CAPITALIZATION RATE ANALYSIS

Transcription

1 LANDAMERICA VALUATION CORPORATION Riverwood 100 Building, Suite Riverwood Parkway, SE Atlanta, GA (Fax) CAPITALIZATION RATE ANALYSIS OF COMMERCIAL PROPERTIES LOCATED IN SHELBY COUNTY, TENNESSEE DATE ISSUED: NOVEMBER 23, 2004 LVC PROJECT NUMBER: PREPARED FOR RITA CLARK SHELBY COUNTY ASSESSOR 160 NORTH MAIN STREET ROOM 550 MEMPHIS, TENNESSEE PREPARED BY JOHN W. CHERRY, JR., MAI, CRE KAREN BURKHART DICK, CRE FOR QUESTIONS OR MORE INFORMATION ABOUT THIS REPORT, PLEASE CONTACT YOUR LVC NATIONAL CLIENT MANAGER, JOHN W. CHERRY, JR. AT (404) EXT. 54.

2 TABLE OF CONTENTS Introduction... 1 Capitalization Rates...4 Memphis Economic Overview Office Properties...15 Industrial Properties Retail Properties...24 Hotel/Motel Properties Multi-Family Properties Assisted Living Facilities Summary and Observations Addendum...40 LVC Project No

3 INTRODUCTION The Assessor of Property for Shelby County, Tennessee (the County ) has retained LandAmerica Valuation Corporation ( LVC ) to prepare a Capitalization Rate Analysis. The County is required by state law to reappraise approximately 10,000 to 15,000 properties by the income approach for ad valorem tax purposes for Year This report will assist the County in selecting appropriate overall capitalization rates for five core property types: office, industrial (warehouse and light industrial), retail, hotels, and multi-family properties (apartments). Net lease properties and assisted living facilities are also included in this analysis due to the recent popularity of these properties among investors. The effective date of our market research occurred from June through October Property transactions were predominately utilized from years 2003 through year to date A few sales were used from the fourth quarter of This report provides a written summary of our findings, organized under the following headings: Capitalization Rates Memphis Economic Overview Office Properties Industrial Properties Retail Properties/ Net Lease Properties Hotel Properties Multi-Family Properties Assisted Living Facilities These sections are preceded by an explanation of terms used in the report, and a description of our scope and methodology. Conversely, the report is followed by an Addendum comprised of three sections: Addendum I Certification Addendum II Standard Conditions Addendum III Qualifications DEFINITIONS A clear definition of certain terminology is necessary for an understanding of the analysis and results of this study. Thus, the following terms, which are critical to determination of capitalization rates, are defined and explained. Capitalization The conversion of income into value. Capitalization Rate Any rate used to convert income into value. Cash Equivalency The procedure in which the sale prices of comparable properties sold with atypical financing are adjusted to reflect typical market terms. Institutional-Grade Real Estate Real property investments that are sought out by institutional buyers and have the capacity to meet generally prevalent institutional investment criteria. LVC Project No

4 Overall Capitalization Rate (cap rate) An income rate for a total real property interest that reflects the relationship between a single year s net operating income expectancy and the total property price or value; used to convert net operating income into an indication of overall property value Net Operating Income (NOI) The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted; may be calculated before or after deducting replacement reserves. NOI is also prior to deducting leasing commissions and tenant improvements. Replacement Allowance (Reserves) An allowance that provides for the periodic replacement of building components that wear out more rapidly then the building itself and must be replaced during the building s economic life. As these terms apply directly to this study, Overall Capitalization Rate ( cap rate ) and Net Operating Income (NOI) are the most critical to our analysis. When referring to cap rate and NOI within this report we are implying that the NOI reflects a property s income potential at normal or stabilized operating levels regarding rent, vacancy, and expenses. That is, the property is at or near stabilization. Consideration is also given to the point in time of the NOI estimate. That is, the NOI based on actual, preceding year, current, or budgeted estimates. In estimating cap rates, consistency in the analysis of the transactions is essential. This involves the other definitions including Reserves and Cash Equivalency. In verifying sales and extracting cap rates, we were certain to apply consistent analysis regarding financing and reserves. The primary data source for this study was the Chandler Reports which is a local Memphis Real Estate Research and Consulting firm providing market data on transactions in Shelby County. Also, the commercial appraisers employed by Shelby County were interviewed regarding their personal knowledge of transactions and information in their databases. Improved property sales from late 2002, 2003 and 2004 were considered as well as current negotiations for properties under contract. Also, interviews were conducted with investment companies active in the Shelby County market and investors in other southeastern locations familiar with and/or with assets in the Shelby County area. The quality and amount of data available for transactions varies greatly depending on the confidentiality of the information and willingness of the parties involved to release the information. Thus, for verified sales for which there was no income data available, the consultants have estimated income and expenses from market data to estimate an implied capitalization rate. SCOPE AND METHODOLOGY The scope of services for this engagement encompassed the following methodology: Meeting with the Appraisal Staff of the Shelby County Assessor s Office to discuss the study, review the process and approach. Review the available data and information accessible in the County Assessor s office and other sources of transactional data. Interview appraisers for a historical perspective on the process and develop a best practices approach to the study. LVC Project No

5 Determine a reasonable sample size of improved sales to accomplish the study for each property type concerned; but not less than your minimum required. Determine the most acceptable approach to developing net operating incomes for the various property types regarding reserves and vacancy. Discuss which approaches and techniques are most acceptable and should be employed to support the capitalization rates such as transactions, investor interviews and surveys such as the Korpacz Real Estate Investor Survey. Develop a matrix of capitalization rates appropriate for the building classes and subcategories and, Review our conclusions with the County and submit our report. Additionally, we have prepared an economic overview of Memphis/Shelby County to better understand the nature of the economic base, demographic trends, and the area s future outlook. Finally, a brief market overview of the current status of each of the five basic property types is presented for better understanding of the current position of these properties in the real estate cycle. Only those sales which could be verified by one of the participating parties, a third party such as a broker or attorney, or from a reliable source, were utilized in our sales database. Many sales were not concluded to represent arm s length transactions due to a variety of reasons which could include internal relationships between buyer and seller, deed-in-lieu of foreclosure transaction, creative financing, quit claim deeds or transfers, condemnation proceedings, and other legal transactions which may cause us to reject a sale. Additionally, sales of vacant buildings and in some cases owner occupied buildings or opportunity or turnaround sales may or may not be acceptable transactions from which to generate and overall cap rate. The marketplace is inconsistent with its treatment of reserves for replacement in the analysis of overall rates. For certain property types such as apartment and hotels/motels, reserves are typically included as an expense item above the NOI line. However, for other property types such as office, retail and warehouse, reserves are not typically included as an expense prior to estimating NOI. In estimating cap rates, care must be taken to be consistent in the application of reserves. Thus, in this analysis, based on market derived data, capitalization rates are presented for each property type with and without reserves for replacement. The following chart depicts typical reserves as taken from the 3rd Quarter 2004 Realtyrates.com investor survey. AVERAGE RESERVE REQUIREMENTS Per SF Per Unit % of EGI Property Type Min. Max. Typical Min. Max. Typical Min. Max. Typical Apartments $150 $250 $250 Healthcare/ Assisted Living $250 $350 $250 Industrial $0.10 $0.20 $0.15 Lodging 4.0% 5.0% 5.0% Office $0.15 $0.20 $0.20 Retail $0.15 $0.25 $0.20 This survey and market derived information from buyers and sellers was used in estimating reserves for each property type. LVC Project No

6 CAPITALIZATION RATES The purpose of this section is to define capitalization rates ( cap rates ) and their use in this study. It is organized in five sub-sections: Derivation of capitalization rates Capitalization rates selection criteria Direct capitalization strengths and weaknesses Property class transition Capitalization rate spreads DERIVATION OF CAPITALIZATION RATES A cap rate reflects a relationship of a property s single year of net operating income estimate as compared to its sales price. Cap rates, thus, can vary based upon the NOI which is utilized in this analysis. The NOI could reflect the actual historical NOI, the year to date annualized, or next years budgeted NOI. Most market transactions are based on the next twelve month budgeted NOI or current in-place NOI. This is another area of inconsistency which should be followed and understood in developing cap rates. Cap rates can be derived from abstraction from market sales, mathematical formulas, and investor surveys. Emphasis in this study has been placed upon actual market transactions and investor surveys-both personal interviews and published studies. Published Studies: Most surveys are performed on a national or regional basis. Of the five surveys we considered, only one (Real Estate Research Corporation) addressed the Memphis area specifically. Those surveys considered in this report are the Korpacz Real Estate Investor Survey, National Real Estate Index/CB Richard Ellis, RealtyRates.com, Real Estate Research Corporation, and Cushman and Wakefield s Real Estate Outlook. These surveys typically provide a fairly wide range of cap rates applicable to certain property types and generally involve only investment or institutional grade properties. Each of the surveys cited in this study reflect what is commonly referred to as investment grade property. This typically includes only class A and good class B level real estate. The Real Estate Outlook does specifically cover Class A and Class B properties. Thus, a spread between Class A snd B properties can be determined from that survey. The CB Richard Ellis survey reports on Class A, B, and C properties. Also, the Korpacz Real Estate Investor Survey summarizes data on institutional grade versus non-institutional grade property rates. Non-institutional grade, according to Peter Korpacz, would be properties ranked less than an A or B class property. Thus, these two surveys can assist in measuring the spread between sub-classes of the core property types. Personal Interviews: We conducted a telephone survey of nine real estate investors and advisors to gain insight into the Memphis investment climate and cap rates. The investors include: Hospitality Consulting Group, Industrial Developments International, ING, LJ Melody, Northwestern Mutual, Panattoni, Sperry Van Ness, Staubach Company, LVC Project No

7 and Trimont Real Estate Advisors (Lehman Brothers). Although only two are Memphisbased, six either own property in Memphis or have consummated a recent deal in Memphis. All agree that there is too much capital in real estate chasing a few deals, which, coupled with a low interest-rate environment, has caused cap rates to fall to an alltime low. The majority expect cap rates to remain relatively flat to slightly declining in the near-term, assuming interest rates remain low and available properties remain scarce; however, these low rates are likely not sustainable over time. Other key findings of the personal investor interviews are: o Office: Class A cap rates in Memphis are in the % range, but older (1980svintage) properties are selling in the 10% cap range. Memphis office properties tend to trade 100 basis points higher than first-tier cities. o Industrial: Class A bulk distribution properties in Memphis are trading at %, depending on location, quality and tenant credit. Lease structure is typically on a triple net basis. Quality flex-type properties are selling as high as a 9.0% cap rate. New industrial product is concentrated in the Southeast submarket due to the availability of land, airport (cargo), interstate highway system, and inter-modal facilities (five rail lines). This submarket includes DeSoto County, Mississippi, which has some tax advantages compared to Shelby County. However, Shelby County will offer tax abatements and the State of Tennessee has no state income tax. o Retail: Anchored shopping centers in the Southeast are selling in a cap range of 7.5% to 10.5%, depending on the credit and remaining lease term of the anchor tenant. Second-tier cities, like Memphis, are trading 50 to 100 basis points higher than top-tier Southeastern cities. That said, retail tends to be more of a national type of investment compared to other asset classes (e.g., office, apartments) due to the national or regional nature of anchor tenants. o Hotels: Full-service hotels are trading at a cap rate range of %, with the Memphis market selling at the top end of the range. Hotel cap rates are applied to prospective net income (e.g., next 12 months). Cap rates for well-branded limited-service hotels generally fall in the same range as full-service hotels; however, rates can climb as high as 14% or more for under-performing limitedservice properties that offer a turn-around investment opportunity. o Apartments: Class A apartments in Memphis are trading in the 6.0 to 6.5% cap rate range (applied to the NOI line). A more sustainable range is %. Apartments offer an attractive investment opportunity today due to their high returns and shorter leases relative to other asset classes. o Net Lease Properties: Net lease deals are all about the credit of the tenant. For that reason, there is not a large differential in cap rates between Memphis and other markets. Good-credit deals (e.g., CVS, Walgreen s) can trade in the % cap rate range, while average credit deals (e.g., Auto Zone, Dollar General) might trade in the % range. The cap rates can vary depending on the remaining lease term. LVC Project No

8 CAPITALIZATION RATES SELECTION CRITERIA There are various economic and physical factors which impact the risk of a particular investment and its implied capitalization rate. These criteria should be understood in the application of and selection of cap rates. The Economic and Physical factors that impact risk are considered to be as follows: Ownership position This refers to the interest or the estate being transferred such as fee simple, leased fee, or leasehold. These interests are created by leases, mortgages, etc. and can impact the risk ascribed to an investment. Management burden This varies by property type and can influence expense ratios and, thus, cap rates accruing to certain property types. Use The marketability of a property can be impacted by its use as with special purpose properties versus general purpose properties. Location This, of course, is critical to the success of a real estate development and involves factors such as demographics, transportation, exposure, and marketability. Geographical/Political Forces These factors can influence either positively or negatively the willingness of investors to purchase or develop property in the area. These issues could involve zoning, transportation issues, utility and infrastructure issues, and real estate tax rates. Financing The availability and price of debt has a direct impact on new development and property transactions. As mentioned, cap rates analyzed herein and assume an unleveraged position or cash equivalent financing. Current alternative yields This consideration involves rates of return available in the current marketplace from alternative investment vehicles such as mortgages, bonds, and certificates of deposit. Ease of entry into development of product type Certain property types may take years to conceive, approve and develop whereas others are easily processed though the development cycle and thus, subject to overbuilding. This feature can restrict supply and influence cap rates. Property Specific Criteria include the following: Operating expense ratio Typically, a higher expense to gross income ratio, reflects a higher capitalization rate. Remaining economic life Real property is a depreciating asset and as properties age they experience class or quality transition, their remaining economic life shortens and the capitalization rates generally increase. Occupancy/Rollover Risk Overall rates are typically analyzed on an as if or stabilized basis. High vacancy rates or near term tenant expirations or rollover risk can greatly influence the cap rate acceptable to a buyer. Potential for growth in NOI Growth in NOI can influence the current years overall rate. This growth can come from market conditions, stepped base rent increases, or percent rent clauses. LVC Project No

9 Tenancy A real estate investment is basically a portfolio of leases. The lease terms and conditions, type lease, creditworthiness of the tenants, and quantity, quality, and durability of the income stream all impact the risk associated with the investment. DIRECT CAPITALIZATION STRENGTHS AND WEAKNESSES An overall rate is applied to the net operating income through the process called direct capitalization. As discussed, the cap rate is typically applied to a stabilized or typical operating year NOI. There are certain strengths and weaknesses in utilizing an overall rate in property valuation. The strengths are: Satisfies all of investors return requirements, that is, return on and of the investment. Simple and easily understood and applied. Reliable for income streams without variable income growth rates. Widely used. There are also certain weaknesses that need to be understood regarding the application of an overall rate. Difficult to apply to an un-stabilized income stream due to vacancy or significant spikes in market rents. Difficult to apply to multi-tenant properties with long term leases that have substantial near term roll-over of tenants. Inconsistency of application regarding the calculation of NOI and reserves. PROPERTY CLASS TRANSITION Over time, properties tend to transition between quality classes. That is, a new property rated a class A grade at its completion may transition to a class B after five or ten years depending on market conditions. Likewise, a class B property that receives significant capital infusion may upgrade to a class A rating. The determination of property class or quality is based upon the analysis of several factors including location, size, age, quality and condition, occupancy and tenancy, and rent levels. To a large extent, these factors are controlled through asset management, maintenance and capital expenditures. However, external factors such as new supply, changing economic conditions, design and amenities can also cause a property to transition between classes. As such, it is necessary to review property class ratings periodically to insure that each is properly categorized. The property classifications will be identified subsequently herein in the individual property type discussions to follow. The purpose of this study is to develop estimated cap rates for each class or quality of the core property types. The classes of property are commonly referred to as being A, B, or C class property. Shelby County requested rates on class D & E properties as well. Surveys and investors do not involve themselves with this low quality of asset and cap rates for the low end classes are not provided in some cases. LVC Project No

10 CAPITALIZATION RATES SPREADS From available market data in Shelby County it is not possible to generate a sufficient number of sales for each property type and for each class. Class A, B, and C properties provide a spread in cap rate data. Using only improved sales was not necessarily sufficient to estimate cap rates for each class of property types. Thus, since the available database from the marketplace is limited and somewhat imperfect, we have analyzed the potential spread between property classes by employing separate techniques. These are: 1) investor surveys reflecting A, B and C class properties, 2) a capitalization rate analysis on 34 separate regional mall sales from 2003 and 2004, and 3) the spread in yields on commercial mortgage backed securities (CMBS) and ten year treasury bills. This spread will track the premium associated with the various investment grades above a safe rate, Treasury Bills. CMBS yields, as opposed to the spread in corporate bond yields, were employed because they are the investment vehicle with characteristics most similar to investment grade real estate, as they have liquidity risk built into their rating. Finally, the Korpacz Survey reports Institutional versus Non-Institutional grade cap rates which are generally A/B versus C class or lower. Our research into the national regional mall sales included sales from January 2003 to August 2004 and present cap rates on class A, B and C regional malls including reserves. This analysis is to assist in analyzing the spread between class A, B, and C property cap rates. The spread on rates of return for different classes of retail property may be applicable to other property types. The chart below presents the details of this analysis. NATIONAL REGIONAL MALL CAPITALIZATION RATE Sample Size Property Class Low High Average 3 Class A+ 5.7% 8.6% 6.9% 9 Class A 5.2% 7.0% 6.1% 8 Class B+ 7.0% 8.8% 7.77% 10 Class B- 7.6% 9.0% 8.32% 4 Class C 7.6% 11.5% 9.53% Using the rates above, a range is indicated for each class. The malls were rated based on retail sales per square foot. The chart shows the range that can occur within class rankings, such as the 55 average spread of basis points between a B+ and a B- mall. The chart depicts that the spread increases between classes of property as the class quality decreases from A to C. Certain of the previously mentioned investor surveys provided distinction between cap rates on A, B, and C mall properties. The following chart summarizes these surveys and the market data from the table above. LVC Project No

11 AVERAGE CAP RATE and CMBS SPREADS Source Class Low High Average Mall Analysis A 5.7% 8.6% 6.3% B 5.2% 8.8% 8.04% C 7.6% 11.5% 9.53% Real Estate Outlook A/B 6.87% 7.98% 7.43% CB Richard Ellis A 6.55% 9.5% 7.75% B 8.0% 9.0% 8.5% C 10.0% 11% 10.33% Korpacz 1) A/B 5.5% 9.5% 7.96% C 8.5% 14.0% % CMBS 2) A B C D Note: CMBS figures reflect spreads over 10 year Treasury Bills 1) Korpacz Survey refers to the data as Institutional and Non-institutional grade 2) A, B, C, & D Classes equate to A, BBB, BB, B/CCC grade mortgage backed securities for analysis purposes. These average spreads reflect all property types on a national basis. The spreads will be used to test the reasonableness of the rates from the sales data and support those building classes for which inadequate market data is available. From this survey data, by far the largest margin between A and C class properties is reflected in the CMBS survey/market data of 285 basis points. This spread is similar to the average of regional malls as class A is 323 basis points (bps) below class C. The investor survey data from Table II is summarized below: Spreads Class Cap Rate Range Avg. Class BPS A 6.3% 7.96% 7.13% A to B 110 B 7.9% 8.5% 8.23% A to C 311 C 9.53% 10.95% 10.24% B to C 201 As summarized, the spreads have a large range as will also be indicated from actual sales. The classes obviously have some overlapping qualities or properties. In that regard, each class property has a reasonable range of cap rates and judgments must be imputed in the application of LVC Project No

12 a specific property s rate. For instance, in the A class, there would be A+, A, and A- rated properties. The RERC Investor Survey presented cap rates for first, second, and third tier cities. The results indicate a load of from 100 basis points to 270 basis points ranging from the first to third tier city. Considering Memphis a second tier city, the spread or load is from 20 to 100 basis points over a first tier city cap rates. A brief overview of the current market conditions of each property type precedes the cap rate analysis. LVC Project No

13 MEMPHIS ECONOMIC OVERVIEW Memphis is a transportation hub located in western Tennessee, served by two interstate highways (I-40 and I-55), Memphis International Airport and the Mississippi River. Two additional interstate highways (I-22 and I- 69) are in the development stages. Shelby County is the primary county in the MSA, which includes two other counties in Tennessee (Fayette and Tipton), one in Arkansas (Crittenden) and one in Mississippi (DeSoto). The metro area comprises approximately 1,171,000 residents and 590,200 jobs, according to Precis Economy.com. Memphis was founded as an inland trading center in The city s location on the banks of the Mississippi River made it an important distribution center for cotton. Trade continues to play an important role in the local economy. Today, Memphis is known as America s Distribution Center. The economic base, demographics, and future outlook of metro Memphis are summarized in the following discussions. ECONOMIC BASE The Memphis economy stumbled in the recent recession, but the recovery has begun as indicated in the following table. From 1998 to 2000 employment grew at a rate of 1.6% per year, followed by two consecutive years of job losses totaling 10,100. In 2003 nearly 5,000 jobs were gained for a growth rate of 0.8%. Although this rate is below pre-recession growth, it indicates recovery. Several other indicators also point to economic recovery, including gross metro product, population growth, housing permits, and home sales prices. The unemployment rate has risen every year since 1999, but the rate should begin to fall as the job market recovers. ECONOMIC INDICATORS - MEMPHIS MSA Gross Metro Product (Billions) Population (Thousands) 1, , , , , ,171.0 Population Change Employment (Thousands) Employment Change (4.7) (5.4) 4.9 Unemployment Rate 3.8% 3.6% 3.8% 4.1% 5.2% 5.6% Per Capita Income $27,625 $28,272 $29,275 $30,559 N/A N/A Housing Permits (Units) 8,524 10,466 10,259 7,640 8,674 9,079 Median Sale Price of Home $109,500 $110,800 $115,000 $124,900 $128,900 $133,400 Airport Passengers 9,732,061 10,289,802 11,769,213 11,340,439 10,712,059 N/A Airport Cargo Tonnage 2,368,973 2,412,905 2,489,070 2,632,081 3,390,299 N/A Sources: Precis - Economy.com and Memphis Regional Chamber. LVC Project No

14 Memphis is primarily known as a major distribution center. However, the local economy in reality is very diverse as indicated in the following table of employment composition for metro Memphis in Industry sectors representing at least 10% of the local economy are government, education and health care, professional and business services, retail trade, and transportation, warehousing and utilities. During the past year, job growth was experienced in the distribution sectors wholesale trade and transportation and warehousing and some services jobs, including financial activities, leisure/hospitality and education/health care. Conversely, manufacturing, retail trade, information and professional/business services continued to decline. DEMOGRAPHIC TRENDS In 2004, the Memphis MSA population is approximately 1,179,000, according to Claritas, a figure that is on par with the Precis figures cited earlier. Population growth is generally slow, steady, and in line with national growth rates. Shelby County, the primary county in the MSA, dominates the region, representing 92% of population. The county is also growing at a faster rate than the MSA. Conversely, the City of Memphis is experiencing stagnation, as indicated by declining growth rates. The following table shows key demographic characteristics and trends. Notable factors are: Memphis is relatively young with a median age falling between 33 and 34 years old. The largest age cohort group is years old (15%), followed by years old (14%). It is also a racially diverse community, essentially split 50/50 between white and minority groups for the MSA and the county. The minority groups include African Americans (44.6%), as well as Hispanics (3.0%) and Asian/other races (2.0%). The City of Memphis has a stronger minority population, particularly African-Americans. Memphis is a middle class community with an average household income of approximately $60,000. More people earn under $15,000 per year (17%) than over LVC Project No

15 $100,000 (14%), while the largest group earns between $35,000 and $75,000 (34%). Incomes are higher in the County ($63,600) and lower in the City ($48,200), compared to the MSA. Memphis tends to be a family-oriented community which is illustrated by the household size, percentage of family households, and propensity toward home ownership. Shelby County reports the highest home values ($122,700), which are 48% higher than the City and 13% higher than the MSA. DEMOGRAPHIC CHARACTERISTICS AND TRENDS City of Shelby Memphis Memphis County MSA Population Trends ,175 1,084,801 1,179,117 Annual % Change % 1.1% 0.9% Annual % Change % 1.0% 0.9% Population Profile (2004) Median Age % Under 18 Years Old 27.4% 27.7% 27.7% % 65+ years Old 10.9% 9.5% 10.0% % Minority Population 70.0% 48.2% 49.1% Average Household Income (2004) $48,223 $63,609 $59,678 Households (2004) 250, , ,312 Average Household Size % Family Households 62.5% 68.8% 69.1% Owner-Occupied Housing 56.0% 66.5% 66.1% Average Home Value (2004) $82,667 $122,713 $108,869 Source: Claritas FUTURE OUTLOOK Memphis offers several strengths as a business location. It has an excellent transportation system, including highways, airport, rail, and river. The local economy is diverse and the local tax burden is relatively low. Memphis also has several challenges, most notably its sensitivity to economic cycles and sluggish growth even in good times. There are several positive factors that are shaping Memphis and its future economy: Federal Express, the largest local employer (40,000 jobs), merged with Kinko s, which should increase the firm s retail presence throughout the nation. Kinko s has 1,200 stores that will offer FedEx shipping capabilities. Memphis important distribution sector continues to strengthen. Johnson & Johnson and Thompson Technicolor have opened new distribution centers. Nike is also upgrading its facility with a $65 million renovation. Memphis is slowly turning into a high-technology center with such significant research facilities as the FedEx Institute of Technology and the Biotech Foundation. The National Institute of Health has announced plans to open a $14 million regional biotechnology lab in the city, further solidifying the city as a biotech center. LVC Project No

16 The central city is experiencing resurgence. Uptown, a six square-mile area north of downtown, is undergoing a $127.5 million redevelopment. The FedEx Forum, future home of the Memphis Grizzlies NBA team, is nearing completion downtown. Memphis is forecasted to out-perform the nation in job growth in the near-term future. According to economy.com, Memphis is expected to gain 53,900 jobs during the next five years, including 7,700 jobs in 2004, followed by 14,000 jobs in 2005 and 13,600 jobs in In addition, the population is also forecasted to grow by 40,200 new residents by These projections indicate a favorable near-term economic outlook. The following sections will present a brief overview of the individual asset class market conditions and the results of the capitalization rate analysis. LVC Project No

17 OFFICE PROPERTIES OFFICE MARKET CONDITIONS MEMPHIS OFFICE MARKET TRENDS CLASS A MARKET CLASS B/C MARKET Total Total Inventory Vacancy Net Absorp- Inventory Vacancy Net Absorp- Inventory Net Absorp- Year (SF) Rate tion (SF) (SF) Rate tion (SF) Growth (SF) tion (SF) ,189, % 80,000 9,515, % 330, , , ,189, % 132,000 9,713, % 251, , , ,189, % 27,000 9,755, % 95,000 42, , ,189, % 244,000 9,755, % 83, , ,217, % 102,000 9,776, % 413,000 49, , ,615, % 384,000 9,782, % 307, , , ,881, % 320,000 9,782, % (33,000) 266, , ,580, % 655,000 9,826, % 72, , , ,015, % 281,000 9,945, % 108, , , ,462, % 482,000 10,102, % 194, , , ,946, % 244,000 10,263, % 41, , , ,580, % 134,000 10,280, % (359,000) 677,000 (225,000) ,881, % 297,000 10,274, % (578,000) 318,000 (281,000) ,946, % (43,000) 10,258, % 1,000 79,000 (42,000) Source: Reis, Inc. Memphis has an office inventory of 19.2 million square feet. As of year-end 2003, the market recorded 3.6 million square feet of vacant stock representing an overall vacancy rate of 18.8%. During the second quarter of 2004 the vacancy rate continued to rise to 19.9% with the net loss of 185,000 square feet in absorption during the first half of 2004, signaling continued softness in the market. The class A market is in better condition than the class B/C market as indicated by the lower vacancy rate and stronger absorption. Other significant office trends are summarized below: Since 1990, a total of 4.9 million square feet have been added to the market, averaging approximately 377,000 per year. By contrast, net absorption has totaled 4.3 million square feet, or approximately 331,000 square feet annually. The overall vacancy rate has risen due to supply outpacing demand for space. The class A market accounts for nearly 80% of absorption over the past 13 years, although this sector represents only 47% of office supply. The average effective rate refers to the average market rate, discounted for market concessions. Average effective class A rents are approximately $15.39 per square foot compared to $11.46 per square foot for class B space. Class A rents peaked in 1999 at $17.62 per square foot and have declined since that time. Rents are likely to remain flat until the market reaches equilibrium with a vacancy rate of around 10%. The dominate office submarket in Memphis is the East submarket, which accounts for nearly 40% (8.0 million square feet) of office inventory. This area includes the wealthier neighborhoods extending from Midtown to Germantown. Class A rents in this submarket exceed $20.00 per square foot, the highest in the market. By contrast, Downtown Memphis has approximately 3.5 million square feet of office supply of which more than LVC Project No

18 23% are vacant. Downtown rents are 20% lower than East Memphis. The 385 Corridor area in Southeast Memphis is another significant submarket. It is roughly the same size as downtown Memphis, but it has the highest amount of class A space in the market and a lot of construction activity. OFFICE CLASS DESCRIPTIONS Office buildings are analyzed and researched by size classifications. The class of property, ranging from class A to class E, is also an importance classification. Office building class is more adequately described in the following summary: Class A Class B Class C Relatively new building or older building that attracts high-quality tenants and upper-tier rental rates. Highest quality of construction and finish Prime location in relation to other projects Very professionally managed and maintained Normally higher occupancy rates than other projects Quoted rent levels typically no less than $16.00 per square foot, but generally at or near $19.00 per square foot of rentable area or higher with an average of about $ Ultimately, an office building can be classified as an A property if it is located in an A location and achieves A rents Relatively new building of good quality or an older building that is completely renovated and updated. Well located with good visibility Above-average finish in space At or above moderate occupancy levels and rents Well managed and maintained Good quality class of tenants Quoted rent levels in the $13.00 to $17.00 range with an average of about $ Lesser quality newer building or older renovated building in average condition with minimal functional deterioration and obsolescence. Mostly in non-prime locations Moderate to average occupancy levels Moderate to average rental rates Normally well-managed building Considered to be the norm in the marketplace Rent levels generally less than $14.00 per square foot with an approximate average of $ LVC Project No

19 Class D Class E Below average newer or older buildings reaching the end of its economic life. Lower quality of construction and finish than found in other projects. Lower occupancy rates Lower rental rates Often in need of extensive renovation or repair Usually in non-prime location Below-average management quality Lower quality of tenants Minimal rent; generally a break-even basis; not income-producing Below average quality building that may be severely impacted by physical, functional or economic obsolescence. May be a newer building that is severely affected May be a building in need of extensive repair and renovation Usually situated in very poor location Not generally income-producing OFFICE INVESTOR SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for office product. OFFICE CAP RATES - INVESTORS SURVEYS URBAN/CBD SUBURBAN Survey Class A Class B Class C Class A Class B Class C Korpacz* rd Quarter 8.48% 8.48% 10.65% 8.91% 8.91% 10.45% rd Quarter 9.49% 9.49% 11.38% 10.02% 10.02% 11.88% RealtyRates.com (3rd Qtr. 2004) 9.14% % Real Estate Research Corp. (Summer 2004) National Markets 8.20% % Memphis Market 9.50% % Cushman & Wakefield Analytics (Mid- 2004) 7.61% % CBRE (4th Quarter 2003) 8.32% 8.81% 10.25% 8.50% 9.08% 9.79% * Korpacz reports institutional and non-institutional grade versus Class A and B property types. OFFICE CAPITALIZATION RATES FROM SALES LandAmerica examined 62 office sales in the Memphis, and other southeast markets. The size of these buildings ranged from 2,350 to 633,650 square feet. Buildings were divided by size category - 200,000 square feet and greater, 100,000 to 199,999 square feet, 50,000-99,999 square feet and 49,999 and below. LVC Project No

20 In instances where actual financial and economic data were not available, estimates were made based on local market data, market research and published industry data. Replacement reserves were estimated at $0.20 per square foot for class A properties, $0.25 for class B and $0.30 for class C, unless otherwise specified by a principal in the transaction. Likewise, the allowance for vacancy and credit loss was eight percent in the instances where transactions were based on 100% occupancy for class A and 10% for class B and C. This is also the case for unstabilized properties, which were grossed-up to 100% and then stabilized at 92% or 90% depending on the class. The sales database does not include medical office buildings. Cap rates vary dramatically depending on the location and the condition of the properties. Vacancy rates in Memphis have influenced sales prices and thus cap rates. Average cap rates in class A buildings were comparable to investor surveys. Surveyed buildings in class B space averaged 8.7% with reserves and 8.9% without reserves. These were comparable with the CBRE 2003 study s 8.81% and Korpacz s 8.48%. Class C cap rates were generally similar to the investor surveys. OFFICE OVERALL RATES The data set from the sales is summarized below. OFFICE PROPERTIES OVERALL RATES Property Class A B C D Offices (greater than 200,000 sf) With Reserves as expense 7.25%-8.95% 7.70%-9.23% 9.11%-14.13% 19.89% Without Reserves 7.41%-9.14% 7.86%-9.45% 9.43%-14.61% 21.05% Average without Reserves 8.34% 8.64% 11.84% Offices ( 100, ,999 sf) With Reserves as expense 7.66%-9.53% 8.28%-10.86% 7.38%-10.66% Without Reserves 7.87%-9.75% 8.49%-11.09% 7.63%-10.93% Average without Reserves 8.82% 9.78% 8.91% Offices (50,000-99,999 sf) With Reserves as expense 8.22%-9.60% 9.65%-10.41% 8.65%-10.96% Without Reserves 8.34%-9.70% 9.84%-10.76% 9.14%-11.43% Average without Reserves 8.90% 10.03% 9.83% Offices (49,999 sf and under) With Reserves as expense 7.13%-9.53% 6.32%-9.89% 11.68% % Without Reserves 7.23%-9.68% 6.59%-10.0% 12.0%-17.92% Average without Reserves 8.21% 8.18% 14.03% LVC Project No

21 The concluded overall rates for office are charted below. OFFICE OVERALL RATES Property Class A B C D Offices (greater than 200,000 sf) With Reserves as expense 8.5% 9.75% 11.5% 16.0% Without Reserves 8.7% 10.0% 11.8% 17.0% Offices ( 100, ,999 sf) With Reserves as expense 9.25% 10.0% 11.5% 16.0% Without Reserves 9.5% 10.25% 11.8% 17.0% Offices (50,000-99,999 sf) With Reserves as expense 9.25% 10.0% 11.5% 16.0% Without Reserves 9.5% 10.25% 11.8% 17.0% Offices (49,999 sf and under) With Reserves as expense 8.5% 8.5% 10.5% 15.0% Without Reserves 8.75% 8.75% 11.0% 16.0% LVC Project No

22 INDUSTRIAL PROPERTIES INDUSTRIAL MARKET CONDITIONS MEMPHIS INDUSTRIAL MARKET TRENDS Inventory Completions Vacant Vacancy Net Absorp- Quoted Year (SF) (SF) Space (SF) Rate tion (SF) Rent/SF ,606,000 1,381,000 12,334, % (2,020,000) $ ,797,000 1,191,000 13,028, % 497,000 $ ,898,000 1,101,000 16,023, % (1,894,000) $ ,033,000 1,135,000 14,728, % 2,430,000 $ ,403,000 2,370,000 12,822, % 4,276,000 $ ,599,000 4,196,000 12,763, % 4,225,000 $ ,943,000 4,344,000 12,633, % 4,744,000 $ ,059,000 4,116,000 15,711, % 5,038,000 $ ,700,000 2,641,000 15,450, % 2,902,000 $ ,900,000 4,200,000 18,860, % 790,000 $ ,601,000 2,701,000 18,911, % 2,650,000 $ ,149,000 2,548,000 21,475, % (16,000) $ ,594,000 1,445,000 22,897, % 23,000 $ ,784,000 1,190,000 23,237, % 850,000 $2.79 Source: Reis, Inc. Memphis is a distribution city, known as America s Distribution Center, Memphis is strategically located in the central United States to serve much of the nation. The Memphis industrial market has an inventory of million square feet, of which 23.2 million square feet are vacant, or 17.5% as of year-end The industrial inventory is seven times the office supply and eight times the retail supply, illustrating the industrial sector s local domination. Relevant trends in the industrial market are summarized below: Since 1990, the industrial inventory has increased by an average of 2.66 million square feet per year, representing an average annual rate of 2.6%. By comparison, absorption has averaged 1.88 million square feet per year. The market recorded strong absorption following the early 1990s recession, but construction did not slow down until the most recent recession hit with full force in Since that time, the vacancy rate has increased by nearly three basis points to its highest mark in more than 13 years and absorption has averaged only 285,000 square feet. Average quoted industrial rents are $2.79 per square foot. Overall rents have increased by only $0.51 per square foot, or 1.6% annually, since Rents vary by type and class of space. Bulk warehouse space ranges from $1.72 to $2.77 per square foot, while standard distribution space ranges from $1.81 to $3.65 per square foot. The highest rents are in service center space, which averages $5.42 per square foot. Southeast Shelby County is the dominant industrial submarket representing approximately 65% of supply. This submarket offers the best airport access and proximity to local industrial giants Federal Express and United Parcel Service. DeSoto County (MS) is an emerging industrial submarket due to its Interstate 55 access and LVC Project No

23 spillover from the Southeast submarket. The Southwest submarket is the second largest submarket, but it has mostly older inventory. Memphis has attracted several national industrial developers, including Panattoni, Industrial Developments International, Duke Realty, Prologis and Champion Partners. The market has also attracted institutional capital. WAREHOUSE/DISTRIBUTION CLASS DESCRIPTIONS Factors that aid in the classification of industrial properties are location, access, site/truck court configuration, ceiling height, column spacing, overall construction quality, and percentage and quality of office build out, among other factors. Class A Class B Class C Relatively new building or older building that attracts high-quality tenants and upper-tier rental rates. Highest quality of construction and finish Prime location in relation to other projects Very professionally managed and maintained Normally higher occupancy rates than other projects Warehouse space leases at $2.50 to $3.25 per square foot, on a NNN basis. Smaller warehouse space leases at $4.00 to $4.50 per square foot on a modified gross basis Relatively new building of good quality or an older building that is completely renovated and updated. Good quality construction and finish Well located with good visibility Well managed and maintained At or above moderate occupancy levels and rents Above-average finished space Good quality class of tenants Warehouse space leases at $2.25 to $2.75 per square foot, on a NNN basis. Smaller warehouse space leases at $2.75 to $3.50 per square foot on a modified gross basis Lesser quality new building or older renovated building in average condition with minimal functional deterioration and obsolescence. Mostly in non-prime locations Normally well-managed building Moderate to average occupancy levels Moderate to average rental rates Considered to be the norm in the marketplace Warehouse space leases for under $2.25 per square foot on a NNN basis Class D Below average newer or older buildings reaching the end of its economic life. Lower quality of construction and finish than found in other projects. LVC Project No

24 Usually in non-prime location Often in need of extensive renovation or repair Below-average management quality Lower occupancy rates Lower rental rates Lower quality of tenants Class E Below average quality building that may be severely impacted by physical, functional or economic obsolescence. Usually situated in very poor location May be a newer building that is severely affected May be a building in need of extensive repair and renovation Not generally income-producing INDUSTRIAL INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for industrial product. INDUSTRIAL CAP RATES - INVESTORS SURVEYS WAREHOUSE FLEX/R&D Class Class Class Class A B C Class A B Class C Survey Korpacz* rd Quarter 8.27% 8.27% 9.52% 8.77% 9.82% rd Quarter 8.93% 8.93% 9.81% 9.53% 10.40% RealtyRates.com (3rd Qtr. 2004) 8.38% % Real Estate Research Corp. (Summer 2004) National Markets 8.00% % Memphis Market 9.60% % Cushman & Wakefield Analytics (Mid-2004) 7.77% % CBRE (4th Quarter 2003) 7.78% 8.63% 9.92% 8.18% 9.19% 10.17% * Korpacz reports institutional and non-institutional grade versus Class A and B property types. INDUSTRIAL CAPITALIZATION RATES FROM SALES LandAmerica Commercial Services examined 24 total sales in Shelby County. The size of these buildings ranged from 13,900 square feet to 1.6 million square feet. The largest sample of ten sales coming from the Class A category, while the eight and six sales came from class B and C, respectively. Final cap rates were derived from an average of industrial properties over 10,000 square feet. For the 100,000+ square foot warehouse space, investors have indicated that capital reserves of between $0.10 and $0.15 per square foot is typical. LVC has used $0.10 per square foot for class A warehouse space and $0.15 per square foot for class B, C and D warehouse space. Capital reserves for warehouse space smaller than 100,000 square feet tends to be a slightly higher LVC Project No

25 because economies of scale cannot be exhibited. For this reason, LVC has used $0.15 per square foot for class A space and $0.20 per square foot for class B and below. In addition, the allowance for vacancy and credit loss for all warehouse space in the instances where transactions were based on 100% occupancy was eight percent for class A properties and ten percent for class B/C properties. This is also the case for stabilized properties, which were grossed-up to 100% and then stabilized at either 92% or 90%. WAREHOUSE/DISTRIBUTION SUMMARY Property Class A B C D/E 7.81% %- 9.21% % 11.55% Range of Sales Average Overall Rate, without reserves 8.71% 9.44% 10.93% INDUSTRIAL OVERALL RATES Class A property sales range from 7.8% to 9.2% with an average of approximately 8.71%. The indicated range of rates for the sales in our survey corresponds with the rates indicated by the investor surveys for class A properties on page 23. Class B property sales ranged from 8.5% to 10.25% with an average of 9.44%. The cap rates from our survey echo the cap rates indicated by the investor surveys for class B. The calculation of NOI and cap rates from sales and the investor surveys do not deduct tenant improvements (TI) or leasing commission as an expense. The class C property sales ranged from 10.5% to 11.55% with an average of approximately 10.93%. This is also similar to the range reflected in the investor survey, only one of the investor surveys included class C properties. The investor surveys did not include class D/E properties and the cap rates below are estimated from spreads between B and C class sales and surveys and from CMBS spreads. Cap rates on flex industrial space have been interpolated by using investor surveys only. In general, the overall rates for buildings smaller than 100,000 square feet are similar to buildings larger than 100,000 square feet. WAREHOUSE/DISTRIBUTION OVERALL RATES Property Class A B C D/E Industrial: With reserves as an expense 8.25% 9.00% 10.00% 14.00% Without Reserves 8.50% 9.75% 11.00% 15.00% LVC Project No

26 RETAIL PROPERTIES RETAIL MARKET CONDITIONS MEMPHIS RETAIL MARKET TRENDS* Inventory Vacant Vacancy Completions Net Absorp- Quoted Year (SF) Space (SF) Rate (SF) tion (SF) Rent/SF ,639,000 1,984, % 43,000 (241,000) $ ,433,000 2,203, % 794, ,000 $ ,968,000 1,676, % 535,000 1,062,000 $ ,080,000 1,225, % 112, ,000 $ ,224,000 1,044, % 144, ,000 $ ,450,000 1,202, % 226,000 68,000 $ ,594,000 1,222, % 144, ,000 $ ,175,000 1,336, % 581, ,000 $ ,642,000 1,227, % 467, ,000 $ ,735,000 1,364, % 93,000 (44,000) $ ,784,000 1,340, % 49,000 73,000 $ ,098,000 1,468, % 314, ,000 $ ,268,000 1,973, % 170,000 (335,000) $ ,451,000 1,830, % 183, ,000 $12.45 * Data include neighborhood and community centers, but not regional centers. Source: Reis, Inc. The Memphis retail market is the strongest performer of all the commercial markets due to continued population growth despite a recessionary climate. Memphis has approximately 16.7 million square feet of retail space as of second quarter The vacancy rate is approximately 11.9%. Since 1990, the overall retail market has delivered 3.9 million square feet (297,000 square feet per year). New supply has outpaced demand by approximately 130,000 square feet during the past 13 years which equates to only 10,000 square feet annually. During this period, a total of 3.7 million square feet (287,000 square feet per year) of retail has been absorbed. The vacancy rate has climbed by 340 basis points since year-end 2000, but the retail market is closer to equilibrium than the office and industrial sectors. Other notable trends are outlined below: Neighborhood centers total 7.7 million square feet representing approximately 46% of retail inventory (excluding regional centers). The first quarter 2004 vacancy rate is 9.5%, which is 1.3 percentage points lower than the market peak of 10.8% at year end This sector has absorbed approximately 334,000 square feet since 2000, experiencing only one year of negative absorption (2002). This compares to 466,000 square feet of new supply. The key grocery anchor in the Memphis market is Kroger, but Super Target and Super Wal-Mart are also significant contenders. Community centers, representing 8.9 million square feet, have a vacancy rate of 14.0% as of first quarter The vacancy rate has increased by more than 4% since year end During this same period, 311,000 square feet have been delivered compared to net absorption of negative 78,000. Peer Market Research, Inc. reports 6.8 million square feet of regional center space in the Memphis market which is primarily concentrated in the Southeast and the Northeast portions of Shelby County. There are four regional malls in Memphis, including Hickory LVC Project No

27 Ridge Mall, Oak Court, Southland Mall, and Wolf Chase Galleria. Primary mall anchor tenants in the Memphis market are Dillards, Goldsmith s-macy s, and Sears. RETAIL CLASS DESCRIPTIONS Retail properties are generally classified by size of center, types of tenants, and trade area draw. The smallest are unanchored strip centers and neighborhood centers, anchored by grocery stores. Community centers are larger than neighborhood centers and have several anchor tenants, often including a large discount retailer. Power centers are larger community center with big box retailers as anchor tenants. The largest centers are regional malls that draw from the largest trade area and are anchored by full-service department stores. Retail properties are also classified on a scale of A to E, based on a variety of factors as indicated below. Class A Class B Class C Class D Class E Wealth distribution, specific location, visibility and/or access greatly contribute to the potential success of the project when compared to others in the market area. Rents for community centers and neighborhood centers range from $14.00 to $17.00 and $17.00 to $22.00 per square foot. Strip centers generally are renting at $16.00 to $21.00 per square foot. Power centers that are A/B grade are renting for $ per square foot. Specialty centers have rents as high as $30-$40 per square foot. These centers are generally rented on a net basis. Wealth distribution, specific location, visibility and/or access to the project is above average and has a positive impact to the potential success of the project when compared to others in the market area. Generally, community centers and neighborhood centers are renting in the $8.00 to $14.00 per square foot range, net of operating expenses. Strip centers are renting in the $11.00 to $16.00 per square foot range. Sub-neighborhood wealth, specific location, visibility and/or access to the project are typical compared to others in the market area. Wealth distribution, specific location, visibility and/or access are inferior to others in the market area. Wealth distribution, specific location, visibility and/or access have substantially limited the potential success of the project as compared to others in the market area. RETAIL INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for retail product. LVC Project No

28 RETAIL CAP RATES - INVESTORS SURVEYS REGIONAL MALL POWER CENTER NEIGHB./COMM. CTR. Survey Class A/B Class C Class A/B Class C Class A/B Class C Korpacz* rd Quarter 7.57% 10.75% 8.67% % 9.17% rd Quarter 8.89% 11.46% 9.48% % 12.50% RealtyRates.com (3rd Qtr. 2004)** 8.38% 9.24% 8.38% 9.24% 8.38% 9.24% Real Estate Research Corp. (Summer 2004) National Markets 7.70% % % --- Memphis Market 8.10% % % --- Cushman & Wakefield Analytics (Mid- 2004) % --- CBRE (4th Quarter 2003) 7.75% 8.50% 7.64% 8.75% % % Korpacz reports institutional and non-institutional grade versus Class A and B * property types. RealtyRates.com reports anchored (Class A) versus unanchored (Class B) ** property types. NET LEASE PROPERTY DESCRIPTIONS Net lease properties are single-tenant assets that have gained in popularity among investors, both large and small exchangers have recently emerged as strong buyers for these properties. The strongest net lease investment opportunities are those with mature cash flow, acceptable tenant credit ratings, and desirable location. Tenant credit is probably the biggest factor in weighing the cap rate, and ultimately the value of net lease deals. LandAmerica examined 10 freestanding drug stores in Tennessee and Alabama. These properties are attractive to investors looking for good products and a credit tenant. Cap rates ranged from 6.65% to 8.6%. An additional four sales of freestanding, big box retail were also examined. These properties had cap rates of 8.13% to 9.21% for class A-C properties, which indicates that a slightly higher cap rate prevails for freestanding retail with a lower credit tenant than for freestanding drug stores. NET LEASE INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for net lease product. NET LEASE CAP RATES - INVESTORS SURVEYS Survey Range Average Korpazc rd Quarter % 8.04% rd Quarter % 9.00% CBRE (4th Quarter 2003) % % LVC Project No

29 RETAIL CAPITALIZATION RATES FROM SALES The retail property type was researched for six different categories: enclosed regional malls, power centers, community centers larger than 100,000 square feet, neighborhood centers between 40,000 and 100,000 square feet, strip centers and single tenant properties. The six classes are further defined below. Land America examined 93 total sales. The size of these buildings ranged from 5,220 square feet to 1.2 million square feet. Sales from across the country were used to estimate capitalization rates for enclosed regional malls. For the other retail center types, sales from Shelby County, from Alabama, Georgia, Florida, North Carolina, and South Carolina were used to develop a reliable capitalization rate range. Depending on the size and property type, capital reserves tend to vary. Investors and appraisers have indicated that capital reserves of $0.25 to $0.35 per square foot is typical for enclosed regional malls. LandAmerica has used $0.25, $0.30 and $0.35 for class A, B and C enclosed regional malls, respectively. Reserves for strip centers, community centers, unanchored strip centers and single tenant retail properties were estimated at $0.10, $0.15 and $0.20 for class A, B and C properties, respectively. When estimated, vacancy and collection loss was treated in accordance with the type of center regarding credit tenants and remaining lease term. Retail cap rates have dropped in the past three years overall. In Memphis, rates vary significantly and in some cases represent both the high and the low of the range. The surveyed class A enclosed malls and power centers were slightly lower than the investor surveys, but the surveyed neighborhoods and strip centers were similar. Class A neighborhood centers, power centers and community centers were generally 8% while enclosed malls were lower at 7%. Class C and D neighborhood centers did not change significantly over the past three years, although indicated rates have dropped. Average class C was 10 and average class D was 13.3%. RETAIL OVERALL RATES The data set from the sales is summarized on the following page. LVC Project No

30 RETAIL OVERALL RATES Property Class A B C D Regional Enclosed Malls With Reserves as expense 5.60%-8.60% 7.00%-8.40% 8.70%-9.00% Without Reserves 5.70%-8.70% 7.20%-8.70% 8.90%-9.10% Average without Reserves 6.67% 7.82% 8.43% Community Centers With Reserves as expense 6.75%-8.22% 7.75%-9.5% 7.25%-10.10% Without Reserves 6.79%-8.28% 7.9%-9.60% 7.6%-10.50% Average without Reserves 7.66% 8.72% 8.87% Neighborhood Centers With Reserves as expense 6.75%-9.31% 7.53%-9.72% 9.09%-10.75% 11.76%-13.19% Without Reserves 6.79%-9.39% 7.71%-9.9% 9.54%-11.10% 13.19%-13.8% Average without Reserves 7.93% 8.04% 9.95% 12.68% Power Centers With Reserves as expense 7.40%-9.16% 7.53%-8.8% Without Reserves 7.50%-9.24% 7.71%-8.9% Average without Reserves 7.93% 8.21% Unanchored Strip Centers With Reserves as expense 7.17%-9.64% 7.65%-9.12% 9.17%-12.52% 10.26%-16.00% Without Reserves 7.25%-9.70% 7.71%-9.22% 9.5%-12.78% 10.63%-16.55% Average without Reserves 8.67% 8.54% 10.57% 13.12% Single Tenant/Drug Store With Reserves as expense 6.65%-8.6% Without Reserves 6.68%-8.66% Average without Reserves 7.52% LVC Project No

31 The concluded overall rates for retail properties are charted below. RETAIL OVERALL RATES Property Class A B C D Regional Enclosed Malls With Reserves as expense 7.5% 8.5% 9.5% 14.5% Without Reserves 7.6% 8.6% 9.75% 15.0% Community Centers With Reserves as expense 8.5% 9.25% 10.0% 14.0% Without Reserves 8.6% 9.35% 10.25% 14.5% Neighborhood Centers With Reserves as expense 8.25% 9.0% 10.75% 13.5% Without Reserves 8.35% 9.15% 11.15% 14.0% Power Centers With Reserves as expense 8.50% 8.75% Without Reserves 8.60% 8.85% Unanchored Strip Centers With Reserves as expense 9.0% 9.0% 11.0% 13.0% Without Reserves 9.1% 9.1% 11.25% 13.5% Single Tenant/Drug Store With Reserves as expense 7.5% Without Reserves 7.6% LVC Project No

32 HOTEL/MOTEL PROPERTIES HOTEL MARKET CONDITIONS MEMPHIS HOTEL MARKET TRENDS FULL-SERVICE HOTELS LIMITED-SERVICE HOTELS Average Average Average Average Year Rooms Occupancy Daily Rate RevPar* Rooms Occupancy Daily Rate RevPar* , % $78.19 $ , % $56.06 $ , % $79.47 $ , % $55.35 $ , % $80.32 $ , % $55.33 $ , % $81.64 $ , % $54.97 $ , % $82.69 $ , % $56.53 $ , % $81.50 $ , % $57.45 $33.30 *Revenue per available room, calculated by multiplying the occupancy by the room rate. Source: Smith Travel Research The Memphis hotel market began to experience some weakness before 9/11, a trend that has continued. Limited development activity will assist the market in recovering. Memphis has a room supply of 179 hotels and 17,082 rooms (average of 95 rooms per property). Full service hotels represent 41% of local room supply while limited service facilities account for 59% of rooms. Only one hotel is under construction at year-end 2003 Residence Inn Memphis Downtown (90 rooms). Other observations about the hotel market are indicated below: Average occupancy among full-service hotels has steadily dropped during the last five years by approximately 8.5%. Although the average daily rate has increased, it has not been strong enough to off-set the decrease in occupancy. As a result RevPar, which is the best measure of hotel performance, has fallen by nearly $5.00 during the last five years to $ During this same period full-service hotel supply has fallen as several facilities have closed. Only five hotels in Memphis offer more than 300 rooms. The largest hotel in Memphis is the famous Peabody hotel with 468 rooms, followed by the Hilton Memphis (405 rooms) and the Marriott Memphis Downtown (393 rooms). Limited service hotel performance is also weak, although this sector has experienced a slight upturn during 2003 for all indicators, despite the addition of 121 new rooms. The 2003 RevPar of $33.30 is still lower than 1998 mostly due to poor occupancy and the addition of nearly 2,000 rooms to the market that will take some time to absorb. Memphis bills itself to travelers as Home of the blues Birthplace of rock n roll. The City offers several attractions that suit this music theme, including Graceland, Beale Street Entertainment District, and Delta Blues Museum. Memphis also has several significant convention and meeting facilities to draw group business to the city. The capstone facility is Memphis Cook Convention Center in downtown Memphis, a 350,000 square-foot facility offering 190,000 square feet of exhibit space, 74,000 square feet of meeting space, and a 28,000 square-foot ballroom. A $92 million renovations and expansion has recently been completed for the Convention Center. Other significant meeting facilities include Agricenter International, Cannon Center for the Performing Arts, Mid-South Coliseum, and The Pyramid. LVC Project No

33 HOTEL CLASS DESCRIPTIONS The following criteria were utilized in classifying hotel properties for this study. In addition, overall appeal, amenities, density, daily rate, and affiliation were considered in classification. Class A The average A property is less than 10 years old (effective age); generally with full amenities (e.g., food and beverage service, meeting rooms, etc.), average size rooms, and generating typical rates for the market area. Any two of the three factors below could push the class to the high ranged A+ classification. Good condition for age. Larger than average size room. Located in most desirable area. Conversely, any two of the three factors below could place the project in the low range of A- classification (all three would lower the category to B+ ). Project showing deferred maintenance. Smaller than average room. Located in less desirable area. Class B Class C Class D Class E These properties are approximately 10 to 15 years old (effective age), offering full amenities with the most desirable area at the top of the B+ range. This could also be a newer property in a less desirable area, quality and/or no amenities. The less desirable location and smaller rooms would be at the B- range. These properties are approximately 15 to 20 years old (effective age), of average quality and condition with less than typical size rooms and fewer amenities. Properties in the most desirable areas would be at the top of the range ( C+ ). Generally, these are properties with an effective age of 20+ years with little or no remodeling and with high maintenance and expenses. Properties in the less desirable area would be rated at the low D- range. These properties are shut down and/or boarded up in less desirable areas. HOTEL INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for hotel product. LVC Project No

34 HOTEL CAP RATES - INVESTORS SURVEYS Survey Range Average Korpacz* rd Quarter Full-Service % 9.88% Economy/Limited Service % 12.04% Luxury % 9.23% Extended Stay % 11.35% rd Quarter Full-Service % 10.61% Economy/Limited Service % 12.00% Luxury % 9.80% Extended Stay % 11.61% RealtyRates.com (3rd Qtr. 2004) All Types % 10.29% Full Service % 8.57% Limited Service % 10.62% Golf/Gaming/Resort % 8.77% Real Estate Research Corp. (Summer 2004) National Markets % 10.60% Memphis Market % Cushman & Wakefield Analytics (Mid-2004) % 9.50% CBRE (4th Quarter 2003) Class A % 9.00% Class B % 10.83% Class C % 12.25% * Korpacz reports institutional and non-institutional grade versus Class A and B property types. HOTEL CAPITALIZATION RATES FROM SALES LandAmerica examined 44 hotel sales in various markets around the Southeastern United States. Fourteen of the sales were full service facilities, sixteen were limited service/select service hotels, and three were all-suite facilities. Generally, the difference between a limited and full service is the provision of a food and beverage service. Actual sales were similar in range when compared with the Korpacz ranges. Class A full service averaged 8.9%, class B averaged 9.5% and class C averaged 11.9%. These were slightly lower than the survey data above. There is material inconsistency in the overall rate data from the sales between both type and class. There is an average upward trend in the cap rates by class from the sales data, although hotel market is still fluctuating as it recovers from a downward trend that started in HOTEL OVERALL RATES The data set from the sales are on the following page. LVC Project No

35 HOTEL OVERALL RATES Class A Class B Class C Full Service 7.9%-9.5% 7.8%-11.5% 7.7%-14.4% Limited/Select 8.37%-13.26% 5.6%-13.7% 8.7%-12.66% Extended Stay 10.0%-10.0% 11.2%-11.6% * The industry standard is to report capitalization rates including reserve as an expense item, therefore no range of rates is given without reserves. * Reserve estimates are typically 3-4% of gross revenue. The concluded hotel overall rates are charted below. HOTEL OVERALL RATES Class A Class B Class C Full Service 9.5% 10.0% 11.5% Limited/Select 11.0% 11.75% 13.0% Extended Stay 10.5% 11.25% * The industry standard is to report capitalization rates including reserves as an expense item, therefore no range of rates is given without reserves. * Reserve estimates are typically 3-4% of gross revenue. LVC Project No

36 MULTI-FAMILY PROPERTIES APARTMENT MARKET CONDITIONS MEMPHIS APARTMENT MARKET TRENDS CLASS A MARKET CLASS B/C MARKET Total Market Total Market Inventory Vacancy Asking Inventory Vacancy Asking Completions Absorption Year (Units) Rate Rent/Month (Units) Rate Rent/Month (Units) (Units) , % $487 45, % $ , % $498 45, % $368 1,842 1, , % $512 45, % $ , , % $535 45, % $ , % $572 45, % $ , % $609 45, % $ , % $635 45, % $448 1,731 1, , % $663 46, % $465 1,727 1, , % $689 46, % $474 3,009 2, , % $717 46, % $492 1,228 1, , % $730 46, % $503 1,174 1, , % $741 46, % $513 3, , % $759 46, % $513 1, , % $760 46, % $ , % $765 46, % $ Source: Reis, Inc. The for sale housing market is taking its toll on the Memphis apartment market as low interest rates attract buyers away from the rental market, particularly the class B market. As of second quarter 2004, Memphis offers 395 apartment projects, comprising 73,999 units (average of 187 units per project). Approximately 37% of the total inventory is newer, class A units, while the majority (63%) are class B units. The overall vacancy rate is 9.7%, but it is significantly higher for class B properties compared to class A properties. Other significant trends are offered below: The supply-demand imbalance is highlighted by comparing deliveries to absorption. Since 1990, a total of 17,756 units have been delivered to the market, averaging 1,365 per year. By comparison, net absorption has totaled 14,288 units or 1,099 per year. The class A market accounts for 91% of new deliveries and 102% of net absorption, as the class B market actually lost occupancy. The market-wide vacancy rates were generally below 5% before the recession. In 2001, the class A vacancy rate more than doubled to an unprecedented 10.6%, but it has fallen by more than 200 basis points since that time due to new demand coupled with limited new supply during that last two years. The class B vacancy rate, on the other hand, has risen by more than 300 basis points during the past two years as renters are upgrading to class A units or moving into home ownership. The class B market will begin to recover as interest rates increase. Class A rents average $760 per month and have increased at a healthy rate of 3.5% annually since Rents have continued to rise during the last couple of years albeit at a slower rate. Class B rents, which average $519 per month, have also increased, but the LVC Project No

37 average annual rate is a slower 2.7% over the past 13 years. Rents have been affected by move-in specials such as reduced monthly rates, and many properties are offering one to two months of free rent. Apartments are concentrated mostly in the eastern and southern market areas. The Poplar Pike/Germantown/Cordova submarket has the highest concentration (25%), as well as the highest rents (average of $758 per month). This submarket is followed by the Southeast Shelby County/Ridgeway area (24%), then Whitehaven/Airport/Southhaven (17%). In addition, there is a central city resurgence beginning to occur. The downtown/midtown market has an inventory of more than 6,800 units, but the vacancy rate (8.2%) is below market, and the average rents ($702) are above market. APARTMENT CLASS DESCRIPTIONS Class A The average A property is less than 10 years old (effective age); generally with full amenities (e.g., swimming pool, exercise room, clubhouse, etc.), approximately 600 to 1,200 square feet for the average unit size and generating typical rents for the area. Any two of the three factors below could push the class to the high ranged A+ classification. Good condition for age. Larger than average size unit. Located in most desirable area. Conversely, any two of the three factors below could place the project in the low range of A- classification (all three would lower the category to B+ ). Project showing deferred maintenance. Smaller than average unit. Located in less desirable area. Ultimately, a property older than 10 years can still be classified as an A property if it is located in an A location and achieves A rents. Class B Class C Class D These properties are approximately 10 to 15 years old (effective age), offering full amenities, with the most desirable area at the top of the B+ range. This could also be a newer property in a less desirable area, quality and/or no amenities. This classification could include newer properties in a less desirable location, quality and/or amenities. These properties are approximately 15 to 20 years old (effective age), of average quality and condition with less than typical size units and fewer amenities. Properties in the most desirable areas would be at the top of the range ( C+ ). Generally, these are properties with an effective age of 20+ years with little or no remodeling and units with high maintenance and expenses. Properties in the less desirable area would be rated at the low D- range. LVC Project No

38 Class E These properties are shut down and/or boarded up in less desirable areas. APARTMENT INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for apartment product. APARTMENT CAP RATES - INVESTORS SURVEYS Survey Class A Class B Class C Korpacz* rd Quarter 7.05% 8.15% rd Quarter 8.36% 9.84% RealtyRates.com (3rd Qtr. 2004) All Types 8.97% Garden/Suburban Townhouse 8.22% Hi-Rise/Urban Townhouse 9.19% Real Estate Research Corp. (Summer 2004) National Markets 7.40% Memphis Market 8.30% Cushman & Wakefield Analytics (Mid-2004) 6.23% CBRE (4th Quarter 2003) 6.95% 7.23% 8.08% * Korpacz reports institutional and non-institutional grade versus Class A and B property types. APARTMENT CAPITALIZATION RATES FROM SALES LandAmerica Commercial Services examined 40 total apartment sales, all of which were located in Memphis. Ten of these properties were classified as class A, seven as class B, fifteen class C properties, and eight were classified as class D. Size categories based on number of units were collapsed due to the fact that there was virtually no difference in cap rates above and below the 200-unit benchmark. In instances where actual financial and economic data were not available, estimates were made based on local market data, market research and published industry data. When provided, replacement reserves were taken from the buyer s proforma and reflected expenses of $200 - $250 per unit for class A and class B properties, and $100 - $200 for class C/D properties, unless otherwise specified by a principal in the transaction. In the instances where transactions were above stabilized occupancy the allowance for vacancy and credit loss was ten percent for class A properties and eleven percent for class B, C, D. These properties, as well as unstabilized properties, were grossed-up to 100% and then stabilized at either 90% or 89%, depending upon class. Properties deemed stabilized at the time of sale were adjusted to reflect a combined vacancy and credit loss of either ten or eleven percent. This is considered to include an allowance for a rent concession or rent special on a long term basis. LVC Project No

39 APARTMENT SUMMARY Property Class A B C D/E Range of Sales 5.85%-8.25% 7.22%-8.88% 7.09%-13.39% 9.84%-16.27% Average Overall Rate 6.98% 7.79% 10.64% 13.10% APARTMENT OVERALL RATES As reflected in the previous chart, class A property sales range from 5.85% to 8.25% with the majority of the sales within the 6.5% to 7.5% range and an average of approximately 7.0%. The indicated range of rates for the sales in our survey mirror the range indicated by the investor surveys for class A properties on page 24. Class B property sales ranged from 7.57% to 9.54% with an average of 8.32%. The majority of the class B sales were at or around 8.0%. Class B cap rates are also similar to the cap rates indicated by the investor surveys. Class C property sales ranged from 8.51% to 14.04% with the vast majority of the sales hovering around the 11.0% mark. Only one of the investor surveys included class C properties, and according to that survey the suggested cap rate for class C is 8.08%. This is well below the implied rate of 11.0% indicated by our survey of 15 class C properties. The investor surveys did not include class D/E properties. APARTMENT OVERALL RATES Property Class A B C D/E Apartments: With reserves as an expense 7.00% 8.00% 11.00% 13.00% Without Reserves 7.25% 8.50% 11.50% 14.25% Notes: The industry standard is to report capitalization rates including reserve estimates; however, capitalization rates without reserves are Included. LVC Project No

40 ASSISTED LIVING FACILITIES ASSISTED LIVING FACILITY INVESTORS SURVEYS The following table summarizes the overall cap rate results of the national investor survey data for assisted living facilities. ASSISTED - INVESTORS SURVEYS Survey Range Average Realtyrates.com rd Quarter 7.79% % 10.79% NIC* (1st Quarter 2004) 8.75% % 10.90% *National Investment Center For the Senior Housing & Care Industries ASSISTED LIVING FACILITIES LandAmerica examined 13 assisted living facility sales in various markets around the Southeastern United States. These sales range from 7.97% %, with the most recent sales predominantly in the 10.5% range. The average cap rate for all the sales is 9.85%. Some of the sales date back to In instances where rates were not based on the buyer s pro forma, a 5 percent management fee and $300 reserves were included. The range of cap rates from these sales emulates the rates reflected in the two investor surveys above. LVC Project No

41 SUMMARY AND OBSERVATIONS On average capitalization rates have decreased significantly since the last Capitalization Rate Analysis study in 2001 and particularly over the past 24 months. Considering just the Korpacz Survey, overall rates, depending on property type and class rating, dropped from 29 to 169 basis points since the 3 rd Quarter 2002 Survey. There is somewhat of a consensus of opinion that the impact of rising interest rates on capitalization rates will not be immediate. The factors influencing the degree of impact include capital market flow and its availability and discipline, the economic and real estate cycle positions, the composition of the buyers and their debt ratio, alternative investment returns, and investor demand among others. The initial impact will most likely be on the capital markets and capital flows. The consensus is that a T-Bill interest rate level of 6% may trigger the beginning of a slow rise in cap rates. Noteworthy, is that in spite of prolonged soft market conditions in most property types, pricing has remained strong and even increased due to the decline in acceptable rates of return to investors. We may see a gradual rise in cap rates as the markets recover and effective rents increase to cost feasible levels. Capital flow into real estate are coming from numerous sources both domestically and globally. A shift in the stock market could occur with improving corporate profits, controlled inflation, and a strong economy. This could take the pressure off real estate for higher returns. The terms cap rate compression and fundamental shift have been used to describe the past two years and are being applied to the foreseeable future by some analysts. As indicated by long-term yield and return studies, true returns have been materially less than the investment when unwritten by the buyer. The underlying question is are the current pricing levels and unprecedented low acceptable rates of return sustainable? Current capital market returns range from about 3.2% to 5.3% for five to 10-year terms in alternative investment vehicles. Thus, the average returns for real estate, although low, are attractive vis-à-vis other asset classes. Current investors are represented by a high percentage of all cash buyers or low leveraged buyers and thus are not directly affected by increases in interest rates. Focus also needs to be on inflation too as rents increase either by the CPI and/or demand. That is, the growth factor in an investor s return impacts the rate of return and can push rates upward. Most respondents to the national investor surveys indicated that rising inflation would not negatively impact pricing until it increased by 5% or more. LVC Project No

42 ADDENDUM Glossary... A Memphis Investor Survey...B Certification...C General Assumptions and Limiting Conditions For a Consulting Assignment... D Professional Qualifications...E LVC Project No

43 GLOSSARY LVC Project No A

44 Assessed Value: Assessed value applies in ad valorem taxation and refers to the value of a property according to the tax rolls. Assessed value may not conform to market value, but it is usually calculated in relation to a market value base. 1 Capital Expenditure: Investments of cash or the creation of liability to acquire or improve an asset, e.g., land, buildings, building additions, site improvements, machinery, equipment; as distinguished from cash outflows for expense items that are normally considered part of the current period s operations. 2 Cash Equivalency: The procedure in which the sale prices of comparable properties sold with atypical financing are adjusted to reflect typical market terms. Complete Appraisal: The act or process of developing an opinion of value or an opinion of value developed without invoking the DEPARTURE RULE. 3 Cost Approach: This approach is based on the premise that an informed purchaser would pay no more than the cost of producing a substitute property with the same utility as the subject property. The analysis involves estimating the current cost (including both direct and indirect costs) to construct a replacement for the existing structure and related site improvements, deducting for evidence of accrued depreciation, and adding the estimated land value. Deferred Maintenance: Curable, physical deterioration that should be corrected immediately, although work has not commenced; denotes the need for immediate expenditures, but does not necessarily suggest inadequate maintenance in the past. 4 Economic Life: The period of time over which improvements to real estate contribute to property value. 5 Effective Date of the Appraisal: The date at which the value opinion in an appraisal applies, which may or may not be the date of inspection; the date of the market conditions that provide the context for the value opinion. 6 Effective Gross Revenue Multiplier (EGRM): A factor which reflects the relationship between the gross annual revenue of the real estate and its sale price or value. Effective Rent: 1) The rental rate net of financial concessions such as periods of no rent during a lease term; may be calculated on a discounted basis, reflecting the time value of money, or on a simple, straight-line basis. 7 2) The economic rent paid by the lessee when normalized to account for financial concessions, such as escalation clauses, and other factors. Contract, or normal, rents must be converted to effective rents to form a consistent basis of comparison between comparables. Exposure Time: The estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a retrospective estimate based upon an analysis of past events assuming a competitive and open market. Exposure time is different for various types of real estate and under various market conditions. It is noted that the overall concept of reasonable exposure encompasses not only adequate, sufficient and reasonable time but also adequate, sufficient and reasonable effort. The fact that exposure time is always presumed to occur prior to the effective date of the appraisal is substantiated by related facts in the appraisal process: supply/demand conditions as of the effective date of the appraisal; the use of current cost information; the analysis of historical sales information (sold after exposure and after completion of negotiations between the seller and buyer); and the analysis of future income expectancy estimated from the effective date of the appraisal. 8 Extraordinary Assumptions: An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser s opinion or conclusions. 9 Fair Market Share: The ratio of the submarket inventory over the fair market share. Fee Simple Estate: Absolute ownership unencumbered by any other interest or estate subject only to the four powers of government. 10 Floor Area Ratio (FAR): The relationship between the aboveground floor area of a building, as described by the building code, and the area of the plot on which it stands; in planning and zoning, often expressed as a decimal, e.g., a ratio of 2.0 indicates that the permissible floor area of a building is twice the total land area; also called building-to-land ratio. 7 Going Concern Value: Going concern value is the value of a proven property operation. It includes the incremental value associated with the business concern, which is distinct from the value of the real estate only. Going concern value includes an intangible enhancement of the value of an operating business enterprise which is produced by the assemblage of the land, building, labor, equipment, and marketing operation. This process creates an economically viable business that is expected to continue. Going concern value refers to the total value of a property, including both real property and intangible personal property attributed to the business value. 1 Gross Building Area (GBA): The sum of all areas at each floor as measured to the exterior walls. Highest and Best Use: 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. 11 Hypothetical Condition: That which is contrary to what exists but is supposed for the purpose of analysis. 12 Income Capitalization Approach: This approach derives a value indication for income-producing property by converting anticipated monetary benefits into a property value. This conversion is typically accomplished in two ways: A direct capitalization analysis where one year's income expectancy or an annual average of several years' income expectancies may be capitalized at a market-derived capitalization rate or a 1 The Appraisal of Real Estate, Eleventh Edition, Appraisal Institute, The Dictionary of Real Estate Appraisal, Third Edition, 1993, p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p The Dictionary of Real Estate Appraisal, Third Edition, 1993, p The Appraisal of Real Estate, 10th ed. (Chicago: Appraisal Institute, 1992), p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p The Dictionary of Real Estate Appraisal, Third Edition, "Uniform Standards of Professional Appraisal Practice" (Washington, D.C.: The Appraisal Foundation, 1996), p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), p The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute), p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p. 3. LVC Project No

45 capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment; secondly, a discounted cash flow analysis where the annual cash flows for the holding period and the reversion may be discounted at a specified yield rate. Insurable Value: Insurable Value is based on the replacement and/or reproduction cost of physical items that are subject to loss from hazards. Insurable value is that portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy. This value is often controlled by state law and varies from state to state. 1 Intended Use: The use or uses of an appraiser s reported appraisal, appraisal review, or appraisal consulting assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment. 13 Intended User: The client and any other party as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communications with the client at the time of the assignment. 14 Internal Rate of Return ( IRR ): The yield rate to the ownership position realized over the term of an investment. Investment Value: Investment value is the value of an investment to a particular investor based on his or her investment requirements. In contrast to market value, investment value is value to an individual, not value in the marketplace. Investment value reflects the subjective relationship between a particular investor and a given investment. When measured in dollars, investment value is the price an investor would pay for an investment in light of its perceived capacity to satisfy his or her desires, needs, or investment goals. To estimate investment value, specific investment criteria must be known. Criteria to evaluate a real estate investment are not necessarily set down by the individual investor; they may be established by an expert on real estate and its value, that is, an appraiser. 1 Leasehold Estate: The right to use and occupy real estate for a stated term and under certain conditions; conveyed by a lease. 15 Leased Fee Estate: An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease. 16 Limited Appraisal: The act or process of developing an opinion of value or an opinion of value developed under and resulting from invoking the DEPARTURE RULE. 17 Load Factor: The amount added to usable area to calculate the rentable area. It is also referred to as a rentable add-on factor which, according to BOMA, is computed by dividing the difference between the usable square footage and rentable square footage by the amount of the usable area. Convert the figure into a percentage by multiplying by "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), p The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p. 1. Market Value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby: (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their own best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale." 18 Market Value "As If Complete" On The Appraisal Date: Market value as if complete on the appraisal date is an estimate of the market value of a property with all construction, conversion, or rehabilitation hypothetically completed, or under other specified hypothetical conditions as of the date of the appraisal. With regard to properties wherein anticipated market conditions indicate that stabilized occupancy is not likely as of the date of completion, this estimate of value should reflect the market value of the property as if complete and prepared for occupancy by tenants. Market Value "As Is" On The Appraisal Date: Market value as is on the appraisal date is an estimate of the market value of a property in the condition observed upon inspection and as it physically and legally exists without hypothetical conditions, assumptions, or qualifications as of the date of appraisal. Marketing Period: The time it takes an interest in real property to sell on the market subsequent to the date of an appraisal. 7 Net Lease: Lease in which all or some of the operating expenses are paid directly by the tenant. The landlord never takes possession of the expense payment. In a Triple Net Lease all operating expenses are the responsibility of the tenant, including property taxes, insurance, interior maintenance, and other miscellaneous expenses. However, management fees and exterior maintenance are often the responsibility of the lessor in a triple net lease. A modified net lease is one in which some expenses are paid separately by the tenant and some are included in the rent. Net Rentable Area (NRA): 1) The area on which rent is computed. 2) The Rentable Area of a floor shall be computed by measuring to the inside finished surface of the dominant portion of the permanent outer building walls, excluding any major vertical penetrations of the floor. No deductions shall be made for columns and projections necessary to the building. Include space such as mechanical room, janitorial room, restrooms, and lobby of the floor "Uniform Standards of Professional Appraisal Practice" (Washington, D.C.: The Appraisal Foundation, 1996), p BOMA Experience Exchange Report, Income/Expense Analysis for Office Buildings (Building Owners and Managers Association, 1990) LVC Project No

46 Penetration Rate: The ratio of the actual market share of a submarket over the fair market share of a submarket. Principle of Substitution: This principle affirms that no prudent buyer would pay more for a property than the cost to acquire a similar site and construct improvements of equal desirability and utility without undue delay. Reconciliation: The strengths and weaknesses of the individual approaches to value may vary based on the quality and quantity of data available in each instance. The final value conclusion is based on the appraisers' judgment with respect to the appropriateness of each approach as it applies to the property being appraised. Replacement Cost: The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout. Sales Comparison Approach: This approach derives a value indication by comparing the subject property to similar properties that have recently sold, applying appropriate units of comparison and making adjustments, based on the elements of comparison, to the sale prices of the comparables. Analysis of properties currently listed for sale is also useful in setting the upper limit of value. The overriding premise of this approach is that an informed purchaser would pay no more than the cost of acquiring an equally desirable substitute. Scope of the Appraisal: Extent of the process in which data are collected, confirmed, and reported. 20 Self-Contained Appraisal Report: A self-contained appraisal report must include sufficient information to indicate that the appraiser complied with the requirements of STANDARD 1, including any permitted departures from the specific requirements. The amount of detail required will vary with the significance of the information to the appraisal. 21 Use Value: Use value is a concept based on the productivity of an economic good. Use value is the value a specific property has for a specific use. Use value focuses on the value the real estate contributes to the enterprise of which it is a part, without regard to the property s highest and best use or the monetary amount that might be realized upon its sale The Dictionary of Real Estate Appraisal, Third Edition, 1993, p "Uniform Standards of Professional Appraisal Practice" (The Appraisal Foundation, 2003 Edition), p. 24. LVC Project No

47 MEMPHIS INVESTOR SURVEY LVC Project No B

48

49 CERTIFICATION LVC Project No C

50 CERTIFICATION OF THE APPRAISERS The signers of this report, do, by their signatures on this report, certify that to the best of their knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, impartial, and unbiased professional analyses, opinions and conclusions. 3. We have no present or prospective interest in the subject matter or results of this report, and have no personal interest with respect to the parties involved. 4. We have no bias with respect to the results of this report or to the parties involved with assignment. 5. Our engagement in this assignment was not contingent upon developing or reporting predetermined results. 6. Our compensation is not contingent upon the reporting of a predetermined results that favors the cause of the client, the attainment of a stipulated result, or the occurrence of a subsequent event. 7. Our analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. John W. Cherry, Jr. has completed requirements of the continuing education program of the Appraisal Institute. Respectfully submitted, LandAmerica Valuation Corporation By: John W. Cherry, Jr., MAI, CRE Chief Appraiser State Certified General Appraiser By: Karen Burkhardt Dick, CRE LVC Project No

51 GENERAL ASSUMPTIONS AND LIMITING CONDITIONS FOR A CONSULTING ASSIGNMENT LVC Project No D

52 GENERAL ASSUMPTIONS AND LIMITING CONDITIONS FOR A CONSULTING ASSIGNMENT The following Standard Conditions apply to real estate consulting and market analysis engagements ( analysis ) by LandAmerica Valuation Corporation ("LandAmerica"). Special Conditions are added as required. Report Content: Analyses are performed and written reports are prepared in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and with the Appraisal Institute's Standards of Professional Appraisal Practice and Code of Professional Ethics. The analysis assumes market conditions as observed as of the current date of our market research stated in the letter of transmittal. These market conditions are believed to be correct; however, the analysts assume no liability should market conditions materially change because of unusual or unforeseen circumstances. No opinion is rendered as to property title, which is assumed to be good and marketable. Unless otherwise stated, no consideration is given to liens or encumbrances against the property. It is assumed that legal, engineering, or other professional advice, as may be required, has been or will be obtained from professional sources and that the report will not be used for guidance in legal or technical matters such as, but not limited to, the existence of encroachments, easements or other discrepancies affecting the legal description of the property. It is assumed that there are no concealed or dubious conditions of the subsoil or subsurface waters including water table and flood plain, unless otherwise noted. We further assume there are no regulations of any government entity to control or restrict the use of the property unless specifically referred to in the report. It is assumed that the property will not operate in violation of any applicable government regulations, codes, ordinances or statutes. This report is not intended to be an engineering report. We are not qualified as structural or environmental engineers; therefore we are not qualified to judge the structural or environmental integrity of the improvements, if any. Consequently, no warranty or representations are made nor any liability assumed for the structural soundness, quality, adequacy or capacities of said improvements and utility services, including the construction materials, particularly the roof, foundations, and equipment, including the HVAC systems, if applicable. Should there be any question concerning same, it is strongly recommended that an engineering, construction and/or environmental inspection be obtained. We will call to your attention any apparent defects or material adverse conditions which come to our attention. In the absence of competent technical advice to the contrary, it is assumed that the property being analyzed is not adversely affected by concealed or unapparent hazards such as, but not limited to asbestos, hazardous or contaminated substances, toxic waste or radioactivity. Information furnished by others is presumed to be reliable, and where so specified in the report, has been verified; but no responsibility, whether legal or otherwise, is assumed for its accuracy, and it cannot be guaranteed as being certain. No single item of information was completely relied upon to the exclusion of other information. Analysis reports may contain estimates of future financial performance, estimates or opinions that represent the analyst's view of reasonable expectations at a particular point in time, but such information, estimates or opinions are not offered as predictions or as assurances that a particular level of income or profit will be achieved, that events will occur, or that a particular price will be offered or accepted. Actual results achieved during the period covered by our prospective financial analyses will vary from those described in our report, and the variations may be material. Any proposed construction of rehabilitation referred to in the analysis is assumed to be completed within a

53 reasonable time and in a workmanlike manner according to or exceeding currently accepted standards of design and methods of construction. It should be specifically noted by any prospective mortgagee that the analysis assumes that the property will be competently managed, leased, and maintained by financially sound owners over the expected period of ownership. This engagement, unless otherwise noted, does not entail an evaluation of management's or owner's effectiveness, nor are we responsible for future marketing efforts and other management or ownership actions upon which actual results will depend. The Americans with Disabilities Act ("ADA") became effective January 26, LandAmerica has not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property, together with a detailed analysis of the requirements of the ADA, could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since LandAmerica has no direct evidence relating to this issue, LandAmerica did not consider how possible noncompliance with the requirements of ADA would impact the value of the property being analyzed. Use of the Report: The analysis applies only to the property or market area described and for the purpose so stated and should not be used for any other purpose. The report and estimates of future financial performance included therein, are intended for the information of the person or persons to whom they are addressed, solely for the purposes stated therein, and should not be relied upon for any other purpose. The addressee shall not distribute the report to third parties without prior permission of LandAmerica. Before such permission shall be provided, the third party shall agree to hold harmless relative to their use of the report. Neither our report, nor its contents, nor any reference to the analysts or LandAmerica, may be included or quoted in any offering circular or registration statement, prospectus, sales brochure, appraisal, loan or other agreement or document without our prior written permission. Permission will be granted only upon meeting certain conditions. Generally, LandAmerica will not agree to the use of its name as a "named expert" within the meaning of the Securities Act of 1933 and the Securities Act of Neither the report nor any portions thereof (especially the identity of the analysts or LandAmerica) shall be disseminated to the public through public relations media, news media, advertising media, sales media or any other public means of communication without the prior written consent and approval of LandAmerica. The date(s) to which the conclusions apply is set forth in the letter of transmittal and within the body of the report. The financial analysis is based on the purchasing power of the United States dollar as of that date. Terms of the Engagement: Assignments are accepted with the understanding that there is no obligation to furnish services after completion of the original assignment. If the need for subsequent service related to a specific assignment (e.g., testimony, updates, conferences, reprint or copy service) is contemplated, special arrangements acceptable to LandAmerica must be made in advance. The working papers for this engagement have been retained in our files and are available for your reference. Unless otherwise stated, no effort has been made to determine the possible effect, if any, on the subject property of energy shortage or future federal, state or local legislation, including any environmental or ecological matters or interpretations thereof. We take no responsibility for any events, conditions or circumstances affecting the subject property or its value, that take place subsequent to either the effective date of the analysis cited in the report or the date of our field inspection, whichever occurs first.

54 LandAmerica does not, as part of its analysis, perform an audit, review or examination (as defined by the AICPA) of any of the historical or prospective financial information used, and therefore does not express any opinion with regard to same. The Addressee agrees to indemnify LandAmerica and its respective partners, principals, affiliates, agents and employees, and its successors and assigns (LandAmerica and each such person being an "Indemnified Party") from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Parties may be subject under any applicable federal or state law, related to, or arising out of, the subject analysis and/or the engagement of LandAmerica pursuant to the assignment and will reimburse any Indemnified Party for all reasonable expenses (including counsel fees and expenses) as they are incurred in connection with the investigation of, preparation for, or defense of, any pending or threatened claim or action or proceeding arising therefrom, whether or not such Indemnified Party is a party. The Addressee will not be liable under the foregoing indemnification provisions to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted primarily from the bad faith, gross negligence or recklessness of an Indemnified Party. LandAmerica's maximum liability relating to services rendered under this report (regardless of form of action, whether in contract, negligence, or otherwise) shall be limited to the fee paid to LandAmerica for the portion of its services or work products giving rise to liability. In no event shall LandAmerica be liable for consequential, special, incidental, or punitive losses, damages, or expenses (including, without limitation, lost profits, opportunity costs, etc.) even if it has been advised of their possible existence. This engagement may be terminated whether by client or LandAmerica at any time upon written notice to that effect to the other parties, it being understood that, unless LandAmerica shall unilaterally terminate the engagement without the client's consent and without reasonable cause, the provisions related to the payment of fees and expenses through the date of termination will survive any termination, and it being further understood that the indemnification and hold harmless provisions shall survive any termination thereof, whether or not such termination is unilateral. Invoices are due upon receipt. Invoices not paid after 30 days from issuance will be subject to a late fee calculated at a 10% per annum rate of interest. The client is responsible for all costs of collection, including attorney's fees.

55 PROFESSIONAL QUALIFICATIONS LVC Project No E

56 John W. Cherry, Jr., MAI, CRE Profile John W. Cherry, Jr., MAI, CRE has approximately 30 years of extensive experience in real estate valuation and investment analysis including a diversified background in the valuation of real estate for a wide range of applications including market value appraisals, reviews, appraisal support for both conventional and bond financed properties, due diligence, and specialized valuations including wholesale trade marts, arenas and stadiums. These activities have been conducted on behalf of major financial institutions, pension funds, government agencies, major corporations, individual investors, and legal firms. The types of properties appraised and engagements include: Preparation of market value appraisals for all types of real estate with a full range of valuation objectives; Intensive experience in the valuation of regional wholesale marts and regional shopping malls; Market studies for existing or proposed development projects; Investment analysis via lease analysis and discounted cash flow techniques before and after debt service; Mixed-use land and subdivision development valuation; and Special purpose properties. Professional Affiliations MAI Appraisal Institute CRE The American Society of Real Estate Counselors Certified General Real Property Appraiser State of Georgia License # Certified General Real Property Appraiser State of Florida License # RZ Certified General Real Property Appraiser State of Tennessee License # 1070 Affiliate Member Atlanta Board of Realtors Member National Association of Industrial & Office Properties Professional History Chief Appraiser LandAmerica Valuation Corporation Director Southeast Region Practice Leader Real Estate Advisory Services PricewaterhouseCoopers LLP Manager Laventhol & Horwath Vice President Coldwell Banker Assistant Vice President C&S National Bank Education Bachelor of Business Administration Oglethorpe University Atlanta, Georgia

57 Executive Bio Karen Burkhart Dick, CRE Executive Vice President - Brokerage/Advisory Services PROFESSIONAL EXPERIENCE (Direct) (Cell) kburkhartdick@ackermanco.net Karen Burkhart Dick, CRE is an Executive Vice President of Ackerman & Co. where she is responsible for the day-to-day operations and management of the fi rm s brokerage division. Ms. Dick provides real estate advisory and asset management services to clients. She works on behalf of developers, owners/investors, and public officials on a variety of commercial and economic development projects in the Southeast, representing all real estate sectors. She offers high-level service in marketing and positioning properties, valuation, market and feasibility analysis, highest and best use analysis, smart growth strategies, and other matters related to real estate problem-solving. Ms. Dick has more than 15 years of commercial real estate experience. Prior to joining Ackerman & Co. in 1998, she was a real estate consultant with Haddow & Company (Vice President and Co-Founder) and with Landauer Associates, an international consulting fi rm. REPRESENTATIVE CLIENTS/PROJECTS Asset Mangement Services The Transinvest Group Pharr Road (100,000 SF offi ce building) and Gwinnett Place Business Park (100,000 SF offi ce and fl ex space) H.J. Russell & Company - Two retail properties AFR Associates - Two industrial properties Advisory Services Developers/Owners - Atlanta Neighborhood Development Partnership, Corporate Campus LLP, First Church Community Development Corporation, Nacoochee Village LLC Communities - Clayton County/Southern Regional Medical Center, City of Atmore (AL), City of Holly Springs (GA), City of Jonesboro (GA), City of Macon (GA), City of McDonough (GA) Memphis/Shelby County (TN), South Fulton Chamber of Commerce CREDENTIALS AND AFFILIATIONS Counselor of Real Estate (CRE) designation Certifi ed Commercial Investment Member (CCIM) - Candidate Realtor of the Year (2003) - Atlanta Commercial Board of Realtors Deal of the Year (2003) - Ackerman & Co. Who s Who in Commercial Real Estate ( ) - Atlanta Business Chronicle Atlanta Commercial Board of Realtors - Current Board of Directors Member National Association of Realtors (NAR) & Georgia Association of Realtors (GAR) Commercial Real Estate Women of Atlanta (CREW) - Former President Real Estate Group of Atlanta (REGA) - Former President Georgia Planning Association (GPA) - Former Board Member Licensed Real Estate Broker - State of Georgia Certifi ed General Real Property Appraiser - State of Georgia Georgia Institute of Technology - Master of City Planning University of Kentucky - Bachelor of Science in Landscape Architecture 1040 Crown Pointe Parkway, Suite 200, Atlanta, GA ph: fax: ackermanco.net