<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1994
REGISTRATION STATEMENT NO. 33-77788
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CAPSTONE CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
ONE PERIMETER PARK SOUTH, SUITE 335-S, BIRMINGHAM, ALABAMA 35243
(205) 967-2092
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
<TABLE>
<S> <C> <C>
MARYLAND JOHN W. MCROBERTS 63-1115479
(State of Incorporation) PRESIDENT AND CHIEF (IRS Employer Identification
EXECUTIVE OFFICER Number)
CAPSTONE CAPITAL CORPORATION
ONE PERIMETER PARK SOUTH,
SUITE 335-S
BIRMINGHAM, ALABAMA 35243
(205) 967-2092
</TABLE>
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
HEALTHSOUTH REHABILITATION CORPORATION
(Exact name of Co-Registrant as specified in its charter)
TWO PERIMETER PARK SOUTH, BIRMINGHAM, ALABAMA 35243
(205) 967-7116
(Address, including zip code, and telephone number, including area code, of
Co-Registrant's principal executive offices)
<TABLE>
<S> <C> <C>
DELAWARE RICHARD M. SCRUSHY 63-0860407
(State of Incorporation) CHAIRMAN OF THE BOARD, (IRS Employer
PRESIDENT AND CHIEF EXECUTIVE Identification Number)
OFFICER
</TABLE>
HEALTHSOUTH REHABILITATION CORPORATION
TWO PERIMETER PARK SOUTH
BIRMINGHAM, ALABAMA 35243
(205) 967-7116
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN H. COOPER, ESQ. J. GREGORY MILMOE, ESQ.
SIROTE & PERMUTT, P.C. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
2222 ARLINGTON AVENUE SOUTH 919 THIRD AVENUE
BIRMINGHAM, ALABAMA 35205 NEW YORK, NY 10022
TEL: (205) 933-7111 TEL: (212) 735-3000
FAX: (205) 930-5301 FAX: (212) 735-2000
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
CAPSTONE CAPITAL CORPORATION
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY FORM S-11
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEMS LOCATION IN PROSPECTUS
------------------------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus......... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front and Outside Back Cover
3. Summary Information and Risk Factors............. Prospectus Summary; Risk Factors
4. Determination of Offering Price.................. Outside Front Cover Page;
Underwriting
5. Dilution......................................... Dilution
6. Selling Security-Holders......................... *
7. Plan of Distribution............................. Outside Front Cover Page;
Underwriting
8. Use of Proceeds.................................. Use of Proceeds
9. Selected Financial Data.......................... Selected Historical, Pro Forma and
Estimated Financial Information
10. Management's Discussion and Analysis of Financial
Condition and Results of Operations............ Management's Discussion and Analysis
of Financial Condition and Results of
Operations
11. General Information as to Registrant............. Prospectus Summary; Risk Factors;
Management; Principal Stockholders;
Description of Securities
12. Policy with Respect to Certain Activities........ Investment and Other Policies;
Business; Management; Description of
Securities; Additional Information
13. Investment Policies of Registrant................ Business; Investment and Other
Policies
14. Description of Real Estate....................... Business
15. Operating Data................................... Business
16. Tax Treatment of Registrant and Its Security
Holders........................................ Federal Income Tax Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder
Matters........................................ Distributions to Stockholders;
Description of Securities
18. Description of Registrant's Securities........... Distributions to Stockholders;
Description of Securities
19. Legal Proceedings................................ Business
20. Security Ownership of Certain Beneficial Owners
and Management................................. Management; Principal Stockholders
21. Directors and Executive Officers................. Management
22. Executive Compensation........................... Management
23. Certain Relationships and Related Transactions... Risk Factors; Management
24. Selection, Management and Custody of Registrant's
Investments.................................... Business; Investment and Other
Policies
25. Policies with Respect to Certain Transactions.... Investment and Other Policies
26. Limitations of Liability......................... Management
27. Financial Statements and Information............. Financial Statements
28. Interests of Named Experts and Counsel........... *
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... *
</TABLE>
- ---------------
* Omitted as inapplicable.
<PAGE> 3
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED JUNE 21, 1994
PROSPECTUS
5,800,000 SHARES
[LOGO] CAPSTONE CAPITAL CORPORATION
COMMON STOCK
---------------------
All of the shares (the "Shares") of Common Stock, $.001 par value per share
(the "Common Stock"), offered hereby (the "Offering") are being issued and sold
by Capstone Capital Corporation (the "Company"), which will invest in a
diversified portfolio of income-producing healthcare-related real estate.
Concurrently with the consummation of this Offering, the Company intends to
acquire an initial portfolio of 20 properties (the "Initial Properties") to be
leased and operated by five healthcare operators. The lessees will include
HEALTHSOUTH Rehabilitation Corporation ("HEALTHSOUTH"), OrNda HealthCorp
("OrNda"), Integrated Health Services, Inc. ("Integrated Health"), Quorum Health
Group, Inc. ("Quorum") and Surgical Health Corporation ("Surgical Health") or
their subsidiaries (the "Subsidiaries"). The Company expects to qualify as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"), for the year ending December 31, 1994, and to pay
regular quarterly dividends, beginning with a dividend for the quarter ending
September 30, 1994. See "Distributions to Stockholders."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial offering price will be between
$18 and $20 per share. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price. The
Company's Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "CCT."
See "Risk Factors" for certain factors relevant to an investment in the
Common Stock offered hereby, including the following:
- The Company is recently organized and has no operating history. Failure to
consummate the purchase of one or more properties could have an adverse
effect on the amount of distributions to stockholders.
- The ability of the lessees (the "Lessees") of the properties to be
acquired by the Company to make lease payments as and when due is
dependent in part upon no material adverse change in existing government
regulation and reimbursement in the healthcare industry and on the
financial condition of such Lessees and the Guarantors of such payments.
- The initial offering price for the Common Stock is not based upon the
market value of the Initial Properties, but was determined by dividing the
estimated dividend distributions by a minimum annual yield. There can be
no assurance that the market price of the Common Stock will not decline
below the initial offering price.
- While all of the Initial Properties have been appraised and are being
purchased by the Company at purchase prices not greater than the appraised
values, appraisals are only estimates of value and should not be relied
upon as a precise measure of realizable value.
- The Company may borrow under the Bank Credit Facility, which could subject
the Company to the risks inherent in the use of borrowed funds including
the risks associated with volatility in interest rates.
- The Company will be taxed as a corporation if it fails to qualify as a
REIT. In order to qualify and to maintain the Company's qualification as a
REIT, direct and indirect beneficial ownership by any person or entity of
more than 9.8% in value of the outstanding Common Stock is restricted. See
"Description of Securities." This may have the effect of hindering
potential takeovers of the Company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<S> <C> <C> <C>
=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
THE PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share............................
- -------------------------------------------------------------------------------------------------
Total(3).............................
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting offering expenses payable by the Company, estimated at
$600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 870,000 additional Shares at the Price to the Public, less
Underwriting Discounts, solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to the
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively.
------------------------
The Common Stock is being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that the Common Stock offered hereby will be
available for delivery on or about June , 1994, at the offices of Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013.
------------------------
SMITH BARNEY INC. J.C. BRADFORD & CO.
June , 1994
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
---------------------
LOCATION OF INITIAL PROPERTIES
<TABLE>
<CAPTION>
INITIAL PROPERTY LOCATION FACILITY TYPE
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<S> <C> <C> <C>
1. American Sports Medicine Institute Birmingham, AL Research Facility
2. Birmingham Medical Building I Birmingham, AL Ancillary Hospital Facility
3. Birmingham Medical Building II Birmingham, AL Ancillary Hospital Facility
4. One-7000 Building South Miami, FL Ancillary Hospital Facility
5. Larkin Medical Building South Miami, FL Ancillary Hospital Facility
6. Richmond Medical Building I Richmond, VA Ancillary Hospital Facility
7. Richmond Medical Building II Richmond, VA Ancillary Hospital Facility
8. Little Rock Little Rock, AR Outpatient Rehabilitation Facility
9. Coral Gables Coral Gables, FL Outpatient Rehabilitation Facility
10. Virginia Beach Virginia Beach, VA Outpatient Rehabilitation Facility
11. Midway Medical Plaza Los Angeles, CA Ancillary Hospital Facility
12. Mountain View Greensburg, PA Long-Term Care Facility
13. Gravois St. Louis, MO Sub-Acute Care Facility
14. Goodyear Clinic Gadsden, AL Ancillary Hospital Facility
15. Hamiter Building Gadsden, AL Ancillary Hospital Facility
16. Medical Building II Gadsden, AL Ancillary Hospital Facility
17. Desert Springs Las Vegas, NV Ancillary Hospital Facility
18. South County Medical Center St. Louis, MO Ambulatory Surgery Facility
19. Northlake Tucker, GA Ambulatory Surgery Facility
20. North Shore Evanston, IL Ambulatory Surgery Facility
</TABLE>
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................... 1
The Company.................................... 1
Risk Factors................................... 2
The Properties................................. 4
Investment Objectives.......................... 5
The Offering................................... 5
Use of Proceeds................................ 6
Distributions to Stockholders.................. 6
Summary Historical, Pro Forma and Estimated
Financial Information........................ 7
Tax Status of the Company...................... 8
RISK FACTORS..................................... 9
Lack of Operating History and Inexperience of
Management in Operating a REIT............... 9
Less Cash Available for Distribution from
Failure to Purchase or Delay in Purchasing
Initial Properties........................... 9
Specific Risks Relating to Healthcare
Facilities................................... 9
Appraisals..................................... 11
Risks of Leverage and Default.................. 11
Board May Change Investment Policies........... 12
Dilution....................................... 12
Lack of Industry Diversification............... 12
Real Estate Investment Risks................... 12
Environmental Risks and Cost of Remediation.... 13
Consequences of Failure to Quality as a REIT... 13
Antitakeover Effect of Ownership Limit and
Power to Issue Additional Shares............. 13
Competition.................................... 14
Maryland Business Combination Law.............. 14
Risks for IRAs and Investors Subject to
ERISA........................................ 14
Dependence on Key Personnel.................... 15
Conflicts of Interest.......................... 15
Absence of Prior Public Market for Common
Stock; Effect of Interest Rates.............. 16
USE OF PROCEEDS.................................. 16
DISTRIBUTIONS TO STOCKHOLDERS.................... 17
DILUTION......................................... 18
CAPITALIZATION................................... 19
SELECTED HISTORICAL, PRO FORMA AND ESTIMATED
FINANCIAL INFORMATION.......................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............ 22
Overview....................................... 22
Results of Operations.......................... 22
Estimated Revenues Less Expenses............... 22
Liquidity and Capital Resources................ 22
BUSINESS......................................... 24
Initial Properties............................. 24
Description of Guarantors, Lessees and Initial
Properties................................... 25
HEALTHSOUTH Initial Properties................. 25
OrNda Initial Properties....................... 29
Integrated Health Initial Properties........... 29
Quorum Initial Properties...................... 31
Surgical Health Initial Properties............. 32
Acquisition of Initial Properties.............. 33
Appraisals..................................... 34
<CAPTION>
PAGE
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<S> <C>
Leases......................................... 34
Insurance...................................... 35
Medicaid, Medicare, Blue Cross and
Other Revenue................................ 35
Future Acquisitions of Healthcare Facilities... 36
Government Regulation and Recent
Developments................................. 37
Regulatory Compliance.......................... 39
Environmental Matters.......................... 39
Company Offices................................ 40
Legal Proceedings.............................. 40
INVESTMENT AND OTHER POLICIES.................... 40
Investment Policy.............................. 40
Other Policies................................. 43
MANAGEMENT....................................... 44
Directors and Executive Officers............... 44
Executive Compensation......................... 45
Compensation Committee Interlocks and Insider
Participation................................ 46
Deferred Compensation Plan..................... 46
1994 Stock Incentive Plan...................... 47
Retirement Plans............................... 47
Compensation of Directors...................... 47
Limitation of Liability and Indemnification.... 47
Insurance...................................... 48
Certain Transactions........................... 48
PRINCIPAL STOCKHOLDERS........................... 49
DESCRIPTION OF SECURITIES........................ 49
General........................................ 49
Common Stock................................... 49
Preferred Stock................................ 50
Power to Issue Additional Shares of Common
Stock and Preferred Stock.................... 50
Restrictions on Transfer....................... 51
Dividend Reinvestment Plan..................... 51
Shares Eligible For Future Sale................ 52
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S CHARTER AND BYLAWS................... 52
Removal of Directors........................... 53
Business Combinations.......................... 53
Control Share Acquisitions..................... 53
Amendment to the Charter....................... 54
Dissolution of the Company..................... 54
Advance Notice of Director Nominations and New
Business..................................... 54
FEDERAL INCOME TAX CONSIDERATIONS................ 54
General........................................ 54
Taxation of the Company........................ 55
Taxation of Domestic Stockholders.............. 60
Taxation of Foreign Stockholders............... 61
Other Tax Consequences......................... 63
Dividend Reinvestment Plan..................... 64
ERISA CONSIDERATIONS............................. 64
UNDERWRITING..................................... 66
LEGAL MATTERS.................................... 67
EXPERTS.......................................... 67
AVAILABLE INFORMATION............................ 68
GLOSSARY......................................... 69
INDEX TO FINANCIAL STATEMENTS.................... F-1
</TABLE>
i
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[THIS PAGE INTENTIONALLY LEFT BLANK.]
ii
<PAGE> 7
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed descriptions and financial information and
statements appearing elsewhere in this Prospectus. Except as otherwise noted,
the information set forth in this Prospectus assumes (i) the acquisition of and
full payment for the 20 Initial Properties and (ii) no exercise of the
Underwriters' over-allotment option. As used herein, unless the context requires
otherwise, the term "Company" includes Capstone Capital Corporation, a Maryland
corporation, and its subsidiaries. For the definition of capitalized terms not
otherwise defined herein, including certain proper names of sellers of Initial
Properties, Lessees, Guarantors and related parties, see "Glossary."
THE COMPANY
The Company was recently organized to qualify as an indefinite life real
estate investment trust. The Company intends to invest in a diversified
portfolio of healthcare properties. Upon completion of this Offering, the
Company will acquire and lease back the 20 Initial Properties to five healthcare
operators. The Lessees will include HEALTHSOUTH, OrNda, Integrated Health,
Quorum and Surgical Health or their Subsidiaries.
The Initial Properties are located in ten states primarily in the
southeastern and western regions of the United States and represent a variety of
facility types in diverse healthcare industry segments. The Initial Properties
will be acquired for an aggregate purchase price of $115.4 million and will
provide annual Base Rent to the Company of approximately $12.8 million which
will result in estimated cash available for distribution of approximately $10.6
million and estimated revenues less expenses of approximately $9.1 million. All
of the Initial Properties have been appraised and will be purchased at prices
not greater than their respective appraised values. However, appraisals are only
estimates of value and should not be relied upon as a precise measure of
realizable value. All of the Leases are Triple Net Leases which require the
Lessees to pay all operating expenses, taxes, insurance and other costs. All of
the Leases provide for Additional Rent commencing after the first year. All of
the Leases have primary terms of 10 to 15 years and options to extend the term
at least 10 additional years. HEALTHSOUTH, Integrated Health, OrNda, Quorum and
Surgical Health are guarantors (the "Guarantors") of the obligations of their
respective Subsidiaries under the Leases. Each of the Guarantors has one or more
classes of publicly-traded debt or equity securities, except for Surgical
Health, which recently filed a registration statement with the Securities and
Exchange Commission ("SEC") relating to the issuance of senior subordinated
notes. The obligations under the guarantees are not subordinated to any
indebtedness of the Guarantors, but the guarantees are unsecured and may be
structurally subordinated to secured indebtedness of the Guarantors to the
extent of the assets securing such indebtedness. In addition, the guarantees do
not limit the Guarantors' ability to incur additional secured indebtedness. The
Company intends to close all of the Initial Properties into escrow on or before
the Effective Date of the Offering and to release the Initial Properties from
escrow as soon as practical after the closing of the Offering.
The Company's strategy is to become an important source of healthcare
facility capital by investing in a high quality portfolio of properties managed
by established operators, including long-term care, hospital management,
rehabilitation and alternate-site care companies. The Company intends to
diversify its portfolio by operator, geography, facility type and healthcare
industry segment. Its investment criteria emphasize the creditworthiness of the
lessee and any guarantor, competitive position of the property, attractiveness
of the industry segment and fit with the Company's existing portfolio. The
Company believes that there currently is significant demand for REIT financing
capital in the healthcare industry. In addition, the Company believes the
substantial healthcare industry experience and industry relationships of its
management and directors will help the Company identify, evaluate and complete
additional investments.
The Company has a written commitment for a $60 million line of credit (the
"Bank Credit Facility") from a consortium of banks led by NationsBank of
Georgia, N.A. ("NationsBank") with which to fund a portion of the purchase price
for the Initial Properties and to fund additional investments. The Company may
enter into interest rate swaps in order to mitigate the effect of a rising
interest rate environment on the cost of the Bank Credit Facility.
The Company will be self-administered and self-managed and will not engage
or pay a separate advisor.
1
<PAGE> 8
RISK FACTORS
Prospective investors should consider carefully the matters discussed under
"Risk Factors" prior to making an investment decision regarding the Shares
offered hereby. Some of the significant considerations include:
- - Lack of Operating History and Inexperience of Management in Operating a
REIT. The Company has been recently organized and has no operating history.
The Company will be self-administered and therefore will not have a
third-party investment advisor. Management of the Company has not had prior
experience in operating a REIT.
- - Lack of Diversification. The Company intends to concentrate its investments
in healthcare-related properties and will be subject to the risks associated
with investing in a single industry.
- - Dependence on Lessees and Guarantors and Potential Reduction in Revenues. The
Company's revenues will be derived solely from rent under the Leases, and
therefore, any defaults under the Leases or the guarantees will result in
lower revenues and less cash available for distribution to the investors. The
obligations under the guarantees will be unsecured and may be structurally
subordinated to secured indebtedness of the Guarantors to the extent of the
assets securing such indebtedness. In addition, the guarantees do not limit
the Guarantors' ability to incur additional secured indebtedness. There is no
assurance that the Company will be able to renew its Leases upon their
expiration or that unfavorable economic, demographic or competitive conditions
or industry reform will not adversely affect the financial condition of the
Lessees and/or the Guarantors and, consequently, Lease revenues and the value
of the Company's investment in the Initial Properties.
- - Environmental Risks and Cost of Remediation. Under various federal, state and
local environmental laws, ordinances and regulations, an owner of real
property, such as the Company, may be responsible for certain liabilities
relating to environmental risks, including the costs of remediation, which
could adversely affect the financial condition of the Company.
- - Development Projects. The Company may enter into build-to-suit type
agreements that by their terms require conversion to leases upon the
completion of the development of the property. Such activities, if undertaken,
might subject the Company to risks related to delays in construction, cost of
materials, financing availability, volatility in interest rates, labor
availability and other property development uncertainties.
- - Real Estate Investment Risks. Investments in the Initial Properties and any
additional properties in which the Company may invest in the future are
subject to risks, including illiquidity, typically associated with investments
in real estate.
- - Healthcare Industry Risks. The healthcare industry is highly regulated by
federal and state laws, licensing requirements, property inspections,
reimbursement policies, regulations concerning capital and other expenditures
and certification requirements. The failure of any Lessee to comply with such
laws, requirements and regulations could affect its ability to operate the
property or properties which it leases from the Company. New federal or state
laws or regulations may be enacted or promulgated which would have a material
adverse effect on the Lessees, and in turn on the Company. Additionally, the
uncertainty associated with current proposals for comprehensive national
healthcare reform may adversely affect the Lessees and the Guarantors, and in
turn, the Company.
- - Appraisals. While all of the Initial Properties have been appraised and are
being purchased by the Company at purchase prices not greater than appraised
value, appraisals are only estimates of value and should not be relied upon as
a precise measure of realizable value. See "Business -- Appraisals."
- - Risks of Leverage and Default. Subject to any limitations on borrowings which
may be imposed under the Bank Credit Facility, the Company may borrow funds
and mortgage its properties in connection with the acquisition of the Initial
Properties, the acquisition of additional properties and for purposes of
funding other capital and operating expenditures. In addition, the Bank Credit
Facility bears interest at a variable rate, which exposes the Company to the
risks associated with the volatility in interest rates. If the Company
2
<PAGE> 9
defaults on any loan secured by mortgages or other security interests on any
of its properties, the lenders may foreclose on such property and the Company
could lose its investment therein. Company policy prohibits the incurrence of
debt in excess of 50% of the Company's total capitalization.
- - Reduction in Dividends from Failure to Qualify as a REIT. If in any taxable
year the Company did not qualify as a REIT, it would be taxed as a corporation
and distributions to stockholders would not be deductible by the Company in
computing its taxable income. In addition, unless the Company were entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four years following the year in
which qualification was lost. Failure to so qualify, even in one taxable year,
could cause the Company to dramatically reduce its dividends.
- - Antitakeover Effect of Ownership Limit and Power to Issue Additional
Shares. In order to assist the Company in meeting certain tests applicable to
REITs with respect to the ownership of its capital stock, the Company's
Charter contains certain restrictions on the ownership and transfers of Common
Stock. The Company's Charter also authorizes the Board of Directors to
classify or reclassify any unissued shares of Common Stock or Preferred Stock.
These restrictions may deter acquisition of control of the Company by third
parties.
- - Change in Investment Policies. The Company's board of directors (the "Board
of Directors") may change the investment policies of the Company without
stockholder approval. Such policy changes may have adverse consequences to the
Company.
- - Competition. The Company competes for property acquisitions with, among
others, healthcare providers, other healthcare-related REITs, real estate
partnerships and financial institutions. The Company's properties will be
subject to competition from the properties of other healthcare providers.
- - Dependence on Key Personnel. The Company is dependent on its executive
officers, none of whom has entered into an employment agreement with the
Company.
- - Conflicts of Interest. Two of the nine directors of the Company are executive
officers and directors of HEALTHSOUTH. HEALTHSOUTH is a stockholder of the
Company and will be the lessee or guarantor of 10 of the Initial Properties to
be acquired from HEALTHSOUTH or its Subsidiaries (the "HEALTHSOUTH Initial
Properties"). Conflicts of interest exist in such directors' duties to holders
of the Company's Common Stock and to stockholders of HEALTHSOUTH. Two of the
nine directors of the Company are also directors of Integrated Health and
Surgical Health. Integrated Health and Surgical Health will be the Lessee or
Guarantor of two and three of the Initial Properties, respectively, to be
acquired from Integrated Health and Surgical Health or their respective
Subsidiaries. Conflicts of interest may arise in their duties to holders of
the Company's Common Stock and stockholders of Integrated Health and Surgical
Health, respectively.
- - Dilution. The purchasers of the Shares will experience an immediate dilution
in the net tangible book value per share of the Common Stock.
- - Absence of Prior Public Market for Common Stock; Effect of Interest
Rates. Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained in the future or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price of the Common Stock will be determined by negotiations
between the Company and the Representatives of the Underwriters and may bear
no relationship to the price at which the Common Stock will trade after
completion of the offering. Furthermore the valuation of the Company is not
based upon the current market value of the Initial Properties. Rather, the
estimated initial offering price for the Common Stock was determined by
dividing the estimated dividend distributions to be paid to the purchasers of
Common Stock in this Offering by a minimum annual yield. In addition, since
the market price of common stock of a publicly-traded REIT such as the Company
is determined in part by the attractiveness of the yield on such common stock
in relation to prevailing interest rates, an increase in interest rates could
adversely affect the market price of the Common Stock.
3
<PAGE> 10
THE PROPERTIES
The Initial Properties, which will not be subject to any previously
existing mortgage debt when acquired, are summarized in the following table by
Guarantor:
<TABLE>
<CAPTION>
INITIAL INITIAL PERCENTAGE
INITIAL PROPERTY PROPERTY LEASE OF
GUARANTOR NAME TYPE(1) TERM PURCHASE PRICE(2) PORTFOLIO(3)
- ---------------------------- ------------------------------------ -------- ------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
HEALTHSOUTH American Sports Medicine RF 15 $ 3,200,000 2.8%
Institute.........................
Birmingham Medical Building I....... AHF 15 4,700,000 4.1
Birmingham Medical Building II...... AHF 15 9,600,000 8.3
One-7000 Building................... AHF 15 13,250,000 11.5
Larkin Medical Building............. AHF 15 2,250,000 1.9
Richmond Medical Building I......... AHF 15 2,100,000 1.8
Richmond Medical Building II........ AHF 15 10,000,000 8.7
Little Rock......................... ORF 15 2,060,000 1.8
Coral Gables........................ ORF 15 2,300,000 2.0
Virginia Beach(4)................... ORF 15 1,460,000 1.2
------------------ ------
50,920,000 44.1
OrNda Midway Medical Plaza................ AHF 15 20,400,000 17.7
------------------ ------
20,400,000 17.7
Integrated Health Mountain View....................... LTCF 10 9,775,000 8.4
Gravois............................. SACF 10 8,500,000 7.4
------------------ ------
18,275,000 15.8
Quorum Goodyear Clinic..................... AHF 10 1,607,160 1.4
Hamiter Building.................... AHF 10 4,382,520 3.8
Medical Building II................. AHF 10 5,810,320 5.0
Desert Springs...................... AHF 10 4,700,000 4.1
------------------ ------
16,500,000 14.3
Surgical Health South County Medical Center(4)...... ASF 15 7,400,000 6.4
Northlake........................... ASF 13 1,040,000 0.9
North Shore......................... ASF 15 910,000 0.8
------------------ ------
9,350,000 8.1
------------------ ------
Total $115,445,000 100.0%
=============== ==========
</TABLE>
- ---------------
(1) RF means research facility, AHF means ancillary hospital facility, ORF means
outpatient rehabilitation facility, LTCF means long-term care facility, SACF
means sub-acute care facility and ASF means ambulatory surgery facility.
(2) Includes the purchase price for land, improvements and fixtures but does not
include estimated net capitalized acquisition costs, aggregating
approximately $1.05 million.
(3) Based upon purchase price.
(4) Purchase is subject to the receipt of certain approvals, which are expected
to be received in June 1994.
Ancillary hospital facilities, which are contiguous or adjacent to a
hospital, provide a variety of medical services such as diagnostic, outpatient
surgery and rehabilitation services, in addition to physician offices and
selected hospital support services. Outpatient rehabilitation facilities offer a
comprehensive range of rehabilitative healthcare services, including physical
therapy and occupational therapy, and focus predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries and various neurological/neuromuscular conditions. Long-term care
facilities generally provide a variety of extended care and services to the
elderly. Sub-acute care facilities provide monitoring, specialized care and
comprehensive rehabilitative therapy required by sub-acute and medically complex
patients. Ambulatory surgery centers provide various surgical procedures,
typically on an outpatient basis.
The Company may fund the purchase of additional properties by future equity
or debt financing or by reinvestment of proceeds from the sale of properties.
The Company may incur indebtedness and mortgage its properties in furtherance of
its activities. There are no restrictions on the number of mortgages which may
be placed on a single property. The Company's present policy prohibits incurring
debt (secured or unsecured) in
4
<PAGE> 11
excess of 50% of its total capitalization. However, this debt limitation policy
can be changed by the Board of Directors without stockholder approval. Moreover,
there are no Bylaws or other provisions that require such limitation. Based on
the midpoint of the filing range, the Company estimates that it will borrow
approximately $14,795,000 under the Bank Credit Facility at the closing of this
Offering to fund the balance of the purchase price for the Initial Properties,
which will result in a debt-to-total capitalization ratio of 12.7%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Investment and Other
Policies."
The Company has agreed to reimburse the actual costs incurred by Crescent
Capital Partners (the "Partnership") on behalf of the Company up to $1,675,000
from the proceeds of the Offering. Crescent Capital Partners is an Alabama
general partnership, the partners of which are Richard M. Scrushy, John W.
McRoberts and Michael D. Martin. These costs relate to the activities of the
Partnership prior to the formation of the Company, including organizing the
Company, negotiating the acquisitions of the Initial Properties, performing due
diligence investigation related to the Initial Properties, performing corporate
work in contemplation of the Offering, preparing the Registration Statement,
providing interim financing for and closing the acquisition of the Initial
Properties, employee compensation (including salaries of the executive
officers), travel and overhead. In addition, John W. McRoberts, Richard M.
Scrushy, Michael D. Martin and HEALTHSOUTH (the "Founding Stockholders")
purchased an aggregate of 180,000 shares for $.001 per share, which are valued
at $3,420,000 based upon the midpoint of the filing range. See "Management --
Certain Transactions" for more detailed information relating to the amounts to
be received by affiliates of the Company upon completion of the Offering, and
"Principal Stockholders" with respect to the stock ownership of such persons.
The Company's principal executive offices are located at One Perimeter Park
South, Suite 335-S, Birmingham, Alabama 35243, and its telephone number is (205)
967-2092.
INVESTMENT OBJECTIVES
The Company will seek to generate stable and increasing distributions
through a self-administered portfolio management program that will allow the
Company to maintain diversity and expand the Company's healthcare properties
portfolio. The Company's investment objectives are: (i) to generate current
income for stockholders; (ii) to provide increased returns to stockholders
through the acquisition and development of additional properties, which may
require the use of additional debt or equity financing; (iii) to provide
stockholders with the opportunity to realize capital growth resulting from
appreciation, if any, in the residual values of properties acquired; and (iv) to
preserve and protect stockholders' capital. There can be no assurance that the
Company will be successful in meeting these objectives. See "Risk Factors" and
"Investment and Other Policies."
THE OFFERING
<TABLE>
<S> <C>
Common Stock to be offered...................................... 5,800,000 shares(1)
Common Stock to be outstanding after the Offering............... 5,980,000 shares(2)
New York Stock Exchange Symbol.................................. CCT
</TABLE>
- ---------------
(1) Does not include up to 870,000 shares of Common Stock, if any, that may be
purchased by the several Underwriters to cover over-allotments or 418,600
shares reserved for issuance pursuant to the Company's 1994 Stock Incentive
Plan. See "Management -- 1994 Stock Incentive Plan."
(2) Includes 180,000 shares (the "Founders' Shares"), sold in connection with
the organization of the Company to the Company's Founding Stockholders for
an aggregate of $180 on March 31, 1994, of which 82,656 shares are owned by
Richard M. Scrushy, 71,280 shares are owned by HEALTHSOUTH, 18,000 shares
are owned by John W. McRoberts and 8,064 shares are owned by Michael D.
Martin. Each Founding Stockholder paid $.001 per share for the Founders'
Shares. See "Dilution" and "Principal Stockholders."
5
<PAGE> 12
USE OF PROCEEDS
At the midpoint of the filing range, the net proceeds to the Company from
the sale of the Shares offered hereby are estimated to be approximately
$101,925,000 after deduction of estimated underwriting commissions and Offering
expenses. The purchase price of the Initial Properties, including net estimated
acquisition expenses of approximately $1,050,000, will be approximately
$116,495,000. All of the net proceeds will be applied against the purchase price
of the Initial Properties. The balance of the purchase price required for the
Initial Properties will be covered by borrowings of approximately $14,795,000
under the Bank Credit Facility. The Company intends to close all of the Initial
Properties into escrow on or before the Effective Date of the Offering, and such
Initial Properties will be released from escrow as soon as practical after the
closing of the Offering. See "Business -- Initial Properties."
DISTRIBUTIONS TO STOCKHOLDERS
The Company intends to make quarterly distributions to stockholders of
approximately 85% to 95% of its cash available for distribution (estimated to be
approximately $9,042,000 to $10,106,000). In any event, the Company intends to
pay annual amounts at least sufficient to satisfy the annual distribution
requirements imposed on REITs. In general, such REIT distribution requirements
provide that at least 95% of the Company's REIT taxable income must be
distributed annually to stockholders, which amount is estimated to be $1.28 per
share ($7,654,400). See "Federal Income Tax Considerations -- Taxation of the
Company." The Company expects to make distributions in excess of 95% of its REIT
taxable income. Payment of distributions, however, will be at the discretion of
the Company's Board of Directors at all times and will depend upon various
factors including the Company's financial condition, earnings, anticipated
investments, and other relevant factors. Under certain circumstances, it may be
necessary for the Company to borrow or liquidate investments to satisfy its REIT
distribution requirements. See "Federal Income Tax Considerations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Aggregate Base Rent under the Leases results in estimated cash available
for distribution of $1.78 per share after deducting estimated interest and
operating expenses. Such estimated cash available for distribution does not give
effect to any delay in the acquisition of or failure to acquire the Initial
Properties, to any payments of Additional Rent, to the acquisition of any
properties in addition to those identified in this Prospectus or the incurrence
of indebtedness in connection therewith. No assurance can be given that the
Initial Properties will perform as expected or that the estimated cash available
for distribution will be obtained. The Company estimates that approximately 11%
to 20% of the distributions that could have been made by the Company for the
twelve months ended March 31, 1994, represent return of capital for federal
income tax purposes and, therefore, would not be subject to current federal
income tax. Such nontaxable distributions would reduce a stockholder's tax basis
in its Common Stock and any gain or loss recognized on the subsequent sale of
such shares or upon liquidation of the Company would be increased or reduced
accordingly. Any distributions that exceed a stockholder's basis in its Common
Stock would be treated as gain from the sale or exchange of such Common Stock
for federal income tax purposes. See "Distributions to Stockholders" and "Pro
Forma Balance Sheet and Statements of Estimated Revenues Less Expenses."
For each of the first six quarters in which distributions are paid by the
Company, the Founding Stockholders have consented to contribute to the Company
the after-tax portion of any distributions paid to them for such quarter if (i)
the annualized distributions paid in such quarter do not equal or exceed $1.70
per share ($0.425 per share per quarter) or (ii) the aggregate distributions
paid in such quarter on the outstanding shares exceed 95% of the cash available
for distribution for the relevant quarterly period. The Company estimates that
the aggregate distributions payable to the Founding Stockholders will be
$271,800 (based on a distribution of 85% of estimated cash available for
distribution) and $304,200 (based on a distribution of 95% of estimated cash
available for distribution), subject to the Founding Stockholders' contribution
agreement.
6
<PAGE> 13
SUMMARY HISTORICAL, PRO FORMA AND ESTIMATED FINANCIAL INFORMATION
The following table sets forth financial information for the Company which
is derived from the Balance Sheet, the Pro Forma Balance Sheet and the
Statements of Estimated Revenues Less Expenses included elsewhere in this
Prospectus. The adjustments for the Offering assume an initial public offering
price at the midpoint of the filing range and that the Underwriters'
over-allotment option is not exercised.
Estimated revenues less expenses is presented for the year ended December
31, 1993, and the three months ended March 31, 1994, as if the Offering and the
acquisitions of the Initial Properties by the Company had occurred, and as if
the respective Leases had been in effect, at January 1, 1993. The pro forma
balance sheet data is presented as of March 31, 1994, as if the Offering and the
transfers of the Initial Properties to the Company had occurred, and as if the
respective Leases had been in effect, at that date. The pro forma and estimated
information incorporates certain assumptions that are included in the notes to
the Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses
included elsewhere in this Prospectus. See "Selected Historical, Pro Forma and
Estimated Financial Information" and "Pro Forma Balance Sheet and Statements of
Estimated Revenues Less Expenses." The pro forma and estimated information does
not purport to represent what the actual financial position or results of
operations of the Company would have been as of or for the periods indicated nor
does it purport to represent any future financial position or results of
operations for any future period.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED MARCH 31, 1994
--------------------------------------- YEAR ENDED DECEMBER 31, 1993
AS ADJUSTED FOR THE -----------------------------
OFFERING AND THE AS ADJUSTED FOR THE OFFERING
ACQUISITION OF THE AND THE ACQUISITION OF THE
HISTORICAL(1) INITIAL PROPERTIES INITIAL PROPERTIES
------------- --------------------- -----------------------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS EXPENSES:
Revenues.............................. -- $ 3,478,586 $13,914,344
Interest expense...................... -- 278,182 1,112,729
Estimated revenues less expenses...... -- 2,276,111 9,104,444
Estimated revenues less expenses per
share.............................. -- $ 0.38 $ 1.52
Shares outstanding.................... 180,000 5,980,000 5,980,000
PRO FORMA BALANCE SHEET DATA:
Real estate properties, net........... -- $ 116,495,000
Total assets.......................... $ 180 116,720,000
Bank Credit Facility.................. -- 14,795,480
Total stockholders' equity............ 180 101,924,520
OTHER DATA:
Estimated cash available for
distribution(2).................... -- $ 2,659,468 $10,637,872
Estimated cash available for
distribution per share(2).......... -- $ 0.44 $ 1.78
</TABLE>
- ---------------
(1) The Company was incorporated on March 31, 1994.
(2) Estimated cash available for distribution is estimated revenues less
expenses plus depreciation, amortization and other non-cash items less
accrued rental income. Distributions in excess of net income generally
constitute a return of capital. Management considers cash available for
distribution to be an informative measure of the performance of an equity
REIT and consistent with measures used by analysts to evaluate equity REITs.
Cash available for distribution does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash
needs and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
7
<PAGE> 14
TAX STATUS OF THE COMPANY
The Company intends to qualify and to make an election to be taxed as a
REIT under Section 856(c) of the Code, commencing with its taxable year ending
December 31, 1994. If the Company so qualifies and elects taxation as a REIT,
the Company generally will not be subject to federal income tax to the extent
that it distributes its REIT taxable income to stockholders. REITs are subject
to a number of organizational and operational requirements. If the Company fails
to qualify as a REIT in any taxable year, the Company will be subject to federal
income tax (including any alternative minimum tax) on its taxable income at
regular corporate rates. See "Risk Factors" and "Federal Income Tax
Considerations" for a more detailed discussion of the consequences of the
failure of the Company to qualify as a REIT. Even if the Company qualifies as a
REIT, the Company may be subject to state and local taxes on its income and
property and federal income and excise taxes on its undistributed income.
8
<PAGE> 15
RISK FACTORS
An investment in the Common Stock involves various risks. There can be no
assurance that the Company will achieve its investment objectives. In addition
to general investment risks and those factors set forth elsewhere in this
Prospectus, investors should consider the following factors before making a
decision to purchase Shares.
LACK OF OPERATING HISTORY AND INEXPERIENCE OF MANAGEMENT IN OPERATING A REIT
The Company has been recently organized and has no operating history. The
Company will be self-administered and therefore will not have a third-party
investment advisor. The Company's Board of Directors and executive officers will
have overall responsibility for management of the Company. Although certain of
the Company's officers and directors have extensive experience in the
acquisition, development, financing and leasing of real properties and certain
of the Company's directors have extensive experience in the operation of
healthcare facilities and publicly-owned corporations, no officer has prior
experience in the healthcare industry nor in operating a business in accordance
with the Code requirements for maintaining qualification as a REIT. Failure to
maintain REIT status would have an adverse effect on the Company's ability to
make anticipated distributions to stockholders. There can be no assurance that
the past experience of management will be appropriate to the business of the
Company. See "Management."
LESS CASH AVAILABLE FOR DISTRIBUTION FROM FAILURE TO PURCHASE OR DELAY IN
PURCHASING THE INITIAL PROPERTIES
The purchase of one or more of the Initial Properties may not be
consummated or may be delayed for various reasons, such as the occurrence of
significant casualty losses. If the acquisition of any of the Initial Properties
is not consummated prior to the closing date specified in the respective
Purchase Agreements, the seller of such Initial Property may not be obligated
thereafter to sell such Initial Property to the Company. The Company intends to
close the purchase of the Initial Properties into escrow on or before the
Effective Date of the Offering, and such Initial Properties will be released
from escrow as soon as practical after the closing of the Offering, except for
the South County Medical Center facility, and the Virginia Beach facility, which
will be acquired as soon as practical after the receipt of certain approvals. In
the case of the South County Medical Center facility, construction is
substantially completed and a certificate of occupancy from the proper authority
is expected to be received in June 1994. As of May 25, 1994, leases had been
signed for over 93% of the rentable space in the South County Medical Center and
temporary certificates of occupancy have been issued as present tenants move in.
In the case of the Virginia Beach facility, approval of the formation of a
commercial condominium is expected to be obtained in June 1994. Pending
identification and acquisition of alternative properties to purchase, should the
consummation of the purchase of any of the Initial Properties not occur as and
when planned, the funds intended for such acquisition will be invested in
accordance with the Company's investment policies. The anticipated yield on such
interim investments, if made, will be substantially less than the expected
return on the Initial Properties and the other real estate investments that the
Company will seek to make and less than the anticipated level of distributions
to the Company's stockholders.
In addition, if the purchase of any of the Initial Properties does not
occur, there can be no assurance that the terms of the Lease for any property
acquired in substitution for such Initial Properties will be as advantageous to
the Company as those pertaining to the property that was not acquired. If this
occurs, there may be an adverse effect on the Company's ability to make the
anticipated distributions to stockholders.
SPECIFIC RISKS RELATING TO HEALTHCARE FACILITIES
Lessees' Reliance on Government Reimbursement. A significant portion of
the revenue of the Lessees and the Guarantors is derived from government
reimbursement programs, such as Medicare and Medicaid. While it varies with each
Lessee and Guarantor and changes from time to time, at least one-third of the
revenue of each of the Lessees and the Guarantors is derived from such programs.
Although lease payments to the Company are not directly linked to the level of
government reimbursement, to the extent that changes in these programs have a
material adverse affect on the Lessees, such changes could have an impact on
their
9
<PAGE> 16
ability to make lease payments. The Medicare program is highly regulated and
subject to frequent and substantial changes. In recent years, fundamental
changes in the Medicare program (including the implementation of a prospective
payment system ("Prospective Payment System" or "PPS") in which facilities are
reimbursed generally a flat amount based on a patient's diagnosis and not based
on the facility's cost for inpatient services at medical surgical hospitals)
have resulted in reduced levels of payment for a substantial portion of
healthcare services. The Medicaid program is a federally-mandated, state-run
program providing benefits to low income and other eligible persons and is
funded through a combination of state and federal funding. The method of
reimbursement under Medicaid varies from state to state, but is typically based
on rates negotiated between the provider and the state, or is based on per diem
or per diagnosis rates similar to Medicare. Moreover, healthcare facilities have
experienced increasing pressures from private payors attempting to control
healthcare costs that have reduced reimbursement to levels approaching that of
government payors. See "Business -- Government Regulation."
Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, future budget
reductions in government financed programs could significantly reduce payments
made to Lessees and Guarantors, and there can be no assurance that future
payment rates will be sufficient to cover cost increases in providing services
to patients. Reductions in payments pursuant to government healthcare programs
could have an adverse impact on a Lessee's or Guarantor's financial condition
and, therefore, could adversely affect the ability of the Lessee or Guarantor to
make rental payments.
Impact of Reduced Occupancy Rates in Hospitals Adjacent to Ancillary
Hospital Facilities Being Acquired. Most of the hospitals adjacent to the
ancillary hospital facilities being acquired are substantially less than fully
occupied on an inpatient basis. Despite such occupancy rates, however, the
Company believes that operating cash flow produced by such hospitals will
adequately cover rental payments to the Company. See information regarding
annual coverage ratios under the caption "Business -- Initial Properties." If
the inpatient occupancy rate at such a hospital were to deteriorate to a level
at which operating cash flow would be insufficient to cover the rental payments
to the Company on the particular ancillary hospital facility, the Company would
have to rely upon the general credit of the Lessee or the related Guarantor.
Healthcare Reform. The healthcare industry is undergoing significant
changes as third-party payors attempt to control the cost, utilization and
delivery of healthcare services. In addition, President Clinton and certain
members of Congress recently announced comprehensive healthcare reform proposals
which include such elements as universal coverage and the acquisition of
coverage through regional health alliances. Political and other cost-control
initiatives regarding the cost and delivery of healthcare are also currently
being considered, and reductions in payments to physicians or other changes in
reimbursement for healthcare services by other third-party payors could
materially adversely affect the financial condition of the tenants of some of
the Initial Properties. Substantially all of the tenants of the Initial
Properties are in the medical profession and the Company believes that such
tenants are dependent on payment for their services by third-party payors. No
assurance can be given whether or to what extent any of the healthcare proposals
will be enacted into law, or what effect any such proposals or subsequent
legislation, if any, or other changes regarding healthcare would have on the
financial condition of the tenants of the Initial Properties and their ability
to make lease payments or renew leases.
Proximity to Hospitals. Some of the Initial Properties are in close
proximity to one or more hospitals. The relocation or closure of a hospital
could make the Company's Initial Properties in such area less desirable to
doctors affiliated with such hospital and affect the Lessee's ability to renew
leases and attract new tenants.
Government Regulation of Healthcare Industry. The healthcare industry is
highly regulated by federal, state and local law, state and local licensing
requirements, facility inspections, reimbursement policies, regulations
concerning capital and other expenditures, certification requirements and other
laws, regulations and rules. The failure of any Lessee or sublessee to comply
with such laws, requirements and regulations could affect the Lessee's ability
to operate the Initial Property or Initial Properties which it leases from the
Company. For example, the certificate of need ("CON") for the Northlake facility
has been challenged in two related Georgia state court proceedings. See
"Business -- Surgical Health Initial Properties -- Northlake."
10
<PAGE> 17
Potential Operator Loss of License or Certification. Healthcare operators
are subject to federal and state laws and regulations which govern financial and
other arrangements between healthcare providers. These laws prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. They also require compliance with a variety of safety, health and
other requirements relating to the conditions of the licensed facility and
quality of care provided. Possible sanctions for violation of these laws and
regulations include loss of license or certification and the imposition of civil
monetary and criminal penalties.
In certain circumstances, conviction of abusive or fraudulent behavior with
respect to one facility may subject other facilities under common control or
ownership to disqualification from participation in the Medicare and Medicaid
programs.
Because this area of the law currently is subject to intense scrutiny,
additional laws and regulations may be enacted which could require changes in
certain operations of the Lessees and sublessees of the Initial Properties. A
Lessee's loss of license or Medicare/Medicaid certification could result in the
Company having to obtain another Lessee for the affected Initial Property. No
assurances can be given that the Company could contract with such a Lessee on a
timely basis or on acceptable terms and a failure of the Company to do so could
have an adverse effect on the Company's revenues.
Limitations on Transfers and Alternative Uses of Initial
Properties. Transfers of operations of certain healthcare facilities are
subject to regulatory approvals not required for transfers of other types of
commercial operations and other types of real estate. In addition, certain of
the Initial Properties are special purpose facilities that may not be easily
adaptable to non-healthcare-related uses.
APPRAISALS
While all of the Initial Properties have been appraised and are being
purchased by the Company at purchase prices not greater than the appraised
value, appraisals are only estimates of value and should not be relied upon as a
precise measure of realizable value. Investors should exercise caution in
evaluating appraisal results. See "Business -- Appraisals."
RISKS OF LEVERAGE AND DEFAULT
The Company may incur indebtedness and mortgage its properties in
furtherance of its activities. The Company's present policy prohibits incurring
debt (secured or unsecured) in excess of 50% of total capitalization. However,
this limitation can be changed by the Board of Directors without stockholder
approval. Moveover, there are no Bylaws or other provisions which require such
limitation.
The Company may borrow funds and mortgage its properties in connection with
the acquisition of additional properties and for purposes of funding other
capital and operating expenditures, including expenditures relating to the
renovation, modification or expansion of Initial Properties. In addition, the
Company may be required to borrow money and/or mortgage its properties to fund
any cash shortfall in order to meet its cash distribution requirements if 95% of
the Company's REIT taxable income exceeds its cash available for distribution.
See "Investment and Other Policies." The Company expects that in the definitive
agreements for the Bank Credit Facility it will be prohibited from declaring or
paying dividends (other than as the Company determines is necessary to maintain
its status as a REIT for federal income tax purposes) if at the time of such
action an event of default under the Bank Credit Facility has occurred and is
continuing or would exist immediately after giving effect to such action. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Any borrowings, including borrowings under the Bank Credit Facility, as
well as the resulting interest expense and principal repayments therefrom, could
negatively affect the Company's cash available for distribution. The Bank Credit
Facility matures two years from the date of its closing. The Company intends to
renew the Bank Credit Facility or repay the outstanding balance at that time
with proceeds from a refinancing or from a sale of debt or equity securities.
There can be no assurances that NationsBank will agree to renew
11
<PAGE> 18
the Bank Credit Facility on terms favorable to the Company or that the Company
will be able to obtain refinancing proceeds or proceeds from the sale of debt or
equity securities. If the Company defaults on any loan secured by mortgages the
Company may place on any of its properties, the lenders may foreclose on such
property and the Company could lose its investment therein. The degree of risk
associated with borrowings will increase if the Company borrows on terms
involving a variable interest rate or a "balloon" payment at maturity.
BOARD MAY CHANGE INVESTMENT POLICIES
The Company's Board of Directors may change the investment policies of the
Company without stockholder approval. Such policy changes may have adverse
consequences on the Company.
DILUTION
The purchasers of the Shares offered hereby will experience immediate
dilution of $1.985 per share in the net tangible book value ($1.902 per share
assuming full exercise of the Underwriters' over-allotment option).
LACK OF INDUSTRY DIVERSIFICATION
While the Company is authorized to invest in various types of
income-producing real estate, its current strategy is to acquire and hold, for
long-term investment, healthcare-related properties. Consequently, the Company
currently has chosen not to include assets selected to reduce risks associated
with an investment in real estate in the healthcare industry, and will be
subject to the risks associated with investments in a single industry.
REAL ESTATE INVESTMENT RISKS
Illiquidity of Real Estate Investments. Investments in the Initial
Properties or properties in which the Company may invest in the future are
subject to risks typically associated with investments in real estate. Equity
investments in real estate are relatively illiquid, and, therefore, the ability
of the Company to vary its portfolio in response to changed conditions will be
limited.
Reliance on Lessees and Guarantors. The success of the Company's
investments in the Initial Properties will be dependent on the success of the
business of the Lessees and on the Guarantors with respect to each Lease. The
obligations under the guarantees will be unsecured and may be structurally
subordinated to secured indebtedness of the Guarantors to the extent of the
assets securing such indebtedness. The operating results of the Initial
Properties underlying the Company's investments will depend upon various factors
over which the Company will have no control and which may affect the present or
future cash flows of the Company. Those factors include general economic
conditions, changes in the supply of, or demand for, competing healthcare
facilities, changes in occupancy levels, the ability of the Lessees through rate
increases or otherwise to absorb increases in operating expenses and changes in
government regulations and zoning laws.
No assurance can be given that a Lessee will exercise any option to renew
its Lease upon the expiration of the initial term. In such an instance, the
Company may not be able to locate a qualified purchaser or a qualified
replacement tenant, as a result of which it would lose a source of revenue while
remaining responsible for the payment of its obligations.
Development Projects. The Company's investment policies permit it to enter
into build-to-suit type agreements that by their terms require conversion to
leases upon the completion of the development of the facility. The Initial
Properties do not include any development projects. Such activities, if
undertaken, might subject the Company to risks related to delays in
construction, cost of materials, financing availability, volatility in interest
rates, labor availability and other property development uncertainties.
Development projects are generally considered to involve greater risks than the
sale and lease-back of operating properties. See "Investment and Other
Policies -- Investment Policy." Although the Company will attempt to minimize
the risks associated with development activities, including obtaining additional
forms of security and collateral beyond that provided by the Leases, no
assurances can be given that such additional security will be effective.
12
<PAGE> 19
ENVIRONMENTAL RISKS AND COST OF REMEDIATION
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property (such as the Company will be) may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances at, under or disposed of in connection with such property, as well as
certain other potential costs relating to hazardous or toxic substances
(including government fines and injuries to persons and adjacent property). Such
laws often impose liability without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner in connection with the activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or property
damages and the owner's liability therefor could exceed the value of the
property and/or the aggregate assets of the owner. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral, which in turn would
reduce the Company's revenues and ability to make distributions.
Although the Purchase Agreements and the Leases require the seller or
Lessee, as the case may be, to indemnify the Company for certain environmental
liabilities with respect to the Initial Properties, the scope of such
obligations may be limited and there can be no assurances that any such seller
or Lessee will be able to fulfill its indemnification obligations. Nor can there
be any assurance that those indemnities will be sufficient to cover any
liability for any or all of the hazardous substances that may exist at the
Initial Properties. See "Business -- Environmental Matters."
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends at all times to elect and operate so as to qualify as a
REIT. If the Company qualifies as a REIT, it will generally be allowed a
deduction for dividends paid to its stockholders in computing its federal
taxable income. This treatment substantially eliminates the "double taxation" of
corporate earnings. If in any taxable year the Company did not qualify as a
REIT, it would be taxed as a corporation and distributions to stockholders would
not be deductible by the Company in computing taxable income. In addition,
unless the Company were entitled to relief under certain statutory provisions,
the Company would also be disqualified from electing treatment as a REIT for the
four succeeding years following the year in which qualification was lost.
Failure to so qualify, even in one taxable year, could cause the Company to
dramatically reduce its dividends.
To qualify as a REIT, the Company will be required, among other things, to
distribute at least 95% of its REIT taxable income to stockholders each year. In
order to maintain status as a REIT, the Company must satisfy certain
requirements on a continuing basis, which requirements may substantially affect
day-to-day decision making by the Company. No assurance can be given that the
Company will at all times satisfy these tests. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
deduction of such amounts in determining taxable income, could require the
Company to reduce its dividends below the level necessary to maintain its
qualification as a REIT, which would adversely affect the Company's ability to
maintain REIT status. See "Federal Income Tax Considerations -- Taxation of the
Company."
Even if the Company qualifies as a REIT, certain transactions or other
events could result in the imposition of federal tax at rates ranging from four
percent to 100% on certain types of the Company's income or gains.
ANTITAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL SHARES
For the Company to qualify as a REIT under the Code in any taxable year, no
more than 50% in value of its outstanding stock may be owned directly, or
indirectly by attribution, by five or fewer individuals (as defined in the Code
to include certain entities) at any time during the second half of the Company's
taxable year (other than during the first year for which the Company elects to
be treated as a REIT). In addition, the outstanding stock must be owned by 100
or more persons during at least 335 days of a taxable year of 12 months or
during a proportional part of a shorter taxable year (other than during the
first year for which the Company elects to be treated as a REIT). See "Federal
Income Tax Considerations."
13
<PAGE> 20
Because of the stock ownership requirements applicable to REITs, the
Company's charter (the "Charter") contains restrictions on transfer of its
stock. Such restrictions authorize the Company to refuse to transfer stock to
any person, if as a result of such transfer such person or entity would
beneficially own stock in excess of 9.8% in number or value of the outstanding
stock of the Company ("Excess Shares"). Such provisions may inhibit market
activity and the resulting opportunity for stockholders to realize a premium for
their Common Stock that might otherwise exist if a stockholder were attempting
to assemble a block of stock in excess of 9.8% in number or value of the
outstanding stock. Also, there can be no assurance that such provisions will in
fact enable the Company to meet the relevant REIT stock ownership requirements.
The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
preferred stock (the "Preferred Stock") and to classify or reclassify any
unissued shares of Common Stock or Preferred Stock and to set the preferences,
rights and other terms of such classified or unclassified shares. See
"Description of Securities." Although the Board of Directors has no such
intention at the present time, it could establish a series of Preferred Stock
that could, depending on the terms of such series, delay or impede a transaction
or a change of control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the stockholders. The
Charter and Bylaws of the Company also contain other provisions that may delay
or impede a transaction or a change of control of the Company that might involve
a premium price for the Common Stock or otherwise be in the best interest of the
stockholders. See "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws -- Removal of Directors," "-- Control Share Acquisitions" and
"-- Advance Notice of Director Nominations."
COMPETITION
The Company will be competing for additional investments with, among other
investors, healthcare providers, other healthcare related REITs, real estate
partnerships and financial institutions. Certain of these investors may have
greater capital resources than the Company.
All of the Initial Properties operate in a competitive environment, and
patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time. The Initial Properties
compete with other similar facilities in their various locations for the support
of the medical community. Additionally, other healthcare facilities in which the
Company may invest will likely compete with similar facilities for the support
of the medical community and the general public. Some significant competitive
factors for the placing of physicians in ancillary hospital facilities and
patients in medical facilities include reputation, physical appearance of the
facilities, services offered, quality of care, family preferences, physician
services, location and price. See "Business."
MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law ("MGCL"), certain "business
combinations" (including certain issuances of equity securities) between a
Maryland corporation and any person who owns ten percent or more of the voting
power of the corporation's shares (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder becomes an Interested Stockholder. Thereafter, any such
business combination must be approved by two super-majority stockholder votes
unless, among other conditions, the corporation's common stockholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. See "Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws -- Business Combinations."
RISKS FOR IRAS AND INVESTORS SUBJECT TO ERISA
Fiduciaries of individual retirement accounts or other pension, profit
sharing or employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider whether an
investment in Shares satisfies the diversification requirements of ERISA and
whether the investment is prudent in light of the possible limitations on the
marketability of the Shares. See "Employee
14
<PAGE> 21
Plans and Individual Retirement Accounts." In addition, some or all of the
distributions by a REIT to a tax-exempt employee's pension fund that owns more
than 10 percent in value of such REIT may be treated as unrelated business
taxable income ("UBTI") under the Code if the REIT constitutes a "pension-held
REIT" and if other conditions are met. The Company does not expect that it will
be a "pension-held REIT" for federal income tax purposes. See "Federal Income
Tax Considerations -- Taxation of Domestic Stockholders -- Taxation of Tax
Exempt Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, Messrs.
McRoberts, Harlan and Kizer. The loss of the services of any one of these
individuals could have a material adverse effect on the performance of the
Company. The Company has not entered into any employment agreements with any of
its executive officers.
CONFLICTS OF INTEREST
A conflict of interest exists between the Company and HEALTHSOUTH with
respect to the sale of the HEALTHSOUTH Initial Properties to the Company and the
lease of the HEALTHSOUTH Initial Properties by the Company to HEALTHSOUTH and
Subsidiaries of HEALTHSOUTH. The acquisition price of each of the HEALTHSOUTH
Initial Properties has been determined based upon future rental income,
operating history, age, location and condition of the property and other
relevant factors, including appraisals. The appraised value of the HEALTHSOUTH
Initial Properties is approximately $54,070,000. The Company will pay
$50,920,000 in cash to HEALTHSOUTH and its Subsidiaries for the HEALTHSOUTH
Initial Properties. See "Business -- Appraisals."
Two of the nine directors of the Company are executive officers and
directors of HEALTHSOUTH. Conflicts of interest exist with respect to their
duties to Company stockholders and HEALTHSOUTH stockholders. There may from time
to time be disputes between the Company as landlord and HEALTHSOUTH and
Subsidiaries of HEALTHSOUTH as tenants with respect to maintenance, repairs,
defaults, and similar items. It is also possible that the Company will engage in
other transactions with HEALTHSOUTH or its Subsidiaries in addition to acquiring
and leasing the HEALTHSOUTH Initial Properties, such as purchasing additional
properties from HEALTHSOUTH or its Subsidiaries and leasing back all or a
portion of such additional properties. As a result, conflicts of interest
between the Company and HEALTHSOUTH may arise under certain circumstances.
Two of the nine directors of the Company are also directors of Integrated
Health and Surgical Health. A conflict of interest also exists between the
Company and Integrated Health and Surgical Health with respect to the sale to
the Company of certain of the Initial Properties owned by Integrated Health and
Surgical Health or their Subsidiaries, and the lease of those Initial Properties
from the Company to Integrated Health and Surgical Health or their Subsidiaries.
The acquisition prices of each of the Initial Properties acquired from
Integrated Health and Surgical Health or their Subsidiaries, have been
determined based upon future rental income, operating history, age, location and
condition of the property and other relevant factors, including appraisals. The
appraised values of the Initial Properties acquired from Integrated Health and
Surgical Health or their Subsidiaries, are $18,300,000 and $9,350,000,
respectively. The Company will pay $18,275,000 and $9,350,000 in cash for the
Initial Properties acquired from Integrated Health and Surgical Health or their
Subsidiaries, respectively.
The Company's Bylaws require that any transactions (including a property
acquisition) between the Company and any of its officers and directors or their
affiliates be approved by a majority of the directors not interested in such
transaction, including a majority of the Disinterested Directors and such
directors must conclude that the terms of the transaction are fair and
reasonable and are no less favorable than can be obtained from unaffiliated
third parties.
15
<PAGE> 22
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; EFFECT OF INTEREST RATES
Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or be sustained following the Offering or that purchasers of the Common
Stock in the Offering will be able to liquidate their investments or to resell
such Common Stock at or above the initial offering price. The initial public
offering price will be determined through negotiations between the Company and
the Representatives of the Underwriters and may not be indicative of the market
price of the Common Stock after the Offering. Furthermore the valuation of the
Company is not based upon the current market value of the Initial Properties.
Rather, the estimated initial offering price for the Common Stock was determined
by dividing the estimated dividend distributions to be paid to the purchasers of
Common Stock in this Offering by a minimum annual yield. See "Underwriting" for
a description of the factors to be considered by the Company and the
Underwriters in setting the initial public offering price of the Common Stock.
The market value of the Common Stock could be substantially influenced by
general market conditions. In addition, since the market price of common stock
of a publicly-traded REIT such as the Company is determined in part by the
attractiveness of the yield on such common stock in relation to prevailing
interest rates, an increase in interest rates could adversely affect the market
price of the Common Stock. Moreover, numerous other factors, such as government
regulatory action and tax laws, could have a significant impact on the future
market price of the Common Stock.
USE OF PROCEEDS
At the midpoint of the filing range, the net proceeds to the Company from
the sale of the Shares offered hereby are estimated to be approximately
$101,925,000 after deduction of estimated underwriting commissions and Offering
expenses. The purchase price of the Initial Properties, including net estimated
acquisition expenses of approximately $1,050,000, will be approximately
$116,495,000. All of the net proceeds will be applied against the purchase price
of the Initial Properties. The balance of the purchase price required for the
Initial Properties will be covered by borrowings of approximately $14,795,000
under the Bank Credit Facility. The Company intends to close all of the Initial
Properties into escrow on or before the Effective Date of the Offering, and such
Initial Properties will be released from escrow as soon as practical after the
closing of the Offering. See "Business -- Initial Properties."
Any net proceeds from the exercise of the Underwriters' over-allotment
option will be invested in short-term investment grade instruments,
interest-bearing bank accounts or certificates of deposit, money market
securities, U.S. government securities and mortgage-backed securities guaranteed
by U.S. federal agencies, mortgage loans, mortgage participation and certain
other similar investments, pending their use. Such funds will be used, along
with funds available from the Bank Credit Facility, to acquire additional
properties consistent with the Company's investment policies.
The Company has obtained a written commitment from a consortium of banks
led by NationsBank for a $60 million Bank Credit Facility to finance a portion
of the purchase price for the Initial Properties, the acquisition of additional
properties and for general corporate purposes. The Bank Credit Facility is
expected to be closed on or before the Effective Date with funds being advanced
upon the closing of this Offering and will contain customary financial
covenants. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The Company has agreed to reimburse, upon closing of the Offering, the
actual costs incurred by the Partnership on behalf of the Company up to
$1,675,000 from the proceeds of the Offering. These costs relate to organizing
the Company, negotiating the acquisitions of the Initial Properties, performing
due diligence related to the Initial Properties, performing corporate work in
contemplation of the Offering, preparing the Registration Statement and
providing interim financing for and closing the acquisition of the Initial
Properties, employee compensation, travel and overhead.
16
<PAGE> 23
DISTRIBUTIONS TO STOCKHOLDERS
The Company intends to make quarterly distributions to stockholders of
approximately 85% to 95% of its cash available for distribution (estimated to be
approximately $9,042,000 to $10,106,000). In any event, the Company expects to
pay an amount at least sufficient to satisfy the annual distribution
requirements of a REIT. In general, such requirements provide that at least 95%
of the Company's REIT taxable income must be distributed annually, which income
is estimated to be $1.28 per share ($7,654,400). See "Federal Income Tax
Considerations -- Taxation of the Company." The Company expects to make
distributions in excess of 95% of its REIT taxable income. Payment of
distributions, however, will be at the discretion of the Company's Board of
Directors at all times and will depend upon various factors including the
Company's financial condition, earnings, anticipated investments, and other
relevant factors. The distribution of 85% to 95% of cash available for
distribution could limit the Company's ability to acquire or develop additional
properties because less cash would be accumulated in the Company. Under certain
circumstances, it may be necessary for the Company to borrow or liquidate
investments to satisfy its distribution requirements as a REIT. See "Federal
Income Tax Considerations -- Taxation of the Company."
Aggregate Base Rent payable under the Leases, net of estimated interest and
operating expenses, will result in estimated cash available for distribution of
$1.78 per share. Estimated cash available for distribution is estimated revenues
less expenses plus depreciation, amortization and unfunded retirement plan
expense less accrued rent. Distributions in excess of net income generally
constitute a return of capital. Management considers cash available for
distribution to be an informative measure of the performance of an equity REIT
and consistent with measures used by analysts to evaluate equity REITs. Cash
available for distribution does not represent cash generated from operating
activities in accordance with generally accepted accounting principles, is not
necessarily indicative of cash available to fund cash needs and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. See "Notes to Pro Forma Balance Sheet and Statements of Estimated
Revenues Less Expenses -- Other Data -- Estimated Cash Available for
Distribution."
Such estimated cash available for distribution does not give effect to any
delay in the acquisition of or failure to acquire the Initial Properties, to any
payments of Additional Rent, to the acquisition of any properties in addition to
those identified in this Prospectus or the incurrence of indebtedness in
connection therewith, or to the realization of proceeds on the sale or
disposition of Initial Properties. No assurance can be given that the properties
will perform as expected or the estimated cash available for distribution will
be obtained. It is estimated that approximately 11% to 20% of the distributions
that could have been made by the Company for the twelve months ended March 31,
1994, would represent return of capital for federal income tax purposes and,
therefore, would not be subject to current federal income tax. Such nontaxable
distributions would reduce a stockholder's tax basis in its Common Stock, and
any gain or loss recognized on the sale of such Common Stock or upon liquidation
of the Company would be increased or reduced accordingly. Any distributions that
exceed a stockholder's basis in its Common Stock would be treated as gain from
the sale or exchange of such Common Stock for federal income tax purposes. See
"Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses."
Estimated cash available for distribution is expected to exceed the
Company's estimated taxable income due to non-cash deductions taken by the
Company for income tax purposes, primarily amortization and depreciation which
are estimated to be approximately $80,000 and $2,517,000, respectively.
Accordingly, certain distributions to stockholders may constitute a return of
capital which would not be subject to federal income tax, although such
distributions would lower the stockholder's basis in its Common Stock of the
Company, as described above. See "Federal Income Tax Considerations."
For each of the first six quarters in which distributions are paid by the
Company, the Founding Stockholders have consented to contribute to the Company
the after-tax portion of any distributions paid to them for such quarter if (i)
the annualized distributions paid in such quarter do not equal or exceed $1.70
per share ($0.425 per share per quarter) or (ii) the aggregate distributions
paid in such quarter on the outstanding shares exceeds 95% of the cash available
for distribution for the relevant quarterly period. The Company estimates that
the aggregate distributions payable to the Founding Stockholders will be
$271,800 (based on a distribution of 85% of estimated cash available for
distribution) and $304,200 (based on a distribution of 95% of estimated cash
available for distribution), subject to the Founding Stockholders' contribution
agreement.
17
<PAGE> 24
DILUTION
As of April 30, 1994, the Founding Stockholders (Richard M. Scrushy,
HEALTHSOUTH, John W. McRoberts, and Michael D. Martin) owned 180,000 shares of
Common Stock. The net tangible book value of the Common Stock immediately
subsequent to this Offering (based on the midpoint of the filing range of $19.00
per share, after deduction of estimated underwriting discounts and Offering
expenses) will be $17.015 per share, an increase of $17.014 from the $.001 net
tangible book value per share prior to the Offering(or a net tangible book value
per share of $17.098 and a per share increase of $17.097, respectively, assuming
full exercise of the Underwriters' overallotment option). A $1.985 per share
dilution will be experienced by the purchasers of shares in this Offering (or
$1.902 per share dilution assuming full exercise of the Underwriters'
over-allotment option).
The following table illustrates this dilution on a per share basis based on
the midpoint of the filing range and assuming no exercise of the Underwriters'
over allotment option:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $ 19.00
Pro forma net tangible book value per share before the
offering...................................................... $ .001
Increase per share attributable to new investors................. 17.014
-------
Pro forma net tangible book value per share after the offering... 17.015
-------
Dilution per share to new investors................................ $ 1.985
=======
</TABLE>
The following table summarizes, as of April 30, 1994, after giving effect
to the sale at the midpoint of the filing range of the shares of Common Stock
offered hereby (i) the number and percentage of shares of Common Stock purchased
from the Company, (ii) the total cash consideration for the Common Stock and
(iii) the average price per share of Common Stock paid by the public investors
and the existing shareholders.
<TABLE>
<CAPTION>
TOTAL
CONSIDERATION
SHARES OWNED (IN MILLIONS)
-------------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 180,000 3.0% $ .0 .0% $ .001
New investors............................... 5,800,000 97.0 110.2 100.0 19.00
--------- ------- ------ -------
Total............................. 5,980,000 100.0% $110.2 100.0%
======== ===== ====== =====
</TABLE>
As of the Effective Date of the Offering, the Company intends to grant
options to purchase 260,000 shares of Common Stock at an exercise price equal to
the initial offering price per share. The foregoing table assumes no exercise of
outstanding stock options. See "Management -- Stock Option Plan" and Note 5 to
the Company's Balance Sheet.
18
<PAGE> 25
CAPITALIZATION
The following sets forth the historical capitalization of the Company as of
March 31, 1994, and as adjusted to give effect to the sale of the Shares offered
hereby (assuming an initial public offering price at the midpoint of the filing
range and after deducting underwriters' discounts and Offering expenses), and
the acquisitions of the Initial Properties:
<TABLE>
<CAPTION>
AS ADJUSTED FOR
THE OFFERING AND
AT ACQUISITION OF
MARCH 31, THE INITIAL
1994 PROPERTIES
--------- ----------------
<S> <C> <C>
Indebtedness:
Bank Credit Facility(1)........................................ $ -- $ 14,795,480
--------- ----------------
Total indebtedness..................................... -- 14,795,480
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
none outstanding............................................ -- --
Common Stock, $.001 par value; 50,000,000 shares authorized;
180,000 issued and outstanding; 5,980,000 issued and
outstanding, as adjusted(2)(3).............................. 180 5,980
Additional paid-in capital..................................... -- 101,918,540
--------- ----------------
Total stockholders' equity............................. 180 101,924,520
--------- ----------------
Total capitalization................................... $ 180 $116,720,000
======= ============
</TABLE>
- ---------------
(1) For a description of the Bank Credit Facility, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
(2) Does not include up to 870,000 shares of Common Stock, if any, that may be
purchased by the Underwriters to cover over-allotments, or 418,600 shares
of Common Stock reserved for issuance pursuant to the Company's 1994 Stock
Incentive Plan. See "Management -- 1994 Stock Incentive Plan."
(3) Shares of Common Stock owned by a stockholder in excess of 9.8% in value of
the outstanding Common Stock may be converted by operation of law into
Excess Shares. See "Description of Securities -- Restrictions on Transfer."
19
<PAGE> 26
SELECTED HISTORICAL, PRO FORMA AND ESTIMATED FINANCIAL INFORMATION
The following table sets forth financial information for the Company which
is derived from the Balance Sheet, the Pro Forma Balance Sheet and the
Statements of Estimated Revenues Less Expenses included elsewhere in this
Prospectus. The adjustments for the Offering assume an initial public offering
price at the midpoint of the filing range and that the Underwriters'
over-allotment option is not exercised.
Estimated revenues less expenses is presented for the year ended December
31, 1993, and the three months ended March 31, 1994, as if the Offering and the
acquisitions of the Initial Properties by the Company had occurred, and as if
the respective Leases had been in effect, at January 1, 1993. The pro forma
balance sheet data is presented as of March 31, 1994, as if the Offering and the
transfers of the Initial Properties to the Company had occurred, and as if the
respective Leases had been in effect, at that date. The pro forma and estimated
information incorporates certain assumptions that are included in the notes to
the Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses
included elsewhere in this Prospectus. See "Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Expenses." The pro forma and estimated
information does not purport to represent what the actual financial position or
results of operations of the Company would have been as of or for the periods
indicated nor does it purport to represent any future financial position or
results of operations for any future period.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED MARCH 31, 1994
--------------------------------------- YEAR ENDED DECEMBER 31, 1993
AS ADJUSTED FOR THE -----------------------------
OFFERING AND THE AS ADJUSTED FOR THE OFFERING
ACQUISITION OF THE AND THE ACQUISITION OF THE
HISTORICAL(1) INITIAL PROPERTIES INITIAL PROPERTIES
------------- --------------------- -----------------------------
<S> <C> <C> <C>
ESTIMATED REVENUES LESS EXPENSES:
Revenues.............................. -- $ 3,478,586 $13,914,344
Interest expense...................... -- 278,182 1,112,729
Estimated revenues less expenses...... -- 2,276,111 9,104,444
Estimated revenues less expenses per
share.............................. -- $ 0.38 $ 1.52
Shares outstanding.................... 180,000 5,980,000 5,980,000
PRO FORMA BALANCE SHEET DATA:
Real estate properties, net........... -- $ 116,495,000
Total assets.......................... $ 180 116,720,000
Bank Credit Facility.................. -- 14,795,480
Total stockholders' equity............ 180 101,924,520
OTHER DATA:
Estimated cash available for
distribution(2).................... -- $ 2,659,468 $10,637,872
Estimated cash available for
distribution per share(2).......... -- $ 0.44 $ 1.78
</TABLE>
- ---------------
(1) The Company was incorporated on March 31, 1994.
(2) Estimated cash available for distribution is estimated revenues less
expenses plus depreciation, amortization and other non-cash items less
accrued rental income. Distributions in excess of net income generally
constitute a return of capital. Management considers cash available for
distribution to be an informative measure of the performance of an equity
REIT and consistent with measures used by analysts to evaluate equity REITs.
Cash available for distribution does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash
needs and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
Significant assumptions to the Pro Forma Balance Sheet and Statements of
Estimated Revenues Less Expenses are set forth below. This information should be
read in conjunction with the Notes to the Company's Pro Forma Balance Sheet and
Statements of Estimated Revenues Less Expenses beginning at page F-10.
- - Total rental income from the Initial Properties for the year ended December
31, 1993, is assumed to be $13,914,344, which represents Base Rent of
$12,770,601 and accrued rent of $1,143,743 from the Initial Properties under
the terms of the Leases. Total rental income from the Initial Properties for
the three months ended March 31, 1994, is assumed to be $3,478,586, which
represents Base Rent of $3,192,650 and
20
<PAGE> 27
accrued rent of $285,936 from the Initial Properties under the terms of the
Leases. Generally accepted accounting principles require that scheduled
rent increases be recognized on a straight-line basis over the term of the
lease. Each Lease is a Triple Net Lease and the Lessee is responsible
thereunder, in addition to the rent, for all operating expenses including
taxes, assessments, ground rents, utility charges and insurance premiums.
- - Depreciation of buildings and land improvements is calculated using the
straight-line method and useful remaining lives of approximately 40 years and
20 years, respectively. Amortization of organization costs is calculated using
the straight-line method over a five-year period. The Bank Credit Facility
financing commitment fee is amortized using the straight-line method over the
24-month life of the Bank Credit Facility.
- - Estimated first year operating costs of $1,100,000 ($275,000 for three months)
consist of compensation and related benefits, legal and accounting, travel,
rent and other operating costs. Annual interest expense is calculated at a
rate of 6.375% of the outstanding balance plus 0.375% of the unused portion of
the Bank Credit Facility.
- - Issuance of 5,800,000 shares of Common Stock for $110,200,000 at $19.00 per
share, less estimated underwriting discounts and commissions of $7,675,660.
- - Cost of the Initial Properties of $115,445,000.
- - Payment to the Partnership and its affiliates for reimbursement of actual
costs incurred related to providing interim financing ($375,000), negotiating
acquisition of the Initial Properties ($675,000), organizing the Company
($25,000), and preparing the Offering ($600,000).
- - Borrowings of $14,795,480 under the Bank Credit Facility. The Company has
received a written commitment from a consortium of banks led by NationsBank in
the amount of $60 million to finance, in part, the acquisition of the Initial
Properties, the acquisition of additional properties and for other general
corporate purposes.
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<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in Maryland on March 31, 1994, and intends to
make an election and qualify under the Code as a REIT commencing with its
taxable year ending December 31, 1994. Substantially all of the Company's
revenues are expected to be derived from: (i) Base and Additional Rents received
under Triple Net Leases of healthcare related real property facilities; (ii)
fees received in connection with property acquisitions and leasing transactions;
(iii) interest earned from the temporary investment of funds in short-term
instruments; and (iv) property dispositions effected from time to time in
accordance with requirements for maintaining status as a REIT. With respect to
Leases for the Initial Properties, Base Rent is the minimum annual rental
payment set forth in such Leases. All of such Leases also provide for Additional
Rent commencing after the first year based on either a set percentage increase
or on 67% to 100% of the percentage increase in the applicable consumer price
index, with annual increases generally limited to a maximum of 5%.
The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional properties. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax and
financial advisors from time to time.
The Company also expects to leverage its portfolio of real estate equity
investments and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors -- Risks of Leverage and
Defaults."
The Company intends to declare and pay dividends to its stockholders in
amounts not less than the amounts required to maintain REIT status under the
Code and, in general, in amounts exceeding taxable income. The Company's ability
to pay dividends will depend upon its cash available for distribution.
RESULTS OF OPERATIONS
The Company has had no operations prior to March 31, 1994, (the date of its
incorporation) through the date of this Prospectus. The Company's future results
of operations will depend upon the acquisition of the Initial Properties and
other properties and the terms of any subsequent investments the Company may
make.
ESTIMATED REVENUES LESS EXPENSES
For The Year Ended December 31, 1993
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, revenues would have been $13,914,344 and
net income would have been $9,104,444 or $1.52 per share for the year ended
December 31, 1993. Depreciation, amortization and other non-cash expenses would
have been $2,677,171, accrued rent would have been $1,143,743 and cash available
for distribution would have been $10,637,872 or $1.78 per Share.
For The Three Months Ended March 31, 1994
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties, revenues would have been $3,478,586 and
net income would have been $2,276,111 or $0.38 per share for the three months
ended March 31, 1994. Depreciation, amortization and other non-cash expenses
would have been $669,293, accrued rent would have been $285,936 and cash
available for distribution would have been $2,659,468 or $0.44 per share.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the net proceeds of this Offering along with the
Bank Credit Facility will be sufficient to consummate the purchase of the
Initial Properties and to reimburse the Partnership for expenses related to
organizing the Company, negotiating the acquisition of the Initial Properties,
performing due
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<PAGE> 29
diligence investigation related to the Initial Properties, performing corporate
work in contemplation of the Offering, preparing the Registration Statement and
providing interim financing for and closing the acquisition of the Initial
Properties. Management believes the Company will have adequate remaining credit
under the Bank Credit Facility to meet its liquidity needs. See
"Business -- Initial Properties," "Investment and Other Policies," and Note 3 to
Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses.
The Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of its Initial Properties, the
acquisition of additional properties or, as necessary, to meet certain
distribution requirements imposed on REITs under the Code. See "Investment and
Other Policies." The Company may raise additional capital by issuing, in public
or private transactions, equity or debt securities, but the availability and
terms of any such issuance will depend upon market and other conditions. There
can be no assurance that such additional financing or capital will be available
on terms acceptable to the Company.
Under the terms of the Leases, the Lessees are responsible for all
operating expenses and taxes, including property and casualty insurance. See
"Business -- Initial Properties" and "Business -- The Leases." As a result of
these arrangements, the Company does not believe it will be responsible for any
major expenses in connection with the Initial Properties during the terms of the
respective Leases. The Company anticipates entering into similar leases with
respect to additional properties. After the terms of the respective Leases, or
in the event a Lessee is unable to meet its obligations, the Company anticipates
that any expenditures it might become responsible for in maintaining the Initial
Properties will be funded by cash from operations and, in the case of major
expenditures, possibly by borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, the Company's cash
available for distribution and liquidity may be adversely affected.
The Company has obtained a written commitment from a consortium of banks
led by NationsBank for a $60 million Bank Credit Facility to finance a portion
of the purchase price for the Initial Properties, the acquisition of additional
properties and for other general corporate purposes. The Bank Credit Facility is
expected to be closed on or before the Effective Date with funds being advanced
upon the closing of this Offering. See "Use of Proceeds." Interest on borrowings
under the Bank Credit Facility will be paid at a rate chosen by the Company from
either the base rate, which is the higher of (i) the Federal Funds Rate plus
1/2 of 1%, or (ii) the NationsBank prime lending rate, or LIBOR plus 1.75%. On
May 27, 1994, the interest rate on the Bank Credit Facility would have been
6.375% under the LIBOR option. In addition, the Company will pay .375% per annum
on the unused portion of funds available for borrowings under the Bank Credit
Facility. The Company will pay a commitment fee of one-quarter of 1% of the
committed amount at the closing of the Bank Credit Facility. The Bank Credit
Facility will be available until the second anniversary of the closing of the
facility. The Bank Credit Facility will be unsecured and will contain certain
representations, warranties and financial and other covenants customary in such
loan agreements. The Bank Credit Facility will mature two years from the date of
its closing. The Company intends to renew the Bank Credit Facility or to repay
the outstanding balance at that time from the proceeds of a refinancing or from
the sale of debt or equity securities. There can be no assurance that
NationsBank will renew the Bank Credit Facility on terms favorable to the
Company or that the Company will be able to sell debt or equity securities at
that time. See "Risk Factors -- Risks of Leverage and Default." The Company may
enter into interest rate swaps in order to mitigate the effect of a rising
interest rate environment on the cost of the Bank Credit Facility.
Other than the purchase of the Initial Properties, the Company has no
commitments or understandings with respect to capital expenditures. There can be
no assurance that the Company will be able to purchase or lease additional
properties or to make mortgage loans to others on suitable terms.
Management believes that inflation should not have a materially adverse
effect on the operating expenses of the Company because such expenses are
relatively insignificant as a percentage of revenues. Because the Bank Credit
Facility provides for a variable interest rate, inflation could have a
materially adverse effect on the Company's interest expense if interest rates
increase substantially during any year, because Additional Rent under the Leases
would not be paid until the following year.
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<PAGE> 30
BUSINESS
The Company was organized to invest, either directly or through
wholly-owned subsidiaries, in healthcare related properties located throughout
the United States. The Company has signed letters of intent to purchase the 20
Initial Properties located in 10 states. The Initial Properties will be leased
to 14 Lessees, which are HEALTHSOUTH, Integrated Health, OrNda, Quorum and
Surgical Health, or their Subsidiaries pursuant to long-term, Triple Net Leases
that will be guaranteed by the respective parent companies. The Initial
Properties consist of 11 ancillary hospital facilities, one research facility,
one long-term care facility, one sub-acute care facility, three ambulatory
surgery centers and three outpatient rehabilitation facilities.
INITIAL PROPERTIES
The following table sets forth certain information regarding the Initial
Properties.
<TABLE>
<CAPTION>
INITIAL INITIAL PERCENTAGE
PROPERTY LEASE PURCHASE OF ANNUAL BASE ANNUAL
GUARANTOR/INITIAL PROPERTY NAME TYPE(1) TERM PRICE(2) PORTFOLIO(3) RENT COVERAGE(4)
- ---------------------------------------- --------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HEALTHSOUTH
American Sports Medicine Institute.... RF 15 $ 3,200,000 2.8% $ 359,919
Birmingham Medical Building I......... AHF 15 4,700,000 4.1 528,664
Birmingham Medical Building II........ AHF 15 9,600,000 8.3 1,079,760
One-7000 Building..................... AHF 15 13,250,000 11.5 1,490,664
Larkin Medical Building............... AHF 15 2,250,000 1.9 253,093
Richmond Medical Building I........... AHF 15 2,100,000 1.8 236,237
Richmond Medical Building II.......... AHF 15 10,000,000 8.7 1,125,137
Little Rock........................... ORF 15 2,060,000 1.8 231,723
Coral Gables.......................... ORF 15 2,300,000 2.0 258,704
Virginia Beach(5)..................... ORF 15 1,460,000 1.2 164,300(6)
------------ -------- ----------- ---------
50,920,000 44.1 5,728,201 6.01x
ORNDA
Midway Medical Plaza.................. AHF 15 20,400,000 17.7 2,142,223 5.22x
------------ -------- ----------- ---------
20,400,000 17.7 2,142,223 5.22x
INTEGRATED HEALTH
Mountain View......................... LTCF 10 9,775,000 8.4 1,060,340
Gravois............................... SACF 10 8,500,000 7.4 922,287
------------ -------- ----------- ---------
18,275,000 15.8 1,982,627 1.59x
QUORUM
Goodyear Clinic....................... AHF 10 1,607,160 1.4 180,805
Hamiter Building...................... AHF 10 4,382,520 3.8 493,034
Gadsden Medical Building II........... AHF 10 5,810,320 5.0 653,661
Desert Springs........................ AHF 10 4,700,000 4.1 528,750
------------ -------- ----------- ---------
16,500,000 14.3 1,856,250 18.31x
SURGICAL HEALTH
South County Medical Center(5)(7)..... ASF 15 7,400,000 6.4 832,500 N/A(8)
Northlake............................. ASF 13 1,040,000 0.9 119,600(6) N/A(8)
North Shore........................... ASF 15 910,000 0.8 109,200 6.86x
------------ -------- ----------- ---------
9,350,000 8.1 1,061,300 N/A
------------ -------- -----------
Total............................................... $115,445,000 100.0% $12,770,601
============ ======== ============
</TABLE>
[/R]
- ---------------
(1) RF means research facility, AHF means ancillary hospital facility, ORF means
outpatient rehabilitation facility, LTCF means long-term care facility, SACF
means sub-acute care facility and ASF means ambulatory surgery facility.
(2) Includes the purchase price for land, improvements and fixtures but does not
include estimated net capitalized acquisition costs, aggregating
approximately $1.05 million.
(3) Based upon purchase price.
(4) Annual coverage, which is a measure of the amount of cash available to pay
rent under the Leases, is calculated as Lessee's earnings before
depreciation, amortization, taxes, interest (only on debt to be repaid from
proceeds of the purchase price payable by the Company for the applicable
property) and certain non-cash intercompany charges divided by the Lessee's
Annual Base Rent. These coverages are derived from the financial information
for the most recent fiscal year of the Lessees provided to the Company by
the Lessees or Guarantors. In the case of the HEALTHSOUTH, Integrated Health
and Quorum facilities, the coverage is calculated on
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<PAGE> 31
an aggregate basis because the properties are leased or guaranteed by the
same entity and have cross-default provisions. In the case of ancillary
hospital facilities, the coverage is calculated based upon the financial
information provided for the related hospital, the operator of which is
either the Lessee or the Guarantor of the Lease.
(5) Purchase is subject to the receipt of certain approvals, which are expected
to be received in June 1994.
(6) Excludes ground rent, which will be paid by the applicable Lessee as
sublessee under the land lease.
(7) Construction is substantially completed and a certificate of occupancy is
expected to be issued in June 1994. As of May 25, 1994, leases had been
signed for over 93% of the rentable space.
(8) Coverage ratios cannot be included for the South County Medical Center
facility or the Northlake facility due to the lack of operating history for
either facility.
DESCRIPTION OF GUARANTORS, LESSEES AND INITIAL PROPERTIES
The following is a description of each of the Guarantors and Lessees and
the Initial Properties to be acquired by the Company. Unless otherwise
indicated, all information is given as of December 31, 1993. All of the
Guarantors are subject to the reporting requirements of the SEC and file annual
reports containing audited financial information and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information with the SEC, except Surgical Health, which filed a registration
statement with the SEC on March 30, 1994. With respect to such companies, the
information provided is derived for the limited purposes of this Prospectus from
filings made with the SEC.
The Company has determined the creditworthiness of the Lessees and
Guarantors based upon a review of publicly available financial and other
information, due diligence review of the individual financial statements and
other non-financial information provided by the Lessees and Guarantors, to the
extent available, and other data customarily reviewed when a company makes an
acquisition or significant investment. While the Company believes the
information has been provided in good faith and has no reason to believe that
any of such information is inaccurate in any material respect, in most
instances, the Company has not and cannot make an independent investigation of
such information.
HEALTHSOUTH INITIAL PROPERTIES
HEALTHSOUTH, headquartered in Birmingham, Alabama, is the nation's largest
provider of rehabilitative healthcare services. In its outpatient and inpatient
rehabilitation facilities, HEALTHSOUTH has established interdisciplinary
programs for the rehabilitation of patients experiencing disability due to a
wide variety of physical conditions, such as stroke, head injury, orthopaedic
problems, neuromuscular disease and sports-related injuries. HEALTHSOUTH's
rehabilitation services include physical therapy, sports medicine, work
hardening, neurorehabilitation, occupational therapy, respiratory therapy,
speech-language pathology and rehabilitation nursing. In addition to
rehabilitation services, HEALTHSOUTH's medical center facilities also provide
general and specialty medical and surgical healthcare services.
Effective December 31, 1993, HEALTHSOUTH acquired substantially all of the
assets of the rehabilitation services division of National Medical Enterprises,
Inc. ("NME"), consisting of 28 inpatient rehabilitation facilities and 45
outpatient rehabilitation locations. HEALTHSOUTH currently has 288 locations in
31 states, the District of Columbia and Ontario, Canada, including 172
outpatient rehabilitation centers (including 79 associated satellite clinics),
42 rehabilitation hospitals with 49 associated satellite clinics (including two
rehabilitation hospitals under construction), four medical centers and 21
locations providing other patient care services.
Six ancillary hospital facilities, one research facility and three
outpatient rehabilitation centers are being acquired from and will be leased to
HEALTHSOUTH or Subsidiaries of HEALTHSOUTH. See "Risk Factors -- Conflicts of
Interest." The Leases for the HEALTHSOUTH Initial Properties to Subsidiaries of
HEALTHSOUTH will be guaranteed by HEALTHSOUTH, whose shares are listed on the
New York Stock Exchange under the symbol HRC. As of December 31, 1992 and 1993,
and March 31, 1994, HEALTHSOUTH had assets of $641,799,000, $1,168,068,000 and
$1,238,771,000 and stockholders' equity of $290,132,000, $294,972,000 and
$313,127,000, respectively, and for the years ended December 31, 1992 and 1993
and for the three-month period ended March 31, 1994, had revenues of
$406,968,000, $482,304,000 and $231,296,000 and net income of $29,738,000,
$6,687,000 (after the one time charge of $49,742,000 related to the NME
transaction), and $12,123,000, respectively.
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<PAGE> 32
ANCILLARY HOSPITAL FACILITIES AND RESEARCH FACILITY
Upon completion of the Offering, the Company intends to acquire six
ancillary hospital facilities and one research facility from HEALTHSOUTH, all of
which are associated with three of the four medical centers owned and operated
by HEALTHSOUTH.
HEALTHSOUTH's four medical centers are located in three urban areas of the
country, one each in Birmingham, Alabama and Richmond, Virginia and two in the
Miami, Florida area. These facilities provide general and specialty medical and
surgical healthcare services, emphasizing orthopaedics, sports medicine and
rehabilitation. HEALTHSOUTH acquired the medical centers as an outgrowth of its
ambulatory rehabilitative healthcare services. Often, patients require medical
and surgical intervention prior to the initiation of their rehabilitative care.
In each of the markets in which HEALTHSOUTH has acquired a medical center,
HEALTHSOUTH had well-established relationships with the medical communities
servicing each facility. As a result of these relationships, HEALTHSOUTH was
able to respond to opportunities to enhance its capabilities to better serve the
patients and physicians in those markets. Because HEALTHSOUTH's facilities enjoy
a national and international reputation for orthopaedic surgery and sports
medicine, HEALTHSOUTH believes the level of service and continuum of care
offered by its medical centers enable them to compete successfully.
Initial Properties Associated with HEALTHSOUTH Medical Center -- Birmingham
HEALTHSOUTH Medical Center -- Birmingham is a 219-bed specialty medical
center located in Jefferson County, Alabama that was acquired in October 1989
and expanded and renovated in 1991. HEALTHSOUTH Medical Center concentrates on
orthopaedics, sports medicine, and rehabilitation. The Medical Center's primary
market is the Birmingham Metropolitan Statistical Area ("MSA"), which consists
of five counties with an estimated population of 1,000,000. The Birmingham MSA
is served by 18 acute-care hospitals with a total of 5,323 licensed beds.
HEALTHSOUTH Medical Center -- Birmingham draws patients locally and from across
the nation due to its nationally recognized expertise in the fields of
orthopaedics and sports medicine. The HEALTHSOUTH Medical Center -- Birmingham
campus consists of the hospital, ASMI, Birmingham Medical Building I and
Birmingham Medical Building II.
ASMI. The American Sports Medicine Institute ("ASMI"), a research facility
which was constructed in 1992, is a 27,800 net rentable square foot multi-story
facility located on 1.02 acres. The facility is adjacent to the HEALTHSOUTH
Medical Center -- Birmingham. ASMI is 90% occupied by a not-for-profit
corporation whose purpose is to conduct research and promote education in the
field of orthopaedics and sports medicine.
Birmingham Medical Building I. Birmingham Medical Building I, an ancillary
hospital facility which was constructed in 1981, is a 42,500 net rentable square
foot, multi-story commercial condominium situated on .92 acres. The building is
occupied primarily by physicians and physician practice groups that practice at
the Medical Center. The building is connected to the HEALTHSOUTH Medical
Center -- Birmingham and includes a six-story parking deck with spaces for
approximately 180 cars located adjacent to the building. The leases of two of
the current occupants of the building permit such occupants to purchase 6.46% of
the condominium units.
Birmingham Medical Building II. Birmingham Medical Building II, an
ancillary hospital facility constructed in 1991 as part of the renovation and
expansion of HEALTHSOUTH Medical Center -- Birmingham, is an 81,800 net rentable
square foot, multi-story ancillary hospital facility located on 2.5 acres. The
facility shares common areas with the HEALTHSOUTH Medical Center -- Birmingham,
and subject to approval by the appropriate governmental authority, the portions
occupied by each of Birmingham Medical Building II and the HEALTHSOUTH Medical
Center -- Birmingham will become separate condominiums. Tenants include Alabama
Sports Medicine and other physician practice groups, as well as HEALTHSOUTH
Rehabilitation Outpatient Center of Birmingham. All of the physicians located in
the facility practice at the HEALTHSOUTH Medical Center -- Birmingham.
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<PAGE> 33
HEALTHSOUTH Medical Center, Inc., a Subsidiary of HEALTHSOUTH, will be the
sole Lessee of ASMI, Birmingham Medical Building I and Birmingham Medical
Building II, which will continue to be operated as integral parts of HEALTHSOUTH
Medical Center -- Birmingham. HEALTHSOUTH Medical Center, Inc. will lease the
three properties under a 15-year lease with three five-year renewal options. The
Base Rent per square foot (which does not include an allocation of rent for 180
structured parking spaces) will be $12.95, $12.45 and $13.20 for ASMI,
Birmingham Medical Building I and Birmingham Medical Building II, respectively.
Initial Properties Associated with HEALTHSOUTH Medical Center -- Richmond
HEALTHSOUTH Medical Center -- Richmond is a 200-licensed bed specialty
medical center located in Henrico County, Virginia that was acquired in 1991 and
concentrates on orthopaedics, sports medicine, and rehabilitation. The
hospital's primary market is the 9-county Richmond-Petersburg MSA which has an
estimated population of 825,000. There are 15 acute care hospitals serving the
Richmond MSA with a total of 4,183 licensed beds. The HEALTHSOUTH Medical
Center -- Richmond campus consists of the hospital, Richmond Medical Building I
and Richmond Medical Building II.
Richmond Medical Building I. Richmond Medical Building I, an ancillary
hospital facility constructed in 1977, is a 23,200 net rentable square foot,
multi-story facility located on 6.165 acres together with Richmond Medical
Building II. This facility is adjacent to HEALTHSOUTH Medical Center -- Richmond
and is occupied by physician groups that practice at the Medical Center.
Richmond Medical Building II. Richmond Medical Building II, an ancillary
hospital facility constructed in 1992 as part of the renovation and expansion of
HEALTHSOUTH Medical Center -- Richmond, is a 62,400 net rentable square foot,
multi-story facility with 60 structured parking spaces located on the 6.165
acres together with Richmond Medical Building I. The facility is adjacent to the
HEALTHSOUTH Medical Center -- Richmond and is occupied by physician groups that
practice at the Medical Center.
HEALTHSOUTH Virginia, Inc., a Subsidiary of HEALTHSOUTH, will be the sole
Lessee of Richmond Medical Building I and Richmond Medical Building II, which
will continue to be operated as integral parts of HEALTHSOUTH Medical
Center -- Richmond. HEALTHSOUTH of Virginia, Inc. will lease the two properties
under a 15-year lease (with three five-year renewal options). The Base Rent per
square foot (which does not include an allocation of rent for 60 structured
parking spaces) will be $10.18 and $18.04 for Richmond Medical Building I and
Richmond Medical Building II, respectively.
Initial Properties Associated with HEALTHSOUTH Larkin Hospital
HEALTHSOUTH Larkin Hospital located in South Miami, Dade County, Florida is
a 112-licensed bed specialty medical center acquired in February 1992. This
facility specializes in orthopaedics, sports medicine and rehabilitation. The
hospital's primary market is Dade County, Florida, which encompasses 26
municipalities with a population of approximately 2,000,000. There are 20 acute
care hospitals serving the Dade County area with a total of approximately 6,100
licensed beds. The HEALTHSOUTH Larkin Hospital campus consists of the hospital,
the One-7000 Building and Larkin Medical Building.
One-7000 Building. The One-7000 Building, an ancillary hospital facility
that was constructed in 1973, with a total renovation completed in 1990, is a
106,400 net rentable square foot, multi-story facility with 345 structured
parking spaces on 1.12 acres adjacent to HEALTHSOUTH Larkin Hospital. The
primary occupants are physician groups that practice at the adjacent HEALTHSOUTH
Larkin Hospital and nearby HEALTHSOUTH Doctors' Hospital.
Larkin Medical Building. The Larkin Medical Building, an ancillary
hospital facility that was constructed in 1970 and remodeled in 1980, is a
10,250 net rentable square foot, two-story facility on 1.072 acres. The facility
is located adjacent to HEALTHSOUTH Larkin Hospital and currently houses the
administrative and support staff offices of the hospital while the surplus land
is used for parking by the hospital's employees.
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<PAGE> 34
Because of a unity of title issue, the Company initially will acquire a
leasehold interest from Doctors' Hospital of South Miami, Ltd. a Subsidiary of
HEALTHSOUTH under a 30-year ground lease. The Company intends subsequently to
take appropriate legal action to obtain fee title.
HEALTHSOUTH will be the sole lessee and Doctors' Hospital of South Miami,
Ltd., a Subsidiary of HEALTHSOUTH, will be the sole sublessee of One-7000
Building and Larkin Medical Building, which will continue to be operated as
integral parts of HEALTHSOUTH Larkin Hospital. Doctors' Hospital of South Miami,
Ltd. will sublease the two properties under a 15-year lease with three five-year
renewal options. The Base Rent per square foot (which does not include an
allocation of rent for 345 structured parking spaces) will be $14.01 and $24.68
for One-7000 Building and Larkin Medical Building, respectively.
OUTPATIENT REHABILITATION FACILITIES
HEALTHSOUTH operates the largest group of affiliated proprietary outpatient
rehabilitation facilities in the United States. HEALTHSOUTH's outpatient
rehabilitation centers offer a comprehensive range of rehabilitative healthcare
services, including physical therapy and occupational therapy, that are tailored
to the individual patient's needs, focusing predominantly on orthopaedic
injuries, sports injuries, work injuries, hand and upper extremity injuries,
back injuries, and various neurological/neuromuscular conditions. As of December
31, 1993, HEALTHSOUTH provided outpatient rehabilitative healthcare services
through 93 outpatient centers and their 79 associated satellite clinics as well
as through the 49 satellite outpatient clinics associated with its inpatient
facilities. HEALTHSOUTH's outpatient rehabilitation services play a significant
role in the continuum of care because they provide hospital-level services, in
terms of intensity, quality and frequency, in a more cost efficient setting.
Coral Gables. Coral Gables, an outpatient rehabilitation facility
constructed in 1960 and completely renovated in 1986, is a 14,538 net rentable
square foot, two-story building located on 0.46 acres in Dade County, Florida.
Outpatient rehabilitation services include therapy for orthopaedic injuries,
neuromuscular disease, and programs for work hardening, neurorehabilitation,
occupational therapy, respiratory therapy, and speech-language pathology. The
facility's primary market is Dade County, Florida, which encompasses 26
municipalities, with a total population of approximately 2,000,000. The facility
will be purchased from and leased to HEALTHSOUTH, which will in turn sublease
the facility leased to HEALTHSOUTH Rehabilitation Center of Coral Gables Limited
Partnership, a Subsidiary of HEALTHSOUTH. The Base Rent per square foot will be
$17.80.
Little Rock. Little Rock, an outpatient rehabilitation facility
constructed in 1991, is an 11,963 net rentable square foot, one-story building
located on 1.6 acres in Pulaski County, Arkansas. Outpatient rehabilitation
services include therapy for orthopaedic injuries, strokes, head injuries, or
neuromuscular disease, and programs for work hardening, neurorehabilitation,
occupational therapy, respiratory therapy, and speech-language pathology. The
facility's primary market is the Greater Little Rock MSA encompassing a
four-county region with a population of approximately 500,000. The facility will
be purchased from and leased to HEALTHSOUTH, which will in turn sublease to
HEALTHSOUTH Rehabilitation Center of Little Rock, Ltd., a Subsidiary of
HEALTHSOUTH. The Base Rent per square foot will be $19.37.
Virginia Beach. Virginia Beach, an outpatient rehabilitation facility
constructed in 1993, is a 10,000 net rentable square foot, one-story building
that will become a unit in commercial condominium when it is formed, which is
expected to occur in June 1994. The facility is situated on 1.10 acres in
Lynnhaven Borough, Virginia. Outpatient rehabilitation services include therapy
for orthopaedic injuries, strokes, head injuries, or neuromuscular disease and
programs for work hardening, neurorehabilitation, occupational therapy,
respiratory therapy and speech-language pathology. The Virginia Beach facility's
primary market is the Tidewater region of Virginia which includes three counties
with population of approximately 1,400,000. The Virginia Beach facility is
located on real estate being ground leased from Holcar, Inc. ("Holcar"). The
Company will acquire the seller's leasehold interest in the facility through an
assumption of the existing ground lease of the commercial condominium unit,
between the seller, as tenant, and Holcar, as landlord. The Company will
sublease the outpatient rehabilitation facility to HEALTHSOUTH, which will in
turn sub-sublease to HEALTHSOUTH Rehabilitation Center of Virginia Beach Limited
Partnership, a Subsidiary of HEALTHSOUTH. The Base Rent per square foot will be
$16.43, exclusive of the ground rent, which will be paid by the Lessee as
sublessee under the ground lease.
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<PAGE> 35
ORNDA INITIAL PROPERTIES
OrNda, headquartered in Nashville, Tennessee, is a healthcare services
company that owns and operates acute care hospitals and related healthcare
facilities. American Healthcare Management, Inc. and Summit Health Ltd. were
merged into OrNda in April 1994. As a result of the mergers, OrNda, through its
subsidiaries and affiliated partnerships, owns or operates 44 acute care
hospitals with 7,712 licensed beds, including one managed for another, and two
under leases, and two psychiatric hospitals with 138 licensed beds. OrNda's
hospitals are located in California, Florida, Georgia, Indiana, Louisiana,
Mississippi, Missouri, Oregon, Nevada, Tennessee, Texas, West Virginia and
Wyoming. OrNda also owns 43% of Horizon Mental Health Services, Inc., which
operates one psychiatric hospital with 60 licensed beds and 53 specialty
psychiatric and chemical dependency units with 1,101 licensed beds. Subsequent
to the mergers, OrNda controls Health Choice Arizona, Inc., a Medicaid health
maintenance organization, which has an enrollment of approximately 21,000 in the
state of Arizona. OrNda also provides healthcare services through its majority-
owned subsidiary, Summit Care Corporation, which operates 20 skilled nursing
centers with 2,534 licensed beds and four retirement centers with 468 beds.
On April 19, 1994, Midway Medical Plaza was purchased by Midway Acquisition
Company, Inc. ("MACI"), an Alabama corporation all of the stock of which is
owned by Richard M. Scrushy, John W. McRoberts, and Michael D. Martin. MACI will
be merged into the Company on or before the Effective Date of the Offering
pursuant to the Merger Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Transactions." The
consideration for the Merger will be the cancellation or assumption by the
Company of the indebtedness incurred by MACI in the acquisition of Midway
Medical Plaza and the related parking facility. The Company will lease the
Midway ancillary hospital facility and a 755-space parking deck to a Subsidiary
of OrNda. The Lease will be guaranteed by OrNda, whose shares are traded on the
Nasdaq National Market System under the symbol ORND. As of August 31, 1992 and
1993, and February 28, 1994, OrNda had assets of $649,322,000, $830,564,000 and
$936,694,000, and stockholders' equity of $61,172,000, $78,287,000 and
$170,990,000, respectively, and for the years ended August 31, 1992 and 1993,
and for the six-month period ended February 28, 1994, had net revenues of
$501,770,000, $624,847,000 and $378,327,000, and net income (loss) of
($91,759,000), $770,000 and ($923,000), respectively.
Initial Properties Associated with Midway Hospital
Midway Hospital is licensed for 230 general acute care beds, including 206
medical/surgical beds and 24 ICU/CCU beds. Midway Hospital provides general
acute care and includes a Spine Center, Industrial and Occupational Medicine
Center and a center for treatment of AIDS patients. Midway Hospital is the third
largest hospital in the west Los Angeles area. There are six hospitals with a
combined 1,552 acute-care beds serving the west Los Angeles area. The Midway
Hospital campus consists of the hospital and the Midway Medical Plaza.
Midway Medical Plaza. Midway Medical Plaza, an ancillary hospital facility
which was constructed in 1985, is an 87,000 net rentable square foot,
multi-story facility on 0.59 acres. The related parking structure was
constructed in 1984 and contains 755 structured parking spaces on a 0.65 acre
parcel of land adjacent to both Midway Hospital and the Midway Medical Plaza in
Los Angeles County, California. Other than a pharmacy, the tenants of the Midway
facility are all physicians or physician groups that practice on the medical
staff of Midway Hospital.
A Subsidiary of OrNda will be the sole Lessee of the Midway facility which
will continue to be operated as an integral part of Midway Hospital. The Midway
facility will be leased under a 15-year lease with three five-year renewal
options. The Base Rent per square foot (which does not include an allocation of
rent for 755 structured parking spaces) will be $24.62.
INTEGRATED HEALTH INITIAL PROPERTIES
Integrated Health, formed in 1986, and headquartered in Owings Mills,
Maryland, is one of the nation's leading providers of long-term and sub-acute
healthcare services. Integrated Health's strategy is to use geriatric care
facilities as platforms to provide a wide variety of medical and rehabilitative
services more
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typically delivered in the acute care hospital setting. Integrated Health's
focus on providing sub-acute care is designed to address the fact that cost
containment measures implemented by private insurers and limitations on
government reimbursement of hospital costs have resulted in the discharge from
hospitals of many patients who continue to require sub-acute care. These
patients often cannot be effectively cared for in the home because of the
complex monitoring and specialized medical treatment required. Because geriatric
care facilities have lower capital and operating costs than acute care
hospitals, Integrated Health is able to offer these complex medical services at
a significantly lower cost than acute care hospitals.
On December 1, 1993, Integrated Health acquired substantially all of the
United States operations of Central Park Lodges, Inc., consisting of 30
geriatric care facilities, nine retirement facilities and divisions which
provide pharmacy, healthcare personnel, and support services through branch
locations.
Integrated Health provides sub-acute care through medical specialty units
("MSUs"), which are typically 20 to 75 bed specialty units with physical
identities, specialized medical technology and staff separate from the geriatric
care facilities in which they are located. MSUs are designed to provide
comprehensive medical services to patients who have been discharged from acute
care hospitals but who still require sub-acute or complex medical treatment.
The levels and quality of care provided in Integrated Health's MSUs are
similar to those provided in the hospital but at per diem treatment costs which
Integrated Health believes are generally 30% to 60% below the cost of such care
in acute care hospitals. Because of the high level of specialized care provided,
Integrated Health's MSUs generate substantially higher net revenue and operating
profit per patient day than traditional geriatric care services.
As of December 31, 1993, Integrated Health operated 97 geriatric care
facilities (66 owned or leased and 31 managed) and 60 MSUs located in 33 of
these facilities.
The Company will acquire and lease back one long-term care facility and one
sub-acute care facility from Subsidiaries of Integrated Health. The Leases will
be guaranteed by Integrated Health, whose shares are listed on the New York
Stock Exchange under the symbol IHS. As of December 31, 1992 and 1993, and March
31, 1994, Integrated Health had assets of $311,973,000, $767,664,000 and
$758,537,000, and stockholders' equity of $145,596,000, $209,338,000 and
$217,805,000, respectively, and for the years ended December 31, 1992 and 1993,
and for the three-month period ended March 31, 1994, had net revenues of
$195,262,000, $282,160,000 and $132,323,000 and net income of $9,141,000,
$15,471,000 and $6,394,000, respectively.
Gravois. Gravois, a sub-acute care facility constructed in 1966 with
additions and renovations in 1975, 1987 and 1993-94, is a 167-licensed bed
sub-acute care facility containing a 49,700 net rentable square foot,
multi-story building located on 5.2 acres in St. Louis County, Missouri.
Although the Gravois facility has historically been used as a skilled nursing
facility, Integrated Health recently divided the market between skilled nursing
care and sub-acute care, dedicating the Gravois facility as the sub-acute care
provider and the other Integrated Health facility, Integrated Health of St.
Louis at Big Bend Woods, as the skilled nursing provider. This change will
create more efficient operations at both facilities and should result in more
sub-acute care patients for the Gravois facility. The total population within a
ten mile radius of the facility is approximately 640,000 and the population 65
years and older within the ten mile radius is approximately 96,800. There are 36
additional facilities within a ten mile radius that provide various levels of
intermediate and long-term care.
Gravois Health Care, Inc., a Subsidiary of Integrated Health, will be the
sole Lessee of the Gravois facility pursuant to a ten-year lease with three
five-year renewal options. The Base Rent per square foot will be $18.55.
Mountain View. Mountain View, a long-term care facility constructed in
1971 and renovated in 1981, is a 137-licensed bed long-term care facility
containing 52,700 net rentable square feet in a multi-story building located on
8.2 acres in Unity Township, Pennsylvania, near Pittsburgh. Integrated Health
will provide a full range of services at the Mountain View facility, including
skilled nursing, complex care (post surgery, cancer, etc.), respiratory therapy
and physical therapy. The total population within a ten mile radius is
approximately
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166,500 and the population 65 years and older within a ten mile radius is
approximately 27,300. There are other skilled nursing care providers servicing
the market; however, entry into the market is regulated through Pennsylvania's
CON process. There are 25 additional facilities within a ten-mile radius that
provide various levels of intermediate and long-term care.
Mountain View Nursing Center, Inc., a Subsidiary of Integrated Health, will
be the sole Lessee of the Mountain View facility pursuant to a ten-year lease
with three five-year renewal options. The Base Rent per square foot will be
$20.11.
QUORUM INITIAL PROPERTIES
Quorum, headquartered in Brentwood, Tennessee, owns, operates, manages and
provides consultation services for acute care hospitals nationwide. Quorum is
the nation's largest manager of acute care hospitals, having over 250 management
contracts throughout the country. In December 1993, Quorum acquired Baptist
Hospital in Gadsden, Alabama, renamed Gadsden Regional Medical Center, ("GRMC"),
a 346 bed acute care hospital and in September 1993, Quorum acquired ten acute
care hospitals from Charter Medical Corporation, including the Desert Springs
Hospital, a 225 bed acute care hospital in Las Vegas, Nevada.
The Company will purchase and lease back four ancillary hospital facilities
from two subsidiaries of Quorum. The Leases will be guaranteed by Quorum whose
shares are traded on the Nasdaq National Market System under the symbol QHGI. As
of June 30, 1992 and 1993, and March 31, 1994, Quorum had assets of
$220,603,000, $275,037,000 and $663,648,000 and stockholders' equity of
$43,990,000, $79,561,000 and $172,584,000, respectively, and for the years ended
June 30, 1992 and 1993, and the nine months ended March 31, 1994, had net
revenues of $173,219,000, $343,132,000 and $454,466,000 and net income of
$4,048,000, $14,299,000 (including a $3,559,000 gain in 1992 realized from
cumulative effect of a change in accounting principles and a non-recurring loss
of $1,591,000 in 1993 realized from early extinguishment of debt), and
$25,736,000, respectively.
Initial Properties Associated with Gadsden Regional Medical Center
GRMC, located in Gadsden, Alabama, approximately 65 miles east of
Birmingham, is the leading hospital in a six-county area in northeast Alabama.
GRMC sits on a 23 acre campus which also contains a four story ancillary
hospital facility ("Hamiter Building"), a new five story ancillary hospital
facility ("Gadsden Medical Building II"), a cancer treatment center, a mental
health treatment center, a day care center as well as a single story primary
care clinic ("Goodyear Clinic").
GRMC is the dominant provider in the area of medical services such as
general, neurological, and cardiovascular surgery, obstetrics, gynecology,
pediatrics, orthopaedics and psychiatry. The medical staff is comprised of 155
physicians. A total of 30 specialties and sub-specialties are represented on the
staff.
Goodyear Clinic. The Goodyear Clinic, an ancillary hospital facility
constructed in 1977, is a 14,000 net rentable square foot, single-story building
located on 1.19 acres. The facility is operated as a primary care clinic for the
2,500 employees of the Goodyear Tire & Rubber Company ("Goodyear") plant located
less than a mile from the campus of GRMC. Three family practice physicians
employed by Goodyear provide care to the Goodyear employees at the clinic.
Hamiter Building. The Hamiter Building, an ancillary hospital facility
constructed in 1979, is a 38,200 net rentable square foot, four story building
located on 1.3 acres. The facility is connected to GRMC via an enclosed skywalk.
Tenants of the Hamiter Building facility are physician groups who practice on
the medical staff of GRMC.
Gadsden Medical Building II. Gadsden Medical Building II, an ancillary
hospital facility constructed in 1993, is a 50,600 net rentable square foot,
multi-story building located on 0.65-acres and is connected to GRMC via enclosed
skywalks and hallways. Tenants of the Gadsden Medical Building II facility are
physician groups who practice on the medical staff of GRMC.
QHG of Gadsden, Inc., a Subsidiary of Quorum, will be the sole Lessee of
Goodyear Clinic, Hamiter Building and Gadsden Medical Building II under a
ten-year lease with three five-year renewal options. The
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Base Rent per square foot will be $12.92 for each of the Goodyear Clinic,
Hamiter Building and Gadsden Medical Building II, respectively.
Initial Properties Associated with the Desert Springs Hospital
The Desert Springs facility is located adjacent to the 225-licensed bed
Desert Springs Hospital in the southern section of Las Vegas, approximately two
miles from the "Las Vegas Strip." The Las Vegas MSA has an estimated population
of 870,000. Desert Springs Hospital was established in 1971 and has grown to its
current operating capacity through its diversified and specialized product lines
and medical staff, including cardiac specialty services. There are eight acute
care hospitals serving the Las Vegas MSA with a total of 2,018 licensed beds.
The hospital sits on a 17.5-acre campus, which also contains the two-story
ancillary hospital facility which will be purchased by the Company.
Desert Springs. Desert Springs, an ancillary hospital facility constructed
in 1974, is a 26,700 net rentable square foot, multi-story building located on
3.53 acres in Clark County, Nevada. Current tenants of the facility include
physicians who practice on the medical staff of Desert Springs Hospital. Quorum
has current plans to develop a portion of the foregoing 3.34 acre tract that is
currently used as parking lots into a multi-level parking deck for use by the
Desert Springs Hospital as well as the Desert Springs ancillary hospital
facility. The Company will grant NC-DSH, Inc., a Subsidiary of Quorum
("NC-DSH"), an option to purchase such parking lots provided that certain
assurances are made with respect to construction of the parking deck and
availability of the deck to the ancillary hospital facility on an ongoing basis.
NC-DSH will be the sole Lessee of Desert Springs under a ten-year lease
with three five-year renewal options. The Base Rent per square foot is $19.80.
SURGICAL HEALTH INITIAL PROPERTIES
Surgical Health, headquartered in Atlanta, Georgia, and formed in 1991, is
a leading operator of freestanding outpatient surgery centers. Surgical Health's
surgery centers provide the facilities and medical support staff necessary for
physicians to perform on an outpatient basis non-emergency surgical procedures.
Surgical Health owns and operates a network of 30 freestanding surgery centers
in 11 states with an aggregate of 123 operating and procedures rooms and is
developing an additional eight surgery centers in three states. Based on
industry sources, Surgical Health believes that it is the third-largest operator
of freestanding outpatient surgery centers in the United States.
Surgical Health's strategy is to establish networks of high quality
freestanding surgical centers in selected markets. Surgical Health has
established regional networks in eight markets. This strategy is designed to
enhance Surgical Health's ability to contract with managed care companies,
enable Surgical Health to implement effective sale and marketing programs at
lower marginal costs and provide physicians and patients with increased
accessibility to its surgery centers. Surgical Health pursues a marketing
strategy of developing relationships with associations of prominent primary care
and specialist physicians in its market areas and utilizing these relationships
to establish affiliations with managed care companies. Surgical Health is also
exploring joint ventures with hospitals.
The Company will acquire three ambulatory surgery centers from Surgical
Health. Surgical Health will guarantee the Leases of the facilities leased to
Subsidiaries of Surgical Health. On March 30, 1994, Surgical Health filed a
registration statement with the SEC related to the issuance of $75 million
principal amount of senior subordinated notes that are expected to be listed on
the New York Stock Exchange. As of December 31, 1992 and 1993, and March 31,
1994, Surgical Health had assets of $94,157,000, $162,896,000 and $166,102,000
and stockholders' equity of $21,046,000, $36,140,000 and $35,902,000,
respectively, and for the years ended December 31, 1992 and 1993, and the
three-month period ended March 31, 1994, had net revenues of $36,561,000,
$80,883,000 and $22,869,000 and net income (loss) of $187,000, $3,909,000 and
($719,000) (after pre-tax merger costs of $3,265,000), respectively.
South County Medical Center. The South County Medical Center facility is a
multi-story, ambulatory surgery center. Construction of the facility is
substantially completed and a certificate of occupancy is
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expected to be issued in June 1994. As of May 25, 1994, leases had been signed
for over 93% of the rentable space, and temporary certificates of occupancy have
been issued as present tenants move in. The facility, situated on approximately
10 acres of land in St. Louis County, Missouri, contains approximately 45,200
net rentable square feet, with Surgical Health's surgery center and related
activities occupying approximately 25,000 square feet. Physicians practicing the
following specialties use the four surgery suites at the facility: general
surgery, gastroenterology, orthopaedic, urology, ENT and gynecology. A
Subsidiary of HEALTHSOUTH will lease approximately 4,300 square feet to use as
an outpatient rehabilitation facility. The remaining space will be leased to
physicians. There are five other free-standing ambulatory surgery facilities and
21 hospitals in the St. Louis MSA.
Surgical Health will be the sole Lessee and Healthcare Real Estate Holdings
II, Inc., a Subsidiary of Surgical Health, will be the sole sublessee of South
County Medical Center under a 15-year lease with three five-year renewal
options. The Base Rent per square foot is $18.42.
Northlake. Northlake, an ambulatory surgery facility constructed in 1993,
is an 8,749 square foot, single-story facility located on approximately 2.16
acres in Dekalb County, Georgia. Physicians practicing the following specialties
are expected to use the four surgery suites located at the facility: general
surgery, podiatry, ophthalmology, ENT, gynecology and oral surgery. One of
Surgical Health's Subsidiaries will sublease the facility from the Company under
a 13 year sublease with two five-year renewal options, which will be guaranteed
by Surgical Health. The Northlake facility is located on real estate being
ground leased from J. T. Honea, Sr. and J. T. Honea, Jr. The Company will assume
the existing ground lease between the seller and the Honeas, including the right
of first refusal in favor of the seller, and will sublease the real property to
Surgical Health, which will sublease the facility to one of Surgical Health's
Subsidiaries. The Base Rent will be $13.67 per square foot, exclusive of ground
rent, which will be paid by the sublessee. There are 16 other free-standing
ambulatory surgery facilities and 22 hospitals in the Atlanta MSA.
The CON for the Northlake facility has been challenged by HCA Health
Services of Georgia, Inc., d/b/a/ Northlake Regional Medical Center in two
related Georgia state court proceedings on the basis that the Georgia State
Health Planning Agency did not have authority by statute or regulation to permit
the relocation of the facility without a new CON. Regulations have since been
proposed that would permit such a relocation which contain a grandfather
provision that would be applicable to the Northlake facility. If the proposed
regulations are not finally adopted as published or are challenged and held
invalid, or if Surgical Health does not prevail on the issue of whether the
facility was properly grandfathered from the CON requirements, Surgical Health
may be required to discontinue operation of the Northlake facility and apply for
a new CON. In such event the Company can require Surgical Health to substitute
one or more comparable properties for the Northlake facility.
North Shore. North Shore, an ambulatory surgery facility constructed in
1963, completely remodeled in 1988 and acquired in 1992 by Surgical Health, is a
5,100 net rentable square foot, single-story facility located on approximately
2.2 acres in Cook County, Illinois. Physicians practicing the following
specialties are expected to use the two surgery suites located at the facility:
general surgery, gastroenterology, urology, gynecology and orthopaedics. The
Company will lease the facility to Surgical Health and one of Surgical Health's
Subsidiaries will sublease the facility. The Base Rent per square foot will be
$21.41. There are 19 other ambulatory surgery facilities and 57 hospitals in the
Chicago MSA.
ACQUISITION OF INITIAL PROPERTIES
The Company has entered into Purchase Agreements to acquire the 20 Initial
Properties. The Purchase Agreements include customary representations and
warranties from each current owner of the particular Initial Property relating
to such matters as title (except for Surgical Health Initial Properties),
compliance with laws, condition of the properties and other similar items. The
warranties may be qualified to the best of the Sellers' knowledge and may not
afford the Company as much protection as unqualified warranties. The Company is
obtaining title insurance on all of the Initial Properties and believes that
such insurance is adequate to provide as much protection as unqualified
warranties.
The Company intends to close the purchase of all of the Initial Properties
into escrow on or before the Effective Date of the Offering and to release the
Initial Properties from escrow immediately after the closing of the Offering.
The release from escrow of the South County and Virginia Beach facilities is
expected to
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occur as soon as possible following the receipt of certain approvals with
respect to each property, which are currently expected to be received in June
1994. If the acquisition of any of the Initial Properties does not occur by the
date specified in the applicable Purchase Agreement, the seller of such Initial
Property will no longer be contractually bound to sell such property to the
Company. The Company has no reason to believe that it will not be able to
acquire the Initial Properties under the terms of the Purchase Agreements. The
consummation of the closings of the Initial Properties held in escrow is
contingent only upon the closing of the Offering no later than June 30, 1994.
The purchase price for each of the Initial Properties has been determined
by negotiation with the sellers after taking into consideration the rentals,
operating history, age and condition of each of the Initial Properties, and
other relevant factors, including appraisals. The applicable Disinterested
Directors have approved the purchase price and other terms relating to the
acquisition of each of the Initial Properties. In the opinion of management,
each of the Initial Properties is well maintained, in good repair, and suitable
for its intended use.
APPRAISALS
Current appraisals for each of the Initial Properties have been prepared
for the Company by Valuation Counselors Group, Inc. ("Valuation Counselors"), a
company unrelated to the Company or any of the sellers or Guarantors. All of the
appraisals have been prepared since September 29, 1993, and indicate that the
Initial Properties have an aggregate current fair market value of $120,540,000.
Each of the Initial Properties will be purchased at a purchase price not greater
than its appraised value. Reference is made to the appraisals submitted by
Valuation Counselors, which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
The appraised values of the Initial Properties represent a limited scope
analysis and were generally developed based on the "income" approach. The income
approach develops a going concern value of the Initial Properties by
capitalizing their projected operating income. The income approach normally
provides the most reliable value estimate for multi-tenant professional office
buildings. The value of the property is strongly related to the expected income
stream of the property. Although the buyers of professional office buildings are
usually owner/occupants, these buyers are generally aware of the property's cash
flow potential and its value from an investor's perspective. For this reason,
appraisers consider the income approach the best indicator of value for the
subject. Appraisals based upon the "liquidation" approach may produce values
lower than those produced by the income approach. The appraisals of the Initial
Properties were also not based on the "cost" and "sales comparison" approaches.
There can be no assurances that appraisals based on these other approaches would
be similar.
Valuation Counselors assumed the accuracy and correctness of operating
data, financial data and legal descriptions provided to it, however, no audit or
verification was undertaken by the appraiser in connection with its report. The
appraiser did not assume responsibility for matters of title.
Because the appraisals represent only an estimate of value, and are subject
to numerous assumptions, the appraisals do not purport to represent precise
measures of realizable value and should not be relied upon for purposes of
determining such value at any particular time. The appraisals assume that the
appraised facilities could be sold on an orderly basis under stable market
conditions. The estimate of the aggregate value of the appraised facilities is
the sum of the values determined for the individual facilities. No adjustment
was made with respect to a bulk sale of a group of facilities.
LEASES
The following description of the Leases does not purport to be complete,
but rather contains a general summary of certain provisions thereof. Reference
is made to the Leases filed with the SEC as exhibits to the Registration
Statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by such reference.
Each Lease relates to a healthcare facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use, in most
cases, restricted to the intended healthcare related use and for such other uses
as may be necessary in connection with or incidental to such use (the "Primary
Intended Use"). Generally, personal property is not being purchased or leased,
although the Company has been granted an option to purchase any personal
property necessary or appropriate for the operation of the Initial Properties
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for an amount equal to the then-current book value (original cost less
accumulated depreciation on the books of the Lessee). The Leases have initial
terms ranging from 10 to 15 years with one or more renewal terms exercisable by
the Lessee of at least 10 additional years. The Leases are subject to earlier
termination upon the occurrence of certain contingencies. Base Rent varies by
Lease, taking into consideration many factors, including the credit of the
Lessee, purchase price of the property, operating performance of the facility,
location, type and physical condition of the facility. All of the Leases provide
for Additional Rent commencing after the first year based on either a set
percentage increase or on 67% to 100% of the percentage increase in the
applicable consumer price index, with annual increases generally limited to a
maximum of 5%.
Each Lease is a Triple Net Lease and the Lessee is responsible thereunder,
in addition to Base Rent and any Additional Rent, for all additional charges,
including every fine, penalty, interest and cost which may be levied for
nonpayment or late payment thereof, all taxes, assessments, levies, fees, water
and sewer rents and charges, all governmental charges with respect to each of
the Initial Properties, all utility and other charges, including insurance
premiums, incurred in connection with the operation of the Initial Property and
including ground rent in the case of the Larkin Medical Building, Virginia Beach
and North Shore facilities.
Each Lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Initial Properties. Under certain Leases, the Company must purchase
from the Lessees certain structural capital improvements and replacements made
by such Lessees.
Except for the Surgical Health Leases, the Leases also contain provisions
which generally permit the Lessees, under certain circumstances, to terminate
the Leases and to repurchase the leased property for a price equal to the
Minimum Repurchase Price (as defined in the Leases) or to substitute another
property or properties for the applicable Initial Property. These circumstances
include (i) the occurrence of certain damage to or destruction of one of the
Initial Properties, (ii) condemnation, and (iii) mutual agreement of the
parties. In addition, the Integrated Health Leases contain an option, commencing
at the end of the fifth year, to repurchase the leased property for a purchase
price equal to the Minimum Repurchase Price (as defined is the Leases). The
Lessees also have a right of first refusal to purchase the leased property
during the terms of the Leases and for a short period of time following the
expiration of the terms of the Leases on the same terms and conditions as the
Company may propose to sell one of the Initial Properties.
INSURANCE
The Company will require the Lessees to obtain title insurance with respect
to each of the Initial Properties in amounts equal to their respective purchase
prices, insuring that the Company holds title to each of the Initial Properties
free and clear of all liens and encumbrances, except those approved by the
Company. In the opinion of the management of the Company, the Initial Properties
will be adequately covered by comprehensive liability, fire, flood (if
available) and extended coverage with respect to the Initial Properties with
policy specifications and insured limits customarily carried for similar
properties. While the Company believes that its insurance coverage will be
adequate, there are certain types of losses which may either be uninsurable or
not economically insurable. Except with respect to the Midway facility, the
Company generally does not require the Lessees to carry earthquake insurance
with respect to its Initial Properties. This decision was based upon a number of
factors, including the structural design of the buildings and the general lack
of seismic activity in the areas where the Initial Properties are located.
Should an uninsured loss occur the Company could lose its investment in, and
anticipated profits and cash flow from, an Initial Property.
MEDICAID, MEDICARE, BLUE CROSS AND OTHER REVENUE
Payments for patient care earned by Lessees and sublessees are received
from the federal Medicare program, state Medicaid programs, private insurance
carriers, employers and Blue Cross plans, health maintenance organizations,
preferred provider arrangements and directly from patients. Medicare payments to
acute care hospitals for inpatient services are made pursuant to the Prospective
Payment System under which a hospital is paid a prospectively established rate
based on diagnosis. In general, Medicare payments for psychiatric care and
rehabilitative care are exempt from PPS and continue to be reimbursed on a cost
basis system.
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Under regulations effective November 1, 1991, the capital related costs of
PPS hospitals are to be reimbursed by the Medicare program on a prospective
basis, phased in over a ten-year transition period, eventually to be a set
federal rate. The effects of the new payment methodology on actual levels of
reimbursement cannot yet be predicted. Properties not subject to PPS will
continue to be reimbursed by Medicare for capital costs on a percentage of cost
basis. Payments from state Medicaid programs for acute care, rehabilitative and
psychiatric care are based on reasonable costs or are at fixed rates. Medicare
and Medicaid payments are generally below a facility's actual charge schedule
and in some cases payments are limited, delayed or reduced because of federal
and sometimes state budget deficits.
In recent years, fundamental changes in the Medicare program (including the
implementation of a PPS for inpatient services at medical surgical hospitals)
have resulted in reduced levels of payment for a substantial portion of
healthcare services. Moreover, healthcare facilities have experienced increasing
pressures from private payors attempting to control healthcare costs, that have
reduced reimbursement to levels approaching that of government payors.
Considerable uncertainties surround the future determination of payment levels
under the Medicare program for inpatient hospital services as well as outpatient
services.
Blue Cross payments in different states and areas are based on costs,
negotiated rates or retail rates. Payments from health maintenance organizations
and preferred provider organizations generally are negotiated, usually at a
discount from published charge schedules, which may take the form of a flat
payment per enrollee in the plan offered by such organizations.
FUTURE ACQUISITIONS OF HEALTHCARE FACILITIES
The Company's strategy is to become an important source of healthcare
facility capital by investing in a high quality portfolio of properties managed
by established operators including long-term care, hospital management,
rehabilitation and alternate-site care companies. The Company intends to
diversify its portfolio by operator, geography, facility type and healthcare
industry segment. Its investment criteria emphasize the creditworthiness of the
guarantor, competitive position of the property, attractiveness of the industry
segment, and fit with the Company's existing portfolio.
The Company will determine the creditworthiness of potential lessees and
guarantors based upon a review of publicly available financial and other
information, due diligence review of the individual financial statements and
other non-financial information provided by the potential lessees and
guarantors, to the extent available, and other data customarily reviewed when a
company makes an acquisition or significant investment. While the Company
believes such information will be provided in good faith, the Company will not
and cannot make an independent investigation of such information.
The Company believes that there currently is significant demand for REIT
financing capital in the healthcare industry. In addition, the Company believes
the substantial healthcare industry experience and numerous relationships of its
management and directors will help the Company identify, evaluate and complete
additional investments. Management believes that opportunities for property
acquisitions are currently particularly attractive because of the increasing
demand for alternate site and outpatient healthcare services, anticipated
capital requirements by the healthcare industry to fund these and other
properties, and the reduced supply of available financing from traditional
sources. Management also believes that there are opportunities to provide
development funding to established healthcare industry operators on a selective
basis.
The following are brief descriptions of the types of healthcare facilities
in which the Company will seek additional investment:
Ancillary Hospital Facilities and Acute Care Hospitals
Ancillary hospital facilities are generally not subject to separate
licensing requirements, although certain hospital ancillary services may be
subject to licensing, CON and other regulatory requirements in addition to those
applicable to acute care hospitals. The success of an ancillary hospital
facility is dependent on its proximity to a hospital. The Company may purchase
one or more hospital properties in the future. Acute care hospitals are subject
to extensive federal, state and local legislation and regulation. Acute care
hospitals undergo periodic inspections regarding standards of medical care,
equipment and hygiene as a condition of
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licensure. Various licenses and permits also are required for narcotics,
laboratories, pharmacies, radioactive materials and certain equipment.
Accreditation by the Joint Commission on Accreditation of Healthcare
Organizations is generally required for participation in government sponsored
provider programs. Acute care hospitals are subject to and comply with various
forms of utilization review. In addition, under PPS, each state must have a
Professional Review Organization to carry out a federally mandated system of
review of Medicare patient admissions, treatment and discharges in acute care
hospitals. Medical and surgical services and practices are extensively
supervised by committees of staff doctors at each acute care hospital, and are
reviewed by each acute care hospital's local governing board and quality
assurance personnel. New regulations governing the control of disposal of
hazardous wastes may increase the costs of operating acute care facilities.
Physician Clinics
Physician clinics are subject to extensive federal, state, and local
legislation and regulation. Every state imposes licensing requirements on
individual physicians and on facilities and services operated by physicians. In
addition, federal and state laws regulate health maintenance organizations and
other managed care organizations with which the physician groups may have
contracts. Many states require regulatory approval, including CONs, before
establishing certain types of physician-directed clinics, offering certain
services or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities, or programs. In connection with the expansion of existing
operations and the entry into new markets, physician clinics and affiliated
practice groups may become subject to compliance with additional regulation.
Ambulatory Surgery Centers
Ambulatory surgery centers are subject to extensive federal, state and
local legislation and regulation. Ambulatory surgery centers undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Many states require regulatory approval, including CONs,
before establishing certain types of healthcare facilities, offering certain
services or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities or programs. License and certification standards vary by
jurisdiction and undergo periodic revision. In connection with the expansion of
existing operations and the entry into new markets, ambulatory surgery centers
may become subject to compliance with additional regulation.
Long-Term Care and Sub-Acute Care Facilities.
Long-term care and sub-acute care facilities are licensed by state
healthcare agencies, and are subject to extensive federal, state, and local
regulatory and inspection requirements. License, CON and certification standards
and requirements vary by jurisdiction and undergo periodic revision. These
requirements relate to, among other things, the quality of the nursing care, the
qualifications of administration personnel and nursing staff, the condition of
the long-term care facility and the adequacy of its equipment, and continuing
compliance with laws and regulations to the operation of the facilities.
GOVERNMENT REGULATION AND RECENT DEVELOPMENTS
The financial condition of Lessees or sublessees may be affected by changes
in the reimbursement, licensing and certification policies of federal, state and
local governments for healthcare related facilities. Certain of the Initial
Properties may also be affected by changes in accreditation standards or
procedures of accrediting agencies that are recognized by governments in the
certification process. In addition, expansion (including the addition of new
beds or services or acquisition of medical equipment) and occasionally the
discontinuation of services of healthcare facilities is generally subjected to
state regulatory approval through CON programs.
Rental arrangements are subject to federal and state laws and regulations
governing illegal rebates and kickbacks where co-investors are physicians or
others in a position to refer patients to the facilities. The effect of these
laws and regulations is generally to prohibit, through the imposition of
criminal and civil penalties (including program exclusion), payment arrangements
that are construed to include compensation for patient
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referrals. Although there can be no assurance that government enforcement
agencies' and courts' interpretations of these laws will be consistent with that
of the Company, the Company does not believe it or any of the Lessees or
sublessees of the Initial Properties has any Base Rent arrangements that do not
comply in all material respects with these laws. Legislative and regulatory
proposals may be enacted or adopted in the future that adversely affect
physicians and other healthcare providers that invest in healthcare facilities,
regardless of whether there is compensation for referrals, by limiting
reimbursement by the Medicare and Medicaid programs of otherwise covered
services, requiring disclosures of such interests, or imposing civil monetary
and criminal penalties for violations of proscriptions against referrals to such
facilities.
State CON statutes generally provide that, prior to the addition of new
beds, the construction of new facilities or the introduction of new services, a
state health planning designated agency ("SHPDA") must determine that a need
exists for those beds, facilities or services. The CON process is intended to
promote comprehensive healthcare planning, assist in providing high quality
healthcare at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to the
appropriate SHPDA with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether the
CON is granted is based upon a finding of need by the SHPDA in accordance with
criteria set forth in CON statutes and state and regional health facilities
plans. If the proposed facility or service is found to be necessary and the
applicant to be the appropriate provider, the SHPDA will issue a CON containing
a maximum amount of expenditure and a specific time period for the holder of the
CON to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. The former is usually a state or local requirement and the latter is
a federal requirement. In almost all instances, licensure and certification will
follow specific standards and requirements that are set forth in readily
available public documents. Compliance with the requirements is monitored by
annual on-site inspections by representatives of various government agencies.
The Gravois facility and the Mountain View facility are currently required to be
licensed. All of the hospitals affiliated with the ancillary hospital facilities
have obtained all necessary CONs and are fully accredited. All of the Initial
Properties, Lessees and any hospitals owned by the Lessees and their
Subsidiaries have obtained CONs, where applicable. However, the CON approval for
the Northlake facility is being contested. See "-- Surgical Health Initial
Properties -- Northlake."
Loss by a facility of its ability to participate in government sponsored
programs because of licensing, certification or accreditation deficiencies or
because of program exclusion resulting from violations of law would have adverse
effects on its revenues.
In December 1992, the American Medical Association modified its ethical
position on physician referrals to facilities in which they have an ownership
interest. Generally, physicians are prohibited from making referrals to
facilities in which they have an ownership interest unless they provide services
at the facility (such as surgeons at surgery centers and physicians with staff
privileges at hospitals). A narrow exception to this rule is permitted when a
facility is clearly needed in a community and alternative financing is not
available if certain strict conditions are satisfied. While it is generally
believed that these regulations are not intended to affect physician ownership
in large, publicly-traded companies such as the Company, physicians considering
an investment to the Company should be aware of the existence of these ethical
considerations and consider the potential applicability to the proposed
investment.
In recent years, a number of proposals have been introduced in Congress
that would reform various aspects of the healthcare system, including
malpractice reform, universal access to healthcare, global budgeting of public
and private healthcare spending. Medicare payment reform and establishment of
national health or single payor insurance programs financed by the federal
government. Legislation introduced in Congress known as "The Managed Competition
Act of 1992" would have, if enacted, (i) provided tax incentives to employers
who provide basic healthcare benefits coverage for their employees, but would
limit deductions for providing additional benefits; (ii) provided universal
access to coverage through varying levels
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of direct government subsidies for individuals with incomes below 200% of the
poverty level; (iii) incorporated insurance reform and malpractice reform to
reduce costs; and (iv) encouraged through tax incentives the establishment of
accountable health plans consisting of providers and insurance companies that
compete on the basis of offering high quality, low cost healthcare.
President Clinton and certain members of Congress have proposed plans for
healthcare reform. Although elements of the Managed Competition Act, along with
other health reform initiatives, are being considered, no assurance can be given
as to what elements will be included in the President's or other comprehensive
national healthcare reform package, whether such proposal will be enacted into
law, or what effect such proposals would have on the operations of Initial
Properties.
REGULATORY COMPLIANCE
The Company believes that healthcare regulations will continue to change
and, therefore, regularly monitors developments in healthcare law. There can be
no assurance that all facilities to be subject to Leases can remain in
compliance with applicable law.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, under or disposed of in
connection with such property, as well as certain other potential costs relating
to hazardous or toxic substances (including fines and injuries to persons and
adjacent property). Most, if not all, of these laws, ordinances and regulations
contain stringent enforcement provisions including,but not limited to, the
authority to impose substantial administrative, civil and criminal fines and
penalties upon violators. Such laws often impose liability without regard to
whether the owner knew of, or was responsible for, the presence or disposal of
such substances and may be imposed on the owner in connection with the
activities of an operator of the property. The cost of any required remediation,
removal, fines or personal or property damages and the owner's liability
therefor could exceed the value of the property and/or the aggregate assets of
the owner. In addition, the presence of such substances, or the failure to
properly dispose of or remediate such substances, may adversely affect the
owner's ability to sell or lease such property or to borrow using such property
as collateral.
Operations at the Initial Properties have been and will continue to be
subject to numerous federal, state, and local environmental laws, ordinances and
regulations, including those relating to the generation, segregation, handling,
packaging and disposal of medical wastes as well as facility siting,
construction, occupational training and safety, disposal of non-medical wastes,
underground storage tanks and ash emissions from incinerators. Operations of
nuclear medicine departments at some of the Initial Properties also involve the
use and handling, and subsequent disposal of, radioactive isotopes and similar
materials, activities which are closely regulated by the Nuclear Regulatory
Commission and state regulatory agencies. In addition, several of the Initial
Properties were built prior to the time prohibitions on the use of asbestos in
building construction were enacted and other such facilities may be acquired by
the Company in the future.
The Company has had Phase I environmental audits conducted on all of the
Initial Properties. The audits determined that none of the Initial Properties
contained indications of environmental concerns with the exception of the
presence of non-friable asbestos in eight of the Initial Properties and a small
amount of friable asbestos in three of those properties. Phase I environmental
audits involve preliminary reviews of title and uses of real property with
little or no sampling, except in the case of the suspected presence of asbestos
or lead paint, and should not be relied upon as the final determination of the
absence of environmental concerns. The environmental audits recommended that
operations and maintenance programs be implemented at the properties containing
asbestos. These programs are being implemented, and the costs will be paid by
the Lessees under the Leases. Remedial action was also taken with respect to one
of the Initial Properties containing friable asbestos at the cost of the owner.
Any remedial action taken in the future with respect to other Initial Properties
containing asbestos are required to be paid by the Lessees under the Leases. In
addition, all of the Purchase Agreements and Leases contain indemnification
provisions relating to environ-
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<PAGE> 46
mental liabilities or conditions, although there can be no assurances that the
seller will be able to fulfill its indemnification obligations. Moreover, the
scope of such indemnification obligations may be limited and there can be no
assurances that such indemnification obligations will apply to all environmental
costs or liabilities incurred by the Company. The Leases do not give the Company
control over the operations of the Lessees, nor will the Company monitor the
Lessees with respect to environmental matters.
No assurance can be given that the provisions of either the Purchase
Agreements or the Leases will fully protect the Company or that any prior owner,
Lessee or future lessee of a Initial Property did not and will not create
environmental conditions not known to the Company. However, the Company is not
aware of any such condition or liability that would have a material adverse
effect on the Company's earnings, expenditures or continuing operations.
COMPANY OFFICES
The Company's headquarters are located in offices at One Perimeter Park
South, Suite 335-S, Birmingham, Alabama 35243, which are leased by the Company
from an unaffiliated party on a month-to-month basis. Annual rent is $7,755.00.
The office lease covers approximately 1,500 square feet at rent of $5.17 per
square foot. The Company expects to enter into a new long-term lease for office
space at market rate.
LEGAL PROCEEDINGS
On June 16, 1993, Mr. Gerald Chandler filed a lawsuit in the Circuit Court
for Jefferson County, Alabama, against Richard M. Scrushy, Larry R. House,
Michael D. Martin and a to-be-formed REIT, seeking damages arising out of the
defendants' alleged breaches of alleged verbal agreements to employ Mr. Chandler
in some capacity in a to-be-formed REIT. Mr. Chandler is seeking monetary
damages. The Company is of the opinion that this lawsuit is without merit and
will not have a material adverse effect on the Company and is defending the
lawsuit vigorously.
The CON for the Northlake facility has been challenged by HCA Health
Services of Georgia, Inc., d/b/a/ Northlake Regional Medical Center in two
related Georgia state court proceedings on the basis that the Georgia State
Health Planning Agency did not have authority by statute or regulation to permit
the relocation of the facility without a new CON. Regulations have since been
proposed that would permit such a relocation which contain a grandfather
provision that would be applicable to the Northlake facility. If the proposed
regulations are not finally adopted as published or are challenged and held
invalid, or if Surgical Health does not prevail on the issue of whether the
facility was properly grandfathered from the CON requirements, Surgical Health
may be required to discontinue operation of the Northlake facility and apply for
a new CON. In such event the Company can require Surgical Health to substitute
one or more comparable properties for the Northlake facility.
INVESTMENT AND OTHER POLICIES
The following is a summary of the Company's investment policy and policies
with respect to certain other activities.
INVESTMENT POLICY
The Company's investment objectives are to (i) generate current income for
stockholders, (ii) provide increased returns to stockholders through the
acquisition and development of additional properties, which may require the use
of additional debt or equity financing, (iii) provide the opportunity to realize
capital growth resulting from appreciation, if any, in the residual values of
any properties acquired and (iv) preserve and protect stockholders' capital.
There can be no assurance that any of these objectives will be realized.
The Bylaws of the Company permit the Board of Directors with the consent of
a majority of the Executive Committee, but without the approval of the
stockholders, to alter the Company's investment policies if they determine in
the future that such a change is in the best interests of the Company and its
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<PAGE> 47
stockholders. The methods of implementing the Company's investment policies may
vary as new investment and financing techniques are developed.
The Company intends to invest in real property, principally for the
production of income, although the prospect for capital appreciation is a factor
that will be considered in making such investments. The Company's present policy
is not to have any single property or lease account for more than 20% of either
its assets or annualized rental revenue. There are no limitations on the number
or amount of mortgages that may be placed on any single property, but the
Company's present policy prohibits aggregate debt (secured or unsecured) in
excess of 50% of the Company's total capitalization. The Company intends to
close all of the Initial Properties in escrow on or before the Effective Date of
the Offering and to release the Initial Properties from escrow immediately after
the closing of this Offering, except for the South County Medical Center
facility which will be purchased after the completion of its construction and
the issuance by the proper authority of a certificate of occupancy. Thereafter,
the Company intends to seek growth through the acquisition of additional
income-producing projects developed by third parties. The Company will
concentrate on investments in healthcare-related facilities, including acute
care hospitals, rehabilitation hospitals, physician clinics, ambulatory surgery
centers, clinical laboratories, ancillary hospital facilities, long-term care
facilities, and medical centers, but may also consider opportunities in other
kinds of income-producing real property. Management has no present intention to
invest in properties unrelated to the healthcare industry.
The Company may acquire additional income-producing properties, expand and
improve its properties or sell such properties when, in the opinion of the
Company, circumstances warrant. The Company may also participate with other
entities in property ownership, through joint ventures or other types of
co-ownership, so long as the Company is the controlling party in any such
venture. While the Company presently intends to acquire equity investments in
real estate, it may, in its discretion, invest in mortgages and other types of
interests in real estate. The Company may also invest in securities of concerns
engaged in real estate activities or securities of other issuers, either for
investment purposes or for the purpose of exercising control, subject to
limitations on such investments necessary for REIT qualification. The Company
has the authority but has no present plans to invest in mortgages, to make loans
to other persons, or to underwrite the securities of other issuers. The Company
has the authority to invest in securities of other issuers but has no present
plans to do so. Except for the policy that no one property may account for more
than 20% of the Company's assets or annualized rental revenue, there is no limit
to the percentage of assets that may be invested in securities or interests in
real estate.
The Company may enter into build-to-suit type agreements that by their
terms require conversion to leases upon the completion of the development of the
facility. During the term of the development of the facility, funds will be
advanced pursuant to requests made by the developer in accordance with the terms
and conditions of the applicable development agreement. Simultaneously with the
commencement of the development of a facility, the Company will enter into a
lease with the developer. The Base Rent under such a lease will be established
at a specified rate or at a specified number of basis points over an agreed-upon
United States treasury security's yield in effect at the time of certified
substantial completion of the facility.
The Company's development program will generally include a variety of
additional forms of security and collateral beyond that provided by the Leases,
such as irrevocable letters of credit from financial institutions, payment and
performance completion bonds or completion guarantees. In addition, prior to any
advance of funds by the Company under a development agreement, the developer
generally must provide: (i) satisfactory evidence in the form of an endorsement
to the Company's title insurance policy that no intervening liens have been
placed on the property since the date of the Company's previous advance; (ii) a
certificate executed by the architect-of record that indicates that all
construction work completed on the facility conforms with the requirements of
the plans, specifications, and any change orders previously approved by the
Company; (iii) a certificate executed by the general contractor or construction
manager that all work requested for reimbursement has been completed; and (iv)
satisfactory evidence that the funds remaining unadvanced are sufficient for the
payment of all costs necessary for the completion of the facility in accordance
with the terms and provisions of the agreement. As a further safeguard during
the development period, the Company will generally retain a percentage of
construction costs incurred until it has received satisfactory evidence that the
facility has been substantially completed in accordance with the applicable
plans, specifications, and approved
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change-orders, and the period during which liens may be perfected with respect
to any work performed, or labor or materials supplied, in connection with the
construction of the facility has expired. The Company anticipates that it will
also monitor the progress of the development of each facility and the accuracy
of the developer's requests for funds by having a third-party inspector perform
monthly on-site inspections.
In evaluating potential investments, the Company will consider such factors
as: (i) the geographic area, type of property and demographic profile; (ii) the
location, construction quality, condition and design of the property; (iii) the
current and anticipated cash available for distribution and its adequacy to meet
operational needs and lease obligations and to provide a competitive market
return on equity to the Company's investors; (iv) the potential for capital
appreciation, if any; (v) the growth, tax and regulatory environment of the
communities in which the properties are located; (vi) the occupancy and demand
for similar health facilities in the same or nearby communities; (vii) an
adequate mix of private and government sponsored patients; (viii) any potential
alternative uses of the facilities; (ix) prospects for liquidity through
financing or refinancing; (x) industry segment and operator diversification; and
(xi) the suitability of the potential investments in light of maintaining REIT
status.
In making future investments, the Company intends to focus on established,
creditworthy potential lessees which meet the Company's standards for quality
and experience of management. In order to determine creditworthiness of
potential lessees, the Company will review historical and prospective financial
information of the lessee, together with appropriate financial information of
any guarantor. Factors considered in connection with such financial review with
respect to the lessee and any guarantor will include the net worth,
profitability and cash flow, debt position, and the ability of the lessee and
any guarantor to provide additional credit enhancements.
The Company will actively seek to maintain diversification of its
investments in terms of geographic location, lessee and facility types, although
investments are not limited (as to percentage of assets or otherwise) to any
geographic area or any specific type of property. A fundamental investment
objective of the Company will be to obtain contractual Base Rent escalations
under long-term, noncancellable, Triple Net Leases and to obtain credit
enhancements based upon the credit of the Lessee or its parent.
Management of the Company will conduct market research and analysis for all
potential investments. Management also will review the value of the property,
the interest rates and debt service coverage requirements of any debt to be
assumed and the anticipated sources of repayment for the investment. There are
no limitations on the percentage of the Company's total assets that may be
invested in any one property or joint venture or other investment. The Board of
Directors may establish limitations as it deems appropriate from time to time
without a vote of the stockholders of the Company. No limits have been set on
the number of properties in which the Company will seek to invest, or on the
concentration of investment in any one property or any one city or state.
The Company may determine to finance acquisitions through the exchange of
properties or the issuance of shares of its capital stock to others, if such
transactions otherwise satisfy the Company's investment criteria. The Company
also has authority to repurchase or otherwise reacquire its Common Stock or any
other securities and may determine to do so in the future.
To the extent that the Company's Board of Directors determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financings or retention of cash available for distribution
(subject to provisions of the Code concerning the taxability of undistributed
income of REITs), or a combination of these methods. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and " -- Other Policies" below.
The Company expects to hold its properties as long-term investments and has
no maximum period for retention of each investment. To the extent that the
Company holds its properties for long periods, it may not have sufficient funds
available to acquire additional properties unless such funds are available
through the Bank Credit Facility or other borrowings, or are raised through
additional equity or debt financing, including debt incurred by mortgaging
existing properties.
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The Company may invest its cash in certain short-term investment grade
instruments. Such investments may be in interest-bearing bank accounts,
certificates of deposit, money-market securities, United States government
securities, mortgage-backed securities guaranteed by the Government National
Mortgage Association, mortgages insured by the Federal Housing Administration or
guaranteed by the Veterans Administration, mortgage loans, mortgage loan
participation and certain other similar investments. The Company's ability to
make certain of these investments may be limited by tax considerations.
The Company may sell a property if such property has significantly
appreciated in value. The Company anticipates that the value of the properties
that it intends to acquire will appreciate over the term of its ownership.
Appreciation of the properties is dependent upon many factors, including: (i)
growth of the healthcare industry in general, which in turn is dependent upon a
rising demand for healthcare services, (ii) availability of financial resources
to pay for increased healthcare services, and (iii) supply of healthcare
facilities within the geographical area of the Company's properties which is
available to satisfy the demand for such facilities. Supply and demand for
healthcare facilities within the geographical area of the Company's properties
is dependent, among other considerations, upon (i) availability of capital for
construction of new healthcare facilities; (ii) competing healthcare facilities;
and (iii) population growth and the demographic composition thereof. The
Company, in employing its investment criteria, has selected properties for
acquisition with respect to which it believes there is reasonable likelihood for
appreciation based upon the foregoing considerations.
In the event the Company sells or otherwise disposes of any of its
properties, the Board of Directors will determine whether and to what extent the
Company will acquire additional properties or distribute the proceeds to the
stockholders.
OTHER POLICIES
The Company may incur indebtedness when, in the opinion of the Board of
Directors, it is advisable to do so subject to the limitation described in
" -- Investment Policy" and limitations imposed by financing as described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company has obtained a
written commitment from a consortium of banks led by NationsBank for the $60
million Bank Credit Facility, which will be used to purchase the Initial
Properties, acquire additional properties and for general corporate purposes.
The Company may from time to time negotiate lines of credit or arrange for other
short-term borrowings from banks or otherwise. The Company may also arrange for
long-term borrowings from public offerings, banks or other institutional
investors. Such borrowings may be for general corporate purposes, to improve or
expand existing properties, to acquire additional properties or to fund any
shortfall of cash necessary to meet its cash distribution requirements that
could arise if its taxable income exceeds it cash available for distribution.
In addition, the Company may incur mortgage indebtedness on real estate
which it owns. Where terms are deemed favorable, the Company may invest in
properties subject to existing mortgages, deeds of trust or similar liens on the
properties. The Company also may obtain non-recourse or other mortgage financing
for unleveraged properties in which it has invested or may refinance properties
acquired on a leveraged basis. There is no limitation on the number or amount of
mortgages which may be placed on any one property, although the Company's policy
is not to incur indebtedness in excess of 50% of its total capitalization.
The Company has no present intention to issue senior securities; however,
its Charter authorizes the Board of Directors to classify or reclassify any
unissued shares of stock, including the right to issue up to 10,000,000 shares
of preferred stock in series, and the Company may in the future issue senior
securities to raise equity or debt capital, to acquire real estate or other
assets or in connection with a merger or other business acquisition or for any
other corporate purposes. The Company may repurchase or otherwise reacquire its
own shares, although it may not issue stock that is redeemable at the option of
the holder.
The Company intends to hold the properties it acquires for long-term
investment. The Company will seek to sell the properties it owns when management
determines that the continued ownership no longer meets its then current
criteria or where a higher yield would be achieved through another investment.
Proceeds from the sale of properties may be used by the Company to acquire
additional investments.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ------------------------------------------
<S> <C> <C>
John W. McRoberts(1)(3) 41 President, Chief Executive Officer and
Director
William C. Harlan 43 Senior Vice President and Head of
Acquisitions
Andrew L. Kizer 37 Vice President, Chief Financial Officer,
Secretary and Treasurer
Richard M. Scrushy(1)(3) 41 Chairman of the Board
Michael D. Martin(1)(3) 33 Director
Robert N. Elkins(2) 51 Director
William B. Luttrell(2) 49 Director
Eric R. Hanson(3) 39 Director
Larry D. Striplin, Jr.(2) 64 Director
W. Barry Morton(1) 56 Director
George E. Bogle(2) 56 Director
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Officers are appointed by and serve at the discretion of the Board of
Directors. All current officers were appointed on March 31, 1994. The officers
will devote substantially all of their full business time to the business and
affairs of the Company.
Mr. McRoberts was a senior officer of AmSouth Bank N.A., headquartered in
Birmingham, Alabama, prior to becoming a co-founder, President and Chief
Executive Officer of the Company. He was employed by AmSouth Bank from 1977 to
1993 and most recently was head of Corporate Banking for the Birmingham area.
Mr. McRoberts' responsibilities at AmSouth also included oversight of the bank's
entire healthcare lending portfolio and the Birmingham based real estate lending
portfolio.
Mr. Harlan was a senior officer of SouthTrust Bank, N.A., headquartered in
Birmingham, Alabama, prior to becoming employed by the Company. He was employed
by SouthTrust Bank from 1976 to 1993 and was most recently head of the bank's
healthcare lending area. Mr. Harlan serves on the advisory board of Carraway
Medical Center, Inc.
Mr. Kizer, a CPA, was a senior manager with KPMG Peat Marwick in their
Birmingham office prior to becoming employed by the Company. Mr. Kizer was
employed by KPMG Peat Marwick from 1984 to 1993. Prior to that time he was
employed by Arthur Andersen in their Birmingham office.
Mr. Scrushy is Chairman, President and Chief Executive Officer of
HEALTHSOUTH Rehabilitation Corporation and is a co-founder of the Company. Prior
to founding HEALTHSOUTH in 1983, Mr. Scrushy served as a Vice President of
Lifemark Corporation, a NYSE listed company. He also serves on the Board of
Directors of Surgical Health Corporation, Integrated Health Services, Inc.,
Diagnostic Health Corporation, MedPartners, Inc., Caretenders Healthcorp, Omega
Pharmaceuticals, Inc., and Scandipharm, Inc.
Mr. Martin, is Senior Vice President and Treasurer of HEALTHSOUTH
Rehabilitation Corporation and a co-founder of the Company. Prior to joining
HEALTHSOUTH in 1989, he had been employed by AmSouth Bank N.A. since 1982. At
the time of his departure from AmSouth Bank, Mr. Martin was Vice President and
served in a corporate lending function. Mr. Martin serves on the Board of
Directors of Caretenders Healthcorp.
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<PAGE> 51
Mr. Elkins has served as Chairman and Chief Executive Officer of Integrated
Health Services, Inc., since March 1986. Prior to his founding Integrated
Health, Mr. Elkins served as a co-founder and Vice President of Continental Care
Centers, Inc., an operator of long-term healthcare facilities.
Mr. Luttrell has been President and Chief Executive Officer of Surgical
Health Corporation, a privately held company that operates outpatient surgery
centers throughout the country, since its inception in April 1991. Prior to
co-founding Surgical Health Corporation, Mr. Luttrell was Chief Executive
Officer and a member of the Board of FLR Health Resources, a national healthcare
consulting company. From 1981 through 1987, Mr. Luttrell was associated with
Surgical Care Affiliates, Inc., a publicly held company that operates surgery
centers in partnership with physicians and hospitals.
Mr. Hanson is Chairman and Chief Executive Officer of U.S. Strategies
Corp., a national public affairs and development company specializing in
healthcare and urban affairs. Mr. Hanson founded U.S. Strategies Corp. in 1984
and has served U.S. Strategies Corp. in his current capacity since that time.
Mr. Striplin is President and Chief Executive Officer of Circle "S"
Industries, a holding company with headquarters in Selma, Alabama. Among the
Circle "S" companies are Nelson/Brantley Glass Company, DISCO Aluminum Products,
American Fine Wire, Clearview Properties, Aim Leasing Company. Mr. Striplin
serves on the boards of directors of Omega Pharmaceuticals, Inc. and Med
Partners, Inc.
Mr. Morton is President and Chief Executive Officer of The Robins & Morton
Group, a Birmingham-based construction company that specializes in the
construction of hospitals and related healthcare facilities throughout the
southeast. Mr. Morton has served in his current capacity since 1982 and has been
affiliated with The Robins & Morton Group his entire career.
Mr. Bogle is Chairman and Chief Executive Officer of USA Health Holding,
Inc. USA Health Holding, Inc. is the parent of USA Health Network, the nation's
largest preferred provider organization; USA Workers Insurance Network (WIN),
the nation's largest workers compensation network; and USA Transnet, the
nation's largest trauma and transplant network. Mr. Bogle founded USA Health
Network in 1984.
A director holds office until the next annual meeting and until his
successor is elected and qualified. A director may be removed from office with
or without cause only at a meeting of the stockholders called for that purpose
by the affirmative vote of the holders of not less than two-thirds of the shares
then outstanding and entitled to vote on the election of directors.
The Company's Bylaws provide that a majority of the Company's directors not
interested in a transaction, including a majority of the Disinterested
Directors, is required to approve any transactions between the Company and any
of its officers, directors, or their affiliates. The Company's Bylaws do not
otherwise limit transactions between the Company and interested persons. No
family relationship exists among the officers and directors.
EXECUTIVE COMPENSATION
The Company was organized on March 31, 1994, and has had no operations
since that time.
The Company has agreed to reimburse the Partnership up to $1,675,000 upon
closing of the Offering for actual costs related to organizing the Company,
negotiating the Initial Property acquisitions, performing due diligence
investigations related to the Initial Properties, performing corporate work in
contemplation of the Offering, preparing the Registration Statement and
providing interim financing for and closing the acquisition of the Initial
Properties. These costs include certain costs related to performing property due
diligence, certain property closing and financing costs, employee compensation,
travel and overhead. These costs include salaries of executive officers from
January 1, 1994, through June 30, 1994, to John W. McRoberts ($100,000), William
C. Harlan ($50,000), and Andrew L. Kizer ($35,000). All other amounts paid in
connection with pre-formation activities were paid by the Partnership to
unaffiliated third parties for services rendered on behalf of the Company.
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<PAGE> 52
The following table sets forth certain summary information concerning the
annual base salaries to be paid to the Company's chief executive officer and the
two other executive officers of the Company for 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
-------------------- --------------
PRINCIPAL BASE STOCK
NAME POSITION YEAR SALARY($)(1) BONUS OPTIONS (#)(3)
- -------------------------- ---------------------------------- ---- ------------ ----- --------------
<S> <C> <C> <C> <C> <C>
John W. McRoberts......... President and Chief Executive 1994 $200,000 (2) 125,000
Officer
William C. Harlan......... Senior Vice President and 1994 100,000 (2) 85,000
Head of Acquisitions
Andrew L. Kizer........... Vice President and 1994 80,000 (2) 50,000
Chief Financial Officer
</TABLE>
- ---------------
(1) Annualized for year ended December 31, 1994.
(2) Annual bonuses will be determined by the Compensation Committee of the
Company's Board of Directors.
(3) Options to purchase a total of 260,000 shares of Common Stock will be
granted to executive officers of the Company on the Effective Date at the
initial public offering price. See "Management -- 1994 Stock Incentive
Plan."
<TABLE>
<CAPTION>
OPTIONS GRANTED IN FISCAL YEAR 1994
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------- VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OF SHARE PRICE
OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OR OPTION PERIOD
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR ($/SH)(1) DATE 5% 10%
- ------------------------------- ------- ------------ ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John W. McRoberts.............. 125,000 48% $ 19.00 , 2004 $1,493,625 $3,785,138
William C. Harlan.............. 85,000 33 19.00 , 2004 1,015,665 2,573,894
Andrew L. Kizer................ 50,000 19 19.00 , 2004 597,450 1,514,055
</TABLE>
- ---------------
(1) Based on the midpoint of the filing range of the estimated initial public
offering price of the Common Stock.
The Company intends to adopt and implement a bonus arrangement for its
executive officers to be administered by the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Richard M. Scrushy, John W. McRoberts, Michael D. Martin and Eric
R. Hanson. There are no interlocks among the members of the Compensation
Committee. Richard M. Scrushy is Chairman of the Board, President and Chief
Executive Officer of HEALTHSOUTH. Although John W. McRoberts serves on the
Company's Compensation Committee, he does not participate in any decisions
regarding his own compensation as an executive officer.
DEFERRED COMPENSATION PLAN
The Company intends to adopt a Deferred Compensation Plan (the "Plan"),
pursuant to which eligible participants may elect to defer and invest a portion
of their compensation. The Company intends to match a portion of the deferred
amount. The amounts credited to a participant's account will be credited with
the results of a selected investment option, which are expected to include funds
primarily investing in debt issued by the United States Government, equity
securities, or a combination or debt and equity securities. All amounts in an
account of a participant will be fully vested at all times and may be withdrawn
by a participant 30 days following such participant's termination of employment.
The participant will be able to request that his benefits be paid as a single
lump sum or over a period of between three and ten years as specified by the
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<PAGE> 53
participant. The Plan will be administered by a committee consisting of three or
more persons selected by the Compensation Committee of the Board of Directors.
The Plan committee will have broad powers to interpret and administer the Plan,
including designating participants and investment options.
1994 STOCK INCENTIVE PLAN
The Board of Directors has adopted the 1994 Stock Incentive Plan (the
"Stock Incentive Plan"). After the closing of the Offering, the Stock Incentive
Plan will be administered by the Stock Option Committee appointed by the Board
of Directors.
The Company may issue incentive awards for up to 418,600 of its outstanding
shares of Common Stock under the Stock Incentive Plan. Under the Stock Incentive
Plan, the Stock Option Committee appointed by the Board of Directors may grant
to employees and members of the Board of Directors of the Company or its
subsidiaries or affiliates stock awards or non-transferable options to purchase
Shares of the Company's Common Stock for terms not longer than ten years, at
prices to be determined by the Board of Directors or the Stock Option Committee,
which may not be less than 95% of the fair market value of the Common Stock on
the date of grant. Options granted under the Stock Incentive Plan may be subject
to other conditions set by the Stock Option Committee, may be exercised by
payment of cash, shares valued at fair market value, or, at the option of the
Stock Option Committee, by a note secured by shares. Unless terminated earlier,
the Stock Incentive Plan will terminate in 2004.
Options to purchase a total of 260,000 shares of Common Stock will be
granted to executive officers of the Company on the Effective Date at the
initial public offering price.
RETIREMENT PLANS
The Company intends to adopt a retirement plan for its executive officers
pursuant to which an eligible executive may receive upon normal retirement
(defined to be when the participant reaches age 65 and has completed five years
of service with the Company) certain benefits based on average earnings and
years of service. The plan will be unfunded and will be paid from earnings of
the Company. All three of the Company's executive officers will be eligible
participants.
COMPENSATION OF DIRECTORS
No officer who is a member of the Board receives compensation for serving
on the Board. Each other member of the Board receives annual compensation of
$5,000 for serving on the Board, plus a fee of $1,000 for each Board and
committee meeting attended, except that only one fee will be paid in the event
that more than one such meeting is held on a single day. All directors receive
reimbursement of travel expenses incurred in attending Board and committee
meetings.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which limits such liability to the maximum
extent permitted by the MGCL.
The Charter of the Company authorizes it to obligate itself to indemnify
and to pay or reimburse expenses in advance of final disposition of a proceeding
to directors, officers, employees and agents of the Company to the fullest
extent permitted by Maryland law. The Bylaws of the Company obligate it to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other
47
<PAGE> 54
enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Indemnification of the Company's directors and officers is subject to
certain limitations where claims of securities laws violations are involved.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors and
officers of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In addition, indemnification may be limited by state securities
laws.
INSURANCE
The Company expects to maintain appropriate liability insurance and
casualty insurance on the Company's office premises.
CERTAIN TRANSACTIONS
Ten of the Initial Properties will be purchased by the Company from and
leased to HEALTHSOUTH or its Subsidiaries, and the Leases for such Initial
Properties leased to HEALTHSOUTH's Subsidiaries will be guaranteed by
HEALTHSOUTH. The Company believes that the terms of the purchases from
HEALTHSOUTH are as favorable as those which the Company could have obtained from
unaffiliated parties. Richard M. Scrushy and Michael D. Martin, directors of the
Company, are officers, directors and/or stockholders of HEALTHSOUTH.
Two of the Initial Properties will be purchased by the Company from and
leased to Subsidiaries of Integrated Health, and such Leases will be guaranteed
by Integrated Health. The Company believes that the terms of the purchases from
Integrated health are as favorable as those which the Company could have
obtained from unaffiliated parties. Robert N. Elkins, a director of the Company,
is Chairman, Chief Executive Officer and a stockholder of Integrated Health, and
Richard M. Scrushy, Chairman of the Board of the Company, is a director of
Integrated Health.
Three of the Initial Properties will be purchased by the Company from and
leased to Surgical Health and subleased to Subsidiaries of Surgical Health. The
Company believes that the terms of the purchases from Surgical Health are as
favorable as those which the Company could have obtained from unaffiliated
parties. William B. Luttrell, a director of the Company, is Chairman, President,
Chief Executive Officer and a
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<PAGE> 55
stockholder of Surgical Health, and Richard M. Scrushy, Chairman of the Board of
the Company, is a director of Surgical Health.
The Midway facility was acquired on April 19, 1994, by MACI, an Alabama
corporation all of the stock of which is owned by Richard M. Scrushy, John W.
McRoberts and Michael D. Martin. MACI will be acquired by the Company pursuant
to the terms of the Merger Agreement. The consideration to be paid for MACI is
the assumption of the indebtedness incurred by MACI to purchase the Midway
facility.
The Company has agreed to reimburse the actual costs incurred by the
Partnership on behalf of the Company up to $1,675,000 upon closing of the
Offering. These costs relate to organizing the Company, negotiating the Initial
Property acquisitions, performing due diligence related to the Initial
Properties, performing corporate work in contemplation of the Offering,
preparing the Registration Statement and providing interim financing for and
closing the acquisition of the Initial Properties. These costs include certain
costs related to performing property due diligence, certain property closing and
financing costs, employee compensation, travel and overhead. These
reimbursements will be paid from the proceeds of the Offering.
PRINCIPAL STOCKHOLDERS
The following table sets forth the anticipated ownership of shares of the
Company's Common Stock by certain officers and directors of the Company upon the
closing of this Offering:
<TABLE>
<CAPTION>
PERCENT OF STOCK OWNED
SHARES ----------------------
NAME AND ADDRESS BENEFICIALLY PRIOR TO AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ----------------------------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Richard M. Scrushy......................................... 82,656 45.92% 1.38%
HEALTHSOUTH................................................ 71,280 39.60 1.19
John W. McRoberts.......................................... 18,000 10.00 .30
Michael D. Martin.......................................... 8,064 4.48 .13
------------ -------- -----
Total...................................................... 180,000 100.00% 3.00%
========== ======= ==========
</TABLE>
DESCRIPTION OF SECURITIES
The summary of the terms of the stock of the Company set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Charter and Bylaws of the Company, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
GENERAL
The Charter of the Company provides that the Company may issue up to
60,000,000 shares of stock, consisting of 50,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock, par value $.001 per share. As of March 31,
1994, 180,000 shares of Common Stock were issued and outstanding and held by
four record holders and no shares of Preferred Stock were outstanding. Under
Maryland law, stockholders generally are not liable for the corporation's debts
or obligations.
COMMON STOCK
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding Excess Shares, holders of shares
of Common Stock will be entitled to receive dividends on such stock as the Board
of Directors may declare out of assets legally available for the payment of
dividends. Upon issuance, the Common Stock will be fully paid and nonassessable
and have no preferences or conversion, exchange, or preemptive rights. In the
event of any liquidation, dissolution, or winding-up of the Company, the holders
of shares of Common Stock are entitled to share ratably in any of the Company's
assets remaining after the satisfaction of all obligations and liabilities of
the Company and after required distributions to holders
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<PAGE> 56
of Preferred Stock, if any. The Common Stock is subject to restrictions on
transfer under certain circumstances. See "-- Restrictions on Transfer."
Subject to the provisions of the Charter regarding Excess Shares, each
share of Common Stock will be entitled to one vote on all matters voted upon by
the holders of Common Stock. Holders of Shares will have no cumulative voting
rights. The Company's Bylaws provide that the President, Chief Executive
Officer, or a majority of the Board may call a special meeting and the Secretary
of the Company must call a special meeting of stockholders upon written request
of stockholders entitled to cast at least 25% of all votes entitled to be cast
at the meeting.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Charter of the
Company contains no such provision. As permitted by the MGCL, the Charter of the
Company provides that the affirmative vote of the holders of at least ninety
percent of the "voting stock" of the Company, voting together as a single class,
shall be required to repeal or amend any provision relating to removal of
directors, the limit on ownership and Excess Shares, amendment of the Charter
and limitation of liability and indemnification of directors and officers.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other series of stock and to establish the number of
shares in each series and to fix the designation, conversion or other rights,
voting powers, restrictions, limitations as to distributions, preferences,
qualifications or terms or conditions of redemption of such shares of each such
series.
The transfer agent and registrar for the Company's Common Stock is AmSouth
Bank N.A.
The Company's Common Stock has been approved for listing on the New York
Stock Exchange. Prior to this Offering, there has been no market for the Common
Stock.
PREFERRED STOCK
The Board of Directors is empowered by the Company's Charter to issue from
time to time one or more classes or series of Preferred Stock and to classify or
reclassify any shares of unissued stock without stockholder approval. The Board
of Directors may determine the relative rights, preferences and privileges of
each class or series of Preferred Stock so issued. Because the Board of
Directors has the power to establish the preferences and rights of each class or
series of Preferred Stock, it may afford the holders in any series or class of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
The Board of Directors has no present plans to issue any shares of Preferred
Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified shares
of stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions and in meeting other needs which
might arise. The additional classes or series, as well as the Common Stock, will
be available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. Although the Board of Directors has no intention at the
present time of doing so, it could authorize the Company to issue a class or
series that could, depending upon the terms of such class or series, delay or
impede a transaction or a change of control of the Company
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<PAGE> 57
that might involve a premium price for the Common Stock or otherwise be in the
best interests of the stockholders.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code in any taxable year
after the first year of its election to be treated as a REIT, (i) not more than
50% in value of its outstanding Stock (as defined below) may be owned, directly
or indirectly (after application of certain complex attribution rules), by five
or fewer individuals at any time during the last half of its taxable year, and
(ii) its Stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year.
In connection with the foregoing, if the Board of Directors shall, at any
time and in good faith, believe that direct or indirect ownership (as determined
under applicable federal tax attribution rules) of at least 9.8% or more in
number or value of the outstanding Common Stock and/or Preferred Stock
(collectively, the "Stock") has or may become concentrated in the hands of one
beneficial owner, the Board of Directors has the power to refuse to transfer or
issue Stock to a person whose acquisition of such Stock would cause a beneficial
holder to hold in excess of 9.8% in number or value of the outstanding Stock.
Further, any transfer of Stock that would create a beneficial owner of more than
9.8% in number or value of the outstanding Stock shall be deemed null and void,
and the intended transferee shall be deemed never to have had an interest
therein.
If at any time there is a transfer in violation of such restrictions, the
Excess Shares shall be deemed automatically to have been converted into a class
separate and distinct from the class or series from which converted and from any
other class of Excess Shares, each such class being designated "Excess Shares of
[Name of Stockholder]." Excess Shares shall be issued and outstanding but shall
have no voting rights. No dividends shall be paid with respect to Excess Shares.
The Company shall have the right to redeem Excess Shares for the lesser of the
amount paid by the intended transferee for the Excess Shares or the market
price. The market price for any Stock so purchased, shall be equal to (i) the
average daily per share closing sales price of a share of Stock of the class of
the Company from which such Excess Share was converted, if then listed on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation National Market System or (ii) if such shares are
not so listed, the market price shall be the mean between the average per share
closing bid prices and asked prices, in each case during the 30 day period
ending on the business day prior to the redemption date. If no such closing
sales prices or quotations are available, the purchase price shall be the price
determined by the Board of Directors in good faith.
DIVIDEND REINVESTMENT PLAN
The Company intends to adopt a Dividend Reinvestment Plan to provide
registered owners of the Company's Common Stock with a simple and convenient
method of investing dividends and other distributions paid in cash ("dividends")
in additional shares of the Company's Common Stock at a 5% discount from current
market value and without payment of any brokerage commission or service charge.
Since such additional shares of Common Stock will be purchased from the Company,
the Company will receive additional funds which will be used for its general
corporate purposes.
Participating stockholders ("Participants") may have cash dividends on all
or a portion of their shares of Common Stock automatically reinvested in
additional shares of the Company's Common Stock ("Plan Shares"). Participants'
funds will be fully invested because the Dividend Reinvestment Plan permits
fractions of shares to be credited to a Participant's account. Dividends on such
fractions, as well as on whole shares, will be reinvested in additional shares,
and such shares will be credited to a Participant's account. Participants will
avoid the need for safe keeping of stock certificates for Plan Shares credited
to their accounts under the Dividend Reinvestment Plan.
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<PAGE> 58
Regular statements reflecting all current activity, including purchases and
latest balances and, if applicable, amounts withheld in conformity with any
United States federal income tax requirements, will simplify Participants'
recordkeeping.
Implementation of the Dividend Reinvestment Plan will commence upon
compliance with applicable federal and state securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of Common Stock or the availability of Common Stock for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock of the Company in the public market could
adversely affect the prevailing market prices.
Upon completion of this Offering, a total of 5,980,000 shares of Common
Stock will be outstanding, assuming no exercise of options under the Stock
Incentive Plan to purchase shares of Common Stock. The 5,800,000 Shares sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act, except (i) for shares purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act and (ii) for shares governed by the Excess Share provisions. See
"-- Restrictions on Transfer."
The remaining 180,000 shares are deemed "Restricted Shares" under Rule 144
in that they were originally issued and sold by the Company in private
transactions in reliance upon exemptions from the registration requirements of
the Securities Act. An aggregate of 180,000 shares held by existing stockholders
are subject to "lock-up agreements" under which the holders of such shares have
agreed not to sell or otherwise dispose of any of their shares without the prior
written consent of the Representatives of the Underwriters for 180 days after
the date of this Prospectus. After the expiration of these "lock-up agreements,"
certain of the shares subject to such agreements will be eligible for sale in
the public market subject to volume limitations, holding period requirements and
other requirements of Rule 144 promulgated by the SEC under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least two years from the later of the date such
Restricted Shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of the Common Stock (59,800 shares based on the number
of shares to be outstanding after this Offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information concerning the
Company. In addition, a person who is not deemed to have been an affiliate of
the Company at any time during the three months preceding a sale, and who has
beneficially owned the Shares proposed to be sold for at least three years,
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
The Company has reserved 418,600 shares of Common Stock to be outstanding
from time to time for issuance pursuant to grants under its Stock Incentive
Plan. See "Management -- 1994 Stock Incentive Plan." Options to purchase a total
of 260,000 shares of Common Stock will be granted to executive officers of the
Company on the Effective Date at the initial public offering price.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Charter and Bylaws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law and
the Company's Charter and Bylaws for complete information.
52
<PAGE> 59
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed with or without cause
only by the affirmative vote of the holders of not less than two-thirds of the
shares then outstanding and entitled to vote in the election of directors. This
provision, when coupled with the provision in the Bylaws authorizing the Board
of Directors to fill vacant directorships, may preclude stockholders from
removing incumbent directors except upon a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate thereof, are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors of such corporation
and approved by the affirmative vote of at least (i) 80% of the vote entitled to
be cast by holders of outstanding voting shares of the corporation and (ii)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares of the corporation other than shares held by the Interested Stockholder
with whom (or with whose affiliate) the business combination is to be effected,
unless, among other conditions, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the Board of
Directors of the corporation prior to the time that the Interested Stockholder
becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other shares of stock previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
of all voting power. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "Control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholder meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of
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such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
The business combination statute and the control share acquisition statute
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer.
AMENDMENT TO THE CHARTER
Certain provisions of the Company's Charter, including the provisions
governing removal of directors and limits on ownership and Excess Shares, may be
amended only by the affirmative vote of the holders of not less than 90% of all
of the votes entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than two-thirds of all of the votes entitled to be cast
on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors may
be made only (i) by the Board of Directors, or (ii) by a stockholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws. The Bylaws further provide that with respect
to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders.
The provisions in the Bylaws for removal of directors, the business
combination and control share acquisition provisions of the MGCL, and the
advance notice provisions of the Bylaws could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations to the Company and a prospective holder of Common Stock. Based
upon representations of the Company with respect to certain facts set forth
herein, Sirote & Permutt, P.C., which has acted as tax counsel to the Company in
connection with the formation of the Company and the Company's election to be
taxed as a REIT commencing with its taxable year ending December 31, 1994, is of
the opinion that the following discussion fairly summarizes the material federal
income tax considerations to the Company and a holder of Common Shares. This
discussion and such opinion are based on current law. The following discussion
is not exhaustive of all possible tax considerations. This summary does not give
a detailed discussion of any state, local or foreign tax considerations, nor
does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective stockholder in light of his or her particular
circumstances or, unless otherwise indicated, to certain types of stockholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
Federal income tax laws.
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
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FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES RELATING TO THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SUCH SHARES OF COMMON STOCK.
TAXATION OF THE COMPANY
The Company intends to elect and to qualify as a REIT for federal income
tax purposes under Sections 856 through 860 of the Code (the "REIT Provisions of
the Code"), commencing with its taxable year ending December 31, 1994. The
Company believes that, commencing with such taxable year, it will be organized
and will operate in such a manner as to qualify for taxation as a REIT under the
Code, and the Company intends to continue to operate in such a manner. No
assurance can be given, however, that the Company will operate in a manner so as
to qualify or remain qualified as an REIT. It should be noted that the Code,
rules, regulations, and administrative and judicial interpretations are all
subject to change (possibly on a retroactive basis).
In the opinion of Sirote & Permutt, P.C., upon consummation of the
Offering, the Company will be organized in conformity with the requirements for
qualification as a REIT and its proposed method of operation as described in
this Prospectus will permit it to meet the requirements for qualification and
taxation as a REIT under the Code. This opinion is based on various assumptions
relating to the organization and operation of the Company and is conditioned
upon certain representations made by the Company as to certain relevant factual
matters, including matters related to the organization and expected manner of
operation of the Company. Qualification of the Company as a REIT will depend
upon its ability to meet, through actual annual operating results, the various
qualification tests imposed under the Code, as discussed below. Sirote &
Permutt, P.C. will not review compliance with these tests on a continuing basis.
The Company will receive an opinion of Sirote & Permutt, P.C. that it has been
organized in conformity with the requirements for REIT status under the Code and
that its proposed ownership and method of operations, as described in this
Prospectus, will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. Such opinion will be based upon a review of
the Leases in place before the Offering, representations and opinions as to
reasonable values, and other matters set forth in the opinion. Such opinion
assumes, although no assurance can be given, that the actual results of the
Company's operations for any one taxable year will satisfy such requirements.
See " -- Failure to Qualify" below.
In brief, if certain detailed conditions imposed by the REIT Provisions of
the Code are met, entities such as the Company that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations subject to regular corporate income tax are generally not taxed at
the corporate level on their "REIT taxable income" that is distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
both the corporate and stockholder level) that generally results from the use of
corporate investment vehicles.
If the Company were to fail to qualify as a REIT in any year, however, it
would be subject to federal income tax at regular corporate income tax rates as
if it were a domestic corporation, and its stockholders would be taxed in the
same manner as stockholders of regular corporations. In this event, the Company
could be subject to potentially significant tax liabilities, and, therefore, the
amount of cash available for distribution to its stockholders would be reduced.
General. If the Company qualifies for taxation as a REIT, it generally
will not be subject to federal income tax on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. The Company will
be subject to federal income tax, however, as follows: First, the Company will
be taxed at regular corporate rates on any undistributed "REIT taxable income,"
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its items of tax
preference, if any. Third, if the Company has net income from the sale or other
disposition of foreclosure property that is held primarily for sale to customers
in the ordinary course of business or other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the highest
corporate rate. Fourth, any net income that the Company has from prohibited
transactions (which are, in general, certain sales or other dispositions of
property other than foreclosure property held primarily for sale to customers in
the ordinary course of business) will be subject to a 100% tax. Fifth, if the
Company was to fail
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to satisfy either the 75% or 95% gross income tests (as discussed below), and
nonetheless maintain its qualification as a REIT because certain other
requirements have been met, it would be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests, multiplied by a fraction intended to reflect the
Company's profitability. Sixth, if the Company fails to distribute during each
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from preceding periods, then the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, provided certain federal tax elections
are made, if, during the 10-year period commencing on the day on which assets
having a net unrealized built-in gain are acquired by the Company from a C
corporation in a transaction in which the Company inherits the tax basis in such
assets from the C corporation, the Company recognizes a gain from the
disposition of all or a portion of such assets, then the Company will be subject
to tax at the highest regular corporate rate on the excess, if any, of the fair
market value over the adjusted basis of any such asset disposed of determined as
of the beginning of the relevant 10 year period.
Requirements for Qualification as a REIT. To qualify as a REIT for a
taxable year under the Code, the Company must elect or have in effect an
election to be so treated and must meet other requirements, all of which are
summarized below, including percentage tests relating to the sources of its
gross income, the nature of the Company's assets, and the distribution of its
income to stockholders. Such election, if properly made and assuming continuing
compliance with the qualification tests described herein, will continue in
effect for subsequent years.
The Code defines a REIT as a corporation, trust or association: (1) which
is managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (3) which would be taxable, but for the REIT Provisions of
the Code, as an association taxable as a domestic corporation; (4) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons, determined without reference to any rules of attribution (the
share ownership test); (6) which is not closely held as determined under the
personal holding company stock ownership test of Section 542(a) (as applied with
certain modifications); and (7) which meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. By reason of condition (6) above, the Company will fail to qualify as
a REIT for a taxable year if at any time during the last half of such year more
than 50% in value of its outstanding stock is owned directly or indirectly by
five or fewer individuals (the five or fewer test). For purposes of the five or
fewer test, any stock held by a qualified trust described in Section 401(a) of
the Code will be treated as if the stock is held directly by the beneficiaries
of the trust in proportion to their actual interest in the trust rather than as
held by the trust. The five or fewer test and the share ownership test do not
apply to the first taxable year for which an election is made to be treated as a
REIT. Prior to the consummation of the Offering, the Company will not satisfy
the five or fewer or share ownership tests of conditions (5) and (6) above. The
Company anticipates issuing sufficient Shares pursuant to the Offering to allow
it to satisfy the share ownership test and the five or fewer test. In addition,
the Company's Charter will provide restrictions regarding the transfer of Common
Stock that are intended to assist the Company in continuing to satisfy the share
ownership test and the five or fewer test described in (5) and (6) above. See
"Description of Securities -- Restrictions on Transfer."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.
If a REIT owns a qualified REIT subsidiary, the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities, and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the
outstanding capital stock of which has been owned by the REIT from the
commencement of such subsidiary corporation's existence.
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Gross Income Tests. There are three separate percentage tests relating to
the sources of the Company's gross income that must be satisfied annually.
1. The 75% Test. At least 75% of the Company's gross income from the
taxable year must be "qualifying income." Qualifying income generally includes
(i) rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interest in real property; (iii)
gains from the sale or other disposition of interests in real property and real
estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of the Company's trade or business ("dealer
property"); (iv) dividends or other distributions on shares in other REITS, as
well as gain from the sale of such shares; (v) abatements and refunds of real
property taxes; (vi) income from the operation, and gain from the sale of
property reduced to possession following a lessee's default under the terms of a
lease or, of property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"); (vii) commitment fees
received for agreeing to make loans collateralized by mortgages on real property
or to purchase or lease real property; and (viii) certain qualified temporary
investment income attributable to the investment of new capital received by the
Company in exchange for its shares (including the Shares issued pursuant to the
Offering) during the one-year period following the receipt of such new capital.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test. Similarly, any
payments made to the Company by a financial institution pursuant to a rate
protection agreement that hedges variable rate indebtedness incurred by the
Company to acquire or carry real estate assets will be included as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% test.
For purposes of determining whether the Company complies with the 75% and
95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property, excluding
sales of foreclosure property and certain sales of dealer property exempted from
the prohibited transaction tax by virtue of a limited safe harbor rule.
In order to qualify as rents from real property, the amount of rent
received generally must not be determined on the income or profits of any
person, but may be based on a fixed percentage or percentages of receipts or
sales. The Code also provides that rents will not qualify as rents from real
property, in satisfying the gross income tests, if the REIT owns 10% or more of
the tenant, whether directly or pursuant to certain attribution rules. The
Company intends to lease property only under circumstances such that
substantially all rents from such property would qualify as rents from real
property. Although it is possible that a tenant could sublease space to a
sublessee in which the REIT is deemed to own directly or indirectly 10% or more
of the tenant, the Company believes that as a result of the provisions in the
Articles of Incorporation limiting ownership to 9.8% such occurrence would be
unlikely. Application of the 10% ownership rule is, however, dependent upon
complex attribution rules provided in the Code and circumstances beyond the
control of the Company. Ownership, directly or by attribution, by an
unaffiliated third party of more than 10% of the Company's Common Stock and more
than 10% of the stock of any lessee or sublessee would result in a violation of
the rule.
In order to qualify as interest on obligations secured by mortgages on real
property, the amount of interest received generally must not be determined on
the income or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income. There is an exception to
this rule permitting a REIT to perform directly certain customary tenant
services which are "reasonable and customary" in the geographic area in which
the services are performed. The Company anticipates that any services provided
for tenants will meet this requirement.
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If rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not qualify
as rents from real property. Generally, this 15% test is applied separately to
each lease. The portion of rental income treated as attributable to personal
property is determined according to the ratio of the tax basis of the personal
property to the total tax basis of the property which is rented. The
determination of what fixtures and other property constitute personal property
for federal tax purposes is difficult and imprecise. The Company does not
believe that it will have 15% in value of any of its real properties classified
as personalty. If however, rent payments do not qualify, for reasons discussed
above, as rents from real property for purposes of Section 856 of the Code, it
will be more difficult for the Company to meet the 95% or 75% gross income
tests.
The Company may temporarily invest its working capital in short-term
investments, including shares in other REITs or interests in REMICs. Although
the Company will use its best efforts to ensure that its income generated by
these investments will be of a type which satisfies the 75% and 95% gross income
tests, there can be no assurance in this regard (see the discussion above of the
new capital rule under the 75% gross income test). Moreover, the Company may
realize short-term capital gain upon sale or exchange of such investments, and
such short-term capital gain would be subject to the limitations imposed by the
30% gross income test. The Company generally expects to meet the 75% and 95%
gross income tests through the rental of the property it acquires.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. It is not
possible, however, to know whether the Company would be entitled to the benefit
of these relief provisions as the application of the relief provisions is
dependent on future facts and circumstances. If these relief provisions apply, a
special tax generally equal to 100% is imposed upon the net income attributable
to the greater of the amount by which the Company failed the 75% or 95% gross
income tests, multiplied by a fraction intended to reflect the Company's
profitability.
3. The 30% test. Not more than 30% of the Company's gross income for each
taxable year may be derived from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) real property held for fewer than four years
(apart from involuntary conversions and sales of foreclosure property).
Asset Tests. At the close of each quarter of the Company's taxable year,
it must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must consist of real estate
assets (including interests in real property and interests in mortgages on real
property as well as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates, if any), cash, cash
items and government securities. Second, not more than 25% of the Company's
total assets may be represented by securities other than those includible in the
75% asset class. Finally, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own more
than 10% of any one issuer's outstanding voting securities. The Company may own
100% of another corporation, however, if it is a qualified REIT subsidiary.
Under that circumstance, the qualified REIT subsidiary is ignored and the
assets, income, gain, loss and other attributes are treated as being owned or
generated directly by the Company for federal income tax purposes. The Company
has one or more wholly-owned REIT subsidiaries.
If the Company meets the Asset Tests described above at the close of any
quarter, it will not lose its REIT status merely because of a change in the
value of its assets in a subsequent quarter unless, subject to a 30 day grace
period ending after the close of such subsequent quarter, such change exists
immediately after the acquisition of any security or other property and is
wholly or partly the result of such an acquisition during such quarter. The
Company intends to maintain adequate records of the value of its assets to
maintain compliance with the Asset Tests.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount equal to or greater than the excess of (A) the sum
of (i) 95% of the Company's real estate investment trust taxable income
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (ii) 95%
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of the net income, if any, (after tax) from foreclosure property, over (B) the
sum of certain non-cash income (from certain imputed rental income and income
from transactions inadvertently failing to qualify as like-kind exchanges). To
the extent that the Company does not distribute all of its net long-term capital
gain and all of its real estate investment trust taxable income, it will be
subject to tax thereon. In addition, the Company will be subject to a 4% excise
tax to the extent it fails within a calendar year to make required distributions
to its stockholders of 85% of its ordinary income and 95% of its capital gain
net income plus the excess, if any, of the grossed up required distribution for
the preceding calendar year over the amount treated as distributed for such
preceding calendar year. For this purpose, "grossed up required distribution"
for any calendar year is the sum of the taxable income of the Company for the
taxable year (without regard to the deduction for dividends paid) and all
amounts from earlier years that are not treated as having been distributed under
the provision. Dividends declared in the last quarter of the year (October,
November or December) and paid during the following January, will be treated as
having been paid and received on December 31.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirements due to
timing differences between actual receipt of income and actual payment of
deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at real estate
investment trust taxable income of the Company on the other hand. The problem of
inadequate cash to make required distributions could also occur as a result of
the repayment in cash of principal amounts due on the Company's outstanding
debt, particularly in the case of balloon repayments or as a result of capital
losses on short-term investments of working capital. Therefore, the Company
might find it necessary to arrange for short-term, or possibly long-term,
borrowing or new equity financing. If the Company were unable to arrange such
borrowing or financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a failure
to meet the annual REIT distribution requirements for a taxable year by paying
deficiency dividends to stockholders within a specified period.
Share Ownership Test. As described above, the Company's Common Stock must
be held by a minimum of 100 persons for at least approximately 92% of the days
in each taxable year subsequent to 1994. In addition, at all times during the
second half of each taxable year subsequent to 1994, no more than 50% in value
of the shares of beneficial interest of the Company may be owned, directly or
indirectly, and by applying certain constructive ownership rules, by five or
fewer individuals. In order to ensure compliance with this test, the Company has
placed certain restrictions on the transfer of the Common Stock to prevent
further concentration of share ownership. Moreover, to evidence compliance with
these requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Common Stock. In fulfilling its obligations to
maintain records, the Company must and will demand written statements each year
from the record holders of designated percentages of its Common Stock disclosing
the actual owners of such Common Stock. A list of those persons failing or
refusing to comply with such demand must be maintained as a part of the
Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his tax returns a similar statement
disclosing the actual ownership of Common Stock and certain other information.
In addition, the Company's declaration of trust provides restrictions regarding
the transfer of its shares that are intended to assist the Company in continuing
to satisfy the share ownership requirements.
Other REIT Issues. With respect to property acquired from and leased back
to the same or an affiliated party of a lessee, the IRS could assert that the
Company realized prepaid rental income in the year of purchase to the extent
that the value of the leased property exceeds the purchase price paid by the
Company for that property. In litigated cases involving sale-leasebacks which
have considered this issue, courts have concluded that buyers have realized
prepaid rent where both parties acknowledged that the purported purchase price
for the property was substantially less than fair market value and the purported
rents were substantially less than the fair market rentals. Because of the lack
of clear precedent and the inherently factual nature of the inquiry, complete
assurance cannot be given that the IRS could not successfully assert the
existence of prepaid rental income. The value of and fair market rent for
properties involved in sale-leasebacks are inherently factual matters and always
subject to challenge.
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Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for four years, gain from the sale of a property held for sale to
customers in the ordinary course of business is subject to a 100% tax. The
simultaneous exercise of rights of first refusal granted to certain Lessees or
other events could result in sales of properties by the Company that exceed this
safe harbor. However, the Company believes that in such event, it will not have
held such properties for sale to customers in the ordinary course of business.
Depreciation of Initial Properties. For tax purposes, the Company's real
property generally is expected to be depreciated over 40 years and 20 years for
buildings and land improvements, respectively, utilizing the straight-line
method of depreciation. Personal property is expected to be depreciated over
seven years utilizing the straight-line method of depreciation.
Failure to Qualify. If the Company fails to qualify for taxation as an REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company, nor
will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Failure to qualify and to maintain qualification as a REIT would force the
Company to significantly reduce its distributions and possibly incur substantial
indebtedness or liquidate substantial investments in order to pay the resulting
corporate taxes. In addition, the Company, once having obtained REIT status and
having lost such status, would not be eligible to elect REIT status for the four
subsequent taxable years, unless its failure to maintain its qualification was
due to reasonable cause and not willful neglect, and certain other requirements
were satisfied. In order to elect again to be taxed as a REIT, the Company would
be required to distribute all of its earnings and profits accumulated in any
non-REIT taxable year.
TAXATION OF DOMESTIC STOCKHOLDERS
Taxation of Taxable Domestic Stockholders. As long as the Company
qualifies as a REIT, distributions other than capital gain dividends (including
reinvestments pursuant to the Company's dividend reinvestment plan, if any) made
to the Company's taxable domestic stockholders out of current or accumulated
earnings and profits will be taken into account by them as ordinary income, and
corporate stockholders will not be eligible for the dividends received
deduction. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains to the extent they do not exceed the Company's
actual net capital gain for the taxable year, although corporate stockholders
may be required to treat up to 20% of any such capital gain dividend as ordinary
income. Distributions in excess of current or accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of a stockholder's shares of Common Stock, but will reduce the
basis of such stockholder's shares of Common Stock. To the extent that such
distributions exceed the adjusted basis of a stockholder's shares of Common
Stock, they will be included in income as long-term capital gain (or short-term
capital gain if the shares of Common Stock have been held for not more than one
year) assuming the shares of Common Stock are a capital asset in the hands of
the stockholder. Stockholders may not include, in their respective income tax
returns, any net operating losses or capital losses of the Company.
Dividends declared by the Company in the last quarter of the calendar year
(October through December) to stockholders of record on a date in such quarter,
shall be treated as both paid by the Company and received by such stockholders
on December 31 of such year, provided that the Company actually pays such
dividends during January of the following calendar year.
In general, any gain or loss recognized by a stockholder on the sale or
other taxable disposition of shares of Common Stock will be treated as capital
gain or loss, provided the shares are a capital asset in the hands of the
seller. In general, any loss upon a sale or exchange of shares of Common Stock
by a stockholder who has held such shares for not more than six months (after
applying certain rules), will be treated as a long-term
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capital loss to the extent of distributions from the Company required to be
treated by such stockholder as long-term gain.
Tax preference and other items which are treated differently for regular
and alternative minimum tax purposes are to be allocated between a REIT and its
stockholders under regulations which are to be prescribed. It is likely that
these regulations would require tax preference items to be allocated to the
Company's stockholders with respect to any accelerated depreciation claimed by
the Company.
Backup Withholding. Under certain circumstances, taxable domestic
stockholders may be subject to backup withholding at the rate of 31% imposed for
payments of interest, dividends and payments of gross proceeds by brokers. This
withholding applies only if a stockholder, among other things, (i) fails to
furnish the Company with his taxpayer identification number certified under
penalties of perjury, (ii) furnishes the Company an incorrect taxpayer
identification number, (iii) fails properly to report interest or dividends from
any source or (iv) under certain circumstances fails to provide the Company or
his securities broker with a certified statement, under penalties of perjury,
that he or she is not subject to backup withholding. Stockholders should consult
their tax advisors as to their qualification for exemption from withholding and
the procedure for obtaining such an exemption. Finally, United States persons
are required to certify their United States status in order to receive dividends
without the withholding imposed by the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA").
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
Taxation of Tax-Exempt Stockholders. As a general rule, amounts
distributed by a REIT to a tax-exempt entity do not constitute unrelated
business taxable income ("UBTI") and thus distributions by the Company to a
stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of Common Stock with
"acquisition indebtedness" within the meaning of the Code and the shares of
Common Stock are not otherwise used in an unrelated trade or business of the
tax-exempt entity. If a REIT constitutes a "pension-held REIT" in a taxable
year, distributions by such REIT to a tax-exempt employee's pension trust that
owns more than 10% of the REIT may be treated as UBTI in an amount equal to the
percentage of gross income of the REIT that is derived from an "unrelated trade
or business" (determined as if the REIT were a pension trust and subject to
certain de minimus rules) divided by the gross income of the REIT for the year
in which the dividends are paid. This rule only applies, however, if (i) the
percentage of the gross income derived from the REIT for the year in which the
dividends are paid is at least five percent, (ii) the REIT qualifies as a REIT
only because the pension trust is not treated as a single individual for
purposes of the "five-or-fewer" rule (see " -- Taxation of the
Company -- Requirements for Qualification as a REIT)") and (iii) (A) one pension
trust owns more than 25% of the value of the REIT, or, (B) a group of pension
trusts individually holding more than 10 percent of the value of the REIT
collectively own more than 50 percent of the value of the REIT. The Company does
not expect that it will constitute a "pension-held REIT" in part because the
ownership limits in the Company's Charter (assuming no waiver of such limits by
the Board of Directors) would prevent such a pension trust from acquiring Common
Stock in excess of the Ownership Limit.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income
and estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders of such shares. A "Non-U.S. Holder" is any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includible in gross income for U.S. federal income tax purposes regardless of
its source. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects of
U.S. federal income and estate taxation.
Distributions from the Company
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable to
capital gains of the Company and which are not
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effectively connected with a U.S. trade or business of the Non-U.S. Holder will
be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of Common Stock. In
cases where the dividend income from a Non-U.S. Holder's investment in Common
Shares is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends (and may also be subject to the 30%
branch profits tax in the case of a Non-U.S. Holder that is a foreign
corporation).
To determine the applicability of a tax treaty providing for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country.
Treasury regulations proposed in 1984 which have not been finally adopted,
however, would require Non-U.S. Holders to file certain forms to obtain the
benefit of any applicable tax treaty providing for a lower rate of withholding
tax on dividends. Such forms would contain the holder's name and address and
other pertinent information, to be certified by such holder under penalties of
perjury, and an official statement by the competent authority (as defined in the
applicable treaty) in the foreign country attesting to the holder's status a
resident thereof.
Non-Dividend Distributions. Distributions by the Company which do not
represent dividends paid out of the current and accumulated earnings and profits
of the Company will not be subject to a Non-U.S. Holder withholding tax. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
dividends. The Non-U.S. Holder may seek a refund of such amounts from the IRS,
however, if it is subsequently determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of the Company.
Capital Gain Dividends. Under FIRPTA, a distribution made by the Company
to a Non-U.S. Holder, to the extent attributable to gains from dispositions of
United States Real Property Interests ("USRPIs") such as the Initial Properties
beneficially owned by the Company ("USRPI Capital Gains"), will be considered
effectively connected with a U.S. trade or business of the Non-U.S. Holder and
subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. In addition, the Company will be required to withhold tax
equal to 35% of the amount of dividends to the extent such dividends constitute
USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a foreign corporate stockholder that is
not entitled to treaty exemption.
Dispositions of Common Stock
Unless the Common Shares constitute a USRPI, a sale of Common Stock by a
Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The
Common Stock will not constitute a USRPI if the Company is a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which, at all
times during a specified testing period, less than 50% in value of its shares is
held directly or indirectly by Non-U.S. Holders. It is currently anticipated
that the Company will be a domestically controlled REIT, and therefore that the
sale of Common Shares will not be subject to taxation under FIRPTA. Because the
Common Stock will be publicly traded, however, no assurance can be given the
Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of Common Stock generally will still not be subject to
tax under FIRPTA as a sale of a USRPI provided that (i) the Company's Common
Stock are "regularly traded" (as defined by applicable Treasury Regulations) on
an established securities market (e.g., the NYSE, on which the Common Stock will
be listed) and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding Common Stock at all times during a specified testing period.
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If gain on the sale of Common Stock were subject to taxation under FIRPTA,
the Non-U.S. Holder would be subject to the same treatment as a U.S. stockholder
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of Common Stock could be required to withhold 10% of the
purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in Common Stock is effectively connected with a U.S. trade or
business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject
to the same treatment as a U.S. stockholder with respect to such gain, or (ii)
if the Non-U.S. Holder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, the nonresident alien individual will be subject to a 30%
tax on the individual's capital gain.
Estate Tax
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for U.S. federal estate tax purposes)
of the United States at the time of death will be includible in the individual's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise. Such individual's estate may be subject to U.S.
federal estate tax on the property includible in the estate for U.S. federal
estate tax purposes.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends (including any capital gain dividends) paid to, and the tax
withheld with respect to, each Non-U.S. Holder. These reporting requirements
apply regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these returns may also be made available under
the provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
Common Stock to a Non-U.S. Holder at an address outside the United States.
The payment of the proceeds from the disposition of Common Stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of Common Stock to
or through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting except as noted below. In the
case of a payment of proceeds from the disposition of Common Stock to or through
a non-U.S. office of a broker which is (i) a U.S. person, (ii) a "controlled
foreign corporation" for U.S. federal income tax purposes, or (iii) a foreign
person 50% or more of whose gross income for certain periods is derived from a
U.S. trade or business unless the broker has documented that such holder is a
Non-U.S. Holder and certain other conditions are met.
Backup withholding with respect to foreign stockholders is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a Non-U.S. Holder will be allowed as a credit against any United
States federal income tax liability of such Non-U.S. Holder. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment
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of the Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Common Stock of the Company.
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
There may be other federal, state, local or foreign income, or estate and
gift tax considerations applicable to the circumstances of a particular
investor. Stockholders should consult their own tax advisors with respect to
such matters.
DIVIDEND REINVESTMENT PLAN
Stockholders participating in any dividend reinvestment plan adopted by the
Company will be deemed to have received the gross amount of any cash
distributions which would have been paid by the Company to such stockholders had
they not elected to participate. These deemed distributions will be treated as
actual distributions from the Company to the participating stockholders and will
retain the character and tax effects applicable to distributions from the
Company generally. See " -- Taxation of Taxable Domestic Stockholders" and
" -- Taxation of Foreign Stockholders." Participants in the dividend
reinvestment plan are subject to Federal income tax on the amount of the deemed
distributions to the extent that such distributions represent dividends or
gains, even though they receive no cash. Shares of Common Stock received under
the plan will have a holding period beginning with the day after purchase, and a
tax basis equal to their cost (which is the gross amount of the deemed
distribution).
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA,
OR A GOVERNMENTAL, CHURCH, OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE, AND STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA.
A fiduciary of a pension, profit-sharing, or other employee benefit plan
(an "Employee Plan") subject to ERISA should consider fiduciary standards under
ERISA in the context of the Employee Plan's particular circumstances before
authorizing an investment of all or any portion of such Employee Plan's assets
in the Shares. Among other factors, such fiduciary should consider (i) whether
the investment satisfies the prudence requirements of Section 404(a)(1)(B) of
ERISA, (ii) whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA and (iii) whether the investment is in accordance
with the documents and instruments governing the plan as required by Section
404(a)(1)(D) of ERISA. In addition, persons who control the investments of
individual retirement accounts ("IRAs") should consider that IRAs may only make
investments that are authorized by the appropriate governing documents and under
applicable state law.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code, prohibit a wide range of transactions involving the assets of an Employee
Plan or IRA and persons who have certain specified relationships to the Employee
Plan or IRA ("parties in interest" within the meaning of ERISA or "disqualified
persons" within the meaning of the Code). Such transactions are treated as
"prohibited transactions" under Section 406 of ERISA and Section 408(e)(2) of
the Code and excise taxes are imposed upon such persons by Section 4975 of the
Code. Thus, a fiduciary of an Employee Plan or a person making the investment
decision for an IRA should consider
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whether the acquisition or the continued holding of the Shares might constitute
or give rise to a direct or indirect non-exempt prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if an Employee Plan or IRA acquires an equity
interest in an entity, which interest is neither a publicly offered security nor
a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Employee Plan's or IRA's assets would
include, for purposes of the fiduciary responsibility provisions of ERISA, both
the equity interest and an undivided interest in each of the entity's underlying
assets unless certain specified exceptions apply. The DOL Regulations define a
publicly-offered security as a security that is "widely held," "freely
transferable" and either (i) part of a class of securities registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or (ii) sold pursuant to an effective registration statement under
the Securities Act, if the class of securities of which such security is a part
is registered under the 1934 Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurs. The Shares will be sold
pursuant to an effective registration statement under the Securities Act and
will be registered under the 1934 Act.
The DOL Regulations provide that a security is widely held only if it is
part of a class of securities that is owned by 100 or more investors independent
of the Company and of one another. A security will not fail to be widely held
because the number of independent investors falls below 100 subsequent to the
Offering as a result of events beyond the Company's control. The Company expects
the Common Stock to be "widely held" upon completion of the Offering.
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of the Offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that such securities are freely
transferable. Employee Plan and IRA fiduciaries should be aware that the
Company's Articles of Incorporation contain certain restrictions on any transfer
of Shares that would create a beneficial owner of more than 9.8% in value of the
Company's outstanding Common Stock. See "Description of Securities --
Restrictions on Transfer." While the Company believes that such a restriction
is generally permitted under the DOL Regulations and is not likely to result
in the failure of the Common Stock to be freely transferable, the DOL
Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
Treasury Department will not reach a contrary conclusion.
Assuming that the Common Stock will be widely held, the Company believes
that the Common Stock will be publicly offered securities for purposes of the
DOL Regulations and that the assets of the Company will not be deemed to be plan
assets of any Employee Plan or IRA that invests in the Common Stock.
Employee Plans and IRAs and their fiduciaries are strongly urged to consult
with their advisors before acquiring Common Stock of the Company.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company, and
the Company has agreed to sell to them, the following respective numbers of
Shares at the initial public offering price less the underwriting discounts set
forth on the cover of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------- ---------
<S> <C>
Smith Barney Inc.....................................................................
J.C. Bradford & Co...................................................................
---------
Total...................................................................... 5,800,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all the
Shares offered hereby (other than those covered by the over-allotment option
described below) if any of such Shares are taken.
The Company has been advised by Smith Barney Inc. ("Smith Barney") and J.C.
Bradford & Co. (the "Representatives") that the Underwriters propose to offer
the Shares to the public at the initial public offering price set forth on the
cover of this Prospectus and to certain dealers at such price, less a concession
not in excess of $ per share. The Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share to
certain other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable not
later than 30 calendar days from the date of this Prospectus, to purchase up to
870,000 additional shares at the same price per share as the Company receives
for the shares that the Underwriters have agreed to purchase. To the extent that
the Underwriters exercise such option to purchase up to a total of 870,000
shares, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares to be
purchased by it shown in the above table bears to the total number of shares
shown in the above table, and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares offered hereby. If purchased, the Underwriters will sell such
additional 870,000 shares on the same terms as those on which the shares are
being offered.
The Company will pay an advisory fee equal to 0.67% of the gross proceeds
of the Offering (including any exercise of the Underwriters' over-allotment
option) to Smith Barney for advisory services in connection with the evaluation,
analysis and structuring of the Company's formation and the Offering.
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The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed, and shall cause each officer, director and existing
stockholder of the Company to agree that, without the prior written consent of
the Representatives, such person will not register, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any Shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or warrants to purchase Common Stock, for a period of 180 days,
subject to certain exceptions set forth in the Underwriting Agreement.
Smith Barney has engaged and may in the future engage in investment banking
services for certain affiliates of the Company.
Prior to this Offering there has been no established public market for the
Common Stock. Consequently, the offering price has been determined by
negotiation between the Company and the Representatives. Among the factors
considered in such negotiations were the number of shares to be offered, the
projected revenues to the Company under the Leases and the expected cash
available to the Company for distribution to its stockholders, the current
yields and prices of publicly traded securities believed to be somewhat
comparable to the Company, prevailing market conditions and other factors deemed
relevant.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Sirote & Permutt, P.C. of Birmingham, Alabama. In rendering such
opinion, Sirote & Permutt, P.C. will rely upon the opinion of Ballard Spahr
Andrews & Ingersoll as to certain matters of Maryland law. Sirote & Permutt,
P.C. has represented HEALTHSOUTH on matters unrelated to the Offering. Both the
Company and HEALTHSOUTH have consented to this arrangement. Skadden, Arps,
Slate, Meagher & Flom, New York, N.Y., will pass upon certain legal matters
relating to the Offering for the Underwriters.
EXPERTS
The balance sheet of Capstone Capital Corporation at March 31, 1994,
included herein and in the registration statement has been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young, independent auditors, to the
extent indicated in their reports thereon also appearing elsewhere herein and in
the Registration Statement. Such consolidated financial statements have been
included herein in reliance on their reports given on the authority of such firm
as experts in accounting and auditing.
The combined financial statements of Selected Rehabilitation Hospitals of
National Medical Enterprises as of May 31, 1992 and 1993, and for each of the
years in the three-year period ended May 31, 1993, have been included herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The valuation appraisals of the Initial Properties referenced in this
Prospectus have been performed by Valuation Counselors, an independent appraisal
firm, as indicated in their reports with respect thereto and are included as
Exhibits to this Registration Statement upon reliance on the authority of said
firm as experts in giving said reports.
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AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Shares offered by this Prospectus, which
includes this Prospectus plus additional information. The Company will also file
reports, proxy statements and other information with the SEC under the 1934 Act.
Such reports, proxy statements and other information can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
in Room 1204, Everett McKinley Dirksen Building, 219 South Dearborn Street,
Chicago, Illinois 60605, and 14th Floor, 75 Park Place, New York, New York
10007. Copies of these materials can be obtained from the Public Reference
Section of the SEC, Washington, D.C. 20549, at prescribed rates.
The Company will also furnish to its stockholders annual reports containing
audited financial statements and quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
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GLOSSARY
The following are definitions of certain terms used in this Prospectus.
Unless the context otherwise requires, the following terms shall have the
meanings set forth below for the purposes of this Prospectus:
"Additional Rent" means increases to the Base Rent commencing after
the first year based on either a set percentage increase or on 67% to 100%
of the percentage increase in the applicable consumer price index, with
annual increases generally limited to a maximum of 5%.
"AHF" means ancillary hospital facility.
"AmSouth" means AmSouth Bank N.A.
"ASF" means ambulatory surgery facility.
"ASMI" means American Sports Medicine Institute.
"Bank Credit Facility" means the $60 million line of credit from a
consortium of banks led by NationsBank to be used to fund a portion of the
purchase price for the Initial Properties, to fund the acquisition of
additional properties and for general corporate purposes.
"Base Rent" means the minimum annual rental payment payable by each
Lessee as set forth in its respective Lease.
"Bylaws" means the Bylaws of the Company.
"Charter" means the Articles of Incorporation of the Company, as
amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.001 per share, of
the Company.
"Company" means Capstone Capital Corporation, a Maryland corporation,
and one or more of its subsidiaries or, as the context may require,
Capstone Capital Corporation only.
"CON" means certificate of need.
"CPI" means the Consumer Price Index.
"Disinterested Director" means any member of the Company's Board of
Directors who is not affiliated with any seller of properties to the
Company. For this purpose, an "affiliate" of the Company shall mean a
person who is an officer, director or employee of a seller or who
beneficially owns 5% or more of any class of equity securities of a seller
or of any entity that controls, is controlled by or is under common control
with a seller, or a member of whose immediate family has one of the
foregoing relationships with a seller.
"Dividend Reinvestment Plan" means the Company's plan pursuant to
which holders of its Common Stock may elect to reinvest dividends
automatically in additional shares of Common Stock.
"Effective Date" means the date that the SEC executes an order
declaring the Registration Statement effective under the Securities Act.
"Excess Shares" means those shares owned beneficially (under the
applicable rules and regulations of the Commission) by any stockholder of
the Company in excess of 9.8% in value of the Company's outstanding stock.
"Guarantor" means each of HEALTHSOUTH, Integrated Health, Quorum,
Surgical Health and OrNda.
"HEALTHSOUTH" means HEALTHSOUTH Rehabilitation Corporation.
69
<PAGE> 76
"HEALTHSOUTH Initial Properties" means each property identified in
this Prospectus owned by HEALTHSOUTH or one or more of its Subsidiaries
with respect to which the Company expects to enter into a definitive
Purchase Agreement.
"Initial Properties" means the 20 properties identified in this
Prospectus with respect to which the Company expects to enter into a
definitive Purchase Agreement or the Merger Agreement as soon as practical.
"Integrated Health" means Integrated Health Systems, Inc.
"IRS" means the United States Internal Revenue Service.
"Lease" means the agreement to be entered into by each Lessee to lease
one or more Initial Properties, or a portion thereof, from the Company.
"Lessee" means an entity leasing one or more Initial Properties from
the Company.
"LTCF" means long-term care facility.
"MACI" means Midway Acquisition Company, Inc.
"Merger Agreement" means the Agreement and Plan of Merger between MACI
and the Company, dated May 27, 1994.
"MGCL" means the Maryland General Corporation Law.
"NationsBank" means NationsBank of Georgia, N.A.
"Offering" means the transaction by which the Shares of the Company
are offered and sold pursuant to this Prospectus.
"ORF" means outpatient rehabilitation facility.
"OrNda" means OrNda HealthCorp.
"Partnership" means Crescent Capital Partners, an Alabama general
partnership.
"PPS" means the Medicare prospective payment system.
"Prospectus" means the prospectus that will be issued in connection
with the Offering.
"Purchase Agreement" means each agreement, including the Merger
Agreement, relating to the acquisition by the Company of one or more of the
Initial Properties.
"Quorum" means Quorum Health Group, Inc.
"Registration Statement" means the Company's Form S-11 Registration
Statement under the Securities Act of 1933.
"REIT" means a real estate investment trust as defined pursuant to
Sections 856 through 860 of the Code.
"Representatives" means Smith Barney Inc. and J.C. Bradford & Co. as
representatives of the Underwriters.
"RF" means research facility.
"SACF" means sub-acute care facility.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Common Stock being offered by this
Prospectus.
"SHPDA" means a state health planning and development agency.
70
<PAGE> 77
"Stock Incentive Plan" means the Company's 1994 Stock Incentive Plan.
"Subsidiary" means a wholly-owned corporate subsidiary of the
Guarantors and a limited partnership, the general partner of which is one
of the Guarantors or one of its wholly-owned corporate subsidiaries.
"Surgical Health" means Surgical Health Corporation.
"Treasury Regulations" means the income tax regulations promulgated
under the Code.
"Triple Net Lease" means a lease pursuant to which the lessee pays all
operating expenses, taxes, assessments, ground rents, water, sewer or other
rents and charges, excises, tax levies, fees and all other governmental
charges, utility charges and insurance premiums.
"UBTI" means unrelated business taxable income as defined in Section
512(a) of the Code.
"Underwriters" means the underwriters named in this Prospectus.
"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Underwriters.
71
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CAPSTONE CAPITAL CORPORATION
Report of Independent Auditors.................................................... F-2
Balance Sheet as of March 31, 1994................................................ F-3
Notes to Balance Sheet............................................................ F-4
Pro Forma Balance Sheet and Statements of Estimated Revenues Less Expenses........ F-6
Notes to Pro Forma Balance Sheet and Statements of Estimated Revenues Less
Expenses....................................................................... F-10
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
Report of Ernst & Young, Independent Auditors..................................... F-12
Consolidated Balance Sheets as of December 31, 1992 and 1993...................... F-13
Consolidated Statements of Income for the Years Ended December 31, 1991, 1992
and 1993....................................................................... F-14
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1991, 1992 and 1993............................................................ F-15
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992
and 1993....................................................................... F-16
Notes to Consolidated Financial Statements........................................ F-17
Consolidated Balance Sheets as of December 31, 1993 and March 31, 1994............ F-27
Consolidated Statements of Income as of the Three Months Ended March 31, 1993
and 1994....................................................................... F-28
Consolidated Statements of Cash Flows as of the Three Months Ended March 31, 1993
and 1994....................................................................... F-29
Notes to Consolidated Financial Statements........................................ F-30
SELECTED REHABILITATION HOSPITALS OF NATIONAL MEDICAL ENTERPRISES, INC.
Report of Independent Auditors.................................................... F-32
Combined Balance Sheets as of May 31, 1992 and 1993............................... F-33
Combined Statements of Income for the Years Ended May 31, 1991, 1992 and 1993..... F-34
Combined Statements of Owners' Equity for the Years Ended May 31, 1991, 1992 and
1993........................................................................... F-35
Combined Statements of Cash Flows for the Years Ended May 31, 1991, 1992 and
1993........................................................................... F-36
Notes to Combined Financial Statements............................................ F-37
Combined Condensed Interim Balance Sheet as of November 30, 1993.................. F-43
Combined Condensed Interim Statements of Income for the Six Months Ended November
30, 1992 and 1993.............................................................. F-44
Combined Condensed Interim Statements of Cash Flows for the Six Months Ended
November 30, 1992 and 1993..................................................... F-45
Note to Combined Condensed Interim Financial Statements........................... F-46
Pro Forma Financial Information for the Year Ended December 31, 1993.............. F-47
Pro Forma Condensed Combined Income Statement as of Year Ended December 31,
1993........................................................................... F-48
Notes to Pro Forma Condensed Combined Income Statement............................ F-49
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Capstone Capital Corporation:
We have audited the accompanying balance sheet of Capstone Capital
Corporation as of March 31, 1994. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Capstone Capital Corporation at
March 31, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Birmingham, Alabama
April 6, 1994, except for
Note 6 which is as
of June 20, 1994
F-2
<PAGE> 80
CAPSTONE CAPITAL CORPORATION
BALANCE SHEET
MARCH 31, 1994
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $180
====
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 10,000,000 shares authorized; none
issued or outstanding............................................... $ --
Common stock, $.001 par value; 50,000,000 shares authorized; 180,000
issued and outstanding.............................................. 180
----
Total stockholders' equity.................................. $180
====
</TABLE>
F-3
<PAGE> 81
CAPSTONE CAPITAL CORPORATION
NOTES TO BALANCE SHEET
MARCH 31, 1994
(1) ORGANIZATION
Capstone Capital Corporation (the "Company") was incorporated in the State
of Maryland on March 31, 1994 and issued a total of 180,000 shares of common
stock to the Company's chairman, its president, one of its directors, and
HEALTHSOUTH Rehabilitation Corporation ("HEALTHSOUTH") for total consideration
of $180. The chairman of the Company and one of its directors are executive
officers of HEALTHSOUTH. The Company is in the process of an initial public
offering pursuant to which it plans to issue approximately 5,800,000 additional
shares of common stock (the "Offering"). The 180,000 shares issued upon
incorporation (the "Founders' Shares") will constitute approximately 3 percent
of the outstanding shares immediately after consummation of the Offering.
The Company has had no operations. Upon consummation of the Offering, the
Company intends to begin operations by purchasing a diversified portfolio of
healthcare properties and leasing the properties back to the healthcare
operators.
(2) FEDERAL INCOME TAXES
At the earliest possible date, the Company intends to qualify as a real
estate investment trust under the Internal Revenue Code and, accordingly, will
not be subject to federal income taxes on amounts distributed to stockholders
provided it distributes at least 95 percent of its real estate investment trust
taxable income and meets certain other conditions. The Company may, however, be
subject to state or local taxation in various state or local jurisdictions.
(3) PLANNED TRANSACTIONS
The Company plans to use the Offering proceeds and borrowings under a bank
credit facility to purchase 20 healthcare properties for $115,445,000. Ten of
the properties will be acquired from HEALTHSOUTH for $50,920,000 and five of the
properties will be acquired for $27,625,000 from two companies whose chairmen
are directors of the Company.
The Company has agreed to reimburse actual costs incurred on its behalf by
Crescent Capital Partners and its affiliates upon consummation of the Offering.
The actual costs incurred relate to organizing the Company, negotiating property
acquisitions, performing due diligence related to the properties, performing
corporate work in contemplation of the Offering, preparing the registration
statement and providing interim financing for the acquisition of the properties.
This amount is estimated to be approximately $1,675,000 and will only be payable
upon the closing of the Offering and will be paid from the proceeds of the
Offering. The Company's chairman, its president and one of its directors are the
partners in Crescent Capital Partners.
(4) STOCKHOLDERS' EQUITY
For each of the first six quarters in which dividends are paid by the
Company, the founders have consented to contribute to the Company the after-tax
portion of any dividends distributed to them for such quarter if (i) the
annualized dividends paid in such quarter do not equal or exceed $1.70 per Share
($0.425 per Share per quarter) or (ii) the aggregate dividends paid in such
quarter on the outstanding Shares exceed 95% of the cash available for
distribution for the relevant quarterly period.
The Company intends to adopt a dividend reinvestment plan.
F-4
<PAGE> 82
CAPSTONE CAPITAL CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
MARCH 31, 1994
(5) EMPLOYEE BENEFITS
The Company's board of directors intends to adopt a deferred compensation
plan, a retirement plan for executive officers and has adopted a stock incentive
plan. The Company has reserved 418,600 shares of common stock for issuance under
the stock incentive plan. As of the effective date of the Offering, the Company
intends to grant options to purchase 260,000 shares of common stock.
(6) SUBSEQUENT EVENTS
On June 20, 1994, the Company changed its name from Capstone Capital Trust,
Inc. to Capstone Capital Corporation.
On May 27, 1994, the Company obtained a written commitment, subject to
certain customary terms and conditions, from a consortium of banks for a $60
million credit facility. The facility is expected to be funded upon the closing
of the Offering. Interest on borrowings under the facility will be paid at a
rate chosen by the Company from either the base rate, which is the higher of (i)
the Federal Funds Rate plus 1/2 of 1% or (ii) the lead bank's prime lending
rate, or LIBOR plus 1.75%. In addition, the Company will pay .375% per annum on
the unused portion of funds available for borrowings under the facility. The
facility will be unsecured and will mature two years from the date of its
closing. On May 27, 1994, LIBOR was 4.625% and the lead bank's prime lending
rate was 7.25%.
F-5
<PAGE> 83
CAPSTONE CAPITAL CORPORATION
PRO FORMA BALANCE SHEET AND STATEMENTS
OF ESTIMATED REVENUES LESS EXPENSES
The following pro forma balance sheet is based on the balance sheet of the
Company included elsewhere in the Prospectus, adjusted to give effect to the
Offering and the application of the proceeds therefrom.
The pro forma balance sheet as of March 31, 1994 gives effect to the
Offering and the acquisition of the Initial Properties, as if they had occurred,
and the respective Leases as if they had been in effect, on March 31, 1994. The
statements of estimated revenues less expenses for the year ended December 31,
1993, and for the three months ended March 31, 1994, give effect to the Offering
and the acquisition of the Initial Properties as if they had occurred, and the
respective Leases as if they had been in effect, on January 1, 1993. The pro
forma adjustments and estimates are based upon available information and certain
assumptions that management believes are reasonable. The pro forma balance sheet
and statements of estimated revenues less expenses do not purport to represent
what the Company's financial position or results of operations and cash
available for distribution would actually have been if the transactions had
occurred on March 31, 1994 or January 1, 1993 or to project the Company's
financial position or results of operations for any future period. Differences
would result from, among other things, delays in the acquisition of the Initial
Properties and changes in interest rates.
The pro forma balance sheet and statements of estimated revenues less
expenses should be read in conjunction with the balance sheet of the Company and
related notes thereto, and other financial information pertaining to the
Company, including "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Prospectus.
F-6
<PAGE> 84
CAPSTONE CAPITAL CORPORATION
PRO FORMA BALANCE SHEET
MARCH 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $180 $ 102,524,340(1) $ 50,000
(115,445,000)(2)
(1,675,000)(3)
14,795,480(4)
(150,000)(5)
Real estate property.............................. -- 115,445,000(2) 116,495,000(6)
375,000(3)
675,000(3)
Bank credit facility commitment fee............... -- 150,000(5) 150,000
Organization costs................................ -- 25,000(3) 25,000
---------- ------------------ ------------------
Total assets............................ $180 $ 116,719,820 $116,720,000
======= ============= =============
LIABILITIES
Bank credit facility.............................. $ -- $ 14,795,480(4) $ 14,795,480
---------- ------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 10,000,000
shares authorized; none outstanding............. -- -- --
Common stock, $.001 par value, 50,000,000 shares
authorized; 180,000 issued and outstanding;
5,980,000 issued and outstanding, as adjusted... 180 5,800(1) 5,980
Additional paid-in-capital........................ 102,518,540(1) 101,918,540
(600,000)(3)
---------- ------------------ ------------------
Total stockholders' equity.............. 180 101,924,340 101,924,520
---------- ------------------ ------------------
Total liabilities and stockholders'
equity................................ $180 $ 116,719,820 $116,720,000
======= ============= =============
</TABLE>
See notes to pro forma balance sheet and statements of estimated revenues less
expenses.
F-7
<PAGE> 85
CAPSTONE CAPITAL CORPORATION
STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
Estimated revenues:
Rental income.................................. -- $ 12,770,601(7) $ 13,914,344
1,143,743(8)
Estimated expenses:
Interest....................................... -- 1,112,729(10) 1,112,729
Depreciation................................... 2,517,171(9) 2,517,171
Amortization of organization costs............. 5,000(9) 5,000
Amortization of financing commitment fee....... 75,000(9) 75,000
Operating and administrative expenses.......... -- 1,100,000(10) 1,100,000
---------- ------------------ ------------------
Total expenses................................... -- 4,809,900 4,809,900
---------- ------------------ ------------------
Estimated revenues less expenses................. -- $ 9,104,444 $ 9,104,444
========= ============= =============
Estimated revenues less expenses per share....... -- $ 1.52
========= =============
Shares outstanding............................... -- 5,980,000
========= =============
</TABLE>
See notes to pro forma balance sheet and statements of estimated revenues less
expenses
F-8
<PAGE> 86
CAPSTONE CAPITAL CORPORATION
STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO THE AS ADJUSTED FOR
OFFERING AND THE OFFERING AND
ACQUISITION OF THE ACQUISITION OF THE
HISTORICAL INITIAL PROPERTIES INITIAL PROPERTIES
---------- ------------------ ------------------
<S> <C> <C> <C>
Estimated revenues:
Rental income..................................... -- $3,192,650(7) $3,478,586
285,936(8)
Estimated expenses:
Interest.......................................... -- 278,182(10) 278,182
Depreciation...................................... -- 629,293(9) 629,293
Amortization of organization costs................ -- 1,250(9) 1,250
Amortization of financing commitment fee.......... -- 18,750(9) 18,750
Operating and administrative expenses............. -- 275,000(10) 275,000
---------- ------------------ ------------------
Total expenses...................................... -- 1,202,475 1,202,475
---------- ------------------ ------------------
Estimated revenues less expenses.................... -- $2,276,111 $2,276,111
======= ============= =============
Estimated revenues less expenses per share.......... -- $ 0.38
======= =============
Shares outstanding.................................. 180,000 5,980,000
======= =============
</TABLE>
See notes to pro forma balance sheet and statements of estimated revenues less
expenses
F-9
<PAGE> 87
CAPSTONE CAPITAL CORPORATION
NOTES TO PRO FORMA BALANCE SHEET
AND STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES
(1) Issuance of 5,800,000 Shares of Common Stock for $110,200,000 at $19.00 per
share, less underwriting discount of $7,675,660.
(2) Cost of the Initial Properties of $115,445,000.
(3) Payment to Crescent Capital Partners for reimbursement of actual costs
incurred related to providing interim financing ($375,000), negotiating
Initial Property acquisitions ($675,000), organizing the Company ($25,000),
and preparing the Offering ($600,000).
(4) Borrowings of $14,795,480 under the Bank Credit Facility to maintain cash
and cash equivalents of $50,000.
(5) Payment of Bank Credit Facility commitment fee of $150,000.
(6) The aggregate cost of the real estate properties consists of the following:
<TABLE>
<S> <C>
Buildings........................... $ 97,731,814
Land improvements................... 1,477,517
Land................................ 17,285,669
--------------
Total cost................ $116,495,000
==============
</TABLE>
(7) Rental income from the Initial Properties for the year ended December 31,
1993 is assumed to be $12,770,601 ($3,192,650 for the three months ended
March 31, 1994), which represents Base Rent (assuming no Additional Rent)
from the Initial Properties under the terms of the Leases. Each Lease is a
Triple Net Lease and the Lessee is responsible thereunder, in addition to
the rent, for all operating expenses including taxes, assessments, ground
rents, utility charges and insurance premiums.
(8) Certain of the leases provide for scheduled annual rent increases.
Generally accepted accounting principles require that these rent increases
be recognized on a straight-line basis over the term of the lease. The
additional rental income recognized in this manner is assumed to be
$1,143,743 for the year ended December 31, 1993 ($285,936 for the three
months ended March 31, 1994).
(9) Depreciation of buildings and land improvements is calculated using the
straight-line method and useful remaining lives of approximately 40 years
and 20 years, respectively. Amortization of organization costs is
calculated using the straight-line method over a five-year period. The Bank
Credit Facility commitment fee is amortized using the straight-line method
over the 24-month life of the related facility.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1994 DECEMBER 31, 1993
-------------------- -----------------
<S> <C> <C>
Depreciation:
Buildings................................ $610,824 $ 2,443,295
Land improvements........................ 18,469 73,876
----------- -----------------
Total depreciation......................... 629,293 2,517,171
================ =============
</TABLE>
(10) Operating and administrative expenses of $1,100,000 for the year ended
December 31, 1993 ($275,000 for the three months ended March 31, 1994)
consist of compensation and related benefits, professional fees, travel,
rent, interest expense calculated at a rate of 6.375% of the outstanding
balance of the Bank Credit Facility plus 0.375% of the unused portion of
the Bank Credit Facility, and other costs. A 1/8% fluctuation in the
interest rate would change the interest expense by $4,624 for the three
months ended March 31, 1994, and $18,494 for the year ended December 31,
1993.
F-10
<PAGE> 88
CAPSTONE CAPITAL CORPORATION
NOTES TO PRO FORMA BALANCE SHEET
AND STATEMENTS OF ESTIMATED REVENUES LESS EXPENSES -- (CONTINUED)
OTHER DATA -- ESTIMATED CASH AVAILABLE FOR DISTRIBUTION
Estimated cash available for distribution is estimated revenues less
expenses plus depreciation, amortization and unfunded retirement plan expense
less accrued rent. Distributions in excess of net income generally constitute a
return of capital. Management considers cash available for distribution to be an
informative measure of the performance of an equity REIT and consistent with
measures used by analysts to evaluate equity REITs. Cash available for
distribution does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE
OFFERING AND
ACQUISITION OF
THE INITIAL
PROPERTIES
--------------
TWELVE MONTHS
ENDED
MARCH 31, 1994
--------------
<S> <C>
Estimated cash available for distribution:
Estimated revenues less expenses............................. $ 9,104,444
Accrued rent income (non-cash income) (See Note 8)........... (1,143,743)
Depreciation (See Note 9).................................... 2,517,171
Amortization of organization costs (See Note 9).............. 5,000
Amortization of financing commitment fee (See Note 9)........ 75,000
Unfunded retirement plan (non-cash expense).................. 80,000
--------------
Estimated cash available for distribution.................... $ 10,637,872
===========
Estimated cash available for distribution per share.......... $ 1.78
===========
Estimated cash distribution based on 85% of cash available
for distribution.......................................... $ 9,042,191
===========
Estimated cash distribution per share based on 85% of cash
available for distribution................................ $ 1.51
===========
Estimated cash distribution based on 95% of cash available
for distribution.......................................... $ 10,105,978
===========
Estimated cash distribution per share based on 95% of cash
available for distribution................................ $ 1.69
===========
Shares outstanding........................................... 5,980,000
===========
</TABLE>
F-11
<PAGE> 89
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Rehabilitation Corporation
We have audited the accompanying consolidated balance sheets of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries as of December 31, 1992 and 1993,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries at December 31, 1992 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
ERNST & YOUNG
Birmingham, Alabama
February 28, 1994
F-12
<PAGE> 90
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)................................. $ 70,842 $ 53,470
Other marketable securities (Note 2)............................... 15,074 8,968
Accounts receivable, net of allowances for doubtful accounts and
contractual adjustments of $42,820,000 in 1992 and $104,323,000
in 1993......................................................... 94,381 143,807
Inventories........................................................ 10,800 20,783
Prepaid expenses and other current assets.......................... 21,444 34,682
-------- ----------
Total current assets....................................... 212,541 261,710
Other assets:
Loans to officers.................................................. 1,111 1,488
Other (Note 3)..................................................... 11,092 21,244
-------- ----------
12,203 22,732
Property, plant and equipment, net (Note 4).......................... 335,058 708,205
Intangible assets, net (Note 5)...................................... 81,997 175,421
-------- ----------
Total assets............................................... $641,799 $1,168,068
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 19,972 $ 41,200
Salaries and wages payable......................................... 8,084 21,442
Accrued interest payable and other liabilities..................... 11,452 22,606
Current portion of long-term debt (Note 6)......................... 2,907 4,859
-------- ----------
Total current liabilities.................................. 42,415 90,107
Long-term debt (Note 6).............................................. 299,508 779,690
Deferred income taxes................................................ 12,050 5,098
Other long-term liabilities.......................................... 49 --
Minority interests-limited partnerships.............................. (2,355) (1,799)
Commitments and contingent liabilities (Note 11)
Stockholders' equity:
Preferred Stock, $.10 par value -- 1,500,000 shares authorized;
issued and outstanding -- none.................................. -- --
Common Stock, $.01 par value -- 50,000,000 shares authorized;
issued and outstanding -- 28,823,000 in 1992 and 29,026,000 in
1993............................................................ 288 290
Additional paid-in capital......................................... 241,093 243,229
Retained earnings.................................................. 68,393 70,648
Treasury stock, at cost (20,000 shares)............................ -- (263)
Receivable from Employee Stock Ownership Plan (Note 12)............ (19,642) (18,932)
-------- ----------
Total stockholders' equity................................. 290,132 294,972
-------- ----------
Total liabilities and stockholders' equity................. $641,799 $1,168,068
======== =========
</TABLE>
See accompanying notes.
F-13
<PAGE> 91
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1991 1992 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues....................................................... $225,485 $406,968 $482,304
Operating expenses:
Operating units.............................................. 157,654 303,604 348,912
Corporate general and administrative......................... 7,947 10,245 14,020
Provision for doubtful accounts................................ 5,298 11,000 12,680
Depreciation and amortization.................................. 14,718 25,485 36,494
Interest expense............................................... 9,912 10,836 12,683
Interest income................................................ (5,483) (4,340) (3,173)
NME Selected Hospitals Acquisition related expense (Note 9).... -- -- 49,742
Terminated merger expense (Note 14)............................ -- 3,665 --
-------- -------- --------
190,046 360,495 471,358
-------- -------- --------
Income before income taxes and minority interests.............. 35,439 46,473 10,946
Provision for income taxes..................................... 11,500 15,333 4,069
-------- -------- --------
23,939 31,140 6,877
Minority interests............................................. 1,568 1,402 190
-------- -------- --------
Net income..................................................... $ 22,371 $ 29,738 $ 6,687
======== ======== ========
Weighted average common and common equivalent shares
outstanding.................................................. 25,905 29,887 29,858
======== ======== ========
Net income per common and common equivalent share.............. $ .86 $ 1.00 $ .22
======== ======== ========
Net income per common share-assuming full dilution............. $ .83 $ N/A $ N/A
======== ======== ========
</TABLE>
See accompanying notes.
F-14
<PAGE> 92
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY RECEIVABLE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS STOCK FROM ESOP EQUITY
------ ------ ---------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990... 12,713 $127.1 $100,442.7 $27,331.2 $ -- $ -- $ 127,901.0
Proceeds from issuance of
common shares at $32.00 per
share........................ 2,300 23.0 69,581.3 -- -- -- 69,604.3
Conversion of subordinated
debentures................... 3,081 30.8 50,159.2 -- -- -- 50,190.0
Issuance of shares in
connection with stock
split........................ 9,348 93.5 (93.5) -- -- -- --
Proceeds from exercise of
options...................... 602 6.0 5,761.8 -- -- -- 5,767.8
Income tax benefits related to
incentive Stock Options...... -- -- 4,373.1 -- -- -- 4,373.1
Common shares exchanged in the
exercise of options.......... -- -- (11.9) -- -- -- (11.9)
Loan to Employee Stock
Ownership Plan............... -- -- -- -- -- (10,000.0) (10,000.0)
Purchase of limited partnership
units........................ -- -- -- (854.2) -- -- (854.2)
Net income..................... -- -- -- 22,371.0 -- -- 22,371.0
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1991... 28,044 280.4 230,212.7 48,848.0 -- (10,000.0) 269.341.1
Proceeds from exercise of
options...................... 762 7.6 6,648.6 -- -- -- 6,656.2
Income tax benefits related to
Incentive Stock Options...... -- -- 3,827.7 -- -- -- 3,827.7
Common shares exchanged in the
exercise of options.......... (4 ) -- (95.6) -- -- -- (95.6)
Loan to Employee Stock
Ownership Plan............... -- -- -- -- -- (10,000.0) (10,000.0)
Reduction in Receivable from
Employee Stock Ownership
Plan......................... -- -- -- -- -- 358.0 358.0
Purchase of limited partnership
units........................ 21 .2 499.8 (10,193.4) -- -- (9,693.4)
Net income..................... -- -- -- 29,738.0 -- -- 29,738.0
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1992... 28,823 288.2 241,093.2 68,392.6 -- (19,642.0) 290,132.0
Proceeds from exercise of
options...................... 203 $ 2.0 $ 1,709.6 $ -- $ -- $ -- $ 1,711.6
Income tax benefits related to
Incentive Stock Options...... -- -- 425.7 -- -- -- 425.7
Reduction in Receivable from
Employee Stock Ownership
Plan......................... -- -- -- -- -- 710.1 710.1
Purchase of limited partnership
units........................ -- -- -- (4,431.7) -- -- (4,431.7)
Purchase of treasury stock..... (20 ) -- -- -- (263.0 ) -- (263.0)
Net income..................... -- -- -- 6,687.1 -- -- 6,687.1
------ ------ ---------- --------- -------- ---------- -------------
BALANCE AT DECEMBER 31, 1993... 29,006 $290.2 $243,228.5 $70,648.0 $(263.0 ) $(18,931.9) $ 294,971.8
======== ======== ========== ========= ======== ========== ============
</TABLE>
See accompanying notes
F-15
<PAGE> 93
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1991 1992 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 22,371 $ 29,738 $ 6,687
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 14,718 25,485 36,494
Provision for doubtful accounts..................................... 5,298 11,000 12,680
NME Selected Hospitals Acquisition related expense.................. -- -- 49,742
Income applicable to minority interests of limited partnerships..... 1,568 1,402 190
Provision (benefit) for deferred income taxes....................... 3,168 4,695 (6,611)
Provision for deferred revenue from contractual agencies............ (109) (279) (49)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................................. (15,216) (31,007) (19,545)
Inventories, prepaid expenses and other current assets.............. (7,860) (11,749) (14,317)
Accounts payable and accrued expenses............................... 6,144 5,784 (12,928)
--------- --------- ---------
Net cash provided by operating activities............................. 30,082 35,069 52,343
INVESTING ACTIVITIES
Purchases of property, plant and equipment............................ (71,974) (86,240) (110,800)
Additions to intangible assets, net of effects of acquisitions........ (8,270) (24,976) (38,190)
Assets obtained through acquisitions, net of liabilities assumed...... (41,693) (41,343) (385,077)
Changes in other assets............................................... (648) 1,834 (4,868)
Proceeds received on sale of other marketable securities.............. 11,286 14,041 12,106
Investments in other marketable securities............................ (26,339) (4,945) (6,000)
--------- --------- ---------
Net cash used in investing activities................................. (137,638) (141,629) (532,829)
FINANCING ACTIVITIES
Proceeds from borrowings.............................................. 102,158 169,800 482,710
Principal payments on long-term debt and leases....................... (35,524) (58,890) (17,687)
Proceeds from exercise of options..................................... 5,756 6,561 1,711
Proceeds from issuance of common stock................................ 69,604 -- --
Purchase of treasury stock............................................ -- -- (263)
Loans to Employee Stock Ownership Plan................................ (10,000) (10,000) --
Reduction in Receivable from Employee Stock Ownership Plan............ -- 358 710
Proceeds from investment by minority interests........................ 547 971 614
Purchase of limited partnership interests............................. (993) (11,495) (3,784)
Payment of cash distributions to limited partners..................... (3,146) (2,833) (897)
--------- --------- ---------
Net cash provided by financing activities............................. 128,402 94,472 463,114
--------- --------- ---------
Increase (decrease) in cash and cash equivalents...................... 20,846 (12,088) (17,372)
Cash and cash equivalents at beginning of year........................ 62,084 82,930 70,842
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 82,930 $ 70,842 $ 53,470
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................ $ 12,205 $ 12,469 $ 11,049
Income taxes........................................................ 6,701 9,201 15,608
</TABLE>
NON-CASH FINANCING ACTIVITIES:
The holders of the Company's $52,000,000 in aggregate principal amount of
7 3/4% Convertible Subordinated Debentures Due 2014 surrendered the Debentures
for conversion into 3,081,446 shares (on a pre-split basis) of the Company's
common stock on various dates during 1991.
During 1991 the Company had a three-for-two stock split on its common
stock, which was effected in the form of a fifty percent stock dividend.
The Company received a tax benefit from the disqualifying disposition of
incentive stock options of $4,373,000, $3,828,000 and $426,000 for the years
ended December 31, 1991, 1992, and 1993, respectively.
See accompanying notes.
F-16
<PAGE> 94
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by HEALTHSOUTH Rehabilitation
Corporation and its subsidiaries (the Company) are presented as an integral part
of the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HEALTHSOUTH
Rehabilitation Corporation (HEALTHSOUTH) and its wholly-owned subsidiaries, as
well as its limited partnerships (see Note 8). All significant intercompany
accounts and transactions have been eliminated in consolidation.
HEALTHSOUTH Rehabilitation Corporation is engaged in the business of
providing comprehensive rehabilitative and clinical healthcare services on an
inpatient and outpatient basis.
MARKETABLE SECURITIES
Marketable securities are stated at cost, which approximates market,
adjusted for amortization of premium and accretion of discount. The adjusted
cost of the specific security sold method is used to compute gain or loss on the
sale of securities.
ACCOUNTS RECEIVABLE AND THIRD-PARTY REIMBURSEMENT ACTIVITIES
Receivables from patients, insurance companies and third-party contractual
insured accounts (Medicare and Medicaid) are based on payment agreements which
generally result in the Company collecting an amount different from the
established rates. Final determination of the settlement is subject to review by
appropriate authorities. Adequate allowances are provided for doubtful accounts
and contractual adjustments. Uncollectible accounts are written off against the
allowance for doubtful accounts after adequate collection efforts are made. Net
accounts receivable include only those amounts estimated by management to be
collectible.
The concentration of net accounts receivable from third-party contractual
payors and others, as a percentage of total net accounts receivable, was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1992 1993
---- ----
<S> <C> <C>
Medicare.................................................. 34% 31%
Medicaid.................................................. 2% 4%
Other..................................................... 64% 65%
---- ----
100% 100%
==== ====
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market using the specific
identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Upon sale or retirement
of property, plant or equipment, the cost and related accumulated depreciation
are eliminated from the respective account and the resulting gain or loss is
included in the results of operations.
Interest cost incurred during the construction of a facility is
capitalized. The Company incurred interest of $11,880,000, $12,815,000 and
$15,067,000 of which $1,968,000, $1,979,000 and $2,384,000 was capitalized
during 1991, 1992 and 1993, respectively.
F-17
<PAGE> 95
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets or the term of the lease, as
appropriate. The estimated useful life of buildings is 30-40 years and the
general range of useful lives for leasehold improvements, furniture, fixtures
and equipment is 10-15 years.
INTANGIBLE ASSETS
Cost in excess of net asset value of purchased facilities is amortized over
20 to 40 years using the straight-line method. Organization and start-up costs
incurred prior to opening a new facility and partnership formation costs are
deferred and amortized on a straight-line basis over a period of 36 months.
Organization, partnership formation and start-up costs for a project that is
subsequently abandoned are charged to operations in that period. Debt issue
costs are amortized over the term of the debt. Noncompete agreements are
amortized using the straight-line method over the term of the agreements.
MINORITY INTERESTS
The equity of minority investors in limited partnerships of the Company is
reported on the balance sheet as minority interests. Minority interests reported
in the income statement reflect the respective shares of income or loss of the
limited partnerships attributable to the minority investors, the effect of which
is removed from the results of operations of the Company.
REVENUES
Revenues include net patient service revenues and other operating revenues.
Net patient service revenues are reported at the estimated net realizable
amounts from patients, third-party payors and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors.
INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Income per common and common equivalent share is computed based on the
weighted average number of common shares and common equivalent shares
outstanding during the periods. Common equivalent shares include dilutive
employees' stock options, less the number of treasury shares assumed to be
purchased from the proceeds using the average market price of the Company's
common stock. Fully diluted earnings per share (based on 27,855,000 shares in
1991) assumes conversion of the 7 3/4% Convertible Subordinated Debentures Due
2014 issued in May 1989. The debentures were converted to common stock in 1991.
RECLASSIFICATIONS
Certain amounts in the 1991 and 1992 Consolidated Financial Statements have
been reclassified to conform with the 1993 presentation. Such reclassifications
had no material effect on the previously reported financial position, net income
or cash flows of the Company.
IMPAIRMENT OF ASSETS
Long-lived assets, such as property, plant and equipment and identifiable
intangible assets are reviewed for impairment losses when certain impairment
indicators exist. If an impairment exists, the related asset is adjusted to the
lower of book value or estimated future undiscounted cash flows from the use and
eventual disposal of the asset.
F-18
<PAGE> 96
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. CASH, CASH EQUIVALENTS AND OTHER MARKETABLE SECURITIES (INCLUDING FUNDS
SUBJECT TO WITHDRAWAL RESTRICTIONS)
Cash, cash equivalents and other marketable securities consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash...................................................... $ 6,041 $ 32,221
Municipal put bonds....................................... 49,330 9,800
Tax advantaged auction preferred stocks................... -- 4,000
Municipal put bond mutual funds........................... 8,000 2,000
Money market funds........................................ 7,447 5,449
Bankers acceptances....................................... 24 --
---------- ----------
Total cash and cash equivalents......................... 70,842 53,470
---------- ----------
Certificates of deposit................................... 1,279 1,108
Municipal put bonds....................................... 13,795 1,860
Municipal put bond mutual funds........................... -- 5,000
Collateralized mortgage obligations....................... -- 1,000
---------- ----------
Total other marketable securities....................... 15,074 8,968
---------- ----------
Total cash, cash equivalents and other marketable
securities (approximates market value)............... $ 85,916 $ 62,438
========= =========
</TABLE>
3. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Notes and accounts receivable............................. $ 2,187 $ 2,968
Investment in Caretenders Health Corp..................... 7,380 7,382
Investments in other unconsolidated subsidiaries.......... -- 3,991
Investment in land held for expansion..................... -- 3,023
Other..................................................... 1,525 3,880
---------- ----------
$ 11,092 $ 21,244
========= =========
</TABLE>
The Company has a 24% ownership interest in Caretenders Health Corp.
(Caretenders). Accordingly, the Company's investment is being accounted for
using the equity method of investments in common stock. The investment was
initially valued at $7,250,000. The Company's equity in earnings of Caretenders
for the years ended December 31, 1992 and 1993 was not material to the Company's
results of operations. At December 31, 1993, the Company guaranteed $6,000,000
on a line of credit for Caretenders. The line of credit bears interest at the
banks' prime rate plus 1/2% and is secured by Caretender's receivables and
inventory pursuant to an asset based lending formula. In return for the
guarantee, Caretenders granted the Company warrants to purchase 500,000 shares
of Caretenders common stock at a price of $2.50 per share that expire on
December 31, 2002.
F-19
<PAGE> 97
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land......................................................... $ 37,334 $ 60,048
Buildings.................................................... 170,216 441,885
Leasehold improvements....................................... 11,729 16,454
Furniture, fixtures and equipment............................ 120,097 215,590
Construction in progress..................................... 33,399 29,274
-------- --------
372,775 763,251
Less accumulated depreciation and amortization............... 37,717 55,046
-------- --------
$335,058 $708,205
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Organization, partnership formation and start-up costs....... $ 35,408 $ 41,939
Debt issue costs............................................. 1,308 1,527
Noncompete agreements........................................ 19,983 24,862
Cost in excess of net asset value of purchased facilities.... 46,632 136,196
-------- --------
103,331 204,524
Less accumulated amortization................................ 21,334 29,103
-------- --------
$ 81,997 $175,421
======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes and bonds payable:
Advances under a $390,000,000 credit agreement with a
bank.................................................... $288,000 $370,000
Due to National Medical Enterprises, Inc................... -- 361,164
Notes payable to banks and various other notes payable..... 4,415 4,201
Noncompete agreements payable with payments due at varying
intervals through December 2003............................ 10,000 12,050
Hospital revenue bonds payable............................... -- 24,862
Other........................................................ -- 12,272
-------- --------
302,415 784,549
Less amounts due within one year............................. 2,907 4,859
-------- --------
$299,508 $779,690
======== ========
</TABLE>
F-20
<PAGE> 98
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1992, the Company entered into a Credit Agreement with NationsBank
of North Carolina, N.A. and participating banks (the 1992 Credit Agreement)
which consists of a $390,000,000 revolving facility and term loan. The 1992
Credit Agreement replaced a previous credit agreement with AmSouth Bank N.A.
Interest is paid quarterly based on LIBOR rates plus a pre-determined margin, a
base rate, or competitively bid rates from the participating banks. The Company
is required to pay a fee of 0.25% on the unused portion of the 1992 revolving
credit facility. The principal amount is payable on November 20, 1995. The
maturity date is extendible for two one year periods upon the mutual agreement
of the Company and the lenders. The Company has provided a negative pledge of
all its assets and has granted a first priority security interest in and lien on
all shares of stock of its subsidiaries and rights and interests in its
partnerships.
Effective December 31, 1993, the Company completed an acquisition of
selected rehabilitation facilities from National Medical Enterprises, Inc. (NME)
(see Note 9). The acquisition was financed by the Company through a $410,000,000
Acquisition and Revolving Credit Facility (the NME Acquisition Credit Facility)
with NationsBank of North Carolina, N.A., and six participating banks. Interest
is paid quarterly based on LIBOR or a base rate plus a predetermined margin.
This credit facility has an initial term ending June 30, 1994, but may be
extended to June 30, 1995. The Company has provided a negative pledge on all
assets acquired in the NME Selected Hospitals Acquisition and granted the banks
a first priority security interest in all shares of stock of its subsidiaries
and rights and interests in its controlled partnerships relating to facilities
acquired in the NME Selected Hospitals Acquisition.
The amount shown as Due to National Medical Enterprises, Inc. at December
31, 1993 was subsequently financed through the NME Acquisition Credit Facility.
On February 1, 1994, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission to issue $250,000,000 ($287,500,000
if the underwriter's over-allotment option is exercised in full) in Senior
Subordinated Notes Due 2001 and $100,000,000 ($115,000,000 if the underwriters'
over-allotment option is exercised in full) Convertible Subordinated Debentures
Due 2001. The Company intends to use proceeds from these debt offerings to repay
indebtedness outstanding under its existing bank credit facilities. Accordingly,
all amounts outstanding under the Company's existing bank credit facilities are
shown as non-current in the accompanying financial statements at December 31,
1993.
Principal maturities of notes and bonds payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
----------------------------------------- --------------
<S> <C>
1994..................................... $ 4,859
1995..................................... 375,630
1996..................................... 5,544
1997..................................... 4,602
1998..................................... 3,462
After 1998............................... 390,452
--------------
$784,549
===========
</TABLE>
The fair value of total long-term debt approximates book value at December
31, 1992 and 1993.
7. STOCK OPTIONS
The Company has various stockholder-approved stock option plans which
provide for the grant of options to Directors, officers and other key employees
to purchase common stock at 100% of the fair market value as of the date of
grant. During 1993, the Company's Board of Directors adopted the 1993 Stock
Option Plan, which is subject to approval by the stockholders at their next
meeting. The Board of Directors administers the stock option plans. Options may
be granted as incentive stock options or as non-qualified stock options.
F-21
<PAGE> 99
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Incentive stock options vest 25% annually, commencing upon completion of one
year of employment subsequent to the date of grant. Non-qualified stock options
generally are not subject to any vesting provisions. The options expire at dates
ranging from five to ten years from the date of grant.
The following table summarizes activity in the stock option plans:
<TABLE>
<CAPTION>
1991 1992 1993
------------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding January 1:................. 2,580,113 3,368,571 5,339,742
Granted...................................... 1,725,750 2,762,000 1,770,000
Exercised.................................... 898,854 765,328 180,455
Cancelled.................................... 38,438 25,501 53,501
------------- --------------- ---------------
Options outstanding at December 31............. 3,368,571 5,339,742 6,875,786
============ ============== ==============
Option price range for options granted during
the period................................... $18.33-$27.41 $15.25-$19.88 $13.50-$16.88
Option price range for options exercised during
the period................................... $2.67-$21.41 $5.67-$21.41 $5.91-$19.17
Options exercisable at December 31............. 1,901,565 4,155,817 5,332,940
Options available for grant at December 31..... 1,473,075 546,050 324,550
</TABLE>
8. LIMITED PARTNERSHIPS
HEALTHSOUTH operates a number of rehabilitation centers as limited
partnerships. HEALTHSOUTH serves as the general partner and operates the
partnerships as comprehensive outpatient rehabilitation facilities or inpatient
rehabilitation facilities. These limited partnerships are included in the
consolidated financial statements (as more fully described in Note 1 under
"Minority Interests"). The limited partners share in the profit or loss of the
partnerships based on their respective ownership percentage (ranging from 1% to
50% at December 31, 1993) during their ownership period.
Beginning in 1992, due to federal and state regulatory requirements, the
Company began the process of buying back the partnership interests of its
physician limited partners. The buyback prices for the interests were in general
based on a pre-determined multiple of projected cash flows of the partnerships.
The excess of the buyback price over the book value of the limited partners'
capital amounts was charged to the Company's retained earnings.
9. ACQUISITIONS
Effective December 31, 1993, the Company completed an acquisition from
National Medical Enterprises, Inc. (NME) of 28 inpatient rehabilitation
facilities and 45 outpatient rehabilitation centers, which constituted
substantially all of NME's rehabilitation services division (the NME Selected
Hospitals Acquisition). The purchase price was approximately $296,661,000 cash,
plus net working capital of $64,503,000, subject to certain adjustments as of
June 30, 1994, the assumption of approximately $16,313,000 of current
liabilities and the assumption of approximately $17,111,000 in long-term debt
(see Note 6).
Also, at various dates during 1993, the Company acquired outpatient
operations in nineteen cities located throughout the United States. The Company
also acquired eight satellite locations. The combined purchase price of these
acquired outpatient operations and satellites was approximately $23,943,000.
In connection with these transactions, the Company entered into non-compete
agreements totaling $4,730,000.
The fair value of the total net assets acquired in 1993 was approximately
$301,382,000. The total cost for 1993 acquisitions exceeded the fair value of
the net assets acquired by approximately $83,725,000. This excess
F-22
<PAGE> 100
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is being amortized over a forty-year period on a straight-line basis. The
allocation of the purchase price of the NME Selected Hospitals Acquisition is
tentative pending completion of appraisals on the facilities and equipment
acquired. The allocation may change with the completion of these appraisals.
All of the acquisitions described above were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the accompanying consolidated financial statements from their
respective dates of acquisition.
The following table summarizes the unaudited consolidated pro forma results
of operations, assuming the NME Selected Hospitals Acquisition described above
had occurred at the beginning of each of the following periods. This pro forma
summary does not necessarily reflect the results of operations as they would
have been had the Company and the acquired entities constituted a single entity
during such periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993
-------- --------
<S> <C> <C>
(In thousands, except for per share amounts)
Revenues................................................... $922,136 $937,173
Net income................................................. 45,869 14,566
Net income per common and common equivalent share.......... 1.53 .49
</TABLE>
As a result of the NME Selected Hospitals Acquisition, HEALTHSOUTH
recognized an expense of approximately $49,742,000 during the year ended
December 31, 1993. This expense represents management's estimate of the cost to
consolidate operations of thirteen existing HEALTHSOUTH facilities (three
inpatient facilities and ten outpatient facilities) into the operations of
certain facilities acquired from NME. This plan was formulated by HEALTHSOUTH
management in order to more efficiently provide services in markets where
multiple locations now exist as a result of the acquisition. The plan of
consolidation calls for the affected operations to be merged into the operations
of the acquired facilities over a period of twelve to twenty-four months from
the date of the NME Selected Hospitals Acquisition. Due to the single-use nature
of these properties, the consolidation plan does not provide for the sale of
these facilities.
The total expense of $49,742,000 is broken down into the following
components: First, approximately $39,000,000 relates to the writedown of the
assets of the affected HEALTHSOUTH facilities to their estimated net realizable
value. Of this $39,000,000, approximately $31,500,000 relates to the assets of
the three inpatient facilities and approximately $7,500,000 relates to the
assets of the ten outpatient facilities. The $39,000,000 is broken down into the
following asset categories (net of any related accumulated depreciation or
amortization):
<TABLE>
<CAPTION>
INPATIENT OUTPATIENT
FACILITIES FACILITIES TOTAL
---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.............................................................. $ 2,898 $ 0 $ 2,898
Buildings......................................................... 16,168 0 16,168
Equipment......................................................... 4,326 2,920 7,246
Intangible assets................................................. 6,111 3,455 9,566
Other assets...................................................... 1,997 1,125 3,122
---------- ---------- -------
Total................................................... $ 31,500 $ 7,500 $39,000
======= ======= =======
</TABLE>
Second, $7,700,000 relates to the write-off of certain capitalized
development projects. These projects relate to planned facilities that, if
completed, would be in direct competition with certain of the acquired NME
facilities. Finally, approximately $3,000,000 has been accrued for costs of
employee separations, relocations and other direct costs related to the planned
consolidation of the affected operations. Management estimates that
approximately 150 employees will be affected by separations and approximately
400 will be affected by relocations. The $3,000,000 accrual reflects expenses
which will be paid over the life of the plan (twelve to twenty-four months) and
is the only cash expense included in the acquisition-related expense.
F-23
<PAGE> 101
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management estimates that this accrual is adequate to cover all direct costs
associated with the planned consolidation.
10. INCOME TAXES
HEALTHSOUTH and its subsidiaries file a consolidated federal income tax
return. The limited partnerships file separate income tax returns. HEALTHSOUTH's
allocable portion of each partnership's income (loss) is included in the taxable
income of the Company. The remaining income (loss) of each partnership is
allocated to the limited partners.
Effective January 1, 1993, the Company changed its method of accounting for
income taxes to the liability method required by Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes". The cumulative
effect of adopting Statement 109 was not material. Previously, the Company had
used the liability method as prescribed by FASB Statement No. 96.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.......................... $ -- $ 24,497 $24,497
Other.................................................. 340 -- 340
------- ---------- -------
Total deferred tax liabilities......................... 340 24,497 24,837
Deferred tax assets:
NME Selected Hospitals Acquisition related expense..... -- 19,399 19,399
------- ---------- -------
Total deferred tax assets................................ -- 19,399 19,399
------- ---------- -------
Net deferred tax liabilities............................. $ 340 $ 5,098 $ 5,438
====== ======== =======
</TABLE>
The current portion of the Company's deferred tax liability is included
with accrued interest payable and other current liabilities on the accompanying
balance sheet.
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal............................................. $ 7,639 $ 9,497 $ 9,695
State............................................... 693 1,141 985
------- ------- -------
8,332 10,638 10,680
Deferred expense (benefit):
Federal............................................. 2,616 4,175 (5,933)
State............................................... 552 520 (678)
------- ------- -------
3,168 4,695 (6,611)
------- ------- -------
Total provision..................................... $11,500 $15,333 $ 4,069
======= ======= =======
</TABLE>
F-24
<PAGE> 102
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision for deferred income taxes for the years
ended December 31, 1991 and 1992 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1991 1992
------ ------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and amortization.................................. $1,579 $5,483
Bad debts...................................................... 1,264 (953)
Installment sale............................................... 240 --
Other.......................................................... 85 165
------ ------
$3,168 $4,695
====== ======
</TABLE>
The difference between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1991 1992 1993
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rates....................... $11,516 $15,324 $3,765
Add (deduct):
State income taxes, net of federal tax benefit....... 457 753 650
Tax-exempt interest income........................... (1,267) (1,012) (382)
Other................................................ 794 268 36
======= ======= ======
$11,500 $15,333 $4,069
======= ======= ======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1993, anticipated capital expenditures for the next twelve
months approximate $100,000,000. This amount includes expenditures for the
construction and equipping of additions to existing facilities, the construction
of three inpatient rehabilitation facilities for which regulatory approval has
been obtained and the acquisition or development of comprehensive outpatient
rehabilitation facilities.
Beginning December 1, 1993, the Company became self-insured for
professional liability and comprehensive general liability. The Company
purchased coverage for all claims incurred prior to December 1, 1993. In
addition, the Company purchased underlying insurance which would cover all
claims once established limits have been exceeded. It is the opinion of
management that at December 31, 1993 the Company has adequate reserves to cover
losses on asserted and unasserted claims.
Operating leases
Operating leases generally consist of short-term lease agreements for
buildings where facilities are located. These leases generally have 5-year
terms, with one or more renewal options, with terms to be negotiated at the time
of renewal. Total rental expense for all operating leases was $8,801,000,
$13,099,000 and $18,177,000 for the years ended December 31, 1991, 1992 and
1993, respectively.
F-25
<PAGE> 103
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum lease payments under all
operating leases having initial or remaining non-cancelable lease terms in
excess of one year:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 (IN THOUSANDS)
----------------------------------------------------------------------- --------------
<S> <C>
1994............................................................ $ 35,922
1995............................................................ 33,207
1996............................................................ 30,530
1997............................................................ 28,295
1998............................................................ 26,151
After 1998...................................................... 92,834
--------------
Total minimum payments required...................................... $246,939
===========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan which matches 15% (10% in 1991) of
the first 4% of earnings that an employee contributes. All contributions are in
the form of cash. All employees who have completed one year of service with a
minimum of 1,000 hours worked are eligible to participate in the plan. Company
contributions are gradually vested over a seven-year service period.
Contributions to the plan by the Company were approximately $196,000, $396,000,
and $430,000 in 1991, 1992 and 1993, respectively.
In 1991, the Company established an Employee Stock Ownership Plan (ESOP)
for the purpose of providing substantially all employees of the Company the
opportunity to save for their retirement and acquire a proprietary interest in
the Company. The ESOP currently owns approximately 830,000 shares of the
Company's Common Stock, which were purchased with funds borrowed from the
Company, $10,000,000 in 1991 (the 1991 ESOP Loan) and $10,000,000 in 1992 (the
1992 ESOP Loan). At December 31, 1993, the combined ESOP Loans had a balance of
$18,932,000. The 1991 ESOP Loan, which bears an interest rate of 10%, is payable
in annual installments covering interest and principal over a ten-year period
beginning in 1992. The 1992 ESOP Loan, which bears an interest rate of 8.5%, is
payable in annual installments covering interest and principal over a ten-year
period beginning in 1993. Company contributions to the ESOP began in 1992 and
shall at least equal the amount required to make all ESOP Loan amortization
payments for each plan year. The Company recognizes compensation expense based
on the shares allocated method. The total compensation expense related to the
ESOP recognized by the Company was $367,000, $1,701,000 and $3,198,000 in 1991,
1992 and 1993, respectively. Interest incurred on the ESOP Loans was
approximately $367,000, $964,000 and $1,743,000, in 1991, 1992 and 1993,
respectively.
13. CAPITAL STOCK
On October 17, 1991, the Company's Board of Directors authorized a
three-for-two stock split to be effected in the form of a 50 percent stock
dividend. The stock dividend was distributed on December 31, 1991 to holders of
record on December 13, 1991. An amount equal to the par value of the shares
issued has been transferred from additional paid-in capital to the common stock
account. All weighted average share and per share amounts have been restated to
give effect to the stock split.
14. TERMINATED MERGER
On January 2, 1992, the Company and Continental Medical System, Inc. (CMS)
jointly announced an agreement to combine their business operations as provided
in an Agreement and Plan of Reorganization (the Plan). On May 6, 1992, the
Company and CMS jointly announced the termination of the Plan. Accordingly, all
costs and expenses incurred in connection with the Plan were charged to
operations in 1992 and reported as terminated merger expense in the accompanying
statements of income.
F-26
<PAGE> 104
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 59,728 $ 53,470
Other marketable securities...................................... 9,918 8,968
Accounts receivable.............................................. 157,132 143,807
Inventories, prepaid expenses and other current assets........... 55,022 55,465
----------- ------------
TOTAL CURRENT ASSETS..................................... 281,800 261,710
OTHER ASSETS....................................................... 25,389 22,732
ASSETS HELD FOR SALE............................................... 40,456 -0-
PROPERTY, PLANT AND EQUIPMENT -- NET............................... 684,159 708,205
INTANGIBLE ASSETS -- NET........................................... 206,967 175,421
----------- ------------
TOTAL ASSETS............................................. $ 1,238,771 $1,168,068
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 52,824 $ 41,200
Salaries and wages payable....................................... 30,880 21,442
Accrued interest payable and other liabilities................... 29,129 22,606
Current portion of long-term debt and leases..................... 5,095 4,859
----------- ------------
TOTAL CURRENT LIABILITIES................................ 117,928 90,107
LONG-TERM DEBT AND LEASES.......................................... 804,165 779,690
DEFERRED INCOME TAXES.............................................. 5,507 5,098
MINORITY INTERESTS -- LIMITED PARTNERSHIPS......................... (1,956) (1,799)
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value -- 1,500,000 shares authorized;
issued and outstanding -- none................................ 0 0
Common Stock, $.01 par value -- 50,000,000 shares authorized;
29,337,000 and 29,026,000 shares issued at March 31, 1994 and
December 31, 1993, respectively............................... 293 290
Additional paid-in capital....................................... 247,803 243,229
Retained earnings................................................ 82,771 70,648
Treasury Stock................................................... (263) (263)
Receivable from Employee Stock Ownership Plan.................... (17,477) (18,932)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY............................... 313,127 294,972
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $ 1,238,771 $1,168,068
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 105
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Revenues............................................................. $231,296 $116,149
Operating expenses:
Operating units.................................................... 178,183 86,027
Corporate general and administrative............................... 6,105 3,271
Provision for doubtful accounts...................................... 4,164 2,356
Depreciation and amortization........................................ 13,923 8,352
Interest expense..................................................... 9,603 3,044
Interest income...................................................... (673) (760)
-------- --------
211,305 102,290
-------- --------
Income before minority interests and income taxes.................... 19,991 13,859
Provision for income taxes........................................... 7,734 5,111
-------- --------
Income before minority interests..................................... 12,257 8,748
Minority Interests................................................... (134) 72
-------- --------
Net income................................................. $ 12,123 $ 8,820
======== ========
Weighted average common and common equivalent shares outstanding..... 32,255 29,850
======== ========
Net income per common and common equivalent share outstanding........ $ .38 $ .30
======== ========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 106
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 12,123 $ 8,820
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 13,923 8,352
Provision for doubtful accounts..................................... 4,164 2,356
Income (loss) applicable to minority interests of limited
partnerships....................................................... 134 (72)
Provision for deferred income taxes................................. 6,456 3,324
Provision for deferred revenue from contractual agencies............ 0 (49)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable............................................... (16,498) (19,106)
Inventories, prepaid expenses and other current assets............ 442 (5,105)
Increase (decrease) in accounts payable and accrued expenses...... 21,427 9,833
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 42,171 8,353
INVESTING ACTIVITIES
Purchase of property, plant and equipment.............................. (24,313) (24,107)
Additions to intangible assets, net of effects of acquisitions......... (8,476) (4,466)
Assets obtained through acquisitions, net of liabilities assumed....... (11,681) (1,665)
Changes in other assets................................................ (2,656) (2,051)
Proceeds received on sale of other marketable securities............... 50 30
Investments in marketable securities................................... (1,000) (16)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES.......................... (48,076) (32,275)
FINANCING ACTIVITIES
Proceeds from borrowings............................................... 353,505 16,706
Principal payments on debt and leases.................................. (347,084) (389)
Proceeds from exercise of options on common stock...................... 4,578 437
Reduction in receivable from Employee Stock Ownership Plan............. 1,455 710
Proceeds from investment by minority interests......................... 36 0
Purchase of limited partners' interests................................ 0 (844)
Payment of cash distributions to limited partners...................... (327) (405)
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.................... 12,163 16,215
-------- --------
(INCREASE)(DECREASE) IN CASH AND CASH EQUIVALENTS........................ 6,258 (7,707)
Cash and cash equivalents at beginning of period......................... 53,470 70,842
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 59,728 $ 63,135
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest............................................................ $ 9,583 $ 2,778
Income taxes........................................................ 1,053 2,385
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE> 107
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
NOTE 1
The accompanying consolidated financial statements include the accounts of
HEALTHSOUTH Rehabilitation Corporation (the "Company") and its subsidiaries.
This information should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993. It is management's
opinion that the accompanying consolidated financial statements reflect all
adjustments (which are normal recurring adjustments) necessary for a fair
presentation of the results for the interim period and the comparable period
presented.
NOTE 2
The Company has a $390,000,000 revolving line of credit with NationsBank of
North Carolina, N.A. and eleven other participating banks (the "Credit
Agreement"). At March 31, 1994, the Company had $390,000,000 outstanding under
the Credit Agreement.
The Company also has a $410,000,000 Acquisition and Revolving Credit
Facility with NationsBank of North Carolina, N.A. and other participating banks,
consisting of a $350,000,000 acquisition credit facility and a $60,000,000
revolving credit facility (the "Acquisition Credit Facility"). The Acquisition
Credit Facility was used in part to finance the December 31, 1993 acquisition of
selected rehabilitation facilities from National Medical Enterprises, Inc. At
March 31, 1994, the Company had $20,000,000 outstanding under the revolving
portion of the Acquisition Credit Facility and have repaid all indebtedness
under the acquisition portion thereof.
On March 24, 1994, the Company issued $250,000,000 principal amount of 9.5%
Senior Subordinated Notes due 2001 (the "Notes"). Interest is payable on April 1
and October 1. The Notes are senior subordinated obligations of the Company and
as such will be subordinated to all existing and future senior indebtedness of
the Company. Also on March 24, 1994, the Company issued $100,000,000 principal
amount of 5% Convertible Subordinated Debentures due 2001 (the "Convertible
Debentures"). Subsequent to March 31, 1994, the Company issued an additional
$15,000,000 principal amount of the Convertible Debentures to cover
underwriters' over-allotments. Interest is payable on April 1 and October 1. The
Convertible Debentures are convertible into Common Stock of the Company at the
option of the holder at a conversion price of $37.625 per share, subject to
adjustment in certain events. The net proceeds from the issuance of the Notes
and Convertible Debentures were used by the Company to pay down indebtedness
outstanding under its other existing credit facilities.
At March 31, 1994 and December 31, 1993, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Advances under the $390,000,000 Credit Agreement............. $ 390,000 $370,000
Due to National Medical Enterprises, Inc..................... 0 361,164
Advances under the $410,000,000 Acquisition Credit
Facility................................................... 20,000 0
9.5% Senior Subordinated Notes due 2001...................... 250,000 0
5% Convertible Subordinated Debentures Due 2001.............. 100,000 0
Other long-term debt......................................... 49,260 53,385
--------- ------------
809,260 784,549
Less amounts due within one year............................. 5,095 4,859
--------- ------------
$ 804,165 $779,690
======== ==========
</TABLE>
F-30
<PAGE> 108
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3
During the first three months of 1994, the Company acquired or opened eight
new outpatient facilities. The total purchase price of the acquired facilities
was approximately $6,385,000. The Company also entered into non-compete
agreements totaling approximately $1,170,000 in connection with these
transactions. The cost in excess of net asset value of the acquired outpatient
facilities was approximately $4,234,000. The results of operations (not material
individually or in the aggregate) of these outpatient acquisitions are included
in the consolidated financial statements from their respective acquisition
dates.
NOTE 4
During the first three months of 1994, the Company granted incentive and
non-qualified stock options to certain Directors, employees and others for
1,549,250 shares of Common Stock at an exercise price of $28.375 per share.
NOTE 5
In May 1994 the Company reached an agreement to sell selected properties to
Capstone Capital Trust, Inc. These properties include six ancillary hospital
facilities, three outpatient rehabilitation facilities, and one research
facility. The transaction is expected to be consummated during June 1994. The
net book value of these properties is disclosed as "assets held for sale" in the
accompanying consolidated balance sheet.
NOTE 6
During 1993 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." Among other provisions, SOP 93-6 requires that compensation
expense relating to employee stock ownership plans be measured based on the fair
market value of the shares when allocated to the employees. The provisions of
SOP 93-6 apply only to leveraged ESOPs formed after December 31, 1992, or shares
newly acquired by an existing leveraged ESOP after December 31, 1992. Because
all shares owned by the Company's ESOP were acquired prior to December 31, 1992,
the Company's accounting policies for the share currently owned by the ESOP will
not be affected by SOP 93-6.
F-31
<PAGE> 109
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors
National Medical Enterprises, Inc. and
HEALTHSOUTH Rehabilitation Corporation
We have audited the accompanying combined balance sheets of Selected
Rehabilitation Hospitals of National Medical Enterprises, Inc. as of May 31,
1992 and 1993 and the related combined statements of income, owners' equity and
cash flows for the three years ended May 31, 1993. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We did not audit the financial statements of certain rehabilitation hospitals,
which statements reflect $83,947,000 (or 23%) of the combined total assets at
May 31, 1992 and $88,939,000 (or 21%) and $110,761,000 (or 23%) of the combined
net operating revenues for the years ended May 31, 1991 and 1992, respectively.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for those rehabilitation hospitals, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the combined financial statements referred to above present fairly, in all
material respects, the combined financial position of Selected Rehabilitation
Hospitals of National Medical Enterprises, Inc. as of May 31, 1992 and 1993 and
the results of their operations and their cash flows for the three years ended
May 31, 1993 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Los Angeles, California
January 31, 1994
F-32
<PAGE> 110
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED BALANCE SHEETS
MAY 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 4,202 $ 1,082
Accounts and notes receivable (net of allowance for bad debts of
$12,551 at May 31, 1992 and $7,714 at May 31, 1993)............... 99,563 75,233
Inventories of supplies, at cost..................................... 3,383 3,523
Prepaid expenses and other current assets............................ 8,834 5,466
-------- --------
Total current assets......................................... 115,982 85,304
Long-term notes receivables and other long-term assets................. 6,225 4,619
Due from owner and affiliates, net (note 4)............................ 42,854 55,545
Property, plant and equipment, net (note 3)............................ 189,067 193,042
Intangible assets, at cost, net of accumulated amortization ($20,799 at
May 31, 1992 and $22,735 at May 31, 1993)............................ 12,316 14,671
-------- --------
$366,444 $353,181
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 5)........................... $ 1,704 $ 1,923
Accounts payable..................................................... 19,082 12,547
Income taxes payable (note 6)........................................ 30,462 7,537
Employee compensation and benefits................................... 16,813 16,472
Other current liabilities............................................ 10,459 10,192
-------- --------
Total current liabilities.................................... 78,520 48,671
Long-term debt, net of current portion (note 5)........................ 56,773 61,082
Deferred income taxes and other long-term liabilities.................. 25,543 23,869
Minority interest...................................................... 2,113 1,456
Commitments and contingencies (notes 6, 7, 8, and 9)................... -- --
Owners' equity......................................................... 203,495 218,103
-------- --------
$366,444 $353,181
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE> 111
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Net operating revenues............................. $432,197 $499,555 $476,692
Operating and administrative expenses (note 4)..... 340,585 388,441 420,694
Depreciation and amortization...................... 12,417 15,831 15,171
Interest, net of capitalized portion of $53 in 1992
and $29 in 1993 (note 4)......................... 7,432 6,817 6,448
-------- -------- --------
Total costs and expenses................. 360,434 411,089 442,313
-------- -------- --------
Minority interest in earnings of certain
Selected Hospitals............................... 1,492 2,143 1,233
-------- -------- --------
Income before income taxes......................... 70,271 86,323 33,146
Income taxes (note 6).............................. 27,777 33,804 13,570
-------- -------- --------
Net income............................... $ 42,494 $ 52,519 $ 19,576
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE> 112
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
OWNERS'
EQUITY
--------
<S> <C>
Balance, May 31, 1990............................................................. $ 93,112
Net income........................................................................ 42,494
Capital contribution.............................................................. 2,000
--------
Balance, May 31, 1991............................................................. 137,606
Contribution of net assets of certain rehabilitation hospitals by NME (note 4).... 20,390
Capital contribution.............................................................. 980
Net income........................................................................ 52,519
Dividends paid.................................................................... (8,000)
--------
Balance, May 31, 1992............................................................. 203,495
Capital contribution.............................................................. 32
Net income........................................................................ 19,576
Dividends paid.................................................................... (5,000)
--------
Balance, May 31, 1993............................................................. $218,103
========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE> 113
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1991, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 42,494 $ 52,519 $ 19,576
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 12,417 15,831 15,171
Provisions for bad debts.............................. 12,029 14,260 7,242
Changes in assets and liabilities:
Accounts and notes receivable....................... (21,704) (39,905) 17,963
Inventories, prepaid expenses and other current
assets........................................... (3,211) (3,740) (3,228)
Accounts payable, income taxes, accrued expenses and
other current liabilities........................ 12,351 38,388 (30,725)
Deferred income taxes and other long-term
liabilities...................................... 1,114 (3,920) (1,674)
-------- -------- --------
Net cash provided by operating activities........ 55,490 73,433 24,325
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment................ (23,843) (70,797) (16,419)
Intangible assets........................................ (3,527) (2,777) (5,082)
Proceeds from long-term notes and other long term
assets................................................ 1,897 2,283 1,606
-------- -------- --------
Net cash used in investing activities............ (25,473) (71,291) (19,895)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings................................. 7,121 8,585 6,232
Net change in amounts due from owners and affiliates..... (30,632) (5,941) (7,110)
Principal payments on borrowings......................... (1,354) (5,803) (1,704)
Cash dividends paid to owners............................ -- (8,000) (5,000)
Capital contributions.................................... 2,000 980 32
-------- -------- --------
Net cash used in financing activities............ (22,865) (10,179) (7,550)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 7,152 (8,037) (3,120)
Cash and cash equivalents at beginning of year............. 5,087 12,239 4,202
-------- -------- --------
Cash and cash equivalents at end of year................... $ 12,239 $ 4,202 $ 1,082
======== ======== ========
Supplemental disclosures:
Interest paid, net of amounts capitalized................ $ 7,422 $ 6,829 $ 6,520
======== ======== ========
Supplemental disclosure of noncash financing activities:
Contribution of net assets of certain rehabilitation
hospitals by NME...................................... -- 20,390 --
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE> 114
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1991, 1992 AND 1993
(1) SIGNIFICANT ACCOUNTING POLICIES
The combined financial statements have been prepared in connection with the
purchase by certain subsidiaries of HEALTHSOUTH Rehabilitation Corporation
(HEALTHSOUTH) of 28 inpatient physical rehabilitation hospitals and 45 related
satellite outpatient clinics (collectively, the "Selected Hospitals") from
various subsidiaries of National Medical Enterprises, Inc. ("NME"), which
transaction is described in more detail in note 10. These hospitals serve
patients who have lost physical or cognitive function through illness or trauma
by providing acute medical rehabilitation services.
The combined financial statements present the historical combined financial
position and results of operations of the Selected Hospitals and, as a result,
include certain assets and liabilities of the Selected Hospitals that
HEALTHSOUTH did not acquire or assume as part of the transaction described in
note 10.
Significant intercompany accounts and transactions have been eliminated.
Net Operating Revenues
Net operating revenues consist primarily of net patient service revenues
which are based on the hospitals' established billing rates less allowances and
discounts principally for patients covered by Medicare, Medicaid and other
contractual programs. These allowances and discounts were $229,359,000 in 1991,
$286,725,000 in 1992 and $302,140,000 in 1993. Payments under these programs are
based on either predetermined rates or the costs of services. Settlements for
retrospectively determined rates are estimated in the period the related
services are rendered and are adjusted in future periods as final settlements
are determined. Management of NME believes that adequate provision has been made
for adjustments that may result from final determination of amounts earned under
these programs, however such provisions are necessarily based on estimates.
Approximately 47% of net operating revenues in both 1991 and 1992 and 57% in
1993 are from the participation of the Selected Hospitals in Medicare and
Medicaid programs.
The Selected Hospitals provide care to patients who meet certain financial
or economic criteria without charge or at amounts substantially less than its
established rates. Because the Selected Hospitals do not pursue collection of
amounts determined to qualify as charity care, they are not reported as gross
revenue, nor are they included in deductions from revenue or in operating and
administrative expenses.
Bad debt expense for estimated uncollectible accounts and notes receivable,
net of recoveries, is included in operating and administrative expenses and was
$12,029,000 in 1991, $14,260,000 in 1992 and $7,242,000 in 1993.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The Selected Hospitals principally use the straight-line method of
depreciation for buildings, improvements and equipment over their estimated
useful lives as follows: buildings and improvements - generally 20 to 50 years;
equipment -- 3 to 15 years.
Intangible Assets
Preopening costs are generally amortized over 3 to 5 years. Costs in excess
of the fair value of identifiable net assets of purchased businesses are
generally amortized over 40 years. The straight-line method is used to amortize
most intangible assets.
F-37
<PAGE> 115
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leases
Capital leases are recorded at the beginning of the lease term as assets
and liabilities at the lower of the present value of the minimum lease payments
or the fair value of the assets.
Cash Equivalents
The Selected Hospitals treat highly liquid investments with an original
maturity of three months or less as cash equivalents.
Income Taxes
The operations of the Selected Hospitals are included in the NME
consolidated federal income tax return. The provision for income taxes
represents taxes computed on earnings of the Selected Hospitals.
(2) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents, accounts receivable,
accounts payable and interest payable approximates fair value because of the
short maturity of these instruments. The fair values of investments, both
short-term and long-term, based on quoted market prices, approximates carrying
value. The fair values of long-term receivables based on discounting scheduled
cash flows through estimated maturity using estimated market discount rates,
also approximates carrying value. The fair value of the Selected Hospitals'
long-term debt, (1) calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loans, or (2) based on current rates
offered to the Selected Hospitals for debt of the same remaining maturities,
also approximates the carrying value of the debt.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at May 31 (in
thousands):
<TABLE>
<CAPTION>
1992 1993
-------- --------
<S> <C> <C>
Land......................................................... $ 13,633 $ 16,007
Buildings and improvements................................... 112,200 134,604
Construction in progress..................................... 23,316 2,722
Equipment.................................................... 71,754 82,890
Facilities under capital leases.............................. 16,466 16,339
-------- --------
237,369 252,562
Less accumulated depreciation and amortization............... (48,302) (59,520)
-------- --------
$189,067 $193,042
======== ========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Selected Hospitals and certain NME-owned entities participate in the
NME cash management program which requires that cash deposits be transferred to
NME-controlled bank accounts. In this system, generally all cash accounts are
zero-balance accounts. Increases and decreases in the intercompany account are
principally a function of cash flow and accrued interest (10% in 1991, 1992 and
1993) and to a lesser extent, noncash entries for certain overhead and expense
allocations.
Total interest income recognized relating to balances with NME and
NME-owned entities was $3,958,000, $8,242,000 and $8,609,000 for the years ended
May 31, 1991, 1992 and 1993, respectively.
F-38
<PAGE> 116
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Operating and administrative expenses include gross insurance premiums of
approximately $6,803,000, $5,899,000 and $7,279,000 paid to Health Facilities
Insurance Corporation, Ltd. (HFIC), a wholly owned Subsidiary of NME, for
professional and other insurance coverage for the years ended May 31, 1991, 1992
and 1993, respectively.
NME provides certain management and administrative services to the Selected
Hospitals for which it charges a fee. Each of the Selected Hospitals is
allocated a portion of the fee based on the relative amount of patient days by
facility to total patient days. Fees of $22,022,000, $30,477,000 and $48,020,000
were paid to NME for the years ended May 31, 1991, 1992, and 1993, respectively.
During the year ended May 31, 1992, NME converted two former psychiatric
hospitals to rehabilitation hospitals and contributed the net assets of the
hospitals totaling approximately $20 million to the Selected Hospitals.
(5) LONG-TERM DEBT
Long-term debt of the Selected Hospitals at May 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
Notes secured by property, plant and equipment at rates
ranging from 5.18% to 12.95% in 1992 and 4.20% to 12.90% in
1993....................................................... $44,556 $49,871
Obligations under capital leases............................. 13,618 12,893
Other unsecured.............................................. 303 241
------- -------
58,477 63,005
Less current portion......................................... (1,704) (1,923)
------- -------
$56,773 $61,082
======= =======
</TABLE>
In connection with the sale of the Selected Hospitals discussed in note 10,
all of the debt outstanding at May 31, 1993, with the exception of obligations
under capital leases and approximately $4.9 million of notes secured by
property, plant and equipment which were assumed by HEALTHSOUTH, was repaid
subsequent to May 31, 1993. Following are the minimum principal payments for the
remaining notes for the five years subsequent to May 31, 1993:
<TABLE>
<S> <C>
1994............................................................. $ 113
1995............................................................. 128
1996............................................................. 146
1997............................................................. 165
1998............................................................. 188
Thereafter....................................................... 4,160
------
$4,900
======
</TABLE>
F-39
<PAGE> 117
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Taxes on income for the years ended May 31 consist of the following amounts
(in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current payable
Federal............................................. $23,096 $26,602 $ 9,301
State............................................... 6,328 10,089 4,238
------- ------- -------
29,424 36,691 13,539
------- ------- -------
Deferred taxes:
Federal............................................. (1,341) (725) 211
State............................................... (306) (2,162) (180)
------- ------- -------
(1,647) (2,887) 31
------- ------- -------
Total taxes on income....................... $27,777 $33,804 $13,570
======= ======= =======
</TABLE>
Income taxes paid, net of refunds, to NME and state taxing authorities
during the years ended May 31, 1991, 1992 and 1993 were $21,699,000, $7,519,000
and $36,387,000, respectively.
Deferred income taxes reflect the effect of timing differences in the
recognition of revenues and expenses for tax and financial statement purposes.
Deferred tax expense is composed of the following for the years ended May 31 (in
thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current year impact of change in tax accounting
methods............................................. $(1,587) $(1,778) $(1,832)
Excess of tax depreciation over book depreciation..... 303 52 919
Deferred costs amortized for financial statement
purposes and deducted as incurred for tax
purposes............................................ 326 149 768
Deferred compensation................................. (56) (180) 690
Provision for doubtful accounts in excess of write
offs................................................ (1,069) 307 (649)
Other................................................. 436 (1,437) 135
------- ------- -------
$(1,647) $(2,887) $ 31
======= ======= =======
</TABLE>
Effective June 1, 1993, the Selected Hospitals adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Among
other provisions, this standard requires deferred tax balances to be determined
using enacted income tax rates for the years in which the taxes will actually be
paid or refunds received. At May 31, 1993, the Selected Hospitals' deferred tax
accounts reflect the statutory rates that were in effect when the deferrals were
initiated. The Selected Hospitals recognized a net income benefit, based on
current enacted tax rates, of approximately $10 million as the cumulative effect
of an accounting change in its quarter ended August 31, 1993.
The main difference between the federal statutory rate of 34% and the
effective tax rates is attributable to state income taxes, net of federal income
tax benefit. In addition, taxes are increased for various items treated as
permanent differences which increase taxable income.
F-40
<PAGE> 118
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASE OBLIGATIONS
The Selected Hospitals have entered into capital lease obligations for
several facilities and various equipment. The related obligations bear interest
ranging from 10% to 31% with installment payments to 2022. These leases are
collateralized by certain leased facilities, equipment and letters of credit.
Future minimum lease payments for both capital and operating leases for the
next five years are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1994........................................................ $ 882 $ 15,189
1995........................................................ 750 18,175
1996........................................................ 853 18,104
1997........................................................ 1,025 18,114
1998........................................................ 1,130 17,763
Thereafter.................................................. 8,253 67,428
------- ---------
$12,893 $ 154,773
======= ========
</TABLE>
Rental expense under operating leases, including contingent rent expense
and short-term leases, was $28,696,000 in 1991, $30,744,000 in 1992 and
$30,662,000 in 1993.
(8) PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The professional and comprehensive general liability risks of the Selected
Hospitals are insured by HFIC. The coverage provided is limited to $25,000,000
per occurrence with an annual aggregate limit of $25,000,000. HFIC reinsures
risks in excess of $500,000 per occurrence with major insurance carriers. The
Selected Hospitals may receive periodic premium rebates based upon actual
experience as determined by HFIC management.
The Selected Hospitals also have umbrella coverage with major insurance
carriers for losses above the limits provided by HFIC. The excess coverage
provided is limited to $75,000,000 per occurrence with an annual aggregate limit
of $75,000,000.
(9) EMPLOYEE RETIREMENT PLAN
Substantially all of the Selected Hospitals participate in a defined
contribution 401(k) plan administered by NME. Employees who elect to participate
made contributions equal to 3% of their eligible compensation, with such
contributions matched by NME. Total expense related to this plan and to all
previous plans totaled, $2,458,000, $2,775,000 and $367,000 for the years ended
May 31, 1991, 1992 and 1993, respectively. The Selected Hospitals do not have a
plan that provides postretirement benefits.
(10) SUBSEQUENT EVENTS
On January 6, 1994, certain subsidiaries of HEALTHSOUTH purchased
substantially all of the assets, subject to certain assumed liabilities, of the
Selected Hospitals from various subsidiaries of NME for a purchase price of
approximately $350,000,000, including approximately $50,000,000 (subject to
certain adjustments to be made at June 30, 1994) for the working capital of the
Selected Hospitals. Under the terms of the December 3, 1993 Asset Sale
Agreement, amended as of January 3, 1994, substantially all of the risks and
rewards of ownership of the Selected Hospitals were effectively transferred to
HEALTHSOUTH as of December 31, 1993.
F-41
<PAGE> 119
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NME and certain of its subsidiaries are currently involved in significant
legal proceedings and investigations of an unusual nature related principally to
NME's psychiatric business. These investigations and proceedings have been
described in various filings by NME with the Securities and Exchange Commission.
At this time, the ultimate disposition of the investigations and proceedings nor
the amount of liabilities or losses arising from them can be determined, and
accordingly no provision for any liability resulting from the ultimate
disposition of these matters has been recognized in the accompanying combined
financial statements. HEALTHSOUTH did not assume, and has been indemnified by
NME with respect to, any liabilities of NME and those NME subsidiaries that
owned the Selected Hospitals arising from or in connection with such proceedings
and investigations insofar as any such liabilities arise from actions taken (or
any failure to act) prior to the date of the purchase of the Selected Hospitals.
F-42
<PAGE> 120
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED CONDENSED INTERIM BALANCE SHEET
NOVEMBER 30, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,466
Accounts and notes receivable (net of allowance for bad debts of $9,752 at
November 30, 1993)........................................................... 85,131
Inventories of supplies, at cost................................................ 3,582
Other current assets............................................................ 5,766
--------
Total current assets.................................................... 95,945
Due from owner and affiliates................................................... 65,918
Property, plant and equipment, net.............................................. 199,590
Intangible assets (net of accumulated amortization of $25,181 at November 30,
1993)........................................................................ 14,296
Other long-term assets.......................................................... 8,304
--------
$384,053
========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 3,552
Accounts payable and other accrued expenses..................................... 43,480
Income taxes payable............................................................ 2,243
Other current liabilities....................................................... 9,659
--------
Total current liabilities............................................... 58,934
Long-term debt, net of current portion.......................................... 72,654
Other long-term liabilities..................................................... 17,156
Commitments and contingencies................................................... --
Owners' equity.................................................................. 235,309
--------
$384,053
========
</TABLE>
See accompanying note to combined condensed interim financial statements.
F-43
<PAGE> 121
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED CONDENSED INTERIM STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER
30,
-------------------------
1992 1993
-------- --------
<S> <C> <C>
Net operating revenues............................................. $243,324 $227,780
Operating and administrative expenses.............................. 210,852 209,038
Depreciation and amortization...................................... 7,350 8,101
Interest, net of capitalized portion............................... (506) 175
-------- --------
Total costs and expenses................................. 217,696 217,314
-------- --------
Minority interest in earnings of certain selected hospitals........ 1,658 1,827
-------- --------
Income before income taxes......................................... 23,970 8,639
Income taxes....................................................... 8,869 3,196
-------- --------
Net income before cumulative effect of an accounting
change................................................. 15,101 5,443
Cumulative effect of change in accounting for income taxes......... -0- 10,578
-------- --------
Net income............................................... $ 15,101 $ 16,021
======== ========
</TABLE>
See accompanying note to combined condensed interim financial statements.
F-44
<PAGE> 122
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
COMBINED CONDENSED INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER
30,
-------------------------
1992 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 15,101 $ 16,021
Cumulative effect of change in accounting for income taxes....... -- 10,578
-------- --------
Net income before cumulative effect of accounting change......... 15,101 5,443
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 7,350 8,101
Provisions for losses on accounts and notes receivable........ 3,363 4,392
Changes in operating assets and liabilities:
Accounts and notes receivable............................... 13,159 (14,290)
Inventories of supplies..................................... 33 (59)
Other current assets........................................ 1,204 394
Accounts payable and accrued expenses....................... (2,465) 14,461
Income taxes payable........................................ (26,329) (5,294)
Other current liabilities................................... (1,967) (533)
Other long term liabilities................................. 682 3,865
-------- --------
Net cash provided by operating activities................ 10,131 16,480
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment....................... (1,730) (13,249)
Intangible assets................................................ (1,531) (1,025)
Purchases of long term assets.................................... -- (3,685)
Proceeds from sales of long term assets.......................... 1,257 --
-------- --------
Net cash used in investing activities.................... (2,004) (17,959)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings......................................... -- 14,163
Principal payments on long term debt............................. (533) (962)
Cash dividends paid to NME....................................... (4,000) (2,000)
Net change in amounts due from parent and affiliates............. (5,317) (10,373)
Other............................................................ -- 1,035
-------- --------
Net cash (used in) provided by financing activities.............. (9,850) 1,863
Net (decrease) increase in cash and cash equivalents............. (1,723) 384
Cash and cash equivalents at beginning of period................. 4,202 1,082
-------- --------
Cash and cash equivalents at end of period....................... $ 2,479 $ 1,466
======== ========
</TABLE>
See accompanying note to combined condensed interim financial statements.
F-45
<PAGE> 123
SELECTED REHABILITATION HOSPITALS OF
NATIONAL MEDICAL ENTERPRISES, INC.
NOTE TO COMBINED CONDENSED INTERIM FINANCIAL STATEMENTS
NOVEMBER 30, 1993
The accompanying combined condensed interim financial statements as of
November 30, 1993 and for the six-month periods ended November 30, 1993 and
November 30, 1992 include the accounts of 28 inpatient physical rehabilitation
hospitals and 45 related satellite outpatient clinics (collectively, the
"Selected Hospitals" formerly owned by subsidiaries of National Medical
Enterprises, Inc. ("NME")).
On January 6, 1994, HEALTHSOUTH Rehabilitation Corporation acquired
substantially all of the assets, subject to certain assumed liabilities, of the
Selected Hospitals from subsidiaries of NME.
These combined financial statements are unaudited and were prepared by
management of HEALTHSOUTH following the acquisition described above. NME has not
prepared combined financial statements for the Selected Hospitals for the
periods indicated in these statements. HEALTHSOUTH believes that the accounting
policies used in the preparation of these combined financial statements are
consistent with accounting policies of the Selected Hospitals. These combined
financial statements reflect all adjustments that are, in the opinion of
HEALTHSOUTH's management, necessary to present fairly the combined financial
position and results of operations for the periods indicated. All such
adjustments are of a normal recurring nature.
HEALTHSOUTH presumes that users of this interim unaudited financial
information have read the audited financial statements, (included elsewhere in
this Prospectus), and the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The interim financial
information herein is not necessarily indicative of operations for a full year
for various reasons, including levels of occupancy, interest rates, revenue
allowance and discount fluctuations, the timing of price changes and other
factors.
Effective June 1, 1993, NME recorded the cumulative effect of the change in
accounting for income taxes to adopt the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." In connection with
the adoption of this statement, NME recorded $10,578,000 related to the net
deferred tax liabilities of the Selected Hospitals. As of June 1, 1993, the tax
effect of differences between the tax basis of assets and liabilities of the
Selected Hospitals is summarized as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES
------------ ------------
<S> <C> <C>
Depreciation and fixed asset basis differences..................... $ -- $ 10,522
Receivables -- adjustments and allowances.......................... 4,775 --
Cash basis accounting change....................................... -- 7,358
Intangible assets.................................................. -- 807
Benefit plans...................................................... 1,494 --
Other.............................................................. -- 505
------------ ------------
$6,269 $ 19,192
========= =========
</TABLE>
F-46
<PAGE> 124
HEALTHSOUTH REHABILITATION CORPORATION
AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1993
Effective December 31, 1993, HEALTHSOUTH Rehabilitation Corporation (the
"Company") completed the acquisition from National Medical Enterprises, Inc.
("NME") of 28 inpatient rehabilitation facilities and 45 outpatient
rehabilitation facilities (the "NME Selected Hospitals Acquisition"). In
connection with the NME Selected Hospitals Acquisition, the Company acquired
substantially all of NME's rehabilitation services division, consisting of 24
rehabilitation hospitals (plus a 50% interest in another rehabilitation
hospital), two transitional living centers, one skilled nursing facility, a
free-standing comprehensive outpatient rehabilitation facility and 44 outpatient
rehabilitation facilities operated in conjunction with certain of the acquired
inpatient facilities. The total consideration paid was approximately
$394,600,000, consisting of $296,700,000 in cash for NME's non-current assets,
$64,500,000 in cash for net working capital, (subject to certain adjustments as
of June 30, 1994), the assumption of $17,100,000 in long-term debt obligations,
and the assumption of $16,300,000 in current liabilities.
The following pro forma condensed combined income statement (the "Pro Forma
Income Statement") is based on the historical financial statements of the
Company and the NME Selected Hospitals. The Pro Forma Income Statement was
prepared on the assumption that the NME Selected Hospitals Acquisition had
occurred as of January 1, 1993. The Pro Forma Income Statement does not purport
to represent what the Company's results of operations would actually have been
if such transaction had, in fact, occurred on such date or to project the
Company's results of operations for any future period.
F-47
<PAGE> 125
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
NME
SELECTED PRO FORMA PRO FORMA
HEALTHSOUTH HOSPITALS ADJUSTMENTS COMBINED
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $ 482,304 $ 461,148 $ 21,155(5) $ 937,173
(27,434)(7)
Operating expenses:
Operating units................. 348,912 410,609 (45,010)(1) 714,511
Corporate general and
administrative............... 14,020 0 10,000(2) 24,020
Provision for doubtful accounts... 12,680 8,271 20,951
Depreciation and amortization..... 36,494 15,922 2,924(3) 55,340
Interest expense.................. 12,683 7,129 29,044(4) 48,856
Interest income................... (3,173) 0 (3,173)
NME Selected Hospitals Acquisition
related expense................. 49,742 0 49,742
----------- --------- ----------- ---------
471,358 441,931 (3,042) 910,247
========= ======== ========= ========
Income before income taxes and
minority interests.............. 10,946 19,217 (3,237) 26,926
Provision for income taxes........ 4,069 7,897 (1,198)(6) 10,768
----------- --------- ----------- ---------
Income before minority
interests....................... 6,877 11,320 (2,039) 16,158
Minority interests................ 190 1,402 1,592
----------- --------- ----------- ---------
Net income.............. $ 6,687 $ 9,918 $ (2,039) $ 14,566
========= ======== ========= ========
Weighted average common and common
equivalent shares outstanding... 29,858 29,858
========= ========
Net income per common and common
equivalent share outstanding.... $ .22 $ .49
========= ========
</TABLE>
See accompanying notes.
F-48
<PAGE> 126
NOTES TO PRO FORMA CONDENSED
COMBINED INCOME STATEMENT
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1993
1. To eliminate intercompany management fees and corporate overhead of the
NME Selected Hospitals. The total management fees and corporate overhead expense
for the period equals $45,010 and is included in operating unit expense in the
accompanying statement.
2. To adjust corporate general and administrative expenses for estimated
additions necessary to assimilate and operate the acquired facilities.
3. To adjust depreciation and amortization to reflect the purchase price
allocation as follows (in thousands):
<TABLE>
<CAPTION>
PURCHASE
PRICE USEFUL ANNUAL
NME ASSET ALLOCATION LIFE DEPRECIATION
----------------------------------------------------- ---------- ------ ------------
<S> <C> <C> <C>
Buildings............................................ $ 122,968 30 $ 4,099
Leasehold values..................................... 105,000 15 7,000
Equipment............................................ 61,226 10 6,123
Goodwill............................................. 64,979 40 1,624
------------
Total...................................... 18,846
Historical NME depreciation and amortization......... 15,922
------------
Pro forma adjustment................................. $ 2,924
=========
</TABLE>
4. To adjust interest expense to reflect the Company's pro forma
capitalization, as if it were outstanding during all of the fiscal year ended
December 31, 1993, computed as follows (in thousands):
<TABLE>
<CAPTION>
AVERAGE
AMOUNT AVERAGE INTEREST
OUTSTANDING RATE EXPENSE
----------- ------- --------
<S> <C> <C> <C>
Line of credit........................................ $ 293,000 5.75% $ 16,856
Convertible debentures................................ 100,000 5.0% 5,000
Subordinated notes.................................... 250,000 9.0% 22,500
Other................................................. 45,000 10.0% 4,500
--------
Total....................................... $ 48,856
=======
</TABLE>
5. To adjust estimated Medicare reimbursement for the increases in
reimbursable expenses described in Notes 2, 3 and 4 above. These increases in
expenses include corporate overhead of $10,000,000 (see Note 2), depreciation
expense of $1,300,000 (see Note 3) and interest expense of $29,044,000 (see Note
4).
6. To adjust the provision for income taxes to an incremental rate of 37%
(net of minority interests).
7. To remove estimated Medicare reimbursement of management fees and
corporate overhead eliminated in Note 1 above.
F-49
<PAGE> 127
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
Use of Proceeds....................... 16
Distributions to Stockholders......... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Historical, Pro Forma and
Estimated Financial Information..... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 24
Investment and Other Policies......... 40
Management............................ 44
Principal Stockholders................ 49
Description of Securities............. 49
Certain Provisions of Maryland Law and
of The Company's Charter and
Bylaws.............................. 52
Federal Income Tax Considerations..... 54
ERISA Considerations.................. 64
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 67
Available Information................. 68
Glossary.............................. 69
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1994 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,800,000 SHARES
[LOGO]
CAPSTONE CAPITAL
CORPORATION
COMMON STOCK
------------------
PROSPECTUS
JUNE , 1994
------------------
SMITH BARNEY INC.
J.C. BRADFORD & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 128
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock
offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................... $ 46,000
NASD Filing Fee................................................................... 13,840
New York Stock Exchange Original Listing Fee...................................... 88,100
Blue Sky Fees and Expenses........................................................ 30,000
Legal Fees and Expenses........................................................... 125,000
Accounting Fees................................................................... 40,000
Printing and Engraving Costs...................................................... 250,000
Transfer Agent's Fee.............................................................. 1,000
Miscellaneous Expenses............................................................ 6,060
--------
Total................................................................... $600,000
========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 31. SALES TO SPECIAL PARTIES
The Company sold an aggregate of 180,000 shares of Common Stock to Richard
M. Scrushy (82,656 shares), HEALTHSOUTH Rehabilitation Corporation (71,280
shares), John W. McRoberts (18,000 shares) and Michael D. Martin (8,064 shares),
its Founding Stockholders, for $.001 per share (an aggregate of $180) on March
31, 1994.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
The Company sold an aggregate of 180,000 shares of Common Stock to the four
Founding Stockholders for an aggregate of $180 on March 31, 1994, pursuant to
the exemption from registration contained in Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which limits such liability to the maximum
extent permitted by the MGCL.
The Charter of the Company authorizes it to obligate itself to indemnify
and to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to directors, officers, employees and agents of the Company to the
fullest extent permitted by Maryland law. The Bylaws of the Company obligate it
to indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Bylaws also permit the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any of the capacities described above and to any employee or
agent of the Company or a predecessor of the Company.
II-1
<PAGE> 129
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Indemnification under the provisions of the MGCL is not deemed exclusive of
any other rights, by indemnification or otherwise, to which a director may be
entitled under the Charter, Bylaws, resolution of stockholders or directors,
contract or otherwise.
ITEM 34. TREATMENT OF PROCEEDS FROM SECURITIES BEING REGISTERED
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements and Schedules:
1. Audited Balance Sheet of Capstone Capital Corporation as of March 31,
1994 (included in the Prospectus).
2. Unaudited Pro Forma Balance Sheet of Capstone Capital Corporation as of
December 31, 1993 (included in the Prospectus).
3. Audited Consolidated Financial Statements of HEALTHSOUTH Rehabilitation
Corporation and Subsidiaries (included in the Prospectus).
4. Unaudited Consolidated Financial Statements of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries (included in the Prospectus).
5. Audited Financial Statements of Selected Rehabilitation Hospitals of
National Medical Enterprises, Inc. (included in the Prospectus).
6. Financial Statement Schedules of HEALTHSOUTH Rehabilitation Corporation
and Subsidiaries (not included in the Prospectus).
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
+1 Form of Underwriting Agreement.
+3.1 Articles of Incorporation of the Registrant.
+3.2 Bylaws of the Registrant.
+3.3 Articles of Amendment to Charter of the Registrant
3.4 Articles of Amendment to Charter of the Registrant.
+4 Form of stock certificate.
5.1 Opinion of Sirote & Permutt, P.C. regarding legality.
</TABLE>
II-2
<PAGE> 130
EXHIBIT
NUMBER
- ------
<TABLE>
<S> <C>
5.2 Opinion of Ballard Spahr Andrews & Ingersoll regarding legality.
8 Opinion of Sirote & Permutt, P.C. regarding tax consequences.
+10.1 Agreement of Sale and Purchase by and between HEALTHSOUTH Medical Center,
Inc. and Crescent Capital of Alabama, Inc., dated May 23, 1994, with
respect to American Sports Medicine Institute, Birmingham Medical Building
I and Birmingham Medical Building II.
+10.2 Agreement of Sale and Purchase by or between HEALTHSOUTH Rehabilitation
Corporation and Crescent Capital Trust, Inc., dated May 23, 1994, with
respect to One-7000 Building.
+10.3 Agreement of Sale and Purchase by and between Doctors' Hospital of South
Miami, Ltd. and Crescent Capital Trust, Inc., dated May 23, 1994, with
respect to Larkin Medical Building.
+10.4 Agreement of Sale and Purchase by and between HEALTHSOUTH of Virginia, Inc.
and Crescent Capital Trust, Inc., dated May 23, 1994, with respect to
Richmond Medical Building I and Richmond Medical Building II.
+10.5 Agreement of Sale and Purchase by and between HEALTHSOUTH Rehabilitation
Corporation and Crescent Capital Trust, Inc., dated May 23, 1994, with
respect to Little Rock.
+10.6 Agreement of Sale and Purchase by and between HEALTHSOUTH Rehabilitation
Corporation and Crescent Capital Trust, Inc., dated May 23, 1994, with
respect to Coral Gables MRI.
+10.7 Agreement of Sale and Purchase by and between HEALTHSOUTH Rehabilitation
Center of Virginia Beach Limited Partnership and Crescent Capital Trust,
Inc., dated May 23, 1994, with respect to Virginia Beach.
+10.8 Agreement of Sale and Purchase by and between OrNda Healthcorp and Midway
Acquisition Company, Inc., dated April 19, 1994, with respect to Midway
Medical Plaza.
+10.9 Agreement of Sale and Purchase by and between Mountain View Nursing Center,
Inc. and Crescent Capital of Pennsylvania, Inc., dated April 25, 1994,
with respect to Mountain View.
+10.10 Agreement of Sale and Purchase by and between Gravois Healthcare, Inc. and
Crescent Capital Trust, Inc., dated April 25, 1994, with respect to
Gravois.
+10.11 Agreement of Sale and Purchase by and between QHG of Gadsden, Inc. and
Crescent Capital of Alabama, Inc., dated May 25, 1994, with respect to
Goodyear, Hamiter Building and Medical Building II.
+10.12 Agreement of Sale and Purchase by and between NC-DSH, Inc. and Crescent
Capital Trust, Inc., dated May 25, 1994, with respect to Desert Springs.
+10.13 Agreement of Sale and Purchase by and between Tesson Ferry Medical Equities,
L.P. and Capstone Capital Trust, Inc., dated May 27, 1994, with respect to
South Lake Medical Center.
+10.14 Agreement of Sale and Purchase by and between Northlake Center for
Outpatient Surgery, L.P. and Capstone Capital Trust, Inc., dated May 27,
1994, with respect to Northlake.
+10.15 Agreement of Sale and Purchase by and between Surgical Health Corporation
and Capstone Capital Trust, Inc., dated May 27, 1994, with respect to
North Shore.
+10.16 1994 Stock Incentive Plan of Crescent Capital Trust, Inc.
+10.17 Lease Agreement between the Company and Birmingham Realty Company, dated May
25, 1993.
10.18 Plan and Agreement of Merger between the Company and Midway Acquisition
Company, Inc., dated May 27, 1994.
</TABLE>
II-3
<PAGE> 131
EXHIBIT
NUMBER
- ------
<TABLE>
<S> <C>
10.19 Appraisal of American Sports Medicine Institute Building, Birmingham,
Alabama, dated January 18, 1994.
10.20 Appraisal of HEALTHSOUTH Professional Building, Birmingham, Alabama, dated
January 17, 1994.
10.21 Appraisal of HEALTHSOUTH Professional #2, Birmingham, Alabama, dated March
2, 1994.
10.22 Appraisal of Larkin 7000 Building, South Miami, Florida, dated February 11,
1994.
10.23 Appraisal of Larkin Annex Building and Excess Land, South Miami, Florida,
dated February 11, 1994, as modified by a Supplemental Report, dated May
26, 1994.
10.24 Appraisal of HEALTHSOUTH Professional Building I, Richmond, Virginia, dated
January 18, 1994.
10.25 Appraisal of HEALTHSOUTH Professional Building II, Richmond, Virginia, dated
January 20, 1994.
10.26 Appraisal of HEALTHSOUTH Rehabilitation Center of Little Rock, Little Rock,
Arkansas, dated February 7, 1994.
10.27 Appraisal of HEALTHSOUTH Sports Medicine and Rehabilitation Center, Coral
Gables, Florida, dated February 7, 1994.
10.28 Appraisal of HEALTHSOUTH Rehabilitation Center of Virginia Beach, Virginia
Beach, Virginia, dated February 7, 1994.
10.29 Appraisal of Midway Medical Plaza and Adjacent Parking Structure, Los
Angeles, California, dated April 8, 1994.
10.30 Appraisal of Mountain View Nursing Center, Greensburg, Pennsylvania, dated
March 30, 1994.
10.31 Appraisal of Integrated Health Services of St. Louis at Gravois, St. Louis,
Missouri, dated March 30, 1994.
10.32 Appraisal of The Goodyear Clinic, The Hamiter Building, and Baptist Medical
Building II, Gadsden, Alabama, dated February 25, 1994.
10.33 Appraisal of Desert Springs Medical Plaza, Las Vegas, Nevada, dated February
21, 1994.
10.34 Appraisal of St. Louis Comprehensive and Ambulatory Care Facility (South
County Medical Center), St. Louis, Missouri, dated May 25, 1994.
10.35 Appraisal of Northlake Tucker Ambulatory Surgery Center, Tucker, Georgia,
dated April 14, 1994.
10.36 Appraisal of North Shore Surgical Center, Evanston, Illinois, dated April
28, 1994.
10.37 Dividend Agreement.
21 Subsidiaries.
23.1 Consent of Sirote & Permutt, P.C. (included in Exhibits 5.1 and 8).
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of Ernst & Young.
23.4 Consent of KPMG Peat Marwick.
+23.5 Consent of Valuation Counselors Group, Inc.
23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.2)
+24 Powers of Attorney.
</TABLE>
- ---------------
+ Previously filed.
II-4
<PAGE> 132
ITEM 36. UNDERTAKINGS
The Company undertakes to provide to the Underwriters at the Closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Company further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, which post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Birmingham, State of Alabama, on the 21st day of
June, 1994.
CAPSTONE CAPITAL CORPORATION
By /s/ JOHN W. MCROBERTS
------------------------------------
John W. McRoberts
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
* Chairman of the Board June 21, 1994
- ---------------------------------------------
Richard M. Scrushy
* President, Chief Executive June 21, 1994
- --------------------------------------------- Officer and Director (Principal
John W. McRoberts Executive Officer)
* Vice President -- Finance, Chief June 21, 1994
- --------------------------------------------- Financial Officer, Secretary and
Andrew L. Kizer Treasurer (Principal Financial
and Accounting Officer)
* Director June 21, 1994
- ---------------------------------------------
Michael D. Martin
Director June , 1994
- ---------------------------------------------
Robert N. Elkins
Director June , 1994
- ---------------------------------------------
William B. Luttrell
* Director June 21, 1994
- ---------------------------------------------
Eric R. Hanson
* Director June 21, 1994
- ---------------------------------------------
Larry D. Striplin, Jr.
* Director June 21, 1994
- ---------------------------------------------
Barry Morton
* Director June 21, 1994
- ---------------------------------------------
George Bogle
*By: /s/ JOHN W. McROBERTS
-----------------------
John W. McRoberts
Attorney-in-Fact
pursuant to Power of Attorney filed as
part of original Registration Statement
</TABLE>
II-6
<PAGE> 134
Pursuant to the requirements of the Securities Act of 1933, the
Co-Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Birmingham, State of
Alabama, on the 21st day of June, 1994.
HEALTHSOUTH REHABILITATION CORPORATION
By /s/ RICHARD M. SCRUSHY
------------------------------------
Richard M. Scrushy
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- --------------
<C> <S> <C>
* Chairman of the Board, President June 21, 1994
- --------------------------------------------- and Chief Executive Officer and
Richard M. Scrushy Director (Principal Executive
Officer)
* Executive Vice President and June 21, 1994
- --------------------------------------------- Chief Financial Officer and
Aaron Beam, Jr. Director (Principal Financial
Officer)
* Group Vice President -- Finance June 21, 1994
- --------------------------------------------- and Controller (Principal
William T. Owens Accounting Officer)
* Director June 21, 1994
- ---------------------------------------------
Anthony J. Tanner
* Director June 21, 1994
- ---------------------------------------------
Larry R. House
* Director June 21, 1994
- ---------------------------------------------
James P. Bennett
* Director June 21, 1994
- ---------------------------------------------
Phillip C. Watkins, M.D.
* Director June 21, 1994
- ---------------------------------------------
George H. Strong
* Director June 21, 1994
- ---------------------------------------------
C. Sage Givens
* Director June 21, 1994
- ---------------------------------------------
Charles W. Newhall, III
* Director June 21, 1994
- ---------------------------------------------
John S. Chamberlin
*By: /s/ RICHARD M. SCRUSHY
- ---------------------------------------------
Richard M. Scrushy
Attorney-in-Fact
pursuant to Power of Attorney filed as part
of original Registration Statement
</TABLE>
II-7
<PAGE> 135
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Rehabilitation Corporation
We have audited the consolidated financial statements of HEALTHSOUTH
Rehabilitation Corporation and Subsidiaries as of December 31, 1992 and 1993,
and for each of the three years in the period ended December 31, 1993, and have
issued our report thereon dated February 28, 1994 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedules listed in Item 35 of this Registration Statement. These schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG
Birmingham, Alabama
February 28, 1994
S-1
<PAGE> 136
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE I --
MARKETABLE SECURITIES -- OTHER INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH EACH
PORTFOLIO OF
EQUITY
SECURITY
ISSUES AND
NUMBER OF SHARES MARKET VALUE EACH OTHER
OR OF EACH SECURITY
UNITS -- PRINCIPAL ISSUE AT ISSUE CARRIED
NAME OF ISSUER AND AMOUNT OF BONDS COST OF BALANCE IN THE
TITLE OF EACH ISSUE AND NOTES EACH ISSUE SHEET DATE BALANCE SHEET
- ----------------------------------------- ---------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
December 31, 1993:
Certificates of Deposit.................. 1,108 $ 1,108 $ 1,108 $ 1,108
Money Market Funds....................... 5,449 5,449 5,449 5,449
Tax Exempt Municipal Put Bonds:
DeKalb County GA....................... 1,000 1,000 1,000 1,000
Scottsboro AL.......................... 2,000 2,000 2,000 2,000
Minnesota G/O.......................... 860 860 860 860
Texas G/O.............................. 1,190 1,190 1,190 1,190
Mobile AL G/O.......................... 1,000 1,000 1,000 1,000
Oyster Point VA........................ 400 400 400 400
Calhoun Co AL.......................... 1,000 1,000 1,000 1,000
Spartanburg SC......................... 300 300 300 300
York County SC......................... 450 450 450 450
Chicago O'Hare......................... 500 500 500 500
Livingston IDB......................... 1,100 1,100 1,100 1,100
Fulton Co GA........................... 1,000 1,000 1,000 1,000
Huntsville IDB's....................... 860 860 860 860
Tax Advantaged Auction Preferred Stocks:
G. E. Preferred........................ 2,000 2,000 2,000 2,000
Texaco Preferred....................... 2,000 2,000 2,000 2,000
Municipal Bond Mutual Funds:
Muniyield Michigan Fund................ 3,000 3,000 3,000 3,000
Van Kampen Merritt Auction............. 2,000 2,000 2,000 2,000
PaineWebber Preferred.................. 2,000 2,000 2,000 2,000
Collateralized Mortgage Obligations...... 1,000 1,000 1,000 1,000
---------- ------------ -------------
$ 30,217 $ 30,217 $30,217
======== ========== ==========
</TABLE>
S-2
<PAGE> 137
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER
THAN RELATED PARTIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------
DEDUCTIONS
BALANCE ------------------- BALANCE AT END OF PERIOD
AT AMOUNTS --------------------
BEGINNING AMOUNTS WRITTEN NOT
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED OFF CURRENT CURRENT
- ---------------------------------- --------- -------- -------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1991:
Note Receivable
P. Daryl Brown............... $ 214 $ 0 $ 3 $ 0 $ 0 $ 211
--------- -------- --- -------- ------- ----------
Year Ended December 31, 1992:
Note Receivable
P. Daryl Brown............... $ 211 $ 0 $ 0 $ 0 $ 0 $ 211
Aaron Beam Jr................ 0 255 0 0 0 255
Gerald P. Scrushy............ 0 45 0 0 0 45
Larry R. House............... 0 460 0 0 0 460
William T. Owens............. 0 140 0 0 0 140
--------- -------- --- -------- ------- ----------
$ 211 $900 $ 0 $ 0 $ 0 $1,111
========= ======== ======= ======== ======= ==========
Year Ended December 31, 1993:
Note Receivable
P. Daryl Brown(1)............ $ 211 $ 0 $ 21 $ 0 $ 0 $ 190
Aaron Beam, Jr.(2)........... 255 170 26 0 0 399
Gerald P. Scrushy(2)......... 45 0 4 0 0 41
Larry R. House(2)............ 460 0 46 0 0 414
William T. Owens(2).......... 140 0 14 0 0 126
Larry Taylor(2).............. 0 27 0 0 0 27
Mike Martin(2)............... 0 20 0 0 0 20
Gene Smith(2)................ 0 170 0 0 0 170
David Fuller(2).............. 0 26 0 0 0 26
Other........................ 0 75 0 0 0 75
--------- -------- --- -------- ------- ----------
$ 1,111 $488 $111 $ 0 $ 0 $1,488
========= ======== ======= ======== ======= ==========
</TABLE>
- ---------------
(1) The note bears interest at the prime rate announced from time to time by
AmSouth Bank N.A., Birmingham, Alabama, and is secured by a first lien on
the shares of Common Stock acquired with the proceeds of the loan. The note
has a ten-year term, and the Company's lien on the shares of Common Stock
is released as the indebtedness is repaid, at the rate of one share per the
weighted average option exercise price repaid.
(2) These notes bear interest at the prime rate announced from time to time by
AmSouth Bank N.A. less 1.25%. They are unsecured, payable on demand, and
represent loans made for general business purposes.
S-3
<PAGE> 138
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- --------------------------------------------------------------------------------------------------------------
OTHER
BALANCE AT CHANGES--
BEGINNING OF ADDITIONS ADD (DEDUCT)-- BALANCE AT END
CLASSIFICATION PERIOD AT COST (3) RETIREMENTS DESCRIBE OF PERIOD
- ---------------------------------- ------------ ----------- ----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1991:
Land............................ $ 10,533 $ 3,843 $ 0 $ 4,235(1) $ 18,611
Buildings....................... 66,165 47,802 514 18,571(1) 132,024
Leasehold improvements.......... 7,629 310 28 58(1) 7,969
Furniture, fixtures and
equipment.................... 41,421 28,794 1,798 9,201(1) 77,618
Construction in progress........ 15,649 (8,775) 0 0(1) 6,874
------------ ----------- ----------- -------------- --------------
TOTAL................... $141,397 $ 71,974 $ 2,340 $ 32,065 $243,096
========= ======== ======== ============ ===========
Year Ended December 31, 1992:
Land............................ $ 18,611 $ 7,119 $ 270 $ 11,874(1) $ 37,334
Buildings....................... 132,024 25,785 2,040 14,447(1) 170,216
Leasehold improvements.......... 7,969 3,256 0 504(1) 11,729
Furniture, fixtures and
equipment.................... 77,618 26,304 946 17,121(1) 120,097
Construction in progress........ 6,874 25,910 0 615(1) 33,399
------------ ----------- ----------- -------------- --------------
TOTAL................... $243,096 $ 88,374 $ 3,256 $ 44,561 $372,775
========= ======== ======== ============ ===========
Year Ended December 31, 1993:
Land............................ $ 37,334 $ 8,886 $ 2,898 $ 16,726(2) $ 60,048
Buildings....................... 170,216 62,722 19,021 227,968(2) 441,885
Leasehold improvements.......... 11,729 4,725 0 0(2) 16,454
Furniture, fixtures and
equipment.................... 120,097 39,631 9,307 65,169(2) 215,590
Construction in progress........ 33,399 (5,253) 0 1,128(2) 29,274
------------ ----------- ----------- -------------- --------------
TOTAL................... $372,775 $ 110,711 $ 31,226 $310,991 $763,251
========= ======== ======== ============ ===========
</TABLE>
- ---------------
(1) Includes 1991 and 1992 acquisitions.
(2) Includes 1993 acquisitions. See Note 9 of "Notes to Consolidated Financial
Statements".
(3) Includes reclassifications from construction in progress.
S-4
<PAGE> 139
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION
AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------------------------------------------
ADDITIONS OTHER
CHARGED TO CHANGES--
BALANCE AT COSTS ADD BALANCE AT
BEGINNING OF AND (DEDUCT)-- END
DESCRIPTION PERIOD EXPENSES RETIREMENTS DESCRIBE OF PERIOD
- ----------------------------------- --------------- --------------- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Buildings........................ $ 4,334 $ 2,735 $ 92 $ 0 $ 6,977
Leasehold improvements........... 1,250 573 15 0 1,808
Furniture, fixtures and
equipment...................... 9,081 5,541 873 0 13,749
--------------- --------------- ----------- ------------- -------------
TOTAL..................... $14,665 $ 8,849 $ 980 $ 0 $22,534
============== ============== ========== =============== ============
Year ended December 31, 1992:
Buildings........................ $ 6,977 $ 4,483 $ 500 $ 0 $10,960
Leasehold improvements........... 1,808 941 0 0 2,749
Furniture, fixtures and
equipment...................... 13,749 10,881 622 0 24,008
--------------- --------------- ----------- ------------- -------------
TOTAL..................... $22,534 $16,305 $ 1,122 $ 0 $37,717
============== ============== ========== =============== ============
Year ended December 31, 1993:
Buildings........................ $10,960 $ 5,590 $ 2,519 $ 0 $14,031
Leasehold improvements........... 2,749 1,451 0 0 4,200
Furniture, fixtures and
equipment...................... 24,008 15,202 2,395 0 36,815
--------------- --------------- ----------- ------------- -------------
TOTAL..................... $37,717 $22,243 $ 4,914 $ 0 $55,046
============== ============== ========== =============== ============
</TABLE>
S-5
<PAGE> 140
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------
ADDITIONS CHARGED
BALANCE AT ADDITIONS CHARGED TO OTHER
BEGINNING OF TO COSTS AND ACCOUNTS -- DEDUCTIONS -- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -------------------------- ------------ ----------------- ------------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1991:
Allowance for doubtful
accounts and
contractual $ 84,349(1)
adjustments.......... $ 20,093 $ 5,298 $ 1,446(2) $ 87,784(3) $ 23,402
========= ============= =============== ========== ==========
Year ended December 31,
1992:
Allowance for doubtful
accounts and
contractual $ 194,452(1)
adjustments.......... $ 23,402 $11,000 $ 14,704(2) $200,738(3) $ 42,820
========= ============= =============== ========== ==========
Year ended December 31,
1993:
Allowance for doubtful
accounts and
contractual $ 239,851(1)
adjustments.......... $ 42,820 $12,680 $ 40,300(2) $231,328(3) $ 104,323
========= ============= =============== ========== ==========
</TABLE>
- ---------------
(1) Provisions for contractual adjustments which are netted against gross
revenues.
(2) Allowances of acquisitions in years 1991, 1992 and 1993, respectively.
(3) Write-offs of uncollectible patient accounts receivable and third party
contractual adjustments, net of third party retroactive settlements.
S-6
<PAGE> 141
HEALTHSOUTH REHABILITATION CORPORATION AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COLUMN A COLUMN B
- ---------------------------------------------------------------------------------------------------
CHARGED TO COSTS AND EXPENSES
ITEM -----------------------------
- -------------------------------------------------------------------- (IN THOUSANDS)
<S> <C>
Year ended December 31, 1991:
Maintenance and repairs........................................... $ 2,026
Amortization of intangible assets:
Start-up costs................................................. 4,249
Cost in excess of net asset value of purchased facilities...... 445
Non-compete agreements......................................... 1,157
Debt issue costs............................................... 18
----------
5,869
Taxes, other than payroll and income taxes.......................... 2,567
Advertising costs................................................... 1,939
----------
$ 2,401
======================
Year ended December 31, 1992:
Maintenance and repairs........................................... $ 3,415
Amortization of intangible assets:
Start-up costs................................................. 6,539
Cost in excess of net asset value of purchased facilities...... 761
Non-compete agreements......................................... 1,864
Debt issue costs............................................... 16
----------
9,180
Taxes, other than payroll and income taxes.......................... 4,971
Advertising costs................................................... 3,529
----------
$21,095
======================
Year ended December 31, 1993:
Maintenance and repairs........................................... $ 6,661
Amortization of intangible assets:
Start-up costs................................................. 9,336
Cost in excess of net asset value of purchased facilities...... 1,316
Non-compete agreements......................................... 3,054
Debt issue costs............................................... 545
----------
14,251
Taxes, other than payroll and income taxes.......................... 8,383
Advertising costs................................................... 3,767
----------
$33,062
======================
</TABLE>
S-7
<PAGE> 142
EXHIBIT INDEX
<TABLE>
<CAPTION>
SUBSEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------ ---------------
<C> <S> <C>
+1 Form of Underwriting Agreement.
+3.1 Articles of Incorporation of the Registrant.
+3.2 Bylaws of the Registrant.
+3.3 Articles of Amendment to Charter of the Registrant
3.4 Articles of Amendment to Charter of the Registrant.
+4 Form of stock certificate.
5.1 Opinion of Sirote & Permutt, P.C. regarding legality.
5.2 Opinion of Ballard Spahr Andrews & Ingersoll regarding
legality.
8 Opinion of Sirote & Permutt, P.C. regarding tax
consequences.
+10.1 Agreement of Sale and Purchase by and between HEALTHSOUTH
Medical Center, Inc. and Crescent Capital of Alabama,
Inc., dated May 23, 1994, with respect to American Sports
Medicine Institute, Birmingham Medical Building I and
Birmingham Medical Building II.
+10.2 Agreement of Sale and Purchase by or between HEALTHSOUTH
Rehabilitation Corporation and Crescent Capital Trust,
Inc., dated May 23, 1994, with respect to One-7000
Building.
+10.3 Agreement of Sale and Purchase by and between Doctors'
Hospital of South Miami, Ltd. and Crescent Capital Trust,
Inc., dated May 23, 1994, with respect to Larkin Medical
Building.
+10.4 Agreement of Sale and Purchase by and between HEALTHSOUTH of
Virginia, Inc. and Crescent Capital Trust, Inc., dated May
23, 1994, with respect to Richmond Medical Building I and
Richmond Medical Building II.
+10.5 Agreement of Sale and Purchase by and between HEALTHSOUTH
Rehabilitation Corporation and Crescent Capital Trust,
Inc., dated May 23, 1994, with respect to Little Rock.
+10.6 Agreement of Sale and Purchase by and between HEALTHSOUTH
Rehabilitation Corporation and Crescent Capital Trust,
Inc., dated May 23, 1994, with respect to Coral Gables
MRI.
+10.7 Agreement of Sale and Purchase by and between HEALTHSOUTH
Rehabilitation Center of Virginia Beach Limited
Partnership and Crescent Capital Trust, Inc., dated May
23, 1994, with respect to Virginia Beach.
+10.8 Agreement of Sale and Purchase by and between OrNda
Healthcorp and Midway Acquisition Company, Inc., dated
April 19, 1994, with respect to Midway Medical Plaza.
+10.9 Agreement of Sale and Purchase by and between Mountain View
Nursing Center, Inc. and Crescent Capital of Pennsylvania,
Inc., dated April 25, 1994, with respect to Mountain View.
+10.10 Agreement of Sale and Purchase by and between Gravois
Healthcare, Inc. and Crescent Capital Trust, Inc., dated
April 25, 1994, with respect to Gravois.
+10.11 Agreement of Sale and Purchase by and between QHG of
Gadsden, Inc. and Crescent Capital of Alabama, Inc., dated
May 25, 1994, with respect to Goodyear, Hamiter Building
and Medical Building II.
</TABLE>
<PAGE> 143
<TABLE>
<CAPTION>
SUBSEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------ ---------------
<C> <S> <C>
+10.12 Agreement of Sale and Purchase by and between NC-DSH, Inc.
and Crescent Capital Trust, Inc., dated May 25, 1994, with
respect to Desert Springs.
+10.13 Agreement of Sale and Purchase by and between Tesson Ferry
Medical Equities, L.P. and Capstone Capital Trust, Inc.,
dated May 27, 1994, with respect to South Lake Medical
Center.
+10.14 Agreement of Sale and Purchase by and between Northlake
Center for Outpatient Surgery, L.P. and Capstone Capital
Trust, Inc., dated May 27, 1994, with respect to
Northlake.
+10.15 Agreement of Sale and Purchase by and between Surgical
Health Corporation and Capstone Capital Trust, Inc., dated
May 27, 1994, with respect to North Shore.
+10.16 1994 Stock Incentive Plan of Crescent Capital Trust, Inc.
+10.17 Lease Agreement between the Company and Birmingham Realty
Company, dated May 25, 1993.
10.18 Plan and Agreement of Merger between the Company and Midway
Acquisition Company, Inc., dated May 27, 1994.
10.19 Appraisal of American Sports Medicine Institute Building,
Birmingham, Alabama, dated January 18, 1994.
10.20 Appraisal of HEALTHSOUTH Professional Building, Birmingham,
Alabama, dated January 17, 1994.
10.21 Appraisal of HEALTHSOUTH Professional #2, Birmingham,
Alabama, dated March 2, 1994.
10.22 Appraisal of Larkin 7000 Building, South Miami, Florida,
dated February 11, 1994.
10.23 Appraisal of Larkin Annex Building and Excess Land, South
Miami, Florida, dated February 11, 1994, as modified by a
Supplemental Report, dated May 26, 1994.
10.24 Appraisal of HEALTHSOUTH Professional Building I, Richmond,
Virginia, dated January 18, 1994.
10.25 Appraisal of HEALTHSOUTH Professional Building II, Richmond,
Virginia, dated January 20, 1994.
10.26 Appraisal of HEALTHSOUTH Rehabilitation Center of Little
Rock, Little Rock, Arkansas, dated February 7, 1994.
10.27 Appraisal of HEALTHSOUTH Sports Medicine and Rehabilitation
Center, Coral Gables, Florida, dated February 7, 1994.
10.28 Appraisal of HEALTHSOUTH Rehabilitation Center of Virginia
Beach, Virginia Beach, Virginia, dated February 7, 1994.
10.29 Appraisal of Midway Medical Plaza and Adjacent Parking
Structure, Los Angeles, California, dated April 8, 1994.
10.30 Appraisal of Mountain View Nursing Center, Greensburg,
Pennsylvania, dated March 30, 1994.
10.31 Appraisal of Integrated Health Services of St. Louis at
Gravois, St. Louis, Missouri, dated March 30, 1994.
10.32 Appraisal of The Goodyear Clinic, The Hamiter Building, and
Baptist Medical Building II, Gadsden, Alabama, dated
February 25, 1994.
10.33 Appraisal of Desert Springs Medical Plaza, Las Vegas,
Nevada, dated February 21, 1994.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
SUBSEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------ ---------------
<C> <S> <C>
10.34 Appraisal of St. Louis Comprehensive and Ambulatory Care
Facility (South County Medical Center), St. Louis,
Missouri, dated May 25, 1994.
10.35 Appraisal of Northlake Tucker Ambulatory Surgery Center,
Tucker, Georgia, dated April 14, 1994.
10.36 Appraisal of North Shore Surgical Center, Evanston,
Illinois, dated April 28, 1994.
10.37 Dividend Agreement.
21 Subsidiaries.
23.1 Consent of Sirote & Permutt, P.C. (included in Exhibits 5.1
and 8).
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of Ernst & Young.
23.4 Consent of KPMG Peat Marwick.
+23.5 Consent of Valuation Counselors Group, Inc.
23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in
Exhibit 5.2)
+24 Powers of Attorney.
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
STATE OF MARYLAND
299795
DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: JUNE 20, 1994
THIS IS TO ADVISE YOU THAT THE ARTICLES OF AMENDMENT WITH A NAME CHANGE
FOR CAPSTONE CAPITAL TRUST, INC. CHANGING TO CAPSTONE CAPITAL CORPORATION
WERE RECEIVED AND APPROVED FOR RECORD ON JUNE 20, 1994 AT 11:20 AM.
FEE PAID: 78.00
HARRY J. NOONAN
CHARTER SPECIALIST
(SEAL)
<PAGE> 2
CAPSTONE CAPITAL TRUST, INC.
ARTICLES OF AMENDMENT
CAPSTONE CAPITAL TRUST, INC. (formerly known as "Cresent Capital
Trust, Inc.") a Maryland Corporation having its principal office in Maryland at
The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202
(hereinafter referred to as the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby by striking out
Article II of the Articles of Incorporation and inserting in lieu thereof the
following:
"ARTICLE II
NAME
The name of this corporation shall be Capstone Capital Corporation
SECOND: Article VII of the Charter of the Corporation is hereby
amended by adding the following subsection (n) to Section 7.4 thereof:
"(n) Nothing in this Section 7.4 shall preclude the settlement of any
transaction entered into through the facilities of the New York Stock
Exchange."
THIRD: The Board of Directors of the Corporation by unanimous written
consent, dated June 17, 1994, pursuant to Section 2-408 of the Corporations and
Associations Article of the Annotated Code of Maryland duly adopted a
resolution in which set forth the foregoing amendment to the charter, declaring
that the said amendment of the charter as proposed was advisable and directing
that it be submitted for action thereon by the stockholders of the Corporation.
FOURTH: That the said amendment has been consented to and authorized by
the holders of all the issued and outstanding stock, entitled to vote, by a
written consent, dated June 17, 1994, given in accordance with the provisions of
Section 2-505 of the Corporations and Associations Article of the Annotated
Code of Maryland and filed with the records of stockholder meetings.
FIFTH: The amendment of the charter of the Corporation as hereinabove
set forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation.
(SEAL) STATE OF MARYLAND
-----------------
I hereby certify that this is a true and complete copy of the 3 page document
on file in this office. DATED: 6-20-94.
STATE DEPARTMENT OF ASSESSMENTS AND TAXATION
BY: /s/
---------------------------------
This stamp replaces our previous certification system. Effective: 10/84
<PAGE> 3
IN WITNESS WHEREOF, Crescent Capital Trust, Inc. has caused these
presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on June 18, 1994.
CAPSTONE CAPITAL TRUST, INC.
/s/ John W. McRoberts
----------------------------
John W. McRoberts
President
ATTEST:
/s/ Andrew L. Kizer
- --------------------------
Andrew L. Kizer
Secretary
THE UNDERSIGNED, President of Capstone Capital Trust, Inc., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, that the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ John W. McRoberts
----------------------------
John W. McRoberts
President
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
STATE OF MARYLAND
WILLIAM DONALD SCHAEFER Department of Assessments and Taxation
Governor
LLYOD W. JONES [SEAL] CHARTER DIVISION
Director Room 809
PAUL B. ANDERSON 301 West Preston Street
Administrator Baltimore, Maryland 21201
- -----------------------------------------------------------------------------------------------------------------------------------
DOCUMENT CODE 09A BUSINESS CODE COUNTY 74
------- -------------- ---------
# 03857117 P.A. Religious Close Stock Nonstock
- ----------- --- --- --- --- ---
Merging Surviving
(Transferor) (Transferee)
------------------------------------ ---------------------------------------
- ------------------------------------------------ ----------------------------------------------------
- ------------------------------------------------ ----------------------------------------------------
- ------------------------------------------------ ----------------------------------------------------
CODE AMOUNT FEE REMITTED
- ---- ------ ------------
10 50 Expedited Fee (New Name) Capstone Capital Corporation
20 _____ Organ. & Capitalization ----------------------------------------
61 _____ Rec. Fee (Arts. of Inc.)
62 20 Rec. Fee (Amendment) ----------------------------------------
63 _____ Rec. Fee (Merger, Consol.)
64 _____ Rec. Fee (Transfer) ----------------------------------------
65 _____ Rec. Fee (Dissolution)
66 _____ Rec. Fee (Revival) X Change of Name
52 _____ Foreign Qualification ______ Change of Principal Office
50 _____ Cert. of Qual. or Reg. ______ Change of Resident Agent
51 _____ Foreign Name Registration ______ Change of Resident Agent
13 8 1 Certified Copy 2 Address
56 _____ Penalty ______ Resignation of Resident Agent
54 _____ For. Supplemental Cert. ______ Designation of Resident Agent
53 _____ Foreign Resolution and Resident Agent's Address
73 _____ Certificate of Conveyance X Other Change adding new
paragraph & article VII
-------------------------
-------------------------
-------------------------
75 _____ Special Fee
80 _____ For. Limited Partnership
83 _____ Cert. Limited Partnership CODE 007
84 _____ Amendment to Limited Partnership -----
85 _____ Termination of Limited Partnership
21 _____ Recordation Tax
22 _____ State Transfer Tax ATTENTION: Billie
23 _____ Local Transfer Tax
31 _____ ____ Corp. Good Standing ----------------------------------------
NA _____ Foreign Corp. Registration
87 _____ ____ Limited Part. Good Standing ----------------------------------------
71 _____ Financial
600 _____ _____________________ Personal ----------------------------------------
Property Reports and _________
late filing penalties
70 _____ Change of P.O., R.A. or R.A.A. MAIL TO ADDRESS:
91 _____ Amend/Cancellation, For. Limited Part.
99 _____ Art. of Organization (LLC) ----------------------------------------
98 _____ LLC Amend, Diss, Continuation
97 _____ LLC Cancellation ----------------------------------------
96 _____ Reg. Foreign LLC
94 _____ Foreign LLC Supplemental ----------------------------------------
92 _____ __________ LLC Good Standing (short)
__ _____ Other ______________________________ ----------------------------------------
TOTAL
FEES 78
---
X Check Cash NOTE:
---- ---- -----
Documents on checks
- -------- ------------------
APPROVED BY: HW
-------
</TABLE>
<PAGE> 1
SIROTE
---- & ----
PERMUTT
A PROFESSIONAL CORPORATION
2222 Arlington Avenue South
Reply To:
Post Office Box 55727
Birmingham, Alabama 35255-5727
Telephone (205) 933-7111
Facsimile (205) 930-5301
Writer's direct dial number:
(205) 930-5108
June 21, 1994
Capstone Capital Corporation
One Perimeter Park South
Birmingham, Alabama 35243
Re: Registration Statement on Form S-11
Registration No. 33-77788
Gentlemen:
We have acted as your counsel in connection with the
preparation of a registration statement on Form S-11 (the "Registration
Statement") filed with the Securities and Exchange Commission on April 15,
1994, as subsequently amended, of up to 6,670,000 shares of Common Stock, $.001
par value (the "Shares"), of Capstone Capital Corporation (the "Company") to be
sold by the Company to the underwriters represented by Smith Barney, Inc. and
J. C. Bradford & Co., Inc. (the "Underwriters"), pursuant to the Underwriting
Agreement between the Company and the Underwriters filed as Exhibit 1 to the
Registration Statement (the "Underwriting Agreement").
In connection with this opinion, we have examined and relied
upon such records, documents and other instruments as in our judgment are
necessary and appropriate in order to express the opinions hereinafter set
forth and have assumed the genuineness of all signatures, the authenticity of
all documents submitted to us as originals, and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
We are attorneys admitted to practice in the State of Alabama. We
express no opinion concerning the laws of any jurisdiction other than the laws
of the United States of America and the State of Alabama. With respect to
matters of Maryland law, we have relied upon the opinion of Ballard Spahr
Andrews & Ingersoll.
Based upon the foregoing, we are of the opinion that the Shares, when
issued and delivered in the manner and on the terms described in the
Registration Statement and the Underwriting Agreement (after the Registration
Statement is declared effective), will be duly authorized, validly issued,
fully paid and non-assessable.
<PAGE> 2
Capstone Capital Corporation
June 21, 1994
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to us under the
caption "Legal Matters" in the prospectus included in the Registration
Statement.
Very truly yours,
SIROTE & PERMUTT, P.C.
By /s/ John H. Cooper
-------------------
John H. Cooper
<PAGE> 1
Law Offices
BALLARD SPAHR ANDREWS & INGERSOLL PHILADELPHIA, PA
300 EAST LOMBARD STREET, 19th FLOOR CAMDEN, NJ
BALTIMORE, MARYLAND 21202-3266 DENVER, CO
410-529-5600 SALT LAKE CITY, UT
FAX: 410-528-5650 WASHINGTON, DC
FILE NUMBER
684387
June 20, 1994
Sirote & Permutt
2222 Arlington Avenue South
P.O. Box 55727
Birmingham, Alabama 35255-5727
Re: Capstone Capital Corporation
Registration on Form S-11
(Registration No. 33-77788)
---------------------------
Ladies and Gentlemen:
We have acted as Maryland counsel to Capstone Capital Corporation, a
Maryland corporation (the "Company"), in connection with certain matters of
Maryland law arising out of the registration of up to 5,800,000 shares of
Common Stock, $.001 par value per share (the "Shares"), by the Company, covered
by the above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"1933 Act"). Unless otherwise defined herein, capitalized terms used herein
shall have the meanings given to them in the Registration Statement.
In connection with our representation of the Company, and as a basis for
the opinions hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The Registration Statement and the related form of prospectus included
therein;
2. The charter of the Company, certified as of a recent date by the
State Department of Assessments and Taxation of Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of a recent date by its
Secretary;
<PAGE> 2
Sirote & Permutt
Juen 20, 1994
Page 2
4. Resolutions adopted by the Board of Directors of the Company
relating to the sale and issuance of the Shares and the organization of the
Company, certified as of a recent date by the Secretary of the Company;
5. A certificate as of a recent date of the SDAT as to the good
standing of the Company;
6. A certificate executed by Andrew L. Kizer, Secretary of the
Company, dated June 20, 1994; and
7. Such other documents and matters as we have deemed necessary or
appropriate to express the opinions set forth in this letter, subject to the
limitations, assumptions and qualifications noted below.
In expressing the opinions set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding;
2. Each individual executing any of the Documents on behalf of a
party (other than the Company) is duly authorized to do so;
3. Each individual executing any of the Documents is legally
competent to do so; and
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All
public records reviewed or relied upon by us or on our behalf are true and
complete. All statements and information contained in the Documents are true
and complete.
The pharse "known to us" means the actual knowledge, without
independent inquiry (other than receipt of the certificates referred to in
paragraphs 5 and 6 above), of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
<PAGE> 3
Sirote & Permutt
June 20, 1994
Page 3
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, it is our opinion that:
1. The Company is a corporation duly organized and existing under and
by virtue of the laws of the State of Maryland and is in good standing with
the SDAT.
2. The Shares have been duly and validly authorized and, when sold and
delivered against payment therefor in the manner described in the Registration
Statement, will be duly and validly issued, fully paid and nonassessable.
The foregoing opinions are limited to the laws of the State of Maryland
and we do not express any opinion herein concerning any other law.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinions expressed herein after the date hereof.
This opinion is being furnished to you solely for your benefit.
Accordingly, it may not be relied upon by, quoted in any manner to, or
delivered to any other person or entity without, in each instance, our prior
written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
-------------------------------------
<PAGE> 1
EXHIBIT 8
SIROTE
---- & ----
PERMUTT
A PROFESSIONAL CORPORATION
2222 Arlington Avenue South
Reply To:
Post Office Box 55727
Birmingham, Alabama 35255-5727
Telephone (205) 933-7111
Facsimile (205) 930-5301
Writer's direct dial number:
(205) 930-5108
June 21, 1994
Capstone Capital Corporation
One Perimeter Park South
Birmingham, Alabama 35243
Smith Barney Inc.
J. C. Bradford & Co., Inc.
Representatives of the Several Underwriters
c/o Smith Barney Inc.
338 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as tax counsel to Capstone Capital Corporation
(the "Company") in connection with the transaction (the "Transaction")
described in the Prospectus that constitutes Part I of the Registration
Statement filed by the Company with the Securities and Exchange Commission
under the Securities Act of 1933 on April 15, 1994, as amended through the date
hereof (the "Prospectus"). In connection with the Transaction, we have been
asked to provide opinions on certain federal income tax matters described in
the Prospectus. Capitalized terms used in this letter and not otherwise
defined herein have the meaning set forth in the Prospectus.
The opinions set forth in this letter are based on relevant
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), of
Treasury Regulations thereunder (including Proposed and Temporary Regulations),
and interpretations of the foregoing as expressed in court decisions,
administrative determinations, and legislative history as of the date hereof.
These provisions and interpretations are subject to changes that might result
in modification of our opinion.
<PAGE> 2
Capstone Capital Corporation
Smith Barney Inc.
J. C. Bradford & Co., Inc.
June 21, 1994
Page 2
In rendering the following opinions, we have examined such
statutes, regulations, records, certificates and other documents as we have
considered necessary or appropriate as a basis for such opinions, including the
following: (1) the Prospectus and the Registration Statement (including the
Exhibits thereto); (2) the Charter and Bylaws of the Company as in effect on
the date hereof; (3) the Articles of Incorporation and Bylaws of Crescent
Capital of Alabama, Inc., a wholly-owned subsidiary of the Company ("CCA"), as
in effect on the date hereof; and (4) the Articles of Incorporation and Bylaws
of Crescent Capital of Pennsylvania, Inc. (formerly "Capstone Capital of
Pennsylvania, Inc."), a wholly-owned subsidiary of the Company ("CCP"), as in
effect on the date hereof. In such examination, we have assumed that documents
that have been reviewed in proposed form will be executed in substantially the
form of the proposed agreements we have reviewed. We have also assumed the
genuineness of all signatures, the proper execution of all documents, the
authenticity of all documents submitted to us as originals, the conformity to
originals of documents submitted to us as copies, and the authenticity of the
originals of any copies.
This opinion is based in part on our opinion to be delivered
at the closing of the Transaction addressed to the Underwriters that (i) the
Company is a validly organized and duly incorporated corporation under the laws
of the State of Maryland; (ii) CCA is a validly organized and duly incorporated
corporation under the laws of the State of Alabama; and (iii) CCP is a validly
organized and duly incorporated corporation under the laws of the State of
Pennsylvania.
This opinion is also based on the representations of the
Company contained in a letter to us dated June 21, 1994, and attached hereto.
We are not aware of any facts or circumstances contrary to or
inconsistent with the foregoing representations and assumptions. To the extent
that the representations of the Company are with respect to matters set forth
in the Code or the applicable Treasury Regulations, we have reviewed with the
individuals making such representations the relevant provisions of the Code,
applicable Treasury Regulations and published administrative interpretations
thereof. Based on the foregoing, we are of the opinion that:
(1) Commencing with the Company's taxable year ending
December 31, 1994, and assuming consummation of the Transaction as contemplated
in the Prospectus and assuming a timely election of REIT status, the Company
will be organized in conformity with the requirements for qualification as a
REIT under the Code, and the Company's proposed method of operation will enable
it to meet the requirements for qualification and taxation as a REIT.
<PAGE> 3
Capstone Capital Corporation
Smith Barney Inc.
J. C. Bradford & Co., Inc.
June 21, 1994
Page 3
(2) The discussion in the Prospectus under the heading
"Federal Income Tax Considerations" fairly summarizes the federal income tax
considerations that are likely to be material to a holder of Common Stock.
For a discussion relating the law to the facts and the legal
analysis underlying the opinions set forth in this letter, we incorporate by
reference the discussion of federal income tax issues, which we prepared, in
the section of the Prospectus under the heading "Federal Income Tax
Considerations."
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of the name of our firm therein
and under the caption "Federal Income Tax Considerations" in the Prospectus
filed as a part of the Registration Statement.
Very truly yours,
SIROTE & PERMUTT, P.C.
By /s/ John H. Cooper
-------------------
John H. Cooper
JHC/kwb
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made
and entered into as of this 27th day of May, 1994, by and between: (i) CAPSTONE
CAPITAL TRUST, INC., a Maryland corporation (the "Surviving Corporation"), and
(ii) MIDWAY ACQUISITION COMPANY, INC., an Alabama corporation (the "Merged
Corporation"), as follows:
WHEREAS, the Surviving Corporation desires to acquire all of
the assets and liabilities of the Merged Corporation in exchange the
satisfaction of a $20,400,000 loan (the "Loan") from NationsBank of Georgia,
N.A. (the "Bank");
WHEREAS, the Surviving Corporation and the Merged Corporation
desire to adopt a plan of reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Surviving Corporation and the Merged Corporation
deem it advisable that the Merged Corporation be merged into the Surviving
Corporation pursuant to this Agreement and in accordance with the applicable
statutes of the States of Maryland and Alabama; and
WHEREAS, the principal office of the Surviving Corporation in
the State of Alabama is located at One Perimeter Park South, Suite 335-S, in
the City of Birmingham, County of Jefferson, and the name of its resident agent
at that address is John W. McRoberts.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. THE MERGER
1.1 Transfer of Property and Liabilities. Upon the
Effective Date (as hereinafter defined in Section 1.3 hereof) of the Merger, in
accordance with the applicable sections of the Business Corporation Law of the
State of Maryland and Section 10-2A-145 of the Alabama Business Corporation
Act: (i) the separate existence of the Merged Corporation shall cease; (ii)
all of the outstanding shares of stock of the Merged Corporation held by its
Shareholders shall be cancelled; and (iii) upon the filing of Articles of
Merger, certified as to the requisite stockholder approval, with the Secretary
of State of the State of Alabama and of Articles of Merger with the appropriate
state official of the State of Maryland, the Surviving Corporation shall
possess all of the rights, privileges, immunities, powers, and purposes, and
all the property, real and personal, causes of action, and every other asset of
the Merged Corporation, and shall assume and be liable for all the liabilities,
obligations, and penalties of the Merged Corporation, contingent or otherwise.
1.2 The Surviving Corporation. Following the Merger, the
existence of the Surviving Corporation shall continue unaffected and unimpaired
by the Merger, with all of the rights, privileges, immunities, and powers, and
subject to all the duties and liabilities, of a corporation organized under the
laws of the State of Alabama. The Articles of Incorporation and Bylaws of the
Surviving Corporation, as in effect immediately prior to the Effective Date,
shall continue in full force and effect, and shall not be changed in any manner
by the Merger. The directors and officers of the Surviving Corporation
immediately prior to the Effective Date shall continue as the directors and
officers of the Surviving Corporation.
<PAGE> 2
1.3 Effective Date of Merger. Unless this
Agreement is earlier terminated pursuant hereto, assuming satisfaction of each
of the conditions set forth in Sections 6 and 7 (unless waived in accordance
with this Agreement), the Articles of Merger attached hereto as Exhibit "A",
certified as to the requisite shareholder approval, shall be submitted for
filing with the Secretary of State of the State of Alabama, and the Articles of
Merger attached hereto as Exhibit "B" shall be submitted for filing with the
appropriate state official of the State of Maryland. In accordance with the
provisions of the escrow letter (the "Escrow Letter") by and among the
Surviving Corporation, the Merged Corporation, First American Title Insurance
Company ("FATIC") and the other sellers of property to the Surviving
Corporation, a copy of which is attached hereto as Exhibit "C", this Agreement
and the documents to be delivered pursuant to Sections 8.2 and 8.3 shall be
deposited in escrow with FATIC and shall be released upon the satisfaction of
all of the conditions set forth in the Escrow Letter. The effective date of
the Merger (the "Effective Date") shall be the date the Articles of Merger for
the Merged Corporation and the Articles of Merger for the Surviving Corporation
have been released from escrow for filing and acceptance by the appropriate
authorities.
SECTION 2. CONSIDERATION
2.1 Consideration. On the Effective Date, the Surviving
Corporation shall satisfy the Loan by causing to be deposited with FATIC the
sum of $____________________, which will be disbursed directly to the Bank in
accordance with the provisions of the Escrow Letter.
2.2 Cancellation of Shares.
(a) Shares of Merged Corporation. The shares of
common stock of the Merged Corporation issued and outstanding immediately prior
to the Effective Date shall automatically and without any action on the part of
the Merged Corporation's shareholders be cancelled.
(b) Shares of the Surviving Corporation. None of
the issued shares of the Surviving Corporation shall be converted as a result
of the Merger, but all of such shares shall remain issued shares of capital
stock of the Surviving Corporation.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE MERGED CORPORATION
The Merged Corporation hereby represents and warrants to the
Surviving Corporation as of the Effective Date hereof as set forth below. All
representations and warranties in this Section 3 are qualified in their
entirety: (i) by the specific acts to be taken by the Merged Corporation in
accordance with this Agreement, or as otherwise contemplated by the parties
hereto or by the Merged Corporation exercising its rights or performing its
obligations hereunder; and (ii) the information set forth in the schedules
referenced in this Section 3 and attached hereto, without reference to a
specific section of this Section 3 of this Agreement.
3.1 Organization, Qualifications and Corporate Power.
The Merged Corporation is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Alabama and is duly licensed or
qualified to transact business as a foreign corporation and is in good standing
in each jurisdiction in which the nature of the business transacted by it or
the character of the properties owned or leased by it requires such licensing
or qualification without otherwise having a
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<PAGE> 3
material adverse effect on the Merged Corporation's business or properties.
The Merged Corporation has the corporate power and authority to own and hold
its properties and to carry on its business as now conducted and as proposed to
be conducted, and to execute, deliver and perform this Agreement.
3.2 Authorization of Agreements, Etc. The execution and
delivery by the Merged Corporation of this Agreement and the performance by the
Merged Corporation of its obligations hereunder have been duly authorized by
all requisite corporate action and except to the extent that it will not result
in a material adverse effect on the business or properties of the Merged
Corporation will not (a) violate any provision of law, any order of any court
or other agency of government, the Articles of Incorporation of the Merged
Corporation (the "Charter") or the By-laws of the Merged Corporation or any
provision of any indenture, agreement or other instrument to which the Merged
Corporation, or any of its properties or assets is bound, (b) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both)
a default under any such indenture, agreement or other instrument; or (c)
result in the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of
the Merged Corporation.
3.3 Validity. This Agreement has been duly executed and
delivered by the Merged Corporation and assuming that it constitutes the legal,
valid and binding obligation of the Surviving Corporation, constitutes the
legal, valid and binding obligation of the Merged Corporation, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
3.4 Authorized Capital Stock. The authorized capital
stock of the Merged Corporation consists of 1,000 shares of common stock, par
value $1.00 per share. As of the Effective Date, 1,000 shares of the common
stock of the Merged Corporation will be validly issued and outstanding, fully
paid and nonassessable. The designations, powers, preferences, rights,
qualifications, limitations and restrictions in respect of each class and
series of authorized capital stock of the Merged Corporation are as set forth
in the Charter, a copy of which is attached as Exhibit "D", and all such
designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule 3.4, (a) no
subscription, warrant, option, convertible security, or other right (contingent
or other) to purchase or otherwise acquire equity securities of the Merged
Corporation is authorized or outstanding and (b) there is no commitment by the
Merged Corporation to issue shares, subscriptions, warrants, options,
convertible securities, or other such rights or to distribute to holders of any
of its equity securities any evidence of indebtedness or asset. Except as
provided for in the Charter, as set forth in the attached Schedule 3.4, or as
otherwise contemplated in this Agreement, the Merged Corporation has no
obligation (contingent or other) to purchase, redeem or otherwise acquire any
of its equity securities or any interest therein or to pay any dividend or make
any other distribution in respect thereof. There are no voting trusts or
agreements, stockholders' agreements, pledge agreements, buy-sell agreements,
rights of first refusal, preemptive rights or proxies relating to any
securities of the Merged Corporation (whether or not the Merged Corporation is
a party thereto). All of the outstanding securities of the Merged Corporation
were issued in compliance with all applicable Federal and state securities
laws.
3.5 Litigation. To the Merged Corporation's knowledge,
there are no actions, suits or proceedings before any judicial or
quasi-judicial body, by any governmental authority or other third party,
pending or threatened against or affecting the Merged Corporation's business or
properties. There
3
<PAGE> 4
are no actions, suits or proceedings pending, contemplated or threatened by the
Merged Corporation in connection with its properties or with the Merged
Corporations's ownership, rights, use, operation, development or maintenance
thereof, including, without limitation, tax reduction proceedings which would
be binding upon the Surviving Corporation or the Merged Corporation's business
or properties following the Effective Date. To the Merged Corporation's
knowledge, no attachments, execution proceedings, assignments for the benefit
of creditors, insolvency, bankruptcy, reorganization or other proceedings are
pending or threatened against the Merged Corporation.
3.6 Title. The Merged Corporation is the legal fee
simple titleholder of the real property described on Exhibit "E" (the
"Property"), has good, valid, marketable and insurable title thereto, free and
clear of all liens, claims, encumbrances, covenants, conditions, restrictions,
rights-of-way, easements and any other matters affecting title other than the
matters set forth on Exhibit "F" attached hereto (the "Permitted Exceptions"),
and hereby warrants its title to the Property and agrees to defend such title
against the lawful claims of all persons claiming by, through or under the
Merged Corporation or the Merged Corporation's immediate
predecessor-in-interest. The Merged Corporation is the only legal titleholder
to the personal property and the intangible property with respect to the
Property, free and clear of all liens, claims and encumbrances.
Notwithstanding the foregoing, the Merged Corporation's liability to the
Surviving Corporation for a breach of the foregoing representation and warranty
shall be limited to the damages of the Surviving Corporation on account of such
breach in excess of amounts recovered on account of such breach by the
Surviving Corporation under the "Title Policy" (as defined below).
3.7 Compliance with Laws. To the Merged Corporation's
knowledge, the Property is in compliance with all laws and regulations of all
applicable federal, state, city and other governmental authorities in effect as
of the date of this Agreement, including, without limitation, any laws and
regulations with respect to zoning, building, fire and health codes,
sanitation, pollution control and waste disposal (collectively, the "Laws").
To the Merged Corporation's knowledge, there are no conditions currently or
previously existing on or with respect to the Property which may give rise to
any violation of any Law if such conditions were disclosed to the authorities
with jurisdiction thereover.
3.8 Existing Approvals. To the Merged Corporation's
knowledge, there are now in full force and effect all required certifications,
approvals,consents, authorizations, licenses and permits required by any
governmental authority in connection with the Merged Corporation's ownership
and use of the Property (collectively, the "Existing Approvals").
3.9 Real Estate Taxes. No taxes have been or will be
assessed on the Property, or any portion thereof, in respect of the year of
Closing or any prior year as a result of or on account of any action taken by
the Merged Corporation, other than (a) the consummation of the transactions
which are the subject of this Agreement or (b) any work of tenant improvement
constructed by the tenant under the SHL Lease that has become the property of
the Merged Corporation pursuant to the SHL Lease.
3.10 Condemnation; Special Assessments. To the Merged
Corporation's knowledge, there is no pending, threatened or contemplated
condemnation or similar proceeding or special assessment which would affect the
Property or any part thereof in any way whatsoever.
3.11 Leasehold Interests. The Lease Agreement between the
Merged Corporation and Midway Hospital Medical Center, Inc. is a valid and
subsisting agreement, in full force and effect,
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<PAGE> 5
without any default by the Merged Corporation or the Lessee thereunder. To the
Merged Corporation's knowledge, no event has occurred or is continuing which,
with due notice or lapse of time or both, would constitute a default or event
of default by the Merged Corporation under the Lease or, to the Merged
Corporation's knowledge, by any other party thereto.
3.12 Service Contracts. Neither the Merged Corporation
nor any agent of the Merged Corporation has entered into any maintenance,
repair, management, leasing, supply' or other service contracts affecting the
Property, oral or written, including, without limitation, janitorial, elevator
and landscaping agreements, which would be binding on the Surviving Corporation
or the Property subsequent to the Effective Date.
3.13 Employees. There are no employees presently employed
by the Merged Corporation for the operation and maintenance of the Property
pursuant to employment contracts, written or oral, that would be binding on the
Surviving Corporation or the Property following the Effective Date.
3.14 Insurance. The Merged Corporation has received, and
to the Merged Corporation's knowledge SHL has received, no notice or request
from any insurance company or board of fire underwriters requesting the
performance of any work or alteration with respect to the Property. To the
Merged Corporation's knowledge, there are no defects or inadequacies in the
Property which, if not corrected, would result in the termination of any
insurance policy covering the Property or any part thereof or an increase in
the cost of such policies.
3.15 Taxes. The Merged Corporation has filed all tax
returns, Federal, state, county and local, required to be filed by it and has
paid all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due and payable
including, without limitation, all taxes which the Merged Corporation is
obligated to withhold from amounts owing to employees, creditors and third
parties. The Merged Corporation has established adequate reserves for all
known taxes accrued but not yet payable. All tax elections have been made by
the Merged Corporation in accordance with generally accepted practice. To the
Merged Corporation's knowledge, the Federal income tax returns of the Merged
Corporation have never been audited by the Internal Revenue Service. No
deficiency assessment with respect to or proposed adjustment of the Merged
Corporation's Federal, state, county or local taxes is pending or, to the best
of the Merged Corporation's and Shareholder's knowledge, threatened. To the
best of the Merged Corporation's knowledge, there is no tax lien, whether
imposed by any Federal, state, county or local taxing authority, outstanding
against the assets, properties or business of the Merged Corporation. The
Merged Corporation and the Shareholder filed an election pursuant to Section
1362 of the Code that the Merged Corporation be taxed as an S corporation,
which is valid and in effect on the date hereof.
3.16 Other Agreements. To the Merged Cooperation's
knowledge, the Merged Corporation and each other party to each material
contract between the Merged Corporation and such party that may have a material
adverse affect on the business or Property of the Merged Corporation (a) have
in all material respects performed all the obligations required to be performed
by them to date (or each non-performing party has received a valid, enforceable
and irrevocable written waiver with respect to its non-performance), and (b)
have received no notice of default and are not in default (with due notice or
lapse of time or both) under any such contract.
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3.17 Toxic or Hazardous Materials.
(a) Definitions. The following definitions apply to this
Agreement; (i) "Environmental Claim" means any written notice by a person or
entity alleging liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damages, personal injuries or penalties) arising out
of, based on or resulting from (a) the presence, or release into the
environment, of any "Material of Environmental Concern" (as defined below) in
violation of any "Environmental Law" (as defined below) on the Property, or (b)
circumstances forming the basis of any violation of any Environmental Law; (ii)
"Environmental Laws" means all federal, state, local and municipal laws, rules
and regulations (including common law) relating to pollution or protection of
the environment (including, without limitation, ground water, land surface or
subsurface strata), including, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, recycling,
reporting or handling of materials of Environmental Concern, (iii) "Materials
of Environmental Concern" means chemicals, pollutants, contaminants, petroleum
and petroleum products.
(b) Representations and Warranties.
Except to the extent disclosed in any environmental report
described on Exhibit "H" attached hereto:
(1) To the Merged Corporation's knowledge, (i)
the Merged Corporation is in compliance with all Environmental Laws relating to
the Property, and (ii) there are no circumstances that may prevent or interfere
with compliance in the future with any Environmental Law. The Merged
Corporation has not received any communication (written or oral), whether from
a governmental authority, citizens group, employee or otherwise, that alleges
in substance that the Merged Corporation is not in full compliance with all
Environmental Laws relating to the Property.
(2) To the Merged Corporation's knowledge, no
Environmental Claim is pending or threatened against the Merged Corporation,
the Property or any person or entity whose liability for any Environmental
Claim the Merged Corporation has or may have retained or assumed, either
contractually or by operation of law.
(3) To the Merged Corporation's knowledge, there
are no past or present conditions, actions, activities, circumstances, events
or incidents relating to the Property, including, without limitation, the
release, emission, discharge, presence or disposal of any Material of
Environmental Concern in violation of any Environmental Law, that could form
the basis of any Environmental Claim against the Merged Corporation or any
person or entity whose liability for any Environmental Claim the Merged
Corporation has or may have retained or assumed either contractually or by
operation of law.
(4) Without in any way limiting the generality of
the foregoing, (i) the Merged Corporation has not, and to the Merged
Corporation's knowledge, SHL has not, stored, disposed of or arranged for the
storage or disposal of Materials of Environmental Concern on the Property in
violation of any Environmental Law, and (ii) to the Merged Corporation's
knowledge, (x) no underground storage tanks are located on the Property, (y)
there is no asbestos contained in or forming
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part of any of the improvements on the Property, including, without limitation,
any building, building component, structure or office space on the Property,
and (z) no polychlorinated biphenyls (PCBs) are or have been used or stored at
the Property in violation of any Environmental Law.
3.18 No Defects. With respect to the Property, to the Merged
Corporation's knowledge there are no (i) defects not readily apparent upon
visual inspection of the Property in the physical condition of the Property or
any portion thereof that have not been corrected or which will impair the
operation of the Property, and no (ii) defects not readily apparent upon visual
inspection of the Improvements in the Improvements, the structural elements
thereof, the mechanical systems (including, without limitation, all heating,
ventilating, air conditioning, plumbing, electrical, elevator, security,
utility and sprinkler systems) therein, the roofs or the parking and loading
areas.
3.19 Personal Property. The personal property, if any, has no
significant monetary value. The Merged Corporation and the Surviving
Corporation each acknowledge that no part of the consideration payable by the
Surviving Corporation is attributable to the transfer of the personal property.
3.20 The Merged Corporation's Knowledge. All references in this
Section 3 to (a) actions taken by the Merged Corporation in connection with the
operation of the Property shall be construed to include actions taken on behalf
of the Merged Corporation by the employees and agents of the Merged
Corporation, (b) notices given or received by the Merged Corporation shall be
construed to include notices given or received by the employees and agents of
the Merged Corporation, and (c) the Merged Corporation's knowledge shall be
limited only to the current, actual knowledge of either John W. McRoberts or
Andrew L. Kizer.
3.21 Survival. All of the Merged Corporation's representations and
warranties set forth in this Section 3 shall survive the Effective Date.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SURVIVING CORPORATION
The Surviving Corporation represents and warrants to the
Merged Corporation as of the Effective Date as set forth below. All
representations and warranties in this Section 4 are qualified in their
entirety by the specific acts to be taken by the Surviving Corporation in
accordance with the terms of this Agreement.
4.1 Organization, Qualifications and Corporate Power.
The Surviving Corporation is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Maryland and is duly licensed or qualified to transact business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
the business transacted by it or the character of the properties owned or
leased by it requires such licensing or qualification. The Surviving
Corporation has the corporate power and authority to own and hold its
properties and to carry on its business as now conducted and as proposed to be
conducted, and to execute, deliver and perform this Agreement.
4.2 Authorization of Agreements, Etc. The execution and
delivery by the Surviving Corporation of this Agreement, the performance by the
Surviving Corporation of its obligations hereunder
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<PAGE> 8
have been duly authorized by all requisite corporate action and will not (a)
violate any provision of law, any order of any court or other agency of
government, the Charter of or the By-laws of the Surviving Corporation, or any
provision of any indenture, agreement or other instrument to which the
Surviving Corporation, any of its subsidiaries or any of their respective
properties or assets is bound; (b) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument; or (c) result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Surviving Corporation or
any of its subsidiaries.
4.3 Validity. This Agreement has been duly executed and
delivered by the Surviving Corporation and assuming that it constitutes the
legal, valid and binding obligation of the Merged Corporation, constitutes the
legal, valid and binding obligation of the Surviving Corporation, enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
SECTION 5. INTERIM COVENANTS AND ADDITIONAL AGREEMENTS
5.1 Merged Corporation and Shareholder. The Merged
Corporation covenants and agrees that from the date of this Agreement through
the earlier of the Closing Date as defined in Section 8.1, or the termination
of this Agreement:
(a) Certificate of Incorporation and Bylaws. The
Merged Corporation will not change its Charter or Bylaws.
(b) Corporate Existence. The Merged Corporation
shall maintain its corporate existence and rights in full force and effect.
(c) Capitalization. The Merged Corporation will
not make any change in its authorized, issued, or outstanding capital stock;
grant any stock option or right to purchase shares of its capital stock; issue
any security convertible into shares of its capitol stock; purchase, redeem,
retire, or otherwise acquire any shares of its capital stock; or agree to do
any of the foregoing.
(d) Distributions. The Merged Corporation will
not make or declare, set aside, or pay any dividend or other distribution in
respect of its capital stock.
(e) Shareholder's Meeting. The Merged
Corporation shall submit this Agreement to a special meeting of its
shareholders on or before the Closing Date to obtain the requisite shareholder
approval.
(f) Business in Ordinary Course. The Merged
Corporation will conduct its business in the ordinary course consistent with
past practice.
(g) Restrictive Agreements Prohibited. The
Merged Corporation shall not become a party to any agreement which by its terms
would restrict the Merged Corporation's performance of this Agreement.
8
<PAGE> 9
(h) Banking Arrangements; Powers of Attorney.
The Merged Corporation will not make any change in its banking and safe deposit
arrangements and will not grant any powers of attorney.
(i) Accounting Practices. Except as required by
generally accepted accounting principles, the Merged Corporation will not make
any changes in its accounting methods or practices.
(j) Compliance with Laws. The Merged Corporation
shall use commercially reasonable efforts to comply with all applicable laws,
rules, regulations and orders of which it is aware, noncompliance with which
could materially adversely affect its business or properties.
(k) Keeping of Records and Books of Account. The
Merged Corporation shall keep adequate records and books of account consistent
with past practice, in which complete entries will be made in accordance with
generally accepted accounting principles consistently applied, reflecting all
financial transactions of the Merged Corporation, and in which all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be made.
(l) Merger. The Merged Corporation will not
merge or consolidate with any other corporation; sell or lease all or
substantially all of its assets and business; acquire all or substantially all
of the stock of the business or assets of any other person, corporation, or
business organization; or agree to do any of the foregoing.
5.2 The Surviving Corporation. The Surviving Corporation
covenants and agrees that from the date of this Agreement through the earlier
of the Closing Date as defined in Section 8.1, or the termination of this
Agreement:
(a) Certificate of Incorporation. The Surviving
Corporation will not change its Charter or By-Laws.
(b) Corporate Existence. The Surviving
Corporation shall maintain its corporate existence and rights in full force and
effect.
(c) Shareholder's Meeting. The Surviving
Corporation shall submit this Agreement to a special meeting of its
shareholders on or before the Closing Date to obtain the requisite shareholder
approval.
(d) Business in Ordinary Course. The Surviving
Corporation shall conduct its business in the ordinary course consistent with
past practice.
(e) Restrictive Agreements Prohibited. The
Surviving Corporation shall not become a party to any agreement which by its
terms would restrict the Surviving Corporation's performance of this Agreement.
9
<PAGE> 10
(f) Compliance with Laws. The Surviving
Corporation shall use commercially reasonable efforts to comply with all
applicable laws, rules, regulations and orders of which they are aware,
noncompliance with which could materially adversely affect its business or
properties.
SECTION 6. CONDITIONS PRECEDENT TO THE MERGED CORPORATION'S OBLIGATIONS
The Merged Corporation's obligation to consummate the Merger
shall be subject to the fulfillment on or before the Closing Date of each of
the following conditions, unless waived in writing by the Merged Corporation.
6.1 Representations and Warranties. The representations
and warranties of the Surviving Corporation set forth in Section 4 hereof shall
be true, complete and correct on and as of the Closing Date (except as affected
by transactions contemplated hereby) with the same effect as though such
representations and warranties had been made on and as of such date.
6.2 The Surviving Corporation's Covenants. The Surviving
Corporation shall have performed and complied with all covenants required by
Section 5.2 of this Agreement to be performed by it on or before the Closing
Date.
6.3 All Proceedings to be Satisfactory. All corporate
and shareholder proceedings to be taken by the Surviving Corporation in
connection with the transactions contemplated hereby and all documents incident
thereto shall be satisfactory in form and substance to the Merged Corporation
and its counsel, and the Merged Corporation and its counsel shall have received
all such counterpart originals or certified or other copies of such documents.
6.4 Approval of the Surviving Corporation's Shareholder.
This Agreement shall have been approved by the affirmative vote of the
Surviving Corporation's shareholders requisite therefor under the Surviving
Corporation's Charter and the laws of the State of Maryland.
6.5 Supporting Documents. The Merged Corporation shall
have received copies of the following documents:
(a) (1) the Charter of the Surviving Corporation,
certified as of a recent date by its Secretary and (2) a certificate of the
Secretary of State of the State of Alabama dated as of a recent date as to the
due incorporation and good standing of JFF and the Surviving Corporation.
(b) a certificate of the Secretary of the
Surviving Corporation dated the Closing Date and certifying: (1) that attached
thereto is a true and complete copy of the By-laws of the Surviving Corporation
as in effect on the date of such certification; (2) that attached thereto is a
true and complete copy of all resolutions adopted by the Board of Directors of
the Surviving Corporation and the shareholders of the Surviving Corporation
authorizing the execution, delivery and performance of this Agreement, and that
all such resolutions are in full force and effect and are all the resolutions
adopted in connection with the transactions contemplated by this Agreement; (3)
to the incumbency and specimen signature of each officer of the Surviving
Corporation executing this Agreement and any certificate or instrument
furnished pursuant hereto, and a certification by another officer of the
Surviving Corporation as to the incumbency and signature of the officer signing
the certificate referred to in this clause.
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<PAGE> 11
6.6 Deliver of Closing Items. The Surviving Corporation
shall have delivered all of the items set forth in Section 8.3 hereof.
SECTION 7. CONDITIONS PRECEDENT TO THE SURVIVING CORPORATION'S OBLIGATIONS
The obligations of the Surviving Corporation under this
Agreement are subject to the fulfillment, before or on the Closing Date, of
each of the following conditions, unless waived in writing by the Surviving
Corporation:
7.1 Representations and Warranties. The representations
and warranties of the Merged Corporation set forth in Section 3 hereof shall be
true, complete and correct on and as of the Closing Date (except as affected by
transactions contemplated hereby) with the same effect as though such
representations and warranties had been made on and as of such date.
7.2 The Merged Corporation's Covenants. The Merged
Corporation shall have performed and complied with all covenants required by
Section 5.1 of this Agreement to be performed by it on or before the Closing
Date.
7.3 All Proceedings to be Satisfactory. All corporate
and shareholder proceedings to be taken by the Merged Corporation in connection
with the transactions contemplated hereby and all documents incident thereto
shall be satisfactory in form and substance to the Surviving Corporation and
its counsel, and the Surviving Corporation and its counsel shall have received
all such counterpart originals or certified or other copies of such documents.
7.4 Supporting Documents. The Surviving Corporation and
its counsel shall have received copies of the following documents:
(a) (1) the Charter of the Merged Corporation,
certified as of a recent date by its Secretary, and (2) a certificate of the
Secretary of State of the State of Alabama dated as of a recent date as to the
due incorporation and good standing of the Merged Corporation.
(b) a certificate of the Secretary of the Merged
Corporation dated the Closing Date and certifying: (1) that attached thereto is
a true and complete copy of the By-laws of the Merged Corporation as in effect
on the date of such certification; (2) that attached thereto is a true and
complete copy of all resolutions adopted by the Board of Directors or the
stockholders of the Merged Corporation authorizing the execution, delivery and
performance of this Agreement, and that all such resolutions are in full force
and effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement; (3) that the Charter has not been
amended since the date of the last amendment referred to in the certificate
delivered pursuant to clause (a)(2) above; and (4) to the incumbency and
specimen signature of each officer of the Merged Corporation executing this
Agreement and any certificate or instrument furnished pursuant hereto, and a
certification by another officer of the Merged Corporation as to the incumbency
and signature of the officer signing the certificate referred to in this
clause.
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<PAGE> 12
7.5 Approval of the Shareholder. This Agreement shall
have been approved by the affirmative vote of the Merged Corporation's
shareholders requisite therefor under the Merged Corporation's Charter and the
laws of the State of Alabama.
7.6 Deliver of Closing Items. The Merged Corporation
shall have delivered all of the items set forth in Section 8.2 hereof.
SECTION 8. CLOSING
8.1 Time and Place. The closing of the transaction
contemplated herein shall take place at the offices of Sirote & Permutt, P.C.
at 12:00 p.m., c.s.t. on the date (the "Closing Date") that this Agreement and
the documents to be delivered by the Merged Corporation and the Surviving
Corporation under Sections 8.2 and 8.3 are delivered to FATIC pursuant to the
Escrow Letter, or at such other time or place as the parties hereto may agree
upon.
8.2 Actions by the Merged Corporation. On or prior to
the Closing Date the Merged Corporation shall deliver, or cause to be
delivered, to FATIC the following:
(a) Certificates representing all the issued and
outstanding shares of common stock of the Merged Corporation;
(b) All books and records of the Merged
Corporation, including without limitation, the documents referenced in Section
7.4 hereof, original minute books, stock record books (including all unissued
and cancelled stock certificates), accounting records, tax returns, and all
other corporate and business records;
(c) A Certificate of Good Standing for the Merged
Corporation from the Secretary of State of the State of Alabama as required by
Section 7.4(a)(2);
(d) A certificate from the President of the
Merged Corporation certifying as to the fulfillment of the conditions set forth
in Sections 7.1 and 7.2 hereof; and
(e) A Consent to Assignment of Guaranty of
Obligations Pursuant to Lease Agreement dated as of April 19, 1994, signed by
OrNda HealthCorp.
(f) A Consent to Assignment of Lease Agreement
dated as of April 19, 1994, signed by Midway Hospital Medical Center, Inc.
(g) The executed Articles of Merger to be filed
with the State of Alabama;
8.3 Actions of the Surviving Corporation. On or prior to
the Closing, the Surviving Corporation shall deliver, or cause to be delivered,
to FATIC the following:
(a) The documents referenced in Section 6.5
hereof;
(b) A Certificate of Good Standing for the
Surviving Corporation from the Secretary of State of Maryland as required by
Section 6.5(a)(2);
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<PAGE> 13
(c) A certificate from the President of the
Surviving Corporation certifying as to the fulfillment of the conditions set
forth in Sections 6.1 and 6.2 hereof; and
(d) The executed Articles of Merger to be filed
with the State of Maryland;
SECTION 9. POST-CLOSING AGREEMENTS
9.1 The Surviving Corporation agrees to preserve and keep
the books and records of the Merged Corporation delivered to the Surviving
Corporation hereunder for a period of seven years from the Effective Date, and
to make them available, during normal business hours and upon reasonable
request, to the directors, officers, and the shareholders of the Merged
Corporation, or their representatives, in connection with any claims or legal
proceedings by or against the directors, officers, or the shareholders of the
Merged Corporation. In the event that the Surviving Corporation proposes to
destroy any such books and records, it shall give the shareholders of the
Merged Corporation reasonable advance notice thereof, and said shareholders
shall have the right to obtain or copy such books and records prior to their
destruction.
SECTION 10. TERMINATION
10.1 Circumstances of Termination. This Agreement may be
terminated (notwithstanding approval by the shareholders of a party hereto):
(a) By the board of directors of the Merged
Corporation, if any condition provided in Section 6 hereof has not been
satisfied or waived on or before the Closing Date; or
(b) By the board of directors of the Surviving
Corporation if any condition provided in Section 7 hereof has not been
satisfied or waived on or before the Closing Date.
10.2 Effect of Termination. In the event of a termination
of this Agreement pursuant to Section 10.1(a) or (b) hereof, no party (or any
of its officers, directors, and shareholders) shall be liable to any other
party for any costs, expenses, damage, or loss of anticipated profits
hereunder.
10.3 Survival. Notwithstanding the termination of this
Agreement under this Section 10, to the extent applicable, the indemnification
provisions of Section 11 hereof shall survive such termination.
SECTION 11. SURVIVAL AND INDEMNIFICATION
11.1 Nature of Statements. All representations and
warranties of the parties set forth in Section 3 and 4 hereof and the related
schedules attached hereto shall survive the Effective Date for a period of one
year, and the parties shall be entitled to rely upon such representations and
warranties irrespective of any investigations made by such parties.
13
<PAGE> 14
11.2 Mutual Indemnity.
(a) The Merged Corporation hereby indemnifies the
Surviving Corporation against any loss or liability of any type or nature,
including reasonable attorney's fees, on account of a breach of any
representation or warranty made in Section 3 of this Agreement or in the
related Schedules attached hereto or breach of any covenant or obligation in
this Agreement.
(b) The Surviving Corporation hereby indemnifies
the Merged Corporation against any loss or liability of any type or nature,
including reasonable attorney's fees, on account of a breach of any
representation or warranty made in Section 4 of this Agreement or in the
related Schedules attached hereto, breach of any covenant or obligation in this
Agreement, liabilities assumed in the Merger.
11.3 Matters Involving Third Parties. Promptly after
receipt by an indemnified party of notice of the commencement of any action or
the presentation or other assertion of any claim which becomes known, such
indemnified party shall, give prompt notice thereof to the indemnifying party,
but the failure so to notify the indemnifying party shall not relieve the
indemnifying party of any liability that it may have to any indemnified party
except to the extent that the defense of such claim or action is materially
prejudiced thereby. In case any such action or claim shall be asserted against
an indemnified party, it shall give notice to the indemnifying party of the
commencement thereof and the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, to assume the
defense thereof with counsel satisfactory to such indemnified person and, after
notice to that effect from the indemnifying party, the indemnified party shall
have the right to participate therein and to retain its own counsel, but the
indemnifying party shall not be liable to the indemnified party under such
action for any fees of other counsel or any other expenses, in each case
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and preparation unless
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. If the indemnifying
party assumes the defense of such an action, (a) no compromise or settlement
thereof may be effected by the indemnifying party without the indemnified
party's consent (which shall not be unreasonably withheld) unless (i) there is
no finding or admission of any violation of law or any violation of the rights
of any person and no effect on any other claims that may be made against the
indemnified party and (ii) the sole relief provided is monetary damages that
are paid in full by the indemnifying party and (b) the indemnifying party shall
have no liability with respect to any compromise or settlement thereof effected
without its consent (which shall not be unreasonably withheld). If notice is
given to the indemnifying party of the commencement of any action and it does
not, within ten days after the indemnified party's notice is given, give notice
to the indemnified party of its election to assume the defense thereof, the
indemnifying party shall be bound by any determination made in such action or
any compromise or settlement thereof effected by the indemnified party.
Notwithstanding the foregoing, if any indemnified party determines in good
faith that there is a reasonable probability that an action may materially and
adversely affect it or its affiliates other than as a result of monetary
damages, such indemnified party may, by notice to the indemnifying party assume
the exclusive right to defend, compromise or settle such action, but the
indemnifying party shall not be bound by any determination of an action so
defended or any compromise or settlement thereof effected without its consent
(which shall not be unreasonably withheld). The parties agree to cooperate to
the fullest extent possible in connection with any claim for which
indemnification is sought under this Agreement. As used herein, the term
liability shall include all reasonable costs of litigation or threatened
litigation, including attorney's fees, incurred in connection with litigation
brought or threatened by third parties.
14
<PAGE> 15
SECTION 12. GENERAL PROVISIONS
12.1 Expenses. Each party hereto will pay its own
expenses in connection with the transactions contemplated hereby, whether or
not such transactions shall be consummated.
12.2 Survival of Agreements. Except for the post-closing
agreements contained in Section 9 hereof and the right to indemnification under
Section 11 hereof, which shall survive the execution and delivery of this
Agreement and the Closing Date for the periods specified therein or as provided
by law, all other covenants and agreements contained herein shall be deemed to
have been fulfilled on the Closing Date.
12.3 Entire Agreement. This Agreement, including the
Schedules and Exhibits hereto, constitutes the sole and entire agreement of the
parties with respect to the subject matter hereof. All Schedules and Exhibits
hereto are hereby incorporated herein by reference.
12.4 Amendments. Except as may be otherwise provided
elsewhere herein, this Agreement may not be amended or modified, and no
provisions hereof may be waived, without the written consent of the parties
hereto.
12.5 Severability. If any provision of this Agreement
shall be declared void or unenforceable by any judicial or administrative
authority, the validity of any other provision and of the entire Agreement
shall not be affected thereby.
12.6 Titles and Subtitles. The titles and subtitles used
in this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement.
12.7 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Alabama.
12.8 Assignment. This Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their successors and assigns;
provided, however, that any assignment by either party of its rights under this
Agreement without the written consent of the other party shall he void.
12.9 Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
12.10 Attorneys' Fees. If legal action, including any
action on appeal, or arbitration is necessary to enforce the terms and
conditions of this Agreement, the prevailing party will be entitled to recover
reasonable attorneys' fees and costs, as fixed by a court of competent
jurisdiction or by the arbitrators.
12.11 Arbitration. Any dispute arising after the Closing
Date from or in connection with this Agreement will be determined in accordance
with the then current rules for commercial arbitration of the American
Arbitration Association. If proper notice of any hearing has been given, the
15
<PAGE> 16
arbitrator(s) will have full power to proceed to take evidence or to perform
any other acts necessary to arbitrate the matter in the absence of any party
who fails to appear. Each party hereto waives any rights it may have to demand
trial by jury or to seek punitive damages. The arbitrator will have no power
to assess punitive damages or make any award that modifies or suspends any
lawful provision of this Agreement. All expenses of arbitration must be paid
by the party against whom the arbitrator(s) renders a decision. Judgment upon
any award and/or enforcing any order of the arbitrator may be entered by any
court of competent jurisdiction.
IN WITNESS WHEREOF, the parties to this Agreement and Plan of
Merger, pursuant to the authority duly given by the respective Boards of
Directors, have caused this Agreement and Plan of Merger to be executed on this
the 27th day of May, 1994.
CAPSTONE CAPITAL TRUST, INC.
By /s/ John W. McRoberts
----------------------------
Its President
(CORPORATE SEAL)
MIDWAY ACQUISITION COMPANY, INC.
By /s/ John W. McRoberts
----------------------------
Its President
(CORPORATE SEAL)
16
<PAGE> 1
EXHIBIT 10.19
AN APPRAISAL OF
AMERICAN SPORTS MEDICINE INSTITUTE
BUILDING
BIRMINGHAM, ALABAMA
<PAGE> 2
[logo] VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
January 18, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
AMERICAN SPORTS MEDICINE INSTITUTE BUILDING
1313 13TH STREET SOUTH
BIRMINGHAM, ALABAMA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, subject to a master
lease from HealthSouth Corporation. The report is to be used for asset
valuation purposes. HealthSouth Corporation is selling nine professional
office buildings for the purpose of establishing a real estate investment trust
(REIT). This valuation assumes that the prospective REIT is the owner of the
property, with HealthSouth Corporation guaranteeing annual net rental income of
$12.00 per rentable square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
January 18, 1994
Page Two
o Both parties are well informed or well advised, and acting
in what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U. S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, page 21, 10th Edition, published by The
Appraisal Institute].
The subject property is a three-story professional office building containing
30,144 gross square feet and 27,800 leasable square feet. The building is a
Class B facility, with a steel frame and poured-in-place concrete structure and
dryvit and brick veneer exterior walls. It was constructed in 1992. The
building is currently occupied by the American Sports Medicine Institute, which
is owned by and associated with the HealthSouth Medical Center.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the American Sports
Medicine Institute Building, as of September 29, 1993, to be:
$3,500,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
<PAGE> 4
HealthSouth Corporation
January 18, 1994
Page Three
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:mhb
094-1519.8
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Michael P. Bates has made a personal inspection of the property that
is the subject of this report. Patrick J. Simers has not made a
personal inspection of the property.
The following have provided significant professional assistance to the
person signing this report: Michael P. Bates
/s/ Patrick J. Simers /s/ Michael P. Bates
--------------------- --------------------
Patrick J. Simers Michael P. Bates
Managing Director Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment.
If the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 29, 1993
Property Identification: American Sports Medicine Institute
(ASMI) Building
Property Location: 1313 13th Street South
Birmingham, Alabama
Interest Appraised: Leased Fee Estate
Gross Building Area: 30,144 square feet
Net Rentable Area: 27,800 square feet
Subject Land Size: 44,616 square feet, or 1.0242 acres
Improvements Description: Three-story, steel frame and concrete
structure, Class B professional office
building constructed in 1992.
Occupancy Percentage: Floors 1 and 2 are occupied by American
Sports Medicine Institute
CONCLUSIONS
Cost Approach: $3,975,000
Direct Sales Comparison Approach: $3,475,000
Income Approach: $3,520,000
Final Value Estimate: $3,500,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
Market Data - Metropolitan Birmingham 5
DESCRIPTIVE DATA 10
Neighborhood Analysis 10
Zoning 11
Real Estate Taxes and Assessments 11
Site Analysis 12
Building and Site Improvements 13
HIGHEST AND BEST USE 15
VALUATION SECTION 18
Valuation Methodology 18
Cost Approach 19
Direct Sales Comparison Approach 32
Income Approach 40
CORRELATION AND CONCLUSION 43
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C1 - Metropolitan Area Map
Exhibit C2 - Neighborhood Map
Exhibit D1 - Survey
Exhibit D2 - Tax Plat Map
Exhibit E - Land Sale Location Map
Exhibit F - Building Floor Plans
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparable Location Map
Exhibit J - Rent Comparables Summary
Exhibit K - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is American Sports Medicine Institute Building
located at 1313 13th Street South in Birmingham, Alabama. The subject is a
three-story building that is situated just east of the new HealthSouth
Hospital. The property is identified by Jefferson County as tax parcel number
29-0-1-3-008-11.001. The property has a parking lot on its south end, with
parking spaces for 26 vehicles.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property
would be included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
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<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute].
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting
in what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
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<PAGE> 14
HISTORY OF THE PROPERTY
HealthSouth Medical Center, Inc., acquired the assets of the South Highlands
Hospital in November 1989 [Deed Book 3726/Page 014]. A new main hospital
building and the Alabama Rehabilitation Center were constructed in 1991. From
1990 through 1992, HealthSouth Medical Center acquired 15 parcels containing
1.7525 acres east of the existing hospital, and assembled and rezoned 1.0242
acres for the construction of the American Sports Medicine Institute (ASMI).
The ASMI facility was constructed in late 1992 and early 1993. The top floor
of the facility is vacant, and the tenant finish work has not yet been
completed on this space.
The subject professional building has reportedly not been marketed for sale and
is not currently under an agreement of sale. No other deed transfers were
noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-residential
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<PAGE> 15
Fixed Investment advanced 2.2 percent and Residential Fixed Investment grew 1.7
percent. Federal Government Purchases declined (0.6%) over the same period.
Federal Government Purchases account for 7.2 percent of the total GDP, and this
decline is limited to the rate of overall GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
JUNE 30, 1993 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
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<PAGE> 16
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
MARKET DATA - METROPOLITAN BIRMINGHAM
Birmingham is recognized as a leading financial, transportation, communication,
manufacturing, healthcare and distribution center for the southeast United
States. The region's central location within the state of Alabama has been a
major factor in its economic success.
The Birmingham Metropolitan Statistical Area (MSA) consists of five counties
with an estimated 1992 population of 917,100. This ranks the metropolitan area
as the 46th largest in the county. The larger 16-county primary market area
contains a population of 1,341,500. A map of the Birmingham MSA is shown in
the Exhibit Section of this report.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
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<PAGE> 17
POPULATION
Historical data and growth projections reflect the economic climate of an area
and have both a direct and indirect impact on property values. Table 1 shows
the county population totals by decade. Table 1 also shows the annual
percentage increases in population for the individual counties in the
Birmingham MSA.
The fastest annual population growth in the Birmingham MSA occurred in the
decade of the 1980s. The rate of growth in the 1980s, however, was only 1.13
percent per year, compared to 2.0 percent to 3.0 percent per year for many
other large Southeast US metropolitan cities during the decade. The City of
Birmingham, in Jefferson County, and Walker County experienced population
declines during the most recent decade.
TABLE 1
POPULATION BY COUNTY
<TABLE>
<CAPTION>
1970 1980 1990
COUNTY CENSUS CENSUS CENSUS
<S> <C> <C> <C>
Blount 26,853 36,459 39,248
Jefferson 644,991 671,392 651,525
City of Birmingham* 300,910 286,799 265,968
Saint Claire 27,956 41,205 50,009
Shelby 38,037 66,298 99,358
Walker 56,246 68,660 67,670
TOTAL MSA 794,083 884,014 907,810
* City of Birmingham included in Jefferson County totals.
</TABLE>
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<PAGE> 18
AVERAGE PERCENTAGE INCREASE
COUNTY 1970s 1980s 1990s
Blount 3.58% 0.76% N/A
Jefferson 0.41% -0.30% N/A
Saint Clair 4.74% 2.14% N/A
Shelby 7.43% 4.99% N/A
Walker 2.21% -0.14% N/A
TOTAL MSA 1.13% 0.27% 0.5%
Source: Birmingham Area Chamber of Commerce
Jefferson County, excluding the City of Birmingham, grew 1.18 percent per year
in population during the 1970s, but experienced little growth during the 1980s.
The estimated population growth rate so far in the 1990s is still slow, but
faster than experienced in the 1980s.
HOUSING
The growth in housing in the Birmingham MSA was also slow but stable during the
1980s. As was the case in other cities during the decade, much of the new
housing occurred due to a decline in the average household size. In the
Birmingham MSA, there were 3.01 persons per household in 1970, compared to 2.41
persons per household in 1990.
So far in the 1990s, single-family housing sales have been brisk, with record
sales in 1992 and thus far in 1993. The area ranks 48th in new homes built in
1993, with 3,510 new homes the first half of 1993. New apartment construction
totaled over 6,000 units from 1987 through 1990, or an average of 1,545 per
year. New multifamily units only totaled 40 in 1992 and 140 for the first six
months of 1993. Most of the new apartment construction has been concentrated
south of the City of Birmingham along the U.S. Highway 280 and U.S. Highway 31
corridors.
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<PAGE> 19
Looking forward, the average household size is not expected to continue to
decline indefinitely. The growth in housing, therefore, should equal the
population growth plus the replacement of obsolete housing.
EMPLOYMENT
In the 1980s, the average annual growth in employment in the MSA was 3,520,
compared to 8,290 per year during the 1970s. So far in the 1990s, the region
is averaging 3,233 new jobs each year. The unemployment rate at the end of
1992 was 6.1 percent, compared to 7.3 percent and 7.4 percent for the state of
Alabama and the U.S., respectively.
Table 2 shows the diversity in employment in the Birmingham MSA.
TABLE 2
EMPLOYMENT BY SECTOR
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL
SECTOR LABOR DOLLARS ESTABLISHMENTS
<S> <C> <C>
Health Services 11.7% 6.5%
Other Services 14.0% 26.5%
Manufacturing 15.7% 5.7%
Construction 12.0% 8.8%
Transp., Comm. & Utilities 13.8% 3.6%
Wholesale Trade 10.2% 9.5%
Retail Trade 9.8% 25.2%
Finance, Insurance, & Real Estate 9.1% 9.2%
Mining & Agricultural 3.5% 1.4%
Miscellaneous 0.2% 3.6%
REGION 100.0% 100.0%
Source: Birmingham Chamber of Commerce
</TABLE>
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<PAGE> 20
In 1970, manufacturing accounted for 28.3 percent of the employment in the MSA.
By 1991, manufacturing only accounted for 13.1 percent of the area's
employment. The manufacturing jobs have been replaced with service jobs. The
service sector accounts for 25.4 percent of all jobs in 1991, versus 14.3
percent in 1970.
As of April 1993, the largest employers in the Birmingham MSA are as follows:
University of Alabama 15,696
U.S. Government 9,501
South Central Bell 7,450
State of Alabama 6,304
Birmingham City Schools 4,733
Alabama Power Company 4,611
INCOME
Jefferson County and the Birmingham MSA are very representative of the average
per capita income and average household income in the United States. Table 3
below shows the area's income averages compared to the entire U.S.
<TABLE>
<CAPTION>
TABLE 3
PERCENT PERCENT
AVERAGE PER OF U.S. AVERAGE HOUSEHOLD OF U.S.
COUNTY CAPITA INCOME AVERAGE INCOME AVERAGE
<S> <C> <C> <C> <C>
Blount $13,135 70% $27,219 77%
Jefferson $18,624 100% $34,235 97%
St. Clair $13,056 70% $26,750 76%
Shelby $15,935 85% $44,813 115%
Walker $14,556 78% $26,585 75%
MSA $17,479 94% $34,315 100%
</TABLE>
Jefferson County has approximately the same per capita income and household
income as the national average.
In summary, metropolitan Birmingham has experienced a slow but stable growth
rate in recent years. Its economic base is diverse. National trends of a
lower manufacturing work force and lower household size have also been the
experience in Birmingham.
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<PAGE> 21
DESCRIPTIVE DATA
NEIGHBORHOOD ANALYSIS
The subject neighborhood is identified as the "Southside" area of Birmingham.
This area is just south of the Central Business District (CBD) of Birmingham
and east of the Red Mountain Expressway. This neighborhood is bounded on the
north by the University of Alabama at Birmingham (UAB), on the east by the Red
Mountain Expressway (U.S.Highway 31), on the south by Red Mountain with the
famous Vulcan Statue, and on the west by Interstate 65. A map of the
neighborhood is located in the Exhibit Section.
The Southside includes many of the city's old restored homes. The
Highland/Five-Points area has undergone considerable renovation, and is
becoming a restaurant and entertainment center. The subject medical office
building, which is part of the HealthSouth Medical Center, is located
one-quarter-mile west of the Highland/Five-Points area, and just north of Red
Mountain. The upscale residential communities of Homewood and Mountain Brook
are located just south and east of the Southside. The property is situated at
1313 13th Street South. The block bounded by 13th Place South, 12th Avenue
South and 13th Street South contains the subject building. East and south of
the property are primarily older residential areas. The HealthSouth Medical
Center and the HealthSouth Professional Condominium Building are situated to
the west of the property. Some homes have been converted to commercial uses
around the hospital. A few neighboring parcels have been redeveloped with
small apartment buildings, including the site just south of the property.
North of the HealthSouth Medical Center is UAB, which is reportedly now the
second largest university in Alabama. The university has been growing rapidly
and has absorbed most of the land uses in a six by fifteen block area. The UAB
Medical Center is considered by some to be in the same class as the Mayo Clinic
in some medical research fields.
In summary, the neighborhood is an older residential area that is undergoing
renovation and restoration. Development in the area is being driven primarily
by hospital growth which includes the subject HealthSouth Medical Center, the
UAB Medical Center and St. Vincent Medical Center. Although medical service
is the focus of new development, new retail, restaurant and residential
development is also active in the area.
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<PAGE> 22
ZONING
The subject property is zoned "COI, Conditional Office and Institutional
District", by the City of Birmingham. According to the City zoning
requirements, the office and institutional district provides "for the orderly
arrangement of institutional, clerical and administrative space". Permitted
uses include public, semi-private or private office; public or semi-private,
religious, educational or charitable institutions; and, other similar uses
consistent with this zoning code's purpose and surrounding uses. This zoning
shall not include properties with industrial characteristics, communal living
facilities or correctional institutions.
The subject's "conditional" zoning provided for the specific medical services
property that was constructed on the site. The owners of the building were
reportedly granted setback and parking variances prior to the construction of
the building. Since the site plan was approved prior to construction, and the
occupancy permit received after construction, it is assumed that the property
conforms to all the required conditions of zoning. The zoning variance may
have provided for an easement with the hospital for additional parking spaces
on the north side of the property. A letter of zoning compliance from the City
of Birmingham is recommended for an official determination regarding any zoning
conformity issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in the City of Birmingham, and subject to the
taxing authority of the City and Jefferson County. Commercial properties in
the City and County are assessed at 20 percent of tax-appraised value for tax
purposes. The subject's tax-appraised values and assessed values are
summarized as follows:
Tax-Appraised Assessment
Market Value Values
------------ ----------
Land $ 192,000 $ 38,400
Improvements 2,147,980 429,596
---------- --------
Total $2,339,980 $467,996
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<PAGE> 23
The 1993 millage rate is $69.50 per $1,000 of assessed value. The 1993 taxes
are calculated as follows:
$467,996/$1,000 x $69.50 = $32,526
SITE ANALYSIS
The subject site is rectangularly-shaped with frontage of 240 feet on the east
side of 13th Street South and 240 feet along the west side of 13th Place South.
The subject site is 185.9 feet deep between the two streets. It contains
44,616 square feet, or 1.0242 acres. A survey showing the site containing
48,001 square feet is included in the Exhibit Section. The subject site is
this survey site excluding 3,385 square feet that is now a hospital parking lot
on the north side of the building. This survey is the subject property,
excluding 3,385 square feet that is now a hospital parking lot on the north
side of the building.
A legal description of the 48,001 square foot site was provided to the
appraisers and is included in the Exhibit Section. A current survey and legal
description of the subject 44,616 square feet was not available to the
appraisers at the time of this report. We reserve the right to modify our
report if the actual acreage is found to vary significantly from the 44,616
square feet.
The topography of the site slopes slightly downward from the parking lot on its
south end to its north end adjoining the hospital parking lot. The front and
main entrance to the building is on the first or ground floor. Entrance to the
building from the south end parking lot is on the second floor of the building.
The subject building is located on a hill and does not contain any flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
Other site improvements consists of general landscaping, asphalt paving,
concrete paving and curbing, some shrubs and general signage. The parking lot
to the north of the building contains 26 parking spaces, including two handicap
spaces.
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<PAGE> 24
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Jefferson County tax plat
map is included in the Exhibit Section.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
BUILDING AND SITE IMPROVEMENTS
The ASMI Building was constructed in 1992. It contains 30,144 gross square
feet and 27,800 leasable square feet on three floors. The rentable area
excludes the mechanical rooms and vertical penetrations (stairwells, elevator
shafts). The building area by floor is shown on floor plans included in the
Exhibit Section of this report.
The building is a three-story, reinforced concrete and steel structure
building, with a dryvit and brick veneer exterior. The entire building is
sprinklered. The building has a metal deck roof structure, with a waterproof
membrane roof and large-stone gravel covering. Ceiling heights are
approximately nine and one-half feet on the first floor and nine feet on the
second and third floors. Ceiling finishes consists of acoustical ceiling tiles
and recessed fluorescent lighting and cone directional lights. The interior
walls are wall paper on gypsum board over metal studs.
Air conditioning is supplied via Trane packaged units on each floor. A
gas-fired Teledyne boiler provides heated air to the building. A natural gas
emergency generator is located in the back of the building. The second floor
of the building contains a computer room with raised floors.
The interior floors are mostly carpeted, with some vinyl and ceramic tile in
the lab and bathroom areas. Windows and doors are metal framed, and interior
doors are solid-core wood. The first floor contains the lobby, office and
patient rooms, a laboratory area and a two-story gymnasium or rehab area. The
second floor contains a library, a conference room, offices, a staff lounge and
a television studio.
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<PAGE> 25
A detail description of the building and site improvements are included in the
Exhibit Section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is new and in good condition. There is no deferred maintenance,
functional or economic obsolescence. The top floor of the building contains
3,091 gross square feet and 2,607 net leasable square feet. The tenant finish
work has not yet been completed on this space, and the floor is currently
vacant. Since the master lease provides for HealthSouth guaranteeing income on
this space, this report assumes that HealthSouth will complete the tenant
finish work prior to prospective sale to the REIT.
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<PAGE> 26
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, Page 45, 10th Edition published by The Appraisal
Institute].
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
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<PAGE> 27
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "COI, Conditional Office and Institutional". Permitted uses in
this general zoning category vary widely. Potential legal uses would include
some retail and restaurants, office/institutional, hotels, hospitals and other
medically-oriented uses. The subject's conditional zoning provided for the
construction of the subject medical facility, with variances for setbacks and
parking received prior to construction.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. New hospital
related development on the west side of the building indicates that new
development is financially feasible. HealthSouth Medical Center, UAB Medical
Center and St. Vincent Medical Center have all recently built new medical
office facilities.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development based on the growth needs of the
hospital.
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<PAGE> 28
As Improved
The subject site is currently improved with a 27,800 rentable square foot
professional building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to modify existing improvements. The improvements were
recently constructed and are considered functional.
LEGALLY PERMISSIBLE
The building, as improved, is assumed to be a legal conforming use, since the
property was recently constructed and received an occupancy permit. Under the
current zoning, the property could remain as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. The only
financially feasible use of the existing improvements is it current use as
medical office space.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The exist use was the
only financially feasible use. The highest and best use, as improved, is the
property's current use.
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<PAGE> 29
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-18-
<PAGE> 30
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arms-length transactions that conveyed a fee simple interest, and only
real property was included in the transactions.
-19-
<PAGE> 31
Land Comparable Number 1
<TABLE>
<S> <C>
Parcel Number: 29-01-3-008-7
Location: East side of 13th Street South across from the new Alabama Sports Medicine and Orthopedic
Center and the new HealthSouth Hospital.
Size: 7,000 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/195
Grantor: Randall J. Westbrook
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $135,000
Price Per Square Foot: $19.29
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was part of 15 parcels assembled from 1990-1992 for the construction of the
Sports Medicine Institute and additional parking. The average price for the 15 parcels
was $18.16 per square foot. The Grantor in this transaction is an employee of the
Grantee that acquired the property on July 10, 1992, from Dwain Pitts, et al, for the
same price [Deed Book 4313/Page 978].
</TABLE>
-20-
<PAGE> 32
Land Comparable Number 2
<TABLE>
<S> <C>
Parcel Number: 29-01-3-010-4
Location: West side of 12th Street South adjacent to an existing parking lot across from the old
entrance to the HealthSouth Medical Center.
Size: 8,160 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/197
Grantor: Vicki E. Owens
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $66,000
Price Per Square Foot: $8.09
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel was purchased for future parking needs by the hospital. The hospital
purchased the property based solely on land value and considered the forty year old house
on the site to be only a temporary use until additional parking is needed. The Grantor
in this transaction is an employee of the Grantee that acquired the property on October
30, 1992 from Robert Vests for the same price [Deed Book 4410/Page 819].
</TABLE>
-21-
<PAGE> 33
Land Comparable Number 3
<TABLE>
<S> <C>
Parcel Number: 29-01-3-005-3
Location: Northeast corner of 12th Street South and 11th Avenue South, one block north of the
HealthSouth Medical Center.
Size: 45,600 square feet
Sale Date: November 13, 1990
Deed Book/Page: 3972/250
Grantor: Eleventh Avenue United Methodist Church
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $1,500,000
Price Per Square Foot: $32.89
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was a church before being sold to HealthSouth. Part of the improvements have
been removed and the site is used as overflow parking by the hospital. The remainder of
the building is scheduled to be removed in the near future.
</TABLE>
-22-
<PAGE> 34
Land Comparable Number 4
<TABLE>
<S> <C>
Location: Northeast corner of 17th Street and 11th Avenue approximately one-quarter mile south of
the University of Alabama Medical Center and one-half-mile northeast of the subject.
Size: 16,000 square feet
Sale Date: January 2, 1990
Deed Book/Page: 3951/388
Grantor: Jo Anne Jackson
Grantee: Board of Trustees of University of Alabama
Sale Price: $240,000
Price Per Square Foot: $15.00
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel contains an old doctor's building that is boarded up and no longer used. The
building does not contribute any value.
</TABLE>
-23-
<PAGE> 35
Land Comparable Number 5 - Current Listing
<TABLE>
<S> <C>
Location: Northwest corner of 19th Street and 5th Avenue South, just north of the University of
Alabama Medical Center (UAB).
Size: 56,000 square feet
Owner: Mr. Hill
Asking Price: $3,080,000
Price Per Square Foot: $55.00
Shape: Rectangular
Zoning: M-1 Light Industrial, but permitted for the construction of an 11-story, 220,000 square
foot office building.
Utilities: All utilities are available.
Comments: This vacant parcel is across from UAB and a high rise apartment building that is
currently under construction. The owner has been offered approximately $35 per foot.
</TABLE>
-24-
<PAGE> 36
A summary of the land sales and listing is shown as follows:
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 13th Street South 04/93 7,000 $19.29
2 12th Street South 04/93 8,160 $ 8.09
3 12th Street South 11/90 45,600 $32.89
4 17th Street 01/90 16,000 $15.00
5 19th Street Listing 56,000 $55.00
SUBJECT 13TH AVENUE SOUTH $44,616
</TABLE>
Discussion of Land Comparables
LAND COMPARABLE 1 was one parcel of 15 that were assembled by the hospital
around what is now the American Sports Medicine Institute. Downward
adjustments are indicated because of the more level topography of this
comparable parcel and because of its smaller size. The adjustments are shown
on a Land Sale Adjustment Grid at the end of this discussion. The adjusted
price per square foot of this comparable is $16.40 per square foot.
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
by the hospital for future parking needs of the hospital. The improvements
were not considered to have any significant value. A large upward adjustment
is indicated because of the inferior location of this parcel compared to the
subject that is adjacent to the hospital. Downward adjustments are indicated
because of the comparable's level topography and its smaller size. The
adjusted price per square foot of this comparable is $9.30.
-25-
<PAGE> 37
LAND COMPARABLE 3 was a 45,600 square foot parcel north of the hospital that
contained a Methodist Church. The church has relocated and the land is being
used for hospital overflow parking. The remaining building is reportedly
scheduled to be removed in the near future. Downward adjustments are indicated
because of the declining economy since this purchase and because of the level
topography of this site. The adjusted price for this comparable is $28.12 per
square foot.
LAND COMPARABLE 4 is a parcel that UAB purchased for future parking or
development. It is located one-quarter-mile south of the UAB campus. An
upward adjustment is indicated due to the inferior location of this comparable.
A downward adjustment is indicated for size. The adjusted price per square
foot of this comparable is $14.85.
LAND COMPARABLE 5 is the current listing of a site just north of UAB Medical
Center. This site is zoned for high rise development. A significant downward
adjustment is indicated because this is a listing rather than an actual sale.
Downward adjustments are also indicated for location, topography and due to the
superior zoning density of this site. The adjusted price per square foot of
this comparable is $32.73 per square foot. The adjusted land prices range from
$9.30 per square foot to $32.73 per square foot, with the prices of the most
comparable sites being in the middle of this range. Based on our analysis of
the subject versus these comparables, it is our opinion that a land price of
$18.25 per square is representative of the subject site. The average price per
square foot for the land assembled around what is now the American Sports
Medicine Institute was $18.16 per square foot. The subject land value is
estimated as follows:
44,616 SF x $18.25/SF = $814,242
Rounded to: $815,000
========
-26-
<PAGE> 38
<TABLE>
<CAPTION>
L A N D S A L E A D J U S T M E N T G R I D
American Sports Medicine Institute
Birmingham, Alabama
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4 #5
Sale Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Propery Rights Fee Simple Same Same Same Same Same
Adjustment
-------------------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Financing Cash Cash Cash Cash Cash Cash
Adjustment
-------------------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Conditions of Sale None None None None Listing
Adjustment -15%
-------------------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $46.75
Market/Time Effective
Adjustment Sep-93 0% 0% -10% -10% 0%
-------------------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $29.60 $13.50 $46.75
Other Adjustments:
Location Adjustment 0% 30% 0% 20% -15%
Topography Adjustment -5% -5% -5% 0% -5%
Size Adjustment 44,616 -10% -10% 0% -10% 0%
Zoning Adjustment 0% 0% 0% 0% -10%
Net Other Adjustments -15% 15% -5% 10% -30%
FINAL ADJUSTED PRICE PER SF $16.40 $9.30 $28.12 $14.85 $32.73
=========================================================================
</TABLE>
-27-
<PAGE> 39
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $3,176,887 using Marshall Valuation Services. A schedule at
the end of this section shows the estimated replacement cost by category for
the subject building plus estimates of all forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-28-
<PAGE> 40
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was constructed in early 1992, and it is in excellent to
good condition. After taking into consideration all significant physical
factors affecting the subject property, it is judged that the subject has an
effective age equal to its actual age of one and one-half years. The remaining
useful life is estimated to be 43.5 years. This translates into a physical
depreciation estimate of 3.3 percent (1.5 years divided by 45 years). The
amount of depreciation attributable to the property has been estimated on a
straight-line basis, which is founded on the assumption that depreciation of a
property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of one and one-half years and a remaining
useful life of 13.5 years. Therefore, the depreciation rate attributable to
the site improvements on a straight-line basis is estimated to be approximately
10.0 percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciate rate.
We also requested the actual construction costs for the property, since it was
completed in early 1992. The total costs of the improvements was reported by
HealthSouth to be $2,973,780, including architectural and engineering expenses
but excluding any profit. The detailed cost information was not audited by the
appraisers, but is assumed to be correct. The total replacements costs via the
Marshall Valuation Service, excluding the entrepreneurial profit, was
approximately $200,000 higher than the HealthSouth costs.
-29-
<PAGE> 41
The actual development costs of $2,973,780 for the subject property is
considered more reliable than the Marshall numbers because of the
special-purpose nature of the subject building. We, however, believe that an
entrepreneurial profit of 10.0 percent is normal and customary in the market to
encourage new development. Including the entrepreneurial profit of 10.0
percent, or $297,378, the total building replacement costs are $3,271,158.
Total depreciation is estimated at $109,509, based on 3.3 percent depreciation
of building replacement costs and 10.0 percent depreciation of site
improvements. The total depreciated value of the subject replacement costs is
$3,271,158 less $109,509, or $3,161,649. The $815,000 land value is added to
the depreciated replacement costs, for a final Cost Approach value of
$3,976,649.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is rounded to:
$3,975,000
==========
-30-
<PAGE> 42
SUMMARY OF REPLACEMENT COSTS NEW
1313 13th STREET SOUTH
<TABLE>
<CAPTION>
MARSHALL
SERVICE
<S> <C> <C> <C>
Site Preparation $ 36,440
Foundation $ 66,618
Frame $ 282,449
Exterior Walls $ 201,710
Floors $ 166,297
Roof $ 104,300
Roof Cover $ 36,654
Part. & Bit. in $ 609,512
Ceilings $ 170,916
Floor Coverings $ 98,420
Plumbing $ 189,605
HVAC $ 378,910
Electrical $ 203,773
Other Features Owner's Costs $ 538,433
-------------
Total Building Replacement Costs $2,973,780 $3,084,037
Site Improvement Replacement Costs $ 92,850
-----------------------
Total Replacement Cost $2,973,780 $3,176,887
Architect's Fees Plans and Specs (Of Building Costs) 4.00% $ 123,361
Architect's Fees, Supervision (Of Building Costs) 1.50% $ 46,261
Entrepreneurial Overhead, Profit 10.00%
and other Miscellaneous Fees (Of Total Replacement Costs) $ 297,378 $ 317,689
-----------------------
Total Other Costs $ 487,311
Total Project Replacement Cost $3,271,158 $3,664,198
Accrued Depreciation:
Building Replacement Costs 3.3% Straight Line 1.5/45th $ 99,027
Site Improvement Costs 10.0% 1.5 Years/15 Years $ 0
Other Costs 3.5% Blended Rate $ 10,482
--------
Total Physical Depreciation $109,509
Less Total Depreciation (All Forms) ($ 109,509)
-----------
Depreciated Value of Replacement Costs (Based on Actual Costs) $3,161,649
Plus Land Value $ 815,000
-----------
DEPRECIATED COST APPROACH VALUE $3,975,000
ROUNDED: $3,975,000
===========
</TABLE>
-31-
<PAGE> 43
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-32-
<PAGE> 44
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1770 Independence Court, Homewood, Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $ 5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
-------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 122.69
Stabilized Overall Rate: 8.0%
EGIM: 8.91
</TABLE>
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building, so the Grantee/physician would move
his surgical practice to the HealthSouth Medical Center. The location and
building quality for this comparable are very inferior to the subject property.
-33-
<PAGE> 45
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- ------
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
</TABLE>
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
-34-
<PAGE> 46
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
</TABLE>
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-35-
<PAGE> 47
IMPROVED SALE NUMBER 4
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 38A Lenox Pointe, Atlanta, Fulton County, Georgia
Date of Sale: August 26, 1992
Deed Book/Page: 15703/336
Grantor: Cates Construction Company
Grantee: Dr. Laura J. Mills
Sale Price: $184,000
Terms of Sale: Third-party financing had no impact on the purchase price
PROPERTY DATA
Parcel Number: 17-6-4-38A
Building Size: 1,200 square feet
Year Built: 1992
Occupancy at Sale: Vacant/New
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $21,600 $18.00
Vacancy Allowance: $ 1,080 $ 0.90
------- ------
Effective Gross Income: $20,520 $17.10
Estimated Expenses @ $4.50/SF: $ 5,400 $ 4.50
-------- ------
Net Operating Income: $15,120 $12.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $153.33
Stabilized Overall Rate: 8.2%
EGIM: 8.97
</TABLE>
COMMENTS
This is a two-story office building that was constructed specifically for a
dental practice. The construction is wood frame with brick veneer siding. It
is situated among the Lenox Pointe Office buildings at the intersection of
Lenox Road and Buford Highway.
-36-
<PAGE> 48
These four sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
4 38A Lenox Pointe 1,200 $ 184,000 $153.33
Atlanta, Georgia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot to
$153.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE 1 is a Class C professional office building that is located near the
Brookwood Medical Center. An affiliate of HealthSouth Medical Center purchased
this building to entice its physician/owner to move his practice to their
facility. This transaction was reportedly at a market value price. However, a
downward adjustment is still indicated because the building was not marketed as
a vacant building due to this relationship. A downward adjustment to the price
per square foot is indicated because of the smaller size of this comparable.
The building is located at the end of a steep winding road, and has poor
visibility. An upward adjustment is indicated due to this inferior location
compared to the subject. Upward adjustments to this comparable are also
indicated because of the subject's superior construction quality and because
the building is new. The adjusted price per square foot of this comparable is
$130.36.
SALE 2 is the sale of a building purchased by UAB to use as a Medical Genetics
Center. Upward adjustments are indicated because of the subject's superior
location, and because of the older age of this comparable. An upward
adjustment to the price per
-37-
<PAGE> 49
square foot of this comparable is also indicated because it is larger than the
subject building. The adjusted price for this comparable is $121.99 per square
foot.
SALE 3 was the sale of a three-building professional office facility that is
located approximately one-quarter-mile from the North Fulton Medical Center in
Roswell, Georgia. A downward adjustment is indicated because 80 percent of
this facility was net leased to the hospital. An upward adjustment is
indicated because of the subject's slightly superior location. The adjusted
price per square foot of this comparable is $125.31.
SALE 4 was the August 1992 sale of a small dental office building in Atlanta,
Georgia. A large downward adjustment to the price per foot of this comparable
is indicated because of the comparable's small size. Upward adjustments are
indicated for location and for quality of improvements. The adjusted price for
this comparable is $145.66 per square foot.
The adjusted prices per square foot range from $121.99 to $145.66, with most of
the adjusted sales prices in the lower end of this range. An adjusted price of
$125.00 per square foot is representative of the subject property. Based on
this analysis, the market value of the subject property by the Direct Sales
Comparison Approach, as of September 29, 1993, the effective date of this
report, is calculated as follows:
27,800 SF x $125.00/SF = $3,475,000
-38-
<PAGE> 50
I M P R O V E D S A L E A D J U S T M E N T G R I D
American Sports Medicine Institute
Birmingham, Alabama
<TABLE>
<CAPTION>
Subject Improved Sale Improved Sale Improved Sale Improved Sale
Element #1 #2 #3 #4
<S> <C> <C> <C> <C>
Sale Price/SF $122.69 $84.13 $139.23 $153.33
Property Rights Fee Simple Same Same Same Same
Adjustment
--------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $153.33
Financing Cash Cash Cash Cash Cash
Adjustment
--------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $153.33
Conditions of Sale Relationship None None None
Adjustment -15.0%
--------------------------------------------------------
Adjusted Price/SF $104.29 $84.13 $139.23 $153.33
Market/Time Effective
Adjustment Sep - 93 0% 0% 0% 0%
--------------------------------------------------------
Adjusted Price/SF $104.29 $84.13 $139.23 $153.33
Other Adjustments
Location Adjustment 20% 20% 5% 10%
Age/Condition Adjustment 10% 15% 0% 0%
Size Adjustment -15% 10% 0% -25%
Quality Adjustment 10% 0% 0% 10%
Leasing
Other Adjustment 0% 0% -15% 0%
Net Other Adjustments 25% 45% -10% -5%
FINAL ADJUSTED PRICE PER SF $130.36 $121.99 $125.31 $145.66
========================================================
</TABLE>
-39-
<PAGE> 51
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for each property are not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for each property times the rentable building area. We reserve the right to
modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
As discussed earlier, this report assumes that the tenant finish work on the
top floor of this building will be completed prior to the prospective sale to
the REIT.
-40-
<PAGE> 52
The master lease rate for the subject property will be $12.00 per square foot
of net rentable area. The gross income for the subject property is calculated
as follows:
27,800 SF x $12.00/SF = $333,600
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$16,680, based on the management experience of other properties. The net
operating income for the property is $333,600 less $16,680, or $316,920.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison
Approach Section of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Independence Court March 1993 8.0%
Birmingham, Alabama
2 20th Street South December 1992 9.0%
Birmingham, Alabama
3 Upper Hembree November 1991 10.1%
Roswell, Georgia
4 Lenox Pointe August 1992 8.2%
Atlanta, Georgia
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
8.0 percent to 10.1 percent.
-41-
<PAGE> 53
Since the market net income per square foot for the subject property is
estimated to be the master lease rate of $12.00, a capitalization rate in the
middle of this range, or 9.0 percent, is considered appropriate for the
property.
It is, therefore, our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income\OAR = Estimated Value
$316,920\.090 = $3,521,333
Rounded to: $3,520,000
==========
-42-
<PAGE> 54
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the 1313 13th Street South Office Building. The three approaches are
summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . . . $3,975,000
Direct Sales Comparison Approach . . . . . . . . . . . . $3,475,000
Income Approach . . . . . . . . . . . . . . . . . . . . $3,520,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources, including an
estimator service and the actual costs provided by the building owners. The
Cost Approach is usually considered a good indicator of value for a new special
purpose property such as the subject. Some actual costs, however, may not
translate into a higher value in the eyes of some prospective investors or
property buyers. Overall, this approach is considered a good indicator of
value.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but two of the four sales were not properties located in the
Birmingham market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The subject property is a special
purpose facility that would likely be occupied by one or a very few number of
tenants. For this reason, the Income Approach is only considered a fair
indicator of value for the subject.
Based on this analysis, it is our opinion that the market value of the 1313
13th Street South Office Building, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
$3,500,000
==========
-43-
<PAGE> 1
EXHIBIT 10.20
AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING
BIRMINGHAM, ALABAMA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
January 17, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH PROFESSIONAL BUILDING
1222 14TH AVENUE SOUTH
BIRMINGHAM, ALABAMA 35205
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $12.50 per
rentable square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
<PAGE> 3
HealthSouth Corporation
January 17, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, page 21, 10th Edition, published by The
Appraisal Institute].
The subject property is a five-story professional office building containing a
basement, a doctor's parking deck, and 42,463 rentable square feet of office
space. In addition, there are six staggered public parking deck floors
adjacent to the professional building. The building is a Class B facility,
with a steel frame and poured-in-place concrete structure and brick veneer
exterior walls. It was constructed in 1981. The building is currently 89
percent occupied.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Professional Building, as of September 29, 1993, to be:
$4,750,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
<PAGE> 4
HealthSouth Corporation
January 17, 1994
Page Three
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:jef
094-1519.2
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Michael P. Bates has made a personal inspection of the property that
is the subject of this report. Patrick J. Simers has not made a
personal inspection of the property.
The following have provided significant professional assistance to the
person signing this report: Michael P. Bates
/s/ Patrick J. Simers /s/ Michael P. Bates
--------------------- --------------------
Patrick J. Simers Michael P. Bates
Managing Director Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 29, 1993
Property Identification: HealthSouth Professional Office Building
Property Location: 1222 14th Avenue South
Birmingham, Alabama
Interest Appraised: Leased Fee Estate
Gross Building Area: 53,127 square feet
Net Rentable Area: 42,463 square feet
Subject Land Size: 37,556 square feet, or 0.8622 acres
Improvements Description: Five-story, steel frame and concrete structure, Class B professional office
building that was constructed in 1981.
Occupancy Percentage: 89%
CONCLUSIONS
Cost Approach: $4,700,000
Direct Sales Comparison Approach: $4,585,000
Income Approach: $4,800,000
Final Value Estimate: $4,750,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 2
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 4
Market Data - Metropolitan Birmingham 6
DESCRIPTIVE DATA 11
Neighborhood Analysis 11
Zoning 12
Real Estate Taxes and Assessments 12
Site Analysis 13
Building and Site Improvements 14
HIGHEST AND BEST USE 16
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 21
Direct Sales Comparison Approach 34
Income Approach 42
CORRELATION AND CONCLUSION 45
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C1 - Metropolitan Area Map
Exhibit C2 - Neighborhood Map
Exhibit D1 - Tax Plat Map
Exhibit D2 - Tax Appraisal Summary Sheet
Exhibit E - Land Sale Location Map
Exhibit F1 - Building Floor Plans
Exhibit F2 - Leasing Status Schedule
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparable Location Map
Exhibit J - Rent Comparables Summary
Exhibit K - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is HealthSouth Professional Office Building
located at 1222 14th Avenue South in Birmingham, Alabama. The building is a
five-story building that includes a basement leased to the adjacent hospital, a
doctor's parking deck and three stories of office space. The facility also
includes a six-level parking deck that is attached to the building.
The property was converted to a condominium in 1983. The premises that is the
subject of this report excludes the two office suites that have been owned by
their doctor/occupants since 1983. The tax parcels are listed by individual
office suites beginning with 29-01-3-009-07.302 through 29-01-3-009-07.335.
The office building is situated on 40,150 square feet of land. However, since
6.46 percent of the leasable area in the building is privately owned, the
subject parcel size must be reduced by 6.46 percent, or 2,594 square feet. The
net subject land size is 37,556 square feet.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property,
excluding the two suites owned by doctors, would be included in that sale.
-1-
<PAGE> 13
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, page 123, 10th Edition, published by The
Appraisal Institute].
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
-2-
<PAGE> 14
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, Page 21, 10th Edition, published by The
Appraisal Institute].
HISTORY OF THE PROPERTY
The subject professional building was reportedly constructed by the South
Highlands Hospital in 1981 and converted to a condominium office building in
1983. Two of the office suites, containing 6.464 percent of the leasable area
in the building were sold to two doctor practices in 1983. The hospital
provided long-term financing for most of the purchase price at the time of
those sales.
HealthSouth Medical Center, Inc., acquired the assets of the subject property
and the South Highlands Hospital in November 1989 [Deed Book 3726/Page 014].
Since this sale, HealthSouth has acquired a number of parcels around the
hospital. A new main hospital building and the Alabama Rehabilitation Center
were constructed in 1991. The American Sports Medicine Institute (ASMI) was
added in 1992.
The subject professional office building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
-3-
<PAGE> 15
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
-4-
<PAGE> 16
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
-5-
<PAGE> 17
MARKET DATA - METROPOLITAN BIRMINGHAM
Birmingham is recognized as a leading financial, transportation, communication,
manufacturing, healthcare and distribution center for the southeast United
States. The region's central location within the state of Alabama has been a
major factor in its economic success.
The Birmingham Metropolitan Statistical Area (MSA) consists of five counties
with an estimated 1992 population of 917,100. This ranks the metropolitan area
as the 46th largest in the county. The larger 16-county primary market area
contains a population of 1,341,500. A map of the Birmingham MSA is shown in
the Exhibit Section of this report.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
Historical data and growth projections reflect the economic climate of an area
and have both a direct and indirect impact on property values. Table 1 on the
next page shows the county population totals by decade. Table 1 also shows the
annual percentage increases in population for the individual counties in the
Birmingham MSA.
The fastest annual population growth in the Birmingham MSA occurred in the
decade of the 1980s. The rate of growth in the 1980s; however, was only 1.13
percent per year, compared to 2.0 percent to 3.0 percent per year for many
other large Southeast US metropolitan cities during the decade. The City of
Birmingham in Jefferson County, and Walker County experienced population
declines during the most recent decade.
-6-
<PAGE> 18
TABLE 1
POPULATION BY COUNTY
<TABLE>
<CAPTION>
1970 1980 1990
COUNTY CENSUS CENSUS CENSUS
<S> <C> <C> <C>
Blount 26,853 36,459 39,248
Jefferson 644,991 671,392 651,525
City of Birmingham* 300,910 286,799 265,968
Saint Claire 27,956 41,205 50,009
Shelby 38,037 66,298 99,358
Walker 56,246 68,660 67,670
TOTAL MSA 794,083 884,014 907,810
* City of Birmingham included in Jefferson County totals.
</TABLE>
AVERAGE PERCENTAGE INCREASE
<TABLE>
<CAPTION>
COUNTY 1970s 1980s 1990s
<S> <C> <C> <C>
Blount 3.58% 0.76% N/A
Jefferson 0.41% -0.30% N/A
Saint Clair 4.74% 2.14% N/A
Shelby 7.43% 4.99% N/A
Walker 2.21% -0.14% N/A
TOTAL MSA 1.13% 0.27% 0.5%
Source: Birmingham Area Chamber of Commerce
</TABLE>
Jefferson County, excluding the City of Birmingham, grew 1.18 percent per year
in population during the 1970s, but experienced little growth during the 1980s.
The estimated population growth rate so far in the 1990s is still slow, but
faster than experienced in the 1980s.
-7-
<PAGE> 19
HOUSING
The growth in housing in the Birmingham MSA was also slow but stable during the
1980s. As was the case in other cities during the decade, much of the new
housing occurred due to a decline in the average household size. In the
Birmingham MSA, there were 3.01 persons per household in 1970, compared to 2.41
persons per household in 1990.
So far in the 1990s, single-family housing sales have been brisk, with record
sales in 1992 and thus far in 1993. The area ranks 48th in new homes built in
1993, with 3,510 new homes the first half of 1993. New apartment construction
totaled over 6,000 units from 1987 through 1990, or an average of 1,545 per
year. New multi-family units only totaled 40 in 1992 and 140 for the first six
months of 1993. Most of the new apartment construction has been concentrated
south of the City of Birmingham along the U.S. Highway 280 and U.S. Highway 31
corridors.
Looking forward, the average household size is not expected to continue to
decline indefinitely. The growth in housing, therefore, should equal the
population growth plus the replacement of obsolete housing.
EMPLOYMENT
In the 1980s, the average annual growth in employment in the MSA was 3,520,
compared to 8,290 per year during the 1970s. So far in the 1990s, the region
is averaging 3,233 new jobs each year. The unemployment rate at the end of
1992 was 6.1 percent, compared to 7.3 percent and 7.4 percent for the state of
Alabama and the U.S., respectively.
Table 2 on the following page shows the diversity in employment in the
Birmingham MSA.
-8-
<PAGE> 20
TABLE 2
EMPLOYMENT BY SECTOR
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL
SECTOR LABOR DOLLARS ESTABLISHMENTS
<S> <C> <C>
Health Services 11.7% 6.5%
Other Services 14.0% 26.5%
Manufacturing 15.7% 5.7%
Construction 12.0% 8.8%
Transp., Comm. & Utilities 13.8% 3.6%
Wholesale Trade 10.2% 9.5%
Retail Trade 9.8% 25.2%
Finance, Insurance, & Real Estate 9.1% 9.2%
Mining & Agricultural 3.5% 1.4%
Miscellaneous 0.2% 3.6%
REGION 100.0% 100.0%
Source: Birmingham Chamber of Commerce
</TABLE>
In 1970, manufacturing accounted for 28.3 percent of the employment in the MSA.
By 1991, manufacturing only accounted for 13.1 percent of the area's
employment. The manufacturing jobs have been replaced with service jobs. The
service sector accounts for 25.4 percent of all jobs in 1991, versus 14.3
percent in 1970.
As of April 1993, the largest employers in the Birmingham MSA are as follows:
University of Alabama 15,696
U.S. Government 9,501
South Central Bell 7,450
State of Alabama 6,304
Birmingham City Schools 4,733
Alabama Power Company 4,611
-9-
<PAGE> 21
INCOME
Jefferson County and the Birmingham MSA are very representative of the average
per capita income and average household income in the United States. Table 3
below shows the area's income averages compared to the entire U.S.
TABLE 3
<TABLE>
<CAPTION>
Average Per Percent Average Percent
Capita of U.S. Household of U.S.
County Income Average Income Average
<S> <C> <C> <C> <C>
Blount $13,135 70% $27,219 77%
Jefferson $18,624 100% $34,235 97%
St. Clair $13,056 70% $26,750 76%
Shelby $15,935 85% $44,813 115%
Walker $14,556 78% $26,585 75%
MSA $17,479 94% $34,315 100%
</TABLE>
Jefferson County has approximately the same per capita income and household
income as the national average.
In summary, metropolitan Birmingham has experienced a slow but stable growth
rate in recent years. Its economic base is diverse. National trends of lower
manufacturing work forces and lower household sizes have also been the
experience in Birmingham.
-10-
<PAGE> 22
DESCRIPTIVE DATA
NEIGHBORHOOD ANALYSIS
The subject neighborhood is identified as the "Southside" area of Birmingham.
This area is just south of the central business district (CBD) of Birmingham
and east of the Red Mountain Expressway. This neighborhood is bounded on the
north by The University of Alabama at Birmingham (UAB) on the east by the Red
Mountain Expressway (U.S. Highway 31), on the south by Red Mountain with the
famous Vulcan Statue, and on the west by Interstate 65. A map of the
neighborhood is located in the Exhibit Section.
The Southside includes many of the city's old restored homes. The
Highland/Five Points area has undergone considerable renovation, and is
becoming a restaurant and entertainment center. The subject medical office
building, which is part of the HealthSouth Medical Center, is located
one-quarter-mile west of the Highland/Five Points area, and just north of Red
Mountain. The upscale residential communities of Homewood and Mountain Brook
are located just south and east of the Southside.
The property is situated at 1222 14th Street South. The block bounded by 11th
Avenue South, 14th Avenue South, 12th Street South and 13th Street South
contains the subject building and the HealthSouth Medical Center. East, south
and west of the property are primarily older residential areas. Some homes
have been converted to commercial uses around the hospital, and a few small
blocks have been redeveloped with small apartment buildings.
North of the HealthSouth Medical Center is UAB, which is reportedly now the
second largest university in Alabama. The University has been growing rapidly
and has absorbed most of the land uses in a six by fifteen block area. The UAB
Medical Center is considered by some to be in the same class as the Mayo Clinic
in some medical research fields.
In summary, the neighborhood is an older residential area that is undergoing
renovation and restoration. Development in the area is being driven primarily
by hospital growth, which includes the subject HealthSouth Medical Center, the
UAB Medical Center and St. Vincent's Medical Center. Although medical service
is the focus of new
-11-
<PAGE> 23
development, new retail, restaurant and residential development is also active
in the area.
ZONING
The subject property is zoned "O & I, Office and Institutional District", by
the City of Birmingham. According to the City zoning requirements, this
district provides "for the orderly arrangement of institutional, clerical and
administrative space." Permitted uses include public, semi-private or private
office; public or semi-private, religious, educational or charitable
institutions; and, other similar uses consistent with this zoning code's
purpose and surrounding uses. This zoning shall not include properties with
industrial characteristics, communal living facilities or correctional
institutions.
Other general conditions of the O & I zoning include a minimum lot width of 50
feet, setbacks from fronting streets of 25 feet, and setbacks for side yards
and rear boundaries of 10 feet and 20 feet, respectively. A larger side buffer
of 25 feet is required when the lot joins a residential district. Off-street
parking for medical institutional facilities is three spaces per 1,000 square
feet gross office area plus one space for each 400 square feet of office area
above 10,000 square feet. There is approximately 180 parking spaces, or 4.17
per 1,000 square feet of gross office area.
A letter of zoning compliance from the City of Birmingham is recommended for an
official determination regarding any zoning conformity issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in the City of Birmingham, and subject to the
taxing authority of the City and Jefferson County. Commercial properties in
the City and County are assessed at 20 percent of tax-appraised value for tax
purposes. The 1993 millage rate is $69.50 per $1,000 of assessed value.
The individual office suites are valued and taxed separately, since the
property is a condominium. The total tax-appraised value of the subject office
condominiums owned by HealthSouth is $4,365,704. The total City and County
property taxes due in 1993 are $60,683.28. A summary of the taxes is shown in
the Exhibit Section.
-12-
<PAGE> 24
SITE ANALYSIS
The subject site is rectangularly-shaped and fronts 182.5 feet on the north
side of 14th Avenue South and 220 feet along the east side of 13th Street
South. The entire site contains 40,150 square feet, or 0.92172 acres. Since
6.46 percent of the building area is owned by two doctor practices, 6.46
percent of the site must be excluded for valuation purposes. The remaining
subject acreage is 37,556 square feet, or 0.8622 acres. A legal description of
the subject condominiums was provided to the appraisers and is included in the
Exhibit Section. A survey of the property was not available to the appraisers.
The parcel size was determined by the dimensions on a tax plat map that is also
in the Exhibit Section. We reserve the right to modify our report if the
actual acreage is found to vary significantly from the tax plat acreage.
The topography of the site slopes slightly downward from 14th Avenue South to
the front of the new HealthSouth hospital facing 11th Avenue South. The south
end of the site contains a parking deck. Just north of the parking deck is the
subject medical office building. South of the subject medical office building
is the new Alabama Sports Medicine and Orthopaedic Center and the new
HealthSouth Hospital. The older HealthSouth Hospital buildings are situated
west of the subject building. The subject building is at the crest of a hill
and does not contain any flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
Other site improvements consists of general landscaping, asphalt paving,
concrete paving and curbing, some shrubs and general signage. Seven staggered
levels of parking deck provide parking for approximately 180 cars.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Jefferson County tax plat
map is included in the Exhibit Section.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
-13-
<PAGE> 25
BUILDING AND SITE IMPROVEMENTS
BUILDING
The 1222 14th Avenue South Office Building was reportedly constructed in 1981.
It contains 56,244 gross square feet and 45,580 rentable square feet. The
subject building contains 3,117 square feet in two suites that were sold to
doctor/owners when the building was converted to a condominium in 1983.
Excluding these two suites, the building contains 53,127 gross square feet and
42,463 rentable square feet. The rentable area excludes the common area rest
rooms, the common area hallways, mechanical rooms and vertical penetrations
(stairwells, elevator shafts). The building area by floor and suite is shown
on a Leasing Status Schedule in the Exhibit Section of this report.
The building is a five-story, reinforced concrete and steel structure building,
with a brick veneer exterior. Only the storage areas in the basement of the
building are sprinklered. The building has a metal deck roof structure, with a
waterproof membrane roof and large-stone gravel covering. Ceiling finishes
consist of acoustical ceiling tiles and recessed fluorescent lighting. The
interior walls are gypsum board on metal framing. Most of the hallways have
vinyl flooring, and the suites are mostly carpeted. Windows and doors are
metal framed, and interior doors are solid-core wood.
Heating and air conditioning is supplied via a Carrier chiller and a Cleaver
Brooks boiler that are located in the basement. Additional air handlers are
located on the roof of the building. Two 91-gallon Rudd water heaters are also
in the basement.
A parking floor is located above the basement of the five-story structure.
This parking floor contains the physician's parking. There are three floors of
office space above this parking floor. The second floor parking area connects
with a staggered, six-level parking deck on the south side of the building.
The top floor of this parking decks connects with the third floor of the
professional building, or to the first floor of office space.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
-14-
<PAGE> 26
Condition of Improvements and Obsolescence
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
-15-
<PAGE> 27
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, Page 45, 10th Edition published by The Appraisal
Institute].
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
-16-
<PAGE> 28
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "O-I, Office-Institutional". Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail
and restaurants, office/institutional, hotels, hospitals and other
medical-oriented uses.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. New hospital
related development on the north and east sides of the building indicate that
new development is financially feasible. HealthSouth Medical Center, UAB
Medical Center and St. Vincent Medical Center have all recently built new
medical office facilities.
-17-
<PAGE> 29
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
As Improved
The subject site is currently improved with a 42,463 rentable square foot
office building, with an adjacent parking deck and associated site
improvements. The purpose of this discussion is to determine whether to leave
the improvements as they are, to modify the improvements or to remove the
improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the City
of Birmingham zoning guidelines. Under the zoning, the property could remain
as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. It would, however,
be financially feasible to correct any deferred maintenance.
-18-
<PAGE> 30
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exists.
This will enable to the property to remain competitive in the leasing market.
The highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
-19-
<PAGE> 31
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-20-
<PAGE> 32
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arms-length transactions that conveyed a fee simple interest, and only
real property was included in the transactions.
-21-
<PAGE> 33
Land Comparable Number 1
<TABLE>
<S> <C>
Parcel Number: 29-01-3-008-7
Location: East side of 13th Street South across from the new Alabama Sports Medicine and Orthopedic
Center and the new HealthSouth Hospital.
Size: 7,000 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/195
Grantor: Randall J. Westbrook
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $135,000
Price Per Square Foot: $19.29
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was part of 15 parcels assembled from 1990-1992 for the construction of the
Sports Medicine Institute and additional parking. The average price for the 15 parcels
was $18.16 per square foot. The Grantor in this transaction is an employee of the
Grantee that acquired the property on July 10, 1992, from Dwain Pitts, et al, for the
same price [Deed Book 4313/Page 978].
</TABLE>
-22-
<PAGE> 34
Land Comparable Number 2
<TABLE>
<S> <C>
Parcel Number: 29-01-3-010-4
Location: West side of 12th Street South adjacent to an existing parking lot across from the old
entrance to the HealthSouth Medical Center.
Size: 8,160 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/197
Grantor: Vicki E. Owens
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $66,000
Price Per Square Foot: $8.07
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel was purchased for future parking needs by the hospital. The hospital
purchased the property based solely on land value and considered the forty year old house
on the site to be only a temporary use until additional parking is needed. The Grantor
in this transaction is an employee of the Grantee that acquired the property on October
30, 1992 from Robert Vests for the same price [Deed Book 4410/Page 819].
</TABLE>
-23-
<PAGE> 35
Land Comparable Number 3
<TABLE>
<S> <C>
Parcel Number: 29-01-3-005-3
Location: Northeast corner of 12th Street South and 11th Avenue South, one block north of the
HealthSouth Medical Center.
Size: 45,600 square feet
Sale Date: November 13, 1990
Deed Book/Page: 3972/250
Grantor: Eleventh Avenue United Methodist Church
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $1,500,000
Price Per Square Foot: $32.89
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was a church before being sold to HealthSouth. Part of the improvements have
been removed and the site is used as overflow parking by the hospital. The remainder of
the building is scheduled to be removed in the near future.
</TABLE>
-24-
<PAGE> 36
Land Comparable Number 4
<TABLE>
<S> <C>
Location: Northeast corner of 17th Street and 11th Avenue approximately one-quarter-mile south of
the University of Alabama Medical Center and one-half-mile northeast of the subject.
Size: 16,000 square feet
Sale Date: January 2, 1990
Deed Book/Page: 3951/388
Grantor: Jo Anne Jackson
Grantee: Board of Trustees of University of Alabama
Sale Price: $240,000
Price Per Square Foot: $15.00
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel contains an old doctor's building that is boarded-up and no longer used. The
building does not contribute any value.
</TABLE>
-25-
<PAGE> 37
Land Comparable Number 5 - Current Listing
<TABLE>
<S> <C>
Location: Northwest corner of 19th Street and 5th Avenue South, just north of the University of
Alabama Medical Center (UAB).
Size: 56,000 square feet
Owner: Mr. Hill
Asking Price: $3,080,000
Price Per Square Foot: $55.00
Shape: Retectangular
Zoning: M-1 Light Industrial, but permitted for the construction of an 11-story, 220,000 square
foot office building.
Utilities: All utilities are available.
Comments: This vacant parcel is across from UAB and a high rise apartment building that is
currently under construction. The owner has been offered approximately $35 per foot.
</TABLE>
-26-
<PAGE> 38
A summary of the land sales and listing is shown as follows:
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 13th Street South 04/93 7,000 $19.29
2 12th Street South 04/93 8,160 $ 8.07
3 12th Street South 11/90 45,600 $32.89
4 17th Street 01/90 16,000 $15.00
5 19th Street Listing 56,000 $55.00
SUBJECT 14TH AVENUE SOUTH 37,556
</TABLE>
Discussion of Land Comparables
LAND COMPARABLE 1 was one parcel of 15 that were assembled by the hospital
around what is now the American Sports Medicine Institute. Downward
adjustments are indicated because of the more level topography of this parcel
and because of its smaller size. The adjustments are shown on a Land Sale
Adjustment Grid at the end of this discussion. The adjusted price per square
foot of this comparable is $17.98 per square foot.
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
by the hospital for future parking needs of the hospital. The improvements
were not considered to have any significant value. A large upward adjustment
is indicated because of the inferior location of this parcel compared to the
subject that is adjacent to the hospital. Downward adjustments are indicated
because of the comparable's level topography and its smaller size. The
adjusted price per square foot of this comparable is $9.71.
-27-
<PAGE> 39
LAND COMPARABLE 3 was a 45,600 square foot parcel north of the hospital that
contained a Methodist Church. The church has relocated and the land is being
used for hospital overflow parking. The remaining building is reportedly
scheduled to be removed in the near future. Downward adjustments are indicated
because of the declining economy since this purchase and because of the level
topography of this site. The adjusted price for this comparable is $28.12 per
square foot.
LAND COMPARABLE 4 is a parcel that UAB purchased for future parking or
development. It is located one-quarter-mile south of the UAB campus. An
upward adjustment is indicated due to the inferior location of this comparable.
A downward adjustment is indicated for size. The adjusted price per square
foot of this comparable is $15.53.
LAND COMPARABLE 5 is the current listing of a site just north of UAB Medical
Center. This site is zoned for high-rise development. A significant downward
adjustment is indicated because this is a listing rather than an actual sale.
Downward adjustments are also indicated for location, topography and due to the
superior zoning. The adjusted price per square foot of this comparable is
$30.94 per square foot.
The adjusted land prices range from $9.71 per square foot to $30.94 per square
foot, with the prices of the most comparable sites being in the middle of this
range. Based on our analysis of the subject versus these comparables, it is
our opinion that a land price of $18.50 per square is representative of the
subject site. The average price per square foot for the land assembled around
what is now the American Sports Medicine Institute was $18.16 per square foot.
The subject land value is estimated as follows:
37,556 SF x $18.50/SF = $694,786
Rounded to: $695,000
========
-28-
<PAGE> 40
L A N D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building
Birmingham, Alabama
<TABLE>
<CAPTION>
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4 #5
<S> <C> <C> <C> <C> <C>
Sale Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Property Rights Fee Simple Same Same Same Same Same
Adjustment
------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Financing Cash Cash Cash Cash Cash Cash
Adjustment
------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Conditions of Sale None None None None Listing
Adjustment -25%
------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $41.25
Market/Time Effective
Adjustment Sep - 93 0% 0% -10% -10% 0%
------------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $29.60 $13.50 $41.25
Other Adjustments
Location Adjustment 0% 30% 0% 20% -10%
Topography Adjustment -5% -5% -5% 0% -5%
Size Adjustment -5% -5% 0% -5% 0%
Zoning Adjustment 0% 0% 0% 0% -10%
Net Other Adjustments -10% 20% -5% 15% -25%
FINAL ADJUSTED PRICE PER SF $17.36 $9.71 $28.12 $15.53 $30.94
============================================================
</TABLE>
-29-
<PAGE> 41
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $5,767,449.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-30-
<PAGE> 42
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was constructed in 1981, and it is in average to good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to its actual age of twelve years. The remaining useful life is
estimated to be 33 years. This translates into a physical depreciation
estimate of 26.7 percent (12 years divided by 45 years). The amount of
depreciation attributable to the property has been estimated on a straight-line
basis, which is founded on the assumption that depreciation of a property
occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of seven years and a remaining useful life of
8 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 46.7
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciate rate.
The total depreciation for the building is estimated to be $1,570,836, and the
depreciated value of the building replacement costs to be $4,196,613.
Approximately 4.64 percent of the subject building was sold to physician's
practices and is not considered part of the subject premises. Subtracting 4.64
percent of the depreciated building replacement costs, or $194,723, leaves
$4,001,890 as the Depreciated Replacement Costs for the subject premises.
-31-
<PAGE> 43
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$4,700,000
==========
-32-
<PAGE> 44
SUMMARY OF REPLACEMENT COSTS NEW
1222 14th AVENUE SOUTH
<TABLE>
<CAPTION>
DOLLARS
<S> <C> <C> <C>
Site Preparation $ 52,516
Foundation $ 117,411
Frame $ 513,738
Exterior Walls $ 287,208
Floors $ 392,233
Roof $ 100,716
Roof Cover $ 35,394
Part. & Blt. in $ 1,074,228
Ceilings $ 254,796
Floor Coverings $ 154,706
Plumbing $ 291,696
HVAC $ 568,459
Electrical $ 359,139
Other Features (Includes parking deck) $ 654,289
-----------
Total Building Replacement Costs $ 4,856,529
Site Improvement Replacement Costs $ 143,780
-----------
Total Replacemsnt Cost $ 5,000,309
Architect's Fees Plans and Specs. (Of Building Costs) 4.00% $ 194,261
Architect's Fees, Supervision (Of Building Costs) 1.50% $ 72,848
Entrepreneurial Overhead, Profit, 10.00%
and Other Miscellaneous Fees (Of Total Replacement Costs) $ 500,031
-----------
Total Other Costs $ 767,140
Total Project Replacement Cost $ 5,767,449
Accrued Depreciation:
Building Replacement Costs 26.7% Straight Line 12/45ths $1,294,751
Site Improvement Costs 46.7% 7 Years/15 Years $ 67,145
Other Costs 27.2% Blended Rate $ 208,940
----------
Total Physical Depreciation $1,570,836
Functional & Economic Depreciation $ 0
-----------
Less Total Depreciation (All Forms) $(1,570,836)
-----------
Depreciated Value of Replacement Costs - Entire Building $ 4,196,613
Less: 4.64% of Total Costs due to Doctor/owned Suites $ (195,133)
-----------
Depreciated Value of Replacement Costs - Subject Premises $ 4,001,480
Plus Land Value $ 695,000
-----------
DEPRECIATED COST APPROACH VALUE $ 4,696,480
ROUNDED TO: $ 4,700,000
===========
</TABLE>
-33-
<PAGE> 45
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arms-length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
A secondary unit of comparison used in this analysis is a effective gross
income multiplier (EGIM). This gives an indication of market value as a
multiple of stabilized property income. This method is less reliable than the
sales per square foot method, and will be given less emphasis for this reason.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-34-
<PAGE> 46
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1770 Independence Court, Homewood,
Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $ 5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
-------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 122.69
Stabilized Overall Rate: 8.0%
EGIM: 8.91
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building, so the Grantee/physician would move
his surgical practice to the HealthSouth Medical Center. The location and
building quality for this comparable are very inferior to the subject property.
</TABLE>
-35-
<PAGE> 47
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the
address 908 20th Street South in Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of
Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- ------
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
</TABLE>
-36-
<PAGE> 48
SITE PLAN EXHIBIT F
(Map)
HEALTHSOUTH REHABILITATION CENTER
OF LITTLE ROCK
LITTLE ROCK, ARKANSAS
<PAGE> 49
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in
Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
</TABLE>
-37-
<PAGE> 50
IMPROVED SALE NUMBER 4
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 38A Lenox Pointe, Atlanta, Fulton
County, Georgia
Date of Sale: August 26, 1992
Deed Book/Page: 15703/336
Grantor: Cates Construction Company
Grantee: Dr. Laura J. Mills
Sale Price: $184,000
Terms of Sale: Third-party financing had no impact
on the purchase price
PROPERTY DATA
Parcel Number: 17-6-4-38A
Building Size: 86,206 square feet
Year Built: 1992
Occupancy at Sale: Vacant/New
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $21,600 $18.00
Vacancy Allowance: $ 1,080 $ 0.90
------
Effective Gross Income: $20,520 $17.10
Estimated Expenses @ $4.50/SF: $ 5,400 $ 4.50
------- ------
Net Operating Income: $15,120 $12.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $153.33
Stabilized Overall Rate: 8.2%
EGIM: 8.97
COMMENTS
This is a two-story office building that was constructed specifically for a
dental practice. The construction is wood-frame with brick veneer siding. It
is situated among the Lenox Pointe Office buildings at the intersection of
Lenox Road and Buford Highway.
</TABLE>
-38-
<PAGE> 51
These four sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
4 38A Lenox Pointe 86,205 $ 184,000 $153.33
Atlanta, Georgia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot to
$153.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE 1 is a Class C professional office building that is located near the
Brookwood Medical Center. An affiliate of HealthSouth Medical Center purchased
this building to entice its physician/owner to move his practice to their
facility. This transaction was reportedly at a market value price. However, a
downward adjustment is still indicated because the building never was marketed
as a vacant building due to this relationship. The building is located at the
end of a steep winding road, and has poor visibility. An upward adjustment is
indicated due to this inferior location compared to the subject. An offsetting
downward adjustment to the price per square foot is indicated because of the
smaller size of this comparable. An upward adjustment to this comparable is
indicated because of the subject's superior construction quality. A downward
adjustment is indicated because the subject building is a condominium causing
its marketability to be somewhat restricted. The adjusted price per square
foot of this comparable is $109.50.
-39-
<PAGE> 52
SALE 2 is the sale of a building purchased by UAB to use as a Medical Genetics
Center. Upward adjustments are indicated because of the subject's superior
location, and because of the older age of this comparable. A downward
adjustment is indicated because the subject building is a condominium causing
its marketability to be restricted. The adjusted price for this comparable is
$105.16 per square foot.
SALE 3 was the sale of a three-building professional office facility that is
located approximately one-quarter-mile from the North Fulton Medical Center in
Roswell, Georgia. Downward adjustments to the price per square foot of this
comparable are indicated because it is new and smaller than the subject
facility. A downward adjustment is also indicated because 80 percent of this
facility was net leased to the hospital. A further downward adjustment is
indicated because the subject building is a condominium causing its
marketability to be restricted. Upward adjustments are indicated due to the
subject's superior location and construction quality. The adjusted price per
square foot of this comparable is $111.38.
SALE 4 was the August 1992 sale of a small dental office building in Atlanta,
Georgia. A large downward adjustment to the price per foot of this comparable
is indicated because of the comparable's small size. Downward adjustments are
also indicated because this building is new and because the subject facility is
a condominium. Upward adjustments are indicated for location and for quality.
The adjusted price for this comparable is $107.33 per square foot.
The adjusted prices per square foot range from $105.16 to $111.38. An adjusted
price of $108.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject property by the Direct
Sales Comparison Approach, as of September 29, 1993, the effective date of this
report, is calculated as follows:
42,463 SF x $108.00/SF = $4,586,004
Rounded to: $4,585,000
==========
-40-
<PAGE> 53
I M P R O V E D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building
Birmingham, Alabama
<TABLE>
<CAPTION>
Subject Improved Sale Improved Sale Improved Sale Improved Sale
Element #1 #2 #3 #4
<S> <C> <C> <C> <C>
Sale Price/SF $122.69 $ 84.13 $139.23 $153.33
Property Rights Fee Simple Same Same Same Same
Adjustment
------------------------------------------------------------
Adjusted Price/SF $122.69 $ 84.13 $139.23 $153.33
Financing Cash Cash Cash Cash Cash
Adjustment
------------------------------------------------------------
Adjusted Price/SF $122.69 $ 84.13 $139.23 $153.33
Conditions of Sale Relationship None None None
Adjustment -10.0%
------------------------------------------------------------
Adjusted Price/SF $104.29 $ 84.13 $139.23 $153.33
Market/Time Effective
Adjustment Sep - 93 0% 0% 0% 0%
------------------------------------------------------------
Adjusted Price/SF $104.29 $ 84.13 $139.23 $153.33
Other Adjustments
Location Adjustment 25% 20% 5% 10%
Age/Condition Adjustment 0% 10% -10% -10%
Size Adjustment -25% 0% -10% -35%
Quality Adjustment 10% 0% 10% 10%
Condominium Adjustment -5% -5% -5% -5%
Leasing
Other Adjustment 0% 0% -10% 0%
Net Other Adjustments 5% 25% -20% -30%
FINAL ADJUSTED PRICE PER SF $109.50 $105.16 $111.38 $107.33
============================================================
</TABLE>
-41-
<PAGE> 54
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee in the form of a master lease. The Reit, as the new property owner,
will receive the net rental master lease rate per square foot of rentable office
area regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to various
physicians at different rates and terms, or they can use the office space for
hospital purposes.
The appraisers received a draft of the form of the master lease agreement, but
the actual master lease agreements for each property are not yet available. For
the purpose of our Income Approach, the gross income will be the master lease
rate for each property times the rentable building area. We reserve the right
to modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
42,463 SF x $12.50/SF = $530,788
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
-42-
<PAGE> 55
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$26,539, based on the management experience of other properties. The net
operating income for the property is $530,788 less $26,539, or $504,249.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison Section
of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Independence Court March 1993 8.0%
Birmingham, Alabama
2 20th Street South December 1992 9.0%
Birmingham, Alabama
3 Upper Hembree November 1991 10.1%
Roswell, Georgia
4 Lenox Pointe August 1992 8.2%
Atlanta, Georgia
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
8.0 percent to 10.1 percent.
A capitalization rate at 10.5 percent, is considered appropriate because
effective comparable market net lease rates are $1.00 to $1.50 per square foot
less than the master lease rate of $12.50 per square foot.
-43-
<PAGE> 56
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income\OAR = Estimated Value
$504,249\.105 = $4,802,371
Rounded to: $4,800,000
==========
-44-
<PAGE> 57
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the 1222 14th Avenue South Office Building. The three approaches are
summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . $4,700,000
Direct Sales Comparison Approach . . . . . . . $4,585,000
Income Approach . . . . . . . . . . . . . . . $4,800,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a twelve year old building is difficult. For this reasons,
this approach is only considered a fair indicator of value for the subject
property.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quantity and quality of data available in this approach was
considered good, but two of the four sales were not properties located in the
Birmingham market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the 1222
14th Avenue South Office Building, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
$4,750,000
==========
-45-
<PAGE> 1
EXHIBIT 10.21
AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING #2
BIRMINGHAM, ALABAMA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
FAX 955-0466
March 2, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Ms. Stacy Pulliam
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH PROFESSIONAL BUILDING #2
1201 11TH AVENUE SOUTH
BIRMINGHAM, ALABAMA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of February 2, 1994, subject to a master lease
from HealthSouth Corporation. The report is to be used for asset valuation
purposes. HealthSouth Corporation is selling many of its professional office
buildings for the purpose of establishing a real estate investment trust
(REIT). This valuation assumes that the prospective REIT is the owner of the
property, with HealthSouth Corporation guaranteeing annual net rental income of
$13.00 per leasable square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
March 2, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property is a three-story professional office building containing
109,682 gross square feet and 81,800 leasable square feet. The building is a
Class B+ facility, with a steel frame and poured-in-place concrete structure
and dryvit and brick veneer exterior walls. It was constructed in 1990 to
1991. Floor 1 and Floor 2 of the building are currently occupied by
HealthSouth Rehabilitation and Alabama Sports Medicine, respectively. A lease
is reportedly pending for an ophthalmology practice named Morris/Witherspoon to
occupy the entire third floor of the building. Since HealthSouth is providing
a long-term master lease for the entire building, this report assumes that the
estimated $1,000,000 "to-be-completed" tenant finish work for the third floor
has been completed prior to execution of the sale/lease agreement.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Professional Building #2, as of February 2, 1994, to be:
$11,900,000
===========
<PAGE> 4
HealthSouth Corporation
March 2, 1994
Page Three
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:jef
094-1578
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Michael P. Bates, the principle appraiser, made a personal inspection
of the property that is the subject of this report. Patrick J. Simers
has not made a personal inspection of the property.
This assignment was made subject to regulations of the State of Alabama Real
Estate Appraisers Board. The undersigned state certified appraiser has met the
requirements of the board that allow this report to be regarded as a "certified
appraisal".
/s/ Patrick J. Simers /s/ Michael P. Bates
- ----------------------------------- -----------------------------------
Patrick J. Simers Michael P. Bates, MAI
Managing Director Georgia Certified Appraiser # 0685
Alabama Certified General Real Estate MAI No. 10277
Appraiser No. CG00375
<PAGE> 6
<TABLE>
<S> <C>
State of Alabama [SEAL]
This is to certify that /s/ Lanett Davis
/s/ W. Phil Fowler
PATRICK J. SIMERS
/s/ F. L. Clark
having given satisfactory evidence of the necessary
/s/ Stu Graham
qualifications required by the laws of the State of Alabama
/s/ James ___ Perry, Jr.
is authorized to transact business in Alabama as a
/s/ George C. Washington
CERTIFIED GENERAL REAL ESTATE APPRAISER /s/ Edward Forand
/s/ Robert E. Nesbin
with all the rights, privileges and obligations
/s/ William R. Sizemore
appurtenant thereto.
ALABAMA REAL ESTATE
APPRAISERS BOARD
Certificate Number: CG00375 Expiration Date: SEPT. 30, 1995
</TABLE>
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: February 2, 1994
Date of Report: February 15, 1994
Property Identification: HealthSouth Professional Building #2
Property Location: 1201 11th Avenue South
Birmingham, Alabama
Interest Appraised: Leased Fee Estate
Gross Building Area: 109,682 square feet
Net Leasable Area: 81,800 square feet
Subject Land Size (Allocated): 108,900 square feet, or 2.5 acres
Improvements Description: Three-story, steel frame and
concrete structure, Class B+
professional office building
constructed in 1990 to 1991.
Physical Occupancy Percentage: 67%
CONCLUSIONS
Cost Approach: $13,980,000
Sales Comparison Approach: $11,045,000
Income Approach: $11,900,000
Final Value Estimate: $11,900,000
===========
<PAGE> 11
TABLE OF CONTENTS
Page
----
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 4
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Market Data - Metropolitan Birmingham 7
Neighborhood Analysis 11
Zoning 12
Real Estate Taxes and Assessments 13
Site Analysis 13
Building and Site Improvements 16
HIGHEST AND BEST USE 19
VALUATION SECTION 23
Valuation Methodology 23
Cost Approach 24
Sales Comparison Approach 37
Income Approach 49
CORRELATION AND CONCLUSION 51
<PAGE> 12
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Metropolitan Area Map
Exhibit C - Neighborhood Map
Exhibit D1 - Site Plan
Exhibit D2 - Plat Map
Exhibit E - Land Sale Location Map
Exhibit F - Building Floor Plans
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparable Location Map
Exhibit J - Rent Comparables Summary
Exhibit K - Subject Photographs
<PAGE> 13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is known as, HealthSouth Professional Building
#2, and is located at 1201 11th Avenue South in Birmingham, Alabama. The
subject is a three-story building that is situated on the east side of, and is
contiguous to, the new five-story HealthSouth Hospital. The subject
professional building shares an atrium, mechanical systems and parking with the
hospital. The entire hospital and professional building property is identified
by Jefferson County as tax parcel number 29-1-3-9-1.0.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is February 2,
1994, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of several professional office buildings for the
purpose of establishing a real estate investment trust (REIT). The subject
property would be included in that sale. It is our understanding that the REIT
will involve mortgage financing.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
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<PAGE> 14
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
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<PAGE> 15
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
HISTORY OF THE PROPERTY
HealthSouth Medical Center, Inc., acquired the assets of the South Highlands
Hospital in November 1989 [Deed Book 3726/Page 014]. The purchase consisted of
approximately ten acres of land and improvements. A new main hospital building
and the subject, HealthSouth Professional Building #2, were constructed in
1991. The new hospital and the subject building share a common atrium
entryway, elevators and mechanical systems. From 1990 through 1992,
HealthSouth Medical Center acquired additional parcels around the hospital, and
it now controls approximately 15 acres of land and buildings. The American
Sports Medicine Institute (ASMI) was constructed on 1.7 acres of land just east
of the subject in late 1992 and early 1993.
The top floor of the subject professional office building is currently vacant,
although a lease is reportedly in process for an ophthalmology practice to take
the entire floor. Tenant finish work has not been completed on this space as
of the date of this report. The owners are considering including all medical
office buildings in a new REIT, as mentioned earlier. This report is being
completed for internal valuation purposes and for mortgage financing in
conjunction with the sale to the REIT.
The subject professional building has reportedly not been marketed for sale and
is not currently under an agreement of sale. No other deed transfers were
noted in the last three years. A title search is recommended for official
determination.
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HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent
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<PAGE> 17
annual increase compared to a 4.0 percent increase during 1991. The GDP
Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
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<PAGE> 18
<TABLE>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate. This soft demand has caused some property
values to remain flat and some to decline. The lower interest rates in recent
periods, however, are serving to stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation].
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
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DESCRIPTIVE DATA
MARKET DATA - Metropolitan Birmingham
Birmingham is recognized as a leading financial, transportation, communication,
manufacturing, healthcare and distribution center for the southeast United
States. The region's central location within the state of Alabama has been a
major factor in its economic success.
The Birmingham Metropolitan Statistical Area (MSA) consists of five counties
with an estimated 1992 population of 917,100. This ranks the metropolitan area
as the 46th largest in the country. The larger 16-county primary market area
contains a population of 1,341,500. A map of the Birmingham MSA is shown in
the Exhibit Section of this report.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
Historical data and growth projections reflect the economic climate of an area
and have both a direct and indirect impact on property values. Table 1 on the
next page shows the county population totals by decade. Table 1 also shows the
annual percentage increases in population for the individual counties in the
Birmingham MSA.
The fastest annual population growth in the Birmingham MSA occurred in the
decade of the 1980s. The rate of growth in the 1980s, however, was only 1.13
percent per year, compared to 2.0 percent to 3.0 percent per year for many
other large Southeast U.S. metropolitan cities during the decade. The City of
Birmingham, in Jefferson County, and Walker County experienced population
declines during the most recent decade.
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TABLE 1
POPULATION BY COUNTY
1970 1980 1990
COUNTY CENSUS CENSUS CENSUS
Blount 26,853 36,459 39,248
Jefferson 644,991 671,392 651,525
City of Birmingham* 300,910 286,799 265,968
Saint Claire 27,956 41,205 50,009
Shelby 38,037 66,298 99,358
Walker 56,246 68,660 67,670
TOTAL MSA 794,083 884,014 907,810
* City of Birmingham included in Jefferson County totals.
TABLE 1 (CONTINUED)
AVERAGE PERCENTAGE INCREASE
COUNTY 1970S 1980S 1990S
Blount 3.58% 0.76% N/A
Jefferson 0.41% -0.30% N/A
Saint Clair 4.74% 2.14% N/A
Shelby 7.43% 4.99% N/A
Walker 2.21% -0.14% N/A
TOTAL MSA 1.13% 0.27% 0.5%
Source: Birmingham Area Chamber of Commerce
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Jefferson County, excluding the City of Birmingham, grew 1.18 percent per year
in population during the 1970s, but experienced little growth during the 1980s.
The estimated population growth rate so far in the 1990s is still slow, but
faster than experienced in the 1980s.
HOUSING
The growth in housing in the Birmingham MSA was also slow but stable during the
1980s. As was the case in other cities during the decade, much of the new
housing occurred due to a decline in the average household size. In the
Birmingham MSA, there were 3.01 persons per household in 1970, compared to 2.41
persons per household in 1990.
So far in the 1990s, single-family housing sales have been brisk, with record
sales in 1992 and thus far in 1993. The area ranks 48th in new homes built in
1993, with 3,510 new homes the first half of 1993. New apartment construction
totaled over 6,000 units from 1987 through 1990, or an average of 1,545 per
year. New multifamily units only totaled 40 in 1992 and 140 for the first six
months of 1993. Most of the new apartment construction has been concentrated
south of the City of Birmingham along the U.S. Highway 280 and U.S. Highway 31
corridors.
Looking forward, the average household size is not expected to continue to
decline indefinitely. The growth in housing, therefore, should equal the
population growth plus the replacement of obsolete housing.
EMPLOYMENT
In the 1980s, the average annual growth in employment in the MSA was 3,520 per
year, compared to 8,290 per year during the 1970s. So far in the 1990s, the
region is averaging 3,233 new jobs each year. The unemployment rate at the end
of 1992 was 6.1 percent, compared to 7.3 percent and 7.4 percent for the state
of Alabama and the U.S., respectively.
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Table 2 shows the diversity in employment in the Birmingham MSA.
TABLE 2
EMPLOYMENT BY SECTOR
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
SECTOR LABOR DOLLARS ESTABLISHMENTS
<S> <C> <C>
Health Services 11.7% 6.5%
Other Services 14.0% 26.5%
Manufacturing 15.7% 5.7%
Construction 12.0% 8.8%
Transportation, Communications & Utilities 13.8% 3.6%
Wholesale Trade 10.2% 9.5%
Retail Trade 9.8% 25.2%
Finance, Insurance, & Real Estate 9.1% 9.2%
Mining & Agricultural 3.5% 1.4%
Miscellaneous 0.2% 3.6%
REGION 100.0% 100.0%
Source: Birmingham Chamber of Commerce
</TABLE>
In 1970, manufacturing accounted for 28.3 percent of the employment in the MSA.
By 1991, manufacturing only accounted for 13.1 percent of the area's
employment. The manufacturing jobs have been replaced with service jobs. The
service sector accounts for 25.4 percent of all jobs in 1991, versus 14.3
percent in 1970.
As of April 1993, the largest employers in the Birmingham MSA were as follows:
University of Alabama 15,696
U.S. Government 9,501
South Central Bell 7,450
State of Alabama 6,304
Birmingham City Schools 4,733
Alabama Power Company 4,611
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INCOME
Jefferson County and the Birmingham MSA are very representative of the average
per capita income and average household income in the United States. Table 3
below shows the area's income averages compared to the entire U.S.
<TABLE>
<CAPTION>
TABLE 3
PERCENT PERCENT
AVERAGE PER OF U.S. AVERAGE OF U.S.
COUNTY CAPITA COME AVERAGE HOUSEHOLD COME AVERAGE
<S> <C> <C> <C> <C>
Blount $13,135 70% $27,219 77%
Jefferson $18,624 100% $34,235 97%
St. Clair $13,056 70% $26,750 76%
Shelby $15,935 85% $44,813 115%
Walker $14,556 78% $26,585 75%
MSA $17,479 94% $34,315 100%
</TABLE>
Jefferson County has approximately the same per capita income and household
income as the national average.
In summary, metropolitan Birmingham has experienced a slow but stable growth
rate in recent years. Its economic base is diverse. National trends of a
lower manufacturing work force and lower household size have also been the
experience in Birmingham.
NEIGHBORHOOD ANALYSIS
The subject neighborhood is identified as the "Southside" area of Birmingham.
This area is just south of the Central Business District (CBD) of Birmingham
and west of the Red Mountain Expressway. This neighborhood is bounded on the
north by the University of Alabama at Birmingham (UAB), on the east by the Red
Mountain Expressway (U.S.Highway 31), on the south by Red Mountain with the
famous Vulcan Statue, and on the west by Interstate 65. A map of the
neighborhood is located in the Exhibit Section.
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<PAGE> 24
The Southside includes many of the city's old restored homes. The
Highland/Five-Points area has undergone considerable renovation, and is
becoming a restaurant and entertainment center. The subject medical office
building, which is part of the HealthSouth Medical Center, is located
one-half-mile west of the Highland/Five-Points area, and just north of Red
Mountain. The upscale residential communities of Homewood and Mountain Brook
are located just south and east of the Southside. The property is situated at
1201 11th Avenue South. The block bounded by 13th Place South, 12th Avenue
South and 13th Street South contains the subject building. East and south of
the property are primarily older residential areas. The HealthSouth Medical
Center and the HealthSouth Professional Condominium Building are situated to
the west and south of the property. Some homes have been converted to
commercial uses around the hospital. A few neighboring parcels have been
redeveloped with small apartment buildings, including the site just south of
the property.
North of the HealthSouth Medical Center is the UAB, which is reportedly now the
second largest university in Alabama. The university has been growing rapidly
and has absorbed most of the land uses in a six by fifteen block area. The UAB
Medical Center is considered by some to be in the same class as the Mayo Clinic
in some medical research fields.
In summary, the neighborhood is an older residential area that is undergoing
renovation and restoration. Development in the area is being driven primarily
by hospital growth which includes the subject HealthSouth Medical Center, the
UAB Medical Center and St. Vincent Medical Center. Although medical service
is the focus of new development, new retail, restaurant and residential
development is also active in the area.
ZONING
The subject property is zoned "COI, Conditional Office and Institutional
District", by the City of Birmingham. According to the City zoning
requirements, the office and institutional district provides "for the orderly
arrangement of institutional, clerical and administrative space". Permitted
uses include public, semi-private or private offices; public or semi-private,
religious, educational or charitable institutions; and, other similar uses
consistent with this zoning code's purpose and surrounding uses. This zoning
shall not include properties with industrial characteristics, communal living
facilities or correctional institutions.
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<PAGE> 25
The subject's "conditional" zoning provided for the specific medical services
property that was constructed on the site. The hospital reportedly was granted
setback and parking variances prior to the construction of the building. Since
the site plan was approved prior to construction, and the occupancy permit
received after construction, it is assumed that the property conforms to all
the required conditions of zoning. The zoning variance may have provided for
an easement with the hospital for additional parking spaces on the north side
of the property. A letter of zoning compliance from the City of Birmingham is
recommended for an official determination regarding any zoning conformity
issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in the City of Birmingham, and subject to the
taxing authority of the City and Jefferson County. Commercial properties in
the City and County are assessed at 20 percent of tax appraised value. The
subject building is included with the HealthSouth Medical Center for tax
purposes. The tax appraised market value of the entire hospital and
professional building property in 1993 was $29,368,240. The entire property
recently paid $408,219 in 1993 property taxes.
The market value estimated in this report is $11,900,000. In the City of
Birmingham, properties are assessed at 20% of their tax appraised market
values. The 1993 millage rate is $69.50 per $1,000 of assessed value. The
subject property taxes are estimated as follows:
$11,900,000 x 20% / $1,000 x $69.50 = $165,410
SITE ANALYSIS
The subject site is part of approximately 15 acres owned by HealthSouth Medical
Center. The HealthSouth Professional Building #2 is adjacent and contiguous to
the new hospital on 11th Avenue South. The subject building was constructed
together with the hospital in 1990-1991, and a separate land parcel has not
been surveyed and allocated to the professional building. The appraisers have
not been provided with a survey or legal description for the subject property.
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<PAGE> 26
For the purpose of this valuation, the appraisers have allocated a portion of
the hospital land to the professional building. This allocated land consists
basically of the footprint of the subject building plus a parking lot just east
of the building and 11th Street South. A county tax plat map of the subject
area is included on the next page. The entire hospital property is highlighted
in yellow on that map. The subject land and building footprint are also
identified in orange on that map. A total of 2.5 acres, or 108,900 square
feet, of land has been allocated to the subject property. The appraisers
reserve the right to modify this report if the land is later resurveyed and
found to differ significantly in size from our allocated acreage.
Approximately half of the subject 2.5 acres is situated on the west side of
11th Street South. This parcel is rectangular-shaped, and fronts approximately
240 feet on the west side of 11th Street South. This parcel is approximately
210 feet deep, and slopes upward from its north side toward its south side.
Almost this entire parcel is covered by the footprint of the subject building.
The remaining subject parcel is irregular-shaped. It has approximately 220
feet of frontage on the east side of 11th Street South. This site slopes
slightly from its north end up to its south end, which abuts the new American
Sports Medicine Institute (ASMI) Building. This entire site has asphalt paving
and fencing and is used for hospital and professional office building parking.
Access to this parking lot is via an entrance at the northwest corner of this
site.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. Since the subject building is
contiguous to the hospital, it is likely that the subject property would only
sell along with the hospital. A site plan of the entire hospital is shown in
the Exhibit section.
-14-
<PAGE> 27
Tax Plat Map
(Map)
-15-
<PAGE> 28
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood. Other site improvements consists of general landscaping, asphalt
paving, concrete paving and curbing, some shrubs and general signage. To our
knowledge, no environmental study has been conducted on the subject site. As
appraisers, we are not qualified to detect hazardous materials. Consequently,
our report assumes that there are no environmentally hazardous materials in the
site or building that would adversely affect the subject property's value.
According the Federal Emergency Management Association (FEMA) panel #010116
0044B, dated January 2, 1992, this site is not located in a flood hazard area.
BUILDING AND SITE IMPROVEMENTS
The HealthSouth Professional Building was constructed in 1990-1991. It
contains 109,682 gross square feet and 81,800 leasable square feet on three
floors. The leasable area excludes the mechanical rooms and vertical
penetrations (stairwells, elevator shafts) and lobby bathrooms. The building
areas are the appraiser's calculations based on the dimensions on the Gould
Turner Group, PC, architectural plans dated February 1, 1990. We assume that
the building was constructed according to these plans. The gross and net
building area by floor are summarized as follows:
BUILDING AREA GROSS SF LEASABLE SF
Floor 1 31,490 26,160
Floor 2 39,096 28,568
Floor 3 39,096 27,072
TOTAL BUILDING 109,682 81,800
The building is a three-story, reinforced concrete and steel structure, with a
dryvit and brick veneer exterior. The entire building is sprinklered. The
building has reinforced concrete floors and roof deck, with a waterproof
membrane and rock covering. Ceiling heights are approximately nine feet on the
first floor and eight and one-half feet on the second and third floors. The
reception area has a 14 foot ceiling and the gym area has
-16-
<PAGE> 29
an eleven-foot ceiling. Ceiling finishes consists of acoustical ceiling tiles
and recessed fluorescent lighting with some cone directional lights. The
interior walls are wall paper on gypsum board over metal studs.
Air conditioning is supplied via three 450-ton Trane chillers and air handlers
(one dedicated to hospital). There are additional chillers located in the
hospital serving only that building. Two, 350-hp gas or diesel-fired Burnham
boilers provide steam heat through a circulating water system to both the
professional building and the hospital. Two, 600 KW/hour Cummins diesel
engines provide emergency power for the hospital and medical building if the
other utilities were to fail. A 10,000 gallon tank for the diesel is located
underground in the alley behind the subject building. In addition, there are
eight Marathon variable air fans and two pneumatic air pumps. Two Siemens
electric panels control up to 13,500 volts each of electric power, and either
panel can control power to both the hospital and professional building. We
assume that the heating and electrical capacity is adequate for the subject
facility.
The interior floors have both carpeting and vinyl tiles. There is ceramic tile
in the labs, pool and bathroom areas. Windows and doors are metal framed, and
interior doors are solid-core wood. Each of the floors has their own lobby.
HealthSouth Rehabilitation on the first floor has two gymnasium areas, a pool
area with a 15 foot by 45 foot pool, a walking track and therapy rooms.
Alabama Sports Medicine on the second floor is heavily partitioned with
examination rooms and doctor's offices. A typical floor plan for the building
is shown in the Exhibit Section of this report.
The third floor of the building is vacant except for the mechanical rooms. A
lease is reportedly being negotiated for an ophthalmologist practice to occupy
the entire floor. The construction company has estimated that it will cost
slightly more than $1,000,000, or approximately $37 per square foot of leasable
area, to complete the tenant finish work on the third floor. This is
considered above average tenant finish costs for some medical buildings, but
consistent with the levels of finish on the first two floors.
Site improvements include asphalt paving and curbing, parking lot fencing, a
flag pole in front of the subject building and ground cover and shrubbery
around the subject building. A detail description of the building and site
improvements are included in the Exhibit section of this report.
-17-
<PAGE> 30
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is new and in good condition. There is no deferred maintenance,
or functional or economic obsolescence. Since the master lease provides for
HealthSouth guaranteeing income on this space, this report assumes that
HealthSouth will complete the tenant finish work, estimated at $1,000,000 for
the third floor, prior to prospective sale to the REIT.
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<PAGE> 31
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by
The Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market
for a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
-19-
<PAGE> 32
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "COI, Conditional Office and Institutional". Permitted uses in
this general zoning category vary widely. Potential legal uses would include
some retail and restaurants, office/institutional, hotels, hospitals and other
medically-oriented uses. The subject's conditional zoning provided for the
construction of the subject professional office building and the adjacent
hospital. We assume that variances for setbacks and parking were received
prior to construction.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. New hospital
related development in the subject area and near other surrounding hospitals
indicates that new medical development is financially feasible. HealthSouth
Medical Center, UAB Medical Center and St. Vincent Medical Center have all
recently built new medical office facilities. Office business-use facilities,
however, are generally over-built in Birmingham, as is the case in other major
-20-
<PAGE> 33
metropolitan areas. General business space is not considered financially
feasible in the subject market at this time.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new medical-related development is financially
feasible. Based on this analysis, the current highest and best use of the
land, if vacant, would be for office/institutional development based on the
growth needs of the area hospitals.
As Improved
The subject site is currently improved with a 81,800 rentable square foot
professional building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to modify existing improvements. The improvements were
recently constructed and are considered functional. The building could be
converted to additional hospital space. Recent trends in the hospital business
call for more outpatient business and less inpatient stays. Besides, a new
hospital was constructed with the subject building, and additional hospital
capacity is not needed.
LEGALLY PERMISSIBLE
The building, as improved, is assumed to be a legal conforming use, since the
property was recently constructed and received an occupancy permit. Under the
current zoning, the property could remain as it is, be torn down or renovated.
-21-
<PAGE> 34
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. The only
financially feasible use of the existing improvements is it current use as
professional office space.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The exist use was the
only financially feasible use. The highest and best use, as improved, is the
property's current use.
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<PAGE> 35
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 36
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
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<PAGE> 37
Land Comparable Number 1
Parcel Number: 29-01-3-008-7
Location: East side of 13th Street South across from the
new Alabama Sports Medicine and Orthopedic
Center and the new HealthSouth Hospital.
Size: 7,000 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/195
Grantor: Randall J. Westbrook
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $135,000
Price Per Square Foot: $19.29
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was part of 15 parcels assembled from
1990-1992 for the construction of the Sports
Medicine Institute and additional parking. The
average price for the 15 parcels was $18.16 per
square foot. The Grantor in this transaction is
an employee of the Grantee that acquired the
property on July 10, 1992, from Dwain Pitts, et
al, for the same price [Deed Book 4313/Page 978].
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<PAGE> 38
Land Comparable Number 2
Parcel Number: 29-01-3-010-4
Location: West side of 12th Street South adjacent to an
existing parking lot across from the old entrance
to the HealthSouth Medical Center.
Size: 8,160 square feet
Sale Date: April 29, 1993
Deed Book/Page: 4544/197
Grantor: Vicki E. Owens
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $66,000
Price Per Square Foot: $8.09
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel was purchased for future parking
needs by the hospital. The hospital purchased
the property based solely on land value and
considered the forty year old house on the site
to be only a temporary use until additional
parking is needed. The Grantor in this
transaction is an employee of the Grantee
that acquired the property on October 30,
1992 from Robert Vests for the same price
[Deed Book 4410/Page 819].
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<PAGE> 39
Land Comparable Number 3
Parcel Number: 29-01-3-005-3
Location: Northeast corner of 12th Street South and 11th
Avenue South, one block north of the
HealthSouth Medical Center.
Size: 45,600 square feet
Sale Date: November 13, 1990
Deed Book/Page: 3972/250
Grantor: Eleventh Avenue United Methodist Church
Grantee: HealthSouth Medical Center, Inc.
Sale Price: $1,500,000
Price Per Square Foot: $32.89
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel was a church before being sold to
HealthSouth. Part of the improvements have been
removed and the site is used as overflow parking
by the hospital. The remainder of the building
is scheduled to be removed in the near future.
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<PAGE> 40
Land Comparable Number 4
Location: Northeast corner of 17th Street and 11th Avenue
approximately one-quarter mile south of the
University of Alabama Medical Center and
one-half-mile northeast of the subject.
Size: 16,000 square feet
Sale Date: January 2, 1990
Deed Book/Page: 3951/388
Grantor: Jo Anne Jackson
Grantee: Board of Trustees of University of Alabama
Sale Price: $240,000
Price Per Square Foot: $15.00
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Office/Institutional
Utilities: All utilities are available.
Comments: This parcel contains an old doctor's building
that is boarded up and no longer used. The
building does not contribute any value.
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<PAGE> 41
Land Comparable Number 5 - Current Listing
Location: Northwest corner of 19th Street and 5th Avenue
South, just north of the University of Alabama
Medical Center (UAB).
Size: 56,000 square feet
Owner: Mr. Hill
Asking Price: $3,080,000
Price Per Square Foot: $55.00
Shape: Retectangular
Zoning: M-1 Light Industrial, but permitted for the
construction of an 11-story, 220,000 square foot
office building.
Utilities: All utilities are available.
Comments: This vacant parcel is across from UAB and a high
rise apartment building that is currently under
construction. The owner has been offered
approximately $35 per foot.
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<PAGE> 42
A summary of the land sales and listing is shown as follows:
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
1 13th Street South 04/93 7,000 $19.29
2 12th Street South 04/93 8,160 $ 8.09
3 12th Street South 11/90 45,600 $32.89
4 17th Street 01/90 16,000 $15.00
5 19th Street Listing 56,000 $55.00
SUBJECT 11TH AVENUE SOUTH 108,900
Discussion of Land Comparables
LAND COMPARABLE 1 was one parcel of 15 that were assembled by the hospital
around what is now the American Sports Medicine Institute. Downward
adjustments are indicated because of the more level topography of this
comparable parcel and because of its smaller size. The adjustments are shown
on a Land Sale Adjustment Grid at the end of this discussion. The adjusted
price per square foot of this comparable is $16.40 per square foot.
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
by the hospital for future parking needs of the hospital. The improvements
were not considered to have any significant value. A large upward adjustment
is indicated because of the inferior location of this parcel compared to the
subject that is adjacent to the hospital. Downward adjustments are indicated
because of the comparable's level topography and its smaller size. The
adjusted price per square foot of this comparable is $9.30.
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<PAGE> 43
LAND COMPARABLE 3 was a 45,600 square foot parcel north of the hospital that
contained a Methodist Church. The church has relocated and the land is being
used for hospital overflow parking. The remaining building is reportedly
scheduled to be removed in the near future. Downward adjustments are indicated
because of the declining economy since this purchase and because of the level
topography of this site. The adjusted price for this comparable is $28.12 per
square foot.
LAND COMPARABLE 4 is a parcel that UAB purchased for future parking or
development. It is located one-quarter-mile south of the UAB campus. An
upward adjustment is indicated due to the inferior location of this comparable.
A downward adjustment is indicated for size. The adjusted price per square
foot of this comparable is $14.85.
LAND COMPARABLE 5 is the current listing of a site just north of UAB Medical
Center. This site is zoned for high rise development. A significant downward
adjustment is indicated because this is a listing rather than an actual sale.
Downward adjustments are also indicated for location, topography and due to the
superior zoning density of this site. The adjusted price per square foot of
this comparable is $32.73 per square foot.
The adjusted land prices range from $9.30 per square foot to $32.73 per
square foot, with the prices of the most comparable sites being in the middle
of this range. The arithmetic mean adjusted price per square foot was $20.28.
The average price per square foot for the land assembled around what is now the
American Sports Medicine Institute (ASMI) was $18.16 per square foot. The
subject site is a better location because it is closer to the hospital. The
subject 2.5-acre site, however, is larger than the ASMI site, and a net
downward adjustment is indicated for comparison for this reason. Based on our
analysis of the subject versus these comparables, it is our opinion that a land
price of $17.00 per square is representative of the subject site. The subject
land value is estimated as follows:
108,900 SF x $17.00/SF = $1,851,300
Rounded to: $1,850,000
==========
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<PAGE> 44
<TABLE>
<CAPTION>
L A N D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building #2
Birmingham, Alabama
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4 #5
Sale Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Property Rights Fee Simple Same Same Same Same Same
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Financing Cash Cash Cash Cash Cash Cash
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $55.00
Conditions of Sale None None None None Listing
Adjustment -15%
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $32.89 $15.00 $46.25
Market/Time Effective
Adjustment Sep-93 0% 0% -10% -10% 0%
-----------------------------------------------------------
Adjusted Price/SF $19.29 $8.09 $29.60 $13.50 $46.25
Other Adjustments:
Location Adjustment 0% 30% 0% 20% -15%
Topography Adjustment -5% -5% -5% 0% -5%
Size Adjustment 44,616 -10% -10% 0% -10% 0%
Zoning Adjustment 0% 0% 0% 0% -10%
Net Other Adjustments -15% 15% -5% 10% -30%
FINAL ADJUSTED PRICE PER SF $16.40 $9.30 $28.12 $14.85 $32.73
===========================================================
</TABLE>
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<PAGE> 45
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule at the end of this section derived from the Marshall
Valuation Services shows the estimated replacement cost by category for the
subject building plus estimates of all forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 45 to 50 years. For the subject Class B+
building, we have assumed an economic life of 50 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
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<PAGE> 46
Marshall Valuation Services, Inc. was used to estimate the overall economic
life of the improvements. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its young age. Observation of the subject property indicated
that the structure and related component parts have been adequately maintained
through a continuous maintenance service program.
The subject property was constructed in 1990-1991, and it is in excellent
condition. It is judged that the subject has an effective age equal to its
actual age of three years. The remaining useful life is estimated to be 47
years. This translates into a physical depreciation estimate of 6.0 percent (3
years divided by 50 years). The amount of depreciation attributable to the
property has been estimated on a straight-line basis, which is founded on the
assumption that depreciation of a property occurs equally throughout its
economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of three years and a remaining useful life of
17 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be 15.0 percent.
Entrepreneurial profit and miscellaneous replacement costs are depreciated at a
blended depreciate rate.
The subject building and site improvement replacement costs, excluding
entrepreneurial profit, were calculated to be $11,756,873. Replacement costs
normally include an entrepreneurial profit of 10 percent to 15 percent to
induce the property owner to undergo the development. Entrepreneurial
overhead, profit and miscellaneous fees were estimated at 10 percent of base
building costs, or $1,125,582. The total replacements costs via the Marshall
Valuation Service, including the entrepreneurial profit, is $12,882,455, or
$117.45 per gross square foot of building area.
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<PAGE> 47
The actual construction costs for the subject building by itself were not
available. The building was constructed at the same time as the adjacent
hospital building. The total cost for the hospital and medical building was
reported to be $28.5 million. The subject building represents approximately 45
percent of the combined gross building area for both the subject medical
building and the hospital. The $11,756,873 in building and site costs for the
subject property is approximately 41 percent of the combined costs for the
hospital and professional office building. This seems appropriate since the
hospital costs are estimated to be slightly higher than the office building
costs.
Total depreciation is estimated at $754,896, based on 6.0 percent depreciation
of building replacement costs and 15.0 percent depreciation of site
improvements. There was no functional or economic obsolescence indicated since
the property is new. The total depreciated value of the subject replacement
costs is $12,127,559. The $1,850,000 land value is added to the depreciated
replacement costs, for a final Cost Approach value of $13,977,559.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of February 2, 1994, is rounded to:
$13,980,000
===========
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<PAGE> 48
SUMMARY OF TOTAL PROJECT DEVELOPMENT COSTS
HEALTHSOUTH PROFESSIONAL BUILDING #2
<TABLE>
<CAPTION> MARSHALL
DOLLARS
<S> <C> <C> <C> <C>
Site Preparation $ 47,314
Foundation $ 291,754
Frame $ 1,186,759
Exterior Walls $ 431,541
Floors $ 749,783
Roof $ 218,536
Roof Cover $ 119,152
Part. & Blt. in $ 2,172,800
Ceilings $ 592,009
Floor Coverings $ 835,173
Plumbing $ 994,816
HVAC $ 1,372,122
Electrical $ 1,509,224
Other Features $ 613,508
-----------
Total Building Costs $11,134,491
Site Improvement Costs $ 121,330
-----------
Total Cost $11,255,821
Architect's Fees Plans and Specs. (Of Building Costs) 3.00% $ 334,035
Architect's Fees, Supervision (Of Building Costs) 1.50% $ 167,017
Entrepreneural Overhead, Profit, 10.00%
and Other Miscellaneous Fees (Of Total Costs) $ 1,125,582
-----------
Total Other Costs $ 1,626,634
Total Project Cost $12,882,455
Accrued Depreciation:
Building Costs 6.0% (3/50 YEARS) $668,069
Site Costs 15.0% (3/20 Years) $18,200
Enterpreneural Profit 6.1% (Blended Rate) $68,627
----------
Total Physical Depreciation $754,896
Total Functional & Economic Obsolescence $0
---------
Less Total Depreciation (All Forms) $ (754,896)
-----------
Depreciated Building & Site Improvement Costs $12,127,559
Plus Land Value $ 1,850,000
-----------
DEPRECIATED COST APPROACH VALUE $13,977,559
ROUNDED: $13,980,000
===========
</TABLE>
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<PAGE> 49
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on seven professional office building
sales which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
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<PAGE> 50
IMPROVED SALE NUMBER 1
GENERAL SALE DATA
Location: 1770 Independence Court, Homewood,
Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $ 5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 122.69
Stabilized Overall Rate: 8.0%
EGIM: 8.91
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building, so the Grantee/physician would move
his surgical practice to the HealthSouth Medical Center. The location and
building quality for this comparable are very inferior to the subject property.
-38-
<PAGE> 51
IMPROVED SALE NUMBER 2
GENERAL SALE DATA
Location: West side of 20th Street South at the
address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of
Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------- -----
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- -----
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
-39-
<PAGE> 52
IMPROVED SALE NUMBER 3
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in
Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
------- -----
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- -----
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-40-
<PAGE> 53
IMPROVED SALE NUMBER 4
GENERAL SALE DATA
Location: 2519 Galiano Street, Miami, Dade
County, Florida
Date of Sale: December 29, 1992
Deed Book/Page: 15762/4643
Grantor: American Equeties No. 2, Inc.
Grantee: CAC Properties, Inc.
Sale Price: $12,521,000
Terms of Sale: Third-party financing had no impact on the
purchase price
PROPERTY DATA
Parcel Number: 03-4117-005-1340 & 1330
Building Size: 139,500 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $2,511,000 $18.00
Vacancy Allowance: $ 376,650 $ 2.70
---------- ------
Effective Gross Income: $2,134,350 $15.30
Estimated Expenses @ $6.00/SF: $ 837,000 $ 6.00
---------- ------
Net Operating Income: $1,297,350 $ 9.30
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 89.76
Stabilized Overall Rate: 10.4%
EGIM: 5.87
COMMENTS
This building has six stories of office space over seven stories of parking
deck. The building was purchased by the primary tenant in the building. This
building is not adjacent to a hospital. Sun Bank has bank space in the bottom
floor of the building.
-41-
<PAGE> 54
IMPROVED SALE NUMBER 5
GENERAL SALE DATA
Location: 5 West Sample Road in Pompano
Beach, Broward County, Florida
Date of Sale: July 5, 1991
Deed Book/Page: 18536/769
Grantor: Robert T. Held, Sr.
Grantee: William J. Rand, et al
Sale Price: $3,150,000
Terms of Sale: Third-party conventional financing had no
impact on price.
PROPERTY DATA
Land Size: 15,000 square feet
Building Size: 27,500 square feet - gross
25,000 SF estimated leasable
Year Built: 1991
Occupancy at Sale: Build-to-suit for Rand Eye Institute
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $450,000 $18.00
Vacancy Allowance @ 5%: $ 22,500 $ 0.90
------- -----
Effective Gross Income: $427,500 $17.10
Estimated Expenses @ $5.00: $125,000 $ 5.00
-------- -----
Net Operating Income: $302,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 126.00
Stabilized Overall Rate: 9.6%
EGIM: 7.37
COMMENTS
This is a three-story, Class B, reflective glass and concrete building is
located in the northeast quadrant of the intersection of I-95 and Samples Road
near the campus of the North Broward Medical Center.
-42-
<PAGE> 55
IMPROVED SALE NUMBER 6
GENERAL SALE DATA
Location: 9750 N.W. 33rd Street in Coral
Springs, Broward County, Florida
Date of Sale: September 19, 1991
Deed Book/Page: 18762/194
Grantor: Central Medical Plaza Associates, Inc.
Grantee: Gary V. Caplan, Trustee
Sale Price: $4,790,200
Adjusted Sale Price: $4,550,500
Terms of Sale: Seller provided a 75% mortgage. The
sale price was adjusted downward 5%
for cash equivalency.
PROPERTY DATA
Land Size: 3.5 acres
Building Size: 48,031 square feet - gross
43,500 sf leasable
Year Built: 1988
Occupancy at Sale: 95%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $891,750 $20.50
Vacancy Allowance @ 10%: $ 89,175 $ 2.05
------- ------
Effective Gross Income: $802,575 $18.45
Estimated Expenses @ $6.00: $261,000 $ 6.00
------- ------
Net Operating Income: $541,575 $12.45
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 104.61
Stabilized Overall Rate: 11.9%
EGIM: 5.67
COMMENTS
This is a two-story, steel frame medical office building that was constructed
in 1988. It is located east if University Road and northwest of the Coral
Springs Medical Center. This sale occurred in the recession of 1991 when
conventional financing was difficult to obtain.
-43-
<PAGE> 56
IMPROVED SALE NUMBER 7
GENERAL SALE DATA
Location: South side of SW 8th Street at 4950
SW 8th Street in Coral Gables, Dade
County, Florida
Date of Sale: January 6, 1992
Deed Book/Page: 15338/2902
Grantor: Abbey Health Services Inc.
Grantee: Kendall Health Care Group, Inc.
Sale Price: $10,500,000
Terms of Sale: Third-party financing had no impact
on the purchase price.
PROPERTY DATA
Land Size: 21,250 square feet
Building Size: 37,100 square feet - leasable
Year Built: 1985
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $593,600 $16.00
Vacancy Allowance @ 10%: $ 59,360 $ 1.60
-------- ------
Effective Gross Income: $534,240 $14.40
Estimated Expenses @ $5.00/SF $185,500 $ 5.00
-------- ------
Net Operating Income: $348,740 $ 9.40
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 94.34
Stabilized Overall Rate: 9.9%
EGIM: 5.90
COMMENTS
This building has two stories of office space above a covered, open-air parking
lot. This location is near the Vencor Hospital. The building was reported to
be 100% occupied at the time of sale.
-44-
<PAGE> 57
These seven sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $ 3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $ 4,525,000 $139.23
Roswell, Georgia
4 2519 Galiano Street 139,500 $12,521,000 $ 89.76
Miami, Florida
5 5 West Sample Road 25,000 $ 3,150,000 $126.00
Pompano Beach, Florida
6 9750 N.W. 33rd Street 43,500 $ 4,670,200 $107.60
Coral Springs, Florida
7 4950 SW 8th Street 37,100 $ 10,500,000 $ 94.34
Coral Springs, Florida
</TABLE>
The unadjusted prices of these comparables range from $89.76 per square foot to
$153.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Grid is shown at the end of this section.
IMPROVED SALE 1 is a Class C professional office building that is located near
the Brookwood Medical Center. An affiliate of HealthSouth Medical Center
purchased this building to entice its physician/owner to move his practice to
their facility. This transaction was reportedly at a market value price.
However, a downward adjustment is still indicated because the building was not
marketed as a vacant building due to this relationship. A downward adjustment
to the price per square foot is indicated because of the smaller size of this
comparable. The building is located at the end of a steep winding road, and
has poor visibility. An upward adjustment is indicated due to this inferior
location compared to the subject. Large upward adjustments to this comparable
are also indicated because of the subject's superior construction quality and
because the
-45-
<PAGE> 58
subject building is newer than this comparable. The adjusted price per square
foot of this comparable is $130.36.
IMPROVED SALE 2 is the sale of a building purchased by UAB to use as a Medical
Genetics Center. Upward adjustments are indicated because of the subject's
superior location and quality, and because of the older age of this comparable.
An upward adjustment is indicated because this sale occurred during the
recession in 1991 when property values were declining and financing restricted.
The adjusted price for this comparable is $123.67 per square foot.
IMPROVED SALE 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. A downward adjustment is indicated because 80
percent of this facility was net leased to the hospital. A downward adjustment
is also indicated due to the smaller size of this comparable. Upward
adjustments are indicated for location and quality of improvements. The
adjusted price per square foot of this comparable is $153.15.
IMPROVED SALE 4 was the December 1992 sale of a 139,500 square foot
professional office building located in Miami, Florida. The sale was to the
main tenant in the building, a healthcare plan operated by Ramsay. An upward
adjustment is indicated because this tenant has such a large economic impact on
the property, and because the sellers were reportedly very motivated to sell.
An upward adjustment to the price per foot of this comparable is indicated
because the building is larger than the subject property. A further upward
adjustment is indicated because the subject building is adjacent to a hospital
and this comparable facility is not near a hospital. The adjusted price per
square foot of this comparable is $123.87.
IMPROVED SALE 5 is a Class B professional office building that is located in
Pompano Beach near the North Broward Medical Center. This building was
constructed for use by the Rand Eye Institute. An upward adjustment is
indicated because this sale occurred during the recession in 1991 when property
values declining and financing restricted. Upward adjustments are also
indicated for location and quality of the improvements. The adjusted price per
square foot of this comparable is $138.92.
-46-
<PAGE> 59
IMPROVED SALE 6 was the September 1991 sale of a professional office facility
that is located northwest of the Coral Springs Medical Center. The sale price
was adjusted downward for cash equivalency because of seller financing. Upward
adjustments are indicated due to the improving property values and the economy
since this sale, and because of the subject's superior location and superior
quality of improvements. The adjusted price per square foot of this comparable
is $137.30.
IMPROVED SALE 7 was January 1992 sale of a medical building located near the
Vencor Hospital in Coral Gables, Florida. Small upward adjustments to the
price per square foot of this comparable are indicated for location and size.
Upward adjustment are also indicated due to the older age of this comparable
and the subject's superior quality of improvements. The adjusted price per
square foot of this comparable is $122.64.
The adjusted prices per square foot range from $122.64 to $153.15, with an
arithmetic adjusted price of $132.84. The adjusted price for the comparable
requiring the least adjustments was $138.92 per square foot. An adjusted price
of $135.00 per square foot is representative of the subject property. Based on
this analysis, the market value of the subject property by the Sales Comparison
Approach, as of February 2, 1994, the effective date of this report, is
calculated as follows:
81,800 SF x $135.00/SF = $11,043,000
Rounded to: $11,045,000
===========
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<PAGE> 60
I M P R O V E D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building #2
Birmingham, Alabama
<TABLE>
<CAPTION>
Improved Improved Improved Improved Improved Improved Improved
Subject Sale Sale Sale Sale Sale Sale Sale
Element #1 #2 #3 #4 #5 #6 #7
<S> <C> <C> <C> <C> <C> <C> <C>
Sale Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $110.12 $ 94.34
Property Rights Fee Simple Same Same Same Same Same Same Same
Adjustment ($5.51)
-----------------------------------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $110.12 $ 94.34
Financing Cash Cash Cash Cash Cash Seller Cash Cash
Adjustment
-----------------------------------------------------------------------------------
Adjusted Price/SF $122.69 $84.13 $139.23 $ 89.76 $126.00 $104.61 $ 94.34
Conditions of Sale Relationship None None Mjr.Teant None None None
Adjustment -10.0% 5.0% 15.0% 5.0% 5.0%
---------------------------------------------------------------------------------
Adjusted Price/SF $104.29 $88.34 $139.23 $103.22 $132.30 $109.84 $ 94.34
Market/Time Effective
Adjustment Feb - 94 0% 0% 0% 0% 0% 0% 0%
---------------------------------------------------------------------------------
Adjusted Price/SF $104.29 $88.34 $139.23 $103.22 $132.30 $109.84 $ 94.34
Other Adjustments
Location Adjustment 25% 20% 10% 5% 5% 10% 5%
Age/Condition Adjustment 0% 5% 0% 5% 0% 0% 10%
Size Adjustment -25% 0% -5% 10% -10% 0% 5%
Quality Adjustment 25% 15% 10% 0% 10% 15% 10%
Leasing
Other Adjustment 0% 0% -5% 0% 0% 0% 0%
Net Other Adjustments 25% 40% 10% 20% 5% 25% 30%
FINAL ADJUSTED PRICE PER SF $130.36 $123.67 $153.15 $123.87 $138.92 $137.30 $122.64
==================================================================================
Arithmetic Mean Adjusted Price/SF: $132.84
============
</TABLE>
-48-
<PAGE> 61
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for each property are not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for each property times the rentable building area. We reserve the right to
modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
As discussed earlier, this report assumes that the tenant finish work on the
top floor of this building will be completed prior to the prospective sale to
the REIT.
The master lease rate for the subject property will be $13.00 per square foot
of net rentable area. The gross income for the subject property is calculated
as follows:
81,800 SF x $13.00/SF = $1,063,400
-49-
<PAGE> 62
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$53,170, based on the management experience of other properties. The net
operating income for the property is $1,063,400 less $53,170, or $1,010,230.
The estimated direct capitalization rates, or overall rates (OARs), for the
seven improved sale comparables presented in the Sales Comparison Approach
Section of this report ranged from 8.0 percent to 11.9 percent. Two of the
capitalization rates in the upper end of this range represent sales that
occurred in 1991 when sales and financing availability were restricted. In
Improved Sale #4, with a high estimated capitalization rate of 10.4 percent,
the buyer was the major tenant in the building, and the sale was reportedly not
completely an arms length sale. The estimated capitalization rates for the two
Birmingham properties were 8.0 percent and 9.0 percent. None of the comparable
sales were professional office buildings physically adjacent to hospitals.
This decreases the risks and reflects a higher potential value for the subject
property. Based on the comparables and this discussion, a capitalization rate
of 8.5 percent is considered appropriate for the property.
It is, therefore, our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$1,010,230/.085 = $11,885,059
Rounded to: $11,900,000
===========
-50-
<PAGE> 63
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Professional Building #2. The values derived from the three
approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . $13,980,000
Sales Comparison Approach . . . . . . . . . . . . . $11,045,000
Income Approach . . . . . . . . . . . . . . . . . . $11,900,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. This approach is
representative of the value in use as part of the hospital complex. The Cost
Approach, however, does not necessarily reflect the value that investors and
users would be willing to pay if the property were to be sold. Overall, this
approach is considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject and were in other geographic locations outside the Birmingham market.
None of the comparable sales were professional office buildings that were
physically contiguous to a hospital, which would indicate a higher value
because of lower leasing risks. The appraisers only consider this approach to
be a fair indicator of value for the subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
-51-
<PAGE> 64
Based on this analysis, it is our opinion that the market value of the
HealthSouth Professional Building #2, as of February 2, 1994, subject to the
HealthSouth master lease, and based on the assumptions and limiting conditions
in this report, is the Income Approach value of:
$11,900,000
===========
The values derived in the other approaches support the Income Approach value as
the final value.
-52-
<PAGE> 1
EXHIBIT 10.22
AN APPRAISAL OF
LARKIN 7000 BUILDING
SOUTH MIAMI, FLORIDA
<PAGE> 2
HealthSouth Corporation
February 11, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property includes a seven-story professional office building which
contains 120,981 gross square feet and 106,400 net rentable square feet
including common area allocations. In addition, the subject site contains a
six-story parking structure connected to the office building with open
walkways. The subject is located on a 48,687 square foot land site. The
building is a Class B structure with glass and stucco exterior finishes The
building was originally constructed in 1973 with a total renovation of the
structure occurring in 1989-1990. The building is currently 77 percent
occupied with "move-ins" anticipated over the next three months to fill the
building to a 89 percent occupancy level.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the Larkin 7000
Building, as of September 29, 1993, to be:
$13,500,000
===========
<PAGE> 3
HealthSouth Corporation
February 11, 1994
Page Three
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certification of the appraiser;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 4
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
I have made a personal inspection of the property that is the subject
of this report.
No one provided significant professional assistance to the person
signing this report.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 5
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 8
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 29, 1993
Property Identification: Larkin 7000 Building
Property Location: 7000 Southwest 62nd Avenue,
South Miami, Florida
Interest Appraised: Leased Fee Estate
Gross Building Area: 120,981 square feet
Net Rentable Area: 106,400 square feet
Subject Land Size: 48,687 square feet, or
1.12 acres
Improvements Description: Seven-story, steel frame and
concrete structure, Class B
professional office building
that was constructed in 1973
with a total renovation in
1989-1990.
Six-story concrete parking
deck containing 124,791 square
feet for 345 vehicles.
Occupancy Percentage: 77%
CONCLUSIONS
Cost Approach: $13,450,000
Direct Sales Comparison Approach: $10,640,000
Income Approach: $13,500,000
Final Value Estimate: $13,500,000
===========
<PAGE> 9
TABLE OF CONTENTS
Page
----
Transmittal Letter
Appraiser Certification
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 10
Zoning 11
Real Estate Taxes and Assessments 11
Site Analysis 11
Building and Site Improvements 12
HIGHEST AND BEST USE 15
VALUATION SECTION 19
Valuation Methodology 19
Cost Approach 20
Direct Sales Comparison Approach 30
Income Approach 40
CORRELATION AND CONCLUSION 42
<PAGE> 10
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Metropolitan Area Map
Exhibit D - Neighborhood Map
Exhibit E - Tax Plat Map
Exhibit F - Land Sale Location Map
Exhibit G - Building Descriptions
Exhibit H - Land Improvements Description
Exhibit I - Subject Photographs
Exhibit J - Lease
<PAGE> 11
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the Larkin 7000 Building located at 7000
Southwest 62nd Avenue, South Miami, Florida. The subject property includes a
seven-story professional office building which contains 120,981 gross square
feet and 106,400 net rentable square feet including common area allocations.
In addition, the subject site contains a six-story parking structure connected
to the office building with open walkways. The subject is located on a 48,687
square foot land site. The building is a Class B structure with glass and
stucco exterior finishes. The building was originally constructed in 1973 with
a total renovation of the structure occurring in 1989-1990. The building is
currently 77 percent occupied with "move-ins" anticipated over the next three
months to fill the building to a 89 percent occupancy level.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT).
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
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PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting
in what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U. S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
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<PAGE> 13
HISTORY OF THE PROPERTY
The subject was originally constructed in 1973 to serve the hospitals in the
immediate region. In November of 1988, Juana Corp. purchased the building
from One Seven Thousand Place Corp. for $7,876,100. The building's occupancy
at this time was falling and Juana Corp. mortgaged the property in order to
modernize and renovate the structure to be competitive with new modern
structures in the subject's region. During this renovation period, the
property owners defaulted on the notes and the property was placed in
receivership under the management of the Resolution Trust Corporation. The
property was subsequently purchased from HealthSouth Rehabilitation Corporation
for $6,500,000 in August of 1992. The overall occupancy at the time of
HealthSouth's acquisition was under 50 percent.
The subject professional office building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
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The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non- residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
JUNE 30, 1993 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
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<PAGE> 15
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
1993 1994 1995
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
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DESCRIPTIVE DATA
REGIONAL ANALYSIS
South Miami is located on the southwest border of Coral Gables in Dade County,
Florida. The area is generally known for its fine residential areas,
educational facilities, its quality of life, and is one of the nation's leading
locations for multi-national corporate headquarters.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
The Dade County region encompasses 26 municipalities with an estimated 1992
popu-lation of 1,982,901. This figure represents a growth estimate of
approximately 22 percent over 1980 levels. The subject facility is located in
the eleventh largest munici-pality in the county and presently has an estimated
population of 10,459. It is antici-pated, by the year 2000, that the
population will continue to expand in the county to an estimated 2,201,836 with
individual communities in the region sharing in this growth.
The median age of the population in the community is estimated at 35.5 with 21
percent of the population represented at under 18 years of age and 13 percent
of the population represented above 65 years of age. This compares to an
overall median age of 34.2 for the county with 24 percent of the population
represented at under age 18 and 14 percent of the population over the age of
65. This would tend to indicate that the South Miami region is occupied by
families with members older than the average in the county.
The racial and ethnic distribution of members in the South Miami community is
estimated at 66.8 percent white, 29.6 percent black, and the remaining 3.6
percent other races. It is estimated that the hispanic community in South
Miami is represented as 23.8 percent of the overall population. These figures
would tend to indicate that the South Miami community is similar in ethnic
diversification as computed to the Dade County region which is 72.9 percent
white, 20.6 percent black, and 6.5 percent other, with the hispanic population
represented at 49.2 percent.
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POPULATION GROWTH BY MUNICIPALITY
1980 1992* %
POPULATION POPULATION GROWTH
DADE COUNTY 1,625,509 1,982,901 22.0
Miami 346,865 359,973 3.8
Hialeah 145,254 195,579 34.6
Miami Beach 96,298 93,461 -2.9
North Miami 42,566 50,090 17.7
Coral Gables 43,241 40,700 -5.9
North Miami Beach 36,553 35,268 -3.5
Homestead 20,668 27,087 31.1
Opa-Locka 14,460 15,255 5.5
Sweetwater 8,251 14,096 70.8
Miami Springs 12,350 13,230 7.1
South Miami 10,944 10,459 -4.4
Miami Shores 9,244 10,097 9.2
Hialeah Gardens 2,700 9,259 242.9
Key Biscayne** - 8,897 N/A
Florida City 6,174 6,067 -1.7
West Miami 6,076 5,712 -6.0
North Bay Village 4,920 5,550 12.8
Bay Harbor Islands 4,869 4,721 -3.0
Surfside 3,763 4,204 11.7
Biscayne Park 3,088 3,081 -0.2
Bal Harbor 2,973 3,033 2.0
El Portal 2,055 2,461 19.8
Virginia Gardens 2,098 2,199 4.8
Medley 537 821 52.9
Golden Beach 612 805 31.5
Indian Creek Village 103 44 -57.3
Islandia 12 13 8.3
Unincorporated Dade 799,053 1,060,739 32.7
* Population estimates, subject to revision. ** Key Biscayne incorporated in
June 1991.
SOURCE: Dade County Planning Department, and Bureau of Economic Research.
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DADE COUNTY
POPULATION GROWTH
1950-2000
YEAR POPULATION GROWTH
1950 495,100 -
1955 709,800 43%
1960 935,000 32%
1965 1,097,200 17%
1970 1,267,800 16%
1975 1,452,000 15%
1980 1,625,800 12%
1985 1,775,000 9%
1990 1,937,094 9%
1991* 1,961,694 1%
1992* 1,982,901 1%
1995** 2,083,555 5%
2000** 2,201,836 6%
*Estimate of population, subject to revision
**Projection of population, which is subject to annual adjustment.
SOURCE: Dade County Planning Department; Bureau of Economic and Business
Research, and U.S. Dept. of Commerce
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<PAGE> 19
HOUSING
The growth of the region's population has helped to foster a steady residential
market. The total household units have increased over the past four decades
from 348,946 in 1960 to 771,288 in 1990. This represents an overall increase
of 121.0 percent over the period and an annual compound rate of growth of 2.0
percent. The Dade County real estate market reached its peak in 1980 with over
50,145 residences sold. This figure has dipped and climbed over the past
decade, but has generally declined with 36,521 sales reported in 1992. Average
home prices in the region have generally increased though, indicating that the
area has generally been built-out and that demand in the area remains strong.
From 1980 through 1992 the average single-family residential home price
increased 58.3 percent. The average condominium residence price increased 94.2
percent.
EMPLOYMENT
Employment growth grew rapidly in the region from 1980 through 1988 when it
appeared to hit its peak at 891,788. From 1980 through 1988 this represented
an overall growth of 18.69 percent. In 1992 the employment in the region was
estimated at 878,028, or a drop of 1.54 percent. This rate of employment
appears to be stabilized and one would not anticipate further large drops in
this figure. The labor force in the area has continued to increase with an
overall growth rate of 19.4 percent over the period 1980 through 1992. The
present labor force is estimated at 976,024. During the 1980s, the average
annual unemployment rate ranged from a low of 5.3 percent to a high of 10.0
percent with an overall average of 7.67 percent. The average unemployment at
the end of 1992 was estimated at 10.0 percent compared to 7.4 percent for the
U.S.
From 1980 through 1992 the diversity of the employment in the region has
greatly increased with 60,364 firms active in the Dade County market. This
represents a 32.5 percent change over 1980 levels. The service industry is
represented by the largest number of firms, with healthcare firms ranking as
the largest component of this sector. Wholesale and retail trade represents
the next largest employer in the region. The remaining sectors, which follow
in number of companies in their respective order, include finance/real estate,
construction, manufacturing, transportation, communications, public utilities,
and finally agriculture, forestry, and fishing.
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As of April 1993, the top five employers in the Dade County region were:
Dade County Public Schools 38,310
Metropolitan Dade County 23,000
Federal Government 18,800
State of Florida 14,900
Publix Super Markets, Inc. 8,000
INCOME
The per capita income in Dade County, Florida and the United States in 1990 was
$17,823, $18,539, and $18,696, respectively.
In summary, the region of the subject property enjoyed rapid growth in the
early 1980s which has stabilized in the early 1990s. Its economic base is
diverse, which bodes well for stabilized growth patterns in the foreseeable
future. The economy has recovered from Hurricane Andrew, which occurred in
1992, and is well positioned to post economic gains.
NEIGHBORHOOD ANALYSIS
The subject property is located in the center of South Miami approximately
three blocks west of the Central Business District. The immediate neighborhood
of the subject property is characterized by healthcare development including
the HealthSouth Hospital adjacent to the subject and South Miami Hospital two
blocks south of the subject.
The neighborhood boundaries include U.S. 1 which runs diagonally south and east
of the subject property and the Palmetto Expressway which runs in a north-south
direction approximately two miles west of the subject. The northern boundary
of the subject's neighborhood extends to Southwest 56th Street.
The residential neighborhoods surrounding the subject are diverse in character
with the residential area north of the subject generally consisting of lower
income families with the areas immediately west and south of the subject
experiencing higher income families.
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<PAGE> 21
The general neighborhood of the subject can be classified as stable and
providing a good location for a medical office structure serving the medical
community in the immediate area of the subject.
ZONING
The subject property is zoned "GR" by the City of South Miami. This zoning
district generally allows for the development of commercial properties,
including office, retail and institutional uses. The minimum lot size is
10,000 square feet with a minimum of 100 feet of frontage. Setback
requirements include 20 feet, front; 15 feet, rear; and 15 feet for any side
toward a street. The height limitation is presently 30 feet, or two stories.
A site's maximum improvement ratio is 85 percent.
The subject site's use has been "grandfathered" in due to its height and
improvement ratio. A letter of zoning compliance from the City of South Miami
is recommended for an official determination regarding any zoning conformity
issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in South Miami and is subject to the taxing
authority of the city and Dade County. Commercial properties in the City and
County are assessed at 100 percent of tax-appraised value for tax purposes.
The 1993 millage rate was $28.60 per $1,000 of assessed value.
The total tax-appraised value of the subject is $5,200,000. The total City and
County property taxes due in 1993 were $148,720.
SITE ANALYSIS
The subject site is an L-shaped parcel which fronts 220 lineal feet on the west
side of Southwest 62nd Avenue and 114 lineal feet on the south side of
Southwest 70th Street. The subject site's southern border extends 295 heading
in a westerly direction from Southwest 62nd Avenue. The rear section of the
site contains 130 lineal feet and
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<PAGE> 22
borders a single-family residential home to its rear. The subject site
contains 48,687 square feet.
The topography of the site is level and at street grade throughout. The
eastern half of the site along Southwest 62nd Avenue is improved with the
office structure with the western or rear portion of the site improved with the
parking deck. The subject site enjoys good visibility and frontage along
Southwest 62nd Avenue. The subject site is accessed from the southern
right-of-way of Southwest 70th Street. Vehicles exit through a drive-through
on the first floor of the building which exits on the east side of Southwest
62nd Avenue.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
Other site improvements consists of general landscaping, asphalt paving,
concrete paving and curbing, some trees and general signage.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
BUILDING AND SITE IMPROVEMENTS
Building
The Larkin 7000 Building was originally constructed in 1973 with a total
renovation in 1989-1990. The building contains 120,981 gross square feet and
106,400 net rentable square feet. The building, during our site visit, was 77
percent occupied.
The building is a seven-story, reinforced concrete Class B office structure.
The exterior walls of the structure include glass panels and styrofoam stucco
non-load bearing panels.
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<PAGE> 23
The first floor of the structure is concrete with a portion of the first floor
open to allow for a vehicle exit. Upper floors including the roof are concrete
panels supported on metal framing. There is mechanical penthouse on the roof
of the structure which houses the elevator mechanicals and the chilling units.
Interior finishes in the building are generally excellent quality accommodating
physician suites which range in size from 1,000 to 11,600 square feet. Ceiling
finishes throughout the structure include drop down acoustical panels except
for the main entrance which included reflective panels. Physician suites
generally contain high grade carpeting in patient waiting areas with vinyl tile
found in examination areas. The first floor entrance contains marble floor
finishes. The physician suites include multiple plumbing tie-ins to
accommodate aluminum basins, and private bath areas. Wall finishes primarily
consist of vinyl wall coverings with some areas painted. On each floor of the
building a woman's and men's public restroom is provided.
The building is cooled by a central chiller system. During our site inspection
the building was replacing its original chiller with two new 175-ton chillers.
The building's electric is provided in metal conduit and serves fluorescent and
incandescent lighting. The building has a pass key security system and
emergency power generator. The building is served by three elevators.
Adjacent to the office building and connected through open walkways is a
six-story concrete parking structure. The parking deck contains 124,791 square
feet including the walkways and houses spaces for 345 vehicles. The parking
garage does not contain an elevator and contains minimum lighting. The parking
garage has metal screens on three sides with concrete panels and dryvit on its
north face.
Site Improvements
Site improvements include concrete walkways which surround the structure and
concrete drives to the parking and exit areas.
More detail descriptions of the building and site improvement are included in
the Exhibit section of this report.
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<PAGE> 24
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 25
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for the
site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net income
equal to or greater than the amount needed to satisfy operating
expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for a
particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 26
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "GR" Commercial Retail. Permitted uses in this general zoning
category vary widely. Potential legal uses would include most retail and
restaurants, office/institutional uses, and hotels.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial or future single-family development
on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to retail/office development, the next consideration is economic
feasibility. Financially feasible uses for the site, if vacant, are those uses
that would generate an economic return to the land. New hospital related
development on the north and east sides of the building indicate that new
development is financially feasible. HealthSouth Medical Center is planning an
additional office building across the street.
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<PAGE> 27
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/retail use is physically possible and legally
permissible, and new development is financially feasible. Based on this
analysis, the current highest and best use of the land, if vacant, would be for
office/institutional development.
As Improved
The subject site is currently improved with a 106,400 rentable square foot
office building, with an adjacent parking deck and associated site
improvements. The purpose of this discussion is to determine whether to leave
the improvements as they are, to modify the improvements or to remove the
improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal non-conforming use according to the
City of South Miami, zoning guidelines. Under the zoning, the property could
remain as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would
-17-
<PAGE> 28
not be financially feasible. It would, however, be financially feasible to
correct any deferred maintenance. Due to present height limitations and
build-out ratios, the building's present configuration represents an economic
advantage to the property.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exists.
This will enable to the property to remain competitive in the leasing market.
The highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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<PAGE> 29
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 30
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-20-
<PAGE> 31
Land Comparable Number 1
Folio Number: 09-4025-028-1970, 1980, 1990, 2020, 2030, 2040,
and 2041
Location: 5965 SW 70th Street
Size: 65,550 square feet
Sale Date: May 1991
Deed Book/Page: 15020-0214
Grantor: Francisco Montana and W. Rosario
Grantee: Mauricio Montana
Sale Price: $1,100,000
Price Per Square Foot: $16.78
Terms of Sale: All Cash
Shape: Rectangular
Zoning: South Miami Commercial
Utilities: All utilities are available
Comments: Property is two blocks east of subject and
is presently improved with a five-story
parking garage.
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<PAGE> 32
Land Comparable Number 2
Folio Number: 09-4025-028-1940, 1960
Location: 6920 SW 59th Avenue
Size: 9,450 square feet
Sale Date: April 29, 1993
Deed Book/Page: 15795-3698
Grantor: Imperial Bank
Grantee: A. Building, Inc.
Sale Price: $140,000
Price Per Square Foot: $14.81
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel is presently vacant.
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<PAGE> 33
Land Comparable Number 3
Folio Number: 03-4120-017-1580
Location: Northeast corner of San Lorenzo and LeJeune
Road, 4251 LeJeune Road
Size: 21,805 square feet
Sale Date: February 1993
Deed Book/Page: 15822-3213
Grantor: Commerce Bank
Grantee: Goldcoast Partners Properties Co.
Sale Price: $650,000
Price Per Square Foot: $29.80
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Coral Gables Commercial
Utilities: All utilities are available.
Comments: This parcel is presently being improved
with an office building.
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<PAGE> 34
A summary of the land sales is shown as follows:
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
1 5965 SW 70th Street 05/91 65,550 $16.78
2 6920 SW 59th Avenue 04/93 9,450 $14.81
3 4251 LeJeune Road 02/93 21,805 $29.80
SUBJECT 7000 SW 62ND AVENUE 46,687
Discussion of Land Comparables
LAND COMPARABLE 1 is approximately two blocks east of the subject in a very
comparable neighborhood to the subject. This sale has been adjusted slightly
upward due to the age of the sale. All factors for location, utility,
topography appear to be equal and no adjustment for these occurrences appeared
warranted. A slight upward adjustment is warranted for parcel size due to the
comparable's larger size. The adjustments are shown on a Land Sale Adjustment
Grid at the end of this discussion. The adjusted price per square foot of this
comparable is $18.50 per square foot.
LAND COMPARABLE 2 is approximately one block east of the subject in a very
comparable neighborhood to the subject. No time adjustments to this sale were
made. All factors for location, utility, topography appear to be equal and no
adjustment for these occurrences appeared warranted. A slight downward
adjustment is warranted for parcel size due to the comparable's smaller size.
The adjustments are shown on a Land Sale Adjustment Grid at the end of this
discussion. The adjusted price per square foot of this comparable is $14.07
per square foot.
LAND COMPARABLE 3 is a similar size parcel located on a heavily travelled
thoroughfare approximately one mile east of the subject property. No time
adjustment was made to this sale. A significant downward adjustment to this
sale was made for location. The adjusted price for this comparable is $17.88
per square foot.
-24-
<PAGE> 35
<TABLE>
<CAPTION>
Subject Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C>
Element #1 #2 #3
Sale Price/SF $16.78 $14.81 $29.80
Property Rights Fee Simple Same Same Same
Adjustment
-----------------------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Financing Cash Cash Cash Cash
Adjustment
-----------------------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Conditions of Sale None None None
Adjustment
-----------------------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Market/Time 5% 0% 0%
Adjustment
-----------------------------------------------------
Adjusted Price/SF $17.62 $14.81 $29.80
Other Adjustments:
Location Adjustment 0% 0% -40%
Topography Adjustment 0% 0% 0%
Size Adjustment 5% -5% 0%
Zoning Adjustment 0% 0% 0%
Net Other Adjustments 5% -5% -40%
FINAL ADJUSTED PRICE PER SF $18.50 $14.07 $17.88
=====================================================
</TABLE>
-25-
<PAGE> 36
The adjusted land prices range from $14.07 per square foot to $18.50 per square
foot, with the prices of sales number one and two being the most representative
of the subject parcel. Based on our analysis of the subject versus these
comparables, it is our opinion that a land price of $15.00 per square is
representative of the subject site. The subject land value is estimated as
follows:
48,687 SF x $15.00/SF = $730,385
Rounded to: $730,000
========
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject office and
parking garage is estimated to be $18,908,721.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
-26-
<PAGE> 37
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was originally constructed in 1973 with extensive
renovations occurring in 1989 and 1990, and it is in average to good condition.
After taking into consideration all significant physical factors affecting the
subject property, it is judged that the subject office building and parking
garage has an effective age equal to 15 years. The remaining useful life is
estimated to be 30 years. This translates into a physical depreciation
estimate of 33 percent (15 years divided by 45 years). The amount of
depreciation attributable to the property has been estimated on a straight-line
basis, which is founded on the assumption that depreciation of a property
occurs equally throughout its economic life.
-27-
<PAGE> 38
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of seven years and a remaining useful life of
five years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 66
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciate rate.
The total depreciated value for the office building and parking garage is
estimated to be $12,668,843.
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$13,450,000
===========
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<PAGE> 39
SUMMARY OF REPLACEMENT COSTS
TOTAL RECAPITULATION: LARKIN 7000 BUILDING
<TABLE>
<S> <C> <C>
Excavation and Site Preparation $ 5,495
Foundation 334,491
Frame 1,675,325
Exterior Walls 1,194,146
Floors 1,090,101
Roof 153,848
Roof Cover 48,642
Partitioning and Built-In Items 3,512,643
Ceilings 870,390
Floor Coverings 659,942
Plumbing 978,566
Heating, Ventilation and Air Conditioning (Net) 802,001
Electrical 1,770,621
Other Features 404,109
-----------
Total Labor, Materials, Incidentals and Profit $13,500,320
Architect Fees, Plans and Specifications $ 472,511
Architect Fees, Supervision 405,010
Add: Miscellaneous Fees 1,437,784
-----------
Total Replacement of Cost Medical Office Building $15,815,625
Parking Garage (see Exhibits) $ 3,093,096
-----------
Total Reproduction Cost Buildings $18,908,721
Less: Depreciation at 15/45 (33%) (6,239,878)
-----------
Total Depreciated Value of Improvements $12,668,843
Total Replacement Cost of Land Improvements $100,000
Less: Depreciation at 10/15 (66%) (66,000)
--------
Total Depreciated Value of Land Improvements $ 34,000
Add: Value of Land as Vacant 730,000
-----------
$13,432,843
Rounded to: $13,450,000
===========
</TABLE>
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<PAGE> 40
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on three professional office building
sales which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
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<PAGE> 41
OFFICE BUILDING SALE NUMBER 1
PROPERTY IDENTIFICATION
Building Name: Professional Arts Center
Address: 1150 NW 14th Street, Miami, Dade County,
Florida
Folio Number: 01-3135-062-0010
Brief Legal: All of SECOND ADDITION TO MEDICAL CENTER, PB
123, Pg. 28, Public Records of Dade County,
Florida
Submarket: Civic Center
TRANSACTION DATA
Date of Sale: September 1992
Grantor: Clifford Rosen as Trustee for the Professional
Arts Center Partnership
Grantee: University of Miami
Interest Conveyed: Fee Simple subject to leases
O.R. Book/Page: 15666/3436
Nominal Sales Price: $10,850,000
Cash Equivalent: $8,850,000
Terms of Sale: All Cash. The sale includes approximately 2
acres of excess land which was valued in a
recent appraisal at $2,000,000. For
purposes of deriving appraisal indicators, we
have deducted this amount from the sale price
to derive an estimated amount attributable to
the building.
Marketing Time: Unknown. The property had been widely
marketed, but was off the market for a time.
Occupancy at Sale: 99%
PROPERTY DESCRIPTION
Land Area: 69,217 square feet, or 1.589 acres
Year Built: 1965
Gross Building Area: 87,442 square feet
Rentable Area: 81,485 square feet
Land to Building Ratio: 0.79:1
Number of Stories: Seven
Average Floor Plate: 11,700 square feet
Number of Elevators: Three (one serving floors 6 & 7 only)
Parking: 238 surface spaces, or 3.5 spaces per 1,000
SFRA
-31-
<PAGE> 42
OFFICE BUILDING SALE NUMBER 1 (CONTINUED)
Construction Type: Average quality, architectural Class
"B" building. Exterior curtain walls
consist of plat glass in aluminum
frames and precast concrete panels
which form a non-repetitive bas-
relief sculpture. The site totals
156,337 square feet or 3.589 acres,
of which approximately 2.0 acres is
considered to be excess.
FINANCIAL DATA (BASED ON EXAMINATION OF HISTORIC NUMBERS AND PROJECTIONS IN A
RECENT APPRAISAL)
Gross Revenues: $1,600,000 or $19.64/SFRA
Less Vacancy & Loss: 30,000 or 0.37/SFRA
---------- ------
Effective Gross Income: $1,570,000 or $19.27/SFRA
Less Expenses: 645,000 or 7.92/SFRA
--------- ------
Net Operating Income: $925,000 or $11.35/SFRA
APPRAISAL INDICATORS
Price Per SFRA: $108.61
Effective Gross Income
Multiplier: 5.64
Overall Rate: 10.45%
Equity Dividend Rate: 10.45%
COMMENTS
This was a purchase by the University of Miami which previously occupied
approximately 33.5% of the building's space. The University has a major
commitment in the Civic Center area and will most likely occupy more of the
building as leases with other parties expire.
-32-
<PAGE> 43
OFFICE BUILDING SALE NUMBER 2
<TABLE>
<S> <C>
PROPERTY IDENTIFICATION
Building Name: Kingston Plaza
Address: 8251 West Broward Boulevard, Broward County, Florida
Folio Number: Kingston Properties, 81-7B, Lots A & B
Submarket: Plantation
TRANSACTION DATA
Date of Sale: August 1992
Grantor: G. Heydasch and I. Heydasch, Trs.
Grantee: Kingston Plaza, Inc. (Max Richards, President)
Interest Conveyed: Fee Simple subject to leases
O.R. Book/Page: Not recorded
Nominal Sales Price: $2,750,000
Terms of Sale: Assumed mortgage of $2.4 million and paid $350,000 in cash.
Marketing Time: This property has been on the market since 1985
Occupancy at Sale: 82%
PROPERTY DESCRIPTION
Land Area: 121,532 square feet, or 2.79 acres
Year Built: 1975
Gross Building Area: 52,606 square feet
Rentable Area: 50,449 square feet
Land to Building Ratio: 2.30:1
Number of Stories: Five
Average Floor Plate: Not available
Number of Elevators: One
Parking: Adequate surface parking
Construction Type: Concrete block with stucco
FINANCIAL DATA
* Net Operating Income: $280,000 or $5.55/SFRA
* NOI inclusive of reserves
</TABLE>
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<PAGE> 44
OFFICE BUILDING SALE NUMBER 2 (CONTINUED)
APPRAISAL INDICATORS
Price Per SFRA: $54.51
Overall Rate: 10.18%
COMMENTS
This medical office building is uniquely located adjacent to Humana Hospital.
It also has good frontage along Broward Boulevard, a major east/west
thoroughfare. The broker involved the sale informed that the property was due
for a $300,000 to $400,000 facelift. This is the first time that the occupancy
level has dropped to the eighty percentile. Before the previous owner passed
away (two years ago), the property maintained an occupancy level of 100%. Of
the few parties involved in the sale, two were physicians. Apparently, these
physicians did not base their judgment on the net operating income generated by
the property. Instead, more emphasis was placed on the property's locational
advantages. This property is currently 100% occupied by physicians connected
with Humana Hospital.
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<PAGE> 45
OFFICE BUILDING SALE NUMBER 3
<TABLE>
<S> <C>
PROPERTY IDENTIFICATION
Building Name: Miami Medical Arts
Address: 6201 S.W. 70th Street, Miami, Dade County, Florida
Folio Number: 09-4025-022-0260
Brief Legal: Lots 3-5, and East 35 feet of South 100 feet of Lot 6 and North 20 feet of East 25 feet of
Lot 6 and North 20 feet of East 25 feet of Lot 6 and South 30 feet of east 25 feet of Lot
12 less East 10 feet of Lots 3-5 of COCOPLUM TERRACE, Plat Book 25 at Page 4, Official
Records of Dade County
Submarket: South Miami
TRANSACTION DATA
Date of Sale: October 1990
Grantor: Mr. Steven Raskin
Grantee: Mr. Donald Flitman and Mr. John E. Swift, Trustee
Interest Conveyed: Fee Simple subject to leases
O.R. Book/Page: 14741/2376
Nominal Sales Price: $1,100,000
Terms of Sale: The buyer gave a down payment of $200,000. The previous owners gave a PMM wraparound of
$900,000 at 10%. This PMM is a seven-year interest only which expires at the same time
the first mortgage expires. Presently, the balance on the first mortgage is $250,000.
Marketing Time: Unknown
Occupancy at Sale: 100%
PROPERTY DESCRIPTION
Land Area: 21,000+ square feet, or 0.48 acres
Year Built: 1972
Gross Building Area: 18,780 square feet
Rentable Area: 16,250 square feet
Land to Building Ratio: 0.12:1
Number of Stories: Five
Average Floor Plate: Not available
Number of Elevators: Two
Parking: Surface parking.
Construction Type: Average quality, Class "B" medical building.
</TABLE>
-35-
<PAGE> 46
OFFICE BUILDING SALE NUMBER 3 (CONTINUED)
APPRAISAL INDICATORS
Price Per SFRA: $67.69
Overall Rate: N/A
COMMENTS
This comparable is considered a distressed sale because it was the liquidation
of assets of a partnership. The building was developed by the partnership and
had not changed hands since 1972. It has a history of stable occupancy, with
some tenants leasing space since the opening. The buyer stated that his law
firm intended to pay $16 per square foot for approximately 2,000 square feet.
-36-
<PAGE> 47
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NUMBER NAME/LOCATION (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 Professional Arts Center 81,485 $8,850,000 $108.61
Miami, Florida
2 Kingston Plaza 50,449 $2,750,000 $54.51
Broward County, Florida
3 Miami Medical Arts 16,250 $1,100,000 $67.69
Miami, Florida
</TABLE>
The unadjusted prices of these comparables range from $54.51 per square foot to
$108.61 per square foot. Each of the comparables will be discussed and
adjusted for comparison with the subject property. An Improved Sales
Adjustment Matrix is shown on the following page.
SALE 1 is an average quality Class B professional office building which serves
an adjacent hospital. The sale was an arm's length transaction with no
non-market financing considerations. An initial adjustment to the sale was
made for the excess land associated with the sale. No adjustments were deemed
necessary for location, occupancy, or building condition. A slight downward
adjustment has been made for building size. Overall, the adjusted sales price
per square foot is estimated at $103.18.
SALE 2 is an average quality Class C structure which serves an adjacent
hospital. The sale was an arm's length transaction with financing provided at
market rates. Significant upward adjustments to this sale are warranted for
its inferior occupancy and building quality. A downward adjustment has been
made for building size. The adjusted sales price per square foot is estimated
at $65.41.
SALE 3 is an average quality Class B structure which serves medical and
professional tenants. The sale was initially adjusted upward for the sale's
condition, as it was considered a distressed sale. Further upward adjustments
were made to account for the depressed market condition which existed in 1990.
No adjustments were warranted for location or occupancy. An upward adjustment
has been applied for condition. A downward adjustment has been applied for
size. The adjusted price per square foot is estimated at $89.46.
-37-
<PAGE> 48
Improved Sale Adjustment Matrix
<TABLE>
<S> <C> <C> <C>
Sale Price/SF $108.61 $54.51 $67.69
Property Right Adjustment Same Same Same
Adjusted Price/SF $108.61 $54.51 $67.69
Financing Adjustment Cash Equivalent Cash
Adjusted Price $108.61 $54.51 $67.62
Conditions of Sale Arm's Length Arm's Length Distressed
Adjustment - - 20%
Adjusted Price/SF $108.61 $54.51 $81.14
Market/Time Adjustment 0.00 - 5%
Adjusted Price/SF $108.61 $54.51 $85.20
Other Adjustments:
Location 0 0 0
Occupancy 0 +15% 0
Construction Quality 0 +10% +10%
Size -5% -5% -5%
--- ---- ----
Net Other Adjustments -5% 20% 5%
Final Adjusted Price/SF $103.18 $65.41 $89.46
</TABLE>
-38-
<PAGE> 49
The adjusted prices per square foot range from $65.41 to $103.18 with the most
comparable sales at the upper end of the range. Based on this analysis, the
market value of the subject property by the Direct Sales Comparison Approach,
as of September 29, 1993, is calculated as follows:
106,400 SF x $100.00/SF =
$10,640,000
-39-
<PAGE> 50
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of the master lease agreement, but
the actual master lease agreements for each property are not yet available.
For the purpose of our Income Approach, the gross income will be the master
lease rate for each property times the rentable building area. We reserve the
right to modify the Income Approach valuation if the actual master lease for
each property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
106,400 SF x $14.00/SF = $1,489,600
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
-40-
<PAGE> 51
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$74,480, based on the management experience of other properties. The net
operating income for the property is $1,489,600 less $74,480, or $1,415,120.
The estimated direct capitalization rates, or overall rates (OARs), for the
three improved sale comparables presented in the Direct Sales Comparison
Section of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Professional Arts Center September 1992 10.45
Miami, Florida
2 Kingston Plaza August 1992 10.18
Broward County, Florida
3 Miami Medical Arts October 1990 N/A
Miami, Florida
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
10.18 percent to 10.45 percent.
A capitalization rate at 10.5 percent is considered appropriate.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$1,415,120/.105 = $13,477,333
Rounded to: $13,500,000
===========
-41-
<PAGE> 52
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the Larkin 7000 Building. The three approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . . . $13,450,000
Direct Sales Comparison Approach . . . . . . . . . . . . $10,640,000
Income Approach . . . . . . . . . . . . . . . . . . . . $13,500,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for an older building is unreliable. For these reasons, this
approach is considered only a fair indicator of value for the subject property.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quantity and quality of data available in this approach was
considered good. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the Larkin
7000 Building, as of September 29, 1993, and based on the assumptions and
limiting conditions in this report, is:
$13,500,000
===========
-42-
<PAGE> 1
EXHIBIT 10.23
AN APPRAISAL OF
LARKIN ANNEX BUILDING
AND EXCESS LAND
SOUTH MIAMI, FLORIDA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 11, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the office building identified as follows:
LARKIN ANNEX BUILDING
AND EXCESS LAND
6129 SOUTHWEST 70TH STREET
SOUTH MIAMI, FLORIDA 33143
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $11.00 per
rentable square foot of building area associated with the building and 19,787
square feet of land area and $120,000 of annual rental associated with 100,000
square feet of excess land area.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
<PAGE> 3
HealthSouth Corporation
February 11, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property includes a two-story specialty office/storage building
which is located on a 119,787 square foot site. The office building is a
two-story, Class C structure containing 10,255 square feet which is currently
100 percent occupied by HealthSouth. Approximately 19,787 square feet is
associated with the building with 100,000 square feet of the land site
associated with parking for the hospital.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the property
appraised is, as of September 29, 1993, to be reasonably represented as
follows:
Larkin Annex Building Site $1,100,000
==========
Excess Land $1,200,000
==========
<PAGE> 4
HealthSouth Corporation
February 11, 1994
Page Three
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certification of the appraiser;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:jef
<PAGE> 5
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
I have made a personal inspection of the property that is the subject
of this report.
No one provided significant professional assistance to the person
signing this report.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<CAPTION>
GENERAL DATA
- ------------
<S> <C>
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 29, 1993
Property Identification: Larkin Annex Building
Property Location: 6129 SW 70th Street, South Miami, Florida
Interest Appraised: Leased Fee Estate
Gross Building Area: 10,255 square feet
Net Rentable Area: 10,255 square feet
Subject Land Size: 119,787 square feet, or 1.072 acres
Improvements Description: Two-story, Class C office/specialty building that was constructed in 1970
with remodeling to the building conducted in 1980.
Occupancy Percentage: 100%
</TABLE>
<TABLE>
<CAPTION>
CONCLUSIONS Building Site Excess Land
- ----------- ------------- -----------
<S> <C> <C>
Cost Approach: $800,000 $1,200,000
Direct Sales Comparison Approach: N/A N/A
Income Approach: $1,100,000 $1,200,000
Final Value Estimates: $1,100,000 $1,200,000
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Transmittal Letter
Appraiser Certification
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 10
Zoning 11
Real Estate Taxes and Assessments 11
Site Analysis 12
Building and Site Improvements 13
HIGHEST AND BEST USE 15
VALUATION SECTION 19
Valuation Methodology 19
Cost Approach 20
Income Approach 31
CORRELATION AND CONCLUSION 35
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Metropolitan Area/Neighborhood Map
Exhibit D - Tax Plat Map
Exhibit E - Land Sale Location Map
Exhibit F - Leasing Status Schedule
Exhibit G1 - Building Description
Exhibit G2 - Land Improvements Description
Exhibit H - Office Building Comparables
Exhibit I - Subject Photographs
Exhibit J - Lease Agreement
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the Larkin Annex Building and associated
excess land. The subject property includes a two-story specialty
office/storage building which is located on a 119,787 square foot site. The
office building is a two-story, Class C structure containing 10,255 square feet
which is currently 100 percent occupied by HealthSouth. Approximately 19,787
square feet is associated with the building with 100,000 square feet of the
land site associated with parking for the hospital.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT).
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, P. 21, 10th Ed., published by The
Appraisal Institute.]
-2-
<PAGE> 14
HISTORY OF THE PROPERTY
The subject was originally constructed in 1970 with renovation to the building
conducted in 1980. The building and land was purchased by HealthSouth
corporation in 1992 with their purchase of the adjacent hospital. No other
deed transactions were recorded on the property over the last three years. The
building is presently occupied with accounting and housekeeping departments
associated with the hospital.
The subject professional office building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non- residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period.
-3-
<PAGE> 15
Federal Government Purchases account for 7.2 percent of the total GDP, and this
decline is limited to the rate of overall GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
-4-
<PAGE> 16
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
-5-
<PAGE> 17
DESCRIPTIVE DATA
REGIONAL ANALYSIS
South Miami is located on the southwest border of Coral Gables in Dade County,
Florida. The area is generally known for its fine residential areas,
educational facilities, its quality of life, and is one of the nation's leading
locations for multi-national corporate headquarters.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
The Dade County region encompasses 26 municipalities with an estimated 1992
popu-lation of 1,982,901. This figure represents a growth estimate of
approximately 22 percent over 1980 levels. The subject facility is located in
the eleventh largest municipality in the county and presently has an estimated
population of 10,459. It is anticipated, by the year 2000, that the
population will continue to expand in the county to an estimated 2,201,836 with
individual communities in the region sharing in this growth.
The median age of the population in the community is estimated at 35.5 with 21
percent of the population represented at under 18 years of age and 13 percent
of the population represented above 65 years of age. This compares to an
overall median age of 34.2 for the county with 24 percent of the population
represented at under age 18 and 14 percent of the population over the age of
65. This would tend to indicate that the South Miami region is occupied by
families with members older than the average in the county.
The racial and ethnic distribution of members in the South Miami community is
estimated at 66.8 percent white, 29.6 percent black, and the remaining 3.6
percent other races. It is estimated that the hispanic community in South
Miami is represented as 23.8 percent of the overall population. These figures
would tend to indicate that the South Miami community is similar in ethnic
diversification as computed to the Dade County region which is 72.9 percent
white, 20.6 percent black, and 6.5 percent other, with the hispanic population
represented at 49.2 percent.
-6-
<PAGE> 18
POPULATION GROWTH BY MUNICIPALITY
<TABLE>
<CAPTION>
1980 1992 %
POPULATION POPULATION GROWTH
<S> <C> <C> <C>
DADE COUNTY 1,625,509 1,982,901 22.0
Miami 346,865 359,973 3.8
Hialeah 145,254 195,579 34.6
Miami Beach 96,298 93,461 -2.9
North Miami 42,566 50,090 17.7
Coral Gables 43,241 40,700 -5.9
North Miami Beach 36,553 35,268 -3.5
Homestead 20,688 27,087 31.1
Opa-Locka 14,460 15,255 5.5
Sweetwater 8,251 14,096 70.8
Miami Springs 12,350 13,230 7.1
South Miami 10,944 10,459 -4.4
Miami Shores 9,244 10,097 9.2
Hialeah Gardens 2,700 9,259 242.9
Key Biscayne** -- 8,897 N/A
Florida City 6,174 6,067 -1.7
West Miami 6,076 5,712 -6.0
North Bay Village 4,920 5,550 12.8
Bay Harbor Islands 4,869 4,721 -3.0
Surfside 3,763 4,204 11.7
Biscayne Park 3,088 3,081 -0.2
Bal Harbour 2,973 3,033 2.0
El Portal 2,055 2,461 19.8
Virginia Gardens 2,098 2,199 4.8
Medley 537 821 52.9
Golden Beach 612 805 31.5
Indian Creek Village 103 44 -57.3
Islandia 12 13 8.3
Unincorporated Dade 799,053 1,060,739 32.7
*Population estimates subject to revision. **Key Biscayne incorporated in June 1991.
SOURCE: Dade County Planning Department, and Bureau of Economic Research.
</TABLE>
-7-
<PAGE> 19
Dade County Population Growth
1950 - 2000
YEAR POPULATION GROWTH
1950 495,100 --
1955 709,800 43%
1960 935,000 32%
1965 1,097,200 17%
1970 1,267,800 16%
1975 1,452,000 15%
1980 1,625,800 12%
1985 1,775,000 9%
1990 1,937,094 9%
1991* 1,961,694 1%
1992* 1,982,901 1%
1995** 2,083,555 5%
2000** 2,201,836 6%
*Estimate of population, subject to revision.
**Projection of population, which is subject to annual adjustment.
Source: Dade County Planning Department; Bureau of Economic and Business
Research, and U.S. Dept. of Commerce.
-8-
<PAGE> 20
HOUSING
The growth of the region's population has helped to foster a steady residential
market. The total household units have increased over the past four decades
from 348,946 in 1960 to 771,288 in 1990. This represents an overall increase
of 121.0 percent over the period and an annual compound rate of growth of 2.0
percent. The Dade County real estate market reached its peak in 1980 with over
50,145 residences sold. This figure has dipped and climbed over the past
decade, but has generally declined with 36,521 sales reported in 1992. Average
home prices in the region have generally increased though, indicating that the
area has generally been built-out and that demand in the area remains strong.
From 1980 through 1992 the average single-family residential home price
increased 58.3 percent. The average condominium residence price increased 94.2
percent.
EMPLOYMENT
Employment growth grew rapidly in the region from 1980 through 1988 when it
appeared to hit its peak at 891,788. From 1980 through 1988 this represented
an overall growth of 18.69 percent. In 1992 the employment in the region was
estimated at 878,028, or a drop of 1.54 percent. This rate of employment
appears to be stabilized and one would not anticipate further large drops in
this figure. The labor force in the area has continued to increase with an
overall growth rate of 19.4 percent over the period 1980 through 1992. The
present labor force is estimated at 976,024. During the 1980s, the average
annual unemployment rate ranged from a low of 5.3 percent to a high of 10.0
percent with an overall average of 7.67 percent. The average unemployment at
the end of 1992 was estimated at 10.0 percent compared to 7.4 percent for the
U.S.
From 1980 through 1992 the diversity of the employment in the region has
greatly increased with 60,364 firms active in the Dade County market. This
represents a 32.5 percent change over 1980 levels. The service industry is
represented by the largest number of firms, with healthcare firms ranking as
the largest component of this sector. Wholesale and retail trade represents
the next largest employer in the region. The remaining sectors, which follow
in number of companies in their respective order, include finance/real estate,
construction, manufacturing, transportation, communications, public utilities,
and finally agriculture, forestry, and fishing.
-9-
<PAGE> 21
As of April 1993, the top five employers in the Dade County region were:
<TABLE>
<S> <C>
Dade County Public Schools 38,310
Metropolitan Dade County 23,000
Federal Government 18,800
State of Florida 14,900
Publix Super Markets, Inc. 8,000
</TABLE>
INCOME
The per capita income in Dade County, Florida and the United States in 1990 was
$17,823, $18,539, and $18,696, respectively.
In summary, the region of the subject property enjoyed rapid growth in the
early 1980s which has stabilized in the early 1990s. Its economic base is
diverse, which bodes well for stabilized growth patterns in the foreseeable
future. The economy has recovered from Hurricane Andrew, which occurred in
1992, and is well positioned to post economic gains.
NEIGHBORHOOD ANALYSIS
The subject property is located in the center of South Miami approximately
three blocks west of the Central Business District. The immediate neighborhood
of the subject property is characterized by healthcare development including
the HealthSouth Hospital adjacent to the subject and South Miami Hospital two
blocks south of the subject.
The neighborhood boundaries include U.S. 1, which runs diagonally south and
east of the subject property; and the Palmetto Expressway, which runs in a
north-south direction approximately two miles west of the subject. The
northern boundary of the subject's neighborhood extends to Southwest 56th
Street.
The residential neighborhoods surrounding the subject are diverse in character
with the residential area north of the subject generally consisting of lower
income families with the areas immediately west and south of the subject
experiencing higher income families.
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<PAGE> 22
The general neighborhood of the subject can be classified as stable and
providing a good location for a medical office structure serving the medical
community in the immediate area of the subject.
ZONING
The subject property is zoned "Hospital-MO" by the city of South Miami. This
zoning district generally allows for the development of healthcare properties
including hospital support function structures.
General requirements in the district require a minimum building site of 10,000
square feet, with front, rear, and side setbacks of fifteen feet, ten feet and
ten feet, respectively. Maximum height allowances of four stories or 50 feet
is allowed with a maximum floor ratio of 1.6 feet.
The subject building contains 10,255 square feet. In our determination of the
building's land site, we have estimated that 19,787 feet would be the adequate
amount of land which should be allocated to the subject building to meet all
zoning requirements. The remaining portion of the land would approximate
100,000 square feet.
Based upon our analysis of the zoning regulations, the property under the
proposed allocation scenario would meet zoning requirements.
A letter of zoning compliance from the City of South Miami is recommended for
an official determination regarding any zoning conformity issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is situated in South Miami, and subject to the taxing
authority of the City and Dade County. Commercial properties in the City and
County are assessed at 100 percent of tax-appraised value for tax purposes.
The 1993 millage rate is $28.60 per $1,000 of assessed value. The property is
taxed under thirteen parcel numbers. The amount of the assessment and taxes
for each parcel is shown on the following chart. The total taxes due on the
property $49,901.74.
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<PAGE> 23
Folio Number Assessment Tax Amount
- ----------- ---------- ----------
4025-028-179-00 $ 90,650(L) $ 2,592.59
4025-028-180-00 $ 84,525(L) 2,417.43
4025-028-181-00 $ 84,525(L) 2,417.43
4025-028-182-00 $ 84,525(L) 2,417.43
4025-028-183-00 $169,050(L) 4,834.85
4025-028-183-00 $ 1,000(B) 28.60
4025-028-184-00 $ 84,525(L) 2,417.41
4025-028-184-00 $ 1,000(B) 28.60
4025-028-185-00 $ 84,525(L) 2,417.43
4025-028-186-00 $ 57,428(L) 1,642.44
4025-028-187-00 $202,983(L) 5,805.33
4025-028-187-00 $ 1,000(B) 28.60
4025-028-188-00 127,995(L) 3,660.66
4025-028-188-00 $ 1,000(B) 28.60
4025-028-189-00 $103,500(L) 2,960.10
4025-028-190-00 $200,790(L) 5,742.60
4025-028-190-00 $ 62,791(B) 1,795.83
4025-028-191-00 $103,500(L) 2,960.10
4025-028-1921-00 $199,500(L) 5,705.71
----------
Total $49,901.74
(L) = Land Assessment
(I) = Improvement Assessment
SITE ANALYSIS
The subject site is an L-shaped parcel which is located on the northeast corner
of Southwest 62nd Avenue and Southwest 70th Street. The subject contains 285
feet of frontage on the north side of Southwest 70th Street and 200 feet of
frontage on the south side of Southwest 69th Street. The property contains
138 feet of frontage on the east side of Southwest 62nd Avenue. The building
improvements are located on the southwest portion of the site. The remaining
portion of the site is improved with paved parking areas and concrete dividers.
Adjacent to the site on its east border is vacant land. The northwest
boundaries are also adjacent to a site which is presently unimproved. Across
Southwest 69th Street is
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<PAGE> 24
apartments; across Southwest 70th Street is the HealthSouth Hospital. The
topography of the site is flat and at grade with all road frontages. The site
is accessed from Southwest 70th Street. According to the records contained at
the Tax Assessors Office, the land site contains 119,787 square feet.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
Other site improvements consists of general landscaping, asphalt paving,
concrete paving and curbing, some trees and general signage.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
BUILDING AND SITE IMPROVEMENTS
Building
The Larkin Annex Building was originally constructed in 1970 with some
remodeling made to the building in 1980. The building contains 10,255 square
feet in two stories. The building is a Class C structure with concrete
foundations and footings. Exterior walls consist of concrete block walls with
a stucco covering. The building floors consist of concrete on grade with
concrete flooring over metal sheathing for the second level. The roof of the
building is concrete over metal with a built-up tar and gravel covering.
The building's interior walls consist of drywall and concrete block
partitioning. The wall finishes generally consist of paint and paneling.
Portions of the building's ceiling are unfinished with the remaining portion of
the building containing drop-down acoustical panels. Floor finishes consist of
unfinished concrete areas on the first floor with the remaining sections of the
building being carpeted.
-13-
<PAGE> 25
The building contains five water closets, four ceramic sinks, two urinals, one
slop sink and one water cooler. The building is heated and cooled by roof-top
units. The building contains incandescent and fluorescent light fixtures in
conduit. The building houses a two-stop elevator.
Site Improvements
Site improvements consist of asphalt paving, lighting and fencing.
More detail descriptions of the building and site improvements are included in
the Exhibit section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 26
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 27
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "Hospital-MO". Permitted uses in this general zoning are
specific and allow for healthcare and hospital-related uses. Potential legal
uses would include specialty and general hospitals, clinics, and hospital
support buildings.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to institutional development, the next consideration is economic
feasibility. Financially feasible uses for the site, if vacant, are those uses
that would generate an economic return to the land. New hospital-related
development on the north and east sides of the building indicate that new
development is financially feasible. HealthSouth Medical Center is planning an
additional office adjacent to the subject.
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<PAGE> 28
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for institutional development.
As Improved
The subject site is currently improved with a 10,255 rentable square foot
office/specialty building, with an adjacent parking deck and associated site
improvements. The purpose of this discussion is to determine whether to leave
the improvements as they are, to modify the improvements or to remove the
improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the City
of South Miami, zoning guidelines. Under the zoning, the property could remain
as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would
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<PAGE> 29
not be financially feasible. It would, however, be financially feasible to
correct any deferred maintenance.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exists.
This will enable to the property to remain competitive in the leasing market.
The highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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<PAGE> 30
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a
final opinion of value. Due to the specialized nature of the subject property
with its limited zoning and the need to provide parking to the adjacent hospital
few similar transactions could be found to arrive at a reliable comparison.
Therefore, we have not considered the Direct Sales Comparison Approach as being
an appropriate valuation approach for the subject. The application of the Cost
and Income Approaches to value is further discussed in the appropriate sections
which follow.
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<PAGE> 31
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-20-
<PAGE> 32
Land Comparable Number 1
<TABLE>
<S> <C>
Folio Number: 09-4025-028-1970, 1980, 1990, 2020, 2030, 2040, and 2041
Location: 5965 SW 70th Street
Size: 65,550 square feet
Sale Date: May 1991
Deed Book/Page: 15020-0214
Grantor: Francisco Montana and W. Rosario
Grantee: Mauricio Montana
Sale Price: $1,100,000
Price Per Square Foot: $16.78
Terms of Sale: All Cash
Shape: Rectangular
Zoning: South Miami Commercial
Utilities: All utilities are available.
Comments: Property is two blocks east of subject and is presently improved with a five-story
parking garage.
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
Land Comparable Number 2
- ------------------------
<S> <C>
Folio Number: 09-4025-028-1940, 1960
Location: 6920 SW 59th Avenue
Size: 9,450 square feet
Sale Date: April 29, 1993
Deed Book/Page: 15795-3698
Grantor: Imperial Bank
Grantee: A. Building, Inc.
Sale Price: $140,000
Price Per Square Foot: $14.81
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel is presently vacant.
</TABLE>
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<PAGE> 34
Land Comparable Number 3
<TABLE>
<S> <C>
Folio Number: 03-4120-017-1580
Location: Northeast corner of San Lorenzo and LeJeune Road, 4251 LeJeune Road
Size: 21,805 square feet
Sale Date: February 1993
Deed Book/Page: 15822-3213
Grantor: Commerce Bank
Grantee: Goldcoast Partners Properties Co.
Sale Price: $650,000
Price Per Square Foot: $29.80
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Coral Gables Commercial
Utilities: All utilities are available.
Comments: This parcel is presently being improved with an office building.
</TABLE>
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<PAGE> 35
A summary of the land sales is shown as follows:
<TABLE>
<CAPTION>
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMPARABLE LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 5965 SW 70th Street 05/91 65,550 $16.78
2 6920 SW 59th Avenue 04/93 9,450 $14.81
3 4251 LeJeune Road 02/93 21,805 $29.80
SUBJECT 6129 SW 70TH STREET 119,787
</TABLE>
Discussion of Land Comparables
LAND COMPARABLE 1 is approximately two blocks east of the subject in a very
comparable neighborhood as the subject. This sale has been adjusted upward due
to the age of the sale. All factors for location, utility, topography appear
to be equal and no adjustment for these occurrences appeared warranted. A
downward adjustment is warranted for parcel size due to the comparable's
smaller size. An additional downward adjustment has been made due to the
subject's limited zoning classification. The adjustments are shown on a Land
Sale Adjustment Grid at the end of this discussion. The adjusted price per
square foot of this comparable is $14.10 per square foot.
LAND COMPARABLE 2 is approximately one block east of the subject in a very
comparable neighborhood as the subject. No time adjustments to this sale were
made. All factors for location, utility, topography appear to be equal and no
adjustment for these occurrences appeared warranted. A large downward
adjustment is warranted for parcel size due to the comparable's smaller size.
An additional downward adjustment has been made due to the subject's limited
zoning classification. The adjustments are shown on a Land Sale Adjustment
Grid at the end of this discussion. The adjusted price per square foot of this
comparable is $10.37 per square foot.
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<PAGE> 36
LAND COMPARABLE 3 is a smaller sized parcel located on a heavily travelled
thoroughfare approximately one mile east of the subject property. No time
adjustment was made to this sale. A significant downward adjustment to this
sale was made for location. A slight downward adjustment was also made for
size. An additional downward adjustment has been made due to the subject's
limited zoning classification. The adjustments are shown on a Land Sale
Adjustment Grid at the end of this discussion. The adjusted price per square
foot of this comparable is $11.92 per square foot.
The adjusted land prices range from $10.37 per square foot to $14.10 per square
foot, with the prices of sales number one and two being the most representative
of the subject parcel. Based on our analysis of the subject versus these
comparables, it is our opinion that a land price of $12.00 per square is
representative of the subject site in its entirety. The 19,787 square foot
portion of the site which is will be allocated to the building should have a
square foot estimate greater than the entire site due to its smaller size.
Based upon its smaller size it is our opinion that a 25 percent, or $3.00,
premium should be applied to this portion of the site. The value of the
subject sites as portioned would reasonably be represented as follows:
ANNEX BUILDING
19,787 SF x $15.00/SF = $296,805 rounded to $300,000
EXCESS LAND
100,000 SF x $12.00/SF = $1,200,000
-25-
<PAGE> 37
LAND SALE ADJUSTMENT GRID
Larkin Annex Building
South Miami, Florida
Subject Land Comp Land Comp Land Comp
Element #1 #2 #3
Sale Price/SF $16.78 $14.81 $29.80
Property Rights Fee Simple Same Same Same
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Financing Cash Cash Cash Cash
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Conditions of Sale None None None
Adjustment
------------------------------------
Adjusted Price/SF $16.78 $14.81 $29.80
Market/Time
Adjustment 5% 0% 0%
------------------------------------
Adjusted Price/SF $17.62 $14.81 $29.80
Other Adjustments:
Location Adjustment 0% 0% -40%
Topography Adjustment 0% 0% 0%
Size Adjustment -15% -25% -15%
Zoning Adjustment -5% -5% -5%
Net Other Adjustments -20% -30% -60%
FINAL ADJUSTED PRICE PER SF $14.10 $10.37 $11.92
====================================
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<PAGE> 38
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject office is
estimated to be $1,006,376.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class C
building, we have assumed an economic life of 40 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
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<PAGE> 39
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was originally constructed in 1970 with some renovations
performed in 1980, and it is in fair to good condition. After taking into
consideration all significant physical factors affecting the subject property,
it is judged that the subject office building and parking garage has an
effective age equal to 20 years. The remaining useful life is estimated to be
20 years. This translates into a physical depreciation estimate of 50 percent
(20 years divided by 40 years). The amount of depreciation attributable to the
property has been estimated on a straight-line basis, which is founded on the
assumption that depreciation of a property occurs equally throughout its
economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of seven years and a remaining useful life of
five years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 50
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciate rate.
The total depreciated value for the office building is estimated to be
$428,188.
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<PAGE> 40
COST APPROACH CONCLUSION
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building and improvements plus estimates of
all forms of depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
Larkin Annex Building Site $800,000
========
Excess Land Site $1,200,000
==========
-29-
<PAGE> 41
SUMMARY OF REPLACEMENT COSTS
LARKIN ANNEX BUILDING
<TABLE>
<CAPTION>
Replacement
Cost
-----------
<S> <C> <C>
Excavation and Site Preparation $ 977
Foundation 20,865
Frame 46,180
Exterior Walls 108,106
Floors 61,935
Roof 38,350
Roof Cover 13,775
Partitioning and Built-In Items 173,242
Ceilings 30,005
Floor Coverings 29,766
Plumbing 53,847
Heating, Ventilation and Air Conditioning (Net) 58,371
Electrical 61,674
Other Features 33,916
----------
Total Labor, Materials, Incidentals and Profit $ 731,009
Architect Fees, Plans and Specifications $ 25,585
Architect Fees, Supervision 21,930
Add: Miscellaneous Fees 77,852
----------
Total Replacement Cost of Building $ 856,376
Less: Depreciation at 50% (428,188)
----------
Total Depreciated Value of Building $ 428,188
Land Improvement Replacement Cost $ 150,000
Less: Depreciation at 50% (5/10) (75,000)
----------
Depreciated Value of Land Improvements $ 75,000
Add: Land Value of Building Site 300,000
----------
Total Value of Building Site $ 803,188
Rounded to: $ 800,000
==========
Land Value of Excess Land Site $1,200,000
==========
</TABLE>
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<PAGE> 42
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of the master lease agreement, but
the actual master lease agreements for each property are not yet available.
For the purpose of our Income Approach, the gross income will be the master
lease rate for each property times the rentable building area. We reserve the
right to modify the Income Approach valuation if the actual master lease for
each property differs significantly from the draft lease presented to us.
For the purpose of our analysis we have separated the building site from the
excess land site in estimating values for the Income Approach to value.__
-31-
<PAGE> 43
BUILDING SITE
Based upon the lease rental rate provided, the gross income for the subject
property is calculated as follows:
10,255 SF x $11.00/SF = $112,805
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss. We have verified
the reasonableness of this rental rate by conducting a return analysis of the
property based upon the expected remaining lives of the improvements and
investments rates of return found in the marketplace. A schedule of this
analysis is found in the Exhibit section of this report. Based upon this
analysis, utilizing a required rate of return of 10 percent on land and 12
percent to 14 percent rate on improvements, the annual rental rate would be
anticipated to approximate $10.39 to $11.20 per square foot. The rate
established in the master lease appears to be reasonable.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at five percent of effective gross income, or
$5,640, based on the management experience of other properties. The net
operating income for the property is $112,805 less $5,640, or $107,165.
Although we have not utilized the Direct Sales Comparison Approach to arrive at
an indication of value for the subject property, we have conducted a survey of
office building sales in the region of the subject in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit section of this report and are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 One 7000 Place, South Miami, Florida October 1992 11.33%
2 Professional Arts Center, Miami, Florida September 1992 10.45%
3 Kingston Plaza, Broward County, Florida August 1992 10.18%
</TABLE>
-32-
<PAGE> 44
The direct capitalization, or overall rates, for these comparables ranged from
10.18 percent to 11.33 percent. We believe that the cap rate associated with
the subject property would fall below the rates found above due to the more
stabilized nature of the present market and the overall reduction in interest
rates since these sales occurred. We believe that an overall capitalization
rate of 9.5 percent would be appropriate for the subject property under its
master lease agreement.
Therefore, it is our opinion that the market value of the office site by the
Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$107,165/.095 = $1,128,053
Rounded to: $1,100,000
==========
Excess Land Site
The gross annual rental associated with the excess land site is stated at an
annual rate of $120,000. This rate represents a 10 percent annual return to
the investor and appears appropriate based upon the stability of land prices in
the immediate region of the subject.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at five percent of effective gross income, or
$6,000, based on the management experience of other properties. The net
operating income for the property is $120,000 less $6,000, or $114,000.
We believe that the overall cap rate associated with this income stream would
be similar to the office building site and have used an overall capitalization
rate of 9.5 percent as being appropriate.
-33-
<PAGE> 45
Therefore, it is our opinion that the market value of the office building site
by the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$114,000/.095 = $1,200,000
Rounded to: $1,200,000
==========
-34-
<PAGE> 46
CORRELATION AND CONCLUSION
We have considered two approaches to value in order to estimate the value of
the Larkin Annex and excess land site. The two approaches are summarized as
follows:
<TABLE>
<CAPTION>
Building Site Excess Land
------------- -----------
<S> <C> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . $ 800,000 . . . . . . $1,200,000
Income Approach . . . . . . . . . . . . . . . . . . $1,100,000 . . . . . . $1,200,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for an older building is unreliable. For these reasons, this
approach is considered only a fair indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the Larkin
Annex Building and excess land site, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
<TABLE>
<S> <C>
Larkin Annex Building Site $1,100,000
==========
Larkin Annex Excess Land Site $1,200,000
==========
</TABLE>
-35-
<PAGE> 1
EXHIBIT 10.24
AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING I
RICHMOND, VIRGINIA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
January 18, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH PROFESSIONAL BUILDING I
7760 PARHAM ROAD
RICHMOND, VIRGINIA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $10.00 per
rentable square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
January 18, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
The subject property is a two-story professional office building containing
23,206 rentable square feet of office space. The building is a Class B
facility, with a steel frame and poured-in-place concrete structure and brick
veneer exterior walls. It was constructed in 1977. The building is currently
91 percent occupied.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Professional Building I, as of September 29, 1993, to be:
$2,150,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
<PAGE> 4
HealthSouth Corporation
January 18, 1994
Page Three
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirement of the
Code of Professional Ethics and the Standards of Professional Practice
of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Cheryl Worthy-Pickett, the primary appraiser of this property, has
made a personal inspection of the property that is the subject of this
report. Patrick J. Simers has not made a personal inspection of the
property that is the subject of this report.
/s/ Patrick J. Simers /s/ Cheryl Worthy-Pickett
- ------------------------------------ ---------------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 28, 1993
Property Identification: HealthSouth Professional Office
Building I
Property Location: 7760 Parham Avenue, Richmond, Henrico
County, Virginia
Interest Appraised: Leased Fee Estate
Gross Building Area: 29,516 square feet
Net Rentable Area: 23,206 square feet
Subject Land Size: 6.165 acres or 268,547 square feet
Improvements Description: Two-story, steel frame and concrete structure, Class B professional office
building constructed in 1977.
Occupancy Percentage: 91%
CONCLUSIONS
Cost Approach: $3,450,000
Direct Sales Comparison Approach: $2,200,000
Income Approach: $2,151,000
Final Value Estimate: $2,150,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 11
Market Data - Metropolitan Richmond/Henrico County 12
Zoning 13
Real Estate Taxes and Assessments 13
Site Analysis 14
Building and Site Improvements 15
HIGHEST AND BEST USE 17
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 21
Direct Sales Comparison Approach 32
Income Approach 40
CORRELATION AND CONCLUSION 42
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Location Map
Exhibit D - Area Map
Exhibit E - Tax Plat Map
Exhibit F - Leasing Status Schedule
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparables Summary
Exhibit J - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is HealthSouth Professional Office Building I
located at 7760 Parham Road in Richmond, Henrico County, Virginia. The
building is a two-story, Class B, building constructed in 1977.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 28,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property
would be included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute].
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
-2-
<PAGE> 14
HISTORY OF THE PROPERTY
The subject professional building was constructed by Humana St. Luke's in 1977.
HealthSouth of Virginia acquired the land in December 1991. This transaction
is recorded in Deed Book 2326, Page 454 for a recorded purchase price of
$2,000,000.
The subject professional office building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non- residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
-3-
<PAGE> 15
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a
-4-
<PAGE> 16
troubling unemployment rate". Value Line's Quarterly Economic Review
identified the following estimates for selected economic statistics from 1993
to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
-5-
<PAGE> 17
DESCRIPTIVE DATA
REGIONAL ANALYSIS
The subject property is in the Richmond-Petersburg Metropolitan Statistical
Area (MSA), which consists of the cities of Richmond, Petersburg, Colonial
Heights and Hopewell; and the surrounding counties of Chesterfield, Henrico,
Hanover, Goochland, Powhatan, New Kent, Charles City, Dinwiddie and Prince
George.
The MSA occupies the center of eastern Virginia. It contains more localities
than any other of the state's eight MSAs as well as more area (nearly 3,000
square miles). It is the third largest in population after the Northern
Virginia and the Norfolk-Virginia Beach-Newport News MSAs.
Population
The following is a summary of population changes for the MSAs of the state of
Virginia:
<TABLE>
<CAPTION>
=======================================================================================================
COMPARISON OF POPULATION CHANGE 1980-87
MSAs IN VIRGINIA
=======================================================================================================
Annual
Percent Total
Area 1980 1987 Change Change
-------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Bristol 90,597 90,600 0.0% 3
Charlottesville 113,568 123,300 1.2% 9,732
Danville 111,789 109,100 -0.1% -2,689
Lynchburg 142,000 142,700 0.2% 700
Norfolk 1,160,311 1,346,100 1.5% 185,789
Northern 1,146,184 1,374,400 1.7% 228,216
Richmond 761,311 825,300 0.7% 63,989
Roanoke 220,393 224,200 0.2% 3,807
=======================================================================================================
</TABLE>
Source: Center For Public Service
-6-
<PAGE> 18
The Richmond-Petersburg MSA is the third largest of the state's eight MSAs. It
has grown steadily but at a rate significantly less than that of Northern
Virginia and Norfolk. These areas have enjoyed tremendous growth due to the
strong presence of the federal government. Growth has moderated significantly
in recent years due to sluggish economic conditions discussed previously.
As of 1988, the most populous locality in the MSA was the city of Richmond at
214,500 persons followed by the adjacent counties of henrico and Chesterfield
with 205,200 and 187,100 persons, respectively. Chesterfield County is the
fastest growing locality having registered a 32.3 percent population gain since
1980 and an average growth rate of 3.3 percent per year. Projections by local
planning agencies and the Virginia Employment Commission project that the
Chesterfield and Henrico populations will surpass Richmond by the year 2000.
Both population and population growth are concentrated in the northern section
of the MSA. The population is centered in Richmond but growth is highest in
the counties around Richmond.
Transportation Network
The Richmond-Petersburg MSA is well positioned at the center of the "Golden
Crescent" enabling it to be a crossroads of transportation. Interstate 95
(I-95) connects Richmond with Northern Virginia and the major east coast cities
- -- Washington 100 miles to the north and New York 370 miles to the north.
Interstate 64, the principal east-west highway in the state intersects I-95 in
the MSA and heads east to the Norfolk area and west to Charlottesville.
Another interstate, I-85, slants northeast from central North Carolina to meet
I-95 in Petersburg. Several other arterial and primary highways also converge
on the capital city.
Income
Total personal income (TPI) in the Richmond-Petersburg MSA reached $14.4
billion, or approximately 15 percent of the state total in 1987. TPI is
reported by place of residence, rather than by place of employment, and it has
three components: 1) net
-7-
<PAGE> 19
earnings; 2) dividends, interest, and rent by place of residence; and 3)
transfer payments by place of residence.
The Richmond-Petersburg MSA ranked third in the state in TPI behind the
Norfolk-Newport News-Virginia Beach MSA and the Northern Virginia MSA. These
three MSAs accounted for more than two-thirds of the state TPI. Between 1980
and 1987, TPI in the Richmond- Petersburg MSA increased by $6.6 billion, which
translates into an average annual growth rate of 9.2 percent. This is slightly
faster than the 9.0 percent growth rate for the state, but slightly under that
of the Charlottesville MSA, which was the second fastest growing area and
Northern Virginia which, at 10.7 percent, was the fastest growing area. A
large part of the reason for the high TPI in the Richmond-Petersburg MSA is the
size of its population; areas with a high population naturally have high TPI.
The Richmond-Petersburg MSA ranked second in per capita personal income with
$17,448 in 1987. The highest was Northern Virginia with $23,760.
Employment
Employment for the Richmond-Petersburg MSA has expanded by 100,500 jobs, from
373,900 in January of 1980 to 474,400 in May of 1990. This represents an
annual increase of approximately 2.4 percent. Between May 1989 and May 1990,
employment grew 5,900, or 1.3 percent showing the slowdown.
According to the data from the Virginia Employment Commission, the greatest
employment gains for the Richmond-Petersburg MSA have been in the service
industry sector, which increased its share of total employment from 17 percent
in 1980 to 22 percent in 1990. A relative decline in manufacturing employment
is shown from 18 percent in 1980 to 14 percent in 1990. The other sectors
increased at a rate similar with the overall average. There is an apparent
trend of less semi-skilled and blue-collar workers to more white- collar and
government employee workers.
The area economy has good diversity with 81 percent of the employment split
almost evenly among manufacturing (14%), trade (24%), services (22%), and
government (20%). This diversity creates a very healthy economic climate.
-8-
<PAGE> 20
Richmond is the home of fourteen Fortune 500 companies and besides being the
State Capitol, the city holds several federal offices such as the Fifth
District Federal Reserve Bank and the Fourth U.S. Circuit Court of Appeals.
The unemployment rate over the last 15 years has averaged 3.9 percent. The
lowest rate was 2.4 percent in the national economic expansion year of 1972 and
the highest rate was 5.8 percent during the recession year of 1982. The rate
has consistently been 2.0 percent to 3.0 percent below the national rate and
slightly below the state rate. Recent rates were as follows:
<TABLE>
<CAPTION>
May 1980 May 1989
-------- --------
<S> <C> <C>
Richmond-Petersburg MSA 3.9% 3.9%
Virginia 4.4% 4.5%
United States 5.8% 5.6%
</TABLE>
As with population, Richmond places third behind Northern Virginia and Norfolk
in total employment growth with 84,700 new employees between 1980 and 1988.
Northern Virginia had nearly four times this amount with a growth of 294,200
and Norfolk ranked second with 134,400. Northern Virginia experienced a 6.6
percent annual growth versus 3.5 percent for Norfolk and 2.7 percent for
Richmond. Overall, the state had a 4.0 percent increase annually which was
obviously skewed due to the strong performance of Northern Virginia.
Employment changes between October 1988 and October 1989 displayed a slowing of
growth in Norfolk, while Richmond increased at a slightly higher rate than the
previous eight years. Northern Virginia continued to grow with 47,700 new
employees versus 15,200 for Richmond and 5,000 for Norfolk. The decline in
employment growth in Norfolk was likely due to federal cut-backs in defense
spending.
Healthcare
Healthcare facilities abound in the Richmond area. The following is a list of
local hospitals.
-9-
<PAGE> 21
<TABLE>
<CAPTION>
Facility Number of Beds
-------- --------------
<S> <C>
Charter Westbrook 175
Children's 36
Chippenham 470
Henrico Doctors' 312
Humana - St. Luke's 160
Hunter Holmes McGuire - Virginia Medical Center 1,508
Johnston - Willis 232
Medical College of Virginia 881
Metropolitan 180
Retreat 230
Richmond Community 102
Richmond Eye and Ear 60
Richmond Memorial 351
St. John's 70
St. Mary's Hospital 401
Stuart Circle 153
</TABLE>
Nursing homes in the Richmond area include the following:
<TABLE>
<S> <C>
Beth Sholom Home Central, Virginia Beth Sholom Woods
Cambridge Manor Convalescent Center Camelot Hall
Chippenham Manor Catshaw Nursing Manor
Eastern Star Home Forest Hill Convalescent Center
Imperial Health Center Lakewood Manor Retirement Community
Libbie Convalescent Center Marywood Apartments
Little Sisters of the Poor Richmond Home for Ladies
Masonic Home of Virginia Snyder Memorial Home
Richmond Nursing Home Summerhill at Stony Point
Stratford Hall Nursing Home The Virginia Home
The Hermitage University Park Nursing Home
The Windsor Westport Convalescent Center
Westminster Canterbury
</TABLE>
Conclusion
The Richmond-Petersburg MSA has experienced steady growth during the 1980s. In
relation to the other MSAs in the state of Virginia, it ranks generally third
in most categories behind Northern Virginia and the Norfolk-Newport News MSA.
Northern Virginia, being part of the Washington, D.C. MSA, has been one of the
most active markets in the United States. The large expansion of the federal
government over the
-10-
<PAGE> 22
last several decades has stimulated tremendous growth in this area. This area
of the state will likely continue to exceed other Virginia localities in
population, employment and income growth.
The Norfolk-Newport News-Virginia Beach area will obviously be impacted by the
impending cut-back in defense spending. Due to this, the Richmond-Petersburg
MSA will likely out-perform that MSA in growth during the 1990s. It is,
however, unlikely that the Richmond-Petersburg MSA will experience the
explosive growth that Northern Virginia experienced during the 1980s.
Development over the next decade is expected to be at a pace slightly above
that of the state average, but below that of Northern Virginia. The next
several years will likely be very sluggish until the economy recovers from its
doldrums.
NEIGHBORHOOD ANALYSIS
The neighborhood's area boundaries are Broad Street (Highway 250) to the west,
Staples Road to the east, Parham Road to the south and Hungary Road to the
north.
The area is generally residential with modest single-family homes and
multi-family developments to the north and east of the subject. Development
along Parham Road mainly is office-institutional in nature, such as office
buildings, banks, and county offices. West of the subject, toward Broad
Street, are more commercial or retail developments such as automobile
dealerships, fast food restaurants, and shopping centers.
The area has convenient access to Interstate 64, providing access to downtown
Richmond west of the subject.
The immediate surrounding area is supportive and complementary to the continued
growth potential of the subject facility. The development has also contributed
to a continued growth of the neighborhood.
-11-
<PAGE> 23
MARKET DATA - Metropolitan Richmond/Henrico County
Based upon the 1993 Richmond Commercial Real Estate Market Review prepared by
Harrison and Bates, the suburban office market out- performed the downtown
market during the 1992 fiscal year. Internal market growth particularly in the
northwest quadrant (subject location) was substantial during the 1992 fiscal
year.
Office building sales in 1992 ranged from $30.00 per square to $108.00 per
square foot. Generally, suburban office buildings were selling for $40.00 to
$60.00 per square foot, which in some instances is less than one-half their
replacement (construction) cost. Rental rates appear to be stabilizing in all
markets and even increasing slightly in pockets of the suburban market. Deep
discounts through free rent and other concessions are not always valued, since
many tenants are more interested in the lowest possible rate over the term
rather than increasing the overall rate to cover the often extravagant
concessions and extras.
The Hanover Medical Park was completed in 1992 and contains a total of 110,000
square feet. This property was partially pre-leased with the remaining being
available. Because of the anticipated increase in absorption in the suburban
market, the suburban market is expected to improve faster than the downtown
market. Office building sales will continue to be quite sporadic and will not
truly stabilize until lenders are no longer owners, the RTC is out of the
business and the Banks are willing and /or able to make realistic loans on
speculative office properties.
During the first six months of 1993 the northwest quadrant office market
continued to absorb space and attract leasing and sales activity. Absorption
of the quadrant has been steady with 200,000 square feet of net absorption.
Additionally, the quadrant's appeal to tenants and prospective buyers remains
high. The overall vacancy for the northwest quadrant has been reduced to
almost 13 percent, down considerably from the end of year 1992 vacancy rate of
16.5 percent. Class A office space vacancy rate in the northwest quadrant is
approximately 7.5 percent.
-12-
<PAGE> 24
ZONING
The subject property is zoned "O-I" by the Henrico County Zoning District. The
purpose of this district is to provide for office buildings in attractive
surroundings with types of uses and signs so controlled as to be generally
compatible with high-density residential surroundings.
The subject improvement is considered a legal conforming use. Principle uses
included in this zoning district are as follows:
<TABLE>
<S> <C>
Office Buildings
General Hospitals
Hotels or Motels
Retail and Service Facilities
Schools
Banks
Maximum Stories: 8
Maximum Height: 110 feet
Minimum Lot Area: 25,000 feet
Minimum Lot Width: 100 feet
Minimum Front Yard Depth: 35 feet
Minimum Side Yard: 15 feet
Minimum Rear Yard: 40 feet
</TABLE>
REAL ESTATE TAXES AND ASSESSMENTS
The subject property was assessed in 1993 by the Henrico County Assessment
Office. The property is taxes based upon 100 percent of the assessed value.
The property is identified by real estate account number HE 0110701. The
subject's parcel number is 60-0A-000- 0025. The assessments for the parcel is
presented below:
Parcel Identification Number 60-0A-000-0025
<TABLE>
<S> <C>
Land $1,074,000
Improvements 6,339,000
----------
$7,413,000
</TABLE>
This assessment does include Professional Office Building I and Professional
Office Building II. In 1992 the assessed value for improvements associated
with POB I was
-13-
<PAGE> 25
$1,734,000. Since the land parcels are equal in size we have divided them as
such. This would indicate a total assessed value associated with POB I of
$2,271,000 (land $537,000, improvements $1,734,000).
The millage rate applicable to the subject property for the 1993 tax years was
$.98 per $100. This would indicate a total tax amount payable for the 1993 tax
year of $22,255.80.
SITE ANALYSIS
The subject site is located on the north side of Parham Road in the northwest
section of Richmond, Virginia. The street address is 7760 Parham Road,
Richmond, Virginia. As indicate by the plat map included in the Exhibit
Section of this report, the site is irregular in shape and contains a total of
12.33 acres, of which 6.145 acres has been allocated to the subject. Access to
the site is via Broad Street to the west or Staple Road to the east to Parham
Road. Parham Road is a paved four-lane highway.
The subject land is approximately level with grade on Parham Road. The
topography is generally flat with the rear portion approximately ten feet above
grade on Parham Road. Utilities to the site include water, sewer, electricity,
cable, telephone and gas.
The subject property appears to have adequate drainage and soil load-bearing
capabilities to support most development alternatives. A soil report, however,
was not made available to the appraiser and it is assumed, based on existing
improvement, that soil load-bearing capabilities are adequate.
According to the County Planning Office, the subject property is not located in
a flood plain zone.
A legal description of the property and a land configuration plat are included
in the Exhibit Section of this report.
-14-
<PAGE> 26
BUILDING AND SITE IMPROVEMENTS
BUILDING
The medical office building is a two-story structure containing 29,516 gross
square feet constructed in 1977. The building is of good construction and is
in excellent condition. The building is considered competitive in condition to
other office buildings in the area.
The building's foundation consists of concrete walls and footings supporting
exterior walls. The floor is poured-in place concrete with elevated lift slabs
for the upper floor. Exterior walls consist of concrete block walls with brick
cover. Windows and doors are aluminum and glass with some limited solid metal
doors. The roof is flat metal with lightweight concrete.
The building is partitioned by gypsum board on metal stud partitions. Wall
finished are typically paint and vinyl wall covering. Wood and metal doors in
metal door jambs are typical throughout. Ceiling finishes are primarily
drop-down acoustic panels. Floor finishes are primarily carpeting and vinyl
tile with portions of the building having ceramic and quarry tile. Main areas
in the building include office areas and public areas.
Mechanical services consist of standard plumbing fixtures and a central heating
and air conditioning system supported by roof-top units. Electrical wiring is
in conduit with fluorescent and incandescent light fixtures typical throughout.
SITE
Land improvements consist of general landscaping, asphalt paving, concrete
paving and curbing, exterior lighting, and general signage.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
-15-
<PAGE> 27
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in average to good overall condition. It appears to have been
adequately maintained. No significant deferred maintenance was indicated from
the appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
-16-
<PAGE> 28
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute].
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
-17-
<PAGE> 29
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning Section of this report, the property is
currently zoned "O-I", Office-Institutional. Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail
and restaurants, office/institutional, hotels, hospitals and other
medical-oriented uses.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. Hospital
related development (Professional Office Building II) located just west of the
subject improvement, indicates that development is financially feasible. The
new POB is currently 90 percent occupied.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
-18-
<PAGE> 30
As Improved
The subject site is currently improved with a 26,203 rentable square foot
office building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to Henrico
County zoning guidelines. Under the zoning, the property could remain as it
is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. It would, however,
be financially feasible to correct any deferred maintenance.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exist. This
will enable to the property to remain competitive in the leasing market. The
highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
-19-
<PAGE> 31
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-20-
<PAGE> 32
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arms-length transactions that conveyed a fee simple interest, and only
real property was included in the transactions.
-21-
<PAGE> 33
<TABLE>
<S> <C>
Land Comparable Number 1
Location: 48-OA-0000-0023B; Broad Street
Deed Book/Page: 2330/356
Grantor: Fred and Lavinia Williams, Jr.
Grantee: Broad Street Investment, a Delaware Corporation
Date of Sale: January 1992
Size: 4.644 acres, or 202,293 square feet
Sale Price: $800,000
Unit Price: $3.95 per square foot
Zoning: BU-2
Comments: Improved with shopping center
Land Comparable Number 2
Location: East Broad Street, 38-3-C (78-A2-9)
Deed Book/Page: 2279/1889
Grantor: Rowe Development Company
Grantee: Innsbrook Land Holding Corporation
Date of Sale: February 1991
Size: 14.78 acres, or 643,643 square feet
Sale Price: $2,886,200
Unit Price: $4.48 per square foot
Zoning: Commercial
Comments: Improved with office building
</TABLE>
-22-
<PAGE> 34
<TABLE>
<S> <C>
Land Comparable Number 3
Location: West End Drive, (59-A-6G)
Deed Book/Page: 2252/1843
Grantor: W. Randolph and Elizabeth Cosby
Grantee: Eagles Self Storage Corp.
Date of Sale: July 1990
Size: 2.987 acres, or 130,114 square feet
Sale Price: $552,595
Unit Price: $4.25 per square foot
Zoning: Business
Comments: Improved with mini-storage facility
Land Comparable Number 4
Location: 8250 West Broad Street, 60-A-2 (92-B1-8)
Deed Book/Page: 2186/247
Grantor: Max and Wilma Pearson
Grantee: Holly Brook, Inc. a Virginia Corporation
Date of Sale: April 1989
Size: 7.01 acres, or 305,356 square feet acres
Sale Price: $1,100,000
Unit Price: $3.60 per square foot
Zoning: Commercial
Comments: Improved with a Capitol Lincoln Mercury dealership
</TABLE>
-23-
<PAGE> 35
<TABLE>
<S> <C>
Land Comparable Number 5
Location: Parham Road, north side, west of Hungary Spring; Map 60-A-25
Agent: Ted Austin, Prudential Realty Co., Richmond, Virginia
Size: 6.69 acres, or 291,416 square feet
Asking Price: $1,170,750
Unit Price: $4.02 per square foot
Zoning: Retirement Center
</TABLE>
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
Sale Date of Size Unit Price
Number Location Sale (acres) (sq. ft.) Zoning
<S> <C> <C> <C> <C> <C>
1 Broad Street, north side January 4.644 $3.95 BU-2
1992
2 East Broad Street February 14.780 $4.48 C-2
1991
3 West End Drive July 2.987 $4.25 BU-2
1990
4 West Broad Street April 7.010 $3.60 C-2
1989
5 Parham Road, north side Current 6.690 $4.02 RC
Listing
SUBJECT PARHAM ROAD 6.165 O-I
</TABLE>
-24-
<PAGE> 36
Discussion of Land Comparables
LAND SALE NUMBER 1 is a 4.644-acre tract which is now improved with a shopping
center. The comparable's location is superior to the subject's along Parham
Road. Parham Road is developed with more institutional or office improvements
while this section of Broad Street is more commercially improved. We have made
a downward adjustment for this factor to the comparable. An additional
downward adjustment was indicated because of the parcel's smaller size in
comparison to the subject's 6.165 acres. Typically, smaller parcels sell at a
higher unit price than larger tracts. A downward adjustment has been made for
zoning. The adjustments are shown on a Land Sale Adjustment Grid at the end of
this discussion. The adjusted price per square foot of this comparable is
$3.36 per square foot.
LAND SALE NUMBER 2 is a parcel containing a total of 14.78 acres. This
transaction is approximately two years old, indicating an upward adjustment for
time. An adjustment for location was deemed not necessary. The property was
level throughout indicating a downward adjustment in comparison to the subject
which has a rolling topographical layout. An upward adjustment has been
indicated for the comparable's larger size in comparison to the subject.
Typically, larger tracts sell at a lower unit price than smaller tracts. A
downward adjustment was indicated for zoning in comparison to the subject's
Office-Institutional zoning. The adjusted price per square foot of this
comparable is $4.47.
LAND SALE NUMBER 3 is a 2.987-acre tract located northwest of the subject
improved with a mini-storage facility. Because this transaction is
approximately three years old we have made an upward adjustment for time. An
upward adjustment was indicated for this transaction was based upon location
along a less visible thoroughfare with limited access. Downward adjustments
were indicated for the level topography and the smaller size. An additional
downward adjustment has been made for zoning. The adjusted price for this
comparable is $4.02 per square foot.
LAND SALE NUMBER 4 is a 7.01-acre parcel that was improved with an automobile
dealership. It is located northwest of the subject property along Broad
Street. An upward adjustment was indicated for time. An additional upward
adjustment was made for location. The adjusted price per square foot of this
comparable is $3.97.
-25-
<PAGE> 37
LAND SALE NUMBER 5 is a current listing of a site just east of the subject
along Parham Road. This site is zoned for a retirement facility. A downward
adjustment is indicated because this is a listing rather than an actual sale.
Upward adjustments are also indicated due to the inferior zoning. The adjusted
price per square foot of this comparable is $4.19 per square foot.
The adjusted land prices range from $3.36 per square foot to $4.19 per square
foot, with the prices of the most comparable sites being in the middle of this
range. Based on our analysis of the subject versus these comparables, it is
our opinion that a land price of $4.00 per square is representative of the
subject site. The subject land value is estimated as follows:
268,547 SF x $4.00/SF = $1,074,188
Rounded to: $1,074,000
==========
-26-
<PAGE> 38
<TABLE>
<CAPTION>
LAND SALE ADJUSTMENT GRID
Healthsouth Professional Building I
Richmond, Virginia
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4 #5
<S> <C> <C> <C> <C> <C> <C>
Sale Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Property Rights Fee Simple Same Same Same Same Same
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Financing Cash Cash Cash Cash Cash Cash
Adjustment -----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Conditions of Sale None None None None Listing
Adjustment -5%
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $3.81
Market/Time
Adjustment 0% 5% 5% 5% 0%
-----------------------------------------------------------------------------
Adjusted Price/SF $3.95 $4.70 $4.46 $3.78 $3.81
Other Adjustments:
Location Adjustment -5% 0% 5% 5% 0%
Topography Adjustment 0% -5% -5% 0% 0%
Size Adjustment -5% 5% -5% 0% 0%
Zoning Adjustment -5% -5% -5% 0% 0%
Net Other Adjustments -15% -5% -10% 5% 10%
Final Adjusted Price Per SF $3.36 $4.47 $4.02 $3.97 $4.19
=============================================================================
</TABLE>
-27-
<PAGE> 39
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $3,651,670.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-28-
<PAGE> 40
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were used to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
Building
The subject property was constructed in 1977 and is in average to good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to its actual age of 16 years. The remaining useful life is
estimated to be 29 years. This translates into a physical depreciation
estimate of 36 percent (16 years divided by 45 years). The amount of
depreciation attributable to the property has been estimated on a straight-line
basis, which is founded on the assumption that depreciation of a property
occurs equally throughout its economic life.
The total depreciation for the building is estimated to be $1,314,601 and the
depreciated value of the building replacement costs is estimated to be
$2,337,069.
Site Improvements
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of seven years, and a remaining useful life
of 13 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 35
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciation rate.
-29-
<PAGE> 41
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$3,450,000
==========
-30-
<PAGE> 42
SUMMARY OF REPLACEMENT COST NEW
HEALTHSOUTH PROFESSIONAL
BUILDING 1
RICHMONG, VIRGINIA
<TABLE>
<CAPTION>
REPLACEMENT
COST
-----------
<S> <C> <C>
Site Preparation 5,902
Foundation 65,645
Frame 304,998
Exterior Walls 236,625
Floors 161,681
Roof 108,695
Roof Cover 31,185
Partitioning and Built-in 724,845
Ceilings 171,067
Floor Coverings 122,471
Plumbing 234,953
HVAC 422,372
Electrical 296,417
Other Features 192,643
----------
Total Replacement Cost $3,079,499
Architect's Fees Plans and Specs 4.4% 135,498
Architect's Fees Supervision 3.4% 104,703
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 331,970
----------
Total of Other Costs 572,171
Total Project Replacement Cost $3,651,670
Accrued Depreciation:
Building Costs 36% Straight Line 16/45ths (1,314,601)
----------
Depreciated Value Building $2,337,069
Site Improvements
Replacement Cost $ 65,000
Depreciated Cost 35% Straight Line 7/20ths (23,400)
----------
Depreciated Value $41,600
Plus Land Value $1,074,000
----------
DEPRECIATED COST APPROACH VALUE $3,452,669
</TABLE>
-31-
<PAGE> 43
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arms-length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-32-
<PAGE> 44
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1016 Independence Boulevard,
Virginia Beach, Virginia
Date of Sale: May 12, 1992
Deed Book/Page: 3086/1410
Grantor: Diagnostic Center Associates
Grantee: Diagnostic Center of Virginia Beach
Sale Price: $1,586,500
Terms of Sale: Assumption of original note, $568,494 Cash
PROPERTY DATA
Land Size: .93 acres
Building Size: 15,000 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $225,000 $15.00
Vacancy Allowance @ 5%: $(11,250) $(0.75)
--------- -------
Effective Gross Income: $213,750 $14.25
Estimated Expenses @ $3.50/SF $(52,500) $ 3.50
--------- ------
Net Operating Income: $161,250 $10.75
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 105.77
Stabilized Overall Rate: 10.16%
EGIM: 7.42
</TABLE>
COMMENTS
Structure is a one-story Class C medical office designed for a
single-tenant user. The building is located adjacent to a hospital.
-33-
<PAGE> 45
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- ------
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
</TABLE>
COMMENTS
This three-story building was purchased by the UAB Medical Center. A
Medical Genetics Center now occupies the facility. The current land value near
the UAB campus is estimated at 40 percent to 45 percent of the total purchase
price.
-34-
<PAGE> 46
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
</TABLE>
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF
and 8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-35-
<PAGE> 47
IMPROVED SALE NUMBER 4
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 816 Independence Boulevard, Virginia Beach, Virginia
Date of Sale: August 1991
Deed Book/Page: 3006/1566
Grantor: Humana of Virginia, Inc.
Grantee: MPB, Inc.
Sale Price: $5,011,700
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 3.507 acres (approximate)
Building Size: 35,000 square feet
Year Built: 1977
Occupancy at Sale: 75.0%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $630,000 $18.00
Vacancy Allowance @ 5%: $ 31,500 ($0.90)
-------- -------
Effective Gross Income: $598,500 $17.10
Estimated Expenses @ $5.00/SF $175,000 ($5.00)
-------- -------
Net Operating Income: $423,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 143.19
Stabilized Overall Rate: 8.45%
EGIM: 8.37
</TABLE>
COMMENTS
Built as a four-story Class A building located next to hospital. The
construction is steel frame with brick veneer. It is located north side of
Independence Avenue
-36-
<PAGE> 48
These four sales are summarized as follows:
<TABLE>
<CAPTION>
SUMMARY OF IMPROVED SALES
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 1016 Independence Blvd 15,000 $1,586,500 $105.77
Virginia Beach, Virginia
2 20th Street South 44,574 $3,750,000 $84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
4 816 Independence Blvd 35,000 $5,011,700 $143.19
Virginia Beach, Virginia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot to
$143.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE NUMBER 1 is a Class C professional office building that is located
adjacent to a hospital. The facility was acquired by a physician's group to
provide outpatient service in conjunction with the hospital. This transaction
was reportedly at a market value price. However, a downward adjustment is
still indicated because the building never was marketed as a vacant building
due to this relationship. The building has a substantial setback from
Independence Boulevard and has poor visibility. An upward adjustment is
indicated due to this inferior location compared to the subject. An offsetting
downward adjustment to the price per square foot is indicated because of the
smaller size of this comparable. The adjusted price per square foot of this
comparable is $95.19.
SALE NUMBER 2 is the sale of a building purchased by the University of Alabama
to use as a Medical Genetics Center. An upward adjustment was indicated
because of the time of sale. Upward adjustments were indicated because of the
inferior location as compared to the subject. An additional upward adjustment
was made for size and construction quality. The adjusted price for this
comparable is $101.59 per square foot.
-37-
<PAGE> 49
SALE NUMBER 3 was the sale of a three-building professional office facility
located approximately one-quarter-mile from the North Fulton Medical Center in
Roswell, Georgia. An upward adjustment was made for time of sale. Downward
adjustments to the price per square foot of this comparable are indicated
because it is new and larger than the subject facility. Downward adjustments
are indicated due to the comparable's superior location. The adjusted price
per square foot of this comparable is $111.84.
SALE NUMBER 4 was the August 1992 sale of an office building in Virginia Beach,
Virginia. An upward adjustment was indicated for the time of sale. Downward
adjustments are indicated for location and building condition. The adjusted
price for this comparable is $127.80 per square foot.
The adjusted prices per square foot range from $95.19 to $127.80. An adjusted
price of $95.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject medical office building
by the Direct Sales Comparison Approach, as of September 29, 1993, the
effective date of this report, is calculated as follows:
23,206 SF x $95.00/SF = $2,204,570
Rounded to: $2,200,000
==========
-38-
<PAGE> 50
I M P R O V E D S A L E S A D J U S T M E N T G R I D
Healthsouth Professional Building I
Richmond, Virginia
<TABLE>
<CAPTION>
Subject Bldg Comp Bldg Comp Bldg Comp Bldg Comp
Element #1 #2 #3 #4
<S> <C> <C> <C> <C> <C>
Sale Price/SF $105.77 $ 84.13 $139.23 $143.19
Property Rights Fee Simple Same Same Same Same
Adjustment --------------------------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Financing Cash Cash Cash Cash Cash
Adjustment -------------------------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Conditions of Sale None None None
Adjustment -10% -10%
-------------------------------------------------------------
Adjusted Price/SF $ 95.19 $ 84.13 $125.31 $143.19
Market/Time
Adjustment 0% 5% 5% 5%
-------------------------------------------------------------
Adjusted Price/SF $ 95.19 $ 88.34 $131.57 $150.35
Other Adjustments:
Location Adjustment 5% 10% -10% -10%
Topography Adjustment 0% 0% -0% 0%
Size Adjustment -5% 5% -5% -5%
Zoning Adjustment 0% 0% 0% 0%
Net Other Adjustments 0% 15% -15% -15%
FINAL ADJUSTED PRICE PER SF $ 95.19 $101.59 $111.84 $127.80
=============================================================
</TABLE>
-39-
<PAGE> 51
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
doctor/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various doctors at different rates and terms, or they can use the office space
for hospital purposes. This master lease also guarantees payment regardless of
occupancy levels.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreements for each property are not yet available. For
the purpose of our Income Approach, the gross income will be the master lease
rate for each property times the rentable building area. We reserve the right
to modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
23,206 SF x $10.00/SF = $232,060
Because of the guarantee of payment related to the master lease regardless of
occupancy levels, we have not utilized a vacancy allowance for the property.
-40-
<PAGE> 52
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$11,603, based on the management experience of other properties. The net
operating income for the property is $232,060 less $11,603, or $220,457.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison Section
of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Independence Boulevard May 1992 7.42%
Virginia Beach, Virginia
2 20th Street South December 1992 9.00%
Birmingham, Alabama
3 Upper Hembree November 1991 10.10%
Roswell, Georgia
4 Independence Boulevard August 1991 8.45%
Virginia Beach, Virginia
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
7.42 percent to 10.10 percent.
A capitalization rate slightly above the upper end of this range, at 10.25
percent, is considered appropriate because of the current physical condition of
the building as compared to the comparable and the guaranteed rents involved.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income\OAR = Estimated Value
$220,457/.1025 = $2,150,800
Rounded to: $2,151,000
==========
-41-
<PAGE> 53
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Professional Building I. The three approaches are summarized
as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000
Direct Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . $2,200,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,151,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a sixteen year old building is difficult. For this reasons,
this approach is only considered a fair indicator of value for the subject
property.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but two of the four sales were not properties located in the
Virginia market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyer of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Professional Building I, as of September 29, 1993, and based on the
assumptions and limiting conditions in this report, is:
$2,150,000
==========
-42-
<PAGE> 1
EXHIBIT 10.25
AN APPRAISAL OF
HEALTHSOUTH PROFESSIONAL BUILDING II
RICHMOND, VIRGINIA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
January 20, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH PROFESSIONAL BUILDING II
7760 PARHAM ROAD
RICHMOND, VIRGINIA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $18.00 per
square foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably,
and assuming the price is not affected by unduestimulus. 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
January 20, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
The subject property is a three-story professional office building with an
underground parking deck containing 62,369 rentable square feet of office
space. The building is a Class B facility, with a steel frame and
poured-in-place concrete structure and brick veneer exterior walls. It was
constructed in 1993. The building is currently 82.4 percent occupied.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Professional Building II, as of September 29, 1993, to be:
$10,150,000
===========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
<PAGE> 4
HealthSouth Corporation
January 20, 1994
Page Three
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirement of the
Code of Professional Ethics and the Standards of Professional Practice
of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Cheryl Worthy-Pickett has made a personal inspection of the property
that is the subject of this report. Patrick J. Simers has not made a
personal inspection of the property that is the subject of this
report.
The following people have provided significant professional assistance
to the person signing this report: Cheryl Worthy-Pickett.
/s/ Patrick J. Simers /s/ Cheryl Worthy-Pickett
--------------------- -------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 28, 1993
Property Identification: HealthSouth Professional Office
Building II
Property Location: 7760 Parham Avenue
Richmond, Henrico County, Virginia
Interest Appraised: Leased Fee Estate
Gross Building Area: 118,000 square feet
Net Rentable Area: 62,369 square feet
Subject Land Size: 6.165 acres or 268,547 square feet
Improvements Description: Three-story, with underground
parking deck steel frame and
concrete structure, Class B,
professional office building that
was constructed in November 1992.
Occupancy Percentage: 82.4%
CONCLUSIONS
Cost Approach: $8,836,000
Direct Sales Comparison Approach: $9,980,000
Income Approach: $10,150,000
Final Value Estimate: $10,150,000
===========
</TABLE>
<PAGE> 10
TABLE OF CONTENTS
Page
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 11
Market Data - Metropolitan Richmond/Henrico County 12
Zoning 13
Real Estate Taxes and Assessments 13
Site Analysis 14
Building and Site Improvements 15
HIGHEST AND BEST USE 17
VALUATION SECTION 21
Valuation Methodology 21
Cost Approach 22
Direct Sales Comparison Approach 33
Income Approach 41
CORRELATION AND CONCLUSION 43
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Location Map
Exhibit D - Area Map
Exhibit E - Tax Plat Map
Exhibit F - Leasing Status Schedule
Exhibit G - Building Description
Exhibit H - Land Improvements Description
Exhibit I - Rent Comparables Summary
Exhibit J - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is HealthSouth Professional Office Building II
located at 7760 Parham Road in Richmond, Henrico County, Virginia. The building
is a three-story Class B building constructed in 1992.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property
would be included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
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<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute].
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U. S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
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<PAGE> 14
HISTORY OF THE PROPERTY
The subject professional building was constructed by HealthSouth of Virginia in
1992. HealthSouth of Virginia, acquired the land in December 1991. This
transaction is recorded in Deed Book 2326, page 454 for a recorded purchase
price of $2,000,000.
The subject professional office building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
-3-
<PAGE> 15
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a
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<PAGE> 16
troubling unemployment rate". Value Line's Quarterly Economic Review
identified the following estimates for selected economic statistics from 1993
to 1995.
1993 1994
Real GDP 2.7% 3.2%
Personal Consumption Expenditures 2.8% 2.7%
Federal Government Purchases (5.2%) (3.0%)
30-Year Treasury Bond Yields 7.1% 7.2%
Prime Rate 6.0% 6.3%
Consumer Price Index 3.5% 3.5%
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<PAGE> 17
DESCRIPTIVE DATA
REGIONAL ANALYSIS
The subject property is in the Richmond-Petersburg Metropolitan Statistical
Area (MSA), which consists of the cities of Richmond, Petersburg, Colonial
Heights and Hopewell; and the surrounding counties of Chesterfield, Henrico,
Hanover, Goochland, Powhatan, New Kent, Charles City, Dinwiddie and Prince
George.
The MSA occupies the center of eastern Virginia. It contains more localities
than any other of the state's eight MSAs as well as more area (nearly 3,000
square miles). It is the third largest in population after the Northern
Virginia and the Norfolk-Virginia Beach-Newport News MSAs.
Population
The following is a summary of population changes for the MSAs of the state of
Virginia:
<TABLE>
<CAPTION>
=============================================================================================================
COMPARISON OF POPULATION CHANGE 1980-87
MSAs IN VIRGINIA
=============================================================================================================
Annual
Percent Total
Area 1980 1987 Change Change
-------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Bristol 90,597 90,600 0.0% 3
Charlottesville 113,568 123,300 1.2% 9,732
Danville 111,789 109,100 -0.1% -2,689
Lynchburg 142,000 142,700 0.2% 700
Norfolk 1,160,311 1,346,100 1.5% 185,789
Northern 1,146,184 1,374,400 1.7% 228,216
Richmond 761,311 825,300 0.7% 63,989
Roanoke 220,393 224,200 0.2% 3,807
===========================================================================================================
</TABLE>
Source: Center For Public Service
-6-
<PAGE> 18
The Richmond-Petersburg MSA is the third largest of the state's eight MSAs. It
has grown steadily but at a rate significantly less than that of Northern
Virginia and Norfolk. These areas have enjoyed tremendous growth due to the
strong presence of the federal government. Growth has moderated significantly
in recent years due to sluggish economic conditions discussed previously.
As of 1988, the most populous locality in the MSA was the city of Richmond at
214,500 persons followed by the adjacent counties of henrico and Chesterfield
with 205,200 and 187,100 persons, respectively. Chesterfield County is the
fastest growing locality having registered a 32.3 percent population gain since
1980 and an average growth rate of 3.3 percent per year. Projections by local
planning agencies and the Virginia Employment Commission project that the
Chesterfield and Henrico populations will surpass Richmond by the year 2000.
Both population and population growth are concentrated in the northern section
of the MSA. The population is centered in Richmond but growth is highest in
the counties around Richmond.
Transportation Network
The Richmond-Petersburg MSA is well positioned at the center of the "Golden
Crescent" enabling it to be a crossroads of transportation. Interstate 95
(I-95) connects Richmond with Northern Virginia and the major east coast cities
- -- Washington 100 miles to the north and New York 370 miles to the north.
Interstate 64, the principal east-west highway in the state intersects I-95 in
the MSA and heads east to the Norfolk area and west to Charlottesville.
Another interstate, I-85, slants northeast from central North Carolina to meet
I-95 in Petersburg. Several other arterial and primary highways also converge
on the capital city.
Income
Total personal income (TPI) in the Richmond-Petersburg MSA reached $14.4
billion, or approximately 15 percent of the state total in 1987. TPI is
reported by place of residence, rather than by place of employment, and it has
three components: 1) net
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<PAGE> 19
earnings; 2) dividends, interest, and rent by place of residence; and 3)
transfer payments by place of residence.
The Richmond-Petersburg MSA ranked third in the state in TPI behind the
Norfolk-Newport News-Virginia Beach MSA and the Northern Virginia MSA. These
three MSAs accounted for more than two-thirds of the state TPI. Between 1980
and 1987, TPI in the Richmond- Petersburg MSA increased by $6.6 billion, which
translates into an average annual growth rate of 9.2 percent. This is slightly
faster than the 9.0 percent growth rate for the state, but slightly under that
of the Charlottesville MSA, which was the second fastest growing area and
Northern Virginia which, at 10.7 percent, was the fastest growing area. A
large part of the reason for the high TPI in the Richmond-Petersburg MSA is the
size of its population; areas with a high population naturally have high TPI.
The Richmond-Petersburg MSA ranked second in per capita personal income with
$17,448 in 1987. The highest was Northern Virginia with $23,760.
Employment
Employment for the Richmond-Petersburg MSA has expanded by 100,500 jobs, from
373,900 in January of 1980 to 474,400 in May of 1990. This represents an
annual increase of approximately 2.4 percent. Between May 1989 and May 1990,
employment grew 5,900, or 1.3 percent showing the slowdown.
According to the data from the Virginia Employment Commission, the greatest
employment gains for the Richmond-Petersburg MSA have been in the service
industry sector, which increased its share of total employment from 17 percent
in 1980 to 22 percent in 1990. A relative decline in manufacturing employment
is shown from 18 percent in 1980 to 14 percent in 1990. The other sectors
increased at a rate similar with the overall average. There is an apparent
trend of less semi-skilled and blue-collar workers to more white- collar and
government employee workers.
The area economy has good diversity with 81 percent of the employment split
almost evenly among manufacturing (14%), trade (24%), services (22%), and
government (20%). This diversity creates a very healthy economic climate.
-8-
<PAGE> 20
Richmond is the home of fourteen Fortune 500 companies and besides being the
State Capitol, the city holds several federal offices such as the Fifth
District Federal Reserve Bank and the Fourth U.S. Circuit Court of Appeals.
The unemployment rate over the last 15 years has averaged 3.9 percent. The
lowest rate was 2.4 percent in the national economic expansion year of 1972 and
the highest rate was 5.8 percent during the recession year of 1982. The rate
has consistently been 2.0 percent to 3.0 percent below the national rate and
slightly below the state rate. Recent rates were as follows:
May 1980 May 1989
Richmond-Petersburg MSA 3.9% 3.9%
Virginia 4.4% 4.5%
United States 5.8% 5.6%
As with population, Richmond places third behind Northern Virginia and Norfolk
in total employment growth with 84,700 new employees between 1980 and 1988.
Northern Virginia had nearly four times this amount with a growth of 294,200
and Norfolk ranked second with 134,400. Northern Virginia experienced a 6.6
percent annual growth versus 3.5 percent for Norfolk and 2.7 percent for
Richmond. Overall, the state had a 4.0 percent increase annually which was
obviously skewed due to the strong performance of Northern Virginia.
Employment changes between October 1988 and October 1989 displayed a slowing of
growth in Norfolk, while Richmond increased at a slightly higher rate than the
previous eight years. Northern Virginia continued to grow with 47,700 new
employees versus 15,200 for Richmond and 5,000 for Norfolk. The decline in
employment growth in Norfolk was likely due to federal cut-backs in defense
spending.
Healthcare
Healthcare facilities abound in the Richmond area. The following is a list of
local hospitals.
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<PAGE> 21
<TABLE>
<CAPTION>
Facility Number of Beds
<S> <C>
Charter Westbrook 175
Children's 36
Chippenham 470
Henrico Doctors' 312
Humana - St. Luke's 160
Hunter Holmes McGuire - Virginia Medical Center 1,508
Johnston - Willis 232
Medical College of Virginia 881
Metropolitan 180
Retreat 230
Richmond Community 102
Richmond Eye and Ear 60
Richmond Memorial 351
St. John's 70
St. Mary's Hospital 401
Stuart Circle 153
</TABLE>
Nursing homes in the Richmond area include the following:
<TABLE>
<S> <C>
Beth Sholom Home Central, Virginia Beth Sholom Woods
Cambridge Manor Convalescent Center Camelot Hall
Chippenham Manor Catshaw Nursing Manor
Eastern Star Home Forest Hill Convalescent Center
Imperial Health Center Lakewood Manor Retirement Community
Libbie Convalescent Center Marywood Apartments
Little Sisters of the Poor Richmond Home for Ladies
Masonic Home of Virginia Snyder Memorial Home
Richmond Nursing Home Summerhill at Stony Point
Stratford Hall Nursing Home The Virginia Home
The Hermitage University Park Nursing Home
The Windsor Westport Convalescent Center
Westminster Canterbury
</TABLE>
Conclusion
The Richmond-Petersburg MSA has experienced steady growth during the 1980s. In
relation to the other MSAs in the state of Virginia, it ranks generally third
in most categories behind Northern Virginia and the Norfolk-Newport News MSA.
Northern Virginia, being part of the Washington, D.C. MSA, has been one of the
most active markets in the United States. The large expansion of the federal
government over the
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<PAGE> 22
last several decades has stimulated tremendous growth in this area. This area
of the state will likely continue to exceed other Virginia localities in
population, employment and income growth.
The Norfolk-Newport News-Virginia Beach area will obviously be impacted by the
impending cut-back in defense spending. Due to this, the Richmond-Petersburg
MSA will likely out-perform that MSA in growth during the 1990s. It is,
however, unlikely that the Richmond-Petersburg MSA will experience the
explosive growth that Northern Virginia experienced during the 1980s.
Development over the next decade is expected to be at a pace slightly above
that of the state average, but below that of Northern Virginia. The next
several years will likely be very sluggish until the economy recovers from its
doldrums.
NEIGHBORHOOD ANALYSIS
The neighborhood's area boundaries are Broad Street (Highway 250) to the west,
Staples Road to the east, Parham Road to the south and Hungary Road to the
north.
The area is generally residential with modest single-family homes and
multi-family developments to the north and east of the subject. Development
along Parham Road mainly is office-institutional in nature, such as office
buildings, banks, and county offices. West of the subject, toward Broad
Street, are more commercial or retail developments such as automobile
dealerships, fast food restaurants, and shopping centers.
The area has convenient access to Interstate 64, providing access to downtown
Richmond west of the subject.
The immediate surrounding area is supportive and complementary to the continued
growth potential of the subject facility. The development has also contributed
to a continued growth of the neighborhood.
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<PAGE> 23
MARKET DATA - Metropolitan Richmond/Henrico County
Based upon the 1993 Richmond Commercial Real Estate Market Review prepared by
Harrison and Bates the suburban office market out performed the downtown market
during the 1992 fiscal year. Internal market growth particularly in the
northwest quadrant (subject location) was substantial during the 1992 fiscal
year.
Office building sales in 1992 ranged from $30.00 per square to $108.00 per
square foot. Generally, suburban office buildings were selling for $40.00 to
$60.00 per square foot, which in some instances is less than one-half their
replacement (construction) cost. Rental rates appear to be stabilizing in all
markets and even increasing slightly in pockets of the suburban market. Deep
discounts through free rent and other concessions are somewhat passe' since
many tenants are more interested in the lowest possible rate over the term
rather than increasing the overall rate to cover the often extravagant
concessions and extras.
The Hanover Medical Park was completed in 1992 and contains a total of 110,000
square feet. This property was partially pre-leased with the remaining being
available. Because of the anticipated increase in absorption in the suburban
market, the suburban market is expected to improve faster than the downtown
market. Office building sales will continue to be quite sporadic and will not
truly stabilize until lenders are no longer owners, the RTC is out of the
business and the Banks are willing and /or able to make realistic loans on
speculative office properties.
During the first six months of 1993 the northwest quadrant office market
continued to absorb space and attract leasing and sales activity. Absorption
of the quadrant has been steady with 200,000 square feet of net absorption.
Additionally, the quadrant's appeal to tenants and prospective buyers remains
high. The overall vacancy for the northwest quadrant has been reduced to
almost 13 percent, down considerable from end of year 1992s vacancy rate of
16.5 percent. Class A office space vacancy rate in the northwest quadrant is
approximately 7.5 percent.
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<PAGE> 24
ZONING
The subject property is zoned "O-3" by the Henrico County Zoning District. The
purpose of this district is to provide for office buildings in attractive
surroundings with types of uses and signs so controlled as to be generally
compatible with high-density residential surroundings.
The subject improvement is considered a legal conforming use. Principle uses
included in this zoning district are as follows:
Office Buildings
General Hospitals
Hotels or Motels
Retail and Service Facilities
Schools
Banks
Maximum Stories: 8
Maximum Height: 110 feet
Minimum Lot Area: 25,000 feet
Minimum Lot Width: 100 feet
Minimum Front Yard Depth: 35 feet
Minimum Side Yard: 15 feet
Minimum Rear Yard: 40 feet
REAL ESTATE TAXES AND ASSESSMENTS
The subject property was assessed in 1993 by the Henrico County Assessment
Office. The property is taxes based upon 100 percent of the assessed value.
The property is identified by real estate account number HE 0110701. The
subject's parcel number is 60-0A-000-0025. The assessments for the parcel is
presented below:
Parcel Identification Number 60-0A-000-0025
Land $1,074,000
Improvements 6,339,000
----------
$7,413,000
-13-
<PAGE> 25
This assessment does include Professional Office Building I and Professional
Office Building II.
The millage rate applicable to the subject property for the 1993 tax years was
$.98 per $100. This would indicate a total tax amount payable for the 1993 tax
year of $72,647.40.
SITE ANALYSIS
The subject site is located on the north side of Parham Road in the northwest
section of Richmond, Virginia. The street address is 7760 Parham Road,
Richmond, Virginia. As indicate by the plat map included in the Exhibit
Section of this report, the site is irregular in shape and contains a total of
12.33 acres, of which 6.145 acres has been allocated to the subject. Access to
the site is via Broad Street to the west or Staple Road to the east to Parham
Road. Parham Road is a paved four-lane highway.
The subject land is approximately level with grade on Parham Road. The
topography is generally flat with the rear portion approximately ten feet above
grade on Parham Road. Utilities to the site include water, sewer, electricity,
cable, telephone and gas.
The subject property appears to have adequate drainage and soil load-bearing
capabilities to support most development alternatives. A soil report, however,
was not made available to the appraiser and it is assumed, based on existing
improvement, that soil load-bearing capabilities are adequate.
According to the County Planning Office, the subject property is not located in
a flood plain zone.
A legal description of the property and a land configuration plat are include
in the Exhibit Section of this report.
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<PAGE> 26
BUILDING AND SITE IMPROVEMENTS
BUILDING
The HealthSouth Professional Office Building II is a three-story Class B
building with an underground parking garage. The building was constructed and
opened in November of 1992. The building has a total gross square footage of
118,000 and net leasable area of 62,369 square feet.
The building is a steel and concrete framed structure with a concrete slab
floor. The first, second and third floors are elevated concrete slab with
steel joist supports. The exterior wall finishes include brick veneer and
concrete panels. The roof is concrete slab with built up composition in
portion with metal framed skylights in some portions. Interior wall finishes
include wood finishes with vinyl wall coverings in others. Built in wood
counters and shelving are located in the first floor area.
Heating and cooling is provided by central forced air system. Elevators are in
place for service to all parking garage and doctors offices. Plumbing includes
a full sprinkler located throughout the building including the parking garage.
Overall the building is in excellent condition.
SITE
Land improvements to the site include site preparation and concrete paving for
parking, drives, curbs and sidewalks. In addition, site improvements include
lighting, signage and asphalt paving for driveways.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
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<PAGE> 27
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in excellent overall condition. It appears to have been
adequately maintained. No significant deferred maintenance was indicated from
the appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 28
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute].
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 29
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "O-3", Office-Institutional. Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail
and restaurants, office/institutional, hotels, hospitals and other
medical-oriented uses.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. Hospital
related development (POB I) located just west of the subject improvement
indicate that development is financially feasible.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible,
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<PAGE> 30
and new development is financially feasible. Based on this analysis, the
current highest and best use of the land, if vacant, would be for
office/institutional development.
As Improved
The subject site is currently improved with a 62,369 rentable square foot
office building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to Henrico
County zoning guidelines. Under the zoning, the property could remain as it
is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. It would, however,
be financially feasible to correct any deferred maintenance.
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<PAGE> 31
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exist. This
will enable to the property to remain competitive in the leasing market. The
highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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<PAGE> 32
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 33
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-22-
<PAGE> 34
Land Comparable Number 1
<TABLE>
<S> <C>
Location: 48-OA-0000-0023B; Broad Street
Deed Book/Page: 2330/356
Grantor: Fred and Lavinia Williams, Jr.
Grantee: Broad Street Investment, a Delaware Corporation
Date of Sale: January 1992
Size: 4.644 acres, or 202,293 square feet
Sale Price: $800,000
Unit Price: $3.95 per square foot
Zoning: BU-2
Comments: Improved with shopping center
Land Comparable Number 2
Location: East Broad Street, 38-3-C (78-A2-9)
Deed Book/Page: 2279/1889
Grantor: Rowe Development Company
Grantee: Innsbrook Land Holding Corporation
Date of Sale: February 1991
Size: 14.78 acres, or 643,643 square feet
Sale Price: $2,886,200
Unit Price: $4.48 per square foot
Zoning: Commercial
Comments: Improved with office building
</TABLE>
-23-
<PAGE> 35
Land Comparable Number 3
<TABLE>
<S> <C>
Location: West End Drive, (59-A-6G)
Deed Book/Page: 2252/1843
Grantor: W. Randolph and Elizabeth Cosby
Grantee: Eagles Self Storage Corp.
Date of Sale: July 1990
Size: 2.987 acres, or 130,114 square feet
Sale Price: $552,595
Unit Price: $4.25 per square foot
Zoning: Business
Comments: Improved with mini-storage facility
Land Comparable Number 4
Location: 8250 West Broad Street, 60-A-2 (92-B1-8)
Deed Book/Page: 2186/247
Grantor: Max and Wilma Pearson
Grantee: Holly Brook, Inc. a Virginia Corporation
Date of Sale: April 1989
Size: 7.01 acres, or 305,356 square feet acres
Sale Price: $1,100,000
Unit Price: $3.60 per square foot
Zoning: Commercial
Comments: Improved with a Capitol Lincoln Mercury dealership
</TABLE>
-24-
<PAGE> 36
Land Comparable Number 5 - (Listing)
<TABLE>
<S> <C>
Location: Parham Road, north side, west of Hungary Spring; Map 60-A-25
Agent: Ted Austin, Prudential Realty Co., Richmond, Virginia
Size: 6.69 acres, or 291,416 square feet
Asking Price: $1,170,750
Unit Price: $4.02 per square foot
Zoning: Retirement Center
</TABLE>
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
Sale Date of Size Unit Price
Number Location Sale (acres) (sq. ft.) Zoning
<S> <C> <C> <C> <C> <C>
1 Broad Street, north side January 4.644 $3.95 BU-2
1992
2 East Broad Street February 14.780 $4.48 C-2
1991
3 West End Drive July 2.987 $4.25 BU-2
1990
4 West Broad Street April 7.010 $3.60 C-2
1989
5 Parham Road, north side Current 6.690 $4.02 RC
Listing
SUBJECT PARHAM ROAD 6.165 O-3
</TABLE>
-25-
<PAGE> 37
Discussion of Land Comparables
LAND SALE NUMBER 1 is a 4.644-acre tract which is now improved with a shopping
center. The comparable's location is superior to the subject's along Parham
Road. Parham Road is developed with more institutional or office improvements
while this section of Broad Street is more commercially improved. We have made
an downward adjustment for this factor to the comparable. An additional
downward adjustment was indicated because of the parcel's smaller size in
comparison to the subject's 6.165 acres. Typically, smaller parcels sell at a
higher unit price than larger tracts. A downward adjustment has been made for
zoning. The adjustments are shown on a Land Sale Adjustment Grid at the end of
this discussion. The adjusted price per square foot of this comparable is
$3.36 per square foot.
LAND SALE NUMBER 2 is a parcel containing a total of 14.78 acres. This
transaction is approximately two years old indicating an upward adjustment for
time. An adjustment for location was deemed not necessary. The property was
level throughout indicating a downward adjustment in comparison to the subject
which has a rolling topographical layout. An upward adjustment has been
indicated for the comparable's larger size in comparison to the subject.
Typically, larger tract sell at a lower unit price than smaller tracts. A
downward adjustment was indicated for zoning in comparison to the subject's
Office-Institutional zoning. The adjusted price per square foot of this
comparable is $4.47.
LAND SALE NUMBER 3 is a 2.987-acre tract located northwest of the subject
improved with a mini-storage facility. Because this transaction is
approximately three years old we have made an upward adjustment for time. An
upward adjustment was indicated for this transaction based location along a
less visible thoroughfare with limited access. Downward adjustments were
indicated for the level topography and the smaller size. An additional
downward adjustment has been made for zoning. The adjusted price for this
comparable is $4.02 per square foot.
LAND SALE NUMBER 4 is a 7.01-acre parcel that was improved with a car
dealership. It is located northwest of the subject property along Broad
Street. A upward adjustment was indicated for time. An addition upward
adjustment was made for location. The adjusted price per square foot of this
comparable is $3.97.
-26-
<PAGE> 38
LAND SALE NUMBER 5 is a current listing of a site just east of the subject
along Parham Road. This site is zoned for retirement facility. A downward
adjustment is indicated because this is a listing rather than an actual sale.
An upward adjustment is also indicated due to the limited zoning. The adjusted
price per square foot of this comparable is $4.19 per square foot.
The adjusted land prices range from $3.36 per square foot to $4.19 per square
foot, with the prices of the most comparable sites being in the middle of this
range. Based on our analysis of the subject versus these comparables, it is
our opinion that a land price of $4.00 per square is representative of the
subject site. The subject land value is estimated as follows:
268,547 SF x $4.00/SF = $1,074,188
Rounded to: $1,074,000
==========
-27-
<PAGE> 39
<TABLE>
<CAPTION>
L A N D S A L E A D J U S T M E N T G R I D
HealthSouth Professional Building
Richmond, Virginia
Subject Land Comp Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4 #5
<S> <C> <C> <C> <C> <C>
Sale Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Property Rights Fee Simple Same Same Same Same Same
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Financing Cash Cash Cash Cash Cash Cash
Adjustment
-----------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $4.01
Conditions of Sale None None None None Listing
Adjustment -5%
-----------------------------------------------------------
Adjusted Price/SF $3.95 $4.48 $4.25 $3.60 $3.81
Market/Time
Adjustment 0% 5% 5% 5% 0%
-----------------------------------------------------------
Adjusted Price/SF $3.95 $4.70 $4.46 $3.78 $3.81
Other Adjustments
Location Adjustment -5% 0% 5% 5% 0%
Topography Adjustment 0% -5% -5% 0% 0%
Size Adjustment -5% 5% -5% 0% 0%
Zoning Adjustment -5% -5% -5% 0% 10%
Net Other Adjustments -15% -5% -10% 5% 10%
FINAL ADJUSTED PRICE PER SF $3.36 $4.47 $4.02 $3.97 $4.19
===========================================================
</TABLE>
-28-
<PAGE> 40
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $7,598,450.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class B
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-29-
<PAGE> 41
Marshall Valuation Service, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was constructed in 1992, and it is in excellent condition.
After taking into consideration all significant physical factors affecting the
subject property, it is judged that the subject has no discernible depreciation
at present.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years.
Cost Approach Conclusion
The schedule that followings is a summary of the estimated replacement cost by
category for the subject building plus estimates of all forms of depreciation.
-30-
<PAGE> 42
SUMMARY OF REPLACEMENT COSTS NEW
HEALTHSOUTH PROFESSIONAL BUILDING II
RICHMOND, VIRGINIA
<TABLE>
<CAPTION> Replacement
Cost
<S> <C> <C>
Site Preparation $ 24,295
Foundation 180,214
Frame 883,188
Exterior Walls 540,255
Floors 596,837
Roof 513,465
Roof Cover 64,634
Partitioning and Built-in 1,502,568
Ceilings 122,344
Floor Coverings 283,199
Plumbing 378,023
HVAC 395,605
Electrical 720,859
Other Features 202,382
-----------
TOTAL REPLACEMENT COST $ 6,407,868
Architect's Fees Plans and Specs 4.4% 281,946
Architect's Fees, Supervision 3.4% 217,686
Entrepreneural Overhead, Profit, and Other
Miscellaneous Fees 10.0% 690,768
-----------
Total Other Costs $ 1,190,582
TOTAL PROJECT REPLACEMENT COST $ 7,598,450
ACCRUED DEPRECIATION:
Building Costs 0% Straight Line 0/45ths 0
Depreciated Value Building $ 7,598,450
SITE IMPROVEMENTS
Replacement Cost $ 164,000
Depreciated Cost 0% Straight Line 0/20ths 0
Depreciated Value $ 164,000
Plus Land Value $ 1,740,000
-----------
DEPRECIATED COST APPROACH VALUE $ 8,836,450
</TABLE>
-31-
<PAGE> 43
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$8,836,000
==========
-32-
<PAGE> 44
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arms-length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-33-
<PAGE> 45
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1016 Independence Boulevard,
Virginia Beach, Virginia
Date of Sale: May 12, 1992
Deed Book/Page: 3086/1410
Grantor: Diagnostic Center Associates
Grantee: Diagnostic Center of Virginia Beach
Sale Price: $1,586,500
Terms of Sale: Assumption of original note, $568,494
cash
PROPERTY DATA
Land Size: .93 acres
Building Size: 15,000 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $225,000 $15.00
Vacancy Allowance @ 5%: ($ 11,250) ($ 0.75)
--------- -------
Effective Gross Income: $213,750 $14.25
Estimated Expenses @ $3.50/SF ($ 52,500) $ 3.50
--------- ------
Net Operating Income: $161,250 $10.75
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $105.77
Stabilized Overall Rate: 10.16%
EGIM: 7.42
</TABLE>
COMMENTS
Structure is a one-story, Class C, medical office designed for a single tenant
user. The building is located adjacent to a hospital.
-34-
<PAGE> 46
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the
address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- ------
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $84.13
Stabilized Overall Rate: 9.0 %
EGIM: 6.68
</TABLE>
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40 percent to 45 percent of the total purchase price.
-35-
<PAGE> 47
IMPROVED SALE NUMBER 3
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in
Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $33,556 $1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-36-
<PAGE> 48
IMPROVED SALE NUMBER 4
GENERAL SALE DATA
Location: 816 Independence Boulevard,
Virginia Beach, Virginia
Date of Sale: August 1991
Deed Book/Page: 3006/1566
Grantor: Humana of Virginia, Inc.
Grantee: MPB, Inc.
Sale Price: $5,011,700
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 3.507 acres (approximate)
Building Size: 35,000 square feet
Year Built: 1977
Occupancy at Sale: 75.0%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $630,000 $18.00
Vacancy Allowance @ 5%: $ 31,500 ($ 0.90)
-------- ------
Effective Gross Income: $598,500 $17.10
Estimated Expenses @ $5.00/SF $175,000 ($ 5.00)
-------- ------
Net Operating Income: $423,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $143.19
Stabilized Overall Rate: 8.45%
EGIM: 8.37
COMMENTS
Built as a four-story, Class A, building located next to hospital. The
construction is steel frame with brick veneer. It is located north side of
Independence Avenue
-37-
<PAGE> 49
These four sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 1016 Independence Blvd. 15,000 $1,586,500 $105.77
Virginia Beach, Virginia
2 20th Street South 44,574 $3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
4 816 Independence Blvd. 35,000 $5,011,700 $143.19
Virginia Beach, Virginia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot
to $143.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE NUMBER 1 is a Class C professional office building that is located
adjacent to a hospital. The facility was acquired by a physician's group to
provide outpatient service in conjunction with the hospital. This transaction
was reportedly at a market value price. However, a downward adjustment is
still indicated because the building never was marketed as a vacant building
due to this relationship. The building has a substantial setback from
Independence Boulevard and has poor visibility. An upward adjustment is
indicated due to this inferior location compared to the subject. A downward
adjustment to the price per square foot is indicated because of the smaller
size of this comparable. An upward adjustment to this comparable is indicated
because of the subject's superior construction quality. The adjusted price per
square foot of this comparable is $114.23.
SALE NUMBER 2 is the sale of a building purchased by the University of Alabama
to use as a Medical Genetics Center. An upward adjustment was indicated
because of the time of sale. Upward adjustments were indicated because of the
inferior location as compared to the subject. An additional upward adjustment
was made for size and construction quality. The adjusted price for this
comparable is $114.84 per square foot.
-38-
<PAGE> 50
SALE NUMBER 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. An upward adjustment was made for time of sale.
No adjustments to the price per square foot of this comparable are indicated
because of size. Upward adjustments are indicated due to the comparable's
superior location and construction quality. The adjusted price per square foot
of this comparable is $151.31.
SALE NUMBER 4 was the August 1992 sale of an office building in Virginia Beach,
Virginia. Upward adjustment was indicated for the time of sale. An upward
adjustment to the price per foot of this comparable is indicated because of the
comparable's location and quality. A downward adjustment is indicated for
size. The adjusted price for this comparable is $172.90 per square foot.
The adjusted prices per square foot range from $114.23 to $172.90. An adjusted
price of $160.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject hospital by the Direct
Sales Comparison Approach, as of September 29, 1993, the effective date of this
report, is calculated as follows:
62,369 SF x $160.00/SF = $9,979,040
Rounded to: $9,980,000
==========
-39-
<PAGE> 51
I M P R O V E D S A L E S A D J U S T M E N T G R I D
HealthSouth Professional Building II
Richmond, Virginia
<TABLE>
<CAPTION>
Subject Land Comp Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4
Sale Price/SF $105.77 $ 84.13 $139.23 $143.19
Property Rights Fee Simple Same Same Same Same
Adjustment
-----------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Financing Cash Cash Cash Cash Cash
Adjustment
-----------------------------------------------
Adjusted Price/SF $105.77 $ 84.13 $139.23 $143.19
Conditions of Sale None None None
Adjustment -10% -10%
-----------------------------------------------
Adjusted Price/SF $ 95.19 $ 84.13 $125.31 $143.19
Market/Time
Adjustment 0% 5% 5% 5%
-----------------------------------------------
Adjusted Price/SF $ 95.19 $ 88.34 $131.57 $150.35
Other Adjustments:
Location Adjustment 15% 15% 10% 10%
Topography Adjustment 0% 0% 0% 0%
Size Adjustment -5% 5% 0% -5%
Zoning Adjustment 0% 0% 0% 0%
Construction Adjustment 10% 10% 5% 10%
Net Other Adjustments 20% 30% 15% 15%
FINAL ADJUSTED PRICE PER SF $114.23 $114.84 $151.31 $172.90
===============================================
</TABLE>
-40-
<PAGE> 52
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
doctor/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various doctors at different rates and terms, or they can use the office space
for hospital purposes. This master lease also guarantees payment regardless of
occupancy levels
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreements for each property are not yet available. For
the purpose of our Income Approach, the gross income will be the master lease
rate for each property times the rentable building area. We reserve the right
to modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
62,369 SF x $18.00/SF = $1,122,642
Because of the guarantee of payment related to the master lease regardless of
occupancy levels, we have not utilized a vacancy allowance for the property.
-41-
<PAGE> 53
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$56,132, based on the management experience of other properties. The net
operating income for the property is $1,122,642 less $56,132, or $1,066,510.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison Section
of this report are summarized as follows:
Sale No. Property Location Sale Date OAR (%)
1 Independence Boulevard May 1992 7.42%
Virginia Beach, Virginia
2 20th Street South December 1992 9.0 %
Birmingham, Alabama
3 Upper Hembree November 1991 10.1 %
Roswell, Georgia
4 Independence Boulevard August 1991 8.45%
Virginia Beach, Virginia
The direct capitalization, or overall rates, for these comparables ranged from
7.4 percent to 10.1 percent.
A capitalization rate slightly above the upper end of this range, at 10.5
percent, is considered appropriate because of the current physical condition of
the building as compared to the comparable and the guaranteed rents involved.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$1,066,510/.105 = $10,157,238
Rounded to: $10,150,000
===========
-42-
<PAGE> 54
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Professional Building II. The three approaches are summarized
as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . . $ 8,836,000
Direct Sales Comparison Approach . . . . . . . . . . . $ 9,980,000
Income Approach . . . . . . . . . . . . . . . . . . . $10,150,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a sixteen year old building is difficult. For this reasons,
this approach is only considered a fair indicator of value for the subject
property.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but two of the four sales were not properties located in the
Virginia market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyer of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Professional Building II, as of September 29, 1993, and based on
the assumptions and limiting conditions in this report, is:
$10,150,000
===========
-43-
<PAGE> 1
EXHIBIT 10.26
AN APPRAISAL OF
HEALTHSOUTH REHABILITATION CENTER
OF LITTLE ROCK
LITTLE ROCK, ARKANSAS
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 7, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH REHABILITATION CENTER OF LITTLE ROCK
8821 KNOEDL COURT
LITTLE ROCK, ARKANSAS
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $19.00 per
square foot.
This appraisal investigation included visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
February 7, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
The subject property is a one-story, Class C, rehabilitation clinic containing
11,963 rentable/gross square feet located on a 69,618 square foot land site.
The building was originally built and occupied in 1991 to accommodate a
physical rehabilitation clinic. The building is presently 100 percent occupied
by HealthSouth.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Rehabilitation Center of Little Rock, as of September 29, 1993, to be:
$2,060,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
<PAGE> 4
HealthSouth Corporation
February 7, 1994
Page Three
This appraisal report consists of the following:
o This letter outlining the services performed;
o A Certification of the appraiser;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
----------------------
Patrick J. Simers
Managing Director
PJS:jef
<PAGE> 5
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
A representative of Valuation Counselors Group, Inc. has made a
personal inspection of the property that is the subject of this
report.
Significant professional assistance to the person signing this report
was provided by Jery L. Hunter.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
<TABLE>
<CAPTION>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 28, 1993
Property Identification: HealthSouth Rehabilitation Center of
Little Rock
Property Location: 8821 Knoedl Court, Little Rock, Arkansas
Interest Appraised: Leased Fee Estate
Gross Building Area: 11,963 square feet
Net Rentable Area: 11,963 square feet
Subject Land Size: 69,618 square feet
Improvements Description: A one-story, Class C medical-related
building containing 11,963 square feet.
Occupancy Percentage: 100%
CONCLUSIONS
Cost Approach: $1,560,000
Direct Sales Comparison Approach: N/A
Income Approach: $2,060,000
Final Value Estimate: $2,060,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 2
Property Rights Appraised 2
Definition of Value 2
Estimated Marketing Period 3
History of the Property 3
History and Nature of the Business Environment 4
DESCRIPTIVE DATA 6
Regional and City Analysis 6
Neighborhood Description 12
Market Data - Greater Little Rock 13
Zoning 16
Real Estate Taxes and Assessments 17
Subject Property Description 18
Improvements Description 20
HIGHEST AND BEST USE 22
VALUATION SECTION 26
Valuation Methodology 26
Cost Approach 28
Income Approach 42
CORRELATION AND CONCLUSION 44
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Area Map
Exhibit D - Location Map
Exhibit E - Plat Map
Exhibit F - Site Plans
Exhibit G - Building Plan
Exhibit H - Comparable Land Sales Location Map
Exhibit I - Building Description
Exhibit J - Land Improvements Description
Exhibit K - Estimation of Annual Rental Value
Exhibit L - Comparable Sales
Exhibit M - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property, known as the HealthSouth Rehabilitation Center of Little
Rock, consists of a one-story, Class C, medical building containing a gross
floor area of 11,963 square feet. The property is located at 8821 Knoedl
Court, Little Rock, Arkansas. For title reference and legal description see
the Exhibit Section.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the leased fee
estate in the subject property as of September 29, 1993. The appraisal
assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
FUNCTION OF THE APPRAISAL
This appraisal engagement has been conducted using applicable standard
appraisal techniques and in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Appraisal Practice of the
Appraisal Institute and the Society of Real Estate Appraisers. In the spirit
of the Competency Provision of the Appraisal Institute, we acknowledge our
experience in appraising the subject's type property, and are in compliance
with this provision. This appraisal entails the collection, analysis and
description of data pertaining to physical, legal and economic conditions that
affect the use and value of the subject property and any other relevant data
that would pertain to the appraisal of a medical building.
-1-
<PAGE> 13
SCOPE OF THE APPRAISAL
In order to appraise the property, we initially analyzed the economic,
demographic, and physical characteristics of the market to determine if
sufficient demand exists for the subject type property. We gathered data
relative to rentals, sales, etc., of similar type facilities. The three
approaches (Cost, Direct Sales Comparison, and Income) were considered to
estimate the market value of the subject real estate.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the "leased fee estate", which is
defined as follows:
An ownership interest held by a landlord with the rights of use and
occupancy conveyed by lease to others; the rights of lessor (the
leased fee owner) and leased fee are specified by contract terms
contained within the lease. (1)
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
- -----------------------
(1) American Institute of Real Estate Appraisers, The
Appraisal of Real Estate, 9th Ed. (Chicago: American Institute of
Real Estate Appraisers, 1987), p. 111.
-2-
<PAGE> 14
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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."
Source: Chapter 12, Code of Federal Regulation, Part 34.42(P).
ESTIMATED MARKETING PERIOD
The subject property is best suited for single occupancy. Given the existing
shortage of supply and the increasing demand for medical-related buildings in
the Little Rock area, we estimate the marketing period of the subject is within
four months.
HISTORY OF THE PROPERTY
The subject medical building is currently owned by HealthSouth Rehabilitation
Corporation, an Alabama corporation. The property's land was acquired in
September 1990 from John Everett Knoedl, Carl W. Knoedl and Marjorie L. Knoedl
(his wife), and Charles W. Granberry and Patricia E. Granberry (his wife).
This transaction was recorded in document 90-50473 at a purchase price of
$336,000. The property was subsequently improved with the subject 11,963
square foot medical-related building.
According to Pulaski County public records, the land has been in the Knoedl
family for more than 65 years.
-3-
<PAGE> 15
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
-4-
<PAGE> 16
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
-5-
<PAGE> 17
DESCRIPTIVE DATA
REGIONAL AND CITY ANALYSIS
LOCATION
The subject property is located within the Little Rock city limits. Little
Rock, the capitol of Arkansas, is geographically located 307 miles northeast of
Dallas, 405 miles southeast of Kansas City and 523 miles west of Atlanta.
Little Rock is located within the Greater Little Rock Metropolitan Statistical
Area (MSA), an area encompassing four counties in central Arkansas.
POPULATION
As of 1990, the U.S. Bureau of the Census reported a population of 513,117
people and a median age of 32.7 years for the Greater Little Rock Metropolitan
Area. The 1990 population reflects an increase of 38,654 people, 81.1 percent
over the 1980 population. The 1990 age distribution of the population for the
Greater Little Rock MSA is as follows:
<TABLE>
<CAPTION>
Number
Age Group of People
--------- ---------
<S> <C>
Under 5 years 37,664
5 - 17 years 98,518
18 - 24 years 54,428
25 - 44 years 170,673
45 - 59 years 73,708
60 - 74 years 53,543
75 - 84 years 18,800
85 years and over 5,783
</TABLE>
As indicated above, the majority of the population is 25 years of age to 44
years of age. This factor indicates a greater population growth since the
strongest employment group is typically in the range between 20 and 50 years of
age. Additionally, should Little Rock continue to grow as an employment
center, the under 18 age group, comprising
-6-
<PAGE> 18
26.5 percent of the present population, and the under 25 age group, comprising
37.1 percent of the present population, will tend to seek employment in their
"hometown".
As stated above, the 1990 median age of the Greater Little Rock MSA is 32.7
years of age. This is slightly lower than the median age reported for the
United States of 32.9. 70.4 percent of the Greater Little Rock area is under
45 years of age, while 84.8 percent of the population is under 60 years of age.
According to the U.S. Bureau of the Census, the projected growth rate is going
to be higher than the annual growth rate of .81 percent experienced during the
last census period. Between 1990 and 1993 the population of the Greater Little
Rock MSA is projected to grow at a rate of 1.14 percent and between 1990 and
1998 at a rate of 1.12 percent. According to area business leaders, some of
this growth rate will be attributable to the recognition that Little Rock and
Arkansas has received since the former state governor was elected as President
of the United States.
Little Rock, with a 1990 population of 175,795 people, is the largest city of
both the Greater Little Rock MSA and the state of Arkansas; North Little Rock,
with a 1990 population of 61,741 people is the second largest city in the
Greater Little Rock MSA.
Due to the Greater Little Rock MSA being geographically located in the center
of the state and comprising a significant part of the state's population as
well as being the industrial and employment center of the state, it is expected
that the Greater Little Rock MSA will be the focal point of the state's
population growth.
EMPLOYMENT
As indicated in the following two illustrations, Little Rock's economic base is
well diversified.
-7-
<PAGE> 19
LEADING NON-MANUFACTURING EMPLOYERS
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYER PRODUCT/SERVICE EMPLOYEES
<S> <C> <C>
State of Arkansas Government 22,200
Federal Government Government 9,600
Pulaski County Public School Districts Education 7,473
Little Rock Air Force Base Government 6,890
University of Arkansas for Medical Sciences Education/Medical Science 5,392
Baptist Medical Systems Medical Services 5,000
Veterans Administration Hospitals Medical Services 3,400
St. Vincent Infirmary Medical Center Medical Services 2,837
Arkansas Children's Hospital Medical Services 2,670
Dillard's Department Stores 2,134
Union Pacific Railroad Transportation (Railroad) 2,000
Southwestern Bell Telephone Utility (Telephone) 1,792
University of Arkansas at Little Rock Education 1,500
Arkansas Power & Light Company Utility (Electric) 1,407
Arkansas Blue Cross & Blue Shield Insurance 1,256
</TABLE>
-8-
<PAGE> 20
MAJOR MANUFACTURING EMPLOYERS
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYER PRODUCT/SERVICE EMPLOYEES
<S> <C> <C>
Maybelline Company Cosmetics 1,200
Arkansas Democrat Gazette Newspapers 800
Philips Lighting Corporation Incandescent Light Bulbs 650
Smoky Hollow Foods Meat Products 600
AT&T Data Transmission Equip. 546
Timex Corporation Watches 540
Falcon Jet Corporation Falcon Aircraft 530
Orbit Valve Company Steel Valves 506
R & G Sloane Plastic Pipe Fittings 500
Arkansas Aerospace, Inc. Aircraft Avionics 419
AFCO Steeline Structural Steel and Metal 403
Molex, Inc. Electrical Connectors 400
Personal Products Non-Woven Fabrics 365
Leisure Arts, Inc. Needlecraft Instruction, 356
Leaflets, Neddlecraft Kits
Stone Container Corrugated Board and Boxes 351
</TABLE>
In 1994, the people of Arkansas amended the state constitution to insure that
all people in Arkansas would have the right to work regardless of their
affiliation or non-affiliation with any type of labor union. Another important
law Arkansas has enacted concerns peaceful labor relations; Act 193 provides
that any violence which takes place on any picket line or in conjunction with a
labor dispute becomes a felony and not a misdemeanor, and the person committing
the act of violence is liable for confinement in the state penitentiary for not
less than one year.
-9-
<PAGE> 21
According to the U.S. Bureau of the Census, the Greater Little Rock MSA had a
labor force of 342,762 people in 1990. Of the labor force, 323,567 people were
employed, indicating an unemployment rate of 5.6 percent; comparable with the
national unemployment rate of 5.5 percent. As of August 1993 the Greater
Little Rock MSA had an unemployment rate of 4.6 percent, down from 4.7 percent
the previous month and down from 5.6 percent for the same reporting period in
1992. It is expected that the unemployment rate will continue to go down due
to the anticipated building expected in the office building, office/warehouse
and apartment markets. Recently, each of these markets have seen demand exceed
supply.
INCOME
The 1993 median household income reported for the Greater Little Rock MSA was
$29,031, 11.6 percent lower than the median household income reported for the
same period for the United States; median household incomes tend to be slightly
lower in right to work states. Only 2.6 percent of the households, 5,306,
report an income greater than $100,000. This is significantly lower than the
3.9 percent reported for the United States, while 22.9 percent report an income
lower than $15,000; 35.4 percent of the households report a median household
income between $25,000 and $50,000.
TRANSPORTATION
The Little Rock area, located in the exact center of the state of Arkansas, is
easily accessible by any standard method of transportation. The Little Rock
Regional Airport, located within the city limits of Little Rock three miles
from the downtown area, is served by ten major airlines with a total of 55
departures and arrivals daily. The airport, encompassing over 2,000 acres, is
also served by numerous charter, private and corporate aircraft.
Union Pacific, Cotton Belt/Southern Pacific and Amtrak serve Greater Little
Rock with freight and passenger rail service.
Greyhound/Trailways Bus Lines operates daily with 32 arrivals and departures to
and from the metropolitan area to all major cities. Nationwide charter bus
service is also available.
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<PAGE> 22
Inter-city transit service is provided by publicly-owned and operated Central
Arkansas Transit which operates 49 buses on 21 fixed routes and nine express
routes.
Greater Little Rock has one of the best river utilizations in the United States
with the development of the Arkansas River into a year-round barge navigation
route. The barge system on the river is served by the Little Rock Port,
Foreign Trade Zone 14, United States Customs Port of Entry, and the Fred I.
Brown Jr. Industrial Harbor.
Little Rock is easily accessible by vehicle traffic. Five interstate highways,
five U.S. highways, and 22 state highways intersect the metropolitan area
providing excellent highway transportation facilities.
GOVERNMENT
Pulaski County, encompassing 781 square miles of land area, operates under the
County Judge - Quorum Court form of government. The court is comprised of 15
members elected from the same number of single member districts drawn within
the county. Services provided to the businesses and residents of Pulaski
County include full-time sheriff departments and volunteer fire departments.
Little Rock, encompassing 106.7 square miles of land area, operates under the
city Manager form of government. The Board of Directors is elected by popular
vote; a mayor is then elected by the Board from among its members. Services
provided to Little Rock's businesses and residents include a full-time police
department, fire department and zoning protection.
In summary, the Greater Little Rock MSA area is a progressive and active market
area with a well-diversified and stable economic base. As indicated earlier,
the population growth rate is expected to increase from both migration and
immigration patterns due to the attractive employment market. It is our
opinion that the area will continue to maintain and encourage an increasing
development pace, and that the general economy and property values will
continue to realize and experience moderate growth for the foreseeable future.
-11-
<PAGE> 23
NEIGHBORHOOD DESCRIPTION
As previously stated, the subject, HealthSouth Rehabilitation Center of Little
Rock, is located within the city limits of Little Rock. The location can more
accurately be described as being at the northwest quadrant of the Interstate
630 and John Barrow Road interchange in west Little Rock.
The neighborhood is generally defined as that area lying between West Markham
Road and Kanis Road, both east to west thoroughfares approximately
one-half-mile to the north and south of the subject property, respectively.
And that area lying west of Rodney Parham Road, a north to south major
thoroughfare approximately one-half-mile to the east of Interstate 430,
approximately one mile to the west.
The neighborhood area is comprised of a well-balanced blend of residential,
commercial and institutional properties. The land use is directed by the
interstates and major thoroughfares in the neighborhood area. Commercial
businesses in the neighborhood area are located primarily fronting along the
above mentioned thoroughfares and are typical, catering to passing motorists as
well as area residents. Residential properties are primarily single-family
residences and are mostly located away from the heavily travelled
thoroughfares. The largest institutional property in the neighborhood area is
the Baptist Medical Center located on the south side of Interstate 630 to the
southwest of the subject property.
Access to the neighborhood area is excellent by way of the two interstate
highways: Interstate 630 traversing east to west through the center of the
neighborhood area along the subject property's south neighborhood boundary and,
as indicated above, Interstate 430 running north to south along the west
boundary of the neighborhood area. Additionally, the thoroughfares named above
also provide good access from all directions.
The Interstate 630 and John Barrow Road interchange is the focal point in the
neighborhood area. Other uses located at the interchange include the Henderson
Health Sciences Jr. High School located at the north-east quadrant, across John
Barrow Road from the subject site, Church of Christ at the southwest quadrant
of the interchange and a shopping center with Target as the anchor tenant at
the southeast quadrant.
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<PAGE> 24
Access to the subject property must be gained by John Barrow Road, a four-lane
undivided asphalt paved thoroughfare with concrete curbing, sidewalks and
street lighting. John Barrow Road "dead ends" at West Markham approximately
one-half-mile to the north and into Kanis Road approximately one-half-mile to
the south. Improvements fronting along John Barrow are primarily commercial in
nature due to the high traffic volume.
As stated above, the neighborhood area is a well-balanced blend of commercial,
residential and institutional properties. Traffic along the major
thoroughfares, including John Barrow Road, is significant and the direct result
of the fronting commercial establishments. Properties are well-maintained
indicating an economically stable area. There is vacant land available,
primarily for office building and commercial use; the neighborhood area is in
the natural business growth pattern for Little Rock, therefore it is expected
that property values in the neighborhood area will continue to increase. No
detrimental conditions or hazards appear to exist in the subject neighborhood
or immediate area that would be considered to have a negative affect on the
HealthSouth Rehabilitation Center of Little Rock property or on properties in
the immediate area.
MARKET DATA - Greater Little Rock
The Greater Little Rock office market is segmented into four geographic areas:
downtown, suburban, midtown and North Little Rock.
In 1993 the four office markets combined had a total of 8,473,912 square feet
of net rentable area with 826,910 square feet available, indicating an average
occupancy of 90.2 percent. The downtown office market, the largest of the four
office markets, comprises 48.7 percent (4,126,753 square feet of the total net
rentable area). The second largest office market is the suburban market
comprising 39.6 percent (3,354,527 square feet of the total net rentable area).
The remaining two markets, midtown and North Little Rock, are the smallest
markets comprising 11.7 percent. The 1993 office space summary for the Greater
Little Rock area is set forth in the following table.
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<PAGE> 25
1993 OFFICE SPACE FOR GREATER LITTLE ROCK
<TABLE>
<CAPTION>
AVAILABLE AVERAGE AVERAGE
NET RENTABLE RENTABLE OCCUPANCY RENTAL
MARKET SECTOR AREA (SF) AREA (SF) PERCENT RATE
<S> <C> <C> <C> <C>
Downtown 4,126,753 507,013 87.7% $ 9.33
Suburban 3,354,527 228,305 93.2% $10.60
Midtown 448,714 23,900 94.7% $10.25
North Little Rock 543,918 67,692 87.6% $ 9.84
OVERALL TOTAL 8,473,912 826,910 90.2% $ 9.93
</TABLE>
The demand for office space is catching up with supply thereby reducing the
available office space for lease along with the availability of vacant office
zoned land has resulted in increased building activity in all four of the
office markets. New office building projects taking place, as well as planned,
currently include:
Nationwide Insurance developing a 6,720 square foot office building at
13000 Cantrell Road. Nationwide plans on relocating it's existing
district office from the Arkansas Medial Society Building in west
Little Rock as well as it's claims office in North Little Rock.
Financial Centre Corporation is developing a 23,400 square foot office
project on Shackleford Drive that should be completed in early 1994.
A 130,000 square foot office building known as the Financial Centre
Four Building is planned on a six-acre site.
A $1 million development is underway at 15 Shackleford Drive. This
project includes a 21,000 square foot office/showroom and a 7,600
square foot office building.
A $3 million 76,000 square foot office building is proposed in the
Riverdale area.
According to the September 27, 1993 Arkansas Business periodical published by
Journal Publishing, Inc., finding suitable office space to lease in the 5,000
square foot and up range is becoming difficult. This situation is most acute
in the suburban market of west Little Rock, the location of the subject
property. Only four office buildings in west Little Rock have 10,000 square
feet of vacant space available, however the space is not
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<PAGE> 26
contiguous. Eleven other projects have between 5,000 and 9,900 square feet
available, again not all of this space is contiguous.
The continued demand for office space will also have a direct affect on vacant
land values, local "commercial developers expect land values to firm upward,
along with the lease rates, as the office market squeeze heightens". As lease
rates continue upward, abatements and rental concessions are decreasing,
"abatements or rental concessions may only factor in if a tenant is willing to
sign a minimum five-year lease".
According to the Arkansas Business Office/Warehouse Lease Guide, "the central
Arkansas office market achieved new heights in 1993 after hitting a nine-year
high for occupancy last year. The occupancy rate increased from 87.5 percent
in 1992 to 90.2 percent in 1993. This marked the highest level since Arkansas
Business began tracking office space ten years ago". In addition to the
increasing occupancy, rental rates continue to increase. While there have been
six new office developments totaling 61,476 square feet in the suburban Little
Rock market, occupancy rates have climbed to 93.2 percent.
Presently, there is 3,354,527 square feet of net rentable office space in 119
properties in the suburban office market, with 228,305 square feet of space
available for lease. The average rent rate for the total net rentable area is
$10.60 per square foot. This average rent rate encompasses all buildings. The
following table sets forth lease particulars of properties that are considered
to be more comparable when compared with the subject HealthSouth Rehabilitation
Center of Little Rock.
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<PAGE> 27
<TABLE>
<CAPTION>
NET LEASED
YEAR RENTABLE SQ. FT. PERCENT RATE PER
BUILDING/LOCATION BUILT AREA AVAIL OCCUP. SQ. FT. COMMENTS/AMENITIES
<S> <C> <C> <C> <C> <C> <C>
Blandford Physician Ctr. 1984 53,297 0 100 $21.00 5-yr gross type
5 St. Vincent Circle leases, utilities,
janitorial service
and security incl,
pharmacy
Doctor's Building 1963/ 171,050 4,748 97 $17.15- 3-yr gross type
500 S. University Avenue 1973 $20.60 leases, utilities
and janitorial
service incl,
parking, conference
area, security
First Little Rock Plaza 1986 116,596 0 100 $16.00 3-yr gross type
10800 Financial Ctr. Pky leases, parking,
conference area,
security, janitorial
service
Redding Building 1988 58,000 6,000 90 $15.50 3-yr gross type
1701 Centerview Drive lease, janitorial
service and
utilities incl,
walking and jogging
track
Searcy Building 1989 70,700 8,500 85 $16.50 3-yr gross type
19809 Executive Ctr. Dr. leases, utilities,
janitorial service
incl, parking,
conference area,
security, jogging
track
Medical Towers 1 1974 135,000 7,690 94 $21.00 Gross type leases,
9601 Lile Drive utilities and
janitorial service
incl.
Park West Office 1980 20,743 0 100 $16.00 1-yr gross type
Building leases, utilities
11215 Hermitage Road and janitorial
service incl,
pharmacy in building
</TABLE>
ZONING
The subject property is zoned "O-3", General Office District, by the City of
Little Rock Department of Planning and Zoning. According to the zoning
ordinance, the purpose and intent of the O-3 zoning district is "to accommodate
offices and associated administrative, executive and professional uses in new
and existing structures together with specified institutional and accessory
uses". Additionally, "the O-3 district is characterized by freestanding
buildings and ancillary parking, and shall be limited to arterial street
locations in developed areas of the city and other carefully selected areas
where public utilities, community facilities and other public services are
adequate to
-16-
<PAGE> 28
support general office development". Development requirements for this zoning
classification include the following:
<TABLE>
<S> <C>
Area Requirements: The minimum lot area is 14,000 square feet.
Minimum Lot Width: The minimum lot width is 100 feet.
Minimum Yard Requirements: Front: Twenty-five feet.
Side: Not less than ten feet.
Rear: Not less than fifteen feet.
Height Regulations: No building hereafter erected or structurally altered shall exceed a height at
the required front, side or rear setback lines of 45 feet provided however, that
above the height permitted at said yard lines, one foot may be added to the
height of the building for each foot that the building or portion thereof is set
back from the required yard lines. In no instance shall the maximum height of
the building exceed 60 feet.
</TABLE>
Permitted uses include medical, dental or optical clinics indicating that the
subject property, as improved, is in conformance with the O-3, General Office
District zoning regulations.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is recognized by the Pulaski County Assessor's Office as
Parcel Number 44L017040020001. The subject's real property is assessed and
taxed by Pulaski County at 20 percent of appraised value. The appraised and
assessed value for 1993 is as follows:
Appraised Assessed
Value Value
--------- ---------
Land $419,000 $ 83,800
Improvements 551,000 110,200
--------- ---------
Total $970,000 $194,000
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<PAGE> 29
According to the Collector of Revenue's Office, the real estate tax billing
cycle is delayed for one year. The tax millage rate for 1992 was $6.4234 per
$100 of assessed value. The 1992 real estate taxes are calculated as follows:
Assessed Value/$100 x Millage Rate = Real Estate Taxes
$194,000/$100 x $6.4234 = $12,461.40
The Collector of Revenue's Office adds a fee of $0.29 to the calculated real
estate tax, indicating a total real estate tax liability of $12,461.69.
SUBJECT PROPERTY DESCRIPTION
The subject property is located on Knoedl Court, a cul-de-sac drive serving
four office use zoned lots, running to the west off of John Barrow Road.
Access to the subject site must be gained by way of Knoedl Court, a two-lane
concrete paved drive with concrete curbing.
The subject HealthSouth Rehabilitation Center of Little Rock site, containing
69,618 square feet (1.598 acres), is an irregular-shaped parcel having the
following frontages and boundaries:
North Property Line - 221.19' - Knoedl Office Park development
and residential properties
South Property Line - 239.37' - Interstate 630 right-of-way
East Property Line - 51.86' - Knoedl Court
252.07' - Knoedl Office Park development
West Property Line - 255.70' - Single-family residences
The subject site is at grade with Knoedl Court and with the adjoining office
parking lot to the east. The topography of the site then slopes downward
approximately five to seven feet to the area of the improvement. A significant
amount of excavation and fill from on-site material resulted in the site being
level throughout the area of the improvement and a majority of the parking
area. The adjoining residential property to the west is approximately ten feet
below the grade of the subject improvement.
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<PAGE> 30
Access to the site is by way of one entrance off of the Knoedl Court
cul-de-sac.
The subject site is served by all customary utilities, including water, sewer,
electricity, natural gas and telephone service.
On inspection, the site appeared to have good drainage throughout.
In addition, the soil appears to have been filled and compacted to have
adequate load-bearing capability for this type of improvement.
The improvement is located in the central western section of the property with
asphalt paving comprising the remaining majority of the land area with employee
and patient parking on the north, east and south sides of the improvement.
Expansion of and to the building would be possible on the north, east and south
elevations, however, any expansion would affect the parking areas. In our
opinion, the location of the improvement on the site maximally utilizes that
land area given the terrain of the property and best complements this type of
use.
The building, containing 11,963 square feet, encompasses 17.2 percent of the
site indicating a land-to-building ratio of 5.8 to 1.
The site is considered to complement its current medical-related use. There is
excellent visibility and access from both Interstate 630 and John Barrow Road,
however, it is located on a cul-de-sac drive with the only traffic being
specifically for the subject property or for one of the other three proposed
developments. Additionally, the Interstate 630 and John Barrow Road
interchange is a full interchange with on and off ramps in both directions on
Interstate 630 and John Barrow Road.
Expansion of the site is both feasible and/or possible to both the north and
east since the adjoining land is vacant and comparably zoned.
During our inspection of the site and site plans there were no adverse
easements or encroachments noted that would be considered to have a negative
affect on the value of the property.
According to the National Flood Insurance Program - Federal Emergency
Management Agency, Map 050181, Community Panel 0006E, dated November 3, 1993,
the subject
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<PAGE> 31
property is located in Flood Zone X. Flood Zone X are the areas of 500-year
flood, areas of 100-year flood with average depths of less than one foot or
with drainage areas less than one square mile; and areas protected by levees
from 100-year flood.
A legal description of the property and land configuration plat are included in
the Exhibit Section of this report.
IMPROVEMENTS DESCRIPTION
BUILDING
The subject site is improved with a one-story, Class C medical-related office
building. The building, constructed in 1991, opened in August 1991 and
contains 11,963 square feet of gross building area. The building is of good
construction and is in good condition.
General construction includes reinforced concrete spread footings under
perimeter curtain walls, reinforced concrete column pads and 12-inch thick
concrete foundation walls. Framing consists of a full structural steel framing
system with steel columns, beams and joist girders. Exterior walls are curtain
and are EIFS panels with demsiglass sheathing on metal studs with insulation.
Fenestration includes decorative glass block, aluminum framed plate glass and a
combination of aluminum framed plate glass and painted metal doors. Floor
construction is reinforced concrete on granular fill. The roof is a flat type
with metal decking on steel bar joists and elastomeric membrane on rigid
insulation.
Finish construction includes metal studs and taped and painted drywall
partitions. Wall finishes include paint, vinyl wall covering, ceramic tile
wainscoting and full height glass wall with glass door. Ceiling finishes
include paint on exposed roof underside, drywall and acoustical tile in metal
grid system. Floor finishes include a combination of hardener and sealer,
carpeting, vinyl composition tile, ceramic tile and rubber jogging surface.
Mechanical equipment includes standard plumbing with cast iron, pvc and copper
waste, vent and supply piping and gas-fired hot water boiler. The building is
heated and cooled by five roof-mounted package units with warm and cool air
ducted system. Electrical
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<PAGE> 32
wiring in conduit with fluorescent lighting typical throughout. Other features
include a fire alarm system, nurses' call system, security system and an indoor
swimming pool.
A detailed description of the building by construction components in included
in the Exhibit Section of this report.
SITE
Improvements to the site include site preparation, landscaping, underground
utilities, asphalt and concrete paving, concrete curbing, yard sprinkler
system, yard and parking lot lighting, retaining walls, screen wall, wood
fencing, signage and parking bumpers.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good to excellent condition.
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<PAGE> 33
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows.
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<PAGE> 34
As Vacant
The subject site, containing 69,618 square feet, has been excavated to
maximally utilize the total land area. The terrain, configuration and size are
adequate and sufficient enough for numerous of the permitted uses in the "O-3",
General Office District. In addition, the site has excellent visibility from
Interstate 630, and good access and utility for development. Therefore, the
subject site is available for numerous office/ commercial/medical uses
consistent with the "O-3", General Office District zoning classification.
PHYSICALLY POSSIBLE
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, and special-purpose properties. The site possesses good
access and visibility. The size of the parcel would preclude any large
developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning Section of this report, the property is
currently zoned "O-3", General Office District. Potential legal uses would
include offices and associated administrative institutional uses. This would
include clinics.
Surrounding uses include other professional offices uses, institutional uses
and single-family residential properties. These use patterns would likely
preclude industrial, retail or future single-family development on the site.
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<PAGE> 35
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for this site, if vacant, are
those uses that would generate an economic return to the land. Office and
clinic uses being developed in the region of the subject improvement indicate
that development is financially feasible.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
As Improved
The subject site is currently improved with a 11,963 rentable square foot
specialty rehabilitation clinic. The purpose of this discussion is to
determine whether to leave the improvements as they are, to modify the
improvements or to remove the improvements.
As previously stated in this report, the subject property is located in a
well-balanced mixed use neighborhood area in west Little Rock. The residential
properties consist primarily of single-family moderately priced residences.
The commercial type improvements in the area range from freestanding
single-tenant or owner-occupied buildings with businesses catering to the area
residents and passing vehicular traffic, to large shopping centers.
Institutional properties in the area include a Junior High School and medical
office in close proximity to the subject.
The property is well situated by fronting on a heavily travelled interstate off
of a heavily travelled north to south thoroughfare. Visual exposure to passing
traffic is excellent from both thoroughfares, however, the site is excluded
from the heavy traffic flow by being located on a private cul-de-sac.
As previously stated, the 69,618 square foot site is currently improved with a
11,963 square foot medical-related building indicating a land-to-building ratio
of 5.8 to 1. The
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<PAGE> 36
improvements are situated on the site to maximally utilize the land area as
well as the terrain, provide for good ingress and egress and good parking for
patients and employees.
The location of the property as well as the location of the improvements on the
subject site are considered to satisfy the first criterion, physically
possible, of the highest and best use analysis.
As stated in the Zoning Section of this report, the subject improvement is a
permitted use, therefore the second criterion of the highest and best use
analysis, legally permissible, is satisfied.
The third criterion, financially feasible, of the highest and best use is that
the current medical use produces an income (return) that is greater than the
amount needed to satisfy the operating expenses, financial obligations and
capital amortization. The most feasible use for the property as improved is
the continuation of the building's current use given the special use
construction attributes.
The fourth criteria, maximally productive, is a culmination of the first three
criteria. The subject use is physically possible, legally permissible, and
financially feasible, indicating that the current use could be maximally
productive for the site. Considering the potential rates of return for
medical-related use versus other uses permitted in the "O-3", General Office
District, the subject would clearly be superior to other potential uses at this
location. Therefore, it is our opinion that the highest and best use of the
subject property, as improved, as of the effective date of this appraisal, is
its current medical-related use.
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<PAGE> 37
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. Due to the specialized nature of the subject property, we
have not considered the Direct Sales Comparison Approach as being appropriate
for the subject property. The subject property has been specifically designed
to accommodate a freestanding rehabilitation clinic. An alternative use for
this structure would require extensive renovation and remodeling and as such,
comparisons to medical office space or
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<PAGE> 38
commercial office sales would be inappropriate. We did not find any sales of
comparable specialized facilities in the region which were similar in size or
use and as such, due to the lack of reliable comparable data, we have not
considered this approach as being an appropriate determinant of value. The
application of the Cost and Income Approaches to value is further discussed in
the appropriate sections which follow.
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<PAGE> 39
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arms length transactions that conveyed a fee simple interest, and only
real property was included in the transactions.
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<PAGE> 40
<TABLE>
<S> <C>
Land Sale Number 1
Location: East side of Bowman Road between West Markham and Chenal Parkway
Date: July 23, 1993
Zoning: O-3, General Office District
Size: 29,250 square feet or .671 acres
Sale Price: $121,000
Unit Price: $4.14 per square foot or $180,197 per acre
Grantor: Stephen and Deborah C. Scollard
Grantee: Tierney-Hale Partnership
Recording Data: 93-49589
Comments: Pulaski County Tax Parcel # 44L-067.00-00200. Wooded site sloping downward away from Bowman
Road. Legally described as the South 150' of Lot 2 of Erwin Addition. Bowman Road is a four-
lane asphalt paved thoroughfare. Properties fronting Bowman Road include residential,
institutional and commercial uses.
</TABLE>
-29-
<PAGE> 41
<TABLE>
<S> <C>
Land Sale Number 2
Location: North side of Shackleford Drive north of West Markham Road and west of Shackleford Road
Date: March 3, 1993
Zoning: C-3, Commercial
Size: 80,500 square feet or 1.848 acres
Sale Price: $111,000
Unit Price: $1.38 per square foot or $60,064 per acre
Grantor: Shackleford Street Development Company
Grantee: Shackleford Business Center
Recording Data: 93-16230
Comments: Legally described as Lot 3 of Hooper Bond Addition, Phase II. The site, located in a relatively
new office park development, was purchased for the development of a one-story multi-tenant
office/warehouse building. At the time of the sale the site was very rugged and rocky. The
property is approximately three to four feet above grade of Shackleford Drive. The adjoining
property to the north is approximately 30' higher in elevation than the sale property.
Shackleford Drive is a two-lane asphalt paved street.
</TABLE>
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<PAGE> 42
<TABLE>
<S> <C>
Land Sale Number 3
Location: Southwest quadrant of the Interstate 430/Cantrell Road Interchange.
Date: January 3, 1993
Zoning: O-2, Office District
Size: 662,765 square feet or 15.215 acres
Sales Price: $2,600,000
Unit Price: $3.92 per square foot or $170,884 per acre
Grantor: Interchange Development Company
Grantee: Systematics Information Services, Inc.
Recording Data: 93-01149
Comments: Legally described as the SE 1/4 of Section 21, Township 2N, Range 13 West. Access to the site is
gained by way of an office park drive off of Cantrell Road. The site was purchased by the
adjacent land owner.
</TABLE>
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<PAGE> 43
<TABLE>
<S> <C>
Land Sale Number 4
Location: 21 Corporate Hill Drive, south side of Corporate Hill Drive, south of West Markham Road
Date: December 2, 1992
Zoning: O-2, Office District
Size: 96,268 square feet or 2.210 acres
Sale Price: $300,000
Unit Price: $3.12 per square foot or $135,746 per acre
Grantor: John J. Flake, Trustee. Markham Street Development
Grantee: J. Roger Clark, M.D.
Recording Data: 92-81170
Comments: Legally described as Lot 7 of Corporate Hill Subdivision, Phase IV. The site required
considerable excavation prior to construction of the Arkansas Sports Medicine Orthopedic Clinic.
The property sloped downward away from Corporate Hill Drive. A creek traverses the property at
the rear of the site, resulting in a portion of the property not being suitable for development.
The property has limited visibility from Interstate 630. Corporate Hill Drive is a two-lane
concrete paved cul-de-sac street serving only the Corporate Hill Office Park.
</TABLE>
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<PAGE> 44
<TABLE>
<S> <C>
Land Sale Number 5
Location: Northeast corner of the intersection of Shackleford Road and Kanis Road
Date: October 26, 1992
Zoning: O-3, General Office District
Size: 130,680 square feet or 3.0 acres
Sale Price: $435,000
Unit Price: $3.33 per square foot or $145,000 per acre
Grantor: D. Bud and Martha S. Dickson
Grantee: Arkansas Farm Bureau Federation
Recording Data: 92-70049
Comments: Legally described as part of the NW 1/2 of the NW 1/4: part of the W 1/2 of the NW 1/4: part of
the W 1/2 of the NW 1/4 of the NW 1/4, Section 10, Township 1 North, Range 13 West. The sale
property is approximately 18 to 20 feet above grade with both frontage roads. At the time of the
sale, the site was heavily wooded requiring clearing in the area of the proposed building and
parking areas. The site has been improved with the Arkansas Farm Bureau Center since the time of
the sale. Access to the site is by way of an entrance on both Shackleford Road and Kanis Road.
</TABLE>
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<PAGE> 45
<TABLE>
<S> <C>
Land Sale Number 6
Location: 8821 Knoedl Court, subject property
Date: September 7, 1990
Zoning: R-2, Residential
Size: 69,618 square feet or 1.598
Sale Price: $336,000
Unit Price: $4.83 per square foot or $210,235 per acre
Grantor: John E. Knoedl, Carl W. and Marjorie L. Knoedl, Charles W. and Patricia E. Granberry
Grantee: HealthSouth Rehabilitation Corporation
Recording Data: 90-50473
Comments: As indicated above, the subject property was zoned R-2, Residential, at the time of the sale.
Subsequently, the property was rezoned to O-3, General Office District. The property, having
good visibility from Interstate 630, required excavation to ready the site for development. All
utilities were available to the site at the time of sale.
</TABLE>
A summary of the preceding land sale data is presented on the following page.
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<PAGE> 46
SUMMARY OF LAND SALE DATA
<TABLE>
<CAPTION>
SALE SALE SIZE PRICE
NUMBER DATE ZONING (SF) PER SF
<S> <C> <C> <C> <C>
1 07/23/93 O-3 29,250 $4.14
2 03/03/93 C-3 80,500 $1.38
3 01/03/93 O-2 667,765 $3.92
4 12/02/92 O-2 96,268 $3.12
5 10/26/92 O-3 130,680 $3.33
6 (SUBJECT) 09/07/90 O-3 69,618 $4.83
</TABLE>
Discussion of Land Comparables
A land sale location map depicting the location of the sales utilized in the
land valuation analysis is presented in the Exhibit Section of this report.
As indicated on the land sale location map, the land sales are located in the
general area of the subject property.
The six land sales utilized in determining the market value of the subject land
occurred between September 1990 and July 1993. The sales reflect a wide range
in sale prices from $1.38 to $4.83 per square foot and range in size from
29,250 square feet to 667,765 square feet. Since two properties are rarely
identical it is necessary to adjust the sales for differences when compared
with the subject property.
When analyzing the sales for to compensate for property value inflation that
has taken place since the date of the sale, we have not adjusted Sale Numbers 5
and 6 due to the "soft" conditions experienced in the Little Rock real estate
market up to four to six months ago. Within the past four to six months there
has been a noticeable increase in real estate activity, particularly in vacant
land for office and commercial use. Prior to this, the market was "soft" for
four to five years. Marketing time for "prime" location office use and
commercial properties is typically not affected when compared to the marketing
time for industrial or residential locations, however, economic uncertainty as
-35-
<PAGE> 47
well as job security have slowed speculative development somewhat.
Reciprocally, interest rates have remained lower during the past three years
than those previously experienced resulting in the development of moderate to
lower risk properties. Market activity has been noticeable, to some degree, in
office properties in the past four to six months and market inflation was
noticeable prior to 1990. Due to Sale Numbers 1 through 4 having taken place
during the past year and while activity in the market has increased, there is
not appreciable property value inflation to warrant adjusting Sale Numbers 1,
2, 3 or 4 for time that has elapsed since the time of the sale.
Since, to the best of our knowledge, these transactions did not involve
favorable financing, no adjustment was required for this characteristic.
Care was taken that all sales be located as near the subject as possible so
that the sale properties are influenced by the same surrounding conditions as
the subject property. As previously stated, all sales are located in the same
general area as the subject property. Additionally, all sale properties are
located in similar office type areas with residential properties in the
outlying areas. No adjustment was warranted to the sales for surrounding areas
or the influence the surrounding properties have on the sales since the areas
are similar and influenced by the same type of property uses. A location
adjustment was considered for frontage or exposure on a major thoroughfare. As
previously stated, the subject property is located on a private cul-de-sac
drive at the northwest quadrant of the Interstate 630 and John Barrow Road
interchange. John Barrow Road is a heavily travelled thoroughfare linking
Kanis Road to the south with West Markham to the north. Additionally, the site
has excellent exposure from Interstate 630. When adjusting for this location
factor it was necessary to adjust all sales upward by varying degrees for
having inferior exposure and/or access when compared with the subject site.
When adjusting the sales for zoning we have adjusted Sale Number 2 downward
slightly for being zoned C-3, Commercial use. This zoning permits more
commercial uses than the subject property, resulting in a greater number of
potential uses. No adjustment was warranted to the remaining sales for zoning
since they are zoned, like the subject property, for office.
There typically exists an inverse relation between the size of a parcel and the
price per unit at which it sells such that a smaller tract of land will
generally sell for a higher price per square foot than a larger parcel with all
else being equal. Sale Number 1 was
-36-
<PAGE> 48
adjusted downward for being smaller than the subject property. Reciprocally,
Sale Numbers 3 and 5 were adjusted upward by varying amounts for being
significantly larger than the subject site. No adjustment for size was
warranted to Sales Numbers 2 or 4.
As previously stated in this report, all utilities are available to the subject
property. No adjustment was warranted to any of the sales for utilities since
they are served by the same utility and supplier.
When adjusting the sales for topography, no adjustment was necessary to Sale
Number 1 due to it having a similar topography as the subject property. Sale
Number 2, 4 and 5 were adjusted upward for having an inferior topography when
compared with the subject and reciprocally, Sale Number 3 was adjusted downward
for being superior when compared with the subject site.
As previously indicated, all sales are in the same general area of the subject
property as well as having similar characteristics, differing characteristics
of sales have been adjusted resulting in the adjusted sales providing a better
basis upon which to determine a market value for the subject property. A land
sale adjustment grid is presented as follows:
-37-
<PAGE> 49
LAND SALE ADJUSTMENT GRID
<TABLE>
<CAPTION>
SALE NO. SALE NO. SALE NO. SALE NO. SALE NO.
1 2 3 4 5
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sale Price Per Square Foot $4.14 $1.38 $3.92 $3.12 $3.33
Financing Market Market Market Market Market
Adjustment 0 0 0 0 0
Price Per Square Foot $4.14 $1.38 $3.92 $3.12 $3.33
Adjusted for Financing
Date of Sale 07/93 03/93 01/93 12/92 10/92
Time Adjustment 0 0 0 0 0
Time Adjusted Price Per $4.14 $1.38 $3.92 $3.12 $3.33
Square Foot
Land Area Smaller Similar Larger Similar Larger
Adjustment -5% 0% 10% 0% 5%
Location/Accessibility Inferior Inferior Similar Inferior Similar
Adjustment 10% 15% 5% 10% 5%
Zoning Similar Superior Similar Similar Similar
Adjustment 0% -5% 0% 0% 0%
Topography Similar Inferior Similar Inferior Inferior
Adjustment 0% 5% 0% 10% 10%
Net Adjustment 5% 15% 15% 20% 20%
Adjustment Price Per Square $4.35 $1.59 $4.51 $3.74 $4.00
Foot
</TABLE>
After adjusting the preceding land sales for differences when compared with the
subject property, we find an adjusted sale price per square foot range of $1.59
to $4.51. Utilizing the subject land sale price per square foot, the range is
$1.59 to $4.83.
In our final correlation of land valuation analysis we have considered all
sales, however, the greatest weight was given to the subject property. Based
on the land valuation adjustment analysis and the subject property sale, we
have concluded that the market
-38-
<PAGE> 50
value of the subject site is reasonably represented at $4.75 per square foot,
which for 69,618 square feet amounts to $330,686, rounded to:
$330,000
========
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total replacement costs for the subject building are estimated
to be $1,300,625. A schedule at the end of this section shows the estimated
replacement cost by category for the subject building plus estimates of all
forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
-39-
<PAGE> 51
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class C
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was constructed in 1991, and it is considered to be in
good to excellent condition. After taking into consideration all significant
physical factors affecting the subject property, it is judged that the subject
building has an effective age equal to it's actual age of two years. The
remaining useful life is estimated to be 43 years. This translates into a
physical depreciation estimate of 4.4 percent (two years divided by 45 years).
The amount of depreciation attributable to the building has been estimated on a
straight-line basis, which is founded on the assumption that depreciation of a
property occurs equally throughout it's economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of two years and a remaining useful life of
13 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 13.3
percent. Entrepreneurial profit and miscellaneous replacement costs are
depreciated at a blended depreciation rate.
A summary of our findings is shown on the following schedule.
-40-
<PAGE> 52
SUMMARY OF REPLACEMENTS COSTS NEW
8821 KNOEDL COURT
<TABLE>
<CAPTION>
MARSHALL
DOLLARS
- -------
<S> <C> <C>
Site Preparation $ 2,772
Foundation 33,230
Frame 55,389
Exterior Walls 129,020
Floors 44,263
Roof 80,174
Roof Cover 53,716
Part. & Blt. In 238,662
Ceilings 22,751
Floor Coverings 39,874
Plumbing 85,775
HVAC 79,195
Electrical 99,652
Other Features 21,189
----------
Total Building Replacement Costs $ 985,662
Site Improvement Replacement Costs 134,000
----------
Total Replacement Cost $1,119,662
Architect's Fees Plans and Specs. (Of Building Costs) 4.50% $ 44,355
Architect's Fees. Supervision (Of Building Costs) 2.50% 24,642
Entrepreneurial Overhead. Profit. 10.00%
and Other Miscellaneous Fees (Of Total Reproduction Costs) 111,966
----------
Total Other Costs $ 180,963
Total Project Replacement Cost $1,300,625
Accrued Depreciation:
Building Replacement Costs 4.4% Straight Line 2/45ths $46,405
Site Improvement Costs 13.3% 2 Years/15 Years 17,822
Other Costs 5.4% Blended Rate 6,046
-------
Total Physical Depreciation $70,273
Less Total Depreciation (All Forms) ($70,273)
----------
Depreciated Value of Replacement Costs $1,230,352
Plus Land Value $ 330,000
DEPRECIATED COST APPROACH VALUE $1,560,352
ROUNDED: $1,560,000
==========
</TABLE>
-41-
<PAGE> 53
INCOME APPROACH
The Income Approach is based on the principle of anticipation and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income approach represents an
attempt to simulate the future cash flows for the property and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of the master lease agreement, but
the actual master lease agreements for each property are not yet available.
For the purpose of our Income approach, the gross income will be the master
lease rate for each property times the rentable building area. We reserve the
right to modify the Income approach valuation if the actual master lease for
each property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follow:
11,963 SF x $19.00/SF = 227,297
We have verified the reasonableness of this rental rate by conducting a return
analysis of the property based upon the expected remaining lives of the
improvements and investment rates of return found in the marketplace. A
schedule of this analysis is found in the Exhibit Section of this report.
Based upon this analysis, utilizing a required rate of return of 10 percent on
land and 14 percent to 15.5 percent rate on improvements,
-42-
<PAGE> 54
the annual rental rate would be anticipated to approximate $17.48 to $18.98 per
square foot. The rate established in the master lease appears to be
reasonable.
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$11,365, based on the management experience of other properties. The net
operating income for the property is $227,297 less $11,365 or $215,932.
Although we have not utilized the Direct Sales Comparison Approach to arrive at
an indication of value for the subject property, we have conducted a survey of
medical office building sales throughout the region in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit Section of this report and indicate overall rates from 8.0
percent to 11.33 percent.
A capitalization rate at 10.5 percent is considered appropriate because of the
quality of the tenant and the overall reasonableness of the rental rate
negotiated.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$215,932/.105 = $2,056,495
Rounded to: $2,060,000
==========
-43-
<PAGE> 55
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Rehabilitation Center of Little Rock. The three approaches are
summarized as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,560,000
Direct Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . . N/A
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,060,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a twelve-year-old building is difficult. For this reason,
the Cost Approach is considered only a fair indicator of value for the subject
property.
The Direct Sales Comparison Approach was not utilized due to the specialized
nature of the subject property.
The Income Approach normally provides the most reliable value estimate for
medical office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Rehabilitation Center of Little Rock, as of September 29, 1993, and
based on the assumptions and limiting conditions in this report, is:
$2,060,000
==========
-44-
<PAGE> 1
EXHIBIT 10.27
AN APPRAISAL OF
HEALTHSOUTH SPORTS MEDICINE AND
REHABILITATION CENTER
CORAL GABLES, FLORIDA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 7, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH SPORTS MEDICINE AND REHABILITATION CENTER
3280 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing annual net rental income of $18.00 per
rentable square foot.
This appraisal investigation included visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
February 7, 1994
Page Two
o Both parties are well informed or well advised, and acting
in what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U. S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property is a two-story, Class C, rehabilitation clinic containing
14,538 rentable square feet located on a 20,167 square foot land site. The
facility was originally constructed in 1960, but was totally renovated in 1986
to accommodate a full-service rehabilitation clinic. The improvement is
located on the southern boundary of the site with an asphalt parking area
located north of the subject. The building is presently 100 percent utilized
by HealthSouth.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Sports Medicine and Rehabilitation Center, as of September 29, 1993, to be:
$2,300,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
<PAGE> 4
HealthSouth Corporation
February 7, 1994
Page Three
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certification of the appraiser;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 5
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Patrick J. Simers has made a personal inspection of the property that
is the subject of this report.
No other person has provided significant professional assistance to
the person signing this report.
/s/ Patrick J. Simers
----------------------
Patrick J. Simers
Managing Director
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: October 18, 1993
Property Identification: HealthSouth Sports Medicine and Rehabilitation Center
Property Location: 3280 Ponce de Leon Boulevard
Coral Gables, Florida
Interest Appraised: Leased Fee Estate
Gross Building Area: 14,538 square feet
Net Rentable Area: 14,538 square feet
Subject Land Size: 0.46 acres, or 20,167 square feet
Improvements Description: Two-story, Class C structure, rehabilitation clinic, containing 14,538
square feet. Originally constructed in 1960 with a total renovation in
1986.
Occupancy Percentage: 100%
CONCLUSIONS
Cost Approach: $2,060,000
Direct Sales Comparison Approach: N/A
Income Approach: $2,365,000
Final Value Estimate: $2,300,000
==========
</TABLE>
<PAGE> 10
TABLE OF CONTENTS
Page
Transmittal Letter
Appraiser Certification
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Data 6
Neighborhood Analysis 11
Zoning 11
Real Estate Taxes and Assessments 12
Site Analysis 13
Building and Site Improvements 14
HIGHEST AND BEST USE 16
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 22
Income Approach 33
CORRELATION AND CONCLUSION 36
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Metropolitan Area Map
Exhibit D - Neighborhood Map
Exhibit E - Tax Plat Map
Exhibit F - Land Sale Location Map
Exhibit G - Building Floor Plans
Exhibit H - Building Description
Exhibit I - Land Improvements Description
Exhibit J - Estimation of Annual Rental Value
Exhibit K - Office Building Comparables
Exhibit L - Subject Photographs
Exhibit M - Curvilinear Depreciation Chart
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the HealthSouth Sports Medicine and
Rehabilitation Center located at 3280 Ponce de Leon Boulevard, Coral Gables,
Florida. The building is a two-story, Class C, building which is presently
designed as a physical therapy clinic. The building was originally constructed
in 1960 with a complete renovation in 1986. The building is located on a
20,167 square foot land site with adequate parking located adjacent to the
subject building. The building is presently 100 percent utilized and occupied
by HealthSouth.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993. The date of our last site inspection was October 18, 1993.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT).
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
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<PAGE> 13
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
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<PAGE> 14
HISTORY OF THE PROPERTY
The subject professional building was reportedly constructed in 1960. In March
of 1985 the facility was purchased by Raul I. Lopez and Ray Lopez for
$1,500,000 and totally renovated to accommodate a rehabilitation center. The
cost of the renovation in 1986 approximated $500,000. In May of 1986 the
landlord leased the facility to the Miami Rehabilitation Institute at an annual
rental rate of $15.00 per square foot adjusted for refinancing terms through
the life of the lease. The lease term was structured for an original lease
term of five years with two identical option periods. HealthSouth subsequently
bought out the tenant and purchased the facility in July 1992 for $2,600,000.
This is recorded in Deed Book 15587, Page 0901, in Dade County, Florida.
The subject building has reportedly not been marketed for sale and is not
currently under an agreement of sale. No other deed transfers were noted in
the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately
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<PAGE> 15
two-thirds of GDP, rose only 1.3 percent during the first half of 1993.
Non-residential Fixed Investment advanced 2.2 percent and Residential Fixed
Investment grew 1.7 percent. Federal Government Purchases declined (0.6%) over
the same period. Federal Government Purchases account for 7.2 percent of the
total GDP, and this decline is limited to the rate of overall GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
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<PAGE> 16
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
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<PAGE> 17
DESCRIPTIVE DATA
REGIONAL DATA
Coral Gables is located on the southwest border of Miami in Dade County,
Florida. The area is generally known for its fine residential areas,
educational facilities, its quality of life, and is one of the nation's leading
locations for multi-national corporate headquarters.
Trends in population, housing, employment and income are contributing social
and economic forces that impact property values. Each of these elements is
discussed separately.
POPULATION
The Dade County region encompasses 26 municipalities with an estimated 1992
population of 1,982,901. This figure represents a growth estimate of
approximately 22 percent over 1980 levels. The subject facility is located in
the fifth largest municipality in the county and presently has an estimated
population of 40,700. It is anticipated by the year 2000 that the population
will continue to expand in the county to an estimate of 2,201,836 with
individual communities in the region sharing in this growth.
The median age of the population in the Coral Gables community is estimated at
36.9 years with 15 percent of the population represented at under 15 years of
age and 17 percent of the population represented above 65 years of age. This
compares to an overall median age of 34.2 for the county with 24 percent of the
population represented at under age 15 and 14 percent of the population over
the age of 65. This would tend to indicate that the Coral Gables region is
occupied by families with members older than the average in the county.
The racial and ethnic distribution of members in the Coral Gables community is
estimated at 93.0 percent white, 3.4 percent black, 3.5 percent of other races.
It is estimated that the hispanic community in Coral Gables is represented as
41.9 percent of the overall population. These figures would tend to indicate
that the Coral Gables community is slightly less ethnically diversified in
comparison to the Dade County region which is 72.9 percent white, 20.6 percent
black, and 6.5 percent other with the hispanic population represented at 49.2
percent.
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<PAGE> 18
<TABLE>
<CAPTION>
POPULATION GROWTH BY MUNICIPALITY
1980 1992* %
POPULATION POPULATION GROWTH
<S> <C> <C> <C>
DADE COUNTY 1,625,509 1,982,901 22.0
Miami 346,865 359,973 3.8
Hialeah 145,254 195,579 34.6
Miami Beach 96,298 93,461 -2.9
North Miami 42,566 50,090 17.7
Coral Gables 43,241 40,700 -5.9
North Miami Beach 36,553 35,268 -3.5
Homestead 20,668 27,087 31.1
Opa-Locka 14,460 15,255 5.5
Sweetwater 8,251 14,096 70.8
Miami Springs 12,350 13,230 7.1
South Miami 10,944 10,459 -4.4
Miami Shores 9,244 10,097 9.2
Hialeah Gardens 2,700 9,259 242.9
Key Biscayne** - 8,897 N/A
Florida City 6,174 6,067 -1.7
West Miami 6,076 5,712 -6.0
North Bay Village 4,920 5,550 12.8
Bay Harbor Islands 4,869 4,721 -3.0
Surfside 3,763 4,204 11.7
Biscayne Park 3,088 3,081 -0.2
Bal Harbor 2,973 3,033 2.0
El Portal 2,055 2,461 19.8
Virginia Gardens 2,098 2,199 4.8
Medley 537 821 52.9
Golden Beach 612 805 31.5
Indian Creek Village 103 44 -57.3
Islandia 12 13 8.3
Unincorporated Dade 799,053 1,060,739 32.7
</TABLE>
* Population estimates, subject to revision.
** Key Biscayne incorporated in June 1991.
SOURCE: Dade County Planning Department, and Bureau of Economic Research.
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<PAGE> 19
TABLE 2
DADE COUNTY
POPULATION GROWTH
1950-2000
YEAR POPULATION GROWTH
1950 495,100 -
1955 709,800 43%
1960 935,000 32%
1965 1,097,200 17%
1970 1,267,800 16%
1975 1,452,000 15%
1980 1,625,800 12%
1985 1,775,000 9%
1990 1,937,094 9%
1991* 1,961,694 1%
1992* 1,982,901 1%
1995** 2,083,555 5%
2000** 2,201,836 6%
*Estimate of population, subject to revision.
**Projection of population, which is subject to annual adjustment.
SOURCE: Dade County Planning Department; Bureau of Economic and Business
Research, and U.S. Dept. of Commerce
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<PAGE> 20
HOUSING
The growth of the region's population has helped to foster a steady residential
market. The total household units have increased over the past four decades
from 348,946 in 1960 to 771,288 in 1990. This represents an overall increase
of 121 percent over the period and annual compound rate of growth of 2.0
percent. The Dade County real estate market reached its peak in 1980 with over
50,145 residences sold. This figure has dipped and climbed over the past
decade, but has generally declined with 36,521 sales reported in 1992. Average
home prices in the region have generally increased though, indicating that the
area has generally been built-out and that demand in the area remains strong.
From 1980 through 1992 the average single-family residential home price
increased 58.3 percent. The average condominium residence increased 94.2
percent. According to the Coral Gables Development Department, the Coral
Gables residential market has experienced higher rates of growth than the
neighboring communities in the County.
EMPLOYMENT
Employment growth grew rapidly in the region from 1980 through 1988 where it
appeared to hit its peak at 891,788. From 1980 through 1988 this represented
an overall growth of 18.69 percent. In 1992 the employment in the region was
estimated at 878,028 or a drop of 1.54 percent. This rate of employment
appears to be stabilized and one would not anticipate further large drops in
this figure. The labor force in the area has continued to increase with an
overall growth rate of 19.4 percent over the period 1980 through 1992. The
present labor force is estimated at 976,024. During the 1980s, the average
annual unemployment rate ranged from a low of 5.3 percent to a high of 10.0
percent with an overall average of 7.67 percent. The average unemployment at
the end of 1992 was estimated at 10.0 percent compared to 7.4 percent for the
U.S.
From 1980 through 1992 the diversity of the employment in the region has
greatly increased with 60,364 firms active in the Dade County market. This
represents a 32.5 percent change over 1980 levels. The service industry is
represented by the largest number of firms with healthcare firms ranking as the
largest component of this sector. Wholesale and retail trade represents the
next largest employers in the region. The remaining sectors, which follow in
number of companies in their respective order,
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<PAGE> 21
include finance/real estate, construction, manufacturing, transportation,
communications, public utilities, and finally agriculture, forestry, and
fishing.
As of April 1993, the top five employers in the Dade County region were:
Dade County Public Schools 38,310
Metropolitan Dade County 23,000
Federal Government 18,800
State of Florida 14,900
Publix Super Markets, Inc. 8,000
As of April 1993, the top-five employers in Coral Gables were:
University of Miami 5,390
Klostner Cruise Lines 1,045
Doctors Hospital 950
City of Coral Gables 850
Coral Gables Hospital 551
INCOME
The per capita income in Dade County, Florida and the United States in 1990 was
$17,823, $18,539, and $18,696, respectively. The average household income in
1992 for Coral Gables and the United States was $84,610 and $35,294,
respectively. This would tend to indicate that the residents in Coral Gables
are far above the average in total household income.
In summary, the region of the subject property enjoyed rapid growth in the
early 1980s which has stabilized in the early 1990s. Its economic base is
diverse, which bodes well for stabilized growth patterns in the foreseeable
future. The economy has recovered from Hurricane Andrew, which occurred in
1992, and is well positioned to post economic gains.
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<PAGE> 22
NEIGHBORHOOD ANALYSIS
The subject is located on the eastern border of Coral Gables, approximately one
and one-quarter miles south of the central business district of Coral Gables.
The neighborhood of the subject is bounded on the north by the Tamiami Trail,
the south by the South Dixie Highway, the east by S.W. 37th Avenue and the west
by Grenada Boulevard. As one heads east from the subject, a dramatic change in
neighborhood demographics is experienced as one heads into the south side of
Miami. A map of the neighborhood is located in the Exhibit Section.
Immediately west of the subject are single-family residential homes. As one
heads north along Ponce de Leon Boulevard one encounters single-tenant and
small multi-tenant office structures which turn retail in nature as Ponce de
Leon Boulevard approaches the central business district. As one heads south on
Ponce de Leon Boulevard, the character of the boulevard becomes mixed with
residential and light commercial structures. Approximately two blocks east of
the subject is Coral Gables Hospital. The subject is located two blocks east
of LeJeune Road, which is a major north/south thoroughfare connecting the Coral
Gables region to Miami International Airport.
In the immediate region of the subject are Doctor's Hospital and Coral Gables
Hospital. Other hospitals in the subject's service region include HealthSouth
Hospital, South Miami Hospital and Vencor Hospital. There is a 20-bed nursing
home located in Coral Gables. Approximately 304 physicians are located within
the subject's marketing area.
In general, the subject's neighborhood is well suited to support a specialty
clinic.
ZONING
The subject property is zoned "C-B", Commercial Business District, by the City
of Coral Gables. This zoning district generally allows for the development of
commercial and retail establishments. According to the City zoning
requirements, this district provides for the orderly arrangement of
institutional, clerical and administrative space. Permitted uses include
public, semi- private or private office; public or semi-private, religious,
educational or charitable institutions; and, other similar uses consistent with
this zoning code's purpose and surrounding uses. This zoning shall not include
properties with industrial characteristics, communal living facilities or
correctional institutions.
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<PAGE> 23
Other general conditions of the "C-B" zoning include a minimum lot size of
2,500 square feet, setbacks from fronting streets of 20 feet, and setbacks for
side yards and rear boundaries of 15 feet and 15 feet, respectively. The
maximum height limitation is 35 feet.
A letter of zoning compliance from the City of Coral Gables is recommended for
an official determination regarding any zoning conformity issues.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is assessed and taxed by the Dade County Property
Assessor. Properties are assessed at 100 percent of their market value for tax
purposes. The property is taxed under six separate folio numbers,
4117-007-059-00 through 4117-007-064-00. Commercial properties in Coral Gables
are taxed at $23.9042 per $1,000 of assessed value. The following assessments
and taxes have been placed on the subject property.
Folio Number Assessment Tax Amount
------------ ---------- ----------
[S] [C] [C]
4117-007-059-00 $112,500 (L) $2,689.22
4117-007-060-00 $112,500 (L) 2,690.27
4117-007-061-00 $114,165 (L) 2,729.00
4117-007-062-00 $114,165 (L) 2,729.00
4117-007-063-00 $114,210 (L) 2,730.09
4117-007-064-00 $780,520 (L) 18,657.65
----------
Total $40,340.00
(L) = Land Assessment
(I) = Improvement Assessment
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<PAGE> 24
SITE ANALYSIS
The subject site is a rectangularly-shaped parcel and fronts approximately 200
square feet on the west side of Ponce de Leon Boulevard. The site contains a
depth of approximately 100 feet throughout with some slight fluctuations. The
subject site's south border is Sarto Avenue with its northern border the south
side of Romano Avenue. The subject site contains 20,167 square feet.
The west border of the site is an alley which is adjacent to single-family
dwellings. The site is accessed from the rear of the site off Romano Avenue.
In addition, the rear alley is used as an entrance from Sarto Avenue. The site
enjoys good frontage on Ponce de Leon Boulevard and is of adequate size to
provide parking, which is not typical of other small offices in the immediate
neighborhood of the subject.
The topography of the site is generally flat. The building improvements are
located on the southern half of the site with a paved parking area located on
the northern half. The subject building does not appear to be located in a
flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
Other site improvements consists of general landscaping, asphalt paving,
concrete walkways and curbing, some shrubs and general signage. The parking
lot is designed to accommodate 40 automobiles.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Coral Gables/Dade County
tax plat map is included in the Exhibit Section.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
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<PAGE> 25
BUILDING AND SITE IMPROVEMENTS
BUILDING IMPROVEMENTS
The HealthSouth Sports Medicine and Rehabilitation Center building contains
14,538 square feet of gross and rentable square feet. Due to the specialized
nature of the structure, it is our belief that the gross and rentable square
feet is equal. The building is a Class C, two-story, structure which was
originally built in 1960 and completely renovated in 1986.
The building is a concrete block and steel structure, with concrete block
exterior walls with stucco finish. The front of the building has decorative
glass designed with glass block and storefront glass. The building is accessed
through a double glass door entrance-way in front and an automatic door
adjacent to its parking area. A rear metal door is located in the alleyway.
The building's ground floor is concrete slab on grade. The second floor is
concrete supported on a metal frame. The roof structure is a metal deck roof
covered with lightweight concrete and finished with tar and gravel.
The interior of the structure is finished with metal stud partitions in
finishes typical of a hospital setting. This would include fine wood finishes
along hallways and staircases. Ceiling finishes consist of drop-down acoustic
panels and finished drywall. Wall finishes include vinyl covering, with mirror
walls in some patient treatment areas. Floor finishes consist of carpet, vinyl
tile and ceramic finishes in bath and shower areas. The building is
partitioned-off into therapy treatment rooms, office areas, a conference room,
and a swimming pool area.
Heating and air conditioning is supplied via Carrier roof-mounted package
units. Hot water is supplied by commercial hot water heaters. The building's
electrical wiring is in conduit and supplies incandescent and fluorescent
fixtures throughout the structure. Plumbing in the building includes ceramic
fixtures, with shower areas provided in the pool area downstairs and adjacent
to the therapy rooms upstairs. In addition, each therapy room is separately
plumbed to provide hydrotherapy. The building is served by two elevators.
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<PAGE> 26
SITE IMPROVEMENTS
Site improvements include asphalt paving and landscaping.
A detail description of the building and site improvements is included in the
Exhibit Section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 27
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 28
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including residential, commercial, retail, and
office/institutional properties. The site possesses good access and
visibility. The size of the parcel would preclude any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning Section of this report, the property is
currently zoned "C-B", Commercial Business. Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail
and restaurants, office/institutional, hotels, hospitals and other
medical-oriented uses.
Surrounding uses include residential, other professional office uses, small
retail and vacant land. These use patterns would likely preclude industrial,
or future single-family development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. Other
office-related development east and north of the subject indicates that new
development is financially feasible.
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<PAGE> 29
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
As Improved
The subject site is currently improved with a 14,538 rentable square foot
specialty rehabilitation clinic with adjacent parking and associated site
improvements. The purpose of this discussion is to determine whether to leave
the improvements as they are, to modify the improvements, or to remove the
improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to any deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the City
of Coral Gables' zoning guidelines. Under the zoning, the property could
remain as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the general demand of medical space in the
neighborhood of the subject. Of the physically possible and legally
permissible changes that could be made to the existing facility, demolishing
the building would significantly reduce the current asset value and would not
be financially feasible.
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<PAGE> 30
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exists.
This would enable to the property to remain competitive in the leasing market.
The highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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<PAGE> 31
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. Due to the specialized nature of the subject property, we
have not considered the Direct Sales Comparison Approach as being appropriate
for the subject property. The subject property has been specifically designed
to accommodate a freestanding rehabilitation clinic. An alternative use for
this structure would require extensive renovation and remodeling and as such,
comparisons to medical office space or
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<PAGE> 32
commercial office sales would be inappropriate. We did not find any sales of
comparable specialized facilities in the region which were similar in size or
use and as such, due to the lack of reliable comparable data, we have not
considered this approach as an appropriate determinant of value The
application of the Cost and Income Approaches to value is further discussed in
the appropriate sections which follow.
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<PAGE> 33
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-22-
<PAGE> 34
Land Comparable Number 1
<TABLE>
<S> <C>
Parcel Number: Lots 12-19 and S 1/2 of Lot 20, Block 9 of Coral Gable Ind. Sec pb 28-22
Location: Northeast Corner of San Lorenzo and LeJeune
Road
Size: 21,805 square feet
Sale Date: February 1993
Deed Book/Page: 15822/3213
Grantor: Commerce Bank
Grantee: Gold Coast Partners Properties Co.
Sale Price: $650,000
Price Per Square Foot: $29.81
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Coral Gables, Commercial
Utilities: All available
Comments: At the present time an office building is under
construction on the site.
</TABLE>
-23-
<PAGE> 35
Land Comparable Number 2
<TABLE>
<S> <C>
Parcel Number: 03-4120-022-3380,3420,3430
Location: 4720 LeJeune Road, on the west side of LeJeune
Road across Granello Avenue.
Size: 8,300 square feet
Sale Date: May 1993
Deed Book/Page: 15916/0494
Grantor: Nathan Tartak
Grantee: Riveria Partnership
Sale Price: $285,000
Price Per Square Foot: $34.33
Terms of Sale: Purchase money mortgage at market rates for
$200,000 remaining balance at cash
Shape: Rectangular
Zoning: Coral Gables Commercial
Utilities: All available
Comments: Present improvements are not deemed to have
value.
</TABLE>
-24-
<PAGE> 36
Land Comparable Number 3
<TABLE>
<S> <C>
Parcel Number: 03-4117-006-0010
Location: Southwest Corner of Coral Way and SW 37th Street
Size: 32,705 square feet
Sale Date: June 1992
Deed Book/Page: 15571/4531
Grantor: First Tropical Savings Bank
Grantee: IBEX Miracle Group
Sale Price: $1,350,000
Price Per Square Foot: $41.28
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Coral Gables Commercial
Utilities: All available
Comments: Site remains vacant.
</TABLE>
-25-
<PAGE> 37
A summary of the land sales is shown as follows:
<TABLE>
<CAPTION>
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMP LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 San Lorenzo & LeJeune 02/93 21,805 $29.81
2 LeJeune & Granello 05/93 8,300 $34.33
3 Coral Way & SW 37th Street 06/92 32,705 $41.28
SUBJECT PONCE DE LEON 20,167
</TABLE>
Discussion of Land Comparables
LAND COMPARABLE 1 is located approximately one-half-mile southwest of the
subject on LeJeune Road. The sale is very comparable to the subject in terms
of its overall size, topography, intended use, etc. We have made a slight
downward adjustment to the sale for location as LeJeune Road is a more
travelled thoroughfare than Ponce de Leon Boulevard and may be a more favorable
location. The adjustment is shown on a Land Sale Adjustment Grid at the end of
this discussion. The adjusted price per square foot of this comparable is
$28.32 per square foot.
LAND COMPARABLE 2 was a parcel containing an old house. The site was purchased
by the developer to construct a commercial use on the site. Downward
adjustments to this sale are warranted for its superior location and its size.
A downward adjustment for size has been made as smaller parcels tend to sell at
higher unit costs than larger parcels due to a higher utility. The
improvements were not considered to have any significant value. The adjusted
price per square foot of this comparable is $29.18.
LAND COMPARABLE 3 is an older sale which has been adjusted upward for time.
This sale was adjusted significantly downward for location as this sale is
located in the center of the central business district of Coral Gables. A
slight upward adjustment for parcel size has been made. The adjusted price for
this comparable is $34.01 per square foot.
-26-
<PAGE> 38
The adjusted land prices range from $28.32 per square foot to $34.01 per square
foot, with the prices of the most comparable sites being at the lower end of
this range. Based on our analysis of the subject versus these comparables, it
is our opinion that a land price of $28.50 per square is representative of the
subject site. The subject land value is estimated as follows:
20,167 x $28.50/SF = $574,759
Rounded to: $575,000
========
-27-
<PAGE> 39
<TABLE>
<CAPTION>
LAND SALE ADJUSTMENT GRID
HealthSouth Sports Medicine and
Rehabilitation Center
Coral Gables, Florida
Subject Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C>
Element #1 #2 #3
Sale Price/SF $29.81 $34.33 $41.28
Property Rights Fee Simple Same Same Same
Adjustments
----------------------------------------------------------------------
Adjusted Price/SF $29.81 $34.33 $41.28
Financing Cash Cash Cash Cash
Adjustment
-----------------------------------------------------------------------
Adjusted Price/SF $29.81 $34.33 $41.28
Conditions of Sale None None None
Adjustment
------------------------------------------------------------------------
Adjusted Price/SF $29.81 $34.33 $41.28
Market/Time 0% 0% 3%
Adjustment
-------------------------------------------------------------------------
Adjusted Price/SF $29.81 $34.33 $42.52
Other Adjustments:
Location Adjustment -5% -5% -25%
Topography Adjustment 0% 0% 0%
Size Adjustment 0% -10% 5%
Zoning Adjustment 0% 0% 0%
Net Other -5% -15% -20%
Adjustments
FINAL ADJUSTED PRICE $28.32 $29.18 $34.01
PER SF
============================================================================
</TABLE>
-28-
<PAGE> 40
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $1,586,833.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life. In developing our estimate of
physical depreciation for the building we have utilized the curvilinear
tables developed by the Marshall Valuation Service. This method of
depreciation is founded on the assumption that depreciation of a
structure is accelerated in the later stages of its overall useful
life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class C
building, we have assumed an economic life of 45 years.
-29-
<PAGE> 41
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was constructed in 1960 with a major renovation of the
building conducted in 1986. The building is in good to very good condition.
After taking into consideration all significant physical factors affecting the
subject property, it is judged that the subject has an effective age equal to
15 years. The remaining useful life is estimated to be 30 years. This
translates into a physical depreciation estimate of 14 percent according to the
Marshall Valuation depreciation tables.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 15 years with an effective age of seven years and a remaining useful life of
eight years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 47
percent.
-30-
<PAGE> 42
Cost Approach Conclusion
The schedule which follows is a summary of the estimated replacement cost by
category for the subject building plus estimates of all forms of depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is estimated
in the rounded amount of:
$2,060,000
==========
-31-
<PAGE> 43
<TABLE>
<S> <C> <C>
TOTAL RECAPITULATION: HEALTHSOUTH CORAL GABLES
BUILDING NUMBER: 2 OF 3
EXCAVATION AND SITE PREPARATION 1,303
FOUNDATION 29,579
FRAME 65,467
EXTERIOR WALLS 119,467
FLOORS 88,054
ROOF 54,675
ROOF COVER 19,638
PARTITIONING & BUILT-IN ITEMS 320,550
CEILINGS 70,862
FLOOR COVERINGS 68,719
PLUMBING 176,343
HEATING, VENTILATION & AIR CONDITIONING (NET) 82,750
ELECTRICAL 189,361
OTHER FEATURES 67,762
---------
TOTAL LABOR, MATERIALS, INCIDENTALS AND PROFIT 1,354,530
ARCHITECTS FEES, PLANS AND SPECIFICATIONS 47,409
ARCHITECTS FEES, SUPERVISION 40,636
ADD FOR MISCELLANEOUS FEES 144,258
---------
TOTAL REPRODUCTION COST 1,586,833
TOTAL OVERALL LIFE 45
EFFECTIVE AGE 15
CURVILENEAR DEPR RATE 10.00% 158,683
DEPRECIATED VALUE OF BUILDING 1,428,150
REPRODUCTION COST OF LAND IMPROVEMENTS 100,000
LESS DEPRECIATION OF IMPROVEMENTS @ 47% -47,000
---------
DEPRECIATED VALUE OF LAND IMPROVEMENTS 53,000
TOTAL DEPRECIATED VALUE OF IMPROVEMENTS 1,481,150
ADD LAND VALUE 575,000
---------
TOTAL VALUE COST APPROACH $2,056,150
</TABLE>
-32-
<PAGE> 44
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of the master lease agreement, but
the actual master lease agreements for each property are not yet available.
For the purpose of our Income Approach, the gross income will be the master
lease rate for each property times the rentable building area. We reserve the
right to modify the Income Approach valuation if the actual master lease for
each property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
14,538 SF x $18.00/SF = 261,684
We have verified the reasonableness of this rental rate by conducting a return
analysis of the property based upon the expected remaining lives of the
improvements and investments rates of return found in the marketplace. A
schedule of this analysis is found in the Exhibit Section of this report.
Based upon this analysis, utilizing a required rate of return of 10 percent on
land and 12 percent to 14 percent rate on improvements,
-33-
<PAGE> 45
the annual rental rate would be anticipated to approximate $16.79 to $18.68 per
square foot. The rate established in the master lease appears to be
reasonable.
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$13,084, based on the management experience of other properties. The net
operating income for the property is $261,684 less $13,084, or $248,600.
Although we have not utilized the Direct Sales Comparison Approach to arrive at
an indication of value for the subject property, we have conducted a survey of
office building sales in the region of the subject in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit Section of this report and are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 One 7000 Place, South Miami, Florida October 1992 11.33%
2 Professional Arts Center, Miami, Florida September 1992 10.45%
3 Kingston Plaza, Broward County, Florida August 19921 10.18%
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
10.18 percent to 11.33 percent.
A capitalization rate at 10.5 percent is considered appropriate because of the
quality of the tenant and the overall reasonableness of the rental rate
negotiated.
-34-
<PAGE> 46
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$248,600/.105 = $2,367,619
Rounded to: $2,365,000
==========
-35-
<PAGE> 47
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Sports Medicine and Rehabilitation Center. The three
approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . $2,060,000
Direct Sales Comparison Approach . . . . . . . . . . N/A
Income Approach . . . . . . . . . . . . . . . . . . $2,365,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for a twelve- year-old building is difficult. For this reason,
the Cost Approach is considered only a fair indicator of value for the subject
property.
The Direct Sales Comparison Approach was not utilized due to the specialized
nature of the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Sports Medicine and Rehabilitation Center, as of September 29,
1993, and based on the assumptions and limiting conditions in this report, is:
$2,300,000
==========
-36-
<PAGE> 1
EXHIBIT 10.28
AN APPRAISAL OF
HEALTHSOUTH REHABILITATION CENTER
OF VIRGINIA BEACH
VIRGINIA BEACH, VIRGINIA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 7, 1994
HealthSouth Corporation
Two Perimeter Park South
Birmingham, Alabama 35243
Attention: Mr. Mike Martin, Treasurer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building identified as
follows:
HEALTHSOUTH REHABILITATION CENTER OF VIRGINIA BEACH
1849 OLD DONATION PARKWAY
RICHMOND, VIRGINIA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of September 29, 1993, the effective date of
this report. The report is to be used for asset valuation purposes.
HealthSouth Corporation is selling nine professional office buildings for the
purpose of establishing a real estate investment trust (REIT). This valuation
assumes that the prospective REIT is the owner of the property, with
HealthSouth Corporation guaranteeing net rental income of $18.00 per square
foot.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
<PAGE> 3
HealthSouth Corporation
February 7, 1994
Page Two
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
The subject property is a one-story rehabilitation center/office building
containing 10,000 rentable square feet of office space. The building is a
Class C facility, with a steel frame and overlapped wood siding exterior walls
constructed in 1993. The building is currently 100 percent occupied.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the HealthSouth
Rehabilitation Center of Virginia Beach, as of September 29, 1993, to be:
$1,460,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
<PAGE> 4
HealthSouth Corporation
February 7, 1994
Page Three
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certification of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Cheryl Worthy-Pickett, the primary appraiser of this property, has
made a personal inspection of the property that is the subject of this
report.
/s/ Patrick J. Simers /s/ Cheryl Worthy-Pickett
--------------------- -------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment.
If the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: September 29, 1993
Last Date of Inspection: September 28, 1993
Property Identification: HealthSouth Rehabilitation Center of Virginia Beach
Property Location: 1849 Old Donation Parkway, Virginia Beach, Virginia Beach County, Virginia
Interest Appraised: Leased Fee Estate
Gross Building Area: 12,500 square feet
Net Rentable Area: 10,000 square feet
Subject Land Size: 1.10 acres, or 48,000 square feet
Ground lease with Holcar, Inc. for five years.
Improvements Description: One-story, steel frame structure, Class C rehabilitation center/office
building that was constructed in 1993.
Occupancy Percentage: 100%
CONCLUSIONS
Cost Approach: $1,177,000
Direct Sales Comparison Approach: $1,500,000
Income Approach: $1,460,000
Final Value Estimate: $1,460,000
==========
Sale to REIT Price: $1,460,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
Market Data - Metropolitan Virginia Beach/Virginia Beach County 5
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 9
Zoning 9
Real Estate Taxes and Assessments 10
Site Analysis 10
Building and Site Improvements 11
HIGHEST AND BEST USE 13
VALUATION SECTION 17
Valuation Methodology 17
Cost Approach 18
Direct Sales Comparison Approach 22
Income Approach 30
CORRELATION AND CONCLUSION 33
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Location Map
Exhibit C - Area Map
Exhibit D - Tax Plat Map
Exhibit E - Building Description
Exhibit F - Land Improvements Description
Exhibit G - Rent Comparables Summary
Exhibit H - Subject Photographs
Exhibit I - Ground Lease Agreement
</TABLE>
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the HealthSouth Rehabilitation Center of
Virginia Beach, located at 1849 Old Donation Parkway, Virginia Beach, Virginia
Beach County, Virginia. The building is a one-story, Class C, building
constructed in 1993.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is September 29,
1993, the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owners
are considering the sale of nine professional office buildings for the purpose
of establishing a real estate investment trust (REIT). The subject property
would be included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
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<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute].
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
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<PAGE> 14
HISTORY OF THE PROPERTY
The subject professional building was constructed in 1993 by HealthSouth
Rehabilitation Corporation. The building is constructed on approximately 1.10
acres, which is leased from Holcar, Inc., a Virginia stock corporation. This
ground lease is for an initial period of five years, with five-year renewal
periods. The commencement date of the lease is November 1992. The annual
yearly payment is $17,496 which is net to the Lessor. Adjustments to the lease
payment will occur every five years. A copy of this lease is included in the
Exhibit Section of this report.
The subject rehabilitation center building has reportedly not been marketed for
sale and is not currently under an agreement of sale. No other deed transfers
were noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise value is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
As of the valuation date, the United States economy is currently mired in a
period of slow economic growth. Gross Domestic Product (GDP) increased at a
2.1 percent annual rate during 1992 after declining (1.2%) during 1991. The
GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, or an annualized rate of 1.1 percent.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately
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<PAGE> 15
two-thirds of GDP, rose only 1.3 percent during the first half of 1993.
Non-residential Fixed Investment advanced 2.2 percent and Residential Fixed
Investment grew 1.7 percent. Federal Government Purchases declined (0.6%) over
the same period. Federal Government Purchases account for 7.2 percent of the
total GDP, and this decline is limited to the rate of overall GDP growth.
The value of the business enterprise value is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital.
The economic downturn has resulted in sharply lower inflation. The Consumer
Price Index (CPI) ended 1992 with a 3.0 percent increase compared to a 4.2
percent increase during 1991. The CPI for 1993 is currently estimated at 3.3
percent. The GDP Deflator, a much broader price level index, ended 1992 with a
2.6 percent annual increase compared to a 4.0 percent increase during 1991.
The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JUNE 30, 1993 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.9% 7.5%
Aaa Bond Yield 7.4% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
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<PAGE> 16
Economic Outlook
According to Value Line's Quarterly Economic Review, dated June 30, 1993, the
economic recovery is now two years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the slow growth are "high debt, stagnant personal income, low
consumer confidence and a troubling unemployment rate". Value Line's Quarterly
Economic Review identified the following estimates for selected economic
statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.7% 3.2% 3.3%
Personal Consumption Expenditures 2.8% 2.7% 2.5%
Federal Government Purchases (5.2%) (3.0%) (4.0%)
30-Year Treasury Bond Yields 7.1% 7.2% 7.2%
Prime Rate 6.0% 6.3% 6.7%
Consumer Price Index 3.5% 3.5% 3.6%
</TABLE>
MARKET DATA - Metropolitan Virginia Beach/Virginia Beach County
Based upon a study prepared by Goodman Segar Hogan-Odu Real Estate Center, the
average occupancy is approximately 82.1 percent throughout the Hampton Roads
Metropolitan Statistical Area (MSA). This survey includes Class A, B and C
space, buildings exceeding 10,000 square feet in leasable area, are non-medical
in primary use, and are not exclusively owner-occupied.
In the Hampton Roads area, there is approximately 15.2 million square feet of
office space available with the highest rents found in the downtown area.
Medical office space is estimated to be approximately 15 percent to 20 percent
higher than the general professional office space in the market. Based upon
our discussions with local realtors in the marketplace, medical office space
(in proximity to the hospital) has an estimated average occupancy of 85 percent
to 90 percent.
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<PAGE> 17
DESCRIPTIVE DATA
REGIONAL ANALYSIS
The subject facility is located in Virginia Beach, Virginia, which is located
in the eastern portion of the Hampton Roads MSA. The Hampton Roads MSA
encompasses the nine cities and three counties in the Norfolk-Virginia
Beach-Newport News MSA. The 1,707 square mile region is bounded by the
Atlantic Ocean and the Chesapeake Bay and crisscrossed by dozens of rivers and
creeks.
Hampton Roads is made up of Gloucester County, James City County, York County,
Williamsburg, Newport News, Poguoson and Hampton on the Virginia Peninsula.
Just across the Hampton Roads Bridge Tunnel are the south side cities of
Norfolk, Portsmouth, Virginia Beach, Suffolk and Chesapeake. Together they
form the county's 28th most populous MSA, with nearly 1.4 million residents.
Hampton Roads is renowned for building Navy submarines and aircraft carriers,
growing peanuts, and importing most of the nation's rubber through the Port of
Hampton Roads. The region has Virginia's most populous city (Virginia Beach),
as well as its largest city (Suffolk). It also has the state's fastest-growing
county (Gloucester).
Population
From 1980 to 1988, Hampton Roads' population grew by 227,789, or 19.63 percent.
Although some transplants were military personnel, many civilians were lured to
the rapidly expanding region by the promise of jobs in shipbuilding,
construction, or the service sector.
Like northern Virginia, Hampton Roads benefited from a rapid influx of defense
contractors, consultants and service firms that responded to the government's
military build-up in the 1980s, but Hampton Roads, with several older
land-locked cities, did not have the steady across-the-board growth that
northern Virginia experienced. While rural
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<PAGE> 18
areas in Virginia Beach and James City County boomed with new neighborhoods,
urban cities such as Norfolk and Portsmouth grew only slightly.
Transportation
Interstate 95 connects Chesapeake with northern Virginia. Interstate 64, the
principal east-west highway in the state, intersects Interstate 95 in the
Richmond/Petersburg MSA and heads east to the Norfolk area and west to
Charlottesville.
Employment - Income
In 1988, there were 792,265 workers in Hampton Roads according to the Center
for Public Service at the University of Virginia. One-third held some type of
government or military job -- a drop from the 37.8 percent share in 1980.
Services is the next largest job category with 171,437 employees, followed by
retail trade, construction and manufacturing. Although its jobs are primarily
seasonal, tourism remains an employment mainstay in Williamsburg and Virginia
Beach.
A marketing study by WVEC Television shows that 57 percent of Hampton Roads'
adults work full-time, 11 percent work part-time, 4.0 percent are students, and
14 percent are retired. In Virginia, per capita income was $15,516 in 1987,
the most recent year in which data was available. In Hampton Roads, the figure
was $14,462, which placed it 143rd among 310 MSAs across the country. The only
Virginia areas to top the national figure were northern Virginia, with a per
capita income of $21,539 and Richmond/Petersburg with $17,446.
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<PAGE> 19
Healthcare
Healthcare facilities abound in the Hampton Roads area. The following is a
list of local hospitals:
<TABLE>
<CAPTION>
Number
Facility of Units
<S> <C>
Chesapeake General 210
DePaul Medical Center 390
First Medical Group Langley 70
Humana Hospital Bayside 250
Louise Obici Memorial 243
Mary Immaculate Hospital 110
McDonald Army 57
Newport News General 126
Norfolk Community 189
Portsmouth General 311
Riverside Middle Peninsula 71
Riverside Regional Medical Center 57
Sentara Hampton General 343
Sentara Norfolk General 644
Sentara Leigh Hospital 250
Tidewater Beach General 263
Veteran's Administration 411
Williamsburg Community 139
</TABLE>
Conclusion
Development over the next decade is expected to be at a pace slightly above
that of the state average, but below that of Northern Virginia. The next
several years will likely be very sluggish until the economy recovers from its
current doldrums. This community should continue to offer a stable environment
for operation and growth in the future.
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<PAGE> 20
NEIGHBORHOOD ANALYSIS
The neighborhood area's boundaries are Old Donation Parkway to the north, First
Colonial Drive to the east, Lasken Road to the south, and Great Neck Road to
the west.
The immediate area is primarily medical or professional developments
surrounding the subject, with small sections of modest single-family homes and
multi-family developments to the north and east of the subject. Located just
east of the facility, along First Colonial Drive, is Tidewater General
Hospital. Development along First Colonial Drive is mainly
office-institutional in nature. Located further south, along First Colonial
Drive, are more retail/commercial developments. West of the subject, along Old
Donation Parkway toward Great Neck Road, is more of the residential
development.
The area has convenient access to State Road 44, the Virginia Beach Toll Road
providing access to Interstate 64, a major east/west thoroughfare in the state
of Virginia.
The immediate surrounding area is supportive and complementary to the continued
growth potential of the subject facility. The development has also contributed
to continued growth of the neighborhood.
ZONING
The subject property is zoned "O-I", Office-Institutional, by the Virginia
Beach County Zoning District. The purpose of this district is to provide for
office buildings in attractive surroundings with other types of similar uses.
The subject improvement is considered a legal, conforming use. Principle uses
included in this zoning district are as follows:
Office buildings
General hospitals
Hotels or motels
Retail and service facilities
Schools
Banks
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<PAGE> 21
REAL ESTATE TAXES AND ASSESSMENTS
Based upon the assessment record available, the subject property has not been
added to the tax roll. Its assessment is currently being determined. The
property will be taxed based upon 100 percent of the assessed value.
SITE ANALYSIS
The subject site is located on the south side of Old Donation Parkway in the
northern section of Virginia Beach, Virginia. The street address is 1849 Old
Donation Parkway, Virginia Beach, Virginia. As indicated by the plat map
included in the Exhibit Section of this report, the site is irregular in shape
and contains a total of approximately 1.10 acres. A survey of the land parcel
was not provided to us, but we have included (in the Exhibit Section of this
report) a copy of the tax plat showing the entire parcel owned by Holcar, Inc.
Access to the site is via Old Donation Parkway to the north via First Colonial
Drive; both being four-lane roadways.
The subject land is approximately level with grade on Old Donation Parkway.
Utilities to the site include water, sewer, electricity, cable, telephone and
gas.
The subject property appears to have adequate drainage and soil load-bearing
capabilities to support most development alternatives. A soil report, however,
was not made available to the appraiser and it is assumed, based on existing
improvements, that soil load-bearing capabilities are adequate.
According to the County Planning Office, the subject property is not located in
a flood plain zone.
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<PAGE> 22
BUILDING AND SITE IMPROVEMENTS
Building
The medical office building is a Class C, one-story structure containing 10,000
square feet constructed in 1993. The building is of good construction and is
in excellent condition. The building is considered competitive in condition to
other office buildings in the area.
The building's foundation consists of concrete walls and footings supporting
exterior walls. The floor is poured-in-place concrete. Exterior walls consist
of overlapped wood siding with brick cover in sections. Windows and doors are
aluminum and glass with some limited solid-core metal doors. The roof is
gabled with asphalt shingles.
The building is partitioned by gypsum board on metal stud partitions. Wall
finishes are typically paint and vinyl wall covering. Wood and metal doors in
metal door jambs are typical throughout. Ceiling finishes are primarily
drop-down acoustical panels. Floor finishes are primarily carpeting and vinyl
tile with portions of the building having ceramic and quarry tile. Main areas
in the building include therapy areas, offices and public areas.
Mechanical services consist of standard plumbing fixtures, and a central
heating and air conditioning system supported by roof-top units. Electrical
wiring is in conduit with fluorescent and incandescent light fixtures typical
throughout.
Site
Land improvements consist of general landscaping, asphalt paving, concrete
paving and curbing, exterior lighting, and general signage.
More detail descriptions of the buildings and site improvements are included in
the Exhibit Section of this report.
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<PAGE> 23
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in excellent overall condition. It appears to have been
adequately maintained. No significant deferred maintenance was indicated from
the appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 24
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 25
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning Section of this report, the property is
currently zoned "O-I", Office-Institutional. Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail
and restaurants, office/institutional, hotels, hospitals and other
medical-oriented uses.
Surrounding uses include the hospital, other professional office uses, some
apartments and some old single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. The location of
a large medical facility nearby would tend to suggest that related medical
improvements possibly would be in demand. Tidewater General Hospital is
currently expanding and has an average census of 98 percent. The subject
facility is currently 100 percent occupied.
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<PAGE> 26
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
As Improved
The subject site is currently improved with a 10,000 rentable square foot
office building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the
County of Virginia Beach zoning guidelines. Under the zoning, the property
could remain as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would
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<PAGE> 27
not be financially feasible. It would, however, be financially feasible to
correct any deferred maintenance.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exist. This
will enable to the property to remain competitive in the leasing market. The
highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
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<PAGE> 28
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
DIRECT SALES COMPARISON APPROACH: The principle of substitution also
says that market value can be estimated as the cost of acquiring an
equally desirable substitute property, assuming no costly delay in
making the substitution. This method analyses the sales of other
comparable improved properties. Since two properties are rarely
identical, the necessary adjustments for differences in quality,
location, size, services and market appeal are a function of appraisal
experience and judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 29
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Because the subject land is under a ground lease, we have not considered it in
our valuation.
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. The total project replacement costs for the subject building are
estimated to be $1,132,380.
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<PAGE> 30
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years. For the subject Class C
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
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<PAGE> 31
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age since it was constructed in 1993.
Observation of the subject property indicated that the structure and related
component parts have been adequately constructed and currently are being
maintained through a continuous maintenance service program.
Building
The subject property was constructed in 1993 and is in excellent condition.
Because of the recent construction, we have not considered depreciation as
applicable at this time.
Site Improvements
Because of the recent construction of the property, a depreciation factor was
not considered applicable at this time.
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of September 29, 1993, is:
$1,177,000
==========
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<PAGE> 32
SUMMARY OF REPLACEMENT COST NEW
HEALTHSOUTH REHABILITATION CENTER
VIRGINIA BEACH, VIRGINIA
<TABLE>
<CAPTION>
REPLACEMENT
COST
<S> <C> <C>
Site Preparation 3,821
Foundation 29,717
Frame 64,642
124,223
Floors 44,617
Roof 34,994
Roof Cover 36,185
Partitioning and Built-in 258,125
Ceilings 35,724
Floor Coverings 64,185
Plumbing 60,241
HVAC 63,043
Electrical 68,997
Other Features 66,002
Total Replacement Cost $ 954,950
Architect's Fees Plans and Specs 4.4% 42,018
Architect's Fees Supervision 3.4% 32,468
Entrepreneural Overhead, Profit, and Other
Miscellaneous Fees 10.0% 102,944
Total of Other Costs 177,430
Total Project Replacement Cost $1,132,380
Accrued Depreciation:
Building Costs 0% Straight Line 0/45ths 0
Depreciated Value Building $1,132,380
Site Improvements
Replacement Cost $ 45,000
Depreciated Cost 0% Straight Line 0/20ths 0
Depreciated Value $ 45,000
Plus Land Value GROUND LEASE $ 0
DEPRECIATED COST APPROACH VALUE $1,177,380
</TABLE>
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<PAGE> 33
DIRECT SALES COMPARISON APPROACH
The Direct Sales Comparison Approach is based upon the principle of
substitution; that is, 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 there is no costly delay in making the substitution. Since
two properties are rarely identical, the necessary adjustments for differences
in quality, location, size, services and market appeal are a function of
appraisal experience and judgment.
The Direct Sales Comparison Approach gives consideration to actual sales of
other similar properties with adjustments as previously stated. The sales
prices are analyzed in common denominators and applied to the subject property
in respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arms-length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
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<PAGE> 34
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1016 Independence Boulevard, Virginia Beach, Virginia
Date of Sale: May 12, 1992
Deed Book/Page: 3086/1410
Grantor: Diagnostic Center Associates
Grantee: Diagnostic Center of Virginia Beach
Sale Price: $1,586,500
Terms of Sale: Assumption of original note, $568,494 cash
PROPERTY DATA
Land Size: .93 acres
Building Size: 15,000 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
--------- --------
Estimated Gross Income: $225,000 $15.00
Vacancy Allowance @ 5%: ($11,250) ($0.75)
--------- -------
Effective Gross Income: $213,750 $14.25
Estimated Expenses @ $3.50/SF ($52,500) $3.50
--------- ------
Net Operating Income: $161,250 $10.75
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $105.77
Stabilized Overall Rate: 10.16%
EGIM: 7.42
COMMENTS
Structure is a one-story, Class C, medical office designed for a single-tenant user. The building is located adjacent to a
hospital.
</TABLE>
-23-
<PAGE> 35
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
--------- --------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $62,404 $1.40
------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $5.00
-------- ------
Net Operating Income: $338,762 $7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical Genetics Center now occupies the facility. The
current land value near the UAB campus is estimated at 40% to 45% of the total purchase price.
</TABLE>
-24-
<PAGE> 36
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
--------- --------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $33,556 $1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and 8,100 SF. The first two buildings were leased to North
Fulton Hospital for seven years. The first 12,400 SF was leased for $16.00/SF net, and the other 12,000 SF was leased for $16.25/SF
net. The tenants were responsible for all costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
</TABLE>
-25-
<PAGE> 37
IMPROVED SALE NUMBER 4
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 816 Independence Boulevard, Virginia Beach, Virginia
Date of Sale: August 1991
Deed Book/Page: 3006/1566
Grantor: Humana of Virginia, Inc.
Grantee: MPB, Inc.
Sale Price: $5,011,700
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 3.507 acres (approximate)
Building Size: 35,000 square feet
Year Built: 1977
Occupancy at Sale: 75.0%
STABILIZED OPERATING DATA
Dollars Per SF
--------- --------
Estimated Gross Income*: $630,000 $18.00
Vacancy Allowance @ 5%: $31,500 ($0.90)
-------- -------
Effective Gross Income: $598,500 $17.10
Estimated Expenses @ $5.00/SF $175,000 ($5.00)
-------- -------
Net Operating Income: $423,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $143.19
Stabilized Overall Rate: 8.45%
EGIM: 8.37
COMMENTS
Built as a four-story Class A building located next to hospital. The construction is steel frame with brick veneer. It is located
north side of Independence Avenue.
</TABLE>
-26-
<PAGE> 38
These four sales are summarized as follows:
<TABLE>
<CAPTION>
SUMMARY OF IMPROVED SALES
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 1016 Independence Blvd 15,000 $1,586,500 $105.77
Virginia Beach, Virginia
2 20th Street South 44,574 $3,750,000 $84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
4 816 Independence Blvd 35,000 $5,011,700 $143.19
Virginia Beach, Virginia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot to
$143.33 per square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE NUMBER 1 is a Class C professional office building that is located
adjacent to a hospital. The facility was acquired by a physician's group to
provide outpatient service in conjunction with the hospital. This transaction
was reportedly at a market value price. However, a downward adjustment is
still indicated because the building never was marketed as a vacant building
due to this relationship. The building has a substantial setback from
Independence Boulevard and has poor visibility. An upward adjustment is
indicated due to this inferior location compared to the subject. An upward
adjustment to this comparable is indicated because of the subject's superior
construction quality. The adjusted price per square foot of this comparable is
$118.99.
SALE NUMBER 2 is the sale of a building purchased by the University of Alabama
to use as a Medical Genetics Center. An upward adjustment was indicated
because of the time of sale. Upward adjustments were indicated because of the
inferior location as
-27-
<PAGE> 39
compared to the subject. An additional upward adjustment was made for and
construction quality. A downward adjustment was made for size. The adjusted
price for this comparable is $119.84 per square foot.
SALE NUMBER 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. An upward adjustment was made for time of sale.
Downward adjustments to the price per square foot of this comparable are
indicated for size. Upward adjustments are indicated due to the subject's
superior location and construction quality. The adjusted price per square foot
of this comparable is $144.73.
SALE NUMBER 4 was the August 1992 sale of an office building in Virginia Beach,
Virginia. Upward adjustment was indicated for the time of sale. A downward
adjustment to the price per foot of this comparable is indicated because of the
comparable's size. Downward adjustments are indicated for location, quality
and size. An upward adjustment is warranted for location and quality. A
downward adjustment is indicated for size. The adjusted price for this
comparable is $172.90 per square foot.
The adjusted prices per square foot range from $106.00 to $172.90. An adjusted
price of $150.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject hospital by the Direct
Sales Comparison Approach, as of September 29, 1993, the effective date of this
report, is calculated as follows:
10,000 SF x $150.00/SF =
$1,500,000
==========
-28-
<PAGE> 40
<TABLE>
I M P R O V E D S A L E S A D J U S T M E N T G R I D
HealthSouth Rehabilitation Center
Virginia Beach, Virginia
Subject Bldg Comp Bldg Comp Bldg Comp Bldg Comp
<S> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4
Sale Price/SF $105.77 $84.13 $139.23 $143.19
Property Rights Fee Simple Same Same Same Same
Adjustment ------------------------------------------------------------
Adjusted Price/SF $105.77 $84.13 $139.23 $143.19
Financing Cash Cash Cash Cash Cash
Adjustment ------------------------------------------------------------
Adjusted Price/SF $105.77 $84.13 $139.23 $143.19
Conditions of Sale None None None
Adjustment -10% -10%
------------------------------------------------------------
Adjusted Price/SF $95.19 $84.13 $125.31 $143.19
Market/Time
Adjustment 0% 5% 5% 5%
------------------------------------------------------------
Adjusted Price/SF $95.19 $88.34 $131.57 $150.35
Other Adjustments:
Location Adjustment 15% 15% 10% 10%
Topography Adjustment 0% 0% 0% 0%
Size Adjustment 0% -5% -5% -5%
Zoning Adjustment 0% 0% 0% 0%
Construction Quality 10% 10% 5% 10%
Net Other Adjustments 25% 20% 10% 15%
FINAL ADJUSTED PRICE PER SF $118.99 $106.00 $144.73 $172.90
============================================================
</TABLE>
-29-
<PAGE> 41
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of nine professional office buildings that
HealthSouth is selling for the purpose of establishing a real estate investment
trust (REIT). HealthSouth Corporation, the seller, will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
physicians/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow HealthSouth leasing
flexibility for the office space. HealthSouth can lease office space to
various doctors at different rates and terms, or they can use the office space
for hospital purposes. This master lease also guarantees payment regardless of
occupancy levels.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreements for each property are not yet available. For
the purpose of our Income Approach, the gross income will be the master lease
rate for each property times the rentable building area. We reserve the right
to modify the Income Approach valuation if the actual master lease for each
property differs significantly from the draft lease presented to us.
The gross income for the subject property is calculated as follows:
10,000 SF x $18.00/SF = $180,000
Because of the guarantee of payment related to the master lease regardless of
occupancy levels, we have not utilized a vacancy allowance for the property.
-30-
<PAGE> 42
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$9,000 based on the management experience of other properties. The net
operating income for the property is $180,000 less $9,000, or $171,000.
Ground Lease
The ground lease payment will be paid by the current owner. Currently, that
payment is $17,496 annually. Our analysis gives consideration that this
payment will be made by the REIT. This would indicate a net operating income
for the property of $153,504.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Direct Sales Comparison Section
of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale No. Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Independence Boulevard May 1992 7.42%
Virginia Beach, Virginia
2 20th Street South December 1992 9.0%
Birmingham, Alabama
3 Upper Hembree November 1991 10.1%
Roswell, Georgia
4 Independence Boulevard August 1991 8.45%
Virginia Beach, Virginia
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
7.4 percent to 10.1 percent.
A capitalization rate slightly above the upper end of this range, at 10.5
percent, is considered appropriate because of the current physical condition of
the building as compared to the comparable and the guaranteed rents involved.
-31-
<PAGE> 43
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$153,504/10.5 = $1,461,942
Rounded to: $1,460,000
==========
-32-
<PAGE> 44
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the HealthSouth Rehabilitation Center of Virginia Beach. The three approaches
are summarized as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,177,000
Direct Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . $1,500,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,460,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. For this reason, this approach is only considered a fair
indicator of value for the subject property.
The Direct Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but two of the four sales were not properties located in the
Virginia market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyer of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the
HealthSouth Rehabilitation Center of Virginia Beach, as of September 29, 1993,
and based on the assumptions and limiting conditions in this report, is:
$1,460,000
-33-
<PAGE> 1
EXHIBIT 10.29
AN APPRAISAL OF
MIDWAY MEDICAL PLAZA
AND ADJACENT PARKING STRUCTURE
LOS ANGELES, CALIFORNIA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
April 8, 1994
Crescent Capital Trust, Inc.
One Perimeter Park South
Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John McRoberts
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the professional office building and parking
structure identified as follows:
MIDWAY MEDICAL PLAZA
5901 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA
AND
ADJACENT PARKING STRUCTURE
5975 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA
The purpose of this valuation is to estimate the market value of the subject
properties' leased fee estate as of March 1, 1994, subject to a master lease
from OrNda HealthCorp. The report is to be used for asset valuation purposes.
OrNda HealthCorp is selling this professional office building and adjacent
parking structure for the purpose of incorporating them in a real estate
investment trust (REIT). This valuation assumes that the prospective REIT is
the owner of the property, with OrNda HealthCorp guaranteeing annual net rental
income of $2,142,223 for both structures.
This appraisal investigation includes visits to the facilities, discussions
with the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
<PAGE> 3
Crescent Capital Trust, Inc.
April 8, 1994
Page Two
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property consists of a five-story medical office building, which
contains a gross amount of 95,940 square feet with a net rentable amount of
87,008 square feet. The medical office building is located on a 25,825 square
foot land parcel adjacent to Midway Hospital Medical Center. The building was
constructed in 1985. In addition, an adjacent seven-story parking structure
containing 199,340 square feet is included in the appraisal and planned lease
arrangement. The parking structure is located on a 28,224 square foot site.
The parking structure was constructed to serve the hospital complex and was
constructed in 1984. The medical office building is presently 95.74 percent
leased.
<PAGE> 4
Crescent Capital Trust, Inc.
April 8, 1994
Page Three
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the Midway Medical
Plaza and adjacent parking structure, as of March 1, 1994, to be:
$21,420,000
===========
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative Section detailing the appraisal of the property;
and
o An Exhibit Section containing supplementary data.
<PAGE> 5
Crescent Capital Trust, Inc.
April 8, 1994
Page Four
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 6
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
A representative of Valuation Counselors Group, Inc. has made a
personal inspection of the property that is the subject of this
report. Patrick J. Simers has not made a personal inspection of the
property.
/s/ Patrick J. Simers
- ---------------------
Patrick J. Simers
Managing Director
Georgia Certified Appraiser No. 001977
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc., or
the MAI designation, and the Appraisal Institute, or the SRPA designation shall
be disseminated to the public through public relations media, news media, sales
media or any other public means of communications without the prior written
consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: March 1, 1994
Date of Report: March 1, 1994
Property Identification/ Midway Medical Plaza
Location: 5901 West Olympic Boulevard
Los Angeles, California
Parking Structure
5975 West Olympic Boulevard
Los Angeles, California
Interest Appraised: Leased Fee Estate
Gross Building Area: MOB - 95,040 square feet
Parking Structure - 199,340 square feet
Net Leasable Area: MOB - 87,008 square feet
Improvements Description: MOB - Five-story, concrete frame
structure containing approximately 95,940
gross square feet and 87,008 net square
feet built in 1985.
Parking Structure - Seven-story, steel
frame structure containing 199,340 square
feet and 755 parking spaces, built in 1984.
Subject Land Size: MOB Site - 25,825 SF, or 0.59 acres.
Parking Site - 28,224 SF, or 0.65 acres.
MOB Structure Occupancy: 95.74%
CONCLUSIONS
Cost Approach: $19,200,000
Sales Comparison Approach: $19,860,000
Income Approach: $21,420,000
Final Value Estimate: $21,420,000
===========
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
Page
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 2
Property Rights Appraised 2
Definition of Value 2
Ownership History 3
History and Nature of the Business Environment 3
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Regional Description 7
Neighborhood Description 10
Zoning 11
Real Estate Taxes and Assessments 12
Site Descriptions 13
Buildings and Land Improvements Description 14
HIGHEST AND BEST USE 16
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 21
Sales Comparison Approach 34
Income Approach 43
CORRELATION AND CONCLUSION 45
<PAGE> 12
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit B - Metropolitan Area Map
Exhibit C - Neighborhood Map
Exhibit D1 - Plat Map - Medical Office Building
Exhibit D2 - Plat Map - Parking Structure
Exhibit E - Building Description
Exhibit F - Land Improvements Description
Exhibit G - Subject Photographs
Exhibit H - Improved Sales Photographs
<PAGE> 13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property is known as the Midway Medical Plaza, which is located at
5901 West Olympic Boulevard in Los Angeles, California. This building is a
five-story medical office structure, which is located on an 0.59-acre site.
The building was constructed in 1985 and contains 95,040 gross square feet and
87,008 net rentable square feet. The building is presently 95.74 percent
leased. In addition to the medical office building, the adjacent parking
structure is included in this appraisal analysis. The parking structure is a
seven-story structure which contains 199,340 square feet. The building was
constructed in 1984 and is located at 5975 West Olympic Boulevard, Los Angeles,
California on an 0.65-acre site.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is March 1, 1994,
the date of our last inspection.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The buyers
are considering the purchase of several professional office buildings for the
purpose of establishing a real estate investment trust (REIT). The subject
property would be included in these purchases. It is our understanding that
the REIT will involve mortgage financing.
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SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
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o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
OWNERSHIP HISTORY
The subject properties were acquired by Summit Acquisition, Inc. on April 30,
1980 from Midway Hospital. On the same date, Summit Acquisition, Inc.
transferred the properties to Summit Properties, a California General
Partnership. In 1983 the properties were transferred to OrNda HealthCorp in
conjunction with the purchase of the entire hospital complex. A segregated
value of the assets appraised has not transpired in the past three years.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
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The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
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INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
1993 1994 1995
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed
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above are indicating an on-going soft demand for many types of commercial real
estate. This soft demand has caused some property values to remain flat and
some to decline. The lower interest rates in recent periods, however, are
serving to stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation.]
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
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DESCRIPTIVE DATA
REGIONAL DESCRIPTION
GENERAL DATA
This section of our report summarizes the socioeconomic characteristics of the
market area to provide a frame of reference for our subsequent analysis.
The subject property is located in the mid-city section of the city and county
of Los Angeles, in the state of California. The mid- city section is situated
approximately 6.25 miles west of the downtown Los Angeles Civic Center. As a
point of reference, this area is referred to as Zip Code Area 90019 in our
regional analysis.
DEMOGRAPHIC ANALYSIS
Demographic data was obtained from Urban Decision Systems for Los Angeles
County and the Zip Code Area 90019. The following table shows the demographic
trends of the county and 90019 from 1980 through projected 1995.
DEMOGRAPHIC TRENDS OF LOS ANGELES COUNTY AND ZIP CODE AREA 90019
1980 1990 ANNUAL % ANNUAL 1995 ANNUAL %
CENSUS CENSUS CHANGE 80-90 (PROJECTED) CHANGE 90-95
LOS ANGELES COUNTY
Population 7,477,503 8,758,093 1.6% 9,419,223 1.5%
Households 2,730,469 2,974,734 0.9% 3,096,420 0.8%
Household Size 2.74 2.94 3.04
Median Age 31.7
ZIP CODE AREA 90019
Population 53,63 2 62,766 1.6% 67,710 0.8%
Households 21,69 8 24,248 1.1% 25,527 1.0%
Household Size 2.4 2 2.57 2.63
Median Age 33.4
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In Los Angeles County, total population increased from 7,477,503 in 1980 to
8,758,093 in 1990, which represents an increase of 1.6 percent on an annual
compounded basis. In comparison, the change in total population in Zip Code
Area 90019 was from 53,632 in 1980 to 62,766 in 1990. This change in
population is also 1.6 percent per year.
Total number of households at both geographical levels increased at a slower
rate than their population counterparts. This implies an increase in the total
number of persons per household. At the county level, average household size
increased from 2.74 persons to 2.94. In comparison, average household size is
smaller at the city level. Between 1980 and 1990, average household size in
Zip Code Area 90019 changed from 2.42 to 2.57 persons.
Slow population growth is anticipated between 1990 and 1995. Total population
in Los Angeles County is projected to increase at an annual rate of 1.5
percent, thus indicating a total estimate of 9,419,223 by the year 1995. For
Zip Code Area 90019, annual growth rate is expected to be the same at 1.5
percent per year. By 1995, total population in Zip Code Area 90019 is expected
to be 67,710.
The current median age of residents in Zip Code Area 90019 is older than that
of the county, 33.4 years versus 31.7 years, respectively. The median age
nationwide is 33 years.
ECONOMIC INDICATORS
Between 1980 and 1990, median annual household income in Los Angeles County
increased from $17,563 to $30,525, or 5.7 percent on an annual compounded
basis. During the same period, the median annual household income in Zip Code
Area 90019 increased from $12,818 in 1980 to $26,140 in 1990, an annual
compounded increase of 7.4 percent. Projections to 1995 for the county
indicate an increase of 4.0 percent on an annual compounded basis. The
projected income for Zip Code Area 90019 indicates an increase to $28,860 to
2.0 percent per year on an annual compounded basis.
<PAGE> 21
WORK FORCE, TRADE, INDUSTRY
According to the State of California Employment Development Department, the
highest employment demand in 1990 within Los Angeles County derived from
service industries, accounting for 29 percent of the total number of persons
employed. Manufacturing accounted for the second largest industry with 20
percent, followed by retail trade (15.3%), and government (12.5%). Between
1989 and 1990, services, government and FIRE (finance, insurance and real
estate), experienced the largest growth in employment increases.
Between 1986 and 1990, the total number of unemployed and the associated
unemployment rates are presented below:
PERCENTAGE
YEAR NUMBER UNEMPLOYMENT
1990 255,000 5.8
1989 196,300 4.6
1988 203,000 4.9
1987 243,600 5.9
1986 204,000 6.7
Since 1986, the unemployment rate has been between 4.6 percent and 6.7 percent.
However, not shown is the current employment picture in Los Angeles. The
recession has caused numerous large companies such as Hughes Aircraft to layoff
a large percentage of their work force. The unemployment rate is greater than
the 1990 level of 5.8 percent.
Summary
It is questionable how many years it will take for the local economy to
stabilize and start showing some type of improvement. Major construction in
the county has slowed due to lack of demand and because the lenders are not
making construction money available
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to the developers. It is projected that many of the aerospace companies will
continue to layoff more workers over the next year. While some parts of the
country are showing signs of revitalization, it is forecasted that California,
and in particular southern California, will lag behind since it was the last
part of the country to experience the recession.
NEIGHBORHOOD DESCRIPTION
The subject properties are situated on the north side of West Olympic
Boulevard, on the east and west side of Genesee Avenue, on the east side of
Spaulding Avenue, and on the west side of Ogden Drive. The subject properties
lie just east of the intersection of three major arteries; West Olympic and San
Vicente Boulevards and Fairfax Avenue.
Olympic Boulevard is 100 feet wide, asphalt-paved with curbs, gutters,
sidewalks and street lights. Improvements along Olympic Boulevard in the
subject neighborhood consist of commercial structures at Fairfax Avenue and
Olympic Boulevard, the subject medical office building, parking structure,
hospital and parking lots to the east, the West Side Jewish Center and
multi-family dwellings east and beyond.
San Vicente Boulevard is 150 feet wide, asphalt-paved with landscaped median,
curbs, gutters, sidewalks and street lights. Improvements along San Vicente
Boulevard in the subject neighborhood consist of commercial structures at
Fairfax Avenue and San Vicente Boulevard, the subject hospital and parking
lots, small medical office buildings to the east, the West Side Jewish Center
and multi-family dwellings east and beyond.
Ogden, Genesee, Spaulding and Alandele Avenues are minor residential roadways
averaging 50 feet wide, and are asphalt-paved with curbs, gutters, sidewalks
and street lights. These streets are improved with the subject medical office
building, parking structure, parking lots, the SCCIS and a triplex near and at
their intersections with Olympic Boulevard. The balance of the improvements
along these streets consist of single-family dwellings. Fairfax Avenue is 100
feet wide, asphalt-paved with curbs, gutters, sidewalks and street lights.
Improvements consist of commercial structures and Westside Hospital, a 91-bed
acute care facility approximately two blocks from the subject properties.
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Conclusion
The neighborhood is mature with improvements construction dating from the late
1920s forward. While the riots of April 1992 affected adjacent neighborhoods,
the subject neighborhood was not affected and remains well maintained and in
good condition. The presence of the hospital and associated properties creates
a healthcare campus and enhances the community in which it serves. Access to
the subject neighborhood from the Southern California freeway system is good
via the I-10 Freeway/Fairfax Avenue interchange, approximately two miles south
of the subject property.
ZONING
The subject sites are zoned by the city of Los Angeles as C2-1, Commercial.
The following is a description of, and lot restrictions for, each of the zoning
regulations:
C2-1 zoning allows uses such as C1.5 zone uses; department stores,
theaters, broadcasting studios, parking buildings, parks and
playgrounds and R4 uses, retail, limited manufacturing, hospitals,
clinics, auto services, contractors, churches and schools.
Minimum Lot Size - None for commercial use
Minimum Lot Width - Forty feet for commercial use
Size Yards - None for commercial uses
Maximum Building Height - None
Parking - One space per 500 SF of building
area. Hospitals require two spaces
for each patient bed.
The subject improvements are legal uses.
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Easements/Encroachments/Restrictions
We are not aware of any easements, encroachments or restrictions that would
adversely affect the development of the subject sites.
Flood Zone
The subject properties are located in Community Panel No. 060137007D, February
4, 1987, Zone C (an area of minimal flooding).
Earthquake Zone
According to the California Department of Conservation, Division of Mines and
Geology, the subject is not located in an Alquist- Prolo Special Study zone.
This indicates that there are no active fault lines at the intersection of San
Vicente Boulevard, Olympic Boulevard and Fairfax Avenue.
Legal Descriptions
The legal descriptions for the subject properties are included in the Exhibit
Section of this report.
REAL ESTATE TAXES AND ASSESSMENTS
The subject properties are assessed by Los Angeles County for the 1992/1993 tax
year at 100 percent of market value. The tax rate for this area is $1.05307
per $100 of assessed value plus special assessments. The assessment and taxes
applicable to the subject properties are shown as follows:
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PARCEL NO. 5086-024-025 (MEDICAL OFFICE BUILDING)
Assessed Value:
Land $ 915,008
Buildings 12,207,912
-----------
Total $13,122,920
Taxes: $138,193.78
PARCEL NO. 5086-019-009 (PARKING STRUCTURE)
Assessed Value:
Land $ 982,734
Buildings 5,696,979
-----------
Total $ 6,679,713
Taxes: $ 72,062.26
SITE DESCRIPTIONS
For the purpose of our analyses, we have described the subject sites as
follows:
MEDICAL OFFICE BUILDING SITE
The medical office building (MOB) site consists of one parcel containing 0.59
acres, or approximately 25,825 square feet. It is an irregularly-shaped site
with approximately 221 frontage feet on the north side of Olympic Boulevard,
112 frontage feet on the west side of Spaulding Avenue and 112 frontage feet on
the east side of Genesee Avenue. The frontage on Olympic Boulevard is
interrupted by a 1,279 square foot, wedge-shaped site belonging to others.
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PARKING STRUCTURE SITE
This site consists of one parcel containing 0.65 acres, or approximately 28,224
square feet. The site is nearly rectangular in shape with 254 frontage feet on
the north side of Olympic Boulevard, 112 frontage feet on the west side of
Genesee Avenue and 112 frontage feet on the east side of Ogden Avenue.
Both of the sites are level at street grade. However, commencing at about
Genesee Avenue, the terrain ascends upward gently to the crest of a hill
several blocks to the east.
All of the usual and necessary utilities are available to the subject site from
the following suppliers:
Electricity - Southern California Edison Company
Gas - Southern California Gas Company
Water - City of Los Angeles
Sewer - City of Los Angeles
Telephone - Pacific Bell
Summary
The site are well suited to their improvements. The medical office building
has good street visibility from both Olympic and San Vicente Boulevards and
Fairfax Avenue with good access to the parking structure and parking lots.
BUILDINGS AND LAND IMPROVEMENTS DESCRIPTION
The subject properties are comprised of the medical office building and the
parking structure. These improvements are described as follows:
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Buildings
MEDICAL OFFICE BUILDING
This building is a five-story, concrete frame structure containing 95,940 gross
square feet and 87,008 net leaseable square feet. It was constructed in 1985.
The building is constructed upon a reinforced concrete foundation under masonry
with metal and glass panel exterior walls with a flat lightweight concrete roof
with an insulated rolled cover. The interior of the building is divided into
the lobby, a pharmacy and office suites. There are three five-stop elevators.
Heating and ventilating consists of a computerized double-duct, vari-volume
system. The building appears to be in good condition and the mechanical
components appear to be in working order.
PARKING STRUCTURE
This building is a seven-story, concrete and steel frame structure containing
199,340 square feet. It was constructed in 1984. The building is constructed
upon a reinforced concrete foundation under masonry exterior walls with
concrete floors. The structure has 755 parking spaces, a seven-stop elevator,
a steel stairwell, electric gates and a kiosk. The parking structure appears
to be in good condition.
Land Improvements
Land improvements consist of a concrete patio at the front of the structure
with concrete planters and benches and outdoor lighting. There is minimal
landscaping with an automatic sprinkler system.
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HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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As Vacant
The purpose of this analysis, given the sites ares vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject sites are adequate for the development of a
limited number of uses. These would include the development of residential,
commercial, and office/institutional uses. The small sizes of the parcels
would preclude the development of any industrial use.
LEGALLY PERMISSIBLE
The subject parcels are zoned C2-1, Commercial. This zoning designation allows
for the development of most commercial uses including stores, theaters, parking
buildings retail use, hospitals and multi-family residential uses, etc. This
use would not allow the development of industrial properties and single-family
development.
Surrounding use patterns of the subject sites include the hospital campus,
Westside hospital, and small businesses such as fast food restaurants, dry
cleaners, florists, etc.
FINANCIALLY FEASIBLE
Having established that the sites are physically suited and legally permitted
for the development of medical office building space and parking structure, the
next consideration is economic feasibility. Financially feasible uses for the
site, if vacant, are those uses that would generate an economic return to the
land. The subject structures serve the adjacent hospital which has served the
community for 20 years. The surrounding uses of the subject would suggest that
economically feasible uses would be related to support of the healthcare
business community.
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MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Medical office and parking uses are physically
feasible and legally permissible. Based on this analysis, the highest and best
use of the land, if vacant, would be for the development of their current use
for the support of the hospital campus.
As Improved
The subject sites are currently improved with a 95,040 square foot medial
office building and 199,340 square foot parking structure. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the improvements and replace them with new improvements, or to
modify existing improvements. The improvements were recently constructed and
considered functional. The medical office building could be converted to
ancillary space for the adjacent hospital facility or converted to more typical
office space. It would be anticipated that, due to recent trends in hospital
care, that ancillary development would be its most likely alternative
conversion. The parking structure can be converted to alternative use but the
cost may be prohibitive, and use of the parking structure is necessary to
continue to support the medical office building and the hospital enterprise.
LEGALLY PERMISSIBLE
The buildings, as improved, are assumed to be a legal conforming use, since the
properties were recently constructed and received an occupancy permit. Under
the current zoning, the property could remain as it is, be torn down, or
renovated.
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FINANCIALLY FEASIBLE
As improved, the structures provide significant support to the neighboring
hospital facility which gives support to their economic existence in their
present use as-built. The office building is presently 95.74 percent occupied
with physicians who practice at the neighboring hospital facility. It appears
that the improvements in their present use represent the most financially
feasible use of the subjects.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing properties are the financially
feasible uses that produces the greatest property value. The existing use was
the only financially feasible use. The highest and best use, as improved, is
the properties' current use.
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VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
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Land Comparable Number 1
APN Number: 5521-007-019
Location: South side of Melrose Avenue one-half block
west of Ardmore.
Size: 0.148 acres, or 6,460 square feet
Sale Date: January 28, 1992
Document Number: 142216
Grantor: Mr. and Mrs. Zalman and Esther Roth
Grantee: Mr. and Mrs. Kyung Hee and In Kyu Lee
Sale Price: $265,000
Price Per Square Foot: $41.02
Terms of Sale: Cash and seller financing at market rates.
Shape: Rectangular
Utilities: All Available
Zoning: C2-2
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Land Comparable Number 2
APN Number: 5535-029-010
Location: North side of Melrose Avenue one-half block
west of Hobart
Size: 0.149 acres, or 6,500 square feet
Sale Date: December 19, 1992
Document Number: 2439104, 2439105
Grantor: Charlotte Reed, et al
Grantee: Mr. and Mrs. Mansour and Prichehr Benlevy
Sale Price: $330,000
Price Per Square Foot: $50.77
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C2-2
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Land Comparable Number 3
APN Number: 5523-012-014
Location: Northwest corner of Larchmont
Boulevard and Clinton Avenue
Size: 0.16 acres, or 7,000 square feet
Sale Date: December 17, 1992
Document Number: 2368714, 2368715
Grantor: Mary Auerback, et al
Grantee: Ellis C. Wong
Sale Price: $550,000
Price Per Square Foot: $78.57
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C2-1
Comments: Currently being utilized for
medical/dental office.
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Land Comparable Number 4
APN Number: 5088-014-005,006
Location: South side of Wilshire Boulevard, one
block west of Crescent Heights Boulevard
Size: 0.45 acres, or 19,800 square feet
Sale Date: December 31, 1992
Document Number: 2455200
Grantor: Nedjatollah Zarabi, et al
Grantee: 6300 Wilshire Associates
Sale Price: $2,000,000
Price Per Square Foot: $101.01
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All Available
Zoning: C4-4
Comments: Currently being utilized for surface
parking with owner wishing to place
parking structure on site.
-25-
<PAGE> 38
A summary of the land sales is shown as follows:
<TABLE>
<CAPTION>
SUMMARY OF LAND COMPARABLES
LAND SALE SIZE PRICE
COMPARABLE LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 Melrose/Ardmore 01/92 6,460 $41.02
2 Melrose/Hobart 12/92 6,500 $50.77
3 Larchmont/Clinton 12/92 7,000 $78.57
4 Wilshire/Crescent Heights 12/92 19,800 $101.01
SUBJECT MOB SITE 28,825
PARKING STRUCTURE SITE 28,224
</TABLE>
Discussion of Land Comparables
Due to the proximity and similar nature of the two subject sites, all
comparisons which apply to the MOB site also apply to the parking structure
site. An adjustment grid which summarizes our findings follows the parcel
discussions.
LAND COMPARABLE NUMBER 1 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subject indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subjects' land parcels.
LAND COMPARABLE NUMBER 2 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subject indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subjects' land parcels.
-26-
<PAGE> 39
LAND COMPARABLE NUMBER 3 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has an inferior location to the subject and has been
adjusted upward for this occurrence. The comparable's size is smaller than the
subjects, indicating further upward adjustments in comparison to the subject
sites. Overall, this sale has been adjusted upward in comparison to the
subject's land parcels.
LAND COMPARABLE NUMBER 4 is an older sale and must be adjusted downward for
market conditions as overall sale prices in the region have fallen over the
prior two years. The sale has a superior location to the subject and has been
adjusted downward for this occurrence. The comparable's size is similar to the
subject negating any size adjustment. The sale has a superior zoning over the
subject and downward adjustments for this occurrence have been made. Overall,
this sale has been adjusted upward in comparison to the subjects' land parcels.
The adjusted sales prices per square foot of the comparables range from a low
of $47.99 to a high of $99.00 per square foot with an overall average of $70.35
per square foot. In our opinion, the subject sites would be valued at a value
range slightly above the overall average, or $75.00 per square foot. This
would indicate a total land value for the two parcels in the amount of:
Medical Office Building Site $1,936,875
Parking Structure Site 2,116,800
----------
TOTAL BOTH SITES $4,053,675
-27-
<PAGE> 40
L A N D S A L E A D J U S T M E N T G R I D
Midway Medical Office Building & Parking Garage
Los Angeles, California
<TABLE>
<CAPTION>
Subject Land Comp Land Comp Land Comp Land Comp
<S> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4
Sale Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Property Rights Fee Simple Same Same Same Same
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Financing Cash Cash Cash Cash Cash
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Conditions of Sale None None None None
Adjustment
--------------------------------------------------
Adjusted Price/SF $ 41.02 $ 50.77 $ 78.57 $101.01
Market/Time
Adjustment -10% -10% -10% -10%
--------------------------------------------------
Adjusted Price/SF $ 36.92 $ 45.69 $ 70.71 $ 90.91
Other Adjustments:
Location Adjustment 10% 15% 20% -10%
Topography Adjustment 0% 0% 0% 0%
Size Adjustment 20% 20% 20% 0%
Zoning Adjustment 0% 0% 0% -10%
Net Other Adjustments 30% 35% 40% -20%
FINAL ADJUSTED PRICE PER SF $ 47.99 $ 61.69 $ 99.00 $ 72.73
==================================================
</TABLE>
-28-
<PAGE> 41
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
calculator cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule at the end of this section derived from the Marshall
Valuation Services shows the estimated replacement cost by category for the
subject building plus estimates of all forms of depreciation.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 50 years. For the subject building, we have
assumed an economic life of 50 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
-29-
<PAGE> 42
Marshall Valuation Services, Inc. was used to estimate the overall economic
life of the improvements. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its young age. Observation of the subject property indicated
that the structure and related component parts have been adequately maintained
through a continuous maintenance service program.
The subject properties were constructed in 1984 and 1985, and are in good
condition. It is judged that the subject buildings have an effective age equal
to eight years. The remaining useful life is estimated to be 42 years. This
translates into a physical depreciation estimate of 16 percent (8 years divided
by 50 years). The amount of depreciation attributable to the property has been
estimated on a straight-line basis, which is founded on the assumption that
depreciation of a property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of three years and a remaining useful life of
12 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be 40 percent.
Entrepreneurial profit and miscellaneous replacement costs are depreciated at a
blended depreciate rate.
The subject building and site improvement replacement costs were calculated to
be $18,040,373. Replacement costs normally include an entrepreneurial profit
of 10 percent to 15 percent to induce the property owner to undergo the
development. Entrepreneurial overhead, profit and miscellaneous fees were
estimated at 10 percent.
-30-
<PAGE> 43
Total depreciation is estimated at $2,894,579, based on 16 percent depreciation
of building replacement costs and 40 percent depreciation of site improvements.
There was no functional or economic obsolescence indicated. The total
depreciated value of the subject replacement costs is $15,145,794. The
$4,053,675 land value is added to the depreciated replacement costs, for a
final Cost Approach value of $19,199,469.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of March 1, 1994, is rounded to:
$19,200,000
===========
-31-
<PAGE> 44
COST APPROACH SUMMARY
MEDICAL OFFICE BUILDING
<TABLE>
<S> <C> <C> <C>
Replacement Cost New
Direct Costs:
Main Structure -
Base Square Foot Cost $ 69.00
Adjustments to Base Cost
Elevators 4.00
Sprinklers 1.50
Number of Stories Multiplier 1.00
Perimeter Multiplier 1.00
---------
Adjusted Base Cost $ 74.50
Current Cost Multiplier 1.00
Local Multiplier 1.20
Final Base Cost $ 89.40 Per Sq. Ft.
Gross Building Area 95,940 Square Feet
---------
Total Building Cost $8,577,036
Site Improvements
Surface Parking $ 0
Other 20,000
-------
Total Site Improvement Costs $ 20,000
Total Replacement Cost New Before Indirect
Costs and Entrepreneurial Profit $8,597,036
----------
Estimate of Indirect Costs and
Entrepreneurial Profit
Indirect Costs
Financing Points $ 180,068
Property Taxes on Land
During Construction 28,038
Entrepreneurial Profit 880,511
----------
$1,088,617
Total Replacement Cost New $9,685,653
Estimates of Depreciation
Buildings $1,546,099
Site Improvements 9,013
-----------
Total Depreciation $1,555,112
Summary:
Total Depreciated
Medical Office Building Replacement Depreciation Cost
----------- ------------ -----------
Building $9,663,120 $1,546,099 $8,117,021
Land Improvements 22,533 9,013 13,520
---------- ---------- ----------
Total Medical Office Building $9,685,653 $1,555,112 $8,130,541
Add: Land Value 1,936,875
----------
TOTAL ESTIMATED VALUE VIA THE COST APPROACH $10,067,416
===========
</TABLE>
-32-
<PAGE> 45
COST APPROACH SUMMARY
PARKING STRUCTURE
<TABLE>
<S> <C> <C> <C>
Replacement Cost New
Direct Costs:
Main Structure -
Base Square Foot Cost $ 30.00
Adjustments to Base Cost
Elevators 0.00
Sprinklers 1.50
Number of Stories Multiplier 1.00
Perimeter Multiplier 1.00
---------
Adjusted Base Cost $ 31.50
Current Cost Multiplier 0.98
Local Multiplier 1.20
Final Base Cost $ 37.04 Per Sq. Ft.
Gross Building Area 199,340 Square Feet
---------
Total Building Cost $7,384,351
Site Improvements
Surface Parking $ 0
Other 10,000
------
Total Site Improvement Costs $ 10,000
Total Replacement Cost New Before Indirect
Costs and Entrepreneurial Profit $7,394,351
----------
Estimate of Indirect Costs and
Entrepreneurial Profit
Indirect Costs
Financing Points $ 166,502
Property Taxes on Land
During Construction 34,379
Entrepreneurial Profit 759,488
--------
$ 960,369
Total Replacement Cost New $8,354,720
Estimates of Depreciation
Buildings $1,334,947
Site Improvements 4,520
----------
Total Depreciation $1,339,467
Summary:
Total Depreciated
Parking Structure Replacement Depreciation Cost
----------- ------------ --------------
Building $8,343,421 $1,334,947 $7,008,474
Land Improvements 11,299 4,520 6,779
---------- ---------- ----------
Total Parking Structure $8,354,720 $1,339,467 $7,015,253
Add: Land Value 2,116,800
----------
TOTAL ESTIMATED VALUE VIA THE COST APPROACH $9,132,053
==========
</TABLE>
-33-
<PAGE> 46
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-34-
<PAGE> 47
IMPROVED SALE NUMBER 1
<TABLE>
<S> <S>
GENERAL SALE DATA
Location: 8920 Wilshire Boulevard, Beverly Hills, California
Date of Sale: January 15, 1993
Document Number: 0102008
Grantor: Julio Liberman, et al
Grantee: Advent Realty Limited Partnership II
Sale Price: $7,500,000
Adjusted Sales Price: $10,500,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: .536 acres
Building Size: 99,000 square feet of net rentable area
Year Built: 1964
Occupancy at Sale: 70%
STABILIZED OPERATING DATA
Estimated Gross Income $2,376,000
Vacancy Allowance at 10% 237,600
----------
Effective Gross Income $2,138,400
Estimated Expenses @ 38% 812,592
----------
Net Operating Income $1,325,808
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $ 106.06
Stabilized Overall Rate: 12.6 %
</TABLE>
COMMENTS
The facility was purchased at low overall occupancy and needed substantial
renovation work in order make the facility marketable. The cost of this
renovation was estimated at $3,000,000.
-35-
<PAGE> 48
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 6840, 6850 Sepulveda Boulevard, Van Nuys, California
Date of Sale: June 25, 1993
Document Number: 1216157
Grantor: Valley Presbyterian Hospital
Grantee: Healthcare Realty Trust, Inc.
Sale Price: $5,250,000
Adjusted Sales Price: $5,250,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.9 acres
Building Size: 29,040 square feet of net rentable area
Year Built: 1961
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Income Data: Not Available
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $180.78
Stabilized Overall Rate: 8.2 %
</TABLE>
COMMENTS
The facility is presently utilized as a surgery center and has an interior
build-out superior to the subject. The building is leased on a triple net
basis.
-36-
<PAGE> 49
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 15211, Vanowen St. Van Nuys, California
Date of Sale: June 25, 1993
Document Number: 1216158
Grantor: Valley Presbyterian Hospital
Grantee: Healthcare Realty Trust, Inc.
Sale Price: $7,450,000
Adjusted Sales Price: $7,450,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.111
Building Size: 47,042 square feet of gross rentable area
Year Built: 1981
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Income Data: Not Available
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $158.37
</TABLE>
COMMENTS
The facility is presently utilized as a surgery center and has an interior
build-out superior to the subject. The subject is leased on a triple net
basis.
-37-
<PAGE> 50
IMPROVED SALE NUMBER 4
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: Sherman Oaks Medical Plaza, 4955 Van Nuys, Boulevard, Sherman Oaks, California
Date of Sale: February 23, 1993
Document Number: 0342432
Grantor: Pacprop, Inc.
Grantee: Arthur Gilbert
Sale Price: $8,500,000
Adjusted Sales Price: $8,500,000
Terms of Sale: Cash to Seller
PROPERTY DATA
Land Size: 1.619 acres
Building Size: 72,000 square feet of net rentable area
Year Built: 1968
Occupancy at Sale: 97%
STABILIZED OPERATING DATA
Estimated Gross Income $1,529,280
Vacancy Allowance at 15% 229,392
----------
Effective Gross Income 1,299,888
Estimated Expenses 491,260
---------
Net OperatinIncome $ 808,628
MARKET VALUE INDICATORS
Sales Price Per Square Foot: $118.06
Stabilized Overall Rate: 9.51%
</TABLE>
COMMENTS
The facility was purchased at high overall occupancy which is not anticipated
to be sustainable. Parking lot is located on leased land parcel which was not
included in sale.
-38-
<PAGE> 51
<TABLE>
<CAPTION>
SUMMARY OF IMPROVED SALES
SALE RENTABLE SALE PRICE
NUMBER ADDRESS SF PRICE PER SF
<S> <C> <C> <C> <C>
1 8920 Wilshire Boulevard 99,000 $10,560,000 $106.06
Beverly Hills, CA
2 6840, 6850 Sepulveda Boulevard 29,040 $ 5,250,000 $180.78
Van Nuys, CA
3 15211 Vanowen Street 47,042 $ 7,450,000 $158.37
Van Nuys, CA
4 4955 Van Nuys Boulevard 72,000 $ 8,500,000 $118.06
Sherman Oaks, CA
</TABLE>
The unadjusted prices of these comparables range form $106.06 per square foot
to $180.78 per square foot. Each of the comparable will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Grid is shown at the end of this section.
IMPROVED SALE NUMBER 1 is a Class B structure which was constructed in 1964.
The sale was initially adjusted upward for the renovation costs incurred by the
buyer immediately upon occupancy. The subject's location is slightly inferior
to the comparable's and a downward adjustment for this occurrence has been
made. The sale had a very low occupancy at the time of sale which would
necessitate that an upward adjustment be made. The age of the comparable is
significantly above the subject's and additional upward adjustments were made
for this occurrence. The adjusted sale price of the comparable was $121.97.
-39-
<PAGE> 52
IMPROVED SALE NUMBER 2 is a Class C structure which was constructed in 1961.
This comparable is associated with the neighboring hospital and was sold on a
sale leaseback arrangement on a triple net master lease arrangement. The lease
terms were not disclosed. This sale's location is considered slightly inferior
to the subject's and an upward adjustment for this occurrence has been made.
The sale is significantly smaller than the subject and a downward adjustment
has been made to account for this fact. Due to the older age of the
comparable, additional upward adjustments have been made. The adjusted sale
price of the comparable is $180.78.
IMPROVED SALE NUMBER 3 is a Class B structure which was constructed in 1981.
This comparable is associated with the neighboring hospital and was sold on a
sale leaseback arrangement on a triple net master lease arrangement. The lease
terms were not disclosed. This sale's location is considered slightly inferior
to the subject's and an upward adjustment for this occurrence has been made.
The sale is significantly smaller than the subject and a downward adjustment
has been made to account for this fact. The sale is similar in age to the
subject and no adjustment for age was considered warranted. The adjusted sale
price of this comparable was estimated at $150.45.
IMPROVED SALE NUMBER 4 is a Class B, seven-story, structure with an adjacent
three-story parking garage. The parking garage is located on a land lease and
an upward adjustment for rights transferred has been made. An additional
upward adjustment has been made due to the older age of the comparable. No
other adjustments to this sale appeared warranted indicating an overall
adjusted price of $142.85 per square foot.
The adjusted prices per square foot range from $121.97 to $180.78, with an
overall average of $149.01. It is our opinion, that the subject's medical
office building would sell at a price level above the overall average, or
$160.00 per square foot of rentable area. This would indicate a value for the
medical office building of $13,921,280 ($160.00 x 87,008 square feet).
The adjacent parking structure is utilized to support the office building and
the adjacent medical complex. In our survey of medical office building
comparables the number of parking spaces per 1,000 square feet of rentable area
ranged from 0 to 6.7, with 3 to 4 spaces being typical. The number of spaces
required under the zoning law is 191. The subject parking garage, when
compared to the medical office building's rentable square
-40-
<PAGE> 53
feet, contains 8.67 spaces per 1,000 square feet of rentable area. It is our
belief that an approximate ratio of 3.0 spaces per 1,000 square feet of
rentable area would be associated with the medical office building. This would
represent an overall utilization of the parking garage for the medical office
building of approximately 35 percent. The remaining 65 percent of the parking
garage represents an excess asset and its value should be added to our overall
market findings detailed previously. Based upon our analysis in the Cost
Approach, 60 percent of the parking garage's value would be fairly represented
at $5,935,834.
Based upon this analysis, the market value of the subject property by the Sales
Comparison Approach, as of March 1, 1994, is reasonably represented in the
rounded amount of:
$19,860,000
===========
-41-
<PAGE> 54
I M P R O V E D S A L E A D J U S T M E N T G R I D
The Midway Medical Office Building
Los Angeles, California
<TABLE>
<CAPTION>
Subject Bldg Comp Bldg Comp Bldg Comp Bldg Comp
<S> <C> <C> <C> <C> <C>
Element #1 #2 #3 #4
Sale Price/SF $106.06 $180.78 $158.37 $118.06
Property Rights Fee Simple Same Same Same Mixed
Adjustment 10%
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Financing Cash Cash Cash Cash Cash
Adjustment
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Conditions of Sale None None None None
Adjustment
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Market/Time
Adjustment 0% 0% 0% 0%
------------------------------------------------
Adjusted Price/SF $106.06 $180.78 $158.37 $129.87
Other Adjustments:
Location Adjustment -5% 5% 5% 0%
Occupancy Adjustment 10% 0% 0% 0%
Size Adjustment 0% -15% -10% 0%
Age Adjustment 10% 10% 0% 10%
Net Other Adjustments 15% 0% -5% 10%
FINAL ADJUSTED PRICE PER SF $121.97 $180.78 $150.45 $142.85
================================================
</TABLE>
-42-
<PAGE> 55
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several professional office buildings that
Crescent Capital is purchasing for the purpose of establishing a real estate
investment trust (REIT). OrNda HealthCorp, the seller, will provide a net
rental guarantee in the form of a master lease. The REIT, as the new property
owner, will receive the net rental master lease rate per square foot of
rentable office area, regardless of the rental rates charged or received from
the actual physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow OrNda HealthCorp leasing
flexibility for the office space. OrNda HealthCorp can lease office space to
various physicians at different rates and terms, or they can use the office
space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for the property is not yet available. For the
purpose of our Income Approach, the gross income will be the master lease
amount established for the entire development, or $2,142,223. We reserve the
right to modify the income Approach valuation if the actual master lease for
each property differs significantly from the draft lease presented to us.
The master lease rate implied for the subject property will be $24.62 per
square foot of net rentable area associated with the medical office building.
This rental rate appears at market in comparison to the rates quoted for the
market sales comparisons. The gross income for the subject property is
$2,142,223.
-43-
<PAGE> 56
The subject appraisal assumes 100 percent of the income is guaranteed
throughout the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$107,111 based on the management experience of other properties. The net
operating income for the property is $2,142,223 less $107,111, or $2,035,112.
The estimated direct capitalization rates, or overall rates (OARs), for the
improved sale comparables presented in the Sales Comparison Approach section of
this report ranged from 8.2 percent to 12.6 percent. In Improved Sale Number
1, with a high estimated capitalization rate of 12.6 percent, the buyer had to
put significant improvements in the site. Based on the comparables and this
discussion, a capitalization rate of 9.5 percent is considered appropriate for
the property.
It is, therefore, our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$2,035,112/0.95 = $21,422,231
Rounded to:
$21,420,000
===========
-44-
<PAGE> 57
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the Midway Medical Plaza and its adjacent parking structure. The values
derived from the three approaches are summarized as follows:
Cost Approach . . . . . . . . . . . . . . . . . . . $19,200,000
Sales Comparison Approach . . . . . . . . . . . . . $19,860,000
Income Approach . . . . . . . . . . . . . . . . . . $21,420,000
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. This approach is
representative of the value in use as part of the hospital complex. The Cost
Approach, however, does not necessarily reflect the value that investors and
users would be willing to pay if the property were to be sold. Overall, this
approach is considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quantity of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject and were significantly older than the subject. The comparable sales,
which were professional office buildings that were physically contiguous to a
hospital, appeared to sell at a higher value because of higher leasing risks.
The appraisers only considered this approach to be a fair indicator of value
for the subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
-45-
<PAGE> 58
Based on this analysis, it is our opinion that the market value of the Midway
Medical Plaza and adjacent parking structure, as of March 1, 1994, subject to
the OrNda HealthCorp lease, and based on the assumptions and limiting
conditions in this report, is the Income Approach value of:
$21,420,000
===========
The values derived in the other approaches support the Income Approach value as
the final value.
-46-
<PAGE> 1
EXHIBIT 10.30
AN APPRAISAL OF
MOUNTAIN VIEW NURSING CENTER
GREENSBURG, PENNSYLVANIA
FOR
INTEGRATED HEALTH SERVICES, INC.
AS OF MARCH 1, 1994
<PAGE> 2
[LOGO] VALUATION COUNSELORS GROUP, INC.
Princeton Pike Office Park, CN30
Princeton, New Jersey 08543-0030
(609) 896-0300
(Fax) 896-1849
March 30, 1994
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills Corporate Campus
Owings Mills, Maryland 21117
Attention: Mr. Daniel J. Booth
Director of Project Finance
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the value of the leased fee interest in the property comprising:
MOUNTAIN VIEW NURSING CENTER
SAND HILL ROAD
GREENSBURG, PENNSYLVANIA
The primary purpose of this valuation is to estimate the market value as of
March 1, 1994.
For the purpose of this report, "MARKET VALUE" is defined 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, 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:
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and each acting
in what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
<PAGE> 3
Integrated Health Services, Inc.
March 30, 1994
Page 2
d) payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
e) 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.
Mountain View Nursing Center is a 137 licensed bed healthcare facility which
provides nursing and rehabilitation care. The facility is presently doing
business as Integrated Health Services at Mountain View. Integrated Health
Services, Inc. has advised us the facility is being acquired by Crescent
Capital in the immediate future for $9,775,000 and will be leased to Integrated
Health Services, Inc. at an initial base rent amount of $1,061,000 with
additional rent provisions based upon several factors including the consumer
price index and increments in net operating income. The term of the lease will
be ten years with two option renewal periods of ten years each. We have
appraised the subject property on a leased fee basis which is defined as
follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession at
the termination of the lease.
This appraisal investigation included: a visit to the facility, discussions
with Management, a study of financial data, analysis of other data and research
of the market.
This appraisal was prepared in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP) requirements.
Based upon the procedures outlined in this report, it is estimated that the
market value of the tangible and intangible assets comprising Mountain View
Nursing Center, as of March 1, 1994, is reasonably represented in the rounded
amount as follows:
$9,800,000
==========
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
This report considers estimates, assumptions and other information developed
from research of the market, knowledge of the industry and discussions during
which Management and Management's representatives have provided us with certain
information. Management is assumed to be competent and professional healthcare
providers.
<PAGE> 4
Integrated Health Services, Inc.
March 30, 1994
Page 3
Some assumptions inevitably will not materialize and unanticipated events and
circumstances may occur; therefore, actual results achieved may vary from the
forecasts and the variations may be material. We have not, as part of this
valuation, performed an examination or review in the accounting sense of any of
the financial information used and, therefore, do not express an opinion or
other form of assurance with regard to the same. We have no responsibility to
update our report for events and circumstances occurring after the date of this
report. The information furnished to us by others is believed to be reliable,
but no responsibility for its accuracy is assumed.
This appraisal report consists of the following:
o This letter outlining the services performed;
o A Statement of Basic Assumptions and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o Subject Photographs;
o A Narrative Section detailing the appraisal of the enterprise;
o Certification;
o An Addendum containing supporting schedules; and
o An Exhibit Section containing supplementary data.
Neither the whole, nor any part of this appraisal nor any reference thereto may
be included in any document, statement, appraisal or circular without
Valuation Counselors Group, Inc.'s prior written approval of the form and
context in which it appears.
<PAGE> 5
Integrated Health Services, Inc.
March 30, 1994
Page 4
A copy of this report and the working papers from which it was prepared will be
kept in our office files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ G. Allen Houpt, III
--------------------------------
G. Allen Houpt, III
Managing Director
Commonwealth of Pennsylvania
Real Estate Broker's License
Number RB-20059
GAH:dvm
<PAGE> 6
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
Number
-------
<S> <C>
Statement of Basic Assumptions and Limiting Conditions
Summary of Salient Facts and Conclusions
Subject Photographs
Introduction 1
Property Identification 1
Purpose of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Asset Rights Appraised 2
Effective Date of the Appraisal 2
Definition of Value 2
Compliance 3
Competency 3
Sale History 4
Reasonable Exposure Time 4
History and Nature of the Business Environment 6
State Nursing Home Environment 14
Regional and Market Analysis 18
Neighborhood and Site Description 23
Real Estate Tax and Assessment Analysis 26
Highest and Best Use 29
Valuation Methodology 32
Income Approach 33
Cost Approach 41
Correlation of Value 66
Certification 67
ADDENDUM
Supporting Schedules A-1
EXHIBIT SECTION
Exhibit A - Legal Description E- 1
Exhibit B - Building Description E- 2
Exhibit C - Land Improvements Description E- 6
Exhibit D - Professional Qualifications E- 7
</TABLE>
<PAGE> 7
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
The appraisers assume:
1. That the subject property is marketable and that the property is free
and clear of all liens, encumbrances, easements and restrictions
unless otherwise noted.
2. No liability for matters legal in nature.
3. That ownership and management will be in competent and responsible
hands. We have not been engaged to evaluate the effectiveness of
Management and we are not responsible for future marketing efforts and
other Management actions upon which actual results will depend.
4. That the property will not operate in violation of any applicable
government regulations, codes, ordinances or statutes. It is assumed
that all required licenses, certificates of occupancy, consents or
other legislative or administrative authorization from all local,
state or national governmental or private entities or organizations
have been or can be obtained or renewed.
5. Unless otherwise noted, that there will be no changes in reimbursement
or tax regulations.
6. That there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain. We further
assume that there are no regulations of any government entity to
control or restrict the use of the property unless specifically
referred to in the report.
7. That there are no significant changes in the supply and demand
patterns as indicated in this report. It is emphasized that this is
not a study of market feasibility, rather an appraisal of the property
under market conditions as observed as of the date of our market
research. These market conditions have been researched and are
believed to be correct; however, the appraisers assume no liability
should market conditions materially change because of unusual or
unforeseen circumstances.
The following limiting conditions are submitted with this report:
1. All of the facts, conclusions and observations contained herein are
consistent with information available as of the date of valuation.
Value is affected by economic conditions, local and national. We,
therefore, assume no liability for any unforeseen precipitous change
in the economy.
<PAGE> 8
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
2. The valuation applies only to the property described herein and was
prepared for the function stated in this report and should not be used
for any other purpose.
3. The appraisers have made no survey of the property. Any and all maps,
sketches and site plans are assumed to be correct, but no guarantee is
made as to their accuracy.
4. Information furnished by others is presumed to be reliable, and where
so specified in the report, has been verified; but no responsibility,
whether legal or otherwise, is assumed for its accuracy, and it cannot
be guaranteed as being certain.
5. The signatories herein shall not be required to give testimony or
attend court or be at any governmental hearing with reference to the
subject property unless prior arrangements have been made with
Valuation Counselors Group, Inc.
6. Disclosure of the contents of this report is governed by the bylaws
and regulations of professional appraisal organizations. Neither this
report nor any portions thereof shall be disseminated to the public
through public relations media, news media, advertising media, sales
media or any other public means of communication without the prior
written consent and approval of the appraisers and Valuation
Counselors Group, Inc.
7. No responsibility is taken for changes in market conditions after the
date of valuation, or for the inability of the property owner to find
a purchaser at the appraised value.
8. The legal description shown herein has been included for the sole
purpose of identifying the subject property. The figures have not
been verified by a licensed surveyor or legal counsel and should not
be used in any conveyance or any other legal document.
9. We were not aware of and the report does not take into consideration
the possibility of the existence of asbestos, PCB transformers, or
other toxic, hazardous, or contaminated substances and/or underground
storage tanks containing hazardous material. The report does not
consider the cost of encapsulation treatment or removal of such
material. If the client/property owner has a concern over the
existence of such conditions in the subject property, the appraisers
consider it imperative to retain the services of a qualified engineer
or contractor to determine the existence and extent of such hazardous
conditions. Such consultation should include the estimated cost
associated with any required treatment or removal of hazardous
material.
<PAGE> 9
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
10. The report, the final estimate of value and the prospective financial
analyses included herein are intended for your information. Neither
this report nor its contents nor any reference to Valuation Counselors
Group, Inc. may be included or quoted in any offering circular,
registration statement, prospectus, sales brochure, appraisal, loan
document or other document without Valuation Counselors Group, Inc.'s
prior written permission.
11. The estimate of the market value stated herein is the value of the
subject property as a single entity. No consideration was given to a
bulk sale or group purchase of properties. In the event that this
appraisal is used as a basis to set a market price, no responsibility
is assumed for the seller's inability to obtain a tenant or purchaser
at the value reported herein.
12. It is assumed that there are no outstanding issues related to fraud
and abuse statutes under the Medicare/Medicaid program which would
impact value.
13. It is assumed that the business has an adequate insurance plan.
14. A copy of this report and the working papers from which it was
prepared will be kept in our office files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value March 1, 1994
Date of Inspection March 17, 1994
Property Identification Mountain View Nursing Center
Property Location Sand Hill Road, Greensburg, Westmoreland County, Pennsylvania
Assets Appraised Tangible and Intangible Assets
Interest Appraised Leased Fee Estate
Number of Licensed Beds 137
Land Size 8.238 Acres
Improvement Description One story plus partial basement, Class C, masonry and wood framed nursing home consisting
of 52,727 gross square feet, built in 1971 with an addition in 1981.
INDICATIONS OF MARKET VALUE
Income Approach $9,800,000
Market Approach N/A
Cost Approach $4,800,000
Final Estimate of Market Value $9,800,000
REASONABLE EXPOSURE TIME Twelve Months
</TABLE>
<PAGE> 11
SUBJECT PHOTOGRAPHS
(Photo)
EAST VIEW LOOKING WEST
(Photo)
REAR VIEW, WEST LOOKING EAST
<PAGE> 12
SUBJECT PHOTOGRAPHS
(Photo)
INTERIOR - HALLWAY
(Photo)
INTERIOR - PATIENT ROOM
<PAGE> 13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property, known as Mountain View Nursing Center and doing business
as Integrated Health Services at Mountain View, consists of a 137 licensed bed
nursing home located at Sand Hill Road, in Greensburg, Westmoreland County,
Pennsylvania. For title reference and legal description, see the Exhibit
Section. The improvement consists of a 52,727 square foot building located on
an 8.238 acre site.
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the leased fee
estate as of the date specified within this report.
FUNCTION OF THE APPRAISAL
This report is to be used in connection with financing.
SCOPE OF THE APPRAISAL
This appraisal engagement has been conducted using applicable standard
appraisal techniques and in conformity with the Uniform Standards of
Professional Appraisal Practice (USPAP) as set forth by the Appraisal
Foundation. This appraisal entails the collection, analysis and description of
data pertaining to physical, legal and economic conditions that affect the use
and value of the subject property and any other relevant data that would
pertain to the appraisal of a healthcare facility. In our valuation of the
subject property, we have conducted the Income and Cost Approaches to value.
The Income Approach entailed a present value analysis of lease income. The
Cost Approach involved the estimation of the depreciated replacement cost of
the improvements based upon national cost publications, which was added to the
value of the land as if vacant. The Market Approach has not been utilized due
to the lack of transfers involving similar leased fee estate interests in
nursing facilities. We believe the lease payments include a return on assets
beyond the real
1
<PAGE> 14
INTRODUCTION
property. In accordance with Uniform Standards of Professional Appraisal
Practice (USPAP), an attempt must be made to estimate the value of the real
property from the value of other assets which may exist. However, an attempt
to ascertain the contribution of the various assets to income is nearly
impossible since the value of the tangible property is highly interrelated to
the business enterprise. Accordingly, as allowed by the departure provision of
USPAP, we have not provided an allocation of value between the real property
and other assets which may exist.
ASSET RIGHTS APPRAISED
The property rights appraised herein is the leased fee interest in the
property.
The interest is defined by the Appraisal Institute as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with
the right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession
at the termination of the lease.
EFFECTIVE DATE OF THE APPRAISAL
The date of this appraisal is March 1, 1994.
DEFINITION OF VALUE
For the purpose of this report, market value is defined 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, 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:
a) buyer and seller are typically motivated;
2
<PAGE> 15
INTRODUCTION
b) both parties are well informed or well advised and each
acting in what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
d) payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
e) 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.
COMPLIANCE
To the best of our knowledge, the analyses, opinions and conclusions that were
developed in this report, have been prepared in conformity with the Uniform
Standards of Professional Appraisal Practice (USPAP) of the Appraisal
Foundation and the Appraisal Institute.
COMPETENCY
From our understanding of the assignment to be performed, which we have
addressed in the Scope of this Appraisal, it is our opinion that we are fully
competent to perform this appraisal, due to the fact that:
a. The appraiser has full knowledge and experience in the
nature of this assignment.
b. All necessary and appropriate steps have been taken in order
to complete the assignment competently.
c. There is no lack of knowledge or experience that would
prohibit this assignment from being completed in a
professional competent manner or where an unbiased or
misleading opinion of value would be rendered.
3
<PAGE> 16
INTRODUCTION
SALE HISTORY
The real estate currently has as its fee titled owner a corporation by the name
of Mountain View Nursing Center, Inc. The operating company is called
Integrated Health Services, Inc., who has operated the facility since 1986.
Integrated Health Services, Inc. has advised us that the facility will be sold
in the immediate future to Crescent Capital for $9,775,000 and subsequently
leased to Integrated Health Services, Inc. pursuant to a ten year lease with
two optional ten year renewal periods. We have also been advised us that the
lease will be based on an initial rent of $1,061,000 with additional rent
provisions based upon general factors including the consumer price index and
net operating income levels of the facility.
According to public records, the subject property has not transferred ownership
in the past five years.
REASONABLE EXPOSURE TIME
Reasonable Exposure Time, for the purpose of this report, 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
market value on the effective date of the appraisal; a retrospective estimate
based upon an analysis of past events assuming a competitive and open
market."(1)
-------------------------
(1) Uniform Standards of Professional Appraisal Practice, 1993 Edition,
Washington, DC: The Appraisal Foundation, 1991, page 63 (SMT-6).
4
<PAGE> 17
INTRODUCTION
The concept of reasonable exposure encompasses not only adequate, sufficient
and reasonable time, but also adequate, sufficient and reasonable effort. This
concept also takes into consideration the type of property being appraised,
supply/demand conditions as of the effective date of the appraisal and the
analysis of historical sales information (sold after exposure and after
completion of negotiations between the seller and buyer). The reasonable
exposure period is, therefore, a function of price, time and use, not an
isolated estimate of time alone.
Reasonable exposure time is always presumed to precede the effective date of
the appraisal and differs for various types of real estate and under various
market conditions. Our estimate of exposure time is, therefore, based on the
subject property's determined Highest and Best Use as a healthcare facility in
a market where there is evidence of demand for such services.
The estimate of reasonable exposure time is not a predication, but rather, is
only a judgment made by the appraiser based on market conditions preceding the
effective date of the appraisal.
Based upon the determination of the subject's Highest and Best Use, with
consideration given to the overall condition and physical characteristics of
the subject, it is estimated that a reasonable exposure time preceding the
actual sale of the property and thus implicit in our value estimate is twelve
months.
5
<PAGE> 18
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
INDUSTRY OUTLOOK
The elderly care segment of the healthcare industry includes such providers as
nursing homes, personal care facilities and retirement centers. Demand for
elderly care services continues to increase with the growth of the elderly aged
segment of the United States population.
The sixty-five and over aged portion of the population is forecasted to grow an
additional 11% between 1990 and 1995. During 1990, the elderly aged sixty-five
years and over comprised 13.3% of the total United States population, as
compared to 11.3% as of the 1980 census report. Furthermore, the sixty-five
and over aged portion of the population is forecasted to increase to 14.1% of
total population by 1995.
United States population statistics and forecasts are provided on the following
table.
<TABLE>
<CAPTION>
FORECASTED UNITED STATES POPULATION
(THOUSANDS)
PERCENT CHANGE
1980 1990 1995 1980 TO 1990 1990 TO 1995
<S> <C> <C> <C> <C> <C>
Total U.S. 226,546 249,958 260,788 10.3% 4.3%
65 Years + 25,549 33,184 36,828 29.9% 11.0%
Percent of 11.3% 13.3% 14.1%
Total U.S.
75 Years + 9,969 14,257 16,935 43.0% 18.8%
Percent of 4.4% 5.7% 6.5%
Total U.S.
Source: Donnelley Demographics
</TABLE>
6
<PAGE> 19
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Another factor which has contributed to growth in demand for elderly care is
the increased life expectancy of the United States population.
As the average life expectancy for both men and women continues to increase, as
illustrated on the following table, the probability of an elderly person
requiring some form of healthcare service also increases.
<TABLE>
<CAPTION>
UNITED STATES LIFE EXPECTANCY
MEN WOMEN
AT BIRTH AT AGE 65 AT BIRTH AT AGE 65
<S> <C> <C> <C> <C>
1900 45.6 11.4 49.1 12.0
1910 50.2 11.4 53.7 12.1
1920 54.6 11.8 56.3 12.3
1930 58.0 11.4 61.4 12.9
1940 60.9 11.9 65.3 13.4
1950 65.3 12.8 70.9 15.1
1960 66.6 12.9 73.2 15.9
1970 67.1 13.1 74.8 17.1
1980 69.9 14.0 77.5 18.4
1990 72.3 15.1 79.9 19.9
2000E 73.4 15.7 81.1 20.8
Source: United States Bureau of the Census
</TABLE>
7
<PAGE> 20
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
While most major healthcare providers will benefit from the graying of America,
the nursing home industry will be the chief beneficiary. According to the
United States Commerce Department, long-term care spending for nursing home and
home care services during the 1988 to 2003 period is expected to increase twice
as quickly as the rate of growth of those receiving the services. Demand for
retirement centers and personal care facilities has also increased due to the
aforementioned demographic factors coupled with the fact that the majority of
young couples are employed full-time and unable to care for elderly parents at
home.
During the late 1980s, the growth of total facilities or number of units per
facility in the retirement industry increased significantly. In a survey
conducted by Contemporary Long-Term Care (CLTC), 72% of the fifty largest
retirement operators reported an increase in their total number of facilities
in 1988. The growth had slowed in 1989 with 55.6% of fifty-four operators
surveyed reporting increases in total facilities and number of units per
facility. The average number of units per facility increased from 84 to 122
units in the same survey.(2)
Growth in the retirement industry is forecasted to continue, but at a much
slower rate in regards to the growth exhibited during the 1980s.
United States healthcare costs have increased dramatically over the past few
years. From 1950 to 1990 healthcare expenditures have grown from 4.4% of gross
national product to 12.2% and are forecasted to grow to 16.4% by the year 2000.
Total federal government outlays for healthcare have increased from $24 per
capita in 1965 to $753 in 1990, with forecasts to increase to $1,810 by the
year 2000. Furthermore, health insurance premiums had increased 1,195% between
1970 and 1990.
- -------------------------
(2) "Growth Slows But Continues", CLTC, June, 1990.
8
<PAGE> 21
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
The current fiscal policy of the United States Government has left many states
responsible for providing services the federal government previously provided.
This has led to a fiscal crisis in many states. The direct impact of these
changes is seen in reduced Medicaid budgets. The problem is compounded by the
fact that Medicaid has grown faster than any other major state expenditure.
Currently, Medicaid covers slightly less than 50% of total patient days in
nursing homes. In 1989 Medicaid accounted for an average of 14% of the state
budget, compared to 9% a decade ago. A recent survey by the National
Association of State Budget Office indicates that a total of twenty-eight
states face budget deficits and thirty-two states expect Medicaid spending to
exceed current forecasts.(3)
Escalating costs and the faltering reimbursement system has forced many states
to consider decertification and withdrawal from the program. In addition,
long-term care providers in several states have turned to the courts in an
effort to receive fair reimbursement from the Medicaid system. Consequently,
widespread healthcare cost containment may exhibit downward pressure on the
value of long-term care facilities with a high reliance on Medicaid patients.
Long-term care by source of funds from 1960 to 2000 is presented on the
following table.
- -------------------------
(3) Pallarito, Karen, "Budget Deficit Threats to Shut
Out Medicaid Benefits", Modern Healthcare, April 22,
1991.
9
<PAGE> 22
COST APPROACH
Land Sale Number 2 Photograph
(Photo)
<PAGE> 23
<TABLE>
<CAPTION>
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Long-Term Care Expenditures Aggregate, Per Capita and Percent Distribution,
By Source of Funds: Selected Calendar Years 1960-2000
THIRD PARTIES
GOVERNMENT
DIRECT ALL PRIVATE OTHER STATE
PATIENT THIRD HEALTH PRIVATE AND
YEAR TOTAL PAYMENTS PARTIES INSURANCE FUNDS TOTAL FEDERAL LOCAL MEDICARE MEDICAID
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1960 100.0% 80.0% 20.0% --- 1.0% 1.0% 1.0% 1.0% --- --
1970 100.0% 46.9% 51.0% 0.0% 4.1% 46.9% 28.6% 18.4% 4.1% 28.6%
1980 100.0% 43.5% 56.5% 1.0% 3.0% 52.5% 30.5% 22.0% 2.0% 48.5%
1985 100.0% 49.5% 51.6% 1.2% 2.1% 48.4% 28.4% 20.0% 1.8% 44.6%
1990 100.0% 45.0% 55.0% 1.1% 1.9% 52.2% 32.4% 19.8% 4.7% 45.4%
1995 100.0% 42.9% 57.0% 1.3% 1.9% 53.8% 33.1% 20.7% 3.7% 48.1%
2000 100.0% 45.0% 55.0% 1.7% 2.0% 51.4% 31.7% 19.6% 3.4% 45.8%
Note: 0.0 denotes values less than $50 million.
Source: Health Care Financing Administration. Office of the Actuary.
Office of National Health Statistics. Baltimore, Maryland: December, 1991.
Forecasts: Sonnefeld, Sally; Waldo, Daniel; Lemieux, Jeffrey; McKusick, David,
Projections of National Health Expenditures Through the Year 2000. Health Care
Financing Review, Fall 1991, Vol. 13, No.1. Health Care Financing
Administration. Baltimore, Maryland: October, 1991.
</TABLE>
10
<PAGE> 24
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
As indicated, healthcare facilities currently derive most of their revenue from
government sources such as Medicaid, Medicare and the Veterans Administration
and from private sources such as personal funds and insurance programs. The
Medicaid program, which accounts for over 45% of the United States nursing home
revenues, typically pays rates significantly lower than Medicare or private
rates.
Medicaid covers the skilled or intermediate nursing home costs of qualified low
income residents for an unlimited period. Medicare only pays part of the
skilled nursing home costs incurred by qualified residents during a limited
period. In addition, nursing homes must meet strict federal guidelines in
order to qualify as Medicare certified for reimbursement. Therefore, only a
low percentage of nursing home patients qualify for Medicare coverage relative
to Medicaid. However, nursing homes that attract a higher percentage of
Medicare or private pay patients typically have higher operating margins than
similar facilities with a higher Medicaid census.
Competition is increasing among nursing homes for the more lucrative Medicare
and private pay patients. For example, many nursing homes have been developing
new services such as multiple levels of care, retirement facilities,
Alzheimer's and ventilator programs and other specialized services for niche
markets.
In addition, as acute care hospitals have experienced lower reimbursement
levels and declining occupancy rates, many have expanded into skilled nursing
services to boost revenues. According to a 1986 survey conducted by the
American Hospital Association, Chicago, approximately 19% of hospitals own or
operate skilled nursing facilities, 14% operate swing bed programs (use empty
acute care beds for long-term care) and 12% own or operate intermediate care
facilities. Competition from swing bed programs is likely to intensify as more
hospitals qualify for Medicare reimbursement under this program.
11
<PAGE> 25
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Although nursing facilities benefit from increasing demand and changes in
Medicare reimbursement, widespread healthcare inflation concerns will keep
downward pressure on nursing home revenues. Federal, state and local
governments, along with insurance companies and other third party payers, are
continually seeking ways to contain healthcare expenditures. The focus on
acute care cost containment is spreading to all types of healthcare facilities.
CONCLUSION
Although the healthcare industry, as a whole, has experienced good growth over
the past several years, the news is not all good. An estimated thirty-eight
million Americans have no health insurance coverage at all with children
accounting for 36% of this total. Currently, as many as another fifty million
Americans are believed to have inadequate coverage. The percentage of total
healthcare costs of the United States gross national product (GNP) continually
increases every year and it is estimated that it will consume 28% of the GNP by
the year 2010.
There are currently a number of proposals before the Senate and House of
Representatives' committees to change the current structure of the healthcare
industry. Some of these proposals call for a form of national healthcare with
others leaning towards a heavily regulated form of a free-enterprise system.
All the proposals currently being debated have a great number of controversial
issues, which makes the passage of a new healthcare system very unlikely in the
foreseeable future. This plan and the speculation around it suggests the
possible merging of the Medicare and Medicaid programs, putting spending
capitalizations at an 8% level, making greater utilization of managed care and
managed competition and the creation of a National Health Care Board to oversee
the creation of Healthcare Insurance Purchasing Cooperatives (HIPCs). It is
generally felt by the lawmakers like Congressman Stark, that there will be no
interference or cutbacks on long-term care. It is believed that the current
problems will reach a severe crisis level before some action by Congress will
occur.
12
<PAGE> 26
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Escalating costly regulation and inadequate reimbursement from Medicaid and a
shortage of qualified nurses have squeezed industry profits. In an effort to
remain profitable, many providers have diversified into medical specialty
units, which tend to be more profitable than typical nursing care. In any
case, the elderly care segment of the healthcare industry continues to evolve
in response to profound social and economic influences.
13
<PAGE> 27
STATE NURSING HOME ENVIRONMENT
Operating currently in the state of Pennsylvania are over 98,800 licensed and
approved nursing home beds in more than 950 nursing homes. The overall
occupancy in the state is estimated to be almost 95%. This percentage can be
compared with the national average of approximately 94%. In addition, Medicaid
patients represent at least 58% of the overall occupancy in Pennsylvania and at
least 70% of the national average.
CERTIFICATE OF NEED OVERVIEW
The Certificate of Need (CON) program was created by the national Health
Resource Planning Act of 1974, which mandated a system of state and local
agencies for the purpose of conducting CON reviews and other duties intended to
control the costs and accessibility of healthcare services. In 1980, the
Reagan Administration took the position that the program was ineffective with
respect to controlling healthcare costs and felt that the state should run the
programs. Although Congress re-authorized the program in 1981, federal funding
was reduced and states were given more control over the planning process. In
1986, Congress voted to end federal involvement in state planning activities.
The Federal Government repealed the CON system, effective January 1, 1987.
By the start of the third year without federal mandates or the assistance of
the CON program, a total of thirty-three states and the District of Columbia
still enforced these regulations. During the past three years, several trends
have developed according to the Healthcare Financing Administration's Office of
Intergovernmental Affairs. States have:
1) Liberalized their requirements by increasing expenditures
thresholds;
2) Streamlined review processes and expedited procedures for
selected projects;
3) Exempted certain types of projects from the review process; and
14
<PAGE> 28
STATE NURSING HOME ENVIRONMENT
4) Expanded CON regulations to include specialized nursing
services to include substance abuse treatment, inpatient
psychiatric services and trauma care.
Supporters of this deregulation contend that eliminating market barriers would
expand the number of available nursing beds, improve access in under-served
communities and hold down costs as providers compete with others to attract
patients. Opponents of decontrolled healthcare contend that bed supply would
increase, but in a haphazard manner that favored urban areas. Also, a rapid
increase in capacity would bankrupt the Medicaid program, as excess capacity
would drive up the cost of care.
Although the deregulation of the CON program greatly affected the nursing
industry, the most significant factor which is critical to the survival of
these facilities is the need for innovation. Such factors include
modernization of facilities, marketing to the community, specialization,
personal care of assisted units and contracting with hospitals.
Currently, the state of Pennsylvania still enforces a CON program. Under this
system, state and local planning agencies conduct CON reviews of capital
expenditures and develop state health plans which perform other functions to
ensure access to healthcare services and control rising costs.
For Pennsylvania, a CON is currently required for any new facility and for
expenditures above $2,000,000. Existing nursing homes are permitted every two
years to add up to the lesser of ten beds, or 10% of its certified bed
capacity. In this regard, a CON is a valuable nursing home asset since it is a
prerequisite to opening and operating a facility.
15
<PAGE> 29
STATE NURSING HOME ENVIRONMENT
BED NEED METHODOLOGY
In May 1991, Pennsylvania adopted a new bed methodology which estimates need by
county. Bed need estimates are based on the number of dependent elderly, their
forecasted population (starting with 1995 planning target year) and the
percentage of the dependents needing institutional care.
PENNSYLVANIA'S NEW CASE-MIX PAYMENT SYSTEM
In order to improve the state's payment system, Pennsylvania plans to change,
effective January 1, 1994, from the current methodology to a classification
methodology. So that this classification methodology is consistent with the
goals of the Omnibus Budget Reconciliation Act of 1987 (OBRA '87), the
Pennsylvania Medical Assistance Program has developed a prospective case-mix
payment system for nursing facilities.
The basis of this proposed case-mix payment system is the Research Utilization
Groups, Version III (RUG III), which will be used to classify residents into
case-mix indices from which rates will be based. Residents will be classified
as to their functions in critical areas of daily living. Activities of daily
living include bathing, eating and transfer. For those residents requiring
higher degrees of care, the facility will receive a greater reimbursement under
the new system. Classifications range from heavy rehabilitation to reduced
physical functioning. Each nursing facility will receive an overall case-mix
based upon the complexity of care offered. This new system is designed to
encourage facilities to take on patients requiring higher levels of care
through rewards for quality resident services and resident rehabilitation.
16
<PAGE> 30
STATE NURSING HOME ENVIRONMENT
Capital costs will be reimbursed under a new fair rental payment system. Each
facility in Pennsylvania has been appraised by December 1992 and a depreciated
replacement cost will have been determined. This value is added to a current
land value plus an equipment value to come up with an overall value of the
facility. A yield factor is then applied to impute a fair rental payment
amount. This payment will replace reimbursement for depreciation, interest,
real estate taxes and return on equity.
The new case-mix payment system, as implemented by the Pennsylvania Department
of Public Welfare, has been designed to be budget neutral, however, individual
providers may fair better or worse when the system takes effect. It is unclear
how the subject property will be affected by the change in the Medicaid system,
and our valuation is based upon existing reimbursement methodology.
17
<PAGE> 31
REGIONAL AND MARKET ANALYSIS
The subject is located in Unity Township, Greensburg, Westmoreland County,
which is situated in the western/central portion of Pennsylvania. The closest
major city is Pittsburgh, which is thirty-one miles west of Greensburg, the
county seat. Major north/south highways serving the area include U.S. 22 and
U.S. Highways 66, 819 and 119, and Routes 30, 136 and 130 which run east/west.
The major occupations within the county include clerical and sales at 13% of
the total work force. Professional, technical and officials/business
owners/administrators each account for 10% of the work force, or 22,000
employees each.
The top seven major employers in the county are Westmoreland Hospital, West
Penn Power Company, Bell of Pennsylvania, Super Value Retail Support Center,
PPG Industries, Stuarts Drug and Surgical Supply and Westinghouse ABB Power T
and D Circuit Breaker Division.
Healthcare facilities in the county include the Westmoreland Hospital, which
contains 294 beds. The county also contains seventeen nursing homes with an
excess of 220 beds. The largest facility is Westmoreland Manor with 540 beds.
A total of thirteen of these facilities have 100 beds or more.
According to Donnelley Demographics, the county's 1991 population is estimated
at 368,762 residents, a slight decrease from the 1980 level of 392,294
residents. In 1991, the elderly population comprised 16.5% of total the
population, or 60,839 residents. This represents a 25% increase from the
number of elderly residents in 1980 which was 48,711 residents, or 12.4% of the
total population.
18
<PAGE> 32
REGIONAL AND MARKET ANALYSIS
The county's 1996 total population is forecasted to decrease by approximately
3% to 357,757 residents. However, the county's elderly population (age
sixty-five and over) is expected to exhibit an increase of approximately 1.9%
over the 1991 level to 61,997 residents. This upward shift in elderly
residents from 16.5% to 17.3% of the population suggests increased demand for
long-term care services within the county.
Westmoreland County exhibited an average household income of $34,576 in 1991 as
compared with $19,973 in 1980. Average household income is expected to
increase to $41,139 in 1996, representing a growth of 18.9% over a five year
period. The average household income of residents sixty-five and over was
$39,769 in 1991 and was expected to increase to $40,886 in 1996.
19
<PAGE> 33
REGIONAL AND MARKET ANALYSIS
The following tables present selected demographic data for Westmoreland County.
An area map follows.
<TABLE>
<CAPTION>
TOTALS AND MEDIANS
1980 1991 % CHANGE 1996
CENSUS ESTIMATE 1980 TO 1991 FORECAST
<S> <C> <C> <C> <C>
Total Population 392,294 368,762 -6.0% 357,757
Total Households 139,233 139,642 0.3% 139,825
Household Population 387,739 364,207 -6.1% 353,202
Average Household Size 2.8 2.6 -6.3% 2.5
Average Household Income $19,973 $34,576 73.1% 41,139
Median Household Income $17,955 $28,114 56.6% $32,800
Source: Donnelley Demographics
</TABLE>
20
<PAGE> 34
REGIONAL AND MARKET ANALYSIS
<TABLE>
<CAPTION>
POPULATION BY AGE
1980 CENSUS 1991 ESTIMATE 1996 FORECAST
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
AGE
<S> <C> <C> <C> <C> <C> <C>
Total 392,294 100% 368,762 100% 357,757 100%
0 - 4 24,007 6.1% 23,050 6.3% 21,373 6.0%
5 - 9 27,062 6.9% 22,851 6.2% 22,105 6.2%
10 - 14 32,085 8.2% 21,784 5.9% 22,006 6.2%
15 - 19 33,605 8.6% 24,639 6.7% 21,618 6.0%
20 - 24 31,009 7.9% 29,064 7.9% 23,901 6.7%
25 - 29 30,133 7.7% 29,486 8.0% 27,121 7.6%
30 - 34 28,990 7.4% 27,322 7.4% 28,201 7.9%
35 - 39 23,504 6.0% 26,737 7.3% 26,080 7.3%
40 - 44 20,425 5.2% 25,838 7.0% 25,435 7.1%
45 - 49 20,810 5.3% 21,486 5.8% 24,551 6.9%
50 - 54 24,558 6.3% 18,257 5.0% 20,255 5.7%
55 - 59 25,295 6.4% 17,703 4.8% 16,979 4.7%
60 - 64 22,100 5.6% 19,706 5.3% 16,135 4.5%
65 - 69 18,178 4.6% 19,590 5.3% 17,390 4.9%
70 - 74 12,827 3.3% 16,166 4.4% 16,470 4.6%
75 - 79 8,486 2.2% 11,895 3.2% 12,705 3.6%
80 - 84 5,291 1.3% 7,312 2.0% 8,480 2.4%
85 + 3,929 1.0% 5,876 1.6% 6,952 1.9%
less than 15 83,154 21.2% 67,685 18.4% 65,484 18.3%
65 + 48,711 12.4% 60,839 16.5% 61,997 17.3%
75 + 17,706 4.5% 25,083 6.8% 28,137 7.9%
Median Age 33.1 36.2 37.4
Median Age Adult 44.3 44.0 45.1
Population
Source: Donnelley Demographics
</TABLE>
21
<PAGE> 35
REGIONAL AND MARKET ANALYSIS
AREA MAP
(MAP)
22
<PAGE> 36
NEIGHBORHOOD AND SITE DESCRIPTION
NEIGHBORHOOD ANALYSIS
The subject property is situated on the west side of Sand Hill Road,
approximately six miles from Greensburg, the main business area. Access to the
property is very good via Route 30 to Sand Hill Road. Major arteries serving
the area include Route 30 and U.S. Highway 119, which lead to Pittsburgh to the
west and Harrisburg to the east.
The area consists mainly of farmland, single family residences, small local
businesses and the Westmoreland Mall.
SITE DESCRIPTION
The subject land consists of an 8.238 acre (358,847 square foot) tract located
on Sand Hill Road in Greensburg, Pennsylvania. The parcel is irregularly
shaped with an average depth of 500 feet and frontage on Sand Hill Road of 672
feet. The tract is generally very rolling with adequate drainage.
The site is not located in a floodplain area. Access to the site is good via
two entrance/exits along Sand Hill Road, which are asphalt paved with no curbs
or sidewalks. Adjoining the property to the north is vacant land and a mobile
home property, to the south is a very steep vacant ravine, to the east is Sand
Hill Road then several mobile homes and single family residences and to the
west is vacant land and a steep ravine. The only possible detriment to the
subject site is the large ravine which is a portion of the property. All
utilities are available to the subject site.
Overall, the site is functional, marketable and well suited for the current use
of the property as a skilled nursing home.
A location map and plot plan are provided on the following pages.
23
<PAGE> 37
NEIGHBORHOOD AND SITE DESCRIPTION
LOCATION MAP
(Map)
24
<PAGE> 38
NEIGHBORHOOD AND SITE DESCRIPTION
PLOT PLAN
(Map)
25
<PAGE> 39
NEIGHBORHOOD AND SITE DESCRIPTION
ZONING
The city of Unity in the past year has enacted zoning restrictions for the
development of land use. According to zoning officials, the subject property
is located in an R-1 (Residential) zoning classification. Permitted uses in
this classification include single family residences, farms, parks and
recreation facilities, cemeteries, schools and churches. Minimum lot sizes are
40,000 square feet and minimum lot widths are 125 square feet. Since the
subject property was constructed prior to the enactment of the current zoning
regulations, the current use of the subject is a permitted use due to it being
grandfathered.
REAL ESTATE TAX AND ASSESSMENT ANALYSIS
The subject property is referred to on the Greensburg tax map of Westmoreland
County as parcel number 61-18-00-0-256. The property has been assessed at
$36,100 for the land and $524,280 for the building for a total of $560,380.
The county tax assessor has assessed the property at market value in 1994 by
applying a multiplier of 3 to the assessed value. A total millage rate of
54.69 per $1,000 of assessed value is applicable to the subject property. This
can be broken out as follows:
14.99 for County Taxes
2.20 for Township Taxes
37.50 for School Taxes
Therefore, total real estate taxes due in 1994 are calculated as follows:
$560,380 x 54.69 / $1,000 = $30,647
26
<PAGE> 40
NEIGHBORHOOD AND SITE DESCRIPTION
IMPROVEMENTS DESCRIPTION
The subject site is improved with a one story plus partial basement nursing
home containing 44,064 square feet above grade and 8,663 square feet of
basement area for a total of 52,727 square feet. The structure is a Class C,
wood frame and load bearing masonry wall building in good condition and
constructed in 1971 with an addition in 1981. During 1993 and 1994 certain
areas of the facility were renovated. These renovations consisted of the
replacement of carpeting and vinyl tile in various areas and repainting and
wallpapering throughout hallways and patient rooms. A laundry lift was added
to a rear exterior walkway which was enclosed. The building is constructed of
perimeter concrete footings and piers with the basement wall being concrete
block. The exterior walls are primarily face brick over concrete block with
aluminum frame windows. The floor structure consists of concrete slab for
ground floor areas and wood beam with wood sheathing in the elevated areas
above the partial basement. The roofing system is wood joists with wood
sheathing and composition shingle roof covering.
Partitioning in the building is primarily drywall on wood studs with some areas
containing concrete block partitioning. Wall finishes are primarily painted
block, wallpaper or painted drywall with ceramic tile in the shower/tub rooms.
The building contains seventy patient rooms, three shower/tub rooms, dining
areas, lounges, main lobby, kitchen, administrative offices, nurses' stations,
etc. The ceilings are primarily suspended acoustical panels or painted
drywall. The floor coverings are primarily carpeting in the hallways, offices
and dining areas with vinyl asbestos tile in the patient rooms, quarry tile in
the kitchen and ceramic tile in the shower/tub rooms. Some areas have exposed
concrete.
27
<PAGE> 41
NEIGHBORHOOD AND SITE DESCRIPTION
Plumbing fixtures are standard including seventy-six water closets, seventy-six
lavatories, six tubs and three showers. The building contains a central
electric heating system which is further serviced by central roof top and
through-wall air conditioning units. Lighting is primarily fluorescent
fixtures. Other features include an emergency generator, a walk-in freezer, a
stone fireplace, entrance canopies and a dry and wet fire sprinkler system.
LAND IMPROVEMENTS
Land improvements consist primarily of asphalt paving, gravel, concrete
sidewalks and general landscaping.
A detailed description and component pricing of the cost to replace the
building and land improvements is included in the Exhibit Section.
EQUIPMENT DESCRIPTION
Typical patient rooms contain triple crank beds, wood high back chairs with
vinyl covering, wood dressers and nightstands and cubicle curtains. Most of
these items are original fixtures, however, approximately one-third of the beds
were purchased within the past year. The overall condition of the equipment
found at the subject is average when compared with other similar facilities
inspected by Valuation Counselors Group, Inc.
28
<PAGE> 42
HIGHEST AND BEST USE
The Appraisal Institute defines highest and best use as follows:
The most profitable, likely use to which a property can be put. The
opinion of such use may be based on the highest and most profitable
continuous use to which the property is adapted and needed, or likely
to be in demand in the reasonably near future. However, elements
affecting value which depend upon events or a combination of
occurrences, which, while within the realm of possibility, are not
fairly shown to be reasonably probable, should be excluded from
consideration. Also, if the intended use is dependent upon an
uncertain act of another person, the intention cannot be considered.
The use of the land which may reasonably be expected to produce the
greatest net return to land over a given period of time. That legal
use which will yield to land the highest present value, sometimes
called optimum use.
In estimating the highest and best use, there are essentially four states of
analysis:
1. POSSIBLE USE - Uses which are physically possible for the site
in question.
2. PERMISSIBLE USE (LEGAL) - Uses permitted by zoning and deed
restrictions on the site in questions.
3. FEASIBLE USE - Possible and permissible uses which will produce
a net return to the owner of the site.
4. MAXIMALLY PRODUCTIVE USE - Among the feasible uses, that use
which will produce the highest net return of highest present
worth.
The highest and best use of the land (site) as if vacant and available for use
may be different from the highest and best use of the property as improved.
This will be true when the improvement is not an appropriate use and yet makes
a contribution to total property value in excess of the site.
29
<PAGE> 43
HIGHEST AND BEST USE
The following conditions must be met in determining the highest and best use:
The use must be legal.
The use must be probable, not speculative or conjectural.
There must be a profitable demand for such use and it must return to
land the highest net return for the longest period of time.
In order for the subject site to fulfill its highest and best use, that use
must meet four criteria. It must be (1) physically possible, (2) legally
permissible, (3) financially feasible, and (4) maximally productive. These
criteria are further explained as follows.
PHYSICALLY POSSIBLE
The size, shape, location, utility availability and terrain impose
physical restraints upon the type of uses possible for the subject.
Any use incompatible with the utility capacity or constraints imposed
by the size, shape or terrain would not be considered physically
possible. As mentioned in the land description section of this
report, the subject is irregularly shaped and contains a gross land
area of 8.238 acres. All utilities are available at the site and all
required site improvements are in place. The physical characteristics
of the site in terms of size, shape and topography are favorable for
flexible development. Overall, the physical aspects of the site are
such that they do not impose any constraints which would prevent the
site from being developed to its highest and best use.
LEGALLY PERMISSIBLE
Uses of the land must be permitted by zoning and deed restrictions and
other legal considerations. The subject site is currently zoned R-1
(Residential) by Unity Township. Nursing home use is a legally
permitted use in this zoning designation. Thus, the present use of
the site for a nursing home is a legal use.
30
<PAGE> 44
HIGHEST AND BEST USE
FINANCIALLY FEASIBLE
Any use of the subject which provides a financial return to the land
in excess of that required to satisfy operating expenses, financial
expenses and capital amortizations is considered financially feasible.
It is our opinion that the subject's current use as a nursing home is
financially feasible based upon the historic financial performance of
the facility.
MAXIMALLY PRODUCTIVE
Among the feasible uses, that use which will produce the highest net
return at the highest present worth. The subject site is improved
with a licensed 137 bed nursing home. The improvements are in good
condition with a significant remaining economic life. Functional
utility of the structure meets the market standards expected of a
nursing home and demand for this type of development is evident in the
marketplace. Based upon the supply and demand characteristics of the
nursing home industry in Pennsylvania, it is our opinion that the
highest and best use of the property, as improved, is its current use
as the site of a nursing home.
On reviewing the conditions and criteria for establishing the highest and best
use of the subject, we have examined the market for the subject services and
the regional and local economy as well as the existing physical and zoning
characteristics of the site. Additionally, we have considered the quality and
condition of the subject improvements amendable for use as a nursing home.
Based upon our review and analysis of the subject market, it is our opinion
that the highest and best use of the site as vacant would be for healthcare
development such as the subject and as improved would be for the continuation
of its current use as that of a nursing home.
31
<PAGE> 45
VALUATION METHODOLOGY
There are three generally accepted approaches to estimate the value of an
asset, which are summarized as follows:
INCOME APPROACH: This approach translates earnings, or expected cash
flows, into an estimate of value. It is based upon the premise that
value is determined by the present value of all future expected
income. Thus, forecasted earnings are converted to value through the
application of discount or capitalization rates derived from the
investment market.
MARKET APPROACH: This valuation approach is based upon the comparison
of the subject to the sales of similar assets in the marketplace. Two
methods of estimating value via this approach are the Primary Sales
Comparison Approach and the Secondary Market Approach. The Primary
Sales Comparison Approach entails the analysis of direct asset
transfers, while the Secondary Market Approach involves the analysis
of multiples derived from equity transfers in public secondary markets
or exchanges.
COST APPROACH: This procedure provides an indication of the value of
an asset by reducing an estimate of the current cost to reproduce or
replace an asset by an estimate of accrued depreciation. Depreciation
includes physical deterioration, functional and external (or economic)
obsolescence.
In general, the Income Approach is the most reliable approach to value an
income producing property. It best considers the income potential and risk
characteristics specific to the subject property. The Market Approach has not
been applied due to the lack of transfers of leased facilities. Nursing homes
typically transfer in fee simple estate, with the assets of the operating
company included. The interest considered in this appraisal is that of a
leased fee estate, and we were unable to locate meaningful sales of similar
interests to compare to the subject. The Cost Approach has limitations due to
the difficulty in quantifying the depreciation and obsolescence in the assets.
The Income and Cost Approaches are presented on the following pages.
32
<PAGE> 46
INCOME APPROACH
The Income Approach gives consideration to the net income expectancy from
rental of the property, and to the capitalization of this income in accordance
with prevailing returns on properties or investments of similar risks to
determine the amount at which ownership would be justified by a prudent
investor. Since it is the purpose of this appraisal to estimate the market
value of the leased fee estate, the Income Approach is considered to be the
most reliable method of valuation. The first step involves the estimating of
the subject's potential gross income. For this, we deduct reasonable
allowances for expenses to arrive at the indicate net income which is
capitalized into the value estimate.
ESTIMATE OF GROSS INCOME
Integrated Health Services, Inc. has represented that this facility will be
sold to Crescent Capital and leased back to Integrated Health Services, Inc.
The facility, including land, buildings, equipment and furnishings, will be
leased to Integrated Health Services, Inc. for a ten year period, with two, ten
year renewal options. Although we have not been provided with a copy of the
final lease, Integrated Health Services, Inc. has provided us with a lease
synopsis which indicates that the base rent in the first year will be
$1,061,000. In the second and third forecast years, contract rent is adjusted
1% annually. In subsequent years, additional rent has been based upon the
terms of the lease contract which stipulates the subsequent annual increases
will be increased by the greater of 1) 1% of the then-current minimum rent, or
2) the lesser of either 3.75%, or the greater of either 5% of the incremental
net operating income (before corporate allocations), or 67% the consumer price
index from the preceding period.
33
<PAGE> 47
INCOME APPROACH
In our Discounted Cash Flow forecast, we have assumed an initial ten year
holding period, and have assumed that Integrated Health Services, Inc. will
exercise the two, ten year renewal options. Revenue has been estimated based
upon contract rent comprised of base rent plus additional rent, which we have
assumed to be at market. Because of the scarcity of arm's length leases on
nursing facilities and the multitude of adjustments which would be required to
equate a lease comparable to the subject, revenue has been forecasted based
upon contract rent.
The incremental net operating income factor is calculated based upon the
incremental performance of the most recently ended fiscal year as compared with
the preceding year. The increment is then multiplied by a factor of 0.05.
The lease is a net lease with the lessee responsible for operating expenses.
Management costs have been estimated at 4% of revenue. This charge considers
the cost of collection and accounting for rents. We have also estimated
nominal reserves for replacement at $100 per bed, increasing with inflation.
Total expenses in the first forecasted year are estimated at $57,240, or 5.4%
of revenue. Net income is estimated at $1,003,760 in the first forecasted
year, increasing to $1,229,281 by the tenth year. Schedules A-1 through A-5 in
the Addendum to this report present the subject's historic and prospective
occupancy, payor mix and operating performance of the operating business. The
subject's prospective performance has been estimated based upon information
from Management in conjunction with historic performance. The operating
performance of the business has been analyzed to gauge the potential of the
Company to cover its rent obligations and is a factor in estimating additional
rent. Forecasted net operating income of the business enterprise amounts to
1.6 times lease payments in the first forecasted year, which appears to provide
adequate coverage.
34
<PAGE> 48
INCOME APPROACH
DISCOUNT RATE CALCULATION
CAPITALIZATION PROCESS AND DISCOUNT RATE
As the annual cash flow and reversionary values are estimated ten years into
the future, it is necessary to discount these values into a present value
estimate. Present value is today's cash lump sum which represents the current
value of the right to collect the future payments and reversion. It is the
aggregate value of the discounted future payments and reversion.
The discount rate used must reflect a sufficient rate of return for a developer
or owner of property over the holding period. The rate must take into
consideration the time value of money and charges for holding costs. The rate
must also reflect an adequate rate of return for the risk involved when
compared to other types of investments.
When analyzing discount rates, it is important to realize that all investments
are in competition with each other for the investment dollar. The investor has
a choice of: (1) bank rate securities such as government bonds, industrial or
municipal bonds and debentures, (2) stocks and other securities, or (3)
selected enterprises or other real estate investments at varying rates of
return. The acceptable rate of return to the investor is affected by
considerations of risk, burden of management, degree of liquidity and other
factors (including personal preference). The analysis quite often follows the
historical summation of these factors, known as a "built-up" rate.
As an example, an adjustment for risk is added to a safe or minimum risk rate
as an increment to compensate for the extent of risk believed to be involved in
the use of the capital sum. Another adjustment is usually made of nonliquidity
due to the time required to realize cash from the resale of the property. The
resale period may vary with the general marketability of the type of property
and the amount of the cash investment required.
35
<PAGE> 49
INCOME APPROACH
The principle of discounting money to be received in the future is based upon
the fact that today's dollar can be invested to earn a return, while the
expected future dollar not yet generated, cannot. The discount rate must
reflect what is called the opportunity cost of capital. Thus, the investor is
compensated by the discount rate for the current lost opportunity in investing
in alternative assets.
In order to determine the appropriate rate, we have reviewed current monetary
rates as of March 1994.
The following table presents yield rates associated with various types of
government and corporate securities as indicated by the March 1, 1994 Wall
Street Journal.
YIELD RATES AS INDICATED BY THE MARCH 1, 1994
WALL STREET JOURNAL
SECURITY YIELD
Prime Rate 6.00%
Ten Year U.S. Treasury Bonds 6.14%
Corporate Bonds
Aaa, Aa 6.20% to 7.42%
A, Baa 6.52% to 7.58%
Ba, C 9.44%
36
<PAGE> 50
INCOME APPROACH
As indicated by the following survey conducted by Real Estate Research
Corporation, required rates of return for commercial grade real estate were
approximately 5.6% to 5.9% above year treasury bonds in the first two quarters
of 1993.
Real Estate vis-a-vis Capital Market Returns*
Fourth Third
Quarter Quarter
1993 1993
Real Estate Yield (%) 11.7% 12.0%
Moody's Aa Utilities (%) 7.0% 7.4%
Moody's Aaa Corporate (%) 7.0% 7.2%
10 Year Treasuries (%) 5.3% 5.7%
*This survey was conducted in October, 1993 and reflects desired
returns for fourth quarter 1993 investments.
Source: Real Estate Research Corporation
As the subject property would have less liquidity and more risk than commercial
grade real estate, it is reasonable to expect that the discount rate would be
higher than the real estate yields presented. Several factors which influence
the selection of a discount rate include the following:
o Currently, there are restraints on supply through
licensure requirements which alter normal economics;
and
o The value of the facility is highly related to the
operation of the business which is involved in the
provision of services such as healthcare, dietary and
housekeeping operations which entail a higher level
of Management expertise.
37
<PAGE> 51
INCOME APPROACH
Therefore, given the alternative investments available and taking into
consideration the risks associated with real estate development and the
realization of the additional rent revenue, we believe a 12.5% discount rate
for the subject is appropriate. This return is considered equivalent to
investments with comparable risks available today for the same time period.
FINAL CASH FLOW
The earnings and cash flow forecasts in this analysis only cover a ten year
period. In reality, the property will generate earnings and cash flow well
beyond the five year forecast period. Therefore, the value of this distant
cash flow stream, called a "reversion" value, must be estimated.
We have assumed that Integrated Health Services, Inc. will exercise the renewal
options after the initial ten year lease period. Therefore, the reversion
value has been estimated based upon the capitalization of net cash flow in
forecast year eleven. We have used a terminal capitalization rate of 10% in
calculating the reversion value. According to Real Estate Research
Corporation's Fourth Quarter 1993 Investor Survey, terminal capitalization
rates for multifamily housing averaged 9.4%. Since the risk associated with
the subject is believed to be similar but slightly above that on multifamily
housing, we have added a risk premium to the average terminal capitalization
rate exhibited by multifamily housing. The reversion value has been discounted
to present value at the discount rate of 12.5%.
38
<PAGE> 52
INCOME APPROACH
INCOME APPROACH CONCLUSION
The sum of the annuity and reversion values estimated within the Discounted
Cash Flow Analysis represent the total value of the property. Based upon our
analysis, this value can be represented in the rounded amount of:
$9,800,000
=========
The following schedule presents the earnings forecast and Discounted Cash Flow
Analysis and indicated value.
39
<PAGE> 53
<TABLE>
<CAPTION>
INCOME APPROACH
SCHEDULE A
MOUNTAIN VIEW NURSING CENTER
DISCOUNTED CASH FLOW FORECAST
Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum Rent $1,061,000 $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116
Additional Rent 10,610 10,716 29,006 29,784 30,582
--------------------------------------------------------------------------------------
TOTAL REVENUE $1,061,000 $1,071,610 $1,082,326 $1,111,332 $1,141,116 $1,171,698
--------------------------------------------------------------------------------------
EXPENSES:
Management Fee: 42,440 42,864 43,293 44,453 45,645 46,868
Replacement Items 14,800 15,392 16,008 16,648 17,314 18,006
--------------------------------------------------------------------------------------
TOTAL EXPENSES 57,240 58,256 59,301 61,101 62,959 64,874
--------------------------------------------------------------------------------------
NET INCOME 1,003,760 1,013,354 1,023,025 1,050,231 1,078,158 1,106,824
DISCOUNT FACTOR 0.8889 0.7901 0.7023 0.6243 0.5549 0.4933
PRESENT VALUE 892,231 800,674 718,503 655,654 598,301 545,963
DISCOUNT RATE 12.5%
TERMINAL CAPITALIZATION RATE 10.0%
CONCLUSION OF VALUE
ANNUITY 5,957,547
REVERSION 3,886,121
==========
FIXED ASSET VALUE $9,843,668
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted
Year 7 Year 8 Year 9 Year 10 Year 11
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum Rent $1,171,698 $1,203,100 $1,235,343 $1,268,450 $1,302,444
Additional Rent 31,402 32,243 33,107 33,994 34,906
---------------------------------------------------------------------------------------
TOTAL REVENUE $1,203,100 $1,235,343 $1,268,450 $1,302,444 $1,337,350
---------------------------------------------------------------------------------------
EXPENSES:
Management Fee: 48,124 49,414 50,738 52,098 53,494
Replacement Items 18,727 19,476 20,255 21,065 21,908
---------------------------------------------------------------------------------------
TOTAL EXPENSES 66,851 68,889 70,993 73,163 75,402
---------------------------------------------------------------------------------------
NET INCOME 1,136,249 1,166,453 1,197,457 1,229,281 NET INCOME 1,261,948
CAP. RATE 10%
TERMINAL VALUE 12,619,482
DISCOUNT FACTOR 0.4385 0.3897 0.3464 0.3079 0.3079
PRESENT VALUE 498,202 454,619 414,846 378,552 REVERSION 3,886,121
DISCOUNT RATE
TERMINAL CAPITALIZATION RATE
CONCLUSION OF VALUE
ANNUITY
REVERSION
FIXED ASSET VALUE
</TABLE>
40
<PAGE> 54
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which the depreciated replacement cost of
the improvements and equipment is added. The replacement cost of the
improvements and equipment is adjusted for accrued depreciation resulting from
physical deterioration, functional obsolescence and external (or economic)
obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimation of the replacement cost of the
improvements and equipment.
o Estimation of the accrued depreciation from all
causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
LAND VALUATION
The appraised property consists of approximately 8.238 acres of land situated
along Sand Hill Road in Greensburg, Pennsylvania.
41
<PAGE> 55
COST APPROACH
Land valuation, as reported herein, assuming the site vacant is based upon the
following steps:
o A comparison with recent sales and/or asking prices
for similar land.
o Interviews with reliable real estate brokers and
other informed sources who are familiar with local
real estate activity.
o Our experience in estimating land values; and when
necessary, due to a lack of other available data,
segregation of purchase price of improved properties.
The following six sales are located within the general market area of the
subject property and are considered to be representative of market activity and
conditions as of the valuation date. To the best of our knowledge, all
property rights transferred were fee simple. The following sales, which were
verified by local brokers and members of the Appraisal Institute and by a
search of the land records of Westmoreland County, were considered arm's length
transactions and did not include any special or creative financing, except
where noted.
42
<PAGE> 56
COST APPROACH
LAND SALE NUMBER 1
<TABLE>
<S> <C>
Location: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-094
Grantor: Walter Z. and Ann M. Dillon
Grantee: Keystone Coca-Cola Bottling Corporation
Date of Transaction: August 5, 1993
Deed Book/Page: 3189/247
Consideration: $240,000
Land Size: 9.7034 Acres
Zoning: R-1B (Residential - Single Family)
Price Per Acre: $24,730
Verified By: County Records
Comments: The site is currently improved with Coca-Cola Bottling Corporation. The parcel has approximately 426
feet of frontage on Georges Station Road and 466 feet of frontage on Donohoe Road. The topography is
level and sloping at the rear.
</TABLE>
43
<PAGE> 57
COST APPROACH
Land Sale Number 1 (Plat Map)
(Map)
44
<PAGE> 58
COST APPROACH
Land Sale Number 1 Photograph
(Photo)
<PAGE> 59
COST APPROACH
LAND SALE NUMBER 2
<TABLE>
<S> <C>
Location: Donohoe Road, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-196
Grantor: Westmoreland County Industrial Development Corporation
Grantee: C.C. Incorporated Development Company
Date of Transaction: December 20, 1993
Deed Book/Page: 3221/349
Consideration: $200,000
Land Size: 5.565 Acres
Zoning: IND (Industrial)
Price Per Acre: $35,939
Verified By: County Records
Comments: The site is currently being cleared for development of a structure. This parcel is located
approximately one-half mile off of U.S. Highway 30.
</TABLE>
45
<PAGE> 60
COST APPROACH
Land Sale Number 2 (Plat Map)
(Map)
46
<PAGE> 61
COST APPROACH
LAND SALE NUMBER 3
Location: Unity Township, Westmoreland County,
Pennsylvania
Parcel Number: 61-19-00-0-164
Grantor: Keystone Waterproofing Company, Inc.
Grantee: Clyde W. Hood, John A. Onega and David C.
Hunter, Trustees of the Latrube Congregation of
Jehovah's Witness
Date of Transaction: September 10, 1991
Deed Book/Page: 3045/584
Consideration: $40,000
Land Size: 2 Acres
Zoning: R-4 (Apartment-Residential Use)
Price Per Acre: $20,000
Verified By: County Records
Comments: This parcel is currently improved with a
Jehovah's Witness Congregation.
47
<PAGE> 62
COST APPROACH
Land Sale Number 3 (Plat Map)
(Map)
48
<PAGE> 63
COST APPROACH
Land Sale Number 3 Photograph
(Photo)
<PAGE> 64
COST APPROACH
LAND SALE NUMBER 4
<TABLE>
<S> <C>
Location: U.S. Highway 30, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-16-00-0-189
Grantor: Westmoreland Company (Formerly Westmoreland Hardware Company)
Grantee: Revest Properties
Date of Transaction: August 1, 1990
Deed Book/Page: 2963/84
Consideration: $275,000
Land Size: 7.1469 Acres
Zoning: B-3 (Highway Business)
Price Per Acre: $38,478
Verified By: County Records
Comments: This sale is currently improved with a Comfort Inn hotel. The topography is level and steep in
places.
</TABLE>
49
<PAGE> 65
COST APPROACH
Land Sale Number 4 (Plat Map)
(Map)
50
<PAGE> 66
COST APPROACH
Land Sale Number 4 Photograph
(Photo)
<PAGE> 67
COST APPROACH
LAND SALE NUMBER 5
<TABLE>
<S> <C>
Location: Integrated Drive, Hempfield Township, Westmoreland County, Pennsylvania
Parcel Number: 50-21-12-0-048
Grantor: William Buildings, Inc.
Grantee: I.H. of Locust Valley Road, Inc.
Date of Transaction: May 30, 1990
Deed Book/Page: 2947/296
Consideration: $175,000
Land Size: 5.208 Acres
Zoning: R-5 (Residential)
Price Per Acre: $33,602
Verified By: County Records
Comments: This parcel is improved with an Integrated Health Services at Laurel View.
</TABLE>
51
<PAGE> 68
COST APPROACH
Land Sale Number 5 (Plat Map)
(Map)
52
<PAGE> 69
COST APPROACH
Land Sale Number 5 Photograph
(Photo)
<PAGE> 70
COST APPROACH
LAND SALE NUMBER 6
<TABLE>
<S> <C>
Location: Ligonier Street, Derry Township, Westmoreland County, Pennsylvania
Parcel Number: 45-34-00-0-119
Grantor: Bruce and Sheryl Hershock, Rodger and Elizabeth Ann Searfuss and Arnold Roger and Theresa Wigle
Grantee: Loyalhanna Health Care Associates
Date of Transaction: September 13, 1990
Deed Book/Page: 2973/219
Consideration: $130,000
Land Size: 6.59 Acres
Zoning: N/A
Price Per Acre: $19,727
Verified By: County Records
Comments: This parcel is improved with Loyalhanna Health Care, which is a competitor of the subject property.
</TABLE>
53
<PAGE> 71
COST APPROACH
Land Sale Number 6 (Plat Map)
(Map)
54
<PAGE> 72
COST APPROACH
Land Sale Number 6 Photograph
(Photo)
<PAGE> 73
COST APPROACH
Summary of Sales
SALE SIZE PRICE PER
NUMBER DATE (ACRES) ZONING ACRE
1 08/93 9.7034 R-1B $24,730
2 12/93 5.5650 IN $35,939
3 09/91 2.0000 R-4 $20,000
4 08/90 7.1469 B-3 $38,478
5 05/90 5.2080 R-5 $33,602
6 09/90 6.5900 N/A $19,727
ANALYSIS
In analyzing the land sales, certain elements should be considered when making
adjustments to the price of each comparable property. The elements of
comparison are: 1) market conditions (time); 2) location; and 3) physical
characteristics.
MARKET CONDITIONS (TIME)
The condition of the market may change between the
time of sale and the date of the appraisal and
adjustments would have to be made to reflect the
market. Changed market conditions result from
various causes such as inflation, deflation, changing
demand, changing supply and changing land use
patterns. The tendency over time is for land values
to appreciate. Based on analysis of the recent
economic conditions of the region, there is evidence
that values have trended upward slightly. The supply
of vacant land is somewhat plentiful and demand was
considered average to good.
60
<PAGE> 74
COST APPROACH
LOCATION
An adjustment for location may be required if the
locational characteristics of the comparable
properties are significantly different from those of
the subject. A property's location is analyzed in
terms of the relative time/distance relationship
between it and all likely destinations and origins.
The relationship is relative because the location of
a property can only be judged in relation to that of
others.
PHYSICAL CHARACTERISTICS
Physical characteristics differ between properties.
These differences may require a number of comparisons
and adjustments to the subject. An appraiser may be
required to judge the value that is added or lost by
the size and shape, corner influence, utilities, etc.
Size and shape can affect functional utility in
relation to optimum size and frontage to depth ratio.
The appraiser must also recognize that smaller tracts
of land typically sell for a higher unit price.
Typically, corner influence creates a higher unit of
value due to the frontage on two or more streets.
Also, the availability of utilities influences value.
No sale required an adjustment for property rights conveyed, financing, or
conditions of sale, as all were arm's length conveyances of the fee simple
estate with cash or conventional financing.
Land Sale Number 1 is located on Donohoe Road, Hempfield Township, and was
transferred on August 5, 1993. No adjustment was applied for market
conditions. This land sale contains 9.7034 acres and due to the similarity in
size to the subject property, an adjustment for size was not required. The
southern portion of the parcel is considered to be clear and level and has been
improved with the Coca-Cola Bottling Corporation manufacturing plant. Shape
and access features are considered to be comparable to the subject property,
therefore, adjustments for these physical attributes were not applied. Since
all utilities were available to the comparable, no adjustment was applied for
the factor of utilities.
56
<PAGE> 75
COST APPROACH
Land Sale Number 2 was transferred on December 20, 1993 and did not require an
adjustment for market conditions. Land Sale Number 2, like Land Sale Number 1,
is located on Donohoe Road, approximately two and one-half miles northwest of
the subject property, requiring no adjustment for location. Typically, parcels
with smaller land areas sell for a higher unit price than a larger parcel of
land. Land Sale Number 2 contains 5.565 acres and a downward adjustment was
applied for its smaller size. The topography is level and is gently sloping at
the northerly portion of the parcel. Currently, the lot has been cleared and
is being developed with a one story structure. Shape and access features are
considered to be comparable to the subject property, therefore, an adjustment
for these attributes was not required. Since all utilities were available to
the comparable, no adjustment was applied for the factor of utilities.
Land Sale Number 3 was transferred on September 10, 1991 and, according to
local appraisers and real estate brokers, land values have increased due to the
migration of development easterly from Pittsburgh. A slight adjustment was
applied to the comparable for market conditions. Land Sale Number 3 is
situated approximately five miles southeast of the subject in Derry Township
and required an upward adjustment for its inferior location. The comparable
sale, which has been improved with a Jehovah's Witness Congregation, is
situated on a two acre parcel. A downward adjustment was applied for the
factor of size. Since the comparable contains only a two acre parcel, its
permissible uses are lessened. Therefore, an upward adjustment was applied for
the factor of utility.
Land Sale Number 4 was transferred on August 1, 1990 and required an upward
adjustment for market conditions for the increase in land values since the sale
date. This comparable, which is located on U.S. Highway 30, is in a highly
commercialized area and warrants a greater land value than a property located
off this major highway. Therefore, a significant downward adjustment was
applied for its superior location. This comparable land sale has been improved
with a Comfort Inn hotel. The improvements have been developed on level
terrain with the remaining excess having a relatively steep topography. An
upward
57
<PAGE> 76
COST APPROACH
adjustment was applied for its inferior topography. This land sale contains
7.1469 acres and was considered to be comparable to the subject property,
therefore, an adjustment for land size was not applied.
Land Sale Number 5 was transferred on May 30, 1990 and required an upward
adjustment for market conditions. The comparable sale, located immediately off
U.S. Highway 30, is considered to be in a superior location to the subject
property, therefore, a downward adjustment was applied for location. The
comparable is considered to be level and gently sloping and is improved with an
Integrated Health Services at Mountain View facility. This comparable contains
5.208 acres and a downward adjustment was applied for its smaller land size.
Land Sale Number 6 was transferred on September 13, 1990 and an upward
adjustment was applied for market conditions. This comparable sale, located
approximately six miles northeast of the subject property in Derry Township, is
considered to be in an inferior location. An upward adjustment was applied for
location. The comparable has a similar level and gently sloping topography as
the subject property, therefore, no adjustment for topography was required.
Based upon the above analysis and conversations with local brokers and
authorities familiar with the subject real estate market, it is our opinion
that the subject 8.238 acres of land have a value equivalent to $25,000 per
acre, or the rounded amount of:
$206,000
=======
A land sales adjustment grid and comparable land sales map are provided as
follows:
58
<PAGE> 77
COST APPROACH
Land Sales Adjustment Grid
<TABLE>
<CAPTION>
CHARACTERISTICS SUBJECT SALE #1 SALE #2 SALE #3 SALE #4 SALE #5 SALE #6
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SALE PRICE/ACRE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
PROPERTY RIGHTS FEE SIMPLE SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
FINANCING NORMAL SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
CONDITION OF SALE NORMAL SAME SAME SAME SAME SAME SAME
ADJUSTED SALES PRICE $24,730 $35,939 $20,000 $38,478 $33,602 $19,727
MARKET CONDITIONS 0% 0% 5% 10% 10% 10%
ADJUSTED SALES PRICE $24,730 $35,939 $21,000 $42,326 $36,962 $21,700
LOCATION 0% 0% 20% -30% -10% 15%
PHYSICAL CHARACTERISTICS
TOPOGRAPHY 0% 0% 0% 10% 0% 0%
SIZE 0% -10% -10% 0% -5% 0%
ACCESS 0% 0% 0% 0% 0% 0%
UTILITY 0% 0% 10% 0% 0% 0%
NET ADJUSTMENTS 0% -10% 20% -20% -15% 15%
----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED SALES PRICE $24,730 $32,345 $25,200 $33,861 $31,418 $24,955
</TABLE>
59
<PAGE> 78
COST APPROACH
Land Sales Map
(Map)
60
<PAGE> 79
COST APPROACH
BUILDING AND LAND IMPROVEMENTS VALUATION
The building and land improvements have been valued on the basis of replacement
cost less accrued depreciation. The cost new was estimated using cost factors
obtained from the calculation section of Marshall Valuation Service (MVS), a
nationally recognized cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The soft costs reflect such items as
legal and accounting fees, feasibility studies, architect's fees and plans,
test borings, appraisal fees, superintending, carrying costs and other
contingency costs. To these we have added an amount representing
entrepreneurial profit.
Entrepreneurial profit is a necessary element in the motivation to construct
the improvements and represents an additional amount a developer would expect
to receive for construction of a similar project. The amount of
entrepreneurial profit varies according to the economic conditions and type of
development, but typically ranges from 10% to 20% of total project costs. We
have contacted several developers, contractors and other familiar with real
estate construction. Although each project will vary and each developer
expects a different rate of return, most anticipate a return that falls in the
above stated range. Based on these conversations, we have estimated
entrepreneurial profit to comprise 20% of our estimate of the replacement cost
of the building.
A description and pricing of the cost to replace the building and land
improvements is included in the Exhibit Section of this report.
The overall cost for the subject building was estimated at $5,536,963 inclusive
of all soft costs and entrepreneurial profit. This figure is equivalent to
$105.01 per square foot of gross building area. The land improvements have
been estimated at $74,881.
61
<PAGE> 80
COST APPROACH
Depreciation of a structure is its loss in value due to physical deterioration,
functional obsolescence and external (or economic) obsolescence. Economic life
is the period over which the improvements to the real estate contribute to the
value of the property. These terms are defined as follows:
PHYSICAL DETERIORATION: The loss in value due to
deterioration or ordinary wear and tear, i.e.,
natural forces taking their toll of the improvements.
This begins at the time the building is completed and
continues throughout its physical life.
FUNCTIONAL OBSOLESCENCE: The loss in value within
the property due to poor plan, functional inadequacy,
or super adequacy due to size, style, design or other
items. This form of depreciation occurs in both
curable and incurable forms.
EXTERNAL (OR ECONOMIC) OBSOLESCENCE: The loss in
value caused by forces outside the property itself.
It can take many forms such as excessive noise
levels, traffic congestion, abnormally high crime
rates or other factors which affect a property's
ability to produce an economic income thereby causing
a decline in desirability. Other forms of economic
obsolescence may include governmental restrictions,
excessive taxes or economic trends.
ECONOMIC LIFE: Economic life is the period over
which improvements to real estate contribute to
property value. The economic life of a good quality
healthcare facility is typically forty-five to fifty
years.
REMAINING ECONOMIC LIFE: Remaining economic life can
be defined as the number of years remaining in the
economic life of the structure or structural
components as of the date of the appraisal.
In estimating the overall economic life of the improvements, data on economic
lives, published by Marshall Valuation Service and the American Hospital
Association were considered. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
62
<PAGE> 81
COST APPROACH
In accordance with the guidelines of the MVS manual, it is estimated that the
building will have a total economic life of forty-five years. As stated
earlier, the subject property was constructed during 1971 with an addition in
1981 and renovations in 1993 and 1994. The subject, which has been well
maintained, was considered to be in good overall physical condition. We
estimate that the building has an effective age of twelve years, which equates
to a remaining useful life of approximately thirty-three years. The amount of
physical deterioration attributable to the building is calculated on an
economic age/life method, which is the ratio of the building's effective age to
its total economic life. Based on this premise, total physical deterioration
of 26.7% is imputed to the building.
As stated previously, the improvements have been well maintained, are in good
overall condition and are considered modern and functional in all respects. A
thorough inspection of the subject property revealed that, while typical wear
and tear for a building of this age has occurred, no significant items of
deferred maintenance were noted. Based on this knowledge, it is our opinion
that the subject does not suffer from functional obsolescence. Furthermore, it
is our opinion that the subject property does not suffer from any undue
economic obsolescence.
Based upon the previous analysis, total accrued depreciation from all causes of
26.7% is imputed to the subject building.
The elements that make up the land improvements have shorter economic lives
than that of the building. We have estimated the aggregate economic life of
these items to be twenty years with an effective age of twelve years, which
equates to an average remaining useful life of eight years. The amount of
accrued depreciation attributable to the land improvements has also been
calculated on an economic age/life basis, resulting in a 60% depreciation
estimate.
63
<PAGE> 82
COST APPROACH
The estimate of the depreciated replacement costs of the building and land
improvements is presented as follows:
DEPRECIATED
REPLACEMENT REPLACEMENT
ASSET COST DEPRECIATION COST
Building $5,536,963 $1,478,369 $4,058,594
Land Improvements 74,881 44,929 29,952
TOTAL $5,611,844 $1,523,298 $4,088,546
EQUIPMENT VALUATION
Nursing home equipment includes, but is not limited to, items such as: all
patient room furniture; kitchen utensils, appliances, dinnerware and
accessories; office machines, desks, chairs and files; maintenance and
housekeeping machines and tools; laundry appliances; lounge furniture;
audio/visual equipment and chapel furnishings; nursing items including
monitoring devices, chart racks, medication carts; and items for physical
therapy including parallel bars, training steps, pulleys and hydrocollators.
Depreciated equipment values in nursing homes typically range from $2,000 to
$4,000 per bed. Generally the low end of this range represents equipment in
facilities which is either highly depreciated, low in quality or low in volume
due to smaller common areas and office space. A newer facility, or a facility
which has a high percentage of private patients and a location in an affluent
area, will generally have an equipment value at the high end of the range.
64
<PAGE> 83
COST APPROACH
The patient rooms are equipped with triple crank beds, metal and laminated wood
overbed tables, wood bedside cabinets and bureaus and vinyl covered wood high
back side chairs. The quality of the equipment found at the subject is good.
Based on our experience, it is estimated that the value of the equipment in use
can be reasonably represented at $3,500 per bed, which when multiplied by 131
operating beds, indicates a market value for all equipment of:
$458,500
=======
CONCLUSION
Based upon the investigation, as previously defined, the results of the Cost
Approach, as of November 1, 1993 are reasonably represented as follows:
Land $ 206,000
Building 4,058,594
Land Improvements 29,952
Equipment 458,500
----------
TOTAL $4,753,046
ROUNDED $4,800,000
==========
65
<PAGE> 84
CORRELATION OF VALUE
Each of the three traditional approaches to value have been considered, and we
have applied the Income and Cost Approaches. The Market Approach has not been
applied due to the lack of sales of similar leased fee estate interests as the
subject. While the approaches are independently developed, the same
fundamental principles of valuation and economics form the logical basis for
each approach. The indications of value by the two approaches are as follows:
Income Approach . . . . . . . . . . . . . . . . . . $9,800,000
Market Approach . . . . . . . . . . . . . . . . . . N/A
Cost Approach . . . . . . . . . . . . . . . . . . . $4,800,000
The Income Approach involved a detailed analysis of the earnings potential of
the property. The Income Approach best considers the physical characteristics,
earnings potential and risk specific to the subject entity. Because of the
limitations inherent in the Cost and Market Approaches, the value estimated by
the Income Approach was considered the best representation of value for the
subject.
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, in light of the complexity of estimating the
replacement cost and depreciation of the various components in this approach,
it is not necessarily the most reliable of the value estimates.
Based upon the analysis as presented in this report, it is estimated that the
market value of the leased fee interest in Mountain View Nursing Center, as of
March 1, 1994, can be represented in the rounded amount of:
$9,800,000
=========
66
<PAGE> 85
CORRELATION OF VALUE
We certify that, to the best of our knowledge and belief...
o The statements of fact contained in this
report are true and correct, and that this
report has been prepared in conformity with
the Uniform Standards of Professional
Appraisal Practice of The Appraisal
Foundation and the Principles of Appraisal
Practice and Code of Ethics of the American
Society of Appraisers.
o 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.
o We have no present or prospective interest in
the property that is the subject of this
report; we have no personal interest or bias
with respect to the parties involved.
o The appraisal assignment was not based upon a
requested minimum valuation, a specific
valuation, or the approval of a loan.
o Our compensation is not contingent on an
action or event resulting from the analyses,
opinions or conclusions in, or the use of,
this report.
o John A. Van Havere has personally inspected
the property and Wade A. Collins and
Catherine M. Bernard have provided
professional assistance.
/s/ Wade A. Collins
- -------------------------------------------
Wade A. Collins, Vice President, Healthcare
Valuation Counselors Group, Inc.
/s/ Catherine M. Bernard
- -------------------------------------------
Catherine M. Bernard, Manager, Healthcare
Valuation Counselors Group, Inc.
/s/ John A. Van Havere
- -------------------------------------------
John A. Van Havere, Staff Appraiser
Valuation Counselors Group, Inc.
67
<PAGE> 1
EXHIBIT 10.31
AN APPRAISAL OF
INTEGRATED HEALTH SERVICES OF
ST. LOUIS AT GRAVOIS
ST. LOUIS, MISSOURI
FOR
INTEGRATED HEALTH SERVICES, INC.
AS OF MARCH 1, 1994
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
Princeton Pike Office Park, CN30
Princeton, New Jersey 08543-0030
(609) 896-0300
(Fax) 896-1849
March 30, 1994
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills Corporate Campus
Owings Mills, Maryland 21117
Attention: Mr. Daniel J. Booth
Director of Project Finance
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the value of the leased fee interest in the property comprising:
INTEGRATED HEALTH SERVICES OF ST. LOUIS AT GRAVOIS
10954 KENNERLY ROAD
ST. LOUIS, MISSOURI
The primary purpose of this valuation is to estimate the market value as of
March 1, 1994.
For the purpose of this report, "MARKET VALUE" is defined 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, 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:
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and
each acting in what he considers his own best
interest;
c) a reasonable time is allowed for exposure in the open
market;
<PAGE> 3
Integrated Health Services, Inc.
March 30, 1994
Page 2
d) payment is made in terms of cash in U.S. dollars or
in terms of financial arrangements comparable
thereto; and
e) 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.
Integrated Health Services of St. Louis at Gravois is a 167 licensed bed
nursing and rehabilitation facility which operates with 148 beds. The facility
provides skilled nursing care and complex care including ventilator and wound
care medical specialty units. We have appraised the property on a leased fee
basis which is defined as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession at
the termination of the lease.
We understand the facility is being acquired by Crescent Capital for $8,500,000
and leased to Integrated Health Services, Inc. at a base rent amount of
$922,250 in the first year with additional rent provisions in subsequent years
based upon various factors including increases in the consumer price index and
incremental net operating income. We have been informed the terms of the lease
is ten years with two option renewal periods of ten years.
This appraisal investigation included: a visit to the facility, discussions
with Management, a study of financial data, analysis of other data and research
of the market.
This appraisal was prepared in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP) requirements.
Based upon the procedures outlined in this report, it is estimated that the
market value of the leased fee interest in the assets comprising Integrated
Health Services of St. Louis at Gravois, as of March 1, 1994, is reasonably
represented in the rounded amount as follows:
$8,500,000
==========
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
This report considers estimates, assumptions and other information developed
from research of the market, knowledge of the industry and discussions during
which Management and Management's representatives have provided us with certain
information. Management is assumed to be competent and professional healthcare
providers.
<PAGE> 4
Integrated Health Services, Inc.
March 30, 1994
Page 3
Some assumptions inevitably will not materialize and unanticipated events and
circumstances may occur; therefore, actual results achieved may vary from the
forecasts and the variations may be material. We have not, as part of this
valuation, performed an examination or review in the accounting sense of any of
the financial information used and, therefore, do not express an opinion or
other form of assurance with regard to the same. We have no responsibility to
update our report for events and circumstances occurring after the date of this
report. The information furnished to us by others is believed to be reliable,
but no responsibility for its accuracy is assumed.
This appraisal report consists of the following:
o This letter outlining the services performed;
o A Statement of Basic Assumptions and Limiting
Conditions;
o A Summary of Salient Facts and Conclusions;
o Subject Photographs;
o A Narrative Section detailing the appraisal of the
enterprise;
o Certification;
o An Addendum containing the business enterprise
schedules; and
o An Exhibit Section containing supplementary data.
Neither the whole, nor any part of this appraisal nor any reference thereto may
be included in any document, statement, appraisal or circular without
Valuation Counselors Group, Inc.'s prior written approval of the form and
context in which it appears.
<PAGE> 5
Integrated Health Services, Inc.
March 30, 1994
Page 4
A copy of this report and the working papers from which it was prepared will be
kept in our office files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ G. Allen Houpt, III
-----------------------
G. Allen Houpt, III
Managing Director
<PAGE> 6
Integrated Health Services, Inc.
March 30, 1994
Page 5
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
Number
<S> <C>
Statement of Basic Assumptions and Limiting Conditions
Summary of Salient Facts and Conclusions
Subject Photographs
Introduction 1
Property Identification 1
Purpose of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Asset Rights Appraised 2
Effective Date of the Appraisal 2
Definition of Value 2
Compliance 3
Competency 3
Sale History 4
Reasonable Exposure Time 4
History and Nature of the Business Environment 6
Regional and Market Analysis 14
Neighborhood and Site Description 20
Real Estate Tax and Assessment Analysis 22
Improvements Description 25
Highest and Best Use 28
Valuation Methodology 31
Income Approach 32
Cost Approach 40
Correlation of Value 58
Certification 59
ADDENDUM
Business Enterprise Schedules A- 1
EXHIBIT SECTION
Exhibit A - Legal Description E- 1
Exhibit B - Building Descriptions E- 2
Exhibit C - Land Improvements Description E-11
Exhibit D - Professional Qualifications E-12
</TABLE>
<PAGE> 7
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
The appraisers assume:
1. That the subject property is marketable and that the property is free
and clear of all liens, encumbrances, easements and restrictions
unless otherwise noted.
2. No liability for matters legal in nature.
3. That ownership and management will be in competent and responsible
hands. We have not been engaged to evaluate the effectiveness of
Management and we are not responsible for future marketing efforts and
other Management actions upon which actual results will depend.
4. That the property will not operate in violation of any applicable
government regulations, codes, ordinances or statutes. It is assumed
that all required licenses, certificates of occupancy, consents or
other legislative or administrative authorization from all local,
state or national governmental or private entities or organizations
have been or can be obtained or renewed.
5. Unless otherwise noted, that there will be no changes in reimbursement
or tax regulations.
6. That there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain. We further
assume that there are no regulations of any government entity to
control or restrict the use of the property unless specifically
referred to in the report.
7. That there are no significant changes in the supply and demand
patterns as indicated in this report. It is emphasized that this is
not a study of market feasibility, rather an appraisal of the property
under market conditions as observed as of the date of our market
research. These market conditions have been researched and are
believed to be correct; however, the appraisers assume no liability
should market conditions materially change because of unusual or
unforeseen circumstances.
The following limiting conditions are submitted with this report:
1. All of the facts, conclusions and observations contained herein are
consistent with information available as of the date of valuation.
Value is affected by economic conditions, local and national. We,
therefore, assume no liability for any unforeseen precipitous change
in the economy.
<PAGE> 8
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
2. The valuation applies only to the property described herein and was
prepared for the function stated in this report and should not be used
for any other purpose.
3. The appraisers have made no survey of the property. Any and all maps,
sketches and site plans are assumed to be correct, but no guarantee is
made as to their accuracy.
4. Information furnished by others is presumed to be reliable, and where
so specified in the report, has been verified; but no responsibility,
whether legal or otherwise, is assumed for its accuracy, and it cannot
be guaranteed as being certain.
5. The signatories herein shall not be required to give testimony or
attend court or be at any governmental hearing with reference to the
subject property unless prior arrangements have been made with
Valuation Counselors Group, Inc.
6. Disclosure of the contents of this report is governed by the bylaws
and regulations of professional appraisal organizations. Neither this
report nor any portions thereof shall be disseminated to the public
through public relations media, news media, advertising media, sales
media or any other public means of communication without the prior
written consent and approval of the appraisers and Valuation
Counselors Group, Inc.
7. No responsibility is taken for changes in market conditions after the
date of valuation, or for the inability of the property owner to find
a purchaser at the appraised value.
8. The legal description shown herein has been included for the sole
purpose of identifying the subject property. The figures have not
been verified by a licensed surveyor or legal counsel and should not
be used in any conveyance or any other legal document.
9. We were not aware of and the report does not take into consideration
the possibility of the existence of asbestos, PCB transformers, or
other toxic, hazardous, or contaminated substances and/or underground
storage tanks containing hazardous material. The report does not
consider the cost of encapsulation treatment or removal of such
material. If the client/property owner has a concern over the
existence of such conditions in the subject property, the appraisers
consider it imperative to retain the services of a qualified engineer
or contractor to determine the existence and extent of such hazardous
conditions. Such consultation should include the estimated cost
associated with any required treatment or removal of hazardous
material.
<PAGE> 9
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
10. The report, the final estimate of value and the prospective financial
analyses included herein are intended for your information. Neither
this report nor its contents nor any reference to Valuation Counselors
Group, Inc. may be included or quoted in any offering circular,
registration statement, prospectus, sales brochure, appraisal, loan
document or other document without Valuation Counselors Group, Inc.'s
prior written permission.
11. The estimate of the market value stated herein is the value of the
subject property as a single entity. No consideration was given to a
bulk sale or group purchase of properties. In the event that this
appraisal is used as a basis to set a market price, no responsibility
is assumed for the seller's inability to obtain a tenant or purchaser
at the value reported herein.
12. It is assumed that there are no outstanding issues related to fraud
and abuse statutes under the Medicare/Medicaid program which would
impact value.
13. It is assumed that the business has an adequate insurance plan.
14. A copy of this report and the working papers from which it was
prepared will be kept in our office files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value March 1, 1994
Date of Inspection March 16, 1994
Property Identification Integrated Health Services of St. Louis at Gravois
Property Location 10954 Kennerly Road, St. Louis, St. Louis County, Missouri
Assets Appraised Tangible and Intangible Assets
Interest Appraised Leased Fee Estate
Number of Licensed Beds 167
Number of Operating Beds 148
Land Size 6.816 Acres
Improvement Description Two total story plus basement, Class C, masonry and steel framed nursing home
consisting of 49,719 gross square feet, built in 1966, 1975 and 1987 with
renovations in 1993/1994. There are also two residences located to the east of
the nursing home.
INDICATIONS OF MARKET VALUE
Income Approach $8,500,000
Market Approach N/A
Cost Approach $7,600,000
Final Estimate of Market Value $8,500,000
REASONABLE EXPOSURE TIME Twelve Months
</TABLE>
<PAGE> 11
SUBJECT PHOTOGRAPHS
(Photo)
NORTH (FRONT) ELEVATION LOOKING SOUTHEAST FROM
ACROSS KENNERLY ROAD
<PAGE> 12
SUBJECT PHOTOGRAPHS
(Photo)
EAST ELEVATION LOOKING WEST AT WING FROM
INTEGRATED HEALTH SERVICES OF
ST. LOUIS AT GRAVOIS
<PAGE> 13
SUBJECT PHOTOGRAPHS
(Photo)
REAR ELEVATION OF
10910 KENNERLY ROAD FROM NUMBER 7 KENNERLY MANOR ROAD
<PAGE> 14
SUBJECT PHOTOGRAPHS
(Photo)
FRONT ELEVATION OF
NUMBER 1 KENNERLY MANOR ROAD WHICH IS
SCHEDULED TO BE TORN DOWN
<PAGE> 15
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property, known as Integrated Health Services of St. Louis at
Gravois, consists of a 167 licensed bed nursing and rehabilitation facility
located at 10954 Kennerly Road, St. Louis, St. Louis County, Missouri. For
title reference and legal description, see the Exhibit Section. The
improvements consist of a 49,719 square foot building located on a 6.816 acre
site. The improvements also include two residential structures.
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the leased fee
estate as of the date specified within this report.
FUNCTION OF THE APPRAISAL
This report is to be used in connection with financing.
SCOPE OF THE APPRAISAL
This appraisal engagement has been conducted using applicable standard
appraisal techniques and in conformity with the Uniform Standards of Appraisal
Practice as set forth by the Appraisal Foundation. This appraisal entails the
collection, analysis and description of data pertaining to physical, legal and
economic conditions that affect the use and value of the subject property and
any other relevant data that would pertain to the appraisal of a healthcare
facility. In our valuation of the subject property, we have conducted the
Income and Cost Approaches to value. The Income Approach entailed a present
value analysis of lease income. The Cost Approach involved the estimation of
the depreciated replacement cost of the improvements based upon national cost
publications, which was added to the value of the land as if vacant. The
Market Approach has not been utilized due
1
<PAGE> 16
INTRODUCTION
to the dearth of transfers involving like interests in nursing facilities. We
believe the lease payments include a return on assets beyond the real property.
In accordance with Uniform Standards of Professional Appraisal Practice
(USPAP), an attempt must be made to estimate the value of the real property
from the value of other assets which may exist. However, an attempt to
ascertain the contribution of the various assets to income is nearly impossible
since the value of the tangible property is highly interrelated to the business
enterprise. Accordingly, as allowed by the departure provision of USPAP, we
have not provided an allocation of value between the real property and other
assets which may exist.
ASSET RIGHTS APPRAISED
The property rights appraised herein is the leased fee interest in the
property.
The interest is defined by the Appraisal Institute as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually consists
of the right to receive rent and the right to repossession at the
termination of the lease.
EFFECTIVE DATE OF THE APPRAISAL
The date of this appraisal is March 1, 1994.
DEFINITION OF VALUE
For the purpose of this report, market value is defined 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, 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:
2
<PAGE> 17
INTRODUCTION
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and each acting in
what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
d) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
e) 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.
COMPLIANCE
To the best of our knowledge, the analyses, opinions and conclusions that were
developed in this report, have been prepared in conformity with the Uniform
Standards of Professional Appraisal Practice (USPAP) of the Appraisal
Foundation and the Appraisal Institute.
COMPETENCY
From our understanding of the assignment to be performed, which we have
addressed in the Scope of this Appraisal, it is our opinion that we are fully
competent to perform this appraisal, due to the fact that:
a. The appraiser has full knowledge and experience in the nature of this
assignment.
b. All necessary and appropriate steps have been taken in order to
complete the assignment competently.
c. There is no lack of knowledge or experience that would prohibit this
assignment from being completed in a professional competent manner or
where an unbiased or misleading opinion of value would be rendered.
3
<PAGE> 18
INTRODUCTION
SALE HISTORY
The real estate currently has as its fee titled owner a partnership by the name
of Gravois Health Care, Inc., with the business enterprise doing business as
Integrated Health Services of St. Louis at Gravois. The operating company is
called Integrated Health Services, Inc. who has operated the facility since
1987.
According to public records, the subject property has not transferred in the
past five years. We understand the facility is under agreement for sale to
Crescent Capital for $8,500,000 and will be leased back to Integrated Health
Services, Inc.
REASONABLE EXPOSURE TIME
Reasonable Exposure Time, for the purpose of this report, 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
market value on the effective date of the appraisal; a retrospective estimate
based upon an analysis of past events assuming a competitive and open
market."(1)
The concept of reasonable exposure encompasses not only adequate, sufficient
and reasonable time, but also adequate, sufficient and reasonable effort. This
concept also takes into consideration the type of property being appraised,
supply/demand conditions as of the effective date of the appraisal and the
analysis of historical sales information (sold after exposure and after
completion of negotiations between the seller and buyer). The reasonable
exposure period is, therefore, a function of price, time and use, not an
isolated estimate of time alone.
- ------------------------
1 Uniform Standards of Professional Appraisal Practice, 1993 Edition,
Washington, DC: The Appraisal Foundation, 1991, page 63 (SMT-6).
4
<PAGE> 19
INTRODUCTION
Reasonable exposure time is always presumed to precede the effective date of
the appraisal and differs for various types of real estate and under various
market conditions. Our estimate of exposure time is, therefore, based on the
subject property's determined Highest and Best Use as a healthcare facility in
a market where there is evidence of demand for such services.
The estimate of reasonable exposure time is not a predication, but rather, is
only a judgment made by the appraiser based on market conditions preceding the
effective date of the appraisal.
Based upon the determination of the subject's Highest and Best Use, with
consideration given to the overall condition and physical characteristics of
the subject, it is estimated that a reasonable exposure time preceding the
actual sale of the property and thus implicit in our value estimate is twelve
months.
5
<PAGE> 20
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
INDUSTRY OUTLOOK
The elderly care segment of the healthcare industry includes such providers as
nursing homes, personal care facilities and retirement centers. Demand for
elderly care services continues to increase with the growth of the elderly aged
segment of the United States population.
The sixty-five and over aged portion of the population is forecasted to grow an
additional 11% between 1990 and 1995. During 1990, the elderly aged sixty-five
years and over comprised 13.3% of the total United States population, as
compared to 11.3% as of the 1980 census report. Furthermore, the sixty-five
and over aged portion of the population is forecasted to increase to 14.1% of
total population by 1995.
United States population statistics and forecasts are provided on the following
table.
<TABLE>
<CAPTION>
FORECASTED UNITED STATES POPULATION
(THOUSANDS)
PERCENT CHANGE
1980 1990 1995 1980 TO 1990 1990 TO 1995
<S> <C> <C> <C> <C> <C>
Total U.S. 226,546 249,958 260,788 10.3% 4.3%
65 Years + 25,549 33,184 36,828 29.9% 11.0%
Percent of 11.3% 13.3% 14.1%
Total U.S.
75 Years + 9,969 14,257 16,935 43.0% 18.8%
Percent of 4.4% 5.7% 6.5%
Total U.S.
Source: Donnelley Demographics
</TABLE>
6
<PAGE> 21
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Another factor which has contributed to growth in demand for elderly care is
the increased life expectancy of the United States population.
As the average life expectancy for both men and women continues to increase, as
illustrated on the following table, the probability of an elderly person
requiring some form of healthcare service also increases.
<TABLE>
<CAPTION>
UNITED STATES LIFE EXPECTANCY
MEN WOMEN
AT BIRTH AT AGE 65 AT BIRTH AT AGE 65
<S> <C> <C> <C> <C>
1900 45.6 11.4 49.1 12.0
1910 50.2 11.4 53.7 12.1
1920 54.6 11.8 56.3 12.3
1930 58.0 11.4 61.4 12.9
1940 60.9 11.9 65.3 13.4
1950 65.3 12.8 70.9 15.1
1960 66.6 12.9 73.2 15.9
1970 67.1 13.1 74.8 17.1
1980 69.9 14.0 77.5 18.4
1990 72.3 15.1 79.9 19.9
2000E 73.4 15.7 81.1 20.8
Source: United States Bureau of the Census
</TABLE>
7
<PAGE> 22
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
While most major healthcare providers will benefit from the graying of America,
the nursing home industry will be the chief beneficiary. According to the
United States Commerce Department, long-term care spending for nursing home and
home care services during the 1988 to 2003 period is expected to increase twice
as quickly as the rate of growth of those receiving the services. Demand for
retirement centers and personal care facilities has also increased due to the
aforementioned demographic factors coupled with the fact that the majority of
young couples are employed full-time and unable to care for elderly parents at
home.
During the late 1980s, the growth of total facilities or number of units per
facility in the retirement industry increased significantly. In a survey
conducted by Contemporary Long-Term Care (CLTC), 72% of the fifty largest
retirement operators reported an increase in their total number of facilities
in 1988. The growth had slowed in 1989 with 55.6% of fifty-four operators
surveyed reporting increases in total facilities and number of units per
facility. The average number of units per facility increased from 84 to 122
units in the same survey.(2)
Growth in the retirement industry is forecasted to continue, but at a much
slower rate in regards to the growth exhibited during the 1980s.
United States healthcare costs have increased dramatically over the past few
years. From 1950 to 1990 healthcare expenditures have grown from 4.4% of gross
national product to 12.2% and are forecasted to grow to 16.4% by the year 2000.
Total federal government outlays for healthcare have increased from $24 per
capita in 1965 to $753 in 1990, with forecasts to increase to $1,810 by the
year 2000. Furthermore, health insurance premiums had increased 1,195% between
1970 and 1990.
- ---------------------------
(2) "Growth Slows But Continues", CLTC, June, 1990.
8
<PAGE> 23
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
The current fiscal policy of the United States Government has left many states
responsible for providing services the federal government previously provided.
This has led to a fiscal crisis in many states. The direct impact of these
changes is seen in reduced Medicaid budgets. The problem is compounded by the
fact that Medicaid has grown faster than any other major state expenditure.
Currently, Medicaid covers slightly less than 50% of total patient days in
nursing homes. In 1989 Medicaid accounted for an average of 14% of the state
budget, compared to 9% a decade ago. A recent survey by the National
Association of State Budget Office indicates that a total of twenty-eight
states face budget deficits and thirty-two states expect Medicaid spending to
exceed current forecasts.(3)
Escalating costs and the faltering reimbursement system has forced many states
to consider decertification and withdrawal from the program. In addition,
long-term care providers in several states have turned to the courts in an
effort to receive fair reimbursement from the Medicaid system. Consequently,
widespread healthcare cost containment may exhibit downward pressure on the
value of long-term care facilities with a high reliance on Medicaid patients.
Long-term care by source of funds from 1960 to 2000 is presented on the
following table.
- ------------------------
(3) Pallarito, Karen, "Budget Deficit Threats to Shut Out Medicaid
Benefits", Modern Healthcare, April 22, 1991.
9
<PAGE> 24
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
<TABLE>
<CAPTION>
Long-Term Care Expenditures Aggregate, Per Capita and Percent Distribution,
By Source of Funds: Selected Calendar Years 1960-2000
THIRD PARTIES
GOVERNMENT
DIRECT ALL PRIVATE OTHER STATE
PATIENT THIRD HEALTH PRIVATE AND
YEAR TOTAL PAYMENTS PARTIES INSURANCE FUNDS TOTAL FEDERAL LOCAL MEDICARE MEDICAID
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1960 100.0% 80.0% 20.0% --- 1.0% 1.0% 1.0% 1.0% --- ---
1970 100.0% 46.9% 51.0% 0.0% 4.1% 46.9% 28.6% 18.4% 4.1% 28.6%
1980 100.0% 43.5% 56.5% 1.0% 3.0% 52.5% 30.5% 22.0% 2.0% 48.5%
1985 100.0% 49.5% 51.6% 1.2% 2.1% 48.4% 28.4% 20.0% 1.8% 44.6%
1990 100.0% 45.0% 55.0% 1.1% 1.9% 52.2% 32.4% 19.8% 4.7% 45.4%
1995 100.0% 42.9% 57.0% 1.3% 1.9% 53.8% 33.1% 20.7% 3.7% 48.1%
2000 100.0% 45.0% 55.0% 1.7% 2.0% 51.4% 31.7% 19.6% 3.4% 45.8%
Note: 0.0 denotes values less than $50 million.
Source: Health Care Financing Administration. Office of the Actuary. Office of National Health Statistics. Baltimore,
Maryland: December, 1991.
Forecasts: Sonnefeld, Sally; Waldo, Daniel; Lemieux, Jeffrey; McKusick, David, Projections of National Health Expenditures
Through the Year 2000. Health Care Financing Review, Fall 1991, Vol. 13, No.1. Health Care Financing
Administration. Baltimore, Maryland: October, 1991.
</TABLE>
<PAGE> 25
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
As indicated, healthcare facilities currently derive most of their revenue from
government sources such as Medicaid, Medicare and the Veterans Administration
and from private sources such as personal funds and insurance programs. The
Medicaid program, which accounts for over 45% of the United States nursing home
revenues, typically pays rates significantly lower than Medicare or private
rates.
Medicaid covers the skilled or intermediate nursing home costs of qualified low
income residents for an unlimited period. Medicare only pays part of the
skilled nursing home costs incurred by qualified residents during a limited
period. In addition, nursing homes must meet strict federal guidelines in
order to qualify as Medicare certified for reimbursement. Therefore, only a
low percentage of nursing home patients qualify for Medicare coverage relative
to Medicaid. However, nursing homes that attract a higher percentage of
Medicare or private pay patients typically have higher operating margins than
similar facilities with a higher Medicaid census.
Competition is increasing among nursing homes for the more lucrative Medicare
and private pay patients. For example, many nursing homes have been developing
new services such as multiple levels of care, retirement facilities,
Alzheimer's and ventilator programs and other specialized services for niche
markets.
In addition, as acute care hospitals have experienced lower reimbursement
levels and declining occupancy rates, many have expanded into skilled nursing
services to boost revenues. According to a 1986 survey conducted by the
American Hospital Association, Chicago, approximately 19% of hospitals own or
operate skilled nursing facilities, 14% operate swing bed programs (use empty
acute care beds for long-term care) and 12% own or operate intermediate care
facilities. Competition from swing bed programs is likely to intensify as more
hospitals qualify for Medicare reimbursement under this program.
11
<PAGE> 26
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Although nursing facilities benefit from increasing demand and changes in
Medicare reimbursement, widespread healthcare inflation concerns will keep
downward pressure on nursing home revenues. Federal, state and local
governments, along with insurance companies and other third party payers, are
continually seeking ways to contain healthcare expenditures. The focus on
acute care cost containment is spreading to all types of healthcare facilities.
CONCLUSION
Although the healthcare industry, as a whole, has experienced good growth over
the past several years, the news is not all good. An estimated thirty-eight
million Americans have no health insurance coverage at all with children
accounting for 36% of this total. Currently, as many as another fifty million
Americans are believed to have inadequate coverage. The percentage of total
healthcare costs of the United States gross national product (GNP) continually
increases every year and it is estimated that it will consume 28% of the GNP by
the year 2010.
There are currently a number of proposals before the Senate and House of
Representatives' committees to change the current structure of the healthcare
industry. Some of these proposals call for a form of national healthcare with
others leaning towards a heavily regulated form of a free-enterprise system.
All the proposals currently being debated have a great number of controversial
issues, which makes the passage of a new healthcare system very unlikely in the
foreseeable future. This plan and the speculation around it suggests the
possible merging of the Medicare and Medicaid programs, putting spending
capitalizations at an 8% level, making greater utilization of managed care and
managed competition and the creation of a National Health Care Board to oversee
the creation of Healthcare Insurance Purchasing Cooperatives (HIPCs). It is
generally felt by the lawmakers like Congressman Stark, that there will be no
interference or cutbacks on long-term care. It is
12
<PAGE> 27
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
believed that the current problems will reach a severe crisis level before some
action by Congress will occur.
Escalating costly regulation and inadequate reimbursement from Medicaid and a
shortage of qualified nurses have squeezed industry profits. In an effort to
remain profitable, many providers have diversified into medical specialty
units, which tend to be more profitable than typical nursing care. In any
case, the elderly care segment of the healthcare industry continues to evolve
in response to profound social and economic influences.
13
<PAGE> 28
REGIONAL AND MARKET ANALYSIS
The subject property is located in St. Louis, St. Louis County, Missouri. The
St. Louis Consolidated Metropolitan Statistical Area (CMSA) is a bistate region
consisting of the city of St. Louis, the four Missouri counties of St. Louis,
St. Charles, Franklin and Jefferson and the five Illinois counties of Clinton,
Madison, Monroe, St. Clair and Jersey. The St. Louis Primary Metropolitan
Statistical Area (PMSA) consists of the city of St. Louis, the Missouri
counties of St. Louis, St. Charles, Franklin and Jefferson and the Illinois
county of Monroe.
The St. Louis metropolitan area is located near the geographic and population
centers of the United States. According to Sales and Marketing Management, the
St. Louis PMSA is ranked twentieth in population, twentieth in number of
households and twenty-second in effective buying income. In median household
effective buying income, the St. Louis PMSA is ranked seventy-third, ahead of
other areas such as Atlanta, Indianapolis, Oklahoma City and Tulsa.
The area's location in the center of the United States and on a waterway system
has made the region a leading industrial and transportation center. The port
of St. Louis is the busiest inland port in the nation, with the St. Louis
district constituting the second largest railroad terminal in the country,
surpassed only by Chicago. St. Louis is served by fourteen trunk-line
railroads and five switching lines, with Amtrak providing passenger service to
a variety of cities in the nation. Trucking service is available with more
than 200 common carrier truck lines and numerous local lines operating in the
area. Four interstate highways serve the area, with I-70 linking Washington,
D.C. with the west, I-55 running from Chicago to New Orleans, I-44 connecting
St. Louis with I-40 at Oklahoma City and I-64 traveling inland from Virginia
to St. Louis.
Airline service is available from Lambert-St. Louis International Airport.
Eleven scheduled passenger airlines, eight commuter lines, one all-cargo
airline, two air freight cartage agents and fourteen air freight forwarders all
operate from the airport.
14
<PAGE> 29
REGIONAL AND MARKET ANALYSIS
The St. Louis metropolitan area enjoys a well diversified economy being a major
financial, manufacturing, telecommunications and trade and distribution center
serving the central United States. The area's largest employer is the
McDonnell Douglas Corporation, with approximately 33,000 St. Louis area
employees. In addition to design and manufacturing facilities for military and
aerospace equipment, McDonnell Douglas is headquarters for McAuto, one of the
nation's largest data processing centers. The area is home to two of the
nation's largest shoe manufacturers, Interco, Inc. and Brown Group, Inc., and
to Southwestern Bell, a major telecommunications firm. Other firms
headquartered in St. Louis include Monsanto Company, Ralston Purina Company,
Pet Inc., Peabody Coal Company, Seven-Up, General Dynamics, Graybar Electric
and Emerson Electric. In addition to headquarters, research and chemical
manufacturing facilities, Monsanto Company also has silicon chip manufacturing
facilities in the metropolitan area.
According to Donnelley Demographics, St. Louis County had approximately 392,675
residents in 1991 as compared with the 1980 census level of 453,085. This
represents a 13.3% decrease from 1980 to 1991. Population is estimated to
decrease further to 364,925 in 1996. The portion of the county's residents
over age sixty-five was 18.8%, or 73,847 residents in 1991 as compared with
17.6%, or 79,920 residents in 1980. While the percentage of elderly residents
has increased, the number of elderly residents has decreased approximately 7.6%
from 1980 to 1991. The county's elderly population is expected to decrease to
67,180 in 1996 representing 18.4% of the estimated 1996 forecasted population.
15
<PAGE> 30
REGIONAL AND MARKET ANALYSIS
The following tables present selected demographic data for St. Louis County.
<TABLE>
<CAPTION>
TOTALS AND MEDIANS
1980 1991 % CHANGE 1996
CENSUS ESTIMATE 1980 TO 1991 FORECAST
<S> <C> <C> <C> <C>
Total Population 453,085 392,675 -13.3% 364,925
Total Households 178,048 166,041 -6.7% 160,042
Household Population 443,305 382,920 -13.6% 355,170
Average Household Size 2.5 2.3 -7.4% 2.2
Average Household Income $14,723 $27,332 85.6% $33,443
Median Household Income $11,713 $20,545 75.4% $24,641
Source: Donnelley Demographics
</TABLE>
16
<PAGE> 31
REGIONAL AND MARKET ANALYSIS
<TABLE>
<CAPTION>
POPULATION BY AGE
1980 CENSUS 1991 ESTIMATE 1996 FORECAST
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
AGE
<S> <C> <C> <C> <C> <C> <C>
Total 453,085 100.0% 392,675 100.0% 364,925 100.0%
0 - 4 32,361 7.1% 28,677 7.3% 26,007 7.1%
5 - 9 30,768 6.8% 27,173 6.9% 25,370 7.0%
10 - 14 32,148 7.1% 25,918 6.6% 24,574 6.7%
15 - 19 39,676 8.8% 25,989 6.6% 24,664 6.8%
20 - 24 44,626 9.8% 27,800 7.1% 24,612 6.7%
25 - 29 38,121 8.4% 31,169 7.9% 24,051 6.6%
30 - 34 26,653 5.9% 33,980 8.7% 27,162 7.4%
35 - 39 19,472 4.3% 30,414 7.7% 30,111 8.3%
40 - 44 17,875 3.9% 22,251 5.7% 27,515 7.5%
45 - 49 19,712 4.4% 16,562 4.2% 20,448 5.6%
50 - 54 23,227 5.1% 15,049 3.8% 15,306 4.2%
55 - 59 25,003 5.5% 16,048 4.1% 13,793 3.8%
60 - 64 23,523 5.2% 17,798 4.5% 14,132 3.9%
65 - 69 23,803 5.3% 18,904 4.8% 15,805 4.3%
70 - 74 21,474 4.7% 17,363 4.4% 15,971 4.4%
75 - 79 16,927 3.7% 15,479 3.9% 13,687 3.8%
80 - 84 10,207 2.3% 11,568 2.9% 10,669 2.9%
85 + 7,509 1.7% 10,533 2.7% 11,048 3.0%
< 15 95,277 21.0% 81,768 20.8% 75,951 20.8%
65 + 79,920 17.6% 73,847 18.8% 67,180 18.4%
75 + 34,643 7.6% 37,580 9.6% 35,404 9.7%
Median Age 31.7 34.4 36.0
Median Age Adult 46.1 43.1 43.9
Population
Source: Donnelley Demographics
</TABLE>
17
<PAGE> 32
REGIONAL AND MARKET ANALYSIS
An area map is provided on the following page.
18
<PAGE> 33
REGIONAL AND MARKET ANALYSIS
AREA MAP
(PHOTO - MAP)
19
<PAGE> 34
NEIGHBORHOOD AND SITE DESCRIPTION
NEIGHBORHOOD ANALYSIS
The subject property is situated in the southwest quadrant of Highway 20 and
I-270 on Kennerly Road approximately ten miles from downtown St. Louis. Access
to the property is very good. The major artery serving the area includes I-270
which intersects all the major highways and interstates serving St. Louis in
all directions.
The area consists mainly of single family homes with numerous new developments
of $200,000 homes to many over $400,000 in value, scattered older homes on
large tracts and small individual commercial tracts.
Adjoining the property to the north is vacant land, to the east and south
single family homes and to the west new single family homes and the Friendship
Village Retirement Center.
A location map is provided on the following page.
20
<PAGE> 35
NEIGHBORHOOD AND SITE DESCRIPTION
LOCATION MAP
(PHOTO - MAP)
21
<PAGE> 36
NEIGHBORHOOD AND SITE DESCRIPTION
ZONING
The subject land sites are all zoned R-1, Residence District, by the county of
St. Louis, Missouri. This zoning requires a minimum site size of one acre
except those tracts of record prior to April 8, 1965 containing less area.
This would apply to the one lot adjoining the west side of the nursing home
site on Gravois Road which contains 1.88 acres.
Use of the property for a nursing home requires a CUP, Conditional Use Permit
under the April 8, 1965 zoning regulations of St. Louis County. The nursing
home met these requirements under its grandfather clause for the original
home, which was subsequently razed in 1987 and the 1975 addition, which secured
a building permit prior to 1965. In 1972, the nursing home wanted to expand
and a conditional use permit was approved zoning 6.816 acres for nursing home
use. This includes the nursing home and the two residential homes: 7 Kennerly
Manor Drive and 10910 Kennerly Road. The conditional use permit requires all
improvements on the 6.816 acre site be used in conjunction with the nursing
home operations. A subdivision permit is required to separate the two
residential improved sites out of the CUP zoning. It is assumed that the
subdividing could be reasonably obtained upon appropriate application to the
St. Louis County Planning Commission.
REAL ESTATE TAX AND ASSESSMENT ANALYSIS
The subject property is assessed a total of $766,280, which is comprised of
$55,120 for the land and $711,160 for the improvements. The city and county
tax rate in 1993 is 5.475 (plus 1.700 surcharge on the nursing home property)
per $100 of assessed value. Taxes in 1994 are estimated as follows:
22
<PAGE> 37
NEIGHBORHOOD AND SITE DESCRIPTION
<TABLE>
<CAPTION>
1994 Taxes
Parcel Number Parcel Number Parcel Number
28M540245 28M530059 28M540256 Totals
(4.22 Acres) (0.716 Acres) (1.88 Acres) (6.816 Acres)
<S> <C> <C> <C> <C>
Land $ 40,510 $ 5,680 $ 8,930 $ 55,120
Improvements 698,050 --- 13,110 711,160
Total $ 738,560 $ 5,680 $ 22,040 $ 766,280
1993 Taxes $52,991.68 $310.98 $1,206.69 $54,509.35
</TABLE>
SITE DESCRIPTION
The appraised land consists of a total 6.816 acre site. The nursing home is
situated on a 4.22 acre (183,823 square foot) site fronting about 1,088 feet
along Kennerly Road on the north and east lines which includes 10910 and 10980
Kennerly Road. The topography is generally level at street grade along the
frontage with a slight slope to the west and downward to basement floor grade
at the rear. The slope is then steeper to the rear south and west lines. The
shape is rectangular with an angled east line.
Residence 7 Kennerly Manor Drive (formerly Ozarkdale Drive) has frontage of
about 150 feet along the curve of the street and is a part of the total 6.816
acre CUP nursing home zoning. The grade is gently sloping from the street to
the front of the building and drops off to basement level at the rear and
continues downward to the north. This site contains 1.88 acres and is also CUP
zoned. The site is adjacent to the east line of the two acre excess land site.
23
<PAGE> 38
NEIGHBORHOOD AND SITE DESCRIPTION
The residence at 10910 Kennerly Road is also a part of the CUP zoned site and
is located in the extreme southeast corner of the overall tract fronting along
Kennerly Road on its east and southeast lines and along Kennerly Manor Drive on
its south line. The site grade is gently sloping from the street frontage to
the front of the building and drops off to basement level at the rear and
continues downward to the north. The vacant land at 10980 Kennerly Road
consists of 0.716 acre and is zoned R-1. It follows the terrain of the main
facility and is presently wooded.
Subject management has advised us that the Residence 7 Kennerly Road, which is
presently unoccupied, is scheduled to be torn down and the parking lot
expanded. As such the residential improvements at 7 Kennerly Road have not
been considered in this valuation. In addition, the residence at 10910
Kennerly Road is expected to be converted to house the nursing home business
offices. Therefore, all sites were considered operating acres.
The overall land configuration is very irregular with a slope downward from all
side street frontages to the center of the property then continuing downward in
a natural watershed runoff ravine to the west.
<TABLE>
<CAPTION>
Summary of Land Sites
Facility Zoning Acres
<S> <C> <C>
Nursing Home R-1, CUP 4.220
7 Kennerly Manor Drive R-1, CUP 1.880
10910 Kennerly Road R-1, CUP 0.716
Total Land Area 6.816
</TABLE>
24
<PAGE> 39
IMPROVEMENTS DESCRIPTION
IMPROVEMENTS DESCRIPTION
The site is improved with a two story plus basement, 49,719 square foot 167
licensed bed nursing home which operates with 148 beds. Constructed in 1966,
with additions in 1975 and 1987 and renovations in 1993/1994, this building has
brick and block exterior walls over a foundation consisting of concrete piers
and grade beams and is supported by a steel frame. The roof structure consists
of wood and steel rafters with plywood and rigid insulation. The roof is
covered by asphalt shingles.
The floor structure consists of steel joisted concrete. Floor coverings
consist of terrazzo throughout; carpeting in the offices; sheet vinyl in the
east wing; and exposed concrete in the laundry and maintenance shop.
Partitioning consists of drywall covered metal studs in most areas with ceramic
tile partitioning in the tub rooms and concrete block partitioning in the
mechanical areas. Built-in items include wood handrails, cubicle curtain
tracking, five nurses' stations and an exhaust hood in the kitchen with an
Ansul fire suppression system.
The ceilings are covered by plaster on metal and rock lath with some drywall
and suspended metal grids with lay-in acoustical tiles.
Heating, ventilating and air conditioning are provided via hot water boilers
and chillers. The patient rooms are heated and cooled by radiant floor heat
and ducted cooled air.
Standard plumbing fixtures include fifty-two water closets, fifty-six
lavatories, twenty-six tubs, twelve sit-down shower stalls, six janitor sinks
and five showers. Hot water is heated by commercial gas automatic heaters.
25
<PAGE> 40
IMPROVEMENTS DESCRIPTION
Lighting consists primarily of fluorescent illumination. Other electrical
features include a nurses' call and paging system, a fire alarm system and door
alarms.
Other features include a sprinkler system and two elevators.
There are two residential buildings at the rear of the overall 6.816 acre site
fronting on Kennerly Road and Kennerly Manor Drive. These are briefly
described as:
7 KENNERLY MANOR DRIVE - Brick veneer, one story plus basement single
family residence containing 1,633 square feet with four bedrooms, two
full baths, fully equipped kitchen, attached two car garage, central
air conditioning, full basement with walkout patio doors. This
structure was built in 1962, is in fair condition and is scheduled to
be demolished.
10910 KENNERLY ROAD - Masonry walls, one story plus basement single
family residence containing 1,836 square feet with three bedrooms, one
and one-half baths, fully equipped kitchen, quality interior finishes,
carpeting and drapes, full walkout basement with two car plus garage,
central air conditioning and supplemental furnace. This structure was
built in 1960 and is in fair condition and is scheduled to become
business offices.
Thirty rooms have recently been remodeled and thirty are currently in the
process of being remodeled. Other improvements being considered are painting,
television system, upgrading of employees lounge and upgrading and modification
of dining rooms.
LAND IMPROVEMENTS
Land improvements include, but are not limited to, asphalt paving, concrete
sidewalks, aprons, equipment pads and bumpers, underground utility lines,
exterior lighting, stone retaining wall, concrete retaining wall with fence,
signage and illuminated concrete fountain and fencing.
26
<PAGE> 41
IMPROVEMENTS DESCRIPTION
EQUIPMENT DESCRIPTION
Based upon an inspection of the facility, it appears that the nursing home is
equipped with the normal complement of items necessary to adequately serve the
subject nursing and rehabilitation facility. Upon acquisition of the facility
by Integrated Health Services, Inc. in 1987, new office and lounge furniture
was added. The equipment appears to be in good condition for its age and use.
27
<PAGE> 42
HIGHEST AND BEST USE
The Appraisal Institute defines highest and best use as follows:
The most profitable, likely use to which a property can be put. The
opinion of such use may be based on the highest and most profitable
continuous use to which the property is adapted and needed, or likely
to be in demand in the reasonably near future. However, elements
affecting value which depend upon events or a combination of
occurrences, which, while within the realm of possibility, are not
fairly shown to be reasonably probable, should be excluded from
consideration. Also, if the intended use is dependent upon an
uncertain act of another person, the intention cannot be considered.
The use of the land which may reasonably be expected to produce the
greatest net return to land over a given period of time. That legal
use which will yield to land the highest present value, sometimes
called optimum use.
In estimating the highest and best use, there are essentially four states of
analysis:
1. POSSIBLE USE - Uses which are physically possible for
the site in question.
2. PERMISSIBLE USE (LEGAL) - Uses permitted by zoning
and deed restrictions on the site in questions.
3. FEASIBLE USE - Possible and permissible uses which
will produce a net return to the owner of the site.
4. MAXIMALLY PRODUCTIVE USE - Among the feasible uses,
that use which will produce the highest net return of
highest present worth.
The highest and best use of the land (site) as if vacant and available for use
may be different from the highest and best use of the property as improved.
This will be true when the improvement is not an appropriate use and yet makes
a contribution to total property value in excess of the site.
28
<PAGE> 43
HIGHEST AND BEST USE
The following conditions must be met in determining the highest and best use:
The use must be legal.
The use must be probable, not speculative or conjectural.
There must be a profitable demand for such use and it must return to
land the highest net return for the longest period of time.
In order for the subject site to fulfill its highest and best use, that use
must meet four criteria. It must be (1) physically possible, (2) legally
permissible, (3) financially feasible, and (4) maximally productive. These
criteria are further explained as follows.
PHYSICALLY POSSIBLE
The size, shape, location, utility availability and terrain impose
physical restraints upon the type of uses possible for the subject.
Any use incompatible with the utility capacity or constraints imposed
by the size, shape or terrain would not be considered physically
possible. As mentioned in the land description section of this
report, the subject is irregularly shaped and contains a gross land
area of 6.816 acres. All utilities are available at the site and all
required site improvements are in place. The physical characteristics
of the site in terms of size, shape and topography are favorable for
flexible development. Overall, the physical aspects of the site are
such that they do not impose any constraints which would prevent the
site from being developed to its highest and best use.
LEGALLY PERMISSIBLE
Uses of the land must be permitted by zoning and deed restrictions and
other legal considerations. The subject site is currently zoned R-1
(Residence District) by the county of St. Louis. Nursing home use is
a conditional use in this zoning designation. The present use of the
site for a nursing home is a legal use.
29
<PAGE> 44
HIGHEST AND BEST USE
FINANCIALLY FEASIBLE
Any use of the subject which provides a financial return to the land
in excess of that required to satisfy operating expenses, financial
expenses and capital amortizations is considered financially feasible.
It is our opinion that the subject's current use as a nursing home is
financially feasible based upon the operating performance of the
subject facility.
MAXIMALLY PRODUCTIVE
Among the feasible uses, that use which will produce the highest net
return at the highest present worth. The subject site is improved
with a 142 bed nursing home. The improvements are in good condition
with a significant remaining economic life. Functional utility of the
structure meets the market standards expected of a nursing home and
demand for this type of development is evident in the marketplace.
Based upon the supply and demand characteristics of the nursing home
industry in Missouri, it is our opinion that the highest and best use
of the property, as improved, is its current use as the site of a
nursing home.
On reviewing the conditions and criteria for establishing the highest and best
use of the subject, we have examined the market for the subject services and
the regional and local economy as well as the existing physical and zoning
characteristics of the site. Additionally, we have considered the quality and
condition of the subject improvements amendable for use as a nursing and
rehabilitation facility.
Based upon our review and analysis of the subject market, it is our opinion
that the highest and best use of the site as vacant would be for healthcare
development such as the subject and as improved would be for the continuation
of its current use as that of a nursing and rehabilitation facility.
30
<PAGE> 45
VALUATION METHODOLOGY
There are three generally accepted approaches to estimate the value of an
asset, which are summarized as follows:
INCOME APPROACH: This approach translates earnings, or expected cash
flows, into an estimate of value. It is based upon the premise that
value is determined by the present value of all future expected
income. Thus, forecasted earnings are converted to value through the
application of discount or capitalization rates derived from the
investment market.
MARKET APPROACH: This valuation approach is based upon the comparison
of the subject to the sales of similar assets in the marketplace. Two
methods of estimating value via this approach are the Primary Sales
Comparison Approach and the Secondary Market Approach. The Primary
Sales Comparison Approach entails the analysis of direct asset
transfers, while the Secondary Market Approach involves the analysis
of multiples derived from equity transfers in public secondary markets
or exchanges.
COST APPROACH: This procedure provides an indication of the value of
an asset by reducing an estimate of the current cost to reproduce or
replace an asset by an estimate of accrued depreciation. Depreciation
includes physical deterioration, functional and external (or economic)
obsolescence.
In general, the Income Approach is the most reliable approach to value an
income producing property. It best considers the income potential and risk
characteristics specific to the subject property. The Market Approach has not
been applied due to the lack of transfers of leased facilities. Nursing homes
typically transfer in fee simple estate, with the assets of the operating
company included. The interest considered in this appraisal is that of a
leased fee estate, and we were unable to locate meaningful sales of similar
interests to compare to the subject. The Cost Approach has limitations due to
the difficulty in quantifying the depreciation and obsolescence in the assets.
The Income and Cost Approaches are presented on the following pages.
31
<PAGE> 46
INCOME APPROACH
The Income Approach gives consideration to the net income expectancy from
rental of the property, and to the capitalization of this income in accordance
with prevailing returns on properties or investments of similar risks to
determine the amount at which ownership would be justified by a prudent
investor. Since it is the purpose of this appraisal to estimate the market
value of the leased fee estate, the Income Approach is considered to be the
most reliable method of valuation. The first step involves the estimating of
the subject's potential gross income. For this, we deduct reasonable
allowances for expenses to arrive at the indicate net income which is
capitalized into the value estimate.
ESTIMATE OF GROSS INCOME
Integrated Health Services, Inc. has represented that this facility will be
sold to Crescent Capital and leased back to Integrated Health Services, Inc.
The facility, including land, buildings, equipment and furnishings, will be
leased to Integrated Health Services, Inc. for a ten year period, with two, ten
year renewal options. Although we have not been provided with a copy of the
final lease, Integrated Health Services, Inc. has provided us with a lease
synopsis which indicates that the base rent in the first year will be $922,250.
In the second and third forecast years, contract rent is adjusted 1% annually.
In subsequent years, additional rent has been based upon the terms of the lease
contract which stipulates the subsequent annual increases will be increased by
the greater of 1) 1% of the then-current minimum rent, or 2) the lesser of
either 3.75%, or the greater of either 5% of the incremental net operating
income (before corporate allocations), or 67% the consumer price index from the
preceding period.
32
<PAGE> 47
INCOME APPROACH
In our Discounted Cash Flow forecast, we have assumed an initial ten year
holding period, and have assumed that Integrated Health Services, Inc. will
exercise the two, ten year renewal options. Revenue has been estimated based
upon contract rent comprised of base rent plus additional rent, which we have
assumed to be at market. Because of the scarcity of arm's length leases on
nursing facilities and the multitude of adjustments which would be required to
equate a lease comparable to the subject, revenue has been forecast based upon
contract rent.
The incremental net operating income factor is calculated based upon the
incremental performance of the most recently ended fiscal year as compared with
the preceding year. The increment is then multiplied by a factor of 0.05.
The lease is a net lease with the lessee responsible for operating expenses.
Management costs have been estimated at 4% of revenue. This charge considers
the cost of collection and accounting for rents. We have also estimated
nominal reserves for replacement at $100 per bed, increasing with inflation.
Total expenses in the first forecasted year are estimated at $51,690, or 5.6%
of revenue. Net income is estimated at $870,560 in the first forecasted year,
increasing to $1,065,770 by the tenth year. Schedules A-1 through A-5 in the
Addendum to this report present the subject's historic and prospective
occupancy, payor mix and operating performance of the operating business. The
subject's prospective performance has been estimated based upon information
from Management in conjunction with historic performance. The subject business
enterprise is expected to exhibit a large increase in net operating income in
the first forecast year attributable to an increase in medical specialty unit
census. Medical specialty unit patients are generally of high acuity level,
commanding substantially higher rate levels than skilled nursing and
contributing largely to net operating income. Operating performance of the
business has been analyzed to gauge the potential of the Company to center its
rent obligations and is a factor in estimating additional rent. Forecasted net
operating income of the business enterprise
33
<PAGE> 48
INCOME APPROACH
amount to five and one-half times lease payments in the first forecasted year,
which appears to provide adequate coverage.
DISCOUNT RATE CALCULATION
CAPITALIZATION PROCESS AND DISCOUNT RATE
As the annual cash flow and reversionary values are estimated ten years into
the future, it is necessary to discount these values into a present value
estimate. Present value is today's cash lump sum which represents the current
value of the right to collect the future payments and reversion. It is the
aggregate value of the discounted future payments and reversion.
The discount rate used must reflect a sufficient rate of return for a developer
or owner of property over the holding period. The rate must take into
consideration the time value of money and charges for holding costs. The rate
must also reflect an adequate rate of return for the risk involved when
compared to other types of investments.
When analyzing discount rates, it is important to realize that all investments
are in competition with each other for the investment dollar. The investor has
a choice of: (1) bank rate securities such as government bonds, industrial or
municipal bonds and debentures, (2) stocks and other securities, or (3)
selected enterprises or other real estate investments at varying rates of
return. The acceptable rate of return to the investor is affected by
considerations of risk, burden of management, degree of liquidity and other
factors (including personal preference). The analysis quite often follows the
historical summation of these factors, known as a "built-up" rate.
34
<PAGE> 49
INCOME APPROACH
As an example, an adjustment for risk is added to a safe or minimum risk rate
as an increment to compensate for the extent of risk believed to be involved in
the use of the capital sum. Another adjustment is usually made of nonliquidity
due to the time required to realize cash from the resale of the property. The
resale period may vary with the general marketability of the type of property
and the amount of the cash investment required.
The principle of discounting money to be received in the future is based upon
the fact that today's dollar can be invested to earn a return, while the
expected future dollar not yet generated, cannot. The discount rate must
reflect what is called the opportunity cost of capital. Thus, the investor is
compensated by the discount rate for the current lost opportunity in investing
in alternative assets.
In order to determine the appropriate rate, we have reviewed current monetary
rates as of March 1994.
The following table presents yield rates associated with various types of
government and corporate securities as indicated by the March 1, 1994 Wall
Street Journal.
<TABLE>
<CAPTION>
YIELD RATES AS INDICATED BY THE MARCH 1, 1994
WALL STREET JOURNAL
SECURITY YIELD
<S> <C>
Prime Rate 6.00%
Ten Year U.S. Treasury Bonds 6.14%
Corporate Bonds
Aaa, Aa 6.20% to 7.42%
A, Baa 6.52% to 7.58%
Ba, C 9.44%
</TABLE>
35
<PAGE> 50
INCOME APPROACH
As indicated by the following survey conducted by Real Estate Research
Corporation, required rates of return for commercial grade real estate were
approximately 5.6% to 5.9% above year treasury bonds in the first two quarters
of 1993.
<TABLE>
<CAPTION>
Real Estate vis-a-vis Capital Market Returns*
Fourth Third
Quarter Quarter
1993 1993
<S> <C> <C>
Real Estate Yield (%) 11.7% 12.0%
Moody's Aa Utilities (%) 7.0% 7.4%
Moody's Aaa Corporate (%) 7.0% 7.2%
10 Year Treasuries (%) 5.3% 5.7%
*This survey was conducted in October, 1993 and reflects desired
returns for fourth quarter 1993 investments.
Source: Real Estate Research Corporation
</TABLE>
As the subject property would have less liquidity and more risk than commercial
grade real estate, it is reasonable to expect that the discount rate would be
higher than the real estate yields presented. Several factors which influence
the selection of a discount rate include the following:
o Currently, there are restraints on supply through
licensure requirements which alter normal economics;
and
o The value of the facility is highly related to the
operation of the business which is involved in the
provision of services such as healthcare, dietary and
housekeeping operations which entail a higher level
of Management expertise.
36
<PAGE> 51
INCOME APPROACH
Therefore, given the alternative investments available and taking into
consideration the risks associated with real estate development and the
realization of the additional rent revenue, we believe a 12.5% discount rate
for the subject is appropriate. This return is considered equivalent to
investments with comparable risks available today for the same time period.
FINAL CASH FLOW
The earnings and cash flow forecasts in this analysis only cover a ten year
period. In reality, the property will generate earnings and cash flow well
beyond the five year forecast period. Therefore, the value of this distant
cash flow stream, called a "reversion" value, must be estimated.
We have assumed that Integrated Health Services, Inc. will exercise the renewal
options after the initial ten year lease period. Therefore, the reversion
value has been estimated based upon the capitalization of net cash flow in
forecast year eleven. We have used a terminal capitalization rate of 10% in
calculating the reversion value. According to Real Estate Research
Corporation's Fourth Quarter 1993 Investor Survey, terminal capitalization
rates for multifamily housing averaged 9.4%. Since the risk associated with
the subject is believed to be similar but slightly above that on multifamily
housing, we have added a risk premium to the average terminal capitalization
rate exhibited by multifamily housing. The reversion value has been discounted
to present value at the discount rate of 12.5%.
37
<PAGE> 52
INCOME APPROACH
INCOME APPROACH CONCLUSION
The sum of the annuity and reversion values estimated within the Discounted
Cash Flow Analysis represent the total value of the property. Based upon our
analysis, this value can be represented in the rounded amount of:
$8,500,000
==========
The following schedule presents the earnings forecast and Discounted Cash Flow
Analysis and indicated value.
38
<PAGE> 53
INCOME APPROACH
SCHEDULE A
INTEGRATED HEALTH SERVICES OF ST. LOUIS AT GRAVOIS
DISCOUNTED CASH FLOW FORECAST
<TABLE>
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum Rent $ 922,250 $ 922,250 $ 931,473 $ 940,787 $ 966,000 $ 991,889 $1,018,472
Additional Rent 9,223 9,315 25,213 25,889 26,583 27,295
-----------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 922,250 $ 931,473 $ 940,787 $ 966,000 $ 991,889 $1,018,472 $1,045,767
-----------------------------------------------------------------------------------------------------------
EXPENSES:
Management Fee 36,890 37,259 37,631 38,640 39,676 40,739 41,831
Replacement Items 14,800 15,392 16,008 16,648 17,314 18,006 18,727
-----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 51,690 52,651 53,639 55,288 56,989 58,745 60,557
-----------------------------------------------------------------------------------------------------------
NET INCOME 870,560 878,822 887,148 910,712 934,900 959,726 985,209
DISCOUNT RATE 0.8889 0.7901 0.7023 0.6243 0.5549 0.4933 0.4385
PRESENT VALUE 773,831 694,378 623,072 568,553 518,803 473,404 431,977
DISCOUNT RATE 12.5%
TERMINAL CAPITALIZATION
RATE 10.0%
CONCLUSION OF VALUE
ANNUITY 5,166,071
REVERSION 3,369,099
=========
FIXED ASSET VALUE $8,535,170
<CAPTION>
Forecasted Forecasted Forecasted Forecasted
Year 8 Year 9 Year 10 Year 11
<S> <C> <C> <C> <C>
REVENUE:
Minimum Rent $1,045,767 $1,073,793 $1,102,571 $1,132,120
Additional Rent 28,027 28,778 29,549 30,341
------------------------------------------ ----------
TOTAL REVENUE $1,073,793 $1,102,571 $1,132,120 $1,162,461
------------------------------------------ ----------
EXPENSES:
Management Fee 42,952 44,103 45,285 46,498
Replacement Items 19,476 20,255 21,065 21,908
------------------------------------------ ----------
TOTAL EXPENSES 62,428 64,358 66,350 68,406
------------------------------------------ ----------
NET INCOME 1,011,366 1,038,213 1,065,770 NET INCOME 1,094,055
CAP. RATE 10%
TERMINAL VALUE 10,940,547
DISCOUNT RATE 0.3897 0.3464 0.3079 0.3079
PRESENT VALUE 394,174 359,678 328,200 REVERSION 3,369,099
</TABLE>
<PAGE> 54
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which the depreciated replacement cost of
the improvements and equipment is added. The replacement cost of the
improvements and equipment is adjusted for accrued depreciation resulting from
physical deterioration, functional obsolescence and external (or economic)
obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimation of the replacement cost of the
improvements and equipment.
o Estimation of the accrued depreciation from all
causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
LAND VALUATION
The appraised property consists of approximately 6.816 acres (296,905 square
feet) of land. The site exhibits approximately 1,088 feet of frontage along
the south side of Kennerly Road.
40
<PAGE> 55
COST APPROACH
Land valuation, as reported herein, assuming the site vacant is based upon the
following steps:
o A comparison with recent sales and/or asking prices
for similar land.
o Interviews with reliable real estate brokers and
other informed sources who are familiar with local
real estate activity.
o Our experience in estimating land values; and when
necessary, due to a lack of other available data,
segregation of purchase price of improved properties.
The following six sales are located within the general market area of the
subject property and are considered to be representative of market activity and
conditions as of the valuation date. To the best of our knowledge, all
property rights transferred were fee simple. The following sales were
considered arm's length transactions and did not include any special or
creative financing, except where noted.
41
<PAGE> 56
COST APPROACH
LAND SALE NUMBER 1
<TABLE>
<S> <C>
Location: 5139 Mattis Road, St. Louis, St. Louis County, Missouri
Date of Sale: February 1, 1990
Sale Price: $300,000
Size: 1.19 Acres (51,856 Square Feet)
Zoning: C-8
Price Per Acre: $252,100
Price Per Square Foot: $4.86
Grantor: Taylor, Morlay Simon, Inc.
Grantee: Anwar Shah
Deed Book/Page Number: 9500/1767
Tax Parcel Number: 29L541183
Comments: Purchaser built a 13,466 square foot eye center in 1991.
</TABLE>
42
<PAGE> 57
COST APPROACH
LAND SALE NUMBER 2
<TABLE>
<S> <C>
Location: Tesson Ferry and Town South Roads, Soppington, Missouri
Date of Sale: February 28, 1990
Sale Price: $415,000
Size: 1.64 Acres (71,438 Square Feet)
Zoning: C-8
Price Per Acre: $253,048
Price Per Square Foot: $5.81
Grantor: Boatmen's Bank
Grantee: Voss Properties
Deed Book/Page Number: 6611/2234
Tax Parcel Number: 29L142010
</TABLE>
43
<PAGE> 58
COST APPROACH
LAND SALE NUMBER 3
<TABLE>
<S> <C>
Location: 4079 Telegraph Road, St. Louis, St. Louis County, Missouri
Date of Sale: January 7, 1993
Sale Price: $300,000
Size: 1.375 Acres (59,895 Square Feet)
Zoning: C-8
Price Per Acre: $218,182
Price Per Square Foot: $5.01
Grantor: Shirley and William Nahn
Grantee: Site Oil Company of Missouri
Deed Book/Page Number: Not Available
Tax Parcel Number: 30H410219
</TABLE>
44
<PAGE> 59
COST APPROACH
LAND SALE NUMBER 4
<TABLE>
<S> <C>
Location: 5423 Telegraph Road, Mehlville, Missouri
Date of Sale: April 27, 1990
Sale Price: $310,000
Size: 1.2 Acres (52,272 Square Feet)
Zoning: R-2 (To Be Rezoned Commercial)
Price Per Acre: $258,333
Price Per Square Foot: $5.93
Grantor: Schnuens Markets, Inc.
Grantee: Union Electric Company
Deed Book/Page Number: 8749/2472
Tax Parcel Number: 31H130800
</TABLE>
45
<PAGE> 60
COST APPROACH
LAND SALE NUMBER 5
<TABLE>
<S> <C>
Location: 12152 Tesson Ferry Road, St. Louis, St. Louis County, Missouri
Date of Sale: December 7, 1990
Sale Price: $302,000
Size: 1.259 Acres (54,885 Square Feet)
Zoning: C-8 (See Comments)
Price Per Acre: $239,873
Price Per Square Foot: $5.50
Grantor: VTF Enterprises
Grantee: Physicians Building Partnership
Deed Book/Page Number: Not Available
Tax Parcel Number: Not Available
Comments: Purchased subject to rezoning from Residential to C-8. Purchaser built a 12,000 square foot brick
medical/office building with a 5,000 square foot basement.
</TABLE>
46
<PAGE> 61
COST APPROACH
LAND SALE NUMBER 6
<TABLE>
<S> <C>
Location: Highway 21, Soppington, Missouri
Date of Sale: February 1, 1990
Sale Price: $415,000
Size: 1.609 Acres (70,132 Square Feet)
Zoning: C-8
Price Per Acre: $257,924
Price Per Square Foot: $5.92
Grantor: Boatmen's Bank
Grantee: William and Loriann Voss
Deed Book/Page Number: 8708/1476
Tax Parcel Number: 29L140463
</TABLE>
47
<PAGE> 62
COST APPROACH
These six sales are summarized below. All are located within the general
market area of the subject property and are considered to be representative of
market activity and conditions as of the valuation date.
<TABLE>
<CAPTION>
Summary of Land Sales
Price Per
Sale Sale Land Area Square
Number Location Date (Square Feet) Zoning Foot
<S> <C> <C> <C> <C> <C>
1 5139 Mattis Road 02/90 51,856 C-8 $4.86
2 Tesson Ferry and Town South Roads 02/90 71,438 C-8 $5.81
3 4079 Telegraph Road 01/93 59,895 C-8 $5.01
4 5423 Telegraph Road 04/90 52,272 R-2 $5.93
5 12152 Tesson Ferry Road 12/90 54,885 C-8 $5.50
6 Highway 21 02/90 70,132 C-8 $5.92
Subject 10954 Kennerly Road, et al. --- 296,905 CUP ---
</TABLE>
ANALYSIS
In analyzing the land sales, certain elements should be considered when making
adjustments to the price of each comparable property. The elements of
comparison are: 1) market conditions (time); 2) location; and 3) physical
characteristics.
48
<PAGE> 63
COST APPROACH
MARKET CONDITIONS (TIME)
The condition of the market may change between the time of sale and the
date of the appraisal and adjustments would have to be made to reflect the
market. Changed market conditions result from various causes such as
inflation, deflation, changing demand, changing supply and changing land
use patterns. The tendency over time is for land values to appreciate.
Based on analysis of the recent economic conditions of the region, there
is evidence that values have increased slightly. The estimated marketing
period for land in the Charlotte area at least one year. The supply of
vacant land is limited and demand was considered good.
LOCATION
An adjustment for location may be required if the locational
characteristics of the comparable properties are significantly different
from those of the subject. A property's location is analyzed in terms of
the relative time/distance relationship between it and all likely
destinations and origins. The relationship is relative because the
location of a property can only be judged in relation to that of others.
PHYSICAL CHARACTERISTICS
Physical characteristics differ between properties. These differences
may require a number of comparisons and adjustments to the subject. An
appraiser may be required to judge the value that is added or lost by the
size and shape, corner influence, utilities, etc. Size and shape can
affect functional utility in relation to optimum size and frontage to
depth ratio. The appraiser must also recognize that smaller tracts of
land typically sell for a higher unit price. Typically, corner influence
creates a higher unit of value due to the frontage on two or more streets.
Also, the availability of utilities influences value.
The six sales, representative of the subject sites, indicate a range of values
from $4.86 to $5.93 per square foot.
All sales were found to be superior to the subject land due to the factor of
topography. Therefore, downward adjustments were applied accordingly.
49
<PAGE> 64
COST APPROACH
In keeping with the theory that smaller lot sizes transact at a higher price
per unit, all the sales were adjusted downward for containing a smaller lot
size.
In addition, all the sales warranted upward adjustments for the factor of time.
The indicated range of values after adjustment is $3.94 to $5.44 per square
foot.
We have concluded on a land value of $4.75 per square foot for the 296,905
square foot (6.816 acres) site. We have summarized the land value as follows:
296,905 Square Feet x $4.75 = $1,410,299
ROUNDED: $1,410,000
==========
Following are a land sales adjustment grid and comparable land sales map.
50
<PAGE> 65
COST APPROACH
<TABLE>
<CAPTION>
Adjustment Grid
Subject Sale Sale Sale Sale Sale Sale Number
Number 1 Number 2 Number 3 Number 4 Number 5 Number 6
<S> <C> <C> <C> <C> <C> <C> <C>
Land Area/Square Feet 296,905 51,856 71,438 59,895 52,272 54,885 70,132
Price Per Unit --- $4.86 $5.81 $5.01 $5.93 $5.50 $5.92
Date of Sale Current 02/90 02/90 01/93 04/90 12/90 02/90
Time Adjustment +8% +8% +2% +8% +7% +8%
Time Adjusted Price $5.25 $6.27 $5.11 $6.40 $5.89 $6.40
Location 0 0 0 0 0 0
Size -15% -10% -15% -15% -15% -10%
Access 0 0 0 0 0 0
Visibility 0 0 0 0 0 0
Zoning 0 0 0 0 0 0
Topography -20% -5% -5% -5% -10% -5%
Other 0 0 0 0 0 0
Total Adjustment -25% -15% -20% -20% -25% -15%
Sale Price $5.25 $6.27 $5.11 $6.40 $5.89 $6.40
Adjusted Value $3.94 $5.33 $4.09 $5.12 $4.42 $5.44
</TABLE>
51
<PAGE> 66
COST APPROACH
COMPARABLE LAND SALES MAP
(PHOTO MAP)
52
<PAGE> 67
COST APPROACH
BUILDINGS AND LAND IMPROVEMENTS VALUATION
The buildings and land improvements have been valued on the basis of
replacement cost less accrued depreciation. The cost new was estimated using
cost factors obtained from the calculation section of Marshall Valuation
Service (MVS), a nationally recognized cost manual. To these costs we have
added soft costs reflecting such items as legal and accounting fees,
feasibility studies, architect's fees and plans, test borings, appraisal fees,
superintending, carrying costs and other contingency costs and an amount
representing entrepreneurial profit, which is not included in MVS's unit costs.
Entrepreneurial profit is a necessary element in the motivation to construct
the improvements and represents an additional amount a developer would expect
to receive for construction of a similar project. The amount of
entrepreneurial profit varies according to the economic conditions and type of
development, but typically ranges from 10% to 20% of total project costs. We
have contacted several developers, contractors and other familiar with real
estate construction. Although each project will vary and each developer
expects a different rate of return, most anticipate a return that falls in the
above stated range. Based on these conversations, we have estimated
entrepreneurial profit to comprise 20% of our estimate of the replacement cost
of the building.
The overall cost for the subject nursing home building was estimated at
$7,282,943 inclusive of all soft costs and entrepreneurial profit. This figure
is equivalent to $146.48 per square foot of gross building area. The residence
at 10910 Kennerly Road was estimated at $138,991. The land improvements have
been estimated at $596,436.
A description and pricing of the cost to replace the buildings and land
improvements is included in the Exhibit Section.
53
<PAGE> 68
COST APPROACH
Depreciation of a structure is its loss in value due to physical deterioration,
functional obsolescence and external (or economic) obsolescence. Economic life
is the period over which the improvements to the real estate contribute to the
value of the property. These terms are defined as follows:
PHYSICAL DETERIORATION: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
FUNCTIONAL OBSOLESCENCE: The loss in value within the property due to
poor plan, functional inadequacy, or super adequacy due to size, style,
design or other items. This form of depreciation occurs in both curable
and incurable forms.
EXTERNAL (OR ECONOMIC) OBSOLESCENCE: The loss in value caused by forces
outside the property itself. It can take many forms such as excessive
noise levels, traffic congestion, abnormally high crime rates or other
factors which affect a property's ability to produce an economic income
thereby causing a decline in desirability. Other forms of economic
obsolescence may include governmental restrictions, excessive taxes or
economic trends.
ECONOMIC LIFE: Economic life is the period over which improvements to
real estate contribute to property value. The economic life of a good
quality healthcare facility is typically forty-five to fifty years.
REMAINING ECONOMIC LIFE: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
In estimating the overall economic life of the improvements, data on economic
lives, published by Marshall Valuation Service and the American Hospital
Association were considered. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
54
<PAGE> 69
COST APPROACH
In accordance with the guidelines of the MVS manual, it is estimated that the
building will have a total economic life of forty-five years. As stated
earlier, the subject property was constructed in 1966, 1975 and 1987 with
renovations in 1993/1994. As previously noted, the subject has recently
completed the renovation of thirty rooms with an additional thirty rooms in the
process of being renovated. The subject, which has been well maintained, was
considered to be in good overall physical condition. We estimate that the
building has an effective age of ten years, which equates to a remaining useful
life of approximately thirty-five years. After consideration of all
significant physical factors affecting the subject property, the total physical
deterioration of 25% is imputed to the building.
As stated previously, the improvements have been well maintained, are in good
overall condition and are considered modern and functional in all respects. A
thorough inspection of the subject property revealed that, while typical wear
and tear for a building of this age has occurred, no significant items of
deferred maintenance were noted. Based on this knowledge, it is our opinion
that the subject does not suffer from functional obsolescence. Furthermore, it
is our opinion that the subject property does not suffer from any undue
economic obsolescence. Based upon the previous analysis, total accrued
depreciation from all causes of 25% is imputed to the subject nursing home
building.
As previously noted, the subject property premises includes two residences, 7
Kennerly Manor Drive and 10910 Kennerly Road. Management has indicated that
the residence at 7 Kennerly Manor Drive will be razed in the near future for
the purpose of adding thirty-five additional parking spaces. As such, we have
not considered the value, if any, associated with the current structure.
The residence located at 10910 Kennerly Road, which Management has designated
as office space, appeared in fair condition with a total depreciation estimate
of 56% applied to the residence.
55
<PAGE> 70
COST APPROACH
The elements that make up the land improvements have shorter economic lives
than that of the building. We have estimated the aggregate economic life of
these items to be twenty years with an effective age of fourteen years, which
equates to an average remaining useful life of six years. The amount of
accrued depreciation attributable to the land improvements has also been
calculated on an economic age/life basis, resulting in a 70% depreciation
estimate.
The estimate of the depreciated replacement costs of the buildings and land
improvements is presented as follows:
<TABLE>
<CAPTION>
DEPRECIATED
REPLACEMENT REPLACEMENT
ASSET COST DEPRECIATION COST
<S> <C> <C> <C>
Nursing Home Building $7,282,943 $1,820,736 $5,462,207
Residence 138,991 77,835 61,156
Land Improvements 596,436 417,505 178,931
TOTAL $8,018,370 $2,316,076 $5,702,294
</TABLE>
EQUIPMENT VALUATION
Nursing and rehabilitation facility equipment includes, but is not limited to,
items such as: all patient room furniture; kitchen utensils, appliances,
dinnerware and accessories; office machines, desks, chairs and files;
maintenance and housekeeping machines and tools; laundry appliances; lounge
furniture; audio/visual equipment and chapel furnishings; nursing items
including monitoring devices, chart racks, medication carts; and items for
physical therapy including parallel bars, training steps, pulleys and
hydrocollators. The subject contains various special equipment to accommodate
the specialty units. However, we understand certain items such as ventilator
equipment are leased.
56
<PAGE> 71
COST APPROACH
Depreciated equipment values in nursing homes typically range from $2,000 to
$4,000 per bed. Generally the low end of this range represents equipment in
facilities which is either highly depreciated, low in quality or low in volume
due to smaller common areas and office space. A newer facility, or a facility
which has a high percentage of private patients and a location in an affluent
area, will generally have an equipment value at the high end of the range.
Based on our experience, it is estimated that the value of the equipment in use
can be reasonably represented at $3,500 per bed, which when multiplied by 148
operating beds, indicates a market value for all equipment of:
$518,000
========
CONCLUSION
Based upon the investigation, as previously defined, the results of the Cost
Approach, as of March 1, 1994 are reasonably represented as follows:
Land $1,410,000
Buildings 5,523,363
Land Improvements 178,931
Equipment 518,000
-----------
TOTAL $7,630,294
ROUNDED $7,600,000
==========
57
<PAGE> 72
CORRELATION OF VALUE
Each of the three traditional approaches to value have been considered, and we
have applied the Income and Cost Approaches. The Market Approach has not been
applied due to the lack of sales of similar leased fee estate interests as the
subject. While the approaches are independently developed, the same
fundamental principles of valuation and economics form the logical basis for
each approach. The indications of value by the two approaches are as follows:
Income Approach . . . . . . . . . . . . . . $8,500,000
Market Approach . . . . . . . . . . . . . . N/A
Cost Approach . . . . . . . . . . . . . . . $7,600,000
The Income Approach involved a detailed analysis of the earnings potential of
the property. The Income Approach best considers the physical characteristics,
earnings potential and risk specific to the subject entity. Because of the
limitations inherent in the Cost and Market Approaches, the value estimated by
the Income Approach was considered the best representation of value for the
subject.
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, in light of the complexity of estimating the
replacement cost and depreciation of the various components in this approach,
it is not necessarily the most reliable of the value estimates. Furthermore,
the Cost Approach, as performed herein, failed to include such assets as a CON
and going concern value.
Based upon the analysis as presented in this report, it is estimated that the
market value of the leased fee interest in Integrated Health Services of St.
Louis at Gravois, as of March 1, 1994, can be represented in the rounded amount
of:
$8,500,000
==========
58
<PAGE> 73
CERTIFICATION
We certify that, to the best of our knowledge and belief...
o The statements of fact contained in this report are true and
correct, and that this report has been prepared in conformity with
the Uniform Standards of Professional Appraisal Practice of The
Appraisal Foundation and the Principles of Appraisal Practice and
Code of Ethics of the American Society of Appraisers.
o 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.
o We have no present or prospective interest in the property that is
the subject of this report; we have no personal interest or bias
with respect to the parties involved.
o The appraisal assignment was not based upon a requested minimum
valuation, a specific valuation, or the approval of a loan.
o Our compensation is not contingent on an action or event resulting
from the analyses, opinions or conclusions in, or the use of, this
report.
o Gerald L. Huether has personally inspected the property and Wade A.
Collins has provided professional assistance.
/s/ Wade A. Collins
- ---------------------------------------------
Wade A. Collins, Vice President, Healthcare
Valuation Counselors Group, Inc.
/s/ Gerald L. Huether
- ---------------------------------------------
Gerald L. Huether, Staff Appraiser
Valuation Counselors Group, Inc.
59
<PAGE> 74
ADDENDUM
<PAGE> 75
BUSINESS ENTEPRISE SCHEDULES
<PAGE> 76
A-1
SCHEDULE A-1
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
COMPARATIVE INCOME STATEMENT DATA
Year End Year End
12/31/92 12/31/93
REVENUE:
Patient Revenue (Net) $6,268,316 $6,396,923
Ancillary & Other 1,215,862 812,491
--------------------------
TOTAL REVENUE $7,484,178 $7,209,414
--------------------------
OPERATING EXPENSES:
General & Administrative 399,183 477,996
Dietary 356,397 358,122
Housekeeping & Laundry 223,171 199,384
Healthcare 2,635,850 2,517,531
Ancillary & Social Services 2,058,298 2,329,156
Property 163,570 136,873
--------------------------
TOTAL OPERATING EXPENSES 5,836,469 6,019,062
--------------------------
NET OPERATING INCOME 1,647,709 1,190,352
(PRE-MGT.FEE)
<PAGE> 77
A-2
SCHEDULE A-2
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
OCCUPANCY AND REVENUE ANALYSIS
<TABLE>
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted
Year End Year End Year End Year End Year End Year End Year End
12/31/92 12/31/92 03/01/95 03/01/96 03/01/97 03/01/98 03/01/99
REVENUE: And
Thereafter
<S> <C> <C> <C> <C> <C> <C> <C>
Skilled Nursing 2,768,156 2,417,331 2,033,597 2,135,277 2,242,041 2,354,143 2,471,850
Percent of Total 44.2% 37.8% 23.7% 23.9% 24.1% 24.3% 24.4%
MSU & Complex Care 3,500,160 3,979,592 6,536,921 6,798,398 7,070,334 7,353,147 7,647,273
Percent Of Total 55.8% 62.2% 76.3% 76.1% 75.9% 75.7% 75.6%
--------------------------------------------------------------------------------------------------
Total Revenue 6,268,316 6,396,923 8,570,518 8,933,675 9,312,375 9,707,290 10,119,123
PATIENT DAYS:
Skilled Nursing 30,832 24,299 22,265 22,265 22,265 22,265 22,265
Percent of Total 76.8% 69.0% 57.0% 57.0% 57.0% 57.0% 57.0%
MSU & Complex Care 9,302 10,939 16,790 16,790 16,790 16,790 16,790
Percent Of Total 23.2% 31.0% 43.0% 43.0% 43.0% 43.0% 43.0%
-------------------------- --------------------------------------------------------------------
Total Patient Days 40,134 35,238 39,055 39,055 39,055 39,055 39,055
Average Daily
Census 110 96.5 107.0 107.0 107.0 107.0 107.0
Available Beds 148 148.0 148.0 148.0 148.0 148.0 148.0
Occupancy
Percentage 74.3% 65.2% 72.3% 72.3% 72.3% 72.3% 72.3%
--------------------------------------------------------------------------------------------------
<CAPTION>
Effective Effective Effective Effective Effective Effective Effective
07/01/92 07/01/93 09/01/94 09/01/95 09/01/96 09/01/97 09/01/98
AVERAGE DAILY PATIENT
REVENUE:
<S> <C> <C> <C> <C> <C> <C> <C>
Skilled Nursing 89.78 99.48 91.34 95.90 100.70 105.73 111.02
Annualized
Increase 10.8% -7.0% 5.0% 5.0% 5.0% 5.0%
MSU & Complex
Care 376.28 363.80 389.33 404.91 421.10 437.95 455.47
Annualized
Increase -3.3% 6.0% 4.0% 4.0% 4.0% 4.0%
-------------------------- ------------------------------------------------------------------
Weighted Average 156.18 181.53 219.45 228.75 238.44 248.55 259.10
Annualized
Increase 16.2% 17.9% 4.2% 4.2% 4.2% 4.2%
</TABLE>
<PAGE> 78
A-3
SCHEDULE A-3
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
REVENUE AND EXPENSES PER PATIENT DAY AND COMMON SIZE DATA
<TABLE>
<CAPTION>
Operating Statistics Forecasted Forecasted
Year End Year End Developed From Year End Year End
12/31/92 12/31/93 V.C.I. Database 03/01/95 03/01/96
REVENUE: (1993 Dollars)
<S> <C> <C> <C> <C> <C>
Total Patient Days 40,134 35,238 39,055 39,055
Patient Revenue (Net) 156.18 181.53 158.66 219.45 228.75
Ancillary & Other 30.30 23.06 36.34 25.17 26.24
--------------------- ------- ----------------------
TOTAL REVENUE 186.48 204.59 195.00 244.62 254.99
--------------------- ------- ----------------------
EXPENSES:
General & Administrative 9.95 13.56 17.73 15.95 16.74
Dietary 8.88 10.16 9.12 11.69 12.15
Housekeeping & Laundry 5.56 5.66 5.29 6.71 6.98
Healthcare 65.68 71.44 57.10 76.46 81.05
Ancillary & Social Services 51.29 66.10 52.80 69.96 73.46
Property 4.08 3.88 9.75 4.07 4.23
--------------------- ------- ----------------------
TOTAL OPERATING EXPENSES 145.42 170.81 155.74 184.83 194.61
--------------------- ------- ----------------------
NET OPERATING INCOME 41.06 33.78 39.26 59.79 60.38
REVENUE:
Patient Revenue (Net) 83.8% 88.7% 81.4% 89.7% 89.7%
Ancillary & Other 16.2% 11.3% 18.6% 10.3% 10.3%
--------------------- ------- ----------------------
TOTAL REVENUE 100.0% 100.0% 100.0% 100.0% 100.0%
--------------------- ------- ----------------------
EXPENSES:
General & Administrative 5.3% 6.6% 9.1% 6.5% 6.6%
Dietary 4.8% 5.0% 4.7% 4.8% 4.8%
Housekeeping & Laundry 3.0% 2.8% 2.7% 2.7% 2.7%
Healthcare 35.2% 34.9% 29.3% 31.3% 31.8%
Ancillary & Social Services 27.5% 32.3% 27.1% 28.6% 28.8%
Property 2.2% 1.9% 5.0% 1.7% 1.7%
--------------------- ------- ----------------------
TOTAL OPERATING EXPENSES 78.0% 83.5% 79.9% 75.6% 76.3%
--------------------- ------- ----------------------
NET OPERATING INCOME 22.0% 16.5% 20.1% 24.4% 23.7%
<CAPTION>
Forecasted Forecasted Forecasted
Year End Year End Year End
03/01/97 03/02/98 03/02/99
<S> <C> <C> <C>
REVENUE:
Total Patient Days 39,055 39,055 39,055
Patient Revenue (Net) 238.44 248.55 259.10
Ancillary & Other 27.35 28.51 29.72
---------------------------------------
TOTAL REVENUE 265.79 277.07 288.82
---------------------------------------
EXPENSES:
General & Administrative 17.58 18.46 19.38
Dietary 12.64 13.14 13.67
Housekeeping & Laundry 7.26 7.55 7.85
Healthcare 85.91 91.06 96.53
Ancillary & Social Services 77.14 80.99 85.04
Property 4.40 4.57 4.76
---------------------------------------
TOTAL OPERATING EXPENSES 204.92 215.78 227.23
---------------------------------------
NET OPERATING INCOME 60.88 61.29 61.59
REVENUE:
Patient Revenue (Net) 89.7% 89.7% 89.7%
Ancillary & Other 10.3% 10.3% 10.3%
---------------------------------------
TOTAL REVENUE 100.0% 100.0% 100.0%
---------------------------------------
EXPENSES:
General & Administrative 6.6% 6.7% 6.7%
Dietary 4.8% 4.7% 4.7%
Housekeeping & Laundry 2.7% 2.7% 2.7%
Healthcare 32.3% 32.9% 33.4%
Ancillary & Social Services 29.0% 29.2% 29.4%
Property 1.7% 1.7% 1.7%
---------------------------------------
TOTAL OPERATING EXPENSES 77.1% 77.9% 78.7%
---------------------------------------
NET OPERATING INCOME 22.9% 22.1% 21.3%
</TABLE>
<PAGE> 79
A-4
SCHEDULE A-4
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
GROWTH OF REVENUE AND EXPENSES
<TABLE>
<CAPTION>
Year
Overall Ending Forecasted
<S> <C> <C>
REVENUE: 12/31/93 03/01/95
Patient Revenue (Net) 2.0% 29.0%
Ancillary & Other -33.1% 27.8%
------ -----
TOTAL REVENUE -3.7% 27.8%
------ -----
EXPENSES:
General & Administrative 19.7% 25.9%
Dietary 0.5% 23.5%
Housekeeping & Laundry -10.6% 26.8%
Healthcare -4.5% 15.9%
Ancillary & Social Services 13.1% 14.8%
Property -16.3% 13.7%
------ -----
TOTAL OPERATING EXPENSE 3.1% 17.0%
------ -----
NET OPERATING INCOME -27.7% 82.2%
0
Per Patient Day
REVENUE:
Patient Revenue (Net) 16.2% 17.9%
Ancillary & Other -23.9% 7.8%
------ -----
TOTAL REVENUE 9.7% 16.7%
------ -----
EXPENSES:
General & Administrative 36.3% 15.0%
Dietary 14.4% 12.8%
Housekeeping & Laundry 1.8% 15.9%
Healthcare 8.8% 6.0%
Ancillary & Social Services 28.8% 5.0%
Property -4.7% 4.0%
------ -----
TOTAL OPERATING EXPENSES 17.4% 7.0%
------ -----
NET OPERATING INCOME -17.7% 65.8%
</TABLE>
<PAGE> 80
A-5
SCHEDULE A-5
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
PROSPECTIVE OPERATING PERFORMANCE
<TABLE>
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted
Year End Year End Year End Year End Year End Year End Year End
12/31/92 12/31/93 03/01/95 03/01/96 03/01/97 03/02/98 03/02/99
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Patient Revenue (Net) $6,268,316 $6,396,923 $8,570,518 $8,933,675 $ 9,312,375 $ 9,707,290 $10,119,123
Ancillary & Other 1,215,862 812,491 983,114 1,024,771 1,068,212 1,113,512 1,160,753
-----------------------------------------------------------------------------------------------------
TOTAL REVENUE $7,484,178 $7,209,414 $9,553,632 $9,958,446 $10,380,586 $10,820,802 $11,279,876
-----------------------------------------------------------------------------------------------------
EXPENSES:
General & Administrative 399,183 477,996 622,770 653,909 686,604 720,934 756,981
Dietary 356,397 358,122 456,370 474,625 493,610 513,354 533,888
Housekeeping & Laundry 223,171 199,384 261,984 272,463 283,362 294,696 306,484
Healthcare 2,635,850 2,517,531 2,986,083 3,165,248 3,355,163 3,556,472 3,769,861
Ancillary & Social Services 2,058,298 2,329,156 2,732,449 2,869,071 3,012,525 3,163,151 3,321,308
Property 163,570 136,873 158,798 165,150 171,756 178,626 185,771
-----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,836,469 6,019,062 7,218,453 7,600,465 8.003,019 8,427,234 8,874,294
-----------------------------------------------------------------------------------------------------
NET OPERATING INCOME
(PRE-MGT.FEE) 1,647,709 1,190,352 2,335,179 2,357,981 2,377,568 2,393,568 2,405,582
</TABLE>
<PAGE> 1
EXHIBIT 10.32
AN APPRAISAL OF
THE GOODYEAR CLINIC
THE HAMITER BUILDING
AND
BAPTIST MEDICAL BUILDING II
GADSDEN, ALABAMA
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 25, 1994
Crescent Capital Trust, Inc.
One Perimeter Park South
Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John W. McRoberts
President & Chief Financial Officer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the three professional office buildings identified
as follows:
THE GOODYEAR CLINIC, 851 GOODYEAR AVENUE
THE HAMITER BUILDING, 100 MEDICAL CENTER DRIVE
AND
BAPTIST MEDICAL BUILDING II, 300 MEDICAL CENTER DRIVE
GADSDEN, ALABAMA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of January 1, 1994, the effective date of this
report. The report is to be used for asset valuation purposes. Crescent
Capital Trust is acquiring these office buildings for the purpose of
establishing a real estate investment trust (REIT). This valuation assumes
that the prospective REIT is the owner of the property with Quorum Health Group
guaranteeing an annual rental income stream of $1,327,501. This would
correlate to an average annual square foot amount, based upon the total
leasable square footage of the subject building, of $13.00 (rounded).
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
<PAGE> 3
Crescent Capital Trust, Inc.
February 25, 1994
Page Two
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The Goodyear Clinic is a one-story, 13,998 square foot building constructed in
1977 with a rentable area of 13,998 square feet. This building is currently
100 percent occupied. The Hamiter Building is a four-story building
constructed in 1979 and contains a total of 51,000 square feet with a leasable
area of 38,154 square feet. This building is currently 100 percent occupied.
The Baptist Medical Building II is a five-story, 62,500 square foot, building
constructed in 1993 with a leasable area of 50,589 square feet. This building
was approximately 43 percent occupied during our site inspection, but has
subsequently been further leased.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
<PAGE> 4
Crescent Capital Trust, Inc.
February 25, 1994
Page Three
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the subject
professional office buildings, as of January 1, 1994, to be as follows:
$12,600,000
A significant assumption in this report is that all parking easements will be
granted to allow full utilization of the buildings.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
------------------------------
Patrick J. Simers
Managing Director
PJS:mhb
094-1536R.1.2.3
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Cheryl Worthy-Pickett and Patrick J. Simers have made a personal
inspection of the property that is the subject of this report.
Cheryl Worthy-Pickett has provided significant professional assistance
to the person signing this report.
This assignment was made subject to regulations of the State of
Alabama Real Estate Appraisers Board. The undersigned state certified
appraiser has met the requirements of the board that allow this report
to be regarded as a "certified appraisal".
/s/ Patrick J. Simers /s/ Cheryl Worthy-Pickett
---------------------------- --------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
Alabama Certified General Real Estate
Appraiser No. CG00375
<PAGE> 6
<TABLE>
<S> <C>
State of Alabama [SEAL]
This is to certify that /s/ Lanett Davis
/s/ W. Phil Fowler
PATRICK J. SIMERS
/s/ F. L. Clark
having given satisfactory evidence of the necessary
/s/ Stu Graham
qualifications required by the laws of the State of Alabama
/s/ James ___ Perry, Jr.
is authorized to transact business in Alabama as a
/s/ George C. Washington
CERTIFIED GENERAL REAL ESTATE APPRAISER /s/ Edward Forand
/s/ Robert E. Nesbin
with all the rights, privileges and obligations
/s/ William R. Sizemore
appurtenant thereto.
ALABAMA REAL ESTATE
APPRAISERS BOARD
Certificate Number: CG00375 Expiration Date: SEPT. 30, 1995
</TABLE>
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 10
<TABLE>
<CAPTION>
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<S> <C>
GENERAL DATA
Effective Date of Value: January 1, 1994
Last Date of Inspection: November 27, 1994
Property Identification: GOODYEAR CLINIC, 851 Goodyear Avenue, Gadsden, Alabama
HAMITER BUILDING, 100 Medical Center Drive, Gadsden, Alabama
BAPTIST MEDICAL BUILDING II, 300 Medical Center Drive, Gadsden, Alabama
Interest Appraised: Leased Fee Estate
Building Area: Goodyear Clinic: 13,998 Gross SF/13,998 Leasable SF
Hamiter Building: 51,000 Gross SF/38,154 Leasable SF
Baptist Medical Building II: 62,500 Gross SF/50,589 Leasable SF
Subject Land Size: Goodyear Clinic: 1.19 acres/51,836 SF
Hamiter Building: 1.30 acres/56,628 SF
Baptist Medical Building II: 0.65 acres/28,314 SF
Improvements
Description: GOODYEAR CLINIC: A one-story, Class C, structure constructed in 1977.
HAMITER BUILDING: A four-story, Class B, structure constructed in 1979.
BAPTIST MEDICAL BUILDING II: A five-story, Class B, structure constructed in 1993.
Significant Assumption: All parking easements will be granted to allow for full utilization.
CONCLUSIONS
Cost Approach: $13,650,000
Sales Comparison Approach: $12,750,000
Income Approach: $12,600,000
Final Value Estimate: $12,600,000
===========
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Data 6
Neighborhood Data 9
Real Estate Taxes and Assessments 9
Zoning 10
Site Analysis 10
Buildings and Site Improvements 13
HIGHEST AND BEST USE 16
VALUATION SECTION 19
Valuation Methodology 19
Cost Approach 20
Sales Comparison Approach 34
Income Approach 41
CORRELATION AND CONCLUSION 43
</TABLE>
<PAGE> 12
TABLE OF CONTENTS
-----------------
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Area Map
Exhibit D - Neighborhood Map
Exhibit E - Comparable Land Sale Location Map
Exhibit F - Tax Map
Exhibit G - Building Descriptions
Exhibit H - Rent Comparables Summary
Exhibit I - Subject Photographs
<PAGE> 13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is three professional office buildings located in
Gadsden, Alabama. The Goodyear Clinic, located at 851 Goodyear Avenue, is a
one-story, 13,988 square foot building constructed in 1977 with a leasable area
of 13,998 square feet. This building is currently 100 percent occupied. The
Hamiter Building, located at 100 Medical Center Drive, is a four-story, 51,000
square foot building constructed in 1979 with a leasable area of 38,154 square
feet. This building is currently 100 percent occupied. The Baptist Medical
Building II, located at 300 Medical Center Drive is a five-story, 62,500 square
foot building constructed in 1993 with a leasable area of 50,589 square feet.
This building is currently 43.3 percent occupied.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is January 1, 1994.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owner,
Quorum Health Group, Inc. is considering the sale of four professional office
buildings to Crescent Capital Trust, Inc. The subject properties would be
included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 14
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
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<PAGE> 15
HISTORY OF THE PROPERTY
The subject professional buildings were all constructed by and on the Baptist
Hospital campus. Quorum Health Group, Inc. acquired these buildings on
December 31, 1993 in conjunction with their acquisition of the hospital. An
individual allocation to these buildings was not conducted.
It is our understanding, as confirmed with Crescent Capital Trust, these three
buildings will be acquired by the REIT at an agreed upon purchase price of
$11,800,000.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
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<PAGE> 16
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent
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<PAGE> 17
slow growth are "high debt, stagnant personal income, low consumer confidence
and a troubling unemployment rate". Recent improvements have focussed on the
auto, machinery, steel, housing and specialty retailer market segments. Value
Line cautions, however, that the recent improvements in the economy are being
limited by a slow job growth base. Value Line's Quarterly Economic Review
identified the following estimates for selected economic statistics from 1993
to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate. This soft demand has caused some property
values to remain flat and some to decline. The lower interest rates in recent
periods, however, are serving to stabilize commercial property values.
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<PAGE> 18
DESCRIPTIVE DATA
REGIONAL DATA
GADSDEN/ETOWAH COUNTY
Etowah County, Alabama lies in the lower region of the Appalachians,
incorporating the southern terminus of Lookout Mountain. Gadsden, the county
seat, was developed along the Coosa River which flows through the heart of
Etowah and surrounding communities. The county was carved out from her sister
counties of Blount, Calhoun, Cherokee, DeKalb, Marshall and St. Clair.
The county's nearest major city is Birmingham which is 55 miles south. The
nearest interstates are Interstate 59 and Interstate 20. Atlanta, Georgia is
located approximately 110 miles to the east, and Memphis, Tennessee is located
approximately 275 miles to the north.
Population
The total population within a 30-mile radius is estimated at 342,000. The
population of Gadsden alone is 42,523, which represents 42.6 percent of the
total county population. Based upon the 1990 Census, the population of the
county was 99,840. The population can be further described by the following
statistics:
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<PAGE> 19
POPULATION
GADSDEN, ETOWAH COUNTY, ALABAMA
Population within 30-mile radius 342,000
Gadsden population 42,523
Metro population 71,044
County population 99,840
Male 47.3%
Female 52.7%
White 85.4%
Black 13.8%
Under 18 24.6%
18 to 39 31.3%
40 to 64 28.2%
65 and over 15.9%
Transportation
Air transport into the county of Etowah is provided by the Gadsden Municipal
Airport. The nearest passenger airport is in Birmingham. Ground transport is
provided by Greyhound bus services. There are a number of truck carriers
including Roadway, Yellow Freight, and Consolidated Freightways. Rail services
are provided by CSX and Norfolk Southern.
Healthcare
Baptist Memorial Hospital, with 1,233 employees (346 beds), is the county's
fourth largest employer. Riverview Regional Medical Center, with 570 employees
(281 beds), is the fourth largest property taxpayer in the county. Both
facilities are owned by publicly-held companies.
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<PAGE> 20
Gadsden/Etowah County also supports Mountain View, which is devoted to
addictive, behavioral, and emotional problems. It has 120 employees and 68
beds. This community is also home to more than 160 physicians and surgeons and
60 doctors of dentistry. Gadsden is recognized as the hub for the surrounding
counties, because of the unusually large number of physicians in the area.
This is partly due to its location because Alabama's University Hospital in
Birmingham has become national and internationally famous. The University of
Alabama Hospital is approximately 60 miles from downtown Gadsden.
Area Industries
The largest employer in Etowah County is the Goodyear Tire & Rubber Company,
which manufactures tires. It is estimated that Goodyear employs approximately
2,300 persons. The following chart identifies the top ten employers in the
area.
AREA INDUSTRIES
<TABLE>
<CAPTION>
NUMBER OF
TEN LARGEST INDUSTRIES PRODUCT EMPLOYEES
<S> <C> <C>
Goodyear Tire & Rubber Company Tires 2,300
Gulf States Steel, Inc. Coils and Plates 1,950
Mid-South Industries Appliances/Machining 1,340
Tyson Foods Poultry Processing 1,300
Equity Group of Alabama Processed Poultry 350
Liberty Trousers Trouser Sewing 193
Center Star Manufacturing T-Shirt Sewing 193
South Central Bell Telephone Service 189
Dixie Pacific Manufacturing Wooden Columns 174
AAA Plumbing Pottery Plumbing Fixtures 165
</TABLE>
Overall, the community is a growing and viable area with a growing population.
The location of major industries in the area have contributed positively to the
area and should continue to do so in the future.
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<PAGE> 21
NEIGHBORHOOD DATA
The subject properties are located on the Baptist Hospital medical campus which
is located in the eastern portion of Gadsden on the south side of Goodyear
Avenue. The campus is located adjacent (north) to the Goodyear Tire & Rubber
Company and east of Alabama Power Company. Located to the south of the subject
property are single-family dwellings.
Access to the subject site is provided by Meighan Boulevard (State Road 431/1)
which is a major north-south thoroughfare in Gadsden. Meighan Boulevard is
located southwest of the subject property.
The single-family dwellings located south of the subject site are older homes
approximately 15 to 30 years of age. The average price of a three-bedroom,
2,000 square foot home is $65,000. Overall, the community has developed in
relationship to the existing employers in the area; the hospital, the Goodyear
plant, and the power company.
The subject property's neighborhood is located in the zip codes 35901, 35903
and 35904. The estimated population in these areas has decreased approximately
6.8 percent from the 1980 Census data. As of 1993, the population has remained
relatively stable. Based upon 1993 data, median household income is estimated
to be $23,077. The median age is 37.5.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is located in Etowah County and within the city limit of
Gadsden. Because the subject property is currently owned by a not-for-profit
entity they are not taxed or assessed by the county. The parcel numbers are
presented below:
The Goodyear Clinic 31-15-01-11-0-001-002.050
The Hamiter Building 31-15-01-11-0-001-002.060
Baptist Medical Building II 31-15-01-12-0-001-064
31-15-01-12-0-001-065
If the property was acquired by a for profit entity, the county would be
required to assess and tax the parcels. The millage rate for the 1993 tax year
was $4.90 per $100.
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<PAGE> 22
ZONING
The subject parcels are zoned "O-I" by the Gadsden Planning Department. This
zoning district is designed to provide suitable sites for the development of
office, retail and service uses of a convenience nature which satisfy the
essential and frequent needs of adjacent residential neighborhoods in areas
consistent with the city's comprehensive plan.
Permitted uses includes banks and financial institutions, medical offices,
institutions such as schools and churches and retail and service
establishments. The subject properties are considered legal conforming uses
and in accordance with the current zoning ordinance.
A letter of zoning compliance from the Etowah County is recommended for an
official determination regarding any zoning conformity in regards to parking
requirements.
SITE ANALYSIS
THE GOODYEAR CLINIC, 851 GOODYEAR AVENUE
The Goodyear Clinic parcel is irregularly-shaped and fronts Goodyear Avenue on
the south side. The entire parcel contains a total of 1.19 acres or 51,836
square feet. A legal description is included in the Exhibit section of this
report. A master survey was prepared for the acquisition of the entire Baptist
Hospital campus, inclusive of the subject site. The parcel size has been
determined by the dimensions on a tax plat map and public record. We reserve
the right to modify our report if the actual acreage is found to vary
significantly from the tax plat acreage.
The topography of the site slopes slightly upward from Goodyear Avenue to the
front of the clinic. Located to the south of this building is a mental health
center and the Baptist Hospital. West of the parcel is a softball field and
parking area. Located east of the parcel is a parking area. The site does not
contain any flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
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<PAGE> 23
Other site improvements consist of general landscaping, asphalt paving,
concrete paving and curbing, some shrubs and general signage. The parking lot
for the subject parcel appears to be adequate.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Etowah tax plat map is
included in the Exhibit section.
To our knowledge, no environmental study has been conducted on the
subject site. As appraisers, we are not qualified to detect hazardous
materials. Consequently, our report assumes that there are no environmentally
hazardous materials in the site or building that would adversely affect the
subject property's value.
THE HAMITER BUILDING, 100 MEDICAL CENTER DRIVE
The Hamiter Building parcel is irregularly-shaped and fronts Old Goodyear
Avenue on the east side and Medical Center Drive along its southern borders.
The entire parcel contains a total of 1.30 acres or 56,628 square feet. A
legal description is included in the Exhibit section of this report. A master
survey was prepared for the acquisition of the entire Baptist Hospital campus,
inclusive of the subject site. The parcel size has been determined by the
dimensions on a tax plat map and public record. We reserve the right to modify
our report if the actual acreage is found to vary significantly from the tax
plat acreage.
The topography of the site slopes slightly upward from Old Goodyear Avenue to
the front of the building. Located east of the building is a parking lot and
Medical Center Drive. Located west of the building is the Baptist Hospital and
to the south the Baptist Medical Building II and the Cancer Center. Immediate
north of the parcel is Old Goodyear Avenue and single-family dwellings. The
subject does not contain any flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
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<PAGE> 24
Other site improvements consist of general landscaping, exterior lighting,
asphalt paving, concrete paving and curbing, some shrubs and general signage.
The parking lot for the subject appears to be adequate.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Etowah tax plat map is
included in the Exhibit section.
To our knowledge, no environmental study has been conducted on the
subject site. As appraisers, we are not qualified to detect hazardous
materials. Consequently, our report assumes that there are no environmentally
hazardous materials in the site or building that would adversely affect the
subject property's value.
BAPTIST MEDICAL BUILDING II, 300 MEDICAL CENTER DRIVE
The Baptist Medical Building II parcel is rectangular-shaped and fronts Medical
Center Drive on the west side. It is located just south of Old Goodyear
Avenue. The entire parcel contains a total of 0.65 acres or 28,314 square
feet. A separate legal description for the subject parcel was not made
available to us. We have included a legal description, which encompasses the
entire Baptist Hospital campus in the Exhibit section of this report. This
description is inclusive of the subject parcel. A master survey was prepared
for the acquisition of the entire Baptist Hospital campus, inclusive of the
subject site. The parcel size has been determined by the dimensions on a tax
plat map and public record. We reserve the right to modify our report if the
actual acreage is found to vary significantly from the tax plat acreage.
The topography of the site is level throughout. Located east of the building
is Medical Center Drive, a ravine, and medical office buildings. Located
further east are single-family dwellings. Located west of the parcel is
Baptist Hospital. North of the parcel is Old Goodyear Avenue and single-family
dwellings. South of the subject parcel is the parking area for the hospital
and single-family dwellings. The subject site is level throughout and does
not contain any flood plain.
Utilities serving the site include water, sewer, telephone, gas and
electricity. Police services and fire protection are located in the
neighborhood.
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<PAGE> 25
Other site improvements consist of general landscaping, exterior lighting,
asphalt paving, concrete paving and curbing, some shrubs and general signage.
The subject parcel does not provide parking, but an arrangement has been made
with the hospital for parking for approximately 175 vehicles.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. A copy of a Etowah tax plat map is
included in the Exhibit section.
To our knowledge, no environmental study has been conducted on the
subject site. As appraisers, we are not qualified to detect hazardous
materials. Consequently, our report assumes that there are no environmentally
hazardous materials in the site or building that would adversely affect the
subject property's value.
BUILDINGS AND SITE IMPROVEMENTS
THE GOODYEAR CLINIC, 851 GOODYEAR AVENUE
The Goodyear Clinic is located at 851 Goodyear Avenue. It is a one-story
building constructed in 1977 containing 13,998 gross square feet with a
leasable area of 13,998 square feet.
The building is a one-story structure with wood framing supported on attic
beams with lightweight concrete cover and a brick veneer exterior. The
building has a flat metal deck. Ceiling finishes consist of acoustical ceiling
tiles and recessed fluorescent lighting. The interior walls are gypsum board
on metal framing. Most of the hallways and office areas have vinyl tile and
carpet and pad. Windows and doors are metal-framed, and interior doors are
solid-core wood.
Heating and air conditioning is supplied via Trane package units located
adjacent to the subject. Heat is supplied by a RayPak boiler. One 38-gallon
water heater is part of the plumbing system. The building is 100 percent
sprinklered.
More detail descriptions of the building and site improvements are included in
the Exhibit section of this report.
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<PAGE> 26
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
THE HAMITER BUILDING, 100 MEDICAL CENTER DRIVE
The Hamiter Building is located at 100 Medical Center Drive. It is a
four-story building constructed in 1979 containing 51,000 gross square feet
with a leasable area of 38,154 square feet.
The building is a four-story structure with reinforced concrete post and beam
frame and stucco over fiberglass exterior panels. The building has a flat,
concrete deck roof structure, with a waterproof membrane and large-stone gravel
covering. Ceiling finishes consist of acoustical ceiling tiles and recessed
fluorescent lighting. The interior walls are gypsum board on metal framing.
Most of the hallways and office areas have vinyl tile and carpet and pad.
Windows and doors are metal-framed, and interior doors are solid-core wood.
Air conditioning is supplied via a centrifugal chiller system with perimeter
heat along windows provided by steam condensers with steam provided by the
hospital central plant. Additional air handlers are located on the roof of the
building. One 125-gallon water heater is part of the plumbing system. The
electrical system is comprised of a 1500 amp system consisting of ample
outlets, and incandescent and fluorescent light fixtures. There are a total of
two elevators; one four-stop and one five-stop to the penthouse area.
More detail descriptions of the building and site improvements are included in
the Exhibit Section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in good overall condition. It appears to have been adequately
maintained. No significant deferred maintenance was indicated from the
appraiser's
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<PAGE> 27
inspection of the property. There does not appear to be any functional or
economic obsolescence.
BAPTIST MEDICAL BUILDING II, 300 MEDICAL CENTER DRIVE
The Baptist Medical Building II is located at 300 Medical Center Drive. It is
a five-story building constructed in 1993, containing 62,500 gross square feet
with a leasable area of 50,589 square feet.
The building is a five-story structure with reinforced concrete post and beam
frame and a brick veneer exterior. The building has a flat concrete deck roof
structure with a waterproofed tar and gravel covering. Ceiling finishes
consist of acoustical ceiling tiles and recessed fluorescent lighting. The
interior walls are high quality finishes including gypsum board on metal
framing. The hallways and offices contain high quality vinyl tile and carpet
and pad. Windows and doors are metal-framed, and interior doors are solid-core
wood. At the time of our site inspection the first floor was approximately 100
percent complete, the second floor was approximately 50 percent complete, the
third floor was a shell, the fourth floor was approximately 50 percent
complete, and the fifth floor was completely built-out. Our valuation does
consider the structure as complete and ready for occupancy.
Heating and air conditioning is supplied via a hot and cold water system
comprised of a York chiller, a cooling tower located on the Baptist Hospital
campus and a Lochinvar boiler. The electrical system is comprised of an 800
amp system consisting of ample outlets and incandescent and fluorescent light
fixtures. There are a total of two elevators. The building is 100 percent
sprinklered.
More detail descriptions of the building and site improvements are included in
the Exhibit Section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is in excellent overall condition. It appears to have been
adequately maintained. No significant deferred maintenance was indicated from
the appraiser's inspection of the property. There does not appear to be any
functional or economic obsolescence.
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<PAGE> 28
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, p. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
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<PAGE> 29
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "O-I", Office-Institutional. Permitted uses in this general
zoning category vary widely. Potential legal uses would include some retail,
restaurants, office/institutional, hotels, hospitals and other medical-oriented
uses.
Surrounding uses include the hospital, other professional office uses, some
apartments and some older single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land. New
medical-related development on the south side of the building indicates that
new development is financially feasible. Local physicians have opened a
diagnostic medical office along Goodyear Avenue.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
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<PAGE> 30
As Improved
The subject site is currently improved with a rentable square footage office
building, with an adjacent parking deck and associated site improvements. The
purpose of this discussion is to determine whether to leave the improvements as
they are, to modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the City
of Gadsden zoning guidelines. Under the zoning, the property could remain as
it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. It would, however,
be financially feasible to correct any deferred maintenance.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The highest and best
use, as improved, is to not make any major changes to the current asset use.
The improvements represent the current highest and best use of the property.
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<PAGE> 31
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 32
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
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<PAGE> 33
Land Comparable Number 1
<TABLE>
<S> <C>
Parcel Number: 31-15-05-22-14
Location: East side of Rainbow Drive, west of the river
Size: 56,192 square feet
Sale Date: January 12, 1993
Deed Book/Page: 1821/301
Grantor: Keeling and Loveman
Grantee: Applebee's of North Alabama, Inc.
Sale Price: $200,000
Price Per Square Foot: $3.56
Terms of Sale: All Cash
Shape: Irregular
Zoning: Commercial
Utilities: All utilities are available.
Comments: This parcel was later improved with an Applebee's restaurant. This location is along a
major roadway (Rainbow Drive), and in close proximity to a hotel and large shopping
center.
</TABLE>
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<PAGE> 34
Land Comparable Number 2
<TABLE>
<S> <C>
Parcel Number: 31-15-02-04-03-304-20
Location: East of Eighth Street, south side of Forrest Avenue
Size: 10,400 square feet
Sale Date: January 13, 1992
Deed Book/Page: 1772/101
Grantor: Mary E. Barlow Kidd, et al
Grantee: Thomas and Diane Davis
Sale Price: $15,000
Price Per Square Foot: $1.44
Terms of Sale: All Cash
Shape: Rectangular
Utilities: All utilities are available.
Comments: This parcel was purchased for an office building, which is presently under construction.
It is located in proximity to the government center of Gadsden.
</TABLE>
-22-
<PAGE> 35
Land Comparable Number 3
<TABLE>
<S> <C>
Parcel Number: 31-21-02-09-16
Location: Southwest side of Pilgrim's Rest Road (State Road 1073)
Size: 39,600 square feet
Sale Date: September 30, 1991
Deed Book/Page: 1752/265
Grantor: Jason B. Newton
Grantee: Big B Food Systems, Ltd., an Alabama Partnership
Sale Price: $60,000
Price Per Square Foot: $1.52
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Commercial
Utilities: All utilities are available.
Comments: This parcel was an out-parcel to an existing shopping center. It will be improved
with a Big B Drugstore. The parcel does not have road frontage, although visual to the
roadway.
</TABLE>
-23-
<PAGE> 36
A summary of the land sales is shown as follows:
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
LAND SALE SIZE PRICE
OMPARABLE LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 East side Rainbow Drive 1/93 56,192 $3.56
2 South side of Forrest Avenue 1/92 10,400 $1.44
3 Southwest side of Pilgrim's Rest Road 9/91 39,600 $1.52
(SR1073)
SUBJECT 851 GOODYEAR AVENUE 51,836
100 MEDICAL CENTER DRIVE 56,628
300 MEDICAL CENTER DRIVE 28,314
</TABLE>
Discussion of Land Comparables
LAND COMPARABLE 1 is a parcel located on Rainbow Drive, later developed as a
restaurant. Downward adjustments were indicated because of the level
topography of this sale. An additional downward adjustment has been made for
its location because of the sale's proximity to the river and its location
along a major commercial road. The adjustments are shown on a Land Sale
Adjustment Grid at the end of this discussion. The adjusted price per square
foot of this comparable is $1.42 per square foot.
LAND COMPARABLE 2 was a significantly smaller parcel located in downtown
Gadsden, later improved with an office. A slight downward adjustment has been
made for its favorable location. An additional downward adjustment was made for
size, since smaller tracts tend to sell for higher unit prices than larger
tracts. The parcel has similar topography as the subject parcels negating an
adjustment. The adjusted price per square foot of this comparable is $1.32.
-24-
<PAGE> 37
LAND COMPARABLE 3 was a 39,600 square foot parcel located on Pilgrim Rest Road
which is west of the subject parcels. The parcel was later improved with a
drugstore. An upward adjustment has been to this sale, because of its lack of
road frontage. A downward adjustment has been made for its level topography as
compared to the subject parcels. The adjusted price for this comparable is
$1.55 per square foot.
The adjusted land prices ranged from $1.32 per square foot to $1.55 per square
foot, with the prices of the most comparable sites being in the middle of this
range. Based on our analysis of the subject versus these comparables, it is
our opinion that a land price of $1.45 per square is representative of the
subject sites. The subject land value is estimated as follows:
<TABLE>
<S> <C> <C> <C>
The Goodyear Clinic 51,836 SF x $1.45/SF = $ 75,162
The Hamiter Building 56,628 SF x $1.45/SF = $ 82,111
Baptist Medical Building II 28,314 SF x $1.45/SF = $ 41,055
-------
Total $198,328
Rounded to: $198,000
========
</TABLE>
-25-
<PAGE> 38
L A N D S A L E A D J U S T M E N T G R I D
Goodyear Clinic
Hamiter Building
Baptist Medical Building II
Gadsden, Alabama
<TABLE>
<CAPTION>
Subject Land Comp Land Comp Land Comp
Element #1 #2 #3
<S> <C> <C> <C> <C>
Sale Price/SF $3.56 $1.44 $1.52
Property Rights Fee Simple Same Same Same
Adjustment
--------------------------------------------
Adjusted Price/SF $3.56 $1.44 $1.52
Financing Cash Cash Cash Cash
Adjustment
--------------------------------------------
Adjusted Price/SF $3.56 $1.44 $1.52
Conditions of Sale None None None
Adjustment
--------------------------------------------
Adjusted Price/SF $3.56 $1.44 $1.52
Market/Time
Adjustment 0% 2% 2%
--------------------------------------------
Adjusted Price/SF $3.56 $1.47 $1.55
Other Adjustments:
Location Adjustment -50% -5% 10%
Topography Adjustment -10% 0% -10%
Size Adjustment 0% -5% 0%
Zoning Adjustment 0% 0% 0%
Net Other Adjustments -60% -10% 0%
FINAL ADJUSTED PRICE PER SF $1.42 $1.32 $1.55
============================================
</TABLE>
-26-
<PAGE> 39
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. An amount representing entrepreneurial profit has also been included
in this analysis. This profit is a necessary element in the motivation to
construct the improvements and represents an additional amount the develop
would expect to receive for construction of the project. The amount of
entrepreneurial profit varies according to economic conditions and types of
developments. For the purpose of this report, entrepreneurial profit was
estimated to comprise ten percent of the direct and indirect building costs.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of good quality medical office
buildings is typically 40 to 50 years. For the Goodyear Clinic and the
Hamiter Building, we have estimated an economic life of 45 years. The
Baptist Medical Building II has an economic life of 50 years.
-27-
<PAGE> 40
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
THE GOODYEAR CLINIC
The Goodyear Clinic was constructed in 1977, and is in average to good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to 16 years. The remaining useful life is estimated to be 29 years.
This translates into a physical depreciation estimate of 36 percent (16 years
divided by 45 years). The amount of depreciation attributable to the property
has been estimated on a straight-line basis, which is founded on the assumption
that depreciation of a property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of five years and a remaining useful life of
15 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 25
percent.
The total depreciation for the building is estimated to be $652,507, and the
depreciated value of the building replacement costs to be $1,160,013.
-28-
<PAGE> 41
THE HAMITER BUILDING
The Hamiter Building was constructed in 1979, and it is in average to good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to its actual age of fifteen years. The remaining useful life is
estimated to be 30 years. This translates into a physical depreciation
estimate of 33 percent (15 years divided by 45 years). The amount of
depreciation attributable to the property has been estimated on a straight-line
basis, which is founded on the assumption that depreciation of a property
occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of five years and a remaining useful life of
15 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 25
percent.
The total depreciation for the building is estimated to be $1,713,815, and the
depreciated value of the building replacement costs to be $3,479,637.
BAPTIST MEDICAL BUILDING II
The Baptist Medical Building II was constructed in 1993, and it is in excellent
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to one year. The remaining useful life is estimated to be 49 years.
This translates into a physical depreciation estimate of two percent (1 year
divided by 50 years). The amount of depreciation attributable to the property
has been estimated on a straight-line basis, which is founded on the assumption
that depreciation of a property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of one year and a remaining useful life of 19
years. Therefore, the depreciation rate attributable to the site improvements
on a straight-line basis is estimated to be approximately five percent.
-29-
<PAGE> 42
The total depreciation for the building is estimated to be $177,646, and the
depreciated value of the building replacement costs to be $8,704,662.
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of January 1, 1994, is:
<TABLE>
<S> <C> <C>
The Goodyear Clinic $ 1,255,263
The Hamiter Building 3,606,637
Baptist Medical Building II 8,802,662
-----------
Total $13,664,562
Rounded to: $13,650,000
===========
</TABLE>
-30-
<PAGE> 43
SUMMARY OF VALUE VIA COST APPROACH
GOODYEAR CLINIC
GADSDEN, ALABAMA
Replacement
Cost
-----------
Site Preparation 3,907
Foundation 35,018
Frame 16,778
Exterior Walls 144,353
Basement Walls 0
Floors 48,993
Roof 137,525
Roof Cover 53,005
Partitioning & Built-In Items 344,815
Ceilings 100,279
Floor Coverings 81,151
Plumbing 112,742
HVAC 202,706
Electrical 141,536
Other Features 17,743
----------
Total Replacement Cost 1,440,551
Architect's Fees Plans and Specs 3.9% 56,181
Architect's Fees, Supervision 3.0% 43,217
Legal, Accounting, Contingency 7.0% 107,796
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 164,775
----------
Total of Other Costs 371,969
Total Project Replacement Cost $1,812,520
==========
Accrued Depreciation
Depreciation Factor 36% Straight Line 16/45th (652,507)
----------
Depreciated Value of Building $1,160,013
Site Improvements
Replacement Cost $ 27,000
Depreciated Cost 25% Straight Line 5/20ths (6,750)
----------
Depreciated Value $ 20,250
Plus Land Value (rounded) 1.19 acres $ 75,000
----------
COST APPROACH VALUE FOR ALL ASSETS $1,255,263
==========
-31-
<PAGE> 44
SUMMARY OF VALUE VIA COST APPROACH
HAMITER BUILDING
GADSDEN, ALABAMA
Replacement
Cost
-----------
Site Preparation 3,049
Foundation 100,323
Frame 484,194
Exterior Walls 253,322
Basement Walls 0
Floors 274,231
Roof 107,773
Roof Cover 17,064
Partitioning & Built-In Items 1,100,025
Ceilings 262,781
Floor Coverings 152,047
Plumbing 217,537
HVAC 495,857
Electrical 451,527
Other Features 207,940
----------
Total Replacement Cost 4,127,670
Architect's Fees Plans and Specs 3.9% 160,979
Architect's Fees, Supervision 3.0% 123,830
Legal, Accounting, Contingency 7.0% 308,874
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 472,135
----------
Total of Other Costs 1,065,818
Total Project Replacement Cost $5,193,488
==========
Accrued Depreciation
Depreciation Factor 33% Straight Line 15/45th (1,713,851)
----------
Depreciated Value of Building $3,479,637
Site Improvements
Replacement Cost $ 60,000
Depreciated Cost 25% Straight Line 5/20th (15,000)
----------
Depreciated Value $ 45,000
Plus Land Value (rounded) 1.30 acres $ 82,000
----------
COST APPROACH VALUE FOR ALL ASSETS $3,606,637
==========
-32-
<PAGE> 45
SUMMARY OF VALUE VIA COST APPROACH
BAPTIST MEDICAL BUILDING II
GADSDEN, ALABAMA
Replacement
Cost
-----------
Site Preparation 3,049
Foundation 157,127
Frame 783,132
Exterior Walls 890,444
Basement Walls 0
Floors 399,111
Roof 109,476
Roof Cover 42,194
Partitioning & Built-In Items 1,391,265
Ceilings 274,554
Floor Coverings 248,542
Plumbing 688,986
HVAC 1,066,425
Electrical 571,072
Other Features 434,085
----------
Total Replacement Cost 7,059,462
Architect's Fees Plans and Specs 3.9% 275,319
Architect's Fees, Supervision 3.0% 211,784
Legal, Accounting, Contingency 7.0% 528,260
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 807,483
----------
Total of Other Costs 1,822,846
Total Project Replacement Cost $8,882,308
==========
Accrued Depreciation
Depreciation Factor 2% Straight Line 1/50ths (177,646)
----------
Depreciated Value of Building $8,704,662
Site Improvements
Replacement Cost $ 60,000
Depreciated Cost 5% Straight Line 1/20ths (3,000)
----------
Depreciated Value $ 57,000
Plus Land Value (rounded) .65 acres $ 41,000
----------
COST APPROACH VALUE FOR ALL ASSETS $8,802,662
==========
-33-
<PAGE> 46
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on three professional office building
sales which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-34-
<PAGE> 47
IMPROVED SALE NUMBER 1
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1770 Independence Court, Homewood, Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Gross Square Foot: $ 108.86
Stabilized Overall Rate: 8.0%
EGIM: 8.91
</TABLE>
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building, so the Grantee/physician would move
his surgical practice to the HealthSouth Medical Center. The location and
building quality for this comparable are inferior to the subject property.
-35-
<PAGE> 48
IMPROVED SALE NUMBER 2
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: West side of 20th Street South at the address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
-----
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- -----
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Gross Square Foot: $ 71.51
Stabilized Overall Rate: 9.0%
EGIM: 6.68
</TABLE>
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
-36-
<PAGE> 49
IMPROVED SALE NUMBER 3
<TABLE>
<S> <C>
GENERAL SALE DATA
Location: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
------- -----
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- -----
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Gross Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
</TABLE>
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-37-
<PAGE> 50
These three sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NUMBER ADDRESS SQ. FT. SALE PRICE SQ. FT.
<S> <C> <C> <C> <C>
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $4,525,000 $139.23
Roswell, Georgia
</TABLE>
The unadjusted prices of these comparables range from $84.13 per square foot to
$139.23 per gross square foot. Each of the comparables will be discussed and
adjusted for comparisons with the subject property. An Improved Sales
Adjustment Matrix is shown at the end of this section.
SALE NUMBER 1 is a Class C professional office building that is located near
the Brookwood Medical Center. An affiliate of HealthSouth Medical Center
purchased this building to encourage its physician/owner to move his practice
to their facility. This transaction was reportedly at a market value price.
However, a downward adjustment is still indicated because the building never
was marketed as a vacant building due to this relationship. The building is
located at the end of a steep winding road, and has poor visibility. An upward
adjustment is indicated due to this inferior location compared to the subject.
An offsetting downward adjustment to the price per square foot is indicated
because of the smaller size of this comparable. An upward adjustment to this
comparable is indicated because of the subject's superior construction quality.
The adjusted price per square foot of this comparable is $103.42.
SALE NUMBER 2 is the sale of a building purchased by UAB to use as a Medical
Genetics Center. An upward adjustment is warranted for time. The sale's
location near a medical center is similar to the subject's. The sale's
effective age is significantly above the subject's indicating an upward
adjustment. A downward adjustment for size would be warranted. The adjusted
price for this comparable is $90.10 per square foot.
-38-
<PAGE> 51
SALE NUMBER 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. An upward adjustment for time has been applied.
Downward adjustments to the price per square foot of this comparable are
indicated because it is new and smaller than the subject facility. The
adjusted price per square foot of this comparable is $116.95.
The adjusted prices per square foot range from $90.10 to $116.95. An adjusted
price of $100.00 per square foot is representative of the subject property.
Based on this analysis, the market value of the subject property by the Sales
Comparison Approach, as of January 1, 1994, the effective date of this report,
is calculated as follows:
127,488 SF x $100.00/SF = $12,448,800
Rounded to: $12,750,000
==========
-39-
<PAGE> 52
I M P R O V E D S A L E A D J U S T M E N T G R I D
Goodyear Clinic
Hamiter Building
Baptist Medical Building II
Gadsden, Alabama
Element Subject Bldg Comp Bldg Comp Bldg Comp
#1 #2 #3
Sale Price/SF $108.86 $71.51 $139.23
Property Rights Fee Simple Same Same Same
Adjustment
--------------------------------
Adjusted Price/SF $108.86 $71.51 $139.23
Financing Cash Cash Cash Cash
Adjustment
--------------------------------
Adjusted Price/SF $108.86 $71.51 $139.23
Conditions of Sale None None
Adjustment -5% 0%
--------------------------------
Adjusted Price/SF $108.86 $71.51 $139.23
Market/Time
Adjustment 0% 5% 5%
--------------------------------
Adjusted Price/SF $103.42 $75.09 $146.19
Other Adjustments:
Location Adjustment 5% 0% 0%
Building Condition 5% 25% -15%
Size Adjustment -10% -5% -5%
------ ------ ------
Net Other Adjustments 0% 20% -20%
FINAL ADJUSTED PRICE PER SF $103.42 $90.10 $116.95
================================
-40-
<PAGE> 53
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject properties consist of three of four professional office buildings
that Quorum Health Group, Inc. is selling for the purpose of establishing a
real estate investment trust (REIT). Quorum Health Group, Inc., the seller,
will provide a net rental guarantee in the form of a master lease. The REIT,
as the new property owner, will receive an annual rental income regardless of
the rental rates charged or received from the actual physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow leasing flexibility for the
office space. Quorum can lease office space to various physicians at different
rates and terms, or they can use the office space for hospital purposes.
The annual income stream guaranteed to the REIT is $1,327,501. Based upon the
total leasable square footage of the subject office buildings of 102,741, this
would correlate to a net rental rate per square foot of $13.00 (rounded). This
average rate per square foot appears to be reasonable based upon our market
research and rent comparables. There is little Class A space in the Gadsden
area, and as such, the subject property is viewed as premium office space. We
have included these comparables in the Exhibit Section of this report.
Valuation Counselors has received documentation of the guaranteed rental income
stream, but the actual master lease agreements for each property are not yet
available. For the purpose of our Income Approach, the gross income will be
the guaranteed annual income stream for all three of the professional office
buildings of $1,327,501.
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
-41-
<PAGE> 54
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at five percent of effective gross income, or
$66,375, based on the management experience of other properties. The net
operating income for the property is $1,327,501 less $66,375, or $1,261,126.
The estimated direct capitalization rates, or overall rates (OARs), for the
four improved sale comparables presented in the Sales Comparison Approach
section of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale Number Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 Independence Court March 1993 8.0%
Birmingham, Alabama
2 20th Street South December 1992 9.0%
Birmingham, Alabama
3 Upper Hembree November 1991 10.1%
Roswell, Georgia
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
8.0 percent to 10.1 percent.
A capitalization rate at 10.0 percent is considered appropriate because of the
age of the subject.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$1,261,126/.10 = $12,611,260
Rounded to: $12,600,000
==========
-42-
<PAGE> 55
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the subject professional office buildings. The three approaches are summarized
as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,650,000
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . . $12,750,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,600,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation is difficult. For this reason, this approach is considered only a
fair indicator of value for the subject property.
The Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable professional office
buildings. The quantity and quality of data available in this approach was
considered good, but no comparable transactions were found directly in the
Gadsden market. The appraisers only consider this approach to be a fair
indicator of value for the subject property.
The Income Approach normally provides the most reliable value estimate for
professional office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the subject
professional office buildings, as of January 1, 1994, and based on the
assumptions and limiting conditions in this report, is:
$12,600,000
==========
-43-
<PAGE> 1
EXHIBIT 10.33
AN APPRAISAL OF
DESERT SPRINGS MEDICAL PLAZA
LAS VEGAS, NEVADA
<PAGE> 2
(logo) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
February 21, 1994
Crescent Capital Trust, Inc.
One Perimeter Park South
Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John W. McRoberts
President & Chief Financial Officer
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the medical office building identified as follows:
DESERT SPRINGS MEDICAL PLAZA
2121 EAST FLAMINGO ROAD
LAS VEGAS, NEVADA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of January 1, 1994, the effective date of this
report. The report is to be used for asset valuation purposes. Crescent
Capital Trust is acquiring this office building for the purpose of establishing
a real estate investment trust (REIT). This valuation assumes that the
prospective REIT is the owner of the property with Quorum Health Group
guaranteeing an annual rental income stream of $528,750. This would correlate
to an average square foot amount, based upon the total leasable square footage
of the subject building, of $19.80 (rounded). This average rate for leasable
square footage appears reasonable based upon our research of the market and
market comparables.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
<PAGE> 3
Crescent Capital Trust, Inc.
February 21, 1994
Page Two
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
o buyer and seller are typically motivated;
o both parties are well informed or well advised, and acting in
what they consider their own best interests;
o a reasonable time is allowed for exposure in the open market;
o payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The Desert Springs Medical Plaza is a two-story, Class A, 33,360 gross square
foot building constructed in 1974. This building is currently 100 percent
occupied with a net leasable area of 26,701 square feet.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
<PAGE> 4
Crescent Capital Trust, Inc.
February 21, 1994
Page Three
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the subject medical
office building, as of January 1, 1994, to be as follows:
$4,800,000
==========
We have no responsibility to update our report for events and circumstances
occurring after the date of this report.
Neither the whole, nor any part of this appraisal or any reference thereto may
be included in any document, statement, appraisal or circular without Valuation
Counselors Group, Inc.'s prior written approval of the form and context in
which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
-----------------------
Patrick J. Simers
Managing Director
PJS:jef
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Cheryl Worthy-Pickett of Valuation Counselors has made a personal
inspection of the property that is the subject of this report.
John Bodine and Cheryl Worthy-Pickett provided significant
professional assistance to the person signing this report.
/s/ Patrick J. Simers Cheryl Worthy-Pickett
------------------------------ ------------------------
Patrick J. Simers Cheryl Worthy-Pickett
Managing Director Senior Appraiser
Nevada Certified General Real Estate
Appraiser No. 01339
<PAGE> 6
NOT TRANSFERABLE NOT TRANSFERABLE
STATE OF NEVADA - DEPARTMENT OF COMMERCE
REAL ESTATE DIVISION
LICENSE: 01339 This Is to Certify That ISSUE: 11/23/1993
SIMERS, PATRICK J
90 DAY PERMIT CERTIFIED GENERAL APPRAISER
340 INTERSTATE N PARKWAY - #440
ATLANTA GA 30339
IS DULY AUTHORIZED TO ACT AS A REAL ESTATE APPRAISER FROM BUSINESS ADDRESS
STATED HEREIN TO 02/21/1994 UNLESS LICENSE OR REGISTRATION IS SOONER REVOKED,
CANCELLED, WITHDRAWN, OR INVALIDATED.
EXPIRES, FEBRUARY 21, 1994
IN WITNESS WHEREOF, THE DEPARTMENT OF COMMERCE, REAL ESTATE DIVISION, by virtue
of the authority vested in it by Chapter 645C, Nevada Revised Statutes has
caused the License or Registration to be issued with its Seal printed thereon.
This license or registration must be displayed conspicuously in place of
business.
REAL ESTATE DIVISION
LARRY D. STRUVE
DIRECTOR OF COMMERCE
Administrator
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 9
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
GENERAL DATA
Effective Date of Value: January 1, 1994
Last Date of Inspection: February 21, 1994
Property Identification: DESERT SPRINGS MEDICAL PLAZA,
2121 East Flamingo Road, Las
Vegas, Nevada
Interest Appraised: Leased Fee Estate
Building Area: 33,360 gross square feet; 26,701
leasable square feet
Subject Land Size: 3.34 acres, or 145,490 square
feet
Improvements Description: A two-story, Class A, structure
constructed in 1974.
CONCLUSIONS
Cost Approach: $4,600,000
Sales Comparison Approach: $3,100,000
Income Approach: $4,800,000
Final Value Estimate: $4,800,000
==========
<PAGE> 11
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 3
DESCRIPTIVE DATA 6
Regional Analysis 6
Neighborhood Analysis 10
Zoning 10
Real Estate Taxes and Assessments 10
Site Description 11
Improvements Description 12
HIGHEST AND BEST USE 14
VALUATION SECTION 18
Valuation Methodology 18
Cost Approach 19
Sales Comparison Approach 29
Income Approach 36
CORRELATION AND CONCLUSION 38
</TABLE>
<PAGE> 12
TABLE OF CONTENTS
-----------------
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Area Map
Exhibit D - Neighborhood Map
Exhibit E - Comparable Land Sale Location Map
Exhibit F - Plat Map
Exhibit G - Building Descriptions
Exhibit H - Rent Comparables Summary
Exhibit I - Subject Photographs
<PAGE> 13
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal is the Desert Springs Medical Plaza (hereinafter
referred to as the "Plaza") located in Las Vegas, Nevada. The Plaza, located
at 2121 East Flamingo Road, is a two-story, Class A, 33,360 gross square foot
building with 26,701 leasable square feet, constructed in 1974. This building
is currently 100 percent occupied.
A legal description of the property and detail building description is included
in the Exhibit section of the report.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is January 1, 1994.
FUNCTION OF THE APPRAISAL
The report is to be used for internal financial valuation purposes. The owner,
Quorum Health Group, Inc., is considering the sale of four medical office
buildings for the purpose of establishing a real estate investment trust
(REIT). The subject property would be included in that sale.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
-1-
<PAGE> 14
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o buyer and seller are typically motivated;
o both parties are well informed or well advised, and acting in
what they consider their own best interests;
o a reasonable time is allowed for exposure in the open market;
o payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, P. 21, 10th Ed., published by The
Appraisal Institute.]
-2-
<PAGE> 15
HISTORY OF THE PROPERTY
The subject medical plaza was acquired on September 30, 1993 by Quorum Health
Group, Inc. This acquisition was part of the acquisition of the Desert Springs
Hospital. The purchase of the facility was recorded in the Clark County
records, Document Record 00702. The recorded purchased price of the Desert
Springs Hospital, inclusive of the medical plaza, was $140,000,000. The
allocated value for the Desert Springs Medical Plaza was $4,717,839.
Based upon confirmation by Crescent Capital Trust, the REIT has agreed upon a
purchase price of $4,700,000 for the medical office building.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period.
-3-
<PAGE> 16
Federal Government Purchases account for 7.2 percent of the total GDP, and this
decline is limited to the rate of overall GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
<TABLE>
<CAPTION>
INTEREST RATES AND SELECTED STATISTICS
JANUARY 6, 1994 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
-4-
<PAGE> 17
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate. This soft demand has caused some property
values to remain flat and some to decline. The lower interest rates in recent
periods, however, are serving to stabilize commercial property values.
-5-
<PAGE> 18
DESCRIPTIVE DATA
REGIONAL ANALYSIS
The subject property is located in the southern section of the city of Las
Vegas, in the county of Clark, and the state of Nevada. An area map is
included in the Exhibit section of this report. Demographic information at the
county and state levels is presented below. This data was obtained from Las
Vegas Perspective 1993, and from National Planning Data Corporation (NPDC), a
service that provides both demographic and economic market data for all
geographic areas in the United States.
Demographic Analysis
According to NPDC, the population of Clark County grew from 463,086 in 1980 to
741,459 in 1990. On an annual compounded basis, the growth rate was 4.8
percent. During the same time period, the population in Nevada grew from
800,492 in 1980 to 1,201,833 in 1990, a 4.1 percent compounded annual growth
rate. It is estimated that by 1997, total population at the county and state
levels will be 1,018,240 and 1,615,121, respectively. This represents annual
growth rates of 4.6 percent for the county and 4.3 percent for the state over
the period 1990 to 1997.
The total number of households at the county level rose from 173,888 in 1980 to
287,025 in 1990, thus representing an increase of 5.1 percent on an annual
compounded basis. The total number of households in Nevada increased at a
slower pace than that of the county. Between 1980 and 1990, the number of
households in the state rose from 304,324 in 1980 to 466,297 in 1990, an
increase of 4.4 percent compounded annually.
The 1990 median age of Clark County's population was 33.1 years, with a median
age of the state at 33.3 years. Both geographic areas are considered to have
mature populations similar to the national median age of 33.1 years.
Approximately 7.5 percent of the total population in Clark County in 1980 was
65 years and older. In 1990, the percentage increased to 10.5 percent and is
expected to reach 10.9 percent by 1997. Corresponding percentages for the
state were 8.2 percent in 1980, 10.6 percent in 1990, and 11.0 percent
estimated for 1997.
-6-
<PAGE> 19
Based on the preceding data, the estimated change in population of persons 65
years and older at both the county and state levels is as follows:
<TABLE>
<CAPTION>
Annual Compounded
1990 1995 Rate of Change
-------- -------- ------------------
<S> <C> <C> <C>
County:
Total Population 741,459 1,018,240 4.6%
% 65 Years + 10.5% 10.9%
Population 65 Years + 77,678 110,546 5.2%
State:
Total Population 1,201,833 1,615,121 4.3%
% 65 Years + 10.6% 11.0%
Population 65 Years + 127,631 177,212 4.8%
Source: NPDC
</TABLE>
The above table supports the outlook that populations at both the county and
state levels will continue to mature. As indicated, the total population of
persons 65 years and older will increase at annual rates of 5.2 percent for the
county and 4.8 percent for the state. For the most part, these rates are
significantly higher than the estimated overall rates of growth between 1990
and 1997.
Economic Analysis
The median household income for Clark County increased from $18,113 in 1980 to
$30,714 in 1990, representing an annual compounded rate of change of 5.4
percent. In comparison, the median household income in Nevada rose 5.5 percent
on an annual compounded basis over the same time period. The state's median
income in 1980 was $18,216 and increased to $31,011 in 1990.
Clark County's strong economic well-being is due to its diversification. Of
the county's total number of employed (not including agriculture or mining
occupations), the service industry accounts for nearly 46 percent, retail and
wholesale trade 21 percent, government 11 percent, and construction 8.0
percent. Combined, the total number of
-7-
<PAGE> 20
employed persons in nonagricultural and mining occupations accounted for over
75 percent of the total. This distribution indicates a fairly well-balanced
economy which is less prone to economic hardship should one industry experience
a downturn.
The Nevada Department of Economic Security lists 35 businesses in Clark County
which have more than 1,000 employees. Of these, 24 were hotels and/or casinos.
Other major employers included three utility companies, three government
agencies, two banks, two engineering firms, and one hospital.
Tourism provides, by far, the greatest source of income for the area. In 1992,
21.9 million tourists generated nearly $14.7 billion in income for the Las
Vegas Metropolitan Statistical Area (MSA).
Transportation is provided by U.S. Interstate Highway 15 south to Los Angeles
and north to Salt Lake City, U.S. Routes 93 and 95 south to Phoenix and north
to Tonopah; McCarran International Airport, which has been expanded with a new
Charter/ International terminal to further facilitate airline access, Amtrak
rail passenger service, and major bus lines.
The median purchase price for a home in the Las Vegas Metropolitan Statistical
Area (MSA) was $119,900 in 1992, with 63 percent of households owning their
homes.
The Suburban East sub-market consists of office buildings located east of
Interstate 15, not including those in the Downtown sub-market. In the
Suburban East sub-market, the most clearly defined corridor is Flamingo Road.
The heaviest concentration of office development in this corridor is located
between Maryland Parkway on the west and Eastern Avenue on the east. As the
office market has expanded, Eastern and Tropicana Avenues have also become
popular office locations. More recently a small cluster of office buildings
has developed in the area of the Green Valley Town Center in Henderson.
The Suburban East sub-market absorbed approximately 5,560 square feet, based
upon a study developed by Coopers and Lybrand. However, due to its inventory
base, the sub-market vacancy rate increased slightly to 14.5 percent. The
subject property is presently 100 percent occupied and located next to hospital
that is growing. We would not anticipate any dramatic decline in its occupancy
over the foreseeable future.
-8-
<PAGE> 21
TABLE 1
SUMMARY OF OFFICE MARKET CONDITIONS
BY REGION AND AGE
QUARTER 2 1993
METRO LAS VEGAS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASKING
O C C U P A N C Y D A T A ABSORPTION LEASE
------------------------------------------------ ---------- RATES
Total Unoccupied Unoccupied ------------
Space but and Current Average &
Sq. Ft. Occupied Committed Available Quarter Weighted
------------- Sq. Ft. Sq. Ft. Sq. Ft. ----------- Average
# of % of ------------ ------------- ------------- Previous ------------
Submarket/Age Buildings Metro Total % % % 12 mos. $/Sq. Ft.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Downtown 15 909,483 856,431 8,000 45,052 2,892 $1.39
13.0% 94.2% 0.9% 5.0% 16,321 $1.60
Suburban East 56 3,566,062 3,044,589 4,750 516,723 5,560 $1.31
50.8% 85.4% 0.1% 14.5% 65,062 $1.45
Suburban West 55 2,537,481 2,268,522 17,250 251,709 33,598 $1.38
36.2% 89.4% 0.7% 9.9% 58,098 $1.48
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 126 7,013,026 6,169,542 30,000 813,484 42,050 $1.35
Percent of Total 100.0% 88.0% 0.4% 11.6% 139,481 $1.48
- ------------------------------------------------------------------------------------------------------------------------------------
New 5 130,434 129,234 0 1,200 2,800 $1.18
1.9% 99.1% 0.0% 0.9% 47,700 $1.13
Recent 41 1,661,265 1,539,372 8,800 113,093 445 $1.44
23.7% 92.7% 0.5% 6.8% 83,698 $1.52
Mature 80 5,221,327 4,500,936 21,200 699,191 38,805 $1.31
74.5% 86.2% 0.4% 13.4% 8,083 $1.48
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Definitions:
New = First occupied within the last two years.
Recent = First occupied within the last three to five years.
Mature = First occupied six years ago or more.
Note: Percentage may not sum 100% due to rounding.
Source: Surveyed building owners and managers, June 1993
-9-
<PAGE> 22
NEIGHBORHOOD ANALYSIS
The subject property is located in the southern section of Las Vegas. It is
bounded by Flamingo Road to the north, Rochelle Avenue to the south, and Bruce
Street to the west. Burnham Avenue divides the hospital property from the
medical office building. A map of this area is included in the Exhibit section
of this report.
The subject's immediate area is comprised of a diverse sampling of commercial,
medical office, and large multi-family residential units along Flamingo Road.
Southwest Medical Associates, Paradise Valley Women's Care Center, Charter
Counseling Center, Cosmetic Surgery Center, and a physician's clinic surround
the subject providing a variety of healthcare services. South of the property
are primarily modest single-family homes.
The property has convenient access to Interstate 15, which is located two miles
west on Flamingo Road. McCarran International Airport is also approximately
two miles southwest of the property.
Currently, there are a total of eight hospitals in the Las Vegas area providing
2,278 beds. With the continued growth of Clark County virtually assured, we
believe that the resulting increased demand for quality healthcare should
provide the subject with a good basis for continued growth and high occupancy
levels.
ZONING
The subject property is zoned local business (C-1). Its use as a medical
office is permitted in accordance with the Conditional Use permit it has been
granted for the hospital site and its own separate zoning. Potential legal
uses include office/institutional, retail and restaurants.
REAL ESTATE TAXES AND ASSESSMENTS
The subject property was assessed in 1988 by the Clark County Property
Assessor. The property is taxed based upon approximately 35 percent of the
appraised value. The property is identified by parcel number 150-360-006. The
assessor's appraised values for the subject parcel is presented on the
following page.
-10-
<PAGE> 23
<TABLE>
<CAPTION>
Clark County Property Assessor's Appraised Value
------------------------------------------------
<S> <C>
Land $1,091,857
Improvements 1,881,486
----------
$2,973,343
</TABLE>
The subject is assessed at 35 percent of the appraised value. The indicated
assessed value is $1,040,670. The Clark County tax rate is 2.6347 per $100.
This would indicate a taxable amount of $27,418.53
SITE DESCRIPTION
The medical plaza site enjoys approximately 289 feet of frontage along Flamingo
Road to the north and approximately 536 feet along Burnham Avenue. Ingress and
egress is available from both streets, providing the primary public points of
entry and departure. As indicated by the plat map included in the Exhibit
section of this report, the site consists of an irregularly-shaped parcel
containing 3.34 acres.
The subject land is generally level at street grade rising only slightly
southwardly back toward the building improvements. Utilities to the sites
include water, sewer, electricity, cable, telephone and gas.
The subject properties appear to have adequate drainage and soil load-bearing
capabilities to support most development alternatives. A soil report, however,
was not made available to the appraiser and it is assumed, based on existing
improvement, that soil load-bearing capabilities are adequate.
We are not aware of any detrimental easements or encroachments encumbering the
site. Further, we assume that the subject site is not encumbered with
detrimental easements or encroachments. To our knowledge, no environmental
study has been conducted on the subject site. As appraisers, we are not
qualified to detect hazardous materials. Consequently, our report assumes that
there are no environmentally hazardous materials in the site or building that
would adversely affect the subject property's value.
According to the County Planning Office, the subject property is not located in
a flood plain zone.
-11-
<PAGE> 24
A legal description of the properties and a plat map are included in the
Exhibit section of this report.
IMPROVEMENTS DESCRIPTION
Medical Plaza
The site at 2121 East Flamingo Road is improved with a two-story medical office
building (MOB) containing a gross area of 33,360 square feet. The facility was
built in 1974.
The building has full frame construction with steel columns and beams. Floors
are mesh reinforced concrete with some brick on the ground floor and concrete
with steel joists on the second floor. The roof cover is bituminous roofing on
two-inch rigid insulation and two-inch vermiculite. The exterior walls are a
mixture of stucco and eight-inch clay tile masonry units.
Partitioning is generally drywall on metal studs dividing the building into
conventional medical suites. Finishes are generally good quality commercial
grade carpeting, vinyl asbestos tile and suspended acoustical fiber ceilings.
Mechanical services are typical for an office building of this type.
Electrical features include rigid conduit wiring, fluorescent fixtures with
snap switches, wall outlets, and a Westinghouse transformer.
Heating, ventilating and air conditioning are provided by an Ajax natural gas
boiler, an American hot water heater, and Commandair individual combination
1.5- to 5-ton air conditioning units.
The building is serviced by a U.S. Elevator 4,000-pound capacity elevator.
-12-
<PAGE> 25
Land Improvements - MOB
Land improvements consist of concrete and asphalt paving, concrete curbing,
yard lighting and signage, landscaping, a carport, and underground utility
lines.
Details of the construction are shown in the Exhibit section of this report.
DEFERRED MAINTENANCE
Construction of the subject's improvements date from their original
construction in 1974. The improvement is considered to have an effective age
of ten years based upon its continued renovation plan. The overall condition
of the facilities is considered above average. The short-lived building
components have been replaced periodically. Deferred maintenance is short-term
curable depreciation that should be corrected to ensure the facility remains
competitive with other facilities in the area. No deferred maintenance was
noted during our site inspection.
The design of the subject improvements is functional for their intended uses.
Accrued depreciation due to functional features is considered minimal and is
combined with physical depreciation.
The subject's location and surrounding development do not present any
limitation to the competitiveness of the facilities. Surrounding the subject
are several other medical establishments, which suggests no limitation in
attracting physicians and patients. Therefore, we are of the opinion that no
economic or external obsolescence exists.
-13-
<PAGE> 26
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
-14-
<PAGE> 27
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "C-1", local business. Permitted uses in this general zoning
category vary widely. Potential legal uses would include some retail and
restaurants, office/institutional and hotels.
Surrounding uses include the hospital, other medical office uses, some
apartments and some older single-family residential properties. These use
patterns would likely preclude industrial, retail or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional development, the next consideration is
economic feasibility. Financially feasible uses for the site, if vacant, are
those uses that would generate an economic return to the land surrounding the
subject building.
-15-
<PAGE> 28
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new development is financially feasible. Based on
this analysis, the current highest and best use of the land, if vacant, would
be for office/institutional development.
As Improved
The subject site is currently improved with a 26,701 rentable square footage
office building, and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to make minor repairs to the deferred maintenance items on the
property. The improvements are considered functional.
LEGALLY PERMISSIBLE
The improvements, as improved, are a legal conforming use according to the City
of Las Vegas zoning guidelines. Under the zoning, the property could remain as
it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an
office/institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible.
-16-
<PAGE> 29
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The only financially
feasible use is to correct any deferred maintenance that currently exists.
This will enable to the property to remain competitive in the leasing market.
The highest and best use, as improved, is to not make any major changes to the
current asset use. The improvements represent the current highest and best use
of the property.
-17-
<PAGE> 30
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-18-
<PAGE> 31
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-19-
<PAGE> 32
Land Sale Number 1
Location: Flamingo Road, east of Arville Street
Date of Sale: September 5, 1991
Grantor: Marcor Development Company, Inc.
Grantee: Sun State Bank
Document Number: 91090500024
Sale Price: $1,064,810
Size: 106,286 square feet, or 2.44 acres
Unit Price: $10.02 per square foot
Zoning: C2, County Commercial District
Comments: Four miles west of subject.
Land Sale Number 2
Location: Twain Avenue, east of Eastern Avenue
Date of Sale: January 10, 1991
Grantor: Century Property Limited
Grantee: Diamond Villas Partners
Document Number: 011000465
Sale Price: $451,043
Size: 231,304 square feet, or 5.31 acres
Unit Price: $1.95 per square foot
Zoning: RE, Clark County
Comments: One-half-mile from subject in residential
area.
-20-
<PAGE> 33
Land Sale Number 3 (Listing)
Location: Flamingo Road, west of Topaz
Broker: McCardell Realty
Asking Price: $8.50 per square foot under current
zoning (R1),[$12.50 - $15.00 after
rezoning to C2 (1 - 3 months)]
Size: 129,809 square feet, or 2.98 acres
Unit Price: $8.50 per square foot (currently)
Zoning: R1 (Current) / C2 (Applied)
Comments: One-half-mile from subject on Flamingo
Road. Broker feels subject property is
worth $8.00 to $12.00 per square foot.
Land Sale Number 4 (Listing)
Location: Flamingo Road, west of Topaz
Broker: Realty Holdings Group
Asking Price: $15.00 per square foot
Size: 69,696 square feet or 1.6 acres
Unit Price: $15.00 per square foot
Zoning: C1
Comments: One-half-mile from subject on Flamingo
Road. Broker feels average property on
Flamingo Road is worth $8.00 to $9.00 per
square foot.
-21-
<PAGE> 34
<TABLE>
<CAPTION>
SALE SUMMARY
SALE SALE SIZE UNIT PRICE
NUMBER DATE LOCATION SQ. FT. PER SQ. FT. ZONING
<S> <C> <C> <C> <C> <C>
1 09/05/91 Flamingo Road and Arville Street 106,286 $10.02 C2
2 01/10/91 Twain Avenue and Eastern Avenue 231,304 $ 1.95 RE
3 Offered Flamingo Road and Topaz 129,809 $ 8.50 R1
4 Offered Flamingo Road and Topaz 69,696 $15.00 C1
SUBJECT 2121 EAST FLAMINGO ROAD 145,490 C1
</TABLE>
The above sales indicate an unadjusted range of $1.95 to $15.00 per square foot
and range in size from 69,696 square feet to 231,304 square feet. The sales
occurred in 1991. No more recent sales of comparable land have been found.
Based on our analysis of the market and the recent occurrence of these
transactions, no adjustment for time is necessary. Financing for the sales is
deemed to be cash equivalent. As such, no adjustment for financing is
required. Adjustments are necessary to reflect differences in location, access
and exposure characteristics, size, zoning, and other factors influencing
value.
SALE NUMBER 1 is located approximately four miles west of the subject. The
sale is located on a heavily traveled commercial drive (Flamingo Road) and,
therefore, requires no adjustment for location and access. Also, the size of
the sale parcel is smaller than the subject. Typically, smaller parcels sell
for higher unit prices than larger tracts. The subject land is 3.34 acres. As
such, no adjustment for size was warranted, as the property could sell in
smaller lots. Topography and zoning is considered to be comparable and,
therefore, no adjustment is required. Overall, we have made no adjustment to
this sale and consider the sale the most comparable to the subject.
SALE NUMBER 2 is located approximately one-half-mile northeast of the subject.
The sale is located in a residential neighborhood with no frontage on a busy
street. Therefore, a significant upward adjustment is warranted for location.
Topography of the sale is considered comparable and requires no adjustment for
this factor. No adjustment is needed for size. Overall, we have adjusted the
sale upward in comparison to the subject, but have given the sale little
consideration in determining the value of the subject property.
-22-
<PAGE> 35
SALE NUMBER 3 (LISTING) is located one-half-mile east of the subject on
Flamingo Road. An upward adjustment was necessary for location based upon the
limited visibility of the parcel as compared to the subject. The property is
smaller than the subject but, given the subject's characteristics, no
adjustment is necessary. Topography of the offered land is considered
comparable and requires no adjustment for this factor. Finally, a downward
adjustment is warranted to reflect the likely reduction of the offering price
during the negotiation process, and also to reflect the effects of rezoning the
property.
SALE NUMBER 4 (LISTING) is also located one-half-mile east of the subject on
Flamingo Road. Therefore, no adjustment is necessary for location or access.
The property is smaller than the subject but, given the subject's
characteristics, no adjustment is necessary. Topography of the offered land is
considered comparable and requires no adjustment for this factor. Finally, a
downward adjustment is warranted to reflect the likely reduction of the
offering price during the negotiation process, and also to reflect the
difference in zoning.
Based on the preceding analysis and discussions with local sources, we estimate
a land value of $10.00 per square foot for the medical office building. This
value was considered appropriate given the proximity of the parcel to Flamingo
Road and its current zoning. The resulting rounded land value is as follows:
$1,455,000
==========
-23-
<PAGE> 36
L A N D S A L E A D J U S T M E N T G R I D
Desert Springs Medical Plaza
Las Vegas, Nevada
Subject Land Comp Land Comp Land Comp Land Comp
Element #1 #2 #3 #4
Sale Price/SF $10.02 $1.95 $8.50 $15.00
Property Rights Fee Simple Same Same Same Same
Adjustment
----------------------------------------------
Adjusted Price/SF $10.02 $1.95 $8.50 $15.00
Financing Cash Cash Cash Cash Cash
Adjustment
----------------------------------------------
Adjusted Price/SF $10.02 $1.95 $8.50 $15.00
Conditions of Sale None None None None
Adjustment
----------------------------------------------
Adjusted Price/SF $10.02 $1.95 $8.50 $15.00
Market/Time
Adjustment 0% 0% -5% -5%
----------------------------------------------
Adjusted Price/SF $10.02 $1.95 $8.08 $14.25
Other Adjustments: 0% 50% 10% 0%
Location Adjustment 0% 0% 0% 0%
Topography Adjustment 0% 0% 0% 0%
Size Adjustment 0% 0% 0% 0%
Zoning Adjustment 0% 0% 0% 0%
Net Other Adjustments 0% 50% 10% 0%
FINAL ADJUSTED PRICE PER SF $10.02 $2.93 $8.88 $14.25
=============================================
-24-
<PAGE> 37
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Services, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. An amount representing entrepreneurial profit has also been included
in this analysis. This profit is a necessary element in the motivation to
construct the improvements and represents an additional amount the develop
would expect to receive for construction of the project. The amount of
entrepreneurial profit varies according to economic conditions and types of
developments. For the purpose of this report, entrepreneurial profit was
estimated to comprise ten percent of the direct and indirect building costs.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 40 to 50 years.
-25-
<PAGE> 38
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Services, Inc., and the actual experience of other buildings
in the market, were use to estimate the overall economic life of the
improvements. The assignment of economic lives assumed that, except for the
building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
judged normal for a building of this age. Observation of the subject property
indicated that the structure and related component parts have been excellently
maintained through a continuous maintenance service program.
The Desert Springs Medical Plaza was constructed in 1974, and is in very good
condition. After taking into consideration all significant physical factors
affecting the subject property, it is judged that the subject has an effective
age equal to ten years. The remaining useful life is estimated to be 35 years.
This translates into a physical depreciation estimate of 22 percent (10 years
divided by 45 years). The amount of depreciation attributable to the property
has been estimated on a straight-line basis, which is founded on the assumption
that depreciation of a property occurs equally throughout its economic life.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of five years and a remaining useful life of
15 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be approximately 25
percent.
The total depreciation for the building is estimated to be $864,789, and the
depreciated value of the building replacement costs to be $3,066,069.
-26-
<PAGE> 39
Cost Approach Conclusion
The schedule on the following page is a summary of the estimated replacement
cost by category for the subject building plus estimates of all forms of
depreciation.
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of January 1, 1994, is:
$4,600,000
==========
-27-
<PAGE> 40
SUMMARY OF VALUE VIA COST APPROACH
DESERT SPRINGS MEDICAL PLAZA
LAS VEGAS, NEVADA
Replacement
Cost
-----------
Site Prepraration 31,304
Foundation 89,352
Frame 363,984
Exterior Walls 411,067
Basement Walls 0
Floors 219,006
Roof 220,485
Roof Cover 62,137
Partitioning & Built-In Items 619,431
Ceilings 119,202
Floor Coverings 116,492
Plumbing 182,853
HVAC 384,487
Electrical 243,095
Other Features 58,344
----------
Total Hard Costs 3,121,239
Architect's Fees Plans and Specs 4.0% 124,850
Architect's Fees, Supervision 3.0% 93,637
Legal, Accounting, Contingency 7.0% 233,781
Entrepreneurial Overhead, Profit, and Other
Miscellaneous Fees 10.0% 357,351
----------
Total Soft Costs 809,619
Total Replacement Cost $3,930,858
==========
Accrued Depreciation
Depreciation Factor 22% Straight Line 10/45th (864,789)
----------
Depreciated Value of Building $3,066,069
Site Improvements
Replacement Cost $ 150,000
Depreciated Cost 25% Straight Line 5/20ths (37,500)
----------
Depreciated Value $ 112,500
Plus Land Value (rounded) 3.34 acres $1,455,000
----------
COST APPROACH VALUE FOR ALL ASSETS $4,633,569
==========
-28-
<PAGE> 41
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on four medical office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-29-
<PAGE> 42
IMPROVED SALE NUMBER 1
GENERAL SALE DATA
Location: South 7th Professional Plaza,
801-829 7th Street, Las
Vegas, Clark County, Nevada
Date of Sale: February 28, 1992
Document Number: 92022800202/203
Grantor: Scott W. Brown
Grantee: Kenneth S. Shioi Trust
Sale Price: $700,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 21,000 square feet
Building Size: 7,412 square feet - leasable
Year Built: 1962
Occupancy at Sale: 90%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $88,944 $12.00
Vacancy Allowance @ 5%: ($4,447) ($.60)
------- ------
Effective Gross Income: $84,497 $11.40
Estimated Expenses @ $3.00/SF: ($22,236) $3.00
------- ------
Net Operating Income: $62,261 $8.40
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 94.44
Stabilized Overall Rate: 8.9%
EGIM: 8.28
COMMENTS
The building is a one-story brick structure with a reported lease rate of
12.00/SF triple net. There are a total of nine units approximately 800 square
feet each.
-30-
<PAGE> 43
IMPROVED SALE NUMBER 2
GENERAL SALE DATA
Location: Parkway Building
Bunkado, 3909 S.
Maryland Parkway,
Las Vegas, Clark
County, Nevada
Date of Sale: August 6, 1992
Document Number: 92080600187
Grantor: M/M Akira & Nobuka Futami
Grantee: Jewish Federation of
Las Vegas
Sale Price: $1,300,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 25,265 square feet
Building Size: 17,227 square feet -
Leasable
Year Built: 1981
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: 227,396 $13.20
Vacancy Allowance @ 10%: 29,561 $ 1.72
------
Effective Gross Income: 197,835 $11.48
Estimated Expenses @ $3.00/SF 52,301 $ 3.00
------- ------
Net Operating Income: 145,534 $ 8.45
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $75.46
Stabilized Overall Rate: 11.16%
EGIM: 6.57
COMMENTS
This is a three-story steel frame building. The average lease rate was
reported at 1.10/SF modified gross. Vacancy rates were reported at 13% and
expenses were reported at 23% of the gross scheduled income.
-31-
<PAGE> 44
IMPROVED SALE NUMBER 3
GENERAL SALE DATA
Location:
Lake Mead Medical
Plaza, 2031 McDaniel
Street, Las Vegas,
Clark County,
Nevada
Date of Sale: March 31, 1992
Document Number: 92033101338
Grantor: McDaniel Street Partnership
Grantee: NLVH, Inc.
Sale Price: $1,200,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 50,530 square feet
Building Size: 24,000 square feet
Year Built: 1975
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
Estimated Gross Income*: $216,000 $9.00
Vacancy Allowance @ 5%: 10,800 ( .45)
-------- ------
Effective Gross Income 205,200 8.55
Estimated Expenses @ $2.00/SF 48,000 (2.00)
-------- ------
Net Operating Income: $157,200 $6.55
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 50.00
Stabilized Overall Rate: 13.1 %
EGIM: 5.85
COMMENTS
This buyer had a one-year-old option to purchase the property. They also spent
an additional $750,000 in tenant improvements. The building is a two-story
steel frame structure constructed in 1975.
-32-
<PAGE> 45
These three sales are summarized as follows:
<TABLE>
<CAPTION>
SUMMARY OF IMPROVED SALES
SALE RENTABLE SALE PRICE PER
NUMBER ADDRESS SQ. FT. PRICE SQ. FT.
<S> <C> <C> <C> <C>
1 South 7th Professional Plaza 7,412 $700,000 $94.44
801-829 7th Street
2 Parkway Building 17,227 $1,300,000 $75.46
3909 S. Maryland Parkway
3 Lake Mead Medical Plaza 24,000 $1,200,000 $50.00
2031 McDaniel Street
</TABLE>
The unadjusted prices of these comparables range from $50.00 per square foot to
$94.44 per square foot. Each of the comparables will be discussed and adjusted
for comparisons with the subject property. An Improved Sales Adjustment Matrix
is shown at the end of this section. All the transactions have received a
downward adjustment for time of sale since they are all older transactions.
SALE NUMBER 1 is a Class C medical office building that is located in the
downtown market of Las Vegas. This transaction is reportedly at a market value
price. However, an upward adjustment for location has been indicated. An
additional upward adjustment has been made based upon the building condition as
compared to the subject. A downward adjustment to the price per square foot is
indicated because of the smaller size of this comparable. An upward adjustment
to this comparable is indicated because of the subject's superior construction
quality. The adjusted price per square foot of this comparable is $113.33.
SALE NUMBER 2 is an older building acquired in 1992. Upward adjustments are
indicated because of the subject's superior location and because of the older
age of this comparable. The adjusted price for this comparable is $94.32.
SALE NUMBER 3 is the sale of a similar building in size, but dissimilar in age.
An upward adjustment has been made because this sale is a single-tenant
building. An upward adjustment has been made. Upward adjustments are
indicated due to the subject's
-33-
<PAGE> 46
superior location and construction quality. The adjusted price per square foot
of this comparable is $71.88.
The adjusted prices per square foot range from $113.33 to $71.88. A rounded
adjusted price at the upper end of the range of $115.00 per square foot is
representative of the subject property. Based on this analysis, the market
value of the subject property by the Sales Comparison Approach as of January 1,
1994, the effective date of this report, is calculated as follows:
26,710 x 115.00 = $3,071,650
Rounded to: $3,100,000
==========
-34-
<PAGE> 47
<TABLE>
<CAPTION>
I M P R O V E D S A L E S A D J U S T M E N T G R I D
Desert Springs Medical Plaza
Las Vegas, Nevada
<S> <C> <C> <C> <C>
Subject Bldg Comp Bldg Comp Bldg Comp
Element #1 #2 #3
Sale Price/SF $ 94.44 $75.46 $50.00
Property Rights Fee Simple Same Same Same
Adjustment ------------------------------------------
Adjusted Price/SF $ 94.44 $75.46 $50.00
Financing Cash Cash Cash Cash
Adjustment ------------------------------------------
Adjusted Price/SF $ 94.44 $75.46 $50.00
Conditions of Sale None None
Adjustment 0% 0%
------------------------------------------
Adjusted Price/SF $ 94.44 $75.46 $50.00
Market/Time
Adjustment 0% 0% 15%
------------------------------------------
Adjusted Price/SF $ 94.44 $75.46 $57.50
Other Adjustments:
Location Adjustment 15% 15% 15%
Size Adjustment -5% 0% 0%
Building Adjustment 10% 10% 10%
Net Other Adjustments 20% 25% 25%
FINAL ADJUSTED PRICE PER SF $113.33 $94.32 $71.88
==========================================
</TABLE>
-35-
<PAGE> 48
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property, Desert Springs Medical Plaza is one of four medical
office buildings that Quorum Health Group, Inc. is selling for the purpose of
establishing a real estate investment trust (REIT). Quorum Health Group, Inc.,
the seller, will provide a net rental guarantee in the form of a master lease.
The REIT, as the new property owner, will receive the net rental income
regardless of the rental rates charged or received from the actual
physician/tenants.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow leasing flexibility for the
office space. Crescent Capital can lease office space to various physicians at
different rates and terms, or they can use the office space for hospital
purposes.
The annual income stream guaranteed to the REIT is $528,750. Based upon the
total leasable square footage of the subject office building of 26,701 this
would correlate to a net rental rate per square foot of $19.80 rounded. We
reserve the right to modify the Income Approach valuation if the actual annual
rental income for the property differs significantly from the draft lease
presented to us. This average rate per square foot appears to be reasonable
based upon our market research and rent comparables. We have included these
comparables in the Exhibit section of this report.
Valuation Counselors has received documentation of the guaranteed rental income
stream, but the actual master lease agreements for the property is not yet
available. For the purpose of our Income Approach, the gross income will be
the guaranteed annual income stream for the professional office building of
$528,750.
The subject appraisal assumes that 100 percent of the income is guaranteed
through the master lease agreement. Since the leased fee interest is being
appraised, there is no deduction for vacancy or credit loss.
-36-
<PAGE> 49
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$26,438, based on the management experience of other properties. The net
operating income for the property is $528,750 less $26,438, or $502,312.
The estimated direct capitalization rates, or overall rates (OARs), for the
three improved sale comparables presented in the Sales Comparison Approach
section of this report are summarized as follows:
<TABLE>
<CAPTION>
Sale Number Property Location Sale Date OAR (%)
<S> <C> <C> <C>
1 South 7th Professional Plaza February 1992 8.9%
801-829 7th Street
Las Vegas, Nevada
2 Parkway Building August 1992 11.16%
3904 South Maryland Parkway
Las Vegas, Nevada
3 Lake Mead Medical Plaza 2031 McDaniel March 1992 13.1%
Las Vegas, Nevada
</TABLE>
The direct capitalization, or overall rates, for these comparables ranged from
8.9 percent to 13.1 percent.
A capitalization rate at 10.5 percent, is considered appropriate because
effective comparable market net lease rates are $1.80 to $6.30 per square foot
less than the master lease rate of $19.80 per square foot.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$502,312/.105 = $4,783,924
Rounded to: $4,800,000
==========
-37-
<PAGE> 50
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the Desert Springs Medical Plaza. The three approaches are summarized as
follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,600,000
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . $3,100,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,800,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation is difficult. Based upon the data available for analysis, it is
our opinion that this approach serves as support and is a fair indication of
value.
The Sales Comparison Approach is based on the price that investors and
owner-occupants have recently paid for comparable medical office buildings.
The quantity and quality of data available in this approach was considered
good, but because of the lack of available transactions in the market, it is
our opinion that they are not a fair representation of value. The appraisers
only consider this approach to be a fair indicator of value for the subject
property.
The Income Approach normally provides the most reliable value estimate for
medical office buildings such as the subject. Although many buyers of
professional office buildings are owner/occupants, these buyers are generally
aware of a property's cash flow potential and its value from an investor's
perspective. For this reason, the Income Approach is considered the best
indicator of value for the subject property.
Based on this analysis, it is our opinion that the market value of the subject
medical office buildings, as of January 1, 1994, and based on the assumptions
and limiting conditions in this report, is:
$4,800,000
==========
-38-
<PAGE> 1
EXHIBIT 10.34
AN APPRAISAL OF
ST. LOUIS COMPREHENSIVE AND
AMBULATORY CARE FACILITY
ST. LOUIS, MISSOURI
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
May 25, 1994
Crescent Capital Trust, Incorporated
One Perimeter Park South, Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John W. McRoberts
President & CFO
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the medical office building identified as follows:
ST. LOUIS COMPREHENSIVE AND AMBULATORY CARE FACILITY
13303 TESSON FERRY ROAD
ST. LOUIS, MISSOURI
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of March 15, 1994, subject to a master lease
from Surgical Health Corporation. The report is to be used for asset valuation
purposes in conjunction with financing. Crescent Capital Trust, Incorporated
is establishing a real estate investment trust (REIT) and the valuation assumes
that the prospective REIT is the owner of the property, with Surgical Health
Corporation guaranteeing annual net rental income of $801,563 on a fifteen-year
lease.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
<PAGE> 3
Crescent Capital Trust, Incorporated
May 25, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by
The Appraisal Institute.]
The subject property is a two-story outpatient surgery center containing 54,801
gross square feet constructed in 1993, located on a 10.002-acre site. The net
leasable square feet is equal to its gross amount of 45,205 square feet. A
critical assumption of our report is that the subject property will be complete
prior to transfer to the REIT.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the St. Louis
Comprehensive and Ambulatory Care Facility, as of March 15, 1994, to be:
$7,400,000
==========
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
<PAGE> 4
Crescent Capital Trust, Incorporated
May 25, 1994
Page Three
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
-----------------------------
Patrick J. Simers
Managing Director
<PAGE> 5
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of my knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Jery L. Hunter made a personal inspection of the property that is the
subject of this report. Patrick J. Simers has not made a personal
inspection of the property.
This assignment was made subject to regulations of the State of
Georgia Real Estate Appraisers Board. The undersigned state certified
appraiser has met the requirements of the board that allow this report
to be regarded as a "certified appraisal".
/s/ Patrick J. Simers
-----------------------------------
Patrick J. Simers
Managing Director
Georgia Certificate No. 001977
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value: March 15, 1994
Property Identification: St. Louis Comprehensive and Ambulatory Care Facility.
Property Location: 13303 Tesson Ferry Road, St. Louis, Missouri
Interest Appraised: Leased Fee Estate
Gross Building Area: 54,801 square feet
Net Leasable Area: 45,205 square feet
Land Size: Approximately 435,687 square feet, or 10.002 acres
Improvements Description: A two-story building anticipated to be complete and occupied by May 1994.
Physical Occupancy Percentage: 92.16%
CONCLUSIONS
Cost Approach: $7,400,000
Sales Comparison Approach: $7,124,000
Income Approach: $7,456,000
Final Value Estimate: $7,400,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
Estimated Marketing Period 3
History of the Property 3
History and Nature of the Business Environment 3
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Regional and City Analysis 7
Office Market Data - St. Louis Area 11
Neighborhood Description 15
Zoning 17
Real Estate Taxes and Assessments 18
Subject Property Description 19
Improvements Description 21
HIGHEST AND BEST USE 23
VALUATION SECTION 26
Valuation Methodology 26
Cost Approach 27
Sales Comparison Approach 40
Income Approach 50
CORRELATION AND CONCLUSION 52
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Subject Location Map
Exhibit D - Land Sales Location Map
Exhibit E - Improved Sales Location Map
Exhibit F - Site Plan
Exhibit G - Building Description and Summary of Value
Exhibit H - Land Improvements Description
Exhibit I - Lease Comparables Summary
Exhibit J - Improved Sales Comparables Summary
Exhibit K - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal, known as St. Louis Comprehensive and Ambulatory
Care Facility, is a 54,801 square foot medical office facility located at 13303
Tesson Ferry Road, St. Louis, Missouri. The building is anticipated to be
complete in May 1994. It is presently 92.16 percent pre-leased. The building
contains 45,205 net rentable square feet.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is March 15, 1994.
The date of the appraisal report is March 25, 1994.
FUNCTION OF THE APPRAISAL
The report is to be used for asset valuation purposes in conjunction with
financing. Crescent Capital Trust, Incorporated is establishing a real estate
investment trust (REIT). It is our understanding that the REIT will involve
mortgage financing.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
-2-
<PAGE> 14
ESTIMATED MARKETING PERIOD
As completed, the subject property is best suited for multi-tenant
medical-related occupancy. Given the existing balance of supply and demand for
medical-related buildings in the St. Louis metropolitan area, we estimate the
marketing period of the subject is between six and eight months.
HISTORY OF THE PROPERTY
Ownership
According to public records on file at the St. Louis County Recorder of Deeds
office, the subject property is currently owned by Tesson Ferry Medical
Equities L.P., a Missouri limited partnership. The property's land was
acquired on November 10, 1992 from Louis & Rhoda M. Laudel, William H. &
Kathleen M. Laudel, Herbert & Margaret H. Laudel, Albert & Barbara R. Laudel
and Bernadine & Kenneth Kuhn. This sale transaction is recorded in Deed Book
9512, Page 1130 and represents the only sale transaction within the past five
years.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991.
-3-
<PAGE> 15
The GDP was 0.7 percent and 1.6 percent, respectively, for the first and second
quarters of 1993, and an estimated 4.0 percent for the fourth quarter of 1993.
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non- Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
-4-
<PAGE> 16
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JANUARY 6, 1994 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate. This soft demand has caused some property
values to remain flat and some to decline.
-5-
<PAGE> 17
The lower interest rates in recent periods, however, are serving to stabilize
commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation].
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is six to eight months.
-6-
<PAGE> 18
DESCRIPTIVE DATA
REGIONAL AND CITY ANALYSIS
The subject property is located in the City of St. Louis, St. Louis County,
Missouri. More specifically, the property is located in the western central
section of the city.
The City of St. Louis is located within the St. Louis Consolidated Metropolitan
Statistical Area (CMSA). The CMSA is located near both the geographic and
population centers of the United States and has a current population of
1,942,000. The 1980 census indicated that the St. Louis consolidated area had
experienced a population decline since 1970, however, the 1990 census indicated
that the population has recovered somewhat during more recent years with the
St. Louis CMSA currently ranked fifteenth in population in the nation. The St.
Louis regional population was 2,444,000 at the 1990 census reporting period.
This level reflects an increase of approximately 67,000 people, or 2.8 percent,
since the 1980 census. The current population is reported at 2,452,000.
Population growth figures, both actual and projected, for the Missouri counties
of the St. Louis CMSA and City of St. Louis, are as follows:
<TABLE>
<CAPTION>
Actual Projected
1960 1970 1980 1990 2000
<S> <C> <C> <C> <C> <C>
St. Louis 703,532 951,353 974,177 993,529 1,035,852
St. Charles 52,970 95,954 144,107 212,907 250,797
Jefferson 66,377 105,248 146,183 171,380 201,880
Franklin 44,566 55,116 71,233 80,603 91,117
St. Louis City 750,026 622,236 452,804 396,685 357,971
</TABLE>
According to the above population table, St. Charles County had the greatest
increase in population of the Missouri counties in the CMSA and the City of St.
Louis. Additionally, St. Charles County has the greatest growth rate of all
counties in the state of Missouri. The 47.7 percent increase is attributable
to the three largest incorporated areas in St. Charles County, St. Peters, St.
Charles and O'Fallon, ranked first, third and fifth, respectively, in the top
ten total gain increase in population of incorporated areas.
-7-
<PAGE> 19
Reciprocally, the City of St. Louis ranked first of the bottom 10 incorporated
places in Missouri that had a loss in population.
The Missouri portion of the CMSA area is located on the eastern edge of the
state of Missouri near the confluence of the Missouri and Mississippi Rivers.
This site was originally chosen by French traders in the mid-1700s because of
its favorable location on the waterway system of the central North American
continent. Their foresight and vision have been vindicated by the fact that
over 200 years have passed and St. Louis is still the leading port on the
Mississippi River, second largest rail hub and sixth busiest air traffic point
in the nation. These location factors also make it a major industrial center.
The port of St. Louis is the busiest inland port in the nation. In addition,
the St. Louis district constitutes the second largest railroad terminal in the
country, surpassed only by Chicago. The CMSA of St. Louis is served by 14
trunk-line railroads and five switching lines, with Amtrak providing passenger
service to a variety of cities throughout the nation. Trucking service is
available with more than 200 common carrier truck lines and numerous local
lines operating in the area. Four interstate highways serve the area, with
Interstate 70 linking Washington, D.C. with the west via Kansas City and
Denver; Interstate 55 running from Chicago to New Orleans; Interstate 44
connecting St. Louis with Interstate 40 at Oklahoma City and continuing through
points southwest to Los Angeles, and Interstate 64 traveling inland from
Virginia to St. Louis. Additionally, Interstates 270 and 255 serve as
circumferential highways in the metropolitan area.
Airline service is available from Lambert - St. Louis International Airport.
Ten scheduled passenger airlines, three commuter lines, one all-cargo airline,
two air freight cartage agents and 14 air freight forwarders operate from the
airport. In addition to Lambert-St. Louis International Airport, there are six
general aviation airports serving the area.
The area enjoys a diversified economy, being a major financial, manufacturing,
telecommunications, and trade and distribution center serving the central
United States. St. Louis is headquarters for six of the Fortune 100
corporations and ten of the Fortune 500 companies.
-8-
<PAGE> 20
The following are the largest employers in the St. Louis CMSA area with their
respective number of employees:
Number of
Company Employees
McDonnell Douglas 30,000
Scott Air Base, IL 13,512
McDonald's Restaurant 13,279
Schnuck Markets, Inc. 12,000
Southwestern Bell 10,800
U.S. Postal Service 10,442
Washington University 8,013
Trans World Airlines 7,463
Barnes Hospital 7,025
National Supermarkets 6,890
St. Louis University 6,685
May Department Stores 6,500
St. Louis Board of Education 6,127
SSM Health Care Systems 6,000
Sisters of Mercy Health System 5,714
As indicated above, the area's largest employer is McDonnell Douglas
Corporation, with approximately 30,000 St. Louis area employees. Other
nationwide firms headquartered in the area include Anheuser-Busch Co., Inc.,
Ralston Purina Company, Pet, Inc., Peabody Coal Company, and Graybar Electric.
In addition to their headquarters, and research and chemical manufacturing
facilities, international high tech giant Monsanto also established a major
silicon chip manufacturing facility in the area, since sold to a German combine
and know as Monsanto Electronic Materials Corporation (MEMC). Furthermore, the
St. Louis area is second only to Detroit in automobile manufacturing.
-9-
<PAGE> 21
It should be noted that there is no one dominant segment of the economy; it is
a diverse employment base. As indicated by the following table, each industry
is well represented in the St. Louis MSA.
<TABLE>
Employment - St. Louis, MSA
June, 1993
<CAPTION>
Total Percentage
Employment of Total
<S> <C> <C>
Construction & Mining 50,400 4.4
Manufacturing 193,600 16.8
Transportation & Public Utilities 77,700 6.7
Trade 280,400 24.3
Finance, Insurance & Real Estate 73,900 6.4
Services 344,300 29.9
Government 131,900 11.4
--------- -----
Total 1,152,200 100.0
</TABLE>
In keeping with the national trend of the times, the manufacturing sector,
historically a strong one in St. Louis, is losing ground to service-based
industries. Between 1983 and 1987, non-manufacturing employment increased at
an annual compound rate of approximately 3.6 percent, while Department of Labor
figures show employment in manufacturing industries decreased approximately 1.1
percent.
According to Employment Security, a division of the Missouri Department of
Labor and Industrial Relations, the St. Louis Metropolitan area, as of June,
1993 had a civilian labor force of 1,285,504 people with a total employment of
1,209,658. The unemployment rate, currently 5.9 percent, is down from 6.5
percent for the same reporting period in 1993. The current unemployment rate
of 5.9 percent for the state of Missouri is also down, from 6.3 percent, for
the same reporting period in 1992.
In summary, the St. Louis CMSA is a progressive and active market area with a
well-diversified and stable economic base. The migration and in-migration
patterns are typical of those in other large CMSAs with active suburban areas.
It is our opinion that the area will continue to maintain and encourage an
increasing development pace, and that the general economy and property values
will start to realize and experience moderate growth for the foreseeable
future.
-10-
<PAGE> 22
OFFICE MARKET DATA - ST. LOUIS AREA
The St. Louis area office market is segmented into six markets, downtown,
Clayton, west county, south county, north county and St. Charles.
In 1993 the six office markets combined had a total of 38,336,000 square feet
of net rentable office area with 6,977,000 square feet available indicating an
overall average occupancy of 81.8 percent. The following table illustrates the
office space summary for the six markets:
<TABLE>
<CAPTION>
1993 OFFICE SPACE FOR ST. LOUIS AREA
(SQUARE FEET IN THOUSANDS)
NET AVAILABLE AVERAGE
RENTABLE RENTABLE OCCUPANCY
MARKET SECTOR AREA (SF) AREA (SF) PERCENT
<S> <C> <C> <C>
Downtown 14,834 3,931 73.5
Clayton 4,564 758 83.4
West County 13,572 1,656 87.8
South County 2,099 168 92.0
North County 2,895 428 85.2
St. Charles 402 28 93.1
TOTAL 38,366 6,969 81.8
</TABLE>
The above table reflects the net rentable area and available rentable
area and resulting average occupancy for all types of office space in
the St. Louis area. As indicated, the downtown market, the largest
of the office markets, has the greatest vacancy rate at 26.5 percent.
The remaining markets combined, comprising the suburban market, has a
vacancy rate of 12.9 percent. The market area the subject property
is located in, the south county market, reported a vacancy rate for
all types of office area of 8 percent.
The majority of the occupancy rates reported reflect an increase from the
previous reporting period. Overall, the metropolitan area is seeing little or
no new construction resulting in office area vacancies going down.
Additionally, by occupying existing buildings the rental rates are starting to
increase after having been stable for the past
-11-
<PAGE> 23
two years; according to building owners these rates are starting to reach a
reasonable level.
In 1993, office rental rates were low prompting tenants to absorb large
contiguous blocks of office space. The complete shut-down of speculative
office construction, combined with positive net absorption, continues to reduce
the available number of large contiguous blocks of space. No other market
characteristic seems to surprise tenants more than the limited selection of
Class A buildings with large contiguous blocks of space available. The
dwindling supply of large blocks of Class A space is most apparent in suburban
St. Louis County. After hitting a peak of 16 blocks in 1992 only 7 blocks of
20,000 square feet of contiguous Class A space were available by mid-1993.
According to the Turley Martin Office Report "the market is already tight for
large tenants and is limited for mid-size tenants. As a result, owners with
larger blocks of space in some sub-markets are setting higher lease rates."
The following table illustrates the Class A office space summary for the six
markets comprising the St. Louis area office market:
<TABLE>
<CAPTION>
1993 CLASS A OFFICE SPACE FOR ST. LOUIS AREA
(SQUARE FEET IN THOUSANDS)
NET AVAILABLE AVERAGE
RENTABLE RENTABLE OCCUPANCY
MARKET SECTOR AREA (SF) AREA (SF) PERCENT
<S> <C> <C> <C>
Downtown 7,282 1,027 85.9
Clayton 3,232 514 84.1
West County 7,786 926 88.1
South County 718 13 98.2
North County 1,731 242 86.0
St. Charles 109 8 93.1
TOTAL 20,858 2,730 86.9
</TABLE>
As indicated above, Class A office space approximates 54 percent of all office
space in the St. Louis area. The Clayton area, the seat of St. Louis County,
has the highest concentration of Class A office space while St. Charles,
geographically divided from St. Louis County by the Missouri River, has the
least amount of Class A office space.
-12-
<PAGE> 24
South St. Louis County, the area the subject property is located in, has the
second lowest amount of Class A office space.
The overall average occupancy rate for Class A office space in the St. Louis
area is 86.9 percent compared with 81.8 percent of all office space. Clayton,
the area with the highest concentration of Class A office space has the lowest
average occupancy at 84.1 percent while South County has the highest occupancy
rate at 98.2 percent. As indicated by the second lowest amount of Class A
space and the highest occupancy rate the South St. Louis County area has a good
balance of supply and demand favoring the building owners.
With little or no new office building construction it is expected that
occupancy rates throughout the St. Louis area will continue to increase.
The increasing occupancy rates have had a positive affect on rental rates as
well. With the decreasing supply of office space building owners are having to
make less concessions than before to attract tenants. Asking rental rates in
Class A buildings typically range from $16 to $22 per square foot for full
service. At one time, substantial concessions were decreasing the asking rents
by up to 30 percent over a five to seven-year lease. According to the 1993
Urban Land Institute Profiles standard lease terms for new office space for the
St. Louis area are:
Original Lease Length: Five years
Number of Renewals: One
Length of Renewal Term: Five years
Free Rent: None, however substantial services are
included in base rent.
Escalation Clauses: Rents adjusted annually by operating expenses.
Tenant Improvement
Allowances: $12 - $14 per square foot over the life of
the lease.
Pass-Through Expenses: Taxes, insurance, utilities, common area
maintenance above base amount or base year.
-13-
<PAGE> 25
Concessions: 15-30 percent off face rent, extra tenant
improvement allowance, moving expenses.
As indicated above, the asking rental rates in Class A office buildings is
between $16 to $22 per square foot. The following table reflects the asking
rental rates for office buildings in the Interstate 44/South St. Louis County
area:
<TABLE>
<CAPTION>
YEAR BUILT NO. OF BUILDING ASKING
BUILDING/LOCATION FLOORS SIZE (SF) RENT
<S> <C> <C> <C> <C>
Laumeier II 1990 4 118,000 $19.50
3636 S. Geyer Road
Laumeier I 1987 4 112,000 $19.50
3630 S. Geyer Road
Sunset Office II 1984 4 90,000 $18.50
10733 Sunset Office Drive
Southwest Executive Ctr 1982 3 76,400 $17.50
9735 Landmark Parkway R 1986
Laumeier III 1990 3 52,000 $19.50
3660 S. Geyer Road
Laumeier IV 1990 3 50,800 $19.50
3666 S. Geyer Road
Clubs Center Office Bldg. 1989 4 44,000 $16.00 -
12300 Old Tesson Road $18.00
10825 Watson Building 1978 2 40,000 $16.50
10825 Watson Road R 1990
Sunmark Building 1975 2 40,000 $16.50
10795 Watson Road
</TABLE>
-14-
<PAGE> 26
NEIGHBORHOOD DESCRIPTION
As previously stated, the subject St. Louis Comprehensive and Ambulatory Care
Facility is located in St. Louis County. The location can more accurately be
described as being on the west side of Tesson Ferry Road (Missouri State
Highway 21) two miles south of Interstate 270 in the southwestern section of
St. Louis County.
The neighborhood is generally defined as that area lying on both sides of
Tesson Ferry Road to the south of Interstate 270 being bounded on the east by
Interstate 55 and on the west by the Meramec River.
The neighborhood area is comprised of a well-balanced blend of residential,
commercial and institutional properties with commercial, institutional,
professional and multi-family residential uses near the Interstate 270
interchange and along the major thoroughfares and single-family residential use
in the outlying areas away from the major thoroughfares.
Commercial uses in the immediate area are located primarily to the north along
Tesson Ferry Road. These uses include those types of businesses serving
passing motorists as well as the area's residential base. Commercial uses
include a McDonald's and a Taco Bell fast-food restaurant, a gasoline station,
an automobile repair facility, a sit-down restaurant, a grocery store, banks
and two strip shopping centers.
Institutional uses include the St. Anthony's Hospital located on the west side
of Tesson Ferry Road approximately 1.5 miles north of the subject property, a
church and the Mehlville Fire Protection District fire house also to the north
and the Garden Villa South - Luxury Retirement Community and Delmar Gardens
South - Nursing and Rehabilitation Center to the south.
Professional properties include medical office buildings at the St. Anthony's
Hospital complex, Tesson Grove Medical Center, numerous doctors offices, Nooter
- - Eriksen office building and the General American corporate offices located to
the north of the subject property.
Multi-family residential properties include the multi-story Village Royale
Apartments directly to the east across Tesson Ferry Road, Southmoor Apartments
and Townhomes
-15-
<PAGE> 27
adjacent to, and on the north of the subject property and the Cedar Run
Apartment Complex at Suson Woods Drive to the south.
While there are numerous single-family subdivisions in the area of the subject
property the newest single-family residential development is to the south and
west at Suson Woods Drive and Tesson Ferry Road.
The growth pattern in the area along Tesson Ferry Road has been progressing to
the south, the natural growth pattern being experienced in St. Louis County,
from Interstate 270. This growth is expected to continue due to the abundance
of vacant land available to the south of the subject property.
Like any high density commercial areas, good access has had a direct positive
affect on the commercial growth in the area. Tesson Ferry Road (Missouri State
Highway 21), an asphalt-surfaced, four-lane with center turning lane
thoroughfare, is a heavily travelled commuter route connecting Gravois Road
(Missouri State Highway 30) to the north with the small town of Glover,
Missouri to the south. Tesson Ferry Road intersects with the major
thoroughfares Lindbergh Boulevard (U.S. Route 61/67), Interstate 270 and
Missouri State Highway 141 within the St. Louis Metropolitan Area. Like Tesson
Ferry Road, Interstate 270 also provides direct access to the neighborhood
area, Interstate 270, linking with Interstate 255 is a circumfrential
interstate serving the St. Louis Metropolitan Area. Access to the area is also
provided by way of Missouri State Highway 141 traversing north to south through
the western and southern sections of St. Louis County and in the general area
connecting Interstate 44 to the north with Interstate 55 to the south.
As stated above the neighborhood area is a well balanced blend of commercial,
professional, institutional and residential properties. Traffic along the
major thorough-fares is significant and the direct result of the fronting
commercial businesses. The residential base in the area tends to support the
commercial businesses as well as the institutional and professional uses. The
properties in the area are well maintained indicating an economically stable
area. As stated above, there is vacant land available for continued
commercial, institutional, professional and residential growth; this area is
within a natural growth corridor of St. Louis County.
No detrimental conditions or hazards appear to exist in the subject
neighborhood or immediate area that would be considered to have a negative
affect on the St. Louis
-16-
<PAGE> 28
Comprehensive and Ambulatory Care Facility property or on properties in the
immediate area.
ZONING
The subject property is zoned "C-8" - Planned Commercial District, by the St.
Louis County Department of Planning and Zoning. According to the zoning
ordinance, "the C-8 Planned Commercial District encompasses areas where
developments and uses permitted in any of the other "C" Commercial Districts
may be located. It is the purpose of these regulations to facilitate the
establishment of combinations of developments and uses for which no provision
is made in any other single "C" Commercial District, or the establishment of
developments and uses in locations appropriate under approved site plans and
conditions. Such approved plans and conditions shall be consistent with good
planning practice and compatible with permitted developments and uses in
adjoining districts, so as to protect the general welfare".
Planned Commercial Districts are designated to those properties approved by the
St. Louis County Council upon review and acceptance of a preliminary
development plan, approval and recordation of a site plan and the schedule of
construction of the approved use is complied with in accordance with the zoning
ordinance.
The subject property was zoned "R-6A" - Residence District at the time Tesson
Ferry Medical Equities L.P. purchased the property. The application and
preliminary plans for the proposed subject development were submitted by the
purchasers and approved by the St. Louis County Council; this approval
resulted in rezoning the subject property to a "C-8" classification allowing
the proposed use as the St. Louis Comprehensive and Ambulatory Care Facility.
-17-
<PAGE> 29
REAL ESTATE TAXES AND ASSESSMENTS
The subject property is recognized by the St. Louis County Assessor's Office by
locator number 31L430040. As indicated in the Zoning section of this report,
at the time of the sale the subject property was zoned for residential
purposes, therefore the property was assessed as residential property;
residential properties are assessed at 19 percent of appraised value. The
appraised and assessed value for 1993 is as follows:
<TABLE>
<CAPTION>
Appraised Assessed
Value Value
--------- --------
<S> <C> <C>
Land $105,800 $20,100
Improvements 0 0
--------- ---------
Total $105,800 $20,100
</TABLE>
According to the Collector of Revenue's Office the millage rate for properties
located within the Mehlville R-9 School Subdivision District 120H is $6.015 per
$100 of assessed value. Based upon the above assessed value of $20,100 and the
millage rate of $6.015 the 1993 real estate tax liability is $1,209.02.
Subsequent to it's purchase the subject property was rezoned to C-8 - Planned
Commercial District. According to the Assessor's Office the subject property
will be reassessed as a commercial property upon completion of the
improvements; commercial properties are assessed at 32 percent of appraised
value. In addition to the 1993 base millage rate of $6.015, industrial and
commercial properties are levied an additional surcharge of $1.70 per $100 of
assessed value.
Real estate tax liabilities in the state of Missouri are based upon the
assessed value as of the first day of the year and due and payable by the last
day of the year. Since the subject property was still under construction as of
January 1, 1994 the property will not be assessed as if completed until January
1, 1995.
-18-
<PAGE> 30
SUBJECT PROPERTY DESCRIPTION
Site Description
The subject St. Louis Comprehensive and Ambulatory Care Facility site is
located on the west side of Tesson Ferry Road at Duessel Road. The
irregular-shaped parcel, containing 10.002 acres, or 435,687 square feet, has
the following frontages and boundaries:
<TABLE>
<S> <C> <C> <C> <C>
North property line - 749.46' - Southmoor Apartment Complex
East property line - 761.13' - Tesson Ferry Road
South property line - 555.45' - Garden Villas South
West property line - 557.15' - Butler Hill Road/Garden Villas South
</TABLE>
The subject site has a sloping terrain with the highest elevation being at the
northeast corner of the property. From this area the site slopes uniformly
downward to the south with a change in elevation of -30 feet from the north
property line to the south property line. Additionally, the terrain slopes
downward to the west and to the southwest with a change in elevation of -65
feet along the north property line and a change in elevation of -68 feet from
the northeast corner to the southwest corner of the site. A significant amount
of excavation was necessary in the area of the improvement resulting in the
improvement's main entrance on the front elevation entering into the second
level and the rear entrance being on the lower level. The site has been
excavated to maximally utilize the property for the existing improvement,
parking areas and any future expansion or additions.
Access to the subject property is by way of one signalized entrance on Tesson
Ferry Road on the east property line and one entrance on Butler Hill Road on
the west property line.
The subject site is served by all customary utilities, including water, sewer,
electricity and telephone service.
Given the sloping terrain and the excavation for a water retention area in the
southwest portion of the property, the site has the appearance of having good
drainage throughout. In addition, with properly engineered concrete piers and
footings, the soil appears to
-19-
<PAGE> 31
have been excavated, filled and compacted to have adequate load bearing
capability for this type of improvement.
The improvement is located in the north-central section of the property with
asphalt paving for employee/guest parking on the north and east sides of the
improvement. Expansion of and to the building would be possible on the west
and south elevations. Additionally, there is adequate room on the site for an
additional structure. In our opinion, the location of the improvement on the
site maximally utilizes the land area given the terrain of the property and
allows for future improvements on the site.
The building containing 27,558 square feet on the lower level encompasses 6.3
percent of the site indicating a land to building ratio of 15.8:1.
The site is considered to compliment its proposed medical related use. There
is good visibility and access from Tesson Ferry Road. Additionally, access is
provided to the site by way of one entrance on Butler Hill Road, a much less
travelled road.
During our inspection of the site and site plans there were no adverse
easements or encroachments noted that would be considered to have a negative
affect on the value of the property.
According to the National Flood Insurance Program - Federal Emergency
Management Agency, Map 290327 Community Panel 0135E dated November 1, 1985, the
subject property is located in Flood Zone C. Flood Zone C are areas of minimal
flooding.
A legal description of the property and a plot plan showing the property
configuration are included in the Exhibit Section of this report.
-20-
<PAGE> 32
IMPROVEMENT DESCRIPTION
Building
The subject site is improved with a two level, Class A, medical office
building. The building, with a projected opening date of May, 1994, contains
54,801 square feet of gross building area with 27,558 square feet on the lower
level and 27,243 square feet on the upper level. The building is of good
construction with good quality materials and in good condition.
General construction includes drilled, poured-in-place pilings, reinforced
concrete spread footings under exterior curtain walls, concrete column pads and
12" thick, below grade concrete walls and interior shear wall. Framing
consists of a full structural steel framing system with fire protected steel
columns, beams and joist girders. Above grade exterior walls are non-bearing
EIFS panels with 1/2" gypsum board on 6" metal studs and batt insulation;
fenestration includes vinyl-clad aluminum framed windows with decorative
mullions, automatic sliding doors on the main entrances and painted metal doors
on secondary entrances. Floor construction is reinforced 5" concrete on
granular fill on the lower level and 5" composite deck on channel-formed metal
deck on steel bar joists on the upper level. The roof structure is a flat type
with roof insulation on gypsum board on metal decking on steel bar joists; the
roof cover is built-up composition.
Finish construction includes metal studs and taped and painted drywall
partitions; wall finishes include paint, vinyl wall covering, ceramic tile and
full height glass wall with sliding glass doors. Ceiling finishes include
taped and painted drywall and acoustical tile panels in metal grid system.
Floor finishes include ceramic tile, vinyl composition and carpeting.
Mechanical equipment includes standard plumbing fixtures with copper, cast iron
and pvc supply, waste and vent piping and electric hot water heaters. The
building is heated and cooled by a zoned warm and cool forced air ducted system
with electric duct heaters and three roof-mounted freon air conditioning units.
Electric service is rated at 2,500 amps with wiring in flexible and rigid
conduit; incandescent and fluorescent light fixtures are typical throughout.
Other mechanical features include a fire alarm system, emergency generator, two
elevators and fire protection sprinkler system.
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<PAGE> 33
A detailed description of the building by construction components is included
in the Exhibit Section of this report.
Site Improvements
Improvements to the site include site preparation, landscaping, underground
utilities, asphalt and concrete paving, concrete curbing, parking lot lighting
and signage.
A detailed description of the site improvements is included in the Exhibit
Section of this report.
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<PAGE> 34
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
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<PAGE> 35
The analysis of highest and best use is divided into two sections. The site is
analyzed as if vacant and available for development and as currently improved.
As if Vacant
The subject site, containing 10.002 acres, has been excavated to maximally
utilize the total land area and sloping terrain. The terrain, configuration
and size are adequate and sufficient enough for numerous uses that would be
permitted by the St. Louis County Department of Planning and Zoning and the St.
Louis County Council for a Planned Commercial District. In addition, the site
has good visibility on a heavily travelled thoroughfare, good access from a
major thoroughfare and a secondary road, therefore the subject site is
available for numerous office/commercial/medical uses consistent with a Planned
Commercial District.
As If Improved
As previously stated in this report the subject property is located in a
well-balanced mixed use neighborhood area in southwest St. Louis County. The
residential properties consist of upper middle class single-family residences
and multi-family apartment complexes. The commercial type improvements in the
area range from free-standing single-tenant or owner occupied buildings and
strip shopping centers with businesses catering to both area residents and
passing vehicular traffic. Institutional properties in the area include
churches, a nursing homes and retirement village, a hospital and a fire
station. Professional development includes corporate offices, multi-tenant
office buildings and medical office buildings and single-tenant or owner
occupied professional offices and medical offices.
The property is well situated by fronting on a heavily-travelled major
thoroughfare approximately two miles south of an interstate highway; visual
exposure to passing traffic is excellent.
As previously stated, the 10.002-acre site is currently improved with a 54,801
square foot medical office building with 27,558 square feet of floor area on
the lower level indicating a land to building ratio of 15.8:1. The
improvements are situated on the site to maximally utilize the land area as
well as the terrain, provide for good ingress and egress and adequate parking
for this type of use. Additionally, there is sufficient enough space on the
site for future expansion to the building or additional buildings.
-24-
<PAGE> 36
The location of the property as well as the location of the improvements on the
subject site are considered to satisfy the first criterion, physically
possible, of the highest and best use analysis.
As stated in the Zoning section of this report the subject improvement is a
permitted use, therefore the second criterion of the highest and best use
analysis, legally permissible, is satisfied.
The third criterion, financially feasible, of the highest and best use is that
the proposed medical office building use produces the income (return) that is
greater that the amount needed to satisfy the operating expenses, financial
obligations and capital amortization. The most feasible use for the property
as improved is the building's current use given the special use construction
attributes.
The fourth criteria, maximally productive, is a culmination of the first three
criteria. The subject use is physically possible, legally permissible and
financially feasible indicating that the current use could be maximally
productive for the site. Considering the potential rates of return for medical
related use versus what the property was originally zoned for, residential, the
subject use would clearly be superior to potential residential uses at this
location. Therefore, it is our opinion that the highest and best use of the
subject property, as improved, as of the effective date of this appraisal, is
its proposed medical office building use.
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<PAGE> 37
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
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<PAGE> 38
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-27-
<PAGE> 39
Land Sale Number 1
<TABLE>
<S> <C>
Location: 13303 Tesson Ferry Road, subject property, St. Louis County
Date: November 10, 1992
Zoning: R-6A, Residence District
Size:" 435,687 square feet, 10.002 acres
Sales Price: $1.88 per square foot, $81,984 per acre
Grantor: Louis and Rhoda M. Laudel, William H. and Kathleen M. Laudel, Herbert and Margaret H.
Laudel, Albert and Barbara R. Laudel, Kenneth and Bernadine Kuhn
Grantee: Tesson Ferry Medical Equities, L.P., a Missouri Limited Partnership
Recording Data: Book 9512, Page 1130
Comments: At the time of the sale the subject property was zoned for residential use; the site has
since been rezoned for commercial use. All utilities were available at the time of the
sale. Sale transaction verified by a representative of SHC Midwest, Inc. and St. Louis
County public records.
</TABLE>
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<PAGE> 40
Land Sale Number 2
<TABLE>
<S> <C>
Location: 12152 Tesson Ferry Road, at the southeast corner of Gerald Drive and Tesson Ferry Road,
St. Louis County
Date: December 7, 1990
Zoning: C-8, Planned Commercial District
Size: 54,842 square feet, 1.259 acres
Sales Price: $302,000
Unit Price: $5.51 per square foot, $239,873 per acre
Grantor: VTF Enterprises
Grantee: Physicians Building Partnership
Recording Data: Book 8897, Page 139
Comments: Purchased subject to rezoning from residential to Commercial zoning. A medical office
building containing 12,000 square feet of floor area on the first level and a 5,000
square foot basement has been built on the site since the time of the sale. The site is
below the grade of Highway 21, at grade with Gerald Drive and slopes downward to the
south. Interstate 270 is approximately 1,000 feet to the south. All utilities were
available at the site at the time of the sale. Sale transaction verified by a
representative of Physicians Building Partnership.
</TABLE>
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<PAGE> 41
Land Sale Number 3
<TABLE>
<S> <C>
Location: 3668 South Geyer Road, Sunset Hills
Date: September 13, 1990
Zoning: PD2, Planned Development, Business Commercial
Size: 97,618 square feet, 2.241 acres
Sales Price: $750,000
Unit Price: $7.68 per square foot, $334,672 per acre
Grantor: Linclay Realty Corporation
Grantee: LJP Realty Corporation
Recording Data: Book 8844, Page 1119
Comments: All utilities were available at the time of the sale. The property has subsequently been
improved with a 64,000 square foot, three-story office building. Sale transaction
verified by a representative of Linclay Realty Corporation.
</TABLE>
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<PAGE> 42
Land Sale Number 4
<TABLE>
<S> <C>
Location: 5423 Telegraph Road, St. Louis County
Date: April 27, 1990
Zoning: R-2, Residence District
Size: 52,272 square feet, 1.200 acres
Sales Price: $310,000
Unit Price: $5.93 per square foot, $258,333 per acre
Grantor: Schnuck Markets, Inc.
Grantee: Union Electric Company
Recording Data: Book 8749, Page 2472
Comments: St. Louis County located #31H130800. This site, with all utilities available, has been
rezoned for commercial use since the time of the sale. Sale transaction verified by St.
Louis County public records.
</TABLE>
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<PAGE> 43
Sale Number 5
<TABLE>
<S> <C>
Location: 12727 Old Tesson Ferry Road at Tesson Ferry Road, St. Louis County
Date: February 1, 1990
Zoning: C-8, Planned Commercial District
Size: 70,132 square feet, 1.610 acres
Sales Price: $415,000
Unit Price: $5.92 per square foot, $257,763 per acre
Grantor: Boatmen's National Bank
Grantee: William and Louann Voss
Recording Data: Book 8708, Page 1476
Comments: St. Louis County locator #29L140463. Part of the land has been improved with a
Children's World Learning Center. The property is located across from St. Anthony's
Hospital and adjoins the south side of the Boatmen's Bank building. The site, with all
utilities available, is at grade with Old Tesson Ferry Road, below the grade of Tesson
Ferry Road and level throughout. Sale transaction verified by St. Louis County public
records.
</TABLE>
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<PAGE> 44
Land Sale Number 6
<TABLE>
<S> <C>
Location: 5139 Mattis Road, St. Louis County
Date: February 1, 1990
Zoning: C-8, Planned Commercial District
Size: 51,856 square feet, 1.190 acres
Sales Price: $300,000
Unit Price: $5.79 per square foot, $252,006 per acre
Grantor: Taylor, Morley, Simon, Inc.
Grantee: Shah Anwar
Recording Data: Book 9500, Page 1767
Comments: St. Louis County locator #29L541183. Sale property, with all utilities available, is
located at the northwest corner of the intersection of Mattis Road and Somerset. The
property has been developed with a 13,466 square foot medical building housing the
Midwest Eye Center. Sale transaction verified by the purchaser.
</TABLE>
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<PAGE> 45
The preceding six land sales are summarized in the following table.
<TABLE>
LAND SALES SUMMARY
<CAPTION>
SALE DATE LAND SIZE SALE UNIT PRICE
NUMBER OF SALE ZONING (SQ. FT.) PRICE (SQ. FT.)
<S> <C> <C> <C> <C> <C>
1 November 1992 R-6A 435,687 $820,000 $1.88
2 December 1990 C-8 54,842 $302,000 $5.51
3 September 1990 PD2 97,618 $750,000 $7.68
4 April 1990 R-2 52,272 $310,000 $5.93
5 February 1990 C-8 70,132 $415,000 $5.92
6 February 1990 C-8 51,856 $300,000 $5.79
</TABLE>
A land sale location map depicting the location of the sales utilized in the
land valuation analysis is presented in the Exhibit Section of this report.
As indicated on the land sales location map, the land sales are located in the
immediate and the same general area of the subject property.
The six land sales utilized in determining the market value of the subject land
occurred between February 1990 and November 1992. The sales reflect a wide
range in sale price from $1.88 to $7.68 per square foot and range in size from
51,856 square feet to 435,687 square feet, the largest being the subject sale.
Since two properties are rarely identical, it is necessary to adjust the sales
for differences when compared with the subject property.
When analyzing the sales for date of sale adjustment to compensate for property
value inflation that has taken place since the date of the sale, we have not
adjusted any sales due to the "soft" conditions experienced in the St. Louis
real estate market for the past three years. Within the past year there has
been a noticeable increase in real estate activity particularly in vacant land
for residential and commercial use.
Since, to the best of our knowledge, these transactions did not involve
favorable financing no adjustment was required for this characteristic.
-34-
<PAGE> 46
Care was taken that all sales be located as near the subject as possible so
that the sale properties are influenced by the same surrounding conditions as
the subject property. As previously stated, all sales are located in the same
general area as the subject property. Additionally, all sale properties are
located in similar office/commercial type areas with residential properties in
the outlying areas. No adjustment was warranted to the sales for surrounding
area or the influence the surrounding properties have on the sales since the
areas are similar and influenced by the same type of property uses. A location
adjustment was considered for frontage or exposure on major thoroughfares. As
previously stated, the subject property is located on the west side of Tesson
Ferry Road 2.2 miles south of the Interstate 270 and Tesson Ferry Road
interchange. Tesson Ferry Road is a heavily travelled thoroughfare linking
Highway 141 to the south with Highway 30 to the north.
When adjusting for this location factor we have adjusted Sale Numbers 2, 5 and
6 downward for their superior location closer to the Interstate 270/Tesson
Ferry Road interchange. Sale Number 3, while being located on a lesser
travelled street nd therefore considered inferior, is located within close
proximity to the Interstate 270/Interstate 44 interchange in a more centralized
location of St. Louis County resulting in a superior location when compared
with the subject. Therefore, Sale Number 3 was adjusted downward as well.
Sale Number 4 is considered to have similar location characteristics, therefore
no adjustment was warranted to this sale.
When adjusting the sales for zoning we have adjusted the subject sale upward
for being zoned for residential use at the time of its sale as compared with
its commercial zoning as of the date of this report. We have also adjusted
Sale Number 4 upward for being zoned for residential use. No adjustment was
warranted to Sale Numbers 2, 3, 5 and 6 since they are zoned, like the subject
property, for commercial use.
There typically exists an inverse relation between the size of a parcel and the
price per unit at which it sells such that a smaller tract of land will
generally sell for a higher price per square foot than a larger parcel with all
else being equal. All sales were adjusted downward by varying degrees for
being significantly smaller than the subject property.
As previously stated in this report, all utilities are available to the subject
property. No adjustment was warranted to any of the sales for utilities since
they are served by the same utility and supplier.
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<PAGE> 47
When adjusting the sales for topography, all sales were adjusted downward for
having a superior topography when compared with the sloping terrain of the
subject property.
As previously indicated, all sales are in the same general area of the subject
property and have similar characteristics. Differing characteristics of the
sales have been adjusted resulting in the adjusted sale providing a better
basis upon which to determine a market value for the subject property. A land
sale adjustment grid is presented as follows.
<TABLE>
<CAPTION>
LAND SALES ADJUSTMENT GRID
SALE NO. 1 SALE NO. 2 SALE NO. 3 SALE NO. 4 SALE NO. 5 SALE NO. 6
<S> <C> <C> <C> <C> <C> <C>
Sale Price Per $1.88 $5.51 $7.68 $5.93 $5.92 $5.79
Square Foot
Financing Market Market Market Market Market Market
Adjustment 0 0 0 0 0 0
Price Per Square $1.88 $5.51 %$7.68 $5.93 $5.92 $5.79
Foot Adjusted for
Financing
Date of Sale 10-Nov-92 07-Dec-90 19-Sep-90 27-Apr-90 01-Feb-90 01-Feb-90
Time Adjustment 0% 0% 0% 0% 0% 0%
Time Adjusted Price $1.88 $5.51 $7.68 $5.93 $5.92 $5.79
Per Square Foot
Land Area 435,687 54,842 97,618 52,272 70,132 51,856
Adjustment 0% -15% -10% -15% -15% -15%
Location/Accessibility Similar Superior Superior Similar Superior Superior
Adjustment 0% 0% 0% 0% 0% 0%
Zoning Inferior Similar Similar Inferior Similar Similar
Adjustment 25% 0% 0% 25% 0% -5%
Topography Similar Superior Superior Superior Superior Superior
Adjustment 25% -55% -45% -15% -55% -60%
Adjusted Price Per $2.35 $2.48 $4.22 $5.04 $2.66 $2.32
Square Foot
</TABLE>
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<PAGE> 48
After adjusting the preceding land sales for differences when compared with the
subject property, we find an adjusted sale price per square foot range of $2.32
to $5.04.
In our final correlation of land valuation analysis we have considered all
sales, however the greatest weight was given to the subject property. Based on
the land valuation adjustment analysis and the subject property sale, we have
concluded that the market value of the subject site is reasonably represented
at $2.35 per square foot, which for 435,687 square feet amounts to $1,023,864
rounded to:
$1,024,000
==========
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Service, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule, indicating the derived costs from the Marshall Valuation
Service shows the estimated replacement cost by category for the subject
building, is presented in the Exhibit section of this report. An amount
representing entrepreneurial profit has also been included in this analysis.
This profit is a necessary element in the motivation to construct the
improvements and represents an additional amount the developer would expect to
receive for construction of the project. The amount of entrepreneurial profit
varies according to economic conditions and types of development. For the
purpose of this report, entrepreneurial profit was estimated to comprise ten
percent of the direct and indirect building costs.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
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<PAGE> 49
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 45 to 50 years. For the subject Class A
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Service, Inc. was used to estimate the overall economic life
of the improvements. The assignment of economic lives assumed that, except for
the building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
zero.
Due to the design and structural components of the building, we have not
indicated any loss in value due to functional obsolescence.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of zero years and a remaining useful life of
20 years. Therefore,
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<PAGE> 50
the depreciation rate attributable to the site improvements on a straight-line
basis is estimated to be zero percent.
During our area study, we did not notice any evidence of economic obsolescence
associated with the subject property.
The computation of value is shown as follows:
<TABLE>
<CAPTION>
Replacement Accumulated Depreciated
Cost Depreciation Value
------------ ------------ -----------
<S> <C> <C> <C>
MOB $6,023,595 $0 $6,023,595
Site Improvements 352,850 0 352,850
---------- ---- ----------
Total Improvements $6,376,445 $0 $6,376,445
</TABLE>
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of March 15, 1994, is rounded to:
$7,400,000
==========
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<PAGE> 51
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on six professional office building sales
which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages.
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<PAGE> 52
<TABLE>
<S> <C>
Improved Sale Number 1
Location: 13065 Old Tesson Ferry Road, St. Louis County
Date of Sale: October 13, 1992
Building Size: 4,596 square feet
Year Built: 1978
Land Area: 47,916 square feet, 1.100 acres
Land to Building Ratio: 10.4:1
Sale Price: $495,000
Price Per Square Foot of Building Area: $107.70
Grantor: Charles and Bernice Willis
Grantee: Kromal Investments, Inc.
Recording Data: Book 9477, Page 1154
Comments: St. Louis County locator #30L420352. This vacant one-story State Farm
Agency building had a 930 square foot garage that was incorporated into
finished office space during a $100,000 renovation for a psychiatric
practice comprising offers of Kromal Investments, Inc. Sale transaction
verified by the Grantor.
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C>
Improved Sale Number 2
Location: 1265 Graham Road, Florissant
Date of Sale: July 1, 1991
Building Size: 11,386 square feet
Year Built: 1978
Land Area: 75,359 square feet, 1.730 acres
Land to Building Ratio: 13.2:1
Sale Price: $1,140,000
Price Per Square Foot of Building Area: $100.12
Grantor: Perry L. Mehlman
Grantee: Christian Hospital N.E./N.W.
Recording Data: Book 9038, Page 1330
Comments: St. Louis County locator #09K340392. Two-story medical office building
known as the Northwest County Professional Building. Sale transaction
verified by St. Louis County public records.
</TABLE>
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<PAGE> 54
<TABLE>
<S> <C>
Improved Sale Number 3
Location: 450 New Ballas Road, Creve Coeur
Date of Sale: May 1, 1991
Building Size: 30,834 square feet
Year Built: 1984
Land Area: 98,446 square feet, 2.260 acres
Land to Building Ratio: 6.4:1
Sale Price: $4,100,000
Price Per Square Foot of Building Area: $132.97
Grantor: Donald Ferguson
Grantee: Dr. Joseph Rubado
Recording Data: Book 9001, Page 94
Comments: St. Louis County located #170320971. Two-story medical office building.
The above stated building area does not include 9,387 square feet of
basement garage.
</TABLE>
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<PAGE> 55
Improved Sale Number 4
<TABLE>
<S> <C>
Location: 414 North New Ballas Road, Creve Coeur
Date of Sale: March 5, 1991
Building Size: 16,536 square feet
Year Built: 1958
Land Area: 92,347 square feet, 2.120 acres
Land to Building Ratio: 11.2:1
Sale Price: $1,575,000
Price Per Square Foot of Building Area: $95.25
Grantor: Joe H. Scott, Sr.
Grantee: Medical Equities, L.P.
Recording Data: Book 9001, Page 98
Comments: St. Louis County locator #17O320265. Two-story Class C medical office
building known as the Creve Coeur Dental Arts Building. Lower level
accessed at the rear of the building. Located at the northeast corner
of New Ballas Road and Magna Carta Drive.
</TABLE>
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<PAGE> 56
Improved Sale Number 5
<TABLE>
<S> <C>
Location: 8430 Pershall Road, Hazelwood
Date of Sale: December 10, 1990
Building Size: 7,017 square feet
Year Built: 1981
Land Area: 40,075 square feet, 0.920 acres
Land to Building Ratio: 11.4:1
Sale Price: $875,000
Price Per Square Foot of Building Area: $124.70
Grantor: Ronald Gersten, DDS
Grantee: Bonhomme Acquisition Corporation
Recording Data: Book 7315, Page 92
Comments: St. Louis County locator #09J110471. Two-story, Class D, medical office
building known as Life Smile Dental Care. Sale transaction verified by
St. Louis County public records.
</TABLE>
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<PAGE> 57
Improved Sale Number 6
<TABLE>
<S> <C>
Location: 225 Dunn Road, Florissant
Date of Sale: July 19, 1990
Building Size: 8,416 square feet
Year Built: 1988
Land Area: 41,382 square feet, 0.95 acres
Land to Building Ratio: 4.9:1
Sale Price: $876,000
Price Per Square Foot of Building Area: $104.09
Grantor: Land Dynamics, Inc.
Grantee: Grey Arch Partnership
Recording Data: Book 8807, Page 1830
Comments: St. Louis County locator #09J130897. One-story medical office building
known as Building A of the Florissant Professional Campus. Land size
includes share of common ground parking. Buyer comprises tenant
physicians exercising option in 1988 lease. Sale transaction verified
by the Grantor.
</TABLE>
-46-
<PAGE> 58
The preceding six medical office building property sales are summarized in the
following table.
<TABLE>
<CAPTION>
IMPROVED SALES SUMMARY
SALE DATE BUILDING YEAR SALE UNIT PRICE
NUMBER OF SALE AREA (SF) BUILT PRICE (SF)
<S> <C> <C> <C> <C> <C>
1 10/92 4,596 1978 $ 495,000 $107.70
2 07/91 11,386 1978 $1,140,000 $100.12
3 05/91 30,834 1984 $4,100,000 $132.97
4 03/91 16,536 1958 $1,575,000 $ 95.25
5 12/90 7,017 1981 $ 875,000 $124.70
6 07/90 8,416 1988 $ 876,000 $104.09
</TABLE>
The six comparable sales utilized in the Sales Comparison Approach analysis
were transacted between July 1990 and October 1992. The building sizes range
from 4,596 square feet to 30,834 square feet and range in sale price from
$95.25 to $132.97 per square foot of building area.
In order to arrive at a market value of the subject property, it is necessary
to compare the subject property with each sale and make adjustments to the
sales for differences. Adjustments are then applied to the unit of comparison.
The most common unit of comparison for commercial properties is based upon
building area. A discussion of the adjustments to develop a similarity between
the sale property and the subject property is as follows:
Since, to the best of our knowledge, these sales transactions did not involve
favorable financing, no adjustment was required for this characteristic.
All sales are located within similar high traffic commercial areas.
Additionally, each medical office building sale is located within close
proximity to an acute care general hospital. Based upon the similar
surrounding property influences and close proximity to an acute-care general
hospital, no adjustment was warranted to any sale for location.
-47-
<PAGE> 59
In addition to comparing location of the area and surrounding properties, we
have analyzed each sale for access. All sales are located on major
thoroughfares within close proximity to an interstate highway, therefore no
adjustment was warranted to these sales since they have comparable access.
All sales were adjusted downward by varying amounts for having less building
area when compared with the subject property's building area. Typically,
smaller buildings sell for more on a per square foot basis than larger
buildings. Smaller buildings of this type must have the same components and
complements as larger buildings to operate properly for their intended
professional use.
When adjusting the sales for building characteristics we have first adjusted
considered condition. No adjustment was warranted to the sales since they are
in similar good condition when compared with the subject building improvement.
In addition to condition, we have also considered an adjustment for age. All
sales were adjusted upward by varying amounts for age due to the subject
property being new.
We have also considered the land to building ratio in our adjustment analysis.
A higher land to building ratio indicates sufficient land area for possible
expansion to the existing improvement or construction of additional buildings.
All sales, except for Sale Number 2, have an inferior land to building ratio
when compared to the subject property's land to building ratio of 15.8:1. We
have therefore, adjusted Sale Numbers 1, 3, 4, 5 and 6 upward by varying
amounts to compensate for the inferior land to building ratio.
No adjustment was warranted to any of the sales for ceiling heights since
ceiling heights are not a significant factor that will adjust marketing time or
sales price in professional office related uses.
In addition, no adjustment was deemed necessary for functional utility since
all improvements are currently being utilized for medical office use.
In our final correlation of the Sales Comparison Approach analysis, we have
relied on the adjusted results of each property since we consider all
properties to be a good representation of the market and to reflect market
conditions. Due to the soft real
-48-
<PAGE> 60
estate market conditions, we have not made an adjustment for the time since
current market conditions ar considered to compensate for inflationary factors.
Based on the foregoing adjustment analysis, we have concluded the market value
of the subject property, utilizing the Sales Comparison Approach, is reasonably
represented at $130.00 per square foot, which for 54,801 square feet, amount to
$7,124,130, rounded to:
$7,124,000
==========
-49-
<PAGE> 61
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several professional office buildings that
Crescent Capital Trust, Incorporated is purchasing to establish a real estate
investment trust (REIT). Surgical Health Corporation will provide a net rental
guarantee, in the form of a master lease. The REIT, as the new property owner,
will receive the net rental master lease rate per square foot of rentable
office area, regardless of the rental rates charged or received from the actual
tenant(s). Additionally, the annual rental income provided for in the ground
lease, associated with the subject property, will be received by the REIT.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also give Surgical Health Corporation
leasing flexibility for the medical office building space, i.e., they can lease
office space to various physicians at different rates and terms, or they can
use the office space for their own expansion.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for the property is not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for the property. We reserve the right to modify the Income Approach valuation
if the actual master lease for the property differs significantly from the
draft lease presented to us.
The master lease rate for the subject property will be $824,063 annually based
on a fifteen-year lease. The annual rental amount is adjusted each year for
C.P.I. increases. The rental rate approximates $18.23 per square foot. Based
on the subject's build-out and age, this rate appears in line with market
rates. A survey of lease comparables is shown in the Exhibit Section of this
report.
-50-
<PAGE> 62
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$41,203, based on the management experience of other properties.
Master Lease Revenue $824,063
Less:
Management Fees (5% of master lease) (41,203)
Net Operating Income --------
$782,860
Although we have not utilized the Sales Comparison Approach to arrive at an
indication of value for the subject property, we have conducted a survey of
medical office building sales throughout the region in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit Section of this report and indicate overall rates from 8.0
percent to 11.33 percent.
A capitalization rate at 10.5 percent is considered appropriate because of the
quality of the tenant and the overall reasonableness of the rental rate
negotiated.
It is, therefore, our opinion that the market value of the subject property, as
of March 15, 1994, by the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$782,860/.105 = $7,455,810
Rounded to: $7,456,000
==========
-51-
<PAGE> 63
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the St. Louis Comprehensive and Ambulatory Care Center. The values derived
from the three approaches are summarized as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,400,000
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . $7,124,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,456,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. The Cost Approach, however,
does not necessarily reflect the value that investors and users would be
willing to pay if the property were to be sold. Overall, this approach is
considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject. The appraisers only consider this approach to be a fair indicator of
value for the subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
Based on this analysis, it is our opinion that the market value of the St.
Louis Comprehensive and Ambulatory Care Facility, as of March 15, 1994, subject
to the Surgical Health Corporation master lease, and based on the assumptions
and limiting conditions in this report, is the Income Approach value of:
$7,400,000
==========
-52-
<PAGE> 64
The values derived in the other approaches support the Income Approach value as
the final value.
-53-
<PAGE> 1
EXHIBIT 10.35
AN APPRAISAL OF
NORTHLAKE TUCKER
AMBULATORY SURGERY CENTER
TUCKER, GEORGIA
<PAGE> 2
[logo] VALUATION COUNSELORS GROUP, INC.
340 Interstate North Parkway
Atlanta, Georgia 30339
(404) 955-0088
(Fax) 955-0466
April 14, 1994
Crescent Capital Trust, Incorporated
One Perimeter Park South, Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John W. McRoberts
President & CFO
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the medical office building identified as follows:
NORTHLAKE TUCKER AMBULATORY SURGERY CENTER
1491 MONTREAL ROAD
TUCKER, GEORGIA
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of March 15, 1994, subject to a master lease
from Surgical Health Corporation. The report is to be used for asset valuation
purposes in conjunction with financing. Crescent Capital Trust, Incorporated
is establishing a real estate investment trust (REIT) and the valuation assumes
that the prospective REIT is the owner of the property, with Surgical Health
Corporation guaranteeing annual net rental income of $115,000 on a fifteen-year
lease, and an additional $104,709 annual rental income in conjunction with the
ground lease associated with the subject property.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
<PAGE> 3
Crescent Capital Trust, Incorporated
April 14, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property is a one-story outpatient surgery center containing 8,749
gross square feet constructed in 1993, located on a 2.16-acre site. The net
leasable square feet is equal to its gross amount of 8,749 square feet.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the Northlake Tucker
Ambulatory Surgery Center, as of March 15, 1994, to be:
$1,040,000
==========
<PAGE> 4
Crescent Capital Trust, Incorporated
April 14, 1994
Page Three
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:mhb
<PAGE> 5
APPRAISER CERTIFICATION
We, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
We have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
Our compensation is not contingent on an action or event resulting
from the analyses, opinions, or conclusions in or the use of this
report.
Our analyses, opinions, and conclusions were developed, and this
report has been prepared in conformity with the requirements of the
Code of Professional Ethics, the Appraisal Institute, American Society
of Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
Barbara R. Anderson, the principle appraiser, made a personal
inspection of the property that is the subject of this report.
Patrick J. Simers has not made a personal inspection of the property.
This assignment was made subject to regulations of the State of
Georgia Real Estate Appraisers Board. The undersigned state certified
appraiser has met the requirements of the board that allow this report
to be regarded as a "certified appraisal".
/s/ Patrick J. Simers /s/ Barbara R. Anderson
- --------------------------- ----------------------------
Patrick J. Simers Barbara R. Anderson
Managing Director Appraiser
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<CAPTION>
GENERAL DATA
- ------------
<S> <C>
Effective Date of Value: March 15, 1994
Property Identification: Northlake Tucker Ambulatory Surgery Center
Property Location: 1419 Montreal Road, Tucker, Georgia
Interest Appraised: Leased Fee Estate
Gross Building Area: 8,749 square feet
Net Leasable Area: 8,749 square feet
Land Size: Approximately 94,090 square feet, or 2.16
acres
Improvements Description: A one-story building constructed in 1993,
containing 8,749 gross square feet and 8,749
leasable square feet.
Physical Occupancy Percentage: 100%
CONCLUSIONS
- -----------
Cost Approach: $1,100,000
Sales Comparison Approach: $1,140,000
Income Approach: $1,040,000
Final Value Estimate: $1,040,000
==========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
----
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 4
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Area Data - Metropolitan Atlanta 7
Neighborhood Analysis 8
Zoning 9
Real Estate Taxes and Assessments 10
Site Analysis 11
Building and Site Improvements 12
HIGHEST AND BEST USE 14
VALUATION SECTION 18
Valuation Methodology 18
Cost Approach 19
Sales Comparison Approach 30
Income Approach 41
CORRELATION AND CONCLUSION 44
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
-----------------
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Area Map
Exhibit D - Location Map
Exhibit E - Tax Plat Map
Exhibit F - Site Plan
Exhibit G - Floor Plan
Exhibit H - Land Sales Map
Exhibit I - Building Description
Exhibit J - Land Improvements Description
Exhibit K - Ground Lease
Exhibit L - Rent Comparable Location Map
Exhibit M - Rent Comparables Summary
Exhibit N - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal, known as Northlake Tucker Ambulatory Surgery
Center, is a 8,749 square foot outpatient surgery facility located at 1491
Montreal Road, Tucker, DeKalb County, Georgia.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is March 15, 1994.
The date of the appraisal report is March 25, 1994.
FUNCTION OF THE APPRAISAL
The report is to be used for asset valuation purposes in conjunction with
financing. Crescent Capital Trust, Incorporated is establishing a real estate
investment trust (REIT). It is our understanding that the REIT will involve
mortgage financing.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute].
-2-
<PAGE> 14
HISTORY OF THE PROPERTY
The subject land, comprised of 2.16 acres, is owned by J.T. Honea, Sr. and J.T.
Honea, Jr. and is subject to a ground lease between the owners and Surgical
Health Corporation (Lessee) which commenced August 20, 1992 for a fifteen-year
term with two, five-year renewal options. A summary of the lease terms is
included in the Exhibit section of this report. The subject improvements were
constructed in 1993 by Surgical Health Corporation and the Northlake Tucker
Ambulatory Surgery Center opened for business in October 1993.
Surgical Health Corporation is considering including the subject medical office
building in a new REIT, as mentioned earlier. This report is being completed
for internal valuation purposes and for mortgage financing in conjunction with
the sale to the REIT.
The subject professional building has reportedly not been marketed for sale and
is not currently under an agreement of sale. No other deed transfers were
noted in the last three years. A title search is recommended for official
determination.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
-3-
<PAGE> 15
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non- Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
-4-
<PAGE> 16
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JANUARY 6, 1994 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate.
-5-
<PAGE> 17
This soft demand has caused some property values to remain flat and some to
decline. The lower interest rates in recent periods, however, are serving to
stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation].
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
-6-
<PAGE> 18
DESCRIPTIVE DATA
AREA DATA - Metropolitan Atlanta
The subject property is located in DeKalb County, approximately 15 miles
northeast of downtown Atlanta via Interstate 85. The Atlanta Metropolitan
Statistical Area (MSA) is a 5,148 square mile region encompassing 18 counties
in the northwestern portion of the state of Georgia. Atlanta has grown to
become the major economic center of the Southeast in recent decades. Very
early in its history, the city developed a retail, wholesale, and distribution
economy based upon its transportation and locational advantages. Atlanta's
emergence as a major urban center, however, did not begin until the 1950s after
changes wrought by the wartime economy laid the groundwork for a major
transformation of the Southeast regional economy. Despite its early dominance
as a transportation hub and center of commerce, Atlanta could only expand in
concert with the region it served.
During the past three decades, Atlanta has consistently out-paced the nation as
well as the Southeast region in population and employment growth. In 1950,
Atlanta comprised only .48 percent of the nation's population and 3.47 percent
of the Southeast's population. By 1980, Atlanta had increased these
percentages to .89 percent and 5.76 percent, respectively. Employment growth
was no less dramatic. In 1950, Atlanta accounted for only .57 percent of all
non-agricultural employment in the nation and 5.60 percent of the region's
employment. By 1980, these percentages were 1.06 percent and 7.27 percent,
respectively.
The Atlanta MSA now ranks as the ninth largest primary metropolitan area in the
nation. The 1980 census recorded 2,029,710 persons residing in the 18-county
metropolitan area. The 1990 estimated population was 2,717,784, a 33.9 percent
increase from the 1980 census. The population for the 18-county metropolitan
area for 1995 is forecast to be 3,071,283, a 13.0 percent increase from the
1990 estimate.
The Atlanta economy is distinguished from the national economy by its greater
concentration of trade and service employment, and the relatively low share of
manufacturing employment. The service sector of the economy has consistently
grown at a much faster pace than the goods-producing sector. Atlanta's
employment base is broadly diversified, with no single industry dominating the
local economy.
-7-
<PAGE> 19
Atlanta's economy continued to expand during the 1980 and 1982 nationwide
economic recessions. From 1978 to 1983, Atlanta was the second fastest growing
employment center in the nation. During the eight economic recessions since
World War II, Atlanta was only seriously affected by the 1974-1975 slowdown,
which was largely the result of an over-built real estate market. Atlanta has
felt the impact of the current recession, but the overall impact has been mild
and as the national economy improves, so will the city's.
Anticipated high growth areas include retail trade, services, international
business, interstate banking, and high technology. Atlanta should continue to
benefit from the emergence of interstate banking because of the strength of its
financial institutions and its obvious locational advantages.
International business has grown steadily and holds great promise, partially
with improved overseas air connections. Georgia Tech has spawned many high
technology firms and is actively involved in nurturing this growing sector of
the national and local economies. Trade activity has always been, and will
continue to be, a mainstay of Atlanta's economy. Services will continue to
keep pace with these basic growth factors.
In summary, metropolitan Atlanta has developed the necessary infrastructure of
transportation and commercial services to secure its role as a regional trade,
convention, and office center. Led primarily by the service sector, growth in
economic indicators such as employment and population are expected to continue
during the 1990s; however, at a slower rate than the current decade. Further,
the 1980s have left most markets over-built, specifically office, retail and
housing; a slowing of new construction is expected in order to allow the
absorption of existing inventories.
NEIGHBORHOOD ANALYSIS
The subject property is located in unincorporated DeKalb County, Georgia along
the east side of Montreal Road approximately 250 feet south of the
Lawrenceville Highway, also known as Highway 29. It's physical street address
is 1491 Montreal Road.
-8-
<PAGE> 20
The neighborhood boundaries are considered to be Lawrenceville Highway to the
north, Interstate Highway 285 to the west, Stone Mountain Parkway (Highway 78)
to the south, and John's Road to the east. Within the neighborhood, the
predominant land uses are institutional and single-family residential, with
commercial and retail uses located along the major thoroughfares; and the
Northlake Regional Medical Center to the south of the subject property along
the East side of Montreal Road.
Lawrenceville Highway, a major east/west thoroughfare with Interstate 285
access, gives the neighborhood excellent access. Development along
Lawrenceville Highway is comprised of commercial and retail structures.
Montreal Road provides north/south access for the residential and institutional
uses within the neighborhood.
Land uses adjacent to the subject property are medical office to the south,
used car lot and vacant land to the north, single-family residence to the east
and a car dealership and vacant land to the west, across Montreal Road. The
older, single-family residences are being demolished or converted to medical
and professional offices. The redevelopment of the area is being driven
primarily by the central location of the Northlake Regional Medical Center
within the neighborhood.
All typical urban services including utilities and police and fire protection
are available to the subject property. No negative influences or trends were
noted in the neighborhood.
In summary, the property is located in a mixed-use residential and
institutional neighborhood with close proximity to the Northlake Regional
Medical Center. The neighborhood is considered to have good access and
exposure. The surrounding land uses are not considered detrimental to the
subject's existing improvements. The subject's use as an outpatient surgery
center blends in well with the surrounding land development.
ZONING
The subject property is zoned "C-1, Conditional", Commercial Conditional
District, by the County of DeKalb. According to the County zoning
requirements, the commercial district provides for the orderly arrangement of
commercial, sales and service space.
-9-
<PAGE> 21
Permitted uses include commercial, retail, service, professional office and
other similar uses consistent with this zoning code's purpose and surrounding
uses.
The subject's "conditional" zoning, effective May 7, 1992, allows one point of
entry from Montreal Road and no point of entry from Woodlawn Circle.
Improvement setback requirements within the C-1 District are as follows:
<TABLE>
<S> <C>
Front 75 feet
Rear 30 feet, if adjacent to commercial
50 feet with buffer, if adjacent to residential
Side 20 feet
</TABLE>
The maximum building height is not to exceed five stories. Parking
requirements for medical office require four spaces per 1,000 square feet of
building. The subject building contains 8,749 square feet which equates to 35
parking spaces. The subject is improved with 44 parking spaces including 4
handicap spaces. According to a review of the zoning ordinance and discussions
with the local zoning authorities, the subject is a legal and conforming use
and is in conformance with current zoning requirements.
REAL ESTATE TAXES AND ASSESSMENTS
The subject's real property is assessed and taxed by the County of DeKalb. The
subject's full parcel number is 018-144-003-229. All properties within DeKalb
County are assessed at 40 percent of their fair market value. The property's
1993 assessed value is $330,500 (land only) indicating a total value for county
tax purpose of $132,200. The 1993 milage or tax rate for DeKalb County was
$42.53 per $1,000 of assessed value. Therefore, taxes were $5,622.00 for 1993.
The 1994 milage rate has not been set; however, a change in the assessment is
anticipated due to the 1993 construction of the improvements on the site.
-10-
<PAGE> 22
We have estimated the market value of the improvements, based on the Cost
Approach in this report, to be $1,104,965, assessed at 40 percent, results in
an estimated assessed value of $441,986. Added to the indicated current
assessed land value of $132,200 for a total estimated assessment of $574,186.
Based on the foregoing, the subject property taxes are estimated as follows:
$1,435,465 x 40% / $1,000 x $42.53 = $24,420
SITE ANALYSIS
The subject 2.16-acre site is located along the east side of Montreal Road,
approximately 250 feet south of Lawrenceville Highway, at 1491 Montreal Road,
Tucker, DeKalb County, Georgia. The site is basically rectangular in shape and
exhibits an arc distance of 131.80 feet along the eastern right-of-way line of
Montreal Road. The topography of the site is graded level on the western
portion of the side and is at grade with Montreal Road. The parking area at
the southeast corner of the improved area has been in-filled, held by a
concrete retainer wall. The remainder of the site is gently rolling and slopes
down toward the east. The eastern portion of the site exhibits approximately
an eight-foot grade difference. No limitations to potential development
results from the size, shape, or terrain of the site.
The subject property is located in Flood Zone C, an area of minimal flooding,
according to Flood Insurance Rate Map Panel Number 130065 0006 C, with an
effective date of July 5, 1983. The site appears to have adequate drainage and
soil load-bearing capabilities to support most development alternatives. A
soil report, however, was not made available to the appraiser and it is
assumed, based on existing improvements, that soil load-bearing capabilities
are adequate.
The site is improved with a one-story facility constructed of a structural
steel frame with dryvit covered exterior walls and a store-front type entrance,
utilized as an outpatient surgery center. In addition to concrete and asphalt
paving, the site is also improved with general landscaping, site lighting and
signage.
Access to the site is provided from one curb cut along the east side of
Montreal Road. Montreal Road is a two-lane thoroughfare with an additional
turn lane along the east side.
-11-
<PAGE> 23
All utilities, inclusive of water, sanitary sewer, electricity, natural gas and
telephone service, are available to the site. The public utilities that are
available at the present time are considered adequate to service the property.
Our site inspection of the property revealed no obvious easements or
encroachments, other than the typical street and utility easements, which do
not negatively affect the utility of the property. Further, we assume that the
subject site is not encumbered with detrimental easements or encroachments.
To our knowledge, no environmental study has been conducted on the subject
site. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
Overall, the characteristics of the subject property are functional, marketable
and well suited for the current use as a medical office building.
A legal description of the property and a land configuration plat are included
in the Exhibit section of this report.
BUILDING AND SITE IMPROVEMENTS
The site is improved with a one-story structure constructed in 1993. The
building contains 8,749 gross square feet, which is the same as the leasable
square feet.
The building areas are the appraiser's calculations based on the dimensions on
the Davis-Stokes-Chilton Collaborative P.C. Architects, architectural plans
dated June 25, 1992. We assume that the building was constructed according to
these plans.
The building is a one-story, pre-fabricated steel structure, with a dryvit
exterior. The entire building is sprinklered with a wet system. The building
has reinforced concrete floors. The roof is comprised of steel joists, and
metal decking, with a waterproof membrane covering. Ceiling finishes consists
of acoustical ceiling tiles and recessed fluorescent lighting and gypsum board
with painted finish. The interior walls are gypsum board over metal studs with
vinyl wall coverings and paint.
-12-
<PAGE> 24
Air conditioning is supplied via four roof-mounted York compressors and air
handlers with electric duct heaters in the zoned system. In addition, the
facility is equipped with a medical gas system with vacuum. A 175 kilawatt
generator provides emergency power for the facility. We assume that the
heating and electrical capacity is adequate for the subject facility.
The interior floors have both carpeting and vinyl tiles. Windows and doors are
metal- framed, and interior doors are solid-core wood. The facility has two
surgery suites, a procedure room, patient recovery areas, a laboratory, a
pharmacy, a nurses' station, locker rooms, a lounge, and office and reception
areas. A portion of the interior has not been finished out at this time. This
area is reportedly for future expansion for two additional surgery suites. A
typical floor plan for the building is shown in the Exhibit section of this
report.
Site improvements include asphalt paving and concrete sidewalks and curbing,
exterior lighting, wood fencing, and ground cover and shrubbery around the
subject building. A detail description of the building and site improvements
are included in the Exhibit section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building is new and in excellent condition. There is no deferred
maintenance, or functional or economic obsolescence.
-13-
<PAGE> 25
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
-14-
<PAGE> 26
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, industrial and special-purpose properties. The site
possesses good access and visibility. The size of the parcel would preclude
any large developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "C-1, Commercial". Permitted uses in this general zoning
category vary widely. Potential legal uses would include retail and
restaurants, office/institutional, hotels, hospitals and other medical-oriented
uses. The subject's conditional zoning provided for the limited access from
the adjacent residential street.
Surrounding uses include the hospital, other professional office uses, car lots
and some older single-family residential properties. These use patterns would
likely preclude industrial, retail or future single-family development on the
site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional and commercial development, the next
consideration is economic feasibility. Financially feasible uses for the site,
if vacant, are those uses that would generate an economic return to the land.
New hospital related development in the subject area indicates that new medical
development is financially feasible. New medical offices have recently been
constructed along Lawrenceville Highway to the west of the subject property.
Office business-use facilities, however, are generally over-built in Atlanta,
as is the case in other major metropolitan areas. General business space is
not considered financially feasible in the subject market at this time.
-15-
<PAGE> 27
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new medical-related development is financially
feasible. Based on this analysis, the current highest and best use of the
land, if vacant, would be for office/institutional development based on the
growth needs of the area hospitals.
As Improved
The subject site is currently improved with an 8,749 leasable square foot
professional building and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to modify existing improvements. The improvements were
recently constructed and are considered functional. The building could be
converted to an alternative medical office use as recent trends in the hospital
business call for more outpatient business and less inpatient stays.
LEGALLY PERMISSIBLE
The building, as improved, is assumed to be a legal conforming use, since the
property was recently constructed and received an occupancy permit. Under the
current zoning, the property could remain as it is, be torn down or renovated.
-16-
<PAGE> 28
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. The only
financially feasible use of the existing improvements is its current use as an
outpatient surgery center.
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The existing use was
the only financially feasible use. The highest and best use, as improved, is
the property's current use.
-17-
<PAGE> 29
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. The application of each approach to value is further
discussed in the appropriate sections which follow.
-18-
<PAGE> 30
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-19-
<PAGE> 31
<TABLE>
<CAPTION>
Land Comparable Number 1
- ------------------------
<S> <C>
Parcel Number: 18-145-08-014
Location: North side of Lawrenceville Highway
approximately 271 feet west of Spruce Valley
Drive.
Size: 35,625 square feet
Sale Date: February 11, 1992
Deed Book/Page: 7184/295
Grantor: Mildred M. Fisher
Grantee: Bruce A. and Iris Feinberg
Sale Price: $105,000
Price Per Square Foot: $2.95
Terms of Sale: All Cash
Shape: Rectangular
Zoning: R-3
Utilities: All utilities are available.
Comments: This parcel was part of two parcels
assembled for the construction of a medical
office building.
</TABLE>
-20-
<PAGE> 32
<TABLE>
<CAPTION>
Land Comparable Number 2
- ------------------------
<S> <C>
Parcel Number: 18-145-08-015
Location: North side of Lawrenceville Highway
approximately 396 feet west of Spruce Valley
Drive.
Size: 35,625 square feet
Sale Date: February 11, 1992
Deed Book/Page: 7184/288
Grantor: O. S. Bailey, Jr.
Grantee: Bruce A. & Iris Z. Feinberg
Sale Price: $105,000
Price Per Square Foot: $2.95
Terms of Sale: All Cash
Shape: Rectangular
Zoning: R-3
Utilities: All utilities are available.
Comments: This parcel was part of two parcels assembled
for the construction of a medical office
building.
</TABLE>
-21-
<PAGE> 33
<TABLE>
<CAPTION>
Land Comparable Number 3
- ------------------------
<S> <C>
Parcel Number: 18-145-08-018
Location: North side of Lawrenceville Highway
approximately 721 feet south of Spruce Valley
Drive.
Size: 45,846 square feet
Sale Date: April 27, 1993
Deed Book/Page: 7652/353
Grantor: Carde M. Connely
Grantee: Bruce & Iris Feinberg
Sale Price: $49,600
Price Per Square Foot: $1.08
Terms of Sale: All Cash
Shape: Basically rectangular
Zoning: C-3 (Commercial)
Utilities: All utilities are available.
Comments: The site has 237 feet of frontage and is at
grade with Lawrenceville Highway. The site is
presently improved with a two-story
professional office building.
</TABLE>
-22-
<PAGE> 34
<TABLE>
<CAPTION>
Land Comparable Number 4
- ------------------------
<S> <C>
Location: Southeast side of Lawrenceville Highway
approximately 419 feet south of McClendon
Drive.
Size: 89,298 square feet
Sale Date: September 25, 1991
Deed Book/Page: 7139/754
Grantor: Orr Palmer Brick Company
Grantee: Jarvis W. Palmer
Sale Price: $217,000
Price Per Square Foot: $2.43
Terms of Sale: All Cash
Shape: Irregular
Zoning: C-3 (Commercial)
Utilities: All utilities are available.
Comments: The site has approximately 227 feet of
frontage along Lawrenceville Highway and is at
grade. The topography is rolling and slopes
down to the rear of the lot. The site is
improved with a single-family residence,
constructed in 1959, which does not contribute
any value.
</TABLE>
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<PAGE> 35
A summary of the land sales is shown as follows:
<TABLE>
<CAPTION>
SUMMARY OF LAND COMPARABLES
SALE SALE SIZE PRICE
NO. LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 N/s Lawrenceville Hwy. 02/92 35,625 $2.95
2 N/s Lawrenceville Hwy. 02/92 35,625 $2.95
3 N/s Lawrenceville Hwy. 04/93 45,846 $1.08
4 SE/s Lawrenceville Hwy. 09/91 89,298 $2.43
SUBJECT 1419 MONTREAL ROAD 94,090
</TABLE>
The above sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. The sales range in size from 35,625
square feet to 89,298 square feet and indicate an unadjusted range of value
from $1.08 per square foot to $2.95 per square foot. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions. The
comparable sales are analyzed in the following paragraphs.
LAND SALE NUMBER 1 was one of two parcels that were assembled for the
construction of a professional office building. A downward adjustment is
indicated for this condition of sale. The land sale is recent and no
adjustment appears warranted for time of sale. The sale is located
approximately one mile to the west of the subject and is not adjacent to a
hospital. As such, an upward adjustment for location is indicated. The site
has good access and exposure characteristics and is considered comparable to
the subject. As such, no adjustment is indicated for these factors. The
parcel is smaller in size compared to the subject. Typically, smaller sites
command a higher unit price than larger sites. A downward adjustment is
indicated for the sale site compared to the subject. The topography, overall
utility and zoning are considered comparable to the subject and no adjustment
is indicated for these factors. Overall, a downward adjustment is indicated
for the sale.
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<PAGE> 36
LAND SALE NUMBER 2 was one of two parcels that were assembled for the
construction of a professional office building. A downward adjustment is
indicated for this condition of sale. The land sale is recent and no
adjustment appears warranted for time of sale. The sale is located
approximately one mile to the west of the subject and is not adjacent to a
hospital. As such, an upward adjustment for location is indicated. The site
has good access and exposure characteristics and is considered comparable to
the subject. As such, no adjustment is indicated for these factors. The
parcel is smaller in size compared to the subject. Typically, smaller sites
command a higher unit price than larger sites. A downward adjustment is
indicated for the sale site compared to the subject. The topography, overall
utility and zoning are considered comparable to the subject and no adjustment
is indicated for these factors. Overall, a downward adjustment is indicated
for the sale.
LAND SALE NUMBER 3 was the April 1993 sale of a 45,846 square foot site located
along the north side of Lawrenceville Highway. The site was vacant at the time
of sale and is presently improved with a medical office building. The sale is
recent and no adjustment is indicated for market conditions. The sale is
located approximately one mile to the west of the subject and is not adjacent
to a hospital. As such, an upward adjustment for location is indicated. The
site has good access and exposure characteristics and is considered comparable
to the subject. As such, no adjustment is indicated for these factors. The
parcel is smaller in size compared to the subject. Typically, smaller sites
command a higher unit price than larger sites. A downward adjustment is
indicated for the sale site compared to the subject. The topography, overall
utility and zoning are considered comparable to the subject and no adjustment
is indicated for these factors. Overall, no adjustment is indicated for the
sale.
LAND SALE NUMBER 4 represents the September 1991 sale of a 89,298 square foot
parcel located along the southeast side of Lawrenceville Highway south of
McClendon Drive. A slight downward adjustment is indicated for market
conditions based on the date of sale. The site is improved with an older,
single-family residence constructed in 1959. However, the improvements do not
contribute any value to the site. The sale is located approximately one mile
to the west of the subject and is not adjacent to a hospital. As such, an
upward adjustment for location is indicated. The site has good access and
exposure characteristics and is considered comparable to the subject. As such,
no adjustment is indicated for these factors. The parcel is comparable in size
compared to the subject and no adjustment is indicated. The topography,
overall utility and zoning
-25-
<PAGE> 37
are considered comparable to the subject and no adjustment is indicated for
these factors. Overall, a downward adjustment is indicated for the sale.
Land Conclusion
Based upon the preceding analysis and conversations with local brokers, it is
our opinion that a value of $1.50 per square foot is representative of the
subject site, as if vacant. Multiplied by the subject's 94,090 square foot
site, this would indicate a market value of the subject land calculated as
follows:
94,090 SF x $1.50/SF = $141,135
Rounded to: $140,000
========
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Service, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule, indicating the derived costs from the Marshall Valuation
Service shows the estimated replacement cost by category for the subject
building, is presented in the Exhibit section of this report. An amount
representing entrepreneurial profit has also been included in this analysis.
This profit is a necessary element in the motivation to construct the
improvements and represents an additional amount the developer would expect to
receive for construction of the project. The amount of entrepreneurial profit
varies according to economic conditions and types of development. For the
purpose of this report, entrepreneurial profit was estimated to comprise ten
percent of the direct and indirect building costs.
-26-
<PAGE> 38
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 45 to 50 years. For the subject Class C
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Service, Inc. was used to estimate the overall economic life
of the improvements. The assignment of economic lives assumed that, except for
the building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its young age. Observation of the subject property indicated
that the structure and related component parts have been adequately maintained
through a continuous maintenance service program.
-27-
<PAGE> 39
The subject property was constructed in 1993 and it is in excellent condition.
It is judged that the subject has an effective age equal to its actual age of
one year. The remaining useful life is estimated to be 44 years. This
translates into a physical depreciation estimate of 2.0 percent (1 year divided
by 45 years). The amount of depreciation attributable to the property has been
estimated on a straight-line basis, which is founded on the assumption that
depreciation of a property occurs equally throughout its economic life.
Due to the design and structural components of the building, we have not
indicated any loss in value due to functional obsolescence.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of one year and a remaining useful life of 19
years. Therefore, the depreciation rate attributable to the site improvements
on a straight-line basis is estimated to be 5.0 percent.
During our area study, we did not notice any evidence of economic obsolescence
associated with the subject property.
The computation of value is shown as follows:
<TABLE>
<CAPTION>
Replacement Accumulated Depreciated
Cost Depreciation Value
------------ ------------ -----------
<S> <C> <C> <C>
MOB $1,083,375 $21,668 $1,061,707
Site Improvements 45,535 2,277 43,258
---------- ------- ----------
Total Improvements $1,128,910 $23,945 $1,104,965
</TABLE>
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of March 15, 1994, is rounded to:
$1,100,000
==========
-28-
<PAGE> 40
SALES COMPARISON APPROACH
The Sales Comparison Approach is based upon the principle of substitution; that
is, 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 there
is no costly delay in making the substitution. Since two properties are rarely
identical, the necessary adjustments for differences in quality, location,
size, services and market appeal are a function of appraisal experience and
judgment.
The Sales Comparison Approach gives consideration to actual sales of other
similar properties with adjustments as previously stated. The sales prices are
analyzed in common denominators and applied to the subject property in
respective categories to be indicative of market value.
The unit of comparison used in this analysis is the price per square foot,
which is the gross purchase price of the building divided by the net leasable
area in the building. The following sales are considered to be representative
of market activity and conditions as of the valuation date. Unless otherwise
indicated, the sales involved arm's length transactions that conveyed a fee
simple interest, and only real property was included in the transactions.
Also, all purchase prices quoted in this report represent all cash sales unless
seller financing is noted and the sale prices adjusted for cash equivalency.
In our analysis, we obtained details on seven professional office building
sales which have occurred over the past two years. The terms of the sale and
significant data was verified to the extent possible by county deed records and
with parties to the transaction. Information on these sales is shown on the
following pages:
-29-
<PAGE> 41
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 1
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: 1770 Independence Court, Homewood, Jefferson County, Alabama
Date of Sale: March 9, 1993
Deed Book/Page: 4223/115
Grantor: Brookwood Medical & Dental Group
Grantee: Proxy Land Development Corporation
Sale Price: $850,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 92,200 square feet
Building Size: 7,808 square feet - gross
6,928 square feet - leasable
Year Built: 1984
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $100,456 $14.50
Vacancy Allowance @ 5%: $ 5,023 $ 0.73
-------- ------
Effective Gross Income: $ 95,433 $13.77
Estimated Expenses @ $4.00: $ 27,712 $ 4.00
-------- ------
Net Operating Income: $ 67,721 $ 9.77
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 122.69
Stabilized Overall Rate: 8.0%
EGIM: 8.91
</TABLE>
COMMENTS
The Grantor was an affiliate of HealthSouth Medical Center. The hospital paid
more than market value for the building so the Grantee/physician would move his
surgical practice to the HealthSouth Medical Center.
-30-
<PAGE> 42
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 2
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: West side of 20th Street South at the address 908 20th Street South in
Birmingham, Alabama
Date of Sale: December 20, 1991
Deed Book/Page: 4166/170
Grantor: The Byrd Company, Inc.
Grantee: Board of Trustees of the University of Alabama
Sale Price: $3,750,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 82,460 square feet
Building Size: 52,440 square feet - gross
44,574 square feet - leasable
Year Built: 1964
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $624,036 $14.00
Vacancy Allowance @ 10%: $ 62,404 $ 1.40
-------- ------
Effective Gross Income: $561,632 $12.60
Estimated Expenses @ $6.00/SF $222,870 $ 5.00
-------- ------
Net Operating Income: $338,762 $ 7.60
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 84.13
Stabilized Overall Rate: 9.0%
EGIM: 6.68
</TABLE>
COMMENTS
This three-story building was purchased by the UAB Medical Center. A Medical
Genetics Center now occupies the facility. The current land value near the UAB
campus is estimated at 40% to 45% of the total purchase price.
-31-
<PAGE> 43
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 3
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: 1260 Upper Hembree Road in Roswell, Fulton County, Georgia
Date of Sale: November 20, 1991
Deed Book/Page: 14752/1-8
Grantor: Upper Hembree Associates II, Ltd.
Grantee: Medical Plaza, Inc.
Sale Price: $4,525,000
Terms of Sale: All Cash
PROPERTY DATA
Land Size: 1.65 acres (approximate)
Building Size: 32,500 square feet
Year Built: 1991
Occupancy at Sale: 100%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income*: $671,125 $20.65
Vacancy Allowance @ 5%: $ 33,556 $ 1.03
-------- ------
Effective Gross Income: $637,569 $19.62
Estimated Expenses @ $6.00/SF $178,750 $ 5.50
-------- ------
Net Operating Income: $458,819 $14.12
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 139.23
Stabilized Overall Rate: 10.1%
EGIM: 7.10
</TABLE>
COMMENTS
This property included three buildings containing 12,400 SF, 12,000 SF and
8,100 SF. The first two buildings were leased to North Fulton Hospital for
seven years. The first 12,400 SF was leased for $16.00/SF net, and the other
12,000 SF was leased for $16.25/SF net. The tenants were responsible for all
costs but structural maintenance and management.
* The rents were adjusted upward $4.50/SF for gross comparison.
-32-
<PAGE> 44
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 4
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: 2519 Galiano Street, Miami, Dade County, Florida
Date of Sale: December 29, 1992
Deed Book/Page: 15762/4643
Grantor: American Equities No. 2, Inc.
Grantee: CAC Properties, Inc.
Sale Price: $12,521,000
Terms of Sale: Third party financing had no impact on the purchase price
PROPERTY DATA
Parcel Number: 03-4117-005-1340 & 1330
Building Size: 139,500 square feet
Year Built: 1986
STABILIZED OPERATING DATA
Dollars Per SF
------- ------
Estimated Gross Income: $2,511,000 $18.00
Vacancy Allowance: $ 376,650 $ 2.70
---------- ------
Effective Gross Income: $2,134,350 $15.30
Estimated Expenses @ $6.00/SF: $ 837,000 $ 6.00
---------- ------
Net Operating Income: $1,297,350 $ 9.30
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 89.76
Stabilized Overall Rate: 10.4%
EGIM: 5.87
</TABLE>
COMMENTS
This building has six stories of office space over seven stories of parking
deck. The building was purchased by the primary tenant in the building. This
building is not adjacent to a hospital. Sun Bank has bank space in the bottom
floor of the building.
-33-
<PAGE> 45
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 5
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: 5 West Sample Road in Pompano Beach, Broward County, Florida
Date of Sale: July 5, 1991
Deed Book/Page: 18536/769
Grantor: Robert T. Held, Sr.
Grantee: William J. Rand, et al
Sale Price: $3,150,000
Terms of Sale: Third party conventional financing had no impact on price.
PROPERTY DATA
Land Size: 15,000 square feet
Building Size: 27,500 square feet - gross
25,000 SF estimated leasable
Year Built: 1991
Occupancy at Sale: Build-to-suit for Rand Eye Institute
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income: $450,000 $18.00
Vacancy Allowance @ 5%: $ 22,500 $ 0.90
-------- ------
Effective Gross Income: $427,500 $17.10
Estimated Expenses @ $5.00: $125,000 $ 5.00
-------- ------
Net Operating Income: $302,500 $12.10
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 126.00
Stabilized Overall Rate: 9.6%
EGIM: 7.37
</TABLE>
COMMENTS
This is a three-story, Class B, reflective glass and concrete building is
located in the northeast quadrant of the intersection of I-95 and Samples Road
near the campus of the North Broward Medical Center.
-34-
<PAGE> 46
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 6
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: 9750 NW 33rd Street in Coral Springs, Broward County, Florida
Date of Sale: September 19, 1991
Deed Book/Page: 18762/194
Grantor: Central Medical Plaza Associates, Inc.
Grantee: Gary V. Caplan, Trustee
Sale Price: $4,790,200
Adjusted Sale Price: $4,550,500
Terms of Sale: Seller provided a 75% mortgage. The sale price was adjusted downward 5%
for cash equivalency.
PROPERTY DATA
Land Size: 3.5 acres
Building Size: 48,031 square feet - gross
43,500 sf leasable
Year Built: 1988
Occupancy at Sale: 95%
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income: $891,750 $20.50
Vacancy Allowance @ 10%: $ 89,175 $ 2.05
-------- ------
Effective Gross Income: $802,575 $18.45
Estimated Expenses @ $6.00: $261,000 $ 6.00
-------- ------
Net Operating Income: $541,575 $12.45
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 104.61
Stabilized Overall Rate: 11.9%
EGIM: 5.67
</TABLE>
COMMENTS
This is a two-story, steel frame medical office building that was constructed
in 1988. It is located east of University Road and northwest of the Coral
Springs Medical Center. This sale occurred in the recession of 1991 when
conventional financing was difficult to obtain.
-35-
<PAGE> 47
<TABLE>
<CAPTION>
IMPROVED SALE NUMBER 7
- ----------------------
GENERAL SALE DATA
<S> <C>
Location: South side of SW 8th Street at 4950 SW 8th Street in Coral Gables, Dade
County, Florida
Date of Sale: January 6, 1992
Deed Book/Page: 15338/2902
Grantor: Abbey Health Services Inc.
Grantee: Kendall Health Care Group, Inc.
Sale Price: $10,500,000
Terms of Sale: Third party financing had no impact on the purchase price.
PROPERTY DATA
Land Size: 21,250 square feet
Building Size: 37,100 square feet - leasable
Year Built: 1985
STABILIZED OPERATING DATA
Dollars Per SF
-------- ------
Estimated Gross Income: $593,600 $16.00
Vacancy Allowance @ 10%: $ 59,360 $ 1.60
-------- ------
Effective Gross Income: $534,240 $14.40
Estimated Expenses @ $5.00/SF $185,500 $ 5.00
-------- ------
Net Operating Income: $348,740 $ 9.40
MARKET VALUE INDICATORS
Sale Price Per Square Foot: $ 94.34
Stabilized Overall Rate: 9.9%
EGIM: 5.90
</TABLE>
COMMENTS
This building has two stories of office space above a covered, open-air parking
lot. This location is near the Vencor Hospital. The building was reported to
be 100% occupied at the time of sale.
-36-
<PAGE> 48
The comparable improved sales are summarized as follows:
SUMMARY OF IMPROVED SALES
<TABLE>
<CAPTION>
SALE RENTABLE PRICE PER
NO. ADDRESS (SQUARE FEET) SALE PRICE SQUARE FOOT
<S> <C> <C> <C> <C>
1 Independence Court 6,928 $ 850,000 $122.69
Birmingham, Alabama
2 20th Street South 44,574 $ 3,750,000 $ 84.13
Birmingham, Alabama
3 1260 Upper Hembree 32,500 $ 4,525,000 $139.23
Roswell, Georgia
4 2519 Galiano Street 139,500 $12,521,000 $ 89.76
Miami, Florida
5 5 West Sample Road 25,000 $ 3,150,000 $126.00
Pompano Beach, Florida
6 9750 N.W. 33rd Street 43,500 $ 4,550,500 $104.61
Coral Springs, Florida
7 4950 SW 8th Street 37,100 $10,500,000 $ 94.34
Coral Springs, Florida
</TABLE>
The unadjusted prices of these comparables range from $89.76 per square foot to
$153.33 per square foot. All of the transactions presented involved improved
facilities conveyed in fee simple. The sales were either purchased with all
cash or with a down payment and financing to be considered at market, unless
indicated otherwise.
IMPROVED SALE 1 is a Class C professional office building that is located near
the Brookwood Medical Center. An affiliate of HealthSouth Medical Center
purchased this building to entice its physician/owner to move his practice to
their facility. This transaction was reportedly at a market value price.
However, a downward adjustment is indicated because the building was not
marketed as a vacant building due to this relationship. The building is
considered comparable in size to the subject and no adjustment is indicated for
size. The building is located at the end of a steep winding road, and has poor
visibility. An upward adjustment is indicated due to this inferior location
compared to the subject. An addition upward adjustment to this comparable is
also indicated due to the subject's recent construction making the subject
building
-37-
<PAGE> 49
newer than this comparable. Overall, an upward adjustment to the sale, in
comparison to the subject, was made.
IMPROVED SALE 2 is the sale of a building purchased by UAB to use as a Medical
Genetics Center. Upward adjustments are indicated because of the subject's
superior location and quality, and because of the older age of this comparable.
An upward adjustment is indicated because this sale occurred during the
recession in 1991 when property values were declining and financing restricted.
An upward adjustment is indicated for the sale's larger size in comparison to
the subject facility. Overall, an upward adjustment has been made to the sale.
IMPROVED SALE 3 was the sale of a three-building professional office facility
that is located approximately one-quarter-mile from the North Fulton Medical
Center in Roswell, Georgia. A downward adjustment is indicated because 80
percent of this facility was net leased to the hospital. An upward adjustment
is indicated due to the larger size of this comparable. Upward adjustments are
indicated for location and quality of improvements. All factors considered, a
slight upward adjustment is indicated.
IMPROVED SALE 4 was the December 1992 sale of a 139,500 square foot
professional office building located in Miami, Florida. The sale was to the
main tenant in the building, a healthcare plan operated by Ramsay. An upward
adjustment is indicated because this tenant has such a large economic impact on
the property, and because the sellers were reportedly very motivated to sell.
An upward adjustment to the price per foot of this comparable is indicated
because the building is larger than the subject property. Overall, the sale
has been adjusted upward.
IMPROVED SALE 5 is a Class B professional office building that is located in
Pompano Beach near the North Broward Medical Center. This building was
constructed for use by the Rand Eye Institute. An upward adjustment is
indicated because this sale occurred during the recession in 1991 when property
values declining and financing restricted. Upward adjustments are also
indicated for location and quality of the improvements. All factors
considered, this comparable has been adjusted upward.
IMPROVED SALE 6 was the September 1991 sale of a professional office facility
that is located northwest of the Coral Springs Medical Center. The sale price
was adjusted downward for cash equivalency because of seller financing. Upward
adjustments are indicated due to the improving property values and the economy
since this sale, and
-38-
<PAGE> 50
because of the subject's superior location and superior quality of
improvements. All factors considered, this sale has been adjusted upward.
IMPROVED SALE 7 was January 1992 sale of a medical building located near the
Vencor Hospital in Coral Gables, Florida. Upward adjustments to the price per
square foot of this comparable are indicated for location and size. Upward
adjustment are also indicated due to the older age of this comparable and the
subject's superior quality of improvements. Overall, this comparable sale has
been adjusted upward.
Based on the preceding analysis, we are of the opinion that $130.00 per square
foot would be indicative of the subject's value. Therefore, the market value
of the subject property via the Sales Comparison Approach, as of March 15,
1994, the effective date of this report, is calculated as follows:
8,749 SF x $130.00/SF = $1,137,370
Rounded to: $1,140,000
==========
-39-
<PAGE> 51
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several professional office buildings that
Crescent Capital Trust, Incorporated is establishing a real estate investment
trust (REIT). Surgical Health Corporation will provide a net rental guarantee,
in the form of a master lease. The REIT, as the new property owner, will
receive the net rental master lease rate per square foot of rentable office
area, regardless of the rental rates charged or received from the actual
tenant(s). Additionally, the annual rental income provided for in the ground
lease, associated with the subject property, will be received by the REIT.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow Crescent Capital Trust,
Incorporated leasing flexibility for the medical office building space, i.e.,
they can lease office space to various physicians at different rates and terms,
or they can use the office space for hospital purposes.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for the property are not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for the property times the rentable building area. We reserve the right to
modify the Income Approach valuation if the actual master lease for the
property differs significantly from the draft lease presented to us.
The master lease rate for the subject property will be $115,000 annually based
on a 15-year lease, and an additional $104,709 annual rental income in
conjunction with the ground lease associated with the subject property.
-40-
<PAGE> 52
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$5,750, based on the management experience of other properties. The income
received in conjunction with the ground lease will be offset by the ground
lease expense. The net operating income for the property is calculated as
follows:
<TABLE>
<S> <C>
Master lease revenue $ 115,000
Ground lease revenue 104,709
---------
Total revenues $ 219,709
Less:
Management fees (5% of master lease) $ (5,750)
Ground lease expense (104,709)
---------
Net Operating Income $ 109,250
</TABLE>
The estimated direct capitalization rates, or overall rates (OARs), for the
seven improved sale comparables presented in the Sales Comparison Approach
section of this report ranged from 8.0 percent to 11.9 percent. Two of the
capitalization rates in the upper end of this range represent sales that
occurred in 1991 when sales and financing availability were restricted. In
Improved Sale Number 4, with a high estimated capitalization rate of 10.4
percent, the buyer was the major tenant in the building, and the sale was
reportedly not completely an arm's length sale. Based on the comparables and
this discussion, a capitalization rate of 10.5 percent is considered
appropriate for the subject property.
-41-
<PAGE> 53
It is, therefore, our opinion that the market value of the subject property, as
of March 15, 1994, by the Income Approach is calculated and rounded as follows:
Net Operating Income/OAR = Estimated Value
$109,250/.105 = $1,040,476
Rounded to: $1,040,000
==========
-42-
<PAGE> 54
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the Northlake Tucker Ambulatory Surgery Center. The values derived from the
three approaches are summarized as follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,100,000
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . $1,140,000
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,040,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using reliable sources. The Cost
Approach provides a good indicator of the current replacement cost for new and
special purpose properties such as the subject. This approach is
representative of the value in use as part of the hospital complex. The Cost
Approach, however, does not necessarily reflect the value that investors and
users would be willing to pay if the property were to be sold. Overall, this
approach is considered only a fair indicator of value.
The Sales Comparison Approach is based on the price that investors and
owner/occupants have recently paid for comparable professional office
buildings. The quality and quality of data available in this approach was
considered good, but several of the comparable sales differed in size from the
subject and were in other geographic locations outside the Atlanta market. The
appraisers only consider this approach to be a fair indicator of value for the
subject property for this reason.
The Income Approach normally provides the most reliable value estimate for
multi-tenant professional office buildings. The value of the property is
strongly related to the expected income stream of the property. Although the
buyers of professional office buildings are usually owner/occupants, these
buyers are generally aware of the property's cash flow potential and its value
from an investor's perspective. For this reason, the Income Approach is
considered the best indicator of value for the subject.
-43-
<PAGE> 55
Based on this analysis, it is our opinion that the market value of the
Northlake Tucker Ambulatory Surgery Center, as of March 15, 1994, subject to
the Surgical Health Corporation master lease, and based on the assumptions and
limiting conditions in this report, is the Income Approach value of:
$1,040,000
==========
The values derived in the other approaches support the Income Approach value as
the final value.
-44-
<PAGE> 1
EXHIBIT 10.36
AN APPRAISAL OF
NORTH SHORE
SURGICAL CENTER
EVANSTON, ILLINOIS
<PAGE> 2
April 28, 1994
Crescent Capital Trust, Incorporated
One Perimeter Park South, Suite 335-S
Birmingham, Alabama 35243
Attention: Mr. John W. McRoberts
President & CFO
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the market value of the surgical center identified as follows:
NORTH SHORE SURGICAL CENTER
815 HOWARD STREET
EVANSTON, ILLINOIS
The purpose of this valuation is to estimate the market value of the subject
property's leased fee estate as of March 15, 1994, subject to a master lease
from Surgical Health Corporation. The report is to be used for asset valuation
purposes in conjunction with financing. Crescent Capital Trust, Incorporated
is establishing a real estate investment trust (REIT) and the valuation assumes
that the prospective REIT is the owner of the property, with Surgical Health
Corporation guaranteeing annual net rental income of $105,860 on a fifteen-year
lease.
This appraisal investigation includes visits to the facility, discussions with
the current owners and management of the property, a review of available
financial data, discussions with local brokers and government offices, and
research and analysis of the market.
"Market value" is defined as:
"The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently 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:
<PAGE> 3
Crescent Capital Trust, Incorporated
April 28, 1994
Page Two
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
The subject property is a one-story outpatient surgery center containing 5,100
gross square feet constructed in the 1960s, but completely remodeled in 1988,
located on an 0.23-acre site. The net leasable square feet is equal to its
gross amount of 5,100 square feet.
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
The information furnished us by others is believed to be reliable, but no
responsibility for its accuracy is assumed. The value reported herein is based
upon the integrity of the information provided.
Based upon the procedures, assumptions and conditions outlined in this report,
we estimate the market value of the leased fee interest in the North Shore
Surgical Center, as of March 15, 1994, to be:
$910,000
========
<PAGE> 4
Crescent Capital Trust, Incorporated
April 28, 1994
Page Three
This value estimate includes real property only, and excludes the value of any
furniture or equipment located within the property.
We have no responsibility to update our report for events and circumstances
occurring after the date of this report. Neither the whole, nor any part of
this appraisal or any reference thereto may be included in any document,
statement, appraisal or circular without Valuation Counselors Group, Inc.'s
prior written approval of the form and context in which it appears.
This appraisal report consists of the following:
o This letter outlining the services performed;
o Certifications of the appraisers;
o A Statement of Facts and Limiting Conditions;
o A Summary of Salient Facts and Conclusions;
o A Narrative section detailing the appraisal of the property;
and
o An Exhibit section containing supplementary data.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
PJS:mhb
<PAGE> 5
APPRAISER CERTIFICATION
I, the undersigned, do hereby certify that to the best of our knowledge and
belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions and are our personal,
unbiased professional analyses, opinions, and conclusions.
I have no present or prospective interest in the property that is the
subject of this report, and have no personal interest or bias with
respect to the parties involved.
My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in or the use of this report.
My analyses, opinions, and conclusions were developed, and this report
has been prepared in conformity with the requirements of the Code of
Professional Ethics, the Appraisal Institute, American Society of
Appraisers, and the Uniform Standards of Professional Appraisal
Practice.
The use of this report is subject to the requirements of the Appraisal
Institute and American Society of Appraisers relating to review by its
duly authorized representatives.
A representative of Valuation Counselors Group made a personal
inspec-tion of the property that is the subject of this report.
Patrick J. Simers has not made a personal inspection of the property.
/s/ Patrick J. Simers
---------------------
Patrick J. Simers
Managing Director
<PAGE> 6
STATEMENT OF FACTS AND LIMITING CONDITIONS
Valuation Counselors Group, Inc. strives to clearly and accurately disclose the
assumptions and limiting conditions that directly affect an appraisal analysis,
opinion, or conclusion. To assist the reader in interpreting this report, such
assumptions are set forth as follows:
Appraisals are performed, and written reports are prepared by, or under the
supervision of, members of the Appraisal Institute in accordance with the
Institute's Standard of Professional Practice and Code of Professional Ethics.
Appraisal assignments are accepted with the understanding that there is no
obligation to furnish services after completion of the original assignment. If
the need for subsequent services related to an appraisal assignment (e.g.,
testimony, updates, conferences, reprint or copy services) is contemplated,
special arrangements acceptable to Valuation Counselors Group, Inc. must be
made in advance. Valuation Counselors Group, Inc. reserves the right to make
adjustments to the analysis, opinions and conclusions set forth in the report
as we may deem necessary by consideration of additional or more reliable data
that may become available.
No opinion is rendered as to legal fee or property title, which are assumed to
be good and marketable. Prevailing leases, liens and other encumbrances,
including internal and external environmental conditions and structural
defects, if any, have been disregarded, unless otherwise specifically stated in
the report. Sketches, maps, photographs, or other graphic aids included in
appraisal reports are intended to assist the reader in ready identification and
visualization of the property and are not intended for technical purposes.
It is assumed that: no opinion is intended in matters that require legal,
engineering, or other professional advice which has been or will be obtained
from professional sources; the appraisal report will not be used for guidance
in legal or professional matters exclusive of the appraisal and valuation
discipline; there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain, unless otherwise noted;
there are no regulations of any government entity to control or restrict the
use of the property unless specifically referred to in the report; and the
property will not operate in violation of any applicable government
regulations, codes, ordinances or statutes.
In the absence of competent technical advice to the contrary, it is assumed
that the property being appraised is not adversely affected by concealed or
unapparent hazards, such as, but not limited to, asbestos, hazardous or
contaminated substances, toxic waste or radioactivity. The appraiser is not
qualified to detect such substances.
<PAGE> 7
STATEMENT OF FACTS AND LIMITING CONDITIONS
No engineering survey has been made by the appraiser. Except as specifically
stated, data relative to size and area were taken from sources considered
reliable, and no encroachment of real property improvements is considered to
exist.
Information furnished by others is presumed to be reliable, and where so
specified in the report, has been verified; however, no responsibility, whether
legal or otherwise, is assumed for its accuracy, and cannot be guaranteed as
being certain. All facts and data set forth in the report are true and
accurate to the best of Valuation Counselors Group, Inc.'s knowledge and
belief. No single item of information was completely relied upon to the
exclusion of other information.
It should be specifically noted by any prospective mortgagee that the appraisal
assumes that the property will be competently managed, leased, and maintained
by financially sound owners over the expected period of ownership. This
appraisal engagement does not entail an evaluation of management's or owner's
effectiveness, nor are we responsible for future marketing efforts and other
management or ownership actions upon which actual results will depend.
No effort has been made to determine the impact of possible energy shortages or
the effect on this project of future federal, state or local legislation,
including any environmental or ecological matters or interpretations thereof.
The date of the appraisal to which the value estimate conclusions apply is set
forth in the letter of transmittal and within the body of the report. The
value is based on the purchasing power of the United States dollar as of that
date.
Neither the report nor any portions thereof, especially any conclusions as to
value, the identity of the appraiser, or Valuation Counselors Group, Inc.,
shall be disseminated to the public through public relations media, news media,
sales media or any other public means of communications without the prior
written consent and approval of Valuation Counselors Group, Inc.
Unless otherwise noted, Valuation Counselors Group, Inc. assumes that there
will be no changes in tax regulations.
No significant change is assumed in the supply and demand patterns indicated in
the report. The appraisal assumes market conditions observed as of the current
date of our market research stated in the letter of transmittal. These market
conditions are believed to be correct; however, the appraisers assume no
liability should market conditions materially change because of unusual or
unforeseen circumstances.
<PAGE> 8
STATEMENT OF FACTS AND LIMITING CONDITIONS
The report and the final estimate of value and the prospective financial
analyses included therein are intended solely for the information of the person
or persons to whom they are addressed, solely for the purposes stated and
should not be relied upon for any other purpose. Any allocation of total price
between land and the improvements as shown is invalidated if used separately or
in conjunction with any other report.
This report assumes that the property is in compliance with the various
requirements of the Americans with Disabilities Act (ADA) or that the cost of
compliance is minimal. As appraisers, we are not qualified to determine
compliance with ADA, and this report does not consider any effects of the ADA
on the value of the property.
A copy of this report and the working papers from which it was prepared will be
kept in our files for eight years.
<PAGE> 9
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<CAPTION>
GENERAL DATA
- ------------
<S> <C>
Effective Date of Value: March 15, 1994
Property Identification: North Shore Surgical Center
Property Location: 815 Howard Street, Evanston, Illinois
Interest Appraised: Leased Fee Estate
Gross Building Area: 5,100 square feet
Net Leasable Area: 5,100 square feet
Land Size: Approximately 10,004 square feet, or 0.23 acres
Improvements Description: A one-story, Class D, building constructed in the 1960s, containing 5,100 gross square
feet and used as an ambulatory surgical center.
Physical Occupancy Percentage: 100%
CONCLUSIONS
- -----------
Cost Approach: $925,000
Sales Comparison Approach: N/A
Income Approach: $912,000
Final Value Estimate: $910,000
========
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Transmittal Letter
Appraiser Certifications
Statement of Facts and Limiting Conditions
Summary of Salient Facts and Conclusions
INTRODUCTION 1
Property Identification 1
Purpose and Effective Date of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Property Rights Appraised 2
Definition of Value 2
History of the Property 3
History and Nature of the Business Environment 4
Reasonable Exposure Time 6
DESCRIPTIVE DATA 7
Area Data - Metropolitan Chicago 7
Neighborhood Analysis 10
Zoning 12
Real Estate Taxes and Assessments 12
Site Analysis 13
Building and Site Improvements 14
HIGHEST AND BEST USE 16
VALUATION SECTION 20
Valuation Methodology 20
Cost Approach 22
Income Approach 31
CORRELATION AND CONCLUSION 33
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
EXHIBIT SECTION
- ---------------
Exhibit A - Professional Qualifications
Exhibit B - Legal Description
Exhibit C - Area Map
Exhibit D - Location Map
Exhibit E - Land Sales Map
Exhibit F - Building Description
Exhibit G - Land Improvements Description
Exhibit H - Estimation of Annual Rental Value
Exhibit I - Improved Sales Comparables
Exhibit J - Subject Photographs
<PAGE> 12
INTRODUCTION
PROPERTY IDENTIFICATION
The subject of this appraisal, known as North Shore Surgical Center, is a 5,100
square foot outpatient surgery facility located at 815 Howard Street, Evanston,
Cook County, Illinois.
PURPOSE AND EFFECTIVE DATE OF THE APPRAISAL
The purpose of this appraisal is to estimate the market value of the real
property identified above. The effective date of valuation is March 15, 1994.
The date of the appraisal report is March 25, 1994.
FUNCTION OF THE APPRAISAL
The report is to be used for asset valuation purposes in conjunction with
financing. Crescent Capital Trust, Incorporated is establishing a real estate
investment trust (REIT). It is our understanding that the REIT will involve
mortgage financing.
SCOPE OF THE APPRAISAL
This appraisal engagement includes all three of the standard valuation
approaches and is in conformity with the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the Appraisal
Institute and Society of Real Estate Appraisers. The scope of our assignment
included collecting, verifying and analyzing market and property data
applicable to the three approaches and consistent with the property's highest
and best use. The results of the three approaches are then reconciled into a
final value conclusion considering the relevancy and quality of data presented
in each of the approaches.
-1-
<PAGE> 13
PROPERTY RIGHTS APPRAISED
The property right appraised herein is the Leased Fee Estate.
"Leased Fee Estate" is:
"an ownership held by the landlord with the right of use and occupancy
conveyed by lease to others; the rights of lessor (the leased fee
owner) and leased fee are specified by contract terms contained within
the lease."
[The Appraisal of Real Estate, p. 123, 10th Ed., published by The
Appraisal Institute.]
DEFINITION OF VALUE
For the purpose of this valuation, "market value" is defined 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:
o Buyer and seller are typically motivated;
o Both parties are well informed or well advised, and acting in
what they consider their own best interests;
o A reasonable time is allowed for exposure in the open market;
o Payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto; and
o 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 Appraisal of Real Estate, p. 21, 10th Ed., published by The
Appraisal Institute.]
-2-
<PAGE> 14
HISTORY OF THE PROPERTY
In November 1987, the subject property was purchased for $200,000. Subsequent
remodeling hard costs were $473,000, indirect costs $87,000 and $40,000 for
special purpose fixed systems. Total remodeling costs were estimated at
$600,000.
On April 1, 1989, Affiliated Bank Group/North Shore National Bank as Trustee
under Trust Agreement dated March 22, 1988, Trust Number 965, entered into a
purchase agreement to sell the subject property on April 1, 1989 for $800,000
to 815 Howard Associates Limited Partnership, an Illinois Corporation. The
purchase closed on June 30, 1989 at a final purchase price of $748,458.28. The
document number for the transaction is 89-3808671.
The subject facility was purchased as part of an entire business enterprise in
August 1992 by Surgical Health Corporation.
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
United States Economic Performance and Outlook
The value of the business enterprise is influenced by potential returns
available from alternative investments. These return expectations are affected
by economic conditions as they impact the ability of a business enterprise to
generate a return on its invested capital. Perhaps the most important economic
indicator affecting potential investor returns is the aggregate demand for
goods and services. Aggregate demand is measured by a country's Gross Domestic
Product (GDP), which is the sum of all domestic expenditures for consumption,
government services, and net exports.
The United States economy has been in a period of slow economic growth, but the
rate of growth appears to have increased in recent months. Gross Domestic
Product (GDP) increased at a 2.1 percent annual rate during 1992 after
declining (1.2%) during 1991. The GDP was 0.7 percent and 1.6 percent,
respectively, for the first and second quarters of 1993, and an estimated 4.0
percent for the fourth quarter of 1993.
-3-
<PAGE> 15
The components of GDP indicate that the economic recovery is affecting many
sectors of the economy. Personal consumption expenditures, which account for
approximately two-thirds of GDP, rose only 1.3 percent during the first half of
1993. Non-Residential Fixed Investment advanced 2.2 percent and Residential
Fixed Investment grew 1.7 percent. Federal Government Purchases declined
(0.6%) over the same period. Federal Government Purchases account for 7.2
percent of the total GDP, and this decline is limited to the rate of overall
GDP growth.
The value of the business enterprise is also affected by the current and
expected levels of inflation and interest rates. Inflation creates uncertainty
in the mind of investors as they attempt to estimate future investment returns.
This uncertainty is incorporated into both the required return on equity and
debt capital. The Federal Reserve has warned, however, that interest rates
will be pushed higher if inflation begins to show signs of "heating up".
The economic downturn in the early 1990s resulted in sharply lower inflation.
The Consumer Price Index (CPI) ended 1992 with a 3.0 percent increase compared
to a 4.2 percent increase during 1991. The CPI for 1993 is currently estimated
at 3.3 percent. The GDP Deflator, a much broader price level index, ended 1992
with a 2.6 percent annual increase compared to a 4.0 percent increase during
1991. The GDP Deflator is currently estimated at 2.5 percent for 1993.
The Federal Reserve Bank has adopted a relatively easier monetary policy as a
result of the recession. Interest rates, as represented by long-term Treasury
bond yields, declined approximately ten basis points compared to rates existing
a year earlier. Long-term corporate bond rates have also decreased and the
Federal Reserve's discount rate reductions have prompted commercial banks to
lower their prime lending rate to 6.0 percent. Selected monetary statistics
are presented in the following table.
-4-
<PAGE> 16
INTEREST RATES AND SELECTED STATISTICS
<TABLE>
<CAPTION>
JANUARY 6, 1994 JANUARY 2, 1992
<S> <C> <C>
Federal Fund Rate 3.0% 3.9%
90-Day Treasury Bill Rate 3.1% 3.9%
30-Year Treasury Bond 6.4% 7.5%
Aaa Bond Yield 6.9% 8.2%
Prime Rate 6.0% 6.5%
</TABLE>
Economic Outlook
According to Value Line's Quarterly Economic Review, dated December 24, 1993,
the economic recovery is now 2.5 years old, but shows much slower growth than
normal for a mature recovery. Among factors cited by Value Line for
contributing to the recent slow growth are "high debt, stagnant personal
income, low consumer confidence and a troubling unemployment rate". Recent
improvements have focussed on the auto, machinery, steel, housing and specialty
retailer market segments. Value Line cautions, however, that the recent
improvements in the economy are being limited by a slow job growth base. Value
Line's Quarterly Economic Review identified the following estimates for
selected economic statistics from 1993 to 1995.
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Real GDP 2.6% 3.3% 3.3%
Personal Consumption Expenditures 3.0% 2.7% 2.3%
Federal Government Purchases (4.8%) (5.8%) (4.0%)
30-Year Treasury Bond Yields 6.6% 6.6% 6.8%
Prime Rate 6.0% 6.2% 6.4%
Consumer Price Index 3.1% 3.2% 3.3%
</TABLE>
In summary, these factors play an important part in determining the supply and
demand for real property, and, indirectly, the value of properties. Most of
the forces discussed above are indicating an on-going soft demand for many
types of commercial real estate.
-5-
<PAGE> 17
This soft demand has caused some property values to remain flat and some to
decline. The lower interest rates in recent periods, however, are serving to
stabilize commercial property values.
REASONABLE EXPOSURE TIME
The Appraisal Foundation defines "Exposure Time" as follows:
"The estimated length of time the property interest being appraised
would have been offered on the market prior to the hypothetical
consummation of a sale at market value on the effective date of the
appraisal; a retrospective estimate based upon an analysis of past
events assuming a competitive and open market. Exposure Time is
different for various types of real estate and under various market
conditions. It is noted that the overall concept of reasonable
exposure encompasses not only adequate, sufficient and reasonable time
but also adequate, sufficient and reasonable effort. This statement
focusses on the time component."
[Statement on Appraisal Standards No. 6 (SMT-6) from the Appraisal
Foundation].
It is our opinion, based on an analysis of comparable sales and market
transactions, that a reasonable exposure time for the subject property type, at
the appraised market value, is three to six months.
-6-
<PAGE> 18
DESCRIPTIVE DATA
AREA DATA - Metropolitan Chicago
The subject property is located in Evanston, in the Chicago Metropolitan
Statistical Area. This area has the third largest population in the United
States, behind New York and Los Angeles. The Metropolitan Statistical Area
includes six counties in Illinois and one in Indiana. The MSA has an estimated
1987 population of 8,146,900 persons.(1)
Chicago was first discovered by the French in 1673 when Pere Marquette and
Louis Joliet passed the mouth of the Chicago River during a trip through the
area. The future site of the city became part of the portage route between the
Mississippi and the Saint Lawrence to French Canada. In the 1770 Jean Baptiste
Point du Sable had set up a trading post at the mouth of the river, becoming
the first permanent resident. Fort Dearborn was built in 1803 to secure the
area and guard the portage route. Platted in 1830, the original town had
approximately 50 residents. In 1837 the city was incorporated, with a
population of 4,170 persons. Chicago soon became a center of transportation.
By 1848 the Illinois and Michigan Canal was opened connecting the city to the
Mississippi River by a water route. The canal lost its importance as a
transportation route as Chicago soon became the major railroad center of the
West. In 1856 Chicago had ten trunk lines with 58 passenger trains and 389
freight trains serving the city daily. In 1871 the city was ravaged by fire.
Almost 100,000 people were homeless and nearly $200 million worth of property
destroyed. Many predicted the end of Chicago. The city was, however, rapidly
rebuilt. A new style of architecture developed, the Chicago School, and the
city continued to grow by leaps and bounds. The population increased from
298,977 persons in 1870 to 503,185 persons by 1880 and over one million persons
by 1890.
Today, the Northeastern Illinois Counties Area (NICA), as defined by the
Northeastern Illinois Planning Commission, consists of the six northeastern
Illinois Counties, encompassing 3,724 square miles. It includes Cook, DuPage,
McHenry, Kane, Lake and Will. This area encompasses not only the City of
Chicago but also 208 communities. It had an estimated 2,659,500 households, in
1987, with an average size of 2.76 persons,
____________________
(1) U.S. Census
-7-
<PAGE> 19
and a calculated median household effective buying income of $32,067. In 1987
total retail sales exceeded $47.6 billion, or $17,915 per household.
<TABLE>
<CAPTION>
CHICAGO NICA POPULATION
(thousands)
1960 Census 1970 Census 1980 Census 1990 Census
<S> <C> <C> <C> <C>
Chicago 3,550.4 3,369.4 3,005.1 2,783.7
Suburban Cook 1,579.3 2,132.2 2,248.6 2,321.3
DuPage 313.5 492.2 658.8 781.7
Kane 208.2 251.0 278.4 317.5
Lake 293.7 382.6 440.4 516.4
McHenry 84.2 111.6 147.9 183.2
Will 191.6 247.8 324.5 357.3
Total 6,220.9 6,977.6 7,103.6 7,261.2
</TABLE>
Source: Bureau of the Census, 1960, 1970, 1980, 1986 and 1990.
National trends during the late 1970s have shown a shift in population movement
from the central city to the outlying suburban areas. This trend seems to be
constant with that experienced in the Chicago area. During this period, each
of the five collar counties within the metropolitan area has shown a strong
continual growth pattern.
Business and industry have tended to shift from the city to the suburbs. This
trend is due in part to the increase in crime rate, traffic, taxes and the lack
of new facilities in the urban areas. It is causing the outlying areas to
absorb the region's industries. The trend has been increasing steadily over
the past few years.
There are 3.4 million people in the Chicago Metropolitan Statistical Area work
force. Their professions include 28.7 percent in managerial and professional
fields; 28.0 percent in administration, technical and sales; and 9.0 percent in
service businesses. Other occupations include 15.9 percent in crafts and
repair; 17.2 percent operators and laborers; and 1.2 percent in farming and
fishing. Important industries include
-8-
<PAGE> 20
publishing, food, printing and chemical industries. One result of the region's
numerous industries is that the unemployment rate is typically less than other
areas throughout the United States.
Due to the excellent air, rail and expressway system, the Chicago Metropolitan
Region is considered a major national transportation and distribution center.
O'Hare International Airport, located just southwest of Elk Grove Village, is
the would's busiest airport both in terms of number of passengers and cargo.
Midway Airport and Meigs Field also operate in Chicago. More than 63,700,000
air passengers and more than 1,000,000 flights pass through Chicago's three
airports during a year. O'Hare Airport has an average of 927 flights per day
and with approximately 795,000 flights per year. The region's extensive
highway system, which is the third largest in the United States (behind Texas
and California), is served by nine interstate highways including the new
North-South Tollway, Interstate 355, which opened at the end of 1989. This
results in an effective means of travel between city and suburban areas. There
are more than 1,650 trucking and warehousing firms and 350 interstate trucking
companies serving the metropolitan area.
The Chicago Metropolitan Region is also important as the central point for
moving goods and materials across the nation through its excellent system of
railroads. Chicago's trunk lines operate half of the nation's railway mileage.
The city has 22 Class I railroads, three Class II railroads and 22 terminal
companies. It is the leading area in the nation for total number of persons
employed in the railroad industry. Employing one of the most extensive spur
and trunk lines in the county, all major rail companies have carry-through
service to make Chicago the world's largest center, handling 37,000 freight
cars daily and 40 million tons of freight per day out of the city.
The port of Chicago is a major seaport of Lake Michigan, connecting the
Atlantic Ocean through the St. Lawrence Seaway and the Gulf of Mexico via the
Illinois Sanitary and Shipping Canal and the Mississippi River. Interstate
waterways include the Cal-Sag Channel, joining the Illinois Waterway River with
Lake Calumet and Lake Calumet joining Lake Michigan and the Calumet River. In
1987, some 188 overseas ships carried more than 1.6 million short tons of
cargo.
According to a recent study by the Chicago Association of Commerce and
Industry, Chicago's suburbs gained $22.8 billion in industrial and commercial
development since 1970, compared with only $10.6 billion in the city. There
has been a continual shift from
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<PAGE> 21
goods produced to serve producing industries within the city with a
corresponding relocation of manufacturing industries out of the central city.
During 1987, Chicago lost 524 manufacturing plants, almost a tenth of the
total, while only 73 new plants were begun, indicating a net loss of 451
plants. Since 1970, Chicago has lost more than 250,000 manufacturing jobs.
The Chicago area has a rich cultural heritage, including its would famous
architecture, and has much to offer. Cultural attractions include the world
famous Chicago Symphony Orchestra, the Lyric Opera, and the Ravinia Festival.
Museums include the Art Institute of Chicago, the Museum of Science and
Industry, the Field Museum of Natural History, the Adler Planetarium and the
John G. Shedd Aquarium. In addition, there are two zoos and numerous annual
events including the Chicago Blues Festival and Taste of Chicago. Free
open-air concerts are offered throughout the warm months at the Petrillo Music
Shell in Grant Park. Chicago has two major league baseball teams, as well as
professional football, hockey and basketball.
In conclusion, it can be stated that the Chicago Metropolitan Area, as a whole,
represents a thriving political, physical, economic and social climate which
should continue to prosper in terms of growth and economy due to the great
diversity of industry and excellent transportation. However, the majority of
the growth is expected to occur in the suburban areas while the City of Chicago
experiences a continued gradual decline in industry and population.
NEIGHBORHOOD ANALYSIS
The subject property is locate at 815 Howard Street within the community of
Evanston, Illinois. Evanston is located near Lake Michigan, 12 miles north of
the Loop. It is bounded on the south by Chicago, on the west by Skokie and on
the north by Wilmette. The population of Evanston is approximately 73,700.
The development of Evanston proper began with the founding of Northwestern
University, located in the northeastern corner of the city along the lake
shore. The university was founded in 1850. Evanston was incorporated as a
town in 1863. In 1872, the town was reincorporated as a village. In 1892,
Evanston was incorporated as a city with a mayor-council form of government.
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<PAGE> 22
Improved transportation was the key to development of Evanston. By the turn of
the century, the Chicago North Shore and Milwaukee Line was operating between
Wilson Avenue in Chicago and Waukegan. In 1908, the Chicago Rapid Transit
System was extended to Central Street near the northern border of Evanston and
in 1912 to Linden Street in Wilmette. Population increased rapidly in the
first decades of the twentieth century.
Growth continued but at a slower pace after World War II. In 1952, Evanston
adopted a council manager form of government.
There are over 100 manufacturing establishments in the city but Evanston is
primarily a residential community. Property tax is the single largest source
of revenue, and the tax rate is one of the highest in the metropolitan area.
Evanston has a large downtown area which was a key retail center serving the
north shore for many years. In the 1950s, however, downtown Evanston began to
decline in terms of retail sales,a nd general desirability. The Old Orchard
regional shopping center in Skokie signaled the beginning of this decline. A
growth of community shopping centers is continuing to this day. These centers
have the advantage of ample parking which is not available in traditional
downtown retail districts. However, in the late 1980s there has been both new
development and rehabilitation in downtown Evanston. Central Evanston has over
200 stores. In addition, there has been construction for over a decade of
modern high-rise office space. Washington National Insurance Company is the
largest user in the downtown area. There are other modern office buildings as
well as some rehabilitated older offices. Another major development is the
American Hospital Plaza.
All typical city services such as police, fire and garbage pickup are provided.
Public transportation is also available. Access to the Loop is available via
the CTA, Evanston Express or the Chicago and Northwestern Railroad, which also
accesses northern suburbs. Entry to Edens Expressway is available at Dempster
Street in adjoining Skokie, as well as Old Orchard Road (known as Harrison
Street in Evanston). Access is also available to the Chicago Outer Drive via
Sheridan Road.
The immediate area of the subject property is improved with commercial
properties. Immediately to the west of the subject is a dental center. The
subject property is in census tract 81-2.
-11-
<PAGE> 23
In conclusion, Evanston in general and the vicinity of the subject are
considered to be stable.
ZONING
According to the zoning code for the City of Evanston, the subject property is
zoned C-2, Commercial District.
It is the Appraiser's opinion that the subject property represents a conforming
use under this zoning classification.
For full permitted uses or restrictions thereof under this classification, we
suggest that an inspection of the complete ordinance be made.
REAL ESTATE TAXES AND ASSESSMENTS
According to the Cook County's Assessors office, the properties Permanent Index
Numbers, assessments and taxes are represented as follows:
<TABLE>
<CAPTION>
Permanent 1992/1993
Index Assessed Equalization Equalized Real Estate
Number Valuation Factor Value Taxes
------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C>
11-30-123-019 $ 38,938 2.0897 $81,368.74 $ 9,198.74
11-30-123-020 $ 38,938 2.0897 $81,368.74 $ 9,198.74
11-30-123-021 $ 24,325 2.0897 $50,831.95 $ 5,746.55
11-30-123-022 $ 10,054 2.0897 $21,009.84 $ 2,375.16
-------- ---------- ----------
Totals $112,255 $ 234,579 $26,519.19
</TABLE>
-12-
<PAGE> 24
11-30-123-019 Land $ 9,712
Improvements 29,226
-------
Total $38,938
11-30-123-020 Land $ 9,712
Improvements 29,226
-------
Total $38,938
11-30-123-021 Land $ 9,712
Improvements 14,613
-------
Total $24,325
11-30-123-022 Land $ 9,712
Improvements 342
-------
Total $10,054
SITE ANALYSIS
The subject site is a rectangular-shaped interior parcel of land having
approximately 100.04 feet of frontage along the north side of Howard Street and
a depth of 100 feet, for a total land area of approximately 10,004 square feet.
The site is level throughout. All street improvements are in, as well as
concrete curbs, gutters, and sidewalks. Public utilities of water, sewer and
electricity are available and connected to the property. No portion of the
subject site lies within a special flood hazard area, but rather in Flood Zone
C, an area of minimal flood hazard. The flood plain map is effective date
January 2, 1981.
No soil boring tests were made or caused to be made to determine the
suitability of land for construction purposes, as necessity for the same is
precluded by the existence of the present improvement thereon. There were no
noticeable settlement cracks or indication of any sub-soil problems.
No plat of survey was provided to the appraiser.
-13-
<PAGE> 25
Our site inspection of the property revealed no obvious easements or
encroachments, other than the typical street and utility easements, which do
not negatively affect the utility of the property. Further, we assume that the
subject site is not encumbered with detrimental easements or encroachments.
To our knowledge, no environmental study has been conducted on the subject
side. As appraisers, we are not qualified to detect hazardous materials.
Consequently, our report assumes that there are no environmentally hazardous
materials in the site or building that would adversely affect the subject
property's value.
Overall, the characteristics of the subject property are functional, marketable
and well suited for the current use as a surgical center.
A legal description of the property is included in the Exhibit Section of this
report.
BUILDING AND SITE IMPROVEMENTS
The site is improved with a one-story structure constructed in the 1960s and
completely renovated in 1988. The building contains 5,100 gross square feet,
which is the same as the leasable square feet.
The building is a one-story, Class D structure, with a brick exterior. The
building has reinforced concrete floors. The roof is comprised of wood joists,
and wood decking, with asphalt composition shingles. Ceiling finishes consists
of acoustical ceiling tiles and recessed fluorescent lighting and gypsum board
with painted finish. The interior walls are gypsum board over metal studs with
vinyl wall coverings and paint.
Air conditioning is supplied via package units with electric baseboard heat in
the zoned system. Heat is also supplied by a gas-fired forced air system. In
addition, the facility is equipped with a medical gas system with vacuum. We
assume that the heating and electrical capacity is adequate for the subject
facility.
The interior floors have both carpeting and vinyl tiles. Windows and doors are
metal-framed, and interior doors are solid-core wood. The facility has two
surgery suites, administrative offices, patient recovery areas, a laboratory,
an instrument preparation room, locker rooms, a lounge, and reception areas.
-14-
<PAGE> 26
Site improvements include paved parking, exterior lighting and shrubbery around
the subject building. A detail description of the building and site
improvements are included in the Exhibit section of this report.
CONDITION OF IMPROVEMENTS AND OBSOLESCENCE
The building has been remodeled and in excellent condition. There is no
deferred maintenance, or functional or economic obsolescence.
-15-
<PAGE> 27
HIGHEST AND BEST USE
The Appraisal Institute defines "highest and best use" as follows:
"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 Appraisal of Real Estate, P. 45, 10th Ed. published by The
Appraisal Institute.]
The four categories of highest and best use analysis are:
1. Physically Possible - Uses which are physically possible for
the site and improvements being analyzed.
2. Legally Permissible - Uses permitted by zoning and deed
restrictions applicable to the site and improvements being
analyzed.
3. Financially Feasible - This step identifies if the physically
possible and legally permitted alternatives produce a net
income equal to or greater than the amount needed to satisfy
operating expenses.
4. Maximally Productive - This step clarifies which of the
financially feasible alternatives provides the highest value
consistent with the rate of return warranted by the market for
a particular use.
There are two types of highest and best use: THE HIGHEST AND BEST USE OF LAND
AS VACANT and THE HIGHEST AND BEST USE OF A PROPERTY AS IMPROVED. Both types
are discussed as follows using the four categories of highest and best use.
-16-
<PAGE> 28
As Vacant
The purpose of this analysis, given the site is vacant or can easily be made
vacant, is to determine if something should be constructed on the site, and, if
so, what should be constructed on the site.
PHYSICALLY POSSIBLE
The size and shape of the subject site is adequate for the development of a
number of alternative uses including small residential, commercial,
office/institutional, and special-purpose properties. The site possesses good
access and visibility. The size of the parcel would preclude any large
developments.
LEGALLY PERMISSIBLE
As stated earlier in the Zoning section of this report, the property is
currently zoned "C-2, Commercial". Permitted uses in this general zoning
category vary widely. Potential legal uses would include retail and
restaurants, office/institutional, hotels, hospitals and other medical-oriented
uses.
Surrounding uses include a dentist office and other office/commercial uses.
These use patterns would likely preclude industrial, or future single-family
development on the site.
FINANCIALLY FEASIBLE
Having established that the site is physically suited for and legally
restricted to office/institutional and commercial development, the next
consideration is economic feasibility. Financially feasible uses for the site,
if vacant, are those uses that would generate an economic return to the land.
New commercial related development in the subject area indicates that new
commercial/office development is financially feasible.
MAXIMALLY PRODUCTIVE
The maximally productive use is a financially feasible use that would produce
the greatest land value. Office/institutional use is physically possible and
legally permissible, and new medical-related development is financially
feasible. Based on this analysis, the
-17-
<PAGE> 29
current highest and best use of the land, if vacant, would be for
office/institutional development based on the growth needs of the area.
As Improved
The subject site is currently improved with an 5,100 leasable square foot
surgical center and associated site improvements. The purpose of this
discussion is to determine whether to leave the improvements as they are, to
modify the improvements or to remove the improvements.
PHYSICALLY POSSIBLE
It would obviously be physically possible to leave the improvements as they
are, to demolish the existing improvements and replace them with new
improvements, or to modify existing improvements. The improvements were
recently renovated and are considered functional. The building could be
converted to an alternative medical office use as recent trends in the hospital
business call for more outpatient business and less inpatient stays.
LEGALLY PERMISSIBLE
The building, as improved, is assumed to be a legal conforming use, since the
property was recently renovated and received an occupancy permit. Under the
current zoning, the property could remain as it is, be torn down or renovated.
FINANCIALLY FEASIBLE
The highest and best use of the land, if vacant, was to develop with an office/
institutional use based on the adjacent hospital's growth needs. Of the
physically possible and legally permissible changes that could be made to the
existing facility, demolishing the building would significantly reduce the
current asset value, and would not be financially feasible. The only
financially feasible use of the existing improvements is its current use as an
outpatient surgery center.
-18-
<PAGE> 30
MAXIMALLY PRODUCTIVE
The maximally productive use for the existing property is the financially
feasible use that produces the greatest property value. The existing use was
the only financially feasible use. The highest and best use, as improved, is
the property's current use.
-19-
<PAGE> 31
VALUATION SECTION
VALUATION METHODOLOGY
There are three principal methods to estimate the market value of the assets of
the subject property. These are summarized as follows:
COST APPROACH: This method is based on the principle of substitution,
whereby no investor would prudently pay more for a property than it
costs to buy land and build a comparable new building. The market
value is estimated by calculating the replacement costs of a new
building and subtracting all forms of depreciation and obsolescence
present in the existing facility. This provides a depreciated value
of the subject improvements if replaced new. The estimate of the
current value of the subject land is then added to provide a market
value of the property.
SALES COMPARISON APPROACH: The principle of substitution also says
that market value can be estimated as the cost of acquiring an equally
desirable substitute property, assuming no costly delay in making the
substitution. This method analyses the sales of other comparable
improved properties. Since two properties are rarely identical, the
necessary adjustments for differences in quality, location, size,
services and market appeal are a function of appraisal experience and
judgment.
INCOME APPROACH: This method is based on the principle of
anticipation, which recognizes that underlying value of the subject
property can be estimated by its cash flow or stream of earnings.
This approach simulates the future earnings for the property, and
converts those earnings into a present market value estimate.
Consideration has been given to each of the three methods to arrive at a final
opinion of value. Due to the specialized nature of the subject property, we
have not considered the Sales Comparison Approach as being appropriate for the
subject property. The subject property has been specifically designed to
accommodate a freestanding surgical center. An alternative use for this
structure would require extensive renovation and remodeling and as such,
comparisons to medical office space or commercial office sales
-20-
<PAGE> 32
would be inappropriate. We did not find any sales of comparable specialized
facilities in the region which were similar in size or use and as such, due to
the lack of reliable comparable data, we have not considered this approach as
being an appropriate determinant of value. The application of the Cost and
Income Approaches to value is further discussed in the appropriate sections
which follow.
-21-
<PAGE> 33
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which is added the depreciated replacement
cost of the improvements. The replacement cost new of the improvements is
adjusted for accrued depreciation resulting from physical deterioration,
functional obsolescence, and external (or economic) obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimated replacement cost of the improvements.
o Estimation of the accrued depreciation from all causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
Land Valuation
Land valuation, assuming the site is vacant, is based upon the following steps:
o A comparison with recent sales and/or asking prices for
similar land.
o Interviews with reliable real estate brokers and other
informed sources who are familiar with local real estate
activity.
o Our experience in estimating land values.
The following sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. Unless otherwise indicated, the sales
involved arm's length transactions that conveyed a fee simple interest, and
only real property was included in the transactions.
-22-
<PAGE> 34
<TABLE>
<CAPTION>
Land Comparable Number 1
- ------------------------
<S> <C>
Parcel Number: 09-23-106-001
Location: Greenwood Terrace/Blk 2, Southeast corner Dempster Street and Greenwood Avenue.
Size: 17,269 square feet
Sale Date: May 1993
Document Number: 93-855170
Grantor: Union Oil Co. of California, 1201 W 5th Street, Los Angeles, California 90017
Grantee: S & S Petroleum Products, 400 S. Curran Road, Grayslake, Illinois 60030
Sale Price: $278,000
Price Per Square Foot: $16.09
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Evanston Commercial
Utilities: All utilities are available.
</TABLE>
-23-
<PAGE> 35
<TABLE>
<CAPTION>
Land Comparable Number 2
- ------------------------
<S> <C>
Parcel Number: 05-19-109-001
Location: Northeast corner Central Avenue and Cherry Street. Willow Crest/Blk 12, Parcel has
additional frontage on Frontage Road for Edens Expressway.
Size: 21,780 square feet
Sale Date: August 1993
Document Number: 93-683 844
Grantor: LaSalle National Trust, Chicago (no Trust No. listed)
Grantee: NBD Bank-Highland Park (no Trust No. listed)
Sale Price: $295,000
Price Per Square Foot: $13.54
Terms of Sale: All Cash
Shape: Rectangular
Zoning: Commercial
Utilities: All utilities are available.
Comments: This parcel was improved with a 12,000 square foot two-story office building.
</TABLE>
-24-
<PAGE> 36
<TABLE>
<CAPTION>
Land Comparable Number 3
- ------------------------
<S> <C>
Parcel Number: 10-21-414-053
Location: N. Lincoln Avenue
Size: 7,800 square feet
Sale Date: April 1993
Document Number: 93-344648
Grantor: NBD Skokie
Grantee: Village of Skokie
Sale Price: $94,000
Price Per Square Foot: $12.05
Terms of Sale: All Cash
Shape: Basically rectangular
Zoning: Commercial
Utilities: All utilities are available.
</TABLE>
-25-
<PAGE> 37
A summary of the land sales is shown as follows:
SUMMARY OF LAND COMPARABLES
<TABLE>
<CAPTION>
SALE SALE SIZE PRICE
NO. LOCATION DATE (SF) PER SF
<S> <C> <C> <C> <C>
1 Greenwood Terrace 05/93 17,269 $16.09
2 NEC Central Avenue & Cherry Street 08/93 12,000 $13.54
3 8017 - 8019 Lincoln Avenue 04/93 7,800 $12.05
SUBJECT 815 HOWARD STREET 10,004
</TABLE>
The above sales are located within the general market area of the subject
property and are considered to be representative of market activity and
conditions as of the valuation date. The sales range in size from 7,800 square
feet to 17,269 square feet and indicate an unadjusted range of value from
$12.05 per square foot to $16.09 per square foot. Unless otherwise indicated,
the sales involved arm's length transactions that conveyed a fee simple
interest, and only real property was included in the transactions. The
comparable sales are analyzed in the following paragraphs.
LAND SALE NUMBER 1 is a corner parcel which is utilized as a gas station. This
comparable's location is considered to be superior to the subject's and a
downward adjustment for location is considered appropriate. The sales's size
is larger than the subject's which would necessitate that a downward adjustment
for this factor be made. Overall, we believe that these factors offset each
other negating any overall adjustment to this parcel. The adjusted price is
$16.09.
LAND SALE NUMBER 2 is located on a more travelled thoroughfare with greater
exposure than the subject. This sale was used for the development of an
office structure. Due to its location, a down ward adjustment to this sale is
warranted. Overall, we have made a downward adjustment of five percent for an
adjusted price of $13.24.
LAND SALE NUMBER 3 is located near a hospital campus and carries with the most
similar characteristics as the subject. We believe that this sale has a
slightly superior location and have adjusted this sale downward by five
percent. This indicates an adjusted sale price of the subject of $11.44.
-26-
<PAGE> 38
Land Conclusion
Based upon the preceding analysis and conversations with local brokers, it is
our opinion that a value of $14.00 per square foot is representative of the
subject site, as if vacant. Multiplied by the subject's 10,004 square foot
site, this would indicate a market value of the subject land calculated as
follows:
10,004 SF x $14.00/SF = $140,056
Rounded to: $140,000
========
Building and Site Improvements
The building and site improvements have been valued on the basis of replacement
cost less accumulated depreciation. The cost new was estimated via the
segregated cost method, with cost factors obtained from Marshall Valuation
Service, Inc., a national cost manual. The unit cost includes both direct and
indirect costs, with adjustments made for special building features,
construction quality, time and location. The composite unit cost has then been
applied to the gross square footage of the building to derive the replacement
cost new. A schedule, indicating the derived costs from the Marshall Valuation
Service shows the estimated replacement cost by category for the subject
building, is presented in the Exhibit Section of this report. An amount
representing entrepreneurial profit has also been included in this analysis.
This profit is a necessary element in the motivation to construct the
improvements and represents an additional amount the developer would expect to
receive for construction of the project. The amount of entrepreneurial profit
varies according to economic conditions and types of development. For the
purpose of this report, entrepreneurial profit was estimated to comprise ten
percent of the direct and indirect building costs.
The total accumulated depreciation of a structure represents the loss in value
due to physical deterioration, functional obsolescence, or external (or
economic) obsolescence. Economic life of a structure or improvement is the
period over which they contribute to the value of the property. These terms
are defined as follows:
-27-
<PAGE> 39
Physical Deterioration: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
Functional Obsolescence: The loss in value due to poor plan,
functional inadequacy, or super-adequacy due to size, style, design, or
other items. This form of depreciation occurs in both curable or
incurable forms.
External (or Economic) Obsolescence: The loss in value caused by
forces outside the property itself. It can take many forms such as
excessive noise levels, traffic congestion, abnormally high crime
rates, or any other factors which affect a property's ability to
produce an economic income, thereby causing a decline in desirability.
Other forms of economic obsolescence may include governmental
restrictions, excessive taxes, or economic trends.
Economic Life: The economic life of a good quality medical office
buildings is typically 45 to 50 years. For the subject Class D
building, we have assumed an economic life of 45 years.
Remaining Economic Life: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
Marshall Valuation Service, Inc. was used to estimate the overall economic life
of the improvements. The assignment of economic lives assumed that, except for
the building shell and foundation, building components would be replaced
periodically over the life of the building.
Physical Depreciation
The amount of physical depreciation and obsolescence in the subject building is
minimal due to its recent renovation. Observation of the subject property
indicated that the structure and related component parts have been adequately
maintained through a continuous maintenance service program.
The subject property was renovated in 1988 and it is in excellent condition.
It is judged that the subject has an effective age equal to five years. The
remaining useful life is estimated to be 40 years. This translates into a
physical depreciation estimate of 11.0
-28-
<PAGE> 40
percent (5 years divided by 45 years). The amount of depreciation attributable
to the property has been estimated on a straight-line basis, which is founded
on the assumption that depreciation of a property occurs equally throughout its
economic life.
Due to the design and structural components of the building, we have not
indicated any loss in value due to functional obsolescence.
The elements which make up site improvements have shorter economic lives than
the building. We have estimated the aggregate useful lives of these items to
be 20 years with an effective age of five years and a remaining useful life of
15 years. Therefore, the depreciation rate attributable to the site
improvements on a straight-line basis is estimated to be 25 percent.
During our area study, we did not notice any evidence of economic obsolescence
associated with the subject property.
Cost Approach Conclusion
Based on the investigation as previously defined, the market value of the
subject property by the Cost Approach, as of March 15, 1994, is rounded to:
$925,000
========
-29-
<PAGE> 41
North Shore Surgical Center - 815 Howard Street
EXCAVATION AND SITE PREPARATION 1,771
FOUNDATION 16,033
FRAME 21,009
EXTERIOR WALLS 67,431
FLOORS 18,638
ROOF 26,950
ROOF COVER 15,261
PARTITIONING & BUILT-IN ITEMS 264,891
CEILINGS 34,225
FLOOR COVERINGS 30,847
PLUMBING 75,201
HEATING, VENTILATION & AIR CONDITIONING (NET) 59,745
ELECTRICAL 85,786
OTHER FEATURES 0
-
TOTAL LABOR, MATERIALS, INCIDENTALS AND PROFIT 717,788
ARCHITECTS FEES, PLANS AND SPECIFICATIONS 25,123
ARCHITECTS FEES, SUPERVISION 21,534
ADD FOR MISCELLANEOUS FEES 76,445
--------
TOTAL REPRODUCTION COST 840,890
TOTAL OVERALL LIFE 45
EFFECTIVE AGE 5
CURVILENEAR DEPR RATE 11.00% 92,498
--------
DEPRECIATED VALUE OF BUILDING 748,392
REPRODUCTION COST OF LAND IMPROVEMENTS 50,000
LESS DEPRECIATION OF IMPROVEMENTS @ 25% (12,500)
--------
DEPRECIATED VALUE OF LAND IMPROVEMENTS 37,500
TOTAL DEPRECIATED VALUE OF IMPROVEMENTS 785,892
ADD LAND VALUE 140,000
--------
TOTAL VALUE COST APPROACH $925,892
-30-
<PAGE> 42
INCOME APPROACH
The Income Approach is based on the principle of anticipation, and has as its
premise that value is represented by the present worth of expected future
benefits. The price that an investor will pay for an income property usually
depends on the anticipated income stream. The Income Approach represents an
attempt to simulate the future cash flows for the property, and to quantify the
future benefits in present dollars.
The subject property is one of several buildings that Crescent Capital Trust,
Incorporated is establishing a real estate investment trust (REIT). Surgical
Health Corporation will provide a net rental guarantee, in the form of a master
lease. The REIT, as the new property owner, will receive the net rental master
lease rate per square foot of rentable office area, regardless of the rental
rates charged or received from the actual tenant(s). Additionally, the annual
rental income provided for in the ground lease, associated with the subject
property, will be received by the REIT.
This master lease is a credit enhancement vehicle that will enable the REIT
issuer to sell the REIT shares. It will also allow Surgical Health Corporation
leasing flexibility for the surgical space, i.e., they can lease office space
to various physicians at different rates and terms.
The appraisers received a draft of the form of master lease agreement, but the
actual master lease agreement for the property are not yet available. For the
purpose of our Income Approach, the gross income will be the master lease rate
for the property times the rentable building area. We reserve the right to
modify the Income Approach valuation if the actual master lease for the
property differs significantly from the draft lease presented to us.
The master lease rate for the subject property will be $105,860 annually based
on a 15-year lease. We have verified the reasonableness of this rental rate by
conducting a return analysis of the property based upon the expected remaining
lives of the improvements and investment rates of return found in the
marketplace. A schedule of this analysis is found in the Exhibit section of
this report. Based upon this analysis, utilizing a required rate of return of
10 percent on land and 12 percent to 14 percent rate on improvements, the
annual rental rate would be anticipated to approximate
-31-
<PAGE> 43
$21.56 to $24.54 per square foot. The rate established in the master lease at
$20.75 appears to be reasonable.
The subject appraisal assumes 100 percent of the income is guaranteed through
the master lease agreement. Since the leased fee interest is being appraised,
there is no deduction for vacancy or credit loss.
Since the master lease provides for an income level to the REIT net of all
operating expenses, the only out-of-pocket expenses to the REIT will be
accounting, legal and internal administration or management expenses. These
management expenses are estimated at 5.0 percent of effective gross income, or
$5,293, based on the management experience of other properties. The net
operating income for the property is $105,860 less $5,293 or $100,567.
Although we have not utilized the Sales Comparison Approach to arrive at an
indication of value for the subject property, we have conducted a survey of
medical office building sales throughout the region in order to abstract an
overall rate for capitalization. The full details of these sales are located
in the Exhibit Section of this report and indicate overall rates from 8.0
percent to 11.33 percent.
A capitalization rate of 11.0 percent is considered appropriate because of the
quality of the tenant and the overall reasonableness of the rental rate
negotiated.
Therefore, it is our opinion that the market value of the subject property by
the Income Approach, as of March 15, 1994, is calculated and rounded as
follows:
Net Operating Income/OAR = Estimated Value
$105,567/.11 = $914,245
Rounded to: $910,000
========
-32-
<PAGE> 44
CORRELATION AND CONCLUSION
We have considered three approaches to value in order to estimate the value of
the North Shore Surgical Center. The three approaches are summarized as
follows:
<TABLE>
<S> <C>
Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $925,000
Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $910,000
</TABLE>
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, estimating the replacement cost and all forms of
depreciation for the subject. For this reason, the Cost Approach is considered
only a fair indicator of value for the subject property.
The Sales Comparison Approach was not utilized due to the specialized nature of
the subject property.
The Income Approach normally provides the most reliable value estimate for
specialty properties such as the subject. Although many buyers of professional
office buildings are owner/occupants, these buyers are generally aware of a
property's cash flow potential and its value from an investor's perspective.
For this reason, the Income Approach is considered the best indicator of value
for the subject property.
Based on this analysis, it is our opinion that the market value of the North
Shore Surgical Center, as of March 15, 1994, and based on the assumptions and
limiting conditions in this report, is:
$910,000
========
-33-
<PAGE> 1
EXHIBIT 10.37
DIVIDEND AGREEMENT
THIS DIVIDEND AGREEMENT, entered into as of June 15, 1994, by
and among RICHARD M. SCRUSHY, HEALTHSOUTH REHABILITATION CORPORATION, JOHN W.
MCROBERTS and MICHAEL D. MARTIN (collectively referred to herein as the
"Founding Stockholders"), and CAPSTONE CAPITAL TRUST, INC. (the "Company"), as
follows:
WHEREAS, the Founding Stockholders are the holders, in the
aggregate, of 180,000 shares of the common stock, $.001 par value (the "Common
Stock") of the Company, constituting all of the issued and outstanding shares
of the Company (the "Founders' Shares");
WHEREAS, the Company has filed a Registration Statement on
Form S-11 with the Securities and Exchange Commission on April 15, 1994, as
amended, registering up to 6,670,000 shares of its Common Stock, in connection
with the Company's initial public offering (the "Initial Public Offering");
NOW, THEREFORE, in consideration of the benefits to the
Founding Stockholders from the completion of the Initial Public Offering, the
Founding Stockholders and the Company agree as follows:
1. Consent Dividend. For each quarter during the term
of this Agreement for which the Company's annualized dividends paid to the other
holders of the Company's Common Stock do not equal or exceed $1.70 per share
($0.425 per share per quarter), the Founding Stockholders agree to treat as a
dividend such amounts as shall be specified in a written consent to be filed by
the Company with its income tax return (the "Consent Dividend") and to include
such amounts in gross income for federal income tax purposes.
2. Effect of Consent Dividend. The Founding
Stockholders and the Company acknowledge that, for federal income tax purposes,
the amount of the Consent Dividend shall be considered as (a) a distribution in
money by the Company to the Founding Stockholders on the last day of the
Company's taxable year and (b) a contribution to the capital of the Company by
the Founding Stockholders on the same date.
3. Term. The term of this Agreement shall begin with
the quarter ending September 30, 1994, and shall continue thereafter for the
next succeeding five (5) calendar quarters.
4. Rights of Founding Stockholders. Nothing in this
Agreement shall impair the other rights and benefits, including, without
limitation, voting rights, of Founders' Shares or prevent the Founding
Stockholders from exercising all other rights and powers applicable to the
Founders' Shares as provided in the Company's Charter and Bylaws or by
applicable law.
<PAGE> 2
5. Scope of Agreement. This Agreement shall apply
only to the Founders' Shares and shall not apply to any other shares of Common
Stock of the Company acquired by the Founding Stockholders.
6. Restrictive Legend. Upon execution of this
Agreement, each and all certificates for the Company's Common Stock owned by
the Founding Stockholders evidencing the Founders' Shares shall be delivered to
the Company, and the back of each such certificate shall be endorsed with a
legend substantially as follows:
The dividends payable with respect to the shares of Common
Stock represented by this Certificate are restricted by, and
subject to the terms and provisions of, a Dividend Agreement,
dated June 15, 1994. A copy of the Dividend Agreement, as
amended, is on file in the office of the Secretary of the
Company. By acceptance of this Certificate, the holder hereof
agrees to be bound by the terms of said Dividend Agreement, as
amended.;
After endorsement, the certificates shall be returned to said Founding
Stockholders who shall, subject to the terms of this Agreement, be entitled to
exercise all rights of ownership of such stock.
7. Binding Effect. This Agreement shall be binding upon
or inure to the benefit of the Company, the Founding Stockholders, and their
respective successor, heirs, legatees, executors, personal representatives and
assigns.
8. Entire Agreement. This instrument contains the
entire agreement of the parties hereto with respect to the subject hereof, and
no modification, amendment, change or discharge of any term or provision of
this Agreement shall be valid or binding unless the same is in writing and
signed by all the parties hereto.
9. Applicable Law. The validity, construction,
apportionment and effect of this Agreement shall be governed by the laws of
Alabama.
10. Counterparts. This Agreement may be executed in
any number of counterparts, and each counterpart shall for all purposes be
deemed to be an original.
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
HEALTHSOUTH Rehabilitation Corporation
/s/ Richard M. Scrushy
--------------------------------------
Richard M. Scrushy, President
/s/ John W. McRoberts
--------------------------------------
John W. McRoberts
/s/ Michael Martin
--------------------------------------
Michael Martin
CAPSTONE CAPITAL TRUST, INC.
/s/ John W. McRoberts
--------------------------------------
John W. McRoberts, President
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF CAPSTONE CAPITAL CORPORATION
Crescent Capital of Alabama, Inc.
Crescent Capital of Pennsylvania, Inc.
<PAGE> 1
ACCOUNTANTS' CONSENT
The Board of Directors
Capstone Capital Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK
Birmingham, Alabama
June 21, 1994
<PAGE> 1
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors
HEALTHSOUTH Rehabilitation Corporation
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 28, 1994, in the Registration Statement
(Form S-11 No. 33-77788) and related Prospectus of Capstone Capital Corporation
for the registration of 6,670,000 shares of Common Stock of Capstone Capital
Corporation.
ERNST & YOUNG
Birmingham, Alabama
June 21, 1994
<PAGE> 1
ACCOUNTANTS' CONSENT
The Boards of Directors
National Medical Enterprises, Inc. and
HEALTHSOUTH Rehabilitation Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK
Los Angeles, California
June 21, 1994
