APPRAISAL REPORT PROPOSED LAKE ARROWHEAD AIRPORT LOCATED AT LAKE ARROWHEAD SAN BERNARDINO COUNTY, CALIFORNIA PREPARED FOR

Transcription

1 APPRAISAL REPORT OF PROPOSED LAKE ARROWHEAD AIRPORT LOCATED AT LAKE ARROWHEAD SAN BERNARDINO COUNTY, CALIFORNIA PREPARED FOR BAYSIDE FINANCIAL CORP IRVINE BLVD, SUITE 200 TUSTIN, CA DATE OF VALUE: JUNE 7, ANITA LANE NEWPORT BEACH, CA 92660

2

3 June 7, 2008 Vic Domines Bayside Financial Corp Irvine Blvd, Suite 200 Tustin, CA Re: Appraisal of : Lake Arrowhead Airport Proposed Commercial Airport and Site Improvements On 80 Acres of Land Lake Arrowhead, California San Bernardino County Assessor s Parcels: , , Dear Mr. Domines, As you requested, I have conducted the required investigations, gathered the necessary data, and made certain analyses that have enabled me to form an opinion of the market value of the fee simple interest in the above captioned property on both an as-is and prospective basis. The following summary appraisal report is in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP.) I have also complied with the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute. This analysis follows the procedures set forth in the Scope of the Report section of this report. Please note the Special Assumptions and Limiting Conditions contained in the Limiting Conditions section of the attached appraisal report. The appraised property consists of 80 acres of land contained in three contiguous parcels and partially improved with an FAA-certified 3,620 foot runway and taxi areas, ranch house, horse barn, various outbuildings and site improvements. The site is surrounded by Forest Service land and there is an additional 20± acres that may be annexed by the subject s owners through adverse possession. Based on the investigation and analyses undertaken, I have formed the opinion that as of June 7, 2008, and subject to the assumptions and limiting conditions set forth in the appraisal report, the "As-Is" market value of the fee simple interest in the Subject, including the residence, is: SIX MILLION FOUR HUNDRED THOUSAND DOLLARS [$6,400,000] Based on the investigation and analyses undertaken, and the projected completion of improvements comprising paving and lighting of 3,170 feet of runway and construction of ANITA LANE NEWPORT BEACH, CA 92660

4 enclosed hangars and 40 tiedowns, we have formed the opinion that as of June 7, 2008, and subject to the assumptions and limiting conditions set forth in the appraisal report, it is my opinion that the Hypothetical Prospective [Stabilized] market value of the fee simple interest in the Subject, including the residence, is: ELEVEN MILLION FIFTY THOUSAND DOLLARS [$11,050,000] Please direct your attention to the Special Assumptions and Limiting Conditions relating to this appraisal and contained in the Assumptions and Limiting Conditions section in the appraisal. This appraisal was made according to the following Special and General assumptions and limiting conditions. The appraisers have the right to review the documentation and amend the opinions of value as warranted. Please be advised that the terms of the special assumptions and limiting conditions must be met for the value opinions to be valid. The client has requested that the residence located on the subject property be separately valued. The residence, which is described within the body of the appraisal report, is situated on Assessor s Parcel , which contains 20 acres. The parcel encompasses a portion of the runway as well as extensive vacant land. If the residence were to be sold apart from the airport facility, the airport would be severely impacted. It could theoretically be accomplished via a re-parceling, or a subdivision of the parcel. As such, I have made a hypothetical assumption that the subject residence has been separated from the other parcel(s) in such a manner as to not impact the airport operations and to have unrestricted access to the forest service road. Under this hypothetical scenario, it is my opinion that the residence would have a market value of $300,000. THREE HUNDRED THOUSAND DOLLARS ($300,000) Under this scenario, the market value of the remainder of the subject property would be diminished by this amount. SPECIAL ASSUMPTIONS & LIMITING CONDITIONS 1. This appraisal assumes the proposed 50 hangars, x 52 and x 40, will be built, and all runway paving, striping and pilot-controlled lighting are completed in compliance with all regulatory requirements. Working plans and specifications with the necessary departmental approvals are required. The type and quality of construction are to be in compliance with prevailing good quality new construction for general aviation hangars. 2. This appraisal assumes that a valid lease contract between the owner and a public fire protection agency will be prepared and signed for a monthly rental rate of $5,000 or more ANITA LANE NEWPORT BEACH, CA 92660

5 3. This appraisal is contingent upon documentation of all necessary municipal and regulatory approvals for the operation of the proposed subject airport. 4. Finalized construction drawings and construction contracts were not yet available as of the inspection and valuation date. If there is a significant departure regarding the scope of the proposed development, this appraisal report and its conclusions are obsolete and the appraiser reserves the right to modify any conclusions, including value conclusions. This letter must remain part of the attached appraisal report. The report must remain intact and can only be understood in its entirety. Thank you for this opportunity to be of service to Bayside Financial. I trust that this appraisal report meets with your requirements. If you have any questions, please feel free to call me at any time. Respectfully submitted, Bruce Diller, MAI CA Certified General Appraiser AG ANITA LANE NEWPORT BEACH, CA 92660

6

7 TABLE OF CONTENTS Title Page... i Letter of Transmittal... ii Table of Contents... 1 Assumptions and Limiting Conditions... 2 Certification... 6 Summary of Salient Facts... 7 INTRODUCTION... 8 Property Identification Subject Property History Purpose of the Report Function of the Report Scope of the Report Date of Valuation Personal Property Exposure Period Competency Provision Property Interest Appraised Market Value Defined AREA DESCRIPTION SITE DESCRIPTION IMPROVEMENT DESCRIPTION HIGHEST & BEST USE PROPERTY VALUATION INCOME CAPITALIZATION APPROACH FINAL VALUE RECONCILIATION AND VALUE CONCLUSIONS ADDENDA

8 ASSUMPTIONS AND LIMITING CONDITIONS This appraisal was made according to the following Special and General assumptions and limiting conditions. The appraiser has the right to review the documentation and amend the opinions of value as warranted. Please be advised that the terms of the special assumptions and limiting conditions must be met for the value opinions to be valid. SPECIAL ASSUMPTIONS & LIMITING CONDITIONS 1. This appraisal assumes the proposed 50 hangars, x 52 and x 40, can be built, and all runway paving, striping and lighting are completed in compliance with all regulatory requirements. Working plans and specifications with the necessary departmental approvals are required. The type and quality of construction are to be in compliance with prevailing good quality new construction for general aviation. 2. This appraisal assumes that a valid lease contract between the owner and a public fire protection agency will be prepared and signed for a monthly rental rate of $5,000 or more. 3. This appraisal is contingent upon documentation of all necessary municipal and regulatory approvals for the operation of the proposed subject airport. 4. Finalized construction drawings and construction contracts were not yet available as of the inspection and valuation date. If there is a significant departure regarding the scope of the proposed development, this appraisal report and its conclusions are obsolete and the appraiser reserves the right to modify any conclusions, including value conclusions. GENERAL ASSUMPTIONS AND LIMITING CONDITIONS 1. No responsibility is assumed by us for matters that are legal in nature. No opinion of title is rendered, and the property is appraised as though free of all encumbrances and the title is assumed to be marketable. No survey of the boundaries of the property was undertaken by the appraisers. All dimensions and legal descriptions found through available records or onsite inspections are assumed to be correct. 2. The report contains conclusions and opinions that are the result of the training, experience and judgment of the appraiser in the particular circumstances under which the report was prepared. No representation or warranty is made and none may be assumed or implied as to whether any other appraiser working in the same or different circumstances would agree with the conclusions or opinions contained in this report. 3. The date of value to which the conclusions and opinions expressed in this report apply, is set forth in the appraisal report or in the appraiser's letter of transmittal. Further, the dollar amount of any value opinion rendered in the report is based upon the purchasing power of the U.S. Dollar existing on that date. 2

9 4. The appraiser assumes no responsibility for economic, social, governmental, or physical factors which may affect the opinions in the appraisal report that occur after the date of the letter transmitting the report. 5. All information, as found in data furnished, is deemed to be reliable. Therefore, no representation or warranty is made for its truth or accuracy. If any errors are found, the right is reserved to modify the conclusions reached. 6. The appraiser reserves the right to make such adjustments to the analysis, opinions and conclusions set forth in the report as may be required by the consideration of additional data or more reliable data that may become available. 7. The Subject property is appraised assuming it to be under responsible ownership and competent management, and available for its highest and best use. 8. Testimony or attendance in court or at any other hearing shall not be required by reason of rendering the appraisal, unless additional employment arrangements satisfactory to the appraiser are made in writing and within a reasonable time in advance. Nothing stated herein shall imply any waiver by Diller & Associates of its, or its client s, rights of privacy to their records. 9. In order to better estimate the value of the property as a whole, the value of the land and the improvements may be shown separately. However, the value shown for either of the components may or may not reflect its market value apart from the whole. 10. Disclosure of the contents of this appraisal report is governed by the bylaws and regulations of the Appraisal Institute. 11. Neither all nor part of the contents of this report (especially any conclusions as to value, the identity of the appraiser of the firm with which he is connected, or any reference to the Appraisal Institute or MAI designation) shall be disseminated to the public through advertising media, public relations media, news media, sales media or any other public means of communication without the prior written consent and approval of the appraiser. 12. No warranty, expressed or implied is made or may be assumed concerning any statements or observations in the report concerning the safety, fitness for use, soundness, design or marketability of the land or any of the improvements in, on, or under the land, or the existence of hazardous waste, toxic substances or nuisances in, on, or under the land or the improvements. Moreover, no investigation of effort has been made to discover potential or actual defects or other conditions, unless expressly stated in the report. 13. The appraiser assumes no responsibility for hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for arranging for engineering studies that may be required to discover such matters. 3

10 14. The property is appraised assuming it to be in full compliance with all applicable federal, state, and local environmental regulations and laws, unless otherwise stated. 15. The property is appraised assuming that all applicable zoning and use regulations and restrictions have been complied with, unless otherwise noted. 16. The property is appraised assuming that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority form any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based, unless otherwise stated. 17. No opinion is expressed as to the value of subsurface oil, gas, or mineral rights or whether the property is subject to surface entry for the exploration or removal of such materials except as is expressly stated. 18. Maps, plats, and exhibits included in the report are for illustration only as an aid in visualizing matters discussed within the report. 19. No opinion is intended to be expressed for matters that require legal expertise or specified investigation or knowledge beyond that customarily employed by real estate appraisers. 20. The data and conclusions embodied in this appraisal are a part of the whole valuation. No part of this appraisal is to be used out of context; and, by itself alone, no part of this appraisal is necessarily correct in that it represents only part of the evidence upon which the final judgment of value is based. 21. Within the various approaches to value and mathematical calculations, certain arithmetical figures are rounded to the nearest significant amount. 22. Unless otherwise stated in the report, no consideration has been given in the appraisal as to the value of the property located on the premises considered by the appraiser to the personal property, nor has the appraiser given consideration to the cost of moving or relocating such personal property. Only the real property has been considered. 23. Our forecasts of future events that influence the valuation process are predicated on the continuation of historic and current trends in the market. 24. No soils report was provided to us and none was reviewed in our investigations. For purposes of this appraisal, it is assumed that the soil conditions permit the existing development of the property to the uses set forth. However, no representations are made here as to these matters. 25. If the signatory or signatories to this appraisal report are members of the Appraisal Institute, the Bylaws and Regulation of the Appraisal Institute require each member to control the use and distribution of each appraisal report signed by such member. 4

11 Therefore, except as hereinafter provided, the party for whom this appraisal report was prepared may distribute copies of this appraisal report, in its entirety, to such third parties as may be selected by the party for whom this appraisal report was prepared; however, portions of this appraisal report shall not be given to third parties without the prior written consent of the signatories of this appraisal report. Further, neither all no part of this appraisal report shall be disseminated to the general public by the use of advertising media, public relations media, news media, sales media, or other media for public communication without prior written consent of the signatories of this appraisal report. 26. The Americans with Disabilities Act (ADA) became effective January 26, We have not made a specific compliance survey and analysis of the Subject property to determine whether or not it conforms to the numerous requirements of the ADA. It is possible that a compliance survey could reveal that the property is not in compliance with one or more requirements of the ADA. If so, this could have a negative impact on the market value of the property. As we have no direct evidence relating to this issue, we did not consider possible non-compliance with the requirements of the ADA on our market value estimates. 27. For purposes of this report, the Cost Approach was not fully developed. The lack of truly comparable vacant land in the area has resulted in limited comparable land sales in the area during the past few years. Also, the airport and potential vineyard, winery and restaurant operations indicate that the most probable buyer of a property similar to the subject would not conduct a Cost Approach analysis as part of their purchase decision making. Therefore, the Cost Approach was not considered to be a method of valuation typically used by either potential buyers, sellers or appraisers for determining the market value of a similar type property. 28. No architectural drawings were provided or otherwise available to identify the extent or specifications of the improvements on the site. We measured the cabin and horse barn. Other descriptive information was based on personal inspections, the aforementioned measurements and additional data provided by the subject s owner. Although the descriptions of improvements used in this report are believed to be reliable, the appraisers reserve the right to revise the concluded areas and descriptions of the improvements, both existing and proposed, if more reliable data become available in the future. 5

12 CERTIFICATION The undersigned hereby certifies that to the best of his knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions. I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved. I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. My analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. As of the date of this report, Bruce Diller, MAI has completed the requirements of the continuing education program of the Appraisal Institute and is currently certified to appraise in the State of California. Bruce Diller, MAI inspected and prepared all conclusions and opinions concerning the Subject that are set forth in the appraisal. Bruce Diller, MAI 6

13 SUMMARY OF SALIENT FACTS Property Location: Arrowhead Airport [aka The Lost Ranch,] Lake Arrowhead, San Bernardino County, California Assessor s Parcels: Property Type: Three contiguous Assessor s Parcels with a combined area of 80 acres. Improved with a 3,620 foot runway, taxi and tie down areas, ranch house, horse barn, various outbuildings and site improvements. Ownership: Zoning: Mountains by the Sea, Inc. [according to a Property Profile] Refer to Addenda of this report. RC (Resource Conservation), County of San Bernardino. This zoning permits development with a single residence on a minimum lot size of 40 acres and/or agricultural uses. The subject s airport use was reportedly grandfathered in, according to the owner and county representatives. For purposes of this appraisal, the subject is presumed to be in compliance with all current requirements. Highest and Best Use: As Vacant: Development of two single family homes, each having minimum 40-acre sites. As Improved: Existing private landing strip and ancillary improvements plus completion of runway paving, 50 hangars and tie downs, which were represented as being permissible under current regulations. VALUATION CONCLUSIONS as of: June 7, 2008 As Is Value Conclusion: $6,400,000 Prospective [Stabilized] Value Conclusion: $11,050,000 Hypothetical Value of Residence (not included in above values) $300,000 7

14 INTRODUCTION Property Identification The subject property consists of three San Bernardino County Assessor s Parcels, (with residence), and , located north of Lake Arrowhead, San Bernardino County, California. The predominant identification and use is an existing landing strip, recently approved by the FAA and Caltrans Division of Aeronautics as a private airport. Existing improvements consist of a one-story cabin, horse barn, various out buildings and site improvements. Property History According to information obtained from public sources, the Subject is currently owned by Mountains by the Sea, Inc, which is a dba of Mark Bayley, who reportedly purchased the property on October 11, 2001 for $640,000. After the purchase, the owner reports that he has invested well over $2,000,000 in physical improvements to the property and has also attained Federal [FAA] and State [Caltrans] approvals and other required approvals to operate a private airport on the site. The subject has not been exposed on the open market, nor were there any transfers reported for the property during the three years preceding the effective date of this appraisal. Purpose of the Report The purpose of the appraisal report is to communicate the data and analysis supporting an opinion of market value of the fee simple interest in the subject property, based on its concluded Highest & Best Use as of June 7, 2008 for loan underwriting purposes. Function of the Report/Intended Use The function and intended use of this appraisal report is to provide an opinion of market value for loan underwriting purposes for a potential loan secured by the subject property. Scope of the Appraisal The scope of work is the type and extent of the research and analyses performed to develop the assignment results. This is generally determined by the appraisers, based on their understanding of the requirements of the intended user of the report. As the scope is defined by the intended use, a summary overview will be provided in this section, with additional descriptions of the specific research and analyses conducted located throughout the report. The appraisal process utilized in this analysis consists of identifying and inspecting the Subject. Research and analysis were conducted to determine the relevance of the different approaches that might be taken to arrive at an opinion of market value. Comparable market data was sought from various sources. Information about the local and regional economies was considered, as was building a supportable scenario for the proposed airport operation. The information gathered was then utilized in the consideration of the three traditional methods to valuation: the 8

15 Cost Approach, the Income Approach, and the Sales Comparison Approach. Based on the unique nature of the Subject, all three approaches, Cost, Income and Sales Comparison were considered in this analysis. Although an extensive search for comparable sales data was conducted, it was concluded that neither the cost nor the sales comparison approach provided a credible indication of market value for the subject property under the highest and best use premise. It was concluded that the income approach was the only suitable indicator of market value for the subject. A variety of data sources have been employed in completing this appraisal. The sources are directly related to the market analysis and development of value estimates. Although some specific information from these sources is provided in this report, much of the data is retained in office files with other data being available in the public domain or through proprietary information sources. Some of the sources used in this report include: aircraft owner associations, hangar rental databases, municipalities, airport representatives, local property brokers and owners, published data, surveys of the general real estate market and public records. Date of Valuation The date of valuation is June 7, Date of Report The date of the appraisal report is June 7, Personal Property This appraisal has not taken any personal property, either existing or proposed, into consideration. Exposure/Marketing Period The subject is a unique property. As an income-producing property, it is marketable to a limited audience. Because the subject s existence and operations are considered to be in demand, it is reasonable to conclude that a buyer could be found. The market value estimate in this report is based upon a marketing period considered to be appropriate for this type of property under current and anticipated market conditions. Exposure time is the estimated amount of time that the Subject property would have been on the market prior to being sold at the appraised value. Marketing time is the estimated amount of time it will take to sell the property in the future from the date of value at the appraised value. When market conditions are similar, the two time estimates are similar. Market conditions have been relatively stable for over a year; therefore, the two time estimates in this report are the same. 9

16 Based on the aforementioned and considering the subject s unique physical and locational characteristics, the subject is estimated to have a marketing time of approximately twelve months for sale purposes. This marketing time is based upon our experience with marketing and pricing strategies to facilitate sales. This assumes that experienced, knowledgeable, and diligent personnel are retained to manage and market the property. In addition, this time estimate is based upon the valuation assumptions and conclusions found in this appraisal report, and the availability of financing. Competency Provision The Competency Provision of the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Foundation and required as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) states that: Prior to entering into an agreement to perform any assignment, an appraiser must properly identify the property to be appraised and have the knowledge and experience that will be required to complete the assignment competently or alternatively: 1. Disclose the lack of knowledge and/or experience to the client before accepting the assignment; 2. Take all appropriate steps necessary to complete the assignment competently; and 3. Describe the lack of knowledge and/or experience and the steps taken to complete the assignment competently in the report. The appraiser has adequate education, has previously appraised parcels of land with unique and/or limited permissible uses, and is familiar with the subject area. The appraiser has the competency and experience necessary to complete this appraisal assignment as requested. Property Interest Appraised The property interest valued in this report is the fee simple interest. Only the real estate interest is appraised herein. The term fee simple is defined as: "... absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." [Source: The Appraisal of Real Estate, Twelfth Edition, Appraisal Institute, 2001] 10

17 Market Value Defined This appraisal conforms to Federal Regulations that define "Market Value" as follows: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: a. buyer and seller are typically motivated; b. both parties are well informed or well advised, and each acting in what they consider their own best interest; c. a reasonable time is allowed for exposure in the open market; d. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and e. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. [Source: The Appraisal of Real Estate, Twelfth Edition, Appraisal Institute, 2001] 11

18 AREA DESCRIPTION State of California California encompasses approximately one hundred million acres (164,000 square miles) of varying topographies with a population of over 37 million people, making it the most populous state in the country with 12% of the nation s population. Projections estimate that by the year 2020, the state will have a population of over 45 million people. As of 2005, the Gross National Product of California was approximately $1.63 billion, representing 13% of the total for the entire US. The State of California is one of the largest economic forces in the United States, and is the seventh largest economic entity in the world, ranking between China and Canada. California is a diverse state that encompasses a number of distinct economies and localized labor markets. Major industries in the state include agriculture, oil drilling and refining, technology, electronics, entertainment and tourism. As of the fourth quarter of 2006, the state s labor force was estimated to be 17.8 million persons. Unemployment in the state was 4.6%, as compared to a national rate of 4.5%. Per capita income throughout the state is $36,354 (2005), which is approximately 32% higher than the national average of $27,640. Foreign trade has been increasing in recent years, with the current figure of two-way trade at ±$436 billion; primarily with Pacific Rim trading partners. Southern California s port complex of Los Angeles-Long Beach has become the busiest seaport in the United States. The point in presenting these summary figures is to illustrate that California has a large and diverse economy that can be expected to play a major role, both domestically and internationally, into the foreseeable future. Local/Regional Market Considerations The basic premise of this appraisal is to render an opinion of the market value of the subject property as it is proposed to be developed by its owner. The subject property has received Federal [FAA] and State approvals for use as a private airport and it is our understanding that similar requisite approvals from San Bernardino County and any other agencies are in their final stages. The existing landing strip is functional and has a history of being used for emergencies such as forest fires. Lake Arrowhead is the premiere recreational mountain lake in Southern California and has many expensive vacation and permanent homes, with multi-million dollar homes lining most of its shoreline. Southern California s huge population routinely creates heavy traffic, particularly during vacation seasons. Lake Arrowhead is close to much of the metropolitan Los Angeles area, but is increasingly difficult to reach for weekend getaways. Wealthy property owners living in the Los Angeles basin, or other more distant locales, could greatly reduce the time required to get to Lake Arrowhead by flying in. Although this location is close enough to permit skipping refueling for many users, the subject will have a fueling facility, which will allow more distant users. The economics of the airport with its proposed improvements seem to be well supported by the sheer number of potential users, the positive response of the local community and the emergency and public services sectors. 12

19 SITE DESCRIPTION General Description The Subject site is located slightly more than two miles north of Lake Arrowhead. The site has relatively level natural terrain with portions of slight to moderately sloping areas. The site is reached on the ground via unpaved roads through slightly hilly areas. The subject s dominant improvement is its 3,620 foot landing strip, comprised of decomposed granite. This runway is very level and can accommodate landings and takeoffs by relatively large twin-engine pistonpowered aircraft. The subject property has been variously identified as The Lost Ranch and The Lake Arrowhead Airport. The site is surrounded by land owned by the U.S. Forest Service and, according to the subject s owner, has enjoyed unrestricted access to and use of approximately 20 acres of adjacent land, which may be annexed via adverse possession. The closest residences are over two miles from the subject s runway; precluding any legal objections to airport-related usage. Legal Description An updated preliminary title report from Commonwealth Land Title Company, dated June 22, 2007, was provided to the appraiser. The subject site is identified via San Bernardino County Assessor s maps as three contiguous assessor s parcels: , and The subject is surrounded by Federal land. The appraiser was advised by the Title Officer that, according to the Alaska Lands Act, unrestricted access to and from the site is guaranteed. It is presumed that access is via the unpaved roads in existence as of the inspection date. It is also presumed that the site has water rights to draw water from under the site. The site is presumed to be fully usable and with no unusual or non-standard constraints. The appraiser is not responsible for any variance from these presumptions and the actual nature and bundle of rights of the Subject as of the date of value. The appraiser reserves the right to revise any of the assumptions/conclusions of this analysis should the legal description and/or title restrictions be different than those presumed for this appraisal. Easements and Restrictions It is a presumption of this analysis that there exist no unusual easements, encroachments, restrictions of an unusual nature, or ones that would materially affect the value/use of the Subject. The appraiser reserves the right to change any conclusions in this report should any additional items be reported that may affect title to the Subject. Utilities The subject site is understood to be off the grid as of the inspection date and is expected to remain as such in the future. With the exception of telephone service, no public utilities are readily available. Electricity is provided via solar panels and supplemented by a gas-powered 13

20 generator. Gas for cooking and heating is provided via an on-site propane tank. Water is drawn from on-site wells. A septic system handles domestic waste. Hazardous Materials/Conditions The appraisers are not qualified to render opinions as to surface and subsurface toxic or hazardous materials. Unless otherwise noted, it is assumed that the Subject site is totally free of toxic/hazardous substances. The appraisers reserve the right to adjust any of the assumptions/conclusions contained in this analysis should toxic or hazardous contamination be identified. No separate environmental report was provided to the appraisers. Existing structures show no visible signs of subsurface soil problems. Thus, there is no apparent reason to suspect that soil problems exist. However, as an environmental assessment was not provided, the appraisers reserve the right to adjust any of the assumptions/conclusions contained in this report should any soils problems be identified. The Subject site's drainage, particularly as it applies to the runway, appears to be adequate; therefore, no adverse conditions were noted regarding drainage. Zoning The Subject is under the zoning jurisdiction of the County of San Bernardino. The Subject site is zoned RC (Resource Conservation) by the County of San Bernardino. This zoning permits development with a single residence on a minimum lot size of 40 acres and/or agricultural uses. The subject s airport use was reportedly grandfathered in, according to the owner and County representatives. For purposes of this appraisal, the subject, as proposed to be improved, is presumed to be in compliance with all current regulatory requirements. Assessment and Taxes The Subject is located in San Bernardino County and consists of three County Assessor's parcels. Summaries of the assessed values for the sites are contained in Property Profiles which are contained in the Addenda to this appraisal report. Note that the assessment information reflects values assigned at the time of acquisition by the present owner and does not reflect current market value. Summary Overall, the Subject site and improvements, existing and proposed, were considered to be legally conforming to current zoning regulations. The Subject site was not considered to have any materially adverse influences. We reserve the right to adjust our opinion of value if hidden and/or unseen adverse influences exist, which are later brought to our attention, or any suspected influences that are later confirmed to be adverse. 14

21 PLAT MAP 15

22 SUBJECT PHOTOGRAPHS 16

23 SUBJECT PHOTOGRAPHS 17

24 SUBJECT PHOTOGRAPHS 18

25 SUBJECT PHOTOGRAPHS SUBJECT PHOTOGRAPHS 19

26 20

27 IMPROVEMENT DESCRIPTION Introduction Existing The Subject improvements presently consist of a 3,620 foot runway, taxi areas, approaches and graded areas for tie-downs and hangars. There are also a residence, horse barn, outbuildings and miscellaneous improvements. Proposed The subject s owner intends to improve the existing runway to create a viable private airport by paving the runway, building a fueling facility, lighting the runway, building hangar structures for 50 aircraft, and adding approximately 40 tie-down pads for additional aircraft. Additional improvements include the recent cultivation of grapes for a winery, proposed upgrading to the entrance to the site and restoration of the existing three acre lake. Only limited details on the proposed construction and site work have been provided. As such, a description of the existing residence is the only construction detail presented in this appraisal report. Construction The following section summarizes the physical characteristics of the residence. These existing improvements, while functional, have only a limited contributing value relative to the total subject property. Description Living Area Age Exterior Walls Foundation Roof System and Cover Doors and Windows Single-story, wood frame, two-bedroom, great room, den and bath dwelling. 1,090 square feet 1940 per County records Wood siding and rock, wood frame (Class D) construction. Unknown, but lower walls are river rock set in concrete. The roof and support system are assumed to be of wood construction. The roof cover is corrugated sheet metal. Doors and windows are wood frame. 21

28 Interior Finishes Lighting Heating/Air Conditioning Electrical Interior walls and ceilings are knotty pine in a natural finish. The floors are predominantly wood. Ceiling height is approximately 8' throughout the interior. Lighting consists primarily of incandescent ceiling and wallmounted fixtures. A central air conditioning and forced air heating system was recently installed. This is supplemented by a wood burning fireplace. Electricity is provided by solar panels with storage batteries supplemented by a gas powered generator. [The proposed airplane hangars have not been described in any detail, and, as such, are not described beyond the owner s representation that they propose to build 14 hangars with dimensions of 60 x 52 and 36 hangars with dimensions of 42 x 40.] Conclusions The Subject s existing improvements are considered to be functional and have adequate quality, reflect good maintenance and are projected to provide a home base for resident management. The proposed improvements: hangars, runway pavement, irrigation, etc, are projected to be of good quality and workmanship. The satisfactory construction of these proposed improvements is a condition of the market value opinion in this appraisal. 22

29 HIGHEST AND BEST USE The concept of Highest and Best Use represents the premise upon which a value estimate is based. The determination of Highest and Best Use is the result of the appraiser's judgment and analytical skill. The use determined from the analysis represents an opinion, not a fact to be found. Highest and Best Use is defined as follows: "The reasonable probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability." (The Appraisal of Real Estate, Twelfth edition, Appraisal Institute, 2001) This definition applies specifically to the Highest and Best Use of the land. It is to be recognized that in cases where a site has existing improvements, the Highest and Best Use as vacant may be determined to be different from the existing use. The existing use will continue; however, unless and until land value at its Highest and Best Use exceeds the total value of the property at its existing use. The four considerations that are imposed upon a site in the estimation of Highest and Best Use are: 1. Legally Permissible: Uses that are permitted by zoning and deed restrictions on the site. 2. Physically Possible: Uses that are physically possible with regards to size, shape, terrain, and accessibility. 3. Financially Feasible: Uses that meet the first two criteria are further analyzed to determine which of these uses will produce a positive return to the owner of the site. 4. Maximally Productive: Among the financially feasible uses, the uses that produce the highest residual land value consistent with the rate of return warranted by the market. Implied within these definitions is recognition of the contribution of specific uses (parks, greenbelt areas, etc.) to community environment or to community development goals in addition to wealth maximization of individual property owners. The following is the appraiser s opinion of the Highest and Best Use of the subject site. HIGHEST AND BEST USE AS VACANT Legally Permissible "As Vacant": In analyzing the Highest and Best Use for the Subject site, as vacant, the appraiser attempts to determine the most likely and probable use of the vacant site. Allowable uses under the present private and public restrictions are a major consideration for the development of the site. The current zoning of the Subject is RC (Resource Conservation) which allows construction of single family residences to a density of one unit per 40 acres. Other potential uses were not identified, as the intent of the zoning classification is to preserve open space. Under the as vacant premise, one or two homes would be the only legally permissible use. Physically Possible "As Vacant": This category considers the configuration, size, topography and location of the site, taking into consideration only those uses that are legally permissible. 23

30 The Subject is presumed to have acceptable access, and encompasses many acres of land that is reasonably level and conducive to construction. Physically possible uses that are within the scope of legal uses are relatively unlimited. The legal uses are essentially confined to improvement of the existing uses. However, as vacant, the only uses would consist of single family residences on minimum 40-acre sites. The topography and shape of the site do not appear to pose any development restrictions. Drainage at the site is assumed to be adequate. As such, it is reasonable to conclude that two homes could be built on the site. Financially Feasible and Maximally Productive "As Vacant": After determining the potential uses of the site, both physically and legally, the financial feasibility of the remaining uses must be determined. This includes all uses that will provide a positive rate of return to the site. One or two homes could be built. However, the location is somewhat remote relative to the community of Lake Arrowhead. The availability of utilities is unknown and it is unlikely that utilities could be economically delivered to the site. It is our opinion that the most likely financially feasible use, and maximally productive use of the site, as vacant, would be to hold the site for future development. Conclusion of Highest & Best Use "As Vacant": Based on the information presented above, the Highest and Best Use of the Subject property, as vacant, and considering the permissibility, possibility, productivity, and feasibility of the site, would be to hold the site for future development. HIGHEST AND BEST USE AS IMPROVED Legally Permissible: The subject s existing improvements are considered legal non-conforming because they were in existence prior to the RC zoning being implemented. The improvements and ancillary structures can be rebuilt, expanded and upgraded, according to the subject s owner, because of their pre-existing condition. As such, it is an assumption of this appraisal that the owner s proposed improvements consisting of the private airport improvements, vineyard and recreational lake, are all legally permissible. Alternately, the site could be developed with one or two homes, as discussed under the as vacant premise. Physically Possible: All of the legal uses are also physically possible. The existing improvements can be upgraded and expanded, according to the owner. Since these uses are obviously physically possible, they, along with the other legally permissible use of one or two residences, constitute the physically possible uses for this site. Financially Feasible and Maximally Productive: When a site is improved, the Highest and Best Use of the improvements will continue until the land value in its highest and best use exceeds the sum of the value of the property in its existing use, plus the cost to remove the improvements. The subject s proposed uses are presumed to be legally permissible and are physically possible. Our analysis of the proposed improvements indicate that they are financially feasible. By definition they are, with the exception of the possibility of two 24

31 residences, the only permissible use of the site. Our analysis indicates the improvements will be capable of supporting a positive revenue stream to the property. Therefore, the airport use is considered financially feasible and maximally productive. The Subject s proposed improvements contribute to the overall property value and are projected to produce an adequate return to the land to justify their expansion, construction and continued use. Therefore, the Highest and Best Use of the Subject, "As Improved", is the expansion and enhancement of the existing airport improvements. It is with this Highest and Best Use judgment that we have valued the Subject. 25

32 PROPERTY VALUATION The Appraisal Problem The appraisal problem is concerned with providing an opinion of the present Market Value of the Subject property. The Appraisal Process There are three basic approaches typically considered by appraisers in the estimation of market value. These three approaches provide data from the market which, when available and applicable, can produce three separate value indications. The three approaches are defined and described as follows: The Cost Approach involves the valuation of the site by comparing it to other sites in the area that have sold in the recent past. If required, adjustments are made to the comparables for differences between the comparables and the Subject property. The indicated site value is added to the estimated cost to reproduce or replace the improvements, less any loss of value (depreciation) that may have occurred. The Income Approach is a process of converting the net income derived from a property into an indication of value. This is accomplished by analyzing the relationship of net income from similar properties to their selling prices in the market. This may be via direct capitalization, using a single period s net income or via a discounted cash flow analysis, which projects net income over multiple periods and discounts the cash flows to a present value. The Sales Comparison Approach is based upon the principle that the value of a property tends to be set by the price at which similar properties have sold or for which they can be acquired. This approach requires the comparison of sales of properties having similar attributes to the Subject property. Ideally, the approaches to value will each indicate fairly similar values when two or more are used. A final opinion of value is obtained by considering the strengths and limitations of each approach and reconciling those value indications. If any of the approaches are considered not applicable to the property being appraised, the approach or approaches may be omitted with an explanation for the exclusion. The subject property has been identified as very unique. Its proposed use as a private airport has been determined to constitute its Highest and Best Use. The cost approach requires a supported estimate of the value of the land. The subject land s permitted use and highest and best use have rendered it unique in the local and regional marketplace. No land of similar acreage, with highest and best use as an airport, was found to have been sold or offered for sale in the region. Similarly, no sales of operational private airports were identified through any sources. It should be noted that there is a pending sale reported of the Upland Airport, but the buyer intends to raze the existing improvements and subdivide the site for residential construction. We identified a 77 acre property listed for sale in Oregon for $4,999,999. It is in a remote location and evidently is intended as a private retreat, but not for commercial operations. We have concluded that the most appropriate means of arriving at a supported opinion of market value is to estimate the potential net income that can be generated by the property. As 26

33 such, we have focused on the Income Approach to Value for the subject. It is our opinion that neither the cost approach nor the sales comparison approach are appropriate means of estimating the market value of the subject property. 27

34 INCOME APPROACH Introduction The Income Approach is based on the concept of the present worth of future benefits. The investor provides present day dollars for the right to receive dollars in the future. For this capital investment, the investor expects a return on and a return of the investment capital. The present worth of the anticipated future income is the amount that a prudent investor would pay, on the valuation date, for the right to receive this income during the projection period, discounted at an appropriate risk-adjusted interest rate. Because the future cash flows are increasingly uncertain, investors will typically pay less for the projected payments than they would for the same sum at the present. Risk can be viewed by the investor in many ways. Investors analyze alternative investment options, ranging from relatively low risk investments to those which are highly speculative. Typically, the greater the potential financial reward, the higher the risk to the investor. The subject property contains an existing 3,620 foot landing strip suited for general aviation. It has received FAA approval as a private airport, meaning it can be operated as an airport for aircraft having the operator s permission to land or take off. The subject s owner has prepared the site for airplane tie-downs and construction of hangars. Both of which may be rented to airplane owners. The owner intends to complete site preparation, pave and stripe the runway and construct 50 aircraft hangars. Information provided by the owner, supplemented by our own research, has revealed that the flying community is strongly interested in using the subject airstrip. Based on this pent-up demand, we have estimated the potential revenues that can be generated by such an airport operation and have used the estimated revenue stream as the basis for an income capitalization analysis for this appraisal. Please note that the subject has reportedly received most, if not all, necessary approvals to operate the private airport. The Lost Ranch also has an existing horse barn and basic equestrian facilities, an existing cabin-style residence and has a vineyard in the early stages. There are plans to develop the vineyard with a winery and restaurant, improve an existing manmade recreational lake and potentially offer additional recreational activities. Each of these are in various stages of development; whereas the airport can be operational almost immediately. As such, only the airport operation is considered in this income capitalization analysis. The basic steps taken to estimate the potential income generating capability of the subject private airport include: (1) Determine the sources of revenues from all sources attributable to the airport operation; (2) Estimate the revenues that can be generated based on surveys of similar operations in the area; (3) Estimate Operating Expenses based on assumptions made in the estimate of potential gross income; (4) Subtract the estimated operating expenses from the projected revenues to arrive at an estimate of the Net Operating Income (NOI) for the airport. The estimated Net Operating Income can be used to as the basis for converting income into a value estimate. There are two dominant methodologies: the Direct Capitalization and Discounted Cash Flow (DCF) methods. Both techniques consider the present worth of the estimated future income. The Discounted Cash Flow (DCF) method is typically employed in the valuation of multi-tenant investment properties, in which cash flows vary from year-to-year 28

35 based upon escalations, expense bases, expiration of leases, etc. The Direct Capitalization Method capitalizes the stabilized net operating income (NOI) for the property at a rate of return consistent with investors requirements in the current market. A third method, called the gross revenue multiplier, is a less sophisticated approach that is sometimes applied as a rule of thumb. The gross revenue multiplier was traditionally associated with the Sales Comparison Approach. The subject is unique in that, after extensive research, we have concluded that there is little, if any, established market for transactions involving private airports as going concerns. Available data permits us to develop a supported estimate of revenue and of operating expenses. The real estate market has established ranges of capitalization rates for a wide range of property types. Despite the subject s uniqueness, we believe it is appropriate to estimate and apply such a rate to the net operating income rather than the gross revenue multiplier. It is also our opinion that income generating properties similar in nature to the subject are typically owned by individuals and small companies that do not generally conduct the more complex DCF analysis in order to estimate market value. Therefore, this analysis will focus on the direct capitalization method. Revenues Hangars: Hangar rental rates vary widely. Many small and private airports report having no hangar space available. With a regional pattern of small airports being closed, but with increasing demand for corporate and business aircraft, hangers are increasingly in demand. Airports report having waiting lists for hangar space to become available, but report that it is unusual for a vacancy to occur. Private aircraft are very costly and hangars are considered a cost-effective means of protecting them. The following table summarizes our findings in the current market for enclosed hangar spaces. Although none of the locations is exactly comparable to the subject, they indicate the range found in the region. General Aviation Hangar Rental Rates [6/2007] Airport Type Size Hangar Rent Chino Bi-fold 60 x 60 $1,800 Chino Bi-fold 50 x 40 $1,200 Brackett Bi-fold 60 x 60 $1,800 Redlands Bi-fold 50 x 50 $1,500 Redlands Bi-fold 50 x 40 $700 Nevada County [Grass Valley] Bi-fold 48 x 50 $1,175 Palm Springs Bi-fold 60 x 60 $2,500 Gillespie Field [El Cajon] Bi-fold 60 x 50 $1,300 The subject s owner has a list of 30 aircraft owners who want hangars at Arrowhead Airport. This is a strong indicator of interest; particularly this far in advance of their actual construction. Based 29

36 on the survey data and the apparent pent-up demand for hangars in the local market, it is my opinion that the attainable rental rates for the subject s two types of hangars are as follows: Additional Income: 42 x 40 Hangars $1,250/month 60 x 52 Hangars $2,000/month Tiedowns: The subject s owner intends to install 40 tiedown locations which can be rented for $200 per month. The interest list indicates that the tiedown locations will be fully subscribed shortly after they are made available. Landing Fees: The owner projects that there will be an average minimum of two landings per day, for which he will charge $50. Our research indicates that the typical airport does not charge a fee for landing, per se, but does charge for overnight parking. In this location, it is highly probable that virtually all landings will be for at least a day, since there is little reason to stop in without going to Lake Arrowhead. Government Agency Operations Base: The owner has evidence of strong interest in using the subject as an operations base for emergencies. He also reports that they want to base an aircraft at Lake Arrowhead Airport and will pay $5,000 per month for the privilege. The fire agencies are negotiating other terms which may prove even more favorable, but were not finalized as of the valuation date. Conclusions: The hangar rental income is supported by data from other regional airport locations. The additional income sources summarized here were not supportable via comparable data in our survey. Airports offering tiedowns tend to have no availabilities and provided little information on the rates being paid. Similarly, landing fees were not widely available. Some locations reportedly charge on the order of $100, while some charge only a few dollars. The supporting data is sketchy, but it is reasonable to conclude that the relatively wealthy owners of private aircraft, coming to an exclusive resort, would not be put off by these charges. For these reasons, we have accepted the projected rates of $200 per month for tiedowns and $50 per day for landing fees. We have also accepted the stated rent of $5,000 per month for a government agency operations base, subject to written documentation of such an agreement. Expenses 30

37 The projected revenues from airport operations reflect the gross income attributed to the airport. There will be operating expenses that must be estimated and subtracted from the gross income in order to arrive at an estimate of net income. The expense categories are presented below, along with a discussion of their derivation. Property Taxes: Under California law, property taxes are assessed at the rate of 1% of market value of the real estate, plus additional assessments, bonded indebtedness, etc. The subject s three parcels have effective tax rates of between 1.03% and 1.08%. A market valuation presumes that a sale has occurred. Upon sale, a property is frequently assessed for additional charges. Assessments most often are at rates closer to 1.1% of market value. The subject s estimated market value on an as is basis is $6,400,000, which, for this analysis, has been taxed at 1.066%, reflecting an estimated annual property tax of $68,200. It should be noted that the subject s actual property taxes totaled only $7,226, according to recent property profiles. It is reasonable to assume that taxes will not increase beyond the legislated annual increase of 2% while the property remains under continuous ownership by the present owner. Insurance: The owner reports that he pays minimal insurance on the subject property. The airport use does not incur any unusual liability to the property owner. As such, we have estimated the annual property hazard insurance premium to be reflective of the insurable values of the improved structures. Management: We have estimated property management at a rate that is typical for professional management of a variety of income producing real property categories. Management is frequently budgeted as a percentage of revenues and can range from under 2% to upwards of 10% for different categories. The subject will require a moderate amount of management and has been estimated to require 5% of revenues for management services. Utilities: The airport will require limited utility services, according to the owner. Electrical power is presently provided by solar panels and storage cells. This system is budgeted to be upgraded to accommodate increased requirements with the new construction. Landing lights will be solar powered as will all electricity uses. We have estimated that backup generators will be needed at times, and, considering the airport use, will need to be reliable. Propane gas is stored in an above-ground tank and is expected to be needed in the future. Water is provided by on site wells, but will require electric pumps to be drawn. We have selected a rate of $200 per month, on an annual amount of $2,400, to cover these contingencies and recurring utility costs. Maintenance and Repair: With no operating history, we have made an estimate of $250 per month, or $3,000 annually, to cover routine maintenance and repairs that may be required on the subject property. The total expenses equate to $129,000 and are deducted from the projected revenues, to arrive at an indication of the net operating income that can be expected on a stabilized basis for the subject property. Cost to Achieve Stabilization: Completion of the proposed improvements can be accomplished in a period of under six months, with the major grading and infrastructure already in place. Paving and lighting the runway, followed by construction of the hangars are both achievable in 31

38 this timeframe. The owner of the subject has reported sign-ups for 30 of the 50 hangars. This has occurred prior to any serious marketing campaign or the finalization of the permitting process. At this rate it is reasonable to presume that the airport s operations will stabilize within six months of completion of construction. As such, the cost to achieve stabilization is estimated to be one half the income that can be earned in this time frame, assuming a steady rate of increase in rentals and general business. [ie: 0% to 100% of scheduled income increasing during the six months.] This can be reflected as being equal to three months income, or $267,000. CAPITALIZATION METHODOLOGY The Direct Capitalization Method applies a capitalization rate (OAR) to the concluded NOI for the Subject to generate an indication of market value. The selection of a capitalization rate is based upon the return necessary to attract investment capital as it applies to the typical investor. The subject, being a unique property, does not enjoy being in a standard category. Therefore, we concluded that the appropriate OAR should be similar to the rates of a similar type of investment property. Standard property categories, such as apartments, industrial, retail and office properties, have large numbers of investors and transactions are frequent. The subject is clearly specialized and would appeal to a more narrow range of investors. Additionally, the fact that the subject operations are proposed, there is no operating history from which to base the revenue stream. We considered the relative expertise required to manage an airport as proposed, and the limited data base from which to gather revenue, expense and capitalization data and concluded that the subject s operations will be somewhat comparable to that of a hotel. Both have a transient clientele with varying lengths of stays, but the revenues derived from the primary revenue generators [rooms and hangars] are quantifiable. We obtained capitalization rate data that was collected by Korpacz investor surveys for hotel information. Capitalization Rates 3 rd Qtr st Qtr 2008 Full Service Hotels 8.25% 8.25% Limited Service Hotels 9.5% 9.5% Luxury Hotels 7.5% 7.5% The OARs indicated in both the third quarter 2007 and first quarter 2008 surveys were consistent. However they did indicate an increase from the 7.0% observed one year earlier. Lacking more precise points of reference, but recognizing that these rates are higher than those recently observed among more conventional categories, we have concluded at an OAR of 8.5%. On the following page, we have presented a summary income and expense capitalization analysis, followed by our opinion of market value based on the income capitalization approach to value. 32

39 AIRPORT INCOME CAPITALIZATION Potential Monthly Revenue Proforma Rent Market Rent Hangars 52 x ,227 2,000 28, x ,277 1,250 45,000 Tie Downs ,000 Landings/Layovers ,000 Government 5,000 Agency Operations Base Total Monthly 89,000 Revenue Annual Revenue 1,068,000 Expenses [Annual] Property Taxes 6,400, % 68,200 Insurance 2,000 2,000 Management 1,068, % 53,400 Utilities 2,400 2,400 Maint. & Repair 3,000 3,000 Annual Expenses 129,000 Net Operating Income 939,000 Capitalization 939, % $11,047,059 Prospective [Rounded/Stabilized] Value: $11,050,000 Airport-Related Development Costs: Hangars $3,124,800 sf Runway 1,200,000 Improvements Solar Upgrades 50,000 Engineering, 25,000 Permits, Survey Total Airport-related Development Costs 4,399,800 Cost to achieve stabilization 267,000 As-Is market Value Indication via Income $6,383,200 Approach Rounded $6,400,000 33

40 FINAL VALUE RECONCILIATION The Income Approach was the basis for this market valuation and resulted in the following indication of value on an as-is basis: $6,400,000. (inclusive of the residence.) As presented in this report, we have concluded that the cost approach or sales comparison approach are not useful for valuation of this property. Its primary value in the marketplace is its ability to permit earning a revenue stream. The supportable revenue stream is derived from the proposed improvements resulting in an operational private airport. Being a unique property, we applied a relatively conservative capitalization rate to our estimate of net income. This is similar to the methodology that an informed investor would apply when considering a purchase for which no direct comparable sales exist. Our opinion of prospective market value assumes the completion of the proposed improvements subject to the special assumptions and limiting conditions contained in this report. The prospective value is discounted to a current date, but, based on the owner s representations regarding getting all necessary approvals and market demand, stabilization is anticipated within 12 months. In the final analysis, based on the research and conclusions drawn from the market, the "As Is Market Value of the fee simple interest in the Subject on June 7, 2008 is estimated to be: SIX MILLION FOUR HUNDRED THOUSAND DOLLARS ($6,400,000) In the final analysis, based on the research and conclusions drawn from the market, the prospective market value of the fee simple interest in the Subject on June 7, 2008 is estimated to be: ELEVEN MILLION FIFTY THOUSAND DOLLARS ($11,050,000) 34

41 ADDENDA 35

42

43 THE LOST RANCH Property Profile PrimaryMOUNTAINS BY THE SEA INC Secondary Mail 0 PO BOX 2724 LAKE ARROWHEAD, CA Site 0 Geo Level: 9 Telephone Referen Cens Housing Tract Lot Page G366A-C2 Page G4567-D7 Legal DesS 1/2 SE 1/4 NW 1/4 SEC 36 TP 3N R 3W Sub Property Characteristics Bedrooms: 2 Year Built: 1940 Square Feet: 1,061 Bathrooms: 1.0 Garage: Y Lot Size: 871,200 sq ft / acres Total Rooms: 5 Fireplace: Number of Units: 1 Zoning: 5 Pool/View: /5 Use Code: Single Family Residence Heating/Cooling: Y/ Cost/Sq Feet: $ Title Co.: Commonwealth Land Title Lender: Seller Last Trans W/O$: Interest Rate Type: F Last Trans W/O$ Doc: Sel Document: Assessed & Tax Information Assessed Value: $202,151 Percent Improvement: Homeowner Exemption: Land Value: $162,166 Tax Amount: $2,176 Tax Rate Area: Improvement Value: $39,985 Tax Status: default

44 Property Profile PrimaryMOUNTAINS BY THE SEA INC Secondary Mail 0 PO BOX 2724 LAKE ARROWHEAD, CA Site 0 Geo Level: 9 Telephone Referen Cens Housing Tract Lot Page G366A-C2 Page G4567-D7 Legal DesSW 1/4 NW 1/4 SEC 36 TP 3N R 3W Sub Property Characteristics Bedrooms: Year Built: 0 Square Feet: Bathrooms: Garage: Lot Size: 1,742,400 sq ft / acres Total Rooms: Fireplace: Number of Units: Zoning: 5 Pool/View: /Y Use Code: Vacant Miscellaneous Heating/Cooling: Sale & Loan Information Transfer Date: Seller: Document: Transfer Value: $640,000 Cost/Sq Feet: Title Co.: Commonwealth Land Title First Loan Amt: $385,000 Lender: Seller Last Trans W/O$: Loan Type: Interest Rate Type: F Last Trans W/O$ Doc: Assessed & Tax Information Assessed Value: $324,306 Percent Improvement: 0.00 Homeowner Exemption: Land Value: $324,306 Tax Amount: $3,344 Tax Rate Area: Improvement Value: $0 Tax Status: default Property Profile 2

45 PrimaryMOUNTAINS BY THE SEA INC Secondary Mail 0 PO BOX 2724 LAKE ARROWHEAD, CA Site 0 Geo Level: 9 Telephone Referen Cens Housing Tract Lot Page G366A-C2 Page G4567-D7 Legal DesE 1/2 SE 1/4 NE 1/4 SEC 35 TP 3N R 3W Sub Property Characteristics Bedrooms: Year Built: 0 Square Feet: Bathrooms: Garage: Lot Size: 871,200 sq ft / acres Total Rooms: Fireplace: Number of Units: Zoning: 5 Pool/View: /Y Use Code: Miscellaneous Heating/Cooling: Sale & Loan Information Transfer Date: Seller: Document: Transfer Value: $640,000 Cost/Sq Feet: Title Co.: Commonwealth Land Title First Loan Amt: $385,000 Lender: Seller Last Trans W/O$: Loan Type: Interest Rate Type: F Last Trans W/O$ Doc: Assessed & Tax Information Assessed Value: $165,396 Percent Improvement: 1.96 Homeowner Exemption: Land Value: $162,154 Tax Amount: $1,706 Tax Rate Area: Improvement Value: $3,242 Tax Status: default 3