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HomeMy WebLinkAbout08- Bridger Appraisal, Proposal A SUMMARY REPORT City Hall 411 East Main Street Bozeman,MT 59715 PREPARED FOR: Mr.James Goehrung City of Bozeman 411 East Main Street Bozeman,MT 59715 PREPARED ON: January 23,2008 EFFECTIVE DATE OF VALUATION: January 7,2008 PREPARED BY: Keith O'Reilly,MAI General Certified Appraiser Bridger Appraisals,Inc. PO BOX 11145 Bozeman,Montana 59719 i r I RIDGER APPRAISALS • Ketth 0'11e11y.MAI January 23,2008 City of Bozeman 411 East Main Street Bozeman MT,59715 Re: City Hall Bozeman,MT,59715 Dear Mr.Goehrung: in accordance with your request and authorization,I have inspected the referenced property,also referred to as the appraised or Subject property in the following report,and have estimated its current Fee Simple value,"As Is"as of January 7,2008. My professional opinion is based upon analysis of market data gathered for this purpose and upon the assumptions and limiting conditions stated on pages 6-8 of the following report. This is a Summary Report as defined by Uniform Standards of Professional Appraisal Practice under Standards Rule 2-2(B).This format provides a summary of the appraisal process,subject and market data and valuation analyses. The information contained in this report is specific to the needs of the client and for the intended use as stated in this report. The appraiser is not responsible for unauthorized use of this report. The opinions stated in the accompanying report are based on my inspection of the appraised property,comparable properties,and analysis of all pertinent data. Ina 406 58% 7742 tot, nob 587 245Z PO 13—1114.5 As a result of my investigation and analysis,it is my opinion that the Market Value of the Fee Simple Interest, "As is",in the Subject property,as of January 7,2008,is: ONE MILLION SIX HUNDRED FIFTY THOUSAND DOLLARS (S 1,650,000) The following report contains(67)pages plus an addendum that provides the data and analysis to support the stated value estimates. Respectfully submitted, Keith O'Reilly,MAT General Certified Appraiser#400 State of Montana TABLE OF CONTENTS ITEM• PAGE NO. PHOTOGRAPH OF THE SUBJECT PROPERTY......................................................................................................5 ASSUMPTIONS AND LIMITING CONDITIONS................... SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS.................................................................................9 SCOPEOF THE APPRAISAL...................................................................................................................................I I PURPOSE AND INTENDED USE AND USER OF THE APPRAISAL..................................................................12 DEFINITIONOF MARKET VALUE........................................................................................................................12 PROPERTYRIGHTS APPRAISED...........................................................................................................................13 EXPOSURETIME......................................................................................................................................................14 VALUATIONDATE..................................................................................................................................................14 IDENTIFICATION AND HISTORY OF THE SUBJECT.........................................................................................15 REGIONAL,CITY,AND NEIGHBORHOOD ANALYSIS.....................................................................................18 TAXES AND ASSESSMENT ANALYSIS................................................................................................................28 SITEDATA AND ANALYSIS..................................................................................................................................29 ZONING AND GOVERNMENT RESTRICTIONS..................................................................................................32 DESCRIPTION OF IMPROVEMENTS.....................................................................................................................33 HIGHESTAND BEST USE.......................................................................................................................................35 THEAPPRAISAL PROCESS....................................................................................................................................38 COSTAPPROACH.....................................................................................................................................................39 SALES COMPARISON APPROACH........................................................................................................................44 INCOMEVALUATION.............................................................................................................................................55 FINALRECONCILIATION.......................................................................................................................................64 CERTIFICATION.......................................................................................................................................................66 ADDENDUM Resume PHOTOGRAPH OF THE SUBJECT PROPERTY 7' 1 1 View of the Subject property looking from southwest to northeast. Photo taken on January 7,2008 by Keith O'Reilly,MAT. Bridger Appraisals Inc. U S Keith O'Reilh.MAI ASSUMPTIONS AND LIMITING CONDITIONS This appraisal report,the letter of transmittal,and certification are subject to the following assumptions and limiting conditions;and also,any special qualifying conditions that may be contained elsewhere in the report are incorporated by reference. Assumptions 1. That the legal description,as furnished,is correct;and that the title to the property is good and marketable.All existing liens and encumbrances,if any,have been disregarded.The property is appraised,as though free and clear of other burdens,under responsible ownership and competent management. 2. That the land dimensions taken from available maps,plats,and/or surveys are correct.It has been assumed that those boundaries that are apparent are correct. 3. It is assumed that the use of the land and improvements is confined within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted in the report. 4. That no adverse water table or soil conditions exist,and no representation regarding such conditions is made in this report unless specifically stated; and,that the value estimated is predicted on the absence of any such conditions occurring. 5. It is assumed that the Subject property conforms to all applicable zoning and use regulations and restrictions unless nonconformity has been identified,described and considered in the appraisal report. 6. Those opinions,estimates,data and statistics supplied by others in the course of this study,are correct;the assumption has been made that the sources are reliable,but no responsibility has been inferred for their accuracy. 7. This report does not contemplate any court action,nor does it obligate the appraiser to give any testimony or make any appearance in court,before commission,arbitrator or any other individual,body or agency.if court action or appearance later becomes necessary in the interest of the client,the terms of the additional service shall be negotiated at that time. Bridger \ppraralsInc. 6 Kcnh ffRed1% %1\1 8. Unless otherwise stated in this report,the appraiser did not observe the existence of hazardous material,which may or may not be present on the property.I have no knowledge of the existence of such materials on or in the property.I am not qualified to detect such substances.The presence of potentially hazardous materials may affect the value of the property.This extends to any leaks from underground fuel storage tanks,and identification of Asbestos containing materials.The value estimate is predicated on the assumption that there is no such material on or in the property.No responsibility is assumed for any such conditions or for any expertise or engineering knowledge required to discover them.The client is urged to retain an expert in this field,if desired.Any such environmental risk discovered at a later date may require a revised estimate of value that may or may not be simply a reduction of the value by the estimated cost to cure the environmental condition. Properties known to have environmental risk may also carry a stigma in the market place that may or may not affect the value.If future soil tests should reveal the existence of any such soil conditions or hazardous waste, I reserve the right to review and adjust this appraisal accordingly. Limiting Conditions 1. The appraiser is not responsible for any matter legal in character,nor is any opinion rendered as to title,which is assumed to be marketable. 2. The value reflected in the analysis applies only to the program of utilization considered in this report.The use of the value in conjunction with any other appraisal or under other influences invalidates the conclusions developed. 3. This analysis and estimate of value is made for the exclusive use and benefit of the clients to whom it is addressed;and,possession of this report or a copy,does not carry with it the right of publication,nor may it be used for any purpose other than that intended without the previous consent of the appraisers. In any event,only the entire report may be used and no part shall be taken or used out of context. 4. Included as an integral part of this report are maps and photographs of the appraised properties and sales.The maps and photographs were prepared and taken by the appraisers,and although they do not purport to represent survey accuracy,they are substantially correct and adequately serve as visual reference to the property. 5. Disclosure of the contents of this report is governed by the By-Laws and Regulations of the Appraisal Institute. Neither all nor any part of the contents of this report(especially any conclusions of value,the identity of the appraisers or the firm with which they are connected)shall be disseminated to the public through advertising media,public relations,news media,sales media,or any other public means of communication without the prior written consent and approval of the authors. lirndper kppraisak Inc. 7 keah 0lRcdh %1 kl 6. The forecasts,projections,or operating estimates contained herein are based on current market conditions, anticipated short-term supply and demand factors,and a continued stable economy. These forecasts are, therefore,subject to changes with future conditions. 7. The Americans with Disabilities Act(ADA)became effective January 26, 1992. The appraiser has not made a specific compliance survey or analysis of the property to determine whether or not it is in conformity with the various detailed requirements of ADA. It is possible that a compliance survey of the property and a detailed analysis of the requirements of the ADA would reveal that the property is not in compliance with one or more of the requirements of the act. If so,this fact could have a negative impact upon the value of the property. Since the appraiser has no direct evidence relating to this issue,possible noncompliance with the requirements of ADA was not considered in estimating the value of the Subject property. Iindger:\rlxanals Inc. k 8 Keitho'Redk NINI SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS Client: James Goehrung,City of Bozeman Owner of Property: City of Bozeman Date of Valuation: January 7,2008 Date of Preparation: January 23,2008 Rights Appraised: Fee Simple Legal Description: Rouse's 1st Addition to Bozeman,Lots 10-14,Block F,Section 7 T2S R6E;Bozeman,Gallatin Co.,Montana. Location of Property: 411 East Main Street,Bozeman,MT 59715 Improvements: 6,790sf above grade office building located in the CBD Highest and Best Use: Continue with the present office use until such time as it is financially feasible to raze the improvements. Present Use: The highest and best use of the Subject property as if vacant is for the construction of at least a two story retail building with parking acceptable to the market. Zoning/Governmental: B-3 Site Shape and Size: The Subject site is Rectangular in shape and contains 20,625.00 Environmental: I have inspected the Subject site and did not observe any suspicious materials or any situation that would lead me to conclude that there were any environmental contamination concerns nor were any brought to my attention by the owner of the property or the client. However, I am not expert in these matters, and recommend a professional evaluation if the reader of this report wants more reliable information. Market Status: There has been good demand for commercial building sites in the Bozeman area. Presently,there is a considerable amount of commercial and retail construction in the Subject neighborhood. There has been a considerable amount of land with preliminary plat approval for residential development.Like the rest of the Country, the residential real estate market in Bozeman has slowed dramatically. Concluded value for each appraisal: Site Value as Vacant: $780,000 Cost Approach: $1,540,000 Sales Comparison Approach: $1,600,000 Income Approach: $1,710,000 Concluded Market Value: $1,650,000 Estimated Exposure Time: 6-12 months Estimated exposure time is based on current sales of commercial properties within the Bozeman area that are similar to the Subject.The estimated exposure time is predicated on the final opinion of value. Bridger \pprarsak Inc. .0 10 Keith() Redh NI V SCOPE OF THE APPRAISAL The scope of work consists of the amount and type of information researched and analyzed in an assignment. In preparing the appraisal,I have personally inspected the Subject site and improvements and considered pertinent characteristics of the site and improvements in comparison to current market standards.I have analyzed the Subject neighborhood and competing markets for current sales,cost and lease data. Local commercial real estate agents and brokers were consulted with to confirm sales and lease information.The offices and brokers include Mike McKenna(McKenna Realty),Dick Stefani(Bozeman Broker Group),Chris Pope (ERA Landmark),and Gene Cook(Gene Cook Real Estate). I inspected the Subject site on January 7,2008. General and specific data were obtained through personal and telephone interviews with government officials, property managers,developers,and other market participants. I have considered the highest and best use of the property as if vacant and as improved,and have applied the cost approach,sales comparison approach and income approach valuation methods.The results indicated by these methods have been reviewed and reconciled based on the reliability,relevance and reasonableness of the data,and the purpose and intended user of the appraisal. This is a Summary Report as defined by Uniform Standards of Professional Appraisal Practice under Standards Rule 2-2(B).This format provides a summary of the appraisal process,subject and market data and valuation analyses. The information contained in this report is specific to the needs of the client and for the intended use as stated in this report. Bridger Nppraisala luc.S 1I K:nh0 Reilh.%LV PURPOSE AND INTENDED USE AND USER OF THE APPRAISAL The purpose of this appraisal is to estimate a credible opinion of the Current Market Value of the Subject property's Fee Simple Interest,"As Is"as of January 7,2008,in accordance with the Uniform Standards of Professional Appraisal Practice(USPAP)and supplemented by the Appraisal Institute.The intended use of the appraisal is to assist the Client,City of Bozeman,in Potentially Marketing the Subject Property.Insurable value has not been estimated. DEFINITION OF MARKET VALUE 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 consummation of a sale as of a specified date and passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised,and each acting in what they consider their own best interest; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in U.S.dollars or in terms of financial arrangements comparable thereto; 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale , 'Source Federal Register,vol.55,August 22,1990,also quoted in the Uniform Standards of Professional Appraisal Practice. The Dictionary of Real Estate Appraisal,3rd ed.(Chicago;Appraisal Institute,1993),pp 222-223 lindw \hpiaisak Int. S 12 Krnh O'Reilh \141 PROPERTY RIGHTS APPRAISED Property rights are ownership interests in real estate and have value. It is important to know what property right(s) or estate(s)are involved in the appraisal,because the estate identifies the rights being valued.The Subject property rights being appraised are the Fee Simple Interest. Fee Simple:Absolute ownership unencumbered by any other interest or estate,subject only to the limitations imposed by the governmental powers of taxation,eminent domain,police power and escheat.` Leased Fee:An 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.' ' The Dictionary of Real Estate Appraisal,op.cit.,p. 140 3 The Dictionary of Real Estate Appraisal,op.cit.,p. 140, Rridger \phrai,ak Inc. C 13 hclth O Rcilh \l\1 EXPOSURE TIME Exposure time should not be confused with the marketing period.Exposure time precedes the effective date of the appraisal.In other words,how long the Subject property would be actively marketed prior to the effective date of the appraisal to bring the estimated opinion of market value determined in the appraisal. Marketing time is the period after the effective date of the appraisal. In other words,how long would it take to sell the subject property,at the appraised market value,after the effective date of the appraisal?Typically,in a stable market the marketing time and exposure time should be relatively similar. Based upon the current market conditions and sales data with the report,I have estimated the exposure time for the Subject property to be 6-12 months. VALUATION DATE The effective date of the appraisal is January 7,2008.This is the date of valuation and the date that the Subject property was personally inspected. Bridget Apprusaln Inc. <_' 14 KrrthO Reflk..Mki IDENTIFICATION AND HISTORY OF THE SUBJECT The legal description of the Subject property is: Rouse's 1st Addition to Bozeman,Lots 10-14,Block F,Section 7 T2S R6E;Bozeman,Gallatin Co.,Montana. Sale History: The Subject property has never sold or been transferred. The property is owned by the City of Bozeman. Reference to the ownership is in Deed Book 147,Pg 148. BndgeT AI,hrai`aIa Inr. 15 KeithO Redh �111 MONTANA REGIONAL AND CITY MAPS roou • IEYGOW OLACOR • &Mk } � NLL ��� DAERf .5•IlQ4N •LAY RATH!" soy �•1�'(Trr • • •1(pipN .� • 1 AL W u vAyLLl1' NDOsamy ° � F •°�• ![rIDN•aII 0 Brio" °S I nq Eccor CHOUNAU A __ CASCADE r •IOldao W70N k, 1 gygpq FENGus } 9AIRiD • NBSONLA �D11YLAGLARN' L� • 1 Lnwal�wT - vow Yt • 1 :tintlo 1mnX. � SUBJECT - �wII• AEAGN ..�_ `•; �_ °H nnas— �rowton• wssoEuansoNuEuu. ,e��-°-M�'A'un •F o�q cidf/S QTtlT 7 sou ir WN-A9-TL•AN0 R"9419 . f MON ARAVALI 01ja • 9RONA TER j t COLDEN VALLEY rREASIRE LODGE uJ�FFERSON _ IpS�IO • .---SLYER BOW ".. dwEFrGRA SS i MLONSroNE. ' sq TrrGur TT96��j �t (M " • 7LL Colonlut ° tl •1YIdh` ep NOAE PDl10eTANlBE •VYp. 1BAYBIBI6tD NAOBON •Rad LOOya-- �. CA/dON A - W REMARK Y..I.werrrwarry oprnl_RN BrndgCT Appraisals Inc. Ci 16 Keith O'Rrilh',MAI 1tELGR=D i Subject A.-_. Bridget Appraisals Inc.C 17 Keith O'Kedh,MA1 REGIONAL, CITY, AND NEIGHBORHOOD ANALYSIS The purpose of this section is to identify the pertinent social,economic,governmental and environmental factors that affect property value and to analyze their impact on the appraised property's current market value. This analysis begins with regional information and moves to relevant information about the city and the subject's neighborhood.A Neighborhood is defined as a grouping of similar land uses. From an appraisal viewpoint,this is the area where the Subject property competes with other properties and where the most comparable market data is obtained. Bozeman,Montana is located in Gallatin County,in an area more commonly referred to as the Gallatin Valley. Gallatin County is a mountainous area located in the southwestern part of the state between Park and Madison Counties,north of the Montana-Wyoming border and Yellowstone National Park.Gallatin County is the most populated and fastest growing county in southwest Montana. The county covers 2,500 square miles of mountainous lands varying in topography and climate.Nearly half of all of the land in Gallatin County is under public ownership by the Gallatin National Forest,State of Montana,Bureau of Land Management or the National Park Service. The City of Bozeman is located approximately 140 miles to the west of Billings,MT and 65 miles to the north of Yellowstone National Park.Bozeman is the fifth largest city and Gallatin County is the fifth largest county in Montana.Bozeman is the County Seat of Gallatin County. Social Factors: Social influences that affect value include,but are no limited to,population characteristics such as growth, population density,age distribution,household sizes,employment status,availability of education and the quality of life. Historic Population Trends-City of Bozeman,Gallatin County and the State of Montana: According to the U.S.Census Bureau,the City of Bozeman's population increased from 22,660 in 1990 to 27,509 in 2000-an increase of 4,849 people.This represents an increase in population of approximately 21%over a ten-year period,or an average rate of growth of about 2.1%per year. In contrast,the City grew by only 1,015 people during the 1980s.Between 1980 and 1990,the City's population increased from 21,645 to 22,550—a 4.7%increase over the 10 year period,or an average rate of growth of about 0.47%per year. Gallatin County's population increased from 50,463 in 1990 to 67,831 in 2000-an increase of 17,368 people.This represents an increase in population of approximately 34%over a ten-year period,or an average growth rate of 3.4% Btidger \ppr,uNals hx. 18 kctthU'Rcilh %1•\I per year.The entire state of Montana grew by 12.9%between 1990 and 2000(799,065 in 1990 and 902,195 in 2000)with an average growth rate of approximately 1.29%per year. City,County and State Historic Population Trends: 1900-2000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Bozeman 3,419 5,107 6,183 8,855 8,665 11,325 13,361 18,670 21,645 22,660 27,509 Gallatin County 9,553 14.079 15,864 16;124 18,269 21,902 26,045 32,505 42,865 50,463 67,831 State of Montana 243,329 376,053 548 889 537,606 559,456 591,024 674,767 694,409 786,690 799,065 902,195 ■Bozeman DGallatinCoullty WON '0,000 a 60,000 50,000 a 40,000 ro 30,000 20,000 10,000 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year Recent Population Trends-City of Bozeman It is estimated that the City's population grew by approximately 1,210 people(or 3.6 percent)in 2005,and the City's population was approximately 34,810 at the end of 2005. During 2006,it is estimated that the City's population grew by approximately 1,515 people(or 4.3 percent)for a total of approximately 36,325 people. Population projections indicate average annual compounded growth of 2.4 percent per year in the county between 2006 and 2010,continuing to outpace the rates of state and national growth. The expected strength in population growth in the county is related to the constant influx of residents to the area due to the high quality of life. In addition to population growth,the City of Bozeman continues to grow in geographic size.In order to accommodate increasing population and business growth,new land for residential,commercial and industrial development continues to be annexed into the City. In 1990,the City was approximately 6,210 acres(9.7 square miles)in size.By the end of 2006,the City was approximately 11,540 acres(18 square miles)in size. This is an 86 percent increase in the size of the City in 17 years.The DPCD processed 16 annexation applications in 2006. Bridgcr Appraisals Inc.lC 19 Keith O'Rcill\,MAI Annexation to the City of Bozeman(in Acres):1990— 2006 1990 1991 1992 1993 1994 1995 10.38 0.00 85.92 31.36 11.92 540.14 19% 1997 1998 1999* 2000 2001 11.50 958.96 90.04 104.06 632.09 794.06 2002 2003 2004 2005 2006 222.75 1 186.58 1 484.47 1 444.50 1716.80 Thir 75-acre annexation(Loyal Garden)was approved in 2006 *In 1999,0.1239 acres weir de-annexed Bozeman is characterized by a smaller portion of families and an average household size somewhat smaller than Gallatin County as a whole.Bozeman has an average household size of 2.27 persons,while the average household size for Gallatin County is 2.49 persons.Just over half of Bozeman households are families compared to 63% countywide.Bozeman also exhibits a significantly lower homeownership rate than the county as a whole,primarily due to the student body of Montana State University. The population of Bozeman is considerably younger than Gallatin County as a whole,and even moreso in comparison to the State of Montana. Again this shows the significant impact of Montana State University on Bozeman and Gallatin County.The estimated median age for Bozeman and Gallatin County residents in 2000 was 30.4 years and 32.9 years respectively.The median age for Montana residents for this time period was 36.4 years. The City of Bozeman has a significantly higher educational attainment level than Gallatin County or Montana in general.Approximately 47%of Bozeman residents'ages 25 and older have a college degree,compared to 39%for Gallatin County and 25%for the State of Montana. Bozeman and Gallatin County have transformed over the past decade from a primarily agricultural based community to a tourism related community.Quite frankly,what drives most of the new residents to the Bozeman area and Gallatin County is the quality of life,including low crime rates. Outdoor activities are abundant throughout Gallatin County.Activities include excellent snow skiing developments, world class fly fishing rivers and streams,miles of hiking trails and almost any other outdoor recreation that comes to mind. Economic Factors: Historically Bozeman is somewhat different than the rest of the State of Montana and the nation as a whole economically.One of the primary reasons is the fact that there are not a large number of employers who employ a significant number of the population. For example,other areas of Montana like Missoula are very dependent on the lumber industry-when the lumber industry slows,Missoula is more likely to feel the impact.The primary employer in Bozeman is Montana State University. Bridger Appraisals Inc.OL 20 Keith O'Reilh%MA1 The economy in Bozeman and Gallatin County are both broad based and diverse,with 3,400+business establishments employing over 41,000 people.Major sectors of the economy in addition to Montana State University include recreational,retail trade,agricultural services,manufacturing and natural resource based industry including mining and forestry. The largest single employer in the area is Montana State University that employees approximately 3,500 people.In the spring of 2005 the student enrollment at MSU was 12,000.The student body has a significant effect on the local economy. The state of Montana,Gallatin County and city of Bozeman are significant employers as well. As the county's employment base continues to diversify,the local economic health will be buffered from a downturn in any of the county's key industries. Overall economic growth has been much stronger in Bozeman and Gallatin County than statewide;earnings increased 116%over the 1989 to 1998 period but increased only 60%in all of Montana.Sectors in Gallatin County and Bozeman showing the most substantial growth include agricultural services,construction,manufacturing, finance,insurance,real estate and hotels and lodging. In April 2007(the latest month for which data is available),Montana's non-agricultural employment increased by 0.7 percent to approximately 445,500 employees. The largest gains were in the leisure&hospitality sector,where employment increased by 1,500 jobs,or 2.6 percent in April. The largest sectors are trade,transportation&utilities (approx.91,200 employees in April),government(87,600 employees), leisure&hospitality(58,800 employees)and education&health services(58,400 employees). Montana experienced a very low unemployment rate of 2.2%in April 2007,compared to a rate of 4.5%in the U.S.. Montana and the U.S.reported the unemployment rates of 3.6 and 4.7 percent,respectively one year earlier in April 2006. Gallatin County recorded an even lower unemployment rate of 1.5%in April 2007,down from a rate of 2.7% in April 2006. Gallatin County's labor force is currently estimated at approximately 55,000 employees. Gallatin County has the third largest labor force in Montana's 57 counties. Median household income for Gallatin County is$35,710,which is above the statewide median of$29,672 and ranks the County sixth highest in the State.Nearly every sector of the economy is experiencing increased activity. Rent levels increased significantly over the past ten years;however,due to the increase in inventory rental rates have stabilized and some have slightly declined for residential properties. As shown in the table below, residential building permit activity in the City of Bozeman has been strong ever since 1991. At the time of the 1990 Census,the City had 9,117 dwelling units in the City limits. By the 2000 Census that HridYer Apprw.ak Inc. 21 Keith O Reilk %1.11 i number had increased to 11,577 dwelling units. This represents a 27% increase in the City's housing stock in 10 years. Today,there are approximately 16,000 dwelling units in the City, Since 1990,single-household units have been the most popular housing type permitted at approximately 38 percent, followed by multi-household units at 23 percent.Of the 670 housing units permitted in 2006,38.4%were for single- household residences,9.4%for townhomes,8.7%for duplexes,6.71/o for triplexes, 13.7%for fourplexes,23.1%for apartment buildings,and 0%for manufactured homes. Residential Units Permitted by Type:1990-2006 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Percent S' e-hoeuehold 50 101 104 139 130 100 113 98 135 155 158 229 259 215 260 265 257 _)768 Xl Tonnhouse 0 4 4 38 11 53 52 40 35 26 34 0 28 52 70 63 63 573 7,9 Duplex 2 20 32 50 38 24 46 48 40 56 2; 51 37 108 144 141 58 918 126 Triplex 3 18 6 0 6 21 21 3 6 3 6 3 6 12 45 105 45 309 4 2 Fo 12 28 32 24 16 64 24 48 52 136 60 12 16 44 120 100 92 880 121 Multi-household 0 0 0 30 83 160 119 8 60 116 73 71 132 146 235 281 155 1668 23.0 Almn4acturahame 0 0 0 0 0 1 1 7 51 7 0 20 25 36 7 0 0 155 2.1 Total 67 171 1781 2811 2831 4231 376 252 3-191 4991 354 386 503 6131 881 955 670 7 2?1 100.0 Economic Development: Economic development can also be measured by the amount of new commercial and institutional construction activity within the City. The City of Bozeman has seen strong growth in commercial real estate development in recent years. The following table summarizes the growth in square footage of commercial, office and manufacturing space in the city and suggests an 8.9 percent compound annual growth rate since 2001. Approved Square Feet of Commercial,Office&industrial Space Year Square Feet 2001 412,000 2002 490,000 2003 586,200 2004 362,500 2005 649,700 2006 630,000 *Note-Figures are rounded to the nearest hundred square feet. In 2006, a number of major commercial developments were approved and permitted for construction, including: Lowe's HIW (165,765 square feet); Rosauer's Supermarket(60,045 square feet); Sportsman's Warehouse(46,334 square feet); Linen's-n-Things (24,852 square feet); Nicali Office Building (24,577 square feet); Staples (20,389 square feet); and Office Depot (18,752 square feet). Of the 630,000sf of non-residential buildings approved in I3ridger Appraisals Inc.© 22 Keith O'Reilly,MAI 2006, uses were classified as follows: 188,807sf of office, 397,942sf of general commercial (including retail) and hotel,and 5,302sf of industrial/warehouse space. The North 191h Avenue Corridor has evolved as a significant area of commercial real estate development in Bozeman. Among the retail stores and restaurants opening along North 19`h Avenue in 2007 are Sportsman's Warehouse,IHOP,Lowe's,Bed Bath &Beyond, Staples, World Market,and Linen's & Things. Other projects anticipated in 2007 include two new lifestyle retail centers and new Toyota and Chrysler dealerships,all of which are currently under construction. A $25 million biology building is currently under construction at the Montana State University campus. Significant development in Bozeman in 2006 included several projects at Montana State University,including a new Molecular Biology Center ($458,000), a Health and Physical Education Center ($4.9 million), the Black Box Theater ($1.2 million),and the Marsh Laboratory ($2.0 million). Also in 2006,several infrastructural projects were completed in the city of Bozeman, including a new fire station ($3.5 million), police station ($400,000), water/wastewater treatment plants($32.2 million)and city hall($3.0 million). Tourism: Yellowstone National Park is a significant generator of visitation to Bozeman. Yellowstone visitation has gradually increased over the years, ranging from 2,752,346 visitors in 2001 to 2,870,293 in 2006, representing a 0.8 percent compound annual growth rate. Yellowstone was the first U.S.national park,and with 3,472 square miles of land is larger than Rhode Island and Delaware combined. It features an active volcano, more than 300 geysers, approximately 290 waterfalls and the 136 square mile Yellowstone Lake. Through the National Park Service, the park employs around 380 people year-round and 800 during its peak summer season. In addition, approximately 3,700 people work for concessionaires operating such services as lodging,foodservice,retail and transportation. The Big Sky resort area is located approximately 45 miles south of Bozeman. Skiing Magazine has listed Big Sky as the seventh best skiing resort in the nation. The area averages over 300 inches of annual snowfall, with skiing available November through April. In addition, Big Sky has evolved as more of a year-round destination over the pat several years. Big Sky Resort was conceived and built by the late NBC newscaster, Chet Huntley. It first opened for skiing in 1973. In 1976, Michigan-based Boyne USA Resorts purchased the resort and has owned and managed it since then. Under the management of Boyne USA,Big Sky Resort continues to grow. A lift expansion plan saw the area add 13 new lifts since 1988. The resort now offers 17 lifts transporting skiers and snowboarders over 3,812 skiable acres,and hosts approximately 300,000 skiers per year. In 1990, the resort invested $18 million in the Shoshone Condominium Hotel and the 46,000-square-foot Yellowstone Conference Center which can accommodate 950 people. In 1995, the Lone Peak Tram was built hoisting skiers to 11,150 feet and giving Big Sky one of the nation's largest total vertical drops at 4,180 feet. Big Sky completed the single largest development since the resort's inception in 2000 when the Summit at Big Sky, a Iindeer.lppraisak Illl. S' 23 K,:ghu Redh. MAI luxury hotel condominium complex was constructed. The resort now offers 658 units,including guest rooms,suites, studios and condos. In 2001, Boyne USA announced a 10-year plan which will include $400 million in improvements to the Village and ski terrain at Big Sky. Other activities in the Big Sky area include scenic lift rides, hiking, rock climbing, horseback riding,tennis, fly fishing and whitewater rafting. In addition,the scenic 18-hole, par 72 Golf Course at Big Sky was originally designed by Arnold Palmer and has a classic links style,winding along the banks of the West Fork of the Gallatin River. The golf course and entire area are populated with beavers,geese, deer, marmot, rainbow trout and moose. The golf course is also served by the Bunker Bar and Grill and a fully- equipped pro shop. Another development near Big Sky is the Yellowstone Club, an exclusive vacation/residential development with a minimum 7,500 square foot homes, a $250,000 membership fee, and a $100,000 annual fee. This development includes private skiing and golfing. Additional ski areas in Gallatin County include Moonlight Basin near Big Sky with an adjacent condo development, and Bridger Bowl, 15 miles to the north of Bozeman and owned by Montana State University. Also, the region's excellent fishing and other outdoor activities generate many visitors to the area. Glacier National Park, located near the northwestern corner of the state also generates lodging demand in Bozeman due to Bozeman's location between Glacier and Yellowstone National Parks. Other attractions in the Bozeman area include the Museum of the Rockies, Emerson Cultural Center,American Computer Museum("Compuseum")and the Pioneer Museum. The Bozeman Area Convention & Visitors Bureau has organized a Tournament Committee which brings to Bozeman ten to twelve amateur sporting events per year. These events are usually held at the facilities on the Montana State University campus or at an events center in Belgrade, seven miles west of the subject property, and the events typically fill numerous area hotel rooms. Governmental Factors: The City of Bozeman is a City Commission/City Manager form of government with and elected Municipal Judge. These three entities form the legislative,executive and judicial branches of government.Five commissioners, elected with no party affiliation,make up the City Commission. They are elected to four year,overlapping terms and are part time officials.Terms are staggered,and elections are held every two years.The candidate who receives the most votes in an election becomes the Mayor the last two years of their term. The Bozeman Police Department consists of 40 sworn officers and six civilian employees.The Bozeman Fire Department includes the Fire Chief,Deputy Chief/Training Officer,and Deputy Chief/Marshall,seven Captains and 18 firefighters and support staff.There are two fire stations,one located on South 19th and one located on North Rouse.Both fire and police protection are considered good. 13ndeer.%ppriitiak Inc. 4 24 h, itlt() ReIlK. MAI The State of Montana assesses an ad valorem property tax to run public schools and other government agencies. There is also a State levied income tax.There is no sales tax in the State of Montana. Zoning Activity: Gallatin County administers the zoning code for properties outside the city limits,but within the zoning doughnut. In general,planning and zoning regulations in the area are considered stringent.The Gallatin County Comprehensive Plan encourages development near existing cities and discourages those in more remote locations. Bozeman's Planning Department enforces zoning regulation within the City Limits.In addition,the City adopted a "Big Box"ordinance to limit the size and number of big box retailers. Consequently low supply and high demand have had a significant impact on real estate values. As shown in the table below,the Department of Planning and Community Development processed 64 zoning applications in 2006.This is less than the number of applications processed in 2004(80),but similar to recent years -65 applications in 2004,66 applications in 2003,67 applications in 2002 and 62 applications in 2001.Zoning projects include Site Plans,Conditional Use Permits(CUP),Planned Unit Development(PUD)Concept Plans and PUD Preliminary Plans. Zoning Re-.news by Type: 1996-2006 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Site Plan 34 24 26 36 24 20 40 40 39 46 53 32 CUP 11 6 14 25 12 14 14 12 16 11 14 23 PUD Concept PL1n 3 1 4 6 0 1 4 9 5 6 6 3 Prelinvnw PUD 1 3 7 3 3 4 6 6 ? 6 Total 55 32 47i 74 39 38 62 67 66 65 60 1 64 In 2006,DPCD also processed 14 Zone Map Amendments(ZMA),6 Zone Code Amendments(ZCA),5 Growth Policy Amendments(GPA),3 Planned Unit Development(PUD)Final Plans, 10 Reuse/Further Development applications, I Variance and 33 Informal reviews. Subdivision Activity: Subdivision activity remained strong in 2006 with new subdivision lots being created.In 2006,final plat applications for 1,211 lots were received,up from 495 in 2005. Since the beginning of 1996,approximately 5,050 new building lots have been created in the City. In 2006,the Department of Planning and Community Development processed 67 subdivision applications and 21 subdivision exemption applications. Since the beginning of 1996,543 subdivision applications have been processed. Bridgcr Appraisals Inc. 0 25 Keith O'Rcdh.MAI Subdivision Reviews by Type:1996-2006 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Preapplications 12 12 17 7 15 10 15 15 18 26 18 Minor Prel.Plats 3 10 9 8 6 9 9 7 5 11 7 Major Prel.Plats 9 8 13 5 10 6 8 7 10 12 12 Final Plats 1 13 1 11 18 25 15 12 16 18 19 1 17 30 Total 37 1 41 57 45 46 37 48 47 52 1 66 67 Final Plat Lots by Type:2000 Number of Lots:1906-2006 Indw teal,8, Commerdal,79. 1"c anted Use.S. zoos :COS ?C0� z003 aQ-IR,46.4'e zco' zca 2-3 netts,170, 2000 1 o 999 598 IP97 SHR,900,'3°o b90 o zoo 400 600 Soo woo 1200 1400 moo zoo this pie chart illustrates lots by rope applied for cyith ®Preliminary PLit O Final PLu finslplat applications in 2006. Environmental Factors: Environmental factors consist of both natural and man-made features that can influence property values. These forces include but are not limited to climate,topography,natural barriers and transportation systems. Bozeman's climate reflects its mountain valley location.Bozeman,Gallatin County and the entire State of Montana truly have four seasons.Summers are pleasant and characterized by warm to hot days,cool nights and an abundance of sunshine. Humid conditions are infrequent.The average high temperatures in the summer are in the upper 80s and the average lows are in the mid 20s to lower 30s. The average high and low monthly temperatures for December,January,and February are 34 degrees and 15 degrees,33 degrees and 14 degrees,and 39 degrees and 18 degrees respectively. Springs tend to come late in the Gallatin Valley. One third of the annual precipitation of 19.29 inches falls during May and June. The average annual mean snowfall in Bozeman is 72.1 inches and the average length of the growing season is 107 days. The climate of the county varies according to elevation,but is generally characterized by relatively cold winters and warm summers.Typical operation costs that affect real estate are the inclusion of snow removal in the wintertime. Due to the fairly temperate summers,cool air conditioning costs are less;however,heating bills can be high due to the cold winter months. lindger Appraisals lnc.L0 26 Keith O'Reil IN,MAI Bozeman is located in Southwest Montana and has access going east and west on U.S.Interstate Highway 90. Access to the south towards Yellowstone National Park and Salt Lake City is via U.S.Highway 191.Interstate 90, State and County roads provide access throughout the region and commercial air,truck and rail(commercial service only)transportation are adequate. Gallatin Field near Belgrade(ten miles west of Bozeman)is the second busiest airport in the state and provides adequate service to the region. Conclusion: In general,the outlook for Bozeman and surrounding communities is good.The area has seen significant growth over the past ten years. Significant growth in the construction sector is expected to remain strong and building permits have seen an upward trend.Bozeman's economy is diverse and anchored by Montana State University.As far as the labor market,Bozeman has a young and very well educated work force. The quality of life and outdoor activity will continue to be one of the driving factors for population growth in Gallatin Valley. There is some concern that the quality/size of housing and costs are being driven up by the demand of people moving in from costlier locations,and there are some shortages existing in quality rentals. Gallatin County has a wide variety of excellent outdoor recreational opportunities. There are cultural and additional recreational resources in Bozeman due to the presence of MSU,and the tourism industry in southwestern Montana is poised for continued growth. Current population trends continue in an upward direction and growth has been sustained over the past decade. Bridgcr \pprai<als lnc. C 27 K•ith(Yltcill� �i V TAXES AND ASSESSMENT ANALYSIS The State of Montana,through the Department of Revenue,is responsible for valuing all taxable real and personal property.Department of Revenue field offices accomplish this property valuation.State guidelines are followed to ensure property is appraised in a fair and equitable manner.According to the Department of Revenue all three approaches to value are considered in the appraisal process. The amount of property tax paid is not determined solely by a property's value.The property's value is multiplied by a tax rate,set by the Montana Legislature,to determine its taxable value.The taxable value is then multiplied by the mill levy established by various taxing jurisdictions—city and county government,school districts and others-to provide services in the property's area. The following calculations are used to determine general property tax: Value x Tax Rate=Taxable Value Taxable Value x Mill Levy=General Property Tax The property tax process begins with an appraisal of the property.State law requires the Department of Revenue to reappraise property periodically.The most recent reappraisal was completed on December 31,2002. Each year,the Department of Revenue field offices must certify the taxable value of all properties incorporated within the boundaries of each existing tax jurisdiction or school district.This valuation is then submitted to the taxing jurisdictions and the county commissioners. The taxing jurisdictions then set mill levies based on these values and the budget required to provide the necessary services.The levy is calculated by dividing the necessary budget by the taxable value.In addition to local levies, there are statewide mills mandated by the Montana Legislature to provide school equalization and funding for the university system. No taxes are assessed on the Subject property. findger Appr iti,ik Ins. r' 28 Keith(YRedh %1�1 SITE DATA AND ANALYSIS Location: 411 East Main Street,Bozeman,MT 59715 Dimensions: See Attached Plat Map Land Area: 20,625.00 acres Areas&Ratios: Gross Building Area:6,790sf Shape: Rectangular Drainage: Adequate Flood Zone: Census Tract: 7. Zone:X50. The Subject Is Not located in a flood hazard zone. FEMA Map Number: 300028 0012C. FEMA Map Date: 07/15/88 Topography: Level Frontage: 140'on Main Street-Excellent Visibility: Good Landscaping: Typical for neighborhood Site Utility: Good Off-Site Improvements: Concrete Sidewalks Street Access: Good Maintenance: Public Surface: Asphalt Sewer and Water; Sewer:City Sewer Water: City Water Utilities: NorthWestern Energy Curb/Gutter: Concrete Sidewalk: Concrete Streetlights: Gas 2007 Real Estate Taxes: N/A Adverse Easements or None Noted Encroachments: Adjacent Uses: Commercial 13rideer \hrr j�a;Inc. < 29 Keith O'Reilk N1\1 SUBJECT PLAT MAP MENDENHALL STREET r 28. 28, 201 =.281 c- 261 4 ZE/:' 260 24, 4"• � �Y A55OGI E r � C t 15 16 17, ' 1B� 19 20 `r 21 22` f 2$ 24 25 -��cc MA�9c Fit n, Subject= r Lots 10-14 F W 14 13 18 11 l0 9 8 7 6 k 5 .t 4 9/-uB 28' 281 28, 26, 28 r 28, 28r r r N �• t' r/•' M A 1 N STREET Bi idger Appraisals Inc.© 30 Keith O'Kedl ,MAI FLOOD MAP t•Y� BdrJdSt��Ln E Oak S1 �E8inchSt s� Hemlock St ref v ypt�t N E Juniper St 9 L wJunrperS7� 10O` E Tam a'Pacttg� J�Q_tI��QQanc�i Ss , oltaftLn W Short St �� z no I �rIIJnI1IIIIIIrsrI�1Ih-m,-sa F holdold I 9 U�uuauLiJD �l ILz� E'tiV;�'�r'a5'1 aLJju Cw Bea'.° �nClnnnr---Jl�C L[�t t',O[� tsmmJS1 our%1710QCIO�yrDL��Or�.r ' n�tlhallrSS>t GCS 1 oj'''''�I . Boy �LaIL��s.Hwyt9t L�OC7�C7Cr�C�L�L� 84 �'���C��a�DOL7j�E8 -ocurs' U' y���n�QQQ Q�Q�1�QC�G�i��LIU�a r��s St 0 l �QQ�oL1oon � d n SF n Ft G ti Slop 1�QQCry,o C- R I�� ClC]QQQ � � �I��est e w�Col a`S1 00 ti 11 E COJI St�r-_ U('1j� u( � p . 11 E Hamfon St g i-tU E ClevelartdaSt a', C�]��Qal t o ��a01 �A QLincoln v E Afiason ISt tL-a .Flood Map Legends Flood Zone .hQS !f f Determination Flood Zones SFHA(Flood Zone): Out .area in ondafed by560y9ar flooding Within 250 ft,of multiple flood zone?No Area o utsi]eofftre too and 500 year food Community., 300028 plains Community Name: BOZEMAN,CITY OF Area inundabea by 100year flooding Zone:X50 Panel:300028 0012C Panel Date: 07/15/1988 Area inundated by 10"wr flooding wlh FIPS Code:30031 Census Tract: 0007.00 velooiy nazara Tlus Flood Retort is for the sole benifit of the Customer that ordered and paid Floodw area for the ROOK and is based on the orooerty information orovided by the customer.That customer's use of this reoort is subiect to the terms agreed by rbodway area w to velocly namrd that customer when accessing this oroduct.No third batty is authorized to use or rely on this report for anv ouroose,NEITHER FIRST AMERICAN FLOOD Area of undeb rminea Dirt pole ibbflood DATA SERVICES NOR THE SELLER OF THIS REPORT MAKES ANY hazard REPRESENTATIONS OR WARRANTIES TO ANY PARTY CONCERNING Area not mapped o n any pu bit hod FIRM THE CONTENT ACCURACY OR COMPLETENESS OF THIS REPORT INCLUDING ANY WARRANTY OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.Neither FAFDS nor the seller of this Retso shall have any liability to any third patty for any use or misuse of this Report. Bridger Appraisals Inc. 0 31 Korth O'Reilly.MAI Conclusion: The Subject site has many attributes that make it ideal to develop to its Highest and Best Use.The topography of the site is level to slightly sloping for adequate drainage. All utilities are in place, NorthWestern Energy supplies electricity and natural gas.There is good access via Main Street and Rouse Avenue.The site also has good visibility from Main Street.The site size is typical of sites developed into commercial retail space. ZONING AND GOVERNMENT RESTRICTIONS 1F.HEALI,S7' E LAbZZ Sr E I9b�lE•Sr M-1 i E Al NDEKHA[J.sT 3 B-2 7 B`3 J E a.Hcrxa sr uecs< �C"X Rrts%ST The subject site is zoned by the City of Bozeman as B-3. The intent of the B-3 central business district is to provide a central area for the community's business,government service and cultural activities.Uses within this district should be appropriate to such a focal center with inappropriate uses being excluded.Room should be provided in appropriate areas for logical and planned expansion of the present district. 1. It is the intent of this district to encourage high volume,pedestrian-oriented uses in ground floor space in the "core area"of Bozeman's central business district,i.e.,along main Street from Grand to Rouse and to the alleys one- half block north and south from Main Street. Lower volume pedestrian uses such as professional offices may locate on ground floor space in the B-3 area outside the above defined core. The Subject improvements are legal and conforming. lind2cr Appraisals Inc.�C 32 KeithO'Redly.MAI DESCRIPTION OF IMPROVEMENTS Since the intended user occupies the Subject building and is more familiar with the improvements than the appraisers,the report is not going to detail the improvements.The following are photos taken at the time of inspection. INNER Sample photo of interior office space second level Sample photo of interior office space second level Bndger Appraisals Inc.C 33 Keith O'Redh.MAI r A r I Sample photo of interior basement level storage and mechanical Sample photo of the rear of the Subject property. Bridger Appraisals Inc,C, 34 Keith O'Reilly,MAI HIGHEST AND BEST USE Highest and best use is defined in the fourth edition of The Dictionary of Real Estate Appraisal(Appraisal Institute, Chicago,2002),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 four criteria the highest and best use must meet are legal permissibility,physical possibility,financial feasibility,and maximum profitability. Highest and best use analysis is a three-step process. The first step involves the highest and best use of a site as though vacant. The determination must be made to leave the site vacant or improve it. If the conclusion is to improve the site,the second step is to determine the ideal improvement. The final step is a comparison between the ideal improvement and the existing improvement. At this point, the determination must be made to maintain the property in its present form or to modify the improvements to more closely conform to the ideal use. Highest and best use may be defined as the reasonably probable and legal use of vacant land or improved property, which is physically possible,appropriately supported,financially feasible,and that results in the highest value.4 1. Permissible Use. What uses are permitted by zoning and other legal restrictions? 2. Possible Use.To what use is the site physically adaptable? 3. Feasible Use.Which possible and permissible use will produce any net return to the owner of the site? 4. Maximally Productive. Among the feasible uses which use will produce the highest net return,(i.e.,the highest present worth)? 4 The Appraisal of Real Estate l Ph Edition,Page 297,Appraisal Institute Itndgcr Ahhr i,Lila Inc. 35 Kcnh U Kcillx M I i The Blackwood Building located directly across the street from City Hall has a site size of 15,428sf and a building size above grade of 13,201sf.Ratio is 86%of the site. There is a basement,however,City Hall has a basement,as well. The City Hall site is 20,625sf, It is reasonable to construct a two-story 17,647sf building and allow for similar parking ratios. Rents for the new building at City Hall should easily support$l 8.00psf on the main level and$17.00psf on the second level. Potential Gross Income 8,824sf x$18.00nnn or$158,832 Potential Gross Income 8,824sf x$17.00nnn or$150,008 $308,840 PGI Vacancy and Collection Loss @ 3% $299,574 Management Expense @5% $284,596 Reasonable Overall Cap Rates 6.5%to 7.0% $4,378,400(6.5%) $4,065,658(7.0%) Indicated value psf for the proposed Subject Building would be based upon 6.75%cap $4,216,237/17,647sf=$238psf Estimated cost of construction at$180.00 to $210.00psfaveraged @$195.00 $3,441,165+$150,000 demolition $3,591,165 or 203.50 sf Therefore,the price that a developer would pay to make the development financially feasible would be the overall value of$238 00psf less development costs of$203 50psf or approximately$34 50psf x 17,647sf or$608 821 This equates to$29.52psf of the total land area plus the lump sum adjustment for parking permits already paid.25 parking permits at$5,000 each or$125 000.Total site value$733 821 or$35 57psf lindeer Ahhraisals Inc.S 36 Keith 0 Rei11%.MA i Conclusion Highest and Best Use As Improved: Continue with the present office use until such time as it is financially feasible to raze the improvements. Highest and Best Use As Vacant: The highest and best use of the Subject property as if vacant is for the construction of at least a two-story retail building with parking acceptable to the market. Bridger %ppr jxak Inc. 37 K�ghc)'itcill� tit\I THE APPRAISAL PROCESS Typically,real estate can be valued by applying three approaches. Cost Approach: That approach in appraisal analysis that is based on the proposition that the informed purchaser would pay no more than the cost of producing a substitute property with the same utility as the Subject property. It is particularly applicable when the property being appraised involves relatively new improvements that represent the highest and best use of the land or when relatively unique or specialized improvements are located on the site and for which there exist no comparable properties on the market 5 Sales Comparison Approach: Traditionally, an appraisal procedure at which the market value estimate is predicated upon prices paid in actual market transactions and current listings; the former fixing the lower limit of value in a static or advancing market(price wise),and fixing the higher limit of value in a declining market; and the latter fixing the higher limit in any market. It is a process of analyzing sales of similar recently sold properties in order to derive an indication of the most probably sales price of the property being appraised.The reliability of this technique is dependent upon (a) the availability of comparable sales data, (b) the verification of the sales data, (c) the degree of comparability or extent of adjustment necessary for time differences and (d) the absence of non-typical conditions affecting the sale price.' Income Approach: That procedure in appraisal analysis that converts anticipated benefits (dollar income or amenities) to be derived from the ownership of property into a value estimate. The Income Approach is widely applied in appraising income-producing properties. Anticipated future income and/or reversions are discounted to a present worth figure through the capitalization process In essence,all approaches to value(particularly when the purpose of the appraisal is to establish market value)are market data approaches since the data inputs are presumably market derived." SBoyce,op.ca.,pp.63,132,and 160. Bfid cr 1prrai<ak Inc.G 38 Keith(i'Kalk MAI COST APPROACH The Cost Approach is one of the three traditional approaches in valuing real property. This approach is based on the proposition that an informed purchaser would pay no more than the cost of producing a substitute property with the same utility. The approach represents an alternative course of action available to a purchaser considering the acquisition of the Subject property, i.e., instead of buying the Subject property, what would it cost to build an improvement offering the same utility? Estimating Market Value for the Subject property by use of the Cost Approach involves the following procedures: a. Estimating value of the site as if vacant and available to be put to its Highest and Best Use. b. Estimating Reproduction Cost New of the Improvements. C. Subtracting the total depreciation, if any, from the reproduction cost new of the improvements,resulting in an estimate of the depreciated value of the improvements. d. Adding site value to the depreciated value cost of the improvements. The sum of these estimates represents a value indication of the subject property via the Cost Approach. The following pages present data and analysis utilized in estimating the value of the Subject property by the Cost Approach. Site Valuation: See Highest and Best Use tit ldPCr \pprmi 'Ils Inr. 39 KeithO Rcilh. \t\1 Reproduction Cost New: The next step in the Cost Approach to Value is estimating the Reproduction Cost New of the Improvements, as of the date of valuation. Reproduction Cost New of the improvements is defined as: The cost of construction at current prices of an exact duplicate or replica using the same materials, construction standards, design, layout, and quality of workmanship, embodying all the deficiencies, superadequacies, and obsolescence of the subject building 6 Reproduction Cost New,then,involves the cost associated in reproducing the exact physical structure with all items of functional and locational obsolescence built-in. The structure and the cost thereof together with accrued depreciation(functional, locational,and physical)are analyzed,estimated and deducted in the next step of the Cost Approach. Reproduction Cost New is contrasted to replacement cost which involves the cost associated with replacing utility, not the physical structure;therefore,the cost of functionally obsolete components would not be included. Reproduction Cost New reflects all ingredients of cost to the most probable,typical purchaser. Specifically,they include direct,or hard,costs and indirect,or soft,costs. Direct costs include labor,materials,equipment and subcontractor's fees and charges. Indirect costs involve such items as contractor's overhead and profit;architectural, engineering and legal fees;taxes and insurance during construction;construction financing cost,etc. Reproduction Cost New of the Subject is estimated using the Calculator Cost Method in the Marshall and Swift Valuation Service. Costs are classified by class and quality of construction. Buildings typical of a certain quality have many characteristics in common. For example,a"Good Quality" building will usually have good quality roofing so modifications for roof differences on a quality-classified building are seldom necessary. Marshall Valuation Service,compiled and published by Marshall and Swift Publication Company of Los Angeles, California,was used as a source of cost data. Marshall Valuation Service is a cost data manual based on analysis of the cost of new buildings on a national basis. The costs are updated quarterly via a current cost multiplier compiled on a regional basis. The costs are further refined to a metropolitan area by use of a local multiplier. Boyce,op,cit.,p.205. lindgrr Appr,u+ak hu.. 40 hcith 0 Rcdh. MA i i Therefore,current cost for the Western United States are modified by a Bozeman,Montana Area multiplier and reported on a unit or component basis. The Marshall Valuation Service has long been recognized as an authoritative source of cost data and has been used extensively by the appraisal profession. The RCN has been estimated using(1)the Marshall Swift Cost Manual,(2)analysis of other construction projects. The following page contains the cost calculations by Marshall Swift Commercial Estimator. Iindger Appru,.rb Inc. 41 Flnh(YRellh MNI Marshall&Swift Multipliers I Cost Analysis Marshall&Swift Section: Please Select No.of Stories Multiplier: 1.000 Local Multiplier: 1.000 HeightlStory Multiplier: 1.000 Current Cost Multiplier: 1.000 Perimiter Multiplier: 1.000 Combined Multipliers: 1.000 Building Improvements Cost Section 1 of 1 Item UnItType Cost Quantity M&s x Total Main Level Sq.Ft. $135.46 6,790 1.000 $919,773 Basement Sq.Ft. $67.73 6,370 1.000 $431,440 1.000 $0 Total Building Improvement Costs $1,351,214 Per SF GBA $199.00 Site Improvements Item Unit Type Cost Quantity Total Landscaping Lump Sum $30,000 1 $30,000 Parking Lump Sum $15,000 1 $15,000 $0 $0 Total Site Improvement Costs $45,000 Subtotal:Building&Site Costs $1,396,214 Per SF GBA $205.63 Soft Costs Item Percent Type Total Engineering ................................. 5.0% %Building Cost $67,561 Architectural ................................. 7.0% %Building Cost $94,585 Permits&Legal ............................................................................................. $40,000 Leasing ............................................................................................. $0 Total Soft Costs $202,146 Contingency @ 2.0% $27,924 Entrepreneurial Profit 15.0% $209,432 Total Cost $1,835.715 Per SF GBA $270.36 Cost Allocation Total Building Costs ............................................................................................. $1,790,715 TotalSite Costs ............................................................................................ $45,000 Depreciation Component Effective Age Life Percent Amount Physical Depreciation:Building 30 50 60% $1,074,429 Physical Depreciation:Site 0 1 0% $0 Functional Obsolescence Building ................................................... 0% $0 External Obsolescence Building ................................................... 0% $0 Total Depreciation $1,074,429 Depreciated Value of Improvements $761,286 Per SF GBA $112.12 Land Value LandValue ............................................................................................. $780,000 Other ............................................................................................. $0 Cost Approach Value Indication $1,541,286 Rounded $1,540,000 Per SF GBA $226.80 QValue Soft re—vMwatvaluer m 13ndgcr Apprai,ah Inc. <' 42 Keith O Redl% \1\1 Developer's Profit This factor reflects the profit necessary for the developer to undertake the management,responsibility and risks of construction associated with the Subject property. Current valuation theory states that the four components that create value are land,labor,capital and coordination. Developer's profit as used in the Cost Approach reflects the coordination component of value. Typically,developer's profit runs 10%to 20%.I have computed developer's profit at 15%of construction costs. Depreciation Analysis Depreciation may be defined as any loss of value from any cause.There are three general areas of depreciation: physical deterioration,functional obsolescence and external obsolescence.Depreciation may be curable or incurable, the test being that money spent to cure the depreciation be gained in value.If the depreciation costs more to fix than will be gained in value,then the depreciation is considered incurable. Physical Deterioration This results from deterioration from aging and use.This type of depreciation may be curable or incurable. Functional Obsolescence This results from a lack of utility or desirability due to design or market perception of the improvements.This type of depreciation may be curable or incurable. External Obsolescence This is due to circumstances outside the property itself,such as industry,demographic and economic conditions or an undesirable proximate use.This type of depreciation is rarely curable. Market data suggests that properties similar to the subject depreciate at a rate of approximately 1.5%to 2%per year. The Subject improvements are older and would require some serious renovation from a new purchaser. 1 estimated an effective age of 30 years with a overall life economic life of 50 years that equates to 60% Cost Approach Conclusion Based on the analysis detailed on the following page,I have reconciled to a cost approach value of$1,540,000,as of January 7,2008,subject to the Limiting Conditions and Assumptions of this appraisal. [iudger \hlnavah Inc.. 43 Ketth(>'KedIx MAI SALES COMPARISON APPROACH The Sales Comparison Approach is one of the three traditional approaches to value. It is also referred to as the Market Data or Market Comparison Approach. It is defined as follows: "That approach in appraisal analysis which is based on the proposition that an informed purchaser would pay no more for a property than the cost to him acquiring an existing property with the same utility."' Basic real estate appraisal principles involved in this approach are the principles of substitution, anticipation and contribution. The "principle of substitution"is the underlying premise from the Sales Comparison Approach and its definition is very similar to that of the approach itself. This principle fundamentally states that the value of a property is influenced to a large extent by the prices being paid in the open market for similar properties offering the same utility, It is irrational for somebody to pay an amount of money for a property that is greater than the price at which an equally desirable substitute may be acquired. The market,which is made up of substitute properties,thus represents alternatives for a prospective buyer and tends to set the range of values. The 'principle of anticipation"states that prices paid for property is a reflection of the market's expectation of future benefits that accrue from ownership. It follows,then,that if the property is old and nearing the end of its economic life, or for another reason has a dismal future,the present worth of all future benefits would be considerably lower than if the property was new and could generate benefits for a longer period of time. The value of real property, therefore,can be considered the present worth of all future benefits that can be derived from its ownership. The 'principle of contribution"is the underlying rationale for the adjustment process in the Direct Sales Comparison Approach. This principle views the sale price of real property as the sum of all value contributing characteristics. The individual characteristics are measured by the effect their presence or absence has on the total sale price. Not only are their mere presence important,but also the quantity and quality in which they exist. There are other appraisal principles involved in Direct Sales Comparison, but the three mentioned are considered most pertinent. 7 Boyce,op,cit.,p.79 Briklyer Vpru,uls Iill. ,<_ q¢ Rrrth U Reills %1A1 IMPROVED SALE NO. 1 t r Property Type: Office Date of Sale: 10/25/07 Location: 1609 West Babcock Sale Price: $1,050,000 County: Gallatin Grantor: Neil,Williamson,Eide Financing: Conventional Grantee: Youth Dynamics,Inc. Marketing Time: DOM 36 Recording Date: 12/14/07 Property Rights: Fee Simple Recording Doc#: 228623 Asking: $715,000 Confirmed With: Wayne Neil Phone Number: 587-9239 Confirmed By: Keith O'Reilly Legal Description: Tract in COS 963,Parcel#RGG3871 SITE DATA Site Size(Acres): .3742 Acres Site Topography: Level Site Size(SF): 16,298sf Zoning: B-2 Dimensions: Rectangular Landscaping: Paved/Good Frontage: None Parking: Good Access: Good Water: Private Well Corner: No Utilities: City Bridger Appraisals Inc.C 45 Keith O'Redh.MAI i IMPROVEMENT DATA Gross Building Area 6,864sf Condition: Good (SF): Year Built: 1980 Other Improvements: INCOME DATA Anticipated 1st year's income $85,083 Vacancy @ 3% $2,552 Management @5% $4,127 Taxes and Insurance $10,607 NOI $67,797 Value indicators:Cap Rate: Income/Sales price=.0646k PRICE PER SF: SALE PRICE = $1,050,000 LESS EST.LAND VALUE = $180,000 ESTIMATED VALUE OF IMPROVEMENTS= $870,000 PRICE PSF FOR IMPROVEMENTS(GBA) = $126.74 OVERALL PRICE PSF(GBA) = $152.97 NOTES Bridgcr Appwitia k Inc. 46 hclth()Rcdh \1 M IMPROVED SALE NO. 2 Location: SE corner Main and Willson Date of Sale: 03/25/07 County: Gallatin Sale Price: $1,850,000 Grantor: Bon Ton,Inc.of Bozeman Overall PSF(GBA): $207.07 Grantee: Joseph&Janet Colombo, Financing: Conventional Michael A.Basile Marketing Time: 347 Days Recording Date: 05/30/07 Property Rights: Leased Fee Recording Doc#: 2268159 Asking: $1,850,000 Confirmed With: Mike Basile Phone Number: 586-7676 Legal Description:Lot 10 rem.And Lot 11 in Blk A of Story's Addition to Bozeman SITE DATA Site Size(Acres): 0.125 acres Site Topography: Level Site Size(SF): 5,460sf Zoning: B-3 Dimensions: Rectangular Landscaping: None Frontage: 45'along Main, 138'along Willson Parking: Street Parking Access: Good Water: City Corner: Yes Utilities: NorthWesteni Energy IMPROVEMENT DATA GBA(SF): 8,934sf Condition: Average V'ear Built: 1880 Other Improvements: Bridger Appraisals Inc.0 47 Keith O'Reilh.MAI IMPROVED SALE NO. 3 Rio RIALTO i Property Type: Retail-Commercial Date of Sale: Ukn Location: 10 W Main St. Sale Price: $1,200,000 County: Gallatin Overall PSF GBA: $167.83 Grantor: Montana Theatreworks Inc Financing: Cash Grantee: Bozeman Rialto Redevelopment Marketing Time: Less than 6 months Recording Date: 09/01/06 Property Rights: Fee Simple Recording Doc#: 2240565 Asking: Ukn Confirmed By: Keith O'Reilly Phone Number: 587-2452 Legal Description: Lot 2,3,20&21,Block A Story's Bozeman SITE DATA Site Size(SF): 5,200sf Site Topography: Level Dimensions: Common Zoning: B-3 Frontage: Yes-Main St. Parking: Street Parking Access: Main St Water: City Corner: No Utilities: NorthWestern Energy IMPROVEMENT DATA Gross Building Area(SF): 7,150sf Condition: Poor Year Built: 1900's Other Improvements: Bndger Appraisals Inc.0 48 Keith O'Reilly,MAI IMPROVED SALE NO. 4 MAIF • :.Yt lr Property Type: Retail-Commercial Date of Sale: Ukn Location: 128 E Main St Sale Price: $4,500,000 County: Gallatin Grantor: Torres.Davis,LLC Financing: Conventional Grantee: Guglielmino Family,Ltd Marketing Time: Less than 6 months Partnership Recording Date: 04/07/06 Property Rights: Fee Simple Recording Doc#: 2224753 Asking: N/A Confirmed By: Keith O'Reilly Phone Number: 587-2452 Legal Description: Lot 8A of the Amen Sub Plat of a portion of Lot 7 and Lots 8,9,10 of Block B of the Orig Plat of Bozeman. NWI/4 of Sec 7,T2S,R6E. Plat Ref:C-1-G SITE DATA Site Size(Acres): Common Site Topography: Level Site Size(SF): 5,640sf Zoning: B-3 Commercial Dimensions: Irregular Landscaping: 100%Coverage Frontage: 49' Parking: Street Parking Access: Paved Water: City Corner: No Utilities: Public Badger Appraisals Inc.© 49 Keith O'Reilly.MAI IMPROVEMENT DATA Gross Building Area(SF): 20,851 Condition: Year Built: 1891 Other Improvements: PRICE PER SF: SALE PRICE = $4,500,000 OVERALL PRICE PSF(GBA) = $215.82 NOTES The improvements were constructed in 1981 and have been used for retail on the main level and there are 12 apartment units located on the second and third level. The basement is unfinished and used for storage. Since that purchase, Davis Torres has significantly remodeled the main level and the basement. The property is used for retail sales of custom furniture. This property sold for less than a 5%Cap Rate. lindgrr:�hLrai al,Illy.x' 50 Krnh(r Rcilh 11,\I IMPROVED SALE NO. 5 � i f Property Type: Retail-Commercial Date of Sale: 03/05/05 Location: 121 W Main St Sale Price: $1,180,000 County: Gallatin Grantor: Steve and Jean Schnee Financing: Cash to seller Grantee: Jon Logan Edwards Marketing Time: Less than 12 months Recording Date: 04/8/05 Property Rights: Fee Simple Recording Doc#: 2184161 Asking: N/A Confirmed With: Steve Schnee Phone Number: 587-0981 Confirmed By: Keith O'Reilly Legal Description: Lots 5&6 of Tracy's 1st Addition to the City of Bozeman SITE DATA Site Size(Acres): .181 acre Site Topography: Level Site Size(SF): 7,896sf Zoning: B-3 Dimensions: Rectangular Landscaping: Good Frontage: Main Street Parking: Average Access: Paved/Good Water: City Corner: No Utilities: All IMPROVEMENT DATA Bridget Appraisals Inc.C( 51 Keith O'Reilly.NIAI Gross Building Area(SF): 5,560sf Condition: Year Built: 1930 Other Improvements: PRICE PER SF: SALE PRICE = $1,180,000 LESS EST.LAND VALUE = $335,000 ESTIMATED VALUE OF IMPROVEMENTS= $845,000 PRICE PSF FOR IMPROVEMENTS(GBA) = $151.97 OVERALL PRICE PSF(GBA) = $212.23 NOTES The quality and quantity of market data to analyze this sale is very good. This is an older building in the CBD that has been updated and very well maintained. This is a one-level building that has been used by Schnee's boots and shoes for retail sales for years. Bridgcr 1ppmvah Inc. 4 52 Kcrth UlZeilk %1\I LOCATION OF COMPARABLE SALES 36 _ 31 I � ' 2 S 6E' a 171A 1 ! I 1 - • Fs i L - —;— Comp 1 Subject rJ • `� Comp a F3WVl�iti� 19t I— Comp 4 Comp 3 Comp 2 It --_ U1lv'�3h7ffL:i•!C{I 4 � r Brndger Appraisals Inc.G 53 Keith O'Reilly.MAI Units of Comparison-Property Valuation: Since the Subject property is a commercial office building,value is derived from the square footage of the improvements. It is logical to use the square footage of the gross building area to derive a value from other comparable sales. The preceding sales have been analyzed and compared with the Subject property. We have considered adjustments in the areas of •Property Rights Sold •Economic Trends(time) •Financing • Location •Conditions of Sale • Physical Characteristics Comparable Sale Adjustments Overall,Comparable Sale 5 is considered the most similar to the Subject,with the exception of a warranted positive market condition adjustment.Like the Subject,this property is located on the outer edge of the CBD.After analyzing sales within the CBD,it is apparent that main level space rarely sells for less than$200.00psf.Although the Subject improvements do not have the curb appeal of historical buildings in the CBD,it would still be considered a valuable location for retail. I have also researched the sale of a building located within a block of the Subject where the purchaser does not want the sales price disclosed.Overall,the improvements are inferior to the Subject and sold for approximately $234.00psf. I have reconciled to a value of$235.00psf,applied to the upper level of 6,790sf or$1,595,650 rounded to $1,600,000.Like the comparables,the overall value psf captures the basement area of the Subject. Sales Comparison Approach Conclusion Based on the above analysis,I have reconciled to a value of$1,600,000,as of January 7,2008,and subject to the Limiting Conditions and Assumptions of this appraisal. Iindger Ahrraisah Inc. < 54 Kcith 0'Rri11% \1\1 INCOME VALUATION In the income approach, property value is estimated by measuring the present worth of the future income stream. The principle of anticipation is very important and serves as the underlying premise. The procedure in the Income Approach is to estimate the present worth of the value of future anticipated benefits that are derived from ownership of the real property. The reason is that ownership of property rights is entitled to the future benefits accruing from the real estate. Anticipated future benefits have a direct effect on value. The process involved in this approach is two-fold: 1. The various income and expense items are defined which results in the estimation of Net Operating Income. 2. The Net Operating Income is then converted into a value estimate by direct capitalization. The basic capitalization formula is: Value is equal to the Net Operating Income divided by the overall capitalization rate. The following pages present various data and analyses that are employed in estimating the value of the Subject property by the Income Approach. Potential Gross Income(PGI) The first step in the income approach is the estimation of potential gross income. This income is the annual rent at current market rates that the Subject property is capable of producing. The potential gross income is largely determined by what other similar properties are currently being rented for in the open market. To estimate the market rental for the Subject,a survey of comparable rentals in the area was conducted. The following leases were analyzed to best estimate the market lease rates for the Subject property. Ni idger:\ppranak Inc. k SS hCnh(I'Rrilk MAI COMPARABLE LEASE NO. 1 r i yam= Lessor: Lincoln Place,LLC Location: 1822 West Lincoln,#1 Lessee: Health Motion Physical County: Gallatin Therapy,Inc, Confirmed With: Ardi DeVries,ERA Realty Terms: NNN Confirmed By: Keith O'Reilly Phone Number: 587-2452 Term: 3 yr Dimensions: Rectangular Improvements(SF): 3,285sf Topography: Level Age of Improvements: 1989 Water: Municipal Corner: Yes Utilities: NorthWestern Energy Zoning: R-4 Parking: Asphalt Surface Access: S. 19`h Ave.&Lincoln St. Landscaping: Good Lease Rate: $14.50psf NNN Conditions of Lease: Lease rate at 14.50psf the I"yr beginning 11/01/2007. Rent will be annually adjusted 3.00%over the next 3 yrs. Option to extend lease an additional 3 years,thereafter. Lease will be$16.82psf by the 6th year of the lease. Bridger Appraisals Inc.0 56 Keith O'Redly,h]AI COMPARABLE LEASE NO. 2 Vr 1 r, Lessor: Faure Halvorsen Location: 1425 W Main St.,Ste C Lessee: Xionetic Technology County: Gallatin Confirmed By: Keith O'Reilly Terms: NNN Confirmed With: Matt Faure Phone Number: 587-1204 Term: 3 yr Dimensions: Rectangular Improvements(SF): 2,600sf Topography: Level Age of Improvements: Water; City Corner: Yes Utilities: NorthWestern Energy Zoning: B-2 Parking: Surface Access: Paved/Good Landscaping: Adequate Lease Rate: $10.00psf Conditions of Lease: 3 yr fixed at$1 Opsf Improvements: Bridger Appraisals Inc. V 57 Keith O'Reill _NIAI COMPARABLE LEASE NO. 3 Lessor: Faure Halvorsen Location: 1425 W Main St.,Ste B Lessee: Windermere Real Estate County: Gallatin Confirmed By: Keith O'Reilly Terms: NNN Confirmed With: Matt Faure Phone Number: 587-1204 Term: 5 yr Dimensions: Rectangular Improvements(SF): 4,000sf Topography: Level Age of Improvements: Water: City Corner: Yes Utilities: NorthWestern Energy Zoning: B-2 Parking: Surface Access: Paved/Good Landscaping: Adequate Lease Rate: $12.75psr Conditions of Lease: 5%yearly lease increase. Improvements: Bridger Appraisals Inc.CC) 58 Keith O'Reilly.MAI COMPARABLE LEASE NO. 4 J • J_ Lessor: 4-K Location: 1 l88 North 15th Lessee: Korman Marketing Group County: Gallatin Confirmed By: Keith O'Reilly Terms: NNN Confirmed With: Tom Starner Phone Number: 539-0717 Term: 5 yr Dimensions: Nearly Rectangular Improvements(SF): 2,650sf Topography: Level Age of Improvements: 2007-New Water: City Corner: No Utilities: City Zoning: R-O Parking: Surface Access: Good/Paved Landscaping: Good Lease Rate: $15.00 NNN Conditions of Lease: This is a 5-year NNN lease with 3%annual increases.The tenant is also renting 900sf of upstairs storage space for$8.00psfNNN Bridger Appraisah,Inc.C 59 Keith O'Rediv MAI Location Map of Comparable Safes I � j 2S 6 I �1 Lease 4 i t Leases ,-t 2�&3 , I BOZEMA , Suj a1 i r - Lease 1 i I t �Tw= - r Badger Appraisals Inc.C 60 Keith O'Redh•-MAI Potential Gross Annual Income: The potential gross income for the Subject is based upon the preceding rental comparables and discussion with local Realtors in the Bozeman market. I have reconciled at$13.00psfNNN for the main level and$8.00psfNNN for the basement area for the Subject improvements.New good quality office space outside the CBD is leasing from $15.00psf to$15.50psf.I would expect the rates for the Subject to be below$15.00psf.Comparable Leases 2 and 3 were given the most consideration in the final rent reconciliation,especially for the basement area. Operating Expenses: Vacancy and Collection Loss: Typical vacancy and collection loss is supported at 5.0%. Management: Typical property management fees range from 5%to 10%. Real Estate Taxes:NNN to tenant Insurance:NNN to tenant Net Operating Income: Net Operating Income represents income to the property remaining after deducting all fixed and operating expenses from the potential gross income,but before deducting financial charges such as depreciation or debt service. Net Operating Income is the annual figure used in capitalizing income into a value indication. The appraiser believes the Net Operating Income utilized for the Subject property represents the criteria that market participants would utilize in estimating a value for the Subject by the Income Approach. Direct Capitalization: Direct capitalization is the conversion of anticipated net operating income into present value by dividing the income by an appropriate rate that reflects the prevailing relationship of net operating income to selling price for comparable properties being sold in the open market. The appropriate rate is the overall rate(Ro)that reflects the return necessary on land and improvements to attract investment capital. The capitalization rate is overall because it encompasses both the land and improvements,and the interest or risk rate and building recapture rate.Income capitalization rates typically increase as investment risk increases. III-Idger 11)rra1tia1S Inc. .c 61 hrrth O'Reilh,MAI It is extremely important that the overall rate is applied in the same manner that it was derived.For example,it would not be appropriate to obtain an overall rate from the sale of a property with a net lease and apply it to a property with a gross lease.As well,it would not be appropriate to derive a cap rate from a property that vacancy was not accounted for and apply it to a property where vacancy is accounted for. The general format for the income approach is: Potential Gross Income -(Vacancy&Collection Loss) =Effective Gross Income -(Fixed and Variable Expenses) =Net Operating Income Overall Capitalization Rate =Indication of Value Current sales of commercial properties have been analyzed to establish a capitalization rate that is extracted from the Bozeman Market. Current Capitalization rates derived from the market were.062 to.075. The reconciled cap rate is in the middle to the upper end of the range at 7.25%since it is likely the improvements would go through a use change in the near future. This rate takes into consideration the age and condition of the improvements.Newer,fully-leased,properties indicate an overall cap rate of approximately 6.25%to 6.75%. IinJer:\pt raic;th inc. 62 Keith 0 Reilly \1 11 Operating Income Statement Income Projection Property Name City Hall Analyst Keith O'Reilly Property Address 411 E Main St Firm Bridger Appraisals,Inc. MT,59715 Date U7/2008 Size Number Income Market Contract Rent %of Tenant SF of Units Type Rent Rent Applied Income Total 1 Office Main Level 6,790 1 $/SFNear $13.00 $0.00 Market $88,270 63.4% 2 Basement Level 6,370 1 $/SFNear $8.00 $0.00 Market $50,960 36.6% 3 $0 0.0% 4 $0 0.0% 5 $0 0.0% Totals 13,160 2 Potential Gross Income $139,230 Vacancy&Collection Loss 5.0% Effective Gross Income $132,269 Other Income $0 Total Effective Gross Income $132,269 Effective Gross Income Per SF $10.05 Income Summary and Expense Projection Income Amount %of Total Effective Gross Income:Section 1 $132,269 100% Total Effective Gross Income Per SF: $10.05 Expense Type % or$ Amount Per Unit 1 Management %of EGI 5.0% $6,613 $6,613 2 Miscellaneous Lump Sum $1,500 $1,500 $1,500 3 $0 $0 4 $0 $0 5 $0 $0 Total Expenses: $8,113 $8,113 Expense Ratio: 6% Net Operating Income: $124,155 Net Operating Income Per SF: $9.43 Income Capitalization Per Unit Per SF Potential Gross Income $139,230 $139,230 $10.58 Vacancy&Collection Loss (5.0%) $6,962 $6,962 $0.53 Effective Gross Income $132,269 $132,269 $10.05 Ex enses 6.1% $8,113 $8,113 $0.62 Net Operating Income $124,155 $124,155 $9.43 Capitalization Rate 7.25% 7.25% 7.25% Indicated Value $1,712,484 $1,712,484 $130.13 Rounded $1,710,000 $1,710,000 $129.94 Bridecr Appraisals Inc. d 63 KcrrhO Rcilh.:%IAI FINAL RECONCILIATION The process of reconciliation involves the analysis of each approach to value.The quality of data applied and the significance of each approach related to market behavior and defensibility of each approach are considered and weighed.Finally,each is considered separately and comparatively with each other. Value Indications Cost Approach: $1,540,000 Land Value: $780,000 Sales Comparison Approach: $1,600,000 Income Approach: $1,710,000 Income Approach The available data for the income approach is good. It is difficult to pinpoint an exact rental rate estimate per square foot for the Subject since there is not a lot of office space on the main level within the CBD;due to the fact it is not typically allowed.$13,00psf is reasonable considering the age and location of the Subject property.The location is good while the overall condition of the improvements is average at best and would likely require some considerable Tl's to entice a new tenant.The Overall Cap Rate was applied in the same manner in which it was derived.The cap rate utilized of 7.25%is reasonable and well supported with current market data.The quality and quantity of market data for the income approach is good and the indication of market value is reasonable and reliable. Cost Approach The data for the cost approach to value is a little more subjective since there are no current sales of vacant land tracts within the CBD.The land value was determined through a feasibility study in the Highest and Best Use Section of the report.The last land sale that took place in the CBD was several years ago and the property can more commonly be described as the land below the Jacob's Crossing Building.At that time,the estimated sales price was between $30.00 and$35.00psf.The reconciled value for this appraisal is about$37.00psf which,quite frankly,is believed to be on the lower end of the range.Depreciation and cost are well supported with current market data. Briagcr ahhrais;ik Inc.:<' 64 Kc4h 0 Rcilk.%I\1 Sales Comparison Approach The data for the sales comparison approach supports the final estimated value.The lack of truly comparable sales is limited because properties like the Subject in the CBD do not transfer often.There is one pending sale of an improvement in the CBD for 51.3 million that is inferior to the subject.In addition I investigated one other sale that the purchaser did not want to disclose,but the sales price was approximately$234.00psf,this property was inferior to the subject as well. Value Conclusions I have reconciled in the middle of the range between the sales approach and the income approach.The indicated value from the income approach could be slightly high due to the fact that the NOI is probably overstated due to increased maintenance costs as the subject building ages.The highest and best use analysis does not support razing the current improvements on the site.There is still economic life left in the Subject improvements. The quality and quantity of market data is good and the indication of value is reasonable and reliable. Based on the data and analyses developed in this appraisal,I have reconciled to the following value conclusions,as of January 7,2008,subject to the Limiting Conditions and Assumptions of this appraisal. Reconciled Value Conclusion: Premise:"As Is" Estate: Fee Simple Value Conclusion:51,650,000 As a result of my investigation and analysis,it is my opinion that the Market Value of the Fee Simple Interest, "As Is",in the Subject property,as of January 7,2008,is: ONE MILLION SIX HUNDRED FIFTY THOUSAND DOLLARS (51,650,000) Hridger.\pprai�alS lrm. 1 65 Keith<>*Redl\ \1\1 CERTIFICATION As a result of a request for an appraisal assignment of the property,identified as: City Hall 411 East Main Street Bozeman MT 59715 We certify: 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 is my personal,unbiased professional analyses,opinions,and conclusions. The appraisal assignment was not based on a requested minimum valuation,a specific valuation,or the approval of a loan. I have no present or prospective interest in the property that is the subject of this report,and I have no personal interest or bias with respect to the parties involved. My compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client,the amount of the value estimate,the attainment of a stipulated result,or the occurrence of a subsequent event. My analyses,opinions,and conclusions were developed,and this report has been prepared,in accordance with the standards and reporting requirements of and in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute,and the Uniform Standards of Professional Appraisal Practice(USPAP)published and copyrighted by the Appraisal Foundation. Keith O'Reilly,MAI,has made a personal inspection of the property that is the subject of this report. No person,other that the appraiser signing this report,provided significant professional assistance to the person signing this report. Further,the value reported is based upon cash in U.S.dollars or in terms of similar financial arrangements. Brideer 1hrr isai�Inc. 66 Keith U Red1% ',IAI The reported analyses,opinions and conclusions were developed,and this report has been prepared in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal 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. As of the date of this report,I,Keith O'Reilly,MAT,have completed the continuing education program of the Appraisal Institute. As a result of my investigation and analysis,it is my opinion that the Market Value of the Fee Simple Interest, "As Is",in the Subject property,as of January 7,2008,is: ONE MILLION SIX HUNDRED FIFTY THOUSAND DOLLARS ($1,650,000) Respectfully Submitted, Keith O'Reilly,MAI General Certified Appraiser#400 State of Montana Bridger Appraisals Inc.D 67 Keith O'kcill�.MAI ADDENDUM Badger Appraisal,;Inc.;t KeithO'Rrdh %I\1 Keith O'Reilly,MAI Fee Appraiser State of Montana General Certificate#400 Expires 3-31-06 Qualifications EDUCATION Educated in the Bozeman and Billings Public Schools Systems,Bozeman and Billings,MT. Obtained a B.S.degree in Business Marketing from Montana State University in 1992. APPRAISAL EDUCATION COURSES: Successfully completed course I110 Appraisal Principles, Completed the Seminar"The New URAR",Appraisal Appraisal Institute. Institute Successfully completed course 1120 Appraisal Procedures, Completed the Seminar "High Tech Appraisal Office", Appraisal Institute Appraisal Institute Successfully completed course 1210 Residential Case Completed the Seminar "Fundamental of Relocation", Study,Appraisal Institute Appraisal Institute Successfully completed course 1410 Standards of Completed the Seminar "Understanding Limited Professional Practice,AI Appraisals Residential",AT Successfully completed course 1420 Standards of Completed the Seminar "Understanding Limited Professional Practice,AT Appraisals General",AI Successfully completed course 310 Basic Income Completed the Seminar "660- Small Hotel/Motel Capitalization,AI Valuation,AI Successfully completed course 430 Standards of Completed the Seminar "620- Mixed Use Valuation Professional Standards Part C,A Analysis"AI Successfully completed course 510 Advanced Completed the Seminar "Appraising Manufactured Income Capitalization,AI Housing"AI Successfully completed course 520 Highest&Best Completed the Seminar "Data Confirmation and Use and Verification Methods"AI Market Analysis,AI Completed Ted Whitmer's Comprehensive Appraisal Successfully completed course 530 Advanced Sales Work Shop,Dallas Texas Comparison and Cost Approaches,Al Completed the Seminar "Partial Interest Valuation- Successfully completed course 540 Report Writing and Undivided"AT Valuation Analysis,AT Completed the Seminar"Appraisal Review General" Successfully completed course 550-Advanced Application,AI Completed the Seminar"2004 7hr USPAP Update" Rrid_rr Apprauak(tic. K�ith() Redh,MAI APPRAISAL EXPERIENCE: Specializes in the appraisal of residential & commercial properties located in Gallatin County, Montana since May of 1992. My experience includes an apprenticeship with Henry Neils, MAI & Patrick Nolan, MAI, SRA. Appraising residential properties including single family, 2-4 family, and condominiums. Appraising industrial sites and buildings,commercial sites and buildings,and insurable value appraisals. I am a native of the Bozeman area and have been for approximately 34 years. I currently serve as a board member for the Montana Board of Real Estate Appraisers. I have completed work for the following: Washington Mutual, American Bank, Intermountain Mortgage, Wells Fargo Home Mortgage, Country Wide Mortgage, Prudential Relocation, First Interstate Bank, Valley Bank of Belgrade, Heritage Bank, United States Government General Services Administration, Big Sky Western Bank, Sterling Savings and Loan, First Security Bank of Bozeman, U.S.Bank,American Federal Savings Bank,Wells Fargo Bank Bridgrr 1pprauak III, t. Kvith t 1 Rrdh %1 NI