Martin Real Estate Group LLC

Real Estate Appraisers

Appraisal of: 23 South 8th Street Tiger Hotel Appraised for: Dan Johnson
Appraisal by: Adam Martin 5085 Commercial Dr. Columbia, MO 65203 [Pick the date]

University of Columbia-Missouri 218 Cornell Hall Columbia, MO 65201 Appraisal Date: December 15, 2010

December 15, 2010 Dan Johnson University of Missouri-Columbia 437 Cornell Hall Columbia, MO 65201 Dear Mr. Johnson:

5085 Commercial Dr. Columbia, MO 65203 314-954-1614

As requested, I have enclosed a complete narrative appraisal report of the Tiger Hotel at 23 South 8th Street in the Historic Business District of Columbia, Missouri. After inspecting the property, I found that it is a nine story commercial use building including leased fee and fee simple businesses. This hotel is primarily used as an income generating asset. The purpose of this appraisal was to determine the estimated fair market value of the leased fee and fee simple subject property by using three valuation methods. The three approaches used in this process were the cost approach, the sales comparison approach, and the income approach. As of December 15, 2010, I have concluded a fair market value of:

$13,180,000
On behalf of the Martin Real Estate Group, I would like to extend to you my gratification for choosing the company that will best assist you in all of your appraisals. I have included a complete, in depth report of my analysis of the property. If you have any questions or concerns, please do not hesitate to call me at (314) 954-1614 or via e-mail at acmww8@mail.missouri.edu. Thank you again for choosing The Martin Real Estate Group.

Sincerely,

Adam Martin Professional Appraiser

Table of Contents
Executive Certifications General Assumptions General Limiting Conditions Premises of Appraisal Identification of the Property Type of Appraisal Purpose and Use of the Appraisal Fair Market Value Scope of Work Property Rights Presentation of Data Area & City Analysis Neighborhood Analysis Site Analysis Zoning Marketability Improvements Analysis of Data and Conclusions Highest and Best Use The Valuation Process Cost Approach Land Valuation Land Sales Schedule Summary of Cost Approach Sales Comparison Approach Comparable Properties Sales Schedule Comparable Sales Adjustment Table Summary of Sales Comparison Approach Income Capitalization Approach Proposed Income Statement Determination of Capitalization Rate Band of Investments Reconciliation of Income Capitalization Approach Reconciliation and Conclusion of Data Addendum 4 5 6 7 8 8 8 8 8 8 8 9 9 10 10 10 10 11 12 12 13 14 15 19 20 21 22 23 26 27 28 30 31 32 33 34

Executive Summary
Effective Date of Valuation: Location: Lot Size: Building Area: Zoning: Improvements: December 15, 2010 23 South 8th Street 102 x 106 77,000 Square Feet C-2 Central Business Renovated rooms, utilities, Ballroom, bar 80 years Mixed-Use Residential And Commercial $9,408,000 $13,588,000 $14,570,000

Estimated Economic Life: Highest and Best Use:

Indication of Value by Cost Approach: Indication of Value by Sales Comparison Approach: Indication of Value by Income Capitalization Approach:

Final Estimate of Fair Market Value:

$13,180,000

Certifications
I certify that, to the best of my 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 is my personal, impartial, and unbiased professional analyses, opinions, and conclusions. I have no present or prospective interest in the property that is 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 or a predetermined value or direction in value that favors the cause of the client, the amount of the value option, the attainment of stipulated results, of 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. I have made a personal inspection of the property that is the subject of this report. No one provided significant real property appraisal assistance to the person signing this certification. This report has been developed in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. As of the date of this appraisal, I have completed the requirements of the continuing education program of the Appraisal Institute.

Adam Martin Professional Appraiser December 15, 2009

General Assumptions
This appraisal report has been made with the following assumptions: No responsibility is assumed for the legal description provided of for matters pertaining to legal or title considerations. Title to the property is assumed to be good and marketable unless otherwise stated. This property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. Responsible ownership and competent property management are assumed. The information furnished by others is believed to be reliable, but no warranty is given for its accuracy. All engineering studies are assumed to be correct. The plot plans and illustrative material in this report are included only to help the reader visualize the property. It is assumed that there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining the engineering studies that may be required to uncover them. It is assumed that the property is in full compliance with all applicable federal, state, and local environmental regulations and laws unless the lack of compliance is stated, described, and considered in the appraisal report. It is assumed that the property conforms to all applicable zoning and use regulations and restrictions unless nonconformity has been identified, described, and considered in the appraisal report. It is assumed that all required licenses, certificates of occupancy, consents, and other legislative or administrative authority from 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 opinion of value contained in this report is based. It is assumed that the use of the land and improvements is confined within the boundaries or property lines of the property described and that there is not encroachment or trespass unless noted in this project. Unless otherwise stated in this report, the existence of hazardous materials, which may or may not be present on the subject, was not observed by the appraiser. The appraiser has no knowledge of the existence of such materials on or in the property. The appraiser, however, is not qualified to detect such substances. The presence of substances such as asbestos, unreaformaldehyde foam insulation and other potentially hazardous materials may affect the value of the property. The value estimated is predicated on the assumption that there is no such material on or in the property that would cause the loss in value. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The intended use is urged to retain an expert in this field, if desired.

General Limiting Conditions

The appraisal report has been made with the following general limiting conditions: Any allocation of the total value estimated in this report between the land and improvement applies only under the stated program of utilization. The separate values allocated to the land and buildings must not be used in conjunction with any other appraisal and are invalid if so used. Possession of this report, or a copy thereof, does not carry with it the right of publication. The appraiser, by reason of this appraisal, is not required to give further consideration or testimony or to be in attendance in court with reference to the property in question unless arrangements have been previously made. Neither all nor any part of the contents of this report (especially any conclusions as to value, the identity of the appraiser, or the firm with which the appraiser in connected) shall be disseminated to the public through advertising, public relations, news, sales, or other media without the prior written consent and approval of the appraiser. The appraiser had a limited amount of comparables when evaluating this space.

Premises of the Appraisal

Identification of the Property: The property being appraised is located at the corner of 8th and Cherry Street. It is one block north of Broadway and one block east of South 9th Street. The address is 23 South 8th Street. Type of Appraisal: This is a formal narrative appraisal report of the subject property. Purpose and Use of the Appraisal: The purpose of this appraisal is to determine the estimated fair market value of the mixture of leased fee and fee simple subject property as of December 15, 2010. The use of the appraisal is to estimate the market value of the property for investment purposes in possibly including the subject property in a portfolio. Definition of Fair Market Value: For the purpose of this appraisal, fair market value is defined as: The most probable selling 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 influences. Implicit in this definition are the consummation of a sale as of a specific date and the passing of the title from seller to buyer under conditions whereby: 1. Buyers and sellers are typically motivated; 2. Both parties are well informed or well advertised, and acting in what they consider their best interests; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in the United States 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 within the sale. Scope of Work: This report is a detailed, unbiased appraisal analysis of the fair market value of 23 South 8th Street. The analysis, opinions, and conclusions are based upon complete inspections of the property and comparable sales in the area. All of the other area, market, neighborhood, and site information were collected before the examination of this appraisal. Property Rights: The subject property has leased fee and fee simple property rights and is owned by John Ott.

Presentation of Data
Area and City Analysis: Columbia Missouri is home to a population of around 100,000 residents. It is largely considered a college town boasting a student base between its three major collages of around 45,000 students. CNNMoney in November of 2009 named Columbia as one of the top spots in the country to launch a small business. Columbia has experienced an 8% population growth in the last six years in small metro areas compared to a national average of just above 4%. Total housing units number around 44,000 with 81% of its residents being over the age 18. This statistic indicates a strong social resident base that is geared more towards entertainment for the older age group as compared to residents under the age of 18. Being a large college town, Columbia is home to a wide array of entertainment attractions. The city is home to the Mizzou Tigers that have shown strong development over the past years and is a strong attraction for potential high school recruits coming to Columbia. The city also has many concert venues that bring top acts to town each year. Between The Blue Note, Mizzou Arena, and Jesse Hall, there is almost always some type of concert to be seen. Columbia is also home to a number of hospitals providing excellent medical care and the latest medical technology to its residents. Columbia has been luckier than most in the recent downturn economy. The city has fared better than the national average in economic statistics but the city has still felt the effects of the recession. The apartment market is currently strong but it has probably reached its peak and will start a slow downturn. Student off campus housing is most likely at a peak too. A number of projects are experiencing larger than normal vacancy rates offering discounts on rent to students to get leases signed. The retail market is currently way overbuilt. After the retail surge of the early to mid 2000s, many second tier strip stores and even first tier stores have a large number of vacancies. With all these vacant buildings with no new tenants, rents have drastically declined to $8 to $15 per square foot leaving many store owners left paying off above average rents for years to come. Columbias economic base primarily relies on the fields of education, medical treatment, and insurance. Educational services, and health care and social assistance employment accounts for 20,000 people, three times that of the closest largest employer, retail. Columbias office market is currently in balance with only a seven to eight percent vacancy rate and rents of $6 to $20 per square foot. Columbia is not home to a large industrial market but what market it does have is stagnant. No one new is entering the market and vacancy rates are as high as 11%. Columbias residential statistics are down but still lower than the national average. New building permits are half of what they were in 2006. The average home price in the second quarter of 2009 has hovered around $158,000. Out of the 44,000 homes located in the city, half are one family detached homes. The unemployment rate as of October 2009 is marked at 5.9% compared to a national average of 10%, a positive statistic. Crime in Columbia is another problem spot for the city. In recent years the city has faced a spike in crime with theft and assault as its primary issue. Although it has seen a jump in crime, law enforcement is taking proactive steps to reduce crime. Columbias crime index is still below the national average at 298 compared to 320.

Neighborhood Analysis: The subject is located on the corner of South 8th Street and Cherry. It is one block north of Broadway Street which is the prime retail and shopping district in Columbia. Columbias roots extend all the way back to 1821 when settlers inhabited the Flat Branch area, the current area the Tiger Hotel sits upon. This northern area that the hotel is located in is part of historic downtown Columbia referred to as The District. Keeping with the tradition of The Districts historic nature, Tiger Hotel fits beautifully among old structures as a historic boutique hotel. Downtown Columbia is a part of town that experiences heavy traffic exposure as well as a large amount of pedestrian traffic every day. This area brings a number of yearly festivals and gatherings that brings in a heavy amount of visitors. Some festivals include the annual three day Roots n Blues festival as well as the Columbia Festival of the Arts. The District was recently created into an Art District with various artistic street elements added to streets and structures as well as having a newly remodeled art museum a stones throw away. Downtown has a plethora of bars and restaurants ranging from your standard bar and grill to upscale wine bars and steakhouses. The nightlife downtown is a huge draw to local businesses benefiting from the local college population. Every night residents scour the town to either bar-hop or just take it easy studying in one of the many coffee bistros. In addition to its bars and restaurants, The District is home to numerous clothing boutiques taken advantage of by residents and many visitors. Site Analysis: The property is located at the corner of 23 South 8th Street and Cherry in the Historic Business District of Columbia Missouri. It is specifically located in the recently named art district one block north of Broadway. The lot size measures 102.5X106.4 and the structure itself tops out at 70,000 square feet, approximately 7,000 square feet per floor (9 floors). Zoning: This site is zoned C-2. A summary of Columbias C-2 zoning rules and regulations can be found at www.gocolumbiamo.com. Marketability: With an extensive renovation coming to an end this historic building is in good condition. Commercial space in downtown Columbia boasts small vacancy rates and good retail space does not stay vacant for long. It is a prime neighborhood for commercial businesses due to the attractions the city brings as well as the high day to day pedestrian traffic. Currently Tiger Hotel is dealing with a nearby eyesore as the new city hall is being constructed causing construction vehicles, dirt, and fenced off sidewalks to line the streets surrounding nearby streets. The hotel has no available parking currently but is looking to strike a deal with the city in hopes of renting 60 spots a month from a nearby parking garage. Having a total of 9 stories, the Tiger Hotel has some amazing views of the city being the tallest building in downtown. The hotel also boasts a new bar in the basement, creating an added attraction and revenue to the hotel. The new bar has become the number one revenue generator
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for the hotel as it has now capitalized on the booming nightlife of downtown Columbia. An added benefit Tiger Hotel maintains in the marketability sector is historic boutique designation which in itself draws many visitors annually. The building has a sense of nostalgia that it brings about itself and the city radiating every night from its enormous neon Tiger sign which is a predominant visual of the city at night. Improvements: The subject property consists of nine stories at approximately 7,000 square feet per floor. The structure was originally built in 1928 as a fire free hotel that was constructed to withstand fire if one was to catch. The building has just gone through an extensive nine million dollar renovation which included new sprinklers, updated plumbing, restored ball room, new basement bar, and all new roofing and HVAC systems. The electrical was recently brought up to code. The bar in the basement is estimated at 3,000 square feet and is open nightly to the public unless privately rented out. The rest of the building has a total of 65 rooms at around 300 square foot a piece with a newly finished banquet room on the 9th floor overlooking the city. All rooms are remodeled with fully functional bathrooms. Two suite style rooms were also added on the 9th floor in addition to the banquet room. The site contains beautiful original fixtures throughout the ballroom, lobby, and rooms. The building also maintains a cell phone tower on the roof that brings in additional revenue.

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Analysis of Data and Conclusions

Highest and Best Use: Definition: Highest and Best Use is the reasonably probable and legal use of vacant land or an improved property that is physically possibly, legally permissible, appropriately supported, financially feasible and that results in the highest value. To find the highest and best use of a property, the subject property needs to be divided into two considerations: The land as vacant and the property as improved. In addition, both must meet the following criteria: Physically Possible: The size, shape, terrain, and accessibility of parcel of land and the risk of natural disasters such as floods or earthquakes affect the use for which it can be developed. Legally Permissible: The test of legal permissibility addresses whether or not the subject property conforms with existing legal requirements. In particular, private restrictions, zoning, building costs, historic district controls, and environmental regulations must be investigated because they may prevent potential uses. Financially Feasible: The test of financial feasibility addresses the market demand for the subject property in its current state. All uses of a property that are expected to produce a positive return are needed to identify those uses that is maximally productive. Maximum Productivity: The use that produces the highest residual land value, after all operating expenses and costs, that is consistent with the rate of return that uses the highest and best use.

Highest and Best Use as Though Vacant: The highest and best use of site as though vacant is define as among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements. The property being appraised is zoned as C-2, giving it a number of options for uses. My professional opinion is that the subjects highest and best use would be to create a multi story mixed commercial and residential property. My proposed plan is going with the new urban style property with commercial on the ground level with residential above. The ground level would be a 3,000 square foot upscale Mexican restaurant by day and a bar by night, the idea coming from downtowns lack of premium Mexican dining. The building would be built at an inset from the street of 25 feet to account for a large concrete patio for outside dining and bar patrons. Along
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the right side of the patio would be a two foot raised concrete platform that will act as a stage for live entertainment. Another 2,000 square feet of ground floor in the corner section of 8th and Cherry will be a 24 hour laid back coffee shop with a target of catering to students with a great environment for studying. A drive up window will be located in the alley so that people on the go can simply shoot down the alley, pick up a drink, and be on their way. Many of the coffee shops patrons will be provided by the mixture of affordable and luxury student lofts located above the ground level. With the first three stories above ground level being affordable lofts and an additional three stories being luxury, you have a great tenant mix. Parking will be covered by an underground garage. With a total of 30,000 square feet among six residential stories rented at $14 and $18 a square foot, coupled with $16 a square foot for commercial would give a GMI of $560,000 and a gross annual income of $6,720,000. Highest and Best Use as Though Improved: The highest and best use as though improved is defined as the use that should be made of a property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. There are two reasons to analyze the highest and best use of the property as improved. To help identify potentially comparable properties. To decide whether to maintain the improvements as is, cure items of deferred maintenance and retain the improvement, modify improvements, or demolish. It is my professional opinion that the highest and best use as though improved is to convert all hotel rooms into student lofts while keeping the ball room, lobby, and bar as is. With eight floors of rooms at 7,000 square feet a piece, four 1,500 square foot lofts could be created on each floor for a total of 24 lofts and 96 tenants. With each loft holding 4 tenants, a reasonable rent would be $520 a bedroom. Even in this rough housing market, there is still a large demand to be met that can easily pay $520 especially when you have far off campus living such as The Cottages charging even more than that. Keeping the ballroom as is still creates revenue by continuing to rent it out at $300 per night, an average of two nights a week. Also, maintaining the basement bar will continue to bring in more revenue than any other use would with revenue streams of $2,500 a week coming in. These combined factors create a GMI of $62,320 and using a gross monthly multiplier of 100, an investment market rate for the building totals 6.2 million dollars.

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The Valuation Process

There are three approaches/procedures that can be used in determining the fair market value of a property. The three methods for determining the market value are the cost approach, the income approach, and the sales comparison approach. The method used depends on the type of property, the intended use of the appraisal, the identified scope of work, and the quality and quantity of data available for analysis. Each approach is acceptable to all professional appraisers nationwide and can be used in conjunction with one another to find the fair market value of the property. The Cost Approach: Is a set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction (or replacement for) the existing structure, including an entrepreneurial profit, deducting depreciation for the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised. The Sales Comparison Approach: Is the set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sales price of the comparables based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant; it is the most common and preferred method of land valuation when comparable sales data is available. The Income Capitalization Approach: Is the set of procedures through which an appraiser derives a value indication for an income-producing property by converting its anticipated benefits (cash flows an reversion) into property value. This conversion can be accomplished in two ways. One years (stabilized) income expectancy can be capitalized at a market-derived capitalization rate that reflects a specified income pattern, return on investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specific yield rate. Reconciliation of Value Indications: The last phase of a valuation assignment in which two or more value indications derived from market data are resolved into a final value option, which may be either a final range of value or a single point estimate.

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The Cost Approach

When applying the cost approach the market value is determined by adding the cost of the land (as vacant) to the cost to replace or improve it. Next, you subtract out accrued depreciation. This approach is most useful when valuing new or proposed construction because it will help determine the highest and best use of the property. The following steps are taken to find an indication of the value of the property. 1. Estimate the value of the land as though vacant and available to be developed to its highest and best use. 2. Estimate the reproduction or replacement cost of the primary structure at the effective appraisal date. 3. Estimate the amount of accrued depreciation in the structure, which includes physical deterioration, functional obsolescence, and external obsolescence. 4. Deduct the estimated accrued depreciation from the total reproduction or replacement cost of the primary structure. 5. Add the estimated depreciation cost of the improvements to the land value to arrive at the value of the property. There are several uses and limitations to the cost approach that need to be considered when finding the value of a property. These are as follows: USES: Special purpose properties with no effective market comparables No existing market sales data New or proposed construction Estimation of highest and best use on income properties (commercial) Insurance or replacement valuation (upper limit to rehab) Test of market value reliability LIMITATIONS: Value is a function of estimated accrued depreciation Improvement must be appropriate and well maintained May require expert assistance Site to be used by other than the typical buyer No upper limit to sale Cost is not discounted for the passage of time

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Land Valuation
The following three properties were selected because of the similarity they hold as compared to the subject property. Each is similar in size, frontage, and traffic count. Out of the 17 properties selected to derive adjustments, comps 12, 10, and 9 were selected because they were the most comparable to the subject property and are listed below. The next graph shows the land sales schedule and adjustments made for differences among the properties. Comp 12 Locust Street $200,000 12/15/2005 8,550 60 No Near Level Low C-2 Paved No SE/DT Comp 10 103 Orr Street $211,000 3/6/2006 14,058 142 No Near Level Low C=3 Paved No NE Comp 9 Garth Avenue $100,000 12/31/2004 19,055 191 No Level Low C-1 Paved No NW

Location Sale Price Date of Sale Size (sq/ft) Frontage Corner Site Topography Traffic Count Zoning Roads Flood Zone Section of Town
Property Subject 23 S. 8th

Price Sale Date Size (sq/ft) Price per Sq. Foot Frontage Corner Site Topography Traffic Zoning Roads Flood Zone Section of Town Adjusted Price

Comp 12 Locust St. Adjustments $ ? 200,000.00 11/19/2009 12/15/2005 10906 8550 (+8.44)=33.09

Comp 10 103 Orr St. Adjustments $ 211,000.00 3/6/2006 14058 (-7.78)=16.18 (1.08)^2, (1.0166) =17.54 (-.86) =16.04 (+4.96) 10,465 (+12.05)=17.97 (-3.14) =17.41

Yes Level Low C-2 Paved No

(1.1),(1.08)^2, (1.0166)= 23.39 30.51 15.01 102 60 (+.92)=33.39 142 No (+4.96)=35.05 No Near Level (+12.05)=39.27 Near Level Low Low C-2 C-3 Paved Paved No No NE $39.27 per square foot

NE/Downtown SE/Downtown

$17.41 per square foot

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Comp 9 Garth Ave Adjustments $ 100,000.00 12/31/2004 19055 (-7.78)*2=5.83 (1.1), (1.08)^2, 5.25 (1.0166) =6.85 191 (-.86)*2= 5.73 (+4.96)=6.01

No Level Low C-1 Paved No NW

(-13.43)=5.20

(-3.64)=5.01 $5.01 per square foot

Adjustments 1. The first adjustments made were to bring the comparable properties up to date using the appreciation rates that were given in class. The rates given in class are as follows, 2001-2006 rates appreciated 10% a year, 2006-2008 8% a year, and 2008-2009 0%. To find the appreciation for these past months in 2009, I referred to www.neighborhoodscout.com to find a 1.66% appreciation rate for commercial land in Columbia. Comp 12 I appreciated 4 years seeing as how the sale was made in December of 2005. Comp 10 I appreciated 4 years. Finally, I appreciated comp 9 5 years seeing as how that sale was made in December of 2004. 2. The topography adjustment was made by comparing comps 1 and 3. First comp 3 had to be appreciated from 1999-2005. This gave me a value of $1,269,545. Here I found that going from near level to level is a 12.05% increase. From these values I then found that going from level to near level yields a 10.76% decrease. 3. The frontage adjustment came from isolation comps 3 and 4. After I appreciated comp 3 from 1999-2000, everything was the same except for a 300 ft. gap in frontage. From here I found that a 300 ft. gain in frontage leads to a 6.56% increase. A 300 ft. loss in frontage leads to a 6.16% decrease. From here I found that my 3 comparable properties all had a difference or incremental difference of 42 ft from my subject property. So I found that 42 ft. is 14% of 300 and multiplied .14*6.56 to get my proper frontage adjustments for my subject property. These are .92% and -.86%.

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4. For traffic count adjustments I isolated comps 6 and 7. Both of these comps were from 1998 so no appreciation was needed. Every aspect of each was identical except the difference from a low to high traffic count. Going from comp 6 (low) to comp 7 (high) yielded an 11.61% increase and going from high to low yielded 10.4% decrease in price. There were no other decent enough comparables to derive another adjustment to weigh in with this one without sounding outlandish. 5. My corner lot adjustments were made by comparing comps 11 and 13. There was only a few months difference between the sales (7/7/05-1/12/06) so no appreciation was necessary. I had to make comp 11 level so I added +12.05% of its price to it. With the comparables even now, Going from no corner to a corner lot gave me a 4.96% increase in price while going from corner to no corner gave me a 4.73% decrease. 6. The adjustments made for square feet were made using comps 14 and 16. First I appreciated comp 14. The next step was to make comp 16 level which is an addition of 12.05%. Now with everything the same, the gap in square footage between the two was 3000 ft. I found that gaining 3000 sq/ft led to an 8.44% increase in price while a 3000 sq/ft decrease led to a 7.78% decrease in price. This 3000 ft gap makes computing my three comparable properties easy because they are all in 3000 ft increments away from my subject property. 7. For section of town adjustments the sections were broken up into four quadrants, NW,NE,SW,SE. Since there was only one comparable that was located in downtown, I labeled that comparable as SE/DT. In finding the NW to NE and vice versa adjustment, comp 11 was appreciated one year from 2005-2006 and comp 11 was also made level which is a 12.05% increase. With these numbers in place, going from NE to NW was a 3.77% increase whereas going NW to NE was a 3.64% decrease. With this calculation done, the subject property is located in the NE/DT section of town. Sales comparable 12 is in the same quadrant so no adjustment is necessary. Also, sales comparable 12 is the only comp that is located downtown so no adjustment is needed for that. 8. My zoning adjustment from C-3 to C-2 involved isolating comps 10 and 12. For this I had to add frontage to comp 12. I did this by multiplying .3333*6.56% to get one third of my previous frontage adjustment of 300 feet. No appreciation was necessary because the sales were within a year. From here I could get my adjustment of C-2 to C-3 being 3.24% increase and C-3 to C-2 being a 3.14% decrease. My next zoning adjustment was from C-1 to C-2 and vice versa. These adjustments isolated comps 12 and 17. For these comps to match up I had to add frontage to comp 12 by once again multiplying .3333*6.56% to get a portion of my previous frontage adjustment of 300 ft. When these comps match up I was able to derive that from C-1 to C-2 there was a 15.51% increase in price and going from C-2 to C-1 there was a 13.43% decrease. 9. There are no adjustments necessary for roads and flood zone because they do not differ across all comparables.

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Summary of Land Sales Schedule

After adjusting for various differences between the properties, I formulated a price range of $5.01 per sq. foot to $39.27 per sq. foot between the comparable properties. This range was determined from many factors that played a large role in determining the value of the subject property. After adjusting the three comparable properties prices, they will now be weighted based upon which properties are most similar to the subject property. In my analysis of the three comparable properties, I feel that comp 12 is most similar to the subject property because it had the least amount of adjustments (5) and it is also the only other comparable zoned C-2 and is located in downtown. Comp 10 will be the next heavily weighted even though the last two comparables have 6 adjustments a piece. Comp 10 is in the same quadrant and has more comparable frontage and square feet than the third comparable. Comp 9 is weighted the least because it has the least amount of comparable data out of the three. Weight of Comparables: Comp 12: $39.27(.5)= Comp 10: $17.41(.3)= Comp 9: $ 5.01(.2)= Adjusted Price for Subject Property:

$19.64 $ 5.22 $ 1.00 $25.86

Total Estimated Price for Subject Property: 10,906 sq/ft * $25.86 = $282,029

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Summary of Cost Approach:

Improvements: Building: Hard Costs: Soft Costs: Finish Costs:

$80*70,000 $35*70,000 $40*70,000

$5,600,000 $2,450,000 $2,800,000 $10,845,000

Site Improvements: Including utilities, water and sewage, etc.

$55,000 $10,900,000

Total Value of Improvements: Less: Accrued Depreciation: $2,452,000 $8,448,000 Depreciated Value of Improvements: Plus: Estimated Value of Land: Indicated Value Estimated by Cost Approach: Without Entrepreneurial Profit Plus: Entrepreneurial Profit: Indicated Value Estimated by Cost Approach: $678,040 $9,408,000 $282,000 $8,730,000

Total Estimated Value of Cost Approach: $9,408,000

From estimates that were provided in class, hard costs were given a range of $80 to $100 per foot. Hard costs are the bones of the building including lumber, concrete, and labor. I concluded that the lower end of the range at $80 is expected because of the discounts many construction companies are giving in this downturn market. Soft costs I pegged at $35 due to the large scale nature of the project incorporating large engineering and architectural fees. Soft costs include accounting, legal, insurance, interest, architects, engineers, and any appraisals necessary. Finish costs are marked at $40 per square foot bringing the total building cost to $155 a square foot. Finish costs include everything it takes to make the interior white box condition. Site improvements including water and sewage total $55,000. I calculated depreciation using the age life method. Built in 1928, I came up with an effective age of 18 years and an economic life of 80 years. The entrepreneurial profit was calculated by taking 22% of the improvements plus the land.
20

The Sales Comparison Approach

The sales comparison approach determines the market value of a property by analyzing similar properties and comparing it to the subject property. The properties that the appraiser uses are comparable to the subject; however, they have just recently sold, are listed for sale, or under contract. The appraiser will adjust for differences. This approach is recommended when you have similar properties. The following steps must be taken in order to find the market value of the subject property: 1. Research the market to obtain information on properties similar to the subject property that have recently sold, are currently listed for sale, or are presently under contract. 2. Verify the information by confirming that the date obtained is accurate and that the transactions reflect arms-length market considerations. 3. Select relevant comparables and develop a comparative analysis for each comparable. 4. Compare each comparable property to the subject property and make appropriate adjustments to the sale price of each comparable for differences between the subject property and the comparables. 5. Reconcile the various indications of value from the analysis of the comparables into a single value of range of values. There are several uses and limitations to the cost approach that need to be considered when finding the value of a property. They are as followed: USES: Sales comparisons best stimulate market behavior Especially useful for residential properties Enables depreciation estimates Establishes income multiples, rents, and required rates of return Courts place greatest reliance on this approach Takes into account financing terms LIMITATIONS: Requires an adequate quantity of data Requires an adequate quality of data Market activity is necessary Property can be unique Assumes past behavior is a fair proxy for the future Assumes appropriate adjustments can and will be made

21

Comparable Building and Land Sales Schedule

The following three properties were selected because of the similarity they hold as compared to the subject property. The three properties are the most similar out of the comps when compared to the subject in terms of size, condition, and functional utility. Out of the 25 properties selected to derive adjustments, comps 1, 14, and 2 were selected because of the similar comparisons to the Tiger Hotel. A graph of the 25 comparables is printed on the next few pages while a list of the three most comparable properties, comps 1,14, and 2 are listed below. Comp 1 1010-1020 East Broadway $1,875,000 Good C-2 31,066 $60 Average Downtown 7/31/2002 None 145 Average Yes Comp 14 10 West Nifong Boulevard $2,300,000 Good C-1 27,138 $81 Average Southwest 4/1/1996 Adequate 105 Average Yes Comp 2 212 East Green Meadows $1,800,000 Good C-1 18,538 $97 Average Southwest 7/30/2003 Adequate 267 Average No

Property Sale Price Condition Zoning Square Footage Price per Sq. Foot Traffic Count Section of Town Date of Sale Parking Frontage Functional Utility Corner Site

22

Comparable Sales Adjustment Table:

Property Subject 23 South 8th Comp 1 1010-1020 E. Broadway $ 1,875,000.0 0 Good C-2 Comp 14 10 W. Nifong Blvd $ 2,300,000.0 0 Good C-1

Adjustments

Adjustments

SALE PRICE Condition Zoning

? Good C-2

(+16.36)=286.73

Size SF

70,000

(+19.38)(+15.38)(11. 31,066 38) (+7.38)=137.52 (1.07)^3,(1.05)^2, 60 (1.02), 1.01)= 83.48

(+19.38)(+15.38)(11. 27,138 38) (+7.38)= 246.41 (1.03)^5, (1.07)^5, (1.05)^2, (1.02), 81 (1.01)=149.58 Average Southwest (+11.46)=319.59

Price per s.f. Traffic Count Section of Town Date of Sale Parking Frontage Functional Utility Corner Site Adjusted Price

? Average Average Downtow n Downtown 12/15/201 0 7/31/2002 None None 92 Good Yes Average Yes

4/1/1996 Adequate (-8.58)=292.17 105 Average Yes (+5.45)

145 (-12.65)=120.12 (+5.45)+126.67

126.67 per sq. foot

308.09 per sq. foot

23

Comp 2 212 E. Green Meadows $ 1,800,000.00 Good C-1 Adjustments

(+16.36)=249.96

(+19.38)(+15.38) (+11.38) 18,538 (+7.38)(+3.38)=214.82 (1.07)^2, (1.05)^2, 97 (1.02), (1.01)=126.14 Average Southwest (+11.46)=278.61 7/30/2003 Adequate (-8.58)=254.71 (-12.65)(-8.65) (267 4.65)=193.79 Average (+5.45)=204.35 No (+3.16)=210.81 210.81 per sq. foot

Adjustments: 1. The first adjustments made were the appreciation rates for land and building which were given in class. Anything before 2001 is appreciated at 3% per year. 2001-2006 is appreciated at 7% per year. 2006-2008 is pegged at 5% and 2008-2009 is appreciated at 2%. For the year 2009 I have found a 1% appreciation rate from neighborhoodscout.com on building rates. 2. The next adjustment accounted for functional utility. By using comps 6 and 9 everything matched up so no separate adjustments were necessary. I found that going from average to good functional utility yielded a 5.45% increase in value. In contrast, I found that going from good to average yielded a 5.17% decrease in value. 3. My third adjustment was for corner lot using comps 11 and 16. First, I had to appreciate comp 16 3% going from 1998 to 1999. From here I calculated that going from no corner lot to corner lot gave me a 3.16% increase in value. Secondly, going from a corner lot to no corner gave me a 3.06% decrease in value. 4. The next adjustment calculated was zoning. By comparing comps 21 and 24 I was able to derive the adjustments. First, comp 16 had to be appreciated three years from 2006 to 2009. After that was done, everything else matched up. Now I was able to calculate that going from C-1 zoning to C-2 zoning resulted in a 16.36% increase,
24

5.

6.

7.

8.

9.

while going from C-2 to C-1 resulted in a 14.06% decrease. To make this adjustment work, I changed the zoning in comp 24 from commercial to C-2. My next adjustment was for section of town. For this I used comps 1 and 2. After adjusting comp 1 for appreciation for one year and adjusting comp 2 to move from C1 to C-2 zoning, a 16.36% increase in value, I was able to derive the values. I found that moving from the southwest part of town to downtown yielded an 11.46% increase in value. Also, moving from downtown to the southwest part of town yielded a 10.28% decrease in value. This adjustment accounted for parking using comparables 8 and 11. To get these adjustments I first had to appreciate comp 11 to adjust for years. The next step was making comp 11 go from the southwest part of town to downtown which is an 11.46% increase in value. From here, I derived that going from no parking or street parking to adequate parking is an increase in value of 9.39% while going from adequate parking to no parking is a drop in value of 8.58%. The square foot adjustment came from isolating comps 10 and 23. No individual adjustments were necessary because everything matched up. I found that an increase of 10,000 square feet gave me an increase in value of 19.38% while a decrease of 10,000 feet gave me a decrease in value of 16.23%. When applying to my comparables, each time I use the adjustment I subtract 4% to account for space discounts. My next adjustment for frontage came from comparing comps 9 and 6. First I had to appreciate comp 9 two years from 2004 to 2006. Next I had to change comp 6 to account for functional utility. It had to go from average functional utility to good, an increase in value of 5.45%. Now I found that an increase of 50 feet of frontage yielded a 14.49% increase in value and a decrease of 50 feet of frontage yielded a decrease in value of 12.65%. When applying to my subject property, for my last comparable there was a 150 foot difference. So when applying, I decreased the adjustment by 4% each time I applied to the subject. No adjustments were necessary for condition and traffic count seeing as how my comparables all had the same attributes as the subject property.

25

Summary of Building and Land Sales Comparison Approach

After adjusting for various differences between the properties, I formulated a price range of $210.81 to $308.09 between the comparable properties. This range was determined from many factors that played a large role in determining the value of the subject property. After adjusting the three comparable properties prices, they will now be weighted based upon which properties are most similar to the subject property. In my analysis of the three comparable properties, I feel that comparable 1 is the most similar to the subject property because it had the least amount of adjustments (4) and it is also zoned C-2 located in the downtown district. Comparable 14 will be the next heavily weighted with a total of 6 adjustments made to it. The least weighted comp will be comparable 2 with 8 adjustments being made to it. It is also the furthest away in terms of square footage and it is not a corner lot. Weight of Comparables: Comp 1: $126.67(.5)= Comp 14: $308.09(.3)= Comp 2: $210.81(.2)= Adjusted Price for Subject Property:

$63.34 $92.43 $42.16 $197.93

Total Estimated Value by Sales Comparison Approach: 70,000 sq/ft * $197.93 = $13,855,000

26

The Income Capitalization Approach

The last method of finding the market value of a property is the income capitalization approach. In this method, the appraiser takes into account the propertys expected future income. The appraiser capitalizes this to find the market value of investment properties. The following criteria must be completed in the income approach to find an appropriate market value: 1. 2. 3. 4. 5. 6. a. b. c. 7. 8. Estimate the gross possible income (GPI) of the subject property based on comparable properties with similar amenities to the subject. Estimate the vacancy rate associated with the subject property based on comparable properties within the subject area. Subtract the vacancy rate from the GPI to determine the effective gross income (EGI). Estimate the fixed and variable costs for the subject property. Subtract the total operating expenses (OE) from the EGI to determine the Net Operating Income (NOI) of the property. Determine the capitalization rate using one of the following methods: Direct Capitalization Method Band of Investment Theory (Land plus building) Band of Investment Theory (Debt plus Equity) Reconcile the results of the three methods to estimate the best capitalization rate to use to value the property. Divide the net operating income by the capitalization rate to determine the indicated value for the property by the income approach.

There are several uses and limitations to the income capitalization approach that need to be considered when finding the value of a property. They are as follows: Uses: -

Essential for income producing properties Simple and direct (assuming reliable and verified market data) No expenditure numbers available Given adequate comparables, GRM can eliminate the need for sales comparable adjustments Federal Housing Administration (FHA) requires GRM FNMA and FHLMC also include GRM analysis on their appraisal forms Limitations: Requires reliable, verifiable data Amenities may affect prices Rents more responsive than price in neighborhoods in transition Physical deterioration affects rents Zoning changes affect prices Imperfect markets (income, vacancy, operating expenses, and return)

27

Proposed Income Statement

Currently rented to: As Though Improved Gross Possible Income (GPI): Basement: (3,000s.f.*$10)+(52*$2,500) Ballroom: 2*52*$1,200 Floors 2-9: 65 Rooms*$150*365 Catering: $900,000 Banquet: 2*52*$200 Phone Tower: 12*$1,200 Total: Less: Vacancy (40%) Total Losses Effective Gross Income (EGI): Less: Operating Expenses: Taxes Insurance Maintenance Management Utilities Replacement Allowances Total Operating Expenses: Net Operating Income: Comments: The subject property has a number of revenue streams coming from a combination of leased fee and fee simple leases. The leased fee stream comes from the basement bar that has a five year triple-net lease meaning the landlords are only held accountable for management expenses. The bar is approximately 3,000 square feet and rents for $10 a square foot. The second half of its revenue is calculated by multiplying the flat fee to rent the bar for a night ($500) and a $2,000 minimum bar tab times the amount of times its generally rented a week (1). The ballroom costs around $1,200 to rent and is occupied an average of twice a week. Floors 2-9 are fee simple with a total of 65 rooms renting on average $150 a night. Catering is a profitable business for the property with the manager mentioning that the hotel is trying to break $1,000,000 in revenue this year. Figuring that statistic was partly high hopes, I calculated the revenue at $900,000. The manager also commented that the banquet room on the ninth floor rents for $200 per day and is occupied on average twice a week. The last cash flow comes from a cell phone tower located on the roof that streams $1,200 a month.
28

$160,000 $124,000 $3,558,000 $900,000 $20,800 $14,400 $4,777,950 $1,423,500 $1,423,500 $3,354,450

($418,070) ($434,456) ($434,456) ($167,228) ($250,842) ($167,228) ($2,172,282) $1,282,168

For expenses, I deducted a standard 35% from my gross potential income to get my total operating expenses figure. From this number, I allotted standard percentages to expenses as follows: taxes 25%, insurance 20%, maintenance 20%, management 10%, utilities 15%, and replacement allowances at 10%. Vacancy rate is pegged at 40%, which is within owner John Otts range of 55%-60% occupancy rate. Ott was optimistic about occupancy rates being even higher that 60%, but until that growth is recognized, its safe to assume a 40% vacancy rate.

29

Determination of Capitalization Rate

In order to find the market value of the property using the income approach, a capitalization rate must first be found. There are three methods used to determine this rate: Direct Capitalization, Band of Investment (Debt plus Equity), and Band of Investment (Land plus Building). These three rates are reconciled into an overall capitalization rate. Then, the value of the property can be determined by using the following formula: Value = Net Operating Income Overall Capitalization Rate Direct Capitalization: Direct Capitalization is the method of converting one years worth of expected income into an indication of value. The capitalization rate is determined by dividing the estimated income by the sales price. This is the best estimate of the capitalization rate when comparables are present. Comparables Comp 1 Comp 2 Comp 3 Sale Price $1,875,000 $2,300,000 $1,800,000 NOI $166,310 $214,758 $163,695 Ro 8.87% 9.34% 9.09%

The capitalization rates used for each of the comparables listed above were not adjusted for sale price by using appreciation rates since the date of sale. NOI also needs to be adjusted by computing the CPI since the date of sale, since leases on these buildings were tied to CPI which hasnt followed appreciation rates in the past few years. The numbers of the new sale price, NOI, and cap rates are shown in the table below as currently updated rates: Comparables Comp 1 Comp 2 Comp 3 Sale Price $2,608,871 $3,969,622 $2,340,670 NOI $200,944 $306,600 $193,338 Ro 7.7% 7.72% 8.26%

After adjusting for increases in NOI due to the recent fall in CPI, the buildings capitalization rates went down. CPI is currently lower than building appreciation rates which causes the cap rates to go down. Weight of Comparables: Comp 1: 7.70%(.5) = Comp 2: 7.72%(.3) = Comp 3: 8.26%(.2) = Overall Capitalization Rate: 3.85% 2.32% 1.65% 7.82%

Each of the comparables is weighted in correlation to their similarity to the subject property. This weight is the same as used in the sales comparison approach. Overall Capitalization Rate: 7.82%
30

The Band of Investment Theory (Debt + Equity)

Most properties are purchased with some combination of debt and equity. The capitalization rate must satisfy the market requirements of both investment positions. Lenders must receive a competitive interest rate (Rm) in return for financing the project. Investors must also receive a return on their invested equity (Re) that adequately compensates them for the risk of undertaking the project. In order to calculate a capitalization rate (Ro) which accounts for the required returns of the lender and the investor the following formula can be applied. Ro = (M*Rm) + [(1-M)*Re] Where: Ro M Rm Re M (1-M) Rm Re = .75 = .25 = 6.00% = 15% = Capitalization Rate = Loan to Value Ratio = Debt Capitalization Rate = Equity Capitalization Rate

Ro = (.75*.07) + (.25*.15) = 9.00%

The Band of Investment Theory (Land + Building)

The Band of Investment Theory can also be applied to the physical components of the property, which are the land and the building. The formula for this is as follows: Ro = (L*Rl) + (B*Rb) Where: Ro =Capitalization Rate L =Land Value as a Percentage of Total Property Value Rl =Land Capitalization Rate Rb =Building Capitalization Rate B =Building Value L = .13 B = .78 Rl= .04 Rb= .11 Ro = (.14*.04) + (.78*.11) = 9.10%

31

Reconciliation of the Income Capitalization Approach

The following data listed below is each capitalization rate and its weight of importance to the subject property. Each approach I felt did an accurate job at calculating a cap rate. I will give a slight edge to the band of investment approaches because I feel the cap rate was accurately calculated on the higher end. Therefore I give the most and equal weightings to the band of investment approaches followed by direct capitalization at a lower weight.

Direct Capitalization: Band of Investment (D+E): Band of Investment (B+L): Overall Capitalization Rate:

7.82%(.2) = 9.00%(.4) = 9.10%(.4) =

1.56% 3.60% 3.64% 8.80%

Total Estimated Value by Income Capitalization Approach: $1,282,168/8.80% = $14,570,000

32

Reconciliation of Values and Conclusion

Listed below are the values of the subject property using each of the three approaches: Indication of Value by Cost Approach: Indication of Value by Sales Comparison Approach: Indication of Value by Income Capitalization Approach: $9,408,000 $13,855,000 $14,570,000

After completing this appraisal, reconciliation of the three different approaches needs to be taken into consideration. Each method needs to be weighted in accordance to its appropriateness to the subject property. The cost approach is one that derives a fair market value from the incorporation of the various costs associated with reconstructing the building mixed with added depreciation and entrepreneurial profit of given project. While this approach in certain cases is the best determinate of value, I have weighted it the least out of the three. With a full blown recession happening I feel that the costs of improvement are too skewed to derive a proper value with many contractors allotting large discounts to investors. Also, with the recent renovation itself costing $9,000,000, a valuation of the entire building at just $400,000 on top of that does not seem like an accurate appraisal. The income capitalization approach values a structure based on the amount of income that structure generates. While the subject property fits this description, I have still decided to weight it slightly less than the sales comparison approach. With the building being classified as a historic boutique, I feel the value indicated is a bit on the high end. The property has this historic designation that I feel has over exaggerated the price and the income that this building can actually generate. Even though the value might be high, it is still within the range of an accurate price when weighted together with the other approaches. The sales comparison method plays a significant role in the computation of a fair market value incorporating comparable sales from the area the subject property is contained. Although the comparables used to derive adjustments were smaller in square feet than the subject, I believe the proper figures were applied to said comparables to account for all differences effectively. The comparables were reliable and provided a good estimate of the market value of the subject property, the reason I weighted the sales comparison approach the heaviest. After carefully analyzing all information and determining an appropriate weight for each approach, I have come to a conclusion that the fair market value as of December 15th, 2010: Cost Approach: Sales Comparison Approach: Income Capitalization Approach: Total Fair Market Value:
33

$9,408,000*20% $13,855,000*50% $14,570,000*30%

=$1,881,600 =$6,927,500 =$4,371,000

$13,180,000

Addendum

34