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Capital Property Assessment

Brett Asselstine

Hillary Muss

Ryan Williams

Shea Stricker

Nick Maupin

Ilyssa Levi

12/8/2013

Appraisal

Report

244 West Gilman Street Madison, WI

Williams Shea Stricker Nick Maupin Ilyssa Levi 12/8/2013 Appraisal Report 244 West Gilman Street Madison, WI
Williams Shea Stricker Nick Maupin Ilyssa Levi 12/8/2013 Appraisal Report 244 West Gilman Street Madison, WI

December 8, 2013

Chase Bank 22 East Mifflin Street Madison, WI 53703

To Mr. Debt Cover:

Capital Property Assessment 1001 State Street Madison, WI 53703

We have completed our valuation of the property located at 244 West Gilman Street in Madison, Wisconsin. This comprehensive report contains all of the information gathered and analyzed in coming to our conclusion on the value of this property.

This report first analyzes the Madison area in regards to its social characteristics, economic and demographic trends and a number of other aspects. This helped strengthen our assessment of the property’s neighboring area as well as the property itself. Three approaches were used to determine the end value of the property: the income approach, cost approach, and sales comparison approach. Together with an analysis of the property’s highest and best use, we reconciled the approaches to come up with a property value of approximately $6,200,000.

We appreciate the opportunity to work with you and were very pleased with the outcome of this report. We hope you are too. If you have any further questions, please feel free to contact us at 608-555-2222.

Sincerely,

Capital Property Assessment

please feel free to contact us at 608-555-2222. Sincerely, Capital Property Assessment 1 | Page 244

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Table of Contents

Summary

of Salient Facts and Conclusions

6

Definitions of Appraisal Assignment

7

Identification of Property

7

Definition

of

Property Rights

8

Definition of Market Value

8

Date of Appraisal

8

Purpose of Appraisal

8

Scope of Appraisal

9

Ownership History

9

Taxes & Assessments

9

MARKET AREA DESCRIPTION AND ANALYSIS

9

MSA, County, City, Neighborhood, Sub-districts

9

Demographic Trends and Analysis

10

Population

10

University of Wisconsin Enrollment Trends

11

Madison Area Technical College (MATC) Enrollment Trends

12

Age

12

Ethnicity

12

Education

12

Income

13

Economic Trends

13

Overview

13

In Summary

14

Transportation and Infrastructure

14

The Subject Property

14

Transportation

14

Infrastructure

15

Local and Regional Government

15

Social Characteristics

15

Recognitions

15

Arts and Culture

16

Sports

16

Healthcare

16

Neighborhood or Commercial District Analysis

17

Madison Area

Market Analysis

17

Retail Market Analysis

18

2013 Forecast

18

Housing Market Overview Conclusion

18

Property Description and Analysis – Site Analysis

19

Physical Characteristics

19

Location Description

19

Size and Shape

19

Topography

19

Drainage and Water Runoff

19

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Soil Conditions

20

Environmental conditions

20

Locational Attributes

20

Transportation Patterns

20

Visibility

22

Frontage

22

Adjacent Properties and Land Uses

22

Retail Properties

22

Ownership and Title

23

Easements

23

Ground lease

23

Encroachments

23

Governmental Restrictions, Development Plans and Districts

23

Zoning Description

23

Neighborhood Plans

24

Madison Comprehensive Plan

24

Other Districts

25

Current Planned Developments and Rezoning

25

Utilities and services (available “to” the site)

25

The Subject Property

25

Sewage Control

26

Telecommunication

26

Other Site Characteristics

27

Urban retail space built in 2001

27

Site Improvements

27

Parking

27

Ingress/Egress

28

Utilities

28

Signage

28

Landscaping

28

Property Description and Analysis – Site Analysis

28

Improved Property Analysis

28

Site Description

28

Flood Hazard

30

Description of Improvements

30

Definition

36

As Improved

36

Physically Possible

36

Legally Permissible

36

Financially Feasible

37

Maximally Productive

37

As Vacant

37

Physically Possible

37

Legally Possible

38

Financially Feasible

38

Maximally Productive

38

Conclusion

38

Income Approach

Operating Income

39

39

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Market Rent Analysis

39

Market Rent Changes-Student Housing

41

Market Rent Changes- Retail

44

Market Leasing Assumptions

46

Rent Roll

47

Expense Recoveries

47

Miscellaneous Income

48

Vacancy Analysis

48

Operating Expenses and Capital Improvements

52

Property Operating History

52

Operating Expense Assumptions

52

Capital Expenses

53

Rate Analysis

53

Capitalization Rate

53

Terminal Cap Rate

55

Discount Rate

56

Growth Rates

57

Discounted Cash Flow Analysis

57

Direct Capitalization Analysis

60

Reconciliation

60

Direct Sales Comparison Approach

61

Sales

Comparison Approach

 

61

Sales Comparables

 

62

502

North

Frances

Street

(The

Towers)

62

505

North Frances Street (The Statesider)

62

445

W Gilman Street

 

63

333

W Johnson Street

63

445

West Wilson Street

64

Sales Comparison Adjustments

 

64

Transactional Adjustments

64

Property Adjustments

65

Sales Comparison Adjustment Table

67

Final Value Estimate

68

Cost Approach

68

Valuation Using Direct Sales Comparison Approach

68

Cost Approach Land Comparables

69

Sale

1:

405 North Lake Street

69

Sale 2: 1202 West Dayton Street

70

Sale 3: 4 North Park Street

70

Sale 4: 1022 West Johnson Street

70

Sale 5: 1001 University Avenue

71

Cost Approach Comparable Adjustments

71

Real Property Rights

71

Financing Terms

71

Conditions of Sale

71

Expenditures at Sale

71

Market Conditions

72

Location

72

Access

73

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Size

73

Shape/Topography

73

Cost Approach Comparable Adjustment Grid

74

Replacement Cost New

74

Structural Improvements

75

Site Improvements

75

Soft Costs

76

Depreciation

76

Physical Deterioration

76

Final Value Estimate

77

Reconciliation and Final Value Conclusions

78

Appendices, Certifications and Other Information

80

National Apartment Market Analysis

80

Zoning Code

80

Environmental Conditions

80

Traffic Patterns

80

Cost Approach Subcategory Details

80

Deed for the Property

80

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Summary of Salient Facts and Conclusions

IDENTIFICATION

Location

244 W. Gilman St, Madison, WI 53703

Property Type

Mixed Use: Student Housing and Retail

Interest Appraised

Leased Fee Interest

Purpose of Appraisal

To estimate the “As-is” Leased Fee MValue of the subject under conditions existing as of Nov 12 th , 2013, the date of inspection.

Owner of Record

244 W Gilman LLC/Steve Brown

Parcel Identification Number

0709-144-2038-9

Appraisal Date

Dec 8 th , 2013

Date of Inspection

Nov 12th, 2011

VALUE INDICATIONS

Sales Comparison Approach

$4,900,000

Direct Capitalization Method

$6,600,000

Final Reconciled Income Valuation

$6,360,000

Discounted Cash Flow Method

$6,260,000

Discount Rate

8%

Inflation Assumption

1.48%

Capitalization Rate at Sale

6.3%

Cost Approach Total Value

$6,250,000

Property Site Value

$1,500,000

Total Improvements New

$4,750,000

PROPERTY DESCRIPTION

Year Built

1999

Stories

6

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Gross Floor Area

32,205 sf.

Net Rentable Area

24,000 sf.

Retail Space

1,800 sf.

Apartment Unit Count

26

Land Area

9,636 sq. ft.

Construction Type

Concrete foundation with steel frame, stone 1st floor walls, brick upper walls, and flat steel framed roof. No basement.

Zoning

PD- Planned Development District by the

Highest & Best Use Leasing Status

City of Madison Mixed Use Residential and Retail 100% Leased Housing and Retail Units

Final Value Conclusion

$6,200,000

Estimate of Marketing Time

1 year

Definitions of Appraisal Assignment

Identification of Property

The subject property is located at 244 West Gilman Street in the City of Madison, Dane County, Wisconsin. The subject improvements consist of one 5-story elevator apartment project comprising a total of 26 residential units and 1,800 square feet of street-level retail space. The building contains above-ground gross floor area of 32,205 square feet, with net rentable area of 24,000 square feet indicating an average unit size of 923 square feet. The building was constructed in 1999. The improvements are situated on a 9,636 square foot site. The subject is identified by tax parcel # 0709-144-2038-9.

We have appraised the property “as-is”, in accordance with plans and specifications submitted by the ownership. The appraised property is the leased fee ownership in the land and building improvements. Additionally, appliances, furniture, and fixtures typically included in the sale of apartment projects, have been included in our valuation, as summarized in the Cost Approach. Any other tangible or intangible assets are excluded from consideration in this report.

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Definition of Property Rights Property rights are a set of legally defined and enforceable rules of ownership specifying who has the right to use or do anything on the property. Well-established property rights are critical to a successful economic system and create value for the property. The subject property contains a leased fee set of property rights, which is an ownership interest held by a landlord with the rights of use and occupancy conveyed by leases to others. The rights of the lessor and lessee are specified by contract terms contained within the lease (The Appraisal of Real Estate).

Definition of Market Value The definition of market value comes from The Dictionary of Real Estate Appraisal, Fourth Edition, Appraisal Institute, 2002. It states that market value is the most probable selling price a property should bring under the following conditions of an open and competitive market:

Buyer and seller are typically motivated

Both parties are well informed or well advised and acting in what they consider their own best interests

A reasonable time is allowed for exposure in the open market

Payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto

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.

Date of Appraisal Friday, December 6 th , 2013

Purpose of Appraisal The objective of this appraisal is to establish a professional opinion of value of the subject property’s market value as of December 6 th , 2013. The subject property was valued with a leased fee interest, as it is a commercial building with current leases on it that will be rolled out into market rents. This report is intended to accurately communicate our professional opinions and conclusions to the client. Capitol Property

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Assessment is appraising the subject property for commercial loan underwriting, which is the process of determining risk involved with a particular loan.

Scope of Appraisal Our investigation included an inspection of the property and surrounding neighborhood, a study of demographics and supply and demand forces affecting the subject property, and an analysis of recent sales and rentals of comparable properties in the area.

Ownership History The subject property is owned by 244 W. Gilman, LLC, (Steve Brown Apartments), and has been owned and operated by this entity for more than three years. We are not aware of sales or offers to purchase the subject in the past three years, nor has the property been marketed for sale.

Taxes & Assessments 2012 Assessed Value Land:

$482,000

Improvements:

$3,387,000

Total:

$3,867,000

2012 Net Taxes:

$93,556.11

MARKET AREA DESCRIPTION AND ANALYSIS

MSA, County, City, Neighborhood, Sub-districts

The Madison Metropolitan Statistical Area (MSA) consists of three counties: Columbia, Dane, and Iowa. The subject property, 244 West Gilman, is located in the City of Madison, Dane County, Wisconsin in the Central Campus Submarket. The subject is affected by social, economic, environmental, and governmental trends in both Madison and Dane County. An Area Map is included in Exhibit 1. A review of the social, economic, environmental, and governmental forces of the area that influence the present and future value of the subject property value are presented as follows:

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Demographic Trends and Analysis

Population According to the U.S. Census, Dane County had a population of 488,073, as of 2010, which was a 14.4% increase from the 2000 population of 426,526. The City of Madison’s 2010 population of 233,209 was a 12.1% increase from the 2000 population of 208,054. Both the City and County population are projected to continue to increase in the coming decades. Historic and projected population trends for the City of Madison and Dane County are summarized as follows. POPULATION TRENDS

Year

City

% Change

County

% Change

1970

164,007

-

290,264

-

1980

170,616

4.1%

323,545

11.5%

1990

190,766

11.8%

367,085

13.5%

2000

208,054

9.1%

426,526

16.2%

2010

233,209

12.1%

488,073

14.4%

2012 Est.

234,625

0.6%

491,555

0.7%

The Wisconsin Department of Administration projects slight increases for both Madison and Dane County for 2012. Outlying areas in Dane County have been and are projected to grow. To date, Madison’s population is 233,209 people and Madison MSA population is 268,593 people.

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University of Wisconsin Enrollment Trends

University of Wisconsin Enrollment Trends 11 | Page 244 West Gilman Street

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Madison Area Technical College (MATC) Enrollment Trends

There are 17,463 students at MATC. There are 5,784 full time students, 11,679 part time students, 3,142 full time male students, and 2,642 full time female students. There are 13,881 undergraduates at MATC. The Madison College District population is growing at rates that exceed national and state averages. The enrollment at Madison College is declining as a percentage of the District population. In 2000, Madison College served 10.2% of the adult population and in 2006 it served only 7.8% of that population. The District population is aging. Median age in 2000 was 34.7 – in 2011 it is projected to be 37.1. The population over 25 is increasing at a much faster rate than the population under 25. Race and ethnicity shifts are occurring throughout the District as well – particularly with the growth in the number of Hispanic and Asian residents. Minority residents are increasing overall as a percentage of total population, and those minority residents tend to be much younger.

Age Among the Madison Region’s growing population, nearly 58% falls within the typical workforce range of 20-49 years old. This is higher than both the state and national averages, reflecting the strength of Madison’s high educated, innovative workforce. Residents over the age of 60 represent the smallest subset of the population at 16.5% of the total population, and the population consisting of 0-19 year olds represent 25.6% of the total population.

Ethnicity Between 2000 and 2010, Madison experienced an increase in ethnic diversity as the Hispanic and Latino population doubled. Between 2000 and 2010, Madison’s Asian population increased by over 56% and the African American population grew by over 38%, which are both above the statewide average growth.

Education More than 60% of adults in the region hold an Associate Degree or higher, while 28% hold a Bachelor’s Degree or higher, greater than both the state and national averages.

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Within Dane County, 38% of adults have a Bachelor’s degree or higher, compared to 25% nationally.

Income Wisconsin personal income rose 2.7% in 2012. This is slower than growth in 2011, when state personal incomes rose 4.5%. Wages and salaries, which are the biggest component

of personal income, rose 2.1% nationally, personal incomes were up 3.6% in 2012. Real personal income, which is adjusted for inflation, rose 0.9% in Wisconsin in 2012.

Income Outlook: Personal income will continue to grow throughout the forecast period, increase 1.9% in 2013 followed by faster growth in 2014 of 4.6%. After that, personal income will rise 4.4% in 2015 and 2016. Wages and salaries show similar growth. After rising 2.1% in 2012, they will increase 2.7% in 2013 and 4.4% for each of the years 2014, 2015, and 2016. Accounting for inflation, Wisconsin real personal income will grow 0.9% in 2013 and 3.1% in 2014, compared to 1.7% and 3.6% increases nationwide, respectively. Per capita personal income in Wisconsin rose 2.2% in 2012 to $40,458. Wisconsin’s per capita personal income is 94.9% of the national per capita personal income of $42,619. In the forecast, per capita personal income will continue to rise. Growth is expected at 1.4% in 2013 and 4.0% for the remainder of the forecast period. In 2016, per capita personal income will be at $46,036 in Wisconsin.

Economic Trends

Overview The Wisconsin economy continues to grow at a moderate pace. The forecast calls for growth in terms of jobs and income for 2013 with the economy gaining steam in 2014. Wisconsin personal income grew 2.7% in 2012 and will increase 1.9% in 2013. Wisconsin personal income growth will then accelerate to 4.6% in 2014 and 4.4% in 2015 and 2016. Employment in Wisconsin is expected to show positive growth throughout the forecast period, rising 1.1% in 2013, 1.4% in 2014, 1.9% in 2015, and 1.8% in 2016. The U.S. forecast from HIS Global Insight expects weak growth in the national economy. The housing sector is recovering, but is currently a much smaller portion of the economy than it was six years ago. Meanwhile, the federal sequester

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hinders the overall economy. Real GDP will increase 1.8% nationally in 2013 and accelerate to 2.8% growth in 2014.

In Summary

The economy continues to grow at a moderate pace

Job growth will continue in 2013, adding 31,000 jobs over the course of the year

The forecast calls for an unemployment rate of 6.9% in 2013 and 6.5% in 2014

The housing sector is showing signs of a recovery at the state and national levels

Wisconsin personal income will grow 1.9% in 2013 with stronger growth of 4.6% in 2014

Transportation and Infrastructure

The Subject Property

The subject property, 244 West Gilman, is located adjacent to State Street and

walking distance from campus, which makes it very easy for tenants to complete daily errands, enjoy leisurely activities, and go to work without a car.

This site has accessible and convenient transit with 35 nearby bus routes.

Transportation

Four major interstates cross the region connecting Madison with Chicago, Milwaukee, the Twin Cities, and beyond. The Beltline Highway is only 15 minutes away.

The Dane County Regional Airport has non-stop service to 14 cities around the United States and offers over 100 flights daily. It is only 15-minutes away from the property site.

Five freight rail lines operate in the region, while Amtrak stops in Columbus, Portrage, and the Wisconsin Dells

Several bus lines provide daily service to Milwaukee, Chicago, and Minneapolis

Almost 6% of commuters in the Madison Region bike or walk to work, above both the state and national averages. In addition, 4.6% of Dane County Commuters utilize public transportation, which is over two times the state average and close to the national average.

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Infrastructure

The Madison Region has a competitive telecommunications industry with a wide range of choices for traditional and non-traditional services and a host of providers across the region.

The Madison Region’s access to clean water reflects its location near the largest freshwater resource in the world, the Great Lakes, but also the cooperative efforts of water systems, water trade associations, and individual operators.

There are five major gas and electric utility providers in the region: Alliant Energy, Madison Gas & Electric, WE Energies, WPPI, Rock Energy Cooperative

Local and Regional Government

Madison has a mayor-council system of government. Madison’s city council, known as the Common Council consists of 20 members, one from each district, and the mayor is elected by a citywide vote.

The local government of the property is the Dane County Government. The current Mayor of Madison is Paul Soglin.

City voters have supported the Democratic Party in national elections in the last half-century, and liberal and progressive majority is generally elected to the city council.

Madison city politics remain dominated by activists of liberal and progressive ideologies. In 1992, a local third party, Progressive Dane, was founded. The party holds several seats on the Madison City Council and Dane County Board of Supervisors, and is aligned variously with the Democratic and Green parties.

Social Characteristics

Countless national rankings confirm that Madison, Wisconsin is one of the best places to live, work, and raise a family. The Greater Madison Area offers residents and visitors a combination of urban and rural opportunities, natural beauty, unique communities, and Wisconsin’s renowned collections of natural, educational, artistic, and historical attractions.

Recognitions Madison: Top 100 Places to Live in America Livability, 2014; UW-Madison: Top 20

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Universities in the World Times Higher Education, 2013; Madison: Top Foodie Paradise foxnews.com, 2013; Madison: Top 20 Best American Cities Bloomberg BusinessWeek, 2012; Madison: #8 Top College Towns Livability.com, 2013; Madison: #4 Safest City in America Business Insider, 2012

Arts and Culture From the world-class Overture Center for the Arts in Madison to the nationally acclaimed Fall Art Tour in the southwest corners of the region, the Madison Region's innovative edge reveals itself through its cultural environment. Creativity shines at the Wisconsin Film Festival, which has grown into the largest campus-based film festival in the United States, averaging 200 films and 35,000 attendees each spring.

Sports

Wisconsin is host to three professional sports teams – the Green Bay Packers, Milwaukee Brewers, and Milwaukee Bucks – all of which are easily accessible from the Madison Region.

The Madison Region's wealth of higher education institutions carries with it the benefit of college athletics, including Big Ten sports at UW-Madison.

For the athletic among us, the Madison Region offers a variety of participatory events, including the international Ironman competition and our own Olympic- style Badger State Games.

During the summer months, residents are likely to be found on one of the region’s many golf courses or outdoor rock climbing routes. In our colder season, you’ll see ski slopes dotted with athletes and indoor recreation centers brimming with youth and adult soccer leagues.

Healthcare The Madison offers unparalleled quality of life with its superior medical services and accessibility. More than 1,000 companies provide direct healthcare services to the population. Madison’s nationally recognized providers in both community focused healthcare organizations and academic and research institutions deliver a full spectrum of well-coordinated care.

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Neighborhood or Commercial District Analysis

A neighborhood analysis is used to determine perceivable patterns of growth, structure

and change that may detract from or enhance property values. A neighborhood is

perceived to be relatively uniform and exhibit a greater degree of uniformity than a city

or metropolitan area.

The subject property is located in a prime, convenient location in downtown Madison, Wisconsin. The property is situated adjacent to State Street, which holds a variety of retailers, businesses, entertainment hotspots, restaurants etc. The property is also a five- minute walk from the State Capitol building. It is a ten-minute walk from the University

of Wisconsin, Madison campus.

There are a variety of downtown customers. Downtown employees primarily work in white-collar occupations. The majority of downtown residents are renters, but downtown Madison has added a large number of new condo units attracting young professionals, empty nesters, and retirees. Many of these individuals have high spending propensities for dining out, movies, concerts, and other leisure activities. There are over 50,000 college students in Dane County. The majority of the student population attends UW- Madison and account for $500 million in expenditures on local goods and services. Downtown Madison visitors comprise expenditures of over $1.2 billion

Madison Area Market Analysis

According to Madison’s “Downtown Dynamic” Market Analysis, Downtown Madison offers an outstanding business location for maximum sales opportunity in one of the nation’s top-ranked places to live and work. This vibrant district is home to more than 350 shops, galleries, restaurants, and nightspots, with locally owned, regional and

national brands. A mix of residents, workers, students, and visitors generates exceptional foot traffic and spending potential. As an employment center, downtown has a high share

of legal, financial, hi-tech, government and creative workers.

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Retail Market Analysis Downtown Madison’s retail environment faces growing competition, limited regional accessibility, and a variety of public perception issues. However, downtown Madison has a number of unique opportunities including a growing downtown resident population, proximity to numerous large scale customer traffic generators, and access to a diversity of consumers. These potential challenges and advantages suggest that downtown Madison should seek to differentiate itself from other shopping destinations in the Madison region. Specifically, downtown Madison should focus on commercial niches that best serve its key consumers while building upon its existing retail strengths. Downtown Madison’s retail niches can be enhanced through the targeted recruitment of businesses that complement existing goods and services in each respective niche. More importantly, these niches can be supported by offering retention and expansion assistance for existing businesses. Specific business retention, expansion and recruitment activities are listed below and are partially based on best practices in downtown economic restructuring as well as the results of the business operators’ survey. The length of State Street commercial district (including the side streets), the location of downtown customer traffic generators (along with parking perception challenges) suggests that downtown Madison should consider the development of business clustering and placement guidelines.

2013 Forecast The 2013 forecast shows that vacancy rates will continue to fall, rental rates will be stable to slightly higher, concessions will dwindle, especially in Class A office space, a few more new buildings to begin construction, continued rise in sales volume of buildings and land, and foreclosures will continue to his the market.

Housing Market Overview Conclusion

The downtown and campus area apartment occupancies have historically exhibited strong demand for units with few concessions offered, and steadily increasing rental rates. Recent market information appears to indicate equalization of supply and demand in the market, with a significant amount of new supply of competitive properties are in the pipeline for development at this time. The combination of steady increases in demand for units, and the current undersupply, bodes well for the subject’s viability. Based on our examination of the market, we expect that the subject should operate at a stabilized

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vacancy and collection loss rate of 3%, which is somewhat lower than its historical operations would suggest, but considered reasonable considering the risk of new competitive supply, and rent loss considerations. *The National Apartment Market Analysis is included in the appendix.

Property Description and Analysis – Site Analysis

Physical Characteristics

Location Description The subject site is located on an interior lot on the northwest side of West Gilman Street just east of the University of Wisconsin campus, and west of the State Capitol building. A Site Map is included. The subject land is situated in an area of similar and complimentary uses and is typical in comparison to similar projects in terms of size, shape, topography, and availability of utilities, setbacks, landscaping, and parking. Road access and parking are adequate and there were no adverse influences, nuisances, hazards, or easements observed that could have a negative impact on value. The subject site is considered adequate and suitable for multifamily residential development.

Size and Shape The subject site contains a total of 9,636 square feet, and is rectangular in shape, being functional for multifamily use. It has frontage of 72 feet along Gilman Street, with a depth of 134 feet. It is considered to be functional for development of apartments, though it has a deficit of parking, which is common for older apartment buildings in the neighborhood.

Topography The topography of the site is generally level and at-grade with respect to surrounding streets and properties.

Drainage and Water Runoff There are no apparent flood hazards with respect to the developable portion of the site, nor is it in any seismic zone. According to the FEMA Flood Insurance Rate Maps 55025C0409G, dated January 2, 2009, the subject property is located in Zone X. Values

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of properties in Zone X are generally not affected by flood potential.

Soil Conditions Meaningful soil and topographical maps were not available. Additionally, soil borings for the subject site were not available. Older existing improvements and recent new construction in the immediate area, however, suggest no substantial development problems with sub-soils although we make no guarantee in this respect.

Environmental conditions The subject property complies with Wisconsin’s residential building codes. The appendix provides the requirements for energy conservation and other environmentally related obligations. To date, there are not any known environmental conditions pertaining to the property that are problematic.

Locational Attributes

Transportation Patterns

The subject property is located close to State Street where the traffic count is primarily foot traffic with the exception of city busses and police cars.

The traffic count between Henry and State is approximately 2,200 per average weekday according to the City of Madison website

One problem of getting to the subject property is that there are one-way roads surrounding the property.

The subject property is 15 minutes from the Beltine, the closest major highway, which is not that essential to the typical tenant who primarily walks or bikes to the Capitol area, State Street, and/or campus.

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Visibility

The building is very visible from Gilman and as one walks away from the Capitol building along State Street.

However, the residential entrance is not very visible from either Gilman or State

Street. It is only visible from Gilman if you are standing in front of the alleyway.

o Los Gemelos, the retail occupier on the first floor of the subject property, is very visible from State Street if one is walking on State Street away from the Capitol building.

o Depending on the floor and side of the building, certain apartments and hallways have a view of the Capitol building.

o There is a roof on the fifth floor of the building that has a view of Downtown Madison.

Frontage

It has frontage of 72 feet along Gilman Street

The site has access and frontage from southwest-bound Gilman Street.

Adjacent Properties and Land Uses

There are multifamily residential buildings to the north of the site and commercial buildings along State Street to the east, south, and west of the site

Retail Properties

Samba, a Brazilian steakhouse, is located northeast of the subject property. The building was formerly The Historic Women’s Club. The building, constructed in 1907, is now considered a landmark. The exterior of the building has been restored.

Mimosa, a gift shop, is located Southwest of 244 West Gilman.

American Apparel, a retail clothing store, is located southwest of the subject property.

Both the Wisconsin Lutheran Chapel and Student Center and the Chabad House are located northeast of the subject property.

There is a small park across the street called the Peace Park, which was renovated in 2010.

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The majority of the surrounding properties add value to the subject property with the exception of the park across the street where homeless people frequent its public use.

Ownership and Title

Easements 244 West Gilman has one easement attached to the property. The following has been attached to the deed:

“Subject to, and reserving in the grantors and their heirs, as an easement and right of way for the driveway purposes over the westerly twenty feet (20’) of said lots six (6) and seven (7) of said block fifty nine (59).

This should not affect the value of the property as the effect on the tenants and owner should be negligible.

Ground lease Stephen Brown, the owner of Steve Brown apartments, owns the site and its improvements. To our knowledge, in the event of a sale, the property would be sold in its entirety. We have estimated it accordingly.

Encroachments There are no known encroachments on the subject property.

Governmental Restrictions, Development Plans and Districts

Zoning Description The subject site is zoned PD, Planned Development District by the City of Madison. The PD code’s Statement of Purpose indicates the following: “The Planned Development District is established to provide a voluntary regulatory framework as a means to facilitate the development of land in an integrated and innovative fashion, to allow for flexibility in site design, and to encourage development that is sensitive to environmental, cultural, and economic considerations.” The subject building was design and constructed

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under the guidelines of the code, and is considered to be a legal, conforming use. The code is included in the Appendix.

Neighborhood Plans The closest neighborhood plans are the development plans for the Fourth District – Old Market neighborhood and the Regent Street – South Campus neighborhood plan, neither of which have an immediate connection nor border to the subject property due to the neighborhood boundaries.

to the subject property due to the neighborhood boundaries. Madison Comprehensive Plan The City of Madison

Madison Comprehensive Plan The City of Madison Comprehensive Plan establishes an urban development strategy and policies to guide the future growth and development of the community over the next two decades. The Plan assesses existing conditions and trends, and provides recommendations for the use and development of land, the extension and improvement of transportation services and infrastructure, the development of community facilities, the expansion of the City’s economic base, the provision of housing, and the protection of natural resources. The area of the Comprehensive Plan that affects the subject property the most would be in chapters 2, 5, and 10, which covers the future plan and objectives for land use, economic development, and utilities. Most student housing developments have low vacancy rates. In fact, developers are taking advantage of this demand with planned residential development projects to be completed in the near future. With the

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advancements in technology, the utilities that the Madison area utilizes have to be updated accordingly.

Other Districts The subject property is not located in a Tax Increment Finance (TIF) District.

Current Planned Developments and Rezoning There are several current developments going on close to the subject property. The locations of development are 644 North Frances, 622-632 Howard Place, and 633 North Henry Street. These developments are student-housing buildings.

Street. These developments are student-housing buildings. Utilities and services (available “to” the site) The

Utilities and services (available “to” the site)

The Subject Property Prior to move in, tenants need to set up the apartment’s utilities by getting in touch with the electricity, gas, telephone, internet, and Directv providers. These providers are:

Madison Gas & Electric, ResTech Services, TDS Telecom, and Charter Communications. The site is encumbered by standard utility easements that do not adversely affect its value. Utilities available to the site include sanitary sewer and water, electricity, natural gas, and telephone.

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Sewage Control The Madison Metropolitan Sewage District (MMSD) manages the regional wastewater service and treatment for the Madison area. The condition and capacity of MMSD’s collection system and treatment plant facilities are reviewed by MMSD on an ongoing basis. Repair and maintenance projects are undertaken annually to keep facilities in proper working order. Major expansions and capital improvements are guided by MMSD Facilities Plan studies. Individual projects are incorporated into MMSD’s annual capital budgeting process.

The Sewer Utility has identified several areas within the City that require improved conveyance of wastewater during large, intense rainfall events. Problem areas of the City have been readily identified through reported sewage backups into basements during storm events. The City has initiated engineering studies in most of the areas with a known history of sanitary sewer flooding in order to develop recommendations for improving conveyance. Several of the recommendations from each of the reports have already been implemented.

Telecommunication Telecommunication facilities are privately constructed and maintained throughout the city of Madison. Private telecommunications companies coordinate with the communities they serve to evaluate the need for modifications or expansion to their current network. As the City expands and develops, extensions of the telecommunication lines are required. Private land owners/developers are required to coordinate the extension of the new lines to serve their development. The telecommunications industry is undergoing dramatic changes as a result of deregulation and technological advances. The City of Madison, in partnership with the State of Wisconsin and Dane County, is encouraging wireless technology for data transmission. It remains the goal of the City to facilitate the provision of telecommunications, including wireless technology, to Madison residents and businesses.

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Other Site Characteristics

Urban retail space built in 2001

o

Los Gemelos is a Mexican restaurant located on the first floor of the subject property. It is open seven days a week from 11am until late. Los Gemelos is approximately 1,800 square feet with 600 square feet of storage space.

o

Considered a busy, high-traffic, high visibility urban freestanding retail unit located below luxury apartments.

o

Surrounded by many local, long-term establishments including restaurants, quick marts, soft goods, and coffee shops.

Site Improvements

The subject improvements consist of one 5-story elevator apartment project comprising a total of 26 residential units and 1,800 square feet of street-level retail space. The building contains aboveground gross floor area of 32,205 square feet, with net rentable area of 24,000 square feet indicating an average unit size of 923 square feet. The building was constructed in 1999. The garage contains approximately 2,870 square feet. There is also a 600 square foot basement space utilized by the restaurant tenant for storage. The building contains 26 units, primarily intended to serve the student housing market of the University of Wisconsin. Student-oriented apartment projects also typically report the total number of beds in a project. The subject contains a total of 68 beds. The site has a density of 117.5 units per acre, with a land to building ratio of 0.30:1 and a parking ratio of 0.38 spaces per unit. Although newer buildings typically include nearly one garage parking space per unit, the nature of the demand for student housing is such that car parking is a secondary consideration for the neighborhood, and this condition does not affect the subject’s marketability. Other site improvements include concrete sidewalks considered to be in good condition.

Parking The building has an underground parking garage with ten interior parking spaces that can be rented for everyday parking at a first come first serve basis to anyone who is interested. The parking garage is accessed via an alley on the building’s western side.

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Ingress/Egress Two in and out entrances and exits for ingress and egress exist for the subject property. The residential entrance is located east of the front of the building. The retail entrance is located at the front of the building.

Utilities Water utilities bill every three or six months, which can be hard to account for in a monthly budget. To help residents absorb these costs, Steve Brown pays the total bill and then charges back monthly. The electricity and gas provider is Madison Gas & Electric. The tenant can choose between three telephone providers: ResTech Services, TDS Telecom, and Charter Communications. Internet and basic DirecTV from ResTech Services are included: Internet & DirecTV Provider is ResTech Services.

Signage The subject property’s signage is located at the front of the building and the side of the building. The front of the building consists of the building number. The side of the building has an awning that reads Steve Brown Apartments. Los Gemelos, the occupier of the retail space on the first floor, has visible signage of the restaurant name at the front of the restaurant as well.

Landscaping Landscaping is principally located along the street facades and on the roof terrace.

Property Description and Analysis – Site Analysis

Improved Property Analysis

Site Description The subject site is located on an interior lot on the northwest side of West Gilman Street just east of the University of Wisconsin campus, and west of the State Capitol building. The building is situated right next to a historic landmark, the historic Woman’s Club (240 West Gilman.

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The subject site contains a total of 9,636 square feet, and is rectangular in shape, being functional for multifamily use. It is considered to be functional for development of apartments, though it has a deficit of parking, which is common for older apartment buildings in the neighborhood.

The site is improved with the subject building, along with 10 interior parking spaces, accessed via an alley on the building’s western side. The site has a density of 117.5 units per acre, with a land to building ratio of 0.30:1 and a parking ratio of 0.38 spaces per unit. Although newer buildings typically include nearly one garage parking space per unit, the nature of the demand for student housing is such that car parking is a secondary consideration for the neighborhood, and this condition does not affect the subject’s marketability. Other site improvements include concrete sidewalks considered to be in good condition.

The site is encumbered by standard utility easements that do not adversely affect its value. Utilities available to the site include sanitary sewer and water, electricity, natural gas, and telephone.

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Flood Hazard There are no apparent flood hazards with respect to the developable portion of the site, nor is it in any seismic zone. According to the FEMA Flood Insurance Rate Maps 55025C0409G, dated January 2, 2009, the subject property is located in Zone X. Values of properties in Zone X are generally not affected by flood potential.

in Zone X are generally not affected by flood potential. Description of Improvements The subject improvements

Description of Improvements The subject improvements consist of one 5-story elevator apartment project comprising a total of 26 residential units and 1,800 square feet of street-level retail space. The condition of the elevator is acceptable. The building contains above-ground gross floor area of 32,205 square feet, with net rentable area of 24,000 square feet indicating an average unit size of 92. The building was constructed in 1999. The garage contains approximately 2,870 square feet. There is also a 600 square foot basement space utilized by the restaurant tenant for storage. The building contains 26 units, primarily intended to serve the student housing market of the University of Wisconsin. Student-oriented apartment projects also typically report the total number of beds in a project. The subject

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contains a total of 68 beds. A summary of the subject’s unit types is presented as follows:

of the subject’s unit types is presented as follows: The subject units consist of two basic

The subject units consist of two basic types including two- and three-bedroom single-

level “flat” configurations. Based on the student target market, unit layouts are functional

in design and layout. Units facing Gilman Street have Juliette Balconies. The retail space

consists of ceramic tile flooring and 2’ x 4’ acoustic ceiling tiles and fluorescent lighting

in the dining area, with a serving bar, and a full kitchen with stainless steel appliances

and fiberglass wall panels, and tile flooring. The signage for the apartment portion of the building is minimal as it not viewable from the front of the building. The signage for the retail portion of the building is acceptable.

A summary of the construction of the subject building is presented as follows:

Summary of Building Construction

Foundations:

Concrete slab-on-grade with poured concrete footings, and foundation walls.

Structure:

First floor: precast concrete frame; Second, third, and fourth floors: wood exterior framing with wood floors and interior wall framing and flat metal roof deck supported by metal joists.

Structural Floors:

First floor: precast concrete planks; Upper floors: Wood with lightweight concrete topping.

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Roof:

Flat, with rubber membrane.

Floor Finish:

Hardwood flooring in living rooms and kitchens, with ceramic tile in bathrooms, and carpeting in bedrooms.

Exterior Walls:

Brick veneer.

Interior Walls:

2” x 4” and 2” x 6” framing with 5/8” painted textured drywall surfaces. Sound insulated walls between units, and between units and corridors.

Ceilings:

Painted drywall surfaces. Nine feet height.

Doors:

Solid-core wood unit entrance doors in metal frames, solid wood unit interior doors.

HVAC:

Gas boiler hot water baseboard heating for most units with hotel-type air conditioning units. Gas forced heating and central air conditioning for seven units.

Fire Protection:

Electric and battery operated smoke alarms. Hard-wired system. Sprinklers throughout.

Plumbing/Bathroom:

Vitreous china toilets, fiberglass shower stalls and tubs. Formica kitchen counters with stainless steel sinks. Bathrooms with cultured marble vanity tops with integral sinks.

Windows:

Double-hung with vinyl frames.

Woodwork:

Stained hardwood trim.

Cabinets:

Raised panel hardwood in kitchens and bathroom vanity.

Appliances:

Range, refrigerator, dishwasher, microwave oven, disposal.

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Common Areas:

Rooftop patio, elevator, coin-operated laundry room.

Amenities:

Free DirecTV satellite and high speed internet included in the rent. All units furnished with living room furniture, flat screen television, kitchen table and chairs, beds, and dressers. Some units with balconies.

Site:

The site features minimal landscaping, with concrete sidewalks.

The subject has a chronological age of 14 years, however, it is considered to be in good condition. The estimated economic life of the improvements as determined from depreciation rates of comparable projects that have sold in the market, as well as from published cost services, is estimated at 40 years. Based on the good condition, we estimate the effective age of the project at 10 years, with a remaining economic life of 30 years.

The subject property functions well for its intended use as it is at the high end of the student housing market, and is generally similar to superior to most student housing projects in the market in terms of amenities and views. The layout of the units and common areas are functional for renter occupancy and utilization.

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Highest and Best Use Analysis

Definition

The highest and best use of a property specifies which use maximizes the value of the property. The highest and best use must be the reasonably probable and legal use of property, which is physically possible, appropriately supported, and financially feasible. In order to correctly assess the usage of the property, we will consider what is possible to improve upon the existing structure as well as what is possible to build upon the land in the future.

As Improved

When analyzing the subject property as improved, we must consider the property as is, as renovated, and with additions.

Physically Possible The building currently occupies most of the lot. While a teardown and reconstruction of building with a larger footprint is physically possible due to the small alley way on the right side of the property as well as a setback spacing behind, there is little justification for this when considering other factors. The building has been limited in height due to zoning, however, so it would be physically possible to build a much taller structure with much more space for residential units. This would be an intensive renovation, possible after zoning changes.

The existing structure maximizes its usage by providing a small amount of space for amenities and common spaces for its residents as well as capitalizing of the large commercial space on the ground floor which brings in a large amount of revenue. Renovations to change the floor plan would not yield high enough change in PGI to justify.

Legally Permissible Our property is currently 6 stories tall and fulfills the legal footprint allowed by zoning. It currently conforms to all zoning laws and maximizes the ground and air rights order to create a large profitable commercial space, ample parking, the necessary utilities, and as

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much space for residential units that can be supported. We believe the property is currently at its highest and best use, and will be until zoning laws allow for a taller structure, or the conditions of the market drastically change.

Financially Feasible The structure currently provides maximum space for its commercial tenant after you consider the parking needs of the residents. While a tenant change could allow for higher revenue on the ground floor, the property is not directly on State Street and would unlikely be the most desirable location for more profitable businesses that can afford better rents.

As far as what the building offers for student housing, it is disadvantaged by not being in the highest tier for location, preventing it from collecting the highest rents without offering extremely expensive amenities that it does not have space for such as pools, workout facilities, or entertainment spaces. It could benefit slightly from higher quality furnishings, but the current landlord offers many premium property options to students and has clearly assessed that the demand for this building does not allow for investment in these types of renovations.

Maximally Productive

We conclude that the current building very nearly maximizes its possible use. Any investments to achieve higher rents would incur a large amount of risk as it not a Class A property and is realistically unsuitable for the “premium” tag as a student housing option.

As Vacant

Physically Possible

As previously stated, a slightly larger structure could be built in terms of footprint, and a much taller structure could be physically possible as the lot allows for a range of construction options as it does not present constraining attributes such as bad soil or problematic slopes.

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Legally Possible

The building currently maximizes its allowance for space. It is somewhat constrained by setback requirements and held to a limit of 6 stories. A larger building could not be legally constructed with the current zoning laws. Its usage is already at the highest and best use by capitalizing on student housing demand and offering ground floor commercial space to the state street market.

Financially Feasible

It

would financially feasible to build a larger structure as the demand for student housing

in

the state street neighborhood is very high and vacancy rates are extremely low.

Comparables all experience high demand as class B apartments with decent amenities are very popular. Its location is better than most campus options and in the future, after zoning laws allow for a taller structure, it would be feasible to build a structure many stories taller to allow for more student housing.

Maximally Productive

A mixed use student housing and commercial space that maximizes ground floor space

for commercial tenants, while holding space for amenities such as limited parking, entertainment space, elevator and stair shafts, etc. is the highest and best use for this lot.

Conclusion

Built in 1999, it was designed to meet the student apartment demand to the highest degree possible. It would be physically and financially feasible to build a larger structure to absorb more tenants, but this is not possible until zoning laws change.

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Income Approach

Operating Income

Market Rent Analysis

 

Housing Market Rent Comparables

 
 

SUBJECT

Comp 1

Comp 2

Comp 3

Comp 4

Address

244 Gilman

614 Langdon

420 W. Gorham

515 N. Lake

625 Langdon

     

Madison Property

   

Owner

Steve Brown

J Michael

Management

Central Properties

Steve Brown

Year Built

1999

1999

2004

2003

1999

Class

B

B

B

B

A

Stories

6

7

6

8

7

Units

26

30

80

28

30

#

of Beds in 2BR/3BR Units

68

54

114

42

56

Occupancy

100%

100%

100%

100%

100%

Planned Rent Increase

1.70%

3%

1.80%

1.50%

3.00%

Total Building Size (s.f.)

32,813

34,186

94,091

41,814

44,039

 

2 Bedroom Detail

 

#

of 2BR

10

18

9

-

10

2BR Rent for 2013

$1,430

$1,240

$1,775

-

$1,810

2BR Square Footage

880

532

890

-

800

#

Baths

1

1

1

-

1

Adjusted Rent

$1,430

$1,414

$1,770

-

$1,850

 

3 Bedroom Detail

 

#

of 3BR

16

6

32

14

12

3BR Rent for 2013

$2,065

$2,300

$2,225

$2,400

$2,550

3BR Square Footage

940

1,040

865

970

950

#

Baths

1

2

1

2

1

Adjusted Rent

$2,065

$2,190

$2,263

$2,325

$2,545

Parking Charge

$250

$200

$165

-

$200

Included Utilities

C+I

None

All

C+I

C+I

Total Monthly Rent Revenue

$47,340

$38,592

$88,330

$32,550

$49,040

Revenue Per Square Foot

$1.99

$2.44

$2.47

$2.40

$2.53

Revenue Per Bed

$696

$715

$775

$775

$876

Revenue Per Bed (Utility Adjusted) WEIGHT

$696

$740

$730

$775

$876

40%

30%

20%

10%

FINAL MARKET RENT CONCLUSION

 

$760

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Map of Student Housing Comparables- from BatchGeo Comp #1- 614 Langdon Comp#3- 515 N. Lake

Map of Student Housing Comparables- from BatchGeo

Comp #1- 614 Langdon

Housing Comparables- from BatchGeo Comp #1- 614 Langdon Comp#3- 515 N. Lake Comp #2- 420 W.

Comp#3- 515 N. Lake

from BatchGeo Comp #1- 614 Langdon Comp#3- 515 N. Lake Comp #2- 420 W. Gorham Comp

Comp #2- 420 W. Gorham

Comp #1- 614 Langdon Comp#3- 515 N. Lake Comp #2- 420 W. Gorham Comp #4- 625

Comp #4- 625 Langdon

Comp #1- 614 Langdon Comp#3- 515 N. Lake Comp #2- 420 W. Gorham Comp #4- 625

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Retail Market Rent Comparables

 
 

SUBJECT

Comp 1

Comp 2

Comp 3

Address

244 W Gilman

222 West Gorham

411 State 311 N. Frances

Tenant Name

Los Gemelos

For Lease

For Lease

For Lease

Space Rating

B

B

B

A

Rent/sf (Annual)

26

25

29

35

Expense Reimbursements

NNN

NNN

NNN

NNN

Average Weekday Traffic Count

2,200

30,500

2,000

6,800

Foot Traffic Rating (1-10)

8

8

10

10

Traffic and Quality Adjustment

0%

-5%

-10%

-15%

Adjusted Triple Net Rents WEIGHT

$26

$23

$26

$28

40%

40%

20%

FINAL MARKET RENT CONCLUSION

 

$25.00

40% 20% FINAL MARKET RENT CONCLUSION   $25.00 Map of Retail Comparables- from BatchGeo Market Rent

Map of Retail Comparables- from BatchGeo

Market Rent Changes-Student Housing In the “Housing Market Rent Comparables” table above, we have reconciled comparable student housing properties to a final market rent of $760 per-bed. NOTE: We are assume single occupancy in each bedroom for all units.

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The comparable properties were selected primarily on location, age, and class. Adjustments were made to the comparable units on the basis of square footage, utilities paid, and number of bathrooms. The adjustments used are as follows:

$.50 for every Square foot difference in unit size

o Explained Below in A)

$25 per bed for gas and electric utilities

o From subject property MG+E Averages

$25 per bed for cable and internet utilities

o Assuming current Charter “bundle” price

$20 per bed for water and sewer utilities

o From city of Madison

$60 per unit for having an additional bathroom (Only applies to 3BR units)

o Explained Below in B)

A) Comparable student housing properties average $2.40/sf. A $.50/sf adjustment is

acceptable because the primary occupants in the market (students) are more willing to

pay based on bedrooms rather than square feet. This adjustment amounts to 20% of the market rent per square foot, ensuring our adjustments don’t over-compensate for apartments size differences.

B) We justify the $60 extra bathroom adjustment in the 3 bedroom units based on each

occupant’s willingness to pay an 8% premium to have the extra bath. We view this adjustment as conservative

The adjusted rents per bed were then appropriately weighted according to each comparables’ similarity to the subject to arrive at $760 per bed. We can conclude that our subject property rents at 9% below market at current rents of $696 per bed. Fixing all other variables, this finding gives our team confidence that the subject would be able to increase rents in the future.

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From the “Housing Market Rent Comparables” table above, planned rent increases for the 2014-2015 academic year leasing term average 2.2% for the subject and its comparable properties. The planned rent increases were obtained by calling the individual property managers directly to obtain quotes on current 2013 rents and planned 2014 rents. This forecasting method can be seen as reliable because the property managers have claimed that the majority of their units are already leased for the next term, as of the appraisal date.

Additionally, Mike Herl, the VP of brokerage services at Colliers International of Madison, foresees a steady rent growth of 3.5% for class B student housing in the immediate campus area. This quote was noted on 12.4.2013.

Finally, the most recent national survey of brokers done by PWC forecasts average apartment rental rates to increase at 2.69% in the next year. This data is helpful, though we do not weigh it heavily.

In determining our rent growth assumption, we consider data compiled from three areas:

Comparable properties, local brokers, and national surveys. First, market comparables clearly show rents will be increasing for the 2014-2015 academic year by an average of 2.2%. Next, our current rents are 9% below comparable rental properties. A steady increase in rents toward the fair market rent is feasible over the next 5 years. Finally, an experienced local broker has quoted a yearly increase of 3.5% for similar student housing properties in the campus area. Reconciling these sources of information, we have determined a rent growth of 3% for each of the 5 years in our theoretical hold period.

Note: There is significant concern for a slowdown of rent increase in the near future due to a substantial amount of new development coming online. This concern is detailed in the Vacancy Analysis section.

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Market Rent Changes- Retail From the “Retail Rent Comparables” table, we conclude a NNN market

Market Rent Changes- Retail From the “Retail Rent Comparables” table, we conclude a NNN market rent of $25 per square foot. Comps were selected primarily on location with an emphasis on foot and car traffic. A secondary consideration was the overall quality of the space. Only NNN comps were considered.

Adjustments were then made for estimated car and foot traffic. A portion of the car traffic flow chart published by the city of Madison is shown below. Rents were adjusted 5% downward for comps #1 and #3 due to their substantially higher car traffic counts.

Although car traffic should be considered, a more important metric for retail space in our subject property’s area is foot traffic (for which data is not published). Foot traffic is more important than car traffic for our purposes due to the limited parking available in the area that would allow drivers to stop and visit retail spaces. To account for foot traffic, we instead gave properties a foot traffic rating of 1-10 based on our team’s firm understanding of the campus area. Each point in the scale represents a 5% adjustment. Finally, comp #3 received a 5% downward adjustment on the basis of overall space quality since it will be brand new in 2014. The adjusted rents were then appropriately weighted according to the similarity to the subject retail space to arrive at the market rent of $25/sf triple-net.

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In addition to our market rent conclusions based on comparable retail spaces, we have sourced

In addition to our market rent conclusions based on comparable retail spaces, we have sourced the following outside information.

Mike Herl at Colliers quoted rents in our subject’s area of state street remaining stable in the mid-twenties. (12.4.2013)

The PWC national broker survey forecasts an average increase in net lease rents of 1.35%. This data is nearly irrelevant for our appraisal considering our subject property is located in immediate proximity to one of the most unique retail strips in the nation. To reconcile our three sources of information, we have placed the most weight on our market rent findings based on comparable properties. The quote from Colliers broker Mike reinforces our conclusion of $25/sf. This represents a $1/sf or 4% decrease from the current tenant’s lease.

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Market Leasing Assumptions As outlined above, we conclude a NNN market rent of $25 per square foot from the “Retail Rent Comparables” table. This market rent will be the assumed rent upon the current retail tenant’s lease turnover on July 31 st of 2014.

Our model handles the expiration of the current lease in July 31 st of 2014 with the following assumptions:

RENEWAL

The contract will be renewed at our concluded market rent of $25/sf NNN

o Storage space will continue to be rented at $2/sf

Probability of tenant renewal is 80%

o Reasoning discussed Below

For a term of 4 years

o Based on current lease term

No tenant improvements will be funded

o Rent decrease provides an enticing reason for renewal

A $2/sf leasing commission will be incurred

o Based on broker statements

NEW

Probability of needing a new tenant is 20%

The new tenant will be given $5/sf in tenant improvements

o Broker stated many new leases are including no T.I. on State street area, however we model them make months vacant assumption more concrete

T.I. improvements are accounted for in the General Remodeling line item

Rent will be the concluded market rent of $25/sf NNN

For a term of 4 years

o Based on current lease term

Months vacant will be 5

o

Based on broker statements. (Quoted 3-6 months)

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A $6/sf leasing commission will be incurred

o Based on broker statements

We believe an 80% renewal probability is appropriate for the current tenant based on the fact that they appear to have a healthy business according to the subject property financials. “Los Gemelos” has not been delinquent in on rent for over three years under the current lease. We see it as highly likely the business will choose to remain in the current space in order to continue their livelihood. Additionally, we have modeled for rents lower than the current rate, which would entice the tenant to renew and avoid costs associated with moving.

Broker statements to derive the market leasing assumptions were taken from Mike Herl, a VP of brokerage services at the Madison Colliers International branch.

Rent Roll The subject property’s current rent roll consists of 26 student housing leases and one

Both the Housing and Retail components fully occupied as of the

appraisal date. The rent roll can be seen in the appendix.

retail space lease.

Expense Recoveries Under current housing leases, the subject property is reimbursed by tenants for water/sewer utilities and a portion of “make-ready” expenses the landlord incurs to repair “abnormal damage” upon lease-up. Tenants are required to pay their gas and electric expenses through their own account with the service provider; therefore the subject is not reimbursed unless the tenant fails to set up their own account.

The current retail space lease is a “Triple Net” which entitles the subject property to recover a portion of the real estate taxes, insurance, utilities, other operating expenses outlined. The lease specifically entitles the subject property to recover 5% of the building’s total annual budgeted yearly real estate taxes and operating expenses. The operating expenses that are eligible for reimbursement are generally “Common Area Maintenance” items such as cleaning, heating, lighting, air-conditioning, repairing lobbies, and snow removal. These

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Miscellaneous Income The property benefits from parking revenues, “Preferred resident card” revenue, and various miscellaneous charges to housing tenants.

Parking revenue is the most significant. The building is currently able to lease each garaged spot for $250 per month. This rate represents a significant premium from the market average of $185 for comparable properties. With only 7 spots to provide for 68 beds, tenants must compete for the few spots. This competition seems to support the premium. We don’t see any feasible increase in parking rates during our theoretical 10 year holding period. Parking revenue is modeled to increase at inflation.

Preferred resident card revenues are unique to Steve Brown apartments. They have been modeled to increase with inflation.

Miscellaneous charges to tenants may include damage fees, late fees, payment processing fees, sublet fees, and pet premiums. As these fees can be very volatile from year to year, we have taken the average of 3 prior years of historical data and increased that average by the rate of inflation.

Vacancy Analysis

that average by the rate of inflation. Vacancy Analysis As of the date of this appraisal,

As of the date of this appraisal, the overall vacancy rate of apartments in the Madison area is 2.7% according to Madison Gas and Electric. More specifically, the vacancy rate for our subject’s zip code is 1.63%. Furthermore, our subject along and similar market

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comps are currently reporting 0% vacancy. These low rates would entail a very healthy and reliable cash flow stream for the subject for years to come.

However, there are major concerns that a large influx of new housing developments coming online will cripple the student housing market with high vacancy rates and lower rents. Because the concern could greatly impact the current value of the subject property, a thorough supply and demand analysis was performed using three major data sources:

New housing starts, nearby University enrollment, and EPIC employee statistics.

According to broker Mike Herl, there will be about 2,200 new bedrooms coming into our subject’s housing market in the next year and a half. Because vacancy rates are currently near 0%, our analysis hinges on how the market will absorb the new units according to the increase in relevant demand.

Student enrollment is the primary driver of demand for the student housing market our subject belongs to. From the data described in the Market Analysis section, we can see that enrollment at the UW has been stagnant for over 10 years. Enrollment in 2003 was 41,588 while enrollment in 2012 was 42,820. This represents a yearly change of .3%. We assume a 0% UW enrollment growth rate for our analysis. In addition to private housing development, the university has also increased the supply of dormitory housing. According to the university’s “Master Plan,” there is enough public housing for every enrolled Freshman as of the 2013 academic year. The master plan in the appendix also states that vacancy rates for any given year in their residences have been less than .5%. This information tells us that Freshman enrollment cannot be a consideration in determining demand for private student housing. After taking these Freshman out of the enrollment total, the UW had 36,480 students. However, 25% of Freshman also return according to the “Master Plan”. This leaves 34,900 UW students demanding private housing.

Madison-Area Technical College also provides demand for campus-area housing, with its 17,500 students. Because MATC does not have residence halls, our analysis assumes all

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17,500 students contribute to the demand for private housing in our subject’s market. Though enrollment data could not be sourced, we have assumed a 3% growth rate.

The final source of demand we have included in the analysis comes from young working professionals who still prefer to live on a campus setting. Much of this demand comes from the major employer EPIC, which has been based in nearby Verona since 2005. According to Wikipedia, EPIC has 6,800 employees. 1,000 of those employees were added in 2012 alone, which represents a 15% yearly increase. As EPIC continues to expand employment, the majority of their hires are young professionals, some of whom will demand housing in our subject’s market. Although EPIC will create new demand as they expand, current EPIC employees who age will also be leaving the bustling campus living to settle elsewhere. Therefore, the best way to account for EPIC’s derived demand is to assume 10% of their employees demand housing in our subject market. We have interviewed a current EPIC employee to confirm our estimate is accurate. We also assume EPIC will increase their total employment by 8% annually. Therefore, we forecast 700 EPIC employees currently demand campus area housing and that 100 additional employees will demand housing in 2014.

 

Vacancy Analysis: Absorbtion of 2,200 beds added in Year 2

 

Sources of Demand

Yearly Growth

Current

2014

2015

2016

2017

Total Change

UW Madison Students

0%

34,900

34,900

34,900

34,900

34,900

0

MATC Students

3%

17,500

18,000

18,500

19,100

19,700

2,200

EPIC Employees

8%

680

730

790

850

920

240

Total Demand

 

53,080

53,630

54,190

54,850

55,520

2,440

Supply: Housing Beds

 

53,080

55,280

55,280

55,280

55,280

2,200

Derived Vacancy Rate

 

0.0%

3.0%

2.0%

0.8%

-0.4%

 

Using the described sources of demand and their assumed growth rates, we have forecasted vacancy rates as shown in the table above. We estimate a 2.9% market spike in vacancy rates will occur in 2014 due to the 2,200 additional bedrooms coming online. After the spike, continued increase in demand brings the rate back down to current 2013 levels.

It should be noted that our model only includes three major sources of demand, when in reality there are more demand drivers. If we could account for all demand drivers, the

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vacancy spike may be even lower if other sources of demand increased. After all, Madison’s population is projected to increase as outlined in our Demographic and Trend analysis. We also think that our subject will not be competing directly with the new housing supply in the first place. Our subject is a class B property with class B level rents. The new supply will be mostly grade A units, which will be rented at a premium high enough to not be competitive with the subject’s rents.

Our forecast and reasoning give us confidence that the influx of housing supply coming into the subject’s market will have a minimal effect on the subject’s vacancy rates. We have therefore modeled a 2% vacancy allowance in year 2014 and subsequently decrease the rate by .5% each year, which brings the level back to 0% in 2018.

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Operating Expenses and Capital Improvements

Property Operating History

 

244 W. Gilman - Before Tax Cash Flow

 
       

2014

2011

2012

2013

Projected

 

Gross Income(Housing)

$537,130

$559,415

$570,215

$587,321

 

Gross Income(Retail)

$48,100

$48,000

$48,000

$43,400

 

Total Gross Potential Rent

$585,230

$607,415

$618,215

$630,721

Less Vacancy and Collection

       
 

Vacancy Allowance

$480

$141

$243

(11,746.43)

 

Write-Offs

$46,717

($70)

-

-

 

Net Rent Revenue

$632,427

$607,486

$618,458

$618,975

Other Income

       
 

Parking

$20,746

$19,563

$20,450

$20,553

 

Prefered Card

$24

$6,609

$4,771

$5,774

 

CAM Chargeback

$8,721

$9,433

$10,849

$9,811

 

Utility Reimbursements

$16,963

$16,581

$18,417

$17,578

 

Misc. Fees

$12,038

$12,183

$13,733

$12,839

 

Effective Gross Income

$690,919

$671,855

$686,678

$685,530

Less Operating Expenses

 
 

Utilities

$43,241

$46,201

$49,042

$46,846

 

Payroll

$51,840

$50,865

$52,688

$52,566

 

Administrative

$8,334

$8,028

$6,097

$7,598

 

Leasing/Marketing

$4,049

$4,925

$4,257

$4,475

 

Repairs/Maint./Turnover

$23,559

$24,378

$24,236

$24,414

 

Make-Ready Expenses

$12,027

$14,536

$13,975

$13,713

 

Management Fee

$24,182

$23,530

$27,225

$25,350

 

Insurance

$9,175

$9,479

$9,655

$9,576

 

Property Tax

$91,705

$96,346

$103,571

$98,649

 

NOI

$422,808

$393,567

$395,932

$402,343

Less Capital Expenses

       
 

Replacement Reserves

-

-

-

$7,250

 

General Remodeling

$21,000

$3,828

$40,440

$47,180

 

Furniture

-

$74,325

-

-

 

Before-Tax Cash Flow

$401,808

$315,414

$355,492

$355,163

Operating Expense Assumptions In three years of actual operating expense data, there were no significantly positive or negative trends in expense increases or decreases. We found the most appropriate assumption to model these expenses was to average the prior 3 years of historical data,

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then increase that average by 1.48% inflation each year. We derived the 1.48% rate based on the average actual inflation rate for the most recent 6 months of data published by the U.S. government. See the appendix for the inflation table.

Capital Expenses Significant capital expenditures have been incurred by the subject property in the last 3 years in an effort to maintain the condition of the premises. The building has been well maintained throughout, and is in exceptional condition for its age. We have modeled a specific $47,000 capital expenditure in the year 2014 to upgrade the remaining kitchen counters and cabinets in the 14 units that were not completed in 2013. Additionally, we’ve modeled a $250 per unit replacement reserve for unknown future capital expenditures. We chose this assumption because it is the minimum reserve required for Fannie Mae student housing loans. Because the subject property is abnormally good condition, the absolute minimum reserve requirements are acceptable. A table of past capital expenditures can be seen in the appendix.

As outlined in the Market Leasing Assumptions section, in the case of non-renewal at lease-up, we will need to model capital expenses to allow for tenant improvements of $5/sf. Under the assumptions, there is a 20% chance of non-renewal; therefore we’ve model 20% of the total tenant improvements in the year 2015.

Rate Analysis

Capitalization Rate

Address

Sales Date

Price

NOI

OAR

333

W Johnson St

12/1/09

$13,600,000

$908,607

6.68%

810

Jupiter Drive

9/28/10

$2,000,000

$130,700

6.54%

406

E Wilson St

8/19/11

$1,525,000

 

4.92%

445

W Wilson St

4/25/12

$957,500

$50,996

5.33%

1702

Waldorf Blvd

9/24/12

$1,800,000

$104,815

5.82%

2218

& 2230 Luann Ln

12/28/12

$5,295,000

$308,451

5.83%

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Going-In Cap Rate

Range

Average

PwC 3Q2013

3.5%-10.00%

5.61%

PwC 2Q2013

3.5%-10.00%

5.70%

PwC 3Q2012

3.75%-10.00%

5.74%

3.5%-10.00% 5.70% PwC 3Q2012 3.75%-10.00% 5.74% While there was a period of decreasing capitalization rates

While there was a period of decreasing capitalization rates during the initial years of the economic recovery (2009-2011), the national market is starting to even out for apartment buildings as developers saturated the market with multi-family housing. Rates both nationwide and in Madison are continuing to drop (CITE) but at a slower pace as the housing market becomes safer and the level of risk falls. In the last year the nationwide cap rate average for apartments only fell by 9 basis points (CITE) leading to a projected period of leveling out at an average of about 6.5%-7% (Colliers, 12/13) for a class B mixed in Madison. At this point it becomes more important to look at the microcosm of the state street neighborhood to understand how to project the capitalization rate for 244 West Gilman.

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For comparable properties we look for apartment properties that have been sold since the market improved and cap rates began to stabilize. We look at the apartment transactions that have occurred in the past 5 years but pay much closer attention to the apartment buildings since 2010 as this is when cap rates have stabilized. The properties above are all large apartment buildings in the Class A or Class B range and are found in an urban neighborhood with of Madison. All but the 445 Wilson property have been built since the 1980’s, and furthermore, all have been assessed by Madison as being in “Average” condition (Madison Assessors). From this we know that these comparables are very similar to 244 Gilman. While only one of the properties is strictly student housing, they reflect similar property values.

When comparing the cap rates of these properties we can generally assess a range of between 5.3%-6.5% after taking out the outliers, lower than the quoted average. The property at 333 West Johnson was bought in a period of economic uncertainty and was a much larger property reflecting a large risk in its higher cap rate. The Waldorf and Luann properties are of higher quality but are not in the downtown area so generally reflect the same risk and capitalization rate. Narrowing down our criteria and adjusting for differences, we feel that a class B apartment building with prime location, decent amenities, and kept in decent condition will fall into the middle of these rates. We propose a rate of 6% to reflect the properties solid qualities and a history of extremely low vacancy and risk, allowing it to be slightly under the current averages.

Terminal Cap Rate

Terminal Cap Rate

Range

Average

PwC 3Q2013

4.0%-9.75%

6.15%

PwC 2Q2013

4.25%-9.75%

6.18%

PwC 3Q2012

4.50%-9.75%

6.20%

The terminal cap rates reflect the common knowledge that terminal rates are typically higher than going-in rates by anywhere from 50-100 basis points higher (an “ad-hoc rule of increasing period-zero capitalization rates” – Cornell University) due to the degradation of the property. The building ages during a holding period and this leads a to

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higher risk being associated with the property as it becomes less desirable relative to the buildings around it. This means it is harder to keep vacancy rates low.

The national terminal rates increased only marginally due to the fact that inventory did not expand rapidly during this time. In Madison, apartment buildings have been in high enough demand to fill vacancy rates (1.63% in this zip code – Madison Gas & Electric). This is similar to the national picture as vacancy rates are low and so risk is not being attributed to older buildings.

The subject property is well maintained and although slight degradation is apparent, the building is still a popular for student housing with high occupancy rates (building is fully rented). Although slight degradation will continue for this next holding period, good maintenance should hold the cap rate from increasing in a significant way as cap rates are in a very stable trend. We suggest an increase of 50 basis points during its 5 year holding period, as a projection that reflects our confidence that this building with not become obsolescent quickly due to its location and quality. This brings us to 6.5%, keeping it within the average range of the marketable apartment buildings of Madison (Colliers,

12/13).

Discount Rate

Discount Rates

Range

Average

PwC 3Q2013

5.00%-14.00%

7.98%

PwC 2Q2013

5.00%-14.00%

8.04%

PwC 3Q2012

5.25%-14.00%

8.28%

As capital becomes freed up as people are investing more, the discount rate lowers as the funds become more available. This means that investors are becoming more competitive as the market is getting slowly better, and real estate is becoming a more popular option for investment. We see rates falling here by 30 basis points in one year reflecting significant but not phenomenal change. Regardless, with most predicting a slow but steady crawl out of the recession we were in, we expect the discount rate to continue with this trend, slowly dropping. We find this parallel to the falling capitalization rates. The

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logic is that the lower the risk, the lower the required rate of return for investors is, which is in many ways, synonymous to the discount rate. We expect an 8.0% discount rate, in accordance with the national average. This was confirmed as a good discount rate by Colliers.

Growth Rates Assumed growth rates for the subject’s housing and retail components are discussed in the Market Rent Analysis section above.

Discounted Cash Flow Analysis

The discounted cash flow model is an analysis based on the time value of money by using forecasts of expected property cash flows. In order to arrive at the value of the property, we used a theoretical holding period of 5 years. The before tax operating cash flows and theoretical sale price after the 5 th year of operation are discounted back to present value to estimate the property’s value. Our model generates a present value of $6.26 Million using the assumptions outlined in the summary table below.

 

244 W. Gilman - Discounted Cash Flow

 
     

Period

 

1

2

3

4

5

6

 

2011

2012

2013

2014

2015

2016

2017

2018

2019

Historical

Historical

Historical

Projected

Projected

Projected

Projected

Projected

Projected

 

Gross Income(Housing)

$537,130

$559,415

$570,215

$587,321

$596,033

$604,875