matters.
3. The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the
Property itself can significantly affect property value.
4. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Except as may be otherwise stated
in the letter of engagement, the Appraisal may not be used by any person
other than the party to whom it is addressed or for purposes other than
that for which it was prepared. No part of the Appraisal shall be
conveyed to the public through advertising, or used in any sales or
promotional material without C&W's prior written consent. Reference to
the Appraisal Institute or to the MAI designation is prohibited.
5. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
-71-
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
- -------------------------------------------------------------------------------
6. The Appraisal assumes (a) responsible ownership and competent
management of the Property; (b) there are no hidden or unapparent
conditions of the Property, subsoil or structures that render the
Property more or less valuable (no responsibility is assumed for
such conditions or for arranging for engineering studies that may
be required to discover them); (c) full compliance with all
applicable federal, state and local zoning and environmental
regulations and laws, unless noncompliance is stated, defined and
considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have been
or can be obtained and renewed for any use on which the value estimate
contained in the Appraisal is based.
7. The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment,
plumbing or electrical components.
8. The forecasted potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser assumes no responsibility for the authenticity or completeness
of lease information provided by others. C&W recommends that legal advice
be obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market
thinking on future income and expenses. The Appraiser and C&W make no
warranty or representation that these forecasts will materialize. The
real estate market is constantly fluctuating and changing. It is not the
Appraiser's task to predict or in any way warrant the conditions of a
future real estate market; the Appraiser can only reflect what the
investment community, as of the date of the Appraisal, envisages for the
future in terms of rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance of the improvements or may be located at or about the
Property was not considered in arriving at the opinion of value. These
materials (such as formaldehyde foam insulation, asbestos insulation and
other potentially hazardous materials) may adversely affect the value of
the Property. The Appraisers are not qualified to detect such substances
C&W recommends that an environmental expert be employed to determine the
impact of these matters on the opinion of value.
11. Unless otherwise stated in the Appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has
not been considered in arriving at the opinion of value. Failure to
comply with the requirements of the ADA may adversely affect the value
of the property. C&W recommends that an expert in this field be
employed.
-72-
<PAGE>
CERTIFICATION OF APPRAISAL
- -------------------------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
1. Kelly J. Small inspected the property and prepared the report. John D.
Busi, MAI, reviewed the report and concurred in the conclusions herein.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event. The appraisal assignment was not
based on a requested minimum valuation, a specific valuation or the
approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of
Professional Ethics and the Standards of Professional Appraisal Practice
of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, John D. Busi , MAI, has completed the
requirements of the continuing education program of the Appraisal
Institute.
Kelly J. Small
Associate Director
Maryland Certified General Appraiser License 20143
John D. Busi, MAI
Managing Director
-73-
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
-74-
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
LEGAL DESCRIPTION
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
EQUIFAX DEMOGRAPHICS
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
IMPROVED SALE COMPARABLES
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
RENT COMPARABLES
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
RENT ROLL
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
<PAGE>
ADDENDA
- -------------------------------------------------------------------------------
QUALIFICATIONS OF THE APPRAISERS
<PAGE>
QUALIFICATIONS OF JOHN D. BUSI
- -------------------------------------------------------------------------------
BACKGROUND
John D. Busi is the Managing Director of Cushman & Wakefield's New York
Area Valuation Advisory Services Group. His responsibilities include management
of 34 professionals and 11 support staff housed within four branch offices. He
joined Cushman & Wakefield in March, 1981. In May, 1990, Mr. Busi was awarded
the MAI designation by the American Institute of Real Estate Appraisers. In
March, 1991, Mr. Busi was promoted to the position Associate Director and in
March, 1992 was promoted to the position of Director by the Executive Board of
Cushman & Wakefield, Inc. In December, 1992, Mr. Busi was promoted to the
position of Manager - New York Branch. In December, 1995, Mr. Busi's
responsibilities were broadened to include the tri-state New York metropolitan
area containing three branch offices. In January, 1996, Mr. Busi became a
stockholder in Cushman & Wakefield, Inc. In November, 1996, Mr. Busi was
promoted to the position of Managing Director. In January, 1997, Mr. Busi's
responsibilities were expanded to include management of the Boston VAS branch
office. Mr. Busi's responsibilities include marketing and development of new
business for the region, managing regional and national appraisal accounts,
review and quality control functions and the appraisal of investment grade real
estate.
APPRAISAL EXPERIENCE
Appraisal and consulting assignments have included regional malls and
shopping centers, proposed and existing multi-tenanted office buildings,
cooperative, condominium and rental apartment buildings, feasibility and market
studies, vacant land and assemblages, special use industrial properties,
developable air rights, and investment properties throughout the United States.
A list of properties appraised by Mr. Busi is available upon request.
MEMBERSHIPS, LICENSES AND PROFESSIONAL AFFILIATIONS
MEMBER, REAL ESTATE BOARD OF NEW YORK, INC.
MEMBER, APPRAISAL INSTITUTE (MAI) - CERTIFICATE 8456
ASSOCIATE MEMBER THE URBAN LAND INSTITUTE
CERTIFIED GENERAL REAL ESTATE APPRAISER #46000005078 STATE OF NEW YORK
In January 1996, Mr. Busi was appointed the New York Metropolitan Area
Appraisal Institute Chapter Admissions Committee Chairman. In this capacity, Mr.
Busi is responsible for overseeing institute candidates fulfillment of
admissions requirements and appointment of experience review committees.
EDUCATION
Long Island University
Degree: Bachelor of Business Administration
Graduated: January 1981
APPRAISAL EDUCATION
As of the date of this report, John D. Busi, MAI, has completed the
requirements under the continuing education program of the Appraisal Institute.
Mr. Busi has also been a guest lecturer for NYU's Real Estate Masters
Program.
<PAGE>
QUALIFICATIONS OF KELLY J. SMALL
- -------------------------------------------------------------------------------
PROFESSIONAL AFFILIATIONS:
Candidate Member of the Appraisal Institute (#M921847)
State of Maryland Certified General Real Estate Appraiser (#20143)
State of Michigan Certified General Real Estate Appraiser
(#12-01-005686)
Maryland Salesperson License (#313081)
APPRAISAL/REAL ESTATE EXPERIENCE:
Associate Director, Cushman & Wakefield, Inc., Valuation Advisory
Services, a full service real estate organization specializing in
appraisal and consultation. Member of National Affordable Housing
Group. October 1995 to present.
Staff Appraiser, Legg Mason Realty Group, Inc., Baltimore,
Maryland. February 1990 through October 1995.
Other work experience includes financial analyst, market research
analyst and real estate settlement work. Experience includes
appraisal of the following types of property:
Office Buildings Shopping Centers
Subdivision Development Analysis Industrial Facilities
Commercial Land Multi-Family Properties
Single Family Residences Leasehold/Leased Fee Interests
Hotels/Motels Special Purpose Facilities
Manufacturing Facilities Warehouse Facilities
EDUCATION:
Bachelor of Science (Finance), 1990
University of Baltimore, Baltimore, Maryland
Masters of Science (Real Estate Development), 1996
The Johns Hopkins University, Baltimore, Maryland
Appraisal Institute Courses:
#1A1 - Real Estate Appraisal Principles
#1A2 - Basic Valuation Procedures
#1B1 - Capitalization Theory & Techniques, Part A
#1B2 - Capitalization Theory & Techniques, Part B
#410 - Standards of Professional Appraisal Practice,
Part A (USPAP)
#420 - Standards of Professional Appraisal Practice,
Part B (AI)
#540 - Report Writing and Valuation Analysis
#550 - Advanced Applications
<PAGE>
Unit Summary
<TABLE>
<CAPTION>
============================================================================================================
ONE-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 1 BR/1 BA 717 $575 $0.80
R-1 Deertree 1 BR/1 BA/Den 849 $595 $0.70
R-2 Hunt Club 1 BR/1 BA 701 $705 $1.01
R-3 Mays Chapel Village 1 BR/1 BA 700 $610 $0.87
R-3 Mays Chapel Village 1 BR/1 BA/DEN 820 $665 $0.81
R-4 Briarcliff East 1 BR/1 BA 937 $665 $0.71
R-5 Town & Country 1 BR/1 BA 805 $649 $0.81
Comparable Range Min 700 $575 $0.70
Max 937 $705 $1.01
============================================================================================================
Subject 1-BR/1-BA 691 $675 $0.98
1-BR/1-BA/Den 801 $710 $0.89
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
============================================================================================================
TWO-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 2 BR/1 BA 972 $640 $0.66
R-1 Deertree 2 BR/1.5 BA 972 $655 $0.67
R-2 Hunt Club 2 BR/1.5 BA 1,003 $795 $0.79
R-3 Mays Chapel Village 2 BR/1.5 BA 880 $720 $0.82
R-4 Briarcliff East 2 BR/1 BA 974 $750 $0.77
R-5 Town & Country 2 BR/1 BA 1,057 $739 $0.70
Comparable Range Min 880 $640 $0.66
Max 1,057 $795 $0.82
============================================================================================================
Subject 2-BR/1.5-BA 974 $785 $0.81
============================================================================================================
</TABLE>
Page 2
<PAGE>
Unit Summary
<TABLE>
<CAPTION>
============================================================================================================
THREE-BEDROOM UNIT SUMMARY
============================================================================================================
PROJECT UNIT RENT PER RENT/SF/
RENTAL NAME BR/BA SIZE MONTH MONTH
<S> <C> <C> <C> <C> <C>
============================================================================================================
R-1 Deertree 3 BR/1.5 BA 1,137 $785 $0.69
R-2 Hunt Club 3 BR/2 BA 1,175 $875 $0.74
R-3 Mays Chapel Village 3 BR/2 BA 1,100 $790 $0.72
R-4 Briarcliff East 3 BR/2 BA 1,166 $860 $0.74
Comparable Range Min 1,100 $785 $0.69
Max 1,175 $875 $0.74
============================================================================================================
Subject 3-BR/2-BA 1,166 $940 $0.81
============================================================================================================
</TABLE>
<PAGE>
Unit Summary
OLDER +
Page 3
<PAGE>
Comps Unit Mix
R-1 Deertree
<TABLE>
<CAPTION>
====================================================
UNIT TYPE UNIT STREET RENT
SIZE (SF) RENT SF
====================================================
<S> <C> <C> <C>
1 BR/1 BA 717 $575 $0.80
1 BR/1 BA/Den 849 $595 $0.70
2 BR/1 BA 972 $640 $0.66
2 BR/1.5 BA 972 $655 $0.67
3 BR/1.5 BA 1,137 $785 $0.69
====================================================
</TABLE>
R-2 Hunt Club
<TABLE>
<CAPTION>
====================================================
UNIT TYPE UNIT STREET RENT
SIZE (SF) RENT SF
====================================================
<S> <C> <C> <C>
1 BR/1 BA 701 $705 $1.01
2 BR/1.5 BA 1,003 $795 $0.79
3 BR/2 BA 1,175 $875 $0.74
====================================================
</TABLE>
R-3 Mays Chapel Village
<TABLE>
<CAPTION>
====================================================
UNIT TYPE UNIT STREET RENT
SIZE (SF) RENT SF
====================================================
<S> <C> <C> <C>
1 BR/1 BA 700 $610 $0.87
1 BR/1 BA/Den 820 $665 $0.81
2 BR/1.5 BA 880 $720 $0.82
3 BR/2 BA 1,100 $790 $0.72
====================================================
</TABLE>
R-4 Briarcliff East
<TABLE>
<CAPTION>
====================================================
UNIT TYPE UNIT STREET RENT
SIZE (SF) RENT SF
====================================================
<S> <C> <C> <C>
1 BR/1 BA 937 $665 $0.71
2 BR/1 BA 974 $750 $0.77
3 BR/2 BA 1,166 $860 $0.74
====================================================
</TABLE>
Page 1
<PAGE>
R-5 Town & Country
<TABLE>
<CAPTION>
====================================================
UNIT TYPE UNIT STREET RENT
SIZE (SF) RENT SF
====================================================
<S> <C> <C> <C>
1 BR/1 BA 805 $649 $0.81
2 BR/1 BA 1,057 $739 $0.70
====================================================
</TABLE>
Page 2
<PAGE>
Sales SF
<TABLE>
<CAPTION>
================================================
LOCATIONAL ADJUSTMENTS
================================================
SALE GROSS RENT RANKING MKT COND LOCATION OCCUP
<S> <C> <C> <C> <C> <C> <C>
Sale I-1 N/A N/A -5% 0% -5%
Sale I-2 $8,784 Slightly Inferior -7% 7% 0% 7%
Sale I-3 $9,031 Slightly Inferior -4% 4% 0% 4%
Sale I-4 $6,977 Inferior -34% 35% 0% 35%
================================================
Subject $9,358
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
Sales SF
==============================================================================================================================
IMPROVED SALES SUMMARY
==============================================================================================================================
CASH YR BUILT
SALE SALE EQUIVALENT -------- OVERALL NOI PRICE
NO. NAME/LOCATION DATE SALES PRICE NO. UNITS OCCUP. RATE PER UNIT PER UNIT
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I-1 The Manor House Mar-99 $23,000,000 1968 97% 9.89% $5,230 $52,874
14313 Georgia Avenue ----
Silver Spring, Montgomery County 435
I-2 Millpond Apartments Jan-99 $11,030,000 1983 95% 9.35% $4,297 $45,958
604 Millstream Court ----
Millersville, Anne Arundel County 240
I-3 Cedar Valley Apartments Jun-98 $6,850,000 1974 98% N/A N/A $43,910
5458 Harpers Farm Road ----
Columbia, Howard County 156
I-4 Park Place I & II Jan-98 $14,250,000 1971 93% 8.75% $3,189 $36,445
Seven Mile Lane ----
Baltimore City 391
==============================================================================================================================
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
NET INCOME MULTIPLIER ANALYSIS
============================================================================================================
COMP SALE SUBJECT SALES PRICE ADJUSTED
SALE NO. NOI/UNIT NOI/UNIT PER UNIT % DIFFERENCE PRICE/UNIT OAR
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
I-1 $5,230 $4,847 $52,874 -7.31% $49,007 9.89%
I-2 $4,297 $4,847 $45,958 12.81% $51,846 9.35%
I-3 N/A $4,847 $43,910 N/A N/A N/A
I-4 $3,189 $4,847 $36,445 52.01% $55,399 8.75%
------ ------ ------- ----- ------- ----
Averages $4,239 $4,847 $44,797 19.17% $52,084 9.33%
Indicated Value 468 @ $52,000 = $24,336,000
Units Value Per Unit
Rounded $24,300,000
============================================================================================================
$49,007
$51,923 $55,399
</TABLE>
<PAGE>
OPERATING EXPENSE COMPARABLES
CLASS B GARDEN APARTMENTS
BALTIMORE METROPOLITAN AREA
<TABLE>
<CAPTION>
EXPENSE COMPARABLE E-1 E-2 E-3 E-4 E-5
<S> <C> <C> <C> <C> <C>
Property Location Baltimore County Baltimore City Baltimore County Anne Arundel County Baltimore County
Property Type Garden Garden Garden Garden Garden
Year Built N/A 1971 1975 1968 1954
Number of Units 299 544 221 506 262
</TABLE>
<TABLE>
<CAPTION>
PER UNIT PER UNIT PER UNIT PER UNIT PER UNIT
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Variable Expenses:
Management $215 $255 $330 $341 $147
Utilities 465 468 403 $643 $336
Repairs and Maintenance 382 517 1,163 $561 $849
Payroll 515 385 650 $617 $738
General and Administrative 239 453 282 $245 $300
---- ---- ---- ----- -----
Total Variable Expenses $1,816 $2,078 $2,828 $2,407 $2,370
Fixed Expenses
Real Estate Taxes $349 $517 $286 $324 $363
Insurance 48 41 110 $42 $123
--- --- ---- ---- -----
Total Fixed Expenses $397 $558 $396 $366 $486
Total Expenses $2,213 $2,636 $3,224 $2,773 $2,856
Operating Expenses % EGI 46.8% 40.2% 58.4% 40.7% 44.8%
Management % of EGI 4.75% 4.64% 6.0% 5.0% 4.0%
</TABLE>
<TABLE>
<CAPTION>
PER UNIT
OPERATING EXPENSES LOW HIGH AVERAGE
<S> <C> <C> <C>
Variable Expenses:
Management $147 $341 $258
Utilities $336 $643 $463
Repairs and Maintenance $382 $1,163 $694
Payroll $385 $738 $581
General and Administrative $239 $453 $304
----- ----- ----
Total Variable Expenses $1,816 $2,828 $2,300
Fixed Expenses
Real Estate Taxes $286 $517 $368
Insurance $41 $123 $73
---- ----- ---
Total Fixed Expenses $366 $558 $441
Total Expenses $2,213 $3,224 $2,740
Operating Expenses % EGI 40.2% 58.4% 46.2%
Management % of EGI 4.0% 6.0% 4.9%
</TABLE>
<PAGE>
CENTURY APARTMENTS
BALTIMORE COUNTY, MARYLAND
OPERATING INCOME AND EXPENSE ANALYSIS
<TABLE>
<CAPTION>
YEAR-END YEAR END YEAR-TO-DATE
1997 1998 (MAY 1999)
ANNUAL ANNUAL ACTUAL ANNUALIZED
AMOUNT PER UNIT AMOUNT PER UNIT AMOUNT ANNUALIZED PER UNIT
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Rental Income: $3,834,440 $8,193 $3,976,892 $8,498 $1,696,797 $4,072,313 $8,702
Less: Model/Employee Units ($58,971) ($126) ($57,432) ($123) ($24,944) ($59,866) ($128)
Less: Vacancy & Collection Loss ($163,609) ($350) ($188,178) ($402) ($102,385) ($245,724) ($525)
----------- --------
Other Income $111,861 $239 $107,982 $231 $45,630 $109,512 $234
--------- --------- ----------- ---------- -------
Effective Gross Income $3,723,721 $7,957 $3,839,264 $8,204 $1,615,098 $3,876,235 $8,283
EXPENSES
Variable Expenses
Management $138,962 $297 $139,166 $297 $70,493 $169,183 $362
Utilities 272,701 $583 $229,596 $491 $131,899 $316,558 $676
Repairs & Maintenance 367,057 $784 $348,231 $744 $130,826 $313,982 $671
Payroll 357,388 $764 $312,534 $668 $128,847 $309,233 $661
General & Administrative 83,292 $178 $85,949 $184 $36,364 $87,274 $186
----------- -------- ----------- --------- ----------- ----------- --------
Total Operating Expenses $1,219,400 $2,606 $1,115,476 $2,383 $498,429 $1,196,230 $2,556
Fixed Expenses
Real Estate Taxes $284,384 $608 $294,966 $630 $121,875 $292,500 $625
Insurance 14,482 $31 ($20,908) ($45) $11,003 $26,407 $56
----------- -------- ----------- --------- ----------- ----------- --------
Total Fixed Expenses $298,866 $639 $274,058 $586 $132,878 $318,907 $681
Total Expenses $1,518,266 $3,244 $1,389,534 $2,969 $631,307 $1,515,137 $3,237
Reserves for Replacement
Net Operating Income $2,205,455 $4,713 $2,449,730 $5,234 $983,791 $2,361,098 $5,045
Other Income % ERI 3.1% 2.9% 2.9%
Management As % EGI 3.7% 3.6% 4.4%
Operating Expense Ratio 40.8% 36.2% 39.1%
</TABLE>
<TABLE>
<CAPTION>
BUDGET C&W PROFORMA
1999 STABILIZED
ANNUAL ANNUAL
AMOUNT PER UNIT AMOUNT PER UNIT
<S> <C> <C> <C> <C>
INCOME
Rental Income: $4,128,145 $8,821 $4,161,084 $8,891
Less: Model/Employee Units ($54,360) ($116) ($53,175) ($114)
Less: Vacancy & Collection Loss ($140,644) ($301) ($287,554) ($614)
Other Income $102,290 $219 $114,611 $245
----------- ----------- -----------
Effective Gross Income $4,035,431 $8,623 $3,934,966 $8,408
EXPENSES
Variable Expenses
Management $168,289 $360 $157,399 $336
Utilities $251,731 $538 $252,720 $540
Repairs & Maintenance $350,927 $750 $351,000 $750
Payroll $291,050 $622 $318,240 $680
General & Administrative $95,660 $204 $93,600 $200
----------- ----------- ----------- -----------
Total Operating Expenses $1,157,657 $2,474 $1,172,959 $2,506
Fixed Expenses
Real Estate Taxes $298,621 $638 $317,903 $679
Insurance $26,407 $56 $46,800 $100
----------- ----------- ----------- -----------
Total Fixed Expenses $325,028 $695 $364,703 $779
Total Expenses $1,482,685 $3,168 $1,537,662 $3,286
Reserves for Replacement $128,700 $275
Net Operating Income $2,552,746 $5,455 $2,268,604 $4,847
Other Income % ERI 2.6% 3.0%
Management As % EGI 4.2% 4.0%
Operating Expense Ratio 36.7% 39.1%
</TABLE>
<PAGE>
CENTURY APARTMENTS
BALTIMORE COUNTY, MARYLAND
DISCOUNTED CASH FLOW ANALYSIS
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RENTAL INCOME: $4,161,084 $4,285,917 $4,414,494 $4,546,929 $4,683,337 $4,823,837
Less: Employee/Model Units ($53,175) ($54,770) ($56,413) ($58,106) ($59,849) ($61,644)
Less: Vacancy, & Collection Loss ($287,554) ($296,180) ($305,066) ($314,218) ($323,644) ($333,353)
-------------------------------------------------------------------------------------------
Effective Rental Income $3,820,355 $3,934,966 $4,053,015 $4,174,605 $4,299,844 $4,428,839
Add: Other Miscellaneous Income $114,611 $118,049 $121,590 $125,238 $128,995 $132,865
-------------------------------------------------------------------------------------------
EFFECTIVE GROSS INCOME $3,934,966 $4,053,015 $4,174,605 $4,299,844 $4,428,839 $4,561,704
OPERATING EXPENSES:
Management Fee $157,399 $162,121 $166,984 $171,994 $177,154 $182,468
Utilities $252,720 $260,302 $268,111 $276,154 $284,439 $292,972
Repairs & Maintenance $351,000 $361,530 $372,376 $383,547 $395,054 $406,905
Payroll $318,240 $327,787 $337,621 $347,749 $358,182 $368,927
General & Administrative $93,600 $96,408 $99,300 $102,279 $105,348 $108,508
FIXED EXPENSES:
Real Estate Taxes $317,903 $327,469 $337,140 $347,254 $357,672 $368,402
Insurance $46,800 $48,204 $49,650 $51,140 $52,674 $54,254
Reserves for Replacement $128,700 $132,561 $136,538 $140,634 $144,853 $149,199
-------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $1,666,362 $1,716,381 $1,767,720 $1,820,751 $1,875,374 $1,931,635
NET OPERATING INCOME $2,268,604 $2,336,634 $2,406,886 $2,479,092 $2,553,465 $2,630,069
CAPITAL RESERVES $0.25 Per SF $108,865 $112,130 $115,494 $118,959 $122,528 $126,204
CAPITAL IMPROVEMENTS $920,000 $0 $0 $0 $0 $0
-------------------------------------------------------------------------------------------
CASH FLOW AFTER CAPITAL RESERVES $1,239,740 $2,224,503 $2,291,391 $2,360,133 $2,430,937 $2,503,865
$0 $0 $0 $0 $0 $0
Annual Cash on Cash Return 10.69% 5.56% 9.98% 10.28% 10.58% 10.90% 11.23%
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 YEAR 11
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RENTAL INCOME: $4,968,552 $5,117,608 $5,271,137 $5,429,271 $5,592,149
Less: Employee/Model Units ($63,494) ($65,399) ($67,360) ($69,381) ($71,463)
Less: Vacancy, & Collection Loss ($343,354) ($353,655) ($364,264) ($375,192) ($386,448)
---------------------------------------------------------------------------
Effective Rental Income $4,561,704 $4,698,555 $4,839,512 $4,984,697 $5,134,238
Add: Other Miscellaneous Income $136,851 $140,957 $145,185 $149,541 $154,027
---------------------------------------------------------------------------
EFFECTIVE GROSS INCOME $4,698,555 $4,839,512 $4,984,697 $5,134,238 $5,288,265
OPERATING EXPENSES:
Management Fee $187,942 $193,580 $199,388 $205,370 $211,531
Utilities $301,761 $310,814 $320,138 $329,742 $339,635
Repairs & Maintenance $419,112 $431,686 $444,636 $457,975 $471,715
Payroll $379,995 $391,395 $403,137 $415,231 $427,688
General & Administrative $111,763 $115,116 $118,570 $122,127 $125,791
FIXED EXPENSES:
Real Estate Taxes $379,454 $390,838 $402,563 $414,640 $427,079
Insurance $55,882 $57,558 $59,285 $61,063 $62,895
Reserves for Replacement $153,675 $158,285 $163,033 $167,924 $172,962
---------------------------------------------------------------------------
TOTAL OPERATING EXPENSES $1,989,584 $2,049,272 $2,110,750 $2,174,072 $2,239,295
NET OPERATING INCOME $2,708,971 $2,790,240 $2,873,947 $2,960,166 $3,048,971
CAPITAL RESERVES $0.25 Per SF $129,990 $133,890 $137,906 $142,043 $146,305
CAPITAL IMPROVEMENTS $0 $0 $0 $0 $0
---------------------------------------------------------------------------
CASH FLOW AFTER CAPITAL RESERVES $2,578,981 $2,656,351 $2,736,041 $2,818,122 $2,902,666
$0 $0 $0 $29,575,017
(Reversion)
Annual Cash on Cash Return 10.69% 11.56% 11.91% 12.27% 12.64%
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------------------------------------------------------------------
CASH FLOW ASSUMPTIONS VALUATION
- ---------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Units 468
NRA (sf) 435,458 Discount Rate 12.00%
1998 Average Unit Rent/Month $741 Terminal Capitalization Rate 10.00%
Rental Growth Rate
Year 1 0.0% Cost of Sale at Reversion 3.00%
Year 2 3.0%
Thereafter 3.0% Value of Cash Flow $12,792,520
Vacancy & Collection Loss 7.0% Value of the Reversion $9,522,364
----------
Miscellaneous Income (% of Gross) 3.0% Total Value $22,314,883
Expense Growth Rate 3.0%
Real Estate Tax Growth Rate 3.0%
Management Fee (% of Gross) 4.0% ESTIMATED MARKET VALUE $22,300,000
Reserves for Unit Replacement $275 Per Unit $47,650
Overall Capitalization Rate (on NOI) 10.17%
</TABLE>
<PAGE>
Thur. Aug 19, 1999
CUSTOM SUMMARY REPORT
(POP 80-04, HH 80-04, INC 80-04)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- --------- --------- ---------
<S> <C> <C> <C>
POP_80: TOTAL 12,667 37,366 72,510
POP_90: TOTAL 12,135 42,353 82,700
POP_99: TOTAL (EST.) 11,006 42,740 86,179
POP_04: TOTAL (PROJ.) 10,403 42,712 87,261
HH_80: TOTAL 5,916 14,211 27,124
HH_90: TOTAL 5,881 18,022 33,851
HH_99: TOTAL (EST.) 5,827 18,757 36,061
HH_04: TOTAL (PROJ.) 5,630 18,932 36,849
INC_80: PER CAPITA (EST.) $10,989 $11,639 $12,215
INC_90: PER CAPITA $18,769 $25,083 $27,630
INC_99: PER CAPITA (EST. $22,384 $35,135 $40,145
INC_04: PER CAPITA (PROJ.) $24,837 $41,915 $48,347
HH_90_BY INCOME_89: MEDIAN $33,848 $45,690 $48,528
HH_99_BY INCOME: MEDIAN $37,027 $56,461 $63,056
HH_04_BY INCOME: MEDIAN $37,858 $62,891 $70,492
HH_80_BY INCOME_79: AVERAGE $23,532 $30,602 $32,655
HH_90_BY INCOME_89: AVERAGE $38,584 $58,326 $66,421
HH_99_BY INCOME: AVERAGE $42,274 $79,514 $94,396
HH_04_BY INCOME: AVERAGE $45,878 $93,684 $112,304
1990 MEDIAN HOUSE VALUE $135,122 $158,939 $172,019
1999 MEDIAN HOUSE VALUE $148,868 $188,391 $204,034
2004 MEDIAN HOUSE VALUE $162,438 $207,971 $235,322
</TABLE>
<PAGE>
2
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
POPULATION
2004 PROJECTION 10,403 42,712 87,261
1999 ESTIMATE 11,006 42,740 86,179
1990 CENSUS 12,135 42,353 82,700
1980 CENSUS 12,667 37,366 72,510
GROWTH 1980 - 1990 -4.20% 13.35% 14.05%
HOUSEHOLDS
2004 PROJECTION 5,630 18,932 36,849
1999 ESTIMATE 5,827 18,757 36,061
1990 CENSUS 5,881 18,022 33,851
1980 CENSUS 5,916 14,211 27,124
GROWTH 1980 - 1990 -0.59% 26.81% 24.80%
OCCUPIED UNITS 5,881 18,022 33,851
OWNER OCCUPIED 24.73% 58.26% 63.14%
RENTER OCCUPIED 75.27% 41.74% 36.86%
1990 AVERAGE PERSONS PER HH 2.06 2.31 2.33
1999 EST. HOUSEHOLDS BY INCOME 5,827 18,757 36,061
$150,000 OR MORE 1.59% 10.18% 15.14%
$100,000 TO $149,999 3.35% 12.33% 12.15%
$ 75,000 TO $ 99,999 4.98% 12.70% 13.48%
$ 50,000 TO $ 74,999 18.30% 19.94% 19.33%
$ 35,000 TO $ 49,999 25.19% 16.00% 14.51%
$ 25,000 TO $ 34,999 16.95% 11.01% 9.12%
$ 15,000 TO $ 24,999 19.59% 11.39% 9.08%
$ 5,000 TO $ 15,000 8.83% 5.35% 5.83%
UNDER $ 5,000 1.24% 1.10% 1.37%
1999 EST. AVERAGE HOUSEHOLD INCOME $42,274 $79,514 $94,396
1999 EST. MEDIAN HOUSEHOLD INCOME $37,027 $56,461 $63,056
1999 EST. PER CAPITA INCOME $22,384 $35,135 $40,145
</TABLE>
<PAGE>
3
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
1999 ESTIMATED POPULATION BY SEX 11,006 42,740 86,179
MALE 47.92% 47.35% 46.80%
FEMALE 52.08% 52.65% 53.20%
MARITAL STATUS 10,477 35,637 70,147
SINGLE MALE 18.84% 14.18% 13.60%
SINGLE FEMALE 16.78% 13.04% 13.61%
MARRIED 43.85% 55.42% 55.20%
PREVIOUSLY MARRIED MALE 6.89% 5.14% 4.91%
PREVIOUSLY MARRIED FEMALE 13.64% 12.23% 12.69%
HOUSEHOLDS WITH CHILDREN 1,251 4,604 8,500
MARRIED COUPLE FAMILY 67.91% 79.84% 83.58%
OTHER FAMILY-MALE HEAD 6.05% 3.86% 3.13%
OTHER FAMILY-FEMALE HEAD 24.50% 15.41% 12.62%
NON FAMILY 1.54% 0.89% 0.68%
1999 ESTIMATED POPULATION BY AGE 11,006 42,740 86,179
UNDER 5 YEARS 5.01% 5.13% 4.88%
5 TO 9 YEARS 5.53% 5.86% 5.51%
10 TO 14 YEARS 5.27% 5.95% 5.61%
15 TO 17 YEARS 2.29% 3.11% 3.13%
18 TO 20 YEARS 2.02% 2.32% 3.53%
21 TO 24 YEARS 6.70% 4.82% 4.78%
25 TO 29 YEARS 10.22% 7.52% 6.72%
30 TO 34 YEARS 9.42% 6.84% 6.44%
35 TO 39 YEARS 10.65% 7.61% 6.54%
40 TO 49 YEARS 16.27% 15.91% 15.12%
50 TO 59 YEARS 10.74% 13.36% 13.34%
60 TO 64 YEARS 3.57% 5.40% 5.44%
65 TO 69 YEARS 3.35% 4.80% 5.11%
70 To 74 YEARS 3.15% 4.01% 4.40%
75 + YEARS 5.80% 7.37% 3.46%
</TABLE>
<PAGE>
4
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
MEDIAN AGE 36.66 40.53 41.91
AVERAGE AGE 37.91 40.51 41.84
1999 ESTIMATED FEMALE POP. BY AGE 5,731 22,501 45,846
UNDER 5 YEARS 4.75% 4.81% 4.55%
5 TO 9 YEARS 5.20% 5.50% 5.08%
10 TO 14 YEARS 5.18% 5.68% 5.12%
15 TO 17 YEARS 2.42% 3.03% 2.94%
18 TO 20 YEARS 2.27% 2.26% 3.74%
21 TO 24 YEARS 6.75% 4.89% 4.67%
25 TO 29 YEARS 9.70% 7.07% 6.19%
30 TO 34 YEARS 8.82% 6.36% 5.91%
35 TO 39 YEARS 10.17% 7.32% 6.24%
40 TO 49 YEARS 15.76% 15.78% 14.99%
50 TO 59 YEARS 10.96% 13.51% 13.15%
60 TO 64 YEARS 3.68% 5.49% 5.45%
65 To 69 YEARS 3.46% 4.87% 5.29%
70 TO 74 YEARS 3.54% 4.16% 4.62%
75 + YEARS 7.34% 9.26% 12.07%
FEMALE MEDIAN AGE 37.41 41.98 43.76
FEMALE AVERAGE AGE 39.08 41.92 43.65
POPULATION BY HOUSEHOLD TYPE 12,135 42,353 82,700
FAMILY HOUSEHOLDS 68.70% 78.87% 77.43%
NON-FAMILY HOUSEHOLDS 31.25% 19.41% 18.00%
GROUP QUARTERS 0.04% 1.73% 4.57%
HOUSEHOLDS BY TYPE 5,881 18,022 33,851
SINGLE MALE 17.45% 11.93% 10.43%
SINGLE FEMALE 19.76% 16.79% 18.37%
MARRIED COUPLE 37.62% 53.16% 55.22%
OTHER FAMILY-MALE HEAD 3.35% 2.72% 2.37%
OTHER FAMILY-FEMALE HEAD 9.56% 7.81% 6.92%
NON FAMILY-MALE HEAD 6.59% 4.03% 3.49%
NON FAMILY-FEMALE HEAD 5.67% 3.57% 3.20%
</TABLE>
<PAGE>
5
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
POPULATION BY URBAN VS. RURAL 12,013 42,369 82,712
URBAN 100.00% 95.89% 85.28%
RURAL 0.00% 4.11% 14.72%
FEMALES 16+ WITH CHILDREN 0-17: BAS 5,447 18,767 37,377
WORKING WITH CHILD 0-5 5.25% 4.30% 3.62%
NOT WORKING WITH CHILD 0-5 0.32% 0.23% 0.19%
NOT IN LABOR FORCE WITH CHILD 0- 2.57% 2.48% 2.20%
WORKING WITH CHILD 6-17 7.38% 9.06% 8.56%
NOT WORKING WITH CHILD 6-17 0.00% 0.26% 0.19%
NOT IN LAB. FORCE WITH CHILD 6- 2.58% 2.65% 3.01%
WORKING WITH CHILD 0-5 & 6-18 1.15% 1.98% 2.22%
NOT WORKING WITH CHILD 0-5 & 6-18 0.07% 0.09% 0.04%
NOT IN LAB. FORCE W/CHILD 0-5 & 6- 1.86% 2.13% 1.98%
WORKING WITH NO CHILDREN 53.60% 45.05% 40.21%
NOT WORKING WITH NO CHILDREN 1.45% 0.97% 0.80%
NOT IN LAB. FORCE WITH NO CHILD. 23.77% 30.81% 36.98%
HH BY AGE BY POVERTY STATUS 5,822 18,092 33,898
ABOVE POVERTY UNDER AGE 65 78.71% 77.46% 71.15%
ABOVE POVERTY AGE 65 + 16.51% 19.20% 25.06%
BELOW POVERTY UNDER AGE 65 3.77% 2.40% 2.33%
BELOW POVERTY AGE 65 + 1.01% 0.93% 1.45%
POPULATION 16+ BY EMPLOYMENT
STATUS 10,298 35,320 69,370
EMPLOYED IN ARMED FORCES 0.13% 0.10% 0.07%
EMPLOYED CIVILIANS 73.80% 68.83% 63.68%
UNEMPLOYED CIVILIANS 2.10% 1.39% 1.23%
NOT IN LABOR FORCE 23.98% 29.67% 35.02%
POPULATION 16+ BY OCCUPATION 7,600 24,311 44,172
EXECUTIVE AND MANAGERIAL 18.89% 21.92% 22.22%
PROFESSIONAL SPECIALTY 17.22% 22.75% 25.21%
TECHNICAL SUPPORT 5.74% 4.26% 3.86%
</TABLE>
<PAGE>
6
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
SALES 15.19% 16.79% 16.77%
ADMINISTRATIVE SUPPORT 16.73% 15.33% 14.53%
SERVICE: PRIVATE HOUSEHOLD 0.34% 0.33% 0.37%
SERVICE: PROTECTIVE 0.97% 0.99% 0.80%
SERVICE: OTHER 9.41% 7.04% 6.56%
FARMING FORESTRY & FISHING 1.01% 0.76% 0.91%
PRECISION PRODUCTION & CRAFT 7.13% 5.31% 5.21%
MACHINE OPERATOR 3.10% 1.71% 1.28%
TRANS. AND MATERIAL MOVING 2.20% 1.51% 1.11%
LABORERS 2.07% 1.30% 1.18%
FAMILIES BY NUMBER OF WORKERS 2,996 11,626 22,070
NO WORKERS 10.26% 10.77% 11.94%
ONE WORKER 29.34% 27.48% 27.25%
TWO WORKERS 51.80% 48.66% 47.61%
THREE + WORKERS 8.59% 13.08% 13.20%
POPULATION BY TRANSPORTATION
TO WORK 7,499 24,026 43,635
DRIVE ALONE 80.88% 83.73% 82.16%
CAR POOL 11.70% 9.77% 9.19%
PUBLIC TRANSPORTATION 2.33% 1.95% 1.95%
DRIVE MOTORCYCLE 0.16% 0.05% 0.05%
WALKED ONLY 2.77% 1.68% 3.07%
OTHER MEANS 0.60% 0.51% 0.55%
WORKED AT HOME 1.56% 2.32% 3.03%
POPULATION BY TRAVEL TIME TO WORK 7,499 24,026 43,635
UNDER 10 MINUTES/WORK AT HOME 16.94% 15.07% 15.99%
10 TO 29 MINUTES 51.89% 55.62% 55.17%
30 TO 59 MINUTES 28.25% 26.07% 25.69%
60 TO 89 MINUTES 2.46% 2.64% 2.65%
90+ MINUTES 0.46% 0.60% 0.50%
AVERAGE TRAVEL TIME IN MINUTES 21.04 21.08 20.87
HOUSEHOLDS BY NO. OF VEHICLES 5,899 18,027 33,897
</TABLE>
<PAGE>
7
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
NO VEHICLES 5.89% 4.01% 5.72%
1 VEHICLE 47.09% 36.48% 33.96%
2 VEHICLES 37.25% 44.08% 42.85%
3+ VEHICLES 9.78% 15.43% 17.47%
ESTIMATED TOTAL VEHICLES 9,018 31,369 59,507
POPULATION 25+ BY EDUCATION LEVEL 8,284 30,166 58,566
ELEMENTARY (0-8) 4.43% 4.43% 4.09%
SOME HIGH SCHOOL (9-11) 9.43% 7.50% 7.71%
HIGH SCHOOL GRADUATE (12) 26.92% 21.41% 19.80%
SOME COLLEGE (13-15) 19.71% 18.51% 18.56%
ASSOCIATES DEGREE ONLY 5.18% 5.28% 5.18%
BACHELORS DEGREE ONLY 23.01% 26.37% 25.42%
GRADUATE DEGREE 11.32% 16.51% 19.24%
POPULATION ENROLLED IN SCHOOL 2,497 9,313 19,826
PUBLIC PRE- PRIMARY 4.68% 4.11% 2.87%
PRIVATE PRE- PRIMARY 4.14% 5.98% 6.39%
PUBLIC ELEM/HIGH 39.35% 42.43% 34.46%
PRIVATE ELEM/HIGH 6.75% 11.91% 15.46%
ENROLLED IN COLLEGE 45.08% 35.56% 40.83%
HOUSING UNITS BY OCCUPANCY STATUS 6,431 19,009 35,738
OCCUPIED 91.45% 94.80% 94.72%
VACANT 8.55% 5.20% 5.28%
VACANT UNITS 550 988 1,886
FOR RENT 78.43% 64.49% 59.22%
FOR SALE ONLY 14.16% 18.72% 20.00%
SEASONAL 0.91% 2.63% 3.97%
OTHER 6.51% 14.17% 16.81%
OWNER OCCUPIED PROPERTY VALUES 1,250 9,215 18,494
UNDER $25,000 0.18% 0.18% 0.18%
$25,000 TO $49,999 0.30% 0.27% 0.25%
$50,000 TO $74,999 2.00% 1.15% 1.11%
</TABLE>
<PAGE>
8
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
$75,000 TO $99,999 8.36% 5.33% 5.44%
$100,000 TO $149,999 55.82% 37.61% 31.71%
$150,000 TO $199,999 24.62% 30.58% 25.65%
$200,000 TO $299,999 8.22% 17.50% 19.94%
$300,000 TO $399,999 0.36% 3.87% 7.88%
$400,000 TO $499,999 0.14% 1.71% 3.69%
$500,000 + 0.00% 1.81% 4.13%
MEDIAN PROPERTY VALUE $135,122 $158,939 $172,019
TOTAL RENTAL UNITS 4,374 7,345 11,985
MEDIAN RENT $526 $531 $552
PERSONS IN UNIT 5,881 18,022 33,851
1 PERSON UNITS 37.21% 28.72% 28.80%
2 PERSON UNITS 35.82% 37.28% 36.76%
3 PERSON UNITS 15.36% 16.23% 15.59%
4 PERSON UNITS 7.99% 11.99% 12.52%
5 PERSON UNITS 2.69% 4.21% 4.64%
6 PERSON UNITS 0.73% 1.14% 1.27%
7 + UNITS 0.20% 0.42% 0.42%
YEAR ROUND UNITS IN STRUCTURE 6,431 19,009 35,738
SINGLE UNITS DETACHED 18.26% 42.81% 49.85%
SINGLE UNITS ATTACHED 8.83% 15.11% 12.56%
DOUBLE UNITS 0.37% 0.24% 0.50%
3 TO 9 UNITS 14.16% 9.04% 9.30%
10 TO 19 UNITS 55.70% 30.30% 18.93%
20 TO 49 UNITS 2.35% 1.07% 2.48%
50 + UNITS 0.00% 0.88% 5.18%
MOBILE HOME OR TRAILER 0.01% 0.06% 0.07%
ALL OTHER 0.32% 0.50% 1.14%
SINGLE/MULTIPLE UNIT RATIO 0.37 1.39 1.72
HOUSING UNITS BY YEAR BUILT 5,899 18,027 33,897
BUILT 1989 TO MARCH 1990 0.24% 1.47% 1.74%
</TABLE>
<PAGE>
9
CUSTOM SUMMARY REPORT
(POP FACTS: FULL DATA REPORT)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
BUILT 1985 TO 1988 2.05% 10.82% 10.64%
BUILT 1980 TO 1984 6.84% 14.60% 11.63%
BUILT 1970 TO 1979 46.38% 29.04% 25.03%
BUILT 1960 TO 1969 34.28% 24.98% 22.11%
BUILT 1950 TO 1959 7.61% 14.65% 19.09%
BUILT 1940 TO 1949 1.15% 1.78% 3.91%
BUILT 1939 OR EARLIER 1.45% 2.66% 5.85%
</TABLE>
<PAGE>
10
CUSTOM SUMMARY REPORT
(RETAIL TRADE POTENTIAL REPORT - CURRENT YEAR SALES BY STORE TYPE)
BY NATIONAL DECISION SYSTEMS 800-866-6510
PREPARED FOR
CUSHMAN & WAKEFIELD, INC.
<TABLE>
<CAPTION>
CENTURY APARTMENTS
COCKEYSVILLE, MD COORD: 39:27.91 76:37.84
1.00 MILE 3.00 MILE 5.00 MILE
DESCRIPTION RADIUS RADIUS RADIUS
- ----------- ------ ------ ------
<S> <C> <C> <C>
TOTAL RETAIL SALES $189 $626 $1,208
APPAREL & ACCESSORY STORES $11 $37 $72
AUTOMOTIVE DEALERS $40 $134 $258
AUTOMOTIVE & HOME SUPPLY $2 $7 $14
STORES
DRUG & PROPRIETARY STORES $6 $21 $41
EATING & DRINKING PLACES $16 $53 $100
FOOD STORES $29 $95 $184
FURNITURE & HOME FURNISHINGS $6 $22 $43
STORES
HOME APPLIANCE, RADIO, & T.V. $8 $26 $50
STORES
GASOLINE SERVICE STATIONS $8 $25 $48
GENERAL MERCHANDISE $29 $95 $183
DEPARTMENT STORES $23 $76 $147
(INCLUDING LEASED DEPTS.)
HARDWARE, LUMBER & GARDEN STORES $11 $37 $72
($'S IN MILLIONS)
</TABLE>
<PAGE>
11
ADDENDA
- --------------------------------------------------------------------------------
IMPROVED SALE COMPARABLES
<PAGE>
12
COMPARABLE IMPROVED SALE 1-1
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Name: The Manor House
Location: 14313 Georgia Avenue
Silver Spring, Maryland
Grantor: Smith Property Holdings V LP
Grantee: Manor II Associates LLC
Date of Sale: March 1999
Year Built: 1968
Number of Units: 435
Consideration: $23,000,000
Financing: $18,000,000; Lehman Bros. Holdings, Inc.
INCOME DATA
NOI (after reserves): $2,275,000
Overall Rate: 9.89%
Price per Unit: $52,874
NOI per Unit: $5,230
</TABLE>
Comments:
This is a four-story Class B garden style project that offers a mix of
one, two and three bedroom units ranging in size from 588 to 1,360 square feet.
Amenities include a pool, clubhouse, and playground. At the time of sale, the
project was 97 percent occupied. The overall rate is based on the 1999 projected
net operating income.
<PAGE>
13
COMPARABLE IMPROVED SALE 1-2
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Name: Millpond Apartments
Location: 604 Millstream Court
Millersville, Maryland
Grantor: Millpond Associates LP
Grantee: Second Country Club Associates LP
Date of Sale: January 1999
Year Built: 1983
Number of Units: 240
Consideration: $11,030,000
Financing: Cash to seller
INCOME DATA
NOI (after reserves): $1,031,305
Overall Rate: 9.35%
Price per Unit: $45,958
NOI per Unit: $4,297
</TABLE>
Comments:
This is a four-story Class B garden style project that offers a mix of
one, two and three bedroom units. Amenities include a swimming pool, tennis
courts, and playground. At the time of sale, the project was 95 percent
occupied. The overall rate is based on the grantee's proforma.
<PAGE>
14
COMPARABLE IMPROVED SALE 1-3
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Name: Cedar Valley Apartments
Location: 5458 Harpers Farm Road
Columbia, Maryland
Grantor: Cedar Valley, Inc.
Grantee: BFMIT Cedar Valley LLC
Date of Sale: July 1998
Year Built: 1974
Number of Units: 156
Consideration: $6,850,000
Financing: $5,500,000 Acacia Life Insurance
INCOME DATA
NOI (after reserves): N/A
Overall Rate: N/A
Price per Unit: $43,910
NOI per Unit: N/A
</TABLE>
Comments:
This is a three-story Class B garden style project that offers a mix of
one, two and three bedroom units ranging from 815 to 1,056 square feet. Rents
range from $659 to $809 per month. Amenities include a swimming pool and
playground. All units are equipped with dishwashers, disposals, and
washer/dryers. At the time of sale, the project was 98 percent occupied. We were
unable to confirm the overall rate.
<PAGE>
15
COMPARABLE IMPROVED SALE 1-4
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Name: Park Place I and II Apartments
Location: Seven Mile Lane & Park Heights Avenue
Baltimore City, Maryland
Grantor: Seventy Two Hundry LP
Grantee: Seven Mile Lane LP
Date of Sale: January 1998
Year Built: 1971
Land Area: 26.28 acres
Number of Units: 391
Consideration: $14,250,000
Financing: $11,500,000; Column Financial
Marketing Time: 2 months
INCOME DATA
NOI (after reserves): $1,246,875
Overall Rate: 8.75%
Price per Unit: $36,445
NOI per Unit: $3,189
</TABLE>
Comments:
This sale consists of four separate communities that are located
adjacent or opposite one another that were built in sections between 1971 and
1981. At the time of sale, the property was 93 percent occupied with expenses of
$3,300 per unit.
<PAGE>
16
ADDENDA
- --------------------------------------------------------------------------------
RENT COMPARABLES
<PAGE>
17
RENT COMPARABLE R-1
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
<TABLE>
<S> <C>
Name: Deertree
Location: 10000 Greenside Drive
Cockeysville, Maryland
Physical Description
Number of Units: 477
Average Unit Size: 717 -1,137 SF
Year Built: 1966
Type: Garden
Parking: On-site
Unit Amenities: Dishwasher, disposal
Project Amenities: Pool, clubhouse, laundry, playground
Occupancy: 99%
</TABLE>
<PAGE>
18
RENT COMPARABLE
- --------------------------------------------------------------------------------
Rental R-1 (Continued)
<TABLE>
<CAPTION>
Unit Street Rent
Unit Type Size (SF) Rent SF
--------- ---- ------ ----
<S> <C> <C> <C>
1 BR/1 BA 717 $575 $0.80
1 BR/1 BA/Den 849 $595 $0.70
2 BR/1 BA 972 $640 $0.66
2 BR/1.5 BA 972 $655 $0.67
3 BR/1.5 BA 1,137 $785 $0.69
</TABLE>
<PAGE>
19
RENT COMPARABLE R-2
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
<TABLE>
<S> <C>
Name: Hunt Club
Location: 2 Carston Court
Cockeysville, Maryland
Physical Description
Number of Units: 252
Average Unit Size: 701 - 1,175SF
Year Built: 1972
Type: Garden
Parking: On-site
Unit Amenities: Dishwasher, disposal, washer/dryer
Project Amenities: Pool, clubhouse, fitness center
Occupancy: 98%
</TABLE>
<PAGE>
20
RENT COMPARABLE
- --------------------------------------------------------------------------------
Rental R-2 (Continued)
<TABLE>
<CAPTION>
Unit Street Rent
Unit Type Size (SF) Rent SF
--------- --------- ---- --
<S> <C> <C> <C>
1 BR/1 BA 701 $705 $1.01
2 BR/1.5 BA 1,003 $795 $0.79
3 BR/2 BA 1,175 $875 $0.74
</TABLE>
<PAGE>
21
RENT COMPARABLE R-3
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
<TABLE>
<S> <C>
Name: Mays Chapel Village
Location: 10 Dodworth Court
Cockeysville, Maryland
Physical Description
Number of Units: 192
Average Unit Size: 700 -1,100 SF
Year Built: 1978
Type: Garden
Parking: On-site
Unit Amenities: Dishwasher, disposal
Project Amenities: Laundry, playground
Occupancy: 99%
</TABLE>
<PAGE>
22
RENT COMPARABLE
- --------------------------------------------------------------------------------
Rental R-3 (Continued)
<TABLE>
<CAPTION>
Unit Street Rent
Unit Type Size (SF) Rent SF
--------- --------- ---- --
<S> <C> <C> <C>
1 BR/1 BA 700 $610 $0.87
1 BR/1 BA/Den 820 $665 $0.81
2 BR/1.5 BA 880 $720 $0.82
3 BR/2 BA 1,100 $790 $0.72
</TABLE>
<PAGE>
23
RENT COMPARABLE R-4
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
<TABLE>
<S> <C>
Name: Briarcliff East
Location: 599 Cranbrook Road
Cockeysville, Maryland
Physical Description
Number of Units: 609
Average Unit Size: 937 - 1,166 SF
Year Built: 1968
Type: Garden
Parking: On-site
Unit Amenities: Dishwasher, disposal, washer/dryer
Project Amenities: Pool, fitness, playground
Occupancy: 98%
</TABLE>
<PAGE>
24
RENT COMPARABLE
- --------------------------------------------------------------------------------
Rental R-4 (Continued)
<TABLE>
<CAPTION>
Unit Street Rent
Unit Type Size (SF) Rent SF
--------- --------- ---- --
<S> <C> <C> <C>
1 BR/1 BA 937 $665 $0.71
2 BR/1 BA 974 $750 $0.77
3 BR/2 BA 1,166 $860 $0.74
</TABLE>
<PAGE>
25
RENT COMPARABLE R-5
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
<TABLE>
<S> <C>
Name: Town & Country
Location: 10337 Society Park Drive
Cockeysville, Maryland
Physical Description
Number of Units: 554
Average Unit Size: 805 -1,057 SF
Year Built: 1973
Type: Garden
Parking: On-site
Unit Amenities: Dishwasher, disposal, washer/dryer
Project Amenities: Pool, clubhouse, fitness, playground
Occupancy: 97%
</TABLE>
<PAGE>
26
RENT COMPARABLE
- --------------------------------------------------------------------------------
Rental R-5 (Continued)
<TABLE>
<CAPTION>
Unit Street Rent
Unit Type Size (SF) Rent SF
--------- --------- ---- --
<S> <C> <C> <C>
1 BR/1 BA 805 $649 $0.81
2 BR/1 BA 1,057 $739 $0.70
</TABLE>
<PAGE>
EXHIBIT C(1)
[EXECUTION COPY]
VOTING AGREEMENT
among
EQUITY RESOURCE BOSTON FUND,
EQUITY RESOURCE BRIDGE FUND,
EQUITY RESOURCE CAMBRIDGE FUND,
EQUITY RESOURCE GENERAL FUND,
EQUITY RESOURCE FUND XVII,
EQUITY RESOURCE FUND XIX,
EQUITY RESOURCE FUND XXI
KRF COMPANY, L.L.C.,
and
KR5 ACQUISITION, L.L.C.
------------------------------
Dated as of December 2, 1999
------------------------------
<PAGE>
VOTING AGREEMENT
VOTING AGREEMENT, dated as of December 2, 1999 (this
"AGREEMENT"), by and among KRF Company, L.L.C., a Delaware limited liability
company ("BERKSHIRE"), KR5 Acquisition, L.L.C., a Delaware limited liability
company (the "COMPANY"), and certain investment funds affiliated with Equity
Resources Group Incorporated (collectively referred to as "EQUITY RESOURCES"),
listed on Schedule I hereto (each, a "UNITHOLDER" and, collectively, the
"UNITHOLDERS").
WHEREAS, the Company, Berkshire and Equity Resources propose
to enter into an Investment Agreement, dated as of the date hereof (the
"INVESTMENT AGREEMENT") which contemplates, among other things, (i) the
investment by each of Berkshire and Equity Resources in the Company; (ii) the
merger of the Company with Krupp Realty Limited Partnership-V with and into the
Company, a Massachusetts limited partnership (the "PARTNERSHIP") (the "MERGER")
pursuant to a Merger Agreement (the "MERGER AGREEMENT") substantially in the
form attached as Exhibit C to the Investment Agreement; and (iii) the amendment
of the Amended Agreement of Limited Partnership of the Partnership, dated
July 27, 1983, as amended from time to time (the "FUND V AGREEMENT") to permit
the Company to enter into the Merger Agreement and consummate the transactions
contemplated thereby (the "AMENDMENT").
WHEREAS, as of the date hereof, the Unitholders are holders of
record or Beneficially Own (as defined herein) an aggregate amount of 3,985.5
limited partnership units of the Partnership listed opposite the name of each
such Unitholder on Schedule I hereto; and
WHEREAS, in order to induce Berkshire and the Company to enter
into the Investment Agreement, each Unitholder has agreed to enter into this
Agreement with respect to all of the investor limited partnership interests of
the Partnership now held of record or Beneficially Owned and which may hereafter
be acquired by such Unitholders (the "UNITS").
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements contained herein, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 GENERAL. Capitalized terms used and not
defined herein have the respective meanings ascribed to them in the
Investment Agreement.
Section 1.2 BENEFICIAL OWNERSHIP. For purposes of this
Agreement, "BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" with respect to any
securities shall mean "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT")), including pursuant to any agreement,
arrangement or understanding, whether or not in writing.
ARTICLE II
Section 2.1 VOTING AGREEMENT. Each of the Unitholders
hereby agrees as follows:
(a) to appear, or cause the holder of record on any
applicable record date with respect to any Units owned by such
Unitholder to appear, in person or by proxy, for the purpose of
obtaining a quorum at any annual or special meeting of the partners of
the Partnership and at any adjournment thereof, at which matters
relating to the Merger, the Amendment or any transaction contemplated
thereby are considered; and
(b) at any meeting of the partners of the
Partnership, however called, and in any action by consent of the
limited partners of the Partnership, to vote, or cause to be voted by
the Unitholders, in person or by proxy, the Units held of record or
Beneficially Owned by such Unitholder in favor of the Merger, the
Merger Agreement (as amended from time to time), the Amendment and the
transactions contemplated by the Merger Agreement; and
(c) at any meeting of the Partners of the
Partnership, however called, and in any action by consent of the
limited partners of the Partnership, to vote, or cause to be voted by
the Unitholders, in person or by proxy, the Units held of record or
Beneficially Owned by such Unitholder against approval of any proposal
made in opposition to or in competition with the Merger or any of the
other transactions contemplated by the Merger Agreement, and any other
action that may reasonably be expected to impede, interfere with,
delay, postpone or attempt to discourage the Merger or the other
transactions contemplated by the Merger Agreement which would
<PAGE>
materially and adversely affect the Partnership or its ability to
consummate the transactions contemplated by the Merger Agreement.
Section 2.2 NO OWNERSHIP INTEREST. Nothing contained in
this Voting Agreement shall be deemed to vest in the Company or Berkshire any
direct or indirect ownership or incidence of ownership of or with respect to
any Units. All rights, ownership and economic benefits of and relating to the
Units shall remain and belong to the Unitholders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE UNITHOLDERS
Each of the Unitholders hereby represents and warrants,
severally and not jointly, to the Company and Berkshire as follows:
Section 3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Such
Unitholder has all necessary power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Where such Unitholder is a corporation,
partnership or other entity, the execution and delivery of this Agreement by
such Unitholder and the consummation by such Unitholder of the transactions
contemplated hereby have been duly and validly authorized by the board of
directors or other governing body of such Unitholder, and no other
proceedings on the part of such Unitholder are necessary to authorize this
Agreement or to consummate such transactions. This Agreement has been duly
and validly executed and delivered by such Unitholder and constitutes a
legal, valid and binding obligation of such Unitholder, enforceable against
such Unitholder in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting creditors' rights generally or by general principles
governing the availability of equitable remedies.
Section 3.2 NO CONFLICT. (a) The execution and delivery
of this Agreement by such Unitholder does not, and the performance of this
Agreement by such Unitholder shall not, (i) where such Unitholder is a
corporation, partnership or other entity, conflict with or violate the
organizational documents of such Unitholder, (ii) conflict with or violate
any agreement, arrangement, law, rule, regulation, order, judgment or decree
to which such Unitholder is a party or by which such Unitholder (or the Units
held of record or Beneficially Owned by such Unitholder) is bound or affected
or (iii) result in any breach of or constitute a default (or an event that
with notice or lapse or time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the Units
held of record or Beneficially Owned by such Unitholder pursuant to any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which
<PAGE>
such Unitholder is a party or by which such Unitholder (or the Units held of
record or Beneficially Owned by such Unitholder) is bound or affected, except,
in the case of clauses (ii) and (iii) of this Section 3.2, for any such
conflicts, violations, breaches, defaults or other occurrences which would not
prevent the performance by such Unitholder of its material obligations under
this Agreement.
(b) The execution and delivery of this Agreement by such
Unitholder does not, and the performance of this Agreement by such Unitholder
shall not, require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental entity except for applicable
requirements, if any, of federal or state securities and antitrust laws and
except where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent the
performance by such Unitholder of its material obligations under this Agreement.
Section 3.3 TITLE TO THE UNITS. As of the date hereof,
such Unitholder is the record or Beneficial Owner of the Units listed
opposite the name of such Unitholder on Schedule I hereto. The Units listed
opposite the name of such Unitholder on Schedule I hereto are all the
securities of the Partnership either held of record or Beneficially Owned by
such Unitholder. Such Unitholder has not appointed or granted any proxy,
which appointment or grant is still effective, with respect to the Units held
of record or Beneficially Owned by such Unitholder. The Units listed opposite
the name of such Unitholder on Schedule I hereto are owned free and clear of
all security interests, liens, claims, pledges, options, rights of first
refusal, limitations on such Unitholder's voting rights, charges and other
encumbrances of any nature whatsoever other than liens under applicable law.
ARTICLE IV
COVENANTS OF THE UNITHOLDER
Section 4.1 NO INCONSISTENT AGREEMENTS. Each Unitholder
hereby represents, warrants, covenants and agrees that, except as
contemplated by this Agreement and the Investment Agreement, such Unitholder
has not and shall not, and will use its reasonable best efforts to not permit
any Person under such Unitholder's control to, enter into any voting
agreement or grant a proxy or power of attorney with respect to the Units
held of record or Beneficially Owned by such Unitholder which, in either
case, is inconsistent with this Agreement.
Section 4.2 TRANSFER OF TITLE. Each Unitholder hereby
covenants and agrees that such Unitholder will not, prior to the termination
of this Agreement, either directly or indirectly, offer or otherwise agree to
sell, assign, pledge, hypothecate, transfer, exchange, or dispose of any
Units or options, warrants or other convertible securities to acquire or
purchase units of the Partnership or any other securities or
<PAGE>
rights convertible into or exchangeable for units of the Partnership, owned
either directly or indirectly by such Unitholder or with respect to which such
Unitholder has the power of disposition, whether now or hereafter acquired,
without the prior written consent of the Company and Berkshire. Each Unitholder
hereby agrees and consents to the entry of stop transfer instructions by the
Partnership against the transfer of any Units inconsistent with the terms of
this Section 4.2.
ARTICLE V
MISCELLANEOUS
Section 5.1 TERMINATION. This Agreement shall terminate
unless extended by agreement of each of the parties hereto on August 1, 2000.
Upon such termination, no party shall have any further obligations or
liabilities hereunder; PROVIDED, HOWEVER, that nothing in this Agreement
shall relieve any party from liability for the breach of any of its
representations, warranties, covenants and agreements set forth in this
Agreement prior to such termination.
Section 5.2 ADDITIONAL UNITS. If, after the date hereof,
a Unitholder acquires the right to vote any additional partnership interests
of the Partnership (any such partnership interests shall be referred to
herein as "ADDITIONAL UNITS"), the provisions of this Agreement applicable to
the Units shall be applicable to such Additional Units as if such Additional
Units had been Units held by the Unitholders as of the date hereof. The
provisions of the immediately preceding sentence shall be effective with
respect to Additional Units without action by any Person immediately upon the
acquisition by a Unitholder of the right to vote such Additional Units.
Section 5.3 SPECIFIC PERFORMANCE. The parties hereto
agree that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or in equity.
Section 5.4 ENTIRE AGREEMENT. This Agreement and the
Investment Agreement constitute the entire agreement between Berkshire, the
Company and the Unitholders with respect to the subject matter hereof and
supersedes all prior agreements and understandings, both written and oral,
between Berkshire, the Company and the Unitholders with respect to the
subject matter hereof; PROVIDED that, to the extent not inconsistent with the
terms hereof, the Settlement Agreement and Release, dated as of July 17,
1995, among Equity Resources and the parties named therein shall continue in
full force and effect.
<PAGE>
Section 5.5 AMENDMENT. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 5.6 SEVERABILITY. If any term or other provision
of this Agreement is invalid, illegal or incapable of being enforced by any
rule or law, or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereby shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible to the
fullest extent permitted by applicable law in a mutually acceptable manner in
order that the terms of this Agreement remain as originally contemplated.
Section 5.7 NOTICES. All notices and other communications
given or made pursuant hereto shall be in writing and shall be deemed to have
been duly given or made and shall be effective upon receipt, if delivered
personally, upon receipt of a transmission confirmation if sent by facsimile
(with a confirming copy sent by overnight courier) and on the next business
day if sent by Federal Express, United Parcel Service, Express Mail or other
reputable overnight courier to the parties at the following addresses (or at
such other address for a party as shall be specified by notice):
If to a Unitholder:
c/o Equity Resources Group, Inc.
14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
with a copy to:
Holland & Knight, LLP
One Beacon Street
Boston, Massachusetts 02108
If to the Company or Berkshire, to:
c/o The Berkshire Group
One Beacon Street, Suite 1500
Boston, Massachusetts 02108
Attention: David Quade
<PAGE>
with copies to:
The Berkshire Group
One Beacon Street, Suite 1500
Boston, Massachusetts 02108
Attention: Scott Spelfogel, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: James M. Dubin
Section 5.8 GOVERNING LAW. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Delaware applicable to agreements made and to be performed entirely within
such state without giving effect to the provisions thereof relating to
conflicts of law.
Section 5.9 OBLIGATIONS OF UNITHOLDERS. The obligations
of the Unitholders hereunder shall be "joint and several."
Section 5.10 COUNTERPARTS. This Agreement may be executed
in one or more counterparts, each of which shall be an original and all of
which, when taken together, shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective duly authorized
persons on the date first above written.
KR5 ACQUISITION, L.L.C.
By: KRF Company, L.L.C.,
its sole member
By: The Krupp Family Limited Partnership-94,
its sole member
By: /s/ Douglas Krupp
-----------------
Douglas Krupp
General Partner
KRF COMPANY, L.L.C.
By: The Krupp Family Limited Partnership-94,
its sole member
By: /s/ Douglas Krupp
-----------------
Douglas Krupp
General Partner
EQUITY RESOURCE BOSTON FUND,
EQUITY RESOURCE BRIDGE FUND,
EQUITY RESOURCE CAMBRIDGE FUND
EQUITY RESOURCE GENERAL FUND,
EQUITY RESOURCE FUND XVII,
EQUITY RESOURCE FUND XIX,
EQUITY RESOURCE FUND XXI
By: EQUITY RESOURCES GROUP, INCORPORATED,
as general partner of each of the foregoing
By: /s/ Eggert Dagbjartsson
---------------------------
Eggert Dagbjartsson
Executive Vice President
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
UNITHOLDER: NUMBER OF UNITS: ADDRESS:
---------- --------------- -------
<S> <C> <C>
Equity Resource Fund 1,599.50 c/o Equity Resources Group, Inc.
XVII 14 Story Street
Cambridge, Massachusetts
02138
Attention: Mr. Eggert Dagbjartsson
- --------------------------------------------------------------------------------------------------------------------------
Equity Resource Fund 225.00 c/o Equity Resources Group, Inc.
XIX 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- ---------------------------------------------------------------------------------------------------------------------------
Equity Resource Fund 847.00 c/o Equity Resources Group, Inc.
XXI 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- ---------------------------------------------------------------------------------------------------------------------------
Equity Resource General 20.00 c/o Equity Resources Group, Inc.
Fund 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- ----------------------------------------------------------------------------------------------------------------------------
Equity Resource 175.00 c/o Equity Resources Group, Inc.
Cambridge Fund 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- -----------------------------------------------------------------------------------------------------------------------------
Equity Resource Bridge 20.00 c/o Equity Resources Group, Inc.
Fund 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- -------------------------------------------------------------------------------------------------------------------------------
Equity Resource Boston 1099.00 c/o Equity Resources Group, Inc.
Fund 14 Story Street
Cambridge, Massachusetts 02138
Attention: Mr. Eggert Dagbjartsson
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 99(C)(2)
[EXECUTION COPY]
INVESTMENT AGREEMENT
among
EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP,
EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP,
EQUITY RESOURCE FUND XXI LIMITED PARTNERSHIP,
EQUITY RESOURCE FUND XVII LIMITED PARTNERSHIP,
EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP,
EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP
EQUITY RESOURCE BOSTON FUND LIMITED PARTNERSHIP
KRF COMPANY, L.L.C.,
and
KR5 ACQUISITION, L.L.C.
------------------------------
Dated: December 2, 1999
------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS............................................................................2
ARTICLE 2 VOTING AGREEMENT, CLOSING DATE TRANSACTIONS AND USE OF PROCEEDS........................5
2.1 Voting Agreement.......................................................................5
2.2 Closing Date Transactions..............................................................5
2.2.1 LLC Agreement...................................................................5
2.2.2 Capital Contributions...........................................................5
2.2.3 Issuance of LLC Interests.......................................................5
2.3 Use of Proceeds........................................................................5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................5
3.1 Existence and Power....................................................................5
3.2 Authorization; No Contravention........................................................6
3.3 Governmental Authorization; Third Party Consents.......................................6
3.4 Binding Effect.........................................................................6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS AND BERKSHIRE .........................6
4.1 Existence and Power....................................................................6
4.2 Authorization; No Contravention........................................................7
4.3 Governmental Authorization; Third Party Consents.......................................7
4.4 Binding Effect.........................................................................7
4.5 Purchase for Own Account...............................................................7
4.6 Investment Experience; Economic Risk; Accredited Investor..............................7
ARTICLE 5 INDEMNIFICATION........................................................................8
5.1 Indemnification........................................................................8
5.2 Notification...........................................................................9
5.3 Contribution...........................................................................9
ARTICLE 6 CONDITIONS ...........................................................................10
6.1 Notice of the Closing Date............................................................10
6.2 Merger Agreement Conditions...........................................................10
6.3 Compliance with this Agreement........................................................10
ARTICLE 7 TERMINATION...........................................................................10
ARTICLE 8 MISCELLANEOUS.........................................................................10
8.1 Survival of Representations and Warranties............................................10
8.2 Notices...............................................................................11
8.3 Successors and Assigns................................................................11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
8.4 Amendment and Waiver..................................................................12
8.5 Counterparts..........................................................................12
8.6 Headings..............................................................................12
8.7 Governing Law; Arbitration............................................................12
8.8 Severability..........................................................................13
8.9 Entire Agreement......................................................................13
8.10 No Third Party Beneficiaries..........................................................13
8.11 Further Assurances....................................................................13
EXHIBITS
EXHIBIT A Amended and Restated Limited Liability Company
Agreement of KR5 Acquisition, L.L.C.
EXHIBIT B Merger Agreement
</TABLE>
ii
<PAGE>
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT, dated as of December 2, 1999 (this
"AGREEMENT"), among Equity Resource Fund XVII Limited Partnership, Equity
Resource Fund XIX Limited Partnership, Equity Resource Fund XXI Limited
Partnership, Equity Resource General Fund Limited Partnership, Equity Resource
Cambridge Fund Limited Partnership, Equity Resource Bridge Fund Limited
Partnership, Equity Resource Boston Fund Limited Partnership, all Massachusetts
limited partnerships (each, an "INVESTOR" and collectively, the "INVESTORS"),
KRF Company, L.L.C., a Delaware limited liability company ("BERKSHIRE") and KR5
Acquisition, L.L.C., a Delaware limited liability company (the "COMPANY");
WHEREAS, subject to the terms and conditions contained herein,
Berkshire and the Investors wish to enter into the Amended and Restated Limited
Liability Company Agreement of the Company in the form attached hereto as
EXHIBIT A (the "LLC AGREEMENT");
WHEREAS, Berkshire and the Investors wish to make the capital
contributions to the Company pursuant to Section 3.1 (Capital Contributions) of
the LLC Agreement;
WHEREAS, to evidence such capital contributions, the Company
wishes to issue and sell to the Investors and Berkshire, and the Investors and
Berkshire wish to purchase from the Company, the LLC Interests (as defined
herein), having the terms and conditions set forth in the LLC Agreement.
WHEREAS, the Company intends to utilize the proceeds of the
issuance of the LLC Interests to consummate a merger with Krupp Realty Limited
Partnership-V, a Massachusetts limited partnership ("FUND V") upon terms and
conditions substantially similar to the terms and conditions set forth in the
form attached hereto as EXHIBIT B (the "MERGER AGREEMENT").
NOW, THEREFORE, in consideration of the mutual covenants and
agree ments set forth herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
<PAGE>
ARTICLE 1
DEFINITIONS
As used in this Agreement, and unless the context requires a
different meaning, the following terms have the meanings indicated:
"AFFILIATE" shall mean, with respect to any Person, (i) any
other Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such Person,
(ii) any Person that is an officer of, member of, partner in, or trustee of, or
serves in a similar capacity with respect to, the specified Person or of which
the specified Person is an officer, member, partner or trustee, or with respect
to which the specified Person serves in a similar capacity, (iii) any Person
that, directly or indirectly, is the beneficial owner of 10% or more of any
class of equity securities of, or otherwise has a substantial beneficial
interest in, the specified Person or of which the specified Person is directly
or indirectly the owner of 10% or more of any class of equity securities or in
which the specified Person has a substantial beneficial interest, (iv) any
Immediate Family Member of the specified Person and (v) any Affiliate of a
Person described in subsections (i)-(iv). For the purposes of this definition,
"control" shall mean, as to any Person, the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGREEMENT" means this Investment Agreement as the same may be
amended, supplemented or modified in accordance with the terms hereof.
"AMENDMENT" means the amendment to the Fund V Agreement to
permit the Company to enter into the Merger Agreement.
"BERKSHIRE" has the meaning set forth in the preamble to this
Agreement.
"BUSINESS DAY" means any day other than a Saturday, Sunday or
other day on which commercial banks in the State of New York or the Commonwealth
of Massachusetts are authorized or required by law or executive order to close.
"CAPITAL CONTRIBUTION" has the meaning set forth in the LLC
Agreement. In the case of the Investors, the Capital Contribution shall mean all
of the Units owned by them on the Closing Date, but in no event less than
3,985.5 Units.
"CERTIFICATE OF FORMATION" means the certificate of formation
of the Company, duly filed with the Secretary of State of the State of Delaware.
"CLOSING DATE" means a Business Day following the Meeting Date
designated by the Company as the Closing Date.
<PAGE>
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
"COMPANY" has the meaning set forth in the preamble to this
Agreement.
"CONTRACTUAL OBLIGATIONS" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.
"FUND V" has the meaning set forth in the preamble to this
Agreement.
"FUND V AGREEMENT" means the Amended Agreement of Limited
Partnership of Fund V, dated July 27, 1983, as amended from time to time.
"GOVERNMENTAL AUTHORITY" means the government of any country,
state, city, locality or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"IMMEDIATE FAMILY MEMBER" means with respect to any person,
such person's spouse, parent, parent-in-law, issue, brother, sister,
brother-in-law, sister-in-law, or child-in-law.
"INDEMNIFIED PARTY" and "INDEMNIFIED PARTIES" have the
meanings set forth in Section 5.2 (Notification).
"INVESTOR" or "INVESTORS" has the meaning set forth in the
preamble to this Agreement.
"INVESTOR REPRESENTATIVE" has the meaning set forth in Section
8.7(b) to this Agreement (Governing Law; Arbitration).
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or preferential arrangement of any
kind or nature whatsoever.
"LLC AGREEMENT" has the meaning set forth in the preamble to
this Agreement.
"LLC INTERESTS" means the limited liability company interests
in the Company, having the terms and conditions set forth in the LLC Agreement.
"LOSSES" has the meaning set forth in Section 5.1
(Indemnification).
<PAGE>
"MEETING DATE" means the date of the special meeting of the
partners of Fund V at which the Amendment and Merger Agreement and the
transactions contemplated thereby are considered and voted upon.
"MEMBER" has the meaning set forth in Section 1.1
(Definitions) of the LLC Agreement.
"MERGER AGREEMENT" has the meaning set forth in the preamble
to this Agreement.
"PERSON" means any individual, firm, corporation, partnership,
limited liability company, trust, incorporated or unincorporated association,
joint venture, joint stock company, Governmental Authority or other entity of
any kind, and shall include any successor (by merger or otherwise) of such
entity.
"PURCHASED INTERESTS" means the LLC Interests purchased on the
Closing Date pursuant to Article 2 (Voting Agreement, Closing Date Transactions
and Use of Proceeds) of this Agreement.
"REQUIREMENTS OF LAW" means as to any Person, any law, treaty,
rule, regulation, right, privilege, qualification, license or franchise or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable or binding upon such Person or any of its property or to
which such Person or any of its property is subject or pertaining to any or all
of the transactions contemplated or referred to herein.
"SEC" has the meaning set forth in Section 3.3 of this
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended
(or any successor statute thereto), and the rules and regulations of the
Commission promulgated thereunder.
"TRANSACTION DOCUMENTS" means collectively, this Agreement,
the LLC Agreement and the Voting Agreement.
"UNITS" has the meaning set forth in the Fund V Agreement.
"VOTING AGREEMENT" means the Voting Agreement, dated the date
hereof, among the parties hereto.
<PAGE>
ARTICLE 2
VOTING AGREEMENT, CLOSING DATE
TRANSACTIONS AND USE OF PROCEEDS
2.1 VOTING AGREEMENT. Simultaneously with the execution
hereof, each of the Investors has executed the Voting Agreement relating to the
approval of the Amendment and the merger contemplated by the Merger Agreement
and the consummation of the transactions contemplated thereby.
2.2 CLOSING DATE TRANSACTIONS. Subject to the conditions set
forth in Article 6 (Conditions), the parties hereto covenant and agree that on
the Closing Date the following shall occur simultaneously:
2.2.1 LLC AGREEMENT. Each of the Investors and
Berkshire shall execute and deliver the LLC Agreement;
2.2.2 CAPITAL CONTRIBUTIONS. Each of the Investors
and Berkshire shall make their respective Capital Contributions as provided in
Section 3.1 (Capital Contributions) of the LLC Agreement and Exhibit A thereto;
PROVIDED, that, Berkshire shall not be required to contribute more than
$14,500,000; and
2.2.3 ISSUANCE OF LLC INTERESTS. The Company shall
issue LLC Interests to each Investor and Berkshire in respect of the Capital
Contributions made by it as of such date.
2.3 USE OF PROCEEDS. As soon as practicable following the
Closing Date, the Company shall use the proceeds from the sale of the Purchased
Interests, together with other available funds, to consummate the merger of the
Company and Fund V upon terms and conditions substantially similar to the terms
and conditions set forth in the Merger Agreement, and as otherwise may be
required in connection with the ownership and management of the properties
acquired thereby and for other limited liability company purposes.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
The Company hereby represents and warrants to the Investors
and Berkshire as follows:
3.1 EXISTENCE AND POWER. The Company (i) is a limited
liability company duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation and (ii) has the requisite power
and authority to execute, deliver and perform its obligations under this
Agreement and each of the other Transaction Documents to which it is a party.
<PAGE>
3.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Company of this Agreement and each of the other
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, including, without limitation, the sale, issuance and
delivery of the LLC Interests (a) have been duly authorized by all necessary
action of the Company, (b) do not contravene the terms of the Certificate of
Formation or the LLC Agreement of the Company and (c) do not violate, conflict
with or result in any breach or contravention of or the creation of any Lien
under, any Contractual Obligation of the Company, or any Requirements of Law
applicable to the Company. The Company is not a party to or bound by any
agreement which is currently in effect, granting any rights to any Person which
are inconsistent with the rights to be granted to the Investors or Berkshire by
the Company in the LLC Agreement.
3.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. Except
for filings to be made with the Securities and Exchange Commission (the "SEC")
and the approval of the Amendment and the merger by the holders of Units of Fund
V, no approval, consent, compliance, exemption, authorization, or other action
by, or notice to, or filing with, any Governmental Authority or any other
Person, and no lapse of a waiting period under any Requirement of Law, is
necessary or required to be obtained by the Company in connection with the
execution, delivery or performance (including, without limitation, the sale,
issuance and delivery of the LLC Interests) by the Company or of any of the
Transaction Documents to which it is a party.
3.4 BINDING EFFECT. This Agreement and each of the other
Transaction Documents to which the Company is a party have been duly executed
and delivered by the Company and constitute the legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
ARTICLE 4
REPRESENTATIONS AND
WARRANTIES OF THE INVESTORS AND BERKSHIRE
Each Investor and Berkshire hereby represents and warrants
(severally as to itself and not jointly) to the Company as follows:
4.1 EXISTENCE AND POWER. Such Person (a) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation and (b) has the requisite power and authority to execute, deliver and
perform its obligations under this Agreement and each of the other Transaction
Documents to which it is a party.
<PAGE>
4.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by such Person of this Agreement and each of the other
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby, including, without limitation, the purchase of the Purchased
Interests, (a) have been duly authorized by all necessary action by such Person,
(b) do not contravene the terms of the organizational documents of such Person,
and (c) do not violate, conflict with or result in any breach or contravention
of or the creation of any Lien under, any Contractual Obligation of such Person,
or any Requirement of Law applicable to such Person, except for such violation,
conflict, breach, contravention or Lien which would not have a material adverse
effect on the ability of such Person to consummate the transactions contemplated
by the Transaction Documents.
4.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. Except
for filings to be made with the SEC, no approval, consent, compliance,
exemption, authorization, or other action by, or notice to, or filing with, any
Governmental Authority or any other Person and no lapse of a waiting period
under a Requirement of Law, is necessary or required to be obtained by such
Person in connection with the execution, delivery or performance (including,
without limitation, the purchase of the Purchased Interests) by such Person.
4.4 BINDING EFFECT. This Agreement and each of the other
Transaction Documents to which such Person is a party have been duly executed
and delivered by such Person and constitute the legal, valid and binding
obligations of such Person, enforceable against it in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer,
moratorium or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability (regardless of
whether considered in a proceeding at law or in equity).
4.5 PURCHASE FOR OWN ACCOUNT. The LLC Interests to be acquired
by such Person pursuant to this Agreement are being or will be acquired for its
own account and with no intention of distributing or reselling such LLC
Interests or any part thereof in any transaction that would be in violation of
the securities laws of the United States of America, or any state. Such Person
understands and agrees that any sale or other disposition of LLC Interests may
be made only in compliance with the Securities Act and applicable state
securities laws, as then in effect, and the LLC Agreement.
4.6 INVESTMENT EXPERIENCE; ECONOMIC RISK; ACCREDITED INVESTOR.
Such Person has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risk of an investment in the
Purchased Interests hereunder. Such Person understands that it must bear the
economic risk of an investment in the Purchased Interests for an indefinite
length of time because the Purchased Interests have not been registered under
the Securities Act or any applicable state securities laws. Such Person further
understands that the purchase of the Purchased Interests involves a high degree
of risk, and that such Person has been given the opportunity to ask questions of
and receive answers from the Company regarding the Purchased Interests.
<PAGE>
ARTICLE 5
INDEMNIFICATION
5.1 INDEMNIFICATION. (a) Except as otherwise provided in this
Article 5, Berkshire and the Company, severally and not jointly, agree to
indemnify, defend and hold harmless the Investors and their Affiliates and their
respective officers, directors, agents, employees, subsidiaries, partners,
members and controlling persons to the fullest extent permitted by law from and
against any and all claims, losses, liabilities, damages, deficiencies,
judgements, assessments, fines, settlements, costs or expenses (including
interest, penalties and reasonable fees, disbursements and other charges of
counsel) (collectively, "LOSSES") based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any representation, warranty,
covenant or agreement of Berkshire or the Company contained in this Agreement.
(b) Except as otherwise provided in this Article
5, each Investor agrees to indemnify, defend and hold harmless the Company,
Berkshire, and their Affiliates and their respective officers, directors,
agents, employees, subsidiaries, partners, members and controlling persons to
the fullest extent permitted by law from and against any Losses based upon,
arising out of or otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of such Investor contained in
this Agreement.
(c) Except as otherwise provided in this Article
5, the Company agrees to indemnify, defend and hold harmless Berkshire, the
Investors and their respective Affiliates, officers, directors, agents,
employees, subsidiaries, partners, members and controlling persons to the
fullest extent permitted by law from and against any Losses based upon or
arising out of or otherwise in respect of any litigation commenced by or on
behalf of Unitholders relating to the Merger and the transactions contemplated
thereby; PROVIDED that the Company shall not have any liability to any of the
foregoing parties to the extent that any such Loss arises out of or is based
upon such parties' fraud, gross negligence, willful malfeasance or conduct that
is the subject of a criminal proceeding (where such party has a reasonable cause
to believe that such conduct was unlawful). Berkshire shall make capital
contributions to the Company in the event the Company is otherwise unable to
satisfy such indemnity obligations, which shall constitute additional Capital
Contributions of the Managing Member pursuant to Section 3.1(b)(i) of the LLC
Agreement.
5.2 NOTIFICATION. Each Person entitled to indemnification
under this Article 5 (an "INDEMNIFIED PARTY") shall, promptly after the receipt
of notice of the commencement of any action, investigation, claim or other
proceeding against such Indemnified Party in respect of which indemnity may be
sought from the indemnifying parties under this Article 5 (the "INDEMNIFYING
PARTIES"), notify the Indemnifying Parties in writing of the commencement
thereof. The failure of any Indemnified Party to so notify the Indemnifying
Parties of any such action shall not relieve the Indemnifying Parties from any
liability which it may have to such
<PAGE>
Indemnified Party (a) other than pursuant to this Article 5 or (b) under this
Article 5 unless, and only to the extent that, such failure results in the
Indemnifying Parties' forfeiture of substantial rights or defenses. In case any
such action, claim or other proceeding shall be brought against any Indemnified
Party, and it shall notify the Indemnifying Parties of the commencement thereof,
the Indemnifying Parties shall be entitled to assume the defense thereof at
their own expense, with counsel reasonably satisfactory to such Indemnified
Party in its reasonable judgment; PROVIDED, HOWEVER, that any Indemnified Party
may, at its own expense, retain separate counsel to participate in such defense
at its own expense. Notwithstanding the foregoing, in any action, claim or
proceeding in which both the Indemnifying Parties, on the one hand, and an
Indemnified Party, on the other hand, are, or are reasonably likely to become, a
party, such Indemnified Party shall have the right to employ separate counsel at
the expense of the Indemnifying Parties and to control its own defense of such
action, claim or proceeding if, in the reasonable opinion of counsel to such
Indemnified Party, a conflict or potential conflict exists between the
Indemnifying Parties, on the one hand, and such Indemnified Party, on the other
hand, that would make such separate representation advisable; PROVIDED, HOWEVER,
that the Indemnifying Parties shall not be liable for the fees and expenses of
more than one counsel to all Indemnified Parties. Each Indemnifying Party agrees
that it will not, without the prior written consent of the Indemnified Party,
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding relating to the matters contem plated
hereby (if any Indemnified Party is a party thereto or has been actually
threatened to be made a party thereto) unless such settlement, compromise or
consent includes an unconditional release of the Indemnified Party from all
liability arising or that may arise out of such claim, action or proceeding. The
Indemnifying Parties shall not be liable for any settlement of any claim, action
or proceeding effected against an Indemnified Party without its written consent.
Notwithstanding the foregoing or anything to the contrary contained in this
Agreement, nothing in this Article 5 shall restrict or limit any rights that any
Indemnified Party may have to seek equitable relief.
5.3 CONTRIBUTION. If and to the extent that the
indemnification provided for in Section 5.1 (Indemnification) is unenforceable
for any reason, each Indemnifying Party shall make the maximum contribution to
the payment and satisfaction of amounts with respect to such Losses that such
Indemnifying Party would otherwise be obligated to provide indemnification for
pursuant to this Article 5 as shall be permissible under applicable laws.
<PAGE>
ARTICLE 6
CONDITIONS
The obligations of the parties to perform the obligations set
forth in Sections 2.2 (Closing Date Transactions) and 2.3 (Use of Proceeds) are
subject to the fulfillment prior to or on the Closing Date of the following
conditions:
6.1 NOTICE OF THE CLOSING DATE. The Company shall have
provided at least two (2) Business Days' prior written notice to Berkshire and
the Investors of the Closing Date.
6.2 MERGER AGREEMENT CONDITIONS. The conditions set forth in
Article VIII of the Merger Agreement shall have been fulfilled or waived by the
parties thereto.
6.3 COMPLIANCE WITH THIS AGREEMENT. The Company, the Investors
and Berkshire shall have performed and complied with all of their agreements and
conditions set forth or contemplated herein that are required to be performed or
complied with by the Company, the Investors and Berkshire on or before the
Closing Date.
ARTICLE 7
TERMINATION
Notwithstanding anything to the contrary contained herein, if
the Closing Date shall not have occurred on or prior to August 1, 2000 or
Capital Contributions for each Member, as contemplated by the LLC Agreement, are
not made by each of the Members of the Company by the close of business on the
Closing Date, New York City time, then this Agreement shall terminate and the
parties hereto shall have no further obligations hereunder. This Agreement may
be terminated by the Berkshire at any time. Notwithstanding the foregoing, no
termination of this Agreement shall relieve a party that has breached a
representation, warranty or covenant contained herein from liability therefor or
from any indemnity obligation arising under Article 5 hereof prior to the date
of termination.
ARTICLE 8
MISCELLANEOUS
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations, warranties and covenants made herein shall survive the
execution and delivery of this Agreement, acceptance of the Purchased Interests
and payment therefor.
<PAGE>
8.2 NOTICES. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
telecopier, courier service, overnight mail or personal delivery:
(a) if to an Investor:
c/o Equity Resources Group, Inc.
14 Story Street
Cambridge, Massachusetts 02138
Attention: Eggert Dagbjartsson
with a copy to:
Holland & Knight LLP
One Beacon Place
Boston, Massachusetts 02108
Attention: Benjamin Volinski, Esq.
(b) if to the Company or Berkshire:
c/o The Berkshire Group
One Beacon Street, Suite 1500
Boston, Massachusetts 02108
Attention: David Quade
with copies to:
The Berkshire Group
One Beacon Street, Suite 1500
Boston, Massachusetts 02108
Attention: Scott Spelfogel, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: James M. Dubin
All such notices and communications shall be deemed to have
been duly given when delivered by hand, if personally delivered; when delivered
by courier or overnight mail, if delivered by commercial courier service or
overnight mail; five (5) Business Days after being deposited in the mail,
postage prepaid, if mailed; and when receipt is mechanically acknowledged, if
telecopied.
8.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of the
parties hereto. Neither the Company, Berkshire nor the Investors may assign any
of their respective rights under this Agreement, without the written consent of
the other parties.
<PAGE>
8.4 AMENDMENT AND WAIVER.
(a) AMENDMENT. Any amendment, supplement or
modification of or to any provision of this Agreement, any waiver of any
provision of this Agreement, and any consent to any departure by the Company or
the Investors from the terms of any provision of this Agreement, shall be
effective (i) only if it is made or given in writing and signed by the Company,
Berkshire and the Investors, and (ii) only in the specific instance and for the
specific purpose for which made or given. Except where notice is specifically
required by this Agreement, no notice to or demand on the Company in any case
shall entitle the Company to any other or further notice or demand in similar or
other circumstances.
(b) WAIVER. No failure or delay on the part of
the Company or the Investors in exercising any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Company or the Investors at law, in equity or otherwise.
8.5 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
8.6 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
8.7 GOVERNING LAW; ARBITRATION. (a) This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to the principles of conflicts of law thereof.
(b) Any dispute arising hereunder shall be
settled by arbitration in accordance with the Expedited Procedures of the
Commercial Arbitration Rules of the American Arbitration Association (the "AAA
RULES") by a single arbitrator who is mutually agreeable to Berkshire and the
Investors (who shall be represented by Equity Resources Group, Incorporated (the
"INVESTORS' REPRESENTATIVE"). If Berkshire and the Investors' Representative are
unable to agree upon an arbitrator, an arbitrator shall be selected in
accordance with the AAA Rules. Any judgment upon the award rendered by such
arbitrator may be entered in any court of competent jurisdiction. All
proceedings in any such arbitration shall be conducted in Boston, Massachusetts.
Jurisdiction of such arbitrator shall be exclusive as to disputes between
Berkshire and the Investors relating to this Agreement, and Berkshire and the
Investors agree that this agreement to arbitrate shall be specifically
enforceable under the laws of Delaware. Neither Berkshire nor any Investor
(including the Investors' Representative) shall have the right to appeal the
arbitrator's decision or otherwise to submit a dispute relating to this
Agreement to a court of law. With respect to matters submitted to arbitration,
each of Berkshire and the Investors
<PAGE>
shall bear its own respective costs, fees and expenses (including reasonable
fees, expenses and disbursements of attorneys) in connection with such
arbitration. Berkshire, on the one hand, and the Investors, collectively, on the
other hand, shall each pay one-half of the total costs, fees and expenses of the
arbitrator.
8.8 SEVERABILITY. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
8.9 ENTIRE AGREEMENT. This Agreement, the LLC Agreement and
the Voting Agreement, together with the exhibits hereto or thereto, are intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
This Agreement, the LLC Agreement and the Voting Agreement together with the
exhibits attached hereto or thereto, supersede all prior agreements and
understandings between the parties with respect to such subject matter.
8.10 NO THIRD PARTY BENEFICIARIES. Nothing contained in this
Agreement (other than the provisions of Article 5 (Indemnification)) express or
implied, is intended to or shall confer upon anyone other than the parties (and
their successors and permitted assigns) any right, benefit or remedy of any
nature whatsoever under or by reason of any Transaction Documents.
8.11 FURTHER ASSURANCES. Each of the parties shall execute
such documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably required or desirable to carry out or to
perform the provisions of this Agreement.
Remainder of Page Intentionally Left Blank
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their respective duly authorized
persons on the date first above written.
KR5 ACQUISITION, L.L.C.
By: KRF Company, L.L.C.,
its managing member
By: The Krupp Family Limited Partnership-94,
its sole member
By: /s/ Douglas Krupp
----------------------------------------
Douglas Krupp
General Partner
KRF COMPANY, L.L.C.
By: The Krupp Family Limited Partnership-94,
its sole member
By: /s/ Douglas Krupp
----------------------------------------
Douglas Krupp
General Partner
<PAGE>
EQUITY RESOURCE CAMBRIDGE FUND
LIMITED PARTNERSHIP
EQUITY RESOURCE GENERAL FUND
LIMITED PARTNERSHIP
EQUITY RESOURCE FUND XXI LIMITED
PARTNERSHIP
EQUITY RESOURCE FUND XVII LIMITED
PARTNERSHIP
EQUITY RESOURCE FUND XIX LIMITED
PARTNERSHIP
EQUITY RESOURCE BRIDGE FUND
LIMITED PARTNERSHIP
EQUITY RESOURCE BRIDGE FUND
LIMITED PARTNERSHIP
By: EQUITY RESOURCES GROUP,
INCORPORATED,
as general partner of each of
the foregoing
By: /s/ Eggert Dagbjartsson
-------------------------------
Eggert Dagbjartsson
Executive Vice President
<PAGE>
EXHIBIT A
===============================================================================
---------------------------------------
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
KR5 ACQUISITION, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
---------------------------------------
DATED AS OF [________], 2000
===============================================================================
<PAGE>
KR5 ACQUISITION, L.L.C.
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 GENERAL PROVISIONS.................................................................1
1.1 Definitions........................................................................1
1.2 Name...............................................................................9
1.3 Principal Office...................................................................9
1.4 Registered Office and Registered Agent.............................................9
1.5 Term...............................................................................9
1.6 Purpose and Power..................................................................9
ARTICLE 2 MANAGEMENT; LIABILITY OF MEMBERS; EXPENSES........................................10
2.1 Rights and Duties of the Managing Member..........................................10
2.2 Rights and Duties of the Additional Members.......................................12
2.3 Expenses..........................................................................13
2.4 Officers..........................................................................13
ARTICLE 3 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS; ALLOCATIONS...............13
3.1 Capital Contributions.............................................................13
3.2 Capital Accounts..................................................................15
3.3 Distributions.....................................................................16
3.4 Allocations.......................................................................17
3.5 Special Allocations...............................................................18
3.6 Tax Withholding; Withholding Advances.............................................20
ARTICLE 4 LIABILITY; INDEMNIFICATION........................................................21
4.1 Limited Liability of Members......................................................21
4.2 Qualification.....................................................................22
4.3 Liability to Members..............................................................22
4.4 Indemnification...................................................................22
ARTICLE 5 CONSENTS; VOTING; MEETINGS........................................................23
5.1 Method of Giving Consent..........................................................23
5.2 Meetings..........................................................................24
5.3 Quarterly Meetings................................................................24
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 6 REPORTS TO MEMBERS; CONFIDENTIALITY...............................................24
6.1 Books of Account..................................................................24
6.2 Reports...........................................................................24
6.3 Accounting Basis..................................................................25
6.4 Tax Matters.......................................................................25
6.5 Confidentiality...................................................................25
ARTICLE 7 ADDITIONAL MEMBERS; TRANSFER; WITHDRAWAL..........................................26
7.1 Additional Members................................................................26
7.2 Transfer..........................................................................26
7.3 Death, Incompetence, Bankruptcy or Liquidation of an
Additional Member.................................................................26
7.4 Withdrawals.......................................................................27
7.5 Continuation......................................................................27
ARTICLE 8 DISSOLUTION; WINDING UP; TERMINATION..............................................27
8.1 Dissolution.......................................................................27
8.2 Winding Up and Termination........................................................28
8.3 Assets Reserved and Pending Claims................................................29
ARTICLE 9 AMENDMENTS; WAIVER; POWER OF ATTORNEY.............................................30
9.1 Amendments; Waiver................................................................30
9.2 Power of Attorney.................................................................32
ARTICLE 10 MISCELLANEOUS.....................................................................33
10.1 Investment Representations........................................................33
10.2 Successors and Assigns............................................................34
10.3 No Waiver.........................................................................34
10.4 Survival of Certain Provisions....................................................34
10.5 Notices...........................................................................34
10.6 Severability......................................................................34
10.7 Counterparts......................................................................34
10.8 Headings, Etc.....................................................................35
10.9 Gender............................................................................35
10.10 No Right to Partition.............................................................35
10.11 No Third Party Rights.............................................................35
10.12 Entire Agreement..................................................................35
10.13 Rule of Construction..............................................................35
10.14 Authority.........................................................................35
10.15 Reliance..........................................................................36
10.16 Applicable Law....................................................................36
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
Exhibit A Members of KR5 Acquisition, L.L.C.
</TABLE>
iii
<PAGE>
KR5 ACQUISITION, L.L.C.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (the
"AGREEMENT"), dated as of [________], 2000 of KR5 ACQUISITION, L.L.C. (the
"COMPANY") by and among KRF Company, L.L.C., a Delaware limited liability
company, as the managing member of the Company (the "MANAGING MEMBER"), and
those Persons (as defined herein) who have executed this Agreement as additional
members of the Company (each, an "ADDITIONAL MEMBER" and together with the
Managing Member, the "MEMBERS").
WHEREAS, the Company has heretofore been formed as a limited
liability company under the Delaware Act (as defined herein) by the filing by
the Managing Member of a Certificate of Formation on behalf of the Company (the
"CERTIFICATE") with the Secretary of State of the State of Delaware on November
23, 1999;
WHEREAS, the Managing Member entered into a limited liability
company agreement for the Company dated as of November 23, 1999 (the "INITIAL
AGREEMENT"); and
WHEREAS, the Persons listed on Exhibit A hereto under the
heading "Additional Members" will be admitted to the Company as Additional
Members as of the date hereof and the Members wish to amend and restate the
Initial Agreement in its entirety;
NOW, THEREFORE, the Managing Member and the Additional
Members, in consideration of their mutual covenants contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, mutually covenant and agree as follows:
ARTICLE 1
GENERAL PROVISIONS
1.1 DEFINITIONS. For the purpose of this Agreement, the
following terms shall have the following meanings:
"ADDITIONAL CASH DETERMINATION" shall have the meaning set
forth in Section 3.1(b)(ii) (Additional Capital Contributions).
<PAGE>
"ADDITIONAL MEMBERS" shall mean each Person whose name is
listed on Exhibit A hereto under the heading "Additional Members," and any
Additional Members and any substituted Members admitted to the Company in
accordance with Section 7.1 (Additional Members) and 7.2(a) (Conditions to
Transfer).
"AFFILIATE" shall mean, with respect to any Person, (i) any
other Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such Person,
(ii) any Person that is an officer of, member of, partner in, or trustee of, or
serves in a similar capacity with respect to, the specified Person or of which
the specified Person is an officer, member, partner or trustee, or with respect
to which the specified Person serves in a similar capacity, (iii) any Person
that, directly or indirectly, is the beneficial owner of 10% or more of any
class of equity securities of, or otherwise has a substantial beneficial
interest in, the specified Person or of which the specified Person is directly
or indirectly the owner of 10% or more of any class of equity securities or in
which the specified Person has a substantial beneficial interest, (iv) any
Immediate Family Member of the specified Person and (v) any Affiliate of a
Person described in subsections (i)-(iv). For the purposes of this definition,
"control" shall mean, as to any Person, the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"AGREEMENT" shall mean this Amended and Restated Limited
Liability Company Agreement, as amended from time to time.
"AVAILABLE CASH" shall mean, for any quarterly period or such
other period for which computation may be appropriate, the excess, if any, of:
(a) the sum of
(i) the amount of all of the cash receipts of
the Company during such period from whatever source; and
(ii) any cash reserves of the Company existing at
the start of such period;
reduced by
(b) the sum of
(i) all cash amounts paid or payable (without
duplication) in such period on account of expenses and capital
expenditures incurred in connection with the Company's business and
approved in accordance with the
2
<PAGE>
provisions of this Agreement (including, without limitation, general
operating expenses, taxes, amortization or interest on any debt of the
Company; and
(ii) such cash reserves as may be required for
capital expenditures, working capital and future needs of the Company
in an amount reasonably determined by the Managing Member.
"BANKRUPTCY" shall mean the occurrence of any event specified
in Section 8.1(g) (Dissolution) with respect to the Managing Member.
"CAPITAL ACCOUNT" shall have the meaning set forth in Section
3.2(a) (Maintenance of Capital Accounts).
"CAPITAL CONTRIBUTION" shall mean, with respect to each
Member, the amount of cash or other property contributed (or deemed to be
contributed) by such Member to the capital of the Company from time to time
pursuant to Section 3.1 (Capital Contributions).
"CERTIFICATE" shall have the meaning set forth in the
recitals.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"COMPANY" shall mean KR5 Acquisition LLC, a Delaware limited
liability company.
"COMPANY MINIMUM GAIN" shall mean "partnership minimum gain"
as such term is defined in Regulation section 1.704-2(b)(2) and 1.704-2(d).
"CONFIDENTIAL INFORMATION" shall have the meaning set forth in
Section 6.5 (Confidentiality).
"CONSENTING MEMBER" shall have the meaning set forth in
Section 5.1(a) (Written Approval).
"DELAWARE ACT" shall mean the Delaware Limited Liability
Company Act (Del. Code Ann. tit. 6 ss. 18-101 ET. SEQ.), as amended from time to
time, and any successor to such Act.
"DEPRECIATION" shall mean, with respect to any Fiscal Year, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for U.S. federal income tax purposes, except
that if the Gross Asset Value of the asset differs from its adjusted tax basis,
Depreciation shall be
3
<PAGE>
determined in accordance with the methods used for U.S. federal income tax
purposes and shall equal the amount that bears the same ratio to the Gross Asset
Value of such asset as the depreciation, amortization or other cost recovery
deduction computed for U.S. federal income tax purposes with respect to such
asset bears to the adjusted U.S. federal income tax basis of such asset;
PROVIDED, HOWEVER, that if any such asset that is depreciable or amortizable has
an adjusted tax basis of zero, the rate of Depreciation shall be as determined
by the Managing Member.
"DISSOLUTION EVENT" shall have the meaning set forth in
Section 8.1 (Dissolution).
"FINANCING" shall mean the loan facilities available to the
Company, obtained by the Managing Member or its Affiliates, in the amount
necessary to finance, together with the Capital Contributions of the Members
hereto, the Merger contemplated by the Merger Agreement and to refinance the
indebtedness of Fund V.
"FISCAL YEAR" shall mean each fiscal year of the Company (or
portion thereof), which shall end on December 31; PROVIDED, HOWEVER, that upon
Termination of the Company, "FISCAL YEAR" shall mean the period from the January
1 immediately preceding such Termination to the date of such Termination.
"FUND V" shall have the meaning set forth in Section 1.6
(Purpose and Power).
"FUND V AGREEMENT" shall mean the Amended Agreement of Limited
Partnership of Fund V, dated July 27, 1983, as amended from time to time.
"GROSS ASSET VALUE" shall mean, with respect to any asset,
the asset's adjusted basis for U.S. federal income tax purposes, except that
(i) the Gross Asset Value of any asset contributed to
the Company shall be its gross fair market value (as determined by the
Managing Member) at the time such asset is contributed or deemed
contributed for purposes of computing Capital Accounts;
(ii) upon a contribution of money or other property
to the Company by a new or existing Member as consideration for an
interest in the Company and upon a distribution of money or other
property to a retiring or continuing Member as consideration for an
interest in the Company, the Gross Asset Value of all of the assets of
the Company shall be adjusted to equal their respective gross fair
market values (as determined by the Managing Member), to the extent
such adjustment is determined by the Managing Member to be
4
<PAGE>
necessary or appropriate to reflect the Members' relative Interests in
the Company;
(iii) the Gross Asset Value of any asset distributed
in kind to any Member shall be the gross fair market value of such
asset (as determined by the Managing Member) on the date of such
distribution; and
(iv) the Gross Asset Value of any asset determined
pursuant to clauses (i) or (ii) above shall thereafter be adjusted from
time to time by the Depreciation taken into account with respect to
such asset for purposes of determining Net Income or Net Loss.
"IMMEDIATE FAMILY MEMBER" means with respect to any person,
such person's spouse, parent, parent-in-law, issue, brother, sister,
brother-in-law, sister-in-law, or child-in-law.
"INITIAL AGREEMENT" shall have the meaning set forth in the
preamble to this Agreement.
"INTEREST" shall mean, with respect to any Member, as of any
date, the fraction, expressed as a percentage, the numerator of which is such
Member's Capital Contributions and the denominator of which is the sum of the
Capital Contributions of all Members.
"INVESTMENT AGREEMENT" shall mean the Investment Agreement
among the Company, Equity Resource Fund XVII Limited Partnership, Equity
Resource Fund XIX Limited Partnership, Equity Resource Fund XXI Limited
Partnership, Equity Resource General Fund Limited Partnership, Equity Resource
Cambridge Fund Limited Partnership, Equity Resource Bridge Fund Limited
Partnership, and Equity Resource Boston Fund Limited Partnership and KRF
Company, L.L.C., dated as of December 2, 1999.
"INVESTOR LIMITED PARTNER" shall have the meaning set forth
in the Fund V Agreement.
"LIABILITIES" shall have the meaning set forth in Section
4.4(a) (Indemnification of Protected Persons).
"MANAGING MEMBER" shall have the meaning set forth in the
preamble to this Agreement.
"MEMBER NONRECOURSE DEBT" shall mean "partner nonrecourse
debt" as such term is defined in Regulation section 1.704-2(b)(4).
5
<PAGE>
"MEMBER NONRECOURSE DEBT MINIMUM GAIN" shall mean an amount
with respect to each Member Nonrecourse Debt equal to the Company Minimum Gain
that would result if such Member Nonrecourse Debt were treated as a nonrecourse
liability (as defined in Regulation section 1.752-1(a)(2)) determined in
accordance with Regulation section 1.704-2(i)(3).
"MEMBER NONRECOURSE DEDUCTION" shall mean "partner nonrecourse
deduction" as such term is defined in Regulation section 1.704-2(i)(2).
"MEMBERS" shall mean the Managing Member and the Additional
Members, and "Member" shall mean any of the Members.
"MERGER" shall mean the merger of the Company and Fund V under
the Merger Agreement.
"MERGER AGREEMENT" shall mean the Agreement and Plan of Merger
to be executed by the Company and Fund V substantially in the form of Exhibit C
to the Investment Agreement.
"NET INCOME" or "NET LOSS" shall mean, for any Fiscal Year (or
portion thereof), the net income, gain or loss of the Company during such Fiscal
Year (or portion thereof), as determined for United States federal income tax
purposes, with the following adjustments:
(i) Such taxable income or loss shall be increased by
the amount, if any, of tax-exempt income received or accrued by the
Company;
(ii) Such taxable income or loss shall be reduced by
the amount, if any, of all expenditures of the Company described in
Section 705(a)(2)(B) of the Code, including expenditures treated as
described therein under Regulations section 1.704(b)(2)(iv)(i);
(iii) If the Gross Asset Value of any asset is
adjusted pursuant to clause (ii) or (iii) of the definition of Gross
Asset Value, the amount of such adjustment shall be taken into account,
immediately prior to the event giving rise to such adjustment, as gain
or loss from the disposition of such asset for purposes of computing
Net Income or Net Loss;
(iv) Gain or loss resulting from any disposition of
any asset with respect to which gain or loss is recognized for U.S.
federal income tax purposes shall be computed by reference to the Gross
Asset Value of the asset disposed of, notwithstanding that such Gross
Asset Value differs from the adjusted tax basis of such asset; and
6
<PAGE>
(v) In lieu of the depreciation, amortization, or
other cost recovery deductions taken into account in computing such
taxable income or loss, there shall be taken into account Depreciation
for such Fiscal Year.
"NONRECOURSE DEDUCTIONS" shall have the meaning set forth in
Regulation section 1.704-2(b).
"PERSON" shall mean an individual, a corporation, a company, a
voluntary association, a partnership, a joint venture, a limited liability
company, a trust, an estate, an unincorporated organization, a governmental
authority or other entity.
"PRIME RATE" shall mean the rate of interest published from
time to time in The Wall Street Journal, Eastern Edition and designated as the
prime rate.
"PROPERTIES" means any real estate, buildings, improvements,
fixtures and related personal property acquired by the Company in connection
with the Merger or otherwise.
"PROPERTY MANAGEMENT AGREEMENT" shall mean the Property
Management Agreement, dated January 1, 1994, as amended, between Fund V and
Berkshire Realty Enterprises Limited Partnership.
"PROPOSED TRANSFER" shall have the meaning set forth in
Section 6.5 (Confidentiality).
"PROTECTED PERSON" shall mean: (i) the Managing Member, any
Additional Member and their respective members, board members and officers; (ii)
any officer, director, partner, member, employee, stockholder or Specified Agent
of the Managing Member or any Additional Member; and (iii) any Person who serves
at the request of the Managing Member hereunder on behalf of the Company as an
officer, director, partner, member or employee of any other Person.
"RATE OF RETURN" shall mean, with respect to any interest in
the Company held by any Member, a cumulative, semiannually compounded return on
all Capital Contributions made or deemed to have been made by such Member with
respect to such Member's interest in the Company (and accrued but unpaid return
at the specified rate outstanding from time to time) at a rate per annum as
specified. A Member shall be deemed to have received a specified Rate of Return
with respect to such Member's interest in the Company when such Member has
received an amount equal to an annual return on the total Capital Contributions
made from time to time by such Member in respect of such Member's interest in
the Company equal to the specified percentage calculated commencing on the date
such Capital Contributions
7
<PAGE>
are made or are deemed to have been made and compounded semiannually to the
extent not paid on a current basis, taking into account the timing and amounts
of all previous distributions by the Company to such Member. For purposes of
computing such Rate of Return, distributed amounts shall be applied in
accordance with Section 3.3(a)(ii) (Distributions -- General).
"REGULATIONS" shall mean the regulations promulgated under the
Code.
"REGULATORY ALLOCATIONS" shall have the meaning set forth in
Section 3.5(g)(i) (Curative Allocations).
"REPRESENTATIVES" shall have the meaning set forth in Section
6.5 (Confidentiality).
"REQUIRED ADDITIONAL MEMBERS" shall mean Additional Members
holding at least 51% of the aggregate Interests held by all Additional Members.
"SECURITIES ACT" shall have the meaning set forth in Section
10.1 (Investment Representations).
"SPECIFIED AGENT" shall mean any agent of any Person that is
designated in writing by the Managing Member as a "Specified Agent" of the
Company entitled to the protection of Sections 4.3 (Liability to Members) and
4.4 (Indemnification).
"TERMINATION" shall mean the date of the cancellation or
withdrawal of the Certificate following the end of the Winding Up Period by the
filing of a Certificate of Cancellation of the Company in the Office of the
Secretary of State of the State of Delaware.
"TRANSFER" shall have the meaning set forth in Section 7.2(a)
(Conditions to Transfer).
"UNITS" shall mean investor limited partnership interests in
Fund V.
"WINDING UP PERIOD" shall mean the period from the Dissolution
Event to the Termination of the Company.
"WITHHOLDING ADVANCES" shall have the meaning set forth in
Section 3.6(b) (Withholding Advances--General).
8
<PAGE>
1.2 NAME. The name of the Company is "KR5 Acquisition, L.L.C."
The Company's business may be conducted under any other name or names deemed
advisable by the Managing Member; PROVIDED, HOWEVER, that (a) the words "Limited
Liability Company" or the abbreviation "L.L.C." or "LLC" shall be included in
the name where necessary to comply with the laws of any jurisdiction that so
requires and (b) the name shall not contain any word or phrase indicating or
implying that it is organized other than for a purpose stated herein. The
Managing Member shall give prompt notice of any name change to each Additional
Member.
1.3 PRINCIPAL OFFICE. The principal office of the Company is
at One Beacon Street, Suite 1500, Boston, Massachusetts, 02108, or such other
place in the United States as may from time to time be designated by the
Managing Member. The Company shall keep its books and records at its principal
office. The Managing Member shall give prompt notice to each Additional Member
of any change in the location of the Company's principal office.
1.4 REGISTERED OFFICE AND REGISTERED AGENT. The street address
of the registered office of the Company in the State of Delaware is at 1013
Centre Road, Wilmington, Delaware 19805 or such other place in the State of
Delaware as may from time to time be designated by the Managing Member in
accordance with the Delaware Act, and the Company's registered agent at such
address is Corporation Service Company.
1.5 TERM. The Company was formed on November 23, 1999 and
shall continue its regular business activities until the occurrence of a
Dissolution Event as described in Section 8.1 (Dissolution).
1.6 PURPOSE AND POWER.
(a) PURPOSE. The Company is organized for the
purposes of (i) merging with Krupp Realty Limited Partnership-V, a Massachusetts
limited partnership ("FUND V"); (ii) investing in, maintaining, operating,
leasing, improving, holding, encumbering, selling, managing and otherwise
dealing with the Properties; (iii) sharing the profits and losses therefrom;
(iv) engaging in activities incidental or ancillary thereto; and (v) carrying on
any lawful business, purpose or activity permitted under the Delaware Act.
Without the consent of all the Members, the Company shall not engage in any
business other than those described in clauses (i), (ii), (iii) and (iv) above.
(b) POWER. The Company shall have the power to
do any and all acts necessary, appropriate, proper, advisable, incidental or
convenient to or for the furtherance of the purposes and business described
herein and for the protection and benefit of the Company, and shall have,
without limitation, any and all of the powers that
9
<PAGE>
may be exercised on behalf of the Company by the Managing Member pursuant to
this Agreement, including, without limitation, those powers set forth in Section
2.1 (Rights and Duties of the Managing Member). The Company, or the Managing
Member on behalf of the Company, may enter into and perform agreements relating
to the organization of the Company, without any further act, vote or approval of
any Additional Member, notwithstanding any other provision of this Agreement.
ARTICLE 2
MANAGEMENT; LIABILITY OF MEMBERS; EXPENSES
2.1 RIGHTS AND DUTIES OF THE MANAGING MEMBER. Except as
otherwise expressly provided herein, the management and operation of the Company
shall be vested exclusively in the Managing Member, who shall have the power on
behalf of and in the name of the Company to carry out any and all of the
purposes of the Company and to perform all acts and enter into and perform all
contracts and other undertakings that it may deem necessary, appropriate,
proper, advisable, incidental or convenient thereto. Except as otherwise
expressly provided herein, the Managing Member shall have, and shall have full
authority in its discretion to exercise, on behalf of and in the name of the
Company, all rights and powers of a manager of a limited liability company under
the Delaware Act necessary or convenient to carry out the purposes of the
Company. Without limiting the foregoing, and except as otherwise expressly
provided in this Agreement, the Managing Member is hereby authorized and
empowered in the name of and on behalf of the Company:
(a) to acquire, improve, mortgage, hold, sell,
exchange, divide, combine and otherwise transact business with respect to the
Properties and to engage in activities incidental or ancillary to such
transactions; and to execute and deliver in the name of the Company any and all
instruments necessary or desirable to effectuate such transactions;
(b) to make temporary investments of the funds
of the Company in all types of securities, including, without limitation, United
States government and agency securities, interest-bearing deposits in United
States banks, certificates of deposit, securities issued by or on behalf of
states, municipalities and their instrumentalities (the interest from which is
exempt from federal income tax), prime-grade commercial paper, repurchase
agreements with respect to any of the foregoing, prior to long-term investment
or pending cash distributions to the Members;
(c) to employ, retain or consult, or terminate
the services of, such Persons as it shall deem advisable, including, without
limitation, brokers, attorneys, accountants, actuaries or specialists in any
field of endeavor whatsoever, including,
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without limitation, engineers, contractors, appraisers, consultants, advisors,
artisans and workmen;
(d) to deposit and withdraw the funds of the
Company in the name of the Company in any bank or trust company and to entrust
to such bank or trust company any of the investments, monies, documents and
papers belonging to or relating to the Company; to deposit in and entrust to any
brokerage firm that is a member of any national securities exchange any of said
funds, investments, monies, documents and papers belonging to or relating to the
Company; or to enter into custodial arrangements with any Person with respect to
the assets of the Company;
(e) to invest, pay, retain and distribute the
Company's funds in a manner consistent with the provisions of this Agreement,
including, without limitation, to make distributions to the Members in cash, in
kind or otherwise;
(f) to borrow monies and incur liabilities on
behalf of the Company to the extent permitted by this Agreement (including,
without limitation, pursuant to 3.1(b) hereof) and in connection therewith to
issue, accept, endorse and execute promissory notes, guarantees, drafts, bills
of exchange, warrants, bonds, debentures and other negotiable or non-negotiable
instruments and evidences of indebted ness, and to secure the payment of any of
the foregoing by pledge, conveyance or assignment in trust of the whole or any
part of the property of the Company whether at the time owned or thereafter
acquired, and to pay or prepay any such obligations;
(g) to set aside funds for reasonable reserves,
reasonably anticipated contingencies and reasonable working capital, including,
without limitation, for normal repairs and replacements related to the
Properties;
(h) to make such elections under the Code and
other relevant tax laws as to the treatment of items of Company income, gain,
loss and deduction, and as to all other relevant matters, as the Managing Member
deems necessary, appropriate or advisable, including, without limitation,
elections referred to in Section 754 of the Code, determination of which items
of cash outlay are to be capitalized or treated as current expenses, and
selection of the method of accounting and bookkeeping procedures to be used by
the Company;
(i) to sue, prosecute, settle or compromise all
claims against third parties, to compromise, settle or accept judgment in
respect of claims against the Company and to execute all documents and make all
representations, admissions and waivers in connection therewith;
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(j) to enter into, make and perform all contracts,
agreements, instruments, including the Merger Agreement, and other undertakings
as the Managing Member may determine to be necessary, advisable or incidental to
the carrying out of the foregoing objects and purposes, including, without
limitation, deeds, mortgages, leases and other documents of title or conveyance;
(k) to admit Additional Members to the Company
in accordance with Section 7.1 (Additional Members); and
(l) to take all actions that may be necessary or
appropriate in furtherance of any of the foregoing or for the continuation of
the Company's valid existence as a limited liability company under the Delaware
Act and of each other jurisdiction in which such action is necessary to protect
the limited liability of the Additional Members or to enable the Company to
conduct the business in which it is engaged.
2.2 RIGHTS AND DUTIES OF THE ADDITIONAL MEMBERS.
(a) GENERAL. The Additional Members shall have
no right to, and shall not, take part in the management or control of the
Company's business or act for or bind the Company; PROVIDED, that the Additional
Members shall have all of the rights, powers and privileges granted to the
Additional Members in this Agreement and, where not inconsistent with the terms
of this Agreement, under the Delaware Act.
(b) PROPERTY MANAGEMENT AGREEMENT. The Managing
Member shall not consent to any amendment to the Property Management Agreement
that materially increases the liabilities or obligations of the Company without
the consent of the Required Additional Members.
(c) RIGHT TO FORCE SALE OF PROPERTIES. Upon the
written request of the Required Additional Members delivered to the Managing
Member during the period commencing on the fifth anniversary of the Merger and
ending on the 180th day after such anniversary, the Managing Member shall use
its good faith efforts to sell all of the Properties then owned by the Company
at their fair market value within a reasonable period of time from receipt of
such request Property.
(d) MERGER AGREEMENT. Notwithstanding any other
provision of this Agreement, the Additional Members are deemed to have consented
to the Merger Agreement by execution of this Agreement or appropriate
supplement.
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2.3 EXPENSES. The Company shall pay or reimburse the Managing
Member for its payment of (i) any and all costs and expenses incurred by the
Managing Member, its members and agents in connection with the management of the
Company and its assets, including, but not limited to, an annual fee of
$100,000, payable in advance, for time devoted to the management of the Company
and its assets by employees of the Managing Member or its Affiliates (such fee
to be (A) equitably adjusted in the event the Properties are sold by the Company
and (B) in addition to all amounts payable under the Property Management
Agreement); (ii) a fee equal to 0.25% of the gross amount of any proceeds from
the financing, refinancing or sale of the Properties or similar extraordinary
transaction; (iii) any and all taxes and governmental charges that may be
incurred or payable by the Company; (iv) any and all insurance premiums or
expenses incurred by the Company in connection with the activities of the
Company; (v) any and all expenses (including legal fees and expenses) incurred
to enable the Company to comply with any law or regulation related to the
activities of the Company or incurred in connection with any litigation or
governmental inquiry, investigation or proceeding involving the Company,
including the amount of any judgments, settlements or fines paid in connection
therewith, except, however, to the extent such expenses or amounts have been
determined to be excluded from the indemnification provided for in Section 4.4
(Indemnification); and (vi) any and all expenses related to the Company's
indemnification obligations pursuant to Section 4.4 (Indemnification). Nothing
in this Section 2.3 (Expenses) shall require the Managing Member to make any
payment described above on behalf of the Company.
2.4 OFFICERS. The day-to-day operations of the Company shall
be the responsibility of the officers of the Company, who shall be designated
and appointed by, and shall have the powers delegated to it by, the Managing
Member.
ARTICLE 3
CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS;
DISTRIBUTIONS; ALLOCATIONS
3.1 CAPITAL CONTRIBUTIONS.
(a) INITIAL CAPITAL CONTRIBUTION. On the date
hereof or such later date as determined by the Managing Member, (i) the Managing
Member shall have contributed (or shall have caused to have been contributed)
$14,500,000 in cash to the capital of the Company, or such lesser amount, when
added to the Financing and the Capital Contributions of the Additional Members,
as is sufficient to consummate the Merger and to refinance the indebtedness of
Fund V, and (ii) the Additional Members shall have contributed to the Company
all of the Units owned by them. In the event that an amount in excess of
$14,500,000 is necessary to consummate the Merger and to refinance the
indebtedness of Fund V, the Managing Member shall have the right, but
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shall not be required, to contribute such additional amount. Set forth on
Exhibit A opposite each Member's name as such Member's initial Capital
Contribution is (i) in the case of the Managing Member, the amount of cash to be
contributed by the Managing Member on the date hereof, and (ii) in the case of
each Additional Member, the number of Units to be contributed by such Additional
Member on the date hereof and the contribution value per Unit, which value shall
be equal to the consideration paid to the holders of Units in the Merger.
(b) ADDITIONAL CAPITAL CONTRIBUTIONS; LOANS.
(i) The Managing Member shall pay any and
all costs and expenses incurred on behalf of the Company in connection
with (A) the organization of the Company and the preparation of this
Agreement and the Investment Agreement, including, without limitation,
fees, costs and expenses payable to attorneys, accountants, consultants
and custodians; (B) the proxy solicitation; (C) the meeting of
Unitholders to consider the Merger and (D) satisfaction of the
Company's indemnification obligations pursuant to Section 4.4(iv). All
such payments shall constitute additional Capital Contributions of the
Managing Member and the Members' Interests shall be adjusted to reflect
the changes in relative Capital Contributions of the Members resulting
from such payments.
(ii) The Members shall not be obligated to
make additional capital contributions to the Company except as provided
in Section 4.1(b) (Return of Previously Distributed Amounts) and, with
respect to the Managing Member, except as also provided in Section
3.1(b)(i). Upon a determination by the Managing Member that additional
cash is required by the Company for capital improvements to, or
rehabilitation of, the Properties (an "ADDITIONAL CASH DETERMINATION"),
the Managing Member shall use good faith efforts to satisfy such cash
requirements utilizing available cash of the Company and/or with the
proceeds from a refinancing of the Properties. In the event such
actions are not reasonably likely to meet the Company's cash
requirements, each Member shall have the right to make an additional
Capital Contribution in an amount equal to (but not less than) its
proportionate share (determined by reference to the ratio of such
Member's Interests to the Interests of all Members who actually make
such additional Capital Contribution) of any such additional cash
requirement. With respect to each Additional Cash Determination, if any
Member declines to make such an additional Capital Contribution, (A)
the other Members may elect to make a Capital Contribution equal to the
unfunded amount (determined on a PRO RATA basis) thereof and (B) the
Members' Interests shall be adjusted to reflect the changes in the
relative Capital Contributions of Members resulting from such Capital
Contributions.
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(iii) With respect to any Additional Cash
Determination not funded pursuant to Section 3.1(b)(ii) above, the
Managing Member may elect to lend funds to the Company in the amount of
such deficiency with the consent of the Required Additional Members
(which consent shall not unreasonably be withheld). Any loans to the
Company pursuant to this Section (b)(iii) shall not constitute a
Capital Contribution to the Company and shall not affect a Member's
Interest in the Company. Any loans to the Company authorized in
accordance with this Section 3.1(b)(iii) shall be evidenced by a
promissory note and shall be payable to the lender at an interest rate
of twelve percent (12%) per annum, compounded quarterly and shall have
such other terms as determined by the Managing Member, in its sole
discretion.
(c) INTERESTS OF THE MEMBERS. The initial
Interest of each Member of the Company shall be the percentage set forth
opposite such Member's name on Exhibit A. Exhibit A shall be promptly amended to
reflect changes of Interests resulting from any additional capital contributions
in accordance with Section 3.1(b) (Additional Capital Contributions) or the
admission or substitution of any Additional Members to the Company in accordance
with Sections 7.1 (Additional Members) and 7.2 (Transfer), respectively.
(d) NO WITHDRAWAL; RETURN OF CONTRIBUTIONS.
Except as otherwise expressly provided in this Agreement, no Member shall have
the right to withdraw capital from the Company, to receive interest on such
Member's Capital Contributions or to receive any distribution or return of such
Member's Capital Contributions.
3.2 CAPITAL ACCOUNTS.
(a) MAINTENANCE OF CAPITAL ACCOUNTS. The Company
shall maintain a "CAPITAL ACCOUNT" for each Member on the books of the Company
in accordance with the following provisions:
(i) Each Member's Capital Account shall
be increased by the amount of: (A) such Member's Capital Contributions
pursuant to Section 3.1 (Capital Contributions); (B) any Net Income or
other item of income or gain allocated to such Member pursuant to
Section 3.4 (Allocations) or Section 3.5 (Special Allocations); and (C)
Company liabilities, if any, assumed by such Member or secured, in
whole or in part, by any Company assets that are distributed to such
Member.
(ii) Each Member's Capital Account shall be
decreased by the amount of: (A) cash and the fair market value on the
date of distribution of any other Company property distributed to such
Member pursuant to
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Section 3.3 (Distributions) and Section 8.2 (Winding Up and
Termination); (B) any Net Loss or other item of loss or deduction
allocated to such Member pursuant to Section 3.4 (Allocations) or
Section 3.5 (Special Allocations); and (C) liabilities, if any, of such
Member assumed by the Company, other than liabilities for which the
Company is required to reimburse such Member hereunder or otherwise.
(b) SUCCESSION TO CAPITAL ACCOUNTS. In the event any
Person becomes a substituted Member in accordance with the provisions of Section
7.2(a) (Conditions to Transfer), such substituted Member shall succeed to the
Capital Account of the transferor Member to the extent such Capital Account
relates to the transferred interest (or portion thereof).
3.3 DISTRIBUTIONS.
(a) GENERAL.
(i) Distributions shall be made in cash.
The Managing Member shall establish reserves for working capital,
contingencies or other items and for the satisfaction of liabilities
(including contingent liabilities) of the Company. Subject to such
reserves, distributions of Available Cash (subject to all restrictions
in the definitions of such term) shall be made to the Members by the
Managing Member on behalf of the Company in accordance with clause (ii)
below.
(ii) Available Cash to be distributed to
the Members pursuant to this Section 3.3(a)(ii) (Distributions --
General) shall be apportioned among the Members in accordance with
their respective Interests. Amounts so apportioned to the Managing
Member shall be distributed to the Managing Member. Amounts so
apportioned to each Additional Member shall be allocated between such
Additional Member and the Managing Member and distributed as follows
(and the calculations described in the following clauses shall be made
as of the date of each distribution, on a cumulative basis), subject to
the other terms of this Article 3:
(A) First, to such Additional
Member until such Member has received, taking into account the
amount and timing of all prior distributions under this
Section 3.3(a)(ii) (Distributions -- General) and all prior
Capital Contributions made pursuant to Section 3.1 (Capital
Contributions) by such Additional Member, a Rate of Return on
its aggregate Capital Contributions compounded semiannually to
the extent not paid on a semiannual basis, equal to twelve
percent (12%) per annum;
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(B) Next, to such Additional Member
until such Additional Member has received an amount equal to
its aggregate Capital Contributions; and
(C) Thereafter, twenty percent (20%)
to the Managing Member and eighty percent (80%) to such
Additional Member.
(b) TIMING. Distributions shall be made within 45
days after the completion of the first half of each Fiscal Year. Within 90 days
after the end of each Fiscal Year, the Company's profits/income for the year
shall be determined and after giving effect to the amount of profits/income
previously distributed, the remainder will then be distributed in accordance
with Section 3.3(a) (Distributions -- General) above.
(c) DISTRIBUTIONS TO PERSONS ON COMPANY RECORDS.
Any distribution by the Company pursuant to the terms of this Section 3.3 or
Section 8.2 (Winding Up and Termination) to the Person shown on the Company's
records as a Member or to its legal representatives, or to the assignee to the
right to receive such distributions as provided herein, shall acquit the Company
and the Managing Member of all liability to any other Person who may be
interested in such distribution by reason of any other assignment or transfer of
such Member's interest in the Company for any reason (including an assignment or
transfer thereof by reason of death, incompetence, bankruptcy or liquidation of
such Member).
3.4 ALLOCATIONS.
(a) NET INCOME. Net Income for each Fiscal Year (or
portion thereof) shall be allocated among the Members (after giving effect to
the allocations contained in Sections 3.4(c) (Tax Allocations) and 3.5(c) (Gross
Income Allocation) first to the extent Net Loss has been allocated to the
Members pursuant to Section 3.4(b) (Net Loss) and thereafter as nearly as
possible in the manner that distributions would be made pursuant to Section
3.3(a) (Distributions -- General) (other than returns of capital)).
(b) NET LOSS. The Company shall allocate Net Loss
first to offset previous allocations of Net Income in respect of income that has
not yet been distributed, and then among the Members in accordance with their
respective Interests.
(c) TAX ALLOCATIONS. For United States federal,
state and local income tax purposes, items of income, gain, loss, deduction and
credit shall be allocated to the Members in accordance with the allocations of
the corresponding items for Capital Account purposes under Sections 3.4
(Allocations) and 3.5 (Special Allocations), except that items with respect to
which there is a difference between tax and book basis will be allocated in
accordance with section 704(c) of the Code, the Regulations thereunder and
Regulation section 1.704-1(b)(4)(i).
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3.5 SPECIAL ALLOCATIONS.
(a) MINIMUM GAIN CHARGEBACK. Notwithstanding any
other provision of Section 3.4 (Allocations), if there is a net decrease in
Company Minimum Gain or Member Nonrecourse Debt Minimum Gain (determined in
accordance with the principles of Regulation sections 1.704-2(d) and 1.704-2(i))
during any Company taxable year, the Members shall be specially allocated items
of Company income and gain for such year (and, if necessary, subsequent years)
in an amount equal to their respective shares of such net decrease during such
year, determined pursuant to Regulation sections 1.704-2(g) and 1.704-2(i)(5).
The items to be so allocated shall be determined in accordance with Regulation
section 1.704-2(f). This Section 3.5(a) is intended to comply with the minimum
gain chargeback requirements in such Regulation sections and shall be
interpreted consistently therewith; including that no chargeback shall be
required to the extent of the exceptions provided in Regulation sections
1.704-2(f) and 1.704- 2(i)(4).
(b) QUALIFIED INCOME OFFSET. In the event any Member
unexpectedly received any adjustments, allocations, or distributions described
in Regulation section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company
income and gain shall be specially allocated to such Member in an amount and
manner sufficient to eliminate the deficit balance in its Capital Account in
excess of the sum of (i) the amount such Member is obligated to restore, if any,
pursuant to any provision of this Agreement, and (ii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentences of
Regulation sections 1.704-2(g)(1) and 1.704-2(i)(5) created by such adjustments,
allocations or distributions as promptly as possible. This Sec tion 3.5(b) is
intended to comply with the "qualified income offset" requirement in such
Regulation section and shall be interpreted consistently therewith.
(c) GROSS INCOME ALLOCATION. In the event any Member
has a deficit Capital Account at the end of any Fiscal Year which is in excess
of the sum of (i) the amount such Member is obligated to restore, if any,
pursuant to any provision of this Agreement, and (ii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentences of
Regulation section 1.704-2(g)(1) and 1.704- 2(i)(5), each such Member shall be
specially allocated items of Company income and gain in the amount of such
excess as quickly as possible, PROVIDED that an allocation pursuant to this
Section 3.5(c) shall be made only if and to the extent that a Member would have
a deficit Capital Account in excess of such sum after all other allocations
provided for in Section 3.4 (Allocations) and this Section 3.5 have been
tentatively made as if Section 3.5(b) (Qualified Income Offset) and this Section
3.5(c) were not in this Agreement.
(d) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions
shall be allocated to the Members in proportion to their Interests.
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(e) MEMBER NONRECOURSE DEDUCTIONS. Member
Nonrecourse Deductions for any taxable period shall be allocated to the Member
who bears the economic risk of loss with respect to the liability to which such
Member Nonrecourse Deductions are attributable in accordance with Regulation
section 1.704-2(j).
(f) REGULATORY COMPLIANCE. The provisions of
Sections 3.2 (Capital Accounts), 3.3 (Distributions), 3.4 (Allocations), this
Section 3.5 and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Regulation section
1.704-1(b) and shall be interpreted and applied in a manner consistent with such
Regulation. The Managing Member shall be authorized to make appropriate
amendments to the allocations of items pursuant to Section 3.4 (Allocations) if
necessary in order to comply with Section 704 of the Code or applicable
Regulations thereunder; PROVIDED, that no such change shall have an adverse
effect upon the amount distributable to any Member pursuant to this Agreement.
(g) CURATIVE ALLOCATIONS.
(i) The allocations set forth in Sections
3.5(a) (Minimum Gain Chargeback), 3.5(b) (Qualified Income Offset),
3.5(c) (Gross Income Allocation), 3.5(d) (Nonrecourse Deductions) and
3.5(e) (Member Nonrecourse Deductions) of this Agreement (the
"REGULATORY ALLOCATIONS") are intended to comply with certain
requirements of the Regulations. The Managing Member is authorized to
offset all Regulatory Allocations either with other Regulatory
Allocations or with special allocations of income, gain, loss or
deductions pursuant to this Section 3.5(g) in whatever manner it
determines appropriate so that, after such offsetting allocations are
made, each Member's Capital Account balance is, to the extent possible,
equal to the Capital Account balance such Member would have had if the
Regulatory Allocations were not part of this Agreement and all items of
income, gain, loss or deduction were allocated pursuant to Section 3.4
(Allocations). In exercising its discretion under this Section 3.5(g),
the Managing Member shall take into account future Regulatory
Allocations under Section 3.5(a) (Minimum Gain Chargeback) that,
although not yet made, are likely to offset other Regulatory
Allocations made under Sections 3.5(d) (Nonrecourse Deductions) and
3.5(e) (Member Nonrecourse Deductions).
(ii) In the event that there are any changes
after the date of this Agreement in applicable tax law, regulations or
interpretation, or any errors, ambiguities, inconsistencies or
omissions in this Agreement with respect to allocations to be made to
Capital Accounts, which would, individually or in the aggregate, cause
the Members not to achieve in any material respect the economic
objectives underlying this Agreement, the Managing Member may in its
discretion
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make appropriate adjustments to such allocations in order to achieve or
approximate such economic objectives.
(h) ADJUSTMENTS OF CAPITAL ACCOUNTS. The Capital
Accounts of the Members may at the discretion of the Managing Member, be
adjusted in accordance with Regulation section 1.704-1(b)(2)(iv)(f), and
thereafter maintained in accordance with Regulation section
1.704-1(b)(2)(iv)(g), to reflect the fair market value of Company property
whenever an interest in the Company is relinquished to the Company, whenever an
Additional Member is admitted to the Company and the amount of capital
contributed by such Member upon its admission is more than de minimis and
reflects changes in the value of Company assets, and upon a liquidation of the
Company, and shall be adjusted in accordance with Regulation section
1.704-1(b)(2)(iv)(e) in the case of a distribution of more than a de minimis
amount of property (other than cash).
3.6 TAX WITHHOLDING; WITHHOLDING ADVANCES.
(a) TAX WITHHOLDING. If requested by the Managing
Member, each Additional Member shall, if able to do so, deliver to the Company:
(i) an affidavit in form satisfactory to the Managing Member that the applicable
Additional Member is not subject to withholding under the provisions of any
federal, state, local, foreign or other law; (ii) any certificate that the
Managing Member may reasonably request with respect to any such laws; (iii) any
other form or instrument reasonably requested by the Managing Member relating to
any Additional Member's status under such law; and/or (iv) a copy of any tax
return or similar document of the applicable Additional Member that the Managing
Member may reasonably request with respect to any such law. In the event that an
Additional Member fails or is unable to deliver to the Managing Member an
affidavit described in clause (i) of this Section 3.6(a), the Managing Member
may withhold amounts from such Additional Member in accordance with Section
3.6(b) (Withholding Advances -- General).
(b) WITHHOLDING ADVANCES--GENERAL. To the extent the
Company is required by law to withhold or to make tax payments on behalf of or
with respect to any Member (E.G., backup withholding), the Managing Member may
withhold such amounts and make such tax payments as so required. Tax payments
shall constitute "WITHHOLDING ADVANCES" to the extent such tax payments are not
satisfied from amounts otherwise distributable to such Member at the time such
tax payment is made.
(c) REPAYMENT OF WITHHOLDING ADVANCES. All
Withholding Advances made on behalf of a Member, plus interest thereon (unless
waived by the Managing Member) at a rate equal to the Prime Rate as of the date
of such Withholding Advances plus 2.0% per annum, shall (i) be paid on demand by
the Member on whose behalf such Withholding Advances were made (it being
understood that no such payment shall increase such Member's Capital
Contribution), or (ii) with the consent of the
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Managing Member, in its discretion, be repaid by reducing the amount of the
current or next succeeding distribution or distributions which would otherwise
have been made to such Member or, if such distributions are not sufficient for
that purpose, by so reducing the proceeds of liquidation otherwise payable to
such Member. Whenever repayment of a Withholding Advance by a Member is made as
described in clause (ii) above, for all other purposes of this Agreement such
Member shall be treated as having received all distributions (whether before or
upon Termination) unreduced by the amount of such Withholding Advance and
interest thereon.
(d) REIMBURSEMENT OF LIABILITIES. Each Member hereby
agrees to reimburse the Company and the Managing Member for any liability with
respect to Withholding Advances (including interest thereon) required or made on
behalf of or with respect to such Member (including penalties imposed with
respect thereto).
ARTICLE 4
LIABILITY; INDEMNIFICATION
4.1 LIMITED LIABILITY OF MEMBERS.
(a) LIMITED LIABILITY OF MEMBERS. The liability of
the Members shall be limited as provided in the Delaware Act and as set forth in
this Agreement. Neither the Managing Member nor any Additional Member shall be
obligated to restore by way of capital contribution or otherwise any deficits in
its Capital Account or the Capital Account of any other Member (if such deficits
occur).
(b) RETURN OF PREVIOUSLY DISTRIBUTED AMOUNTS. In
accordance with the Delaware Act, a member of a limited liability company may,
under certain circumstances, be required to return to such limited liability
company, for the benefit of limited liability company creditors, amounts
previously distributed to such member. To the extent that an Additional Member
may be required to return capital to the Company under the Delaware Act, it is
the intent of the Managing Member that any obligation to return any such
distributions pursuant to Section 3.3 (Distributions) or Article 8 (Dissolution;
Winding Up; Termination) shall be deemed to be compromised by the consent of all
Members and the Additional Member to whom any money or property is distributed
shall not be required to return any such money or property to the Company or any
creditor of the Company. However, if any court of competent jurisdiction or
regulatory body with jurisdiction over the matter holds that, notwithstanding
the provisions of this Agreement, any Additional Member is obligated to return
to the Company any amounts previously distributed to such Additional Member,
such obligation shall be the obligation of such Additional Member and not of the
Managing Member.
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4.2 QUALIFICATION. The Managing Member shall use its
reasonable efforts to qualify the Company to do business or become licensed in
each jurisdiction where the activities of the Company make such qualification or
licensing necessary or where failure to so qualify or become licensed would have
an adverse effect on the limited liability of the Additional Members.
4.3 LIABILITY TO MEMBERS. No Protected Person shall be liable
to the Company or any Member for any action taken or omitted to be taken by it
or by any other Member or other Person with respect to the Company, including,
without limitation, any negligent act or failure to act, except in the case of a
liability resulting from such Protected Person's own fraud, gross negligence,
willful malfeasance, intentional and material breach of this Agreement or
conduct that is the subject of a criminal proceeding (where such Protected
Person has a reasonable cause to believe that such conduct was unlawful). Any
Protected Person may consult with legal counsel and accountants with respect to
Company affairs (including interpretations of this Agreement) and shall be fully
protected and justified in any action or inaction which is taken or omitted in
good faith, in reliance upon and in accordance with the opinion or advice of
such counsel or accountants. In determining whether a Protected Person acted
with the requisite degree of care, such Protected Person shall be entitled to
rely on written or oral reports, opinions, certificates and other statements of
the directors, officers, employees, consultants, attorneys, accountants and
professional advisors of the Company or the Managing Member selected and
monitored with reasonable care; PROVIDED, that no such Protected Person may rely
upon such statements if it believed that such statements were materially false.
4.4 INDEMNIFICATION.
(a) INDEMNIFICATION OF PROTECTED PERSONS. To the
fullest extent permitted by law, the Company shall indemnify, hold harmless,
protect and defend each Protected Person against any losses, claims, damages or
liabilities, including without limitation reasonable legal fees or other
expenses incurred in investigating or defending against any such losses, claims,
damages or liabilities, and any amounts expended in settlement of any claims
approved by the Managing Member (collectively, "LIABILITIES"), to which any
Protected Person may become subject:
(i) by reason of any act or omission or
alleged act or omission (even if negligent) performed or omitted to be
performed in connection with the activities of the Company;
(ii) by reason of the fact that it is or was
acting in connection with the activities of the Company in any capacity
or that it is or was serving at the request of the Company as a
partner, stockholder, member, director, officer, employee or Specified
Agent of any Person;
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(iii) by reason of any other act or omission
or alleged act or omission (even if negligent) arising out of or in
connection with the activities of the Company; or
(iv) based upon or arising out of any
litigation commenced by or on behalf of Unitholders relating to the
Merger and the transactions contemplated hereby.
unless such Liability results from such Protected Person's own fraud, gross
negligence, willful malfeasance, intentional and material breach of this
Agreement or conduct that is the subject of a criminal proceeding (where such
Protected Person has a reasonable cause to believe that such conduct was
unlawful).
(b) REIMBURSEMENT OF EXPENSES. The Company shall
promptly reimburse (and/or advance to the extent reasonably required) each
Protected Person for reasonable legal or other expenses (as incurred) of each
Protected Person in connection with investigating, preparing to defend or
defending any claim, lawsuit or other proceeding relating to any Liabilities for
which the Protected Person may be indemnified pursuant to this Section 4.4;
PROVIDED, that such Protected Person executes a written undertaking to repay the
Company for such reimbursed or advanced expenses if it is finally judicially
determined that such Protected Person is not entitled to the indemnification
provided by this Section 4.4.
(c) SURVIVAL OF PROTECTION. The provisions of this
Section 4.4 shall continue to afford protection to each Protected Person
regardless of whether such Protected Person remains in the position or capacity
pursuant to which such Protected Person became entitled to indemnification under
this Section 4.4 and regardless of any subsequent amendment to this Agreement;
PROVIDED, that no such amendment shall reduce or restrict the extent to which
these indemnification provisions apply to actions taken or omissions made prior
to the date of such amendment.
(d) LIMITATION ON RECOVERY. Any indemnification
under this Section 4.4 or otherwise shall be paid out of and to the extent of
the Company's assets only.
ARTICLE 5
CONSENTS; VOTING; MEETINGS
5.1 METHOD OF GIVING CONSENT. Any approval required by this
Agreement may be given as follows:
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(a) WRITTEN APPROVAL. By a written approval given by
the Member whose approval is solicited and obtained (the "CONSENTING MEMBER")
prior to or after the doing of the act or thing for which the approval is
solicited; or
(b) APPROVAL AT MEETING. By the affirmative vote of
the Consenting Member to the doing of the act or thing for which the approval is
solicited or obtained at any meeting called and held to consider the doing of
such act or thing; PROVIDED, that, if a proxy is obtained from a Consenting
Member prior to any meeting, such proxy may be revoked at a meeting held to
consider the doing of such act or thing.
5.2 MEETINGS. Any matter requiring the approval of any or all
of the Members pursuant to this Agreement may be considered at a meeting of
Members. Meetings of the Members may be held by telephone or other electronic
device.
5.3 QUARTERLY MEETINGS. Upon the written request of the
Required Additional Members, the Managing Member shall cause a meeting of the
Members to be held, PROVIDED, that no meeting of the Company shall be required
to be held more than once each fiscal quarter.
ARTICLE 6
REPORTS TO MEMBERS; CONFIDENTIALITY
6.1 BOOKS OF ACCOUNT. Appropriate records and books of account
of the Company shall be kept by the Company at the principal place of business
of the Managing Member of the Company. Such records and books of account shall
be subject to inspection and copying by any Member at the reasonable request,
and at the expense, of such Member during normal business hours, upon reasonable
notice to the Company.
6.2 REPORTS.
(a) REPORTS TO MEMBERS. The Company shall furnish to
each Member financial statements of the Company for each calendar quarter during
the term of the Company, commencing with the first full calendar quarter
following the date hereof.
(b) TAX INFORMATION. Within 120 days after the end
of each Fiscal Year, or as soon as reasonably practicable thereafter, the
Managing Member shall furnish to each Member such information regarding the
amount of such Member's share in the Company's taxable income or loss for such
year, in sufficient detail to enable such Member to prepare its United States
federal, state and other tax returns.
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6.3 ACCOUNTING BASIS. The books and records and financial
statements and reports of the Company shall be kept on an accrual basis.
Additional determinations with respect to accounting principles shall be made by
the Managing Member.
6.4 TAX MATTERS. Unless otherwise required by law, the
Managing Member shall be the "tax matters partner" of the Company within the
meaning of Section 6231(a)(7) of the Code. Prompt notice shall be given to the
Members upon receipt of advice that the Internal Revenue Service or other taxing
authority intends to examine any income tax return or record or books of the
Company.
6.5 CONFIDENTIALITY. Each of the Additional Members shall, and
shall direct those of its attorneys, accountants, consultants and advisors (the
"REPRESENTATIVES") who have access to Confidential Information to keep
confidential and not disclose any Confidential Information without the express
consent, in the case of Confidential Information acquired from the Company, of
the Company or, in the case of Confidential Information acquired from another
Additional Member or the Managing Member, such Member, unless (subject in all
cases to any more stringent restrictions imposed on the Company) (a) such
disclosure shall be required by applicable law, governmental rule or regulation,
court order, administrative or arbitral proceeding, (b) such disclosure is
reasonably required in connection with any litigation against or involving the
Company, the Managing Member or any Additional Member, or (c) such disclosure is
reasonably required in connection with any proposed assignment, sale or other
disposition of all or any part of an Additional Member's interest or a
participation in the Company (a "PROPOSED TRANSFER"); PROVIDED, that with
respect to the use of any Confidential Information in any Proposed Transfer, the
consent of the Managing Member, in its sole discretion, shall be necessary prior
to such use and the Managing Member may require any Proposed Transferee to enter
into a confidentiality agreement with terms substantially similar to the terms
of this Section 6.5. "CONFIDENTIAL INFORMATION" shall mean information
concerning the Managing Member, its members, board members and officers and any
information, including the identity of any Additional Member, that an Additional
Member may acquire from the Company, or as a consequence of being an Additional
Member of the Company, from another Additional Member other than information
that (i) is already available through publicly available sources of information
(other than as a result of disclosure by such Additional Member), (ii) was
available to an Additional Member on a non-confidential basis prior to its
disclosure to such Additional Member by the Company, or (iii) becomes available
to an Additional Member on a non- confidential basis from a third party,
provided such third party is not known by such Additional Member to be bound by
this Agreement or another confidentiality agreement with the Company.
Notwithstanding the foregoing, the Managing Member may disclose the identity of
the Additional Members to the extent reasonably calculated to advance or protect
the interests of the Company.
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ARTICLE 7
ADDITIONAL MEMBERS; TRANSFER; WITHDRAWAL
7.1 ADDITIONAL MEMBERS. The Managing Member, with the consent
of the Required Additional Members (which consent shall not be unreasonably
withheld), may admit Additional Members to the Company; PROVIDED, that each such
Additional Member shall execute such instruments as the Managing Member may
reasonably deem necessary or desirable to admit such party as an Additional
Member, pursuant to which such Additional Member shall agree to be bound by and
comply with all of the terms and provisions hereof.
7.2 TRANSFER.
(a) CONDITIONS TO TRANSFER. No direct or indirect
sale, exchange, transfer, assignment or other disposition (collectively referred
to as a "TRANSFER") of all or any fraction of an Additional Member's interest in
the Company may be made without the prior written consent of the Managing
Member, which consent shall not be unreasonably withheld. A Person shall be
deemed admitted as a Member at the time that such Person: (i) executes an
amendment, counterpart or supplement to this Agreement and such other
instruments as the Managing Member may reasonably deem necessary or desirable to
evidence such Person's agreement to be bound by and to comply with the terms and
provisions hereof; and (ii) is named on the books and records of the Company.
(b) NULL AND VOID TRANSFER. Unless waived by the
Managing Member, any purported Transfer by any Additional Member (including
transferees thereof or substituted members therefor) of any interest in the
Company not made strictly in accordance with the provisions of this Section 7.2
or otherwise not permitted by this Agreement shall be entirely null and void.
7.3 DEATH, INCOMPETENCE, BANKRUPTCY OR LIQUIDATION OF AN
ADDITIONAL MEMBER. In the event of the death, incompetence or bankruptcy of an
Additional Member, or the bankruptcy, termination, liquidation or dissolution of
any partnership, trust, corporation or other entity which is an Additional
Member, (a) no Dissolution Event and Winding Up Period of the Company shall be
effected thereby and the Company and its business shall be continued until the
Termination of the Company as provided for in this Agreement, and (b) upon
satisfaction of the conditions of Sections 7.2 (Transfer), the estate or
successor in interest in the Company of such deceased, incompetent, bankrupt,
terminated, liquidated or dissolved Additional Member shall succeed to the
interest of such Additional Member and shall be deemed a Member for any and all
purposes hereunder.
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7.4 WITHDRAWALS. Prior to the Termination of the Company,
except in connection with a Transfer permitted by Section 7.2 (Transfer), no
Member may withdraw from the Company. Withdrawals by any Member of its Capital
Account or any portion thereof shall not be permitted.
7.5 CONTINUATION. Notwithstanding the provisions of Sections
8.1(e) and (g) (Dissolution), the Company shall not commence its winding up upon
the dissolution of the Managing Member or the Bankruptcy of the Managing Member
if, within 90 days following such occurrence, the Additional Members shall agree
in writing to the continuation of the Company and to the appointment, effective
as of the date of such occurrence, of a successor to the Managing Member. If
such a successor is appointed prior to or as of such effective date, the
business of the Company shall be continued as a limited liability company,
subject to and upon the terms and conditions set forth in this Agreement and, if
required, any documents necessary to reflect the continued existence of the
Company as a limited liability company shall be executed by the Members.
ARTICLE 8
DISSOLUTION; WINDING UP; TERMINATION
8.1 DISSOLUTION. The Company shall commence its winding up
upon the first to occur of the following (the "DISSOLUTION EVENT"):
(a) at any time after the tenth anniversary of the
date hereof;
(b) the expiration of 60 days after the assignment,
sale, transfer or other disposition of all or all of the assets, properties and
business of the Company;
(c) at the election of the Managing Member with the
consent of the Required Additional Members at any time;
(d) upon the dissolution of the Managing Member
(unless the Company is continued pursuant to Section 7.5 (Continuation));
(e) within 180 days of the execution of this
Agreement, if the Merger has not been consummated; and
(f) unless the Company is continued pursuant to
Section 7.5 (Continuation), (i) upon the commencement by the Managing Member of
any case, proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of
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debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
adjustment, winding-up, liquidation, dissolution, composition or other relief
with respect to it or its debts, or (B) seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its assets; (ii) upon the Managing Member making a general
assignment for the benefit of its creditors; (iii) at such time as any case,
proceeding or other action of a nature referred to in clause (i) above against
the Managing Member results in the entry of an order for relief or any such
adjudication or appointment, or remains undismissed, undischarged or unbonded
for a period of 120 days; (iv) at such time as any case, proceeding or other
action seeking issuance of a warrant of attachment, execution or similar process
against all or any substantial part of the Managing Member's assets results in
the entry of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 120 days from the entry
thereof; (v) upon the Managing Member's consent to, approval of, or acquiescence
in, any of the acts or relief described in clause (i), (ii), (iii) or (iv)
above; or (vi) upon the Managing Member generally not paying, or being unable to
pay, or admitting in writing its inability to pay, its debts as they become due.
The Dissolution Event shall be effective on the day on which such event occurs
and immediately thereafter the Company shall commence the Winding Up Period
during which its affairs shall be wound up in accordance with Sections 8.2
(Winding Up and Termination) and 8.3 (Assets Reserved and Pending Claims).
8.2 WINDING UP AND TERMINATION.
(a) WINDING UP. Upon the occurrence of the
Dissolution Event, the property and business of the Company shall be wound up by
the Managing Member, or, in the event of the unavailability of the Managing
Member, by a Person designated as a liquidating trustee by the Additional
Members. Subject to the requirements of applicable law and the further
provisions of this Section 8.2, the Managing Member (or any other Person
conducting the winding up of the Company's affairs) shall have discretion in
determining whether to sell or otherwise dispose of Company assets, except upon
a Dissolution Event described in Section 8.1(c) (Dissolution), or to distribute
the same in kind and the timing and manner of such disposition or distribution.
While the Company continues to hold assets, the Managing Member shall as a
general matter seek to maximize the value of such assets and may in its
discretion expend funds, acquire additional assets and borrow funds. The
Managing Member may also authorize the payment of fees and expenses reasonably
required in connection with the winding up of the Company.
(b) DISTRIBUTIONS UPON WINDING UP. Within a
reasonable period of time following the occurrence of the Dissolution Event,
after allocating all Net Income, Net Loss and other items of income, gain, loss
or deduction pursuant to
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Sections 3.4 (Allocation) and 3.5 (Special Allocations), the Company's assets
(except for assets reserved pursuant to Section 8.3 (Assets Reserved and Pending
Claims)) shall be applied and distributed in the following manner and order of
priority:
(i) the claims of all creditors of the
Company (including Members except to the extent not permitted by law)
shall be paid and discharged other than liabilities for which
reasonable provision for payment has been made;
(ii) to the Members in accordance with the
positive balances of their respective Capital Accounts; and
(iii) thereafter, to the Members in
accordance with Section 3.3(a) (Distributions -- General).
Notwithstanding anything to the contrary in this Agreement, liquidating
distributions shall be made no later than the last to occur of (x) 90 days after
the date of disposition (including pursuant to Section 8.3 (Assets Reserved and
Pending Claims)) of the last remaining asset of the Company and (y) the end of
the Company's taxable year in which the disposition referred to in clause (x)
above shall occur. This Section 8.2(b) is intended to comply with, and shall be
interpreted consistently with, the requirements of Regulation section
1.704-1(b)(2)(ii)(b)(2).
(c) DISTRIBUTIONS IN KIND. The Managing Member, in
its sole discretion, may allocate securities for distribution in kind to the
Additional Members. Notwithstanding any other provision of this Agreement, the
amount by which the fair market value of any property to be distributed in kind
to the Members (including property distributed in liquidation, and property
distributed pursuant to Section 3.3 (Distributions)) exceeds or is less than the
adjusted basis of such property shall, to the extent not otherwise recognized by
the Company, be taken into account in computing income, gains and losses of the
Company for purposes of crediting or charging the Capital Accounts of, and
distributing proceeds to, the Members, pursuant to this Agreement.
(d) TERMINATION. When the Managing Member or a
liquidating trustee appointed pursuant to Section 8.2(a) (Winding Up) has
completed the winding up described in this Section 8.2, the Managing Member or
the liquidating trustee shall cause the Termination of the Company.
8.3 ASSETS RESERVED AND PENDING CLAIMS.
(a) ASSETS RESERVED. If, upon a Dissolution Event,
there are any assets that, in the judgment of the Managing Member, cannot be
sold or distributed in kind without sacrificing a significant portion of the
value thereof or where such sale or
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distribution is otherwise impractical at the time of the Dissolution Event, such
assets may be retained by the Company, except upon a Dissolution Event described
in Section 8.1(c) (Dissolution), if the Managing Member determines that the
retention of such assets is in the best interests of the Additional Members.
Upon the sale of such assets or a determination by the Managing Member that
circumstances no longer require their retention, such assets (at their fair
market value) or the proceeds of their sale shall be taken into account in
computing Capital Accounts on winding up and amounts distributable pursuant to
Section 8.2(b) (Distributions Upon Winding Up), and distributed in accordance
with such value.
(b) PENDING CLAIMS. If there are any claims or
potential claims (including potential Company expenses in connection therewith)
against the Company (either directly or indirectly, including potential claims
for which the Company might have an indemnification obligation) for which the
possible loss cannot, in the judgment of the Managing Member, be definitively
ascertained, then such claims shall initially be taken into account in computing
Capital Accounts upon winding up and distributions pursuant to Section 8.2(b)
(Distributions Upon Winding Up) at an amount estimated by the Managing Member to
be sufficient to cover any potential loss or liability on account of such claims
(including such potential Company expenses), and the Company shall retain funds
(or assets) determined by the Managing Member in its discretion as a reserve
against such potential losses and liabilities, including expenses associated
therewith. The Managing Member may in its discretion obtain insurance or create
escrow accounts or make other similar arrangements with respect to such losses
and liabilities. Upon final settlement of such claims (including such potential
Company expenses) or a determination by the Managing Member that the probable
loss therefrom can be definitively ascertained, such claims (including such
potential Company expenses) shall be taken into account in the amount at which
they were settled or in the amount of the probable loss therefrom in computing
Capital Accounts on winding up and amounts distributable pursuant to Section
8.2(b) (Distributions Upon Winding Up), and any excess funds retained shall be
distributed.
ARTICLE 9
AMENDMENTS; WAIVER; POWER OF ATTORNEY
9.1 AMENDMENTS; WAIVER.
(a) AMENDMENT OR WAIVER BY MANAGING MEMBER AND
ADDITIONAL MEMBERS. Except as otherwise expressly provided in this Agreement,
any provision of this Agreement (other than this Section 9.1) may be amended or
waived by an instrument in writing executed by the Managing Member and the
Required Additional Members; PROVIDED, HOWEVER, that:
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(i) any amendment to or waiver of any
provision of this Agreement that would increase or reduce the Capital
Contributions, the Interests or otherwise increase the liabilities or
obligations of any Additional Member shall require the written consent
of such Additional Member;
(ii) subject to Section 3.5(g) (Curative
Allocations), any amendment to or waiver of any provision that would
alter the allocations to Capital Accounts, or the distributions from
the Company, shall require the written consent of each Additional
Member who would be adversely affected by such amendment; and
(iii) any amendment to or waiver of any
provision which discriminates against any Additional Member in relation
to the other Additional Members shall require the written consent of
such Additional Member.
Notwithstanding the foregoing, the Managing Member, without the consent of any
Additional Member, may amend this Agreement (including Exhibit A hereto) as
necessary to reflect the admission or substitution of Additional Members
admitted to the Company pursuant to Sections 7.1(b) (Additional Members) or 7.2
(Transfer), respectively, or to reflect additional Capital Contributions made
pursuant to Section 3.1(b) (Additional Capital Contributions).
(b) AMENDMENT OR WAIVER BY THE MANAGING MEMBER.
Notwithstanding the foregoing, the Managing Member, without the consent of any
Additional Member, may amend or waive any provision of this Agreement (unless
such amendment or waiver would have a material adverse effect on any of the
Additional Members) to reflect:
(i) a change in the name of the Company or
the location of the principal place of business or the registered
office of the Company;
(ii) a change that is necessary to qualify
the Company as a limited liability company in which the Additional
Members have limited liability under the laws of any jurisdiction or
that is necessary or advisable in the opinion of the Managing Member to
ensure that the Company will not be taxable other than as a partnership
under the Code and Regulations;
(iii) a change that is (x) of an
inconsequential nature or (y) necessary or desirable to satisfy any
requirements, conditions or guidelines contained in any opinion,
directive, order, ruling or regulation of any federal or state agency
or contained in any federal or state statute;
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(iv) a change in any provision of this
Agreement that requires any action to be taken by or on behalf of the
Managing Member or the Company pursuant to the requirements of the
Delaware Act if the provisions of the Delaware Act are amended,
modified or revoked so that the taking of such action is no longer
required;
(v) a change to add to the duties or
obligations of the Managing Member;
(vi) a change that, in the reasonable
opinion of the Managing Member, does not adversely affect the rights of
the Additional Members in any material respect; and
(vii) a change clarifying any ambiguity,
defect or inconsistency in this Agreement.
Within a reasonable period after any change or amendment or waiver in accordance
with the preceding sentence, the Managing Member shall send a written notice to
each Additional Member describing such change or amendment or waiver in
reasonable detail.
9.2 POWER OF ATTORNEY.
(a) APPOINTMENT OF POWER OF ATTORNEY. Each
Additional Member by its execution of this Agreement irrevocably makes,
constitutes and appoints the Managing Member as its true and lawful agent and
attorney-in-fact, with full power and authority in its name, place and stead, to
make, execute, sign, acknowledge, swear to, record and file: (i) any amendment
or waiver of any provision of this Agreement that has been adopted or made as
herein provided; (ii) all certificates and other instruments deemed advisable by
the Managing Member to comply with the provisions of this Agreement and
applicable law or to permit the Company to become or to continue as a limited
liability company or other entity wherein the Additional Members have limited
liability in each jurisdiction where the Company may be doing business; (iii)
all instruments that the Managing Member deems appropriate to reflect a change
or modification of this Agreement or the Company in accordance with this
Agreement; (iv) all conveyances and other instruments or papers deemed advisable
by the Managing Member, to effect the dissolution, winding up and termination of
the Company pursuant to the provisions of this Agreement; (v) all fictitious or
assumed name certificates required or permitted to be filed on behalf of the
Company; and (vi) all other instruments or papers not inconsistent with the
terms of this Agreement which may be required by law to be filed on behalf of
the Company.
(b) NATURE AND EXERCISE OF POWER OF ATTORNEY. With
respect to each Additional Member, the foregoing power of attorney:
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(i) is coupled with an interest, shall be
irrevocable and shall survive the incapacity or bankruptcy of such
Additional Member;
(ii) may be exercised by the Managing Member
either by signing separately as attorney-in-fact for such Additional
Member or, after listing all of the Additional Members executing an
instrument, by a single signature of the Managing Member acting as
attorney-in-fact for all of them; and
(iii) shall survive the delivery of an
assignment by such Additional Member of the whole or any fraction of
its interest; except that, where the assignee of the whole of such
Additional Member's interest has been approved by the Managing Member
for admission to the Company, the power of attorney of the assignor
shall survive the delivery of such assignment for the sole purpose of
enabling the Managing Member to execute, swear to, acknowledge and file
any instrument necessary or appropriate to effect such substitution.
ARTICLE 10
MISCELLANEOUS
10.1 INVESTMENT REPRESENTATIONS. Each Additional Member hereby
represents and warrants to the Company that: (a) the limited liability company
interest of the Additional Member is being acquired for investment purposes only
for its own account and not with a view to or in connection with any
distribution, re-offer, resale, or other disposition not in compliance with the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "SECURITIES ACT") and applicable state securities laws; (b) the Additional
Member possesses such expertise, knowledge, and sophistication in financial and
business matters generally, and in the type of transactions in which the Company
proposes to engage in particular, that it is capable of evaluating the merits
and economic risks of acquiring and holding its limited liability company
interest, and it is able to bear all such economic risks now and in the future;
(c) the Additional Member has had access to all of the information with respect
to its limited liability company interest that it deems necessary to make a
complete evaluation thereof and has had the opportunity to question the Company
concerning such limited liability company interest; (d) the Additional Member's
decision to acquire its limited liability company interest for investment has
been based solely upon the evaluation made by it; (e) the Additional Member is
aware that it must bear the economic risk of its investment in the Company for
an indefinite period of time because limited liability company interests in the
Company (i) have not been registered under the Securities Act or under the
securities laws of various states, and, therefore, cannot be sold unless the
limited liability company interests are subsequently registered under the
Securities Act and any applicable state securities laws or an exemption from
registration is available and (ii) are subject to this
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Agreement, which prohibits the transfer of such interests without the consent of
the Managing Member and prohibits the withdrawal of Additional Members; (f) the
Additional Member is aware that the Additional Member's tax liability with
respect to such Additional Member's interest in the Company may exceed any
distributions made to such Additional Member and that the Company is under no
obligation to make any such distributions to such Additional Member to pay any
related taxes; and (g) the Additional Member has not relied upon the Managing
Member, or its members, board members or officers or any other Additional Member
or agent or counsel thereof for any tax or securities law advice with respect to
such Additional Member's interest in the Company.
10.2 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of, and shall be binding upon, the successors and permitted assigns of
the Members.
10.3 NO WAIVER. The failure of any Member to seek redress for
violation, or to insist on strict performance, of any covenant or condition of
this Agreement shall not prevent a subsequent act which would have constituted a
violation from having the effect of an original violation.
10.4 SURVIVAL OF CERTAIN PROVISIONS. Each of the Members
agrees that the covenants and agreements set forth in Sections 4.1 (Liability of
Additional Members), 4.3 (Liability to Members), 4.4 (Indemnification) and 6.5
(Confidentiality) shall survive the Termination of the Company.
10.5 NOTICES. All notices hereunder shall be in writing and
shall be given by personal delivery, mailed by registered or certified mail,
Federal Express, U.S. overnight mail or international air courier service, or
sent by telecopy or other electronic means, and addressed: if to the Company, at
its principal office and, if to a Member, to such Member at its last known
address as disclosed on the records of the Company. Notices shall be deemed to
have been given as of the date delivered (upon confirmed receipt by the delivery
service) or telecopied (upon confirmed receipt). The Company and any Member may
change the address for notices by delivering or mailing as aforesaid, a notice
stating the change and setting forth the changed address.
10.6 SEVERABILITY. In case any provision in this Agreement
shall be deemed to be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions hereof shall not in any way be
affected or impaired hereby.
10.7 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
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10.8 HEADINGS, ETC. The headings in this Agreement are
inserted for convenience of reference only and shall not affect the
interpretation of this Agreement.
10.9 GENDER. As used herein, masculine pronouns shall include
the feminine and neuter, neuter pronouns shall include the masculine and the
feminine, and the singular shall be deemed to include the plural.
10.10 NO RIGHT TO PARTITION. The Members, on behalf of
themselves and their shareholders, partners, members, successors and assigns, if
any, hereby specifically renounce, waive and forfeit all rights, whether arising
under contract or statute or by operation of law, except as otherwise expressly
provided in this Agreement, to seek, bring or maintain any action in any court
of law or equity for partition of the Company or any asset of the Company, or
any interest which is considered to be Company property, regardless of the
manner in which title to such property may be held.
10.11 NO THIRD PARTY RIGHTS. Except as expressly provided in
this Agreement, this Agreement is intended solely for the benefit of the parties
hereto and is not intended to confer any benefits upon, or create any rights in
favor of, any Person other than the parties hereto.
10.12 ENTIRE AGREEMENT. This Agreement and the Investment
Agreement, together with the exhibits attached hereto or thereto, are intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
This Agreement and the Investment Agreement, together with the exhibits attached
hereto or thereto, supersede all prior agreements and understandings between the
parties with respect to such subject matter.
10.13 RULE OF CONSTRUCTION. The general rule of construction
for interpreting a contract, which provides that the provisions of a contract
should be construed against the party preparing the contract, is waived by the
parties hereto. Each party acknowledges that such party was represented by
separate legal counsel in this matter who participated in the preparation of
this Agreement or such party had the opportunity to retain counsel to
participate in the preparation of this Agreement but elected not to do so.
10.14 AUTHORITY. Whenever in this Agreement or elsewhere it is
provided that consent is required of, or a demand shall be made by, or an act or
thing shall be done by or at the direction of, the Company, or whenever any
words of like import are used, all such consents, demands, acts and things are
to be made, given or done by the consent of the Managing Member or Person acting
under the authority of the Managing Member, unless a contrary intention is
expressly indicated.
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10.15 RELIANCE. No Person dealing with the Company, or its
assets, whether as lender, assignee, purchaser, lessee, grantee, or otherwise,
shall be required to investigate the authority of the Managing Member in dealing
with the Company or any of its assets, nor shall any Person entering into a
contract with the Company or relying on any such contract or agreement be
required to inquire as to whether such contract or agreement was properly
approved by the Managing Member. Any such Person may conclusively rely on a
certificate of authority signed by the Managing Member and may conclusively rely
on the due authorization of any instrument signed by the Managing Member in the
name and on behalf of the Company or the Managing Member.
10.16 APPLICABLE LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
(b) Any dispute arising hereunder shall be
settled by arbitration in accordance with the Expedited Procedures of the
Commercial Arbitration Rules of the American Arbitration Association (the "AAA
RULES") by a single arbitrator who is mutually agreeable to the Managing Member
and the Additional Members (who shall be represented by Equity Resources Group,
Incorporated (the "REPRESENTATIVE"). If the Managing Member and the
Representative are unable to agree upon an arbitrator, an arbitrator shall be
selected in accordance with the AAA Rules. Any judgment upon the award rendered
by such arbitrator may be entered in any court of competent jurisdiction. All
proceedings in any such arbitration shall be conducted in Boston, Massachusetts.
Jurisdiction of such arbitrator shall be exclusive as to disputes between the
Managing Member and the Representative relating to this Agreement, and the
Managing Member and the Investors agree that this agreement to arbitrate shall
be specifically enforceable under the laws of Delaware. Neither the Managing
Member nor any Additional Member (including the Representative) shall have the
right to appeal the arbitration decision or otherwise to submit a dispute
relating to this Agreement to a court of law. With respect to matters submitted
to arbitration, each of the Managing Member and the Additional Members shall
bear its own respective costs, fees and expenses (including reasonable fees,
expenses and disbursements of attorneys) in connection with such arbitration.
The Managing Member, on the one hand, and the Additional Members, collectively,
on the other hand, shall each pay one-half of the total costs, fees and expenses
of the arbitrator.
[Remainder of Page Intentionally Left Blank]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
MANAGING MEMBER:
KRF COMPANY, L.L.C.
By: The Krupp Family Limited Partnership-94,
its sole member
By:
-------------------------------------------
Douglas Krupp
General Partner
ADDITIONAL MEMBERS:
EQUITY RESOURCE FUND XVII LIMITED
PARTNERSHIP
EQUITY RESOURCE FUND XIX LIMITED
PARTNERSHIP
EQUITY RESOURCE FUND XXI LIMITED
PARTNERSHIP
EQUITY RESOURCE GENERAL FUND LIMITED
PARTNERSHIP
EQUITY RESOURCE CAMBRIDGE FUND LIMITED
PARTNERSHIP
EQUITY RESOURCE BRIDGE FUND LIMITED
PARTNERSHIP
EQUITY RESOURCE BOSTON FUND LIMITED
PARTNERSHIP
By: EQUITY RESOURCES GROUP, INCORPORATED
as general partner of each of the foregoing
By:
-------------------------------------------
Eggert Dagjartsson
Executive Vice President
37
<PAGE>
EXHIBIT A
MEMBERS OF KR5 ACQUISITION, L.L.C.
<TABLE>
<CAPTION>
CAPITAL CONTRIBUTION INTEREST
MANAGING MEMBER -------------------- --------
- ---------------
<S> <C> <C>
KRF COMPANY, L.L.C. $________________ ____%
ADDITIONAL MEMBERS
- ------------------
EQUITY RESOURCE CAMBRIDGE FUND 175.0 Units @ $___/Unit ____%
($______________)
EQUITY RESOURCE BOSTON FUND 1,099 Units @ $___/Unit
($______________)
EQUITY RESOURCE GENERAL FUND 20 Units @ $___/Unit ____%
($______________)
EQUITY RESOURCE BRIDGE FUND 20 Units @ $___/Unit
($______________)
EQUITY RESOURCE FUND XIX 225 Units @ $___/Unit ____%
($______________)
EQUITY RESOURCE FUND XVII 1,599.50 Units @ $___/Unit
($______________)
EQUITY RESOURCE FUND XXI 847 Units @ $___/Unit ____%
($______________)
EQUITY RESOURCE
TOTAL $ 100.00%
================== ======
</TABLE>
<PAGE>
EXHIBIT B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made
and entered into as of ______________, 2000 by and between KR5 Acquisition,
L.L.C., a Delaware limited liability company (the "COMPANY" or, after the
Effective Time (as defined in Article V hereof), the "SURVIVING ENTITY"), and
Krupp Realty Limited Partnership-V, a Massachusetts limited partnership (the
"PARTNERSHIP").
W I T N E S S E T H:
WHEREAS, the Company is a limited liability company duly
formed and validly existing under the laws of the State of Delaware;
WHEREAS, the Partnership is a limited partnership duly formed
and validly existing under the laws of the Commonwealth of Massachusetts;
WHEREAS, the Massachusetts Revised Uniform Limited
Partnership Act, Mass. Gen. Laws Ann. ch. 109, Sections 1-62 (THE "MASSACHUSETTS
LP ACT"), and the Delaware Limited Liability Company Act, 6 DEL. C. Sections
18-101 et seq. (the "DELAWARE LLC ACT"), each permits a limited partnership
formed and existing under the Massachusetts LP Act to merge with and into a
limited liability company formed and existing under the Delaware LLC Act;
WHEREAS, the members of the Company have authorized and the
general partners and limited partners of the Partnership have duly authorized
the merger of the Partnership with and into the Company pursuant to the terms of
this Agreement; and
WHEREAS, the holders of limited partnership interests of Fund
V have approved an amendment to the Amended Agreement of Limited Partnership,
dated July 27, 1983, authorizing the Partnership to enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is agreed that, in
accordance with the applicable statutes of the State of Delaware and the
Commonwealth of Massachusetts, and subject to the conditions precedent contained
herein, the Partnership shall be at the Effective Time, merged with and into the
Company (the "MERGER"), with the Company to be the Surviving Entity. The mode of
carrying the Merger into effect shall be as follows:
<PAGE>
ARTICLE I
MERGER
At the Effective Time, the Partnership shall be merged with
and into the Company, the separate existence of the Partnership shall cease, the
Company shall continue in existence and the Merger shall in all respects have
the effects provided for by the Massachusetts LP Act and the Delaware LLC Act.
Prior to the Effective Time, the Company and the Partnership
shall take all such action as shall be necessary or appropriate in order to
effectuate the Merger. If at any time after the Effective Time, the Company
shall consider or be advised that any further assignments, conveyances or
assurances in law are necessary or desirable to carry out the provisions hereof,
the proper members, managers, officers or other agents of the Company, as
authorized agents and attorneys-in-fact for the Partnership (and acting in the
name of the Company or the Partnership), shall execute and deliver any and all
proper deeds, assignments, and assurances in law, and do all such additional
things necessary or proper to carry out the provisions hereof.
ARTICLE II
TERMS OF TRANSACTION
At the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, (i) the partnership interests in the
Partnership outstanding immediately prior to the Effective Time, held by (a) the
general partners of the Partnership (the "GENERAL PARTNERS"), (b) the "ORIGINAL
LIMITED PARTNERS" (as defined in the Partnership's Amended Agreement of Limited
Partnership, dated as of July 27, 1983, as amended from time to time (the
"PARTNERSHIP AGREEMENT")) and (c) the limited partners of the Partnership who
are, at the Effective Time, directly or indirectly controlling, controlled by or
under common control with the Company, Equity Resources Group Incorporated or
the General Partners ("the AFFILIATE LIMITED PARTNERS"), shall be canceled and
retired and shall cease to exist, (ii) the partnership interests of limited
partners of the Partnership who are not Affiliate Limited Partners (the
"UNAFFILIATED LIMITED PARTNERS") outstanding immediately prior to the Effective
Time shall be canceled and converted into and represent the right to receive in
exchange therefor $[_____] per "UNIT" (as defined in the Partnership Agreement),
without interest thereon, payable by the Surviving Entity to the holder of such
Unit (as reflected on the records of the Partnership at the Effective Time) upon
receipt by the Surviving Entity of the Proof of Ownership Form hereto, a
Substitute Form W-9 and any other additional documentation necessary or
desirable to complete the conversion of the Units required which the Surviving
Entity shall reasonably request from the holder, (iii) the limited liability
company interests held by the members of the Company outstanding immediately
prior to the Effective Time shall remain the outstanding limited liability
company interests of such members of the Company, and such members shall
continue as the members of the Surviving Entity.
<PAGE>
Neither the Surviving Entity nor any other party hereto shall
be liable to a holder of Units for any payments made to a public official
pursuant to applicable abandoned property laws. The Surviving Company shall be
entitled to deduct and withhold from the amounts otherwise payable to a holder
of Units pursuant to the Merger any taxes or other amounts as are required by
applicable law, including without limitation Sections 3406 and 1445 of the
Internal Revenue Code of 1986, as amended. To the extent that amounts are so
withheld by the Surviving Entity, they shall be treated for all purposes of this
Agreement as having been paid to the holder of the Units in respect of which
such deduction and withholding was made.
After the Effective Time, the transfer books of the
Partnership shall be closed and there shall be no further registration of
transfers on the records of the Partnership of the Units that were outstanding
immediately prior to the Effective Time. As of the Effective Time, each holder
of a Unit which was converted into the right to receive cash pursuant to Article
II hereof shall be deemed to have withdrawn as a limited partner and shall have
no further interest in the Partnership or the Surviving Entity or any
allocations or distributions of income, property or otherwise, other than the
right to receive the amount as provided in this Article II.
No appraisal rights shall be available to holders of Units in
connection with the Merger.
ARTICLE III
CERTIFICATE OF FORMATION AND
LIMITED LIABILITY COMPANY AGREEMENT
From and after the Effective Time, and until thereafter
amended as provided by law, the Certificate of Formation and Limited Liability
Company Agreement of the Company as in effect immediately prior to the Effective
Time shall be the Certificate of Formation and Limited Liability Company
Agreement of the Surviving Entity.
ARTICLE IV
MANAGERS AND OFFICERS
From and after the Effective Time, and until their successors
are duly elected or appointed, or until their earlier death, resignation or
removal, the managers and officers of the Surviving Entity shall be the same as
the managers and officers of the Company immediately prior to the Effective
Time.
<PAGE>
ARTICLE V
EFFECTIVE TIME
Certificates of merger evidencing the Merger ("CERTIFICATES OF
MERGER") substantially in the form of EXHIBIT A attached hereto shall be filed
by the General Partners and the Company with the Secretary of State of the State
of Delaware and the Secretary of State of the Commonwealth of Massachusetts
pursuant to the applicable requirements of the Delaware LLC Act and the
Massachusetts LP Act. The Merger shall become effective upon the later of the
filing of the Certificates of Merger with the Secretary of State of the
Commonwealth of Massachusetts and the Secretary of State of the State of
Delaware or such other time as shall be agreed by the parties and set forth in
the Certificates of Merger and in accordance with the Massachusetts LP Act and
the Delaware LLC Act (such time of effectiveness, the "EFFECTIVE TIME").
ARTICLE VI
TERMINATION
This Agreement may be terminated at any time prior to the
Effective Time:
(i) by mutual written consent of the Company and the
General Partners;
(ii) by either the Company or the General Partners if the
Merger shall not have been consummated by [_______________]; PROVIDED, HOWEVER,
that the right to terminate this Agreement pursuant to this clause (ii) of
Article VI shall not be available to any party whose failure to perform any of
its obligations under this Agreement has been the cause of, or resulted in, the
failure of the Merger to occur on or before such date.
In the event of a termination of this Agreement by either the
Company or the General Partners, as provided in this Article VI, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of the Company or the General Partners or their respective managers or
officers, except with respect to Article IX and this second paragraph of Article
VI. Nothing herein shall relieve any party of liability with respect to any
fraud or intentional breach by any party hereto of this Agreement.
<PAGE>
ARTICLE VII
AMENDMENTS
At any time prior to the Effective Time, the Company and the
General Partners may amend, modify or supplement this Agreement in such manner
as they jointly may determine; PROVIDED, HOWEVER, that, such amendment must be
executed in writing by all parties hereto and PROVIDED FURTHER, that no such
amendment, modification, or supplement shall reduce the amount or change the
type of consideration into which each Unit shall be converted upon consummation
of the Merger or alter or change any term of the Certificate of Formation or
Limited Liability Company Agreement of the Surviving Entity.
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party hereto to effect the
Merger are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(i) this Agreement shall have been approved and adopted
by the partners of the Partnership in accordance with the Massachusetts LP Act
and the Partnership Agreement;
(ii) this Agreement shall have been approved and adopted
by the members of the Company in accordance with the Delaware LLC Act and the
Limited Liability Company Agreement of the Company;
(iii) no statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, promulgated or enforced by
any governmental entity, and no action, suit, claim or legal, administrative or
arbitral proceeding or investigation shall be pending before any governmental
entity which seeks to prohibit, restrain, enjoin or restrict the consummation of
the transactions contemplated by this Agreement or which seeks to subject any
party to substantial damages as a result of the consummation of the transactions
contemplated by this Agreement;
(iv) each of the parties shall have obtained the consent,
approval or waiver of each non-governmental person whose consent, approval or
waiver shall be required in order for such party to consummate the transactions
contemplated by this Agreement;
(v) since June 30, 1999, no change or event shall have
occurred which has had or could reasonably be expected to result in a Material
Adverse Effect. For purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means
any change, event or effect (a) in, on or relating to the business of the
Partnership that is, or is
<PAGE>
reasonably likely to be, materially adverse to the business, assets (including
intangible assets), liabilities (contingent or otherwise), condition (financial
or otherwise), prospects or results of operations of the Partnership and its
subsidiaries taken as a whole, or (b) that may prevent or materially delay the
performance of this Agreement by the Company or the Partnership or the
consummation of the transactions contemplated hereby.
ARTICLE IX
GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware.
ARTICLE X
MISCELLANEOUS
This Agreement may be executed in counterparts, each of which
when so executed shall be deemed to be an original, and such counterparts shall
together constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement as of the day and year first above written.
KR5 ACQUISITION, L.L.C.
By: KRF Company, L.L.C.,
its managing member
By: The Krupp Family Limited Partnership-94,
its sole member
By:
----------------------------
Douglas Krupp
General Partner
KRUPP REALTY LIMITED PARTNERSHIP -V
By: The Krupp Corporation,
its general partner
By:
----------------------------
Douglas Krupp
Co-Chairman of the Board of Directors
<PAGE>
EXHIBIT A
CERTIFICATE OF MERGER
MERGING
KRUPP REALTY LIMITED PARTNERSHIP-V
INTO
KR5 ACQUISITION L.L.C.
The undersigned, being respectively, an authorized person of
KR5 Acquisition L.L.C., a Delaware limited liability company and the general
partners of Krupp Realty Limited Partnership-V, a Massachusetts limited
partnership, do hereby certify for and on behalf of such entities.
FIRST: The name and jurisdiction of formation of each of the
constituent entities in the merger are as follows:
<TABLE>
<CAPTION>
NAME JURISDICTION OF FORMATION
- ---- -------------------------
<S> <C>
Krupp Realty Limited Partnership-V Massachusetts
KR5 Acquisition L.L.C. Delaware
</TABLE>
SECOND: An Agreement and Plan of Merger between the parties to
the merger has been approved, adopted, certified, executed and/or acknowledged
by each of the constituent entities in accordance with the requirements of
Section 16A of the Massachusetts Revised Uniform Limited Partnership Act and
Section 18-209 of the Delaware Limited Liability Company Act.
THIRD: The name of the surviving limited liability company is
KR5 Acquisition L.L.C.
FOURTH: The merger shall be effective at 5:00 p.m. on the
date on which the latter of (a) the filing of this Certificate of Merger in the
Office of the Secretary of State of the State of Delaware and (b) the filing of
this Certificate of
<PAGE>
Merger in the Office of the Secretary of State of the Commonwealth of
Massachusetts, occurs.
FIFTH: The executed Agreement and Plan of Merger is on file
at a place of business of the surviving limited liability company. The address
of such place of business is: KR5 Acquisition L.L.C., One Beacon Street, Suite
1500, Boston, Massachusetts 02108.
SIXTH: A copy of the Agreement and Plan of Merger will be
furnished by the surviving limited liability company, on request and without
cost, to any partner of the constituent limited partnership and any member of
the constituent limited liability company.
SEVENTH: The surviving limited liability company shall accept
service of process at its offices at One Beacon Street, Suite 1500, Boston,
Massachusetts 02108.
IN WITNESS WHEREOF, the undersigned have duly executed this
Certificate of Merger as of _________________, 2000.
KR5 ACQUISITION L.L.C.
By:
---------------------------------
Name:
Title:
KRUPP REALTY LIMITED PARTNERSHIP V
By: The Krupp Corporation,
its general partner
By:
---------------------------------
Name: Douglas Krupp
Title: Co-chairman of the
Board of Directors
<PAGE>
and
By: The Krupp Company Limited Partnership II,
its general partner
By:
-----------------------------
Name: George Krupp
Title: a general partner
<PAGE>
EXHIBIT 99 (D)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1999
================================================================================
PRELIMINARY COPY
SCHEDULE 14A
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------------------
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
KRUPP REALTY LIMITED PARTNERSHIP - V (Name of
Registrant as Specified In Its Charter)
-------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Investor Limited Partnership Interests ("Units")
(2) Aggregate number of securities to which transaction applies:
31,214.5 Units
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: $1,200
(4) Proposed maximum aggregate value of transaction: $37,457,400
(5) Total fee paid: $7,491.48
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
================================================================================
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP - V
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
------------------------------------
Dear Limited Partner:
You are cordially invited to attend a Special Meeting of Unitholders of
Krupp Realty Limited Partnership"V ("Krupp Realty"), to be held on ,
2000 at 10:00 a.m. at .
At the special meeting you will be asked to consider and vote upon a
proposed merger, described in the accompanying proxy statement, of Krupp Realty
with and into KR5 Acquisition, L.L.C., a Delaware limited liability company that
is an affiliate of the general partners. Under the terms of the merger, KR5 is
offering you $1,200 per unit in cash. The general partners of Krupp Realty have
determined that the merger transaction is fair and in the interests of the
unitholders and therefore recommend that unitholders vote "FOR" the merger and
the amendment.
Among the factors considered by the general partners in making the
recommendation were the following:
* Cushman & Wakefield, an independent real estate consulting firm,
appraised the properties owned by Krupp Realty. This offer represents a $350
premium over the independent appraised value of $864 per unit determined based
primarily upon Cushman & Wakefield's appraisals; and
* ERP Operating Limited Partnership, a wholly owned subsidiary of
Equity Residential Properties, itself a $5.3 billion Chicago based Real Estate
Investment Trust UNAFFILIATED with Krupp Realty and the general partners, first
sought to acquire control of Krupp Realty in November 1999 through a tender
offer for the units at $675 per unit. KR5 in turn offered $864 per unit, and
through a subsequent bidding contest, the price offered to you increased from
$864 to $1,200 per unit.
Please read the entire proxy statement carefully, including the discussion
concerning the factors considered by the general partners in making their
recommendation.
The merger, the related merger agreement and the per unit price to be
paid to unitholders have not been reviewed independently. A vote in favor of the
merger will also constitute a vote in favor of an amendment to Krupp Realty's
partnership agreement allowing Krupp Realty to enter into the merger agreement
and complete the merger with KR5.
KR5 has entered into a joint venture agreement with investment funds
affiliated with Equity Resources Group, Inc., a Cambridge, Massachusetts real
estate concern that is not affiliated with ERP. Equity Resouces currently own
approximately 11% of the outstanding units and has agreed to vote in favor of
the merger and the amendment.
Your vote is important no matter how many units you own. Please date,
sign and promptly return the proxy card in the enclosed envelope or by facsimile
as instructed in this proxy statement. If you plan to attend the special meeting
in person, please check the appropriate box on the proxy card. You may change
your vote in person, even if you have previously sent in a proxy.
Any signed proxy cards that are returned without a choice indicated on
them will be voted "FOR" the transaction. The proxy statement explains in detail
the terms of the proposed merger and the related transactions.
<PAGE>
This proxy statement explains in detail the terms of the proposed
merger and the related transactions. The date of this proxy statement is
and was first mailed to unitholders of Krupp Realty on .
KRUPP REALTY LIMITED PARTNERSHIP - V
The Krupp Corporation
GENERAL PARTNER
By:
-------------------------------
Douglas Krupp, CO-CHAIRMAN OF
THE BOARD OF DIRECTORS
Boston, Massachusetts
, 2000
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION, NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP - V
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
------------------------------------
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD , 2000
------------------------------------
To Our Unitholders:
We are holding a special meeting of the holders of investor limited
partnership units of Krupp Realty Limited Partnership - V on , 2000,
at , local time, at , for the following purposes:
- To consider and vote on a proposal to approve a merger agreement
under which KR5 Acquisition, L.L.C., a newly-formed company, will
merge with and into Krupp Realty. Each Krupp Realty unitholder
other than certain unitholders that have agreed to reinvest their
units in KR5 Acquisition will receive $1,200 in cash for each
outstanding investor limited partnership unit that the unitholder
owns immediately before the effective time of the merger. A vote in
favor of the merger agreement will also constitute a vote in favor
of an amendment to Krupp Realty's partnership agreement allowing
Krupp Realty to enter into the merger agreement and complete the
merger with KR5 Acquisition. Copies of the merger agreement and
amendment are attached as Appendices A and B, respectively, and are
described in the accompanying proxy statement.
- To consider and act upon such other matters as may properly come
before the special meeting or any adjournment of the meeting.
Only unitholders of Krupp Realty's investor limited partnership
interests at the close of business on the record date, , 2000, will
be entitled to notice of, and to vote at, the special meeting or any
adjournment of the meeting.
KRUPP REALTY LIMITED PARTNERSHIP - V
The Krupp Corporation
GENERAL PARTNER
By:
---------------------
Scott D. Spelfogel
SECRETARY
Boston, Massachusetts
, 2000
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q. WHAT ARE UNITHOLDERS BEING ASKED TO VOTE UPON?
A. Unitholders are being asked to approve a merger agreement and
related amendment to Krupp Realty Limited Partnership-V's
partnership agreement which allows for the merger of KR5
Acquisition, L.L.C. into Krupp Realty. If the unitholders approve
the transactions, Krupp Realty will no longer be a publicly held
limited partnership.
Q. WHAT WILL UNITHOLDERS RECEIVE IF THE MERGER AGREEMENT IS APPROVED?
A. Unitholders will receive $1,200 in cash for each investor limited
partnership unit of Krupp Realty that they own. Unitholders will
then no longer hold any interest in Krupp Realty.
Q. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A. By , 2000.
Q. WHAT DO UNITHOLDERS NEED TO DO NOW?
A. After carefully reading and considering the information contained in
this document, unitholders should indicate on their proxy card how
they want to vote and mail their signed and dated proxy card in the
enclosed return envelope as soon as possible. Unitholders may also
fax their completed proxy cards to Krupp Funds Group Limited
Partnership at (617) 423-8919.
Q. WHAT SHOULD UNITHOLDERS DO IF THEY WANT TO CHANGE THEIR VOTE?
A. Just send in a later-dated, signed voting form to Krupp Funds Group
Limited Partnership before the special meeting or attend the meeting
in person and vote.
Q. WHAT IF UNITHOLDERS PLAN TO ATTEND THE SPECIAL MEETING IN PERSON?
A. Unitholders should send in their proxy card in any event.
Unitholders may request a ticket for admission to the special
meeting by marking the appropriate box on the proxy card and return
it no later than , 2000.
WHO CAN HELP ANSWER YOUR QUESTIONS?
After reading through this proxy statement, if you have more questions
about the merger, you should contact:
KRUPP FUNDS GROUP LIMITED PARTNERSHIP
One Beacon Street
Suite 1500
Boston, Massachusetts 02108
Attention: Investor Communications
Phone: 1-800-25-KRUPP
(1-800-255-7877)
Fax: (617) 423-8919
1
<PAGE>
SUMMARY
This summary highlights selected information included in this proxy
statement, and is qualified by reference to the detailed information appearing
elsewhere in this proxy statement and the attached appendices. A copy of the
merger agreement and the amendment to Krupp Realty's partnership agreement are
attached as Appendices A and B, respectively. Much of the information contained
in this proxy statement is not covered by the summary. Therefore, please
carefully review all of the information provided in this proxy statement.
PARTIES TO THE TRANSACTION
THE PARTNERSHIP
Krupp Realty Limited Partnership - V, a Massachusetts limited
partnership (the "Partnership" or "Krupp Realty"), was formed in Massachusetts
in 1983 to engage in real estate activities, including the ownership, operation
and management of residential real estate and other real estate related assets.
The Partnership currently owns two multi-family apartment complexes, one located
in Chicago, Illinois (the "Park Place Tower Apartments") and the other in
Cockeysville, Maryland (the "Century II Apartments") (collectively, the
"Properties").
The principal executive offices and place of business of the
Partnership are located at One Beacon Street, Suite 1500, Boston, Massachusetts
02108, and its telephone number is (617) 523-7722.
THE GENERAL PARTNERS
The Krupp Corporation, a Massachusetts corporation ("Krupp Corp"), and
The Krupp Company Limited Partnership-II, a Massachusetts limited partnership
("Krupp LP") (collectively, the "General Partners"), are the general partners of
the Partnership. The principal business of each of Krupp Corp and Krupp LP is
acting as a general partner of limited partnerships and managing real estate.
The principal executive offices and place of business of Krupp Corp and
Krupp LP are located at One Beacon Street, Suite 1500, Boston, Massachusetts
02108, and their telephone number is (617) 523-7722.
THE PURCHASER
The proposed purchaser of the Partnership is KR5 Acquisition, L.L.C., a
Delaware limited liability company (the "Purchaser"), formed on November 24,
1999, by KRF Company, L.L.C., a Massachusetts limited liability company ("KRF
Company"). KRF Company is the sole managing member of the Purchaser and an
affiliate of the General Partners.
The Purchaser was formed for the purpose of merging with the
Partnership, and after the completion of the merger, its primary business will
be operating, managing and otherwise dealing with the Properties.
Before completing the merger, investment funds affiliated with
Equity Resources Group Incorporated (collectively, "Equity Resources") will
contribute the investor limited partnership units ("Units") held by them to
the Purchaser in exchange for an approximately 25% interest in the Purchaser,
assuming the Properties are refinanced as described below under "Special
Factors--Financing of the Merger-- Source of Funds." Consequently, at the
time of and following the merger, KRF Company will own approximately 75% of
the Purchaser.
The principal executive offices and place of business of the Purchaser
is at One Beacon Street, Suite 1500, Boston, Massachusetts 02108, and its
telephone number is (617) 523-7722.
2
<PAGE>
DATE, TIME AND PLACE OF SPECIAL MEETING
The Partnership will hold a special meeting of the holders of the Units
("Unitholders") on , 2000 at , local time, at .
PURPOSE OF THE SPECIAL MEETING
Unitholders of the Partnership will be asked to vote on the merger and
an amendment to Krupp Realty's partnership agreement to permit the Partnership
to enter the merger agreement and complete the merger.
WHAT UNITHOLDERS WILL RECEIVE IN THE MERGER
In the merger, Unitholders will receive $1,200 for each Unit they own.
This price is intended to provide Unitholders with the opportunity to liquidate
their investment in the Partnership for cash at a fair price. The per Unit
merger price will not be reduced by distributions declared or made by the
Partnership to Unitholders.
Unitholders will receive a $20 per Unit distribution from the
Partnership in February 2000.
THE AMENDMENT
The amendment is necessary because the partnership agreement currently
prohibits the General Partners from entering into agreements or transactions on
behalf of the Partnership with affiliates of the General Partners, except as
expressly permitted. Because the Purchaser is an affiliate of the General
Partners, the Unitholders are being asked to consider and consent to an
amendment to the partnership agreement to allow the Partnership to enter into
the merger agreement and complete the merger. Failure to approve the amendment
would preclude the completion of the merger even if the merger were approved by
the Unitholders; consequently, a vote for the merger will automatically
constitute a vote in favor of the amendment.
VOTE REQUIRED
The affirmative vote of the holders of a majority of Units is necessary
to approve the merger and the related approval of the amendment. Equity
Resources, which holds approximately 11% of the Partnership's outstanding Units,
has agreed to vote for the approval of the merger and the amendment to the
Partnership's partnership agreement. This means that Unitholders representing an
additional 39% of the Units must vote in favor of the proposal to ensure its
approval. See "Related Agreements."
INDEPENDENT APPRAISALS OF PROPERTIES
Cushman & Wakefield has appraised the Properties and issued its reports
related to the appraisals, which are described in this proxy statement under
"Special Factors-- Independent Appraisals."
PURPOSE OF AND REASONS FOR THE MERGER
The General Partners considered a number of factors in approving the
merger agreement and recommending it to Unitholders, including:
- the $1,200 per Unit merger price has been established as a
result of several competing offers for the Units between the
Purchaser and a third-party bidder;
- providing liquidity to Unitholders;
- the elimination of uncertainties relating to the price and
timing of any disposition of the Properties by the Partnership;
- the elimination of the risks associated with the future costs
that might be required to maintain the Properties and the
incurrence of additional indebtedness related to such
maintenance; and
- the elimination of the annual filing and reporting of tax
information by the Unitholders.
3
<PAGE>
The primary potential disadvantages of the merger to the unaffiliated
Unitholders include:
- a potentially lower price than what could be realized from the sale
of the Properties to a third party; and
- a potential loss of benefits resulting from any improvements in
economic and market conditions.
See "Special Factors--Fairness of the Merger."
FAIRNESS OF THE MERGER; CONFLICTS OF INTEREST
The General Partners believe that the merger is fair and in the best
interest of the Unitholders and recommends that Unitholders vote for the
approval of the merger. However, the General Partners have economic and other
interests that are in conflict with the interests of the unaffiliated
Unitholders. No independent committee or independent third party has reviewed or
approved the merger, the related merger agreement or the per Unit price to be
paid to Unitholders.
FINANCING OF THE MERGER
The Purchaser expects to finance the merger through capital
contributions from an affiliate and the anticipated refinancing of mortgage
indebtedness of the Partnership. See "Special Factors--Financing of the
Merger--Source of Funds."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Sales of Units under the merger will be taxable transactions for federal
income tax purposes. On a sale of Units under the merger, Unitholders will
recognize gain or loss equal to the difference between:
- their "amount realized" on the sale;
and
- their adjusted tax basis in the Units
sold.
Unitholders "amount realized" will equal the sum of:
- the amount of cash Unitholders
receive; and
- the amount of Partnership
liabilities allocable to their Units.
Unitholders' adjusted tax basis in the Units sold will depend upon the facts of
their situation. The character of any gain or loss Unitholders recognize may be
partially capital and partially ordinary.
THE PRECISE TAX CONSEQUENCES OF THE MERGER TO UNITHOLDERS WILL DEPEND UPON THE
FACTS OF THEIR SITUATION. UNITHOLDERS SHOULD CONSULT THEIR TAX ADVISOR.
MARKET INFORMATION
On December 23, 1999, ERP Operating Partnership, an Illinois limited
partnership ("ERP"), made a revised tender offer to acquire all outstanding
Units at a price of $1,100 per Unit less Partnership distributions. Following
this offer, the Purchaser established a merger price of $1,200 per Unit.
There is otherwise no active trading market in the Units and there have been
no significant transactions between private parties that would establish an
accurate market price for the Units.
According to The Partnership Spectrum, an independent third-party industry
publication, for the eight months ended September 30, 1999, a total of 100 Units
traded at per Unit prices between $575 and $651 with a weighted average of $624
per Unit. For the period between October 1, 1999 and November 30, 1999, a total
of 50 Units traded at per Unit prices between $652 and $655.83 with a weighted
average of
4
<PAGE>
$653.80 per Unit. The General Partners do not, however, know if this information
is accurate or complete and have not independently confirmed these trading
prices.
See "Special Factors--Determination of Merger Price--Recent Unit Sales;
Tender Offer."
RIGHTS OF APPRAISAL
Neither Massachusetts law nor the partnership agreement grants Unitholders
appraisal rights, without regard to how a Unitholder votes (or abstains) at the
special meeting.
FORWARD-LOOKING STATEMENTS
Statements in this proxy statement are or may be forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from
those expressed in these statements depending on a variety of factors.
Unitholders should carefully review all information, including the financial
statements and the notes to the financial statements, included in this document.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected financial information
regarding the Partnership's results of operations and financial position.
This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information
included or incorporated by reference in this document. The historical
financial data as of and for the quarters ended September 30, 1999 and 1998
have been derived from the unaudited financial statements included in the
Partnership's Quarterly Report on Form 10-Q for the quarters ended
September 30, 1999 and 1998, respectively. The historical financial data for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been derived
from audited financial statements included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1998. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
SEPTEMBER 30 YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------------
Unaudited
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues.................. 11,763,548 11,277,451 $15,100,395 $14,523,598 $13,660,261 $13,839,760
Income (loss) before gain from
capital transactions............ 1,574,044 1,012,231 692,911 (304,383) (119,075) (795,377)
Gain on sale of property........ -- -- -- -- -- 3,265,789
Income (loss) before extraordinary
loss............................ 1,574,044 1,012,231 692,911 (304,383) (119,075) 2,470,412
Extraordinary loss.............. -- -- -- (288,156) -- (93,215)
Net income (loss)............... 1,574,044 1,012,231 692,911 (592,539) (119,075) 2,377,197
Net income (loss) allocated to:
Investor Limited Partners....... 1,463,861 941,375 644,407 (586,614) (117,884) 2,353,425
Per Unit........................ 41.59 26.74 18.31 (16.67) (3.35) 66.86
Original Limited Partner........ 94,443 60,734 41,575 -- -- --
Net income (loss) allocated to:
General partners................ 15,740 10,122 6,929 (5,925) (1,191) 23,772
Total assets.................... 34,014,347 35,077,699 34,721,709 35,457,032 37,162,269 38,555,732
Long-term obligations........... 40,752,418 41,387,711 41,235,548 41,848,811 41,700,453 42,273,669
YEAR ENDED DECEMBER 31,
-----------------------
1994
----
Total revenues.................. $13,652,413
Income (loss) before gain from
capital transactions............ (1,450,214)
Gain on sale of property........ --
Income (loss) before extraordinary
loss............................ (1,450,214)
Extraordinary loss.............. --
Net income (loss)............... (1,450,214)
Net income (loss) allocated to:
Investor Limited Partners....... (1,435,712)
Per Unit........................ (40.79)
Original Limited Partner........ --
Net income (loss) allocated to:
General partners................ (14,502)
Total assets.................... 42,604,180
Long-term obligations........... 46,805,538
DISTRIBUTIONS:
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Investor Limited Partners ...... 1,408,000 1,408,000 1,408,000 1,408,000 704,000 -- --
Per Unit........................ 40.00 40.00 40.00 40.00 20.00 -- --
Original Limited Partner........ 90,838 90,839 90,839 90,839 45,419 -- --
General partners................ 15,140 15,140 15,140 15,140 7,570 -- --
</TABLE>
The selected financial data results for the periods presented are not
comparable due to the sale of the Marine Terrace multi-family apartment complex
on July 19, 1995.
The per Unit distributions for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 were $40.00, $40.00, $20.00, $0 and $0, respectively, none
of which represented a return of capital for tax purposes.
The historical performance of the Partnership is not necessarily
indicative of its future operations.
6
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER; PURPOSE OF THE TRANSACTION
The Partnership was formed in 1983. In that year 35,200 Units were
offered to the public at a price of $1,000 per Unit. The Partnership initially
owned four multi-family apartment complexes and a joint venture interest in a
fifth project. In 1992, the Partnership sold one apartment complex as well as
the joint venture. In 1995, the Partnership sold another apartment complex.
The General Partners believe that most Unitholders have held their
investment in the Partnership for longer than their anticipated holding
period. While the Partnership currently provides investors with a $40 annual
distribution, other investment opportunities may offer a rate of return that
is as good or better than that offered by the Partnership.
The Units are not listed or traded on an exchange or quoted on the
National Association of Securities Dealers Automated Quotation System, and no
active trading market in the Units has developed. Because of the limited trading
market for the Units, Unitholders who wish to sell Units may have difficulty
doing so, and from time to time, the General Partners have been asked by
Unitholders to provide a means of disposing of their Units at a fair price.
In the spring of 1999, affiliates of the General Partners considered
the possibility of acquiring the outstanding Units, thereby providing
Unitholders with the opportunity to liquidate their investment in the
Partnership for cash. On July 8, 1999, Cushman & Wakefield was retained by the
Partnership to appraise the fair market value of the Properties, the principal
assets of the Partnership. The Cushman & Wakefield appraisals were completed in
August 1999.
In September 1999, representatives of the Purchaser contacted
representatives of Equity Resources, the holders of approximately 11% of the
outstanding Units, regarding the possibility of forming a joint venture to
acquire the remaining outstanding Units. Equity Resources was approached because
of its considerable experience in evaluating the benefits and risks associated
with continued ownership of the Properties.
During October and November 1999, representatives of the Purchaser and
Equity Resources negotiated the terms of their joint venture, and on December 2,
1999, executed an investment agreement setting forth the terms of their
agreements regarding the merger and the operation of the Properties following
the merger. See "Related Agreements." In connection with the execution of these
agreements, Equity Resources agreed to vote in favor of the merger and the
amendment to Krupp Realty's partnership agreement allowing the Partnership to
complete the merger with the Purchaser. Equity Resources also agreed to reinvest
their outstanding Units as a capital contribution to the Purchaser. The
Purchaser has contacted certain other Unitholders who are engaged in the
business of real estate management and development regarding their interest in
reinvesting Units in the Purchaser on the same terms as Equity Resources, but
has reached no understandings or agreements.
On November 23, 1999, ERP Operating Limited Partnership, an Illinois
limited partnership ("ERP"), made a third-party tender offer to acquire
two-thirds of the outstanding Units at $675 per Unit less distributions. ERP is
an affiliate of Equity Residential Properties Trust, the largest REIT
apartment owner in the country, which owns 1,062 properties in 35 states. On
December 2, 1999, in response to ERP's offer, the Purchaser made a proposal
to acquire all of the Units held by unaffiliated Unitholders at a price of
$864 per Unit. The Purchaser based the $864 per Unit price on an appraisal of
the Properties prepared by Cushman & Wakefield, which determined the
aggregate value of the Properties to be $70,550,000. In establishing this
price, the
7
<PAGE>
Purchaser (a) added to that amount the remaining assets of the Partnership as of
September 30, 1999, principally consisting of cash, cash equivalents and prepaid
assets, (b) decreased such amount by the liabilities of the Partnership as of
September 30, 1999, principally consisting of the approximately $41.4 million of
mortgage indebtedness on the Properties and (c) deducted mortgage debt repayment
costs of approximately $1.6 million which are expected to be incurred in
connection with the refinancing of the Properties.
In response to a third-party tender offer made by ERP on December
15, 1999 to acquire two-thirds of the outstanding Units at a price of $875
per Unit less Partnership distributions, the Purchaser increased its merger
price to Unitholders to $1,000 per Unit.
Following a revised tender offer made by ERP on December 23, 1999 to
acquire all of the outstanding Units at a price of $1,100 per Unit less
Partnership distributions, the Purchaser again increased its merger price to
$1,200 per Unit.
The purpose of the merger is for the Purchaser to acquire all of the
outstanding Units, while providing Unitholders with the opportunity to liquidate
their investment in the Partnership for cash at a fair price.
ALTERNATIVES TO THE MERGER
The General Partners considered two primary alternatives to the merger:
(1) the continued ownership of the Properties by the Partnership and (2) the
sale of one or both of the properties by the Partnership and the distribution of
the net proceeds of the sales to the Unitholders.
CONTINUATION OF THE PARTNERSHIP
The Properties owned by the Partnership were constructed in 1973, in
the case of the Park Place Tower Apartments, and 1969, in the case of the
Century II Apartments. Except for normal and necessary capital improvements,
neither of the Properties have undergone significant renovation. As residential
properties age, they incur increasing maintenance costs and may require
extensive capital improvements to maintain competitive with other properties
located in the marketplace in which the properties are located. These capital
improvements may require the investment of additional equity capital, additional
borrowings or the reduction or discontinuation of future cash distributions
from the Partnership. The Partnership has incurred an average of $1,770,000
of capital improvement expenditures during the last five years. Although
there are no significant capital expenditures currently required for the
Properties, other than for normal and necessary capital improvements, the
Partnership may be required to invest additional capital in the future to
maintain competitively the Properties.
In addition, the Partnership's investment in the Properties is subject
to competition from newly constructed or renovated residential properties
located in the markets served by the Properties.
Finally, as noted above, the General Partners believe that the duration
of most Unitholders' investments in the Properties has exceeded their initial
estimated holding periods, and that providing a means for Unitholders to
liquidate their investment is consistent with the desire of many of the
Unitholders, particularly in light of the limited and sporadic secondary market
for the Units.
8
<PAGE>
SALE OF THE PROPERTIES
The General Partners believe that a sale of the Properties by the
Partnership through a solicitation of third-party bids or an auction would
not necessarily result in a more favorable transaction for Unitholders, and
could result in Unitholders realizing less for their Units than in the
merger. A third-party transaction could require the payment of transaction
costs far in excess of costs incurred by the Partnership in the merger, all
of which would be borne by the Partnership, and these costs would reduce the
amount received by each Unitholder in respect of his or her Units. For
example, a sale of the Properties would entitle the General Partners to a
brokerage fee in an amount equal to 3% of the sales price of the Properties.
Moreover, the Partnership would likely be required to retain a portion of the
proceeds of a third-party sale to cover the expenses related to ongoing
administration of the Partnership and to fund possible post-closing
liabilities to a third-party purchaser. Under the terms of the proposed
merger agreement, the Partnership will not make any representations regarding
the Properties, and following the completion of the merger, Unitholders'
proceeds will not be reduced by claims relating to contingent liabilities of
the Properties.
Although the General Partners do not believe that the solicitation of
third-party bids would necessarily result in a more favorable transaction for
Unitholders, there is no assurance that Unitholders would not ultimately receive
more for their Units as a result of the sale of the Properties to a third party
who was able to consummate this type of transaction.
TENDER OFFER
From time to time, Unitholders have been approached by investors
seeking to acquire Units. Based on analyses of the proposals and general
market information, the General Partners have concluded that these offers are
generally made at prices that are significantly less than the fair value per
Unit. For instance, in the tender offer made by ERP, Unitholders were offered
a price of $1,100 per Unit, 10.9% less than the merger price and distribution
payment offered by the Purchaser. The General Partners recommended that
Unitholders decline this offer.
FAIRNESS OF THE MERGER
THE GENERAL PARTNERS RECOMMEND THAT UNITHOLDERS VOTE FOR THE MERGER AND
THE RELATED TRANSACTIONS. Although the amount to be paid to Unitholders
following the merger is not the result of arm's-length negotiations between the
Purchaser and the Partnership and is subject to conflicts of interest, the
General Partners believe that the per Unit merger price and the other terms of
the merger are fair to Unitholders. Therefore, the General Partners recommend
that Unitholders vote "FOR" the merger. The General Partners based their
conclusion on the following:
- The merger price exceeds by approximately 38.8% the appraised
value of the Properties as determined by Cushman & Wakefield,
an independent, nationally recognized real estate valuation
firm.
- The fact that the $1,200 per Unit merger price (after taking
into account the $20 per Unit distribution payment) is $120
higher than the $1,100 per Unit price offered by a third party
in a recent tender offer, as well as the purchase prices
Unitholders realized on the sale of their Units in recent,
privately negotiated transactions as reported by an
independent, third-party source, which ranged from $571 to
$655 per Unit. See "--Determination of Merger Price--Recent
Unit Sales; Tender Offer."
9
<PAGE>
- The merger will eliminate the uncertainties relating to the
amount and timing of any liquidation of the Partnership
following the sale of the Properties, which will depend upon
the then-current markets for the Properties, as well as upon
amounts that would be required to be reserved to satisfy
contingent liabilities associated with these sales.
Furthermore, by transferring their Units for cash now,
Unitholders will have the opportunity to redeploy investment
assets into alternative and potentially more liquid
investments.
- Because there is no formal trading market for the Units, they
can be difficult to sell. The merger provides Unitholders with
the opportunity to immediately sell their Units for what the
General Partners believe is a fair price without the
commissions or broker's fee of a secondary market sale and
without any transfer fees.
- The merger price will be paid in cash, and will not be reduced
by the amount of any distribution made or declared by the
Partnership before completing the merger.
- Because the transaction is structured as a merger, cash
proceeds will be paid directly to Unitholders by the Purchaser
and all of the assets and liabilities of the Partnership will
be transferred to the Purchaser immediately upon the merger.
As a result, the Partnership is not required to continue
operations or to escrow funds to fund possible post-closing
liabilities. A sale of the Properties, as opposed to a merger,
would require the Partnership to continue operating for an
uncertain time period before distributing the cash
consideration received to the Unitholders. Additionally, it
would be difficult to predict with any precision the amount
ultimately realized by Unitholders, as the amount of
post-closing liabilities is difficult to determine.
- Although the Properties are in good condition, they are now
more than 27 years old and may require refurbishing in the
future.
- The Purchaser's belief that changing market conditions,
including as a result of new construction or renovations to
existing properties competing with the Properties, may
adversely affect the future cash flows generated by the
Properties unless capital improvements are effected.
- The merger is not subject to a financing contingency, which
increases the likelihood that Unitholders who desire to
realize liquidity will be able to do so.
- As a result of the Purchaser's affiliation with the General
Partners, the Purchaser is familiar with the condition of the
Properties and thus is willing to assume all of the assets and
liabilities of the Partnership on terms and conditions that
would be extremely uncommon for a third-party purchaser,
including the absence of representations and warranties about
the Properties, the absence of any indemnification protection
and the lack of any financing contingency. If the Partnership
were to sell the Properties to a third party, a significant
dollar amount of the proceeds would have to be retained to
fund contingent liabilities, thereby delaying Unitholders'
ability to realize the full value of the sale.
10
<PAGE>
- The Merger is subject to the approval of a majority in
interest of the Unitholders.
In determining the fairness of the merger price to Unitholders, and
related terms to Unitholders, the General Partners did not find it practicable
to quantify or otherwise attach relative weights to the specific factors
described above.
DISADVANTAGES AND RISKS ASSOCIATED WITH THE MERGER
Unitholders should note that the affiliates of the General Partners may
benefit from the merger. This is most likely to occur if the Properties are
ultimately sold by the Purchaser for an amount greater than the per Unit price
being offered to Unitholders. The General Partners considered the following
potential disadvantages and risks to the Unitholders if the merger is completed:
- Continued ownership of the Units could be more economically
beneficial to Unitholders than the merger if the value of the
Properties were to increase.
- A more favorable transaction might be available from a
third-party purchaser of the Properties now or in the future.
- No independent committee or entity negotiated, reviewed or
evaluated the merger consideration offered by the Purchaser.
- Unitholders will not be offered appraisal rights or
dissenters' rights in connection with the merger.
- Unitholders may incur tax liabilities as a result of the
merger.
CONFLICTS OF INTEREST
The General Partners faced conflicts of interest with respect to the
merger that may be in conflict with the economic interest of the Unitholders.
Specifically, there is a conflict between the desire of the Purchaser, an
affiliate of the General Partner, to pay unaffiliated Unitholders a lower price
in exchange for Units cancelled in the merger and the desire of unaffiliated
Unitholders to receive a higher price in exchange for their Units.
The General Partners also have an indirect economic interest in
completing the merger, as opposed to a sale or liquidation of the Partnership's
assets to a third party, because a third-party sale or liquidation would
eliminate (a) the distributions received by the General Partners in respect of
their indirect interests in the Properties and (b) the fees paid to their
affiliates for services provided to the Partnership.
To mitigate these conflicts of interest, the General Partners have
relied upon independent appraisals of the Properties prepared by Cushman &
Wakefield. In addition, a majority of the unaffiliated Unitholders must approve
the merger and the amendment to Krupp Realty's partnership agreement before the
merger can be implemented. Although the conflicts of interest cannot be
eliminated, the Purchaser and the General Partners believe that the steps taken
and to be taken constitute sufficient procedural safeguards for Unitholders'
interests and that the proposed transaction is procedurally fair.
11
<PAGE>
Unitholders were not independently represented in the negotiation of
the merger agreement and no independent person or committee has evaluated or
rendered any opinion with respect to the fairness of the per Unit price to be
paid to Unitholders.
INDEPENDENT APPRAISALS
Copies of the appraisals of the Century II Apartments and the Park
Place Tower Apartments have been filed as exhibits to the Statement on
Schedule 13E-3 of the Purchaser and its affiliates, of which this proxy
statement is a part. See "Where You Can Find More Information."
EXPERIENCE OF CUSHMAN & WAKEFIELD
Cushman & Wakefield is part of a national network of affiliated full
service real estate companies providing brokerage, management, consulting and
valuation services in the United States (the "C&W Affiliated Companies"). The
clients of the C&W Affiliated Companies include major commercial and investment
banks, Fortune 500 corporations, pension funds, advisory firms and government
agencies. The Valuation Advisory Services Group of the C&W Affiliated Companies
has 19 branch offices located in various geographic regions of the United
States. This large network of professionals provides local expertise in key
markets and subsidiary-regions and enables Cushman & Wakefield to effectively
handle broad-based, multi-property assignments. Furthermore, the C&W Affiliated
Companies valuation network provides a large national database of market
information and ensures a consistent methodology for each property valuation.
The General Partners considered several appraisal firms but ultimately chose
Cushman & Wakefield based upon their expertise and industry leadership.
APPRAISAL
Based on its complete appraisal, as defined by the Uniform Standards of
Professional Appraisal Practice, Cushman & Wakefield determined that, subject to
the assumptions and limitation described below and disregarding in each case the
existing financing, the "as is" market value of the Park Place Tower Apartments
and the Century II Apartments as of the date of the appraisals was $48,250,000
and $22,300,000, respectively. The appraisals assume a standard marketing and
exposure time of one year. The summary set forth below does not purport to be a
complete description of the analyses employed or the assumptions made by Cushman
& Wakefield in preparing the appraisals. The Partnership imposed no conditions
or limitations on the scope of Cushman & Wakefield's investigation or the
methods and procedures to be followed in preparing the appraisals.
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<PAGE>
FACTORS CONSIDERED
In preparing its valuation of the Properties, Cushman & Wakefield:
- conducted a physical inspection of each Property and site
improvements;
- reviewed the leasing policy, concessions and history of recent
occupancy with each Property's manager;
- reviewed a history of income and expenses and budget forecasts for
1999;
- conducted market research of occupancies, asking rents, concessions
and operating expenses at competing properties;
- conducted market inquiries into and otherwise researched sales of
similar properties;
- prepared an estimate of stabilized income and expenses; and
- considered the highest and best use of each site.
SUMMARY OF CUSHMAN & WAKEFIELD'S METHODOLOGY AND APPROACHES TO VALUE
SALE COMPARISON APPROACH. The sale comparison approach uses analysis
techniques and sales of comparable improved properties to derive units of
comparison that are then used to indicate a value for the subject property.
Cushman & Wakefield conducted a search for sales of comparable improved
properties. In the case of the Park Place Tower Apartments, in determining units
of comparisons, Cushman & Wakefield placed considerable emphasis and
understanding on the sales of properties Cushman & Wakefield had previously
appraised. The primary units of comparison used in this analysis were sales
price per unit, capitalization rates and gross income multiplier. In addition,
the appraisal of the Park Place Tower Apartments utilized a comparison of value
per square foot.
INCOME APPROACH. The purpose of the income approach is to value an
income-producing property by analyzing likely future income and expenses to the
property.
Cushman & Wakefield employed a direct capitalization analysis on each
of the Properties by dividing a forecast of net operating income ("NOI") by an
appropriate capitalization rate, which Cushman & Wakefield believed to be 9.75%
for the Century II Apartments and 9.25% for the Park Place Tower Apartments.
Capitalization rates are extracted from comparable market sales as an indication
of value. Cushman & Wakefield relied on a variety of sources as the basis of the
forecast of NOI, including an analysis of each Property's income and expenses
based on historical figures and comparable projects, as well as the calculation
of a stabilized vacancy rate and collection loss of 7.0% for the Century II
Apartments and 5% for Park Place Tower Apartments. In addition, Cushman &
Wakefield deducted a replacement reserve when calculating the NOI for the Park
Place Tower Apartments and the value of deferred maintenance from the overall
value of the Century II Apartments.
Cushman & Wakefield also utilized a discounted cash flow method to
analyze the value of the Century II Apartments. Under this method, anticipated
future cash flow and a reversionary
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value are discounted at an appropriate rate of return to arrive at an estimate
of present value. The assumptions employed by Cushman & Wakefield to determine
the value of the Century II Apartments under the discount cash flow method
included: a terminal capitalization rate of 10%, a discount rate of 12%, a 3%
cost of sale, a holding period of ten years, a market rent growth rate and an
expense growth rate of 3%, and a vacancy rate and collection loss of 7%. Cushman
& Wakefield did not utilize this method to value the Park Place Tower
Apartments, as it believed that the direct capitalization rate was the method
more likely to be used by potential investors in properties with characteristics
similar to that property.
RECONCILIATION AND CONCLUSIONS OF APPRAISAL. The final step in the
appraisal process was to reconcile the sale comparison approach and the income
approach values to arrive at a final value conclusion. The primary consideration
to reconcile the two approaches are the reliability of the data used and the
applicability of each method for valuing a particular property. After
reconciling the various factors, Cushman & Wakefield arrived at a final
appraised value for the Park Place Tower Apartments of $48,250,000 and a final
appraised value for the Century II Apartments of $22,300,000. The appraisal
valued the Properties at $70,550,000 in the aggregate, disregarding existing
financing secured by the Properties. For a description of how the appraisal was
utilized to determine the fairness of the merger, see "-- Determination of the
Merger Price."
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF CUSHMAN & WAKEFIELD'S
VALUATION
In preparing the appraisals, Cushman & Wakefield relied, without
independent verification, on the accuracy and completeness of all information
supplied or otherwise made available to it by or on behalf of the Partnership,
including rent rolls, histories of income and expenses and lease summaries. In
arriving at the appraisals, Cushman & Wakefield assumed:
- good and marketable title to the Properties;
- each Property was free and clear of all liens, unless
otherwise stated;
- responsible ownership and competent management of each
Property;
- no hidden or unapparent conditions related to either Property,
its structure and its subsoil;
- full compliance with zoning and environmental laws;
- possession of all necessary licenses, certificates of
occupancy and other governmental consents and that the renewal
of these items are possible;
- the soundness of the structures on each Property;
- the functionality of mechanical equipment and plumbing and
electrical components located and utilized by each Property;
- no potentially hazardous or toxic materials were utilized in
the construction or maintenance of the Properties nor located
at or about the Properties; and
- compliance with the Americans with Disabilities Act of 1990.
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Further, in its valuation of the Park Place Tower Apartments, Cushman &
Wakefield was not provided with building plans for the site improvements and,
accordingly, building sizes relating to gross and net rentable area were
compiled from other documentation furnished by the Partnership. Cushman &
Wakefield did not conduct a legal survey of the Properties or review actual
tenant leases. To the knowledge of the General Partners, there have been no
material changes in the Partnership, its assets or any other relevant
information since the date of the appraisals which may limit the usefulness of
the appraisals and otherwise affect the validity and accuracy of the
appraisals.
AN APPRAISAL IS ONLY AN ESTIMATE OF VALUE, AS OF THE SPECIFIC DATES
STATED IN THE APPRAISAL, AND IS SUBJECT TO THE ASSUMPTIONS AND LIMITING
CONDITIONS STATED IN THE APPRAISAL REPORT. AN OPINION IS NOT A MEASURE OF
REALIZABLE VALUE AND MAY NOT REFLECT THE AMOUNT WHICH WOULD BE RECEIVED IF THE
PROPERTY WAS SOLD. REFERENCE SHOULD BE MADE TO THE ENTIRE APPRAISAL REPORT.
AVAILABILITY OF REPORT
Copies of the appraisals have been filed with the Commission as an
exhibit to the Schedule 13E-3 filed by the Partnership and the Purchaser. Copies
of the appraisals for the Properties are also available for inspection and
copying at the principal executive offices of the Partnership during regular
business hours by any interested Unitholder or his designated representative at
its or his cost.
COMPENSATION
Cushman & Wakefield was paid a fee of $15,000 in connection with the
appraisals. The fees paid to Cushman & Wakefield in connection with the
appraisal were negotiated by the General Partners. The Partnership has agreed to
indemnify Cushman & Wakefield against specified liabilities arising out of its
engagement to prepare and deliver the appraisals.
The General Partners engaged Cushman & Wakefield in July 1999 to
value the Properties. In 1998 and 1999, Cushman & Wakefield provided its
appraisal services to Berkshire Realty Company, Inc., an affiliate of the
General Partners and the property manager of the Properties, and Berkshire
Realty Holdings, L.P., also an affiliate of the General Partners. Cushman &
Wakefield received approximately $700,000 for the services provided to
Berkshire Realty Company and Berkshire Realty Holdings. Other than these
engagements, there has been no material relationship between Cushman &
Wakefield or its affiliates and the Partnership or its affiliates, nor is any
material relationship contemplated.
DETERMINATION OF MERGER PRICE
As described above under "--Background of the Merger; Purpose of the
Transaction," the Purchaser based its initial merger price of $864 per Unit
on the appraisals of the Properties prepared by Cushman & Wakefield. The
established merger price of $1,200 per Unit was determined following the
revised tender offer of $1,100 per Unit made by ERP. The General Partners
believe that this price is fair to Unitholders.
BOOK VALUE
Because the Partnership's principal assets, the Properties, are carried
on the Partnership's balance sheet at their historical cost and have been
depreciated over the sixteen years of the Partnership's existence, the net book
value of a Unit is a negative number, and therefore the Purchaser does not
believe net book value is meaningful in determining the fairness of the merger
price.
RECENT UNIT SALES; TENDER OFFER
Although not necessarily an indication of value, the per Unit price to
be paid to Unitholders in the merger is higher than the trading prices for the
Units during the past year as
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reported by The Partnership Spectrum, an independent third-party industry
publication. The General Partners do not know whether the information
compiled by The Partnership Spectrum is accurate or complete. According to
its reports, for the eight months ended September 30, 1999, a total of 100
Units traded at per Unit prices between $575 and $651 with a weighted average
of $624 per Unit. In addition, for the period between October 1, 1999 and
November 30, 1999, a total of 50 Units traded at per Unit prices between $652
and $655.83 with a weighted average of $653.80 per Unit. Trading prices as
reported by The Partnership Spectrum do not necessarily reflect the net sales
proceeds received by sellers of Units, which typically are reduced by
commissions and other secondary market transaction costs to amounts less than
the reported prices. The General Partners have not independently confirmed
the trading prices referred to above, and believe that these prices are not
necessarily indicative of value. Consequently, the General Partners believe
that the comparison of the per Unit price to be paid to Unitholders with
these prices, while informative, is not dispositive of the fairness of the
price to be paid to Unitholders.
The $1,200 per Unit price to be paid to Unitholders in the merger is
also higher than the $1,100 price (less distributions) offered in a recent
third-party tender offer to acquire the outstanding Units.
EFFECTS OF THE TRANSACTION
EFFECT ON THE PARTNERSHIP
If the merger is approved and the remaining conditions to the merger
are met or waived, the merger will be effected by filing certificates of merger
with the Delaware Secretary of State and the Massachusetts Secretary of State.
As a result, the assets and liabilities of the Partnership will be transferred
to the Purchaser as the surviving entity in the merger and the Partnership will
cease to exist. The benefits and risks associated with ownership of the
Properties will then rest solely with the Purchaser.
Following the merger, the Partnership will cease to be a public company
and will not file reports under the Securities Exchange Act of 1934 or be
subject to the rules under it.
EFFECTS ON THE UNITHOLDERS
As a result of the merger, each Unit of the unaffiliated Unitholders
will be cancelled in exchange for a $1,200 cash payment, without interest,
payable by the Purchaser to the Unitholder upon receipt by the Purchaser of the
appropriate forms from the Unitholder. Following the completion of the merger,
the Unitholders will cease to be owners of the Partnership and will no longer
have the potential benefits and risks associated with ownership. Unitholders
will forego the opportunity to continue to participate as investors in the
Partnership, including the right to distributions and potential appreciation of
its assets over time.
Unitholders will recognize a gain or loss on the conversion of Units
into cash in the merger to the extent of the difference between the amount
realized and the Unitholder's adjusted basis in the Units sold. See "--Material
Federal Income Tax Consequences."
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EFFECTS ON THE GENERAL PARTNERS AND THE PURCHASER
The General Partners will not receive any payment in exchange for the
redemption of their general partnership or original limited partnership
interests nor will they receive any fees from the Partnership in connection with
the merger. Following the merger, the Purchaser will continue to pay management
fees to an affiliate of the General Partner as described below under
"Information About the Partnership, Its General Partners and Their
Affiliates--Related Party Transactions." An affiliate of the General Partners
will manage and control and have an approximate 75% ownership interest in the
Purchaser and thus will benefit from any returns the Purchaser receives from its
investment in the Properties, whether from operating the Properties, selling the
Properties or otherwise.
FAILURE TO APPROVE THE MERGER
If the merger is not approved by Unitholders, the General Partners will
continue to operate the Partnership in accordance with the terms of the
partnership agreement and in fulfillment of their fiduciary duties. The
Partnership may (1) continue to hold the Properties, (2) refinance either or
both of the Properties and utilize the proceeds of the refinancing to implement
capital improvements in the Properties, (3) solicit offers from potential
purchasers to acquire either or both Properties, through bid solicitation,
auction or otherwise or (4) pursue other strategies intended to enhance the
value of the Unitholders' investment in the Partnership.
PLANS OR PROPOSALS BY PARTNERSHIP OR AFFILIATES FOLLOWING THE MERGER
Following the completion of the merger, the Purchaser intends to review
the Partnership and its assets, distribution policy, capitalization, operations,
properties, policies, management and personnel and consider what further
changes, if any, would be desirable in light of the circumstances which then
exist. The Purchaser presently anticipates conducting the business and
operations of the Partnership substantially as they are currently conducted.
The Purchaser does not have any specific plans for the sale or
disposition of the Properties or any material change in the business of the
Partnership following the merger. The Purchaser will, however, evaluate any
proposals and may sell or dispose of its assets if attractive terms are offered.
Presently, there are no arrangements or proposals to do so.
Under the agreements entered into in connection with the merger, Equity
Resources, which following the merger will own approximately 25% of the
Purchaser, may require the managing members of the Purchaser to cause the
Purchaser to attempt to sell the Properties at any time during the six-month
period following the fifth anniversary of the completion of the merger. See
"Related Agreements."
FINANCING OF THE MERGER
SOURCE OF FUNDS
The aggregate consideration to be paid to Unitholders is approximately
$37.5 million. Of this amount, up to $16 million will be in the form of a
capital contribution from KR5 Company, L.L.C. to the Purchaser and the remainder
will be obtained from the anticipated refinancing of existing mortgage
indebtedness of the Partnership. The Purchaser has had discussions with several
lenders regarding this mortgage-indebtedness, but no loan commitment has
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been obtained from any lender. In addition, Equity Resources will contribute
3,985.5 Units currently held by them in the Partnership as a capital
contribution to the Purchaser. KRF Company will finance its capital
contributions to the Purchaser through capital contributions from an
affiliate of the General Partners which has available sufficient amounts of
liquid capital necessary to fund the obligations of KRF Company to the
Purchaser in respect of the merger consideration.
COSTS BORNE BY THE PURCHASER
It is expected that approximately $66 million will be required to
finance the merger, and approximately $672,000 will be required to pay
related fees and expenses. The following is an itemized statement of the
approximate amount of all expenses incurred or to be incurred by the
Purchaser in connection with the merger:
<TABLE>
<S> <C>
Financing costs............................. $ 500,000
Legal fees.................................. 100,000
Appraisal and related expenses.............. 25,000
Printing and mailing costs.................. 15,000
Proxy solicitation fees..................... 22,000
Other, including filing fees................ 10,000
--------------
Total......................................... $ 672,000
==============
</TABLE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of material federal
income tax consequences of a sale of Units under the merger assuming that the
Partnership is a partnership for federal income tax purposes and that it is not
a "publicly traded partnership" as defined in Section 7704 of the Internal
Revenue Code of 1986. This summary is based on the Internal Revenue Code,
applicable Treasury Regulations under it, administrative rulings, practice and
procedures and judicial authority as of the date of this proxy statement. All of
the foregoing are subject to change, and any change could affect the continuing
accuracy of this summary. This summary does not discuss all aspects of federal
income taxation that may be relevant to a particular Unitholder in light of the
Unitholder's specific circumstances or to specific types of Unitholders subject
to special treatment under the federal income tax laws, for example, foreign
persons, dealers in securities, banks, insurance companies and tax-exempt
organizations. This summary also does not discuss any aspect of state, local,
foreign or other tax laws. Sales of Units under the merger will be taxable
transactions for federal income tax purposes and may also be taxable
transactions under applicable state, local, foreign and other tax laws.
EACH UNITHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO THE UNITHOLDER OF SELLING UNITS UNDER THE MERGER.
CONSEQUENCES TO UNITHOLDERS
A Unitholder will recognize gain or loss on a sale of Units under the
merger equal to the difference between (1) the Unitholder's "amount realized" on
the sale and (2) the Unitholder's adjusted tax basis in the Units sold. The
"amount realized" with respect to Units sold under the
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merger will be a sum equal to the amount of cash received by the Unitholder for
the Units plus the amount of Partnership liabilities allocable to the Units, as
determined under Internal Revenue Code Section 752. A Unitholder's adjusted tax
basis in Units sold under the merger will vary depending upon the Unitholder's
particular circumstances, and will be affected by allocations of Partnership
income, gain or loss, and by any cash distributions made by the Partnership to a
Unitholder with respect to its Units. In this regard, Unitholders will be
allocated a pro rata share of the Partnership's taxable income or loss with
respect to Units sold under the merger through the effective date of the sale.
In general, the character, as capital or ordinary, of a Unitholder's
gain or loss on a sale of Units under the merger will be determined by
allocating the Unitholder's amount realized on the sale and the Unitholder's
adjusted tax basis in the Units sold between "Section 751 items," which are
"inventory items" and "unrealized receivables" (including depreciation
recapture) as defined in Internal Revenue Code Section 751, and non-Section 751
items. The difference between the portion of the Unitholder's amount realized
that is allocable to Section 751 items and the portion of the Unitholder's
adjusted tax basis in the Units sold that is so allocable will be treated as
ordinary income or loss. The difference between the Unitholder's remaining
amount realized and remaining adjusted tax basis will be treated as capital gain
or loss assuming the Units were held by the Unitholder as capital assets.
A Unitholder's capital gain or loss, if any, on a sale of Units under
the merger will be treated as long-term capital gain or loss if the Unitholder's
holding period for the Units exceeds one year. Under current law, which is
subject to change, long-term capital gains of individuals and other
non-corporate taxpayers generally are taxed at a maximum marginal federal income
tax rate of 20%, or 25% on recapture of the amount of accelerated depreciation
on real property, whereas the maximum marginal federal income tax rate for other
income of these persons is 39.6%. Capital losses are deductible only to the
extent of capital gains, except that non-corporate taxpayers may deduct up to
$3,000 of capital losses in excess of the amount of their capital gains against
ordinary income. Excess capital losses generally can be carried forward to
succeeding years -- a corporation's carryforward period is five years and a
non-corporate taxpayer can carry forward such losses indefinitely; in addition,
corporations, but not non-corporate taxpayers, are generally allowed to carry
back excess capital losses to the three preceding taxable years.
Under Internal Revenue Code Section 469, a non-corporate taxpayer or
personal service corporation can deduct passive activity losses in any year,
other than the year in which the taxpayer's entire interest in the activity is
disposed of, only to the extent of such person's passive activity income for
such year, and closely held corporations may not offset these losses against
so-called "portfolio" income. A Unitholder with "suspended" passive activity
losses (i.e., net tax losses in excess of statutorily provided "phase-in"
amounts) from the Partnership generally will be entitled to offset these losses
against any income or gain recognized by the Unitholder on a sale of his Units
under the merger.
Gain realized by a foreign Unitholder on a sale of a Unit under the
merger will be subject to federal income tax. Under Section 1445 of the Internal
Revenue Code, the transferee of a partnership interest held by a foreign person
generally is required to deduct and withhold a tax equal to 10% of the amount
realized on the disposition. The Purchaser will withhold 10% of the amount
realized by a foreign Unitholder from the price payable to the foreign
Unitholder.
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Amounts withheld would be creditable against a foreign Unitholder's federal
income tax liability and, if in excess of the liability, a refund could be
obtained from the Internal Revenue Service by filing a U.S. income tax return.
Unless an exemption applies under applicable law and regulations
concerning "backup withholding" of U.S. federal income tax, the Purchaser will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a Unitholder or other payee pursuant to the merger unless the
Unitholder or other payee provides its taxpayer identification number (social
security number or employee identification number) and certifies that this
number is correct, or certifies that it is awaiting a taxpayer identification
number. To prevent the imposition of backup federal income tax withholding on
payments made to certain Unitholders with respect to the purchase price of Units
purchased under the merger, a tendering Unitholder must provide the Purchaser
with the holder's correct taxpayer identification number and certify that the
Unitholder is not subject to backup federal income tax withholding by completing
the Substitute Form W-9 included in the letter of transmittal.
THE SPECIAL MEETING
SPECIAL MEETING; RECORD DATE
Under Massachusetts partnership law and the partnership agreement, the
merger and the amendment requires approval of a majority of the holders of each
class of outstanding investor limited partnership units. A special meeting of
the Unitholders will be held on , 2000, at , at
local time, to consider and vote upon the merger and the amendment
to the Partnership's partnership agreement. In accordance with the partnership
agreement, the close of business on , 2000 has been established as
the record date for the special meeting. Under the terms of the partnership
agreement, only the Unitholders of record on the record date are eligible to
vote those Units on the proposals set forth in this proxy statement. A
Unitholder of record as of the record date will retain the right to vote on the
proposals set forth in this document even if the Unitholder sells or
transfers its Units after the record date. As of the record date, the
Partnership had 35,200 Units outstanding and entitled to vote, held of record
by approxmiately 1,870 Unitholders. A list of the Unitholders entitled to
vote at the special meeting will be available for inspection at the executive
offices of the Partnership at One Beacon Street, Suite 1500, Boston,
Massachusetts 02108. Under the partnership agreement, valid voting requires a
quorum constituted by a majority in interest of the Unitholders voting at the
special meeting in person or by proxy.
Even if a Unitholder intends to attend the special meeting in person,
they are requested to complete and return the enclosed proxy card promptly.
PROCEDURES FOR COMPLETING PROXIES
Accompanying this proxy statement is a proxy card solicited by the
General Partners for use at the special meeting. When a proxy card is returned,
properly executed, the Units represented by it will be voted at the special
meeting by the General Partners in the manner specified on the proxy card. It is
important that Unitholders mark, sign and date their proxy card and return it
either in the enclosed, postage-prepaid envelope or by facsimile as instructed
below to Krupp Funds Group Limited Partnership as soon as possible. When voting
a proxy by facsimile, both sides of the proxy must be transmitted. Delivery of a
proxy does not prohibit Unitholders from attending the special meeting. To be
properly executed, the proxy card must be signed by
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and bear the date of signature of the Unitholder voting the Units represented by
the card. All questions as to the form of documents and the validity of consents
will be determined by the General Partners, which determinations shall be final
and binding. The General Partners reserve the right to waive any defects or
irregularities in any proxy.
Each Unit entitles the holder thereof to one vote with respect to the
proxies solicited by this document. Only Unitholders of record on the record
date may grant a proxy with respect to their Units.
IF UNITS STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS, ALL PERSONS MUST
SIGN THE PROXY CARD. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE THE FULL TITLE OF THE POSITION HELD. IF A
CORPORATION, THE PROXY SHOULD BE SIGNED BY THE PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN THE PARTNERSHIP'S NAME BY AN
AUTHORIZED PERSON. IF A UNITHOLDER'S UNITS ARE HELD IN THE NAME OF A BROKERAGE
FIRM, BANK, NOMINEE OR OTHER INSTITUTION, ONLY THIS INSTITUTION CAN SIGN A PROXY
WITH RESPECT TO THE UNITS AND CAN DO SO ONLY AT THE UNITHOLDER'S DIRECTION.
ACCORDINGLY, IF ANY UNITS ARE SO HELD, UNITHOLDERS SHOULD CONTACT THEIR ACCOUNT
REPRESENTATIVE AND GIVE INSTRUCTIONS FOR A PROXY TO BE SIGNED WITH RESPECT TO
THEIR UNITS.
A Unitholder in favor of the merger and the amendment to Krupp Realty's
partnership agreement should mark the "for" box on the enclosed proxy card, date
and sign the proxy and either mail it promptly in the enclosed postage-prepaid
envelope or fax a copy to Krupp Funds as instructed below. If a proxy card is
executed but no indication is made as to what action is to be taken, it will be
deemed to constitute a vote "for" the merger and "for" the amendment. By
consenting to the merger and the amendment, the Unitholders irrevocably appoint
the General Partners, or their designee, as their attorney-in-fact to execute
and deliver those documents as are necessary to effect the merger and the
amendment.
Questions and requests for assistance or for additional copies of this
proxy statement and the proxy card may be directed to the Partnership's
Solicitation Agent, Krupp Funds Group Limited Partnership, One Beacon Street,
Suite 1500, Boston, Massachusetts 02108, Attention: Investor Services, or by
telephone at 1-800-25-KRUPP or facsimile at 617-423-8919. Unitholders should
also use this fax number for delivery of their completed proxy cards. In
addition to soliciting proxies by mail, proxies may be solicited in person and
by telephone or telegraph. Unitholders may also contact their broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
proxy solicitation.
VOTES REQUIRED
Under the terms of the partnership agreement, the vote of the
Unitholders owning a majority of the Units is necessary to approve the amendment
to the partnership agreement. Under Massachusetts law, the vote of the
Unitholders owning a majority of the Units is necessary to approve the merger.
Each Unit entitles the holder thereof to one vote on each matter submitted to a
vote of the Unitholders. If a majority in interest of the Unitholders consent to
the merger and the amendment and certain other conditions are met, the merger
will be completed. If both the merger and the amendment are not approved by the
Unitholders owning a majority of the Units, the merger will not be completed.
Equity Resources, which holds approximately 11% of the Partnership's
outstanding Units, has agreed to vote for the approval of the merger and the
amendment to the Partnership's
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partnership agreement. In addition, Unitholders representing approximately
4.57% of the Units have previously agreed to vote their interest in the
Partnership in proportion to the votes of all other Unitholders who vote on a
given matter. Therefore, these Unitholders would have to vote 60% of their
Unit holdings in favor of the merger if, for example, other Unitholders
representing 60% percent of the outstanding Units voted for the approval of
the merger. This means that, in total, an additional 39% of the unaffiliated
Unitholders must vote in favor of the merger proposal to ensure its approval.
See "Related Agreements." Units held by Krupp LP, as a limited partner of the
Partnership, will not be voted at the special meeting or included in the
determination of whether a quorum exists.
THE CONSENT OF THE UNITHOLDERS HOLDING A MAJORITY IN INTEREST OF THE OUTSTANDING
UNITS IS NECESSARY TO COMPLETE THE PROPOSED MERGER AND TO ADOPT THE AMENDMENT.
FAILURE TO RETURN A PROXY IN A TIMELY MANNER OR TO VOTE AT THE SPECIAL MEETING,
ABSTENTION FROM VOTING OR A BROKER NON-VOTE WILL EACH HAVE THE SAME EFFECT AS A
VOTE "AGAINST" THE MERGER AND "AGAINST" THE AMENDMENT. THEREFORE, UNITHOLDERS
ARE ASKED TO PLEASE DATE, SIGN AND PROMPTLY RETURN THEIR PROXY CARDS.
SOLICITATION PROCEDURES
The Partnership has retained Krupp Funds to act as Solicitation Agent
and for advisory services in connection with this proxy statement. In connection
therewith, Krupp Funds will be paid reasonable and customary compensation and
will be reimbursed for their reasonable out-of-pocket expenses, as described
above under "Special Factors--Financing of the Merger--Costs Borne by the
Purchaser." The Partnership has also agreed to indemnify Krupp Funds against
specified liabilities and expenses including liabilities and expenses under
federal securities laws.
The Partnership will not pay any fees or commissions to any broker or
dealer or other person, other than to Krupp Funds, for soliciting proxies in
this solicitation. Banks, brokerage houses and other custodians, nominees and
fiduciaries will be requested to forward the solicitation materials to the
customers for whom they hold Units, and the Partnership will reimburse them for
reasonable mailing and handling expenses incurred by them in forwarding proxy
materials to their customers.
REVOCATION OF PROXIES
A proxy executed and delivered by a Unitholder may subsequently be
revoked by submitting written notice of revocation to the Partnership. A
revocation may be in any written form, including a later-dated proxy card,
validly signed by a Unitholder as long as it clearly states that the
Unitholder's proxy previously given is no longer effective. To prevent
confusion, the notice of revocation must be dated. Notices of revocation should
be delivered to Krupp Funds at the address or by facsimile as listed above. A
Unitholder may also revoke its proxy by attending the special meeting and voting
in person. If a Unitholder signs, dates and delivers a proxy to the Partnership
and, thereafter, on one or more occasions, signs and delivers a later-dated
proxy, the latest-dated proxy card is controlling as to the instructions
indicated in that proxy and supersedes the Unitholder's prior proxy as embodied
in any previously submitted proxy card.
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APPRAISAL RIGHTS
Neither the partnership agreement nor Massachusetts law provides rights
of appraisal or similar rights to Unitholders whether or not Unitholders abstain
or vote for or against the merger. As a result, if Unitholders holding a
majority of the Units approve the merger and if the merger is completed, the
Partnership will be merged with and into the Purchaser and all unaffiliated
Unitholders, including those who do not approve the merger, will receive the
merger price for each of their Units in accordance with the terms of the merger
agreement.
THE MERGER AGREEMENT
The merger agreement between the Partnership and the Purchaser will be
entered into only if the Unitholders approve the amendment to the Partnership's
partnership agreement. Under the merger agreement, the merger of the Partnership
with and into the Purchaser will not take place unless the Unitholders approve
the merger. If the merger is approved at the special meeting, the General
Partners on behalf of the Partnership intend to enter into an agreement
substantially in the form of the merger agreement. The material provisions of
the merger agreement are summarized below. Although complete in all material
respects, this summary is qualified by reference to the full text of the merger
agreement attached to this proxy statement as Annex A. Unitholders are
encouraged to read the merger agreement carefully. If all of the conditions in
the merger agreement are met, principally the approval by the Unitholders of the
merger, at the effective time of the merger, the Partnership will be merged with
and into the Purchaser, with the Purchaser continuing as the surviving entity.
The Purchaser, as the surviving entity, will succeed to and possess all of the
rights, privileges and powers of the Partnership, whose assets shall vest in the
Purchaser, and who will then be liable for all of the liabilities and
obligations of or any claims or judgments against the Partnership.
CLOSING DATE; EFFECTIVE TIME OF THE MERGER
The merger will become effective at 5:00 p.m. on the date on which the
latter of (1) the filing of the certificate of merger with the Office of the
Secretary of State of Delaware and (2) the filing of the certificate of merger
with the Secretary of State of the Commonwealth of Massachusetts.
EFFECTS OF THE MERGER
At the effective time, by virtue of the merger, and without any further
action on the part of anyone, all Partnership interests outstanding immediately
beforehand, including Units, general partnership interests and original limited
partnership interests, will be cancelled. Each Unit owned by the Unitholders,
other than Equity Resources, or those who are not affiliates of the Purchaser or
the General Partners, will be automatically converted into a right to receive,
in exchange for each Unit, $1,200 in cash, without interest. Immediately before
the effective time, 3,985.5 partnership interests (whether general or limited)
will be contributed to the Purchaser for membership interests in the Purchaser.
PAYMENT
The merger price will be paid to unaffiliated Unitholders by the
Purchaser, upon receipt by the Purchaser of a letter of transmittal and any
other required forms which the Purchaser may
23
<PAGE>
reasonably request. Promptly after the effective time, the Purchaser will mail
to each unaffiliated Unitholder as of the effective time the form of transmittal
letter, any other required forms and instructions. Until receipt of the
transmittal letter and other required forms, the Units owned by Unitholders
represent only the right to receive the merger price multiplied by the number of
Units owned by the unaffiliated Unitholder. Interest will not accrue on amounts
owed to unaffiliated Unitholders. Payments will be made only to the unaffiliated
Unitholder in whose name Units are registered on the books of the Partnership at
the effective time. Neither the Purchaser nor any other party will be liable to
any Unitholder for any merger consideration or other payments made to a public
official under applicable abandoned property laws. The Purchaser will be
entitled to deduct and withhold from the merger consideration paid to a
Unitholder any taxes or other amounts required by law, including Sections 3406
and 1445 of the Internal Revenue Code of 1986.
Under federal law, to the extent that amounts are withheld, these
amounts will be treated as having been paid to a Unitholder for purposes of the
merger agreement. Beginning at the effective time, there will be no further
transfers of any Units on the books of the Partnership. Each Unitholder whose
Units were converted and cancelled will be deemed to have withdrawn as a limited
partner of the Partnership. Unitholders will then have no further interest in
the Partnership or the Purchaser, including any allocations or distributions of
income, property or otherwise, other than the right to receive the merger price
per Unit.
Following the effective time, the officers of the Purchaser, as the
surviving entity in the merger, will terminate the Partnership's reporting
obligations with the Securities and Exchange Commission.
AUTHORITY AND CONSENT OF THE PURCHASER
The Purchaser has informed the Partnership that the execution, delivery
and performance of the merger agreement by the Purchaser and the completion of
the transactions contemplated by it have been duly authorized by the Purchaser's
members as necessary.
REPRESENTATIONS AND WARRANTIES OF THE PARTIES
The merger agreement contains no representations and warranties.
CONDITIONS TO THE MERGER
Before the merger is completed, the following must occur:
- the holders of a majority of the outstanding Units must approve
the amendment in accordance with the partnership agreement;
- the holders of a majority of the outstanding Units must approve
the merger agreement in accordance with the partnership agreement
and Massachusetts law;
- any consent, approval or waiver of any third party required in
order for the Purchaser or the Partnership to complete the merger
must be obtained.
In addition, unless the relevant condition is waived by the Purchaser
and the Partnership, the merger will not be completed if any of the following
occur:
24
<PAGE>
- the enactment, promulgation or enforcement by any governmental
entity of a statute, regulation or injunction which prohibits or
restrains the merger or subjects any party to substantial damage
as a result of the merger; and
- a change or event which has or could be reasonably expected to
either (1) cause a material adverse effect to the business,
condition, financial or otherwise, or result of operations of the
Partnership or (2) prevent or cause a material delay in the
completion of the merger or the performance of the merger
agreement by the Purchaser or the Partnership.
TERMINATION
The merger agreement may be terminated by the mutual agreement of the
Purchaser and the General Partners at any time before the filing of the
certificates of merger.
AMENDMENT
At any time before the filing of the certificates of merger, the merger
agreement may be amended by the joint determination in writing of the Purchaser
and the General Partners. No amendment may be made which would change any term
of the certificate of formation or operating agreement of the surviving entity
in the merger.
WAIVER
At any time before the effective time of the merger, whether before or
after this proxy statement is mailed, any party may waive compliance with any of
the agreements of the other party or conditions to its own obligations contained
in the merger agreement.
THE SURVIVING ENTITY
The certificate of formation, operating agreement and managers and
officers of the Purchaser will be the certificate of formation, operating
agreement and managers and officers utilized by or employed by the Purchaser
before the merger.
RELATED AGREEMENTS
In connection with the merger, the Purchaser and its sole member, KRF
Company, have entered into an investment agreement and voting agreement, each
dated as of December 2, 1999, with Equity Resources. Under the investment
agreement, Equity Resources has agreed to reinvest their Units in the Purchaser
as a capital contribution. KRF Company, on the other hand, will make a cash
contribution to the Purchaser of up to $16 million. The Purchaser and KRF
Company, on the one hand, and Equity Resources on the other hand, further agreed
to indemnify the other in connection with any liability arising out of a breach
of the investment agreement, while the Purchaser agreed to identify the parties
in connection with any liabilities arising out of any Unitholder litigation
relating to the merger. To the extent that the indemnification provisions are
unenforceable, the parties agreed to contribute additional amounts in
satisfaction of any losses to the extent legally permissible.
25
<PAGE>
The Purchaser may terminate the investment agreement at any time. The
investment agreement will terminate automatically if the merger is not completed
by August 1, 2000, or, if the members of the Purchaser do not make their capital
contributions before the parties complete the merger.
Under the voting agreement, Equity Resources, which owns approximately
11% of the outstanding Units, has agreed that at any meeting of the partners of
the Partnership, however called, and in any action by consent of the limited
partners of the Partnership, Equity Resources will vote, or cause to be voted,
the Units held of record or beneficially owned by it in favor of the merger and
the amendment to the partnership agreement. Equity Resources further agreed that
at any meeting of the partners of the Partnership, however called, and in any
action by consent of the limited partners of the Partnership, Equity Resources
will vote, or cause to be voted, in person or by proxy, the Units held of record
or beneficially owned by it against approval of any proposal made in opposition
to or in competition with the merger.
In addition, Equity Resources further agreed that, without the consent
of the Purchaser and KRF Company, Equity Resources would not, either directly or
indirectly, offer or otherwise agree to sell, assign, pledge, transfer, exchange
or dispose of any Units or options, warrants or other convertible securities to
acquire or purchase Units, whether now or later acquired. Under the terms of the
voting agreement, if Equity Resources acquires any additional Units, the voting
agreement will be applicable to the additional Units.
In addition, under the terms of the Purchaser's organizational
documents, upon the request of Equity Resources, the managing members of the
Purchaser have agreed to cause the Purchaser to attempt to sell the Properties
at any time during the six-month period following the fifth anniversary of the
completion of the merger.
THE AMENDMENT TO THE PARTNERSHIP AGREEMENT
PURPOSE
The purpose of the amendment is to amend Krupp Realty's partnership
agreement to permit the Partnership to enter into the merger agreement with the
Purchaser. Except for specifically enumerated transactions, the partnership
agreement prohibits the Partnership from selling any property to, or entering
into any agreement or arrangement with, a General Partner or an affiliate of a
General Partner. Because the Purchaser is an affiliate of the General Partners
and the merger agreement is an agreement which may be considered to be an
indirect sale of the Properties, these prohibitions prevent the Partnership from
entering into the merger agreement with the Purchaser.
THE AMENDMENT
The description of the amendment to the partnership agreement
summarized above is qualified in its entirety by reference to the text of the
amendment attached to this proxy statement as Annex B. Unitholders are
encouraged to read the annexed amendment carefully.
In accordance with the amendment, the parties must enter into the
merger agreement after February 1, 2000 and before August 1, 2000. The amendment
adds the merger agreement to the
26
<PAGE>
list of the transactions which the Partnership is permitted to compete with an
affiliate of the General Partners; otherwise, the amendment does not alter the
partnership agreement.
INFORMATION ABOUT THE PARTNERSHIP,
ITS GENERAL PARTNERS AND THEIR AFFILIATES
THE PARTNERSHIP
The Partnership was organized on June 16, 1983 as a limited partnership
under Massachusetts law. The Partnership is governed by its partnership
agreement, which vests exclusive management and control over the Partnership in
the General Partners, subject to the rights of the Unitholders to vote on
limited matters. The address of the Partnership's principal executive office is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108, and the telephone
number is (617) 523-7722.
The Partnership considers itself to be engaged only in the industry
segment of real estate investing. The Partnership issued all of the original
limited partner interests in the Partnership to The Krupp Company Limited
Partnership-II. On September 6, 1983, the Partnership, under a sales agent
agreement, commenced the marketing and sale of Units for $1,000 per Unit, 35,200
of which were sold. The Partnership invested the net proceeds from the Unit
offering in leveraged real estate. The Partnership originally invested in four
multi-family apartment complexes--Century II Apartments, Marine Terrace, the
Fieldcrest Apartments and the Park Place Tower Apartments--and a joint venture
in Lakeview Tower Apartments with Krupp Realty Limited Partnership-IV, an
affiliated limited partnership. The aggregate purchase price of the properties
was approximately $67 million and the Partnership originally funded
approximately $2.3 million to the joint venture.
On March 20, 1989, the General Partners formed Krupp Realty Park
Place-Chicago Limited Partnership, an Illinois limited partnership ("Realty-V"),
as a prerequisite for the refinancing of the Park Place Tower Apartments. At the
same time, the General Partners transferred ownership of the Park Place Tower
Apartments to Realty-V. The General Partner of Realty-V is Krupp Corp. The
limited partner of Realty-V is the Partnership. Krupp Corp has beneficially
assigned its interest in Realty-V to the Partnership. The Partnership and
Realty-V are collectively known as Krupp Realty Limited Partnership-V and
Subsidiary (collectively referred to in this proxy statement as the
"Partnership").
The Partnership sold two of its apartment complexes, the Fieldcrest
Apartments and Marine Terrace, in 1992 and 1995, respectively. The Partnership
also received a distribution of proceeds from the sale of the joint venture in
1992.
The Partnership's real estate investments are subject to seasonal
fluctuations resulting from changes in utility consumption and seasonal
maintenance expenditures. However, the future performance of the Partnership
will depend upon factors which cannot be predicted. These factors include
general economic and real estate market conditions, both on a national basis and
in those areas in which the Partnership's real estate investments are located,
real estate tax rates, operating expenses, energy costs, government regulations
and federal and state income tax laws. The requirements for compliance with
federal, state and local regulations to date have not had an adverse effect on
the Partnership's operations, and no adverse effect from regulatory compliance
is anticipated in the future.
27
<PAGE>
As of September 30, 1999, the Partnership did not employ any personnel.
THE GENERAL PARTNERS
The General Partners of the Partnership are Krupp Corp and Krupp LP.
The principal business address of each of the General Partners is at One Beacon
Street, Suite 1500, Boston, Massachusetts 02108. The principal business of each
of the General Partners is to act as a general partner of the Partnership. The
directors and principal executive officers of Krupp Corp are Douglas Krupp,
George Krupp and David Quade, and the sole shareholders of Krupp Corp are
Douglas Krupp and George Krupp. The General Partners of Krupp LP are Douglas
Krupp, George Krupp and Krupp Corp. Krupp LP owns all of the original limited
partnership interests in the Partnership.
Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive
Officer of The Berkshire Companies Limited Partnership ("The Berkshire
Companies"), an integrated real estate financial services firm engaged in real
estate acquisitions, mortgage banking, investment sponsorship, venture capital
investing, financial management, commercial laundry and linen services, and
furniture manufacturing and sales.
Mr. Krupp has held the position of Co-Chairman since The Berkshire
Companies was established as The Krupp Companies in 1969 and he has served as
the Chief Executive Officer since 1992. Mr. Krupp serves as a Director of Krupp
Government Income Trust and Krupp Government Income Trust-II and he is also a
member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate
of Bryant College where he received an honorary Doctor of Science in Business
Administration in 1989 and was elected trustee in 1990. Mr. Krupp's address is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108
George Krupp is actively involved in the management of The Berkshire
Companies and affiliated entities. Mr. Krupp has been an instructor of history
at the New Jewish High School in Waltham, Massachusetts since September of 1997.
Mr. Krupp attended the University of Pennsylvania and Harvard University and
holds a master's degree in History from Brown University. Mr. Krupp's address is
at One Beacon Street, Suite 1500, Boston, Massachusetts 02108
David Quade is Executive Vice President and Chief Financial Officer
of The Berkshire Group. Prior to joining The Berkshire Group, Mr. Quade was a
principal and Chief Financial Officer for eighteen years at Leggat McCall
Properties. He received a P.A.P. from Northwestern University Graduate
Business School and an M.B.A. and a B.S. from Central Michigan University.
28
<PAGE>
DESCRIPTION OF THE ASSETS
As of September 30, 1999, the Partnership had leveraged investments in
two apartment complexes acquired in 1984, which together have an aggregate of
1,369 units. One of the complexes has an additional 18,417 square feet of
leasable commercial space. A summary of the Partnership's real estate
investments is presented below.
<TABLE>
<CAPTION>
Average Occupancy
-----------------------------------------------------------------------
For the Year Ended
Total Units/ For the December 31,
Current Leasable Nine Months Ended ------------------------------------------------
Description Square Footage September 30, 1999 1998 1997 1996 1995 1994
----------- ---------------- ------------------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Century II Apartments
Cockeysville, Maryland 468 Units 96% 100% 100% 96% 92% 92%
Park Place Tower Apartments 901 Units/ 97% 99% 99% 96% 94% 94%
Chicago, Illinois 18,417 Sq. Ft. 86% 64% 64% 76% 83% 83%
</TABLE>
CENTURY II APARTMENTS
On December 10, 1997, the Partnership completed the refinancing of the
Century II Apartments mortgage note. The property was refinanced with a
$11,000,000 non-recourse mortgage note payable at the rate of 6.75% per annum
with monthly principal and interest payments of $71,346. The mortgage note,
which is collateralized by the property, matures on January 1, 2008, at which
time the remaining principal of approximately $9,401,537 and the accrued
interest are due. The note may be prepaid, subject to a prepayment penalty, at
any time with 30 days prior notice. The Partnership used the majority of the
proceeds from the refinancing to repay the existing mortgage note of
$10,309,332, to pay closing costs of $236,763 and a prepayment premium of
$210,825, and to establish various escrows. The prepayment premium, as well as
unamortized deferred mortgage costs of $77,331, are reported in the statement of
Operations included in the Partnership's consolidated financial Statements and
appearing elsewhere in this proxy statement as an extraordinary loss from early
extinguishment of debt for the year ended December 31, 1997.
At December 31, 1996, the property was subject to a non-recourse first
mortgage note of $11,000,000, which was payable in equal monthly installments of
principal and interest of $104,844, based on a 25-year amortization schedule.
Based on the borrowing rates currently available to the Partnership for
bank loans with similar terms and average maturities, the fair value of the
long-term debt is approximately $10,898,000 and $10,470,000 for the years ended
December 31, 1998 and 1997, respectively.
PARK PLACE TOWER APARTMENTS
The Park Place Tower Apartments property is subject to a non-recourse
mortgage note in the original amount of $33,000,000, dated September 15, 1993,
held by the U.S. Department of Housing and Urban Development ("HUD"). The note
is payable in equal monthly installments of principal and interest of $212,783,
based on a 31-year amortization. At maturity, all unpaid principal
(approximately $1,457,000) and any accrued interest are due. The note may be
prepaid
29
<PAGE>
subject to a prepayment premium. In the event a prepayment of principal occurs,
a prepayment premium will be due, based on a declining premium rate of 5% to 0%
of the outstanding principal balance over a period of 5 years. As stipulated in
the regulatory agreement with HUD, the Partnership makes monthly deposits of
$17,743 in an established reserve for replacements to be used for improvements.
Under the terms of the loan, HUD restricts the distribution of funds to "surplus
cash," as defined by HUD in the regulatory agreement.
DISTRIBUTIONS
One of the objectives of the Partnership is to generate cash available
for distribution to its partners. In 1995, after several years of infrequent
distributions, the General Partners determined that there was sufficient cash
flow, as calculated under the partnership agreement, and working capital
reserves to reinstate distributions. These semiannual distributions, which
commenced in the first quarter of 1996, were paid at an annual rate of $20.00
per Unit. The General Partners believed there was sufficient cash flow and
working capital reserves to increase the annual distribution rate in 1997 to the
current rate of $40.00 per Unit. The table below sets forth the distribution
made by the Partnership to its partners for the nine months ended September 30,
1999 and during the years ended December 31, 1998 and 1997. The Partnership
will make a $20 per Unit distribution to its partners in February 2000.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999 Year Ended December 31,
------------------------------ ------------------------------------------------------
1998 1997
------------------------- -----------------------------
Amount Per Unit Amount Per Unit Amount Per Unit
------------------------------ ------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Limited Partners:
Investor Limited Partners
(35,200 Units outstanding)....... $1,408,000 $40.00 $1,408,000 $40.00 $1,408,000 $40.00
Original Limited Partner......... 90,838 90,839 90,839
General Partners................. 15,140 15,140 15,140
TOTAL................... $1,513,978 $1,513,979 $1,513,979
</TABLE>
Future distributions will be at the discretion of the Partnership and
will be determined after consideration of a number of factors including, among
others, the Partnership's financial condition, cash flows and current and
anticipated cash needs.
OWNERSHIP OF UNITS
The number of Unitholders as of September 30, 1999 was approximately
1,870. As of September 30, 1999, none of the Unitholders beneficially owned more
than 5% of the Partnerships 35,200 outstanding Units. The table below sets forth
the beneficial ownership interests in the Units held by the investment funds
comprising Equity Resources.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF OF OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER CLASS
- ------------------------------------------------------------------------- ------------------------ ---------
<S> <C> <C> <C>
Investor Limited Partner Units Equity Resource Fund XIX L.P. 225.00 Units 0.64%
14 Story Street
Cambridge, MA 02138
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF OF OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER CLASS
- ------------------------------------------------------------------------- ------------------------ ---------
<S> <C> <C> <C>
Investor Limited Partner Units Equity Resources Bridge Fund 20.00 Units 0.06%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource General Fund L.P. 20.00 Units 0.06%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Fund XVII L.P. 1,599.50 Units 4.54%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Boston Fund 1,099.00 Units 3.11%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Cambridge Fund 175.00 Units 0.50%
14 Story Street
Cambridge, MA 02138
Investor Limited Partner Units Equity Resource Fund XXI L.P. 847.00 Units 2.41%
14 Story Street
Cambridge, MA 02138
TOTAL 3,985.50 Units 11.33%
</TABLE>
On September 30, 1999, the General Partners or their affiliates owned
106 Units, or .30% of the total outstanding Units, of the Partnership in
addition to their general and original limited partner interests.
MARKET FOR THE UNITS
The Units are not traded on any established trading market and no
market of this type is expected to develop. Thus, limited information is
available as to high and low bid quotations or sales prices. According to The
Partnership Spectrum, an independent third-party industry publication, for the
eight months ended September 30, 1999, a total of 100 Units traded at per Unit
prices between $575 and $651 with a weighted average of $624 per Unit. For the
period between October 1, 1999 and November 30, 1999, a total of 50 Units traded
at per Unit prices between $652 and $655.83 with a weighted average of $653.80
per Unit.
Unitholders are advised, however, that these gross sales prices
reported by The Partnership Spectrum do not necessarily reflect the net sales
proceeds received by sellers of Units, which typically are reduced by
commissions and other secondary market transaction costs to amounts less than
the reported prices. In addition, other measures of the value of the Units may
be relevant to Unitholders.
RELATED PARTY TRANSACTIONS
The Partnership pays property management fees to an affiliate of the
General Partners for management services. Under the management agreements,
management fees are payable monthly
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<PAGE>
at a rate of 5% of the gross receipts from the properties under management. The
Partnership also reimburses affiliates of the General Partners for specified
expenses incurred in connection with the operation of the Partnership and its
properties, including administrative expenses.
Amounts accrued or paid to the General Partners' affiliates for the
nine months ended September 30, 1999 and for the years ended December 31, 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996
--------------------- --------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Property management fees $467,815 $506,198 $475,569 $442,295
Expense reimbursements 275,029 307,468 317,432 288,226
------------ --------- --------- ---------
Charged to operations $742,844 $813,666 $793,001 $730,521
</TABLE>
Expense reimbursements due from affiliates of $8,323 and $1,456,
respectively were included in prepaid expenses and other assets for the nine
months ended September 30, 1999 and for the year ended December 31, 1998.
Under the partnership agreements the General Partners are entitled to a
brokerage fee in an amount equal to 3% of the contract sales price of any real
estate sold by the Partnership, subject to specified limitations. No brokerage
fees have been paid to the General Partners of their affiliates for the
three-year period ending December 31, 1998.
In addition to the amounts above, refinancing costs of $110,000 were
paid to the General Partners' affiliates during the year ending December 31,
1997.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information
regarding the Partnership's results of operations and financial position.
This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information
included or incorporated by reference in this document. The historical
financial data as of and for the quarters ended September 30, 1999 and 1998
have been derived from the unaudited financial statements included in the
Partnership's Quarterly Report on Form 10-Q for the quarters ended
September 30, 1999 and 1998, respectively. The historical financial data for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been derived
from audited financial statements included in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1998. See "Where You Can Find More
Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------------ ------------------------------------------------------------------
Unaudited
1999 1998 1998 1997 1996 1995 1994
----------- --------- ------------ ----------- ----------- ------------- -----------
S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......................... 11,763,548 11,277,451 $15,100,395 $14,523,598 $13,660,261 $13,839,760 $13,652,413
Income (loss) before gain from capital
transactions............................ 1,574,044 1,012,231 692,911 (304,383) (119,075) (795,377) (1,450,214)
Gain on sale of property................ -- -- -- -- -- 3,265,789 --
Income (loss) before extraordinary loss. 1,574,044 1,012,231 692,911 (304,383) (119,075) 2,470,412 (1,450,214)
Extraordinary loss...................... -- -- -- (288,156) -- (93,215) --
Net income (loss)....................... 1,574,044 1,012,231 692,911 (592,539) (119,075) 2,377,197 (1,450,214)
Net income (loss) allocated to:
Investor limited partners............... 1,463,861 941,375 644,407 (586,614) (117,884) 2,353,425 (1,435,712)
per Unit................................ 41.59 26.74 18.31 (16.67) (3.35) 66.86 (40.79)
Original limited partner................ 94,443 60,734 41,575 -- -- -- --
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------------------ ---------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------------------------ -------- ------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) allocated to:
General partners................. 15,740 10,122 6,929 (5,925) (1,191) 23,772 (14,502)
Total assets..................... 34,014,347 35,077,699 34,721,709 35,457,032 37,162,269 38,555,732 42,604,180
Long-term obligations............ 40,752,418 41,387,711 41,235,548 41,848,811 41,700,453 42,273,669 46,805,538
DISTRIBUTIONS:
Investor limited partners........ 1,408,000 1,408,000 1,408,000 1,408,000 704,000 -- --
Per Unit......................... 40.00 40.00 40.00 40.00 20.00 -- --
Original limited partner......... 90,838 90,839 90,839 90,839 45,419 -- --
General partners................. 15,140 15,140 15,140 15,140 7,570 -- --
</TABLE>
The selected financial data results for the periods presented are not
comparable due to the sale of the Marine Terrace multi-family apartment complex
on July 19, 1995.
The per Unit distributions for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 were $40.00, $40.00, $20.00, $0 and $0, respectively, none
of which represented a return of capital for tax purposes.
Historical performance of the Partnership is not necessarily indicative
of its future operations.
INFORMATION CONCERNING THE PURCHASER
AND ITS AFFILIATES
THE PURCHASER
The Purchaser, KR5 Acquisition, L.L.C., is a wholly owned subsidiary of
KRF Company. The Purchaser was organized for the purpose of merging with the
Partnership and has not carried
33
<PAGE>
on any activities to date other than those incident to its formation and the
transactions contemplated by the merger agreement. The Purchaser has no assets
and liabilities. The principal office and place of business of the Purchaser is
One Beacon Street, Suite 1500, Boston, Massachusetts 02108.
AFFILIATES OF THE PURCHASER
KRF Company was organized to conduct the business and the operations of
KRF3 Acquisition Company, L.L.C., a Delaware limited liability company whose
principal business is to hold limited partnership interests in Krupp Realty
Fund, Ltd.-III. The principal office and place of business of KRF Company is One
Beacon Street, Suite 1500, Boston, Massachusetts 02108. The sole member of KRF
Company is The Krupp Family Limited Partnership-94 (the "Family Limited
Partnership").
The Family Limited Partnership was formed to hold and manage
investments for its partners. The general partners of the Family Limited
Partnership are Douglas Krupp and George Krupp. See "Information About The
Partnership, Its General Partners and Their Affiliates--The General Partners."
The Family Limited Partnership, KRF Company, the Purchaser and the
General Partners are under the common control of Douglas Krupp and George Krupp.
As a result of the voting and investment agreements entered into among Equity
Resources, the Purchaser and KRF Company, Douglas Krupp and George Krupp may be
deemed to each beneficially own indirectly 4,086.5 Units, which is 11.6% of the
total number of Units.
All information contained in this proxy statement concerning the
Purchaser is based upon statements and representations made by the Purchaser or
its representatives to the Partnership or its representatives.
WHERE YOU CAN FIND MORE INFORMATION
GENERAL
The Partnership files reports with the Securities and Exchange
Commission on a regular basis. Unitholders may read or copy any document that
the Partnership files with the Commission at the Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the Public Reference Room by calling the Commission for
further information at 1-800-SEC-0330. The Partnership's Commission filings are
also available from the Commission's web site at www.sec.gov.
The following documents previously filed by the Partnership with the
Securities and Exchange Commission are incorporated in this proxy statement
by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1998 as filed
on March 31, 1999; and
(b) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as
filed on November 15, 1999.
All documents filed by the Partnership pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act after the date of this document and
prior to the date of the special meeting or any adjournment or postponement
of the meeting shall be deemed to be incorporated by reference and made a
part of this document from the date of the filing of these documents. Any
statement contained in a document incorporated or deemed to be incorporated
by reference in this document shall be deemed to be modified or superseded
for purposes of this proxy statement to the extent that a statement contained
in this document or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference in this
document modified or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement.
The Purchaser, KRF Company, the Family Limited Partnership and George
and Douglas Krupp, are affiliates of the Partnership. Accordingly, they have
jointly filed with the Commission a Schedule 13E-3. This proxy statement does
not contain all of the information contained in the Schedule 13E-3, some of
which is omitted as permitted by Commission rules. Statements made in this proxy
statement, while complete in all material respects, are qualified by reference
to documents filed as exhibits to the Schedule 13E-3. The Schedule 13E-3,
including exhibits, is available for inspection and copying at the Commission as
described above.
The Purchaser and the General Partners are not public companies and are
not required to file reports of any type with the Commission.
34
<PAGE>
INDEPENDENT ACCOUNTANTS
The consolidated financial statements and financial statement
schedule of the Partnership appearing in this proxy statement have been
audited by PricewaterhouseCoopers LLP, independent auditors, as set forth in
their report included in this document. These consolidated financial
statements and financial statement schedule are included in this document and
incorporated in this document by reference. It is expected that
representatives of PricewaterhouseCoopers LLP will be present at the special
meeting, both to respond to appropriate questions of Unitholders and to make
a statement if they so desire.
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annual Audited Financial Statements:
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets, December 31, 1998 and 1997 F-3
Statements of Operations, for the years ended F-4
December 31, 1998, 1997 and 1996
Statements of Changes in Partners' Deficit, for the years ended F-5
December 31, 1998, 1997 and 1996
Statements of Cash Flows, for the years ended F-6
December 31, 1998, 1997 and 1996
Notes to Financial Statements F-7 - F-13
Schedule III - Real Estate and Accumulated Depreciation F-15
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Krupp Realty Limited Partnership-V and Subsidiary:
In our opinion, the consolidated financial statements and the financial
statement Schedule listed in the index on page F-1 present fairly, in all
material respects, the financial position of Krupp Realty Limited Partnership-V
and Subsidiary (the "Partnership") at December 31, 1998 and December 31, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements and financial
statement schedule are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Boston, Massachusetts /s/ PricewaterhouseCoopers LLP
February 10, 1999
F-2
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Multi-family apartment complexes, net of accumulated
depreciation of $45,292,687 and $41,602,481, respectively
(Note D) $28,589,655 $30,790,070
Cash and cash equivalents (Note C) 2,101,415 802,726
Cash restricted for tenant security deposits 311,432 294,572
Replacement reserve escrows (Note D) 664,186 399,771
Prepaid expenses and other assets (Note E) 2,572,492 2,662,138
Deferred expenses, net of accumulated amortization of
$82,843 and $48,332, respectively (Note E) 482,529 507,755
-------------- --------------
Total assets $34,721,709 $35,457,032
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable (Note D) $41,836,237 $42,400,979
Accrued real estate taxes 2,008,500 1,950,000
Accrued expenses and other liabilities 1,841,074 1,249,087
------------- ------------
Total liabilities 45,685,811 45,600,066
------------ ----------
Contingency (Note F)
Partners' deficit (Note G):
Investor Limited Partners
(35,200 Units outstanding) (10,130,376) (9,366,783)
Original Limited Partner (420,061) (370,797)
General Partners (413,665) (405,454)
------------- -------------
Total Partners' deficit (10,964,102) (10,143,034)
------------- -------------
Total liabilities and Partners' deficit $34,721,709 $35,457,032
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental (Note H) $ 14,987,931 $ 14,395,306 $ 13,489,627
Interest Income 112,464 128,292 170,634
------------ ------------ ------------
Total revenue 15,100,395 14,523,598 13,660,261
------------ ------------ ------------
Expenses:
Operating (Note E) 3,205,429 3,629,513 3,635,470
Maintenance 961,085 1,136,671 927,736
General and administrative
(Notes E and F) 891,841 324,660 323,652
Real estate taxes (Note I) 2,117,434 2,280,910 1,621,545
Management fees (Note E) 506,198 475,569 442,295
Depreciation and amortization 3,724,717 3,600,639 3,387,658
Interest (Note D) 3,000,780 3,380,019 3,440,980
------------ ------------ ------------
Total expenses 14,407,484 14,827,981 13,779,336
------------ ------------ ------------
Income (loss) before
extraordinary loss 692,911 (304,383) (119,075)
Extraordinary loss (Note D) -- (288,156) --
------------ ------------ ------------
Net income (loss) (Note J) $ 692,911 $ (592,539) $ (119,075)
============ ============ ============
Allocation of net income (loss)(Note G):
Investor Limited Partners
(35,200 Units outstanding):
Income (loss) before
extraordinary loss $ 644,407 $ (301,339) $ (117,884)
Extraordinary loss -- (285,275) --
------------ ------------ ------------
Net income (loss) $ 644,407 $ (586,614) $ (117,884)
============ ============ ============
Investor Limited Partners Per Unit:
Income (loss)
before extraordinary loss $ 18.31 $ (8.56) $ (3.35)
Extraordinary loss -- (8.11) --
------------ ------------ ------------
Net income (loss) $ 18.31 $ (16.67) $ (3.35)
============ ============ ============
Original Limited Partner:
Income (loss)
before extraordinary loss $ 41,575 $ -- $ --
Extraordinary loss -- -- --
------------ ------------ ------------
Net income (loss) $ 41,575 $ -- $ --
============ ============ ============
General Partners:
Income (loss)
before extraordinary loss $ 6,929 $ (3,044) $ (1,191)
Extraordinary loss -- (2,881) --
------------ ------------ ------------
Net income (loss) $ 6,929 $ (5,925) $ (1,191)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Total
Investor Original General Partners'
Limited Partners Limited Partner Partners Deficit
------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1995 $(6,550,285) $(234,539) $(375,628) $(7,160,452)
Distributions (704,000) (45,419) (7,570) (756,989)
Net loss (117,884) - (1,191) (119,075)
------------- --------------- ----------- -------------
Balance at
December 31, 1996 (7,372,169) (279,958) (384,389) (8,036,516)
Distributions (1,408,000) (90,839) (15,140) (1,513,979)
Early extinguishment
of debt (285,275) - (2,881) (288,156)
Loss before
extraordinary loss (301,339) - (3,044) (304,383)
-------------- ---------------- ------------ --------------
Balance at
December 31, 1997 (9,366,783) (370,797) (405,454) (10,143,034)
Net income (Note G) 644,407 41,575 6,929 692,911
Distributions (Note G) (1,408,000) (90,839) (15,140) (1,513,979)
-------------- ------------- ----------- ---------------
Balance at
December 31, 1998 $(10,130,376) $(420,061) $(413,665) $(10,964,102)
============= ========== ========== =============
</TABLE>
The per Unit distributions for the years ended December 31, 1998, 1997 and 1996
were $40.00, $40.00 and $20.00, respectively, none of which represents a return
of capital for tax purposes.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 692,911 $ (592,539) $ (119,075)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Interest earned on replacement reserve escrows (14,933) (17,068) (27,713)
Depreciation and amortization 3,724,717 3,600,639 3,387,658
Extraordinary loss from early extinguishment
of debt -- 288,156 --
Changes in assets and liabilities:
Decrease (increase) in cash restricted for
tenant security deposits (16,860) 13,336 130,341
Decrease (increase) in prepaid expenses and
other assets 89,646 (1,284,748) (6,508)
Increase in accrued real estate taxes 58,500 290,000 --
Increase in accrued expenses and other
liabilities 591,492 7,037 21,147
Decrease in due to affiliates -- (26,480) (7,847)
------------ ------------ --------------
Net cash provided by
operating activities 5,125,473 2,278,333 3,378,003
------------ ------------ --------------
Cash flow from investing activities:
Deposits to replacement reserve escrows (306,512) (212,912) (212,912)
Withdrawals from replacement reserve escrows 57,030 519,865 280,477
Additions to fixed assets (1,489,791) (1,728,096) (2,413,114)
Increase in accrued expenses and other liabilities
related to fixed asset additions 495 -- --
------------ ------------ --------------
Net cash used in investing activities (1,738,778) (1,421,143) (2,345,549)
------------ ------------ --------------
Cash flow from financing activities:
Proceeds from mortgage note payable -- 11,000,000 --
Repayment of mortgage notes payable -- (10,309,332) --
Payment of prepayment premium -- (210,825) --
Principal payments on mortgage notes payable (564,742) (559,944) (530,699)
Increase in deferred expenses (9,285) (227,478) --
Distributions (1,513,979) (1,513,979) (756,989)
------------ ------------ --------------
Net cash used in financing activities (2,088,006) (1,821,558) (1,287,688)
------------ ------------ --------------
Net increase (decrease) in cash and cash equivalents 1,298,689 (964,368) (255,234)
Cash and cash equivalents, beginning of year 802,726 1,767,094 2,022,328
------------ ------------ --------------
Cash and cash equivalents, end of year $ 2,101,415 $ 802,726 $ 1,767,094
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION
Krupp Realty Limited Partnership-V ("KRLP-V") was formed on June 16,
1983 by filing a Certificate of Limited Partnership in The Commonwealth of
Massachusetts. KRLP-V terminates on December 31, 2020, unless earlier terminated
upon the sale of the last of KRLP-V's properties or the occurrence of certain
other events as set forth in the Partnership Agreement.
KRLP-V issued all of the General Partner Interests to The Krupp
Corporation ("Krupp Corp.") (a Massachusetts corporation) and The Krupp Company
Limited Partnership-II ("KLCP-II") (a Massachusetts limited partnership), in
exchange for capital contributions aggregating $1,000. Except under certain
limited circumstances upon termination of KRLP-V, the General Partners are not
required to make any additional capital contributions. KRLP-V also issued all of
the Original Limited Partner Interests to KCLP-II in exchange for a capital
contribution of $4,000.
On September 6, 1983, KRLP-V commenced the marketing and sale of units
of Investor Limited Partner Interest ("Units") for $1,000 per Unit. The public
offering was closed on December 2, 1983 at which time a total of 35,200 Units
had been sold for $35,200,000.
On March 20, 1989, the General Partners formed Krupp Realty Park
Place-Chicago Limited Partnership ("Realty-V") as a prerequisite for the
refinancing of Park Place Tower Apartments ("Park Place"). At the same time, the
General Partners transferred ownership of Park Place to Realty-V. The General
Partner of Realty-V is Krupp Corp. The Limited Partner of Realty-V is KRLP-V.
Krupp Corp. has beneficially assigned its interest in Realty-V to KRLP-V. KRLP-V
and Realty-V are collectively known as Krupp Realty Limited Partnership-V and
Subsidiary (collectively referred to herein as the "Partnership").
B. SIGNIFICANT ACCOUNTING POLICIES
The Partnership uses the following accounting policies for financial
reporting purposes, which may differ in certain respects from those
used for federal income tax purposes (see Note J).
BASIS OF PRESENTATION
The consolidated financial statements present the consolidated assets,
liabilities and operations of the Partnership. All intercompany
balances and transactions have been eliminated.
RISKS AND UNCERTAINTIES
The Partnership invests its cash primarily in deposits and money market
funds with commercial banks. The Partnership has not experienced any
losses to date on its invested cash.
F-7
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities, contingent assets and liabilities and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Partnership includes all short-term investments with maturities of
three months or less from the date of acquisition in cash and cash
equivalents. The cash investments are recorded at cost, which
approximates current market values.
RENTAL REVENUES
Leases require the payment of base rent monthly in advance. Rental
revenues are recorded on the accrual basis.
DEPRECIATION
Depreciation is provided for by the use of the straight-line method
over estimated useful lives of the related assets as follows:
Buildings and improvements 5 to 25 years
Appliances, carpeting and equipment 3 to 8 years
IMPAIRMENT OF LONG-LIVED ASSETS
Real estate assets and equipment are stated at depreciated cost.
Pursuant to Statement of Financial Accounting Standards Opinion No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," impairment losses are recorded on
long-lived assets used in operations on a property by property basis,
when events and circumstances indicate that the assets might be
impaired and the estimated undiscounted cash flows to be generated by
those assets are less than the carrying amount of those assets. Upon
determination that an impairment has occurred, those assets shall be
reduced to fair value.
DEFERRED EXPENSES
Costs of obtaining and recording mortgages on the properties are
amortized over the term of the related mortgage notes using the
straight-line method which approximates the effective interest method.
INCOME TAXES
The Partnership is not liable for federal or state income taxes as
Partnership income or loss is allocated to the Partners for income tax
purposes. In the event that the Partnership's tax returns are examined
by the Internal Revenue Service or state taxing authority and the
examination results in a change in the Partnership's taxable income or
loss, such change will be reported to the Partners.
F-8
<PAGE>
DESCRIPTIVE INFORMATION ABOUT REPORTABLE SEGMENTS
During the fourth quarter of 1998, the Partnership adopted the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information ("Statement No. 131"). Statement No.
131 superseded FASB Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise." Statement No. 131 establishes standards for
the way that public business enterprises report information regarding
reportable operating segments. The adoption of Statement No. 131 did
not affect the results of operations or financial position of the
Partnership.
The Partnership operates and develops apartment communities which
generate rental and other income through the leasing of apartment
units. The General Partners separately evaluate the performance of each
of the Partnership's apartment communities. However, because each of
the apartment communities have similar economic characteristics,
facilities, services and tenants, the apartment communities have been
aggregated into a single dominant apartment communities segment.
All revenues are from external customers and no revenues are generated
from transactions with other segments. There are no tenants which
contributed 10% or more of the Partnership's total revenue during 1998,
1997 or 1996.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with
current year consolidated financial statement presentation.
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
----------- --------
<S> <C> <C>
Cash and money market accounts $ 405,431 $802,726
Treasury bills 1,695,984 -
----------- --------
$2,101,415 $802,726
========== ========
</TABLE>
F-9
<PAGE>
D. MORTGAGE NOTES PAYABLE
The properties owned by the Partnership are pledged as collateral for
the non-recourse mortgage notes outstanding at December 31, 1998 and 1997.
Mortgage notes payable consisted of the following:
<TABLE>
<CAPTION>
Principal Annual
------------------------------- Interest
1998 1997 Rate Maturity Date
------------ ------------ --------- ---------------
<S> <C> <C> <C> <C>
Century II Apartments $10,882,768 $11,000,000 6.75% January 1, 2008
Park Place Tower Apartments 30,953,469 31,400,979 6.75% May 1, 2024
------------ ------------
Total $41,836,237 $42,400,979
=========== ===========
</TABLE>
CENTURY II APARTMENTS
On December 10, 1997, the Partnership completed the refinancing of the
Century II Apartments mortgage note. The property was refinanced with a
$11,000,000 non-recourse mortgage note payable at the rate of 6.75% per annum
with monthly principal and interest payments of $71,346. The mortgage note,
which is collateralized by the property, matures on January 1, 2008 at which
time the remaining principal (approximately $9,401,537) and accrued interest are
due. The note may be prepaid, subject to a prepayment penalty, at any time with
30 days notice. The Partnership used the majority of the proceeds from the
refinancing to repay the existing mortgage note on the property of $10,309,332,
pay closing costs of $236,763, to pay a prepayment premium of $210,825 and to
establish various escrows. The prepayment premium as well as unamortized
deferred mortgage costs of $77,331, are reported in the Statement of Operations
as an extraordinary loss from early extinguishment of debt for the year ended
December 31, 1997.
At December 31, 1996, the property was subject to a non-recourse first
mortgage note of $11,000,000, which was payable in equal monthly installments of
principal and interest of $104,844, based on a 25-year amortization schedule.
Based on the borrowing rates currently available to the Partnership for
bank loans with similar terms and average maturities, the fair value of long
term debt is approximately $10,898,000 and $10,470,000 for the years ended
December 31, 1998 and 1997, respectively.
PARK PLACE TOWER APARTMENTS
The property is subject to a non-recourse mortgage note in the original
amount of $33,000,000, dated September 15, 1993, held by the U.S. Department of
Housing and Urban Development ("HUD"). The note is payable in equal monthly
installments of principal and interest of $212,783, based on a 31-year
amortization. At maturity, all unpaid principal (approximately $1,457,000) and
any accrued interest are due. The note may be prepaid subject to a prepayment
premium. In the event prepayment of principal occurs, a prepayment premium shall
be due, based on a declining premium rate of 5% to 0% of the outstanding
principal balance over a period of 5 years. As stipulated in the Regulatory
Agreement with HUD, the Partnership makes monthly deposits of $17,743 in an
established reserve for replacements to be used for improvements. Under the
terms of the loan, HUD restricts the distribution of funds to Surplus Cash, as
defined by HUD in the Regulatory Agreement.
F-10
<PAGE>
Based on the borrowing rates currently available to the Partnership for
bank loans with similar terms and average maturities, the fair value of
long-term debt is approximately $31,766,000 at December 31, 1998. At December
31, 1997, the fair market value could not be determined since the mortgage note
could not be prepaid until 1998.
Due to restrictions on transfers and prepayment, the Partnership may be
unable to refinance certain mortgage notes payable at such calculated fair
value.
The aggregate scheduled principal amounts of long-term borrowings due
during the five years ending December 31, 2003 are $600,689, $642,513, $687,250,
$735,102 and $786,286.
During the years ended December 31, 1998, 1997 and 1996, the
Partnership paid $2,844,807, $3,221,886 and $3,280,828 of interest on its
mortgage notes, respectively.
E. RELATED PARTY TRANSACTIONS
The Partnership pays property management fees to an affiliate of the
General Partners for management services. Pursuant to the management agreements,
management fees are payable monthly at a rate of 5% of the gross receipts from
the properties under management. The Partnership also reimburses affiliates of
the General Partners for certain expenses incurred in connection with the
operation of the Partnership and its properties, including administrative
expenses.
Amounts accrued or paid to the General Partners' affiliates during the
years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Property management fees $506,198 $475,569 $442,295
Expense reimbursements 307,468 317,432 288,226
-------- -------- --------
Charged to operations $813,666 $793,001 $730,521
======== ======== ========
</TABLE>
Expense reimbursements due from affiliates of $1,456 were included in
prepaid expenses and other assets for the year ended December 31, 1998.
In addition to the amounts above, refinancing costs of $110,000 were
paid to the General Partners' affiliates during the year ended December 31,
1997.
F. LEGAL PROCEEDING
The Partnership is a defendant in a class action suit related to the
practice of giving discounts for the early or timely payments of rent at Park
Place Apartments ("Park Place") and Marine Terrace Apartments, a previously
owned property. The central issue of the complaint is whether the operative
lease violated a Chicago municipal ordinance relating to late fee charges
because it allowed tenants a discount if rent was paid on or before the first of
the month. The allegation was that, notwithstanding the stated rental rate and
printed discount, the practice represented an unlawful means of exacting late
fee charges. In addition to seeking damages for any "forfeited" discounts,
plaintiffs seek statutory damages of two months rent per lease violation
F-11
<PAGE>
and reasonable attorneys' fees. To be eligible for such damages plaintiffs must
prove that the defendants deliberately used a provision prohibited by the
ordinance.
During 1994, the Court ruled in favor of the defendants, and
accepted the Partnership's Motion to Dismiss the Plaintiff's Third Amended
Complaint. The plaintiffs filed an appeal with the Appellate Court of Illinois,
First District. During 1996, the decision was reversed on appeal and the case
remanded to trial court for further proceedings. The defendants intend to
vigorously defend this case.
Continued discussions with Plaintiffs' counsel have resulted in a
tentative settlement which was presented to the court in December, 1998.
Although the settlement has not been finalized, the Partnership recorded
provisions totaling $1,015,000 in the 1998 and 1997 consolidated financial
statements of $733,000 and $282,000, respectively.
G. PARTNERS' DEFICIT
Under the terms of the Partnership Agreement, losses from operations
are allocated 99% to the Investor Limited Partners and 1% to the General
Partners and profits from operations are allocated 93% to the Investor Limited
Partners, 6% to the Original Limited Partner and 1% to the General Partners
until such time that the Investor Limited Partners have received a return of
their total invested capital plus a 9% per annum cumulative return thereon and
thereafter, 65% to the Investor Limited Partners, 28% to the Original Limited
Partner and 7% to the General Partners.
Profits from Capital Transactions are allocated first, to the
Investor Limited Partners until they have received a return of their total
invested capital. Thereafter, profits from Capital Transactions are allocated in
accordance with the Partnership Agreement. Losses from Capital Transactions are
allocated 99% to the Investor Limited Partners and 1% to the General Partners.
Notwithstanding anything above, the General Partners shall be allocated at least
1% of all profits and losses from Capital Transactions.
Under the Partnership Agreement, cash distributions are made on the
same basis as the allocations of profits described above. Pursuant to the
Partnership Agreement, proceeds from Capital Transactions shall first be applied
to the payment of all debts and liabilities of the Partnership and second to
fund reserves for contingent liabilities. The remaining net cash proceeds shall
then be distributed in accordance with the Partnership Agreement.
As of December 31, 1998, the following cumulative partner
contributions and allocations have been made since inception of the Partnership:
<TABLE>
<CAPTION>
Investor Limited Original General
Partners Limited Partner Partners Total
---------------- --------------- -------- -----
<S> <C> <C> <C> <C>
Capital contributions $35,200,000 $ 4,000 $ 1,000 $ 35,205,000
Syndication costs (4,501,000) - - (4,501,000)
Distributions (7,619,303) (478,576) (79,762) (8,177,641)
Net income (loss)
before capital
transactions (39,885,037) 54,515 (402,327) (40,232,849)
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Investor Limited Original General
Partners Limited Partner Partners Total
------------ --------------- -------- -----
<S> <C> <C> <C> <C>
Net gains on capital
transactions 6,674,964 - 67,424 6,742,388
------------ --------- --------- ------------
Balance at December 31, 1998 $(10,130,376) $(420,061) $(413,665) $(10,964,102)
============ ========= ========= ============
</TABLE>
H. FUTURE BASE RENTS DUE UNDER COMMERCIAL OPERATING LEASES
Future base rent receivable under commercial operating leases for
the years 1999 through 2003 and thereafter is as follows:
<TABLE>
<S> <C>
1999 $149,330
2000 93,989
2001 81,653
2002 82,361
2003 71,177
Thereafter 155,981
</TABLE>
I. REAL ESTATE TAXES
During the third quarter of 1996, the Partnership successfully
petitioned for the reassessment of prior years' real estate taxes on Park Place
Tower Apartments. The Partnership received tax refunds toward the 1986, 1987,
1988 and 1990 real estate taxes totaling approximately $325,000, which was
reflected as a reduction in the 1996 real estate tax expense.
J. FEDERAL INCOME TAXES
For federal income tax purposes, the Partnership is depreciating
property using the Accelerated Cost Recovery System ("ACRS") and the Modified
Accelerated Cost Recovery System ("MACRS") depending on which is applicable.
The reconciliation of the net income (loss) reported in the
accompanying Consolidated Statement of Operations with the net income (loss)
reported in the Partnership's federal income tax return for the years ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) per Consolidated
Statement of Operations $692,911 $(592,539) $(119,075)
Difference between book and tax
depreciation and amortization 414,641 317,863 (30,155)
Difference between book and tax legal
adjustment 733,000 113,526 168,474
------- ------- -------
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net income (loss) for federal income tax purposes $1,840,552 $(161,150) $19,244
========== ========== =======
</TABLE>
The allocation of the net income for federal income tax purposes for 1998 is as
follows:
<TABLE>
<CAPTION>
Portfolio Income Passive Income Total
---------- ------------ ------------
<S> <C> <C> <C>
Investor Limited Partners $101,864 $1,609,849 $1,711,713
Original Limited Partner 6,572 103,861 110,433
General Partners 1,096 17,310 18,406
---------- ------------ ------------
$109,532 $1,731,020 $1,840,552
======== ========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996 the per Unit
net income (loss) to the Investor Limited Partners for federal income tax
purposes were $48.63, $(4.58) and $.54, respectively.
The basis of the Partnership's assets for financial reporting
purposes exceeded its tax basis by approximately $7,651,000 and $8,063,500 at
December 31, 1998 and 1997, respectively. The basis of the Partnership's
liabilities for financial reporting purposes exceeded its tax basis by
approximately $1,015,000 and $282,000 at December 31, 1998 and 1997,
respectively.
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO DEPRECIABLE
INITIAL COSTS TO PARTNERSHIP ACQUISITION LIFE
---------------------------- ----------------- -----------
BUILDINGS BUILDINGS
AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS DEPRECIABLE LIFE
----------- ------------ ---- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Century II
Apartments
Cockeysville,
Maryland $ 10,882,768 $ 1,049,868 $ 13,948,246 $ 5,333,839 3 to 25 years
Park Place Tower
Apartments
Chicago,
Illinois 30,953,469 2,877,561 38,230,448 12,442,380 3 to 25 years
------------- ----------- ------------- -------------
Total $ 41,836,237 $ 3,927,429 $ 52,178,694 $ 17,776,219
============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNTS CARRIED AT
END OF YEAR
---------------------------
BUILDINGS YEAR
AND ACCUMULATED YEAR CONSTRUCTION
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED COMPLETED
----------- ---- ------------ ----- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Century II
Apartments
Cockeysville,
Maryland $ 1,049,868 $ 19,282,085 $ 20,331,953 $ 12,758,634 1984 1971
Park Place Tower
Apartments
Chicago,
Illinois 2,877,561 50,672,828 53,550,389 32,534,053 1984 1973
------------ -------------- ------------ --------------
Total $ 3,927,429 $ 69,954,913 $ 73,882,342 $ 45,292,687
============ ============== ============ ==============
</TABLE>
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION, Continued
December 31, 1998
Reconciliation of Real Estate and Accumulated Depreciation for each of the three
years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
REAL ESTATE
<S> <C> <C> <C>
Balance at beginning of year $72,392,551 $70,664,455 $68,251,341
Acquisition and improvements 1,489,791 1,728,096 2,413,114
----------- ----------- -----------
Balance at end of year $73,882,342 $72,392,551 $70,664,455
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION 1998 1997 1996
- ---------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $41,602,481 $38,066,263 $34,745,814
Depreciation expense 3,690,206 3,536,218 3,320,449
----------- ----------- -----------
Balance at end of year $45,292,687 $41,602,481 $38,066,263
=========== =========== ===========
</TABLE>
Note: The Partnership uses the cost basis for property valuation for both income
tax and financial statement purposes. The aggregate cost for of the
Partnership's real estate for federal income tax purposes was $73,894,392 and
the aggregate accumulated depreciation for federal income tax purposes is
$52,945,211 at December 31, 1998.
<PAGE>
Quarterly Financial Statements:
Balance Sheet at September 30, 1999 (unaudited) and December 31, 1998 F-17
Statements of Operations (unaudited) for the three months ended
September 30, 1999 and September 30, 1998; and for the nine months
ended September 30, 1999 and September 30, 1998 F-19
Statements of Cash Flows (unaudited) for the three months ended
September 30, 1999 and September 30, 1998 F-20
Notes to (Unaudited) Financial Statements F-21-F-24
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Multi-family apartment complexes net of accumulated
depreciation of $47,876,135 and $45,292,687, respectively $27,214,103 $28,589,655
Cash and cash equivalents (Note 2) 3,806,917 2,101,415
Cash restricted for tenant security deposits 320,149 311,432
Replacement reserve escrows 750,758 664,186
Prepaid expenses and other assets (Note 5) 1,465,716 2,572,492
Deferred expenses, net of accumulated amortization of $108,668
and $82,843, respectively 456,704 482,529
----------- -----------
Total assets $34,014,347 $34,721,709
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Mortgage notes payable $41,387,023 $41,836,237
Accrued real estate taxes 1,504,557 2,008,500
Accrued expenses and other liabilities (Note 3) 2,026,803 1,841,074
------------ ------------
Total liabilities 44,918,383 45,685,811
------------ ------------
Contingency (Note 3):
Partners' deficit (Note 4):
Investor Limited Partners
(35,200 Units outstanding) (10,074,515) (10,130,376)
Original Limited Partner (416,456) (420,061)
General Partners (413,065) (413,665)
------------ ------------
Total Partners' deficit (10,904,036) (10,964,102)
------------ ------------
</TABLE>
F-17
<PAGE>
<TABLE>
<S> <C> <C>
Total liabilities and Partners' deficit $34,014,347 $34,721,709
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-18
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ --------------------------------
1999 1998 1999 1998
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 3,922,597 $ 3,807,018 $ 11,634,413 $ 11,193,425
Interest income 53,528 28,705 129,135 84,026
----------- ----------- ------------ ------------
Total revenue 3,976,125 3,835,723 11,763,548 11,277,451
----------- ----------- ------------ ------------
Expenses:
Operating (Note 5) 961,011 652,721 2,652,161 2,351,381
Maintenance 292,786 291,869 705,272 658,108
General and administrative (Note 5) 76,592 43,876 196,675 125,223
Real estate taxes 189,102 572,843 1,334,783 1,728,890
Management fees (Note 5) 178,426 140,224 467,815 395,309
Depreciation and amortization 894,245 967,685 2,609,273 2,751,909
Interest 738,374 748,796 2,223,525 2,254,400
----------- ----------- ------------ ------------
Total expenses 3,330,536 3,418,014 10,189,504 10,265,220
----------- ----------- ------------ ------------
Net income $ 645,589 $ 417,709 $ 1,574,044 $ 1,012,231
=========== =========== ============ ============
Allocation of net income (Note 4):
Investor Limited Partners
(35,200 Units outstanding) $ 600,398 $ 388,469 $ 1,463,861 $ 941,375
=========== =========== ============ ============
Investor Limited Partners Per Unit $ 17.06 $ 11.03 $ 41.59 $ 26.74
=========== =========== ============ ============
Original Limited Partner $ 38,735 $ 25,063 $ 94,443 $ 60,734
=========== =========== ============ ============
General Partners $ 6,456 $ 4,177 $ 15,740 $ 10,122
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-19
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,574,044 $1,012,231
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest earned on replacement reserve escrow (8,842) (9,521)
Depreciation and amortization 2,609,273 2,751,909
Changes in assets and liabilities:
Increase in cash restricted for tenant security
deposits (8,717) (18,382)
Decrease (Increase) in prepaid expenses and other
assets 1,106,776 (601,804)
Increase (Decrease) in accrued real estate taxes (503,943) 660,095
Increase in accrued expenses and other liabilities 185,729 (121,056)
---------- ----------
Net cash provided by operating activities 4,954,320 3,673,472
--------- ---------
Cash flows from investing activities:
Deposits to replacement reserve escrows (229,884) (229,884)
Withdrawals from replacement reserve escrows 152,154 57,030
Additions to fixed assets (1,207,896) (1,002,347)
Increase in accrued expenses and other liabilities
related to fixed asset additions -- 3,349
----------- -----------
Net cash used in investing activities (1,285,626) (1,171,852)
----------- -----------
Cash flows from financing activities:
Principal payments on mortgage notes payable (449,214) (419,973)
Increase in deferred expenses -- (9,285)
Distributions (1,513,978) (1,513,979)
----------- -----------
Net cash used in financing activities (1,963,192) (1,943,237)
----------- -----------
Net increase in cash and cash equivalents 1,705,502 558,383
Cash and cash equivalents, beginning of period 2,101,415 802,726
----------- -----------
Cash and cash equivalents, end of period $3,806,917 $1,361,109
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-20
<PAGE>
KRUPP REALTY LIMITED PARTNERSHIP-V AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies
--------------------
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this report on Form 10-Q pursuant to the Rules
and Regulations of the Securities and Exchange Commission. In the opinion of the
General Partners of Krupp Realty Limited Partnership-V and Subsidiary (the
"Partnership") the disclosures contained in this report are adequate to make the
information presented not misleading. See Notes to Consolidated Financial
Statements included in the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1998 for additional information relevant to significant
accounting policies followed by the Partnership.
In the opinion of the General Partners of the Partnership, the accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the Partnership's
consolidated financial position as of September 30, 1999, its results of
operations for the three and nine months ended September 30, 1999 and 1998
and its cash flows for the nine months ended September 30, 1999 and 1998.
The results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results which may be expected for
the full year.
(2) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash and money market accounts $2,436,248 $ 405,431
Treasury bills 1,370,669 1,695,984
--------- ---------
$3,806,917 $2,101,415
========== ==========
</TABLE>
(3) Legal Proceeding
----------------
The Partnership is a defendant in a class action suit related to the practice of
giving discounts for the early or timely payments of rent at Park Place
Apartments ("Park Place") and Marine Terrace Apartments, a previously owned
property. The central issue of the complaint was whether the operative lease
violated a Chicago municipal ordinance relating to late fee charges because it
allowed tenants a discount if rent was paid on or before the first of the month.
The allegation was that, notwithstanding the stated rental rate and printed
discount, the practice represented an unlawful means of exacting late fee
charges. In addition to seeking damages for any "forfeited" discounts,
plaintiffs seek statutory damages of two months rent per lease violation and
reasonable
F-21
<PAGE>
attorneys' fees. To be eligible for such damages, plaintiffs must prove that the
defendants deliberately used a provision prohibited by the ordinance.
During 1994, the Court ruled in favor of the defendants and accepted the
Partnership's Motion to Dismiss the Plaintiff's Third Amended Complaint. The
plaintiffs filed an appeal with the Appellate Court of Illinois, First District.
During 1996, the decision was reversed on appeal and the case remanded to trial
court for further proceedings. The defendants have continued to vigorously
defend the case.
Continued discussions with Plaintiffs' counsel have resulted in a settlement
which was presented to the court on July 28, 1999. The court granted preliminary
approval of the settlement agreement and a hearing on the fairness of the
settlement has been scheduled for November 18, 1999. Although the settlement has
not received final approval by the court, the Partnership has recorded
provisions totaling $1,015,000 in the consolidated financial statements at
September 30, 1999 and December 31, 1998.
(4) Changes in Partners' Deficit
----------------------------
A summary of changes in Partners' deficit for the nine months ended September
30, 1999 is as follows:
<TABLE>
<CAPTION>
Investor Original Total
Limited Limited General Partners'
Partners Partner Partners Deficit
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1998 $(10,130,376) $(420,061) $(413,665) $(10,964,102)
Net income 1,463,861 94,443 15,740 1,574,044
Distributions (1,408,000) (90,838) (15,140) (1,513,978)
-------------- ------------ ------------ --------------
Balance at September 30, 1999 $(10,074,515) $(416,456) $(413,065) $(10,904,036)
============= ========== ========== =============
</TABLE>
(5) Related Party Transactions
--------------------------
The Partnership pays property management fees to an affiliate of the General
Partners for management services. Pursuant to the management agreements,
management fees are payable monthly at a rate of 5% of the gross receipts from
the properties under management. The Partnership also reimburses affiliates of
the General Partners for certain expenses incurred in connection with the
operation of the Partnership and its properties, including administrative
expenses.
F-22
<PAGE>
Amounts accrued or paid to the General Partners' affiliates were as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Property management fees $178,426 $140,224 $467,815 $395,309
Expense reimbursements 100,691 79,283 275,029 201,456
--------- ---------- --------- ---------
Charged to operations $279,117 $219,507 $742,844 $596,765
======== ======== ======== ========
</TABLE>
Expense reimbursements due from affiliates of $8,323 and $1,456 were included in
prepaid expenses and other assets at September 30, 1999 and December 31, 1998,
respectively.
F-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning
Management's expectations regarding the future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
Liquidity and Capital Resources
- -------------------------------
The Partnership's ability to generate cash adequate to meet its needs is
dependent primarily upon the operating performance of its real estate
investments. Such ability would also be impacted by the future availability of
bank borrowing sources as current debt matures. These sources of liquidity will
be used by the Partnership for payment of expenses related to real estate
operations, capital improvements, debt service and other expenses. Cash Flow, if
any, as calculated under Section 8.2(a) of the Partnership Agreement, will then
be available for distribution to the Partners.
Year 2000
- ---------
The General Partners of the Partnership have conducted an assessment of the
Partnership's core internal and external computer information systems and have
taken the further necessary steps to understand the nature and extent of the
work required to make its systems Year 2000 ready in those situations in which
it is required to do so. The Year 2000 readiness issue concerns the inability of
computerized information systems to accurately calculate, store or use a date
after 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations.
In this regard, the General Partners of the Partnership, along with certain
affiliates, began a computer systems project in 1997 to significantly upgrade
its existing hardware and software. The General Partners completed the testing
and conversion of the financial accounting operating systems in February 1998.
As a result, the General Partners have generated operating efficiencies and
believe their financial accounting operating systems are Year 2000 ready. The
General Partners incurred hardware costs as well as consulting and other
expenses related to the infrastructure and facilities enhancements necessary to
complete the upgrade and prepare for the Year 2000. There are no other
significant internal systems or software that the Partnership is using at the
present time.
The General Partners of the Partnership have evaluated Year 2000 compliance
issues with respect to its non-financial systems, such as computer controlled
elevators, boilers, chillers or other miscellaneous systems. The General
Partners do not anticipate any problems in its non-financial systems.
The General Partners of the Partnership surveyed the Partnership's material
third-party service providers (including but not limited to its banks and
telecommunications providers) and significant vendors and received assurances
that such providers and vendors are to be Year 2000 ready. The General
Partners do not anticipate any problems with such providers and vendors that
would materially impact its results of operations, liquidity or capital
resources.
F-24
<PAGE>
In addition, the Partnership is also subject to external forces that might
generally affect industry and commerce, such as utility and transportation
company Year 2000 readiness failures and related service interruptions. However,
the General Partners do not anticipate these would materially impact its results
of operations, liquidity or capital resources.
Operations
- ----------
The following discussion relates to the operations of the Partnership and its
properties (Park Place and Century) for the three and nine months ended
September 30, 1999 and 1998.
Net income increased for the three and nine months ended September 30, 1999 as
compared to the same periods in 1998, as rental revenue increased and total
expenses remained relatively stable.
The increase in rental revenue for the three and nine months ended September 30,
1999 when compared to the same periods in 1998 is attributable to residential
rental rate increases implemented at Park Place and Century during the second
half of 1998 and the first quarter of 1999. Interest income increased as average
cash and cash equivalent balances increased between the periods.
Total expenses remained relatively stable when comparing the three and nine
months ending September 30, 1999 to the same periods of 1998 as the increase in
operating, general and administrative and management fee expenses were offset by
a decrease in real estate taxes and depreciation expenses. Operating expense
increased in the third quarter of 1999, resulting from increases in electricity
expense and an increase in workmen's compensation expense due to an adjustment
to the workmen's compensation reserve in 1998. General and administrative
expense increased due to higher expenses incurred in connection with preparation
and mailing of Partnership reports and other investor communications. Property
management fees increased in conjunction with the increase in rental revenue as
discussed above. Real estate taxes decreased during the third quarter of 1999
due to an abatement, of approximately $245,000, and refund of prior years taxes
received by Park Place. Depreciation expense decreased as fixed asset additions
purchased in previous years at Park Place became fully depreciated.
F-25
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
------
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
.................................................................... 1
SUMMARY ..................................................................... 2
Parties to the Transaction ......................................... 2
Date, Time and Place of Special Meeting ............................ 3
Purpose of the Special Meeting ..................................... 3
What Unitholders Will Receive in the Merger ........................ 3
Vote Required ...................................................... 3
Independent Appraisals of Properties ............................... 3
Purpose of and Reasons for the Merger .............................. 3
Fairness of the Merger; Conflicts of Interest ...................... 4
Financing of the Merger ............................................ 4
Material Federal Income Tax Consequences ........................... 4
Market Information ................................................. 4
Rights of Appraisal ................................................ 5
Forward-Looking Statements ......................................... 5
Selected Historical Financial Information .......................... 5
SPECIAL FACTORS ............................................................. 7
Background of the Merger; Purpose of the Transaction ............... 7
Alternatives to the Merger ......................................... 8
Fairness of the Merger ............................................. 9
Disadvantages and Risks Associated with the Merger ................. 11
Conflicts of Interest .............................................. 11
Independent Appraisals ............................................. 12
Determination of Merger Price ............................................... 15
Effects of the Transaction .................................................. 16
Failure to Approve the Merger ...................................... 17
Plans or Proposals by Partnership or Affiliates Following the Merger 17
Financing of the Merger ............................................ 17
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ........................... 18
THE SPECIAL MEETING ......................................................... 20
Special Meeting; Record Date ....................................... 20
Procedures for Completing Proxies .................................. 20
Votes Required ..................................................... 21
Solicitation Procedures ............................................ 22
Revocation of Proxies .............................................. 22
Appraisal Rights ................................................... 23
THE MERGER AGREEMENT ........................................................ 23
Closing Date; Effective Time of the Merger ......................... 23
Effects of the Merger .............................................. 23
Payment ............................................................ 23
Authority and Consent of the Purchaser ............................. 24
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Representations And Warranties of the Parties ...................... 24
Conditions to the Merger ........................................... 24
Termination ........................................................ 25
Amendment .......................................................... 25
Waiver ............................................................. 25
The Surviving Entity ............................................... 25
RELATED AGREEMENTS .......................................................... 25
THE AMENDMENT TO THE PARTNERSHIP AGREEMENT .................................. 26
Purpose ............................................................ 26
The Amendment ...................................................... 26
INFORMATION ABOUT THE PARTNERSHIP, ITS GENERAL PARTNERS AND THEIR AFFILIATES 27
The Partnership .................................................... 27
The General Partners ............................................... 28
Distributions ...................................................... 30
Ownership of Units ................................................. 30
Market for the Units ............................................... 31
Related Party Transactions ......................................... 31
SELECTED FINANCIAL DATA ..................................................... 32
INFORMATION CONCERNING THE PURCHASER AND ITS AFFILIATES ..................... 33
The Purchaser ...................................................... 33
Affiliates of the Purchaser ........................................ 34
WHERE YOU CAN FIND MORE INFORMATION ......................................... 34
General ............................................................ 34
Independent Accountants ............................................ 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .................................. F-1
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page #
------
<S> <C>
APPENDIX A - THE MERGER AGREEMENT
APPENDIX B - AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF LIMITED
PARTNERSHIP OF KRUPP REALTY LIMITED PARTNERSHIP - V
APPENDIC C - FORM OF PROXY CARD
</TABLE>
iii
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made
and entered into as of ______________, 2000 by and between KR5 Acquisition,
L.L.C., a Delaware limited liability company (the "COMPANY" or, after the
Effective Time (as defined in Article V hereof), the "SURVIVING ENTITY"), and
Krupp Realty Limited Partnership-V, a Massachusetts limited partnership (the
"PARTNERSHIP").
W I T N E S S E T H:
-------------------
WHEREAS, the Company is a limited liability company duly
formed and validly existing under the laws of the State of Delaware;
WHEREAS, the Partnership is a limited partnership duly formed
and validly existing under the laws of the Commonwealth of Massachusetts;
WHEREAS, the Massachusetts Revised Uniform Limited Partnership
Act, Mass. Gen. Laws Ann. ch. 109, Sections 1-62 (THE "MASSACHUSETTS LP Act"),
and the Delaware Limited Liability Company Act, 6 DEL. C. Sections 18-101 ET
SEQ. (the "DELAWARE LLC ACT"), each permits a limited partnership formed and
existing under the Massachusetts LP Act to merge with and into a limited
liability company formed and existing under the Delaware LLC Act;
WHEREAS, the members of the Company have authorized and the
general partners and limited partners of the Partnership have duly authorized
the merger of the Partnership with and into the Company pursuant to the terms of
this Agreement; and
WHEREAS, the holders of limited partnership interests of Fund
V have approved an amendment to the Amended Agreement of Limited Partnership,
dated July 27, 1983, authorizing the Partnership to enter into this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is agreed that, in
accordance with the applicable statutes of the State of Delaware and the
Commonwealth of Massachusetts, and subject to the conditions precedent contained
herein, the Partnership shall be at the Effective Time, merged with and into the
Company (the "MERGER"), with the Company to be the Surviving Entity. The mode of
carrying the Merger into effect shall be as follows:
<PAGE>
ARTICLE I
MERGER
At the Effective Time, the Partnership shall be merged with
and into the Company, the separate existence of the Partnership shall cease, the
Company shall continue in existence and the Merger shall in all respects have
the effects provided for by the Massachusetts LP Act and the Delaware LLC Act.
Prior to the Effective Time, the Company and the Partnership
shall take all such action as shall be necessary or appropriate in order to
effectuate the Merger. If at any time after the Effective Time, the Company
shall consider or be advised that any further assignments, conveyances or
assurances in law are necessary or desirable to carry out the provisions hereof,
the proper members, managers, officers or other agents of the Company, as
authorized agents and attorneys-in-fact for the Partnership (and acting in the
name of the Company or the Partnership), shall execute and deliver any and all
proper deeds, assignments, and assurances in law, and do all such additional
things necessary or proper to carry out the provisions hereof.
ARTICLE II
TERMS OF TRANSACTION
At the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, (i) the partnership interests in the
Partnership outstanding immediately prior to the Effective Time, held by (a) the
general partners of the Partnership (the "GENERAL PARTNERS"), (b) the "ORIGINAL
LIMITED PARTNERS" (as defined in the Partnership's Amended Agreement of Limited
Partnership, dated as of July 27, 1983, as amended from time to time (the
"PARTNERSHIP AGREEMENT")) and (c) the limited partners of the Partnership who
are, at the Effective Time, directly or indirectly controlling, controlled by or
under common control with the Company, Equity Resources Group Incorporated or
the General Partners ("the AFFILIATE LIMITED PARTNERS"), shall be canceled and
retired and shall cease to exist, (ii) the partnership interests of limited
partners of the Partnership who are not Affiliate Limited Partners (the
"UNAFFILIATED LIMITED PARTNERS") outstanding immediately prior to the Effective
Time shall be canceled and converted into and represent the right to receive in
exchange therefor $[_____] per "UNIT" (as defined in the Partnership Agreement),
without interest thereon, payable by the Surviving Entity to the holder of such
Unit (as reflected on the records of the Partnership at the Effective Time) upon
receipt by the Surviving Entity of the Proof of Ownership Form hereto, a
Substitute Form W-9 and any other additional documentation necessary or
desirable to complete the conversion of the Units required which the Surviving
Entity shall reasonably request from the holder, (iii) the limited liability
company interests held by the members of the Company outstanding immediately
prior to the Effective Time shall remain the outstanding limited liability
company interests of such members of the Company, and such members shall
continue as the members of the Surviving Entity.
<PAGE>
Neither the Surviving Entity nor any other party hereto shall
be liable to a holder of Units for any payments made to a public official
pursuant to applicable abandoned property laws. The Surviving Company shall be
entitled to deduct and withhold from the amounts otherwise payable to a holder
of Units pursuant to the Merger any taxes or other amounts as are required by
applicable law, including without limitation Sections 3406 and 1445 of the
Internal Revenue Code of 1986, as amended. To the extent that amounts are so
withheld by the Surviving Entity, they shall be treated for all purposes of this
Agreement as having been paid to the holder of the Units in respect of which
such deduction and withholding was made.
After the Effective Time, the transfer books of the
Partnership shall be closed and there shall be no further registration of
transfers on the records of the Partnership of the Units that were outstanding
immediately prior to the Effective Time. As of the Effective Time, each holder
of a Unit which was converted into the right to receive cash pursuant to Article
II hereof shall be deemed to have withdrawn as a limited partner and shall have
no further interest in the Partnership or the Surviving Entity or any
allocations or distributions of income, property or otherwise, other than the
right to receive the amount as provided in this Article II.
No appraisal rights shall be available to holders of Units in
connection with the Merger.
ARTICLE III
CERTIFICATE OF FORMATION AND
LIMITED LIABILITY COMPANY AGREEMENT
From and after the Effective Time, and until thereafter
amended as provided by law, the Certificate of Formation and Limited Liability
Company Agreement of the Company as in effect immediately prior to the Effective
Time shall be the Certificate of Formation and Limited Liability Company
Agreement of the Surviving Entity.
ARTICLE IV
MANAGERS AND OFFICERS
From and after the Effective Time, and until their successors
are duly elected or appointed, or until their earlier death, resignation or
removal, the managers and officers of the Surviving Entity shall be the same as
the managers and officers of the Company immediately prior to the Effective
Time.
<PAGE>
ARTICLE V
EFFECTIVE TIME
Certificates of merger evidencing the Merger ("CERTIFICATES OF
MERGER") substantially in the form of EXHIBIT A attached hereto shall be filed
by the General Partners and the Company with the Secretary of State of the State
of Delaware and the Secretary of State of the Commonwealth of Massachusetts
pursuant to the applicable requirements of the Delaware LLC Act and the
Massachusetts LP Act. The Merger shall become effective upon the later of the
filing of the Certificates of Merger with the Secretary of State of the
Commonwealth of Massachusetts and the Secretary of State of the State of
Delaware or such other time as shall be agreed by the parties and set forth in
the Certificates of Merger and in accordance with the Massachusetts LP Act and
the Delaware LLC Act (such time of effectiveness, the "EFFECTIVE TIME").
ARTICLE VI
TERMINATION
This Agreement may be terminated at any time prior to the
Effective Time:
(i) by mutual written consent of the Company and the General
Partners;
(ii) by either the Company or the General Partners if the
Merger shall not have been consummated by [_______________]; PROVIDED, HOWEVER,
that the right to terminate this Agreement pursuant to this clause (ii) of
Article VI shall not be available to any party whose failure to perform any of
its obligations under this Agreement has been the cause of, or resulted in, the
failure of the Merger to occur on or before such date.
In the event of a termination of this Agreement by either the
Company or the General Partners, as provided in this Article VI, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of the Company or the General Partners or their respective managers or
officers, except with respect to Article IX and this second paragraph of Article
VI. Nothing herein shall relieve any party of liability with respect to any
fraud or intentional breach by any party hereto of this Agreement.
<PAGE>
ARTICLE VII
AMENDMENTS
At any time prior to the Effective Time, the Company and the
General Partners may amend, modify or supplement this Agreement in such manner
as they jointly may determine; PROVIDED, HOWEVER, that, such amendment must be
executed in writing by all parties hereto and PROVIDED FURTHER, that no such
amendment, modification, or supplement shall reduce the amount or change the
type of consideration into which each Unit shall be converted upon consummation
of the Merger or alter or change any term of the Certificate of Formation or
Limited Liability Company Agreement of the Surviving Entity.
ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party hereto to effect the
Merger are subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(i) this Agreement shall have been approved and adopted by the
partners of the Partnership in accordance with the Massachusetts LP Act and the
Partnership Agreement;
(ii) this Agreement shall have been approved and adopted by
the members of the Company in accordance with the Delaware LLC Act and the
Limited Liability Company Agreement of the Company;
(iii) no statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, promulgated or enforced by any
governmental entity, and no action, suit, claim or legal, administrative or
arbitral proceeding or investigation shall be pending before any governmental
entity which seeks to prohibit, restrain, enjoin or restrict the consummation of
the transactions contemplated by this Agreement or which seeks to subject any
party to substantial damages as a result of the consummation of the transactions
contemplated by this Agreement;
(iv) each of the parties shall have obtained the consent,
approval or waiver of each non-governmental person whose consent, approval or
waiver shall be required in order for such party to consummate the transactions
contemplated by this Agreement;
(v) since June 30, 1999, no change or event shall have
occurred which has had or could reasonably be expected to result in a Material
Adverse Effect. For purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means
any change, event or effect (a) in, on or relating to the business of the
Partnership that is, or is
<PAGE>
reasonably likely to be, materially adverse to the business, assets (including
intangible assets), liabilities (contingent or otherwise), condition (financial
or otherwise), prospects or results of operations of the Partnership and its
subsidiaries taken as a whole, or (b) that may prevent or materially delay the
performance of this Agreement by the Company or the Partnership or the
consummation of the transactions contemplated hereby.
ARTICLE IX
GOVERNING LAW
This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Delaware or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Delaware.
ARTICLE X
MISCELLANEOUS
This Agreement may be executed in counterparts, each of which
when so executed shall be deemed to be an original, and such counterparts shall
together constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement as of the day and year first above written.
KR5 ACQUISITION, L.L.C.
By: KRF Company, L.L.C.,
its managing member
By: The Krupp Family Limited Partnership-94,
its sole member
By: ____________________________
Douglas Krupp
General Partner
KRUPP REALTY LIMITED PARTNERSHIP -V
By: The Krupp Corporation,
its general partner
By: ____________________________
Douglas Krupp
Co-Chairman of the Board of Directors
<PAGE>
APPENDIX B
Amendment No. 1 to the Amended Agreement of
Limited Partnership of Krupp Realty Limited Partnership-V
---------------------------------------------------------
THIS AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF LIMITED
PARTNERSHIP, dated as of July 27, 1983 (the "Partnership Agreement"), OF KRUPP
REALTY LIMITED PARTNERSHIP-V, a Massachusetts limited partnership (the
"Partnership"), by and among The Krupp Corporation, a Massachusetts corporation,
and The Krupp Company Limited Partnership - II, a Massachusetts limited
partnership, as General Partners (together, the "General Partners"), The Krupp
Company Limited Partnership-II, as the Original Limited Partner, and those
persons admitted to the Partnership as Investor Limited Partners and providing
their Consent hereto is made as of , 2000, in accordance with the procedures
of Section 14(a) of the Partnership Agreement. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to them in the
Partnership Agreement.
1. The Partnership Agreement is amended by adding the
following prior to the last sentence of Section 6.2(b) thereof:
"At any time after February 1, 2000, the Partnership may enter
into a merger agreement with an Affiliate of the General Partner substantially
in the form of the agreement attached hereto as Annex A and provided that such
merger agreement is executed prior to August 1, 2000.
2. The Partnership Agreement is supplemented by adding the
attached Annex A as Annex A thereto.
<PAGE>
3. In all other respects the Partnership Agreement shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
persons as of the date first above written.
The Krupp Corporation,
GENERAL PARTNER
By: ____________________________
Name: Douglas Krupp
Title: CO-CHAIRMAN OF THE BOARD
OF DIRECTORS
The Krupp Company Limited Partnership-II,
GENERAL PARTNER AND ORIGINAL LIMITED PARTNER
By: The Krupp Corporation,
GENERAL PARTNER
By: ____________________________
Name: Douglas Krupp
Title: CO-CHAIRMAN OF THE BOARD
OF DIRECTORS
<PAGE>
APPENDIX C
FORM OF PROXY CARD
KRUPP REALTY LIMITED PARTNERSHIP - V
ONE BEACON STREET
SUITE 1500
BOSTON, MASSACHUSETTS 02108
SOLICITED BY THE GENERAL PARTNERS FOR THE SPECIAL MEETING OF UNITHOLDERS TO BE
HELD ON , 2000
The undersigned hereby appoints , or any of them, each
with full power of substitution, as proxies or proxy of the undersigned and
hereby authorizes them to represent and vote as designated below all investor
limited partnership units of Krupp Realty Limited Partnership - V Units (the
"Partnership") held of record by the undersigned at the close of business on
, 2000 at the Special Meeting of Unitholders (the "Special Meeting")
to be held on , 2000 at the Partnership's principal executive
offices located at One Beacon Street, Suite 1500, Boston, Massachusetts,
02108, or any adjournment or postponement thereof, and, in their discretion,
upon all matters incident to the conduct of the Special Meeting and such
other matters as may properly be brought before the Special Meeting.
This signed Voting Form revokes all proxies previously given by the
undersigned to vote at the Special Meeting of Unitholders or any adjournment or
postponement thereof. The undersigned hereby acknowledges receipt of the Notice
of Special Meeting of Unitholders and the Proxy Statement relating to the
Special Meeting.
THE GENERAL PARTNERS RECOMMEND A VOTE FOR THE FOLLOWING PROPOSAL.
To approve the Agreement and Plan of Merger between KR5 Acquisition,
L.L.C. and the Partnership and the amendment to the Partnership's Amended
Agreement of Limited Partnership, dated as of July 27, 1983, allowing the
Partnership to enter into the merger agreement and complete the merger with KR5
Acquisition, L.L.C.
/ / FOR / / AGAINST / / ABSTAIN
WHEN PROPERLY EXECUTED, THIS VOTING FORM WILL BE VOTED AS DIRECTED. IF
NO DIRECTION IS GIVEN, THIS VOTING FORM WILL BE VOTED FOR THE FOREGOING
PROPOSAL.
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW.
Dated __________________________________ 2000
--------------------------------------------
Signature
--------------------------------------------
Signature, if held jointly
Please sign exactly as your name appears on this
Voting Form. If units are registered in more
than one name, the signatures of all such
persons are required. A corporation should sign
in its full corporate name by a duly authorized
officer, stating such officer's title. Trustees,
guardians, executors and administrators should
sign in their official capacity giving their
full title as such. A partnership should sign in
the partnership name by an authorized person,
stating such person's title and relationship to
the partnership.
<PAGE>
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS VOTING FORM PROMPTLY, USING
THE ENCLOSED ENVELOPE. ALTERNATIVELY, PLEASE FORWARD BOTH SIDES OF THE
COMPLETED VOTING FORM BY FACSIMILE TO KRUPP FUNDS GROUP LIMITED
PARTNERSHIP AT 617-423-8919.
/ / I HAVE READ THE ABOVE AND WOULD LIKE TO ATTEND THE SPECIAL
MEETING IN PERSON. PLEASE SEND ME A TICKET FOR ADMISSION TO THE MEETING.
