SUMMARY APPRAISAL OF FRENCH VALLEY AVIATION, INC. FIXED BASE OPERATION 37552 WINCHESTER ROAD, BUILDING #4 RIVERSIDE COUNTY, CA 92563
Prepared For
Ms. Karen Vincent County of Riverside Economic Development Agency
By
Donald Falk CA Certificate # AG017342
May 1, 2011 June 3, 2011
Ms. Karen Vincent County of Riverside Economic Development Agency P.O. Box 1180 Riverside, CA 92502
Dear Ms. Vincent:
As you requested, I have inspected the French Valley Aviation fixed base aircraft maintenance and storage hangar, which is located on the west side of the French Valley Airport taxiway at 37552 Winchester Road (Building 4) in Riverside County, California 92563. In addition, I have prepared a summary appraisal of the subject property in an as is status. The purpose of this appraisal is to estimate the market value of the subject property's leased fee estate as of May 1, 2011, subject the limiting conditions and assumptions outlined in this appraisal report. The property is legally described at Exhibit A in the report.
Pertinent information utilized in arriving at a value conclusion is contained in my appraisal files and the body of this report, which contains 59 pages and three exhibits. This summary appraisal is prepared in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Standards Board of the Appraisal Foundation, Office of the Comptroller of the Currency (OCC), all State Fish and Game, Wildlife Conservation Board, Federal Fish and Wildlife Service guidelines, including any other applicable County, State, and/or Federal regulations and guidelines, and/or any other applicable statutes for appraisal reports.
Based upon my analysis of the accumulated data, I have concluded the following estimate of market value of the subject property’s leased fee estate as of May 1, 2011:
ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($1,250,000)
Respectfully submitted,
Donald Falk CA Certificate # AG017342 TABLE OF CONTENTS
Page
Summary of Salient Facts and Conclusions...... i Photographs of Subject Property...... ii Scope of Work...... 1 Intended Use of Appraisal...... 2 Ownership and Legal Description...... 2 Purpose and Date of Appraisal...... 2 Property Rights Appraised...... 2 Regional Description...... 3 Regional Map...... 4 Area Description...... 6 Area Map...... 7 Site Description...... 9 Description of Improvements...... 10 History of Subject Property...... 13 Zoning...... 13 Highest and Best Use...... 15 Estimate of Normal Marketing Period...... 17 Approaches to Value...... 17 Cost Approach...... 18 Income Approach...... 23 Sales Comparison Approach...... 38 Improved Sales Map...... 50 Reconciliation of Value Estimates...... 55 Certificate of Appraisal...... 56 Limiting Conditions and Assumptions...... 57 Qualifications of Appraiser...... 58
EXHIBITS
A) Legal Description B) French Valley Airport Plan, Site Plan & Building Floor Plan C) Subject Lease (pages 1-3)
i SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Name: French Valley Aviation fixed based operation
Location: 37552 Winchester Road (Building 4), Riverside County, California 92563
Interests appraised: Leased fee estate
Ownership: Redevelopment Agency for the County of Riverside
Lessee: French Valley Aviation, Inc.
Type of property: Fixed base operation consisting of a pre- engineered metal aircraft maintenance and stor- age hangar with finished office space and flight school store, and aircraft ramp area with 20 small aircraft tie-down spaces; jet fuel dispensing equipment is not included in the appraisal
Date of valuation: May 1, 2011
Land area: 2.94 acres
Building area: Hangar 13,888 square feet Store 1,230 square feet Office space 1,869 square feet Total building area 16,987 square feet
Normal marketing period Six to twelve months
Highest and best use: As though vacant hold for eventual devel- opment of aviation relat- ed uses As improved Existing FBO
Value Estimates Cost approach: $1,380,000 Income approach: $1,220,000 Sales comparison approach $1,270,000
Final value estimate: $1,250,000
ii Looking northeasterly at subject property from airport taxiway
Looking southeasterly at subject building from Sky Canyon Drive
iii Looking northwesterly at subject building from airport taxiway
Looking southwesterly at subject building from Sky Canyon Drive
iv View of ramp area and aircraft tie-downs west of building
View of west ramp area and aircraft tie-downs south of airport taxiway
v Interior view of aircraft maintenance hangar
Interior view of hangar and office mezzanine
vi Interior view of flight center office
Interior view of flight center store
vii Interior view of flight school training area
Interior view of employee work room
viii Looking southerly along taxiway with subject hangar in right of photo
Looking southerly along Sky Canyon Drive with subject property in left of photo
ix SCOPE OF WORK
This section of the appraisal applies to the identification and performance of the ap- propriate level of research and analysis in an assignment and involves the following three steps - 1) identify the problem to be solved, 2) determine and perform the work necessary to develop a credible assignment result, and 3) disclose the scope of work in the report. The work in this assignment involves the review of existing information as well as data gathered from field research leading to a conclusion of the market value of the fixed base aircraft maintenance and storage hangar, which is located on the west side of the French Valley Airport runway at 37552 Winchester Road (Building 4) in Riverside County, Cali- fornia 92563. In this summary appraisal the subject property’s leased fee estate is valued in an as is status, subject to the limiting conditions and assumptions contained in the report. By definition, as is status reflects the improvements’ physical condition and any legal, environmental, and/or financial factors or encumbrances known to impact the property at the effective date of appraisal.
It is my intent that this appraisal assignment be performed in such a manner that the results of the analyzes, opinions, and conclusions be that of a disinterested third party. It is further intended that all appropriate data deemed pertinent to the solution of the appraisal problem be collected, confirmed, and reported in conformity with the Uniform Standards of Pro- fessional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board of the Appraisal Foundation, the appraisal standards required by Title XI of FIRREA, the Office of the Comptroller of the Currency (OCC), all State Fish and Game, Wildlife Conservation Board, Federal Fish and Wildlife Service guidelines, including any other applicable County, State, and/or Federal regulations and guidelines, and/or any other applicable statutes for appraisal reports.
In completing this assignment I first conducted an extensive review of the county’s general aviation airport market, and I analyzed supply and demand characteristics for the type of property that would be considered competitive with the property being appraised. After assemblage and analysis of this information, I conducted a detailed search throughout the French Valley Airport market area, as well as other general aviation airports in Riverside, Los Angeles, and San Diego Counties, for various types of market data, including improved aircraft hangar and maintenance properties and aircraft hangar rental rates. This in- formation was then confirmed with principals, their representatives, and/or their agents. Sources of data include the Riverside, Los Angeles, and San Diego County Recorder’s official records, Riverside County Economic Development Agency, County of San Diego General Services Department, market data services, published reports, my appraisal files, and personal contacts.
In this report my valuation approach consists of the three traditional approaches to value leading to a conclusion of market value of the subject property’s leased fee estate. These approaches are the cost, income, and sales comparison approaches. Each approach, which is discussed and developed in detail in later sections of this report, provides a particular emphasis which aids in arriving at an opinion of value for the property.
1 The report scope also includes a discussion and analysis of the highest and best use of the property as though vacant and as improved. The opinions set forth in this appraisal are subject to the Limiting Conditions and Assumptions contained in the narrative report.
INTENDED USE OF APPRAISAL
The appraisal is prepared for the sole purpose of assisting the County of Riverside Economic Development Agency in establishing a fair market rental rate for the property that is the subject of this appraisal.
OWNERSHIP AND LEGAL DESCRIPTION
The subject parcel and improvements, which are under the ownership of County of Riverside, are legally described at Exhibit A.
PURPOSE AND DATE OF APPRAISAL
The purpose of this valuation is to estimate the as is market value of the subject property’s leased fee estate as of May 1, 2011, subject to the limiting conditions and assumptions included in the report The term market value is defined by The Office of The Comptroller (12 CFR, Page 34, Sub-part C, Section 34.42) as follows:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised and each is acting in what he considers his best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
PROPERTY RIGHTS APPRAISED
The subject building, site improvements, and underlying land, which are leased to French Valley Aviation, Inc., represent a leased fee estate. The term leased fee is defined in the Appraisal Institute The Dictionary of Real Estate Appraisal, Third Edition, as follows:
2 An ownership interest held by the landlord with the right of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and leased fee are specified by contract terms contained within the lease.
REGIONAL DESCRIPTION
The growth in the Rancho California area over the last 10 to 15 years has been a major factor contributing to growth of the cities of the region. Temecula, which were incorporated in 1989, is a 97,500-acre, master-planned residential, commercial and industrial community covering 153 square miles with elevations ranging from 1,012 feet to 2,500 feet above sea level.
The city of Murrieta, located at the merge of interstate highways I-15 and I-215, lies on the northern edge of the Rancho California area. Murrieta contains a total land area of 28.4 square miles, of which 3,030 acres are zoned industrial, 1,910 acres are zoned commercial, and 11,060 acres are designated for residential development. The Regional Map on the following page identifies the location of the subject property.
Population
Estimates published by Riverside County and the State Department of Finance show the current population of the greater Rancho California area, which includes Temecula and Murrieta, at approximately 200,000 people. The Southern California Association of Gov- ernments (SCAG) projects Murrieta’s current population at 103,466, while Temecula has a population of 76,107. The majority of growth has been generated from in-migration, or new residents moving into the area. The region's population is younger than the national average. From all indications the region should continue to enjoy steady population growth from in-migration, as well as some growth from natural population increase.
Employment
Employment within the Rancho California area experienced a rapid increase through 1989 with a noticeable slowdown between 1990 and 1996. However, employment growth percentages did not equal population growth percentages in large part, since much of the population does not work in the area. With the area’s location approximately equidistant from San Diego and Riverside, a large percentage of the region’s work force commutes daily to the larger employment centers in the cities of Riverside, Corona, and San Bernardino to the north and the San Diego metropolitan area to the south.
Initially, the entire area was primarily based upon an export economy, essentially selling more than the area consumed. The regional was basically an agricultural part of the county. However, there was a significant increase in the local industry base over the last 10 years. Currently, there are over 500 businesses located in Rancho California region.
Although job creations were the force that drove the region’s growth in the early 2000s, the current state-wide recession has shown a significant reversal of that trend. Employment
3 4 has decreased in almost every sector of the economy and all types of real estate has been negatively impacted by the county's economic recession and the lack of available mortgage financing to purchase or develop new projects. In addition, stricter borrower qualification criteria, and new federal lending regulations have made industrial financing much more difficult to obtain. The region’s depressed residential market over the last three years has caused demand for industrial properties to decrease. In turn, vacancy rates have increased in most industrial and commercial developments. Consequently, many developers have cancelled or postponed plans for new projects until the real estate market improves.
Personal Income and Cost of Living
As with employment and population, personal income has also shown a steady increase in recent years. The average cost of living in the Temecula and the Rancho California area is lower than the Los Angeles and San Diego metropolitan areas, primarily due to lower land and housing costs. Median family income is $76,221 with the largest number of families in the $45,000 to $74,999 bracket and 24.5% in the $100,000 to $149,999 group.
Tax Structure
The tax structure for the area is made up of California state sales tax, city sales taxes, property taxes and individual income taxes. Under California law, the combined state, county and municipal sales tax cannot exceed a fixed total. Any incorporated second class city or county may adopt a sales tax ordinance and levy a sales tax.
Property taxes may be levied by local governments, school districts and special districts such as fire and sanitation, but with the passage of proposition 13 by California voters, annual tax increases are limited to 1.0% of each county’s market valuation.
Education
Rancho California and Temecula are served by the Temecula Unified School District, while Murrieta and Wildomar have their own districts. Temecula is served by two private schools, Hillcrest Garden and The Linfield School and three public schools, Vail Elementary School, Temecula Middle School, and Temecula Valley High School. Murrieta is served by the Murrieta Valley Unified School District with one high school, one middle school and five elementary schools. A newer high school is located slightly east of the I-215/ Clinton Keith freeway interchange.
Higher educational facilities are available in Riverside at Riverside City College offering a two year program and the University of California at Riverside with a four year program. Mt. San Jacinto College offers classes in the Rancho California Plaza, while Palomar College and California State University, both in the city of San Marcos in San Diego County, offer a two year program and full graduate programs, respectively. The University of California at Riverside has a satellite campus in Temecula. Over 24.0% of the area’s population have college degrees.
5 Transportation
Primary transportation in the area is by road. Temecula is bisected by Interstate Highway 15, the inland route connecting San Diego to Los Angeles and San Francisco, while Murrieta is served by both the I-15 and I-215 freeways. Interstate and in-state trucking service is provided by over 100 truck lines in San Diego and Riverside. The Santa Fe Railroad has a main line in Corona serving the Lake Elsinore area with branch lines in San Bernardino and the city of Perris. The French Valley general aviation airport is located in the neighboring community of French Valley.
Proposals currently exist, which may position the city of Murrieta as the location for a high speed rail system, which voters approved in 2008. The proposed station is projected to accommodate approximately 8,000 daily passengers.
Recreation
Within the Rancho California area recreational activities include skiing, fishing, and camping in nearby San Bernardino Mountains. Golf is available at five courses in the area, including the 18-hole Rainbow Canyon Golf Resort and the private Bear Creek Golf and Country Club. Numerous activities, such Sea World, the San Diego Zoo, and over 30 miles of beaches, are also available in the San Diego area to the south. The premier wine growing region east of Temecula contains numerous small to medium sized wineries. Temecula Valley Wine Country has become the “Napa Valley” of southern California. Numerous wineries offers wine tasting tours with entertainment and jazz concerts during the summer months. A number of the region’s wineries, such as Calloway and Thornton, have become nationally recognized as producers of some of the country’s finest wines.
Regional Conclusions
Temecula, Murrieta, and the Rancho California area enjoy several positive factors, which should contribute to long term growth as a desirable place to live and locate businesses. With steadily increasing population and local employment opportunities and a growing economic base, the region should continue to enjoy a strong economy when the economy and real estate market return to normal levels in the next few years.
AREA DESCRIPTION
Geographic Location
The subject property is located in an unincorporated area of Riverside County known as French Valley, slightly east of the Murrieta city limits and approximately three and one-half miles east of Interstate Highway 215. The French Valley Airport is a fixed base, general aviation airport, which is owned and operated by the Economic Development Agency of Riverside County. The area is generally bordered by Winchester Road on the west, Murrieta Hot Springs Road on the south, Butterfield Stage Road on the east, and Los Alamos Road/Thompson Road on the north. An Area Map on the following page identifies the location of the property.
6 7 Access
Access to the general neighborhood from the west is provided Murrieta Hot Springs Road, the major street through the subject area. This street, which intersects Winchester Road, provides direct access to the I-215 and I-15 freeways to the west via four-way interchanges. From the north and south Winchester Road (State Highway 79 North) is the main thoroughfare through the subject area. To the south this road has a four-way interchange with the I-215 freeway, while it continues in a northerly direction past the French Valley Airport and into the city of Hemet.
Within the immediate neighborhood Sky Canyon Drive provides access from Winchester Road to the French Valley Airport and into the Winchester Commerce Center. Both Winchester and Murrieta Hot Springs Roads have four-way interchanges at the I-215 and I-15 freeways to the west. The subject area has convenient access from Winchester and Murrieta Hot Springs Roads and proximity to the French Valley airport and the I-215 freeway. However, with significant new residential, industrial, and commercial growth in the area in the last 10 years, traffic becomes quite congested along Winchester and Murrieta Hot Springs Roads during the morning and afternoon commutes.
Area Development
The major development is the subject area is the French Valley Airport, a general aviation facility, which opened in 1989. The county recently completed an airport expansion program that lengthened the 4,600 foot runway to 6,000 feet, which can accommodate larger B-2 Class and private jet aircraft. In addition, the airport offers a new French Valley Aviation Center with a full-service restaurant, rental and privately owned aircraft storage hangar developments, charter flights, flight instruction, aircraft rentals, aircraft maintenance facilities, and aircraft fuel service. There are currently 170 aircraft based on the field, the majority of which are single-engine planes. Daily aircraft operations average 269 flights per day, which are divided between local general aviation 60.0% general aviation and 40.0% transient general aviation. In addition, the airport has three asphalt paved helipads.
A new industrial development known as Winchester Commerce Center at Silverhawk is located at the northeast corner of Winchester and Murrieta Hot Springs Roads. This light industrial/office park, which is named Sky Canyon Business Park, has been gradually developing with tilt-up concrete, office and industrial buildings. In addition, there is a planned complex that has experienced strong owner/user buyer demand since its inception in 1999.
Development to the west of Winchester Road is comprised of newer single-family subdivisions, one of which has a golf course, condominiums, and apartments, single-family homes on small acreage lots, and large parcels of undeveloped residential land. Devel- opment to the east and north of Winchester Road is comprised of a combination of land uses, including the French Valley Airport, scattered single-family homes on small acreage lots, and large parcels of undeveloped land. In addition, the new Riverside County Southwest Justice Center is located approximately one mile north of the airport. This complex houses a county court complex and a Riverside County Sheriff station.
8 Development surrounding the Winchester and Murrieta Hot Springs Roads intersection consists of two grocery store anchored community shopping centers, gas stations, and a large rental apartment complex.
Utilities and City Services
Public water and sewer services are provided to the subject area by the Rancho California Water District and Eastern Municipal Water District. Natural gas is supplied by Southern California Gas Company, while electric service is available from Southern California Edison Company. Riverside County provides all normal city services, including police and fire protection, street maintenance, and traffic control. A fire station is located in French Valley Airport.
Summary
Although the area experienced extensive new residential subdivisions and steady industrial and shopping center construction along Winchester Road in the early 2000s, new development of all types has slowed since 2006 in response to the region’s recessionary economy and downturn in the residential real estate market. In turn, the airport’s aircraft industry has also experienced a decline in business. In 2010 the airport had the lowest number of flights since 1992, and the airport’s fixed base operators report significant decreases in aviation fuel sales, demand for aircraft related maintenance services, flight school attendance, and hangar leasing activity. This trend is expected to continue until the county’s economy improves.
SITE DESCRIPTION
Geographic Location And Land Area
The subject site is located one property south of the main entrance street into the the French Valley Airport on the west side of and adjacent to the taxiway. The parcel, which is basically rectangular in shape, contains a total land area of 2.94 acres (128,066 square feet) and has direct access to the runway and street frontage along Sky Canyon Road on the west. The Airport Plan and Site Plan at Exhibit B identify the location and shape of the subject parcel.
Soil, Subsoil, and Topography
Although a soils report was not provided, there are no known soil or subsoil conditions which would restrict this type of development assuming proper drainage engineering. Therefore, it is assumed that the soil and subsoil conditions are adequate to permit development of the parcel with properly engineered foundations. This opinion appears well supported by similar aircraft hangars located along the airport runway system. While a detailed geotechnical study covering the subject was not provided, no evidence of a problem was encountered during my physical inspection of the property. It is assumed that the site is not impacted by any geotechnical condition that would negatively impact the
9 property’s value. In addition, there are no known toxic waste or environmental hazards, nor is there evidence of any natural, cultural, recreational, or scientific value to the subject property.
The topography of the site is level and lies at the same grade as Sky Canyon Drive and the airport’s taxiway. Surface drainage appears to be good in all directions, and there are no noticeable elevation differences. According to Flood Map 060245 2735A, dated August 18, 2003, the parcel is located in a Zone D, which is an area determined to lie outside the 100- year flood plain zone.
Utilities
Public water and sewer are supplied to the French Valley Airport and surrounding properties by Eastern Municipal Water District. Natural gas is provided by Southern California Gas Company, and electricity is supplied by Southern California Edison Company.
Street Improvements and Access
Access is provided to the subject property via two gated entrances off Sky Canyon Drive, which is a two-way, asphalt paved street that parallels the west side of the property and airport. The subject building has direct access to the runway from an asphalt paved ramp area that adjoins the taxiway.
Easements of Record
Based on my review of public records, there are no easements that appear to negatively affect the parcel’s, usable land area, functional utility or development potential.
DESCRIPTION OF IMPROVEMENTS
The subject property's improvements consist of a pre-engineered, 16,987 square foot metal aircraft maintenance and storage hangar with finished office space, a flight school center and store. The following table summarizes the building’s gross floor area (See site and building floor plans at Exhibit B).
TYPE OF SPACE SQ. FT. AREA
aircraft maintenance hangar 13,888
flight school store 1,230
office space 1,869
Total building area 16,987
10 Aircraft Maintenance and Storage Hangar
The hangar’s major construction components include a sealed concrete slab floor, a pre- engineered steel wall and roof structural system with 25 foot eave heights, two sets of 220- volt electric, four section bi-fold doors for aircraft ingress and egress, high intensity halide lighting, and an automatic sprinkler system for fire protection. The hangar has 696 square feet of finished, ground floor office space along the north wall, which is divided into an office/parts room, open storage space, a three-fixture restroom, and an employee shower room. A mezzanine, which has been constructed over the ground floor office area and hangar parts room, contains an additional 928 square feet of finished office space. This area, which is accessed from a stairway from the hangar area, contains three private offices and a small hallway.
Office Space
The first floor office space, which is also sprinklered for fire protection, is divided into a flight school training and test room, two employee work rooms, and two 3-fixture restrooms. Interior finish consists of textured and painted drywall partition walls, carpeted floor, sus- pended acoustical tile ceiling with recessed florescent lighting, anodized aluminum exterior doors and windows, solid core 6-panel, interior doors, and a gas forced air heating and air conditioning system. Built-in cabinets with a wet bar sink are located in the hallway between the two restrooms.
Flight School Dispatch Office and Store
This portion of the building, which is also sprinklered for fire protection, is divided into a product display area and the flight school dispatch desk. Interior finish consists of textured and painted drywall partition walls, carpeted floor, suspended acoustical tile ceiling with recessed florescent lighting, anodized aluminum exterior doors and windows, solid core, 6-panel interior doors, and a gas forced air heating and air conditioning system.
Site Improvements
Site improvements include concrete curbs, gutters, and drainage aprons, concrete and asphalt paved aircraft ramp area with 20 small aircraft tie-downs, 29 asphalt paved vehicle parking spaces and minor landscaping in front of the office area, and 4' wrought iron and chain link fencing with two gated entries off Sky Canyon Drive.
Construction Details
Footings & foundations: Reinforced concrete
Floor structures: Reinforced concrete slab ground floor and wood joist mezzanine floor
11 Floor coverings: Hangar sealed concrete slab Hangar finished area carpet and vinyl tile Office & store carpet
Exterior walls: Hangar pre-engineered steel panels Office & store stucco over wood studs
Clear ceiling height: Hangar 25 feet Office & store 10 feet
Interior walls: Hangar steel panels and painted drywall partition walls Office & store textured and painted dry- wall
Roof structure: Hangar Steel joist system with a plywood overlay
Roof covering: Hangar steel panels with 30 sky- lights Office & store flat built-up composition surface
Interior ceilings: Hangar exposed steel panels Hangar office textured drywall Office & store suspended acoustic tile; textured drywall in rest- rooms
Plumbing: Copper and PVC pipes; two 3-fixture restrooms in ground floor office area; one 3-fixture restroom and one shower room in hangar; entire building is sprinklered for fire protection
Electrical: Hangar 400-amp 120/208-volt, 3- phase power; suspended halide light fixtures Office & store recessed florescent light fixtures
Windows: Hangar none Office & store fixed-pane, anodized al- uminum units
12 Doors: Hangar two 220-volt electrically operated, 4-section steel aircraft hangar doors Office & store anodized aluminum en- trance doors; 6-panel wood interior doors
Heating & air conditioning: Hangar none Office & store gas forced air system
Site improvements: Concrete curbs, gutters, and drainage aprons, concrete and asphalt paved aircraft ramp area with 20 small aircraft tie-downs, 29 asphalt pav- ed parking spaces in front of the office area, 4' chain link fencing and two gated entries off Sky Canyon Drive, and minor landscaping
Based upon my inspection, the improvements are a functionally designed maintenance hangar with adequate ceiling heights, convenient aircraft ramp area, and good quality finished office and store space. In my opinion, the improvements conform well to typical fixed base operators (FBOs) in southern California general aviation airports.
HISTORY OF SUBJECT PROPERTY
According to the owner and Riverside County public records, the subject property has not sold in the last three years, nor has it been listed for sale in the last 12 months. The site and improvements have been leased to French Valley Aviation, Inc. (previously American Valet Air, Inc.) since 1996.
ZONING
French Valley Airport, which is the county’s second largest fixed-base general aviation airport, is owned and operated by Riverside County. The property falls under the jurisdiction of the Riverside County Economic Development Agency Minimum Standards for Fixed Base Operators. The purpose of these standards is to serve to promote and attract professional level of aviation services to the County airports while safeguarding the public interest. The major permitted uses and development standards are summarized as follows:
Permitted Land Uses
Structures and Facilities
Runways, taxiways, and aprons Aircraft hangars, tie-down area, and aircraft maintenance buildings Air traffic control towers and facilities
13 Navigational aid equipment and structures Airport administration buildings, including passenger terminals Heliports Aviation fuel farms Automobile parking lots and structures Buildings for housing operations and equipment necessary to the maintenance, safety, and security of the airport
Commercial Activities
Aviation flight and ground schools Aircraft sales Aircraft hangar and tie-down rentals Aircraft leasing and charters Aircraft engine and equipment repairs, maintenance, and modification Aircraft cleaning services Aircraft painting Aviation fuel facilities Aircraft mechanics schools Scheduled and non-scheduled airlines Air taxi and air ambulance services Air freight terminals Aerial crop dusting Aerial fire fighting Parachute rigging sales and service
Development Standards for Full Service Fixed Base Operators
Minimum lot size 3.0 acres Aircraft hangar area 14,000 square feet Runway setback 25 feet Side setback 20 feet (abutting street) Side setback 0-10 feet (interior property lines) Maximum bldg. height 35 feet or two stories
Minimum Off-Street Parking
Aircraft hangars 0.5 space per 1,000 sq. ft. Aircraft tie-downs 1 space per 7,000 square feet of tie-down area Misc. aviation activities 2 spaces per 1,000 sq. ft. Commercial activities 3 spaces per 1,000 sq. ft. Restaurants 1 space per every 60 sq. ft. of floor area
Based on these requirements and conversations with the Riverside County Economic Development Agency, the subject improvements meet all zoning regulations and are a legally permitted use under the Riverside County Economic Development Agency Minimum Standards for Fixed Base Operators.
14 HIGHEST AND BEST USE
Highest and best use, as defined in The Appraisal of Real Estate, is:
The use, from among reasonably probable and legal alternative uses, found to be physically possible, appropriately supported, financially feasible, and that results in the highest present land value.
Highest and best use is shaped by the competitive forces within the market where the property is located. Therefore, the analysis and interpretation of highest and best use is, in effect, an economic study of market forces focused on the subject property. Consequently, highest and best use represents the foundation on which market value is determined.
When a site contains improvements, the highest and best use may be determined to be different from the existing use. In this determination the existing use will continue unless and until land value in its highest and best use exceeds the sum of the value of the entire property in its existing use and the cost to remove the improvements. In this analysis consideration must be given to that fact that land value is dependent on the uses to which it can be put. Therefore, both highest and best use as improved and as though vacant must be considered in relation to a variety of uses, including its existing and all potential uses.
Highest and Best Use as Though Vacant
In the determination of highest and best as though vacant four criteria must be considered. These include 1) legally permissible, 2) physically possible, 3) financially feasible, and 4) maximally productive. Each is analyzed in the following discussion.
Legally Permissible
In this criterion the major concern is with legally permitted uses by zoning, restrictions or limitations resulting from local building codes, historic district controls, long term leases, environmental regulations, and private easements and deed restrictions. The Riverside County Economic Development Agency Minimum Standards for Fixed Base Operators permit a specific number of airport and aircraft support facilities and related commercial uses. All properties located in Riverside County operated general aviation airports are leased to operators. Except for these minimum standards, there are no known private restrictions, easements, or public controls, which appear to limit the utility of the parcel. Therefore, in my opinion, all uses allowed under the development standards are legally permissible on the site.
Physically Possible
In this analysis the major considerations are typically the site's size, shape, runway frontage and access, and terrain. The subject site is a level, functionally shaped parcel with
15 frontage on and direct aircraft access to the French Valley Airport taxiway. In terms of size the 2.94-acre parcel is typical of other leased sites along the airport runway and well adapted for maximum utilization. When considering the parcel's direct access to the runway, all of the legally permitted aviation related uses are considered physically possible for the property.
Financially Feasible
In this analysis the potential uses, which met the physically possible and legally permissible criteria, are analyzed further to determine those that are likely to produce the greatest income to the property. This is best accomplished by projecting the probable net income which would be produced by the most feasible uses for the site.
Based on the property's location within the airport and the county’s land use restrictions, the most financially feasible uses are strictly limited to aviation related facilities, which require direct access to the runway, such as aircraft hangars, maintenance and repair facilities, and aircraft fueling facilities.
To test the property’s feasibility and highest and best use of land, a study has been made of all logical, feasible alternatives. The property's zoning classification and location, in conjunction with local market trends, typically limit the number of property uses to a few aircraft related choices. In this analysis the potential uses, which met the physically possible and legally permissible criteria, are analyzed further to determine those that are likely to produce the greatest income to the property. This is best accomplished by projecting the probable net income which would be produced by the most feasible uses for the site. In my opinion, based on the property’s zoning designation and location on the airport taxiway, the most financially feasible use would normally be some type of aircraft maintenance and/or hangar facility.
However, a property's financial feasibility depends heavily upon demand. In the late 1990s and early 2000s Riverside County experienced fairly steady growth in its general aviation airports. However, as a result of the nation’s recessionary economy, the city’s aviation- related market has steadily weakened since 2008, which has caused buyer and tenant demand and property values to fall below normal levels. In my opinion, market conditions point to limited demand for new construction in the foreseeable future. Consequently, the financial feasibility of developing the parcel with a new use in the current market is questionable. In my opinion, the highest and best use is to hold the property until the local economy and general aviation market improve, construction financing becomes more readily available, and this type of development is again financially viable.
Maximally Productive
Among the financially feasible and legally permissible uses, the use which provides the highest value is the highest and best use for the property. This is best estimated by capitalizing the potential net income for each use with a capitalization rate, which reflects the risk associated in each use. Since the highest probable net income would be generated
16 by uses, such as aircraft hangars, flight schools, and aircraft maintenance facilities, these types of development are normally considered the maximally productive uses for this type of property.
However, market conditions, reduced demand, and the difficulty in obtaining construction financing point to limited developer interest in new aviation related development in the foreseeable future. Consequently, the financial feasibility of developing the parcel with a new use is questionable. In my opinion, the maximally productive is to hold the property until the real estate market improves.
Highest and Best Use Conclusion
From consideration of these four factors, all indications point to holding the parcel for eventual development when the local economy and aviation related real estate market improve, and construction financing become more readily available.
Highest and Best Use as Improved
This highest and best use analysis recognizes that existing improvements should be continued in use until it becomes financially feasible to demolish the structure and build a new one or to remodel the existing one. This point is normally reached when the land value exceeds the value of the overall property including the improvements. Since the overall value of the improved property is greater than the land value, the improvements represent the site's highest and best use as improved.
ESTIMATE OF NORMAL MARKETING PERIOD
Aircraft related properties are very specialized types of real estate, and marketing times can vary quite widely. It has been my experience that, since most hangars and related office suites are typically sold to private aircraft owners or airport related businesses. Sales of these types of properties are not always formally listed on the market. Based on conversations with owners, brokers, and developers, extended marketing periods are become fairly common as a result of the recessionary economy and depressed aircraft- related market. When considering the extended marketing periods of properties in southern California general aviation airports, which is a result of the county’s depressed real estate market, a marketing period of approximately six to twelve months is suggested.
APPROACHES TO VALUE
When an improved property, such as the subject facility, is leased to a fixed base operator, the fee simple ownership is divided into two interests. The fee simple owner of the land and improvements (Riverside County Redevelopment Agency) holds a leased fee interest, and the lessee (French Valley Aviation, Inc.) has a leasehold interest in the land and im- provements. This appraisal involves the valuation of the owner’s leased fee estate.
17 In the appraisal of this type of real estate three approaches to value are most commonly used. These include: 1) the cost approach, which is the replacement cost of the improve- ments, less accrued depreciation from all causes, added to the land value obtained separately via comparison, 2) the income approach, which is the capitalization of the net income a property may be expected to produce into an estimate of value, and 3) the sales comparison approach, which is an adjusted comparison of similar properties which have sold in the market place. In the valuation the three approaches are individually developed and reconciled into a final estimate of market value.
COST APPROACH
The cost approach is a method of valuation in which the value of the property is derived by estimating the replacement cost of the improvements, deducting therefrom any esti- mated depreciation, and then adding the market value of the land. This process falls into logical steps - estimating the value of the fee simple land, making a careful analysis of the hangar’s construction details, and estimating replacement cost and accrued depreciation. In this appraisal each step is individually developed.
Land Value
Land values may be estimated using a variety of techniques, including the sales compar- ison approach, allocation, extraction, and ground rent capitalization methods. For most types of property the sales comparison approach is the most commonly utilized, when a sufficient number of comparable sale are available for comparison. However, parcels of land located within French Valley Airport, as well as most other publically owned and operated general aviation airports, are not sold to individual owners. Instead, the county leases sites bordering the runway to leasehold operators and developers via long-term ground leases. Since land rental data and capitalization rates are established by the Riverside County, the most reliable method to determine land value for the subject parcel is the ground rent capitalization method.
According to Riverside County Economic Development Agency, the market rental rate for parcels in the airport is periodically established by an appraisal. Reportedly, the current annual monthly rent for the subject site is $1,157.14 per acre per month. According to instructions from the client, this rate is to be utilized as market rent in estimating land value for the property. When this rental rate is applied to the parcel’s total land area, the following annual ground rent results.
2.94 acres @ $1,157.14 = $3,402 $3,402 x 12 months = $40,824
Estimate of Leased Fee Capitalization Rate
Capitalization is the process of converting the ground rent into a value through the use of a rate. To estimate a leased fee risk rate I first considered the terms of the lease. Ac- cording to the lease “in establishing rent beginning in the sixth year of the lease monthly
18 rent shall be 8.0% of the appraised fair market value of the leased property”. In effect, this procedure involves applying an 8.0% rate of return to the estimate of market value of the land and improvements. However, within the capitalization rate there are two components which make it up. When an investor purchases an income-producing property, he anticipates receiving a rate of interest on his investment, and he expects to recover, through the income or the reversion, that part of the property which is wearing out, which is typically the improvements. These two components represent return on (interest rate) and return of (recapture rate) the investment. Added together, they represent a capit- alization rate for the improved property. However, since the land involves only a return on the investment, a rate deduction is warranted for the recapture of the improvements. Based on the age and quality of the leasehold improvements, a 1.0% rate reductions is con- sidered reasonable. With this deduction, a 7.0% capitalization rate is suggested for the land.
To cross-check this rate I analyzed known capitalization rates for parcels of industrial land that were leased at the time of sale. Based on my research and experience, sales of properties encumbered by ground leases typically reflect capitalization rates ranging from 5.0% to 7.0%. Since these sales generally support the rate of return established by River- side County for properties located in the French Valley Airport, a 7.0% capitalization rate is considered applicable to the subject leased fee estate. When the subject parcel’s market rent is divided by this rate, the following estimate of land value is concluded.
$40,824 divided by 7.0% = $583,200 Adopt $580,000
Improvement Value
Replacement Cost - Building and Site Improvements
The improvements consists of a 13,888 square feet of aircraft maintenance and storage hangar space, 3,099 square feet of finished office and flight school store space, and various site improvements, including an asphalt and concrete paved ramp area, concrete work, wrought iron and chain link fencing, and minor landscaping.
Hangar Space and Site Improvements
To estimate the replacement cost of the hangar space and site improvements I analyzed the cost for a 30,000 square foot, aircraft storage hangar that was built in the Thermal Resorts Regional Airport in Thermal, California in 2006. The building is a shell hangar with no interior finish. The developer reported a total cost of $1,319,500, or $43.98 per square foot of gross building area, including normal site improvement and indirect costs, such as ramp area paving, and architectural, engineering, and city fees. However, this is a 2006 cost, which is not representative of the current market. To update this cost to a current figure I utilized the Marshall Valuation Service Comparative Cost Multipliers, which reports 2006 construction costs have increased 13.0% in Riverside County. When this percentage is applied to the actual costs, a current cost estimate of $50.00 per square foot is
19 suggested. In comparison to the subject, this building is a shell with no finished area. Therefore, based on current tenant improvement costs, an additional cost of $2.20 per square foot of finished mezzanine office area (1,869 square feet @ $20.00 per square foot) is suggested. When added to the shell cost, a total cost of $52.20 per square foot results.
To cross-check this cost estimate I utilized the Marshall Valuation Service, which reports average costs per square foot of gross building area, including both direct and normal indirect costs, such as architect's fees and contractor's overhead and profit. In my opinion, the subject hangar best fits the average quality Class S (steel frame and siding) aircraft storage hangar. According to the cost service, this quality steel frame hangar in Riverside County costs an average of $32.00 per square foot of gross building area.
However, this cost service does not include site improvements, or indirect costs, such construction financing fees and interest during construction, and leasing fees. Based on the cost service, and current market financing fees and interest rates in Riverside County, the following additional indirect costs are concluded:
COMPONENT COST PER SQ. FT.
Paving $15.00
Landscaping & fencing 0.30
Construction loan costs 1.50
Total $16.80
When this amount is added to the concluded direct building cost, a total replacement cost of $48.80 per square foot is suggested. The two methods indicate replacement costs of $52.20 and $48.80 per square foot of building area. As can be seen, the cost service suggests a slightly lower construction cost, while the actual cost applies to a larger hangar with no interior finished area or plumbing. Therefore, with consideration given to each estimate, I have adopted a replacement cost of $50.00 per square foot. When this unit cost is applied to the subject hangar space, the following replacement cost is adopted.
13,888 sq. ft. @ $50.00 = $694,400
Store and Office Area
To estimate the replacement cost for the 3,099 square feet of finished store and office space I again utilized the Marshall Valuation Service. In my opinion, the subject space best fits the description of a good quality low-rise office building. According to the cost service, an average quality frame and stucco office building in Riverside County costs an average of $120.00 per square foot of gross building area. When this unit cost is applied to the subject office and store space, the following replacement cost is concluded.
3,099 sq. ft. @ $120.00 = $371,880
20 Total Replacement Cost
Hangar space (13,888 sq. ft. @ $ 50.00) $ 694,400 Finished space ( 3,099 sq. ft. @ $120.00) 371,880
Total replacement cost $1,066,280
Estimate of Entrepreneur's Profit
Entrepreneur's profit is defined in The Dictionary of Real Estate Appraisal, Second Edition, as:
A market-derived figure that represents the amount an entrepreneur expects to receive in addition to costs; the difference between total cost and market value.
The opportunity to earn entrepreneurial profit involves both skill and risk taking. Skill is required to introduce the proper mix and timing of the real estate product, while risk taking is required to encounter unforeseen construction costs, market changes, and financial conditions. Analysis of development costs versus sales prices and from interviews with contractors and developers indicate that, because of the limited number of available sites in many southern California general aviation airports, developers of aircraft facilities, such as storage hangars and maintenance facilities, typically realize an entrepreneur's profit in addition to the normal overhead and profit in a strong market. This condition results from the fact that when an income analysis is applied to these developments, the net income produced justifies a higher value than construction costs.
Since most investors who purchase this type of property give the greatest consideration to the income approach, they are generally willing to pay more for a property than it costs to develop when the income justifies a higher value. This excess profit is realized by the developer for his time, investment, and risk involved in developing the project. Recent sales of similar hangar properties and interviews with airport developers throughout southern California suggest this additional profit typically averages between 10.0% and 20.0% for fully leased properties in strong markets. However, the recessionary economy and depressed real estate market have decreased aircraft-related buyer and tenant demand, which, in turn, has eliminated developer’s profit levels. Thus, in my opinion, an entrepreneurial profit is not justified in the current market.
Accrued Depreciation
Accrued depreciation is a loss in value from the replacement cost due to any cause as of the date of appraisal. However, depreciation is a penalty only insofar as it is recognized by the market as a loss in value. Normally depreciation is broken down into the following three categories, i.e. physical deterioration, functional obsolescence, and external obsolescence. To develop this technique the various items of depreciation present in the property must be identified.
21 Physical Deterioration
This type of depreciation consists of curable and incurable physical deterioration. Curable items, or correctable deferred maintenance, while incurable items of deterioration, which cannot be practically or economically corrected. The building, which has an actual age of approximately 15 years, is adequately maintained and in average condition for its age. To estimate this type of accrued depreciation an age/life method is utilized. In this technique the ratio of the improvements’ effective age to their total economic life is applied to the estimated replacement cost to obtain a lump-sum deduction for physical deterioration. Based on the improvements' age and overall condition, the effective age of the improvements is estimated to be approximately 15 years.
Typically, the economic life of well designed and maintained industrial buildings in good locations has historically averaged about 60 years in southern California. This economic life is well supported the Marshall Valuation Service, which indicates a typical life expectancy of 50 to 60 years for good quality industrial buildings. Therefore, a 60-year economic life is considered realistic and well supported for the improvements. Based on these estimates, the improvements have depreciated 15/60 (25.0%), or $266,570.
Functional Obsolescence
This type of depreciation is a loss in value resulting from defects in the improvements' design. Since the improvements are functionally designed and conform to newer aircraft hangar developments in Southern California, no deduction is warranted for functional ob- solescence.
External Obsolescence
This type of depreciation is the diminished utility of an improvement due to negative influences from outside the site. External obsolescence can result from either a physical negative factor or from market wide negative influences, such as an over-built real estate market. Since there are no influences from outside the property that negatively affect the property’s income level, no external obsolescence is deducted.
Total Estimate of Value
When the estimated accrued depreciation is deducted from the replacement cost and added to the previously concluded land value, the following estimate of value is concluded:
22 Total replacement cost $1,066,280
Less accrued depreciation
Estimated effective age - 15 years Estimated economic life - 60 years 15/60 or 25.0% accrued depreciation 266,570
Total depreciated improvement value 799,710
Add land value 580,000
Total estimate of value 1,379,710
Adopt $1,380,000
INCOME APPROACH
The income approach is an appraisal technique in which the anticipated net income is processed to indicate the capital amount of value of the investment which produces the net income. In utilizing this approach, the major concern is with the present worth of the future benefits of the property. This is typically measured by the net income which a knowledgeable, informed purchaser is warranted in assuming the property will produce during his term of ownership.
In developing this approach the subject property is valued by examining existing and proposed competition and developing a forecast of income and expenses that reflect current and future anticipated income trends. Conversion of the forecasted net operating income into an estimate of value is accomplished through utilization of a capitalization technique. The procedure of forecasting net operating income (NOI) is broken down into the following three steps:
- estimate of annual scheduled gross income - estimate of typical vacancy - estimate of normal operating expenses
Annual Scheduled Gross Income
Scheduled gross income analysis typically begins with a study of the subject property's present rent schedule. The property is leased to French Valley Aviation, Inc. The lease is summarized as follows.
23 Lessor: County of Riverside
Lessee: French Valley Aviation, Inc.
Type of lease: Triple net (NNN)
Leased area: 16,987 square feet
Original lease term: 5 years (3/1/1996 to 3/31/2001)
First renewal option: 5 years (4/1/2001 to 3/31/2006)
Second renewal option: 5 years (4/1/2006 to 3/31/2011)
Third renewal option: 5 years (4/1/2011 to 3/31/2016)
Current monthly rent: $13,483.26
Current lease rate/sq. ft.: $0.79
Monthly rental adjustments: Year 1 $1,500.00 Year 2 $1,750.00 Year 3 $2,000.00 Year 4 $2,500.00 Year 5 $3,000.00 Year 6 8.0% of appraised market value Years 7-10 CPI adjustment Year 11 8.0% of appraised market value Years 12-15 CPI adjustment Years 16 8.0% of appraised market value Years 17-20 CPI adjustment
The lessor (leased fee estate) realizes revenue from the rental income of the aircraft hangar and ramp area. The actual income specified in the lease is referred to as contract rent. In contrast, economic rent is the rental income that a property would most probably command in the open market. The actual rent may be higher, lower, or the same as econ- omic, or market rent. Although the current monthly lease rate is $13,483.26, the lessee reports his company has been paying $8,000 per month ($0.47/sq. ft.) to the county because of depressed aircraft market at the airport.
To estimate economic rent for the hangar from the market I researched monthly rental rates for similar aircraft hangars in the French Valley Airport, as well as other Riverside and San Diego County general aviation airports. In this study particular attention is given to each property's taxiway location, age, quality, and condition of the improvements, and percentage of finished office area. The following facilities, all of which are situated along the west side of the French Valley Airport runway, are considered reliable indications of economic rent for the subject building.
24 RENTAL COMPARISON NUMBER 1
Name: French Valley Jet Center
Location: 37552 Winchester Road
Construction: Pre-engineered, steel hangar with asphalt and concrete paving and security fencing
Building area: 13,490 square feet
Monthly rent/sq. ft.: $0.60 per sq. ft. (hangar space) $1.50 per sq. ft. (office space) $0.70 (average - hangar and office)
Type of lease: Gross
Comments: Newer FBO maintenance/aircraft storage hangar with ancillary office space; development is locat- ed directly north of French Valley Airport fire station
25 RENTAL COMPARISON NUMBER 2
Name: Sky Canyon Enterprises Hangars
Location: 37552 Winchester Road (Buildings A-C)
Construction: Pre-engineered, steel hangars with asphalt and concrete paving and security fencing
Hangar sizes: 923 to 2,486 square feet
Monthly rent/sq. ft.: $0.41
Type of leases: Gross
Comments: Smaller aircraft storage hangars with no office space
26 RENTAL COMPARISON NUMBER 3
Name: Aircraft Hangar Management
Location: 37552 Winchester Road (Buildings 80-82)
Construction: Pre-engineered, steel hangar with asphalt and concrete paving and security fencing
Hangar sizes: 1,430 to 1,700 square feet
Monthly rent/sq. ft.: $0.42
Type of lease: Gross
Comments: Smaller aircraft storage hangars with no office space
27 RENTAL COMPARISON NUMBER 4
Name: French Valley Hangars
Location: 37552 Winchester Road (Buildings 94-100) Murrieta, CA
Construction: Pre-engineered, steel hangar with asphalt and concrete paving and security fencing
Hangar sizes: 1,420 to 3,000 square feet
Monthly rent/sq. ft.: $0.36 to $0.47 per square foot
Type of lease: Gross
Comments: Smaller aircraft storage hangars with no office space; property is located at south end of runway
28 RENTAL COMPARISON NUMBER 5
Name: Murrieta Executive Airpark
Location: 37552 Winchester Road (north end of runway) Murrieta, CA
Construction: Pre-engineered, steel hangar with asphalt and concrete paving and security fencing
Building area: 3,600 square feet (60' x 60')
Monthly rent/sq. ft.: $0.40
Type of lease: Gross
Comments: Smaller storage hangars located at north end of taxiway
29 The surveyed facilities indicate the following rental rates:
RENTAL FACILITY HANGAR MONTHLY NO. SIZES RENT PER SQ. FT.
1 French Valley Jet Center 13,490 SF $0.60 (hangar) (total) $1.50 (office) $0.70 (average)
2 Sky Canyon Enterprises 923-2,486 SF $0.41
3 Aircraft Hangar Mgmt. 1,430-1,700 SF $0.42
4 French Valley Hangars 1,420-3,000 SF $0.36
5 Murrieta Executive Airpark 3,600 SF $0.40
Number 1 a newer development with three large jet hangars and ancillary office space, which can be leased. In my opinion, this facility is slightly superior in overall condition and quality. These factors suggest a 15.0% lower rental rate for the subject.
Numbers 2, 3, 4, and 5 are smaller storage hangars with no office space. Although these hangar developments are considered similar in terms of age and runway location, they cannot accommodate larger jet aircraft and have no support office space. These factors suggests a 25.0% higher rental rate for the subject.
After adjustments, these properties suggest a subject rental range of approximately $0.50 to $0.60 per square foot. In my opinion, this rental rate is bracketed by Numbers 2 through 4 with an average rate of $0.40 per square foot and Number 1 at $0.70 per square foot. Thus, I have concluded economic rent of $0.50 per square foot for the subject property. When this rate is applied to the building’s total area, the following annual rent results:
16,987 sq. ft. @ $0.50 =$8,494 $8,494 x 12 months = $101,928
This concluded rate correlates quite closely with the lessee’s actual annual rent ($96,000). In addition, when an 8.0% rate of return is applied to the concluded value in this appraisal, a similar rent rate of $102,400 per year is suggested. ($1,280,000 x 8.0%).
Estimate of Vacancy
To estimate reasonable vacancy for the building I researched vacancy in larger hangar facilities in French Valley Airport, as well as other general aviation airports throughout Riverside and San Diego Counties. Because of the design of special purpose properties, such as the subject, they are either 100% occupied or are completely vacant until they are leased. Consequently, estimating a normal vacancy rate is somewhat difficult for this type of property. The property has been leased by American Valet Air since 1996. When
30 considering the tenant is negotiating the lease with an additional renewal option, in my opinion, the likelihood of any vacancy prior to the expiration of the lease is quite remote. Thus, a 5.0% vacancy allowance is considered reasonable over the remaining lease term.
Estimate of Effective Gross Income
When a 5.0% vacancy allowance is deducted from the facility's scheduled gross hangar rental income, estimated effective gross income of $96,832 results.
Estimate of Annual Expenses
To determine the subject's net operating income all of the expenses chargeable to the operation of the property must next be deducted from the effective gross income. The subject hangars, as well as all hangars surveyed, are leased on a triple net basis, in which the tenant pays all expenses associated with operation of the property, including a ground lease payment, insurance premiums, utilities, maintenance and repairs, trash removal, and janitorial expenses. Normally, a professional property management fee is deducted. However, since the property is owned and managed by Riverside County, a management fee is not warranted.
Estimate of Net Operating Income
Since there are no lessor expenses incurred, effective gross income also represents net operating income. When the vacancy allowance is deducted from the scheduled gross income estimate, the following net operating income results for the upcoming year:
Hangar rental income $101,928
Less vacancy allowance (5.0%) 5,096
Effective gross income 96,832
Less expenses -0-
Net operating income $96,832
Capitalization of Net Income
Capitalization is the process of converting net operating income into a value through the use of a rate. Within the capitalization rate there are two components which make it up. When an investor purchases an income-producing property, he anticipates receiving a rate of interest on his investment, and he expects to recover, through the income or the reversion, that part of the property which is wearing out, which is typically the im- provements. These two components represent return on (interest rate) and return of (recapture rate) the investment. Added together, they represent a capitalization rate.
31 The most appropriate capitalization technique to utilize depends on whether the income is received in level, constant payments or in fluctuating revenue as the property moves towards the end of its economic life. In the appraisal of properties, such as the subject, which are encumbered by longer term leases, the technique most often used is yield capitalization, or a discounted cash flow analysis. Unlike other capitalization techniques, this procedure recognizes the effects on value resulting from annual CPI adjustments in income over the term of the lease. In this capitalization procedure all future benefits are projected with respect to time and converted into a present value through the use of a discounting procedure. This valuation technique involves the following steps:
- estimate of net operating income over remaining lease term - discounting of the net income over the lease term to arrive at a present worth value of the income stream - discounting of the property's reversionary value to the owner upon termination of the lease
Step 1
The county is currently negotiating with the tenant for a five-year renewal option. During the first year of the pending renewal option (Year 16 of the lease) monthly rent for the property (land and improvements) is calculated by applying an 8.0% rate of return to the appraised fair market value. In an earlier section of this approach market rent is estimated at $101,928 for the first year.
In years 17, 18, 19, and 20 of the lease the rent is adjusted annually based upon the Consumer Price Index. To estimate a realistic annual adjustment I analyzed the historical CPI factors over the last ten years. The following table summarizes the Los Angeles- Anaheim-Riverside Average CPI increases between 2005 and April, 2011.
YEAR CPI
2005 4.5%
2006 3.5%
2007 2.8%
2009 -0.4%
2010 1.9%
4/2011 3.1%
5-year average 3.4%
32 Since 2005 the national economy has experienced lower than normal inflation rates. Most economists predict the current economic conditions will persist for the next few years. Based on this history, an annual 3.0% appreciation factor is adopted for the final four years of the lease. The following net operating income is projected for the upcoming five-year lease term.
Year ANNUAL SCHEDULED LESS 5.0% NET CPI GROSS INCOME VACANCY INCOME INCREASE
1 $101,928 $5,096 $ 96,832 (market) 2 104,986 5,249 99,737 3.0% 3 108,136 5,407 102,729 3.0% 4 111,380 5,569 105,811 3.0% 5 114,721 5,736 108,985 3.0%
Step 2
The next step involves discounting the net income over the remaining lease term to arrive at a present worth value of the income stream. Thus, it is necessary to estimate an appropriate yield rate, which reflects all the elements of risk associated with the income stream in the current market. Investors typically anticipate a return for assuming risk. The yield, or discount, rate combines a safe “risk free” rate with a premium to compensate for risk factors associated with real estate investments. In selecting an appropriate yield rate, an analysis is typically made of current conditions in capital and the actions and ex- pectations of real estate investors in this type of property. First of all, I researched and analyzed current rates of return in low risk investments, such as treasury bills, U.S. 5-year bonds, and corporate bonds. The following table summarizes current market rates.
Investment Rate
Reserve Bank Discount Rate 0.75% Prime Rate (Monthly Average) 3.25% Federal Funds Rate 0.19% 3-Month Treasury Bills 0.13% 6-Month Treasury Bills 0.18% 3-Month Certificates of Deposit 0.27% LIBOR 3-month rate 1.18% U.S. 5-yr. Bonds 2.54% U.S. 10-yr. Bonds 2.54% Municipal tax exempts (A) 4.68% Corporate Bonds (A) 5.72%
As can be seen, yields on longer term, low risk investments, such as Treasury Bills and certificates of deposits are producing very low yields under 0.5%. When considering the upcoming lease term and the historical stability of the lessee, in my opinion, the property has a reasonable level of risk associated with the continued durability of the income
33 stream. However, the county’s recessionary economy has had a negative impact on both buyer and tenant demand for aircraft-related properties in the last few years. In my opinion, the uncertain future of the economy and local real estate market over the upcoming lease term and the difficulty in securing mortgage financing in the market warrant a higher equity yield rate to attract investors into this type of property. With these considerations in mind, an equity yield rate of approximately 8.0% is suggested.
Secondly, I surveyed local real estate brokerage companies and aircraft-related owner/ operators to determine the current minimum equity internal rates of returns and yield requirements of investors in these types of special-purpose properties. This investigation suggest the capitalization rates for good quality, special purpose properties with estab- lished income streams currently range from 7.0% to 9.0%. In my opinion, these sources suggest an 8.0% equity yield rate.
Step 3
The second financial benefit is the reversion of the property to the owner at the end of the projected holding period and assumed sale of the property. This future benefit is called a reversion, since it is identified with the return of capital upon conclusion of the investment. The reversion is often a major portion of the total benefits to be received from an income- producing property. The reversionary value of the subject property is determined by capi- talizing the projected net operating income at the end of the fifth year of the assumed projection period. This value is then discounted to a present worth value at the same 8.0% discount rate.
Determination of Overall Capitalization Rate
To convert the net income into a value an overall capitalization rate must be estimated. Normally these rates are extracted from sales of income-producing investment properties. However, my market research produced no recent sales of aircraft-related properties that were leased at the time of sale. Consequently, current capitalization rates are not available for analysis. However, I concluded a capitalization rate of 7.0% in the previous valuation of the land. While this overall rate is reflective of the land in the current market, in this approach the overall rate must include both a return on and a return off the investment, or improvements. In my opinion, the 8.0% capitalization rate established in the lease is a reliable estimate for the property.
When estimating the value of a property five years into the future, major factors to be taken into consideration include the uncertainty of the length of the recovery period for the local economy and local real estate market and possible development of new competing prop- erties in the airport over the next five years. Market research has shown that the terminal capitalization rate for most properties typically indicates a minor spread between the current rate and the terminal rate when a property is sold. However, since the rate of return dictated in the lease applies to the entire five year term, a capitalization rate of 8.0% is suggested.
34 As a second method I have developed a mortgage-equity capitalization technique. The major difference between the mortgage-equity method and the direct capitalization method is in the consideration of mortgage terms and equity yields as factors influencing the overall rate of return. Unlike other methods, mortgage-equity capitalization does not disregard mortgage terms or view a property as if free and clear. Instead, mortgage financing is considered as an extremely crucial part of real estate investments. This is based upon the fact that knowledgeable investors typically seek the best mortgage financing available in order to maximize their yield on the investment. In this light, mortgage-equity capitalization is a realistic system of analyzing and judging the relative attractiveness of income- producing real estate investments based upon the economic facts pertinent to the investments.
From an investor's viewpoint, the overall rate is that fraction of the total investment which must be collected each year, on the average, to service the debt (principal as well as interest payments), yield the required benefits (cash flow and/or equity build-up), and compensate for depreciation or appreciation. In the mortgage-equity capitalization tech- nique, the overall rate is made up of 1) a basic capitalization rate, which includes all the ingredients except a provision for depreciation or appreciation and 2) a plus or minus adjustment to compensate for expected depreciation or appreciation during the projected term of ownership.
Assumptions
Typical term of ownership: 5 years Loan-to-value ratio: 70.0% Mortgage interest rate: 9.0% Mortgage amortization period: 15 years Mortgage constant 12.17% Equity yield rate: 8.0% Sinking Fund Factor (8% - 5 yrs.) 17.05%
Computation of the Basic Capitalization Rate
The basic rate, which normally accounts for the major part of the overall rate, includes all of the income requirements except for appreciation or depreciation of the property during the projected term of ownership. The calculation of this basic rate can be accomplished through the utilization of a band-of-investment technique. This technique involves both the mortgage applicable to the property and the equity yield rate, which is currently required by investors in the lodging market.
Due to stricter underwriting requirements of lenders in the investment real estate market in recent years, loan-to-value ratios have been reduced, which, in turn, has forced level- opers to invest larger amounts of equity into their projects. To establish the applicable mortgage interest rate in the current market I researched publications, such as the American Council of Life Insurance Investment Bulletin and the Appraisal Institute Appraiser News, which publish mortgage interest rates for various types of investment real
35 estate. Based on this investigation and interviews with local mortgage lenders, I concluded that typical financing for this type of special-use property would be a mortgage comprised of a 70.0% loan-to-value ratio at a 9.0% interest rate amortized over a 15 year term. This interest rate and amortization period are equivalent to a 12.17% mortgage constant.
Having determined typical financing for the property, the next step is to estimate an appropriate equity yield rate in the current market. This rate was previously estimated at 8.0%.
Based upon these assumptions, the following 15-year basic rate is developed:
Weighted Portion Rate Rate
Mortgage loan 0.70 x .1217 = .0852 Equity investment 0.30 x .0800 = .0240
Basic rate (15 years) 1.00 .1092
This concluded basic rate represents the subject investment, assuming the term of ownership is the full amortized over 15-year term of the mortgage. However, since the assumed holding period is five years, it is necessary to further refine the basic rate to compensate for equity build-up during the projected five-year ownership period. This computation follows:
Basic rate (15 years) .1092
Less equity build-up .1992 x .70 x .1705 = .0238
Basic rate (5-year) .0854
Adopt 8.5%
Compensation for Appreciation or Depreciation
The concluded 5-year basic rate allows for the effect of equity build-up, but no provision has been made as yet for adjusting this rate to allow for the appreciation or depreciation during the income projection term. When considering southern California’s weak economy and depressed aircraft-related market, future financial success of the facility is somewhat unknown for the next few years. However, the property’s increases in income over the next five years is established in the lease in the form of an annual a CPI adjustment. Thus, an appreciation factor of 3.0% is considered applicable over the projected ownership period. This percentage is multiplied times the sinking fund factor of .1705 that was utilized in the computation of equity buildup. When this adjustment is deducted from the 5-year basic rate of 8.5%, the resulting percentage represents the subject investment's concluded overall capitalization rate (OAR):
36 Less Appreciation
5-Year Sinking Overall Basic Rate - (Appreciation x Fund Factor) = Rate
.085 - ( .03 x .1705 ) = .08 (.005) Adopt 8.0%
Correlation of Overall Rates
The two methods both suggest a capitalization rate of 8.0%. Of the two techniques the rate derived from the lease is considered slightly more reliable. In contrast, the mortgage-equity technique, which is based on normal mortgage rates and typical equity yield rates for this type of property in the current market, is derived from current real estate market investment criteria. Therefore, I have adopted a capitalization rate of 8.0%.
Final Estimate of Value
Based on the conclusions in these steps, the following value estimate is concluded via the yield capitalization technique.
Present Worth of Income Stream
Assumptions
5-year projection period 8.0% discount rate
YEAR NET INCOME 8.0% PW FACTOR PW VALUE
1 $ 96,832 .923361 $ 89,411 2 99,737 .852596 85,035 3 102,729 .787255 80,874 4 105,811 .726921 76,916 5 108,985 .671210 73,152 Present Worth of Income Stream $405,388
37 Present Worth of Property Reversion at End of 5-Year Holding Period
Assumptions
$108,985 projected net income at end of 5th year 8.0% capitalization rate 3.0% cost of sale in year 6 8.0% discount rate
Calculation
$108,985 divided by 8.0% $1,362,313 Less 3.0% cost of sale 40,869
Net sales proceeds $1,321,444
$1,321,444 x .619770 = $ 818,991
Total Estimate of Value
Present worth of income stream $ 405,388 Present worth of reversion 818,991
Total estimate of value $1,224,379
Adopt $1,220,000
SALES COMPARISON APPROACH
This approach to value is an appraisal technique in which the market value estimate is predicated upon prices paid in actual market transaction. The reliability of this technique, which is actually a process of analysis and correlation of similar, recently sold properties, is dependent upon: 1) the degree of comparability of each property with the subject prop- erty, 2) the time of the sale, and 3) the absence of unusual conditions affecting the sale. In this approach each factor has been considered in an analysis of the market sales utilized.
In developing this approach the first step is to accumulate, verify, and analyze sales of comparable aircraft hangars, which have recently sold in the French Valley Airport, as well as other general aviation airports in Riverside, Los Angeles, and San Diego Counties. Secondly, a comparison is made between the prices paid for these properties and the subject by various common denominators, or units of comparison. These denominators can be in form of direct comparisons, such as the building's gross or net rentable square foot area, net operating income per square foot, or in the form of a factor known as a gross rent multiplier. To determine the appropriate denominator, I have given consideration to the type of property being appraised, the reliability of the comparison, and the most commonly utilized denominators by local appraisers, brokers, and investors.
38 In the current market most aircraft-related properties, such as the subject, are purchased by owner/users. In my opinion, the most applicable and reliable unit of comparison is the price paid per square foot of building area. This valuation technique involves comparing comparable sales to the subject property through an adjustment process. Because of the limited number of sales of aircraft-related facilities in the French Valley Airport in the last three to four years and the depressed southern California private aircraft market, it was necessary to expand my market search to include properties outside the market area and dated transactions of similar facilities. From this research five sales have been selected for comparison. Although some of the transactions are dated or situated outside French Valley Airport, they involve similar aircraft facilities that were purchased with motives and financing similar to those of the purchaser of the subject facility. These sales are con- sidered most reliable available indications of market value for the subject property. (See Improved Sales Map at page 50).
39 IMPROVED SALE NUMBER 1
Location: 3705 (Jack) Northrop Avenue (Hawthorne Municipal Airport), Hawthorne, California
Sale date: November 17, 2009
Documentary fee: 1729298
Assessor parcel no.: 4049-018-001
Sale price: $3,300,033
Ownership interest: Fee simple (land and improvements)
Building area: 35,753 square feet
Date of construction: 1941
Finished area: 11.2%
Fee simple land area: 2.04 acres
Price/sq. ft.: $92.30
40 Improvements: Old, pre-engineered steel aircraft hangar with 17,884 sq. ft. of jet hangar space, 11,297 sq. ft. of aircraft maintenance area, and 4,000 sq. ft. of finished office area
Airport facilities: FAA designated, 24-hour, general aviation air- port with 4,956-foot runway that can accom- modate aircraft weighing up to 90,000 pounds with an FAA-operated air traffic control tower; airport is the home to Northrop Grumman Avia- tion, Inc., a subsidiary of Northrop Grumman Corporation; facility is part of a $500 million air- port revitalization program
Seller: MS Kearny Northrop Avenue LLC
Buyer: Hawthorne Hangar Operations LP
Terms: None - $3,300,033 down payment
Source: Costar.com and public records
Comments: Old aircraft maintenance and storage hangar, located on the south side of Hawthorne Muni- cipal Airport runway; building includes 17,884 sq, ft, of hangar, 11,297 sq, ft, of aircraft maint- enance area, 4,000 sq, ft. of finished office, and two 15,000 gallon fuel tanks; hangar and maintenance facility accommodates larger bus- iness jets
41 IMPROVED SALE NUMBER 2
Location: 7000 Merrill Avenue, Building F-2, (Chino Airport), Chino, California
Sale date: March 5, 2009
Documentary fee: 109434
Assessor parcel no.: 1026-081-13
Sale price: $480,000
Ownership interest: Leasehold (land and improvements)
Building area: 4,200 square feet
Date of construction: 2006
Finished area: None
Price/sq. ft.: $114.29
42 Improvements: New, pre-engineered steel aircraft hangar in 121,600 sq. ft. aircraft condominium develop- ment
Airport facilities: General aviation airport with three runways (7,000, 4,858, and 4,491 feet) and air traffic control tower; airport is home to over 600 aircraft, 100 businesses, and two aircraft mus- eums
Seller: CNO Hangars LLC
Buyer: Randall R. & Marlene Xu Living Trust
Terms: None - $480,000 down payment
Source: Costar.com and public records
Comments: 3-year old aircraft hangar with direct access to Chino Airport runway system; property is an aircraft hangar condominium in a 121,600 sq. ft. development
43 IMPROVED SALE NUMBER 3
Location: 5733 W. Whittier Avenue (Hemet-Ryan Airport), Hemet, California
Sale date: June 22, 2006
Documentary fee: 451417
Assessor parcel no.: 456-020-001
Sale price: $3,000,000
Ownership interest: Leasehold
Building area: 40,000 square feet
Date of construction: Older
Finished area: 10.0% leasehold land area: 9.99 acres
Price/sq. ft.: $75.00
44 Improvements: Pre-engineered steel aircraft hangar with direct access to airport runway system
Airport facilities: General aviation airport with three runways (4,314, 2,045, and 1,315-feet); airport is utilized as a Cal-Fire Air Attack Base
Seller: Deutsch Company
Buyer: Butterfly Wendel US, Inc.
Terms: None -$3,000,000 down payment
Source: Costar.com and public records
Comments: Large aircraft hangar with direct access to the airport runway system; facility accommodates larger business jets
45 IMPROVED SALE NUMBER 4
Location: 37552 Winchester Road (Building 51), French Valley Air Park, Riverside County, California
Sale date: January 7, 2007
Sale price: $2,100,000
Building area: 14,475 square feet
Finished area: 4,470 square feet (30.8%)
Leasehold land area: N/A
Price/sq. ft.: $145.08
Improvements: Pre-engineered steel aircraft hangar with 30.8% finished office area
Airport facilities: General aviation airport with one runway (6,000 feet)
Buyer: French Valley Aviation, Inc.
46 Source: Buyer and public records
Comments: Maintenance and storage hangar, which accom- modates business jets, is located adjacent to subject; property was purchased out of bank- ruptcy by tenant in subject hangar; buyer reports a $400,000 premium was paid, since the hangar adjoins the subject property and met the buyer’s expansion needs; subsequently, with the down- turn in the aircraft market, the property was returned to the original seller
47 IMPROVED SALE NUMBER 5
Location: 37552 Winchester Road (Hangar 3B), Murrieta Executive Airpark, French Valley Airport, River- side County, California
Sale date: January 31, 2011
Sale price: $205,000
Building area: 3,600 square feet
Finished area: None
Leasehold land area: 3,600 square feet
Price/sq. ft.: $56.94
Improvements: Pre-engineered steel aircraft hangar
Date of construction: 2004
Airport facilities: General aviation airport with one runway (6,000 feet)
48 Seller: Murrieta Executive Airpark MEA LLC
Buyer: Ouch Pro Cycling, LLC
Terms: None - $205,000 down payment
Source: Selling broker
Comments: 60'x60' aircraft hangar located in a development at the north end of the runway
49 50 The following table summarizes the five properties.
SALE SALE PRICE SALE DATE BUILDING PRICE PER NO. AREA SF
1 $3,300,033 11/17/2009 35,753 SF $ 92.30
2 480,000 3/5/2009 4,200 SF 114.29
3 3,000,000 6/22/2006 40,000 SF 75.00
4 2,100,000 1/7/2007 14,475 SF 145.08
5 205,000 1/31/2011 3,600 SF 56.94
The five sales indicate a price range of $56.94 to $145.08 per square foot of gross building area prior to adjustment for superior and inferior property characteristics and date of sale. In the process of adjusting these transactions I analyzed and compared each sale to the subject property to identify and estimate supportable adjustment criteria. In analyzing the sales the following adjustments are concluded.
Property Rights Conveyed
The real property rights being valued in this appraisal is the leased fee estate, in which the owner has the right to sell, lease, or transfer the property. In contrast, the leasehold estate only has the right to use and occupy the real estate for a stated period of time subject to conditions of a lease. At the termination of the lease the property reverts to the lessor. Consequently, leased fee ownership is generally considered superior to a leasehold estate, While Number 1 involves a similar fee simple ownership, Sale 2, 3, 4, and 5 are leasehold estates. Therefore, based on previous calculations of leasehold estates, a 5.0% upward adjustment is suggested for these sales.
Financing
Adjustments for financing terms are warranted when a property is purchased subject to non-market financing arrangements. If a sale which had favorable financing, such as seller financing at a below market interest rate, the sale price would be converted to cash equivalency by the application of present value formulas or paired sales analysis. However, since all of the sales were negotiated with either cash to the seller or with mortgages at normal market terms, the sales are considered cash equivalent.
Conditions of Sale
Since Sales 1, 2, 3 and 5 are an arms-length transaction in which the buyer an seller were not under undue stress or atypical motivations, no adjustment is required. However, the buyer in Sale Number 4 reported a $400,000 premium was paid for the property, since it adjoined his primary hangar. Consequently, a 20.0% downward adjustment is warranted for this premium.
51 Date of Sale
The sale dates range from June, 2006 to January, 2011. As I discussed earlier in the appraisal, near the end of 2006 southern California started to experience a significant decline in residential real estate sales volume and values. In addition, with the current banking crisis, land acquisition and construction mortgage financing has become increasingly more difficult to obtain. These factors have negatively affected the county’s general aviation airport market. To determine if adjustments are warranted for elapsed time in these transactions, I interviewed owners and developers who are active in the county’s general aviation airport market, and I considered the impact of the current recessionary real estate market. Input from the brokers and owners indicate a trend of decreasing buyer and tenant demand and depreciating property values in the aircraft related real estate market. Since the end of 2006 San Diego County started to experience a significant decline in residential real estate sales volume and values, which, in turn, has negatively influenced the commercial and industrial markets. In addition, with the current banking crisis, land acquisition and construction mortgage financing has become increasingly more difficult to obtain. In my opinion, this research suggests property values have gradually declined in the county’s general aviation airports in the last three years.
To determine the extent of this decline in values I completed a paired sales analysis between a 2008 sale and a fairly current resale of a hangar in the Premier Jet fixed base operation in McClellan-Palomar Airport in the city Carlsbad (San Diego County). The original purchase was negotiated at a price of $1,127,765, or $235.00 per square foot. This facility re-sold in late 2010 at a price of $175.00 per square foot. This comparison suggests a depreciation rate of approximately 25.0% since February, 2008. Based on this pair sales analysis and input from brokers, owners, and operators, an annual time adjustment of 10.0% is applied to Sales 1, 2, 3, and 4.
Location
Location adjustments are required when the location characteristics of the comparable sales are different than those of the subject. The location of the subject property is anal- yzed in terms of its location in the French Valley Airport. Numbers 3, which is situated in the Hemet-Ryan, and Sales 4 and 5, which are located on the French Valley taxiway, north of the subject, are comparable in location. In contrast, Sales 1 and 2 are located in larger general aviation airports in the cities of Hawthorne and Chino, California. In my opinion, these airports are superior to the French Valley in terms of location in more major metropolitan areas, airport facilities, and access to more extensive freeway systems. Therefore, downward adjustments are warranted for these properties.
Age, Quality and Condition
While Sale 3 is similar to the subject in overall quality, condition, and finished area, Number 2 is a superior building with a higher percentage of finished office space. Therefore, I have made a 10.0% downward adjustment to this sale. Conversely, Numbers 1, 3, and 5 are either older or inferior quality facilities, which require upward adjustments.
52 Finished Office Area
The subject building contains 18.2% finished office and flight school area. While Sale 4 has a higher percentage of finished space, Numbers 1, 2, 3, and 5 have significantly less finished area. Based on the cost to finish this type of office space, I have made adjustments to each property.
Building Area
While the subject building contains 16,987 square feet, the three properties range in size from 3,600 to 73,740 square feet. In recent years I have prepared various studies to determine the relationship between the size of a building and its price per square foot. I have found that smaller hangars, which are otherwise comparable to substantially larger buildings, typically have higher construction costs per square foot and sell at greater prices per square foot. While Sale 4 is a similar size improvement, Numbers 1 and 3 are significantly larger facilities. Conversely, Sales 2 and 5 are much smaller 4,200 and 3,600 square foot hangars. Consequently, I have made size adjustments to these properties.
Reconciliation of Value Estimates
The following table summarizes the adjustments to each sale.
53 ADJUSTMENT ANALYSIS
Characteristic Sale 1 Sale 2 Sale 3 Sale 4 Sale 5
Sale price $3,300,000 $480,000 3,000,000 $2,100,000 $205,000
Sale date 11/17/2009 3/5/2009 6/22/2006 1/7/2007 1/31/2011
Hangar size (SF) 35,753 4,200 SF 40,000 SF 14,475 3,600 SF
% finished area 11.2% none 10.0% 30.8% none
Prices/SF $92.30 $114.29 $75.00 $145.08 $56.94
Property Rights 0% 5% 5% 5% 5%
Financing 0% 0% 0% 0% 0%
Conditions of Sale 0% 0% 0% -20% 0%
Date of Sale -15% -20% -30% -30% 0%
Adjusted Price/SF $78.46 $97.15 $56.25 $79.79 $59.79
Location -20% -10% 0% 0% 0%
Age, quality & condition 10% -10% 10% 0% 10%
% finished area 5% 10% 5% -10% 10%
Building area 10% -10% 20% 0% -10%
Net Adjustment 5% -20% 35% -10% 10%
Adjusted Price/SF $82.38 $77.72 $75.94 $71.81 $65.77
After adjustments, the sales suggest a value range from $65.77 to $82.38 per square foot with an average price of $74.72 per square foot of gross building area. While Sale 5 is the most current transaction, Numbers 1 and 2, which are located in superior airports in major metropolitan areas, require the largest number of adjustments. Numbers 3, 4, and 5 have similar airport locations. However, these sales warrant downward adjust-ments for var- iations in improvements and/or conditions of sale and elapsed time. In my opinion, Sale 4, which is very similar in design and location, is the most similar overall. However, this transaction is a dated sale that warrants a fairly large time adjustment. Sales 1, 2, and 3 suggest the highest values in the $76.00 to $82.00 per square foot range. Conversely, Number 4 and 5, which are located in French Valley Airport, suggest a lower value range under $72.00 per square foot. With these considerations in mind, I have concluded a subject value of $75.00 per square foot. When this unit value is applied to the subject's gross building area, the following estimate of value is concluded:
16,987 square feet @ $75.00 = $1,274,025 Adopt $1,270,000
54 RECONCILIATION OF VALUE ESTIMATES
Cost approach $1,380,000 Income approach $1,220,000 Sales comparison approach $1,270,000
In the valuation of special purpose properties, such as aircraft hangars, the cost approach typically yields a reliable indication of value, when current costs are available, and limited accrued depreciation is present. Purchasers of this type of property typically give fairly significant consideration to this approach. However, this value estimate is well below the other two approaches. This variation in value results from the fact that replacement costs provide no basis for estimating the property's income-producing capabilities. For this reason, investors in this type of income-producing property give little consideration to this approach in making investment decisions. Therefore, I have given limited weight to the cost approach.
The income approach generally is preferred for valuing this type of income-producing property, since it reflects the typical rationale of investors. In this approach market value is estimated by capitalizing a projected income stream using a capitalization technique that reflects both the cost of capital and the relative risk associated with the investment. Since the net operating income and capitalization technique are well supported by market data, I have allocated considerable weight to this value estimate.
In utilizing the sales comparison approach the estimate of value is based on the actual sale prices of similar aviation-related properties, incorporating an adjustment technique that reflects differences in each sale’s physical and locational characteristics. Since this approach is normally given significant consideration by purchasers of aircraft hangars, I have also given significant consideration to this value estimate.
With approximately equal weight given to the income and sales comparison approaches, I have concluded the following final estimate of market value for the property’s leased fee estate as of May 1, 2011:
ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($1,250,000)
55 CERTIFICATE OF APPRAISAL
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 analysis, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analysis, opinions, and conclusions.
- I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest or bias with respect to the parties involved.
- my compensation is not contingent on an action or event resulting from the analysis, opinions, or conclusions in, or the use of, this report.
- my analysis, opinions, and conclusions are developed, and this complete summary appraisal is prepared in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Standards Board of the Appraisal Foundation and the Office of the Comptroller of the Currency (OCC).
- this summary appraisal is not based on a requested minimum valuation, a specific, valuation, or the approval of a loan.
- I am competent to prepare an appraisal of this type of aviation-related property.
- I have made a personal inspection of the property that is the subject of this report.
- No assistance was provided to the person signing this report.
Based on the accumulated information contained in this report, the following estimate of market value, as defined in this appraisal, is concluded:
ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($1,250,000)
Donald P. Falk Certificate # AG017342
56 LIMITING CONDITIONS AND ASSUMPTIONS
1. Title to the property is assumed to be good and marketable.
2. No responsibility for legal matters is assumed, nor is the appraiser required to give testimony or appear in court unless prior arrangements have been made in writing.
3. All information in this report has been obtained from sources believed to be reliable. The appraiser cannot, however, guarantee or be responsible for the accuracy of data furnished by others.
4. The party for whom this appraisal report was prepared may distribute copies of this appraisal report, in its entirety, to such third parties as may be selected by the party for whom this appraisal report was prepared; however, portions of this appraisal report shall not be given to third parties without the prior written consent of the signatory of this appraisal report. Further, neither all nor any part of this appraisal report shall be disseminated to the general public by the use of advertising media, public relations media, news media, sales media or other media for public communication without the prior written consent of the signatory of this appraisal report.
5. The appraiser assumes that there are no hidden or unapparent conditions of the subsoil, soil, or improvements, which would render it more or less valuable. The appraiser assumes no responsibility for such conditions, or for engineering which might be required to discover such factors.
6. Unless otherwise stated in this report, the existence of hazardous material, which may or may not be present on the property, was not observed by the appraiser. The appraiser have 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, urea-formaldehyde foam insulation, or other potentially hazardous materials may affect the value of the property. The value estimate is predicated on the assumption that there is no such material on or in the property that would cause a loss in value. No responsibility is assumed for any such conditions, or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in this field, if desired.
7. The Americans With Disabilities Act (ADA) became effective January 26, 1992. I have not made a specific compliance survey and analysis of this property to determine whether or not it is in compliance with the various detailed requirements of the ADA. It is possible that a compliance survey of the property together with a detailed analysis of the requirements of the ADA could reveal the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative effect upon the value of the property. Without direct evidence relating to these issues, I did not consider possible noncompliance with the requirements of ADA in estimating the value of the property.
57 QUALIFICATIONS OF APPRAISER
DONALD FALK
Professional Experience
Over 35 years of experience in the appraisal of all types of real estate with 20 years of specialization in the valuation of special-use and business oriented, going concern prop- erties, including hotels, resorts, golf courses, car wash facilities, service stations, aircraft related properties, and religious facilities. Strong emphasis in litigation related assign- ments, including construction defect valuations, bankruptcy, condemnation, and civil cases. Extensive litigation related expert witness testimony in federal, state, and district courts throughout the western United States.
Education
Completion of one-half of required credits towards Master of Science Degree, Colorado State University, Major in Real Estate.
Bachelor of Science Degree, Colorado State University, Major in Business Administration and Real Estate.
Professional Licenses, Designations, and Memberships
State of California Certified General Real Estate Appraiser (Certificate # AG017342) Member of Appraisal Institute - MAI and SRPA Designations (1991 - 1995) Member of American Institute of Real Estate Appraisers - MAI Designation (1979 - 1990) Member of Society of Real Estate Appraisers - SRPA Designation (1974 - 1990)
Appraisal Courses
Course Organization
Course 1 Appraisal Institute Course 1-B Appraisal Institute Course 2 Appraisal Institute Course 5 Appraisal Institute Standards of Professional Practice Appraisal Institute Highest & Best Use Analysis Appraisal Institute Appraising From Plans & Specifications Appraisal Institute Apartment Seminar Appraisal Institute Appraisal of Complex Residential Properties Appraisal Institute Report Writing Seminar Society of RE Appraisers Real Estate Investment Analysis Society of RE Appraisers Income Property Seminar Society of RE Appraisers
58 Appraisal Licensing Related Courses
Federal and State Laws and Regulations (32 hours) USPAP (76 hours) California Real Estate Principles (120 hours)
Employment History
Position: Owner Company: Falk and Associates Services: San Diego, California based real estate appraisal company provides commercial, industrial, and residential appraisals throughout the western United States
Position: President Company: Cotton-Ritchie Appraisal Corporation Services: San Diego California based full-service real estate appraisal firm provided commercial and residential appraisals, feasibility studies, and litigation related assignments
Position: President Company: Falk & Smith Associates, Inc. Services: Full-service real estate appraisal firm with offices in San Diego, California and Denver, Colorado; company provided commercial, industrial, and residential appraisals, feasibility studies, and litigation related assignments throughout the western United States
Position: Commercial staff appraiser Company: Bank Western Services: Colorado’s largest savings and loan institution provides commercial, industrial, and residential construction and permanent mortgage financing
Position: Commercial staff appraiser Company: Frederick R. Ross Company Services: Denver, Colorado based, full service, real estate brokerage, leasing, and fee appraisal company
59 EXHIBIT A
EXHIBIT B
EXHIBIT C