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Stiff Professional Building/Bridger Appraisals
r r � w � miwa �a�m�miw �:mmw�mrmwwm xm���A�o�� ���u� ��ranm,. mrw�i u �n�urmmim�wJmmm�muuw�nvmwawiwuummuwawn e J 1 i i Aff ANEW- 1 SERVICES garoi� i�xxu�nin imummumu i � nn'mw.w� rsoiowmv� mii �E V' 'J i 7 1� f r i! y� N I F P . O . B O X 1 0 7 6 a E O Z E M A N , MT 5 9 7 1 5 ( 4 0 6 ) 5 8 7 - 5 0 4 4 COMPLETE APPRAISAL 0 SUMMARY REPORT of Alfred M. Stiff Professional Building, a Commercial Office Property 20 E. Olive St. Bozeman, Gallatin County MT, 59715 and of a City Parking Lot, 216 S. Tracy Ave. Bozeman, Gallatin County MT, 59715 As of January 25, 2006 Prepared For Mr. Ron Brey City of Bozeman 411 E. Main St. Bozeman MT, 59715 Prepared by Jerry R. Gossel Certified General, MT-106 Appraisal Services and Keith O'Reilly, MAI Certified General, MT-400 Bridger Appraisals APPRAISAL SERVICES _ P.O.Box 1076 - w406-587-5044 67A Kagy Blvd. 446-587-5481 February 2, 2006 Ron Brey City of Bozeman 411 E. Main St. Bozeman T, 59715 Re Alfred M. 'Stiff Professional Building 20 E. Olive St. Bozeman, Gallatin MT, 59715 Dear Mr. Brey At your request, we have prepared an appraisal for the above referenced property. The purpose of this appraisal is to estimate the market value of the subject property's fee simple estate for business purposes. This appraisal is intended for the use of the client. This is a Complete Appraisal. All applicable research and valuation analyses have been applied. 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. We certify that we have no present or contemplated fixture interest in the property beyond this estimate of value. Your attention is directed to the Limiting Conditions and Assumptions, located on page 8. Acceptance of this report constitutes an agreement with these conditions and assumptions. February 2, 2006 Page 2 In our opinion, the value of the subject property, as of January 25, 2006, was as follows: Subject Property "As Is" Premise, Fee Simple Estate Value Conclusion $2,700,000 The estimated value of the parking lot is - $167,000 Further, we estimate the market exposure period necessary for the subject to have achieved this value to be 3-6 months. Respectfully submitted, Appraisal Services Terry R Keith O'Reilly-rIOAI Certif MT led nera Ap�prdfse Certified General Appraiser _I 06 MT-400 TABLE OF CONTENTS Summary Of Important Facts and Conclusions......................... ..................................................... 5 AppraisalScope.......-.. ................................................ ................................ ............................... 7 Limiting Conditions and Assumptions ~--.--.--^^^--'--'—'~---^^------~---'-- 8 Purpose and Intended Use/User...................................................................................................... g Definition of Market Value.................................................................................................. 9 RegionalMap.......................................... ........................................................................ ............ l0 Market Area, City, Neighborhood, and Location Data................................................................. 11 PropertyDescription..................................................................................................................... I6 ParkingLot: ................................................. ............................................................................ 1g Subject Photographs..--------_—.----..~.._--.--^--.—...---.—.~.^.--.2U Assessment and Taxes .................................................................................................................23 Zoning...........................................................................................................................................24 Highestand Best Use......................... ......,...._ ...........................................................................25 ValuationMethodology................................................................................................................25 CostApproach ..............................................................................................................................26 LandValue................................................................................................................................26 ComparablesMap.................................................. ..................................................................Z0 AnalysisGrid................................................. ....................................... .................................27 LandValue Conclusion.................................................................... ........................................27 CostAnalysis.............................................................................---_ .........................................28 DepreciationAnalysis...............................................................................................................28 CoatApproach Conclusion...............................................^.^ ....................................................28 Sales Comparison Approach-----..---.--_,^^_.^^---.--~.~_—._.-.--.—.—..,... 3O Comparables .,,,,~.,~.,,,.~^~,~___'_,,^,........................................................................... 30 ComparablesMap.......................................................^.............................................................35 AnalysisGrid............................................................................................................................35 Comparable Sale Adjustments..............................^.^.................................................................37 Sales Comparison Conclusion..................................................................................3# Income Approach -DircCt Capitalization Analysis—.~,,~,,_____^,^____,.,,._____^^3g Income &Expenses .-_~.._,..^--.--..,~,,,,,____._..................................................... Income Approach Conclusion...................................................................................................4l Income Approach.--.........,........----_.^.....^^^-_----,.~—._-..._.—_.---,.....42 Direct Capitalization Analysis..................... ........................................... ................................42 Potential Gross Income /p[;|\...................................................................................................42 Income and Expense Statement............................................................................................ ...44 Income Approach Conclusion...................................................................................................47 FinalReconciliation....................................................^.. .................................. ...........................48 ValueIndications......................................................................................................................48 ValueConclusion......................................................................................................................48 CertificationStatement ........................................................................^^.......................................4g Appraisal Services 4 Summary of Important Facts and Conclusions GENERAL Subject: Alfred M. Stiff Professional Building 20 E. Olive St. and Parking Lot 216 S. Tracy Bozeman, Gallatin MT, 59715 Owner: City of Bozeman Tax Identification: RGH3317 Date of Report: February 2, 2006 Date of Value: January 25, 2006 Property Rights Appraised: Fee Simple Intended Use: Business Intended User(s): Client Appraisal Purpose: Market Value Assessed Value: Local Government Taxes: Exempt PROPERTY Land Area: Total: 23,550 SF Usable: 23,550 SF Improvements: Building Type: Commercial Office Year Built/Rehabbed: 1959/1980 Condition: Average Number of Stories: 2 Stories Gross Building Area: 15,210 GBA Basement: 7,995 Zoning: B-3, Central Business District Highest and Best Use The highest and best use "as vacant" would be for the As Vacant: improvement with an office building. Highest and Best Use The highest and best use of the subject as improved. As Improved: Parking Lot: 13,950 SF Parking Lot Zoning: B-3 Central Business District ................... V, ....... 414, QNS- Land Value: $260,000 Cost Approach: $2,760,000 Sales Comparison Approach: $2,200,000 Income Approach: $2,700,000 Appraisal Services 5 Reconciled Value Conclusion: Premise: "As Is" Estate: Fee Simple Value Conclusion: $2,700,000 Parking Lot: $167,000 Appraisal Services 6 Appraisal Scope According to the Uniform Standards of Professional Appraisal Practice, it is the appraiser's responsibility to determine the appropriate scope of work. USPAP defines the scope of work as, The amount and type of information researched and the analysis applied in an assignment. Scope of work includes, but is not limited to, the following: • the degree to which the property is inspected or identified; • the extent of research into physical or economic factors that could affect the property; • the extent of data research; and • the type and extent of analysis applied to arrive at opinions or conclusions. SCOPE OF WORK Appraisal Type: This is a Complete Appraisal. All applicable research and valuation analyses have been applied. Report Type: 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. Inspection: A complete inspection of the improvements and site were made, and photographs were taken. Highest and Best Use Analysis: A complete analysis of highest and best use, both as vacant and as improved, was made. Market Area and Analysis of A complete analysis of market conditions was made. Market Conditions: Valuation Analyses Cost Approach: A complete cost approach was applied. Sales Comparison Approach: A complete sales approach was applied. Income Approach: A complete cost approach was applied. Appraisal Services 7 Limiting Conditions and Assumptions Acceptance of and/or use of this report constitutes acceptance of the following limiting conditions and assumptions; these can only be modified by written documents executed by both parties. This appraisal is to be used only for the purpose stated herein. While distribution of this appraisal in its entirety is at the discretion of the client, individual sections shall not be distributed; this report is intended to be used in whole and not in part. No part of this appraisal, its value estimates or the identity of the firm or the appraiser(s) may be communicated to the public through advertising,public relations, media sales, or other media. All files, work papers and documents developed in connection with this assignment are the property of Appraisal Services. Information, estimates and opinions are verified where possible, but cannot be guaranteed. Plans provided are intended to assist the client in visualizing the property; no other use of these plans is intended or permitted. No hidden or unapparent conditions of the property, subsoil or structure, which would make the property more or less valuable, were discovered by the appraiser(s) or made known to the appraiser(s). No responsibility is assumed for such conditions or engineering necessary to discover them. Unless otherwise stated,this appraisal assumes there is no existence of hazardous materials or conditions, in any form, on or near the subject property. Unless stated herein, the property is assumed to be outside of areas where flood hazard insurance is mandatory. Maps used by public and private agencies to determine these areas are limited with respect to accuracy. Due diligence has been exercised in interpreting these maps, but no responsibility is assumed for misinterpretation. Good title, free of liens, encumbrances and special assessments is assumed. No responsibility is assumed for matters of a legal nature. Necessary licenses, permits, consents, legislative or administrative authority from any local, state or Federal government or private entity are assumed to be in place or reasonably obtainable. It is assumed there are no zoning violations, encroachments, casements or other restrictions which would affect the subject property, unless otherwise stated. The appraiser(s) are not required to give testimony in Court in connection with this appraisal. If the appraisers are subpoenaed pursuant to a court order, the client agrees to pay the appraiser(s) our regular per them rate plus expenses. Appraisals are based on the data available at the time the assignment is completed. Amendments/modifications to appraisals based on new information made available after the appraisal was completed will be made, as soon as reasonably possible, for an additional fee. Appraisal Services 8 Purpose and Intended Use/User The purpose of this appraisal is to develop an opinion of Market Value of the property of interest. The intended use of this appraisal is for business purposes. This report is intended for the use only by the client and whomever the client deems necessary for the completion of the transaction. Definition of Market Value The definition of"Market Value", as defined by the Office of the Comptroller of Currency (OCC) under 12 CFR,Part 34, Subpart C-Appraisals, 34.42 Definitions, the Board of Governors of the Federal Reserve System (FRS) and the Federal Deposit Insurance Corporation in compliance with Title XI of FIRREA, as well as by the Uniform Standards of Appraisal Practice as promulgated by the Appraisal Foundation, is as follows. Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the pricers not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby, 1. Buyer and seller are typically motivated; 2. Both parties are will informed or well advised,and 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; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Appraisal Services 9 Regional Map DRNIELS't sgER@AN Lrc�J FlATME GL�eiE7.._ TODLE -T—,-- , a HILL ry a SV,} waP DEflJ I.. — BLAINE 7MII_UPS L VALLEY ROOSEVELT � TEiON... CMOIITEAU _^if E r �.-LkCHLANO 6 ERS LgKF �� ��.�. '' r � ( TAcCQNE� BA�JS©N ' �'� I..I �..� I y EASCAL)E 1UQfT/M I FERGUS �PBRO C�ARFIELQ .. t CK LEUM ._.. j k MtSSOULA BASIN ` _.. _ �.— . ..,PRAIRIE �, .. MfAGHER MtbSSEL GRANpTE BROAD O'�1�HE�4T- � SFIEtI r° �FALLON t JFFFER- 'AT _ _w_.- 4AN0 fir. t "jROSEBUO COSTER _. M4 R41tA!Li SON ShVFLI`..... YELLOWSTONE,- IN GRASS STILL' ,�q N WtATER Ft14'�B�,F PARK ..,•. .p ��, POWQER � CARTER MADISON d BIG MORN RIVER j BFAVERH m CARBON B0e1113TT .Appraisal Services 10 Market Area, City, Neighborhood, and Location Data The four forces that influence value in a market are social, economic, governmental, and environmental. This analysis identifies the characteristics that influence value trends in the past and that may affect values in the future. Bozeman, the county seat, is located in the southwest portion of the state in Gallatin County. The county area is 2,510 square miles. Billings,the state's largest city, is located 150 miles to the east; Butte is located approximately 80 miles to the west. Helena, the capitol, is located 90 miles to the north. Gallatin County is one of the fastest growing areas in the state. Social Influences In the market area analysis,the social characteristics that influence property values include: population density, which is important in central business districts and high-rise residential neighborhoods; skill levels or employment categories, which are important in industrial or high- technology districts; age levels, which is important in residential neighborhoods; house-hold size; employment status, including types of unemployment; extent of crime; extent of litter; quality and availability of educational, medical, social, recreational, cultural, and commercial services; and presence of community organizations. According to the Census and Economic Information Center, Montana Department of Commerce, the population of Montana in 2003 was 917,621. According to the 2000 Census, the population of Gallatin County was 67,831 residents, and Bozeman was 27,509 residents. Woods and Poole Economics estimated the population of Gallatin County in 2004 at 75,637, which make it the fastest growing county in Montana. According to the Economic Information Center the population of Bozeman in 2003 was 30,753. The census figures include some students as heads of household and fluctuations in university enrollment may affect the population data. Gallatin County has a well-educated work force. Of the county adult population over 25 years of age, 41% have college degrees; in Bozeman,that number increases to 49.5%. Gallatin County has experienced steady population growth in recent decades. More than 90% of the population lives in Bozeman or within 30 minutes of Bozeman. The age distribution for Gallatin County in 2000 is as follows: under 10, 11.7✓; 10-19, 15.2%; 20-29, 21.9%, 30-39%; 40-49, 16.0%; and 60 & over, 11.4%. The age distribution for Bozeman in 1990 is as follows: under 10, 11.4%; 10-19, 15.7%; 20-29, 31.2%; 30-39, 16%; 40-49, 9.3%; and 60 & over, 11.4%. The average persons per household in Gallatin County for 2000 were 2.46 and for 1990 were 2.50. The average persons per household in Bozeman for 1990 were 2.27. According to the Montana Employment &Labor Trends Quarterly; the civilian labor force of Gallatin County in December of 2000 was 43,401, the number of employed workers was 42,114, and the number of unemployed was 1,287, with an unemployment rate of 3.0%. The civilian labor force in December of 2001 was 44,329, the number of employed workers was 42,937, and the number of unemployed was 1,053, with an unemployment rate of 1.2%. Appraisal Services I 1 The historical unemployment rates are as follows: Year Montana% Gallatin County% 2004 3.84 2.39 2003 4.4 2.5 2002 4.6 2.7 2001 4.6 2.5 2000 4.9 2.7 1999 52 2.9 1998 5.6 3.0 1996 5.3 2.6 1994 5.1 2.3 1992 6.9 5.4 The Bozeman Police Division, with 43 law enforcement officers and 7 civilian employees, provides law enforcement protection to city residents and visitors. The department has a community policing philosophy and has implemented many positive programs over the past few years. In 2001, the number of crimes in Bozeman is as follows: homicide, 3; robbery, 7; assault, 12; burglary, 106; larceny, 1071,vehicle theft, 109; and rape, 24. Gallatin County has 32 schools in 16 school districts, offering educational programs from kindergarten through high school. Gallatin County's total enrollment of students, including private school numbers is 10,942. Montanan State University is one of two university systems within the state. During the 2005 fall semester, 12,300 students were enrolled at MSU-Bozeman. The university offers baccalaureate degrees in 50 fields,master's degrees in 40 fields and doctorates in 13 fields. Bozeman has a full range of medical professionals, several clinics, two urgent care clinics, a low- income clinic, and a modem short-term acute care hospital. There are approximately 100 doctors and 35 dentists, 114 practical and 377 registered nurses in the community. The number of increasing passenger boarding at Gallatin Field Airport is an indication of strength in the tourism and recreation in Gallatin County. Bozeman is a destination point to Yellowstone National Park,which continues to attract over 3 million visitors each year. The alpine skiing is excellent with Bridger Bowl located 15 miles north of town and Big Sky, a destination resort ski area, located 50 miles south of town. Both ski areas offer beginner to expert ski runs. There are numerous cross-country ski trails in the area. The area is known for its fishing on three rivers, the Gallatin,the Jefferson, and the Madison, which form the Missouri River. Access to the Yellowstone River in Park County is 25 miles east of Bozeman. There are 48 religious organizations in the Bozeman area representing a variety of affiliations and denominations. Bozeman has more than 70 motels/hotels with 1,400 rooms and more than 50 restaurants. Appraisal Services 12 Economic Influences Economic considerations relate to the financial capacity of a market area's occupants and their ability to rent or own property, to maintain it in an attractive and desirable condition, and to renovate it when needed. The economic characteristics include; mean and median household income, per capita income, income distribution, extent of owner occupancy, property rent levels and trends, property value levels and trends, vacancy rates for various types of property, and amount of development. The economy in Gallatin County and Bozeman is both broad based and diverse, with 3,400 establishments employing over 41,000 people. Major sectors of the economy, in addition to Montana State University, include recreation, retail trade, agriculture, services, manufacturing, and natural resource-based industry such as mining and forestry. Growing segments within these sectors are technology-based, and sports and recreation-based businesses that find university resources and an educated and recreational active labor force to be significant assets. The largest employer in the area is Montana State University, which employs approximately 3,500 personnel. Employment numbers indicate that retail trade employee's make-up 26% of the covered labor force, with government at 20%, and services at 25%. Manufacturing is the next largest segment, employing 9% of the covered labor force. In 1999 the median household income for Montana was $33,024 with a per capita income of $17,151. The median household income for Bozeman was $32,156 with a per capita income of $16,104. Housing statistics for 2000 are as follows; Residential housing units in Montana 412,633, and for Bozeman 10,877. The persons per household in Montana were 2.45 and Bozeman was 2.26 with the homeownership rate in Montana of 69.1% and Bozeman was 42.9%. Residential housing starts in Bozeman for single-family and multi family units were as follows: 1997, 309; 1998, 423; 1999, 546; 2000, 415; 2001, 422; 2002, 526; 2003, 612; 2004, 881. Source: City of Bozeman Planning Office. The average rental prices in Bozeman as of May 2005 for apartments were: 1 bedroom$300- $500; 2 bedrooms $500-$795; 3 bedrooms $65041000. The average studio rental was$275- $400. The average house rental was: 2 bedrooms $600-$850 and 3 bedrooms $80041,200. Source: Peak Property Management. According to the City of Bozeman Building Division the new construction valuation, including both residential and commercial for Bozeman: 2000 $81.2 million 2001 $78.9 million 2002 $85.8 million 2003 $133.1 million 2004 $144.2 million Appraisal Services 13 Governmental Influences Governmental considerations relate to laws, regulations, and property taxes that affect properties in the market area and the administration and enforcement of zoning laws, building codes, and housing and sanitary codes. The governmental characteristics include; property tax burden relative to services provided compared with other areas in the community; special assessments; zoning, building, and housing codes; quality of public services, such as fire and police protection, schools, and other governmental services; and environmental regulations. In 1921, the city of Bozeman adopted a Commissioner-Manager form of government. The day- to-day operations of local government are administered by the City Manager. All department heads are responsible to the City Manager, who is in turn responsible to the City Commission. Five commissioners are elected at large for four-year overlapping terms. The City Judge,the only other elected official, is also elected at large for a four-year term. The city provides water and sewer services that is supported by user fees. Garbage collection and landfill operations costs are covered by an annual assessment of property-owners. Through its general taxing authority, the City of Bozeman also provides library,parks, cemetery, street, and tree maintenance services. The Bozeman City/County Planning Office advises the Bozeman City Commission, Gallatin County Commission and Bozeman City/County Planning Board on matters within the planning jurisdictional area. The staff reviews subdivision requests, annexation requests, Master Plan amendments, zone changes; conditional uses, and makes recommendations to the respective bodies. The staff is also responsible for carrying out long range, comprehensive planning programs. The Department administers the Bozeman area-zoning ordinance, which contains provisions for site review and planned unit-development. The planning staff administers all housing-programs and historic preservation. Environmental Influences Environmental considerations consist of any natural or man-made features that are contained in or affect the market area and its location, including: building size, type, density, and maintenance; topographical features (terrain and vegetation); open space; nuisances and hazards from nearby facilities; the adequacy of public utilities; the existence and upkeep of vacant lots; general maintenance; the attractiveness and safety of routes into an out of the area; effective ages of properties; changes in property use and land use patterns; microclimate characteristics (temperature, wind, humidity, snowfall, etc.); environmental liabilities (landslides, floods, etc.); and access to public transportation, schools, stores and services establishments, parks and recreational facilities, house of worship, and workplaces. The Gallatin Valley is surrounded by several mountain ranges and thousands of acres of national forest land, where trail systems and wilderness areas abound. Two of the entrances to Yellowstone Park, America's oldest and best-known park are within a 90-mile drive of Bozeman. Yellowstone National Park can be enjoyed year round and Glacier National Park is a short-days drive to the west. Appraisal Services 14 Bozeman is near ten national forests that accommodate a variety of outdoor recreational experiences. There are several areas that are designed to accommodate the needs of people with disabilities, families with small children, and senior citizens. Many organizations and Recreation Department use public lands and city/county facilities to conduct programs. The city of Bozeman supports 23 parks and recreation areas, 19 of which are owned by the city. The city maintains 17 public tennis courts with three public parks are converted to outdoor ice skating rinks in the winter. Bozeman's climate reflects its mountain valley location. Summers are pleasant, characterized by warm days, cool nights, and an abundance of sunshine. Hot weather and humid conditions are infrequent. Bozeman is located in one of the few regions in the country where the average summer climate is comfortable due to the moderate combined heat and humidity. The average high temperatures for the summers are in the 70's and 80's; the average low temperatures are in the mid 40's and low 50's. The autumn high daily temperature is 70 degrees until the middle of October then between 20 and 50 degrees in October and November. The average monthly high and low temperatures for December, January and February are 35 and 16, 31 and 11, and 37 and 17 degrees. The average temperatures for spring are between 53 and 72 degrees. The average snowfall for Bozeman is 73.1 inches. Appraisal Services 15 Property Description SITE Information Sources: City of Bozeman, deed, assessment records, inspection Total Site Size: 23,550 SF Comer Lot: The site is a comer lot. Visibility: Good Shape: Rectangular ........... 1 7 7777` Road Frontage/Access: 157 Feet with Good access. The average depth is 150 Feet . Topography: Mostly level Drainage: Appears Adequate Utilities: Electricity: Northwestern Energy Sewer: City Water: City Natural Gas:Northwestern Energy Adequacy: Average Site Improvements: Good Appraisal Services 16 Landscaping: Average Site Utility: Average Flood Zone: The subject is located in an area mapped by the Federal Emergency Management Agency(FEMA). The subject No located in flood hazard zone. FEMA Map Number: 3000280012C FEMA Map Date: July 15, 1988 FEMA Zone Classification: X Easements: The appraiser viewed the site and reviewed the zoning map, subdivision plat, and deed. The appraiser did not observe any adverse easements affecting the marketability of the site. Encroachments: The appraiser did not observe any encroachments affecting the marketability of the site. IMPROVEMENTS Building Type: Commercial Office Building Class: The subject is a 2 Stories-story Commercial Class C Office Building. Construction: Masonry Quality: Average Year Built: 1959 0� Year Rehabbed: 1980 Condition: Average Effective Age: 10 Years Remaining Useful Life: 60 Years Areas & Ratios: Gross Building Area: 15,210 GBA Basement. 7,995 Net Leasable Area: 23,205 Building Efficiency Ratio: 100% Building to Land Ratio: .9850/1.00 Appraisal Services 17 FoUNDATION,FRAw &ExTmm Foundation: Concrete footings Basement/Lower Level: 7,995 Basement Use: Commercial Office Exterior: Brick Roof/Cover: Built-up Elevators: INTERIOR Interior Finish: Drywall, Wood trim Ceilings: Suspended ceiling Floor Cover: Carpet, Vinyl Doors: Wood, solid core MECHANICAL SYSTEMS Heating: Forced hot air Cooling: Central air conditioning Hot Water: Gas fired hot water heater Electrical: Normal Plumbing: Normal SITE IMPROVEMENTS Parking Type and Type: Open Lot Number of Spaces: Spaces: 24 Condition: Average PROPERTY ANALYsis Functional Utility: Average Design& Appeal: Average Occupancy: Local Government Appraisal Services 18 Parking Lot.• The appraisal includes the estimated value of an open parking lot at the southwest comer of the improved property. The site is asphalt with parking spaces for 24 automobiles. Access is from an alley between South Tracy Avenue and South Black Avenue. The site measures 90' 150' for 13,900 S . The lot is zoned B-3, Central Business District. Appraisal Services 19 Subject Photographs rr Y' yYe D�11'� 4N1 Front: 20 W. Olive St. Appraisal Services 20 i„you , f i VG IMF MIN Rear: 20 W. Olive St. Appraisal Services 21 \�/£ .: y . . « ©z� Street: 20 W. Olive St. Appraisal Services 22 Assessment and Taxes The State of Montana, through the Department of Revenue, is responsible for valuing all taxable and real property. The Montana Department of Revenue is composed of six divisions: The Customer Service Division is designed to provide centralized and consistent customer service, revenue collection, and document processing for the department and for state agency partners. The Business and Income Taxes Division oversees audits and verifies compliance with Montana tax law for all taxes, and completes appraisals and assessments of industrial and centrally assessed property, The Property Assessment Division is responsible for the valuation and assessment of real and personal property throughout the state for property tax purposes. The division is comprised of a central office located in Helena and six regions. There is a local DOR office located in each county seat within the regional areas. The Resource Management Division provides service and support to the department by integrating Human Resources, Payroll and Benefits, Education and Training, Liquor Distribution, Accounting, Purchasing, and Facilities and Asset Management. The Information Technology Division provides service in the area of data support, applications support, technology support, and user assistance that enables the department to meet its business objectives. The Director's Office supports the agency's director and is composed of six work units. The basic function for each unit is: • Legal Services supervises the overall legal efforts of the department, which includes rules, policies, bankruptcy, disclosure officer and the Office of Dispute Resolution, • Tax, Policy&Research is responsible for the preparation of legislative fiscal notes that affect revenue, the analysis of legislative proposals affecting the department, and department economic data analysis. • Budget Analyst provides ongoing oversight of the department budget. • Communications manages the department's communication activities, including information dissemination, media relations, document editing, stakeholder relations, website maintenance, public involvement and special events. • Internal Quality Manager is responsible for providing management with information about the adequacy and the effectiveness of its system of internal controls and quality of its operations with established standards and management expectations. Appraisal Services 23 0 Administrative Support assists all units in the Director's Office with administrative responsibilities including, preparing for legislative committees, editing correspondence and finalizing mass mailings. The property tax is determined by multiplying the property's value by a tax rate. The Montana Legislature sets the tax rate. The taxable value is then multiplied by the mill levy. The local tax jurisdictions, city and county government, school districts, and other public services influence the mill levy. The general property tax equation is: Value x Tax Rate=Taxable Value Taxable Value x Mill Levy= General Property Tax The Property Assessment Division is responsible for determining the value of real property throughout the state for property tax purposes. State Law requires the Department of Revenue's Property Assessment Division to reappraise property periodically. Assessor Parcel #: RGH2842 Year: 2005 Taxes: Local Government/Exempt Total Assessed Value: N/A Taxable Market Value: N/A Zoning Zoning Classification:B-3 General Description: Central Business District Conformance: The subject legally conforms to the zoning compliance Zoning Change: Not Likely Source: Bozeman Zoning Regulations Lot Coverage/Floor Area. Entire lot, exclusive of required yards and parking, may be occupied by the principle and accessory units Lot Area: No minimum size Lot Width: No minimum width Yards: No minimum yards, except a 7 foot yard on Babcock and Mendenhall Streets Building Height: 55 Feet in the core area, 70 feet outside of the core area Appraisal Services 24 Highest and Best 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.1 0 Permissible Use. What uses are permitted by zoning and other legal restrictions? a Possible Use. To what use is the site physically adaptable? ® Feasible Use. Which possible and permissible use will produce any net return to the owner of the site? 0 Maximally Productive. Among the feasible uses which use will produce the highest net return, (i.e.,the highest present worth)? Highest and Best Use is As Improved The highest and best use of the subject is as improved. Valuation Methodology Three basic approaches may be used to arrive at an estimate of market value. They are: • The Cost Approach • The Income Approach • The Sales Comparison Approach The appraisal process concludes with the Final Reconciliation of the values derived from the approaches applied for a single estimate of market value. Different properties require different means of analysis and lend themselves to one approach over the others. In this appraisal: 1. A complete cost approach was applied. 2. A complete sales approach was applied. 3. A complete cost approach was applied. 1 The Appraisal of Real Estate 11'° Edition, Page 297, Appraisal Institute Appraisal Services 25 Cost Approach The Cost Approach is based on the principle of substitution- that a prudent and rational person would pay no more for a property than the cost to construct a similar and competitive property, assuming no undue delay in the process. The applied process is as follows: • Estimate the land value • Estimate the replacement cost of the building and site improvements • Estimate the physical, functional and/or external depreciation accrued to the improvements • Sum the depreciated value of the improvements with the value of the land for an indication of value Land Value The subject's land value has been developed via the sales comparison approach. We have researched and analyzed four comparables for this analysis. Comparables Map "J rN, Land Land Comparable Comparable 42 #3 L 7 Land Comparable #4 Subject L-J r 7-1 Land Comparable 41 f LI L T,--" Appraisal Services 26 Analysis Grid The above 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 Following is a sales comparison grid displaying the subject property,the comparables and the adjustments applied. Land Sales Adjustment Grid Analyst:Ross Wenger Subject Comparable I Comparable Comparable 3 Comparable 4 Address Lot 6 Huffine and FoMei Lot 24A Stoneddge Sub Lot 25 Staneddge Lot 298toneridge Sub Sale Date 04118/06 06/15/05 06/02/05 08/16/05 Sale Price $786,000.00 $307,730.00 $296,650.00 $407,133.00 Price Per SF Land $9.01 $8.28 $8.51 $8.50 Property RiqhQ Fee Simple Fee Simple Fee Simple Fee Simple •Adjustment 0.00% 0.00% 0.00% 0,00% Financin cash to seller cash to seller cash to seller cash to seller •Adjustment i 0.00% 0,00% 0.00% 0.00% Conditions of Sale] %Adjustment 0.00% 0,00% 0.00% 0.00% Economic Trends l 112612006 4/1812005 6/15/2005 6/2/2005 8116/2005 Annual%Adjustment l 0.00% 0% 0% 0% 0% Adjusted Price $9.01 $8.28 $8.51 $8.50 Location Good Good Good Good Good Comparison %Adjustment 0.0% 0.0% 0.0% 0,0% $Adiustment $0.00 $0.00 $0,00 $0.00 Land Area SF 17,180 87120 37168 34848 47898 %Adjustmentl 25M% 15.00% 15M% 20.00% $Adjustment l $2,26 $1.24 $1.28 $1.70 Final Adjusted Price $11.26 $9.52 $9.79 $10.20 Range&Average Low:$9.52,High:$11.26,Average:$10.19 Calculations $11-00 x 23,550.0 =$259,050 Reconciled Value $260,000 Land Value Conclusion Based on the above analysis,we have reconciled to a site value of$260,000, as of January 25, 2006, and subject to the Limiting Conditions and Assumptions of this appraisal. The additional parking lot is considered to have slightly higher unit value to reflect its smaller economy of scale. The lot is valued as follows: 13,900 SF x $12 per SF = $166,800 rounded to $167,000. Appraisal Services 27 Cost Analysis The next step in the Cost Approach is to estimate the replacement cost of the buildings and site improvements. The replacement cost of the subject site and building improvements are based on Marshall and Swift Cost Handbook, Local Contractors and Suppliers, Soft Costs Where appropriate, we have included the following soft costs: Engineering Architectural Permits and Legal Marketing&Leasing Commissions Contingency Developer's Profit 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. Depreciation Accrued to The Subject Component Effective Ne Life Percent Physical Depreciation: Building 10 70 14% Physical Depreciation: Site 0 1 0% Functional Obsolescence Building ............__...... .................... 0% External Obsolescence Building .......... ... .............. ........ 0% Cost Approach Conclusion Based on the analysis detailed on the following page, we have reconciled to a cost approach value of$2,760,000, as of January 25, 2006, subject to the Limiting Conditions and Assumptions of this appraisal. Appraisal Services 28 Building Improvements Cost Section 1 of 1 Item Unit Type Cost Quantity Total Building Sq. Ft. $116.93 15,210 $1,778,505 Basement Sq. Ft. $58.00 7,995 $463,710 $2,242,215 Per SF GBA $147.42 Site Improvements Item Unit Type Cost Quantq Total Landscaping Lump Sum $20,000.00 1 $20,000 Parking Lump Sum $30,000.00 1 $30,000 $50,000 $2,292,215 Per SF GBA $150.70 Soft.Costs Item Percent Type Total Engineering ................................. 5.0% % Building Cost $112,111 Architectural ................................. 10.0% %p Building Cost $224,222 Permits&Legal .......... .......... .. ................................ $0 Leasing $0 . . ............ e+ Yy $3365332 Contingency @ 2.0%m $45,844 Entrepreneurial Profit 10.0% $229,222 $2.903,613 Per SF GBA $190.90 Cost Allocation Total Building Costs ..................... ................................................... ......... $2,853,613 Total Site Costs .................... ................................................... $50,000 Depreciation Component Effective Age Life Percent Amount Physical Depreciation: Building 10 70 14% $407,659 Physical Depreciation: Site 0 1 0% $0 Functional Obsolescence Building ................................................... 0% $0 External Obsolescence Building .................. ............................. 0% $0 $407,659 $2,495,954 Per SF GBA $164.10 Land Value LandValue ........................................ .............................. ..... $260,000 Other $0 $2,755,954 $2,760,000 Per SF GBA $181.46 (:Value Software,..w,aw.atvatue.com Appraisal Services 29 Sales Comparison Approach The Sales Comparison Approach is based on the premise that a buyer would pay no more for a specific property than the cost of obtaining a property with the same quality, utility, and perceived benefits of ownership. It is based on the principals of supply and demand, balance, substitution and externalities. The following steps describe the applied process of the Sales Comparison Approach. 4. The market in which the subject property competes is investigated; comparable sales, contracts for sale and current offerings are reviewed. 5. The most pertinent data is further analyzed and the quality of the transaction is determined. 6. The most meaningful unit of value for the subject property is determined. 7. Each comparable sale is analyzed and where appropriate, adjusted to equate with the subject property. 8. The value indication of each comparable sale is analyzed and the data reconciled for a final indication of value via the Sales Comparison Approach. Cam parables We have researched and analyzed four comparables for this analysis. All sales have been researched through numerous sources, inspected and verified by a party to the transaction. Appraisal Services 30 COMPARA13LE I Property Type: Retail-Commercial Date: 09/14/05 Address: 109-111 E. Mendenhall St,, Sale Price: $1,275,000 Bozeman,MT Grantor: Ridge,LLC Price/SF GBA: $142.54 Grantee. Delaney&Co,Inc. Financing: Conventional Confirmed by. Keith O'Reilly,MAI Property Rights: Leased Fee BookfPage-. 2201 991 Legal Description; Lots 4,5&W. 1/2 Lot 6 Block H Original Plat SITE DATA Site Size(Acres): .241 Site Topography: Mostly Level Site Size(SF): 10,500 Zoning: B-3 Shape: Rectangular Parking: Surface Parking Corner: No Water/Sewer: City .Landscaping: Average Utilities: North Western EneKsy IMPROVEMENT DATA Improvements: Retail-Commercial Number of Units. 2 Gross Building Area(SF): 8,945 #Buildings: I Year Built: 1992 Condition: Good IMAGES Z NOTES @Value Software-wwwatvaluexorn Appraisal Services 31 COMPARABLE 2 Property Type: Retail-Commercial Date- 05/18105 Address., 2407 W. Main St.,Bozeman, Sale Price: $1,150,000 MT Confirmed by: Keith O'Reilly,MAI Price/SF GBA: $146.01 Grantor: The Oakwood Partnership Financing: cash to seller Grantee: GL Investments Marketing Time: 197 Book/Page: 2194181 Property Rights: Fee Simple Legal Description: Unit 9 Oakwood Square SITE DATA Site Size(Acres). Common Site Topography: Mostly Level Site Size(SF): Common Zoning: B-2 Shape: Rectangular Parking- Surface Parking Corner: No Water/Sewer: City Landscaping: Average Utilities: North Western Energy IMPROVEMENT DATA Improvements: Retail-Commercial Number of Units. I Gross Building Area(SF): 7876 #Buildings&Stories : I Year Built: 1994 Condition: Good IMAGES r. NOTES @Value software-www.atvalue.com Appraisal Services 32 COMPARABLE 3 Property Type: Retail-Commercial Date: 02/19/03 Address: 1709 W.College St., Sale Price: $1,740,000 Bozeman,MT Confirmed by: Keith O'Reilly,MAI Price/SF GBA: 5136.19 Grantor: Venture West, Inc. Financing; cash to seller Grantee: Gallatin County Marketing Time: 360 Book/Page: 2142111 Property Rights: Leased Fee Legal Description: Lot 2A College Park Professional Center SITE DATA Site Size(Acres): 0.719995409 Site Topography: Mostly Level Site Size(SF): 31,363 Zoning: B-P Shape: Rectangular Parking: Surface Parking Corner: No Water/Sewer: City Landscaping: Avery Utilities: North Western Energy IMPROVEMENT DATA Improvements: Retail-Commercial Year Built: 1991 Gross Building Area(SF): 12776 Condition: Good IMAGES NOTES @Value Software-www.atvalue.com Appraisal Services 33 COM�PARABLF,4 Property Type: Office Date: 12/01105 Address: 115 W.Kagy Blvd., Sale Price: $895,000 Bozeman,MT Confirmed by: Jerry Gossel Price Per SF GBA: $70.52 Confirmed with: Jason Parks Grantor: Plaza 11,LLP Financing: 1031 Exchange Grantee: Parks Marketing Time: 23 Book/Page: 2211365 Property Rights: Leased Fee SITE DATA Site Size(Acres): 0.408861341 Site Topography: Mostly Level Site Size(SF): 27,920 Zoning: B-1 Shape: Rectangular Parking: Surface Parking Corner: No Water/Sewer: City Landscaping: Average Utilities: North Westem Energy IMPROVEMENT DATA Improvements: Office Number of Units: 8 Gross Building Area(SF): 12692 #Buildings&Stories : 2 Year Built: 1979 Condition: Average IMAGES NOTES @Value Software-www.atvalue.com Appraisal Services 34 Carnparabbles Map IN F 2.. TRtl. •, ,�A U'' r v Rucv 2R_„ �r udk:haw �, �• W% V4 ; wp 'j0 g �•� y f.•n R M' rvl Mr A _ i x p a n wrf,NdKS.sr -12 w ° x e... . � a c � S bje t 6 ti,v9 +4r'w aKXB y. MTN µ a 9stw qq BEAM �i cKrop`i x xru� wp AIM,P,W fu^dm �.... „., '� ��•.;,�. � q Analysis Grid The above 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 On the fallowing page is a sales comparison grid displaying the subject property,the comparables and the adjustments applied. Appraisal Services 35 Improved Sales Adjustment Grid Analyst:Ross Wenger Sub"ect Comparable I Comparable 2 Comparable 3 Comparable 4 Address 109 E.Mendenhall St. 2407 W.Main St. 1709 W.College St. 115 W.Kagy Blvd. Sale Date Confirmed 09/14/05 05118/05 02119/03 12/01/05 Sale Price $1,275,000,00 $1,150,000.00 $1,740,000M $895,000.00 Price Per SF GBA $142.54 $146.01 5136.19 $70-52 Property Rlqhis Leased Fee Fee Simple Leased Fee Leased Fee •Adjustment l 0,00% 0,00% 0-5-0-0/;- 0.00% Financin Conventional Cash to seller Cash to seller 1031 Exchange •Adjustment l U0% 0.00% 0.6-0% 0.00% Conditions of Sal� %Adjustment 0.00% 0,00% 0.00% 0,00% Economic Trends 1125/2006 9/14/2005 5/18/2005 2/1912003 1211/2005 Annual%Adjustment', 0,00% 0% 0% 0% 0% Adjusted Price $142.54 $146.01 $136.19 $70.52 Location Good Good Good Good Average Comparison %Adjustment M% U% 0.0% 15M% $Adjustment $0.00 $0.00 $0.00 $10.58 Gross Building Area 15210 8945 7876 12776 12692 Comparison %Adiustment -10.00% -10-00% 0.0% 0,0% $Adjustment ($14,25) ($14.60) $0,00 WOO Gross Basement Area 7995 None None None None Comparison %Adjustment 10.00% 10-00% 10.00% 10.00% $Adiustment $1415 $14,60 $13.62 $7.05 Year Built 1959 1992 1994 1991 1979 Comparison %Adjustment U% 0,0% 0.0% 0.0%® $ Adjustment $0.00 $0.00 $0.00 $0,00 Property Condition Good Good Good Good Average Comparison %Adjustment U% 0.0% 0.0% 20,00% $Adjustment $0,00 $0,00 $0.00 $14.10 Final Adjusted Price $142.64 $146.01 $149.81 $102.25 Net Adjustments$ WOO $0.00 $13.62 $3133 Range&Average Low$102.25,High:$149.81,Average:$135.15 Calculations $146.00 x 15,210 $2,220,660 Reconciled Value $2,220,000 $145.96 Appraisal Services 36 Comparable Sale Adjustments Real Property Rights Real property rights can be sold, they may be the sole subjects of the contract or the contract may include other rights, less than all of the property rights, or even another property or properties. The comparable sales all have either fee simple or leased fee property rights; no adjustment was made for differences of property rights. Financing The financing terms of the transaction, the terms provided by the seller can affect the price of the comparable sale. According to the Realtors, all of the sales sold with cash equivalent terms that did not influence the price negotiated in the transaction. Conditions of Sale The motivation of either the buyer or the seller in a transaction to determine if in fact the comparable sale was at arm's-length. In many situations the conditions of sale significantly affect the transaction price. The comparable appear to all be arm's length transactions. Expenditures Made Immediately After Purchase An informed buyer will consider expenditures that will have to be made upon purchase of the property. These expenditures may influence the price the buyer agrees to pay for the property. These expenditures may include; cost to cure deferred maintenance, cost to demolish or remove any portion of the improvement, cost to petition for zoning changes, or costs to remediate environmental contamination. Market Conditions The market condition is also referred as a"time" adjustment. The market conditions may have shifted over a period of time. Any adjustment is made because of changes in market conditions; time is not the cause of the adjustment. Appreciation or depreciation of property values is the cause of the adjustment and time is the measure of the adjustment. If market conditions have not changed, no adjustment is made. All of the comparable sales are considered to be recent sales. Economic Trends The probable direction, extent, impact, and cause of change within the local economy that affects the value of real property,the changes include; population, net household formation, diversity of the economic base of the community,the level and stability of employment, wage rates, and household or family income. Location Locational characteristics of comparable properties may differ from those of the subject property. Most properties within a market area have similar characteristics;however variations may exist with that area of analysis. A properties location is analyzed in relation to the location of other properties. Sales of physically similar properties situated in different locations have been analyzed. In the Neighborhood Analysis, on page 11, we described the subject neighborhood and researched comparable sales in the same neighborhood or in similar economic neighborhoods. Appraisal Services 37 Comparable sales #1, #2 and#3 are considered to be similar economic neighborhoods. Comparable sale #4s location is considered to be inferior. Physical Characteristics The difference in physical characteristics between the subject property and the comparable sales may include differences in building size, quality of construction, architectural style, building materials, age, condition, functional utility, site size, attractiveness, amenities, and an-site environmental conditions. The comparable sales were adjusted for their differences in GBA and ,condition. Economic Characteristics Economic characteristics include all attributes of the property that directly affect that properties income. This element of comparison is applied to income producing properties. The economic characteristics that affect income include operating expenses, quality of management, tenant mix, rent concessions, lease terms, lease expiration dates, renewal options, and lease provisions such as expense recovery clauses. Investigation of these properties is crucial to the proper analysis of the comparables and development of the final opinion of value. Use/Zoning The difference in the current use or the highest and best use of a comparable sale and the subject property is addressed. Examples of differences of current use or differences in highest and best use include; properties that have been converted and properties that either have zoning requirements or properties have gone through zoning changes. All of the comparable sales are considered to have similar zoning requirements. Non-realty Components of Value Non-realty components of value such as personal property, business concerns, .and other items that do not constitute real property but are included in either the sale price of the comparable or the ownership interest in the subject property need to be analyzed and considered. Sales Comparison Approach Conclusion Based on the above analysis, we have reconciled to a value of$2,220,000, as of January 25, 2006, and subject to the Limiting Conditions and Assumptions of this appraisal. Appraisal Services 38 Income Approach - Direct Capitalization Analysis The steps involved in capitalizing the subject's net operating income are as follows: • Develop the subject's Potential Gross Income (PGI)through analysis of the subject's actual historic income and an analysis of competitive current market income rates. • Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI). • Develop and subtract operating expenses to derive the Net Operating Income (NOI). • Develop the appropriate capitalization rate (R.). • Divide the net operating income by the capitalization rate for an estimate of value through the income approach. Income & Expenses Current Income The table below summarizes the subject's historic, current and owner's income budget. Based on these data, we have prepared a projection for this appraisal. The following income and expense items were modified: • Income. The estimated income was based on market rents,the most probable rent that a property should bring in a competitive and open market. • Expenses: The leases in the Bozeman area are typically NNN,the only expense associated with a NNN lease is the Management expense. Vacancy and collection loss were calculated at 5% and the management expenses were calculated at 5%. Capitalization Rate The capitalization rate is the factor that coverts the stabilized net operating income (NOI) to a present value. It is the ratio of net income to value or sale price. NOI+ Sale Price = Capitalization Rate Market Extracted Rates The table below details capitalization rates extracted from the market. Appraisal Services 39 Comparable Property Capitalization Rates Address ci!y Sale Price Date NOI Cap Rate 2407 W.Main St. Bozeman $1,150,000 05/18/05 $98,900 8.60% 1709 W.College St. Bozeman $1,740,000 02/19/03 $140,800 8,09% Band of Investment This technique utilizes lender and real estate investor investment criteria to develop, or synthesize a capitalization rate. There are four key inputs necessary for this method: The loan-to-value ratio (M) The mortgage interest rate (i) ➢ The loan term(n) The equity cap rate or equity dividend rate (RE) Formula: RmxM =rate RE x (I-M) =rate =Cap Rate (P,.,,) Debt Coverage Ratio Analysis This technique develops a capitalization rate based on typical mortgage terms. There are four variables necessary for this method: • The loan-to-value ratio (M) • The mortgage interest rate (i) • The loan term(n) • The debt coverage ratio (DCR) Formula: Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant= R,, or, DCR x M x Rm=P, The table below details the Band of Investment and Debt Coverage Ratio Analyses calculations. Appraisal Services 44 Capitalization Rate Calculations Capitalization Rate Variables Mortgage Interest Rate 6.00% Loan Term 20 Years Loan To Value Ratio 80% Debt Coverage Ratio 1.18 Equity Dividend Rate 7.00% Band of Investment Analysis Mortgage Constant Loan Ratio Contributions 0.085971727 x 80,0% = 6.88% Equity Dividend Rate Equity Ratio 7,00% x 20% = 1.40% Band of Investment Capitalization Rate = 8.28% Debt Coverage Ratio Analysis Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant 1.15 x 80.0% x 0.08597 = 0.07909 Debt Covers e Ratio Capitalization Rate = 7.91% Capitalization Rate Summary and Conclusion Capitalization Rate Reconciliation Indicator _2apitallization Rate Comparable Properties 8.1% -8.6% Band of Investment 8.28% Debt Coverage Ratio 7.91% Reconciled Capitalization Rate 8.20% Capitalization to Value Income Capitalization Per Unit Per SF Potential Gross Income $245,700 $122,850 $10.59 Vacancy& Collection Loss(5.0%) $12,285 $6,143 $0.53 Effective Gross Income $233,415 $116,708 $10.06 Expenses(5.3%) $12,285 $6,143 $0.53 Net Operating Income $221,130 $110,565 $9,53 Capitalization Rate 810% 8.20% 8.20% Indicated Value $2,696,707 $1,348,364 $116.21 Rounded $2,700,000 $1,350,000 $116.35 Income Approach Conclusion Based on the analysis detailed above, we have reconciled to an income approach value of $2,700,000 , as of January 25, 2006, subject to the Limiting Conditions and Assumptions of this appraisal. Appraisal Services 41 Income Approach The Income Approach to value is based on the present worth of the future rights to income. This type of analysis considers the property from an investor's point of view, the basic premise being that the amount and quality of the income stream are the basis for value of the property. Direct Capitalization Analysis The steps involved in capitalizing the subject's net operating income are as follows: Develop the subject's Potential Gross Income (PGI)through analysis of the subject's actual historic income and an analysis of competitive current market income rates. Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI). Develop and subtract operating expenses to derive the Net Operating Income (NOI). Develop the appropriate capitalization rate (R,,). ➢ Divide the net operating income by the capitalization rate for an estimate of value through the income approach. Potential Gross Income (PG1) Market Rent In order to determine if the subject's rent is at, above or below market levels, we have researched the following rental data. The potential gross income was estimated using current market rents that the subject is capable of producing. Appraisal Services 42 Comparable Rent Adjustment Grid Analyst:Ross Wenger Subject Comparable 1 Comparable 2 Comparable 3 Comparable4 Address 20 W.Main St. 238 E. Main St. 1933 N.22nd Ave. 354 Stadium Dr. city Bozeman Bozeman Bozeman Bozeman Lease Rate $48,000.00 $80,962.80 $50,328.50 $94,946,00 Lessee Name Harley Davidson Barrel Intermountain State Farm Lessor Name David Brekke Ann Milner DMC Inc Mike Huemphner Conditions of Leasel NNN NNN NNN NNN %Adjustment 0.00% 0,00% 0.00% 0,00% Economic Trends 1/2512006 1/011900 110/1900 1/011900 1/0/1900 %Adjustmen 0.00% 0% 0% 0% 0% Adjusted Rent $16.00 $13.40 $15,50 $14.50 Location Good Good Good Good Good Comparison %Adjustment 0.0% 0.0% 0.0% 0.0% EAdjustment $0.00 $0.00 $0.00 $0,00 Gross Building Area 15210 3000 6042 3247 6548 %Adjustment -20.00% -15,00% -20.00% -15-00% 1 Adjustment ($3,20) ($2.01) ($3.10) ($2.18) GBA Below Grade 7995 0 0 0 G %Adjustmentl 5.00% 5.00% 5.00% 5.00% $ Adjustment $0.80 $0.67 $0.78 $0.73 Final Adjusted Rent $13-60 $12.06 $13.18 $13.05 Net Adjustments ($2.40) ($1.34) ($2.33) ($1.45) Range&Average Low:$12.06,High:$13.60,Average:$12.97 L Reconciled Rent $13.00 Market Rent Reconciliation The comparable rents were reconciled using the comparables above. The comparable leases were considered to be similar properties and were adjusted for their differences. In this market the unit of measurement for commercial office buildings are by the square foot. Based on the above analysis, we have reconciled a value of$13 per square foot as the market rate for the subject. Income Projection Income Projection Property Name Alfred M.Stiff Professional Building Analyst Jerry R.Gossel Property Address 20 E.Olive St. Firm Appraisal Services MT,59715 Date 1125/2006 Size Number Income Market Contract Rent %of Tenant (SF) of Units T Rent Rent Applied Income Total 1 1st&2nd Floor 15,210 1 $/SF/Year $13,00 Market $197,730 80.5% 2 Basement 7,995 1 $/SFNear $6,00 Market $47,970 19.5% Totals 23,205 2 Potential Gross Income $245,700 Vacancy&Collection Loss 5.0% Effective Gross Income $233,415 Other Income $0 Total Effective Gross Income $233,416 Effective Gross Income Per SF $10.06 Appraisal Services 43 Vacancy and Collection Loss Based on a review of the market conditions and the subject's operating history we have projected vacancy and collection loss at 5.0%. Income and Expense Statement Income Summary and Expense Projection Income Amount % of Total Effective Gross lncorne: Section 1 $233,415 100% Total Effective Gross Income Per SF $10.06 Expense lye2 %or$ Amount Per Unit 1 Management Lump Sum $12,285 $12,285 $6,143 Total Expenses: $12,285 $6,143 Expense Patio: 5% Net Operating Income: $221,130 Net Operatin2 Income Per SF: $9.53 Capitalization Rate The capitalization rate is the factor that coverts the stabilized net operating income (NOI)to a present value. It is the ratio of net income to value or sale price. NOI- Sale Price =Capitalization Rate For example, if a property sells for $500,000, and has a stabilized NOI of$50,000,the indicated capitalization rate is 10%. Market Extracted Rates The table below details capitalization rates extracted from the market. Comparable Property Capitalization Rates Address city Sale Price Date NOI Cap Rate 2407 W.Main St. Bozeman $1,150,000 05118/05 $98,900 8,60% 1709 W. College St. Bozeman $1,740,000 02/19103 $140,800 8.09% Band of Investment This technique utilizes lender and real estate investor investment criteria to develop, or synthesize a capitalization rate. There are four key inputs necessary for this method: 1. The loan-to-value ratio (M) 2. The mortgage interest rate (i) 3. The loan term (n) 4. The equity cap rate or equity dividend rate (RE) The mortgage variables are used to build the mortgage constant(Rm), which is the total amount of the payments made in one year, expressed as a percentage of the original loan amount. Appraisal Services 44 Payments x 12/Original Loan Amount= Mortgage Constant(RM) The equity cap rate is the annual return to the investor, expressed as a percent of the original amount invested. The annual return to the investor is also known as the equity dividend rate; it is the profit remaining after debt service and all other expenses. After Debt Service Profit/Equity Investment= Equity Cap Rate (RE) Note that the equity cap rate is not the same (usually, that is) as the equity yield rate. The equity yield rate reflects the total return to the investor over the life of the investment. Factors such as appreciation and mortgage pay down affect and usually increase this return to a point higher than the equity dividend rate. In markets where substantial appreciation is expected, investors will often accept a low or even negative equity dividend rate, anticipating a compensating payoff when the property is eventually sold. In markets where little appreciation is expected, much more weight is given to the annual equity dividend. Formula: RmxM =rate RE x (I-M) =rate = Cap Rate (Ro) Debt Coverage Ratio Analysis This technique develops a capitalization rate based on typical mortgage terms. There are four variables necessary for this method: I. The loan-to-value ratio (M) 2. The mortgage interest rate (i) 3. The loan term (n) 4. The debt coverage ratio (DCR) Items I through 3 are discussed above under the Band of Investment section. In this method it is also used to develop the mortgage constant(Rm). The debt coverage ratio is the factor by which income exceeds debt on an annual basis. Formula: Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant= R, or: DCR x M x Rm=Ro We have researched mortgage rates and terms typical of the subject market segment for the Bozeman area. The table below details the Band of Investment and Debt Coverage Ratio Analyses calculations. Appraisal Services 45 Capitalization Rate Calculations Capitalllzation Rate Variables Mortgage Interest Rate 6.00% Loan Term 20 Years Loan To Value Ratio 80% Debt Coverage Ratio 1.15 Equi Dividend Rate 7,00% Band of Investment Analysis Mortgage Constant Loan Ratio Contributions 0.085971727 x 80.0% = 6.88% Equity Dividend Rate Equity Ratio 7,00% x 20% = 1 A0% Band of Investment Capitalization Rate = 8.28% Debt Coverage Ratio Analysis Debt Coverage Ratio x Loan to Value Ratio x Mortgage Constant 1.15 x 80.0% x 0,08597 = 0,07909 Debt Coverage Ratio Capitalization Rate = 7.91% Survey Data Discuss investor or published survey data Capitalization Rate Summary and Conclusion Capitalization Rate Reconciliation Indicator Capitalization Rate Comparable Properties 8,1% -8.6% Band of Investment 8,28% Debt Coverage Ratio 7.91% Reconciled Capitalization Rate 8.20% Capitalization to Value Income Capitalization Per Unit Per SF Potential Gross Income $245,700 $122,850 $10-59 Vacancy&Collection Loss (5.0%) $12,285 $6,143 $0.53 Effective Gross Income $233,415 $116,708 $10,06 Expenses (5.3%) $12,285 $6,143 $0.53 Net Operating Income $221,130 $110,565 $9.53 Capitalization Rate 8.20% 8,20% 8.20% Indicated Value $2,696,707 $1,348,364 $116.21 Rounded $2,700,000 $1,350,000 $116.35 Appraisal Services 46 Income Approach Conclusion Based on the analysis detailed above, we have reconciled to an income approach value of $2,700,000 , as of January 25, 2006, subject to the Limiting Conditions and Assumptions of this appraisal. Appraisal Services 47 Final Reconciliation The process of reconciliation involves the analysis of each approach to value. The quality of data applied,the significance of each approach as it relates to market behavior and defensibility of each approach are considered and weighed. Finally, each is considered separately and comparatively with each other. Value Indications Land Value: $260,000 Cost Approach: $2,760,000 Sales Comparison Approach: $2,220,000 Income Approach: $2,700,000 Parking Lot: $167,000 Cost Approach The Cost Approach was considered the least reliable method of valuation. Due to the lack of recent land sales in the Central Business District the most similar land sales were used to estimate the land value. The building costs for the improvements were based on Marshall & Swift Valuation Services, local area suppliers and contractors' costs and are considered to be reliable cost data. The improvements are functional in design and do not have any functional depreciation. Sales Comparison Approach The Sales Comparison Approach was considered a reliable method of valuation. The comparable sales were considered to be similar, proximate, and recent. Income Approach The Income Capitalization Approach was also considered a reliable method of valuation, the due to the income producing characteristics of the comparable properties. Justification for market rents, operating expenses, average vacancies, and the comparable capitalization rates were adequately documented from the market. Value Conclusion Based on the data and analyses developed in this appraisal, we have reconciled to the following value conclusions, as of January 25, 2006, subject to the Limiting Conditions and Assumptions of this appraisal. Reconciled Value Conclusion Premise: "As Is" Estate: Fee Simple Value Conclusion: $2,700,000 Parking Lot: $167,000 Appraisal Services 48 Certification Statement We certify that, to the best of our knowledge and belief- • The statements of fact contained in this report are true and correct, • The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions and conclusions. • We have no present or contemplated future interest in the property that is the subject of this report, and we have no personal interest or bias with respect to the parties involved. • Our compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client,the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. • Our analyses, opinions, and conclusions were developed and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP). • We have made a personal inspection of the property that is the subject of this report. • No one provided significant professional assistance in the development of the conclusions contained in this report. • We certify sufficient competence to appraise this property through education and experience, in addition to the internal resources of the appraisal firm. • The value conclusion(s) and other opinions expressed herein are not based on a requested minimum value, a specific value or approval of a loan. 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