11127 Marsh Road, Bealeton, Fauquier County, Virginia, As of September 24, 2014

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1 REAL ESTATE APPRAISAL REPORT Of RETAIL MARKET AND RESIDENTIAL APARTMENTS Marsh Road, Bealeton, Fauquier County, Virginia, As of September 24, 2014 Prepared For Ms. Deborah Richardson Union First Market Bank 5125 John Tyler Highway Williamsburg, VA RIMS # Prepared by REAL PROPERTY VALUATIONS GROUP, LLC Timuchin Ulvi, Virginia Justin S Shelton, Virginia File Name: Marsh Road, Bealeton, VA

2 REAL PROPERTY VALUATIONS GROUP, LLC P.O. BOX 676 WARRENTON, VA October 8, 2014 Ms. Deborah Richardson Union First Market Bank 5125 John Tyler Highway Williamsburg, VA Re: Appraisal Report, Real Estate Appraisal Marsh Road, Bealeton, Fauquier County, Virginia, File Name: Marsh Road, Bealeton, VA RIMS # Dear Ms. Richardson: At your request, we have prepared an appraisal for the above referenced properties. Please reference page 13 of this report for important information regarding the scope of research and analysis for this appraisal, including property identification, inspection, highest and best use analysis and valuation methodology. We certify that we have no present or contemplated future interest in the property beyond this estimate of value. Your attention is directed to the Limiting Conditions and Assumptions section of this report (page 11). Acceptance of this report constitutes an agreement with these conditions and assumptions. In particular, we note the following: Hypothetical Conditions: There are no hypothetical conditions for this appraisal. Extraordinary Assumptions: There are no extraordinary assumptions for this appraisal.

3 Ms. Richardson Page 2 Based on the appraisal described in the accompanying report, subject to the Limiting Conditions and Assumptions, Extraordinary Assumptions and Hypothetical Conditions (if any), we have made the following value conclusion(s): Current As Is Market Value: The as is market value of the Leased Fee estate of the property, as of September 24, 2014, is: $620,000 Six Hundred Twenty Thousand Dollars The market exposure time 1 preceding September 24, 2014 would have been 12 months and the estimated marketing period 2 as of September 24, 2014 is 9-12 months. Respectfully submitted, Real Property Valuations Group, LLC Timuchin Ulvi, Virginia Justin Shelton, Virginia Exposure Time: see definition on page 9. 2 Marketing Time: see definition on page 8.

4 TABLE OF CONTENTS Summary of Important Facts and Conclusions... 5 Definitions... 8 Limiting Conditions and Assumptions Appraisal Scope Market Area Analysis Market Area Location and Boundaries Market Area and Property Characteristics Market Area Location and Boundaries Marketing and Exposure Time Property Description Aerial Tax Map Subject Photographs Assessment and Taxes Zoning Highest and Best Use Valuation Methodology Analyses Applied Sales Comparison Approach Comparables Comparables Map Analysis Grid Comparable Sale Adjustments Sales Comparison Approach Conclusion Income Approach Potential Gross Income (PGI) Comparables Map Analysis Grid Market Rent Reconciliation Vacancy and Collection Loss Expenses Capitalization Rate Capitalization to Value Direct Capitalization Analysis Conclusion Final Reconciliation Value Indications Value Conclusion Certification Statement Addenda... 69

5 Summary of Important Facts and Conclusions Subject: GENERAL Marsh Road, Bealeton, Fauquier County, Virginia The subject property consists of one parcel of land identified as PIN # The subject property is improved and contains 0.75 acres, or 32,670 SF. The property is improved by a two story retail building with four residential apartments on the upper level. The building contains a total of 5,040 SF according to appraiser measurement. There is also a paved parking area with ample parking for its current use. Owner: Marsh Road LLC Legal Description: Block of Marsh Road, Deed Book 1446/624 Tax Identification: Date of Report: September 24, 2014 Effective Date As Is October 8, 2014 Appraisal Date Inspection Date: September 24, 2014 Intended Use: Intended User(s): The intended use of the appraisal is to establish a value of the real estate for loan and underwriting or classification decisions. Union First Market Bank and/or its affiliates Assessed Value: $576,800 at Taxes: $5,710 Sale/Transfer History: Current Listing/Contract(s): Property Agreements: The subject transferred on 10/18/2013 as a deed in lieu of foreclosure from D&K Enterprises LLP to Marsh Road LLC with an indicated price of $10,000, Deed Book 1446/Page 624. No other transfers within three years. The subject is not currently listed for sale The subject property is currently 10 leased. The main level is a retail market and the upper level consists of four residential apartment units Marsh Road, Bealeton, VA 5

6 Land Area: PROPERTY Total: 0.75 acres, 32,670 SF Improvements: Section 1 Building ID: Commercial Retail and Residential Apartments Year Built: 1985 Condition: Renovations: Average Since the purchase of the property, the owner has updated the apartment units on the second level. The main level store has not been updated. Per the owner, there are plans on updating the lower level. Number of Stories: 2.00 Gross Building Area (GBA): Basement Property Totals: Zoning: Highest and Best Use of the Site: Highest and Best Use as Improved: 5,040 SF 2,520 SF Main Level 2,520 SF Second Level with Four Apartments None 5,040 SF C1- Commercial District The highest and best use of the subject as vacant is for commercial office or retail development in compliance with C1 zoning. The highest and best use of the subject as improved is as currently improved as a retail building with apartment units on the second level Marsh Road, Bealeton, VA 6

7 VALUE INDICATIONS Cost Approach: Not Developed Sales Comparison Approach: $605,000 Income Approach: $635,000 Reconciled Value(s): As Is Value Conclusion(s) $620,000 Effective Date(s) September 24, 2014 Property Rights Leased Fee In this assignment a leased fee value was presented given the fact that the subject is encumbered by multiple leases. However, the contract rents are commensurate with market levels and thus the Fee Simple interest would not render a dissimilar market value Marsh Road, Bealeton, VA 7

8 Definitions Market Value: As defined by the Office of the Comptroller of Currency (OCC) under 12 CFR, Part 34, Subpart C-Appraisals, Definitions, the Board of Governors of the Federal Reserve System (FRS) and the Federal Deposit Insurance Corporation in compliance with Title XI of FIRREA, as well as by the Uniform Standards of Appraisal Practice as promulgated by the Appraisal Foundation, is as follows. Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the 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, 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 interest; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. A Leased Fee interest is defined Error! Bookmark not defined. as: An ownership interest held by a landlord with the rights of use and occupancy conveyed by a 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. Marketing Time is defined Error! Bookmark not defined. as: 1. The time it takes an interest in real property to sell on the market sub-sequent to the date of an appraisal. 2. Reasonable marketing time is an estimate of the amount of time it might take to sell an interest in real property at its estimated market value during the period immediately after the effective date of the appraisal; the anticipated time required to expose the property to a pool of prospective purchasers and to allow appropriate time for negotiation, the exercise of due diligence, and the consummation of a sale at a price supportable by concurrent market Marsh Road, Bealeton, VA 8

9 conditions. Marketing time differs from exposure time, which is always presumed to precede the effective date of the appraisal. (Advisory Opinion 7 of the Appraisal Standards Board of The Appraisal Foundation and Statement on Appraisal Standards No. 6, "Reasonable Exposure Time in Real Property and Personal Property Market Value Opinions" address the determination of reasonable exposure and marketing time.) Exposure Time is defined Error! Bookmark not defined. as: 1. The time a property remains on the market. 2. 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 on an analysis of past events assuming a competitive and open market. Exposure time is always presumed to occur prior to the effective date of the appraisal. The overall concept of reasonable exposure encompasses not only adequate, sufficient and reasonable time but also adequate, sufficient and reasonable effort. Exposure time is different for various types of real estate and value ranges and under various market conditions. (Appraisal Standards Board of The Appraisal Foundation, Statement on Appraisal Standards No. 6, "Reasonable Exposure Time in Real Property and Personal Property Market Value Opinions") Market value estimates imply that an adequate marketing effort and reasonable time for exposure occurred prior to the effective date of the appraisal. In the case of disposition value, the time frame allowed for marketing the property rights is somewhat limited, but the marketing effort is orderly and adequate. With liquidation value, the time frame for marketing the property rights is so severely limited that an adequate marketing program cannot be implemented. (The Report of the Appraisal Institute Special Task Force on Value Definitions qualifies exposure time in terms of the three above-mentioned values.) See also marketing time. Gross Building Area (GBA) is the total floor area of a building, including below-grade space but excluding unenclosed areas, measured from the exterior of the walls. Gross building area for office buildings is computed by measuring to the outside finished surface of permanent outer building walls without any deductions. All enclosed floors of the building including basements, mechanical equipment floors, penthouses, and the like are included in the measurement. Parking Error! Bookmark not defined. spaces and parking garages are excluded. Rentable Area (RA) is the amount of space on which the rent is based; calculated according to Error! Bookmark not defined. local practice. Gross Leasable Area (GLA) the total floor area designed for the occupancy and exclusive use of tenants, including basements and mezzanines, and measured from the center of interior partitioning to outside wall surfaces; the standard measure for determining the size of shopping Marsh Road, Bealeton, VA 9

10 centers where rent is calculated based on the GLA occupied. The area for which tenants pay rent. Error! Bookmark not defined. As Is Value The value of specific ownership rights to an identified parcel of real estate as of the effective date of the appraisal; relates to what physically exists and is legally permissible and excludes all Error! Bookmark not assumptions concerning hypothetical market conditions or possible rezoning. defined Appraisal Institute, The Dictionary of Real Estate Appraisal, 4th ed. (Chicago: Appraisal Institute, 2002) Marsh Road, Bealeton, VA 10

11 Limiting Conditions and Assumptions Acceptance of and/or use of this report constitutes acceptance of the following limiting conditions and assumptions; these can only be modified by written documents executed by both parties. This appraisal is to be used only for the purpose stated herein. While distribution of this appraisal in its entirety is at the discretion of the client, individual sections shall not be distributed; this report is intended to be used in whole and not in part. No part of this appraisal, its value estimates or the identity of the firm or the appraiser(s) may be communicated to the public through advertising, public relations, media sales, or other media. All files, work papers and documents developed in connection with this assignment are the property of Real Property Valuations Group, LLC. Information, estimates and opinions are verified where possible, but cannot be guaranteed. Plans provided are intended to assist the client in visualizing the property; no other use of these plans is intended or permitted. No hidden or unapparent conditions of the property, subsoil or structure, which would make the property more or less valuable, were discovered by the appraiser(s) or made known to the appraiser(s). No responsibility is assumed for such conditions or engineering necessary to discover them. Unless otherwise stated, this appraisal assumes there is no existence of hazardous materials or conditions, in any form, on or near the subject property. Unless stated herein, the property is assumed to be outside of areas where flood hazard insurance is mandatory. Maps used by public and private agencies to determine these areas are limited with respect to accuracy. Due diligence has been exercised in interpreting these maps, but no responsibility is assumed for misinterpretation. Good title, free of liens, encumbrances and special assessments is assumed. No responsibility is assumed for matters of a legal nature. Necessary licenses, permits, consents, legislative or administrative authority from any local, state or Federal government or private entity are assumed to be in place or reasonably obtainable. It is assumed there are no zoning violations, encroachments, easements or other restrictions which would affect the subject property, unless otherwise stated. The appraiser(s) are not required to give testimony in Court in connection with this appraisal. If the appraisers are subpoenaed pursuant to a court order, the client agrees to pay the appraiser(s) Real Property Valuations Group, LLC s regular per diem rate plus expenses. Appraisals are based on the data available at the time the assignment is completed. Amendments/modifications to appraisals based on new information made available after the appraisal was completed will be made, as soon as reasonably possible, for an additional fee Marsh Road, Bealeton, VA 11

12 Americans with Disabilities Act (ADA) of 1990 A civil rights act passed by Congress guaranteeing individuals with disabilities equal opportunity in public accommodations, employment, transportation, government services, and telecommunications. Statutory deadlines become effective on various dates between 1990 and Real Property Valuations Group, LLC has not made a determination regarding the subject s ADA compliance or non-compliance. Non-compliance could have a negative impact on value; however this has not been considered or analyzed in this appraisal Marsh Road, Bealeton, VA 12

13 Appraisal Scope According to the Uniform Standards of Professional Appraisal Practice, it is the appraiser s responsibility to develop and report a scope of work that results in credible results that are appropriate for the appraisal problem and intended user(s). Therefore, the appraiser must identify and consider: the client and intended users; the intended use of the report; the type and definition of value; the effective date of value; assignment conditions; typical client expectations; and typical appraisal work by peers for similar assignments. This appraisal is prepared for Union First Market Bank. The problem to be solved is to estimate the 'as is' market value of the subject property. The intended use of the appraisal is to establish a value of the real estate for loan and underwriting or classification decisions. This appraisal is intended for the use of the client, Union First Market Bank and/or its affiliates. Report Type: Property Identification: Inspection: Market Area and Analysis of Market Conditions: Highest and Best Use Analysis: SCOPE OF WORK This is an Appraisal Report as defined by Uniform Standards of Professional Appraisal Practice under Standards Rule 2-2(A). This format provides a summary of the appraisal process, subject and market data and valuation analyses. The subject has been identified by the legal description and the assessors' parcel number. A complete site inspection of the subject property has been made, and photographs taken. A complete analysis of market conditions has been made. The appraiser maintains a comprehensive database for this market area and has reviewed the market for sales and listings relevant to this analysis. A complete as vacant and as improved highest and best use analysis for the subject has been made. Physically possible, legally permissible and financially feasible uses were considered, and the maximally productive use was concluded Marsh Road, Bealeton, VA 13

14 Valuation Analyses Cost Approach: Sales Comparison Approach: Income Approach: Hypothetical Conditions: Extraordinary Assumptions: As the effective age of an improvement increases, the reliability of the cost approach typically decreases because of the subjectivity of estimating depreciation and the difficulty in accurately estimating the reproduction cost of the improvements. Due to the age of the subject property, the cost approach is not considered a reliable approach to market value for this appraisal assignment and was not developed. A sales approach was applied as there is adequate data to develop a value estimate and this approach reflects market behavior for this property type. An income approach was applied as the subject serves as a rental building that is held for its income producing potential. There are no hypothetical conditions for this appraisal. There are no extraordinary assumptions for this appraisal Marsh Road, Bealeton, VA 14

15 Market Area Analysis Market Area Location and Boundaries The subject property is located less than a mile south of the Route 28 and 17 intersection in an area known as Bealeton, Fauquier County, Virginia. The subject is situated along US Route 17, Marsh Road, in an area comprised mainly of commercial oriented properties and residential properties to the east Marsh Road, Bealeton, VA 15

16 Market Area and Property Characteristics Bealeton is difficult to describe because it is not directly associated with Warrenton or Culpeper and represents its own pocket of activity. In the past ten years the area has been developed with newer residential subdivisions and commercial development. In addition, the area maintains its rural nature with larger farm properties, ranging from 10 to 100 acres, located to the south. The Bealeton area has a distinct competitive pricing advantage over areas of Warrenton with good access to US Route 29, Route 28 and Route 17. The area has good access to the I-66 interchange in Gainesville (25 miles to the north), and Interstate 95 (20 miles to the south). Routes 29 and 17 are major north-south arterial roads with four lanes with a grass median. Overall, location is one of the primary positive factors for the subject. Market Area Location and Boundaries The subject property is located at the southern portion of the Bealeton area and directly along Route 17. The area is mainly comprised of commercial retail properties along Route 17 in southern Fauquier County, Virginia. The subject is bounded by Prince William County line to the east, Route 29 to the north and Culpeper County line to the west and Stafford County line south. Access to the subject property is directly from Route 17. Population Trends Overall growth rates in Fauquier County have been steady. The population base grew by 2 from 2000 to 2008, or by 2.5% per year. Growth is expected to remain similar over the next four years. Overall population growth is expected to be 10.4%, or 2.6% per year. This is generally due to the close proximity to Northern Virginia/Washington D.C Marsh Road, Bealeton, VA 16

17 Housing Trends Fauquier County, like many local areas, experienced tremendous growth from 2002 to The housing boom created an extensive oversupply of housing and values declined as demand waned. Prices further plummeted with the onset of mass foreclosures and decreased demand. Foreclosure activity has slowed during the past three years as the inventory was purged from the market. With the decline in inventory relative stability has emerged and now the market is witnessing new construction throughout the county. Housing seems stable at present and is even expanding after years of stagnation. Census Housing Information Marsh Road, Bealeton, VA 17

18 Income Trends General income trends are now stable, with unemployment having recovered since recession level highs were reached. Income trends are up approximately 4.76% since Census Income Information- Major Employers Manufacturing Company Product/Service Estimated Employment CHEMetrics Industrial water test kits Ross Industries Food & packaging machinery SMITH-MIDLAND Corporation Precast concrete products NonManufacturing Company Product/Service Estimated Employment Command Technologies, Inc. Systems engineering Fauquier Hospital, Inc. Health care Pepsi-Cola Bottling Company Wholesale soft drinks SAIC Information systems & technology solutions The Arlie Foundation Conference center Wal-Mart Stores, Inc. Discount supercenter Marsh Road, Bealeton, VA 18

19 Unemployment Trends Unemployment nationally has been generally stable after falling from previous highs reached in late The current rate is 6. according to the U.S. Bureau of Labor Statistics. This is the lowest national rate in over five years, as the slow economic recovery continues. The local rate is below both the state and national averages and unemployment is not a pressing issue for the local economy Marsh Road, Bealeton, VA 19

20 Land Use Trends Again, Bealeton is difficult to describe because it is not directly associated with Warrenton or Culpeper and represents its own pocket of activity. In the past ten years the area has been developed with newer residential subdivisions and commercial development. In addition, the area maintains its rural nature with larger farm properties, ranging from 10 to 100 acres, located to the south. While commercial activity is still limited overall, residential growth has expanded greatly. As economic conditions continue to improve, the appraiser anticipates construction to continue to rally. The appraiser sees more activity for residential development in the short term, with commercial activity potentially following in time, as new residential construction expands and creates a need for commercial services. Marketing and Exposure Time Typical exposure time for commercial properties in the Bealeton area and Fauquier County at large has ranged from 6 to 24 months depending on the pricing of the property. Exposure times have remained somewhat stagnant as sales activity for commercial real estate has remained relatively lukewarm despite the improving economy. However, overall marketing trends for commercial properties in the area appear generally stable due to the limited availability of properties in the immediate Bealeton area. Currently, there are virtually no similar commercial properties being actively marketed in the area. Historically, there has been a constant demand for commercial properties and the lack of inventory should render this so going forward. The value rendered herein reflects a 9 to 12 month marketing and exposure time leading to a presumed sale as of the appraised date Marsh Road, Bealeton, VA 20

21 Property Description The following description is based on our property inspection, assessment records, property deeds and information provided to the appraiser by the client. Location: Current Use of the Property: Site Size: Shape: Road Frontage/Access: Visibility: Topography: Soil Conditions: Utilities: SITE The subject is located along Marsh Road, Route 17 in Bealeton, Fauquier County. It is located within a mile of the intersection of Routes 28 and 17. The area is mainly comprised of commercial properties. With newer commercial improvements directly to the north and south of the subject. Commercial retail and apartments Total: 0.75 acres, 32,670 SF Usable: 0.75 acres, 32,670 SF The site is mainly rectangular in shape. The subject property has good access with frontage as follows: Marsh Road, 150+/- feet Very good The subject has mainly level and slightly gently sloping topography. The soil conditions observed at the subject appear to be typical of the region and adequate to support development. Electricity: Public Sewer: Public Water: Public Natural Gas: None Underground Utilities: The site is serviced by underground utilities. Adequacy: The available utilities are typical and are considered adequate for the improvement. Site Improvements: Paved entry drive and paved parking area, 20+/- spaces Marsh Road, Bealeton, VA 21

22 Flood Zone: The subject is located in an area mapped by the Federal Emergency Management Agency (FEMA). The subject is located in FEMA flood zone X, which is not classified as a flood hazard area. FEMA Map Number: 51061C0410-C FEMA Map Date: February 6, 2008 The subject does not appear to be in FEMA designated flood zone area. The appraiser is not an expert in this matter and is reporting data from FEMA maps. Wetlands/Watershed: Environmental Issues: Encumbrance / Easements: Conclusion: None reflected. The appraiser is not an expert in this matter and is reporting data from readily available sources. There are no known adverse environmental conditions on the subject site. Please reference Limiting Conditions and Assumptions. There no known adverse encumbrances or easements. Please reference Limiting Conditions and Assumptions. In conclusion, based on the subject size, topography, shape, access and availability of utilities, the subject site appears to be adequate to support development as evident by the current improvement. Hazardous Substances Please reference the Limiting Conditions and Assumptions section of this report on page Marsh Road, Bealeton, VA 22

23 Aerial Tax Map County Tax Map Marsh Road, Bealeton, VA 23

24 Property Type: Overview: IMPROVEMENTS DESCRIPTION - GENERAL Commercial Retail and Residential Apartments The subject consists of a 5,040 square foot concrete block and frame building originally built in The main level is 2,520 square feet and consists of a retail country market. The 2,520 square foot upper level consists of four, 2 bedroom and 1 bath apartment units. The subject building has a gable style roof with metal roof covering. The exterior siding is wood board over concrete block and it is on a crawl space foundation. The interior of the main level is mainly open retail with a storage area at the rear and a half bathroom. There is a catering kitchen located at the rear of the building. The upper level is accessed by stairs located at the rear of the building. The central hall leads to the four individual apartment units. Each unit contains living area, kitchen, two bedrooms and one full bath. The apartment units were updated when the current owner purchased the property in The subject is in overall average condition and of average quality of construction and finish. Construction: Construction Quality: IMPROVEMENT DESCRIPTION Class C & D Average Year Built: 1985 Effective Age: Remaining Useful Life: 30+ Overall Condition: Appeal/Appearance: Areas, Ratios & Numbers: Utilities: Average Average Number of Stories: Two 2,520 SF Main Level Retail Store/Market 2,520 SF Second Level Four, 2 BR/1BA Apartment Units The subject building is served by public water and sewer. The building does not have gas connection. Foundation: Basement/Sublevels: FOUNDATION, FRAME & EXTERIOR Masonry concrete block on crawl space foundation None Marsh Road, Bealeton, VA 24

25 Structural Frame: Exterior: Windows: Roof/Cover: Service Access/ Overhead Doors: Concrete block and frame Concrete block covered by wood vertical siding Updated, vinyl dual pane, double hung Gable / Metal and Shingle The retail unit is served by front entry door and a rear service door. The apartments are accessed by enclosed stairs located at the rear of the building which leads to a central hall serving the four units. Interior Layout: Floor Cover: Walls: Ceilings & Ceiling Height: Lighting: Restrooms: INTERIOR MAIN LEVEL Open retail with storage and catering kitchen at the rear. Half bathroom. Vinyl floor covering Painted drywall Painted drywall, 8 Florescent lighting. One half bath. Utility room Heating: Cooling: Electrical: Plumbing Condition: MECHANICAL SYSTEMS MAIN LEVEL Heat pump Central AC Adequate for Use Average Interior Layout: Floor Cover: Walls: Ceilings & Ceiling Height: INTERIOR APARTMENTS Four individual units containing living area, kitchen, 2 bedrooms and full bathroom each. All units are accessed by a central hallway. Laminate wood and carpet Painted wood paneling Painted drywall, Marsh Road, Bealeton, VA 25

26 Lighting: Restrooms: Florescent and incandescent lighting One full bath in each of the four units Heating: Cooling: Electrical: Plumbing Condition: MECHANICAL SYSTEMS APARTMENTS Electric Baseboard No central AC, only individual window units. Adequate for Use Average Parking Type: PARKING Type: Asphalt Condition: Average space for 20+/- cars Design & Functional Utility: Deferred Maintenance: Comments: PROPERTY ANALYSIS The overall design and functional utility of the subject is good. The subject property does not have any substantial deferred maintenance to report. Overall, the subject property is in average condition and the apartment units were recently updated. At the time of inspection, only two of the four apartment units were accessed. The design and condition ably support the current use of the subject improvement as a retail store with four apartment units on the second level Marsh Road, Bealeton, VA 26

27 Subject Photographs Front of Building Front of Building Rear of Building Rear of Building Marsh Road North Marsh Road - South Marsh Road, Bealeton, VA 27

28 Parking Lot Subject Interior Retail Store Subject Interior Retail Store Subject Interior Catering Kitchen Subject Interior Storage Room Subject Interior Upper Hall Marsh Road, Bealeton, VA 28

29 Apartment Interior Apartment Interior Apartment Interior Apartment Interior Apartment Interior Apartment Interior Marsh Road, Bealeton, VA 29

30 Apartment Interior Apartment Interior Marsh Road, Bealeton, VA 30

31 Marsh Road, Bealeton, VA 31

32 Assessment and Taxes REAL ESTATE ASSESSMENT AND TAXES Taxing Authority Fauquier County Assessment Year 2014 ASSESSED VALUES Tax Identification Number Land Assessed Value $250,100 Building Assessed Value $326,700 Total Assessed Value $576,800 Rates, Taxes, More County Tax Rate $0.99 Total Tax Amount $5,710 Special Assessment Comments N/A Assessment Ratio Implied Value $576,800 Property Tax Comments The last assessment period for Fauquier County occurred in New assessments were released in October In general values have increased, or remained generally similar, to the previous assessment. Zoning Zoning Code Zoning Description Current Use Legally Conforming LAND USE CONTROLS C1 Commercial Neighborhood The Commercial - Neighborhood (C-1) District generally a town center type district allowing neighborhood commercial activities and some residential uses. Its main purpose is to provide areas for neighborhood type retail and service convenience shopping. The areas should be located so as to provide pedestrian access from nearby neighborhoods. The size should relate to the neighborhoods served and the configuration should allow for internal pedestrian movement. Current use is legally conforming per zoning ordinance Marsh Road, Bealeton, VA 32

33 Marsh Road, Bealeton, VA 33

34 Highest and Best Use Highest and best use may be defined as the reasonably probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.3 1. Permissible Use. What uses are permitted by zoning and other legal restrictions? 2. Possible Use. To what use is the site physically adaptable? 3. Feasible Use. Which possible and permissible use will produce any net return to the owner of the site? 4. Maximally Productive. Among the feasible uses which use will produce the highest net return, (i.e., the highest present worth)? Highest and Best Use of the Site The highest and best use of the site, as vacant, is for an commercial retail improvement consistent with the subject area. The C1 zoning allows for the use of the site as an commercial retail oriented building and it is considered to be legally permissible. The site is level with good topography and surface drainage where it would be physically possible to develop as a commercial retail improvement. The improvement would generate a positive return over the land value and is judged to be financially feasible. Higher zoning designation is highly unlikely and the improvement will render the subject site to be maximally productive. Highest and Best Use as Improved The highest and best use of the subject as improved is its current use as a commercial retail building with residential apartments above on the second level. The subject improvement is consistent with the C1 zoning ordinance. The improvement is legally permissible and physically possible by the mere fact that it exists under the zoning ordinance and approved by the county. The improvement does generate a positive return over the land value and is judged to be financially feasible. Higher zoning designation is highly un-likely and the improvement renders the subject site to be maximally productive with no excess land area. Highest and Best Use Conclusion In conclusion, the highest and best use of the subject property is as currently improved by a commercial retail building with residential apartments on the second level. 3 The Appraisal of Real Estate 12 th Edition, Page 305, Appraisal Institute Marsh Road, Bealeton, VA 34

35 Valuation Methodology Three basic approaches may be used to arrive at an estimate of market value. They are: 1. The Cost Approach 2. The Income Approach 3. The Sales Comparison Approach Cost Approach The Cost Approach is summarized as follows: Cost New - Depreciation + Land Value = Value The Cost Approach relied upon when appraising special use properties. Sales Comparison Approach The Sales Comparison Approach compares sales of similar properties with the subject property. Each comparable sale is adjusted for its inferior or superior characteristics. The values derived from the adjusted comparable sales form a range of value for the subject. By process of correlation and analysis, a final indicated value is derived. Income Approach The Income Approach converts the anticipated flow of future benefits (income) to a present value estimate through a capitalization and or a discounting process. Final Reconciliation The appraisal process concludes with the Final Reconciliation of the values derived from the approaches applied for a single estimate of market value. Different properties require different means of analysis and lend themselves to one approach over the others Marsh Road, Bealeton, VA 35

36 Analyses Applied Due to the age of the subject property, the cost approach is not considered a reliable approach to market value for this appraisal assignment and was not developed. A sales approach was applied as there is adequate data to develop a value estimate and this approach reflects market behavior for this property type. An income approach was applied as the subject serves as a rental building that is held for its income producing potential Marsh Road, Bealeton, VA 36

37 Sales Comparison Approach The Sales Comparison Approach is based on the premise that a buyer would pay no more for a specific property than the cost of obtaining a property with the same quality, utility, and perceived benefits of ownership. It is based on the principles of supply and demand, balance, substitution and externalities. The following steps describe the applied process of the Sales Comparison Approach. The market in which the subject property competes is investigated; comparable sales, contracts for sale and current offerings are reviewed. The most pertinent data is further analyzed and the quality of the transaction is determined. The most meaningful unit of value for the subject property is determined. Each comparable sale is analyzed and where appropriate, adjusted to equate with the subject property. The value indication of each comparable sale is analyzed and the data reconciled for a final indication of value via the Sales Comparison Approach. Comparables We have researched four comparables for this analysis; these are documented on the following pages followed by a location map and analysis grid. All sales have been researched through numerous sources, inspected and verified by a party to the transaction Marsh Road, Bealeton, VA 37

38 Comparable 1 Transaction ID 394 Date 4/12/12 Address 306 S. Main Street Price $500,000 City Culpeper GBA Unit Price $97.94 State Virginia Transaction Type Closed Tax ID 41A2 1 Y 11A Financing Typ Mkt Grantor Kovi, Mary Property Rights Fee Simple Grantee 4C's Restaurant & Culpeper Verification Source County-Town Property Reports Site Acres 0.2 Topography Level Land SF 7,950 Zoning C2 Flood Zone None Shape Rectangular Utilities City water & sewer GBA 5,105 Units 6 Improvements & Financial Data Year Built 1961 Construction Quality Condition Average Average Notes Two level older commercial building on Main St in Culpeper serving mainly as retail and restaurant space on main level with office space and apartments on upper levels. No other sales within 12 month Marsh Road, Bealeton, VA 38

39 Comparable 2 Transaction ID 757 Date 7/28/14 Address 971 Garrisonville Rd Price $515,000 City Stafford GBA Unit Price $ State Virginia Transaction Type Closed Tax ID 19-24B Financing Typ Mkt Grantor Ramsey Holdings LLC Property Rights Fee Simple Grantee Kamco LLC Verification Source Assessor Site Acres 0.6 Topography Gentle Slope Land SF 24,394 Zoning B2-Comm Flood Zone 0 Shape Appears Rectangular Utilities On site well & septic GBA 3,646 Units 5 Improvements & Financial Data Year Built 1977/1996 Construction Quality Condition Average Average Notes Sale of a Retail unit with four residential units. On site parking lot. Gd exposure along Garrisonville Road. Average overall condition and quality. No prior sale within 12 months Marsh Road, Bealeton, VA 39

40 Comparable 3 Transaction ID 756 Date 2/4/13 Address 1555 Warrenton Rd Price $585,000 City Fredericksburg GBA Unit Price $ State Virginia Transaction Type Closed Tax ID Financing Typ Mkt Grantor J&S Market, LLC Property Rights Fee Simple Grantee Ameriglobe Contracting Verification Source Assessor, MLS Site Acres 2.0 Topography Gentle Slope Land SF 87,120 Zoning B2-Comm Flood Zone 0 Shape Appears Rectangular Utilities On site well & septic GBA 4,800 Units 3 Improvements & Financial Data Year Built 1967 Construction Quality Condition Average Average Notes Sale of a Convenience Market with a residential home with a basement. Gd exposure along Route 17. Average overall condition and quality Marsh Road, Bealeton, VA 40

41 Comparable 4 Transaction ID 302 Date 6/7/13 Address 215 E Davis St Price $675,100 City Culpeper GBA Unit Price $ State Virginia Transaction Type Closed Tax ID 41A2 1Q1 13 Financing Typ Mkt Grantor Hudsons & Daughters LLC Property Rights Fee Simple Grantee Bailey Lynn LLC Verification Source County-Town Property Site Acres 0.1 Topography Gentle Slope Land SF 2,614 Zoning Commercial Flood Zone 0 Shape Appears Rectangular Utilities Public water & sewer GBA 5,787 Units 5 Improvements & Financial Data Year Built 1938 Construction Quality Condition Good Good Notes The building is along Davis Street in Culpeper. Retail unit on the main level with 2 apartments on second level. No prior sale within 12 months Marsh Road, Bealeton, VA 41

42 Comparables Map Analysis Grid The above sales have been analyzed and compared with the subject property. We have considered adjustments in the areas of: Property Rights Sold Financing Conditions of Sale Market Trends Location Physical Characteristics On the following page is a sales comparison grid displaying the subject property, the comparables and the adjustments applied Marsh Road, Bealeton, VA 42

43 Analysis Grid Address Marsh Rd City Bealeton State VA Date 9/24/2014 Price $0 GBA 5,040 GBA Unit Price Transaction Adjustments Leased Fee Conventional Cash Expenditures After Sale Adjusted GBA Unit Price Market Trends Through 9/24/14 0. Adjusted GBA Unit Price Location Bealeton % Adjustment $ Adjustment Property Rights Fee Simple 0. Fee Simple 0. Fee Simple 0. Fee Simple 0. Financing Typ Mkt 0. Typ Mkt 0. Typ Mkt 0. Typ Mkt 0. Conditions of Sale Normal 0. Normal 0. Normal 0. Normal 0. GBA % Adjustment $ Adjustment Year Built % Adjustment $ Adjustment Land SF % Adjustment $ Adjustment Condition % Adjustment $ Adjustment Qual/Construction % Adjustment $ Adjustment Zoning % Adjustment $ Adjustment Parking % Adjustment $ Adjustment Adjusted GBA Unit Price Net Adjustments Gross Adjustments Average Average On Site Comp 1 Comp 2 Comp S. Main 971 Garrisonville 1555 Warrenton Culpeper Stafford Fredericksburg Virginia Virginia Virginia 4/12/2012 7/28/2014 2/4/2013 $500,000 $515,000 $585,000 5,105 3,646 4,800 $97.94 $ $ ,950 5% $5.14 Average Average C2 Street Only 5% $ / ,394 Average Comp E Davis St Culpeper Virginia 6/7/2013 $675,100 5,787 $ $0 $ $ Culpeper 5,040 5,105 3,646 4,800 5, $ ,670 C1 $0 $0 $0 $97.94 $ $ $ $ $ Culpeper Garrisonville Rt 17 Corridor Average B ,120 Average Average On Site On Site ,614 5% $5.83 Good -5% -$5.83 Good -5% -$5.83 B2 C2 Street Only 5% $5.83 $ $ $ $ % % Marsh Road, Bealeton, VA 43

44 Comparable Sale Adjustments Property Rights All sales are Fee Simple sale and no adjustments are required, as the subject is rented at market levels. Financing All sales are typical market transactions with typical market financing. No adjustments are required Conditions of Sale All sales appear to be arms length transactions. Market Trends Real estate and economic trends have shown signs of an upward trend over the past 18 months in the Northern Virginia market area. In recognition of an upward trending commercial market at large, a +5% adjustment will be made on Sale 1 as it is a sale from early All other sales do not warrant adjustments as they are within 18 months of the appraisal date. Location All sales have similar/equal location and exposure. No adjustments are necessary. Improvement Size/GBA Larger properties typically sell for less per square foot than do smaller ones and the size adjustments are applied on this principle. The subject size has been bracketed with only Sale 2 requiring a downward adjustment for its smaller size. Year Built All sales have similar age as the subject, no adjustments are necessary. Site Size The subject parcel is 32,670 square feet in size. Sale 2 is on a similar size parcel and no adjustment is necessary. Sale 3 is on a slightly larger parcel, however, due to its shape and topography, no adjustment is warranted. Sales 1 and 4 are on smaller parcels and are adjusted upward 5%. Condition The subject is in overall average condition. Sales 1, 2 and 3 are in similar condition and do not require adjustments. Sale 4 is in good condition, thus, it is adjusted downward 5%. Quality of Construction The subject is of overall average quality and construction. Sales 1, 2 and 3 are in similar overall quality and do not require adjustments. Sale 4 is of superior quality, thus, it is adjusted downward 5% Marsh Road, Bealeton, VA 44

45 Zoning The subject is zoned commercial as are the provided sales. No adjustments are warranted. Parking The subject has on site parking. Sales 2 and 3 have similar parking situations and do not require adjustments. Sales 1 and 4 have only street parking and are adjusted upward 5%. Sales Comparison Approach Conclusion The adjusted values of the comparable properties range from $ to $127.13; the average is $ All of the value indications have been considered, and in the final analysis, all comparables are given consideration with weight being given to Sale 2 as it is the most recent and similar sale. Our final reconciled per square foot value is $120.00, which represents the middle of a tight and consistent range. As Is Value Indicated Value per Square Foot: $ Subject Size: 5,040 Indicated Value: $604,800 Based on the above analysis detailed above, as of September 24, 2014, we have reconciled to a Sales Comparison Approach value of: $605,000 Six Hundred Five Thousand Dollars Marsh Road, Bealeton, VA 45

46 Income Approach The Income Approach to value is based on the present worth of the future rights to income. This type of analysis considers the property from an investor's point of view, the basic premise being that the amount and quality of the income stream are the basis for value of the property. Appraisers utilize either Direct Capitalization, or Yield Capitalization methods. These methods, which are based upon different measures of expected earnings and different assumptions concerning the relationship between expected earnings and value are briefly described as follows: Direct Capitalization: The method used to convert a single years income expectancy of an annual average of several years income expectancies into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor. Yield Capitalization: The capitalization method used to convert future benefits to present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investments income pattern, value change and yield rate. In selecting the appropriate method of capitalization, the appraisers must attempt to reflect the thinking and actions of the players in a particular market for the property in question. Most prospective buyers make a careful analysis of the cash flows associated with each prospective property over a specific projection period which is tailored to meet their investment goals. In this particular appraisal, the Direct Capitalization Approach is considered the appropriate valuation technique. The Yield Capitalization technique is best suited to the valuation of larger multi-tenant properties, where there are numerous, variable long term leases in effect Marsh Road, Bealeton, VA 46

47 Potential Gross Income (PGI) Current Income Currently, the subject is occupied and operated as a retail store on the first level (Cinco De Mayo), with four apartments on the second story. The appraiser has been given the rent roll for the subject property and utilized the contract rents in order to calculate the current income stream. The table below summarizes the subject s current income stream. The selected rental comparables to follow will support and validate the contract rental rates of the subject. Unit/Space Type Income Method Units/SF Annual % of PGI Apt Unit 1 $ $/Month 1 $11, % Apt Unit 2 $ $/Month 1 $10, Apt Unit 3 $ $/Month 1 $11, % Apt Unit 4 $ $/Month 1 $11, % Retail Unit $3, $/Month 1 $43, % Potential Gross Income: $89, Gross Income Apt Unit 1 Apt Unit 2 Apt Unit 3 Apt Unit 4 Retail Unit Marsh Road, Bealeton, VA 47

48 Space Types & Occupancy For organizing the units into categories for analysis, we have defined the following space types for the subject. Four, one bedroom apartments Retail space The subject property has a reliable rental history over the past year. Apartments are in constant demand in the Bealeton area and similar retail space is also at a premium. Thus, vacancy should not exceed 1 in the proceeding Income/Expense Statement. Lease Structure The predominant lease structure for the subject property and the immediate neighborhood is a modified gross lease, whereby all expenses except day to day utilities are the responsibility of the owner. Typically, the apartment leases are for no longer than a one year term with a potential multi-year lease for the retail space. Market Rent Comparables We have researched several rental comparables for this analysis; these are documented on the following pages followed by a location map and analysis of adjustments. All rentals have been researched through available sources and verified. The comparables are of similar retail and apartment units Marsh Road, Bealeton, VA 48

49 RETAIL LEASE COMPARABLE #1 Address: 102 Duke Street, Culpeper, VA Lessor: KASA Properties LLC Date: Current through 2014 Tax Map #: 41-49B Zoning: C3-Business Leased space: 2,100+/- SF convenience store Rental Rate: $14.50 /SF Expenses: NNN Remarks: The building is occupied by several tenants, but the unit pictured is occupied by a single tenant as an international market. Information provided by tenant Marsh Road, Bealeton, VA 49

50 RETAIL LEASE COMPARABLE #2 Address: 109 Germanna Hwy, Culpeper, VA Lessor: Abdel-Jalil Date: Year to year, active through 2014 Tax Map #: 41-A33A-3B Zoning: C3- General Business Leased space: 2,375 SF thrift and convenience store Rental Rate: $15.00 SF Expenses: NNN Remarks: The building is occupied by several retail tenants, but the unit pictured is occupied by a single tenant as a thrift convenience market. Information provided by owner and appraisal files Marsh Road, Bealeton, VA 50

51 RETAIL LEASE COMPARABLE #3 Address: 8406 W. Main St, Marshall, VA Lessee: La Palmita Deli and Market Date: Current through 2016 Tax Map #: Zoning: C1- Commercial Neighborhood Leased space: 2,400+/- SF convenience market with gas Rental Rate: $26.25/SF Expenses: NNN Remarks: The information is per prior appraisal. The unit is a market and deli with fuel pumps. Located in Marshall in Northern Fauquier County Marsh Road, Bealeton, VA 51

52 RETAIL LEASE COMPARABLE #4 Address: 4211 Plank Road, Fredericksburg, VA Lessor: Liberty Pawn Shop & Gold LLC Date: Current through 2018 Tax Map #: 23-A-14K Zoning: C2- Commercial Neighborhood Leased space: 2,365 SF Retail Pawn Shop Rental Rate: $19.88/SF Expenses: NNN Remarks: The information is per prior appraisal. The unit is a pawn shop with open retail area and storage at the rear. Located along Route 3 in Fredericksburg Marsh Road, Bealeton, VA 52

53 APARTMENT RENT COMPARABLE #1 Address: 212 E. Madison St, Remington, VA Date: Current Mo-Mo Leased space: 1 BR/1BA Apt and 2BR/1BA Apt 500 to 800 SF Rental Rate: $ Remarks: Building has three 1 BR and three 2 BR units. In the Town of Remington. APARTMENT LEASE COMPARABLE #2 Address: 310 Piedmont Street, Culpeper, VA Date: Current Leased space: 800 SF Rental Rate: $850 per month. Remarks: One Bedroom Apartments in converted house Marsh Road, Bealeton, VA 53

54 APARTMENT LEASE COMPARABLE #3 Address: 65/67 East Shirley Ave, Warrenton, VA Date: Current Leased space: 450 SF to 912 SF Rental Rate: $1,295 Remarks: 1 BR and 2 BR Apartments in a converted house in Warrenton. APARTMENT LEASE COMPARABLE #4 Address: 111 E. Lee Street, Warrenton, VA Date: Current Leased space: 520 SF to 675 SF Rental Rate: $1,100 Remarks: 1 BR/ 1BA Apartments in a converted house in Warrenton Marsh Road, Bealeton, VA 54

55 Comparables Map Analysis Grid The above rentals have been analyzed and compared with the subject property. We have applied adjustments for differences in the grid below: Marsh Road, Bealeton, VA 55

56 Lease Analysis Grid Comp 1 Comp 2 Address Marsh 102 Duke St 109 Germanna Rd Hwy City State Date Effective Rent Rent Measure Bealeton Virginia 9/24/2014 Per Culpeper Virginia 9/1/2013 $14.50 Per Square Culpeper Virginia 6/1/2013 $15.00 Per Square Terms Term SF Leased Mod Gross 1 Year 2,520 Triple Net 1 Year 2,100 Triple Net 1 Year 2,375 Triple Net 3 Years 2,400 Triple Net 5 Years 2,365 Mod Gross Mo-Mo 1 Apt Mod Gross Mo-Mo 1 Apt Mod Gross Mo-Mo 1 Apt Mod-Gross Mo-Mo 1 Apt Transaction Adjustments Conditions of Lease Normal Normal Normal Normal Normal Normal Normal Normal Other Similar Similar Similar Similar Similar Similar Similar Similar Adjusted Rent $14.50 $15.00 $26.25 $19.88 $ $ $1, Market Trends/Year Adjusted Rent $ $ $ $ $ $ $1, Expenses $1.50 $1.50 $1.50 $1.50 Adjusted Rent $16.00 $16.50 $27.75 $21.38 $ $ $1, Location % Adjustment $ Adjustment Avg+ Avg+ Avg+ Avg+ Good -1 -$2.14 Avg 1 $89.50 Avg+ Good -1 -$ Condition % Adjustment $ Adjustment Building Class % Adjustment $ Adjustment SF Leased % Adjustment $ Adjustment Misc. % Adjustment $ Adjustment Adjusted Rent Net Adjustments Gross Adjustments SF/Month Avg C 2,520 2,100 None Foot Avg C None $ % 10.3% Foot Avg C 2,375 C 2,400 None Gas Pumps -1 -$2.78 $ Comp 3 Comp W Main 4211 Plank Rd St Marshall Fredericksburg Virginia Virginia 4/1/2013 1/1/2013 $26.25 $19.88 Per Square Per Square Foot Foot Avg+ -1 -$2.78 $ % 26.9% Avg C 2,365 1 Apt None $ % 18.3% Comp E Madison St Remington Virginia 1/1/2014 $895 Per Month Avg Avg C None Comp Piedmont St Culpeper Virginia 1/1/2014 $850 Per Month C 1 Apt None $ $ Comp 7 65 E Shirley Ave Warrenton Virginia 1/1/2014 $1,295 Per Month Avg C 1 Apt None $1, Comp E Lee St Warrenton Virginia 1/1/2014 $1,100 Per Month $1, $1, $1, Good -1 -$ Avg C 1 Apt None $ Marsh Road, Bealeton, VA 56

57 Market Rent Reconciliation The leases presented provide a good indication of the typical lease terms for average quality retail space and one bedroom apartments in the Bealeton area. Adjustments have been applied to each comparable to account for differences. Date of Lease: No adjustments are deemed necessary for rental market conditions, as all leases are recent and active. Conditions of Lease: All leases were considered at market conditions. Expenses: The subject is rented on a modified gross basis whereby the owner pays all expenses except utilities for the individual units. The retail comparables are all NNN and all expenses are passed through to the tenant. NNN rental rates are often lower per unit in recognition of the fact that the landlord also passes through all expenses. Thus, the appraiser has applied a utility expense of approximately $1.50/SF and applied it to the NNN rental comparables to make them similar to the subject rental terms. Location: The subject is located in Bealeton. Culpeper and Marshall are considered to be similar overall with no adjustment required. Remington is inferior and a 1 upward adjustment has been made. Warrenton and Fredericksburg are considered to be superior and a -1 adjustment has been applied to all comparables. Condition: The subject is in average condition. The comparables are all similar, except #3 which is considered to be in average or better condition and requires a downward adjustment. Building Class: The subject and all units are of class C quality. Size: All sizes are similar and no adjustments have been applied. Misc: This adjustment is intended to address any unique features that my affect the rental rate. Comparable #3 is improved by gas pumps that are included in the rental rate and this superior feature necessitates a downward adjustment. The above rentals have been analyzed and compared with the subject property. Based on the rental comparables, the appraiser has determined that the subject rental rate of approximately $17.00/SF for the retail space and $995 per month for the apartments is commensurate with market. In establishing an income and expense statement for the subject property, the appraiser will utilize the subject rent roll/contract rents Marsh Road, Bealeton, VA 57

58 Vacancy and Collection Loss Based on a review of market conditions and the subject being a single tenant property we have projected vacancy and collection loss at 1. Unit/Space Type Income Method Units/SF Annual % of PGI Apt Unit 1 $ $/Month 1 $11, % Apt Unit 2 $ $/Month 1 $10, Apt Unit 3 $ $/Month 1 $11, % Apt Unit 4 $ $/Month 1 $11, % Retail Unit $3, $/Month 1 $43, % Potential Gross Income: $89, Vacancy & Collection Loss 10.0 $8,976 Other Income: Effective Gross Income (EGI): $0 $80, Expenses The table below details the subject s estimated expenses based on modified gross lease terms. Expense Amount (% or $) Method Annual $/SF Taxes $5,710 $/Year $5,710 $1.13 Insurance $4,328 $/Year $4,328 $0.86 Utilities $5,500 $/Year $5,500 $1.09 Repairs/Maintenance 5% % of EGI $4,039 $0.80 Management 6% % of EGI $4,847 $0.96 Reserves 3. % of EGI $2,424 $0.48 Total Expenses: $26,848 $5.33 Expense Ratio (Expenses/EGI): Expense Reimbursements: Net Expense Ratio 33.23% $ % Expenses Analysis and Projection Real Estate Taxes The real estate taxes are calculated at $5,710 and paid by the landlord. Insurance The subject s insurance costs are reported at $4,328. Utilities The lessee is responsible for their own utilities. The owner pays common area utilities for the building and they are reported at approximately $5,500 per year, or an average of $458 per month. Repairs & Maintenance The owner must perform basic repairs and maintenance on the retail unit and apartments. 5% of EGI should be sufficient to cover this expense Marsh Road, Bealeton, VA 58

59 Trash/Snow Removal The owner reports that these expenses are included in the Repairs and Maintenance expense in their operating statement. The appraiser feels that the 5% expense for Repairs and Maintenance is also adequate to cover this expense. Thus, trash/snow/grounds maintenance expense are included in the Repairs and Maintenance expense as opposed to being extracted separately here. Management Management fees have been reported at approximately 6% of the effective gross income, or $4,847. Reserves The appraiser has estimated reserves for replacements at 3% of EGI or $2,424. Expenses Taxes Insurance Utilities Repairs/Maintenance Management Reserves Marsh Road, Bealeton, VA 59

60 $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Potential Gross Income $89,760 Effective Gross Income $80,784 Cash Flow Profile Expenses $26,848 $0 Expense Reimbursements $53,936 Net Oporating Income Cash Flow Potential Gross Effective Exp. Reimbursements Income Gross Income Expenses NOI Amount $89,760 $80,784 $26,848 $0 $53, Marsh Road, Bealeton, VA 60

61 Capitalization Rate The capitalization rate is the factor that converts the stabilized net operating income (NOI) to a present value. It is the ratio of net income to value or sale price. NOI Sale Price = Capitalization Rate For example, if a property sells for $500,000, and has a stabilized NOI of $50,000, the indicated capitalization rate is 1. The appraiser performed a search of surrounding markets in an attempt to locate market derived cap rate data. The appraiser could not find a reliable record of similar sales with income/expense data in order to calculate an OAR. The appraiser found one retail property in Stafford County that indicated a rate of 8.4%. The address is 3247 Jefferson Davis Highway. The retail strip has ten tenant spaces and a 1,500 SF auto repair garage. The comparable is not perfect and was not deemed fit for direct comparison in the sales comparison approach. However, it does yield a cap rate for similar quality retail space in the general area that provides a baseline for further research via other methodologies Marsh Road, Bealeton, VA 61

62 Band of Investment This technique utilizes lender and real estate investor investment criteria to develop, or synthesize a capitalization rate. There are four key inputs necessary for this method: 1. The loan-to-value ratio (M) 2. The mortgage interest rate (i) 3. The loan term (n) 4. The equity cap rate or equity dividend rate (R E ) The mortgage variables are used to build the mortgage constant (R M ), which is the total amount of the payments made in one year, expressed as a percentage of the original loan amount. Payments x 12 / Original Loan Amount = Mortgage Constant (R M ) The equity cap rate is the annual return to the investor, expressed as a percent of the original amount invested. The annual return to the investor is also known as the equity dividend rate; it is the profit remaining after debt service and all other expenses. After Debt Service Profit / Equity Investment = Equity Cap Rate (R E ) Note that the equity cap rate is not the same (usually, that is) as the equity yield rate. The equity yield rate reflects the total return to the investor over the life of the investment. Factors such as appreciation and mortgage pay down affect and usually increase this return to a point higher than the equity dividend rate. In markets where substantial appreciation is expected, investors will often accept a low or even negative equity dividend rate, anticipating a compensating payoff when the property is eventually sold. In markets where little appreciation is expected, much more weight is given to the annual equity dividend. Average equity dividend rates are reported for all property types at around 15% in the proceeding survey data. However, the appraiser utilized a rate of 12% given the relative safety of the subject investment due to a general lack of competition, the reliable income/occupancy history of the subject, and after analyzing the paltry comparative rate of return of alternative investments (CD s for example continue to offer return rates under 2%). Formula: R M x M R E x (1-M) = rate = rate = Cap Rate (R o ) We have researched mortgage rates and terms typical for the subject within the market area. The table below details the Band of Investment calculations Marsh Road, Bealeton, VA 62

63 Survey Data The appraiser has used several sources in order to establish some of the fundamental factors that influence the capitalization rate conclusion. Accurate market data is needed in order to ensure that a reliable rate is derived. Below are several charts with 3rd Quarter 2014 data to augment the appraiser s cap rate selection. The data is available through a subscription to RealtyRates.com. The chart consists of current financing terms for convenience store retail buildings. The relevant variables are the mortgage interest rate, loan term (years), loan to value ratio, debt coverage ratio, and the equity dividend rate. The average equity dividend rate is 12.33%. The appraiser will utilize a rate of 9.0 in the band of investment calculation. Bealeton has a general lack of competition which tends to minimize the risk and allows for the utilization of a lower equity dividend rate. The subject also has a reliable and strong income stream. The assumption is also based on the premise that investors in similar properties are motivated by the potential of the property and would require a lower initial return in anticipation of higher resale income to be generated in the future Marsh Road, Bealeton, VA 63

64 Capitalization Rate Variables Mortgage Interest Rate 6.31% Loan Term (Years) 23 Loan To Value Ratio 63.% Debt Coverage Ratio 1.37 Equity Dividend Rate 9.0 Capitalization Rate Calculations Band of Investment Analysis Mortgage Constant Equity Dividend Rate 9.0 Loan Ratio Contributions x 63.% = 5.2 Equity Ratio x 37.% = 3.33% Band of Investment Capitalization Rate 8.53% Capitalization Rate Conclusion The preceding survey data is considered excellent and indicates a rate of approximately 8.5. The appraiser was only able to procure one market derived rate which does not provide a conclusive market derived rate. In addition, it is of a multi-tenant retail strip property. However, it indicates a rate nearly identical to the Band of Investment rate. Thus, this approach is given an excellent market derived reasonableness check and the reconciled cap rate has been well supported at Marsh Road, Bealeton, VA 64

65 Capitalization to Value Income Capitalization Analysis Unit/Space Type Income Method Units/SF Annual % of PGI Apt Unit 1 $ $/Month 1 $11, % Apt Unit 2 $ $/Month 1 $10, Apt Unit 3 $ $/Month 1 $11, % Apt Unit 4 $ $/Month 1 $11, % Retail Unit $3, $/Month 1 $43, % Potential Gross Income: $89, Vacancy & Collection Loss 10.0 $8,976 Other Income: Effective Gross Income (EGI): $0 $80, Expense Amount (% or $) Method Annual $/SF Taxes $5,710 $/Year $5,710 $1.13 Insurance $4,328 $/Year $4,328 $0.86 Utilities $5,500 $/Year $5,500 $1.09 Repairs/Maintenance 5% % of EGI $4,039 $0.80 Management 6% % of EGI $4,847 $0.96 Reserves 3. % of EGI $2,424 $0.48 Total Expenses: $26,848 $5.33 Expense Ratio (Expenses/EGI): Expense Reimbursements: Net Expense Ratio Net Operating Income (NOI): 33.23% $ % $53,936 $10.70 Capitalization Rate: Value (NOI/Cap Rate): 8.5 $634,544 $ Rounded: $635,000 $ Direct Capitalization Analysis Conclusion Based on the above analysis detailed above, as of September 24, 2014, we have reconciled to a direct capitalization approach value of: $635,000 Six Hundred Thirty Five Thousand Dollars Marsh Road, Bealeton, VA 65

66 Final Reconciliation The process of reconciliation involves the analysis of each approach to value. The quality of data applied reflects the significance of each approach as it relates to market behavior and defensibility of each approach are considered and weighed. Finally, each is considered separately and comparatively with each other. Value Indications Cost Approach: Not Developed Sales Comparison Approach: $605,000 Income Approach: $635,000 Cost Approach As the effective age of an improvement increases, the reliability of the cost approach typically decreases because of the subjectivity of estimating depreciation and the difficulty in accurately estimating the reproduction cost of the improvements. The cost approach is not considered a reliable approach to market value for this appraisal assignment and was not developed. Sales Comparison Approach A sales comparison analysis was considered and was developed because there is adequate data to develop a value estimate and this approach reflects market behavior for this property type. The appraiser found several sales of properties considered similar to the subject in more than one way. They all have similar appeal and localities as the subject and all occurred fairly recently. Moreover, after adjustments the sales established a reliable range of value. Gross and net adjustments were minimal and the range was exceptionally tight. Finally, the sales comparison approach accounts for supply and demand factors that strongly influence sales prices in the area. The sales comparison approach directly responds to such intangible factors that can affect sales prices. The quality of data is considered excellent and the approach is given a degree of consideration. Income Approach Direct Capitalization The income approach has been completed and the appraiser found enough comparable rental data to render a value. Currently, the subject is fully rented. The configuration of the subject accommodates a multi-tenant rental situation and maximizes the potential income of the property. Thus, the appraiser feels that the income stream of the subject is an important component of its market value and appeal to a typical investor. Market data was excellent and the appraiser was supplied with the subject's income and expense statement for additional information. The approach rendered a value generally similar to the SCA and each approach is given essentially equal weight in reconciling to a final value Marsh Road, Bealeton, VA 66

67 Value Conclusion Based on the data and analyses developed in this appraisal, we have reconciled to the following value conclusion(s), as of September 24, 2014, subject to the Limiting Conditions and Assumptions of this appraisal. Reconciled Value(s): Premise: As Is Interest: Leased Fee Value Conclusion: $620,000 Six Hundred Twenty Thousand Dollars In this assignment a leased fee value was presented given the fact that the subject is encumbered by multiple leases. However, the contract rents are commensurate with market levels and thus the Fee Simple interest would not render a dissimilar market value. Timuchin A. Ulvi, Certified General Appraiser VA Justin S. Shelton, Certified General Appraiser VA Marsh Road, Bealeton, VA 67

68 Certification Statement We certify that, to the best of our knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, unbiased professional analyses, opinions and conclusions. We have no present or contemplated future interest in the property that is the subject of this report, and have no personal interest or bias with respect to the parties involved. Our compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. Our analyses, opinions, and conclusions were developed and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP). We have made a personal inspection of the property that is the subject of this report. No one outside of the signatories below provided significant professional assistance in the development of the conclusions contained in this report. We certify sufficient competence to appraise this property through education and experience, in addition to the internal resources of the appraisal firm. The value conclusion(s) and other opinions expressed herein are not based on a requested minimum value, a specific value or approval of a loan. The appraiser has not performed an appraisal of the subject property within three years of the effective date of this appraisal. The appraiser is an associate member of the Appraisal Institute. The reported analyses, opinions and conclusions were developed, and this report has been prepared, in conformity with the requirements of the code of professional ethics and standards of professional appraisal practice of the Appraisal Institute. This report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. Timuchin A. Ulvi has inspected the subject property. Justin S. Shelton has not inspected the subject property. Reconciled Value(s): September 24, 2014 Premise: As Is Interest: Leased Fee Value Conclusion: $620,000- Six Hundred Twenty Thousand Dollars Timuchin A. Ulvi, Certified General Appraiser VA Justin S. Shelton, Certified General Appraiser VA Marsh Road, Bealeton, VA 68

69 Addenda Marsh Road, Bealeton, VA 69

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