Kitsap County Assessor Narrative for Countywide Drug Store Appraisal Date 1/1/2014, Tax Year 2015 Updated 03/31/2014 by CM20

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1 Kitsap County Assessor Narrative for Countywide Drug Store Appraisal Date 1/1/2014, Tax Year 2015 Updated 03/31/2014 by CM20 Valuation Summary Approach Used The income approach was considered the best approach for this property type. Analysis and Conclusion Summary - The three approaches to value were considered. The cost approach is unreliable for this property type. Components such as replacement cost new and depreciation are difficult to calculate due to rapidly changing costs of labor and materials, a variety of obsolescence items including mechanical or power supply, changing demands, and other unaccounted for items. The cost approach is given little consideration in the final analysis. A market or sales approach uses sale prices of comparable properties. Kitsap County lacked sufficient, recent sales to develop a cost per square foot market approach. The income approach is the best method for valuing these properties. The income model was developed with local market rents, vacancy, and expenses collected from our mail survey, Board of Equalization and State Board of Tax Appeal files, site visits, and local sales, in addition to national publications. Property Type Overview Population Drug stores are single tenant standalone buildings. The countywide population consists of seven buildings located in Bremerton, Silverdale, Port Orchard, and Kingston. These buildings range in size between 14,406 square feet and 18,187 square feet. Drug stores are located at primary intersections representing superior locations throughout the county. Drug store tenants in attached units associated with shopping centers are valued using the Community Shopping Center model for an anchor tenant. Economic Condition The current market conditions are improving based on the increase in sales and listings for this property type. Land to Building Ratio The median land to building ratio plus one average deviation is 5.78:1. Since standalone drug stores follow a formula for building and lot size, the deviation for this property is very small and does not adequately indicate whether property has useable excess land. Review of zoning requirements such as total lot coverage or parking requirements, as well as topography or shared easements, must also be considered before calculating excess land. Rating System Two income classes were recognized based on location, traffic, zoning, age, condition, and synergy from surrounding commercial properties. Rating is based on retail classification guidelines. Model Calibration Preliminary Ratio Analysis Three drug store sales occurred countywide between 01/01/2009 and 03/31/2014. The median ratio was 38% with a coefficient of dispersion (COD) of Since initial sales of drug stores are a sale/leaseback agreement, and resale of national chain operated stores have values placed more on the credit worthiness of the business enterprise, these sales were not used to establish value. G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc

2 Narrative for Drug Store (continued) Sales Approach Data and Analysis Regional Sales - Range of Sales Dates 01/01/ /31/2014 Insufficient valid local sales prevented the development of a market approach. Three sales occurred in Kitsap County: the Rite Aid in Kingston, and the Walgreens in Bremerton that sold twice. Price per square foot ranged from $ to $ Nine closed sales of drug store properties from other counties were reviewed. Price per square foot ranged from $ to $ with a median of $ Additional sales and listings of single tenant large retail structures from Kitsap County and surrounding counties were used for analysis on the principal of substitution. Drug stores, built by or for the intended tenant are at primary intersections representing superior locations throughout the county. The tenant (drug store) typically sells the property and leases it back. A saleleaseback transaction is defined as a financing arrangement in which real property is sold by its owneruser, who simultaneously leases the property from the buyer for continued use. Dictionary of Real Estate Appraisal, Fourth Edition, Appraisal Institute As such, the value dictated by these sales is for value in use rather than the fair market value as if it were an unencumbered fee estate. Sale and resale of these properties reflect a value more attributable to the creditworthiness of the business enterprise than the real estate value itself. Current Sale Listings Seven current sales listings of occupied drug stores from around Washington State were reviewed. Price per square foot ranged from $433 to $724 per square foot with a median value of $477. Additional sales listings for single tenant standalone retail buildings were reviewed based on the principal of substitution and given more weight in the analysis. Rates No market rates were developed. Income Approach Data and Analysis Data Three local drug store rents were documented. The leases in place for drug stores occupied by a national chain are typically for twenty to twenty-five years with multiple five-year renewal clauses and are an absolute net basis where the tenant is responsible for all operating expenses. The lease amount established is more by investors estimate of required return rather than market rates. Therefore, the documented rents of stores currently occupied by chain pharmacy retailers have not been used as a basis of value. Using the principal of substitution, review of other single tenant structures, and their rents, were used to develop the income model. Vacancy Data There were no vacancies in Kitsap County. Typical drug store leases are for a term of years with multiple 5-year options. A modest 2% was applied for unanticipated collection. Expense Data Drug stores rent on a triple net () basis. A modest 5% rate for management and reserves was applied. Capitalization (Cap) Data Cap rates were available from the three local drug store sales. Six drug store sales from western Washington had cap rates that ranged between 5.95% and 8.64%. Seven sale listings reflect cap rates between 5.50% and 7.00%. Regional and national publications were reviewed for cap rate ranges. Comparison of single tenant retail and drug store cap rates show a disparity in the rates associated on value given by investors to the credit worthiness of the chain pharmacy retailers rather than the real estate. Cap rates from retail were adopted. Current Lease Listings No listing for freestanding drug stores was found within Kitsap County, additional lease rates were reviewed from surrounding counties. Seven sales listings included current lease rates which ranged from $24.90 to $40.59 per square foot. Listings for former drug stores, and single tenant retail buildings were reviewed for rental information for local and statewide properties. G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc

3 Narrative for Drug Store (continued) Model Validation Final Ratio Analysis The three drug store sales were considered invalid as the basis of the purchase price was more related to the leased fee estate value attributed to the long-term over market rent associated with these stores rather than the value of the real estate. Sources Internet Publications Boulder Group Q the Net Lease Drug Store Report Calkain Research Pharmacy Report 2013 Calkain Monthly Net Lease Trend Report, August 2013 Cassidy Turley Single Tenant Net Lease Investment Overview Fall 2013 Cassidy Turley US Retail November 2012 Integra Realty Resources Viewpoint 2014 Marcus & Millichap 4th Quarter 2012 Realty Rates 3rd Quarter 2013 Other - Kitsap County Board of Equalization appeal documentation Drug Store Valuation: Important Issues to Consider for Ad Valorem Taxation, Keith E. Darin, MAI You can t get the value right if you get the rights wrong. David C. Lennhoff, Appraisal Journal Jan G:\ASSR\comml\PROPERTY TYPES\29_Rtl greater than 100k\MODEL DOCUMENTATION DRUG\15_Narrative Drug.doc

4 RETAIL IFICATION GUIDELINES A Location Synergy Access Visibility Traffic Parking Quality of Building Condition of Building Delivery Access Associated with a shopping center, attached or free standing building. Destination shopping such as shopping centers or designated retail developments. Multiple accesses, lighted access, round-a-bouts, allway stop signs. Store front or signage highly visible. High traffic count or destination shopping area. Ample on-site parking. Very good retail New or recently renovated building with with modern mechanical impressive façade. upgrades. Drug stores. Good delivery access to rear of building, possibly loading docks. Highest and Best Use As developed. B Associated with a shopping center or, attached or free standing building. Destination or easy impulse shopping location. Multiple accesses, lighted access, round-a-bouts, allway stop signs. Store front or signage highly visible. High traffic count or destination shopping area. In midst of downtown core walking pattern. Ample on-site parking or adequate nearby parking for locations. Good retail building with attractive façade. Drug stores. New or recently renovated with modern mechanical upgrades. Good delivery access to rear of building, possibly loading docks. As developed. C Free standing or Adequate access, Good traffic from possible multiple neighboring business accesses, turn lane mix. on busy roads. Good store front or signage visibility. Adequate traffic counts. In midst of or at edge of walking pattern. Adequate on-site parking or nearby parking for locations Average retail building, typical façade. Average condition, no functional obsolescence. All mechanical components meet requirements. Typical maintenance on building completed as needed. Rear access man doors with good road. As developed. D Free standing, secondary street locations, or in defunct shopping center. Limited synergy from neighboring businesses. Adequate access, possibly difficult during high traffic commute hours. Limited store front or signage visibility. Adequate to low traffic count, or extremely high count during peak commute hours. Off the main walking pattern for. Adequate to limited on-site parking or nearby parking for locations Possible deferred Average retail maintenance, possible building with plain functional obsolescence. May or dated façade. not meet todays standards for mechanical improvements. As developed, Possible rear possibly access, alley access. transitioning away from current use. E Free standing, secondary street locations, or in defunct shopping center. Limited or none. Adequate to difficult Very limited. access. Low traffic count. Not part of typical walking pattern for areas. Limited parking, distance to parking in areas. Fair or low quality retail building, plain or dated façade. Needs maintenance, possible functional obsolescence, approaching need for redevelopment. Does not meet todays mechanical standards. Transitioning away Limited with narrow from current use or alley, or no rear need of complete access. redevelopment to today's standards. Onsite parking is not typical in areas where 100% building footprint to land is allowed. Locations within the typical walking pattern for areas are prime retail sites. Those located at the fringes or back streets are less desirable. Retail stores in excess of 10,000 sf for single tenant occupancy tend to be square in shape. Retail stores are typically rectangular in shape with the short side being the store frontage. Consider higher rent class if the long side is store frontage. Standalone drug stores are rated Class A, except for those located in Bremerton, which are rated Class B.

5 Income Model: Property Type: Neighborhood: Retail Countywide 0 Not Used Outside Rtl>100K SA Drug Class A Class B Class C Class D Class E /14/2014

6 Local Income Survey Property Type: Sub Type: Retail-Large & Drug Store Retail-Large & Drug Store PGI per Unit Vacancy EGI per Unit Expense % NOI per Unit $ % $30.00 % $28.50 $ % $ % $15.80 $ % $ % $24.70 $ % $ % $23.36 $ % $ % $13.48 $ % $ % $15.94 $ % $ % $14.73 $ % $ % $11.36 $ % $ % $14.52 $ % $ % $13.18 $ % $ % $16.42 $ % $ % $9.39 $ % $ % $1 $ % $ % $13.87 $ % $ % $13.44 $ % $ % $9.85 $ % $ % $8.08 $ % $ % $8.82 $ % $ % $11.00 $ % $ % $6.17 $ % $ % $8.09 $ % $ % $5.65 $ % $ % $0.00 $ % $ % $7.00 $ % $9.00 % $8.55 $ % $ % $8.25 $ % $ % $8.50 $ % $ % $8.25 $ % $ % $7.34 $ % $ % $6.90 $ % $6.81 % $6.47 $ % $ % $6.08 $ % $ % $6.05 $ % $ % $1.55

7 Tax Year 2015 Drug Stores Sales from 01/01/2009 to 03/31/2014 Drug Store Sales No. NBRHD PC Account Number Project Name Units Excise VC Sale Date Sale Price Price/Unit Assessed Value Ratio Walgreens Kitsap Way 14, EX03007 M 06/15/2011 $ 6,225,000 $ $ 2,564, Walgreens Kitsap Way 14, EX03298 M 06/26/2012 $ 6,750,000 $ $ 2,564, Rite Aid - Kingston 18, EX05633 M 08/15/2013 $ 5,615,000 $ $ 3,932, Single Tenant Retail Sales No. NBRHD PC Account Number Project Name Units Excise VC Sale Date Sale Price Price/Unit NW Liquor and Wine 5, EX08642 V 12/17/2013 $ 650,000 $ Courtesy SW of Edvard & Viking Wy 19, EX02159 V 04/10/2013 $ 1,400,000 $ Destination Harley Davidson , EX08251 D 11/26/2013 $ 3,500,000 $ Outback Steakhouse Restaurant 6, EX08882 V 12/27/2013 $ 1,200,000 $ Wherehouse Music Party City La Z Boy Furniture Applebees 49, EX03750 D 06/12/2013 $ 6,500,000 $ Furniture Store and Sporting Goods 118, EX05260 V 08/05/2013 $ 10,050,000 $ Plat of Central Kitsap Mall- Michaels Center , EX03749 W 06/12/2013 $ 9,500,000 $ NBRHD Neighborhood Median $ West Bremerton Mean $ Kitsap Way Kingston Silverdale Central Kitsap Brownsville Highway VC Validity Code PC V Valid Sale 590 M Invalid - Other 592 D Not and economic unit Property Class Other Retail Trade Shopping Center -Community Out of Area Drug Store Sales No. Location Project Name Units Excise Sale Date Sale Price Price/Unit Cap* City County 1 Bothell Snohomish Walgreens 13, /05/2010 $ 3,735,000 $ Hoquiam Grays Harbor Rite Aid - Hoquiam 17,363 E /10/2012 $ 6,563,330 $ % $ Lake Stevens Snohomish Walgreens 15, /01/2013 $ 9,294,605 $ % $ Lake Stevens Snohomish Walgreens 14,891 E# /18/2010 $ 7,276,697 $ Lynnwood Snohomish Walgreens 12, /28/2013 $ 5,890,000 $ % $ Tacoma Pierce Walgreens 13, /07/2012 $ 5,028,000 $ % $ Spokane Spokane Walgreens 15, /05/2012 $ 4,800,000 $ Graham Pierce Rite Aid Graham 14, /04/2013 $ 5,350,000 $ % $ on King Rite Aid 16, /25/2013 $ 6,645,000 $ % $ Median $ % $ Mean $ % $ Out of Area Single Tenant Retail Sales No. Location Project Name Units Excise VC Sale Date Sale Price Price/Unit Cap* City County 1 Sequim Clallam Big 5 10, /03/2012 $ 1,700,000 $ Tacoma Pierce Rite Aid in Shopping Center 21, /24/2013 $ 2,365,000 $ % $ on King Auto Zone 6, /04/2013 $ 1,408,815 $ Bellingham Whatcom PetCo 12, /20/2012 $ 4,050,000 $ % $ Tacoma Pierce Pier 1 Imports 8, /20/2012 $ 3,225,000 $ lakewood Pierce Discount Store 41, /12/2012 $ 3,950,000 $ Tacoma Pierce Lazy Boy 21, /27/2013 $ 3,050,000 $ Tacoma Pierce Tacoma Lighting 11, /06/2013 $ 810,000 $ Tacoma Pierce O'Reilly Auto Parts 6, /25/2013 $ 1,813,230 $ Tacoma Pierce Hollywood Video/Subway 10, /23/2012 $ 4,000,000 $ Tacoma Pierce discount store/warehouse 6, /29/2013 $ 900,000 $ Tacoma Pierce Auto Zone 7, /27/2012 $ 1,525,000 $ Spokane Spokane Former CompUSA 21, /07/2012 $ 3,000,000 $ Seattle King Pet Smart 26, /18/2013 $ 7,246,400 $ SeaTac King Auto Zone 7, /21/2013 $ 1,465,000 $ Burien King Value Village 23, /12/2012 $ 4,125,000 $ Kent King Central Ave N Bldg 22, /26/2013 $ 1,190,000 $ Issaquah King O'Reilly Auto Parts 5, /11/2013 $ 675,000 $ Median $ % $ Mean $ % $ *Cap rates developed from net operating income (NOI) from listings applied to final sales price. G:\ASSR\comml\PROPERTY TYPES\05_Retail\RETAIL\MODEL DOCUMENTATION\15_Retail_Model_Documentation\15_Drug Stores2

8 No. Drug Store Listings Tax Year 2015 Drug Stores Sale and Lease Listings Location Price Lease Lease Source Project Name Units Sale Date Sale Price Cap City County Per Unit Rate Type 1 Issaquah King CBA Walgreens 15,120 Listing $ 7,100,000 $ % $ Federal Way King Loopnet Walgreens 14,446 Listing $ 6,798,000 $ % $ Bremerton Kitsap Loopnet Walgreens 14,490 Listing $ 7,724,000 $ % $ Tacoma Pierce Loopnet Walgreens & Starbucks 15,154 Listing $ 10,975,000 $ % $ Burlington Skagit Loopnet Walgreens 14,753 Listing $ 8,200,000 $ % $ Marysville Snohomish CBA Bartell Drugs 14,300 Listing $ 6,192,500 $ % $ Lynnwood Snohomish Loopnet Walgreens Lynnwood 12,336 Listing $ 5,890,000 $ % $ Median $ % $ Mean $ % $ Single Tenant Retail Listings No. Location Price Lease Lease Source Project Name Units Sale Date Sale Price Cap City County Per Unit Rate Type 1 Sequim Clallam CBA former Sears 13,000 Listing $ 560,000 $ Sequim Clallam CBA former Rite Aid 22,645 Listing $ Bellevue King CBA Hour Fitness 43,299 Listing $ 7,323,066 $ % $ Federal Way King CBA former Bally Fitness 77,531 Listing $ 3,500,000 $ Issaquah King CBA Big Lots 32,517 Listing $ 7,544,205 $ % $ Redmond King Loopnet former Ethan Allen 40,320 Listing $ 8,750,000 $ % $ on King CBA former McLendon Hardware 35,936 Listing $ 4,000,000 $ Seattle King CBA former PriceCo 38,384 Listing $ 6,750,000 $ % $ Tukwila King CBA FedEx Kinkos 17,588 Listing $ 3,500,000 $ Woodinville King CBA McLendon Hardward 18,928 Listing $ 5,710,000 $ % $ Bremerton Kitsap CBA Boater's World 6,600 Listing $ Port Orchard Kitsap CBA former Hollywood video 5,040 Listing $ Port Orchard Kitsap CBA Bethel (Safeway) strip 7,510 Listing $ Poulsbo Kitsap CBA former Hollywood Video 6,600 Listing $ 1,400,000 $ Silverdale Kitsap CBA Long's 24,446 Listing $ Tacoma Pierce CBA former Bally Fitness 67,200 Listing $ 4,000,000 $ Tacoma Pierce CBA former Rite Aid 16,182 Listing $ Arlington Snohomish CBA former Food Pavilion 66,730 Listing $ 5,500,000 $ % $ Lynnwood Snohomish CBA Ritz Property 27,000 Listing $ 4,950,000 $ Lynnwood Snohomish CBA Vacant 26,656 Listing $ 3,590,000 $ Lynnwood Snohomish CBA Susumu Restaurant 6,428 Listing $ 1,290,000 $ % $ Marysville Snohomish CBA Allen Creek Shopping 28,064 Listing $ 1 23 Stanwood Snohomish CBA former Ace Hardward 13,920 Listing $ 2,250,000 $ % $ 1 24 Spokane Spokane CBA former Ashley Furniture 58,202 Listing $ 4,995,000 $ % $ Spokane Valley Spokane CBA former Hollywood Video 28,162 Listing $ 26 Olympia Thurston CBA former Bally Fitness 65,292 Listing $ 3,250,000 $ Olympia Thurston CBA former furniture store 28,020 Listing $ 3,650,000 $ Olympia Thurston CBA former Stack Furniture 28,020 Listing $ 3,650,000 $ % $ Bellingham Whatcom CBA former grocery store 25,000 Listing $ Bellingham Whatcom CBA Michael's 23,687 Listing $ 4,071,000 $ % $ Bellingham Whatcom CBA Bakker Building 15,000 Listing $ 2,400,000 $ Blaine Whatcom CBA former Rite Aid 31,456 Listing $ Lynden Whatcom CBA former Rite Aid 20,122 Listing $ 7.00 Median $ % $ G:\ASSR\comml\PROPERTY TYPES\05_Retail\RETAIL\MODEL DOCUMENTATION\15_Retail_Model_Documentation\15_Drug Stores2